Flowserve Corporation (FLS) Q2 2026 Earnings Report, Transcript and Summary

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

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

Thank you, Brian, and good morning, everyone. Turning to Slide 3. I'd like to begin by thanking our associates around the world for their hard work, disciplined execution and resilience in what remains a dynamic environment. The second quarter was marked by meaningful customer bookings, solid execution and strong financial performance, building on the momentum of the Flowserve Business System and durable end market demand. Starting off with some key highlights. Bookings were a standout in the quarter, growing double digits year-over-year to $1.35 billion, with record bookings of almost $700 million, and adjusted operating margin expanded 70 basis points to 15.3%. That performance drove adjusted earnings per share of $0.95, ahead of our expectations for the quarter. Sales came in modestly ahead of what we outlined in April, down 2% on a reported basis and down 3% on an organic basis versus the prior year period, reflecting ongoing 80/20 actions and the continuing conflict in the Middle East. These results reflect the earnings power we have built over the last 3 years. Adjusted operating margin has expanded from 9.5% in 2023 to an expected roughly 16% this year, well on the way to our 2030 target of 20%. This expansion has been enabled through operational excellence, the 80/20 program and commercial excellence, all of which are strengthening execution, reducing complexity, and driving sustainable margin expansion. With half the year behind us, we are updating our full year guidance, including modestly lowering our sales outlook due to the expected impact of the conflict in the Middle East and raising the low end of our adjusted EPS guidance range to reflect strong year-to-date performance and confidence in back half earnings. Taken together, I'm incredibly pleased with the performance in the second quarter and encouraged by the continued progress we are making. Let's turn to bookings on Slide 4. Bookings in the second quarter were $1.35 billion, up 26% versus the prior year period, with a book-to-bill of 1.15x. We were particularly pleased to see substantial growth in both original equipment and aftermarket bookings in the quarter. The second quarter performance builds our confidence in delivering mid-single-digit organic bookings growth for the full year. Record aftermarket bookings of nearly $700 million grew 12% year-over-year and marked our ninth consecutive quarter above $600 million, as our focus on expanding the aftermarket business continues to deliver results and we drive higher capture rates across our large installed base. Original equipment bookings of roughly $650 million were up 44%, supported by strong commercial activity, a healthy project funnel, MRO bookings in line with expectations, and continued momentum in power and nuclear. We delivered this growth despite the ongoing challenges in the Middle East. The strength and breadth of our bookings this quarter reflect both the health of our end markets and the commercial discipline we are building through the business system and particularly commercial excellence. Underpinning this momentum, our overall project pipeline remains robust and well balanced across original equipment and aftermarket, giving us good visibility into elevated third quarter bookings and the back half of the year. That strength gives us confidence toward our long-term ambition of mid-single-digit organic sales growth. Importantly, our backlog also continues to grow, creating a runway for future sales growth. Backlog grew 6% sequentially and 9% versus the prior year period, excluding backlog from the Trillium acquisition. Moving to Slide 5. Growth was broad-based across end markets. In energy, bookings grew 48% in the quarter and 17% year-to-date, supported by large engineered project awards, including a large LNG project in the Middle East and another large LNG project in Canada. We saw stronger utilization and maintenance activity across many large process facilities around the world. General industries bookings grew 11% in the quarter and 3% year-to-date, with continued strength in sectors such as pharmaceuticals and water. And we anticipate seeing further growth in areas like food and beverage, pharmaceuticals, mining and agriculture. Chemical bookings grew 7% in the quarter and 5% year-to-date, consistent with the modest gradual improvement we anticipated, including one large chemical project award in the Middle East. Power bookings grew 39% in the quarter and 7% year-to-date, driven by continued strength in both nuclear and traditional power generation. Notably, nuclear bookings were over $110 million in the quarter, including an award for new large reactors in Asia and several life extension awards in North America. We are encouraged by this performance, which reflects broad-based demand across existing reactors and new build activity that we expect to continue. We remain optimistic about the growth in the nuclear sector for years to come. The underlying fundamentals across our end markets remain healthy. Our 12-month project funnel expanded again this quarter, both sequentially and year-over-year. The operating environment also remains favorable for continued global aftermarket growth. These trends reinforce our confidence in the durability of demand and keep us well positioned to deliver on our 2030 targets. As noted last quarter, we believe the broader environment and recent volatility in the Middle East has the potential to drive increased investment in energy security and diversification activities globally, providing another potential long-term tailwind for Flowserve. While it's too early to accurately gauge the potential size of incremental energy security investments, we believe the next few years could see more spending in areas of historical Flowserve strength, like downstream refining, storage facilities, LNG, and pipelines. Our diversification within the 3D strategy has positioned the company to manage through dynamic market conditions more effectively, and we are encouraged by the bookings trends from the second quarter. Turning to the Middle East on Slide 6. Consistent with the situation we described at the end of the first quarter, conditions in the region were a headwind in the second quarter, primarily affecting operational activity at customer sites and the timing of customers' willingness to accept equipment deliveries. The pictures on the slide show pumps and valves at Flowserve facilities awaiting approval to ship into the Middle East region. We have seen no change in cancellation rates in the region, which remains immaterial. But as you can see from the pictures, it has become more challenging to determine exactly when product deliveries may occur. Year-to-date, Middle East sales have declined approximately $60 million, an approximate 3 percentage point headwind to organic sales. Given the nature of our installed base in the region, these headwinds are having a disproportionate impact on FCD as book and ship valve activity has slowed. While FPD has seen some negative impact related to parts and repairs, the larger project backlog in this segment continues to convert to sales. Our #1 priority remains the safety of our associates across the region, and we continue to support our customers as they manage in this dynamic environment. As we have done since the conflict began, we continue to be nimble in our support of our region, leveraging our global presence to best serve our Middle Eastern customers. Looking to the second half of 2026, we continue to anticipate healthy project bookings in the Middle East, though the majority is expected to come from projects that will not convert to sales in 2026. There is also further potential for some large projects originally anticipated in 2026 to push into 2027. Regarding the rebuilding of damaged assets, we have seen some modest restoration activity in certain customer sites, but the magnitude thus far has been limited. Our teams are working with customers and, in some cases, performing site assessments to determine the level of restoration activity that may be needed. While it's too early to know with certainty, we continue to view rebuild as an incremental bookings opportunity of approximately $50 million in late 2026 and into 2027. We will continue to work with our customers to help them restore and restart their assets as quickly as possible. Looking beyond the second half of 2026 for the Middle East, we see sizable incremental opportunities in the 2027 to 2030 time frame. We're already having discussions with customers about expanding capacity and building redundancy in assets like pipelines and storage facilities, which have the potential to provide additional growth tailwinds for Flowserve. As one of the leading suppliers of flow control solutions in the region, with a large installed base and a long legacy of customer relationships, we believe we are prepared to respond quickly and support our customers as these opportunities develop. Let's move to capital allocation on Slide 7. Our intentional disciplined framework continues to guide our capital allocation decisions, balancing reinvestment in the business, strategic M&A, and direct returns to shareholders. We continue to see M&A as an important and attractive way to create shareholder value by growing the business, diversifying our end markets, and expanding our margins. We closed the Trillium Valves Division acquisition on June 30, and I would like to extend a warm welcome to the Trillium associates around the world. We are excited for you to be part of the Flowserve team. The Trillium acquisition is fully aligned with our 3D strategy and further solidifies our ability to capitalize on the power generation megatrend. It extends our leadership in mission-critical flow control solutions, enhances our service capabilities, and expands our global installed base with high aftermarket entitlement. Integration of Trillium Valves is underway using the Flowserve Business System, including our 80/20 operating principles, which we anticipate will enhance operational performance, expand margins, and allow us to serve customers with an even more powerful portfolio of products, services, and aftermarket capabilities. In fact, we have already completed the full 80/20 data analysis. Based on this analysis and reviewing our Trillium backlog, we expect to drive meaningful margin enhancement and support our value creation objectives moving into 2027. Though there will likely be some headwind to Trillium sales in 2027, given the 80/20 actions. In the quarter, we also completed an acquisition for the remaining equity of a joint venture company in the Middle East. This modest deployment of capital further strengthens our ability to serve customers directly in the region. Beyond M&A, we also view share repurchases as an attractive use of cash when we see dislocation between our share price and our view of the company's intrinsic value. Our healthy balance sheet, modest leverage, and improving cash generation give us the flexibility to act decisively while continuing to invest in the business. Combined with the consistent and reliable dividend that reflects our confidence in the durability of our cash flow, returning capital to shareholders is a core disciplined component of our framework. Year-to-date, we returned $80 million to shareholders, including $55 million of dividends and $25 million of share repurchases in the quarter at an average price of $67 per share. Additionally, we repurchased an incremental $25 million of shares in July. Across all of our capital allocation decisions, our focus remains squarely on creating long-term value for our shareholders. In summary, I could not be more pleased with our performance in the quarter and over the last several years. We are gaining momentum and confidence in our long-term 2030 financial targets. The Business System continues to drive results and guide our decision-making. We are beginning to see the benefits of commercial excellence as we have just entered year 2 of execution. Operational excellence continues to be a tailwind, and our facilities are performing at the highest levels in Flowserve history. This improved productivity gives us the opportunity to drive further roofline consolidation in the years to come. We are now in the third year of portfolio excellence, with many of our business units in year 2 of 80/20. We are making thoughtful decisions around the portfolio, including the divestiture of a small product line in valves that we expect to close in Q3. And you can expect more progress in the second half of 2026 and beyond as we continue to drive complexity reduction while leveraging the tailwinds in our end markets to grow the business with a stronger portfolio. I'm excited about what we are doing at Flowserve and confident in our ability to continue to make significant progress in a dynamic environment. With that, I'll turn the call over to Amy to walk through our financial results and guidance in more detail.

Thank you, Scott, and good morning, everyone. Turning to income statement highlights on Slide 8. Reported sales were $1.2 billion, down 2% versus the second quarter of 2025, with aftermarket sales growth of 7%, while original equipment was down 11%, primarily due to lower convertible backlog of large engineered projects. MRO sales were in line with our expectations during the quarter. Walking through the sales bridge versus the prior year, we delivered underlying growth of 1 percentage point, which was offset by an estimated 2-point headwind from disruption in the Middle East and a 2-point headwind from our 80/20 portfolio actions, resulting in organic sales down 3%. Reported sales benefited 90 basis points from acquisitions and 80 basis points from foreign exchange rates. Both organic and reported sales modestly exceeded our expectations for the quarter. We continue to make progress on our margin objectives, with adjusted gross margin expanding 100 basis points to 35.9%, our 14th consecutive quarter of year-over-year adjusted gross margin expansion and adjusted operating margin expanding 70 basis points to 15.3%. Margin expansion in the quarter was again driven by the disciplined execution of the Flowserve Business System, with improved margins from 80/20 and strong operational execution, improved commercial discipline, and mix benefits more than offsetting lower volume. Overall, this performance was ahead of our expectation and reflects positive incrementals on lower sales. These results drove adjusted earnings per share of $0.95, up 4% versus the second quarter of 2025. Turning to Slide 9. Both segments delivered strong execution and tangible progress on our full year objectives. In FPD, bookings of $938 million were up 30% versus the prior year, an exceptional result driven by strong project activity, including energy security and industrial investments, and continued aftermarket momentum as we capture more business from our large installed base. Sales were $814 million, down 1% versus the prior year period. Adjusted gross margin expanded 100 basis points to 37.8%, driven by mix benefits, 80/20 actions, and improved project execution. Adjusted operating income grew 4% to $173 million, with adjusted operating margins up 100 basis points to 21.3%. In FCD, bookings were up 18% to $417 million, with growth across both original equipment and aftermarket. FCD saw particular strength in nuclear and energy project bookings. Sales were $357 million, down 4%, largely reflecting headwinds from the Middle East run rate business and anticipated 80/20 headwinds. Adjusted gross margin expanded 30 basis points to 31.1%. Adjusted operating income was $45 million, with adjusted operating margin up 40 basis points to 12.6%. Lower Middle East run rate volumes in the quarter, which we anticipate will return when the conflict subsides, along with the challenging executional environment in the region, moderated FCD margin expansion. Moving to Slide 10. We generated $129 million of cash from operations in the quarter, driven by higher earnings, strong working capital management, and cash receipts related to IEPA tariff refund claims accrued in the first quarter. Second quarter free cash flow was 92% of adjusted net earnings, and we continue to expect full year free cash flow conversion of approximately 90% of adjusted net earnings. We expect cash flow to improve through the balance of 2026, following our typical seasonal patterns and reflecting focused working capital discipline. Our second half cash flow will include modest use of cash for our accelerated footprint realignment, including roofline consolidation, which we expect will drive structural cost savings and improved operating performance over time. Additionally, in July, we received the remaining IEPA tariff cash refunds that were submitted and recognized in our first quarter results. In May, we issued $500 million of 5.7% senior notes due in 2036, with the net proceeds used to fund the Trillium acquisition, which closed on June 30. Even with the incremental debt, our balance sheet remains very healthy, with net leverage of 1.8x, providing flexibility for capital allocation. Turning to our full year outlook on Slide 11. As Scott covered earlier, we delivered exceptional bookings growth in the second quarter, and we continue to expect organic bookings growth of mid-single digits for the year. The complexion of our bookings has evolved. However, as the ongoing conflict in the Middle East has negatively impacted our run rate, book and ship business in the region. Additionally, the strength in original equipment bookings in Q2 positions us for future sales growth. Though the impact to the second half of this year is more muted based on project start dates impacted by the conflict. This dynamic is muting near-term sales conversion, even as we continue to expand the backlog and build momentum in the back half of the year and into 2027. Based on these updates, we are modestly lowering our sales outlook to the low end of our previous range. We now expect organic sales growth to be down approximately 1%, with roughly 300 basis points of net benefit from acquisitions and divestitures, and an estimated 100 basis point benefit from foreign exchange for total sales growth of approximately 3%. We are also raising the low end of our adjusted earnings per share guidance to $4.05 to $4.20, reflecting our continued confidence in delivering another year of double-digit adjusted EPS growth. Our remaining 2026 guidance assumptions are largely unchanged, and we continue to expect full year adjusted operating margin expansion of approximately 100 basis points. The Trillium acquisition is expected to expand adjusted operating profit dollars in 2026 and be roughly neutral to adjusted earnings per share when factoring in incremental financing costs. Approximately 85% of Trillium sales will reside in FCD, with the remaining 15% of pump aftermarket business in FPD starting in the third quarter. Transitioning to Slide 12. We expect year-over-year performance to accelerate in the second half of the year, with organic sales growth of approximately 5%, driven by a larger backlog, continued aftermarket strength, and steady MRO performance and increasing project activity. We anticipate the 80/20 headwind in the first half will abate through the remainder of the year. Our back half sales outlook also contemplates similar performance in the Middle East, given the ongoing conflict. We anticipate Trillium sales will also benefit back half reported growth as we deliver from the acquired backlog while implementing 80/20 portfolio actions. We expect to expand adjusted operating margins in the back half, driven by top line growth and the associated operating leverage and the ongoing benefits from the Flowserve Business System, partially offset by the margin profile of the Trillium business backlog, expected to convert to sales in the second half of the year. Looking at the third quarter outlook, we anticipate roughly flat organic sales growth and mid-single-digit total sales growth. Third quarter adjusted operating margins are expected to expand modestly from Q2, while net earnings are expected to be similar to Q2, including the impact of the higher tax rate. Turning to Slide 13. In closing, we are proud of our strong second quarter results, particularly securing orders to underpin future revenue growth and the solid execution across the business. We remain firmly on track to deliver double-digit adjusted EPS growth in 2026 and make continued progress towards our 2030 financial targets. I want to thank our associates around the world for their continued dedication. We are confident in the near- and long-term opportunities across our business and in our ability to create value for our stakeholders. With that, operator, please open the line for questions.

And we will take our first question from Andrew Kaplowitz with Citigroup.

Scott, so first half bookings growth actually turned out to be high single digits. So the bar for the second half to get to mid-single digits isn't that high. But maybe you could help us dissect what actually happened in Q2 in terms of the acceleration you saw in power, energy, and general industrial. I think we all understand power, but was the energy acceleration mostly the 2 LNG projects you mentioned? Or would you call it more broad-based across your energy businesses? Do you think your general industrial momentum is sustainable? And could Flowserve actually end up delivering, let's call it, mid-single-digit plus bookings growth in '26 if the Middle East conflict were to be resolved?

Yes. No, great question, Andy. And let me just start. And I'll start at the very end there saying that we are confident on the mid-single-digit bookings growth for the full year. We're currently at 8% year-to-date. And so our setup looks really good to deliver Q3 and Q4 in line with that. Just breaking down the quarter on bookings, I really want to start with record aftermarket bookings, nearly $700 million. It's a great outcome for our teams. I've continued to say this on earnings call, the team focus on aftermarket has been fantastic. And we use the mantra of speed wins and making sure that we can quote our customers quickly. Our QRCs are in the neighborhood of where they need to be in terms of operating and supporting our customers, and then we deliver incredibly fast. And so we're going to continue to refine those processes. We're going to continue to do more to drive services and solutions for our customers. And we feel good about our ability to continue to sustain growth of the aftermarket business and that franchise. And so I think that's probably the single biggest highlight. But then maybe go into some of the end markets and projects that you asked about specifically. In the quarter, we had 4 larger projects, and larger being kind of greater than $20 million. 2 of those were in the Middle East. We had 2 LNG projects, 1 Middle East, one in Canada. We had a large nuclear award in Asia region. And so we're excited about continuing to do over $100 million of nuclear. And then we had the fourth award was another Middle Eastern project. And so I'd say, healthy on the large projects, but definitely not an over rotation. And then -- so that goes back to your point, we feel reasonably good about the sustainability of the end markets across the board. All of our end market sectors showed growth in the quarter and both year-on-year and sequentially. And so we feel really good about our ability to look forward. With that said, our project pipeline is up year-to-date and sequentially. And so that gives us good visibility into Q3 and Q4. And so today, we feel confident about the mid-single-digit growth into 2026. And then that obviously provides a really nice backdrop for 2027 in achieving that mid-single-digit revenue growth in the 2027 time frame.

Good color. And then FCD margin improvement, as you know, continues to lag FPD improvement. And I think we understand the weakness in the Middle East is hurting absorption FPD. But is there anything else going on in FCD besides just under absorption that needs correcting? And what's your confidence level in the second half FCD ramp and margin? Are you assuming -- are you still assuming FCD margin improvement could exceed FPD? Or should -- is that now not in guidance?

Yes. So I think that in terms of FCD margin improvement, we remain confident that we've taken the actions that are necessary to improve their margins. Absent the Middle East, we would've seen over 100 basis points of improvement from FCD in the quarter. In terms of confidence in the second half, I'd just point out that actions have been taken or are well underway to really achieve that margin expansion in the second half and starting to see that overdrive in terms of where we've been at historically in FCD. And I'd point out 80/20 footprint acceleration. And so we actually have 2 relatively significant consolidations that have taken place and will benefit the second half of the year and then also just volume elevated from what we've secured in the backlog. And then the last point I'd make with FCD just overall in terms of our confidence is we have seen more seasonality historically in this business. And so we've expanded margins year-over-year, albeit we would've liked to have seen more in the first half of the year, but we have expanded margins over last year. And last year was a year of improvement for FCD, where we saw operating margins at over 15%. So we like our setup for the back half of the year.

And we'll take our next question from Deane Dray with RBC Capital Markets.

I really appreciate the specifics you provided on both the Middle East disruption so far, but also importantly, on what kind of opportunities come out of it. Obviously, we need peace to break out for those opportunities to read through. But just if we could just follow up, you provided some additional color on the rebuild based upon damage to customer sites. How do you land on that $50 million estimate? And then on the energy security build-out that as a consequence of this, the pipelines and storage, do you have any estimate on a TAM of where and how Flowserve would participate in that? Maybe we can start there.

Yes, Deane, it's funny you say that. I'm hoping for a ceasefire right now. Peace in the Middle East would be -- it seems like a stretch and something that people have been hoping and praying for decades, if not centuries. Maybe just context for everyone, the Middle East is significant for Flowserve, right? It's roughly 12% to 13%. We've got a large presence in the region, both from a manufacturing standpoint and a service standpoint. And I'd say, today's situation is incredibly dynamic. We saw that over the evening. We've seen it this morning. We've seen it over the last couple of weeks. But I also want to just say, we believe that this is temporary or transitory, and we do believe over the long term that this is a massive opportunity for Flowserve. And maybe to hit your specific question, I want to break the kind of categories into 4 things. And so one is our run rate business. And so with our QRC network, with our large installed base across the region, we do have a substantial run rate business. That currently is down about 20%. And so we're being impacted by the ability to go to sites, the ability to conduct our work as we normally would. And then just, quite frankly, our customers being distracted with other things and other priorities. And what we -- you've heard in the preliminary commentary, that we expect that to continue into the second half of the year. And I would say your guess is good as mine of exactly how that plays out. But in our assumptions for the second half, we're saying that we're roughly going to be the same in that category. On the large projects coming into the year, we had a significant funnel of large projects and opportunities. We saw 2 of those projects come to fruition in the second quarter, which we're super excited about. And we're going to begin to start some work on that with revenue more in the 2027 time line, but we'll begin executing on those projects. The project funnel is still healthy, and I would expect other awards in the second half of the year, but some of those bigger projects will most likely slip into 2027 as well. And then getting to restoration, we -- in the prepared remarks, we talked about a $50 million restoration activity. We are -- we have a full understanding of what sites have been damaged, and we're starting to get an understanding of what equipment will either get repaired or replaced. That work has been slow to develop. But every week, we start to get a little bit clearer picture. At this point, we believe it's $50 million. Activities this week, that number may go up. But I would say that's a relatively good estimate given what we know right now and with the limited site access that we have. And so I would expect to start booking some of that in the second half of this year and then into 2027. The biggest prize is on what we're calling the category of redundancy. And so think of the Middle East needing to build out redundant pipelines, incremental storage, incremental capacity. We think there's a very significant prize for this type of work. You asked for an estimate. We're not ready to provide an estimate on that type of work. We are in conversations with our customers. There's some public commentary out there about redundant pipelines already. And so you could expect that we're in those conversations. And we believe we have the right to win there because of our large installed base, because of our presence in the Middle East, because of our customer relationships, and because of our existing market share in the region. So as this redundancy begins to shape up and the build-out begins, I'm confident that Flowserve plays a major role in the activities in the future.

I really like how you've sized that opportunity. And just my second question is on aftermarket. And Scott, you've been working and getting the organization. We called it project selectivity, where you were passing on OE projects that didn't have a good aftermarket. You've done this for a couple of years. So now we're seeing the aftermarket pick up. How much of this growth in aftermarket is a result of prior work in selectivity? And what does that say about the opportunity or the sustainability aftermarket going forward?

Sure. I think the concept that we talk about is selective bidding. And so when we look at the large original equipment work, we're cognizant that typically, you're going to get a little bit of lower margin on that versus some of the MRO run rate aftermarket business. And so what we want to make sure is the OE project work that we're going to win, we want to make sure it's with customers that value our ability to provide support for the life of their asset and our ability to provide the parts, service, and repairs. And so that's where we get really selective is we make sure that we're winning projects that we know will have a long aftermarket tail. And I'd say we've kind of pulled back a little bit on our overall large project funnel. With that said, the work that we win is definitely going to drive large installed base. And strong aftermarket for the future. And the Middle East is the region that does acknowledge and respect the OEM in terms of that aftermarket pull-through. And so we really are leaning into the work in the Middle East because we know they value that relationship. I said this in Andy's question a little bit earlier. We did -- we delivered $700 million of bookings in the aftermarket in the quarter, which is a record. A lot of that is really just on our process focus. And the speed wins is super important, quoting fast, delivering fast, and being local to provide that support. And what we're finding is when we do those things, that our capture rate moves up and our ability to capitalize on our large installed base improves. And so again, really excited about what's happening with the teams and confident that we can continue to, over time, walk up that aftermarket business on a go-forward basis.

And Mike Halloran with Baird has our next question.

Guidance question on the back half of the year. Just confirming that the $60 million headwind in the front half of the year from the Middle East is the dollar number you're roughly anticipating back half? And then could you talk about the sequential ramp into the fourth quarter? Obviously, it's the sharper acceleration from a growth perspective, 3Q to 4Q. I mean there's elements of Flowserve of old in how sharp that ramp is. But just would like to understand the moving pieces behind the confidence in that kind of 4Q outlay.

Yes. So let's first half to second half, a few things that you pointed out, I think that $60 million of Middle East impact is the right ZIP code to be working with in terms of the headwind. We're essentially assuming that, that run rate business that we've seen be muted in the first half of the year that, that dynamic continues as we look at the second half. A couple of things that abate that we saw in the first half. The first is really that 80/20 headwind. That was primarily in valves. We worked through those comps, and we see that move away from us in the second half. That was about 200 basis points over the first half of the year in terms of a sales headwind. And then the second is really around the North American MRO softness that we saw in the first quarter of the year. That dynamic has subsided as well. And so it abates as we go into the second half. You commented really on that third to fourth quarter ramp for Flowserve. And you're absolutely right that it is seasonality that we've seen in the past. I think even last year, as we actually consumed shippable backlog over the course of the year, we actually saw organic sales ramp 4% from the third quarter to the fourth quarter. So the ramp that we're expecting to see from 3Q to 4Q is not out of the range of results that we've delivered in the past. And I'd point out that this year, we actually have seen a 9% year-over-year increase in our backlog at the end of Q2. That includes OE projects that will give us some revenue benefit in the fourth quarter of the year. And we continue to have a lot of confidence in the strength of our aftermarket. So the ramp in the fourth quarter is pretty well supported.

I appreciate that. And then secondarily, just customers, how much hesitancy, if there is any, to move forward on some of these projects? The Middle East commentary makes a lot of sense. I'm curious outside the Middle East, if customers are moving forward at a relatively normal pace, if there's been any catch-up in some of the orders in the second quarter for what happened in the first quarter, and how they're thinking about and how you are thinking about pricing in the context of the environment?

Sure, Mike. You'd have to break it by industry. So I'll just start on the different industries. So on the energy side, what we're seeing is energy security outside of the Middle East. And so we are seeing incremental activity. The LNG award in Canada was -- came a little bit faster than we thought. We believe that some of that acceleration is possibly as a result of what's happening in the Middle East. And when we look at the project funnel, there's other opportunities like that, that really are trying to regionalize energy and making sure that different countries or different regions has a secure source of energy. And so I think you can see incremental LNG on a go-forward basis. You see some midstream kind of build-out, potentially some capital on the refining side, but I'd say less OE on refining and more about making sure that they can continue to run refining assets at a really high level. And then if you go to power, I would say that, that end market or that megatrend continues to work in a big way. And right now, we don't see any slowdown there, and that would be both for traditional power and for nuclear. And so our outlook on power remains incredibly strong. We're well positioned on the nuclear kind of backdrop, and we feel good about our right to win as new awards start to move through the system. We were very excited to get awards for 2 reactors in Asia in this quarter, and we expect to continue to be involved in the new reactor build-out, the life extension, traditional aftermarket, and then ultimately in the space of SMRs. And then on general industries, we feel good about general industries. And so we saw work in the quarter around some -- you had some pharmaceutical, we had water, we had other kind of not necessarily large markets for us, but really healthy growth in demand there. And I don't see that slowing down as we look at the second half of the year. And I'd say then the last one is chemical. We did have a large chemical award in the quarter. That was in the Middle East. The rest of outside of that large order, I would say chemical business is stable. And so of all our end markets, that's the one that's roughly flat, and we feel really optimistic about the other 3.

Moving next to Nathan Jones with Stifel.

This is Adam Farley on for Nathan. One more on the Middle East. How should we think about working capital in 2026 from the delayed Middle East shipments and slower collections?

Yes. I mean I'll start and Amy can hit that. We put some pictures on the slide there of valves and pumps that are tied up in our facilities awaiting to get approval to ship to the Middle East. And so it's definitely having an impact. And as the situation evolves there, we certainly expect to ship that and get it back to a more normal place. But Amy, maybe you can provide more details there.

Yes. I think if we look at our working capital performance in the quarter, we continue to make improvements. We want to see more in this area, and the Middle East has certainly been a headwind. And Scott's pointed out really 2 ways that we're seeing that, or one way that we're seeing that in terms of shipments just being slowed into the Middle East, which slows our cash conversion cycle, overall, particularly on that run rate business where we're recognizing revenue and getting payments after shipment. With our POC or our sort of large project revenue, particularly out of the region, we are seeing a little bit elongated payment cycles from some of our customers as it relates to the Middle East projects. And so we continue to watch that carefully and ensure that we have the appropriate discipline internally to manage those collections and make sure that they're coming through overall. Working capital is going to be a focus for us, as it has been. It's an area that we've made a lot of improvements in, but we continue to watch. And the Middle East is just another situation that we'll manage and overcome.

All right. And then maybe switching gears to FPD margins, really strong in the quarter, up 100 basis points year-over-year. What were the primary drivers of FPD margins in the quarter? Were there any discrete mix benefits? Maybe just expectations in the back half?

Yes. So we're super proud of what we've been able to continue to deliver in FPD in terms of margin expansion. No unusual items in the quarter. You pointed out mix. We continue to see that strength in aftermarket. And the record bookings from an aftermarket perspective are going to assist with mix. And as we see the return of larger projects, -- that is -- that could be a year-over-year moderation that we see in the back half of the year. But what we're seeing is great execution on the project side as well, and that was some of the delivery that we saw in the quarter. And so this is the playbook. Frankly, it's the same playbook that we're running for FPD as we look to expand margins, which is the focus on operational excellence, the discipline of the 80/20 process and making our customers happy, in terms of efficient use through our facilities. So we're going to continue to do more of the same.

And moving next to Amit Mehrotra with UBS.

I just wanted to circle back on the aftermarket, $700 million bookings up 12%. It sounded like a lot of that strength is sort of you guys just doing things better, but I'd be curious to get a perspective on maybe price versus volume and regions, end markets that kind of produced the strongest growth there. And then just related to that, obviously, organic growth down 7% in the first half, inflecting to plus 5% in the back half. I just -- you have the bookings. I'd just be curious to understand how much of that inflection is already supported by that scheduled backlog? Any sort of variables or execution assumptions we have to make to get our confidence around basically hitting that inflection?

Yes. I'll start with aftermarket, then Amy can talk about the inflection in the back half of the year on the sales number. So again, $700 million. We're super proud of what the team is able to accomplish there. I didn't say this earlier, but we continue to make great progress with that aftermarket business, and we're now in the ninth consecutive quarter greater than $600 million. And so I think we kind of established a floor here, $600 million, $650 million is kind of what we think is our entitlement, and we really want to grow on the back of that. And then as you know, right, aftermarket continues to hold a premium in terms of margin, right? We've got a substantial portion of our aftermarket is pumps, pumps or pump parts. Pump parts come at a really high margin entitlement as well as the valve parts. And then repairs is an area that we've continued to do a much better job at growing that business and making sure that we can do the repairs efficiently for our customers, but also making sure that we can get the margin we believe that we're entitled to as we do that repair work. And so the teams have done a really nice job in improving the overall repair. And so I'd say from a price cost standpoint, the aftermarket business continues to shine. We continue to expand our margins and grow that business. And I'll just kind of go back a few years. In 2023, we made the org design change to really have a dedicated focus team across both pumps and valves. And really, that effort, that focus, is helping us drive success. And the other thing would be commercial excellence. And so as we're a year into our Commercial Excellence program, and as I've described it historically, we're really investing in our sales force to do the good hygiene of selling. And part of that is mapping our markets, mapping our customers, making sure we have account plans, making sure that we have visibility to that installed base, and making sure our sales engineers know what the entitlement and what that price is. And so we're giving them more tools to do their job. And we're early days in Commercial Excellence, but we're starting to see some really nice wins which support the aftermarket growth.

Yes. So maybe turning to the organic growth assumptions in the second half of the year. And I'd start by saying, just reiterating those 2 headwinds that we have in the first half that we know have abated and the first around the 80/20 impact that we saw in the first half of the year, that was primarily in valves. That was about 200 basis points of headwind. That wraparound effect goes away as we look at the second half of the year in terms of those product decisions that we've made. And the second is around 200 basis points of the MRO slowness that we had to start the year in North America. That situation has abated as well. We continue to see strong bookings in this area, and have gained confidence in our ability to perform at those levels. We're not assuming that the Middle East improves in terms of run rate, and that's one of the reasons why we moderated, or the main reason why we moderated our organic growth guidance for the full year to accommodate those run rate book-to-ship sales that we don't expect to materialize in the back half of the year in the Middle East. That said, as we look at the remainder, which is, call it 400 basis points of organic growth in the back half of the year, are supported by a backlog that's grown 9%, excluding Trillium. And so we have a high degree of confidence that we have a large amount of that organic growth in the backlog already. That includes some of these project orders that we saw in the second quarter that start to convert to revenue in the fourth quarter of the year as we begin to receive materials and do the necessary engineering associated with these projects. And so those are the factors that led to where we're at organically in the back half.

Great. That's a perfect answer. And just as a follow-up, as we think about some of these larger, longer cycle products in large energy, LNG, nuclear, et cetera, as they convert to revenue, obviously, I assume there's an absorption benefit to the margin, but I'm more interested in kind of the economics of those contracts relative to kind of the P&L margin structure you have today. So is the assumption that there's a margin accretion as some of these larger energy LNG products projects kind of convert to revenue? If you could talk about that.

Yes. So absolutely, the volume and the leverage that we get from that is a benefit over time. Aftermarket business is always going to be more accretive than original equipment. It's -- I don't think that you can look across a number of industries, and that's going to be the setup. That said, we're not taking projects that we think put a drag on our ability to achieve those 2030 margin targets. And so everything that we're taking or putting into the backlog is assumed to provide us a benefit and steps towards that 2030 margin target. And it's through both the margins that we achieve on that original equipment, but also that aftermarket annuity that we look to deliver on quickly in the cycle.

And we'll take our next question from Joe Giordano with TD Cowen.

This is Chris Grenga on for Joe. What do you view as the biggest execution risk to achieving that 4Q growth ramp? Is it gating factor, customer project timing, ability to ship against backlog or something else?

Yes. I think Amy hit this a little bit earlier, and I'll just reiterate our confidence in our ability to do this. And so when we look at our shippable backlog, we look at our backlog conversion rates, this isn't something that's unusual. And so we just need to execute. And I think the teams have done a really good job over the last 3 or 4 years of driving consistent execution. And so the one thing that could disrupt this is the book and ship business, potentially in the Q3 or early Q4. But at this point, we've got a really nice -- we've got good visibility into what the book and ship levels look like, and we track that on a regular basis. And we've seen a really nice step change really since March. So March, April, May, and June, we've seen a nice trajectory of that run rate and in and out business. And so we feel pretty good about the backdrop in the second half.

You noted nuclear. And when you look at the drivers behind the confidence in achieving the long-term growth plan despite Middle East disruption, where does nuclear rank among those growth vectors? And has anything changed in the pace of customer decision-making or project awards or funding over the last prior months that makes you incrementally more constructive on the outlook for nuclear?

Sure. Yes. I would say I'm still incredibly optimistic about nuclear. Our first half awards for nuclear are up 34%. And so you've got some new reactor awards in there. You've got some life extensions in North America. We've got our general aftermarket. And so I'd say, those 3 kind of levers will continue to work as we go forward. What's in the press and what people read all the time are the big kind of announcements of new traditional reactors. And I would say there's a lot of stakeholders in those, right? You've got governments. In the U.S., it's states, it's utilities, it's the government. But also around the world, it's just a lot of stars have to align to make these projects successful and move forward. But I would say talking to a lot of customers and visiting several countries in the second quarter, we still feel incredibly constructive about the backdrop for new large reactors. And so there's a concept in the U.S. of 10 reactors. And the U.S. Department of Energy has leaned in on potential loan structure. And I feel like at some point either a utility or somebody in a private space will take the federal government up on the loan structure and move forward. And once the first one goes, I think you move pretty quickly to getting to 10 announced reactors on a go-forward basis. We've also got Europe that's a proven ground for energy and nuclear. And so there's some concepts in Eastern Europe and Europe proper in terms of what those new builds look like. And I'd say we're relatively on track to our expectations on that. India is moving very quickly in terms of we're moving their nuclear program forward. And I feel very good about our participation and ability to serve the Indian market. And then you recently saw an announcement with the United States and Saudi about sharing of nuclear technology. And while I don't have that in my short-term playbook, that is a win in something that will ultimately go forward. And so I would just say, in summary, large reactors and life extensions are largely playing out like our expectations. If you remember in Q3 last year, we talked about a $10 billion number over 10 years, and that's that market ability or market sizing. We believe we've got the right to win there, and we're excited about what that trajectory looks like. And then maybe on the upside, the Small Modular Reactors are probably moving faster than what I expected a year ago. And so you've seen GE Hitachi move forward into construction. There were several announcements in July with SMR companies and the ability to meet certain technical milestones. And I'd just remind people, Flowserve is incredibly well positioned in the SMR community as we go forward. And then lastly, I'd just add with the Trillium acquisition, they do really well in the nuclear space. That allows us to move up our entitlement on a reactor. And so we were organically about $100 million a prize per reactor. With Trillium, that moves up to kind of a $115 million number per reactor. And so we continue to make sure that we're aligning our product and our technology to best support this in market. And I remain very optimistic about our growth in nuclear and our ability to participate in a large way on a global scale.

And we'll take our final question today from Andrew Obin with Bank of America.

I'll squeeze in 2. So first one, just how much visibility do you have on MRO turnaround sort of outage season in second half in U.S. refining? Because the dynamic here is weird. We're hearing they're running all out because they're making so much money, but effectively, they have to do maintenance eventually. So just color there. And second, can you remind us just time line on LNG? How does it progress? How do your revenues progress from order until shipment? And how much visibility do you have in the funnel?

Yes. Andrew, on the U.S., I'll say North America refineries, a really good question. We're seeing incredibly high utilization rates. The crack spreads are high, so they're making a lot of money. But that really happened from the end of February to now. And so we saw that dynamic in the second quarter as well. And we saw 1 or 2 turnarounds that actually got pushed in the early part of the year. But I'd say more realistic is just, call it, a skinny down turnaround. So just doing less activity, shortening the window for that, and maybe doing less work. And the counter to that is if they're running flat out and don't do a turnaround, then what we see is some kind of emergency spending or stacking up more spare parts in the event that they can service their business quickly. And so I'd say for us, I think it's net neutral. Like I don't see a negative or any negative scenario where the MRO and aftermarket slows in Q3. I think when the crack spreads ultimately do subside, you'll see a more robust turnaround season potentially in 2027. We did see that in 2025, and this is why I feel like a lot of the refineries can run pretty hard in 2026 without jeopardizing their long-term program. But the good refineries know that they have to do that work. We're participating in those turnarounds, and then we'll pick up the emergency type work at a premium as they're desperate to get equipment on and make sure they can keep running. And then secondly, on the -- on the LNG time line, kind of book to award, and it depends pumps versus valves. The pump time line is probably 18 months. They are more engineered. The 2 projects that we booked this year are extensions. And so a lot of that engineering work is done. And so maybe you see, call it, 12 to 14 months versus an 18 month there. And then the valves would typically be 12 months on an LNG project.

Congrats on good quarter.

And that does conclude the question-and-answer session. Mr. Ezzell, I will turn things back over to you for any closing comments.

Great. Thank you, and thank you to everyone for joining the call today. If you do have any further questions regarding our second quarter results, please feel free to reach out to the Investor Relations team, and we will look forward to providing another update on our business performance at the end of the third quarter. Thanks to everyone, and have a great day.

And once again, that does conclude today's call. Thank you for your participation. You may now disconnect.