Ladies and gentlemen, thank you for standing by, and welcome to the Flowserve Corporation Q2 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference to your speaker today, Mr. Jay Rouche, Vice President, Investor Relations, Treasurer.
Please go ahead, sir.
Thank you, Joelle, and good afternoon, everyone. We appreciate you participating in our conference call today to discuss Flowserve's 20 22nd quarter financial results. We also regret the technical issues that the previous third party call provider had during our previous scheduled time slot this morning. But we do very much appreciate you modifying your schedules to join us now. On the call with me today are Scott Rowe, Flowserve's President and Chief Executive Officer and Amy Schwes, Senior Vice President and Chief Financial Officer.
Following our prepared comments, we will open the call up for questions. As a reminder, this event is being webcast and an audio replay will be available. Please also note that our earnings materials do and this call will include non GAAP measures and contain forward looking statements. These statements are based upon forecasts, expectations and other information available to management as of July 31, 2020, and they involve risks and uncertainties, many of which are beyond the company's control. We encourage you to fully review our Safe Harbor disclosures as well as the reconciliation of our non GAAP measures to our reported results, both of which are included in our press release and earnings presentation and are available on our website at flowserv.com in the Investor Relations section.
I would now like to turn the call over to Scott Rowe, Flowserve's President and Chief Executive Officer, for his prepared comments.
Thanks, Jay, and good afternoon, everyone. Thank you for joining today's call. Before discussing our quarter, I first want to acknowledge and thank the Flowserve associates for their dedication and productivity during this difficult time. The COVID pandemic has required all of us to adapt our daily routines and change our approach to better manage the associated distractions of the virus. While each of our employees has been impacted in some way by the virus, I'm especially appreciative of our essential frontline workers who have been physically present in our manufacturing facilities and QRCs each day supporting our customers.
Their commitment and hard work was a key driver to delivering our Q2 performance. Amy will cover our financials in detail, but at a high level, Flowserve delivered adjusted earnings per share of $0.53 which was 152 percent sequential improvement and flat year over year. Our 2nd quarter results demonstrate our ability to persevere through the COVID crisis, take swift and material cost reduction actions and leverage the great work from the Flowserve 2.0 transformation. Our strong earnings were delivered despite a year over year revenue decline of 6.6 percent at $925,000,000 2020 has been an unprecedented year thus far with the combination of energy price volatility and the global shutdown due to the COVID pandemic. Throughout March April, most of our end markets had declined significantly as demand for global liquids plummeted with the worldwide quarantines.
Our customers subsequently announced significant cuts in their spending for both new capital projects and ongoing maintenance spending. Flowserve's 2nd quarter bookings reflect this environment. Despite the severe correction, we saw stabilization in growth in certain key demand metrics. For instance, Asia returned to a more normal demand profile in some end markets like water and specialty chemicals remained reasonably strong throughout the quarter. Additionally, crude oil prices returned to $40 per barrel as operators, including OPEC plus took measures to curb production.
Nevertheless, we are preparing for a prolonged downturn and are prepared to take the actions necessary for the long term health of our business. In terms of COVID-nineteen, we expect the challenges from this pandemic to persist for some time. We have learned a lot in a relatively short period of time that helped us adapt to this new normal. Our top priority in our actions has and will be maintaining the health and safety of our people. We continue to follow the safety guidelines from the World Health Organization and Center For Disease Control.
Given our global footprint, we continue to experience temporary site closures as COVID cases ebb and flow in various geographies. We have undertaken significant steps to protect our safety of our essential associates as they can continue to advance our business. While many of our associates continue to work from home, we are constantly reviewing and updating our prevention and response procedures as well as our return to work plans in anticipation of their arrival back into the office. At the site level, our ongoing proactive measures have enabled improved productivity despite the pandemic disruptions and work stoppages. Implementation of temperature screening, social distancing measures, staggered shifts, improved testing and persistent cleaning has helped us to make consistent operational progress throughout the Q2.
As a result, we were able to recoup some of the deferred profit we experienced in the Q1 and reduce the level of these deferrals that occurred in the Q2. As of today, all of our facilities are open and operational and running close to normal productivity. In response to the challenges in the energy markets and recognizing the ongoing COVID related uncertainties, we have taken quick and decisive action to reduce our overall cost structure at Flowserve. As discussed on our Q1 conference call, we have implemented the steps necessary to drive expected $100,000,000 from our cost structure this year compared to 2019. This amount is comprised of roughly a half year's benefit from structural cost actions with the remainder coming from temporary cost avoidance measures.
Next year, some of the temporary costs will return, but will be more than offset by a full year's worth of the structural changes we have taken. The actions that we took in the Q2 has us tracking ahead of our $100,000,000 commitment level that we communicated in early May. I am pleased with the way we are executing our phased approach to this crisis. We are successfully operating in the new COVID world and providing support and business continuity for our customers. Additionally, we are taking the necessary steps to manage through the downturn.
I am confident we are taking timely actions to successfully manage Flowserve through this period of uncertainty. And with continued transformation progress, our company will emerge as a stronger and more flexible enterprise. Flowserve will be well positioned for the future. Turning now to our markets. We highlighted on our last call that we were preparing for a significant decline in bookings during the Q2 as a result of our customers' delayed infrastructure investment as the current uncertainty has driven the decline in capital commitments, utilization rates and operating budgets.
On a constant currency basis, our 2nd quarter bookings declined 25% year over year, which was at the upper end of our expectations, driven primarily by lower project spending compounded by a difficult comparison given the strong bookings we delivered in the 2019 Q2. As you might recall, last year's Q2 was our highest quarterly level of bookings since 2015 and included large LNG, pipeline and concentrated solar power awards totaling over $80,000,000 in addition to a number of smaller $5,000,000 to $10,000,000 oil and gas awards. By contrast, the largest award we received in the Q2 of 2020 was a $7,000,000 nuclear power award. The combination of COVID and energy volatility has clearly impacted our customers' willingness to move forward with projects currently in the feed stage. And we saw a number of projects that we expected to be awarded in the Q2 get pushed out to a later date and some could potentially get canceled.
Original equipment bookings in the quarter were $366,000,000 down 37.3 percent constant currency compared to last year's strong second quarter. Aftermarket bookings were $443,000,000 down 10.7 percent constant currency. Aftermarket opportunities held up better than original equipment, but continued to be challenged as customers limited access to their facilities and delayed scheduled turnarounds and spending. As expected, our oil and gas markets have been the most affected in the current environment. We saw continued delays, scope reductions and some cancellations of potential projects during the quarter.
In total, bookings in the end market were down 41% constant currency year over year, which was also impacted by the challenging compare period. Last year's 2nd quarter bookings had increased by over 20% to 454,000,000 dollars This quarter, our largest project awarded oil and gas was just $5,000,000 Based on discussions with major customers, we expect that any of the large greenfield and brownfield projects that do progress will most likely be delayed as operators reevaluate their project financial viability in this environment and pursue ways to decrease the project's costs. Any awards that do progress will attract significant competitive attention. On a constant currency basis, chemical bookings were down roughly 18% in the quarter, primarily driven by FPD's 30% decline, while FPD bookings were flat. The quarter included one small award of $3,000,000 in Asia Pacific.
Specialty chemical demand remains reasonably strong and partially offset the declines we saw in the petrochemical markets. Moving now to power. Our power markets saw constant currency bookings down 16%, where FCD's 41% increase, including 3 nuclear awards totaling $16,000,000 was more than offset by FPD's 35% decline. General industry bookings were flat in the quarter where FPD's 11% increase was offset by FPD's 21% decline. FCD's distribution business continued to be impacted by headwinds from the MRO slowdown in North America.
Mining was the only market with growth where bookings were up 18%. Finally, representing our smallest market, water bookings decreased 35% in the quarter with no significant awards. However, we do expect continued investment in demand in water markets from desalination to municipal water. Regionally, declines of 36% in North America and the Middle East and Africa and Europe's 21% decrease more than offset our growth in the Asia Pacific and Latin American markets of 6% and 9%, respectively. We expect to see Asia and the Middle East to hold up better than North America and Europe for the remainder of the year.
With the general decline that we've seen in our customers' large project capital spending, our sales team have shifted their priority towards higher margin aftermarket and replacement equipment opportunities. Our aftermarket and shorter cycle original equipment markets held up reasonably well in the 2nd quarter. Aftermarket bookings declined 10.7% on a constant currency basis in the 2nd quarter, in line with our internal forecasts, which included reduced spending by our customers and continued headwinds from site access issues at our customer locations. We believe that our Flowserve 2.0 transformation related commercial intensity program will better position us to support our customers while protecting and defending our global installed base of pumps, valves and seals. The large project original equipment side of our business has been the most in as our customers modify their investment plans.
Our commercial team is focused on selectively winning the work that is available to win. We will remain disciplined in our pursuit. We plan to balance the desire for installed base growth with driving aftermarket opportunities and loading of our manufacturing capacity. Our focus remains on building a quality backlog despite the competitive pricing environment. I'm confident in our ability to leverage our distinguished brands, our quality products and superior services to win our share of the available orders.
Flowserve's competitive position continues to improve through transformation led efforts to drive manufacturing excellence and lower production costs. Our lean journey progress has significantly increased throughput and reduced waste in a number of key facilities. We continue to pursue our lean journey and we expect further results throughout 2020. In addition to lean, we continue to deliver reductions in our product costs to value and supply chain initiatives. Finally, as we implement these programs in all of our manufacturing locations, our overall manufacturer strategy, we are freeing up capacity and identifying opportunities to further simplify and consolidate our manufacturing presence.
While this will not happen quickly, we do expect to make progress in 2020 on rationalizing our overall roofline. Our transformation program designed to create a more efficient and flexible operating model was roughly half complete entering 2020. As a result, we believe we are in a much better position to react to the current market situation. Turning to our margin performance. Both adjusted gross and operating margins improved substantially versus Q1, up 130 and 5.70 basis points, respectively, 32.1% and 11.6%.
Versus prior year, adjusted gross margin was down 40 basis points, while adjusted operating margin increased 30 basis points and reflected the benefit of the cost actions we took in the 20 22nd quarter. Looking at our business by segment, FCD's constant currency bookings and sales were both down approximately 19%, where the combination of the pandemic impact and volatile commodity prices was exasperated by slower MRO activity in North America and further distributor destocking. The quarter's bookings included $16,000,000 of small project nuclear awards, several $3,000,000 to $5,000,000 oil and gas awards, primarily in Asia Pacific and a $3,000,000 chemical award in North America. Strong cost management drove flat adjusted gross margins and limited the adjusted operating margin decrease to 130 basis points despite the 20% revenue decline. FPD's constant currency bookings decreased 28% with the impact on the pandemic and commodity environment.
In 2019, the Q2 represented FPD's highest booking quarter since the segment was created and included significant LNG, oil and gas and power project bookings totaling over $100,000,000 Aftermarket orders of $373,000,000 in the 20 22nd quarter decreased 12.3% on a constant currency basis. However, our steel aftermarket business performed well despite the COVID challenges. FPD's revenue was flat with prior year, driven by original equipment growth of 11.4%. Adjusted operating margins increased 180 basis points, where absorption benefits offset a 400 basis point shift towards original equipment and aggressive cost actions drove a $17,000,000 decrease in adjusted SG and A. As a percentage of sales, FPD's adjusted SG and A decreased 2 50 basis points to 19.5%.
Let me now turn the call over to Amy to cover our financial results in greater detail before I return to provide our outlook for the second half.
Thanks, Scott, and good afternoon, everyone. We are pleased with our 2nd quarter results considering the headwinds we faced from the ongoing impact of the COVID pandemic, coupled with significant energy market volatility. The $0.53 of adjusted EPS we delivered in the quarter decreased $65,000,000 of lower revenue year over year. On a sequential basis, revenue and adjusted EPS improved 3.4% and 152%, respectively, as compared to the 20 21st quarter. You may recall that in the Q1 of 2020, we experienced COVID related delays of roughly $74,000,000 in revenue and approximately $25,000,000 of gross profit, as well as discrete period costs of about $8,000,000 related to the pandemic.
In the second quarter, most of the revenue and profit from the 1st quarter's delays were realized, but as anticipated, new delays were incurred during the Q2. We were pleased that our manufacturing productivity improved as the quarter progressed as our measures to adjust our facility's operating environment to safely and effectively deliver in this pandemic gained traction. As we look ahead to the next few quarters, we plan to consistently reduce the profit impact that COVID issues have on our results. On a reported basis, 2nd quarter EPS was 0 point severance and transformation expenses as we took decisive actions during the quarter to accelerate and bring forward cost reduction initiatives, which includes the reduction of over 12% of our headquarters workforce as well as further cost reductions in the field. Additionally, our reported EPS included a loss of $0.07 in below the line foreign currency headwinds, which reduced much of the gain that we had reported for this line item in our Q1 results.
Turning to revenues. 2nd quarter sales decreased 6.6% versus prior year to $925,000,000 and included a 2.4% negative impact from currency headwinds. Both original equipment and aftermarket revenues were down in the mid single digits. By segment, FPD delivered strong 15% constant currency original equipment sales growth following last year's 22% OE bookings growth. Offsetting FCD's strong OE revenue performance was FCD's 23% original equipment revenue decline as the segment's short cycle MRO business and distribution channels remain challenged.
Aftermarket revenues in total were $462,000,000 and accounted for half of our sales mix similar to prior year, but were down 5% constant currency as we continue to face disruption in our QRCs related to COVID as well as ongoing difficulties accessing our customer facilities, as Scott mentioned earlier. Shifting to margins. 2nd quarter adjusted gross margin decreased 40 basis points versus last year to 32.1 percent, which is solid performance considering the $65,000,000 year over year revenue decline. FPD's 70 basis points of adjusted gross margin decline was impressive considering the significant increase in lower margin, large project OE revenues and the decline in higher margin aftermarket activity. The business very effectively managed its absorption and exhibited tight cost control to offset the 4% mix shift to original equipment.
FCD also managed well and delivered flat adjusted gross margins year over year at 31.4% despite accounting for almost all of Flowserve's year over year revenue decline. The business was also aided by a 3% sales mix shift towards aftermarket. On a reported basis, Flowserve's 2nd quarter gross margin decreased 320 basis points to 28.9%, again almost all due to $24,000,000 in increased adjusted items as compared to last year's Q2 that we incurred, primarily through severance to structurally reduce our ongoing cost structure. 2nd quarter adjusted SG and A decreased approximately $21,000,000 on tight discretionary cost control and the aggressive cost we took during the quarter. As a percentage of sales, adjusted SG and A decreased 70 basis points year over year to 20 point 9%.
On a reported basis, SG and A as a percent of sales increased 200 basis points, primarily due to the higher realignment and transformation expenses, again largely severance related. The decisive and early cost actions we took in the Q2 were a key component to maintaining our adjusted operating income near prior year levels despite the revenue decline. As a result, adjusted operating margin increased 30 basis points to 11.6% with FPD's 100 basis point improvement being partially offset by FCD's 130 basis point decline. Reported 2nd quarter operating margin decreased 5.30 basis points to 4.6%, driven primarily by increased realignment expenses of $52,000,000 Turning to cash. Our first half cash flow from operations decreased roughly $28,000,000 versus prior year, driven primarily by lower reported earnings.
Working capital use of approximately $89,000,000 improved $25,000,000 versus the first half of twenty nineteen, while primary working capital as a percentage as a percent of sales of 28.6% was essentially flat with 2019 2nd quarter levels. Although we saw sequential build in accounts receivable during the quarter due to escalating sales from April to June, DSO remained consistent with both the prior year and the sequential quarter. Our 2nd quarter cash balance declined sequentially by approximately $60,000,000 to $562,000,000 Major uses of cash in the period included seasonal working capital, our quarterly dividend, severance expense, capital expenditures and other realignment and transformation costs. Our quarter end liquidity position remained strong at $1,300,000,000 which includes cash and cash equivalents of $562,000,000 as well as $722,000,000 of available capacity under our revolving credit facility, which remains undrawn. I am confident through our disciplined capital spending, discretionary cost management and transformation initiatives to drive working capital and cash flow improvement, we will generate significant cash in our seasonally strong second half.
Finally, turning to our expected cash usage in 2020 and considering our near term focus on capital preservation, we continue to expect our previously reduced capital expenditures for the year to be around $60,000,000 In addition to maintenance CapEx, our investments here will largely focus on enterprise wide IT investments that further enable our transformation progress. Other expected uses of cash consists primarily of realignment and transformation expenses and the funding of expected dividends of approximately $100,000,000 As I begin my 6 months of Flowserve, I'm surprised by how quickly time has gone by and also even more pleased by my decision to have joined this company. Despite the challenges we currently face, the leadership team is collaborative, decisive and striving towards a common goal. I'm extremely pleased or extremely impressed with the dedication and commitment of our worldwide associates and their desire to satisfy our customers' needs is second to none. The quality and professionalism of the finance organization provides me great confidence and the opportunities that remain from our transformation program are significant.
Together, we have all the ingredients necessary to drive long term value for our customers, associates and importantly, our shareholders. Let me now return the call to Scott.
Great. Thank you, Amy. Let me wrap up my prepared remarks with our outlook for the remainder of 20 20. Building on the momentum of our 2nd quarter performance, I'm confident we will continue to execute well in the second half of the year. Assuming no resumption of broad based government imposed or COVID related shutdowns.
While we're encouraged by both the recent recovery in oil prices as well as the early indication of the growth associated with global economies reopening, we recognize that there's still a high degree of volatility and uncertainty around the world. As a result, we are maintaining what we believe is a prudently conservative outlook for the rest of the year. From a booking standpoint, we are planning for limited large project awards for the remainder of 2020. However, we expect aftermarket and MRO spending to hold up better in comparison. In total, we expect our quarterly bookings in the second half of the year will be around or better than this quarter's level, but likely will represent a decline of about 20% year over year.
With our strong backlog of $2,100,000,000 we believe revenues will be less impacted and would expect year over year declines for the second half of twenty twenty to be about 15%. We also expect adjusted gross margins to hold at or slightly better than Q2 levels through the remainder of the year as cost out initiatives take hold and better margin backlog continues to shift. The structural SG and A cost actions we have taken will increase in the second half of the year and will be supplemented by the ongoing tight control of discretionary spending. We expect our decremental adjusted operating margins to be in the range of 20% to 25% for the second half of the year. Also, we are expecting Flowserve's adjusted EPS in the second half of twenty twenty to exceed the 73% performance that we delivered or the $0.73 performance that we delivered during the first half of the year, assuming that we don't have another major COVID related shutdown like we experienced in March April.
Despite this challenging environment, we are committed to continuing with our Flowserve 2.0 transformation This program is core to our long term success and we expect to build on the fundamental improvement and momentum achieved to date. We have accelerated the timing of some of our cost actions in certain growth initiatives. I'm confident in our ability to respond to the opportunities in the marketplace and winning the work that is out there. We will continue to focus on controlling what we can control, including taking further cash actions if the market warrants. Flowserve's legacy dates back over 220 years.
Our brands, products and services are valued by our customers. Our customers tend to be the larger participants in their respective markets who we expect to be around for decades to come. And as many of you know, the majority of our business involves keeping critical infrastructure running and operational. Throughout our history, Flowserve has experienced challenging markets before. We have endured these downturns and come out better on the other side.
We have an excellent leadership team with the ability to execute through this cycle and help differentiate Flowserve with our customers as we remain committed to driving long term value for our associates, customers and shareholders. Operator, this concludes our prepared remarks, and we'd now like to open the call to questions. Thank
Our first question comes from Deane Dray with RBC Capital Markets. Your line is now open.
Thank you. Good afternoon, everyone.
Good afternoon, Deane.
Hey. Maybe just start with a comment from Scott. I was kind of surprised that you said that operations I would expect the manufacturing plants to be all up and running. But when you said they're close to normal productivity, just considering all of the new restrictions that you have, social distancing, how inventory is handled, I would expect there to be a bit more of a headwind and inefficiencies that are being factored in. Is that fair?
Yes, Deane, it's a really good question. I just want to remind you and everyone else, we are on a journey to significantly improve our productivity. And so as Flowserve 2.0 was kicking in as we were doing some of the things around lean and some of the things about how we account and measure our productivity and just getting laser focused on that. We truly expected to continue to improve throughout 2020. And then obviously, COVID hit.
March, the end of March was a disaster at our European operations and then Americas and April wasn't good. But since then, we've continued to make progress. And so I would say right now, we're operating what I'll call, let's just say, last year's normal productivity in our operations. And I feel really good about that. I think without the COVID disruption or anything else, we'd be operating higher than we did last year.
And so I'd say we're kind of back to that baseline that we were last year and we still have opportunities to get even better. But I've been really proud of the team that despite the social distancing, despite wearing masks, despite not having the non essential folks there, we're doing a really nice job performing those operations. And what we saw was April wasn't a great month for us, but May got better and then June was even better. And at this point, I don't necessarily expect to go backwards unless there's a major outbreak and issue that we saw in something similar to March.
Got it. That's really helpful. And then can you comment on July and then just kind of bridge it to the decrementals assumptions for the second half, maybe even a bit more specific on what you think for the Q3, the 20% to 25% range. How are you trending towards that? What are kind of the key puts and takes?
Sure. Yes, I mean, we're obviously looking at our results on a regular basis. And I'd say, we just announced the decrementals. And so we didn't see anything in July that would change what we're talking about today. And so today, I feel very good about being right there in that the decremental range that we talked about of that 20% to 25%.
And I think as we continue to move forward, we should expect to have a decent quarter and we'll we can reconfirm that after the Q3.
Great. And just last quick one for me. I don't recall the last time I've heard nuclear come up as many times as it has on this call.
Yes.
Maybe it's one of the places they are still investing because there's nothing you can't really defer, But just kind of share with us what's driving that business.
Yes, sure. It's mostly on the valve side where we have the nuclear awards and a lot of it was just replacement valves and just making sure that they can continue to certify their operations and stay operational. It's not a whole lot of work, which is unfortunate that we had to talk about it. But for our nuclear valve, the Edwards brands and what we do there is actually a really strong quarter for bookings for them.
That's good to hear. Thank you.
Thank you. Our next question comes from Andy Kaplowitz with Citi. Your line is now open.
Good afternoon, guys.
Hey, Andy. Hey, Andy.
Scott, could you talk about the visibility you have at this point into bookings? I mean, you talked about recording the bottom of your expected bookings range for Q2 and there are some large energy customers out there talking about constrained CapEx for some time. Are customers saying they will do turnarounds in the fall, for example? Do you see your aftermarket decline at a bottom in Q2? And I think you mentioned this, but are you anticipating any large projects in that second half bookings that you talked about for the second half of twenty twenty?
Yes. Okay. No problem, Andy. Let me talk first about the OE and the projects and then I'll talk about what we're seeing on the aftermarket side. And so you know, right, the world went upside down in March, and all of our customers and operators were really trying to work through the chaos and the volatility in the end markets.
And what we saw was revisions on capital spending almost across the board. And so you're seeing anywhere from 20% to 40% down depending on are you more upstream or downstream or in the chemical space. And a lot of our customers were concerned about their viability. And so I think everybody put the brakes on in Q2. And what we're starting to see now is that a little bit of the dust is settled, folks are relooking their project portfolio, they're relooking the cost of those projects.
But right now, we don't have a lot of visibility to big projects resuming in Q3 and Q4. Now what I would say is there's certainly some exceptions there. Like we feel good about some Asia Pacific projects going forward. We feel good about a handful of Middle Eastern stuff that will go forward in the back half of the year, but it's a fraction of what we were tracking even 3 to 4 months ago. And so I don't expect those to come back, but I in the second half of twenty twenty.
But what I would say is if we can continue to see some of the green shoots of road transportation continuing, economies in Asia continuing to progress forward, COVID somewhat stabilizing in more mature regions, then I think these projects at least get back onto the docket. They start to relook the cost structure and I think there's hope that they move forward at some point in 2021. And then on the aftermarket side, it's a combination of 2 So one is just operators clamping down on their spending, but it's even more than that. It's compounded by access to their sites. And so I'll just let's just use the Gulf of Mexico and the Gulf region there.
We saw a little bit of a resurgence in early June where we're starting to get invited back onto the sites and our aftermarket business picked up a tick. And then at the end of June, it was kind of all stopped due to the COVID outbreak in the Houston area and the Gulf Coast. And so I really think it's dependent on the virus. And so I would say for turnarounds in service intensive type businesses in areas where the virus is contained, we are seeing folks talk about getting us back on the site and doing major services and turnarounds. But in areas like the Gulf Coast, all of that now will be potentially pushed off into Q4 or even into 2021.
And so I really just think that virus containment is the wild card on that. What I would say though is that our aftermarket is holding up in line with our expectations. The steel business has performed incredibly well throughout all of this. And we're still getting parts orders. And in some cases, we're seeing a little bit of an uplift on some overhauls where we're doing the work where traditionally the service department of that site would have done the work, but they're not bringing their folks in.
And so we're getting some of that. So I think our aftermarket will hold up reasonably well here in the second half of twenty twenty. But obviously, we're watching the COVID outbreak pretty intensely and carefully.
So I'm not going to pin you down on the Z axis stuff, but let me ask you about commercial intensity because you mentioned that how much is it helping you this cycle because obviously it's been one of the big things you've been focused on. So what's the opportunity here over the next year or 2 to really push the envelope on commercial intensity to go after installed base and take share this cycle. So even if site access is still a problem for us over the next few quarters, maybe you get better than that sort of down 11% that you've been at?
Yes. So the opportunity doesn't go away, right? And so commercial intensity is all about getting the market share and getting that work back that it's our installed base and we want the entitlements there. And so we want to be the ones that are servicing or providing the parts or doing the repairs for that. And so the price doesn't change.
And I think in a time of crisis and times of uncertainty, a lot of operators are looking to get back to people that they trust, that have good balance sheets that will be there for the long run, that will come out and do a service call when they need the service. And so I don't think that the value proposition changes whatsoever given where we're at. Now folks are going to cut back on spending. They are limiting access. And so I think we've got to get through that.
But long term, the commercial intensity is still super important for us, and it's a big part of our commercial organizational focus. And I think at some point, it starts to show real value for us as we transition into kind of late 2020 and into 2021.
Thanks, Scott.
Thank you. Our next question comes from John Walsh with Credit Suisse. Your line is now open.
Hi, good afternoon.
Hey, John.
Maybe the follow-up first here, it might be a little bit quicker, but when we think about the $58,000,000 you called it severance and other items. Was that a similar cash impact as well in the quarter? Or does that or is there some timing there? I'm just trying to wonder how much of that was actually cash in the quarter?
Yes. John, this is Amy. There is some timing impact related to the $58,000,000 So if we think about that, a little less than half of that was cash outlays in the second quarter and the rest will be phased for the rest of the year and even small portions into 2021. So we've accrued all the items that are necessary for us to obtain the $100,000,000 of cost savings this year and achieve that run rate going into next year. But there will be some cash outlays in future quarters related to that.
Great. Thank you. And then I guess maybe a question for Scott. So a lot of attention this quarter and focus on remote monitoring and other kind of applications like that. Curious, when you look at your portfolio of kind of smart pumps and equipment, can you actually go in and sell that to the customer?
Or does that have to be part of a larger IT, OT convergence that the customer is doing? I'm just wondering if we might see more conversations or if that's still something to come.
Yes. It's a good question, John, and it's absolutely part of our technology road map and our long term strategy. So we unveiled this technology in the 2018 investor conference at the end of '18, and we've made incredible progress since then. We haven't been talking about it maybe as much as we should, but I am really pleased with the progress that we're making. And what I would say is in a COVID world where folks are trying to limit access to sites, the ability to remotely monitor, the ability to track uptime operational issues and then the ability to predict a failure is super, super important.
So we continue to have great discussions with our customers. We've worked through, I think I don't have the exact number, but call it, 13 20 different pilot locations where our technology is out there and involved. And to your question specifically, we don't need an overhaul of the site or the installations IT system. We can plug our technology in and basically do the monitoring, the diagnostics and the prediction of failures. And so in early 2020, we actually were able to predict it was our first prediction of failure.
And so what it's showing is not only can we detect and monitor, but our algorithms and kind of what we're doing on the pump side are starting to work and show real value. And so this is something that as we go forward, we're going to talk more and more about, but it's certainly part of our long term strategy and part of our future. And what we want to really be is much more of a service provider where we're helping operators with their uptime and their viability. And so I think we're on the right path here. We've got a proven product and the more time it's installed, the more failures we can predict and it's just really kind of helping us with our selling and value proposition.
But I'd just say more to come in future quarters as we continue to invest and continue to progress this technology.
Great. Thanks for the color.
Thank you. Our next question comes from Mike Halloran with Baird. Your line is now open.
Hey, good morning. Well, good afternoon, everyone. Good afternoon, Mike. Yes. I wish I could say that was an intentional joke, it wasn't.
Yes. I wish we could say it was morning.
Yes, right. So first on the aftermarket side, we're 3, 4 months into this now. What's your sense for the ability to defer? The thought process coming into this downtick was that the level of deferral seen in that 'fifteen, 'sixteen timeframe was unlikely to be repeated this time around, just given the age and where everything was at from a maintenance perspective. Do you think that still holds true?
And what are the thoughts now after having a few months to talk with your customers about it?
Yes. I feel good about our aftermarket bookings in the quarter, right? I mean, we were tracking right at that kind of 10%, 11% down, very much in line with our expectations. And I think we're getting the work that's out there. We're doing good things.
And so I think I'm not going to say we get better from this point forward, but I feel good about what we're doing and how we're really making sure that we're a vital and critical partner for our customers. And then the other thing I'd just say is, as the world starts to reopen and I'm speaking specifically more on the petrochem and the refining side, right, ground transportation up, GDP starting to come back a little bit, We know that our operators' facilities got more and more utilized in the back half of the second quarter. And so they're running it kind of pick a number 75% to 85% utilization. At some point, they've got to do the operational maintenance stuff to keep that up and running. And so I feel reasonably good about those customers spending money in the aftermarket side and the MRO side.
But again, there's just some wildcards, right? And the fact that they're not making a whole lot of money if they're making money at all right now and then the issues with getting site access. And I do think as this kind of works its way through a little bit more, then I think our aftermarket business stays robust and reasonably healthy. But we're well positioned. Our QRCs are in the right locations.
Our teams are actively involved with the customers at those locations. Commercial intensity is doing what it needs to do. And I think we're going to continue to have good performance there.
And then a question on the pricing side of things. When you think about the competitive pricing, how pervasive is that? Is that on the engineered side to the standardized side? Does it fall into the aftermarket side? And then I think more importantly, how do you what have you set up?
What processes or incentive structures have you set up to make sure that the pricing discipline remains part of the organizational philosophy?
Yes. So as we enter the downturn, really late March, we started to develop downturn playbooks. And so some of them was refreshing some stuff we had, some is refreshing stuff I had from my prior years. But really, one of the key components was the pricing side. And so we spent a lot of time thinking through how do we price and what do we do in the downturn and how do we balance price with the desire to achieve the aftermarket work and the desire to keep our facilities as full as possible.
And what I'd say is, I think we're doing a reasonably good job there across the board. Where we're seeing intense pricing pressure has been on the pump OE side. I'd say some of it, our poor bookings performance in Q2 on the pump OE, some of it was because we wouldn't go lower on the pricing side. And so that's the part that's highly competitive. I think the competitive landscape there is everyone saw that things were going to come down pretty dramatically and there's been a lot of price consolidation.
At the same time, we've got to do more on our cost side and I'd say cost side more on the product cost side. So this is on design to value, working over the supply chain and then really making sure that we're getting the productivity in the manufacturing locations. And so as we continue to make progress there, then we get our cost more in line and we can make money even at the pricing that we're seeing today. So it's going to be tough, particularly the pump OE side is going to be tough for the next couple of quarters. But outside of that, it's not a great environment to get price, but it hasn't been as severe as what we've seen on the pump OE side.
Makes a lot of sense. Appreciate the time.
Thank you. Our next question comes from Nathan Jones with Stifel. Your line is now open.
Good afternoon, everyone.
Yes. Hey, Nathan. I guess one
of the upsides of it being afternoon is we're that much closer to getting a beer.
Yes, please.
I just wanted to follow-up on the pricing question and the pricing discipline angle on this. I've seen a few cycles from you guys and it's everyone goes into these cycles looking to be disciplined on pricing. And if the cycle drags out a little bit, then the volumes become a problem, your overhead absorption I'm wondering if there's anything that's happened in the Flowserve 2.0 transformation, such as lane, operational excellence, ability to do more with less that might enable you to accelerate some of the cost out plans that you might have had over the next 1, 2, 3 years earlier on so that that doesn't put you in that corner where you're between a rock and a hard place and you can protect margins without having to take some of these low margin, no margin. I know FlowServe over the years has even taken negative margin projects to absorb overheads. And just any color or comments you have around that?
Yes. No, I agree with everything you're saying, Nathan. You should be involved in some of our commercial and operations discussions. But really, that's exactly how we're looking at it, right? And part of Flowserve 2.0, we with a heavy emphasis on the lean side, heavy emphasis on productivity.
And we continued the realignment, but we kind of pressed pause there on roofline because we wanted to get common practice, common systems and really drive up that competency in manufacturing. While our work isn't done, we've made tremendous progress and I feel good about where we're at. It's coming through in the numbers even in Q2. And so what it tells you is that even as pricing comes down, if we can continue to push on that productivity, then we're going to be in better shape than what Flowserve has experienced in the past. And then the other thing it's done and it continues to do, right, is as we lean out our facilities and improve that productivity, we're actually creating internal capacity.
And so while we had put a hold on the realignment program, we were always pretty certain we'd pick that up in kind of 2021 and progress down that. And now our thinking is we can actually accelerate that. And so you'll see some more realignment, really more about roofline optimization from us. It will start at the back half of this year with some minor locations and some minor sites. But as we move into 2021, it will become more substantial.
And so I feel good about our continued ability to drive productivity. If we can systematically work through some of our roofline issues and drive further consolidation, then it really does allow us to take big chunks of cost out of the equation. And even if we are getting a little bit of price pressure, then we're still in reasonably good shape on the margin side.
I think typically on the aftermarket side of the business, you don't see a lot of pricing pressure. You haven't at least I think historically in previous cycles. Are you seeing pricing on the aftermarket side, the MRO side of the business continue to hold in? And do you expect that to continue to hold in going forward?
Yes. This is where our team has done a really good job. And so I would say all of our customers are asking for some sort of concession. Part of our pricing playbook is, okay, we're willing to do something, but what do we get in return? And so on the aftermarket side, we're seeing a little bit of pressure on the price side, but anytime we provide a concession, we're able to get something out of it.
And what we're getting out of it is potentially a new service or getting more of the parts business or getting guaranteed overhaul work and things like that. And so I think we're actually doing really good there. And the other thing that's helping on that side is a lot of the aftermarket content, particularly in the steel side is under a frame agreement or a long term service agreement. We call them LCAs here. And that managed spend, we already have some pricing metrics built into there.
And at any given time, the operator can call us in and take us back to take us back and say, hey, this doesn't apply anymore and what are we going to do? But for the most part, we honor it in up cycles in terms of our ability and how much we're allowed to move price up and then the downside that's in that contract. And so that managed for contract spend is actually holding up really well on the pricing side. And so I feel good about our ability to at least protect price on the aftermarket side and certainly a lot better than on the OE side. But request from our customers at this point.
Our next question comes from Joe Giordano with Cowen and Company. Your line is now
open. Hey, good afternoon. This is Robert in for Joe. So I just had a quick question on earnings seasonality and the typical cadence that we see into 3Q and 4Q, would you expect that to hold this year and see that sequential improvement from 2Q as a base year or base quarter?
So I think we've given our first half, second half guidance as it relates to EPS. And so not necessarily at this point committing to how that looks like between quarters, but I would say as we generally see some seasonality in the Q3 as we accommodate vacations, particularly in Europe. I would comment from a cash flow standpoint that Flowserve has traditionally seen a significant amount of cash generated in the back half of the year and we expect to see that trend continue. So although we've used cash in the first half of twenty twenty, we'd anticipate that we will build cash in the back half and would anticipate being cash flow positive.
Okay. And then just one on cost savings. I know you said you also said that you might see some benefits from some of the cost structural cost savings in
next year because you'll
have a full year benefit. But do you think there'll be any other incremental cost savings outside of that into 2021 like when you net out the temporary cost actions that might be coming back into the business as activity picks up?
So ironically, the numbers look the same. So year over year, we're anticipating about $100,000,000 of benefit from cost out and cost deferral actions in 2020. And that is a mix between things like travel slowing down this year, actually not happening at all right now for the business. But as we move into 2021, we're going to get the full benefit of the more structural decisions that we've made this year. So we'd anticipate even after building those costs back in, there's $100,000,000 of benefits.
As you can tell kind of the way that we're talking, we're not done looking for cost saving opportunities. And Scott alluded to that as he talked about some of the transformation activities that we continue to work on. But at this point in time, we think that we have put actions in motion that achieve not just $100,000,000 of savings and deferrals in 2020, but also set us up for $100,000,000 of structural savings in 2021.
Yes. Just I'll add 2 things to that. And we did say in the prepared remarks that we're tracking above that, and we took really quick and decisive actions there in the Q2. And so we're now moving a little bit ahead of that curve. And then secondly, we built that plan given what we knew and what we're facing today.
If things got significantly worse here in the 3rd Q4, then we'll revise that plan and we'll take the actions necessary. But at this time, we feel very good about the plan that we put in place and we'll continue to work that plan.
That's great. Thank you for taking my questions. Have a good weekend.
Yes. You as well.
Thank you. Our next question comes from Andrew Obin with Bank of America. Your line is now open.
Hi, this is Al Garruzza on for Andrew Obin.
Hi. Hi.
How are you? On supply chain, are you considering areas where you can de risk your supply chain and move your supply base to the U. S? Can you just talk about how you're thinking about your supply chain post COVID?
Yes, sure. I think the COVID situation has had everybody relook their supply chain strategies and operations. And so as this thing moved from China into Europe, into Americas and into India and Latin America, it is absolutely something that we're looking at and making sure that we've got, 1, the right regional presence and then 2, making sure that we've got some redundancy in there. And so, Particle Store 2.0 was a pretty significant supplier rationalization strategy. And we have been on the past to really trying to concentrate our suppliers and move to a more proactive spend with them versus a reactive spend.
And then what I'd say is, we're way down the path and doing good things there. And then now with the new situation with COVID is really about protecting that supply chain and making sure that we've got some redundancy. And so we've been working hard really since February, March timeframe on that. And I feel reasonably good right now. And so our we've got a we've made a lot of progress and we've got some good actions there for our U.
S. Facilities. A lot of those suppliers that we leverage are local. And then we're working to get even that consolidated and get better pricing. And then I'd just add, the only place that I'm concerned right now from a disruption standpoint would be India and potentially Mexico.
Mexico. And so we've got a pretty good supply base in India and they're obviously having a large outbreak right now. And so we're watching that carefully and making sure we've got a redundant source of supply there. And then in Mexico is the other the area of concern. And again, we're watching that carefully.
We've got opportunities to flex there if needed. Great.
And then do you have any visibility into how projects that were deferred in the first half are going to start? Could some push out into 2021? Thank you.
I wish I had the crystal ball on that. I would say a lot of the projects that are now on hold are deferred. I would expect the resumption of that work to be majority of that will be 2021. There will be some things that go forward in the back half of this year. But I'd just say that's probably, in my earlier remarks, a handful of orders that actually do make it forward.
And I'm talking large EPC type projects, a handful that do progress and go forward here in the back half of the year with the majority happening in 2021.
Great. Thank you for taking my questions.
Thank you. At this time, we have no further questions. Thank you for joining. And this concludes the call. You may now disconnect.