Welcome to the Flowserve 2019 second quarter earnings conference call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question answer session, if you have a question, please press star then one on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Jay Roueche, Vice President of Investor Relations and Treasurer. You may begin.
Thank you, Paulette, and good morning, everyone. We appreciate you participating in our conference call today to discuss Flowserve's 2019 second-quarter financial results. Joining me this morning are Scott Rowe, Flowserve's President and Chief Executive Officer, and Lee Eckert, Senior Vice President and Chief Financial Officer. Following our prepared comments, we will open the call for your 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 August 1st, 2019, 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 flowserve.com in the investor relations section. I'd now like to turn the call over to Scott Rowe, Flowserve's President and Chief Executive Officer, for his prepared comments.
Thanks, Jay. Good morning, everyone. Flowserve delivered solid second quarter financial results building on the momentum of the first quarter. We continue to make progress on our Flowserve 2.0 transformation journey, and we are seeing good results from each of the different work streams in the program. Our associates' engagement remains high, and they have fully embraced our strategic program to drive growth, lower costs, and deliver operational improvements throughout the company. Flowserve 2.0 is becoming the way that we operate our company each and every day. Let me begin with some highlights of the quarter before turning to our segments and markets in detail. We delivered second quarter revenue growth of 1.7%, or 6.2% excluding currency and divestiture impacts, and drove adjusted gross and operating margin improvement of 60 and 200 basis points, respectively. Adjusted EPS of $0.54 increased 32% both sequentially and year-over-year.
Reported EPS of $0.44 included transformation and realignment costs of $0.08 and below-the-line foreign exchange impacts of $0.02. With our solid first half results, including the bookings and backlog growth, combined with our expectations to continue to drive further operational and productivity improvements, we increased our full-year adjusted EPS guidance range to $2.05-$2.20. Turning now to our segments. FPD's first half performance continued to validate our decision to combine our pumps platform and leverage its scale and better serve our customers. FPD's bookings increased 5.7% in the second quarter, or 10.8% excluding the impact of currency and divestitures, and are up 14% for the first half of 2019. Operating improvement and leverage drove a 230 and 210 basis point improvement in adjusted gross in operating margins, respectively. With the multi-year realignment program now largely complete, we are optimistic about the opportunities ahead for this segment.
Our legacy IPD facilities continued to show improvement this past quarter. We are gaining traction on our transformation initiatives and lean implementation at the site level. These efforts are expected to drive further improvement in planning, manufacturing productivity, supply chain, and inventory management. FCD delivered a solid quarter with 8.7% bookings growth, including 3.2% of negative currency impact. Margins were negatively impacted in the quarter due to shipping a higher mix of lower margin project work and a slowdown in short cycle MRO activity. As a result, adjusted growth and operating margins decreased year-over-year by 190 and 110 basis points, respectively. We fully expect the FCD team will deliver another solid full-year performance as we focus on growing our valve platform for the future. I would also like to thank and recognize John Lenander, who has led the FCD segment for the past four years.
John retired earlier this month, and we wish him well in the next chapter of his life. Turning now to our overall bookings and end markets. Second quarter bookings increased 6.5% to $1.1 billion, including sequential growth of 3.6%, reaching the highest level in over three years. Excluding the impact of currency and divestitures, second quarter bookings increased 11.1%. The combination of our growth-oriented transformation initiatives and improved energy infrastructure investment drove project wins across all our core markets. While we had a few larger awards exceeding $20 million during the quarter, the vast majority of the bookings were smaller in size.
Looking forward, we expect our markets to remain healthy near term, and we expect another solid quarter of bookings in Q3 as global projects continue to move toward award. However, we do recognize and remain vigilant of the ongoing uncertainty due to geopolitical volatility, global trade disruptions, and fluctuations in commodity pricing. Original equipment orders grew nearly 12% over prior year and over 7% sequentially, accounting for 54% of bookings and reaching the highest level since 2015's second quarter. With larger projects beginning to ramp up, we expect the pricing environment to remain highly competitive for this type of work for both pumps and valves. However, with improved market visibility, we have been and will remain disciplined in our project pursuits.
We are committed to building a quality backlog while targeting prospects based more on customer relationships, our ability to offer a differentiated solution, and where there's a high probability of aftermarket services. We remain optimistic in the progression of the cycle where we are seeing a significant number of new projects in LNG, midstream oil and gas, and global chemical markets. These projects will provide opportunities to strengthen our installed base and ultimately drive aftermarket growth. As part of the transformation growth initiatives, we are increasing our collaboration across our segments, leveraging the power of a flow control pure play to better support our customers and increase Flowserve's capture of expected large project investment. We launched the concept at the end of last year, and we are pleased with the results that we're seeing in 2019.
In fact, in the second quarter, we received a large LNG award that was comprised of valves, pumps, and seals, and the associated services that come with it. We are actively pursuing other projects where we can bring the full technology portfolio at Flowserve to better meet our customers' challenges. Turning to our aftermarket franchise, we continued the rollout of the Commercial Intensity initiative in the quarter, driving increased aftermarket capture and producing our fifth consecutive quarter with bookings over $500 million. Our efforts resulted in a constant currency increase of 4.5% versus the prior year. We expect that the ongoing implementation of the Flowserve 2.0 growth initiatives, coupled with the increased customer spending we see, will continue to drive aftermarket growth, as many of our customers have increased their focus on the efficiency of their facilities and the upgrades required to meet regulatory challenges.
Now, from a served and end market perspective and starting with our largest market, oil and gas. Second quarter bookings increased 22% year-over-year, driven primarily by FPD's 30% growth, with FCD's contributing a 6% increase. Both LNG and midstream pipeline awards represented over 5% each of Flowserve's bookings this quarter. Two of our largest awards in the quarter related to a North American LNG project and a crude oil pipeline award in Texas. Both LNG and midstream pipelines are part of the Transformation Strike Zone initiative, where we are seeing tremendous success when we focus the resources and technology available to Flowserve. Additionally, we continue to benefit from global IMO 2020 investment in refining debottlenecking and efficiency upgrades. Regionally, North America and the Middle East delivered a number of orders in the $5 million-$10 million range across the downstream and upstream markets.
North American upstream has recovered modestly since the first quarter slowdown, but it is not back to the levels that we experienced in 2018. Our chemicals markets remained strong in the second quarter, delivering nearly 3% growth, including 3.7% of currency headwind. Growth was driven primarily by smaller projects and run rate investments in FCD's 16% growth, which included an $11 million project award in Europe. We continue to believe that the strong pipeline investment expected in North America, Asia, and the Middle East will present near-term opportunities, including ethylene crackers and derivative facilities. Challenges in our power markets continued, where second quarter bookings declined 4% year-over-year. We were pleased that FPD received a $20 million award for a concentrated solar power project in the Middle East, which is a growing niche power market for us, where we have a differentiating offering for pumps, valves, and seals.
Overall, we expect industry-wide headwinds to continue in traditional power markets for the near term. We do continue to see opportunities related to fuel switching, new-build nuclear in China, and competitive fossil fuel development in Asia. We also continue to support existing nuclear facilities with maintenance, upgrades, and life extensions, which drove a $4 million aftermarket award for us in Asia Pacific this quarter. Second quarter bookings in general industries declined 13% year-over-year, including nearly 3% of currency headwind. FCD's 5% increase was more than offset by FPD's 19% decrease, primarily due to lower distribution activity that was negatively impacted by oil price volatility and higher levels of inventory at our partner locations. General industry bookings also included increased pump and paper activity while mining, food & beverage, and agriculture declined. Although combined, these markets currently represent less than 5% of our overall bookings.
Lastly, representing our smallest market, water bookings increased 12% in the second quarter, including small project awards in North America and Europe. Turning to total bookings by geography, we delivered 49% growth in the Middle East and African markets. We are seeing a significant increase in project activity. We also grew 11% in Asia Pacific and 2% in North America. This growth was partially offset by an 11% decline in Europe and a 4% decrease in Latin America. I'll now turn the call over to Lee to cover our financial results in greater detail, and then I will return for closing remarks before we open the call up to questions and answers. Lee?
Thanks, Scott, and good morning, everyone. As previously mentioned, we are pleased with our strong performance in the second quarter. We delivered adjusted earnings per share of $0.54, in line with our expectations, and keeping us on pace to deliver another year of substantial adjusted EPS growth. On a report basis, second quarter EPS was $0.44, which included $0.08 of realignment and transformation charges and $0.02 of negative below-the-line currency impacts. For the first six months of 2019, our adjusted EPS of $0.95 is 40% above prior year. In addition, our reported EPS is approximately 93% of our adjusted EPS, a meaningful improvement from 32% last year as we continue to improve Flowserve's quality of earnings through reduced realignment and transformation expense. Second quarter revenues were $990 million, an increase of 1.7% versus prior year, and up 11.2% sequentially, in line with normal seasonality.
On a constant currency basis and excluding divestiture headwinds, organic revenues grew over 6% year-over-year. Second quarter aftermarket sales increased 2%, or 5.4% on a constant currency basis, to $498 million, or 50% of our sales mix, similar to prior year. Turning to our margins. Second quarter adjusted gross margin increased 60 basis points to 32.5%, driven by FPD's 230 basis point improvement to 33.6%, which included continued operational improvement, cost control, and leverage from our pumps combination. Partially offsetting FPD's strong performance was a 190 basis point decline in FCD's adjusted gross margin to 31.4%, primarily due to higher sales mix of lower margin project work, as well as lower percentage of MRO and aftermarket sales. Reported gross margin increased 270 basis points to 32.1% on improved operational execution, decreased realignment items, and the impact of 2018's loss on an asset sale.
Second quarter adjusted SG&A declined $7.6 million to approximately $214 million. As a percentage of sales, adjusted SG&A decreased 110 basis points to 21.6% as a result of focused cost control and modest revenue growth leverage. On a reported basis, second quarter SG&A decreased $17 million, including approximately a $10 million reduction in adjusted items versus the prior year. With our solid adjusted gross margin improvement, as well as ongoing tight cost control, we drove a 200 basis point improvement in adjusted operating margin to 11.3%. FPD's 12.1% adjusted operating margin increased 210 basis points year-over-year, which was partially offset by FCD's 110 basis point decrease, although FCD still delivered a respectable adjusted operating margin of 14.6%. Reported operating margin increased 510 basis points, which benefited from continued operational improvements, as well as approximately $30 million net reduction in adjusted items.
Our adjusted tax rate was 26%, at the low end of our full-year adjusted tax rate guidance of 26%-28%. Turning to cash. First half operating cash flows increased $100 million versus the prior year, including earnings growth and approximately $80 million improvement in working capital, which drove our cash balance to approximately $600 million, or roughly $80 million higher than last year's second quarter balance. Primary working capital as a percentage of sales declined 160 basis points to 28.5%. While we've made some early progress on working capital, we still need to continue to drive improvements in our inventory and order cash processes until they are sustainable, systemic, and embedded into our operating cadence. Capital expenditures for the second quarter were approximately $15 million. We also returned $25 million to shareholders through dividends and repaid $15 million of long-term debt.
In July of this year, Flowserve entered into a new $800 million, five-year senior credit facility, replacing the one that has supported us since 2012. Our new facility will provide Flowserve with the liquidity and flexibility to support the company over the coming years. We are very pleased with the outcome of the new agreement, and I want to thank our banking partners for their support and ongoing strong relationship. Turning to our outlook for the remainder of the year. With our strong first half results and expectations for the second half of the year, we increased our full-year adjusted EPS target range between $2.05 and $2.20 per share. The adjusted EPS target range excludes the expected 2019 realignment and transformation expense of approximately $50 million, as well as below-the-line foreign currency effects and the impact of other discrete items which may occur during the year.
As a result, we also increased our reported EPS range between $1.75 and $1.90 per share. Essentially, we expect this year's reported EPS to equal or exceed the adjusted EPS we delivered in 2018. We also tightened our expected revenue growth to 4%-5% from the prior range of 4%-6% due to the continuing strong U.S. dollar, where we now expect full-year currency headwinds of 2% versus the prior expectation of 1.5%. We also face an additional revenue headwind of roughly 0.5% from last year's business divestitures. However, our total organic revenue growth, excluding the impact of FX and last year's divestitures, means that the high end of our original range now narrow to 6.5%-7.5% for the full year 2019.
As I indicated last quarter, our revenue growth for the year will see a higher percentage of sales from larger project original equipment work as the growth in our short cycle MRO business has decelerated in recent months. Net interest expense for the full year is expected to between $55 million-$57 million, with an adjusted tax rate of 26%-28%. From a 2019 full year cash interest perspective, we expect to return approximately $100 million through dividends to our shareholders. Capital expenditures are expected in the $90 million-$100 million range. We also continue to reduce our long-term debt within our credit facility during the remainder of the year. We expect it to contribute approximately $20 million to our global pension plans, mainly to cover our ongoing service costs as the U.S. plan remains largely fully funded.
Let me now turn it back to Scott for his closing remarks.
Great. Thank you, Lee. As I wrap up, I'd like to spend a few minutes on our outlook and the progress of our transformational efforts. We are well into the Flowserve 2.0 transformation program that commenced in early 2018. I am very pleased with the momentum that we are building on the multi-year journey to drive the cultural and operational improvements necessary to better serve our customers, our employees, and our shareholders. Over the last two months, I've spent significant time meeting with our associates and leaders from around the globe. I couldn't be more pleased with the progress that we are making and their willingness to take on the challenges of this transformation. They are informed, engaged, and empowered to drive the changes at all levels of Flowserve.
The engagement level of our workforce has improved dramatically in the past two years, and the overall health of Flowserve is significantly better than where it was in the past. We are spending a lot of time investing in our leaders and creating a performance-based culture. Today, our transformational program is largely internally led and is being executed by our frontline leaders from around the globe. We are encouraged by the results that we are starting to deliver in the areas of our business, including strong bookings and backlog growth, consistent margin improvement, increased manufacturing productivity, reduced working capital, and lower past due backlog. Even more encouraging, there is still significant opportunity ahead for Flowserve. Much work remains on the path to our 2022 targets that we presented last year, but we are instilling the culture, developing the processes, and changing the operational model to create sustainable long-term value.
As we approach the middle innings of our transformation, I am confident that we will build on the momentum that we have created and continue to drive further improvements at Flowserve. Operator, we have now concluded our prepared comments and we'd like to open the call for questions.
Operator?
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Our first question comes from Andy Kaplowitz from Citi. Please go ahead.
Hey, good morning, guys.
Hey, Andy. Good morning.
Scott, can you step back and talk about the cycle as you see it? You haven't recorded $1.1 billion in bookings since early 2015, yet many of your peers have been talking about project delays, and obviously we have seen a short cycle slowdown that you're feeling in your general industrial business. Can you give us some perspective on the booking cycle as Flowserve sees it? Do you think there's a good enough pipeline out there where you could sustain or grow from this level of bookings for the next few quarters? How much at a higher level of bookings has actually come or could come from self-help, with the initiatives that you have, such as Strike Zone and Commercial Intensity?
Yep. Our project outlook still remains really positive, I've talked about that now for probably two quarters. We still feel very good about the health of the project pipeline and the project portfolio. The LNG markets are robust, and I'd say that's got at least another year or two of activity. Our midstream oil and gas markets are very active, and we've had some great awards this quarter, and we expect further awards here in the next 12 months there. Petrochemical is strong as well. I think from a project standpoint, we're still seeing a lot of activity, and we expect project work in the second half of the year to be pretty robust for us. The concern, and it's very similar to what I talked about at the end of the first quarter, would be more that North American MRO business.
This is primarily the distribution network that services more of the upstream markets, but also some of the midstream, and that's where we've seen a slowdown. You can see that in our general industries category, where our bookings were down 12% year-over-year. I'd say that's where we're putting the most focus on transformation, right? Our Commercial Intensity is meant to attack and really address that MRO type business. I would say that we're trying to offset the negative market sentiment there with the internal actions. Overall, I feel reasonably positive with the markets. Again, I think the projects will continue here for at least another year. Our outlook for Q3 and Q4 remains solid.
Just following up on that, Scott, can you give us more color into your margin progression in FCD? You mentioned in the short cycle slowdown impact in margin in the segment, but you just said the general industrial business was weak last quarter also. What changed this quarter, and should we still see FCD on a generally upward margin trajectory for the second half of 2019?
Yeah. I would say, certainly we never want to go backwards in margins. For the first time, FCD kind of took a big step backwards. It's really being impacted by the mix within our OE business, and that's the slower MRO work that comes through the North American distribution. It's not shown in aftermarket, it's more on that OE side. The OE is pivoted to projects, and the differential in margins between projects and MRO is pretty significant. We've looked at it in great detail. We know which products it is, which facilities. Unfortunately, with North American distribution, there's just a lot of products on the shelves from a lot of activity last year. That inventory's got to bleed off over the next quarter or two before we start to see active bookings there.
I don't expect that situation to get worse, but I also don't expect significant improvement to probably 2020 as the inventory levels start to get down.
Got it. Thanks.
Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead.
Thanks. Good morning, everyone.
Good morning, Deane.
Hey, Scott, would love to follow up on Andy's questions. This whole sort of industrial short cycle pressure has been happening to everyone. There's no surprise that it manifests in your business. You give really good color in terms of what you're seeing and the expectations for the channel. What might be helpful is how did it progress during the quarter, and then any commentary about July and if I could start there. Thanks.
Sure. I'd say, it progressed not as well as we would've expected in Q2. We knew we had a concern with the bookings in Q1, then I'd say in Q2, it did not improve at the rate that we were expecting. I don't want to give any color on July or the third quarter yet, what I'd say is our guidance has this level of activity in it for the back half of the year. That's already baked in, we don't have any uplift in that guidance. I would say as the North American markets start to improve, which I think we saw a little bit of improvement in June, if they continue to move forward in the back half of the year, we start to move up from where we are.
The other thing I'd just add is, it's something that's happening to everybody, as you said. It's that short cycle industrial, and it's the North American upstream business that's pulled back now since December. It won't stay down forever, right? There's a lot of activity that has to happen. There are things that are going to have to move forward with. It comes back, and it's just more a question of timing. For us, probably the biggest single thing is just inventory on the distributor shelves. We get good visibility with our partners and their inventory levels. As we start to see that come down, our bookings will increase here, and we'll start to generate revenue pretty quickly because it's very short cycle work.
That's real helpful. Given that bookings were one of the positives here in your results, I'd love to hear more color on this large LNG project because it does sound like the perfect win here. You had pumps, valves, seals, and services. So what was different about the selling proposition for this win versus what Flowserve 1.0 was doing? Is it maybe a little bit on pricing, and what does it say for a project like this about the aftermarket opportunity?
Yep. Unfortunately, I can't speak to the details because our customers haven't allowed us to do that yet. Hopefully, we'll get a press release out on this shortly. What I would say is it's absolutely a flagship award for Flowserve, and it's the first time where really we put the efforts of Strike Zone across all of our products and the whole portfolio to bear. What we saw is when we do that early in the process, so pre-FID and in the concept phase, we can start to partner with our customers about how we can bring better efficiencies in the pumps, the right isolation and flow of control with our valve, making sure we have the proper barrier and safety with our seals business, and then assuring them that our aftermarket will be present and help them with reliability and uptime.
When we do all that and we do that early, we can have incredible opportunities to get a bigger share of these projects, and then a bigger share of partnering with them throughout startup commissioning and through the operations. We're super excited. It's definitely a flagship award. It exemplifies what we've been talking about on power of the pure play. It also just validates the efforts in the Transformation Office. Like we've talked about on the midstream pipeline, LNG is also a Strike Zone market for us. This is one we've been focusing on. We've been making sure that we have the right portfolio. We've been enhancing our technology to better serve this market, and this is just a great win for us in a pretty big and growing market.
Yeah. Congrats to the team on that one. Just a clarification, and then last one from me is, can you explain in a bit more detail the aftermarket discussion that you have? You hinted at it that there's some assurances that you'll be participating in the aftermarket. Is that a formal process? How does it differ from project to project in terms of how realistic the aftermarket opportunity is?
Ideally, we would love to sign, like on a greenfield facility, ideally we would love to sign the long-term life cycle agreement while we're in the process of negotiating the front-end valve. We haven't done this on this award, what I would say is I've got about a 90% confidence rate that we will get the long-term service agreement for pumps, valves, and seals here. It's because we'll have the installed base and all the original equipment. We are picking up the installation commissioning work, we'll get aftermarket on that. I highly anticipate that we will have a long annuity here on the aftermarket side on both pumps and services in this facility.
Congrats. Thank you very much.
Our next question comes from Nathan Jones from Stifel. Please go ahead.
Hey, good morning. This is Adam Farley on for Nathan.
Okay. Hey, Adam. Good morning.
Hey. You sound pretty confident in this late cycle project work. Could you just provide a little bit more color along the lines of the late cycle projects? We have heard from some companies that projects are starting to slip to the right. Maybe there's a little bit of a pause given the macro uncertainty. Are you seeing this anywhere in any of your end markets?
I think we're always concerned. There's a lot of negativity in the backdrop. I'd say for us in Q3 and Q4, the project work should absolutely continue. These are projects that are already through FID or are nearing FID. I would say the Middle East is incredibly active, North America is active, and Asia Pacific's active. We feel really good about our Q3 bookings. We feel pretty good about Q4. I would say as we get further out, the confidence starts to go down. Certainly, the backdrop with oil and some of the other commodity pricing provides concern here and will potentially delay some of the larger awards. I think overall for us, we've got reasonable visibility into projects in Q3 and into Q4.
All right. That's helpful. Just turning to free cash flow and working capital. You made some improvements there. Maybe just provide a little more color on how you view working capital performance and maybe where are you in terms of implementing structural processes and technology into working capital management.
Yeah, I'll start and then I'll let Lee do some details on the receivables side and maybe inventory. This is an area that we've been focused on since I've been here. What I would say is I'm very pleased with the progress we made. I'm also a little frustrated that it's taking this long to get to where we are. I think, from a systemic standpoint, though, we're putting the process in place, certainly on inventory and inventory planning, that will sustain this momentum and continue to move inventory down even further. I feel really good about that. On the receivables side, Lee's leading that, and we're seeing good progress there. What I would say both in inventory and receivables is just the fragmented nature of Flowserve and just the disparate locations that we have has made this incredibly challenging.
We're starting to make good progress, and our leaders very much understand the importance of driving working capital. I'm very pleased to start to see the movement here on the year-over-year numbers. Lee, you want to add anything on overdue on receivables?
Just to build on what you said. I think the key thing that Scott already kind of ended with was awareness. I recently spent time in India at three of our facilities, and they're talking about receivable improvement, they're talking about inventory improvement, and that didn't exist a few years ago. Awareness is, I would say, very high across the company, which was a start. One of the major strategies we have at Flowserve is try to consolidate our collections work. I would say beginning of the year, we had roughly about 30% of our collections work at our shared service operation. Our goal is to get to around 60% of the year. By doing that, we get a lot more transparency and insight what's going on in our receivable performance and what's going on with customers.
We're also trying to build out tools to get better insight across looking at our invoices and understanding what is past due and which ones are not being paid. We're in the process of building much better Power BI tools around understanding what is late, providing that information to our sales organization, which we didn't have in the past, of saying, "Here are the customers that are delinquent or have issues with us that are preventing them from paying." We're slowly building out the process. The awareness is clearly there. We're trying to catch up with the tools and the ownership, and as we shift our collections work to shared services, we expect to also improve that performance.
All right. That's really helpful. Thank you.
Thank you.
Our next question comes from John Walsh from Credit Suisse. Please go ahead.
Hi. Good morning.
Morning, John.
I guess just a question around pricing. You've been talking about positive momentum on the aftermarket side the last couple of quarters. One of your European competitors actually mentioned some capacity tightening. We just wanted to get your view on the pricing landscape and kind of what your view is on if we're actually starting to see industry capacity tighten a little bit.
Yeah. It's really not a lot of different than my commentary in Q1. We hit our pricing very early in the year, right? We actually started in December, and we did a second pricing increase kind of late Q1. For the work that is a priceless work, so that would be our MRO valves, our spare parts, some of our services and service contracts, and then some of the smaller pumps, very confident that we're ahead of that price cost curve and that we're doing really well. Unfortunately, a lot of that's through that distribution channel, which we talked about that is now off and lower than we expected.
If that comes back, we start to see more margin and mix on the higher prices side. What I would say is I am very happy to hear our peers starting to talk about price. That's the first time I've seen that since I've been talking about it now for three quarters. What I'd say is we're starting to see a little progress on pricing for our bigger projects, but they still remain highly competitive. I do believe, though, as capacity begins to fill across the peer group in both pumps and valves, I think we're going to see more people get more discipline in that project pricing. Honestly, in Q2, I think it was still pretty competitive on the larger projects. For whatever reason, the bigger the project, the more excited people get and the more discounts seem to be provided.
That's an area of concern. What I would say is we're incredibly focused on our pricing. It's part of our commercialization work stream, and it's an area of intense focus. We'll remain very selective on our projects, and we're going to make sure that they provide the margins that Flowserve and our shareholders deserve. We'll continue to focus on this as we move to the back half of the year through the transformation work stream.
Great. Thank you. Then maybe a follow-on for Lee around free cash flow. The last couple of quarters you've been talking about this kind of 75%-plus conversion. Is that still the right bogey? Anything to call out in terms of cadence in the back half?
Sure. Just to remind everybody, free cash flow in the first half of the year was $24 million, which was up $113 million versus prior year. Improving working capital, quality earnings, free cash flow conversion is a high priority for the business. As I mentioned on the last call, we had really strong first quarter cash flow, but it benefited from some accrual timing that reversed out in the second quarter. We were really pleased with our $113 million improvement in the first half of the year, and we've got really good line of sight to that 75% conversion.
Great. Thank you.
Our next question comes from Joe Giordano from Cowen. Please go ahead.
Hey, guys. Good morning.
Hey, Joe.
Hey, I just wanted to clarify something you said on FCD margins. You said you're not expecting kind of an improvement until 2020 on some of the distribution kind of frees up a little bit. Are you talking from 2Q or are we talking year-on-year? Obviously that's a business that steps up materially in the second half typically, if we look at last year back half, something like high 18%-low 19%. How should we think about second half in that business year-on-year?
Yeah. From the second quarter gross margins, we don't expect gross margins to go down from where we are right now. The progression there really depends on how North America responds and if we're able to get more product through our distribution in the general industries category. Right now we feel reasonably good that it steps up in Q3 and Q4, I think it is dependent on the activity that we see in North America.
Okay. That's fair enough. The corporate line was one that was kind of brought up by a couple people as being pretty light in the quarter. Is that just kind of timing or does that step up to compensate in the back half, or how should we think about that?
This is Lee. In my prepared remarks, we are focused on driving SG&A down as a percentage of sales year-over-year. That corporate line that you see really reflects, I would say, unallocated corporate cost. As I mentioned on previous calls, it's about $100 million of cost that's unallocated. It represents legal costs and board costs and CEO costs. That number does bounce around from quarter to quarter, but overall, we expect it to be roughly around $100 million for the year.
Okay. One maybe more higher level on the business. For LNG, I know we've talked in the past, the leverage you have to that has historically been lower than something like a refinery because certain product categories on cryo pumps and stuff like that you don't have. Is there ways for you, given how you're having some success here and it's a market that seems to be doing pretty well, is there ways for you to kind of raise your content on some of these projects?
Sure. I think through the power of the pure play, that's absolutely how we raise the content. If we can get valves pulled in and get seals locked in, then we're doing really good things there. The other thing is just expanding the portfolio through our R&D and new product development. The LNG focus is within our new product development, and we continue to add more cryogenic products both on the pump side and the valve side to make sure that we've got a bigger entitlement on each of the LNG trains.
Good. Thanks, guys.
Our next question comes from Walter Liptak from Seaport Global. Please go ahead.
Hi. Thanks. Good morning.
Hi, Walter.
Hi. I wanted to ask an LNG question, too. It's good that you've got some LNG projects that are moving forward, and I wonder if you could maybe give us some insight into your win rates, because there have been a small number of projects that have moved forward. How do you think about the market share on those wins? The second half of the question is, there's a bunch of projects that look like they could go FID and provide visibility into 2020, and have you done the value-added selling or the pre-FID selling on those LNG projects, too?
Yeah, sure. I don't want to get into specific win rates on a category, but what I'd say is we have been doing reasonably well with LNG, but it's been a little bit under the radar because we're getting around $10 million of awards. We would get a pump award or just a valve award in that kind of $8 million-$10 million range. We've been reasonably successful thus far. This quarter was the first time we've been able to really bring all of the assets and technology that Flowserve has together into a single award. That was roughly $30 million for us. Again, a flagship award to talk about on power, the pure play. We are engaged in other of those type of discussions, but they're way up front in that concept phase.
At this point, I'd be reticent to commit to when do we see another one of these type awards, just because we don't know the timing for sure. One of the things that we're trying to do is to get more involved with operators and our customers and licensors and really make sure that our technology is part of that package and part of the solution for providing a better service to our customers in the long run.
Okay. All right. Sounds good. Just switching gears to the pipelines, the midstream. Is that where you were talking about in the third quarter, fourth quarter, you've got visibility, but 2020 you're not so sure because I think some of the pipeline spending comes to an end in the back half of this year? Do you have any visibility into 2020?
Yeah. I'll talk a little bit about Q2, then I can go into kind of the back half of the year. We received a really nice award here in North America on a crude oil pipeline. We're very excited about it. It's a big number for us. It's a flagship award to really get us back into the interstate or the large pipeline work. Thus far, we launched this initiative about a year ago, and we've booked $120 million over the last 12 months in midstream pipeline. We believe the outlook for the remainder of the year is reasonably healthy. We don't have another incredibly large award in the kind of $20 million-$25 million range, but we've got a lot of activity in the $5 million-$10 million range, and our outlook for Q3 and Q4 remains robust in midstream.
I do believe that starts to slow down in 2020. Certainly, for the next two quarters, we feel good about midstream pipeline.
Okay. All right, great. Okay, I'll take the rest offline. Thank you.
Great. Thank you.
Our next question comes from Brett Lindsey from Vertical Research. Please go ahead.
Hi. Good morning, all.
Hey, Brett.
Hey, just want to come back to the sales guide. You mentioned some of the uncertainty from a macro standpoint, the weaker upstream and some of the destock, but you're holding the organic guide here. I guess in terms of that big ramp in the back half, is it just confidence around backlog and deliverables? I guess if so, what % of the backlog do you need to ship in the second half to hit the plan?
Yeah, I'll let Lee walk through our revenue guidance here in the back half.
Just to answer your question directly, right now we're expecting around between 60% and 65% of our backlog to convert. Our backlog is up 14% since year-end, it's actually up 18% year-over-year. Based on what we've got line of sight on, we expect roughly between 60% and 65%. Basically the book and burn is the balance. Right now, it's pretty much flat year-over-year. We feel good about our revenue guidance. We should be able to convert the backlog and get the same amount of book and burn that we've had historically.
Okay, great. Just thinking about the Q3 to Q4 progression from a growth standpoint, but also margins, anything to be aware of from a modeling standpoint and the way OE versus aftermarket mix hits both those quarters?
Sure. I'm glad you brought that up. Just to remind everybody, we remain highly focusing on expanding our margins. Driving year-over-year margin expansion is important to us in order to drive shareholder value. We've seen great progress over the last five quarters. Four out of six of our Flowserve 2.0 initiatives are around margin expansion. Our growth initiatives that Scott talked about has resulted in OE bookings being up 17% in the first half, and our backlog and OE being up 20% year-over-year. As I discussed in the first quarter call and discussed in my prepared remarks, we expect the sales mix the rest of the half of the year to shift towards the OE in the project work with the strong bookings that we have.
The result is that we're going to see an increase in OE sales, which are going to help drive earnings and obviously build our installed base, but there will be some downward pressure on margins versus what we've seen, say, in the first quarter, where we had a heavy aftermarket mix.
Is that a Q3 comment or just kind of the back half as a whole?
I would say it's the back half.
Okay. Just one quick follow-up. Could you just put a finer point on what the size and scope of the large projects were in the quarter? I think you mentioned a few were in the $20 million range. Could you just quantify that just any visibility on the timing when those let out?
LNG award was right at $30 million. Our big midstream pipeline award was above $20 million. We had a nice concentrated solar power award in the Middle East that was around $20 million as well.
Okay.
That's kind of when we talk about large projects, that's kind of the size that we like. We can bring our technology and get the margins that we deserve in that kind of range.
Okay. I appreciate all the color. Thanks.
Our next question comes from Steven Fisher from UBS. Please go ahead.
Thanks. Good morning.
Good morning.
Morning. Just wanted to follow up on your recent comment there, a couple of questions ago about the midstream, where you said there's lots of activity, I think, in the $10 million-$15 million range after this big $20 million-$25 million range. You said that would slow down in 2020. What tells you that that will slow down on the smaller side in 2020? Is it that your customers are already telling you this, or is it just sort of assumption that, "Hey, it's going really well this year, it's bound to slow down?
Yeah, no, that's a great point because I probably didn't answer that as well as I should. The reason I think it slows down a bit is just we don't have visibility beyond this year on the pipeline work. Typically this is a little bit shorter cycle type work. It gets built pretty fast and we can ship within 12 months. For us, we've got visibility in Q3 and Q4 on midstream work. It's all, again, kind of that $10 million-$15 million work, and we believe we'll get our share of that. We just don't have great visibility to 2020. When you step back and look at the macro, though, there still needs to be pipeline build-out, certainly in North America and then other parts of the world.
I would expect international opportunities to start to come through in 2020 and probably some other big ones in 2020 that we just don't have visibility to right now. I don't necessarily believe midstream comes down dramatically in 2020. We just don't have a lot of visibility right now in what we're chasing and looking at and talking to our customers.
Got it. That's helpful. Is there any connection on the MRO piece in North America tied to oil and gas, directly or indirectly, is there any assumption that that would have to pick up in, say, the fourth quarter, to kind of get your FCD margin back up?
Yeah, no, our distribution channel is largely oil and gas. There's others. There's refining, petrochemical and others, but a big portion of that is the oil and gas markets. We need oil and gas to pick up in the back half of the year on the more of the upstream side. As that happens, we start to move up, in our bookings and certainly in our revenue, because it's such a short cycle business there.
Got it. Thanks a lot.
Great. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.