Flowserve Corporation (FLS) Earnings Call Transcript & Summary

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

Thank you, and good morning, everyone. Welcome to Flowserve's Second Quarter 2026 Business Update. I'm joined by Scott Rowe, Flowserve's President and Chief Executive Officer; and Flowserve Chief Financial Officer, Amy Schwetz. Following Scott and Amy's prepared remarks, we'll open the call for questions. Turning to Slide 2. Our discussion will contain forward-looking statements that are based upon information available as of today. Actual results may differ due to risks and uncertainties. Refer to additional information, including our note on non-GAAP measures in our press release, earnings presentation and SEC filings, which are available on our website. With that, I will turn it over to Scott.

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

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

[Operator Instructions] We will take our first question from Andy Kaplowitz with Citi Group.

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

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

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

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

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

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

Yes, Deane, it's funny you say that. I'm hoping for a ceasefire right now, piece in the Middle East would be -- it seems like a traction something that people have been hoping and praying for decades, if not centuries. Maybe just context for everyone, the Middle East is significant for Flowserve, right? It's roughly 12% to 13%. And we've got a large presence in the region, both from a manufacturing standpoint and a service standpoint. And I'd say today's situation is incredibly dynamic. We saw that over the evening. We've seen it this morning. We've seen it over the last couple of weeks. . But I also want to just say we believe that this is temporary or transitory and we do believe over the long term that this is a massive opportunity for Flowserve. And maybe to hit your specific question, I want to break that kind of categories into 4 things. And so 1 is our run rate business. And so with our QRC network, with our large installed base across the region, we do have a substantial run rate business. That currently is down about 20%. And so we're being impacted by the ability to go to sites, the ability to conduct our work as we normally would. And then just, quite frankly, our customers being distracted with other things and other priorities. And what we -- you've heard in the preliminary commentary that we expect that to continue into the second half of the year. And I would say your guess is good to mind of exactly how that plays out. But in our assumptions for the second half, we're saying that we're roughly going to be the same in that category. On the large projects coming into the year, we had a significant funnel of large projects and opportunities. We saw 2 of those projects come to fruition in the second quarter, which we're super excited about. And we're going to begin to start some work on that with revenue more in the 2027 time line, but we'll begin executing on those projects. The project funnel is still healthy. And I would expect other awards in the second half of the year, but some of those bigger projects will most likely slip into 2027 as well. And then getting to restoration, we -- in the prepared remarks, we talked about a $50 million restoration activity. We are -- we have a full understanding of what sites have been damaged, and we're starting to get an understanding of what equipment will either get repaired or replaced. That work has been slow to develop. But every week, we start to get a little bit clearer picture. At this point, we believe it's $50 million activities this week. That number may go up. But I would say that's a relatively good estimate given what we know right now and with the limited site access that we have. And so I would expect to start booking some of that in the second half of this year and then into 2027. The biggest prize is on what we're calling the category of redundancy. And so think of the Middle East needing to build out redundant pipelines, incremental storage, incremental capacity. We think there's a very significant prize for this type of work. You asked for an estimate, we're not ready to provide an estimate on that type of work. We are in conversations with our customers. There's some public commentary out there about redundant pipelines already. And so you could expect that we're in those conversations. And we believe we have the right to win there because of our large installed base because of our presence in the Middle East because of our customer relationships, because of our existing market share in the region. So as this redundancy begins to shape up and the build-out begins, I'm confident that Flowserve plays a major role in the activities in the future.

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

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

And Mike Halloran with Baird -- our next question. .

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

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

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

Sure, Mike. You'd have to break it by industry. So I'll just start on the different industries. So on the energy side, what we're seeing is energy security outside of the Middle East. And so we are seeing incremental activity. The LNG award in Canada was -- came a little bit faster than we thought. We believe that some of that acceleration is possibly as a result of what's happening in the Middle East. And when we look at the project funnel, there's other opportunities like that, that really are trying to regionalize the energy and making sure that different countries or different regions has a secure source of energy. And so I think you can see incremental LNG on a go-forward basis. You see some midstream kind of build out potentially some capital on the refining side, but I'd say less OE on refining and more about making sure that they can continue to run refining assets at a really high level. And then if you go to Power, I would say that, that end market or that megatrend continues to work in a big way. And right now, we don't see any slowdown there. And that would be both for traditional power and for nuclear. And so our outlook on power remains incredibly strong. We're well positioned on the nuclear kind of backdrop and we feel good about our right to win as new awards start to move through the system. We're very excited to get awards for 2 reactors in Asia in this quarter, and we expect to continue to be involved in the new reactor build out, the life extension traditional aftermarket and then ultimately in that -- the space of SMRs. And then on general industries, we feel good about general industries. And so we saw work in the quarter around some -- you had some pharmaceutical, we had water. We had other kind of not necessarily large markets for us, but really healthy growth in demand there. And I don't see that slowing down as we look at the second half of the year. And I'd say then the last 1 is chemical. We did have a large chemical award in the quarter that was in the Middle East. The rest of -- outside of that large order, I would say chemical business is stable. And so of all our end markets, that's the 1 that's roughly flat. And we feel really optimistic about the other 3.

Moving next to Nathan Jones with Stifel.

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