Business Description<br />Basic Business Description<br />Flowserve Corporation (FLS) is a manufacturer and service provider of flow control systems. The company develops and builds flow control equipment such as pumps, valves, and seals, and provides installation, repair, and retrofitting services for its products through its quick response centers (QRCs). <br />The company pursues a strategy of pursues a strategy of industry diversity and geographic breadth in order to hedge against industry-specific or region-specific downturns. Sales are generally direct through employees assigned to specific regions and industries; majority of sales are through existing relationships or referrals.<br /><ul><li>Market Cap = 4.09B (mid-cap)
2008 P/E = 9.34 (Diversified Machinery industry average of 16.7)
2008 EPS = 7.82</li></ul>FLS operates in three sectors: <br /><ul><li> Flow Control Division
Revenue Breakdown<br />Sales by Geographic Region<br />(amounts in thousands)<br />North America 1,565,715.55 (35%)<br />Europe 1,252,572.44 (28%)<br />Middle East and Africa 492,082.03 (11%)<br />Asia Pacific 805,225.14 (18%)<br />Latin America 357,877.84 (8%)<br />
Revenue Breakdown<br />Bookings by Industry<br />Oil and Gas 39%<br />Chemical 17%<br />Power Generation 15%<br />Water 6% <br />General Industries* 23%<br />* General industries includes the following: mining and ore processing, pharmaceuticals, pulp, paper, food and beverage, and other small enterprises.<br />
Recent News<br />Recent Developments<br /><ul><li>Added to the S&P 500 in September 2008 (replaces WaMu).
2007: Joint venture with Changsa Pump Works in China, gives access to 2.7 million square feet of space, access to cheap labor.
2008: 10-year supplier agreement with Saudi Aramco (world’s largest oil company, state-owned national oil company of Saudi Arabia) to supply entire range of products and services.
2008: Exclusive relationship with Petrobras (Brazilian oil exploration and refining company – world’s 7th largest oil company). Investing more than $15 million for manufacturing plant in Brazil to support the recent large oil discoveries there. FLS has already received $18.4 million in pump orders from the company.
April 2009: FLS acquires desalination (remove salt and other minerals from water) energy-recovery system Calder AG, which generated 2008 revenues of $23 million. Terms of the deal were not discussed. FLS has already received more than $3 million in deals for Calder products.</li></li></ul><li>Business Segments<br />1) Flowserve Pump Division (55% of sales, 50% of operating income)<br /><ul><li> 2008 Bookings (in millions): 3040.3
Designs, manufactures, distributes, and services pumps, pump systems, replacement parts, and other related equipment.
Marketing through worldwide sales force, regional services and repair centers, independent sales representatives. 30 plants worldwide (8 in Americas, 12 in Europe, 10 in Latin America and Asia).
Manufactures more than 150 active pump models.
FLS is the world’s largest supplier of pumps to oil and gas, chemical, and power generation industries.
Primarily used by companies in: Oil and Gas, Chemical Processing, Power Generation, Water Treatment industries.
Highly fragmented industry, with more than 100 competitors.
FLS Pump Division is 3rd largest pump manufacturer overall.
Strongest competitive advantage sources: extensive range of products, large installed base (which will require repairs and services), over 100 years of experience, reputation. </li></li></ul><li>Business Segments<br />2) Flow Control Division (30% of sales, 29% of operating income)<br /><ul><li> 2008 Bookings (in millions): 1486.4
Designs, manufactures, distributes, and services valves, actuators (device for moving or controlling a system) and automation systems. These products are usually custom-designed.
Also sells “smart” valves, embedded with microprocessors, that can analyze fluid quality and remotely control the flow of the liquid.
48 sites worldwide including 19 principal manufacturing facilities (5 in the US), 29 QRCs.
Primarily used by companies in: Chemical, Power Generation, Oil and Gas, Water industries.
Industry is highly fragmented: top 25 global valve manufacturers comprise less than 25% of total valve market.
FLS Flow Control Division is 3rd largest global valve supplier.
Strongest competitive advantage sources: comprehensive portfolio of valve products and services, expertise and experience in the industry.</li></li></ul><li>Business Segments<br />3) Flow Solutions Division (15% of sales, 21% of operating income)<br /><ul><li> 2008 Bookings (in millions): 668.8
Designs, manufactures, distributes, and services mechanical seals and sealing systems and parts. Seals are used in high-stress conditions, and need constant repair or replacement.
Purpose of seals: safety and environmental benefits, reduces emissions and use of power.
Seals manufactured at 4 US plants, 6 worldwide. Due to need for constant maintenance, 74 QRCs are located worldwide.
24 hour-service performed on a quick-response basis.
Primarily used by companies in: Oil and Gas, Chemical Processing, Mineral and Ore Processing industries.
FLS Flow Solutions Division is 2nd largest industrial mechanical seals supplier in the world.
Strongest competitive advantage sources: ability to quickly satisfy customer orders (design, manufacturing, delivery, etc).</li></li></ul><li>SWOT<br />Strengths<br /><ul><li> Exposure to a wide variety of industries and countries to hedge against industry and country specific risks (limited exposure to the general economic downturn).
Well-positioned in markets which will have need for infrastructure and plants: China, Brazil, etc (exclusive deals with companies in those countries).
Quick Response Centers (QRCs) throughout the world make it easier to provide quick and reliable service to clients around the globe.
All parts of the business are connected: will likely need pumps, valves, and seals all at the same time. By also providing repair services, company ensures that it will maintain long-term relationships with its clients.
Wide selection of products provides flexibility to custom-make new orders for clients.
Products are patented and trademarked, making many of them unique. Patents generally expire 20 years after filing.
Large backlog of orders waiting to be filled – has business for some time.</li></li></ul><li>SWOT<br />Strengths<br />Strong performance:<br />Current Ratio = 1.45 Quick Ratio = 0.93<br />Increasing gross margin, net margin, ROA, and ROE over time<br />
SWOT<br />Weaknesses<br /><ul><li> Size of backlog has ballooned in recent years – many of FLS’s orders contain penalty clauses related to on-time delivery. May be “stretching itself too thin” and be unable to make deliveries on time.
Bookings can also be canceled or modified, so they are no guarantee of future revenue.
Oil and gas industries represent a hefty amount of revenue – if demand for these products dramatically goes down, FLS will be negatively affected.
Large focus on aftermarket services (QSC) since it is a high margin business where they have the competitive advantage of knowledge and experience. Competition with local repair centers, etc could hurt profit margins in the future.</li></li></ul><li>SWOT<br />Opportunities<br /><ul><li> Increased demand and reduced supply for water:
99% of world’s freshwater is not readily accessible.
Increased demand for water and farm irrigation.
Water consumption has doubled every 20 years; water will get more difficult to find over time, will need more complex systems and pumps.
Goldman Sachs estimate: by 2020, US will need one trillion dollars in more piping and water treatment
Expensive oil requires new systems: When oil prices rise, companies can drill for oil in harder-to-reach places while still making a profit; these operations will require more intricate piping and pumping.
As population increases, general demand for more energy will increase (especially in developing countries). Demand for more powerful pumps and more accurate valves has been increasing over time.</li></li></ul><li>SWOT<br />Threats<br /><ul><li> US export laws make it difficult to sell abroad
2006: FLS failed a review of compliance with US export laws. A law in 2007 increased the penalties for violation to be 2*transaction value.
11.5M in fees from SEC by recording false sales to Iraq from 2001-2003.
Increases and volatility in prices of raw materials
Foreign exchange risk: 65% of sales outside the US. These businesses are primarily conducted in local currencies so foreign exchange rates can affect results adversely. Also subject to regulatory and political risks abroad.</li></li></ul><li> Porter’s Five Forces<br />Supplier Power: Low<br /><ul><li> Many of FSL’s required raw materials – bar stock, fasteners, motors, etc – are readily available from many sources.
In other cases, FSL is a vertically-integrated producer of certain pump and valve products.</li></li></ul><li>Porter’s Five Forces<br />Buyer Power: Low <br /><ul><li> Sell to a wide variety of customers across many different industries across the world.
No customer counts for more than 10% of revenue.</li></li></ul><li>Porter’s Five Forces<br />Threat of Substitutes: Moderate<br /><ul><li> Pumps, seals, and valves are extremely important and irreplaceable parts of fluid control systems. These parts will also be in constant need of aftermarket service.
Possibility that companies could try to cut costs by buying less sophisticated and cheaper pumps, valves, etc from other companies.</li></li></ul><li> Porter’s Five Forces<br />Degree of Competitiveness: High<br /><ul><li> Large number of companies, each with small amount of market share (highly fragmented industries).
High competition for aftermarket services – in certain cases, existence of common standards can allow anyone to replace or repair products.</li></li></ul><li> Porter’s Five Forces<br />Barriers to Entry: High<br /><ul><li> FLS’s products, experience, and service relationships with its buyers are a large barrier to entry.
In order to respond to service calls as quickly as FLS, need to have service centers throughout the world – very large required capital investment.
Also require manufacturing plants and experienced personnel, as well as a developed reputation for reliability in the industry.</li></li></ul><li>Q1 2009 Results<br />Q1 2009 Results<br />Extremely strong Q1 2009 results (compared to Q1 2008):<br /><ul><li> Record EPS of $1.64, up 8% (this is even accounting for $0.13/share of realignment charges).
Record Q1 sales of $1.02 billion, up 3% (or up 13% excluding currency effects).
Record operating income of $147 million, up $28 million.