Business Overview<br />Business Overview (Week 1 Slides)<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) of which there are more than 150 total worldwide.<br />
“Turnaround” Restructuring<br />“Turnaround” Restructuring Throughout Early 2000s<br /><ul><li> Before 2003, company was relatively stagnant: gross margin floating around 30%, operating margin between 6-7%, EPS barely positive (2003 10-K p14).
2002: Acquired Invensys plc’s Flow Control Division (IFC) for $535 million, suffered large integration costs due to the acquisition.
Underwent major restructuring program: reduce costs and eliminate excess capacity – closed 28 facilities, removed about 700 positions (2002-2003).
Installed new CEO Lewis Kling in 2005, who focused on increasing operating efficiency by divesting unprofitable divisions, reducing debt (net income suffered before due to large interest expenses, approximately half of operating income), improving company’s image and establishing a vision for the future.
Replaced other major positions around same time: CFO, CCO, CMO, COO, etc.
Company has turned itself around since then: see quantitative data on next slide.</li></li></ul><li>Strong Performance<br />Industry Leading Margins, ROA, ROE (Week 2 Slides)<br />Current Ratio = 1.45 Quick Ratio = 0.93<br />Increasing gross margin, net margin, ROA, and ROE over time<br />2008 P/E = 9.34, 2008 EPS = 7.82<br />Margins, ROA and ROE higher than competitors – strongest competitor Dresser Rand Inc (DRC) is a very new company, founded in 2004. DRC has gross margin 28.19%, net margin of 9%, ROA of 9.63%, and ROE of 26.01% for the FY 2008.<br />
2009 Restructuring, Revenue from Servicing<br />2009 Restructuring Initiative (Week 2 Slides)<br /><ul><li> Management committed to improve long-term performance of the company.
Goals of 2009 restructuring initiative: cut unproductive manufacturing facilities and personnel and reduce SG&A expenses.
Expect to incur $40 million ($0.50/share) in fees.
Currently spent $0.38/share in first two quarters of 2009, restructuring almost complete.
Believe that restructuring will deliver annual run rate savings of $56 million.</li></ul>Estimated High Percentage of Revenue from Services (Week 2 Slides)<br /><ul><li> No exact figure for percentage of revenue from services is provided by FLS.
However, competitor DRC derives 45% of revenue from aftermarket servicing, with 33 service centers in 17 countries.
FLS has more than 150 service centers in 28 different countries (much more than DRC), so conservative estimate of revenue from services is around 40%.</li></li></ul><li>Wide Industry and Region Exposure<br />Exposure to Wide Variety of Industries and Regions (Week 1 Slides)<br />
End Industry Exposure<br />End Industries to Expand Infrastructure (Week 3 Slides)<br /><ul><li>“Easy to reach” oil being exhausted – as oil prices increase, companies can drill in more difficult-to-reach areas and still turn a profit. FLS currently has deals with Saudi Aramco (world’s largest oil company) and Petrobras (world’s 7th largest oil company).
Power generation industry expected to grow dramatically over time, especially in developing countries such as China and India. Alternative energy will become more popular in coming years; company sees alternative energy as important part of its growth.
Recent developments in power generation:</li></ul>July 30, 2009: FLS receives more than $45 million in orders to provide parts for two new nuclear power plants in the US. First new nuclear power plants projects in US since 1977.<br />August 12, 2009: FLS receives more than $31.5 million in orders from the solar power industry.<br /><ul><li>Goldman Sachs says by 2020, US will need to have spend $1 trillion in water treatment and infrastructure (water consumption has doubled every 20 years). Growth in demand for water and need to transport water over larger distances will create opportunities.</li></li></ul><li>Comps<br />Relative Valuation - Comps<br />