Flowserve Corporation (NYSE: FLS) sells the largest number of pumps in the world to the oil and gas, chemical, and power generation industries. Until 2009, FLS had grown its revenues for over 10 straight years; however, in 2009 its total revenues declined.
The growing demand in water consumption and farm irrigation along with a shrinking supply of freshwater has increased demand for Flowserve's products. Flowserve has benefited from the spike in demand for more power pumps and more accurate valves. The construction of new infrastructure by the oil and gas industry increases demand for the pumps and valves that Flowserve makes. However, the company is under investigation for violating export laws. Flowserve was fined over $11.5M for past trespasses involving the UN Oil-for-Food program.
In 2009, FLS had total revenues of $4.47 billion, a decline from its 2008 total revenues of $4.57 billion. This marked the first time in over ten years that FLS's total revenues declined. As a result of the decline in revenues, FLS's net income was adversely affected. FLS earned a net income of $428 million in 2009, a slight decline from its 2008 net income of $442 million.
Flowserve operates through 3 segments: Flowserve Pump Division (FPD), Flow Control Division (FCD), and Flow Solutions Division (FSD).
This segment makes industrial and submersible pumps and replacement parts. Industrial pumps are used to move large quantities of liquid through a piping system, while submersible pumps can be placed physically underwater. The pumps are used primarily to move fluids in the oil and gas, chemical, power generation, and water treatment industries. In 2007, the FPD division entered a joint venture with Changsa Pump Works, a Chinese pump manufacturer. The venture gives Flowserve access to 2.7 million square feet of production space and low cost labor and supply. Flowserve's FPD segment sells the largest number of pumps to the oil, power and chemical industries. In 2009, this segment earned a total of $2.65 billion.
This segment produces valves, actuators, and controlling equipment. FCD normally customizes each valve for its customer to fit the specific function. FCD sells valves embedded with microprocessors or "smart" valves which are able to control, analyze, warn, and remotely alter the flow or the quality of the fluid. The valve industry is relatively decentralized -- the top 10 largest valve manufacturers sell less than 30% of all valves. In 2009, this segment earned a total of $1.2 billion in 2009.
This segment produces seals and sealing parts for pumps and pipes. These seals are used to lower the environmental impact, ensure the purity of the fluid being transferred, and insure safety of the pressurized lines.
Because Flowserve sells valves that are used by the US military in nuclear operations, it is not allowed to release information or sell similar goods to other customers. In 2006, the company failed a review of compliance with US export regulations and economic sanctions. Legislation enacted in October 2007 increased the penalties for violation to twice the value of the transaction. Between 2001 to 2003, Flowserve personnel recorded false sales under the United Nations Oil-for-Food Program. The company falsely claimed that it had delivered goods to Iraq through the program, and it received payment for this exchange. The company was issued over $11.5M in fees and fines from the SEC and the United States Department of Justice for this legal violation.
In 2007, 26% of the US Southwest was in a state of exceptional drought, the worst drought level used by the National Weather Service. Over 99% of the world's freshwater supply is considered not easily accessible, and China with 20% of the world's population, only has 7% of the world's water. The shortage of accessible water however, is met with a rise in demand in consumption and farm irrigation. Water consumption has doubled every 20 years. As water gets more difficult to procure, more complex and powerful pumps and water systems are necessary to extract the commodity. According to a Goldman Sachs, the US alone needs up to one trillion dollars in additional piping and water treatment plants by 2020 to deal with the rise in demand and fall in supply.
The rise in oil prices has driven up the profit margins on oil and gas drilling. This means that oil and gas companies can now drill smaller and more isolated reserves while still making a profit. These distant reserves require more extensive oil pipelines and pumps to get the crude oil to refineries at low prices. Transcanada Pipelines (TRP) announced in March of 2008 that it plans to build a large "bullet" pipeline to quickly and cheaply move crude oil to the refineries on the Gulf Coast. The Canadian National Energy Board also announced in June 2008 that the Canadian Oil Pipeline is reaching maximum capacity, and it requires new faster pumping system. The demand for new, faster pipelines contributed to Flowserve's growth in 2007 and 2008, and has the opportunity to continue the trend of increasing sales in the oil and gas industry.
Flowserve competes against other large conglomerates which produce a range of goods. However, Flowserve is one of the few to have an extensive international base and to specialize in fluid control. Flowserve's most prominent competitors consist of: