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Pump up the Volume

Oil prices are scraping the bottom of the barrel, chemicals are in the tank, and the power-plant business is dim, …

Oil prices are scraping the bottom of the barrel, chemicals are in the tank, and the power-plant business is dim, at best. If 80 percent of your company’s revenues relied on these three sectors, how would you manage?

You might learn from Bernard Rethore, the chief executive who has the formidable assignment of putting the flow back in Flowserve, the world’s largest independent industrial pump and valve producer. “Industrial works of art,” Rethore gushes proudly about his products. Trouble is, economic turmoil in Southeast Asia and Latin America has rusted the industrial works of whole economies, creating a fierce headwind for this Irving, TX-based manufacturer and its facilities in 29 countries.

Flowserve’s business is highly cyclical to begin with, but Rethore is confronting the worst industry conditions in years unprecedented circumstances that are largely out of his control. Historically, petroleum and chemical prices have maintained independent orbits. But the Asian meltdown sent the value of both crashing simultaneously-delivering a one-two punch to Flowserve’s revenues and margins. Sales of $1.08 billion in 1998 were down from $1.15 billion in 1997. Net earnings slipped to $48.9 million from $51.6 million.

Now Rethore is hitting back. Once a decorated master parachutist in the U.S. Army, he’s encountered tight spots before. He is battening hatches in an attempt to position the firm and its 7,000 employees for an eventual upswing. “The challenge of cyclical businesses,” he says, “is to find how to maintain shareholder value through the downside and the necessary steps to really capitalize as the market comes back.”

The challenge must seem a Sisyphean task, two steps forward and one step back. Still, Rethore is philosophical. “You can’t control the wind, but you can learn how to adjust the sails,” he explains. “We have strategic advantages that we are capitalizing on to a degree that others are not yet doing.”

Size and a strong balance sheet provides ballast. Flowserve was formed through the July 1997 merger of Durco International and BW/IP, a pump company that Rethore joined as CEO in 1995. Over the past 18 months, the combination produced considerable savings from streamlined operations. Cost of capital is paramount to Rethore, who has implemented an Economic Value Added (EVA) program. “EVA is our principal measure and overarches all of senior management’s long-term incentives,” he says. “We need to earn more with our capital than the cost of borrowing it. You don’t have to be a CFO to understand it.”

The integration has received some favorable recognition on Wall Street and is expected to improve Flowserve’s margins and productivity once the industry regains its footing. Until then, Flowserve will slog through continued pricing pressures and margin erosion.

“Nineteen-ninety-nine is going to be a terrible year, but that is going to represent a trough for their earnings,” predicts CIBC Oppenheimer analyst Holden Lewis, who expresses confidence in Rethore. “He came into BW/IP when it was sucking wind and he turned it around. He’s put into place the building blocks for a very sound company here as well.” But integration, was the relatively easy part, he warns. “The most difficult aspect of the reorganization is ahead. Now they actually have to find the sales synergies in a difficult market.”

Rethore knows this, and a key driver of Flowserve’s growth is an emphasis on the aftermarket service and repair of the parts and equipment that it sells to OEM manufacturers. This counter-cyclical move doesn’t come cheaply, but it helps construct a recurring revenue base and reduce dependence on one-time orders. Higher-margin replacement parts and service calls now account for about 45 percent of revenues. In addition, this responsibility has been placed with the new Service Repair Division and its 80 centers worldwide. “There’s a lot more focus, and we intend to keep that,” Rethore promises.

Top-line benefits from domestic and international acquisitions is another pledge. Rethore claims that the firm’s revenues could double in the next several years through selective purchases and internal growth. About half of Flowserve’s current business is outside of the U.S., and from Rethore’s vantage, this global reach can be leveraged into a significant brand identity where Flowserve is synonymous with service and supply.

Scheduled to relinquish his post in 2002, Rethore has the option of resigning in 2000. That seems unlikely given that William Jordan, Flowserve former president and a veteran Durco executive, resigned in October 1998, citing “personal reasons,” and as yet Rethore has no clear successor. Jordan was an operations whiz, but Rethore has a reputation for being able to orchestrate both strategy and implementation. “You get a tighter nail down between the strategic and the operating,” is all Rethore will say about his now-solo endeavor.

Rethore’s struggle with Flowserve is far removed from his tenure as a senior official at Phelps Dodge Industries between 1989 and 1995, a golden time when copper prices and company spirits were high. This followed 16 years at industrial equipment maker Microdot Industries and another life as a top-level McKinsey & Co. management consultant. After so many years in manufacturing, Rethore recognizes the longtime economic reality of business cycles. “Knowing that after ‘down’ comes ‘up,'” he observes, “is wonderfully comforting and energizing.”



Chief Executive


Age: 57

Family: Married, seven children

Education: BA., Economics, Yale University, 1962; M.B.A., Wharton School, 1967.

First Postgraduate Job: Consultant, McKinsey & Co.

Outside Interests: Board member, Ballet Arizona; Trustee, Thunderbird School of International Management.

Favorite Ballet: Romeo & Juliet

Operating Philosophy: “What’s right” matters, not “who’s right.”

About jonathan burton