Forum Energy Technologies, Inc. (FET) Q3 2012 Earnings Report, Transcript and Summary

A very good day to you, ladies and gentlemen, and welcome to the Third Quarter 2012 Forum Energy Technologies Earnings Conference Call. My name is Nancy, and I'm your coordinator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mark Traylor, Vice President, Investor Relations. Please go ahead.

Thank you, Nancy. Good morning, and welcome to the Forum Energy Technologies quarterly earnings conference call for the third quarter 2012. With us today to present formal remarks is Cris Gaut, Forum's Chairman and Chief Executive Officer; as well as Jim Harris, Senior Vice President and Chief Financial Officer. Also with us today are Forum's 2 Division Presidents; Charlie Jones, President of the Drilling & Subsea division; and Wendell Brooks, President of our Production & Infrastructure division. We've issued our earnings release last night and it is available on our website. The statements made during this conference call, including answers to your questions, include information that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. Those risks include, among other things, matters that we have described in our earnings release and in our filings with the Securities and Exchange Commission. We do not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the live call. This call is being recorded and will be available for replay on our website for 30 days following the call. Management statements may include non-GAAP financial measures. For a reconciliation of these measures, please refer to our earnings news release available on our website. I'm now pleased to turn the call over to Cris Gaut, our CEO.

Thanks, Mark, and good morning. Let me begin by introducing Mark Traylor, our new Vice President of Investor Relations and Planning. Mark replaces Patrick Connelly, who has returned to SCF as planned, and we thank Patrick for his valuable contribution. Mark Traylor has been with Forum for about a year now as the Vice President of Finance for 1 of our 2 divisions. Mark and I previously worked together at Halliburton, and some of you may recall Mark from his days in IR at Hal. I will start with some highlights from the quarter, offer a few thoughts on the outlook for our business and then turn it over to Jim, who will provide greater detail on our financial performance. In the third quarter of 2012, we generated $75 million of EBITDA on $348 million of revenue, producing EBITDA margins of 21.6%. Diluted earnings per share were $0.44. We had a good third quarter of the year. Demonstrating the benefits of our balanced portfolio, the Production Equipment and Valve Solutions product lines delivered strong results, which helped offset the impact of the decline in North America rig count on some of our other product offerings. Third quarter 2012 revenue decreased 7% from the second quarter of 2012, as our pressure pumping customers continue to work through excess inventories of consumable parts. And our Subsea revenue was down from the very strong level of the second quarter due to customers' project delays and order deferrals. Total customer inbound orders during the third quarter were $362 million, an 11% increase over the second quarter on more orders for subsea vehicles and Production Equipment. The third quarter book-to-bill ratio was 104% for the company as a whole; for Drilling & Subsea division, was 98% and for Production & Infrastructure, was 113%. All of these book-to-bill ratios are up from the second quarter of this year. We are currently experiencing a slowdown in orders for our drilling consumable products due to the decline in the North American rig counts, as many E&P operators have exhausted their 2012 spending budgets. New orders for our drilling capital equipment are also down with the softening of the North American market, but with some offset on the international side. During the quarter, we broke ground on a new 150,000-square-foot manufacturing facility in Louisiana to more efficiently produce drilling products and equipment for our global customers and to address future growth. Orders in our Subsea Technologies product line for new ROVs do tend to be quite lumpy. Although our ROVs orders picked up during the third quarter, these new orders contributed little to third quarter revenue. We have had some very nice awards already in the fourth quarter. The contract awards for the 4 Perry workclass vehicles for one of our large customers, the XT 600 Trenching System and the 2 sub-Atlantic observation class ROVs. The outlook for our Subsea Technologies product line looks very good for 2013 and beyond, and we anticipate probably needing to add to our capacity. We welcome the addition of Syntech Technology to our Subsea product line. The recent acquisition of Syntech allows Forum to integrate an important part of our ROV supply chain that also adds to the range of ROV-related components we sell, and we plan to continue to provide top quality service to Syntech's other legacy customers. We also intend to apply Syntech's technology to a broader range of Subsea products requiring buoyancy. The Downhole Technologies product line is encountering strong demand for their products, and we are progressing with our system implementation and manufacturing process improvements to be able to scale this business for offshore and international growth. The acquisition of Wireline Solutions, a manufacturer of composite hydraulic fracturing and bridge plugs and other completion tools, is a welcome addition to expand our Downhole product offerings. Moving to our Production & Infrastructure segments, our Production Equipment product line generated record revenue earnings and orders in the third quarter. Demand for well site separation, processing and storage systems has benefited from this shift from gas to oil drilling activity, and we remain positive about the outlook. We are having good success with our new modular production system design for multi-well pad sites. This modular system has 8 to 12 separate skidded components and is manufactured and then preassembled in our plant, and completely tested by the customer for their specification requirements. Then, the entire modular system is shipped for rapid assembly at the customer's well site location. Our Valve Solutions product line is experiencing broad-based growth across several markets, including midstream transmission, pipeline integrity and petrochemicals. We are pleased with the consistent rate of growth in the Valves product line and with the margin improvement. As expected, our Flow Equipment product line orders decreased in the third quarter as our pressure pumping customers worked through their own inventories of consumable products. We expect the fourth quarter to be the bottom of this destocking process and anticipate some improvement beginning next year. Our repair and recertification work continues to increase with a growing roster of pressure pumping customers. We have expanded into the Bakken with a new facility in Williston, North Dakota, which will also be used by some of our other product lines in this important market. Our revised 2012 earnings per share guidance of $1.83 to $1.88 that we provided on our earnings release reflects the recent steeper decline in the North America drilling activity and rig counts, and our expectation that some customers will defer deliveries into 2013 of equipment they have ordered from us. However, we are encouraged by the long-term demand trends we are seeing especially as related to deepwater activity, valve-intensive infrastructure projects and completion activity in oily basins, as well as increased activity in offshore and international areas. Our CFO, Jim Harris, will now discuss our financial results in greater detail. Jim?

Thank you, Cris, and good morning. Consolidated revenues of $348 million are up 5% year-over-year. Sequentially, consolidated revenue declined 7% as a result of the continued challenging market conditions for our Flow Equipment products, which began mid-second quarter; declining rig activity in North America, impacting our Drilling products; and incoming order delays for workclass ROVs from our Subsea customers. While our net income was up 15% in the third quarter 2012, compared to the same period last year, our fully diluted earnings per share of $0.44 compares to $0.48 for the third quarter 2011. The 8% decrease year-over-year on higher net income is attributable to the impact of the 16.6 million shares issued in the IPO and the concurrent private placement in April 2012. Sequentially, net income decreased 7% in the third quarter and fully diluted earnings per share were down by $0.05, which we will explain when we talk about segment operating income. Our consolidated EBITDA margins for the third quarter of 21.6% are down 50 basis points from the 22.1% achieved in the second quarter of 2012. Gross margin percentages for both divisions improved this quarter, and total SG&A dollars declined. However, on the reduced revenue, SG&A as a percent of revenue increased, driving down our EBITDA margins. EBITDA for the quarter was $75 million, up 4% over the same period last year and down 9% sequentially from the second quarter. I will now review our segment results, comparing the third quarter of 2012, sequentially, with the second quarter of 2012. Our Drilling & Subsea segment revenue was down $19 million, primarily attributable to workclass ROVs, with some customer orders received during the quarter contracted for delivery in 2013 and delays in the receipt of other ROV orders with expected near-term delivery. The demand outlook for our ROVs remains strong, with improving order rates in the fourth quarter and expected in early 2013. Operating income for Drilling & Subsea declined $5 million in the quarter, attributable to the Subsea order delays and the impact of the declining North American rig activity on the Drilling product line. The Production & Infrastructure segment revenue of $144 million in the third quarter was down $7 million from the second quarter of 2012, entirely attributable to Flow Equipment lower activity levels for the full quarter, offset partially by gains in both Valve Solutions and Production Equipment. Our Valve Solutions line was the strongest in terms of increased revenue with 9% sequential growth. We continue to see strong demand for both Valve Solutions and Production Equipment, both product lines seeing year-over-year revenue increases of more than 20% and both achieving record shipments while orders and backlog have also reached record levels. We continue to see weakness in our Flow Equipment product line as our customers and pressure pumping service providers are still working off excess inventories, a condition we expect to continue through the fourth quarter with gradual improvements starting in early 2013. The Flow Equipment business should improve, as pressure pumping activity levels remain strong and the consumable products we supply should once again be in high demand. The decline in the Flow Equipment business in the quarter is reflected in our operating income, with both lower shipments and reduced margins. Operating income for Production & Infrastructure increased $700,000, with gains in Production Equipment and Valve Solutions partially offset by the Flow Equipment declines. I will now explain our expectations for the fourth quarter and provide guidance for the full year results. With the impact of the steeper decline in North American rig activity, we now expect fully diluted earnings per share to be between $0.33 and $0.38 for the fourth quarter, and for the year, between $1.83 and $1.88. In the third quarter, Drilling & Subsea contributed approximately 59% of revenue and is expected to be at that level for the full year. Net debt at the end of the third quarter was approximately $300 million, and interest expense for the quarter was $3.6 million. Both the debt and interest expense amounts are down significantly from the first quarter due to the payment of debt with proceeds from the IPO and concurrent private placement. Interest expense for the year, excluding any additional debt incurred for acquisitions, should be approximately $16 million. We are progressing in our evaluation of the bond market, making preparations to be in a position to add longer-term fixed-rate debt to our capital structure early next year, replacing the $300 million amortizing term loan in our current credit facility. We continue to believe that having a layer of more permanent debt will provide greater flexibility as we execute on our acquisition strategy in 2013 and beyond. Consolidated SG&A in the third quarter was down $400,000. Corporate SG&A was $1.5 million higher, principally, for public company related cost and fees, more than offset by lower SG&A in both divisions with tight controls in place. Corporate SG&A in the fourth quarter is expected to, again, be approximately $6.2 million. Our tax rate for the quarter was 30%. The lower rate was due to discrete benefits in the quarter, and we expect the effective tax rate for the full year to be approximately 32.5%. Our diluted share count for the third quarter was approximately 92.3 million shares. We anticipate our diluted share count for the fourth quarter 2012 to be approximately 92.9 million shares, while diluted shares for the full year should be approximately 86.8 million. Cash flow from operations, excluding the payment of contingent consideration related to 2011 acquisitions, was almost $50 million for the third quarter and $82 million year-to-date. While we did, again, increase inventories in the quarter, the rate of increase slowed as expected. We should achieve strong operating cash flow for the rest of the year, as incremental investments and inventories, globally, are expected to decline further going forward. We now expect CapEx for the year will be approximately $50 million, as some projects are deferred into next year. For more information about our financial results, please review the earnings release on our website. I will now turn the call back over to Cris for concluding remarks and to moderate Q&A.

Thanks, Jim. Forum had a good third quarter. Our balanced portfolio of products helped offset the impact of a declining North American rig count on some of our product offerings. We are expanding our capabilities with new facilities in Louisiana and North Dakota. We welcome the addition of Syntech Technologies and Wireline Solutions to the Forum product family, and we see good potential for other attractive acquisitions that will further expand our offering within our existing product lines. We recently received several large contract awards for subsea vehicles and production processing equipment. Let me finish with some comments on 2013. Currently, our Drilling and Flow Equipment product lines are facing an adverse market, as many North American E&P operators have largely exhausted their 2012 budgets; and our pressure pumping customers have clearly reduced their spending. But we believe there will be a gradual return to increased demand for these products during the first half of next year. Our Downhole product line will complete its process improvements this year and will be positioned for growth in 2013 to take advantage of the strong demand that we are seeing. We see excellent prospects for our Subsea, Valves and Production Equipment product lines for next year. The ROV orders are now coming through for 2013, and we see the strong growth continuing for our Valves and Production Equipment. I am pleased with the progress Forum has made and I want to recognize and thank our employees for their good work. Thank you for your interest. And at this point, we will open the line for questions. Nancy, please take the first question.

[Operator Instructions] We have our first question from the line of Doug Becker.

Cris, I just want to get a little more color on Production & Infrastructure, very good margins, particularly, in light of the revenue decline. I just -- what type of sustainability is there as we think about the fourth quarter, given some of the dynamics?

Right, Doug. On Production & Infrastructure, we are seeing good margin improvement there on higher volumes, in both Production Equipment; and in Valves, manufacturing efficiencies in our Production Equipment; some pricing leverage in both Valves and Production Equipment. So we see those margins as sustainable, and we are very pleased with the margin improvement that we are seeing in those businesses.

So something between 17% and 18% operating margin in the fourth quarter is not unreasonable?

Yes, we've made good progress there, yes.

That's great. And just trying to get a calibration here in Downhole Technologies. I know you gave us some of the moving parts in Drilling & Subsea. Was revenue down in Downhole Technologies sequentially?

Slightly. Pretty flat, though.

Flat. Okay, that helps with calibration. Maybe one, just on the acquisitions. Have they both officially closed at this point? It certainly sounds like they have. And I appreciate that you don't want to maybe provide all the details. But just anything you can provide on helping us calibrate the impact of the acquisitions going forward?

Right. Syntech closed on October 1. The Wireline Solutions has been signed, that's going to close on Thursday, I guess, November 1. The contribution from those 2 companies in those 2 acquisitions in this fourth quarter, net of the initial integration costs and deal costs and so forth, it isn't real significant. What we'd like to do, in the next call, with those acquisitions, is give you a better feeling for the contribution that they would have at that time.

Okay. And any change in your M&A thoughts going forward? Or are you still, kind of, staying the course?

We see good opportunities, Doug. And we will continue to look to add to our existing product lines. We feel that we can continue to do acquisitions that are in line with our strategy and consistent with our valuation parameters.

Still targeting Subsea and Downhole as part of your..?

The emphasis will be on those areas, but not exclusively so.

We have a next question from the line of Robin Shoemaker.

I wanted to ask you, you made a comment about the activity levels in the oily basins. One -- another company yesterday, Lufkin, indicated that they had seen a little softness since oil dropped below $90. And I just wondered if your very positive commentary on activity in the oily basins could be subject to a little bit of review if oil prices stay at current levels. In other words, in your product lines, are you seeing any slowdown in the oily basins across the whole spectrum?

Yes. Let me clarify that, Rob, and I think we are seeing the impact of the declining rig count in North America, and we're seeing that, in particular, on our Drilling business and Flow Equipment. Production Equipment business is in a different category. We are seeing very good market share gains because of -- I think, specific advantages that we have. And we're able to continue to grow this business in the face of a soft North America market. So the reason for the good performance of Production Equipment is not due to our expectation of increased activity in the oily basins, but rather, things that are more specific to our business and market share improvements and the market position that we have. Does that help?

Okay. Yes, yes, sure. Definitely. So you are seeing a little -- I mean, definitely, a slowdown in Drilling and Flow Equipment?

We are. But Production Equipment is getting real traction with some of the larger and major oil companies, as -- and with their programs, and that continues to gain traction.

And then, my other question is -- I missed the explanation for some deferred delivery to certain customers of equipment. And is that related to year-end budget constraints or any -- I just missed your commentary on that?

Yes. No, thanks. In setting the context for our guidance for the fourth quarter, I mentioned that it's our expectation that there will be some customers who want to defer delivery. And that's because we feel, and based on our experience in a market such as this, there is a lack of urgency among customers. Just a lack of urgency. And it's our expectation, based on our experience, that when we get to the year end and with the holidays, and companies just not -- customers not wanting to add to their working capital, that we are expecting that this lack of urgency and inertia will result in orders being deferred into 2013. Is that clear?

Okay. Yes, sure. And that's across multiple products?

It is. This lack of urgency does cross multiple product lines, and it's certainly not specific or unique to Forum.

We have the next question from the line of Blake Hutchinson.

I just wanted to clarify on, first of all, your comments around the Subsea business. Obviously, the order visibility has improved quite a bit over the course of this quarter and towards the end of the third quarter. But do we envision, kind of, a flat result in that business for 4Q, with some of the delays and to just kind of the way the gestation period in Equipment plays out?

Yes, that's right, Blake. We're not expecting a big improvement in Q4, partly because of the additional holidays and just fewer manufacturing days in Q4, but also, because of the requested delivery days and project schedules with customers. So it looks like the ramp-up there is going to be in 2013.

So kind of a bit of maybe a step function change, as we enter '13, is maybe the right way to think about it?

Correct.

Great. And then just, trying to gauge the reaction and the immediacy in your reaction to declining activity levels in your Drilling business. Would you suggest, with your outlook, the improvement in international business notwithstanding, that we should think about that as kind of having maybe a -- the top line there having kind of a 1-quarter lag or so with the activity declines that we've seen, so that maybe the decline is a bit more severe in 4Q, tapering off in the first half in terms of rate of decline and then, improving throughout the year? Is that kind of your -- the feel that we should have for your commentary here?

Yes, I think that -- there is a longer gestation period with these international projects. And sometimes, we can't recognize revenue until the equipment's received. So there is, clearly, the bigger impact of the declining rig count and activity in Q4 in North America. So I would agree with your supposition here, Blake, yes.

Okay. And then, just quickly, on the Downhole segment, you mentioned the system implementation and scale out. Where are we just on timing of that?

A lot of the heavy lifting on our Downhole process improvements has been done. I think in the fourth quarter, we will be proving out this system and increasing our confidence with the processes. And then, we -- we'll be good to go with the first of the year, and ramp up from there.

We have a next question in the queue from the line of Brad Handler.

I guess I, like my peers, have little questions across a couple different product lines. But maybe you can help us understand the idea in the Drilling section, in the Drilling division within the U.S. Is there a degree of inventory usage and burning through inventory in the same vein as kind of the fluid end concept that you've been explaining to us? Is there an element of even after the rig count picks up, when the rig count picks up, there's sort of folks have been either dipping into inventory or maybe even cannibalizing some stuff on rigs that have been idle, is there a rebound that we might think about in that context?

Brad, I think that's right. I think that with the declining rig count and lower utilization, customers don't need to order so much handling equipment and consumable pumps and bearings and so on. And as a result, it does affect our revenue. But when that turns, it is very much to our benefit.

Have they been -- do you think they've been drawing some pumps on rigs that are idle? So might they need to order 2 pumps for -- in the sense because that even though a pump is -- even though a rig has been idle, the pump has been used?

Yes. When it turns, yes.

Okay. That's sort of the way the rebound works, okay. Interesting. In Downhole, I guess, I -- if I understand it right, you've engaged 1 major customer to try to build a position there. And now I think you're building your capacity to satisfy needs. Could you explain the interchange in terms of developing additional customers? Is there one -- you kind of take care of the one first before you really turn your attention to another? If you can explain the business development path for us a little bit, please.

Right. Well, I think we have opportunities to expand our position with a number of customers, both in North America and in particular, going after the international markets in a more direct and larger way. But we need to be able to have a scalable business where we can ramp up our production and meet the promised deliveries in order to take on those orders. And that's what we're in the process of doing. But if -- I -- it will be with a number of customers and taking on more of their needs. And that -- but it is also taking on some big international projects, as well, with bigger customers. All of those things, Brad.

Okay, understand. And then maybe, just 1 more for me, please. I guess, we had gotten the impression from some comments made late in the third quarter, that your EPS might have come in a little bit lower. And so I was curious if there was something that wound up coming in late in the quarter that maybe, you had expected to fall into Q4 to some degree?

No, not so much. As Jim mentioned, we did have some tax benefits in the third quarter, which we hadn't, I guess, included in the commentary, the updated outlook that we have provided a few weeks ago, if that's what you're referring to. From an operational standpoint, no, I don't think that was the case.

Our next question is from the line of Mike Urban from Deutsche Bank.

So you talked a bit about your desire to grow the international side of the business. You've elaborated on that a little bit on this call. It seemed like you're having some success to the point that you're willing to make some investments on that front. I was just wondering if you could calibrate that for us a little bit, either in terms of where the international revenues are currently as a percentage of total, or where you think they can get to, based on the bookings that you've seen? And then also, I guess, as a related follow-up, where the opportunities are going forward? Seems like a lot of it right now is on the Drilling and Equipment side.

That's right. I think for the past couple of quarters, our non-North America revenue has been in the low 30s percentage-wise. But that has reflected the very strong largely North America business in Production Equipment and the Valve Solutions area. As we look ahead to 2013, in our commentary there, we're expecting, as we said, a step change in our ROV and Subsea Technologies business, which is primarily international, very largely international, growth in the Downhole space and growing there. And also, as we said, a lot of our capital -- there's going to be a shift in the mix of our drilling capital equipment to the international side. So those things, I think, will give us a higher weighting of non-North America international sales in 2013.

Okay. So we should see growth in international relative to U.S. And then, I guess, within the U.S., you mentioned opening a facility in the Bakken. I think that's one other thing that you highlighted, as you do get a bit of a slowdown here, maybe there are opportunities to being shared at customers to improve the geographic penetration, I guess, both in the U.S. and international. Are there any other opportunities or examples of that, that you're looking at either organically or via acquisition?

Yes. Well, we -- in the Flow Equipment side, we're -- the service side and the repair and replacement side continue to do quite well, and now we're in 8 different basins, right, Wendell?

Yes.

And we're pleased with the progress there. And let's see, the expansion we made a year or so ago into Marcellus and Utica with Production Equipment and then, the Flow Equipment has been picking up momentum, and sales have been growing there. Obviously, we're concerned about the safety of the folks in that area, and we'll see some delays. But in the larger picture, even with the softness in that market, we've seen growth in our market position there. Although some of our product lines, in particular, Drilling and Valves have good positions in Canada. I think there are other product areas where there is definite room for expansion and market improvement into the Canadian markets. It's been soft year-to-date, but I think the prospects should be better off these low levels in Canada now. And so that's something we'll be looking at as well. We're going kind of full out on Production Equipment, but we think we've got a good formula there. And there are other areas where we think we could expand if we can -- have a chance. But I think we're going at about 110% with the rapid rate of growth from that business there now. Anything else -- what other -- yes, okay, I think that covers it.

Okay, great. If I can just sneak 1 more in. Not to parse the guidance too much, but obviously, looking for a sequential decline in earnings. Part of that is tax rate, but not all of it. P&I margin sounds like it's going to hang in there. Presumably, in both segments, you see a revenue decline, just given some of the delays that you talked about. And I've got, I guess, both revenue and margin perhaps significantly, on the Drilling & Subsea side. Does that kind of piece it all together correctly?

Yes, we say -- I think we said Flow Equipment is going to bottom out in the fourth quarter. Drilling has the headwinds that we've been talking about. And then, just the general lack of urgency in the fourth quarter and fewer manufacturing days in Q4, and this being the kind of market where customers aren't going to really push for higher deliveries at year end to the contrary. I think those are the factors that go into our guidance, Mike.

We have our next question from the line of Jonathan Sisto.

On the Schlumberger conference call, one of my contemporaries asked about the rig count deteriorating 10% from current levels over the next 6 months, and then they pointed to Wireline and LWD declining as a result. I wonder if you could address that question and maybe see what other product lines within the portfolio might be hurt that we're not discussing yet?

Gosh. That's a significant downward step in the rig count. In terms of how that would affect us, it's interesting you'd say that. We're actually seeing fairly good orders and backlog in our well intervention businesses, where we supply parts for well intervention equipment, even to the big service companies, so the orders are still coming in and they're strong. Right, Charlie?

Yes.

So I guess I could go into the potential for deferral, but the orders are still coming in, which is good.

Well, I guess, what I'm hearing is that you don't anticipate the rig count deteriorating to those drastic levels from current levels?

Yes. We do anticipate further step-down. It's been declining at about what, on average, 20, 30 rigs a month, right? So if we see another couple of that, I don't think that amounts to 10% down. And we're already here, almost, October done, so I don't see another 10% down over the next 2 months, no.

Oh, I'm sorry, I said next 6 to 12 months, or maybe, I misspoke. I'm sorry, Cris.

Okay, sorry. Misunderstood. So yes, in 2013, our expectation is that things kind of bottom out, from a rig count standpoint, in the first half. And then, we see improvement starting before midyear of next year or around midyear, in terms of the North America -- or the U.S. rig count. But that's what we're planning for, and I don't know that we -- so that's why we give a range in our guidance, Jonathan, and it could be that. And I think our comments kind of incorporate that continued decline through and into the first half of next year.

Our next question is from the line of Michael Marino.

Cris, if I can just kind of come at the last question a little bit differently. If you do expect things to kind of decline a little bit and maybe rebound, so kind of the mirror image in 2013, would you expect any of your 6 subsegments to be down year-on-year in 2013, from a top line standpoint?

With Flow Equipment, we've started off the year really strong. And so they would have to have a real good recovery to get back to, to make up for that. I would say, that's probably the biggest question, but I think they will certainly see sequential improvement. And other than that, I think we feel pretty good about the prospects for the businesses. And we also feel that we'll have progress on the acquisitions front, too.

Okay. And just as a follow-up, can you help us understand how kind of a mix shift affects the Subsea & Drilling margins? So obviously, Drilling would be coming down and Subsea would be going up next year from a top line standpoint. What's the net result on kind of margins?

Yes. What's kind of nice is our margins have been kind of converging across our product lines. And so the difference and gap between Drilling and some of the other product lines has been shrinking. So Subsea operating income margins are a little bit lower than Drilling, but not significantly so. So I wouldn't overstate that the mix effect there. And then, I think the growth in Downhole, where -- in fact, too, there is a gap there. Those are higher margins. And if we're successful in scaling up that business, that could be a nice positive for us. But I am pleased with the progress that some of our lower margin businesses have made in improving their margins.

Okay, we have our next question from the line of Jeff Tillery.

Cris, can you just comment, what you're seeing on a leading edge basis for the Flow Equipment business, and what gives you the confidence that Q4 is bottoming? Have you seen a trend in orders flatten out there yet or is that something that you're expecting this quarter?

Yes, we are seeing orders that are, the book-to-bill is not yet at 1, but it's converging towards that point. So that's one issue. The other would be the discussions with customers and when we think that the higher rate of reordering will take place. So it's hard to have -- until you're there, you can't have complete confidence, right? But it's based on both the customer interactions and the rate of orders relative to revenue. Anything else, Wendell?

Well, I think the service and parts business, as Cris mentioned, continues to grow, so that's sort of an anchor for us. And we are definitely seeing some clients coming back in to reorder parts. The destocking varied widely across the clients. But anecdotally, we feel like we've touched bottom. As Cris said, you don't know until you're there. But we feel like we're there and next year, we should see some gradual improvements.

Good, Wendell.

And Cris, your comment on margins converging on the businesses, was that focused just on the Drilling & Subsea business or has that happened as well in Production & Infrastructure?

It has happened in Production & Infrastructure as well, with Production Equipment and Valves both seeing nice improvements in their margins. And I want to compliment the managements in both of those business lines for the improvement.

Okay. And then, just the last question I had, just that -- you guys talked about the total dollars exposed for the 2 acquisitions that were closed in the fourth quarter, just in terms of acquisition dollars paid out.

We haven't -- the contract -- we haven't closed the second one. I don't think it'd be appropriate there. We don't want to, I think, establish a precedent of disclosing the purchase price of every deal we do. But as I mentioned, Jeff, our intent is -- in our fourth quarter conference call is, and as we give guidance for 2013, to give a little better visibility on the contribution of the acquired entities.

I understand. And I guess, the last question I had, this will be the first Q1 where we'll see you guys public, and in terms of the construct that the company's in. Any of the businesses have a downward Q1 seasonality bent?

No, the quarter with fewest manufacturing days tends to be Q4, right? With all those holidays.

Yes.

And I think we do have this kind of almost window dressing the balance sheets taking place here, people not wanting to load up on working capital. So Q1, we expect to be a return to more normal, if you will. One more question, Nancy.

We have a last question on the queue from the line of Joe Gibney.

Just 1 quick question on the reference to Subsea capacity expansion, maybe Charlie or Jim, just your initial thoughts on nature and scale of that capacity, as it is more greenfield or just tack-on to existing facilities, kind of, more ROV-oriented, trenching-oriented. Just kind of curious if you could provide some color on that. Appreciate it.

Right. So the addition for Subsea capacity we anticipate and where we see the greatest constraint, right, Charlie? Is probably in the ROVs and trenching area?

Yes, it's complicated by the trenching, for sure.

Yes, because the trenching -- these trenchers that we are now getting orders for do eat up a lot of production capacity. And as we hear from customers that there's more interest in that, that's one thing that's driving the additional capacity, right?

Yes. So the mix change can drive our capacity decisions going forward. I think the thing we also have to consider is that we've got a very skilled and experienced work force that we want to leverage as we grow that business, so we'll have to take that into consideration, with respect to where we add that capacity.

Well, very good, folks. Thank you for your interest and good questions and we look forward to talking to in February, for our fourth quarter conference call. Mark?

Thank you for joining us this morning, and we'll say goodbye. Thank you, Nancy.

You're welcome. Thank you, all, for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may now disconnect. Have a good day.