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| FET > SEC Filings for FET > Form 10-Q on 6-Nov-2012 | All Recent SEC Filings |
6-Nov-2012
Quarterly Report
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or
suggested by the forward-looking statements we make in this Quarterly Report on
Form 10-Q are reasonable, we can give no assurance that these plans, intentions
or expectations will be achieved. We disclose important factors that could cause
our actual results to differ materially from our expectations in "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Prospectus dated April 11, 2012 and filed with the Securities
and Exchange Commission (the "SEC") on April 13, 2012 (the "Prospectus") and
elsewhere in this Quarterly Report on Form 10-Q. These cautionary statements
qualify all forward-looking statements attributable to us or persons acting on
our behalf.
Overview
Organization
We are a global oilfield products company, serving the subsea, drilling,
completion, production and infrastructure sectors of the oil and natural gas
industry. We design, manufacture and distribute products, and engage in
aftermarket services, parts supply and related services that complement our
product offering. Our product offering and related services include a mix of
highly engineered capital products and frequently replaced items that are
consumed in the exploration and development of oil and natural gas reserves.
Historically, a little more than half of our revenue is derived from
activity-based consumable products, while the balance is derived principally
from capital products and a small amount from rentals and other services. We
seek to design, manufacture and supply reliable, cost effective products that
create value for our broad and diverse customer base, which includes oil and gas
operators, land and offshore drilling contractors, well stimulation and
intervention service providers, subsea construction and service companies, and
pipeline and refinery operators, among others. We believe that we differentiate
ourselves from our competitors on the basis of the quality of our products, the
level of related service and support we provide and the collaborative approach
we take with our customers to help them solve critical problems.
We operate in two business segments:
• Drilling & Subsea Segment. We design and manufacture products and provide
related services to the subsea, drilling, well construction, completion
and intervention markets. Through this segment, we offer drilling
products, including capital equipment and a broad line of products
consumed in the drilling and well intervention process; downhole products,
including cementing and casing tools and a range of downhole protection
solutions; and subsea products, including robotic vehicles and other
capital equipment, specialty components and tooling, and applied products
for subsea pipelines. We also provide a broad suite of complementary
subsea technical services and rental items.
• Production & Infrastructure Segment. We design and manufacture products and provide related equipment and services to the well stimulation, completion, production and infrastructure markets. Through this segment, we supply production equipment, including well site production and process equipment and specialty pipeline construction equipment; valves products, which includes a broad range of industrial and process valves; and flow equipment, including well stimulation consumable products and related recertification and refurbishment services.
Market Conditions
The demand for our products and services is ultimately driven by energy prices
and the expectations of exploration and production companies as to future trends
in those prices. Management believes that the long-term fundamentals underlying
the global demand for energy, such as long-term economic and demographic trends,
remain strong. Recently, however, the outlook for commodity prices has become
less strong, as evidenced by the reduced rig activity in North America. The
level of demand for our products and services is directly related to the capital
budgets of our customers, which in turn are influenced heavily by the outlook
for energy prices.
The table below shows average crude oil and natural gas prices for West Texas
Intermediate crude oil (WTI), United Kingdom Brent crude oil (Brent), and Henry
Hub natural gas:
Three Months Ended
September 30, June 30,
2012 2011 2012
Average oil, $/bbl
West Texas Intermediate $ 91.49 $ 90.37 $ 93.51
United Kingdom Brent $ 108.80 $ 113.98 $ 108.60
Average North American Natural Gas, $/Mcf
Henry Hub $ 2.85 $ 4.28 $ 2.43
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Crude oil prices appear adequate to generally maintain the current level of
global exploration and production activity, including the development of
deepwater prospects, which stimulates demand for our subsea products and
services. Current oil prices are also supporting a generally steady level of oil
related activity, both offshore and onshore. Low North American natural gas
prices have, however, negatively impacted certain areas of our business,
principally those tied to products and services we provide to the drilling and
pressure pumping service sectors. At the same time, abundant natural gas at low
prices appears to be leading to redevelopment of U.S. petrochemical and process
industry facilities, promoting increased demand for our valve products.
Corresponding to the commodity price levels, the active rig count data below,
based on the weekly Baker Hughes Incorporated rig count, reflect a broad measure
of industry activity and resultant demand for our drilling and production
related products and services.
Three Months Ended
September 30, June 30,
2012 2011 2012
Active Rigs by Location
United States 1,905 1,945 1,959
Canada 325 443 261
International 1,259 1,169 1,285
Global Active Rigs 3,489 3,557 3,505
Land vs. Offshore Rigs
Land 3,145 3,212 3,154
Offshore 344 345 351
Global Active Rigs 3,489 3,557 3,505
U.S. Commodity Target, Land
Oil/Gas 1,419 1,048 1,421
Gas 486 897 534
Unclassified - - 4
Total U.S. Land Rigs 1,905 1,945 1,959
U.S. Well Path, Land
Horizontal 1,153 1,114 1,171
Vertical 531 590 553
Directional 221 241 235
Total U.S. Active Land Rigs 1,905 1,945 1,959
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Increased activity in the refurbishment and upgrade of petrochemical facilities and projects to ensure pipeline integrity have strengthened the demand for our valve products. We have also continued to see strong demand in our production equipment, subsea and downhole product lines. The decline in drilling activity levels in North America has resulted in reduced demand for products and services in our drilling technologies and flow equipment
product lines. Those portions of our business that supply parts and equipment
relating to pressure pumping, primarily flow equipment, have experienced a
decline in revenue and a compression of margins due to a shift in activity
towards oil drilling, which generally places less of a demand on pressure
pumping equipment. This shift and an overstocking of parts and supplies by our
customers during prior periods has necessitated a destocking of that inventory
beginning in the second quarter. We expect this destocking to continue through
the end of the year.
Results of operations
We have grown our business both organically and through strategic acquisitions,
including eight acquisitions in 2011, all of which were completed during the
nine months ended September 30, 2011. For additional information about these
acquisitions, see Note 3 of the notes to condensed consolidated financial
statements in Item 1 of Part I of this quarterly report. For this reason, our
results of operations for the 2012 periods presented may not be comparable to
historical results of operations for the 2011 periods. There are factors related
to the businesses we have acquired that may result in lower net profit margins
on a going-forward basis, including the fact that several of these acquired
businesses were organized as tax pass-through entities without federal income
tax incurred or recognized at the entity level, and the fact that
post-acquisition we have recorded higher depreciation and amortization expenses.
Three months ended September 30, 2012 compared to three months ended
September 30, 2011
Three Months Ended September 30, Favorable / (Unfavorable)
2012 2011 $ %
(in thousands of dollars, except per
share information) Revenue: Drilling & Subsea $ 203,823 $ 197,933 $ 5,890 3.0 % Production & Infrastructure 144,095 132,973 11,122 8.4 % Eliminations (151 ) - (151 ) * Total revenue $ 347,767 $ 330,906 $ 16,861 5.1 % Cost of sales: Drilling & Subsea $ 129,326 $ 124,853 $ (4,473 ) (3.6 )% Production & Infrastructure 102,098 93,462 (8,636 ) (9.2 )% Eliminations (151 ) - 151 * Total cost of sales $ 231,273 $ 218,315 $ (12,958 ) (5.9 )% Gross profit: Drilling & Subsea $ 74,497 $ 73,080 $ 1,417 1.9 % Production & Infrastructure 41,997 39,511 2,486 6.3 % Total gross profit $ 116,494 $ 112,591 $ 3,903 3.5 % Selling, general and administrative expenses: Drilling & Subsea $ 33,091 $ 29,668 $ (3,423 ) (11.5 )% Production & Infrastructure 16,477 15,808 (669 ) (4.2 )% Corporate 6,253 5,270 (983 ) (18.7 )% Total selling, general and administrative expenses $ 55,821 $ 50,746 $ (5,075 ) (10.0 )% Operating income: Drilling & Subsea $ 41,406 $ 43,412 $ (2,006 ) (4.6 )% Operating income margin % 20.3 % 21.9 % Production & Infrastructure 25,520 23,703 1,817 7.7 % Operating income margin % 17.7 % 17.8 % Corporate (6,253 ) (5,270 ) (983 ) (18.7 )% Total segment operating income $ 60,673 $ 61,845 $ (1,172 ) (1.9 )% Operating income margin % 17.4 % 18.7 % Contingent consideration expense (benefit) (700 ) 200 900 * Transaction expenses 85 818 733 89.6 % (Gain)/loss on sale of assets (1,616 ) (100 ) 1,516 * Income from operations 62,904 60,927 1,977 3.2 % Interest expense, net 3,592 6,034 2,442 40.5 % Other, net 764 510 (254 ) (49.8 )% Other (income) expense, net 4,356 6,544 2,188 33.4 % Income before income taxes 58,548 54,383 4,165 7.7 % Income tax expense 17,605 18,793 1,188 6.3 % Net income 40,943 35,590 5,353 15.0 % Less: Income attributable to non-controlling interest 20 80 (60 ) (75.0 )% Income attributable to common stockholders $ 40,923 $ 35,510 $ 5,413 15.2 % Weighted average shares outstanding Basic 84,993 67,655 Diluted 92,339 73,635 Earnings per share Basic $ 0.48 $ 0.52 Diluted $ 0.44 $ 0.48 |
Revenue
Our revenue for the three months ended September 30, 2012 increased $16.9
million, or 5.1%, to $347.8 million compared to the three months ended
September 30, 2011. For the three months ended September 30, 2012, our Drilling
& Subsea segment and our Production & Infrastructure segment comprised 58.6% and
41.4% of our total revenue, respectively, compared to 59.8% and 40.2%,
respectively, for the three months ended September 30, 2011. Both of our
operating segments had increased revenue in the three months ended September 30,
2012 compared to the comparable prior year period. The revenue increase by
operating segment consisted of the following:
Drilling & Subsea Segment - Revenue increased $5.9 million, or 3.0%, to $203.8
million during the three months ended September 30, 2012 compared to the three
months ended September 30, 2011. The increase is mostly attributable to our
downhole product line, the majority of which was owned for only two of the three
months ended September 30, 2011. Adding to the increase in revenue was higher
shipments of various types of capital equipment items in our drilling product
line, such as tubular handling products and coiled tubing blowout preventer
equipment. These increases were offset by fewer shipments of remote operating
vehicles (ROV's) in our subsea product line as our customers have delayed orders
and shipments.
Production & Infrastructure Segment - Revenue increased $11.1 million, or 8.4%,
to $144.1 million during the three months ended September 30, 2012 compared to
the three months ended September 30, 2011. The growth was attributable to
increased shipments in both production equipment and valve solutions products as
each experienced increased orders from existing and new customers. The higher
shipments were made possible for production equipment by the expansion of
existing facilities and the addition of new facilities in Pennsylvania, each
completed in 2011. These increases were offset by lower revenue in flow
equipment products as the market decline experienced in the three months ended
June 30, 2012 continued into the three months ended September 30, 2012.
Segment operating income and segment operating margin percentage
Segment operating income for the three months ended September 30, 2012 decreased
$1.2 million, or 1.9%, to $60.7 million compared to the three months ended
September 30, 2011. The segment operating margin percentage is calculated by
dividing segment operating income by revenue. For the three months ended
September 30, 2012, the segment operating margin percentage of 17.4% represents
a decline of 130 basis points from an 18.7% operating margin percentage for the
three months ended September 30, 2011. The decline in operating margin
percentage in each segment was derived as follows:
Drilling & Subsea Segment - The operating margin percentage declined 160 basis
points to 20.3% for the three months ended September 30, 2012, from 21.9% for
the three months ended September 30, 2011. Of this decline in operating margin
percentage, 120 basis points is due to increased spending on sales and
engineering initiatives, while 30 basis points is attributable to pricing
pressure in certain product lines.
Production & Infrastructure Segment - The operating margin percentage declined
by 10 basis points to 17.7% for the three months ended September 30, 2012, from
17.8% for the three months ended September 30, 2011. We experienced margin
improvement in both production equipment and valve solutions as a result of
manufacturing efficiencies on higher volumes and modest price increases, offset
by reduced sales of our higher margin flow equipment product line coupled with
pricing pressure on some of those products.
Corporate - Selling, general and administrative expenses for Corporate increased
$1.0 million, or 18.7%, for the three months ended September 30, 2012 compared
to the three months ended September 30, 2011 due to higher compensation expense
and professional fees. Corporate costs included, among other items, payroll
related costs for general management and management of finance and
administration, legal, and human resources; professional fees for legal,
accounting and related services; and marketing costs.
Other items
Several items are not included in segment operating income but are included in
total operating income. These items include: Contingent consideration,
impairment of intangible assets, transaction expenses and gains/losses from the
sale of assets. Contingent consideration is related to two acquisitions in 2011
where part of the purchase price is payable in cash and/or shares of the
Company's common stock based on the earnings of the acquired entities. The
change in the amount of the accrual is recorded as part of operating income, an
increase of $0.7 million for the three months ended September 30, 2012 due to
lower projected earnings of an acquired entity, and a decrease to operating
income for $0.2 million for the three months ended September 30, 2011.
Transaction
expenses relate to costs incurred in acquiring businesses and are not considered
part of on-going segment operating income. These costs were $0.1 million and
$0.8 million for the three months ended September 30, 2012 and 2011,
respectively.
Interest expense
We incurred $3.6 million of interest expense during the three months ended
September 30, 2012, a decrease of $2.4 million from the amount incurred in the
three months ended September 30, 2011. The decrease in interest expense was
attributable to the decrease in debt levels as we repaid a portion of our debt
from the net proceeds of the initial public offering (the "IPO") and concurrent
private placement of our common shares in April 2012.
Taxes
Tax expense includes current income taxes expected to be due based on taxable
income to be reported during the periods in the various jurisdictions in which
we conduct business, and deferred income taxes based on changes in the tax
effect of temporary differences between the bases of assets and liabilities for
financial reporting and tax purposes at the beginning and end of the respective
periods. The effective tax rate, calculated by dividing total tax expense by
income before income taxes, was 30.1% and 34.6% for the three months ended
September 30, 2012 and 2011, respectively. The effective tax rate for the three
months ended September 30, 2012 is lower than the comparable period in 2011
primarily due to a reduction in the tax provision from the finalization of
certain prior year tax returns.
Nine months ended September 30, 2012 compared to nine months ended September 30,
2011
Nine Months Ended September 30, Favorable / (Unfavorable)
2012 2011 $ %
(in thousands of dollars, except per
share information) Revenue: Drilling & Subsea $ 639,538 $ 465,898 $ 173,640 37.3 % Production & Infrastructure 445,770 325,514 120,256 36.9 % Eliminations (540 ) - (540 ) * Total revenue $ 1,084,768 $ 791,412 $ 293,356 37.1 % Cost of sales: Drilling & Subsea $ 405,015 $ 310,116 $ (94,899 ) (30.6 )% Production & Infrastructure 314,554 232,716 (81,838 ) (35.2 )% Eliminations (540 ) - 540 * Total cost of sales $ 719,029 $ 542,832 $ (176,197 ) (32.5 )% Gross profit: Drilling & Subsea $ 234,523 $ 155,782 $ 78,741 50.5 % Production & Infrastructure 131,216 92,798 38,418 41.4 % Total gross profit $ 365,739 $ 248,580 $ 117,159 47.1 % Selling, general and administrative expenses: Drilling & Subsea $ 100,739 $ 72,304 $ (28,435 ) (39.3 )% Production & Infrastructure 51,145 42,069 (9,076 ) (21.6 )% Corporate 14,996 15,253 257 1.7 % Total selling, general and administrative expenses $ 166,880 $ 129,626 $ (37,254 ) (28.7 )% Operating income: Drilling & Subsea $ 133,784 $ 83,478 $ 50,306 60.3 % Operating income margin % 20.9 % 17.9 % Production & Infrastructure 80,071 50,729 29,342 57.8 % Operating income margin % 18.0 % 15.6 % Corporate (14,996 ) (15,253 ) 257 1.7 % Total segment operating income $ 198,859 $ 118,954 $ 79,905 67.2 % Operating income margin % 18.3 % 15.0 % Contingent consideration expense (benefit) (4,600 ) 6,000 10,600 * Impairment of intangible assets 1,161 - (1,161 ) * Transaction expenses 882 3,434 2,552 74.3 % (Gain)/loss on sale of assets (1,539 ) (520 ) 1,019 196.0 % . . . |
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