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FTI > SEC Filings for FTI > Form 10-K on 21-Feb-2014All Recent SEC Filings

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Form 10-K for FMC TECHNOLOGIES INC


21-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

We design, manufacture and service technologically sophisticated systems and products for customers in the energy industry. We have manufacturing operations worldwide, strategically located to facilitate delivery of our products, systems and services to our customers. We report the results of operations in the following segments: Subsea Technologies, Surface Technologies and Energy Infrastructure. Management's determination of the Company's reporting segments was made on the basis of our strategic priorities and corresponds to the manner in which our chief operating decision maker reviews and evaluates operating performance to make decisions about resources to be allocated to the segment.

A description of our products and services, as well as annual financial data, for each segment can be found in Part I, Item 1, "Business" and Note 19 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. The discussions below include the results of each of our segments for the years ended December 31, 2013, 2012 and 2011.

We focus on economic and industry-specific drivers and key risk factors affecting our business segments as we formulate our strategic plans and make decisions related to allocating capital and human resources. The following discussion provides examples of economic and industry factors and key risks that we consider relevant to our business segments.

The results of our businesses are primarily driven by changes in production spending by oil and gas companies, which largely depend upon current and anticipated future crude oil and natural gas demand, production volumes, and consequently, commodity prices. Our Subsea Technologies business is primarily affected by trends in deepwater oil and natural gas production. Our Surface Technologies business is primarily affected by trends in land-based and shallow water oil and natural gas production, including trends in shale production. We use crude oil and natural gas prices as an indicator of demand. Additionally, we use rig count as an indicator of demand which consequently influences the level of worldwide production activity and spending decisions.

We also focus on key risk factors when determining our overall strategy and making decisions for capital allocation. These factors include risks associated with the global economic outlook, product obsolescence and the competitive environment. We address these risks in our business strategies, which incorporate continuing development of leading edge technologies and cultivating strong customer relationships.

We have developed close working relationships with our customers. Our Subsea Technologies business results reflect our ability to build long-term alliances with oil and natural gas companies that are actively engaged in offshore deepwater development and to provide solutions for their needs in a timely and cost-effective manner. We believe that by working closely with our customers, we enhance our competitive advantage, strengthen our market positions and improve our operating results. Examining our share of subsea tree awards during the year is one of the ways we evaluate our market position.

As we evaluate our operating results, we consider business segment performance indicators like segment revenue, operating profit and capital employed, in addition to the level of inbound orders and order backlog. A significant proportion of our revenue is recognized under the percentage of completion method of accounting. Cash receipts from such arrangements typically occur at milestones achieved under stated contract terms. Consequently, the timing of revenue recognition is not always correlated with the timing of customer payments. We may structure our contracts to receive advance payments that we typically use to fund engineering efforts and inventory purchases. Working capital (excluding cash) and net (debt) cash are therefore key performance indicators of cash flows.

In each of our segments, we serve customers from around the world. During 2013, approximately 73% of our total sales were recognized outside of the United States. We evaluate international markets and pursue opportunities that fit our technological capabilities and strategies. For example, we have targeted opportunities in West Africa, Brazil, the North Sea and the Asia-Pacific region because of the expected offshore drilling potential in those regions.


Business Outlook
Overall, management is optimistic about business activity in 2014 as global economic growth continues to recover. While expectations of future energy demand remain closely tied to economic activity in major world economies, total world consumption of crude oil and liquid fuels is expected to slightly increase in 2014. As a result, we expect crude oil prices to remain at a level that supports strong production activity, especially in subsea markets.
Orders were strong in every quarter in 2013 as operators continued to award subsea projects in all basins throughout the world. Our strong subsea project backlog as of December 31, 2013, combined with increasing demand for subsea services related to production activity, supports our expectations of higher subsea revenue and margin expansion in 2014. However, due to the lower backlog conversion rate associated with multi-year delivery schedule awards, we expect modest subsea revenue growth in 2014 when compared to the growth we have experienced over the last few years. Subsea awards over the last couple of years have filled industry backlogs, and we believe the pricing environment should remain positive in 2014 as oil and gas companies remain committed to developing their deepwater portfolios because of the long-term returns these portfolios generate.
In addition, we continue to focus on subsea processing and subsea services as key growth platforms so that we can expand our role as life-of-field partners with our customers by lowering their costs and improving their recovery. In subsea services and in conjunction with our joint venture with Edison Chouest Offshore LLC, we expect to bring our fourth riserless light well intervention system into the market in the end of 2014. Also, our service facility expansions in Norway and Brazil are expected to allow us to meet the growing customer demand for equipment refurbishment. Overall, we expect market demand to remain strong for our subsea technologies systems and service offerings worldwide despite expectations that total industry tree orders will be lower as Petrobras will not repeat its awards related to its multi-year pre-salt requirements. We continue to seek ways to leverage our capacity investments, our talent, and our overall cost structure to drive improvement in our execution and our financial results.
Regarding our surface technologies portfolio, the slowdown in North American surface activity in the latter half of 2012, resulting from oversupply of equipment and lower natural gas prices, led to curtailed fracturing capacity expansion. This slowdown in North American surface activity continued in 2013. As a result, the slowdown had a negative impact on profits in our fluid control business and fracturing rental assets in our surface wellhead business in 2013 compared to the prior year. We believe the international markets for our surface technologies businesses are expected to remain strong in 2014, while the flat activity in North American markets experienced in 2013 is expected to continue in 2014. Shale markets remains part of our long-term strategy, and we continue to invest in our surface technologies businesses to capitalize on these growth opportunities while taking steps to better integrate our product and service offerings with our customers' needs.


CONSOLIDATED RESULTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
                                  Year Ended December 31,                             Change
(In millions, except
percentages)                 2013          2012          2011           2013 vs. 2012          2012 vs. 2011
Revenue                   $ 7,126.2     $ 6,151.4     $ 5,099.0     $  974.8       16%      $ 1,052.4      21%
Costs and expenses:
Cost of sales               5,571.4       4,832.9       3,966.2        738.5        15          866.7      22
Selling, general and
administrative expense        694.8         596.9         479.9         97.9        16          117.0      24
Research and development
expense                       112.4         116.8          90.5         (4.4 )     (4)           26.3      29
Total costs and expenses    6,378.6       5,546.6       4,536.6        832.0        15        1,010.0      22
Other income (expense),
net                             5.3          23.0          (1.4 )      (17.7 )     (77)          24.4     1,743
Net interest expense          (33.7 )       (26.6 )        (8.2 )       (7.1 )     (27)         (18.4 )   (224)
Income before income
taxes                         719.2         601.2         552.8        118.0        20           48.4       9
Provision for income
taxes                         212.6         166.4         149.3         46.2        28           17.1      11
Net income                    506.6         434.8         403.5         71.8        17           31.3       8
Less: net income
attributable to
noncontrolling interests       (5.2 )        (4.8 )        (3.7 )       (0.4 )     (8)           (1.1 )   (30)
Net income attributable
to FMC Technologies, Inc. $   501.4     $   430.0     $   399.8     $   71.4       17%      $    30.2      8%

2013 Compared With 2012

Revenue increased by $974.8 million in 2013 compared to the prior year and reflected revenue growth in all reporting segments. Revenue in 2013 included a $136.8 million unfavorable impact of foreign currency translation. Excluding the impact of foreign currency translation, total revenue increased by $1,111.6 million year-over-year. Subsea systems and services had another strong year of order activity in 2013. The impact of the higher backlog coming into 2013, combined with robust market activity, led to increased Subsea Technologies sales year-over-year. Additionally, revenue increased year-over-year as a result of our acquisition of the remaining 55% of Schilling Robotics during the second quarter of 2012. Surface Technologies posted higher revenue in 2013 as a result of our acquisition of our completion service business in the fourth quarter of 2012 and higher conventional wellhead system sales in our surface wellhead business in the Middle East and Europe regions.
Gross profit (revenue less cost of sales) increased as a percentage of sales to 21.8% in 2013 from 21.4% in the prior year. The increase in gross profit as a percentage of sales was primarily due to increased utilization and efficiency of engineering resources in our Western Region subsea business, improved performance in our subsea services business, additional subsea contract value in 2013 related to an Angolan withholding tax adjustment, a larger remeasurement of the Multi Phase Meters contingent earn-out consideration in 2012, increased sales volumes and profitability in our Schilling Robotics business, and foreign exchange gains recognized in 2013, partially offset by charges taken on the ExxonMobil Hibernia Southern Extension project in our subsea business and the slowdown in the North American shale markets, primarily from a lack of capacity expansion, which lowered demand for our well service pumps and flowline products.

Selling, general and administrative ("SG&A") expense increased by $97.9 million year-over-year, driven by higher bid and proposal expenses, increased sales commissions and additional staffing to support subsea service operations in our subsea systems business, the full year impact of SG&A expense as the result of our acquisition of our completion services business in the fourth quarter of 2012, and increased sales commissions in our surface wellhead business.


Other income (expense), net, reflected a $20.0 million gain related to the fair valuation of our previously held equity interest in Schilling Robotics during 2012 and $1.7 million and $1.4 million of gains related to the remeasurement of foreign currency exposures in 2013 and 2012, respectively. Further discussion of our derivative instruments is incorporated herein by reference from Note 14 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Our provision for income taxes reflected an effective tax rate of 29.8% in 2013. Excluding a charge related to withholding taxes in Angola, our effective tax rate was 26.7% in 2013. In 2012, our effective tax rate was 28.0%. The decrease in our effective tax rate from 2012 to the adjusted rate in 2013 was primarily due to a more favorable mix of earnings. Our effective tax rate can fluctuate depending on our country mix of earnings, since our foreign earnings are generally subject to lower tax rates than in the United States. In certain jurisdictions, primarily Singapore and Malaysia, our tax rate is significantly less than the relevant statutory rate due to tax holidays which are set to expire after 2018 and 2015, respectively. The difference between the effective tax rate and the statutory U.S. federal income tax rate primarily related to differing foreign and state tax rates.

2012 Compared With 2011

Revenue increased by $1,052.4 million in 2012 compared to the prior year and reflected revenue growth in all reporting segments. Revenue in 2012 included a $188.4 million unfavorable impact of foreign currency translation. Excluding the impact of foreign currency translation, total revenue increased by $1,240.8 million year-over-year. Subsea systems and services had another strong year of order activity during 2012. The impact of the higher backlog coming into 2012, combined with robust market activity, led to increased Subsea Technologies sales year-over-year. Additionally, revenue increased year-over-year as a result of our acquisition of the remaining 55% of Schilling Robotics during the second quarter of 2012. Surface Technologies posted higher revenue during 2012 from higher backlog entering the year, which resulted from increased demand for Weco®/Chiksan® equipment and well service pumps due to the ongoing strength of the North American oil and gas shale markets in 2011.
Gross profit (revenue less cost of sales) decreased as a percentage of sales to 21.4% in 2012 from 22.2% in the prior year. The decline in gross profit as a percentage of sales was primarily due to the $42.0 million remeasurement of the Multi Phase Meters contingent earn-out consideration in 2012, higher staffing and increased depreciation expense as a result of our expansion of our fluid control business, and certain foreign exchange losses, partially offset by charges taken in 2011 from higher project completion and post-completion costs.

SG&A expense increased by $117.0 million year-over-year, driven by higher bid and proposal expenses, increased sales commissions and additional staffing to support operations.

R&D expense increased by $26.3 million year-over-year as we continued to advance new technologies in Subsea Technologies, including subsea processing capabilities, and related to the development of our permanent magnet motor technologies.

Other income (expense), net, reflected a $20.0 million gain related to the fair valuation of our previously held equity interest in Schilling Robotics during 2012 and $1.4 million and $1.9 million of gains related to the remeasurement of foreign currency exposures in 2012 and 2011, respectively. Further discussion of our derivative instruments is incorporated herein by reference from Note 14 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Our provision for income taxes reflected an effective tax rate of 28.0% in 2012. In 2011, our effective tax rate was 27.2%. Excluding a benefit related to recognizing a retroactive holiday in Singapore in the first quarter of 2011, our effective tax rate was 28.5%. The decrease from this adjusted rate to the effective tax rate in 2012 was primarily due to changes in our international structure during 2012, partially offset by the tax impact of the remeasurement of the Multi Phase Meters contingent earn-out consideration and a less favorable mix of earnings. Our effective tax rate can fluctuate depending on our country mix of earnings, since our foreign earnings are generally subject to lower tax rates than in the United States. In certain jurisdictions, primarily Singapore and Malaysia, our tax rate is significantly less than the relevant statutory rate due to tax holidays which are set to expire after 2018 and 2015, respectively. The difference between the effective tax rate and the statutory U.S. federal income tax rate related primarily to differing foreign and state tax rates.


Operating Results of Business Segments

Segment operating profit is defined as total segment revenue less segment
operating expenses. The following items have been excluded in computing segment
operating profit: corporate staff expense, interest income and expense
associated with corporate debt and investments, income taxes and other revenue
and other (expense), net.

The following table summarizes our operating results for the years ended
December 31, 2013, 2012 and 2011:
                                     Year Ended December 31,                   Favorable/(Unfavorable)
(In millions, except
percentages)                    2013          2012          2011         2013 vs. 2012         2012 vs. 2011
Revenue
Subsea Technologies          $ 4,726.9     $ 4,006.8     $ 3,289.5     $  720.1      18%    $   717.3      22%
Surface Technologies           1,806.8       1,598.1       1,310.8        208.7      13         287.3      22
Energy Infrastructure            617.2         574.1         499.0         43.1       8          75.1      15
Other revenue and
intercompany eliminations        (24.7 )       (27.6 )        (0.3 )        2.9       *         (27.3 )     *
Total revenue                $ 7,126.2     $ 6,151.4     $ 5,099.0     $  974.8      16%    $ 1,052.4      21%
Net income
Segment operating profit:
Subsea Technologies          $   548.2     $   432.2     $   306.0     $  116.0      27%    $   126.2      41%
Surface Technologies             257.2         284.3         250.1        (27.1 )   (10)         34.2      14
Energy Infrastructure             74.3          68.2          63.2          6.1       9           5.0       8
Intercompany eliminations         (0.1 )           -             -         (0.1 )     *             -       *
Total segment operating
profit                           879.6         784.7         619.3         94.9      12         165.4      27
Corporate items:
Corporate expense                (46.3 )       (41.8 )       (39.4 )       (4.5 )   (11)         (2.4 )    (6)
Other revenue and other
(expense), net                   (85.6 )      (119.9 )       (22.6 )       34.3      29         (97.3 )   (431)
Net interest expense             (33.7 )       (26.6 )        (8.2 )       (7.1 )   (27)        (18.4 )   (224)
Total corporate items           (165.6 )      (188.3 )       (70.2 )       22.7      12        (118.1 )   (168)
Income before income taxes       714.0         596.4         549.1        117.6      20          47.3       9
Provision for income taxes       212.6         166.4         149.3        (46.2 )   (28)        (17.1 )   (11)
Net income attributable to
FMC Technologies, Inc.       $   501.4     $   430.0     $   399.8     $   71.4      17%    $    30.2      8%

* Not meaningful

We report our results of operations in U.S. dollars; however, our earnings are generated in various currencies worldwide. For example, we generate a significant amount of revenue, and incur a significant amount of costs, in Norwegian krone, Brazilian real, Singapore dollar, Malaysian ringgit, British pound, Angolan new kwanza and the euro. The earnings of subsidiaries functioning in their local currencies are translated into U.S. dollars based upon the average exchange rate during the period, in order to provide worldwide consolidated results. While the U.S. dollar results reported reflect the actual economics of the period reported upon, the variances from prior periods include the impact of translating earnings at different rates.


Subsea Technologies

2013 Compared With 2012

Subsea Technologies' revenue increased $720.1 million in 2013 compared to the prior year. Revenue for 2013 included a $129.1 million unfavorable impact of foreign currency translation. Excluding the impact of foreign currency translation, Subsea Technologies' revenue increased by $849.2 million during 2013 compared to the prior year. With continued high crude oil prices, oil and gas exploration and production activity increased in 2013 when compared to the prior year, as evidenced by increased spending by oil and gas companies. This led to a stronger market for subsea products and services. We entered the year with a strong backlog and continued to have solid order activity during 2013 from high demand for subsea systems. The year-over-year increase in revenue was attributable to the conversion of backlog, combined with strong order activity in 2013. The revenue increase in 2013 was also due in part to our acquisition of the remaining 55% of Schilling Robotics in the second quarter of 2012.

Subsea Technologies' operating profit totaled $548.2 million, or 11.6% of revenue, in 2013, compared to the prior-year's operating profit as a percentage of revenue of 10.8%. The margin improvement was primarily driven by the following:
• Subsea Systems - 0.9 percentage point increase due to increased utilization and efficiency of engineering resources in our Western Region business, improved results in our subsea service business, additional contract value in 2013 related to an Angolan withholding tax adjustment, lower overall research and development expenses and liquidated damage charges recognized in 2012 in Brazil, partially offset by charges taken on the ExxonMobil Hibernia Southern Extension project; and

• Schilling Robotics - 0.1 percentage point decrease due to the gain on our previously held equity interest in Schilling Robotics recognized in 2012.

Foreign currency translation unfavorably impacted operating profit in 2013 by $14.6 million compared to the prior year.

2012 Compared With 2011

Subsea Technologies' revenue increased $717.3 million in 2012 compared to the prior year. Revenue for 2012 included a $159.9 million unfavorable impact of foreign currency translation. Excluding the impact of foreign currency translation, total revenue increased by $877.2 million during 2012 compared to the prior year. With continued high crude oil prices, oil and gas exploration and production activity increased in 2012 when compared to the prior year, as evidenced by increased spending by oil and gas companies. This led to a stronger market for subsea products and services. We entered the year with a strong backlog and continued to have solid order activity during 2012 from high demand for subsea systems. The year-over-year increase in revenue was attributable to the conversion of backlog, combined with strong order activity in 2012. The revenue increase in 2012 was also due in part to our acquisition of the remaining 55% of Schilling Robotics in the second quarter of 2012.

Subsea Technologies' operating profit totaled $432.2 million, or 10.8% of revenue, in 2012, compared to the prior-year's operating profit as a percentage of revenue of 9.3%. The margin improvement was primarily driven by the following:
• Subsea Systems - 1.1 percentage point increase due to the conversion of lower margin backlog and higher project-related and post-completion costs in 2011;

• Schilling Robotics - 0.2 percentage point increase due to the acquisition of the remaining 55% of Schilling Robotics in the second quarter of 2012; and

• Multi Phase Meters - 0.3 percentage point increase due to higher margins realized in 2012 from increased recognition and acceptance of our meters in the market.

Foreign currency translation unfavorably impacted operating profit in 2012 by $23.5 million compared to the prior year.


Surface Technologies

2013 Compared With 2012

Surface Technologies' revenue increased $208.7 million in 2013 compared to the prior year. The revenue increase was driven by the acquisition of our completion service business in the fourth quarter of 2012 and our surface wellhead business in the Middle East and Europe regions due to conventional wellhead system sales. These increases were partially offset by a decrease in revenue in our fluid control business resulting from the slowdown of the North American shale markets which have decreased demand for our well service pumps and flowline products. Foreign currency translation unfavorably impacted revenue by $11.9 million in 2013 compared to the prior year.

Surface Technologies' operating profit totaled $257.2 million, or 14.2% of revenue, in 2013, compared to the prior-year's operating profit as a percentage of revenue of 17.8%. The margin decline was primarily driven by the following:
• Fluid Control - 2.2 percentage point decrease due to the slowdown in the North American shale markets, primarily from a lack of capacity expansion, which lowered demand for our well service pumps and flowline products;

• Completion Services - 1.8 percentage point decrease due to the inclusion of our completion service business and lower activity in the Canadian market which impacted results; and

• Surface Wellhead - 0.5 percentage point increase due to strong sales of conventional wellhead systems in the Middle East and Europe.

2012 Compared With 2011

Surface Technologies' revenue increased $287.3 million in 2012 compared to the prior year. The revenue increase was driven by strong demand for Weco®/Chiksan® equipment coupled with an increased demand for well service pumps in our fluid control business due to the strength in North American oil and gas shale activity in the first half of 2012. Surface wellhead also experienced revenue growth year-over-year primarily due to conventional wellhead system sales and increased services related to hydraulic fracturing activity in North America and strong market growth in the Middle East. In addition, revenue increased year-over-year due to the acquisition of our completion services business in the fourth quarter of 2012.

Surface Technologies' operating profit totaled $284.3 million, or 17.8% of revenue, in 2012, compared to the prior-year's operating profit as a percentage of revenue of 19.1%. The margin decline was primarily driven by the following:
• Fluid Control - 1.0 percentage point decrease due to higher staffing and increased depreciation expense as a result of business expansion;

• Completion Services - 0.5 percentage point decrease due to the inclusion of our completion service business and lower activity in the Canadian market which impacted results; and

• Surface Wellhead - 0.3 percentage point increase due to strong sales of conventional wellhead systems in the Middle East, partially offset by higher warranty costs in Europe.


Energy Infrastructure

2013 Compared With 2012

Energy Infrastructure's revenue increased $43.1 million in 2013 compared to the prior year. The increase in revenue was led by our measurement solutions . . .

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