Forum Energy Technologies Inc (FET) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the 3rd Quarter 2012 Forearm Energy Technologies Earnings Conference Call. My name is Mansi, and I'm your coordinator today. At this time, all participants are in listen-only mode. We will conduct a question, answer session towards the end of this conference. (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, Mansi. Good morning, and welcome to the Forum Energy Technologies quarterly earnings conference 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, our Forum's two division presidents, Charlie Jones, President of the Drilling and Subsea Division, and Wendell Brooks, President of our Production and Infrastructure Division. We issued our earnings release last night, and it is available on our website. The statements made during this conference call, including your 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 risk 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 at 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 or 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 returned to SCF, as planned, and we thank Patrick for his valuable contribution. Mark Traylor has been Forum for about a year, now as the Vice President of Finance for one of our two divisions.

Mark and I previously worked together at Halliburton, and some of you may have 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 declining North America rig count on some of our other product offerings. Third quarter 2012 revenue decreased 7% from the second quarter 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. The Drilling and Subsea division was 98%, and for Production and 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 ROV 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 four Perry work-class vehicles for one of our large customers, the XT 600 trenching system and the two 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, but also add to the range of our 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 flux and other completion tools is a welcome addition to expand our Downhole product offerings.

Moving to our Production and Infrastructure segments, our Production Equipment product line generated record revenue earnings and orders in the third quarter. Demand for well site separation and 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 as is manufactured and then pre-assembled 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 the consistent rate of growth in the Valves product line, and with the margin improvements.

As expected, our Flow Equipment product line orders decreased in the third quarter, as our pressure pumping customers work through their own inventories of consumable products.

We expect the fourth quarter to be the bottom of this de-stocking 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 the 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 in our earnings release, reflects the recent steeper decline in the North America drilling activity and rate 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 trend we are seeing, especially as related to deep water 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 ROV's 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 oh $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 in the concurrent private placement in April 2012. Sequentially, net income decreased 7% in the third this 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 and Subsea segment revenue was down the $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 nearer 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 and 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 and Infrastructure segment revenue of $144 million in the third quarter was down $7 million from the second quarter 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, the pressure pumping service providers, are still working off excess inventories, a condition we expect to continue through the fourth quarter with gradual improvement 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 and infrastructure increased $700,000 with gains in Production Equipment and Valve Solutions partially offset by the Flow Equipment declines.

I will explain our expectations for the fourth quarter and apply 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 and 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 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 a 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 flows 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 products 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 and A.

Thanks, Jim. Forum had a good third quarter. Our balanced portfolio of products helped offset the impact of a declining North America rig count on some of our products 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. We see good potential for other attractive acquisitions that will further expand our offerings 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 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 prospect 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. Mansi? Please take the first question.

Thank you, very much. (Operator Instructions). We have a first question from the line of Doug Becker. Please, go ahead.

Thanks. Cris, just want to get a little more clear on production infrastructure. Very good margins, particularly in light of the revenue decline. What sustainability is there as we think about fourth quarter given some of the dynamics?

Right, Doug. Thanks for your question. On Production and Infrastructure, we are seeing a good margin improvement there on higher volumes in both production equipment and in valves, manufacturing efficiencies and our Production Equipment. There is some pricing leverage in both valves and production equipment, so we see those margins as sustainable, and we're very pleased with the margin improvement that we're seeing in those businesses.

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

Yes. We have made good progress there.

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

Slightly. Pretty flat, though.

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

Right. Syntech closed on October 1st. Wireline Solutions has been signed. That's going to close on Thursday, I guess, November 1st. The contribution from those two companies in those two acquisitions in this fourth quarter that will have the initial integration cost, deal cost and so forth, isn't real significant. What we would 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 still 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 evaluation parameters.

Still targeting Subsea and Downhole?

Yes. It will be in those areas, but not exclusively so.

Thank you, very much.

Thanks, Doug.

Thank you very much for your questions, Doug. We have a next question from the line of Robin Shoemaker. Please, go ahead.

Thank you. Good morning, Cris.

Hi, Robin.

Hi. I wanted to ask you, you made a comment about the activity levels in the oily basins. Another company yesterday indicated that they have seen softness since oil dropped below $90 and I just wondered if your positive commentary of activity in the oily basins could be subject to review if oil price stay at current levels. Are you seeing any slow-down in the oily basins? Another company indicated, Lufkin 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 slow-down in the oily basins across the whole spectrum?

Yes. Let me clarify that, Robin. I think we are seeing the impact of the declining rig count in North America. And we are seeing that, in particular, in our Drilling business and Flow Equipment. Production Equipment business is in a different category. We are seeing very good market share gains because, I think, of 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 basin, but rather things that are more specific to our business, and market share improvements in the market position that we have. Did that help?

Yes. Definitely. So you are seeing a little, I mean, definitely a slow-down in Drilling and Flow Equipment?

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

Okay. Thanks for that. Then my other question is, I missed the explanation for some deferred delivery to certain customers of equipment. Is that related to year-end budget constraints? I just missed your commentary on that.

No. Thanks. In setting the contacts for our guidance for the fourth quarter, I mentioned that it's our expectation that there will be some customers who want a deferred delivery. That's because, we feel and based on our experience in the market, such as this, there is a lack of urgency among customer, just a lack of urgency. It's our expectation based on our experience that when we get to year-end and with the holidays, and companies, just 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.

Okay.

Does that clarify it?

Yes. 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.

Right. Okay. Thank you, Chris.

Yes.

Thank you for your questions, Robin. We have the next question from the line from Blake Hutchinson. Please, go ahead.

Good morning, guys.

Hi, Blake.

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 a flat result in that business for 4Q with some of the delays, and the way the gestation of the 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. It looks like the ramp up there is going to be in 2013.

It's kind of, maybe a step function change as we enter 2013 is maybe the right way to think about it?

Correct.

Great. Then just trying to gauge the reaction, and the immediacy of the 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 top line of there having a long 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 improving throughout the year? Is that the field 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 is received. So there is, clearly, the bigger impact of declining rig count and activity in Q4 in North America, so I would agree with your supposition there, Blake. Yes.

Okay. Thanks. 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 of 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 will be good to go with the first of the year. Upward from there.

Great, thanks, guys. I'll turn it back.

Okay, Blake. Thanks.

Thank you. We have a next question in the queue from the line of Brad Handler. Please, go ahead.

Thanks. Good morning, guys.

Hi, Brad.

I guess I, like my peers, have little questions across a couple of different product lines. Maybe you can help us understand the idea in the division within the US. Is there a degree of inventory usage, and burning through inventory in the same vein 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, that 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. With the declining rig count and lower utilization, customers don't need to order so much pipe handling equipment and consumable pumps and bearings and so on. 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 have been drawing some pumps on rigs that are idle? So might they need to order two pumps because in the sense because even though a rig has been idle, the pump has been used.

Yes.

Okay.

When it turns, yes.

That's the way the rebound works. Okay. That's interesting. In Downhole, if I understand it right, you have engaged one major customer to try to build position there, and now, I think you're building your capacity to satisfy needs.

Yes.

Could you explain the interchange in terms of developing additional customers? It is there one you take care first, before you really turn your attention to another? If you could explain the business development path for us a little bit, please?

Write. 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 it will be with a number of customers and taking on more of their needs. But it is also taking on some big international projects, as well with bigger customers.

I understand.

All of those things, Brad.

Okay. And maybe just one 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. 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 had 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.

Okay. All right. Very good. Thanks. Take care.

Thanks, Brad.

Thank you. Our next question is from the line of Mike Urban from Deutsche Bank. Please, go ahead.

Thanks. Good morning, guys.

Hi, Mike.

You talked about the desire to grow the international side of the business. You have 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 the where the international revenues are, currently, as a percentage of total, or where you think can get to based on the bookings that you have seen. And, also, as a related follow-up, where the opportunities are going forward. It seems like a lot of it, right now, is on the Drilling equipment side.

Yes. 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 in the Valve Solutions area. If 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 equipment. There is going to be a shift in the mix of our drilling capital equipment to the international seller. Those things, I think, will give us a higher weighting of non-North America international sales in 2013.

Okay. You should see growth in international relative to US. Within the US, you mentioned opening a facility in the Bakken. I think that's one other thing that you had highlighted as you do get a bit of a slow down, here. Maybe there are opportunities to find new customers to improve the geographic penetration, I guess, both in the US and internationally. Are there any other opportunities or examples of that you're looking at either organically or by acquisition?

Yes. Well, in the Flow Equipment side we're known on the service side and the repair and replacement side continues to do quite well, and we are now in eight different basins. Right, Wendell?

Yes.

And we are 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 are concerned about the safety of the folks from that area, and we will see some delays. But in the larger picture, even with the softness in that market, we have seen growth in our market position there. Although some of our product lines, in particular drilling and valves, have good position in Canada. I think there are other product areas where there is definitely room for expansion and a market improvement into the Canadian market. It's been soft year to date, but I think the prospects should be better off these low levels in Canada now. So that's something we will be looking at, as well. We're going full out on production equipment, but we think we've got a good formula there. There are other areas where we think we could expand if we can have a chance. I think we are going at about 110% with the rapid rate of growth and that business there, now. Anything else? I think that covers it.

Okay. Great. If I can sneak one 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. PNI 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 have talked about. And I've got a, I guess, both revenue and margin, perhaps significantly, on the Drilling and Subsea side. Does that piece it all together correctly?

Yes. I think we said Flow Equipment is going to bottom out in the fourth quarter. Drilling has the head-winds that we've been talking about. 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 are not going to really push for higher deliveries at your end, to the contrary. I think those are the factors that go into our guidance, Mike.

Okay. Great. That's all for me. Thank you.

We have our next question on the line from Jonathan Sisto. Please, go ahead. Please go ahead.

Good morning, gentlemen.

Hi, Jonathan.

On the Schlumberger conference call, one of my contemporaries asked about the rate count deteriorating 10% from current levels over the next six months. And 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 are not discussing yet?

Gosh. That's a significant downward step in the rig count. In terms of how that would effect us, it's interesting you say that. We are actually seeing fairly good orders and backlog, and our well intervention business is 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?

Okay. Great.

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

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 about at on average 20, 30 rigs a month, right? So we see another couple of that? I don't think that amounts to 10% down. We are already here and October is almost done. Don't see another 10% down over the next two months. No.

I'm sorry I said the next six to 12 months. Maybe, I misspoke. Sorry.

Sorry. Misunderstood. In 2013, our expectation is that things kind of bottom out, from a rig count standpoint, in the first half, and then we see improvements starting before mid-year of next year, or around mid-year in terms of the North America rig count or the US rig count. That's what we're planning for. I don't know that we given, that's why we give a range in our guidance, Jonathan. It could be that. And I think that our comments kind of incorporate continued decline through and into the first half of next year.

Great. Thank you, very much.

okay, Jonathan.

Thank you. Our next question is from the line of Michael Marino. Please, go ahead.

Good morning.

Hi, Mike.

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

If it's flow equipment, we started off the year really strong, so they would have to have a real good recovery to get back to make up for that. I would say that's probably the biggest question, but I think they will certainly see sequential improvement. Other than that, I think we feel pretty good about the cross specs 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 a mixed shift affects the Subsea and Drilling margins. 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 margins?

Yes. What's nice is our margins have been converging across our product lines, and so the difference in 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 the mix effect there.

Okay. That's helpful.

And then I think the growth in Downhole where in fact there is a gap there. Those are much higher margins. And if we're successful in scaling up that business, that could be a nice positive for us.

Okay, great. That's all I had. Thanks.

I am pleased with the progress that some of our, what were lower margin businesses have made in improving their margins.

Okay. We have a next question from the line of Jeff Tillery. Please, go ahead.

Hi, guys. Good morning.

Hi, Jeff.

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

Yes. We are seeing orders. The book-to-bill is not yet at one, 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 a higher rate of reordering will take place. It's hard to have hope until you're there, you can't have complete confidence; right? But it's based on 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 varies widely across the clients, but, anecdotally, we feel like we've touched bottom. As Cris said, you don't know you are there, but we feel like we're there. And next year, we should see some gradual improvement.

Good, Wendell.

Cris, your comment on margins converging on the businesses, was that focused just on the Drilling and 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 margin. And I want to compliment the managements in both of those business lines for the improvement.

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

We haven't signed the contract, we haven't closed the second one. I don't think it would be appropriate there, and we don't want to 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 of the contribution of the acquired entities.

I understand. The last question I have, this will be the first Q1 where we will see you guys public in terms of the constructed the company end. Any of the companies have a downward Q1 seasonality bent?

The quarter with the fewest manufacturing days tends to be Q4. Right? With all of those holidays. I think we do have this kind of almost window dressing of balance sheets taking place, here. People not wanting to load up on working capital. Q1, we expect to be a return to normal if you will.

Great. Thank you, very much.

Thanks, Jeff. One more question, Mansi?

Thank you. Yes. We had a last question in the queue from the line of Joe Gibney. Please, go ahead.

Thanks. Good morning. Just one quick question on the references to the capacity expansion, maybe Charlie or Jim, just some initial thoughts on nature and scale of that capacity as is it more greenfield, or just tacked on to existing facilities, or through acquisition? Just curious if you could provide some color on that. Appreciate it.

Right. Oh, the addition for subsea capacity to anticipate, and where we see the greatest constraint, right, Charlie? Is probably in the ROV trencher area.

Yes. It gets complicated by the trenching. For sure.

Because of the 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 that, that's one thing that's driving the additional capacity. Right?

So the mix change can drive our capacity decisions going forth. I think the thing that we also have to consider is that we've got a very skilled and experience 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 have that capacity. Consideration with respect to when we have that capacity.

Fair enough. Thanks.

Thanks, Joe. Very good, folks. Thank you for your interest and good questions. We look forward to talking to you in February for our fourth quarter conference, call. Mark?

Thank you for joining us this morning. And we'll say goodbye. Thank you, Mansi.

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.