Forum Energy Technologies Inc (FET) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies earnings release conference call for the fourth-quarter 2012. My name is Chanelle, and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. And all lines have been placed on mute to prevent any background noise. We will be facilitating a question-and-answer session after the speakers' remarks.

As a reminder, this conference call is being recorded for replay purposes. After the speakers' remarks today, I will instruct you on the procedures for asking questions.

I will turn the conference over to Mark Traylor, Vice President of Investor Relations and Planning. Please proceed, sir.

Thank you, Chanelle. Good morning, and welcome to Forum Energy Technologies' quarterly earnings conference call for the fourth-quarter 2012. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer, and Jim Harris, Senior Vice President and Chief Financial Officer. Also with us today are 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 the 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.

These 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 our 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. A replay of the call will be available on our website for 30 days following the call. Management's statements may include non-GAAP financial measures. For reconciliation of these measures, refer to our earnings release available on our website.

I am now pleased to turn the call over to Cris Gaut.

Thanks, Mark, and good morning. I will start with some highlights from the quarter and the full year, and offer a few thoughts on the outlook for our business. And then I will turn it over to Jim, who will provide greater detail on our financial performance.

Our fourth-quarter diluted earnings per share were $0.26, but this includes $0.02 of charges for acquisition transactions, severance and foreign currency expenses. During the fourth quarter, oil and gas operators reduced their spending, resulting in a declining US rig count.

This lack of spending and activity, especially in the latter part of the quarter, affected our sales of consumable products. And we also saw some customers defer the acceptance of capital goods they already had on order from us. This lower level of activity caused us to have an underabsorption of manufacturing costs, which depressed our operating margins in the fourth quarter across many of our product lines.

Total customer orders during the fourth quarter were $335 million. The fourth-quarter book-to-bill ratio was 101% for the Company as a whole; for Drilling and Subsea Division, it was 99%; and for the Production and Infrastructure Division it was 105%. On a sequential basis, we had a 6% decrease in orders from the third quarter on lower orders for drilling, subsea and valve product lines.

Production equipment orders, although down from the third quarter as well, remained at a very high level. And we have recently received a number of large orders for modular equipment from major operators. We also saw an increase in orders for Flow Equipment, and we believe this business has now begun to improve. The outlook for our Subsea Technologies product line looks good. And based on recent customer discussions, we expect strong demand for our remotely-operated vehicles, our ROVs, and component parts in 2013.

Our Drilling and Subsea segment completed four acquisitions in the fourth quarter of 2012 for an aggregate purchase price of $140 million. In 2013, the combined revenue for these four acquisitions is expected to be approximately $100 million. And we expect the acquired entities to generate operating income of approximately $20 million this year.

We welcome the employees of Dynacon and Merrimac, our two most recent acquisitions, to Forum. The other two fourth-quarter acquisitions were Syntech and Wireline Solutions, both of which we talked about on our conference call in October.

Dynacon is the leading provider of launch and recovery systems used for deployment of ROVs, and also manufactures high-quality specialized cable and umbilical handling equipment for the marine industry. Dynacon expands our Subsea Technologies capability and integrates an important part of the ROV supply chain. We plan to continue Dynacon's well-earned reputation of providing top quality systems to its customers.

Merrimac manufactures premium consumable parts for drilling, well servicing, and pressure pumping applications, including drilling mud pump parts and repair, and valves and seats for hydraulic fracturing pumps. Merrimac increases the range of products in our Drilling Technologies business line and is complementary to our Flow Equipment line as well. The acquisition expands our offering of activity-based consumable products serving the drilling, workover and pressure pumping markets.

We see opportunity to expand the market for Merrimac's products domestically and internationally by utilizing our existing sales channels. The Downhole Technologies product line is seeing strong demand for their products in the North America and international markets. 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 and Infrastructure segment, our production equipment product line revenue slowed in the fourth quarter, due primarily to customer delays, where customers were not wanting to accept delivery before year-end, or their well sites were not complete and delivery was just not possible. However, this product line generated record revenue, earnings and orders in 2012.

We make production equipment for all the major unconventional basins in the United States. Demand for well site separation, processing, and storage systems is strong, and we remain positive about the outlook for this product line.

Our Valve Solutions product line had a slight slowdown in demand for consumable products at year-end, yet recorded double-digit growth in 2012. The business is experiencing broad-based growth across several markets, including midstream transmission, pipeline integrity, petrochemicals, upstream and mining. We have expanded our supply chains, and we are adding additional equipment and manufacturing space in order to meet the increase in demand for our valves.

Our Flow Equipment product line fourth-quarter revenue increased 4% -- increased 4% sequentially, as our pressure pumping customers worked through their inventories of consumable products. We feel the destocking process has bottomed, and anticipate gradual improvement in 2013.

Now, looking ahead to 2013, we anticipate sequential quarterly revenue and margin improvement in both of our segments, as most of our product lines are seeing improved demand. However, our drilling product line is expected to face continued demand softness until the North America rig count improves.

Our 2013 earnings per share guidance is $1.80 to $1.90. 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, everyone. Consolidated revenues of $330 million for the fourth quarter are down 2% year-over-year. We had good year-over-year revenue growth in Valve Solutions at 23%, and Production Equipment improved 8%. These gains were offset by the challenges faced in Drilling Technologies. With the North American rig count down over 11% at the end of the year, compared to a year earlier, these declines in activity drove our Drilling Products revenue down 7%.

We have discussed in earlier calls the market for our Flow Equipment products, where our customers continued destocking in the fourth-quarter 2012. And this resulted in a year-over-year decline of 34% from the very strong results achieved by Flow Equipment in the fourth-quarter 2011. Sequentially, our consolidated revenue declined 5%, mostly attributable to Drilling Technologies' 16% reduction. So that product line has been working down the portion of its backlog with near-term delivery commitments.

Despite the strong headwinds in the year, Drilling Technologies achieved record revenue for the full-year 2012. We had good sequential revenue gains coming from our Downhole product line, up 11% in the fourth quarter, and the demand for those products remains consistently elevated above our current production capacity.

Our net income for the fourth quarter 2012 was $24 million, a decrease of $8 million or 25% compared to the same 2011 period. Fully diluted earnings per share for the quarter of $0.26 includes $0.02 in charges for transaction fees related to the four acquisitions, severance costs, and foreign exchange translation losses. The adjusted $0.28 represents a decrease of $0.15, or 35% from $0.43 reported in the fourth-quarter 2011. However, approximately $0.08, or over half of that decrease year-over-year, is attributable to the dilutive impact of the shares issued in the IPO and concurrent private placement in April 2012.

The real operational year-over-year decline of $0.07, or 20% as adjusted, is primarily due to lower operating income in our Flow Equipment and Drilling Technologies product lines. Sequentially, net income decreased 41% in the fourth quarter, while adjusted fully diluted earnings per share were down by $0.16. I will further explain the sequential decline in the context of EBITDA margins.

Our consolidated EBITDA margins for the fourth quarter were down significantly. While our margins were consistently higher than 20% in each of the first three quarters of the year, our margins in the fourth quarter were 15.5%. EBITDA for the quarter of $51 million was down 20% over the same period last year, and down 32% sequentially from the third quarter.

The gross margin compression, which impacted all of our product lines, was primarily caused by lower productivity levels and other inefficiencies in our manufacturing plants in the quarter on the reduced production volumes. We also experienced inefficiencies related to ERP systems conversions affecting both segments.

Finally, the margin impact was compounded by proportionally more sales of lower margin products and several customers' requests that large orders be postponed for delivery into 2013. Most of those deferred orders have now shipped, and the manufacturing issues are being addressed, so that we expect first-quarter 2013 EBITDA margins to improve, and then to return to more normal levels above 20% by the second quarter.

I will now review our segment results comparing the fourth-quarter 2012 sequentially with the third-quarter 2012. Our Drilling and Subsea segment revenue was down $17 million or 8%, entirely due to lower demand in our drilling product line -- again, because of the further declines in North American rig activity in the quarter. We experienced a healthy 11% gain in revenue in our Downhole product line on strong international demand, while Subsea revenues were basically flat, as some of our customers continued to delay several expected large orders for work class ROVs.

Operating income for Drilling and Subsea declined $14 million in the quarter, or 34%, as our gross margins were down 310 basis points and SG&A was up $2 million. Our Production and Infrastructure segment revenue of $143 million in the fourth quarter was nearly flat compared to the third-quarter 2012.

A 4% decline in the Production Equipment product line revenue arose from customers' requests to delay deliveries of completed systems at year-end, which was offset by modest increases in both Valve Solutions and Flow Equipment. We do believe our Flow Equipment revenue has bottomed out, and we continue to expect gradual improvement in early 2013, gaining more momentum in the second half of the year.

We continue to see strong demand for both our Valve Solutions and Production Equipment products. Production Equipment ended the year with record order backlog. Operating income for the Production and Infrastructure segment decreased $8 million, or 33%, sequentially, as gross margins were down 500 basis points for the issues previously cited. And SG&A was up $1 million.

I will now explain our earnings expectations for the first quarter and for the full-year 2013. With the expected gradual improvement in North American rig activity, and higher well count achieved on greater rig efficiencies, we estimate fully diluted earnings per share to increase from fourth-quarter levels, and for the growth rate to accelerate in the second half of the year.

We expect first-quarter diluted earnings per share to be between $0.31 and $0.35, and for the year, between $1.80 and $1.90. The midpoint of our estimated 2013 diluted earnings per share of $1.85 represents a 15% increase over 2012 results, adjusted for the full-year dilutive impact of the IPO and concurrent private placement last April. Roughly half of that increase year-over-year is attributable to the 2012 acquisitions included in these estimates, and the other half is organic growth.

In the fourth quarter of 2012, Drilling and Subsea contributed 57% of consolidated revenue, and is expected to deliver approximately 60% for 2013 as a result of the fourth-quarter acquisitions. Net debt at the end of the fourth quarter was $380 million, and interest expense for the quarter was $3.4 million. While we invested $140 million in the fourth quarter for the four acquisitions previously described, net debt increased only $80 million sequentially from the third quarter, due to strong cash flows in the fourth quarter.

Interest expense for the year 2013, excluding any additional debt incurred for acquisitions, should be approximately $16 million. Corporate cost in the fourth quarter were $5.6 million and $21 million for the full year. Corporate costs in 2013 are expected to be approximately $27 million. The $6 million increase, principally for full-year costs, related to being a public company, including first-time audit fees for internal controls testing for compliance with the Sarbanes-Oxley Act, increase in our internal audit and other staff positions, and IT initiatives aimed at automating several of our key control processes.

Our tax rate for the fourth quarter was 30%, approximately equivalent to the effective rate in the third quarter. The effective tax rate for the full-year 2012 was 32%, and we estimate that our rate for 2013 will be approximately 32.5%. Our diluted share count for the fourth quarter was 93.4 million shares, and we do not anticipate the share count to change materially in 2013.

Cash flow from operations in the fourth quarter was a record for the Company at $63 million, and for the year, was $145 million. We expect to achieve strong operating cash flows in 2013, as we have implemented measures to improve the Organization's focus on managing efficiently our substantial investment in inventories. Capital expenditures were $12 million in the fourth quarter and $50 million for the year in 2012. We expect 2013 capital expenditures will be approximately $65 million, with the amount supporting capacity expansions of our manufacturing facilities in both segments.

Full-year 2012 depreciation and amortization was $52 million, and we estimate that amount will increase in 2013 to $58 million, partially as a result of the allocation of a portion of the purchase consideration for the four acquisitions to amortizable intangibles. 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. I think Forum had a fairly successful year during 2012. We delivered record annual revenue of $1.4 billion, grew revenue 25% year-over-year, with each of our six product lines contributing to the growth. Of course, we completed our IPO and concurrent private placement in April, and closed four acquisitions in the fourth quarter. We welcome the addition of Dynacon and Merrimac 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.

Let me finish with some comments on 2013. We expect sequential improvement throughout 2013 in our results and a good contribution from our recent acquisitions. Although our drilling product line continues to face headwinds, our other businesses are seeing growing demand and good prospects. We are seeing an increase in orders, which will drive an improvement in our results over the course of 2013, we believe.

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. Chanelle?

(Operator Instructions). Jonathan Sisto, Credit Suisse.

Cris, if you may, as we look into '13, how much of your cash flow will go to acquisitions? And how much will go to organic growth? And then, I guess, secondarily, do you expect to lever up in any way to accelerate the growth in '13?

So, as Jim said, Jonathan, our capital spending program in 2013, about $65 million, we made a significant investment in working capital for growth throughout 2012. And we think we'll be able to leverage that working capital balance we have with minimal increase, as we grow revenue from here organically.

So, that will leave a significant amount of free cash flow that we can devote to acquisitions. As you know, and I think you can see from the balance sheet attached to the press release, we have an underleveraged balance sheet.

If we are very successful in acquisitions, it's a potential -- it is possible that we would increase our debt percentage of our capital structure somewhat in 2013, Jonathan. But I do not see us levering up the Company, so to speak, right? We have -- feel we've got the resources to fund our growth, both organically and continue our acquisitions program, which we see as having good prospects.

On the prospects, how many prospects are out there in kind of the $25 million to $100 million range?

Well, we don't want to, for obvious reasons, be too specific there, but we're looking at, as we always do, a number of acquisitions. And there tend to be more naturally in the smaller end of that range. But we also have some bigger things that we're investigating as well.

It's very hard to predict or plan or budget acquisitions, but it is an area that gets significant effort for us. But I don't want that to take away from what we see as our growth opportunities in a number of our businesses.

The prospects in the Subsea business look good. We have -- we know there's the demand out there for our Downhole products that we'd like to get on with addressing. Continued strong demand in Production Equipment and Valves, and even Flow Equipment having turned the corner, don't expect a rapid improvement there, but a gradual one during 2013, now that that destocking is behind us.

Cris, I appreciate the color. I'll turn it back.

Thank you.

Brad Handler, Jefferies & Company.

Could you please fill in a little bit for us with respect to your '13 guidance, I guess. Perhaps maybe -- is the $1.80 to $1.90 range, is the real swing factor there Drilling Technologies and the strength of the recovery? And perhaps you could fill that answer in with, is the bottom of the range a flat year-on-year in Drilling Technologies, for example?

Yes, I think that's one way to think about it, Brad, yes. I think the rate of improvement or the level of improvement in Drilling Technologies, that being our largest product line, is a swing factor for us. When we think about the improvement over the course of the year, it is a combination of, of course, revenue growth, but also margin improvement.

Okay, fair enough. Is that -- maybe it makes sense then to try to get a sense for your rig count forecast implicit in the range or your sense of activity, if you want to express it in some other way. What are you assuming? And then, specifically, how strong does it have to be in the back half of the year to get there?

Right. So, from year-end '11 to year-end '12, if the US rig count came down 10% to 12%, and we think we might get, maybe by the end of '13, maybe half of that back, but that still implies that, year-over-year, the rig count would be down 5%, right? So, some improvement from year-end 2012, but our planning is not significant in the rig count improvement.

On the other hand, we think, Brad, with the greater level of drilling efficiency, uncompleted wells and so on, that the number of wells that will be completed will be at a significantly higher rate. And that what that -- that is meaningful for Forum, because more of our businesses are tied to the well count than to the rig count.

If maybe 25% of our revenue base is tied to the rig count, 40% is tied to the well count. And so with that higher well count, I think that explains part of our growth expectations for a number of our businesses, including Downhole Technologies, Production Equipment, Flow Equipment, and to some extent, Valves and our Well Servicing Products and Equipment that we sell, even within the Drilling Technology group.

That all makes sense. No, that all makes a lot of sense. If I may, wait, maybe just one more quick one, then I'll turn it back. In your Q1 guidance, what are you expecting revenues to do? Or perhaps, what's the range of revenues?

Brad, this is Jim Harris. We don't typically give revenue guidance, but with the acquisitions, I will say it will be up from the fourth quarter.

Yes. So, we said $100 million for the year. And so that's the starting point, but I think we have indicated that we do see some other growth in a number of our product lines. We expect revenue to be up across the board in Production and Infrastructure. We're hoping for improvement in Downhole. And in Subsea and Drilling, is the question mark, as you pointed out, the outside of your question.

Okay, all very helpful. Thanks, guys.

Thanks.

Doug Becker, Bank of America.

Just hoping to get a little more order of magnitude of the factors that impacted fourth quarter. Certainly, the underabsorption has been mentioned, lower spending in Drilling Technologies, some of the deferral of capital equipment. Just to better calibrate the recovery in '13, can we get a sense of the order of magnitude of some of these larger factors?

Yes. Doug, so about -- I'd say about half of the decline, maybe a little less than half was attributable to the -- this absorption issue and the manufacturing and efficiencies. And then a little less than half would be attributable to these systems implementations.

Over the last 18 months, we have implemented close to 20 new ERP systems in our businesses. And, as you know, putting those in is disruptive, and there tends to be a period of adjusting to those systems after they're in. And we still have several more that we intend to implement this year, and that has driven some of the inefficiencies.

And then, keep in mind, also, the $0.02 that we called out from the earnings per share, those factors do also impact EBITDA margins and they would have contributed. And then the balance would have been with the mix and the customer delays that we talked about, the deliveries.

Right. So you're speaking of the kind of EBITDA margins (multiple speakers) --

Yes.

-- and the breakdown in the margin percentages there among those items, which I think is good color. But, going to revenue, if that's part of your question as well, Doug, obviously, that the revenue reduction sequentially was all in the Drilling and Subsea group. And it was primarily in the (multiple speakers) --

(multiple speakers) Drilling.

-- in the drilling area.

Yes.

Is that responsive?

No, that makes a lot of sense. Have we seen capital equipment cancellations? Or is it really just deferrals that we're seeing?

No, we have not seen cancellations, so it was truly operators who had, because of the greater drilling efficiencies, used up their budgets. And we're really in a position to say, gosh, we're just going to -- not -- we don't need to do anything the rest of the year. We're not going to do anything the rest of the year until we get our budgets refreshed.

I think, in some cases, they were also looking possibly at some of their contracts for services -- not with us, but with our customers, turning over to more attractive rates for the operators at the beginning of the year. A lack of urgency to do work, and for example, as I mentioned, not getting well sites prepared to accept delivery. But even in the Subsea space, we saw some delays on taking what we expected would be delivery of some capital equipment there into the first quarter.

Okay. And one last one on just Downhole. You mentioned that was exceeding -- demand was exceeding a variable capacity. Is this roof line? Is it machines for manufacturing? And how quickly can this be addressed?

So, we've been working on that for some time, Doug. And it's a challenge that, both on the process side and the culture side. And I think we're making progress. We know the potential is there. Revenue was up fourth-quarter over third-quarter, and we're looking for continued improvement.

I guess the good news out of this is we are more confident that the potential exists. Right, Charlie?

Absolutely.

Okay, thank you very much.

Thanks, Doug.

Blake Hutchinson, Howard Weil.

Cris, you made some comments about order flow in the fourth quarter, and I just wanted -- and also cited some early quarter success in both Production Equipment and Flow Equipment. Wanted to get your feel for first-quarter order flow. Are you suggesting that maybe we're starting the year definitively better than 4Q or kind of tracking that $330 million? Or just kind of maybe any thoughts around what you're seeing?

On the Production and Infrastructure side, yes, I think we're definitely starting the year stronger from an order flow there. Right, Wendell?

Yes.

Across the board. And the Drilling and Subsea space, drilling is in a different category. That's going to be slow until the rig count turns around. On the other hand, if we're just talking about Downhole and the strong demand that's out there, it's a matter of how much in the way of orders we can accept and deliver on time. Subsea space, we are seeing that we expect an increase in orders there.

Just recently, Charlie and I were talking this morning, that we had received an order for a trencher in Asia.

Yes.

I think today, we also just got another order for a work class vehicle. And both of those have Dynacon [LARS] associated with them. So it demonstrates the advantage of the combination there. So, we certainly need more than that for the quarter, but the discussions we are having with customers indicate to us that the demand is out there.

So P&I definitively, but the drilling in -- side, it's going to be a little tougher, as drilling's such a big piece of that division?

Yes. I mean, we do think the orders will be up over Q4. (multiple speakers)

Okay, great.

Yes.

And just following up on your talk about the Subsea segment, I guess because of the fairly well-documented success in order flow, is a little surprising that it's flat, understanding it's lumpy. Is there a projection in terms of where we'll be delivering some of these longer lead items, where we should expect an uptick in revenue? Should we be more concentrated to second/third quarter? Or do you see a nice uptick in first-quarter? Can you help us out with kind of the lumpiness of that business a bit?

Yes, right. So, we sometimes receive orders for equipment for delivery a year from now, but we only -- we don't begin recognizing revenue on that until we're substantially closer to delivery. Because it doesn't take us that long to build it.

So, we -- so revenue increase in Q1 would be driven by nearer-term orders. I think this trencher for Asia is a near-term order, as is this work class ROV I just mentioned. We're seeing good demand for observation class ROVs. And some of the orders that are under discussion, but not yet booked, would be for nearer-term delivery as well.

Okay, that's good color. And just housekeeping, Merrimac is going to go all in the Drilling segment, correct? It's not split between Drilling and Flow Equipment?

Correct.

And would you suggest -- you gave a little color as to revenue run rate -- can we enter these immediately, kind of that 20% op margin in terms of -- or should we build that over the year?

For the four deals? (multiple speakers) No, I think a consistent margin over the course of the year is a reasonable assumption, Blake.

Great, thanks. I'll turn it back.

Jeff Tillery, Tudor, Pickering.

The Downhole Tools business, you talked about demand being there in excess of what you feel comfortable being able to take the orders and be comfortable you can deliver them, is there capacity milestones we need to be watching this year? Is there some light switch date that we need to be aware of where we see an inflection there? Or is it more gradual?

It's a gradual improvement in our capabilities that we are clearly working on. We are taking a number of steps that gradually will improve our capacity. But we think there is the potential for some larger orders out there that we'll be working towards. And that would be once we can take those on and make some announcements, that will be a big step for us.

Can I add on, Cris, that I think the thing that you need to understand, Jeff, as well is there is no step function. It's going to be gradual, as Cris said, but we are looking at some longer-term deals. So that's why we're trying to take our time and position ourselves to be able to address it from the longer-term from a capacity perspective.

Longer-term large deals.

Right.

I guess, mechanically, how would that work? Would you book that all in one period of time? That way we see that and we see the visibility around that coming? Or would that -- it would be more of a frame agreement type?

It would be a frame agreement. Right, these are not capital goods, right? So it would be orders for a certain volume of our equipment over a period of time.

Yes, we're trying to position ourselves (multiple speakers).

And we would book that and recognize the revenue as that -- as those products shift.

That makes sense. The Production and Infrastructure segment with revenues that were pretty flattish sequentially, I guess I was surprised to see the 500 basis point gross margin decline. Was that -- how much was a mix issue versus just efficiency issues? Or can you just provide a little bit more color around that, Jim?

Yes, it was both. Wendell, do you want to address that?

Sure, Jeff. Biggest problem for us in the fourth quarter were the delayed shipments, which led to a lot of inefficiency in our plants. That was about probably 300 basis points.

We also had about 100 basis points of product mix. The client mix from the third to the fourth quarter shifted. And we had some inefficiencies in a few jobs. But the primary problem for us was the delayed shipments coming into the end of the year.

(multiple speakers) Yes, and so we have labor costs. And it didn't make sense for us to lay off or reduce hours for people in December, knowing that this is a business that was seeing strong demand, and one we're trying to build, and trying to build and retain a capable workforce. So, we endured those costs.

I guess, think about it another way. Those -- revenue was flat sequentially, but coming into the quarter, just given what you had known, you would have thought revenue would have been up quite a bit. And so that's why those costs were still in place. Is that fair?

We thought that those products would ship, that we had an order, yes. (multiple speakers).

All right, thank you guys very much.

As that flips into Q1, that doesn't mean we're going to have some kind of windfall in Q1 of the stuff that slipped, plus a normal level of Q1. It's more likely that the whole schedule just shifts out, right?

Okay, that makes sense. Thank you.

Robin Shoemaker, Citi.

I wanted to ask you if you could just give us an overview of the international business. I think that's now 40% of your revenue, roughly. And where do you see the most opportunities for growth internationally across all of your product lines? And are there any new international markets that you're targeting?

Okay, so our Subsea business, we clearly see as growth, and all of that is international, because our customers tend to be non-US companies. And so we recognize that all as international, even if we sell some Subsea equipment that goes on a vessel that might be working in the Gulf of Mexico from time to time. Right? Does that make sense?

Other areas that are driving international opportunities for us in the Downhole space, international demand opportunities look good in a number of areas related to where the active rig counts are -- whether that is Brazil, in the Middle East, Asia. And in drilling, we see opportunities that we're working on in Asia for some capital equipment in the Middle East. And we think that the recent acquisition of Merrimac on the consumable side has really good international opportunities that we can grow into. That won't all happen at once, but it's something we're ramping up.

Okay. Good. Just one other sort of smallish question. But -- in your previous earnings releases, you had disclosed gross profit and SG&A by -- in terms of both divisions, Drilling and Subsea, and Production and Infrastructure. And in this press release, you disclosed operating income and EBITDA, which you had previously. But is this the new format going forward, just for modeling purposes?

Yes, Robin, we'll have full disclosures in the K, but the reason that we cut it back, if you'll note in the MD&A in each of the quarters, where we discussed result, we've talked about operating income margins as opposed to breaking it out between gross margins and SG&A. And it was unwieldy having those schedules in there.

So what we've done is gone to a format that's consistent with what other companies report that are in our space. And we would expect to continue to have the earnings release on that basis.

Okay, got it. Thank you.

Mike Urban, Deutsche Bank.

Cris, I appreciate the breakdown on the percentage of the business coming from rig count versus well count or consumables, but wanted to dig a little bit further into the drilling business, since that's kind of where, I guess, you have the least visibility, and then where maybe is the weakest right now.

I guess, the first question is, I mean, how much, if any, visibility do you have into a recovery at this point or is it still kind of a wait-and-see right now?

So on the -- there's two parts, right? There's the consumable part and the capital equipment side. On the capital equipment side, that's going to be down, right? Most of our own capital equipment is sold to land rig operators, and there's less new building of land rigs and upgrading going on there.

We're offsetting that with our initiatives on the international side. And US rig upgrades haven't gone away; they've just -- they're just at a lower level. So that's where we are on the capital equipment side. And it will be a bit lower until either we can attract more international upgrade and association with newbuilds for our capital goods or the US market picks up.

On the consumable side, there is the initial destocking that goes on when rigs are stacked, and the rig count is on its way down. That kind of runs its course. And we feel that we're -- that that destocking is possibly getting to an inflection point. Right, Charlie?

Fair enough, yes.

Not ready to call the bottom, but we think we may see it on the horizon there. So, we don't -- what we're signaling is we don't expect consumable business to continue to fall. And it's possible in the nearer-term we could see an inflection point.

Okay, got you. And then digging in more specifically on the capital equipment piece, given what we have seen and continue to see in terms of rig efficiency improvements, is that a business that can return to the previous level of growth that you had in the past? And, if so, what drives that?

Is that, as you said, the international coming through? Is that gas coming back in the US? Is that attrition? How should we think about that business structurally, given the ongoing improvements in efficiency and the fact that we have significantly recapitalized the US fleet at this point?

Yes, I think there are a number of potential drivers there. Like one is new rigs internationally, both land rigs and jackup rigs that we can be associated with. Second is on the international side -- a, I think, growing desire by rig contractors to do some of the upgrades that have been done to rigs here in the US.

And then, thirdly, in North America, with this drilling efficiency trend there is a real push to have highly efficient rigs and upgrading equipment. And some mechanical rigs are certainly going to be retired, but other SCR rigs and so on will be upgraded. And I think there is potential with more cash flow to the drilling contractors, as their cash flow improves, for them to begin to invest as their utilization opportunities improve for them to do more upgrades there again.

Okay, great, thank you.

Thanks, Mike. We'll take one more question, Chanel.

Yes. Our final question comes from [Josh Jayne], [Simmons & Company].

Cris, a couple of questions for you. You mentioned revenue from Flow Equipment increased 4% in Q4 due to increased consumable orders. Was that primarily fluid ends?

It was not. It was -- you had flow iron, treating iron, and there were some fluid end orders that we have begun to see. And we are getting more orders for fluid ends, but it was -- most of our sales are flow iron, treating iron, valves and so on. That would be the larger portion of the mix of our business.

Okay, great. Thanks. And then, second, could you provide us with your thoughts on the wear and tear of the US frac fleet? And when do you see the need for increased fleet remanufacturing? And when does that effort actually materialize?

Okay, so what we largely produce in the flow iron and consumable parts, the high-pressure components there, high use areas are, by their nature, equipment that needs to be inspected, serviced and replaced on an ongoing basis. And I think we have a number of different currents in the pressure pumping market today.

We may not, in many basins, be press pumping as higher pressure as we were in, say, the Haynesville, but on the other hand, as we move to the basins where there are more stages and possibly more pad sites, where the equipment can stay on one location longer and be pumping more stages for months with fewer moves, obviously, that's more uptime on the equipment and more pumping.

So, we think that now that the destocking has largely run its course, the level of demand will be driven by the activity. And we expect there is a good amount of pumping activity going on. And that will drive demand for these consumable products.

Okay. (multiple speakers) that destocking process (multiple speakers) --?

Your question about demand for new equipment, I think that goes to how much equipment, pressure pumping equipment, remains stacked, what the utilization rates are, and when that -- when those utilization rates go back up. And that is not a market that we track as much as what the activity is, and what the demand for these consumable products are.

But, clearly, there's still a significant amount. I don't know what it is -- 30% of pressure pumping spreads that are stacked. (multiple speakers). If they go back to work, that much more treating iron we'd need to sell.

Thank you very much.

Very good, Josh. Well, we thank you all for your interest and good questions. And we look forward to talking with you again next quarter, and hopefully, seeing you in the interim. Thanks. Chanelle?

Thank you. Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.