Forum Energy Technologies Inc (FET) 2013 Q3 法說會逐字稿

Welcome to the Forum Energy Technologies earnings release conference call for the third quarter 2013. My name is Alex, and I will be your coordinator for today's call.

(Operator Instructions)

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

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

Good morning and welcome to Forum Energy Technologies' quarterly earnings conference call for the third quarter 2013.

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 is Wendell Brooks, our President of Production and Infrastructure division.

We issued our earnings release last night. 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 risks 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 any forward-looking statements to reflect future events, information, or circumstances that arise after this call.

In addition, this conference call contains time sensitive information that reflects Management's best judgment, only as of the date of the live call. Management's statements may include non-GAAP financial measures. For a reconciliation of these measures, refer to our earnings news release available on our website.

This call is being recorded. A replay of the call will be available on our website for 30 days following the call.

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

Thanks, Mark, and good morning.

I will start with an overview of the quarter and offer a few thoughts on the outlook of our business. Then I will turn it over to Jim, who will provide more detail on our financial performance.

In the third quarter 2013, we had record revenue of $390 million and improved sequential operating income and margins. Margin improvement was our primary objective this quarter. I am pleased that our employees delivered on that objective.

The third quarter results include $12 million in pre-tax charges associated with Executive severance, facility consolidation and several other nonrecurring and non-operating items. Excluding these items, adjusted net income was $0.44 per diluted share and adjusted EBITDA was $79 million. EBITDA margins in the third quarter were 20%. We achieved this goal ahead of our stated fourth quarter objective.

We implemented a number of restructuring and cost reduction initiatives during the third quarter, resulting in approximately $8 million of cost reductions from our annual G&A run rate, primarily in our drilling and subsea segment, as well as additional direct cost savings.

Total orders during the third quarter were $354 million, consistent with orders in the second quarter. Bookings increased sequentially for drilling capital equipment and in well construction and completion products. The third-quarter book-to-bill ratio was 91% for the Company as a whole, 94% for drilling and subsea and 85% for production and infrastructure. Our D&S segment achieved a significant improvement in operating margins compared to the first half of this year, due to restructuring of the business during the third quarter and to an increase in revenues.

Orders continued at a very strong pace for drilling capital equipment, especially for international customers. We received capital equipment orders associated with new land rigs and continued to improve our participation in the offshore market with our catwalks, cranes and manifolds. Blohm + Voss continued to receive orders for specialized handling tools for international and offshore markets. Order levels for consumable products in the North America market remained steady with the second-quarter levels.

During the quarter, drilling reduced their SG&A spending, consolidated office and operations facilities, and had better absorption of manufacturing costs. These actions improved EBITDA margins into the low 20% range for our drilling product line. That's a significant increase compared to recent quarters. The integration and performance of Blohm + Voss is progressing well.

The Blohm + Voss brand name is well recognized in the industry and has a strong reputation for delivering high quality products to a global customer base. Its strength in international offshore markets complements Forum's strength in the North America land market.

Our subsea product line orders in the third quarter were good, though lower than the record level set in the first half of the year, and will remain lumpy. During the quarter, we sold five of our new generation work-class ROVs, scheduled for customer delivery in the first quarter 2014. Based on discussions with our customers, the near and long-term outlook for this sector remains strong. We are currently in the process of consolidating manufacturing facilities to further improve manufacturing absorption, supply chain and margins.

We are pleased with the recent acquisition of Moffat, a manufacturer of subsea pipeline inspection launching and receiving systems and subsea connectors. Moffat had a good third quarter, with increased demand for its products.

As we previously announced, Bill Boyle has joined Forum as our new Senior Vice President, Subsea Technologies. We welcome Bill to this role, where he will be responsible for Forum's global subsea business. Bill brings a wealth of subsea experience and has a proven track record of building businesses.

In the downhole technologies product line, we recently received several large orders from major service companies for our cementing and casing products and expect deliveries to begin in late fourth quarter. Strong demand continues for our Cannon protectors and ProDrill composite frac plugs.

Moving to our production and infrastructure segment, there we had a sequential decline in revenue as demand for both our production equipment and valves experienced declines from the record levels they had in the first half of 2013. Inquiries remain at high levels from new and existing customers, but we have seen a pause in contract awards.

Our valve solutions and flow equipment product lines each had improved margins compared to the preceding quarter, due to a shift in mix to more profitable products during the quarter. Flow equipment revenue increased sequentially on improved demand for pressure pumping consumable products.

In partnership with a private equity firm, we recently acquired Global Tubing, which gives Forum additional exposure to the key industry trends of increasing well complexity and horizontal well completion activity. Global Tubing's high-quality coiled tubing strings are critical consumable components of coil tubing units that perform well completion and intervention activities.

Looking ahead, we are planning for a stable US land rig count over the next six months and have reduced our cost structure to match this outlook. We will continue to press for further margin improvement, now with emphasis on the production and infrastructure segment. We are also focused on integration of our operations and execution of our expansion into international and offshore markets.

Our CFO, Jim Harris, will now discuss our financial results in greater detail. Jim?

Thank you, Cris, and good morning.

Consolidated revenues of $390 million for the third quarter are up approximately 6% sequentially and represent a record level for the Company. Our drilling and subsea segment revenue increased 19% sequentially, while our production and infrastructure segment revenue was down 10% from its second quarter record.

Net income for the third quarter was $33 million, up $3 million from the second quarter, including pretax charges of $12 million for several nonrecurring and non-operating items.

Over 75% of these charges were non-cash. As anticipated, in adjusting our cost base to return EBITDA margins to above the 20% level, we incurred charges in the quarter of $6.5 million associated with facility consolidations and severance. In addition, we wrote off $2.1 million of deferred loan costs attributable to our bank term loan, which was paid off in October with proceeds from the $300 million senior unsecured bonds.

Finally, the results for the quarter also include non-operating charges of $2.4 million in foreign exchange losses and $1.1 million in transaction expenses, $800,000 of which are reported as part of earnings from our equity investment in Global Tubing. Excluding these nonrecurring and non-operating items, adjusted net income increased $10 million, or over 30%. These charges equate to $0.09 per fully diluted share after tax, making our adjusted earnings per share for the quarter $0.44.

On a comparable basis for both quarters, excluding these charges, adjusted EBITDA margins improved 300 basis points sequentially to 20.3%. The margin improvement is attributable to the targeted reductions in our cost base and the higher revenues in several product lines. We expect to achieve comparable margins in the fourth quarter and into 2014.

I will now review our segment results, comparing the third quarter of 2013 sequentially with the second quarter of 2013. Our drilling and subsea segment revenue of $248 million was up $39 million sequentially with good contributions from Blohm + Voss and Moffat acquired during the quarter, and organic growth in both our drilling and subsea products. Excluding Blohm + Voss, drilling technologies was up 8% as we began to deliver on the higher international orders received in the first half of the year, most of the improvement from higher shipments of tubular handling equipment.

Order levels in this product line have remained elevated. As we continue to deliver on these orders, we expect more sequential organic growth in the fourth quarter. We achieved meaningful sequential improvement in operating margins in the drilling and subsea segment as we implemented cost saving measures and we achieved top line growth. Excluding the nonrecurring charges incurred for severance and plant closures, adjusted operating margins improved almost 400 basis points to 19.6%, equivalent to full-year 2012 margins for the drilling and subsea segment.

Our production and infrastructure segment revenue of $143 million in the third quarter was down $16 million compared to the second quarter. The sequential declines came in production equipment and valves off of the record levels achieved in the very strong first half of the year. While production equipment shipments were down sequentially, they are up slightly from year earlier levels. We have experienced a recent slowing in valve orders, especially those destined for midstream projects, which impacted revenue in the quarter. The long-term fundamentals for valves remains strong. The outlook is good.

Flow equipment revenue was up almost 5%, as our pressure pumping customers continue to fracture more stages per well. Order levels for our consumable products continued to improve. Adjusted operating income for production and infrastructure of $22 million, excluding nonrecurring charges, was down slightly on lower sequential revenue as margins improved 120 basis points. The margin improvements came in the flow equipment and valve product lines.

I will now summarize our expectations and update our diluted earnings per share guidance for the fourth quarter. We expect diluted earnings per share of between $0.42 and $0.46 for the fourth quarter. Excluding nonrecurring charges incurred in the third quarter, and non-operational transaction expenses and foreign exchange losses year-to-date, adjusted earnings per share for the first nine months were $1.11, implying full-year expected earnings per share of between $1.53 and $1.57. Adjusting for the $0.02 dilution from the $300 million bonds issued in October, which was not factored into our prior guidance, our expected annual earnings are within the range previously provided for the year.

Net debt at the end of the third quarter was $503 million. Interest expense for the quarter was $4.4 million. The $1.3 million increase in interest expense over the prior quarter was due to debt incurred on the three acquisitions closed July 1. Interest expense for the fourth quarter, including the higher interest on the bonds will be approximately $7 million. Total cash consideration for the three acquisitions was approximately $230 million. Net debt increased only $172 million from the second quarter, as we paid down revolver advances with approximately $60 million of free cash flow.

That is a record quarter for free cash flow and doubles our year-to-date free cash flow to approximately $120 million. Our objective this year of managing our significant investment and working capital more efficiently is paying off. We appreciate all of our employees' attention and effort to achieve our targets. Capital expenditures were $45 million for the nine months. We expect full-year 2013 capital expenditures to be approximately $60 million. Corporate expenses were $7.5 million in the third quarter and should be approximately $7 million in the fourth quarter.

Our effective tax rate for the third quarter was 29.6%, slightly lower than expected, as we successfully concluded several examinations with tax authorities. We expect the effective tax rate in the fourth quarter will be approximately 31.5%.

Our diluted share count for the third quarter was 94.7 million shares. We anticipate our diluted share count for the remainder of the year will be at about this level.

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 good third quarter. We had record revenue, and improved our sequential financial performance, executed our key objective to improve margins and successfully completed our first bond offering. The integration and performance of our recent acquisitions are progressing as expected. We saw improvement in international bookings, and continued to position the Company for international and offshore growth. I am pleased with the progress Forum has made. I want to recognize and thank our employees for their good work.

Mark, [Wes] and I will open it up for questions. Alex?

Alex, we are ready to take the first question, please.

(Operator instructions)

Brad Handler, Jefferies.

Maybe just a couple of questions keying off your comments. This may be starting with the experience in the quarter on the production in the valve side and the slowing that you are seeing. You are obviously not the only ones seeing this over the course of this week. But I'm curious, to what do you attribute some of the slowing? Is a function of sort of digesting -- your customers digesting decent purchases in the first half of the year? Or again, what can you attribute it? What's your visibility on how that might progress as we look towards 2014?

Yes. I think we are in a period here, between some very high activity in intra-field pipeline work. On the one hand and before, the purchasing really ramps up for the large petrochemical projects that are being planned. Wendell?

I agree with that. I think our customers slowed their purchases down in third quarter. They have a little too much inventory right now. But the inquiries continue to be at a very high level. So we see this as more of a pause than anything else right now.

How much of the purchasing behavior -- this might help us -- help me, understand it anyway. How much of is a standardized kind of buy? So is there an ability to buy in some sort of bulk. They know it will be attributed to projects as they progress versus it being very project or pipeline specific?

Well, these are largely distributed valves. They are going through the distribution system. So I think --

Okay.

I think the implication here, Brad, is that there is a fair amount of inventory with the distribution -- the PVF companies. The pipe, valve and fittings companies.

Okay. All right. I was thinking perhaps of a more engineered custom product. That probably clears it up for me.

Our full valve business is stronger. But a lot of the more distributed valves are experiencing -- I think there's plenty of inventory out there right now.

Got it. I suppose I wouldn't mind asking the same question on the production equipment side. Is there an element of the same? Have your customers prepped for various pad completions and therefore they are sort of saturated for the moment? Or what's the visibility there?

Yes. I think that there were two things there. I think there are some elements of just more measured approach and not a great deal of urgency. But I think there are some specific things to the contracts that we have here and the rate at which we are completing those.

We do have some lower margin contracts currently working through our system this quarter and next quarter, that have taken some time to get out. I think we'll have digested those during the fourth quarter. Wendell? Then from that point, we think that we will see some margins. We do see some volume improvement in the fourth quarter.

That's right. Frankly, we have had some execution problems as we've moved into the larger, heavier vessels for the multi-well pad applications. So we are working through those issues. That will work through -- itself out in the fourth quarter. Activity remains very good. Inquiries are good. So I think most of the problems are ones that we are just working through right now, not market related.

Production equipment has been a very strong product line for us. We think that it will be going forward. But it didn't have a -- among our businesses, it was not one that had its best quarter this time. I think over in the D&S side, on the drilling and subsea's business, some very good performance. The benefit of the cost savings and the efficiency drive is really evident.

Okay. I appreciate that. I don't want to steal all the -- too much here -- or too much time. Could I ask maybe an unrelated follow-up related to kind of how the Management team may be forming? So congratulations on hiring Bill to that spot. Do you envision perhaps there, sort of a drilling SVP? Does that division somehow gets split in how it's managed going forward?

No. We are recruiting currently for a drilling SVP. We want to make sure we have the right person there. We are very pleased with the hire of Bill Boyle, a very experienced Executive. I think an example of the caliber of person that we are looking for. In the interim, I think the drilling group is performing much better. Under the direction of the interim heads that we have. I'm very pleased with the performance of that group. It's come a long way.

Sure.

Thanks, Brad.

Thank you.

David Anderson, JPMorgan.

So this quarter, there's been a lot of talk about supply chain management, manufacturing capacity, whatnot. Last year you guys undertook some costs for actualization in your flow iron equipment. I was just wondering, as you are looking around -- clearly, it's obviously, it's been a big deal in terms of execution issues for a lot of people. As you survey your businesses, how do you feel in terms of your capacity levels? Do you feel like you are stretched in any place? I'm particularly thinking about the offshore component. Maybe in terms of the Davis-Lynch business? Or perhaps in the ROV side? Are there any issues to worry about in terms of supply chain or capacity?

David, that's a good question. We work hard to anticipate where the constraints might be and addressing those. That's -- resource planning is a key function of Senior Management. So within our drilling and handling equipment, we have a large new facility coming online at the end of the fourth quarter. We are moving around our manufacturing capacity for our ROVs to be more efficient in that regard. I think it will give us some cost -- margin improvements as well. We recently expanded our -- also within the subsea business. We are currently expanding our capacity to build launch and recovery systems at DYNACON, an acquisition we made a little less than a year ago and has seen exceptional demand growth.

We -- during the third quarter, brought on additional capacity for an element of our production equipment business. I think that part of that business is performing well. So David, I think -- then touching on the downhole tool business. I was just down there recently and very impressed with the layout improvements, the additional equipment that we have brought in and how well the distribution center is going as we have started that up. So I think that will serve us well for the additional capacity that we are anticipating for our downhole business.

So, obviously you are a little bit more shorter cycle than some of the others who have had these struggles. So basically, I think what the message is, you feel pretty good right now where you stand. You think that if business picks up or flattens out over the next couple of quarters, you don't foresee any kind of execution issues or supply chain things over the next several quarters?

That's right, David. I think a strength of Forum is that in our business we can respond. Because our bill cycles aren't as long, we can respond more quickly.

On the Davis-Lynch side, I believe you signed a master frame agreement with a couple of the large cap service companies. Can you talk about that a little bit? Can you just kind of give us the context of what you think it could mean to this business? I don't expect you to tell me what the revenues and operating margins are, but maybe just give us a handle in terms of what the volume flow through could go to? I mean, how do we think about this and its contribution over the next couple of years?

Yes. I've alluded to this briefly in the earlier remarks, but we have received the first large orders, millions of dollars of orders, from the major service companies. We will begin delivering and recognizing revenue on those just late this year. They will have more of an impact in 2014 -- at the beginning of 2014. But that is clearly something we're looking to build upon. I am very pleased to have these first significant groups of contracts, both internationally and domestically. But feel that will be an excellent growth driver for us in 2014.

Great. Okay, thanks, Cris.

Thanks, David.

Jonathan Sisto, Credit Suisse.

Jim, I think you mentioned in your remarks that you were expecting comparable margins in Q4 and 2014. Should we be interpreting that, in that you guys are maxed out for the next five quarters?

I didn't mean to put a lid on operating margins and EBITDA margins, Jonathan. That was more a comment that we feel like what we have achieved, we'll be able to recur with that. But we do have other margin opportunities with this new plant that Cris described. My only point with that comment is that we expect to continue to see margins at least at this level.

Very good. Understanding that the top line within drilling and subsea can be fairly episodic, ROVs, big drilling capital equipment orders. How do we see that trending, given the shift is more international than domestic as we look into 2014?

I think we will have the international component growing. The subsea business a driver there. The capital equipment, but we are also looking to sell more of our consumable products on the international side through the Blohm + Voss acquisition. Even for some of our capital equipment, on the drilling side, Jon, keep in mind that our orders there, our pieces of capital equipment are typically $500,000 to $1 million per unit, not multi-millions of dollars. The lumpiest part we have is the ROVs, which would be $3 million, $4 million or $5 million for a work-class vehicle or $10 million for a trencher. But the drilling capital equipment does not come for us in very large lumps per unit.

I will turn it back. Thank you, Cris.

Thanks, Jon.

Robin Shoemaker.

Cris, I wanted to ask you about, how you assess customer inventories of consumable products at this juncture? I noticed that you did see a 5% increase in flow equipment sales in the quarter. But the expectation would be -- perhaps it takes just a higher rig count for this to occur, but that once customer inventories were depleted and you see a little bit better activity levels, that you would see some continued -- very strong sales in consumable products. So how do you assess your customer inventory situation now?

I think that customers' inventories, pretty much across the board, have now normalized. We are getting back to a situation where our consumable product sales are aligned with activity levels. I think that's true in our drilling business. I think it's true in our flow equipment business. I think it's true in a lot of our well construction and downhole business. Although we do have these opportunities now with newer customers to us with the big service companies on top of that.

Okay. So you would anticipate the next few quarters to see some -- if inventories have normalized, you'd see some modest growth in sales of consumable products from -- off of a very low level, of course.

Right. So we're seeing that in flow equipment. As additional units would go back to work, whether they are pumping units or drilling rigs, those would have to be restocked. That would be a benefit. But I think we now see that there is not that oversupply. We've worked through that with the customers. Our revenue levels will reflect changes in activity from here.

Okay. If I may just ask also about the Global Tubing acquisition. We hear from various service companies of very competitive market conditions in pricing for coiled tubing services. They are probably in the same boat as pressure pumping companies in terms of wanting to conserve capital, perhaps take idle equipment or coiled tubing strings off idle equipment. But in any case, how is the sales of this acquisition that you made, split between international and domestic markets? Do they manufacture these -- both small and large diameter coiled tubing strings? It seems that the small diameter is the one that is really -- it has an excess of capacity.

Yes. Global Tubing can supply a full range of coiled tubing strings. It has a very modern facility. The current breakdown is about -- for Global Tubing, about 80% domestic, 20% international. They have recently expanded their presence in the Canadian market. So I think that will be a growth opportunity for Global in 2014.

We are seeing more opportunities for international sales into Europe and Asia. I think that will be a growth opportunity for them, as well as further penetration with the more internationally oriented service companies. But yes, they -- I think that Global has a good reputation for service and for technology. That's how they compete.

Okay. Good. Thank you.

Thanks, Robin.

Brandon Dobell, William Blair.

I was wondering if we could focus I guess on margin trajectory within drilling and subsea, but also within production and infrastructure. I guess from your perspective, what's going to be the bigger lever to get margins to progress from here? Is it just revenue scale? Or kind of more process inventory, kind of throughput efficiencies that you can drag out of those businesses?

Yes. I appreciate the question. I think we have made very good progress on the drilling and subsea side this quarter on cost structure. So I think we've seen not all, but certainly most of the benefit from a cost structure standpoint in D&S. We will see further improvement in margins, I think driven more on the -- I think more to the driver of results for D&S going forward will be revenue growth, right?

Okay.

On the P&I side, as I mentioned in my prepared remarks, we are now focused on margins there. We need to get the margins back up in P&I. We are focused on that. Then in 2014, looking for some revenue growth on that cost structure.

Okay. I think, Cris, your comment about planning for stable land rig counts here in North America in the next couple, three quarters -- it sounds like within that there was an assumption just kind of based on the momentum you have in flow equipment that the consumables side of it will continue to act better? Or should we expect that the assumptions you've got in the next couple of quarters for your revenues, don't expect an awful lot more momentum in flow equipment?

I think we are seeing modest improvement in volumes in the flow equipment business. We've worked through the oversupply there. We are going to see a gradual improvement. But I think it's going to be in line with the number of frac stages that are done, right?

Yes.

Certainly more as we -- at the point where utilization of frac equipment goes up and units need to be resupplied, that would be an increment for us. But we are going to be tied to that activity. As we all know, the level of stages being fracked is pretty good. So we feel good about that business now. (multiple speakers)

Okay. Then final one for me, within P&I, your comments about valves here. The pause that you expect in contracts awards, do you think that's just through a year-end thing? Or do you think we have got a couple, three quarters where people are just kind of sitting on their hands a little bit before activity picks up on some of those larger petrochem facility opportunities?

Yes. I don't think we expect a pickup in the first quarter 2014. But later in 2014, we do expect to see some increases in that business and some awards of some of the bigger contracts.

Okay. Great. Thanks a lot.

Jeff Tillery, Tudor, Pickering Holt.

In the drilling and subsea business, you obviously saw a very quick impact of the cost initiatives you've taken. As you look at what you're contemplating on the P&I side, how does that compare -- I guess in both the magnitude of the cost opportunity as well as the timing of implementation?

Right. So I think on the valve business, as we've said, we do expect that to come back next year. So I think there's limited cost restructuring that we're going to be doing there. Some, but not a great deal. On the PE side, I think we do have opportunity to get the margins up there. But as mentioned, we do have a mix, a fact that is a bit hampering us this quarter and next quarter there. We'll work through that and do better in 2014.

So just the relative opportunity in that segment. It's smaller, I guess fewer acquisitions there. Is that the right takeaway?

Yes. As volumes get up -- I think we can -- my personal view, Jeff, is that we can get the margins up a few hundred basis points in P&I over time. Right?

(technical difficulty) -- it's still significant, so -- in the next quarter or two, within that business, I guess if I look at the orders intake for P&I the last three quarters, it's averaging about $130 million a quarter. Is that where we see the revenues migrate towards kind of over the next six months or so?

I'm sorry, Jeff. Could you repeat the question?

Sure. Over the last three quarters, the P&I order imbalance has averaged about $130 million a quarter. Is that roughly the revenue outlook we need to be thinking about for each of the two quarters there?

No, I don't think so necessarily. We do have, within P&I, some customers -- some large customers, where we have their master agreements. They don't give us big orders in advance, but give us a continual stream of orders. So -- although that can be a significant part of our revenue, it doesn't help our backlog and the bookings so much, if that makes sense, right?

Jeff, I'd add to that, we do carry some backlog in the production equipment and valves area that will also be supportive of revenue as we expect these orders to pick up going forward. So our revenue will be at a higher level than you are expecting.

Okay. Then the last question I had, just within the drilling and subsea business -- the business seems more skewed international today than -- obviously with -- even excluding Blohm + Voss. The orders intake over the last three or four quarters has been skewed a little bit more international than in the past. That's had more of a longer lead time impact in terms of impacting your revenue. Are you at the point where those issues are getting anniversaried and so we see more a normal revenue progression as we watch orders?

Yes. So we've been working through that the past couple of quarters, yes. We've had the pain there. Yes.

Perfect. Thank you very much.

Blake Hutchinson, Howard Weil.

Just a couple questions around near-term guidance. On the last call, you talked a bit about the longer lead international revenue stream from drilling and it's plausible impact on 3Q and 4Q. Did we actually see a good bit more of that in 3Q than you expected? Or is there still more to come, which gives us a heightened confidence in the drilling sub-segment for 4Q?

Sure. Blake, we have seen for three quarters in a row now, a good uptick in orders. They have remained at that elevated level through the third quarter. So there's a bit of a bow wave effect with these international orders that shipments should in the fourth quarter start to catch up with the level of orders we have seen for the last several quarters. So, yes, we should see a good increase.

So true to form, you didn't really see a big impact from that in 3Q?

It was small. I think we talk about an 8% increase sequentially. So there was a small increase. In the third quarter, we will see more as we deliver in the fourth quarter.

Okay. Then, Cris, regarding this subsea segment, I know you had called out and just as you often do, the lumpiness of the business and pointed towards 1Q as a potential delivery point for the bulk of some recent orders. Does that suggest that the comparison may be tough here in Q4 for that sub-segment?

Not necessarily. That is the one that is toughest to pin down, I would say. But no, I think we've got some good work in-house. We'll be working to deliver.

We have some discussions with customers ongoing. If those come through here quickly, we would receive some recognition in the fourth quarter. But I would say that in our subsea business, we are all aware of the very large number of subsea equipment awards during 2013. Our timing for what we build tends to be 12 to 18 months behind that. So we do see all the subsea equipment awards in 2013 being a positive driver for our business next year.

Great. That's helpful. Then, Jim, I'm sorry if I missed this. Is there a new tax rate assumption to be made post this host of acquisitions?

Yes. We're holding, Blake, at the 31.5% expected for the fourth quarter. We will give guidance on the 2014 rate after we've gone through the planning process.

Got it. Thanks. I will turn it back.

Okay. Alex, we are going to have time for one more question, please.

Mike Urban, Deutsche Bank.

I don't want to belabor the point on the questions on the flat or flattish margin guidance out there. But it does seem like just about everything you are pointing to would suggest improvement here over the next few quarters, whether that's higher volume, the full effect of some of the restructuring and efficiency initiatives, especially on the P&I side and just integration of acquisitions, which you guys have always done a good job on. So I'm just trying to understand actually, what would cause that flat margin outlook? Understanding the need to be conservative and I appreciate that, but is that a timing issue? Do you need time to implement some of these things? There is some mix? Some pricing? Just trying to understand actually what would cause you to be flat because everything else kind of points up.

Well, let me reiterate on the D&S side, I think we've seen the biggest increase in margins there, cost restructuring has been done. From here, it's more a revenue growth story there. On the P&I side, that is going to take some time. We'll be working on that in the fourth quarter, but we do have some contracts to work through. I don't think we're going to get a great bit of help on the valve side in Q4 yet. So it will take some time on the P&I side. But we are going to get those margins up on the P&I side.

So more timing than anything.

Yes.

That's all for me. Thank you.

Thanks, Mike. Well, we appreciate your interest. I know it's a busy time for all of our listeners. But please, when you do get a chance, have any follow-up questions for us, give us a call. We look forward to seeing you all soon. Thanks.

Thank you for your participation in today's conference. This completes the presentation. You may now disconnect. Good day.