Forum Energy Technologies Inc (FET) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth-quarter Forum Energy Technologies earnings conference call. My name is Denise, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Mark Traylor, Vice President of Investor Relations and Planning. Please proceed.

Thank you Denise. Good morning, and welcome to Forum Energy Technologies quarterly earnings conference call for the fourth 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 Prady Iyyanki, Chief Operating Officer; and Wendell Brooks, President of 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, provide 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 as the date of the live call.

Management statements may include non-GAAP financial measures. For 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. Good morning. I will start with highlights from the fourth quarter and the full year, and offer some thoughts on the outlook for our business. And then I will turn it over to Jim, who will provide more detail on our financial performance.

In the fourth quarter 2013 we had record revenue of $394 million. The fourth quarter results include $0.03 per share of severance and restructuring charges and several non-operating items. Excluding these items, adjusted net income was $0.39 per share, and adjusted EBITDA was $76 million.

EBITDA margins in the fourth quarter were 19.2%, just under our third quarter and targeted margins of 20%. Margin improvement remains a primary objective.

Total orders during the fourth quarter were a record $387 million, a 9% increase over orders in the third quarter. Bookings increased sequentially for subsea equipment, downhole and completion products, and production equipment.

The fourth quarter book-to-bill ratio was 98% for the Company as a whole, 100% for the Drilling and Subsea segment, and 95% for the Production and Infrastructure segment. Our Drilling and Subsea segment achieved a 5% increase in sequential revenue on record quarterly sales of drilling and downhole products.

However, margins were down sequentially from the third quarter, due to cost overruns on one drilling project and delays in subsea deliveries. Orders continued at a strong pace for capital drilling equipment, and especially for international and offshore customers.

During the fourth quarter, the drilling product line had record revenue, also officially opened a new 150,000 square foot manufacturing facility in Broussard, Louisiana, and we rolled out a new organization restructure to better align product offerings with our customers. Our subsea product line orders in the fourth quarter were up over 50% sequentially, primarily on the previously announced contract with DOF Subsea to supply seven Perry 200 horsepower work class remotely operated vehicle systems, including five of our DYNACON launch and recovery systems.

A very recent development is the order from another customer for an additional eight work-class ROVs to be delivered later this year and into 2015. Together, these two large orders are validation of our leading market position in the work class ROV market, and confirmation of the strength in this sector.

The downhole technologies product line realized record quarterly revenue and had a sequential improvement in orders, as we receive large orders from major service companies for international sales of our cementing and casing accessories, and are seeing a recovery in orders for the North America market. Strong demand continues for our Cannon protectors and our ProDrill composite frac plugs.

Moving to our Production and Infrastructure segment, we had a sequential decline in revenue, as demand for our valves declined from the record levels in the first half of 2013, and both production and flow equipment were impacted by the severe winter weather in the fourth quarter. However, this segment maintained good cost control, and actually improved margins on the lower revenue. Inbound orders in the Production and Infrastructure division increased sequentially by only 4%, but order flow has increased for our production equipment and flow equipment product lines since the beginning of this year.

Now looking ahead to 2014. We will continue providing earnings guidance for the forward quarter, but are not providing full-year earnings guidance. Our decision to only provide quarterly guidance is driven by Forum's emphasis on consumable products and the relatively fast turnover of our backlog.

Our first quarter 2014 earnings per share guidance is $0.35 to $0.41 per share. We currently have a conservative view of the market. For 2014, we are assuming a flattish North America rig count and a growing well count, though not at the rate of prior years.

However, as our new COO and I visited a dozen of our manufacturing facilities over the past two weeks and have met with our operations and sales teams, there does seem to be a more positive tone to our business and our customer interactions.

As we start 2014, we remain focused on driving growth, improving operational performance, and increasing our operating margins.

As we previously announced, Mr. Prady Iyyanki has joined Forum as our new Chief Operating Officer. We welcome Prady to this new role, where he will be responsible for Forum's global operations.

Prady brings international business, process improvement, and manufacturing industry expertise to Forum from his many years of experience at GE. His leadership and depth of experience will be a great value as we continue to enhance our manufacturing excellence, supply chain efficiency, and product quality.

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

Thank you Cris, and good morning. Consolidated revenues of $394 million for the fourth quarter are up approximately 1% sequentially and represent a record level for the Company. Our Drilling and Subsea segment revenue increased 5% sequentially, while our Production and Infrastructure segment revenue was down 7% from the third quarter.

Net income for the fourth quarter was $35 million, including $3 million in restructuring and non-operational charges. Operating income, excluding these charges, was $59 million, down $4 million, or about 7% from the third quarter.

The sequential decline was partially attributable to severe weather in North Texas and Oklahoma, affecting six of our production facilities, exacerbated by customers' holiday schedules, making year-end deliveries a challenge. As previously disclosed, the fourth quarter was also impacted by delay in receipt of orders and production of subsea equipment.

Finally, consolidated gross margins were down 170 basis points, a major contributor to the decline being cost overruns on deliveries against a significant order in drilling for a newly designed larger and more complex catwalk. This order dates from 2011, and has undergone significant scope change over the course of design and construction. The last of these units will be delivered in the first quarter, which will also be at low margins.

Our fourth-quarter adjusted EBITDA margins came in at 19.2%, just under our target of 20%. Adjusted diluted earnings per share for the fourth quarter of $0.39 are down $0.05 from the third quarter.

In addition to the operational issues already highlighted, higher interest expense on the $400 million in unsecured bonds issued during the quarter contributed $0.02 to the sequential decline. Going forward, a full quarter's incremental interest on the bonds will cost about $0.03 per quarter. We are pleased to have successfully completed the bond offering, which combined with our recently amended $600 million revolving credit facility, provides us with greater financial capacity and flexibility for pursuing our acquisition strategy in the future.

For the full year, we recognized $3 million in foreign exchange losses, $1 million of which was in the fourth quarter. Since these losses primarily relate to the translation of US dollar-denominated receivables for reporting purposes only and have no economic meaning in dollar terms, we have treated them as non-operational items.

I will now review our segment results, comparing the fourth quarter 2013 sequentially with the third quarter of 2013. Our Drilling and Subsea segment revenue of $261 million was up $30 million sequentially, or 5%. We achieved good increases in both drilling and downhole, offset by the decline in subsea revenue resulting from the receipt of customer contract awards late in the quarter. Drilling was up another 13%, as we are now delivering on the longer lead-time international orders received earlier in the year.

Order levels in drilling have continued at an elevated pace, giving us confidence that revenues should grow in the product line year over year, despite the relatively flat North American rig count. Drilling and Subsea operating margins in the quarter at 17.7% were down sequentially 190 basis points, with all three product lines off third-quarter levels.

As already highlighted, a major contributor to the decline was cost overruns on the catwalk project referred to earlier. We also saw margin pressure in subsea on reduced volumes, and in downhole on a higher mix of product shift for lower margin international products.

Production and Infrastructure revenue of $133 million was down $10 million, or 7%, with all three product lines contributing to the decline. The production equipment product line was affected most by the winter weather with several facilities closed for over a week due to ice.

Customers delayed deliveries at year end, as their operations were also slowed by the weather. We have seen some pick-up in orders early in 2014 as our customers' operations normalize.

We achieved a record quarter in our global tubing joint venture, where we saw high demand for our coiled tubing strings. Operating margins for Production and Infrastructure of 15.9%, excluding charges, improved 40 basis points sequentially. Our valve product line improved margins, despite the lower shipments.

I will now summarize our expectations and update our diluted earnings per share guidance for the first quarter 2014. As stated, we expect diluted earnings per share of between $0.35 and $0.41.

Relative to the fourth quarter, where we reported adjusted EPS of $0.39, the first quarter is burdened by about $0.03 in higher compensation-related accruals and just under $0.01 for the full-quarter's interest on the bond offering. The higher compensation expense is principally attributable to returning our management incentive bonus accruals throughout the Company to target levels, and to an incremental year of incentive stock awards. Since we went public in April 2012, we do not yet have a full cycle of incentive stock awards.

Net debt at the end of the fourth quarter was $474 million, down $29 million from the third quarter, as we paid down revolver advances with free cash flow. For the year, we generated just over $150 million in free cash flow, after $60 million in capital expenditures.

Interest expense for the quarter was $7.5 million, a $3 million increase over the prior quarter due to the issuance of the bonds. Interest expense for the first quarter with the bonds outstanding for the full quarter will be about $8 million.

Corporate expenses were $7.9 million in the fourth quarter, and will be approximately $9 million per quarter in 2014. Capital expenditures in 2014 should be approximately $60 million, and depreciation and amortization expense for the full year, approximately $70 million.

Our effective tax rate in the fourth quarter was 29%, bringing the full-year effective tax rate to 30.4%. We expect our full-year tax rate for 2014 will be approximately 30%.

Our diluted share count for the fourth quarter was 94.9 million shares. We anticipate our diluted share count for the 2014 year will be at about this level.

For more information about our financial results, please review the earnings release on our website. I would now turn the call back over to Cris for concluding remarks and to moderate Q&A.

Thanks, Jim. I believe Forum is well positioned as we began a new year. We have strengthened our management team and our organization.

We have made great progress on integrating our acquisitions, and we have improved our processes. There is still much to do and plenty of opportunities for internal improvement remain.

We will maintain our internal focus in the first half of 2014. I think the benefit of this effort will be apparent this year.

I am pleased with the progress Forum has made, and I especially want to thank our employees for their strong efforts.

We have a great team. Thank you for your interest and listening to our remarks, and at this point we will open the line for questions. Denise, let's take the first question.

(Operator Instructions)

Blake Hutchinson, Howard Weil.

First, just starting off, Cris. Relating to the extra expenses with delivering the catwalks here. I think the industry at large is pretty wary that these expense issues and their tendency to transform from one time into an issue that sticks around for a while.

Can you take some time to walk us through what you are seeing there and your thoughts on how it may stick to some of the product as it delivers through the year? And give us some clarity on perhaps that expense line going away?

Right. These catwalks for a Middle East customer for very large land rigs, with the rig floor elevated 50 feet in the air, which is larger and higher than we have done before. And you remember from your geometry, if you are having to take pipe up across the hypotenuse of that triangle, it is a lot -- as you increase the height, the length of that catwalk becomes that much more.

There was a lot of scope change in that project as well. We originally to do doubles lengths of drill pipe. Customer actually ended up wanting to do triples with the catwalk.

A lot of design change since this original order took place back in 2011. A lot of engineering change, changed a lot of engineering hours, and we weren't on percentage of completion. When we finally delivered the first group of these in the fourth quarter, the cost that we had incurred in the design stage over that extended period of time were quite high.

I think that having designed now a catwalk for a 50-foot rig floor, we have got that work done. I don't think it will have an impact on future projects, although we do have, as Jim said, a few more of these to deliver during the first quarter at depressed margins.

I think to your point Blake, I think a few things to keep in mind. This is a legacy project, and I think we have learned from it. We don't -- it is not like we are going to have an ongoing series like that. I think we have improved our process going forward, tied the organization closer together, and I think this is an unusual legacy circumstance for us. You look across Forum in our other areas, we do not have those kinds of projects in our backlog.

Just to be clear, at this point there is nothing in the order book that looks particularly onerous for beyond 1Q, from a cost perspective?

Right.

Okay.

Blake, we will continue to work on product development and expanding our product line. We are moving into the offshore market and have contracts there, but we don't expect to have a repeat of this experience.

I think one of the things that got us on this one is the catwalk got so large and shipping it to the Middle East, we actually had to design it to be broken down into two pieces for shipment, and then be able to be reassembled.

I think that this was an unusual circumstance, although we are developing projects for the offshore market. I think we have learned from this experience.

Then just finally, as you mentioned at the top of your commentary, your commitment to margin improvement here. The 3Q margins that we saw out of Drilling and Subsea that were approaching 20% operating margin, kind of reset for us, looking out for 2014, look, we have got a different mix, there's going to be different interplay between the sub-segments. Is that 3Q margin the realistic goal for the team? Put that in perspective for us.

Blake, we do believe that the fourth quarter was the aberration because of these contracts. We will see improvement in the first quarter. We won't get all the way back to that level because of the overhang of these additional units, but the expectation of the team is to get back to that third quarter level, and then look beyond in the future.

Jonathan Sisto, Credit Suisse.

Prady, welcome to the team. Jim, if I could, the higher incentive compensation expense that you highlighted for the first quarter, should we be viewing that as a 1Q kind of event, or will that persist over the course of 2014?

On a sequential basis, that is taking the third quarter to the first. So as you proceed through, it is the second quarter and the subsequent quarters will be burdened by the same amount. It is accrued equally over the year.

We do assess that accrual over the year up or down, depending upon how operations are going, but since our bonuses are self-funded, meaning that the bonuses come out before we measure our achievement, the bonus accruals would never go up unless operations were sufficiently high to more than cover that. It should be a consistent accrual through the course of the year, Jonathan.

Cris, I think in your prepared remarks you highlighted that flow equipment revenue was fairly flat quarter over quarter. The market seems to be getting a little bit more excited about tightening some gas drilling going on. Any sort of anecdotal evidence you can share with us as far as demand, recertification work, that kind of stuff in flow equipment?

In the fourth quarter, we did not see a change or improvement in orders in the fourth quarter over the third quarter. However, since the beginning of this year, and it is still early days yet, we have seen an increase, a notable increase, in orders within our flow equipment product line.

But yet, it is too early I think to assess whether that is just a deferral or make-up of deferred purchases from prior periods, or whether it is indeed a sustainable increase. Would you agree, Wendell?

Yes. I think that we have seen an improvement, and I think what we can say is it feels better to us, and we have seen some new equipment purchases. Our service business is active. I agree with Cris, it is early days yet. But we can say we feel better about the market start this year.

We will keep our fingers crossed for $5 gas, I guess. Cris, as you look at CapEx of $60 million for 2014, maybe walk us through the allocation of that.

As in 2013, our sustaining maintenance level CapEx will be in the $25 million range and the addition will be for growth. We have allocated some growth capital for a number of our businesses, and I think that that is an advantage that Forum has, that within the level of our DD&A that Jim was sharing with you, it does provide significant growth capital for us that we can spread across our businesses.

Robin Shoemaker, Citi.

I wanted to pursue a little bit, you mentioned that you had gone out and visited many of your field locations and were detecting some optimism about 2014, and certainly that is something we sort of hear echoed from other companies. And yet, of course, most of your other commentary had a flattish rig count and maybe a slightly higher well count.

Do you think there is -- I just wanted to probe that a little bit. What kind of -- about what kind of your businesses were you detecting a sense of optimism?

Prady and I visited our drilling business, our downhole business, flow and production equipment, and valve. I think we have been to five of our six product lines in the past couple of weeks. And I will let Prady comment, but I think there was a more positive tone, as I was saying, as we visited with the folks that I have got the benefit of relative comparisons to earlier visits, obviously, but it was enthusiasm.

I think the anecdotes from customers are feeling a bit better. I think that a characteristic to Forum is that we are activity-related. But Prady, maybe you can comment a bit about what you saw and some of the opportunity.

Just to equal what Cris mentioned, the enthusiasm and the momentum in the shops seemed positive, even though it is just four weeks in the quarter and the year. How much of that is compared to last year and how much of that is sustainable, we will see down the road.

One of the things we do feel good about on a move-forward basis is our focus on the operating performance where execution in the plants with some of the big projects, the product execution and the project management structure we're going to put in place this year. And driving the lean principles, which will help us on the operational performance, and our focus on quality where the total cost of quality which is wastage, which will help us on the margins, but also our special focus on the sourcing.

Our source base has increased significantly over the last few years, and we're going to focus on our source base, not only from a quality standpoint but also to leverage some of the source bases we have. And the last focus being the margins where the variable cost, the indirect cost, and the SG&A, all those will be areas of focus. And obviously we need to use some of that money to get from a cost perspective on products and to be more competitive in our space.

Interesting. We talked about a little bit, the upstream. I know that you have got some leverage to downstream projects that are expected to accelerate, particularly here in the US, petrochemicals and so forth in terms of your valve solutions business, for example. What are you seeing there in terms of these projects we have been expecting to get truly on track?

Robin, the valves orders are remaining fairly flat, steady. We have not yet seen the -- we have not seen large orders coming in, in connection with petrochemical or LNG facilities at this point.

We continue to do some bidding. I think that is helping E&C companies with their planning and feed work. Our expectation is late this year and into 2015, we will see that increment in the valves business, but have not seen it yet.

I see, but you do have some visibility that these projects are coming because you are being asked to give some kind of a ballpark quotes or for their budgeting purposes, I guess?

Absolutely.

Bob Mackenzie, Jefferies.

This is Brad Handler, actually. I think we're mixing up some firms, too. I was not sure if I was on. Would you guys be comfortable sharing a revenue or indicative revenue by division for Q1 of 2014?

The Q1 revenue by division, no, we are not going to get into that quantitatively, Brad, but I think from a qualitative standpoint, in 2014 our growth engine is going to be our Drilling and Subsea division. We see growth in each of the product lines within Drilling and Subsea during 2014.

You know that we have had strong orders for a number of quarters now, building quarter over quarter in the drilling business. And again, I guess fourth quarter wasn't up that much over third quarter, but it is at quite a high level.

Subsea, we are very pleased with these two packages, it was for a total of 15 ROVs that we have had in the past couple of months. And the downhole business continues to receive impressive orders from our new target customer base there of the large service companies, but it is also recovering share with the domestic customers.

I think that will be the growth side. On the P&I side, particularly in the first part of the year until [both] some of that valve improvement kicks in, we are expecting fairly steady performance from valves and production equipment.

We talked about flow. It is really too early to say, but there is certainly some optimistic signs there. We are not yet building that into our thinking a whole lot, though.

Okay. I appreciate that color, Cris. That's very helpful. Just to clarify, your comment about production equipment, so it's more of a flattish revenue outlook for the year?

Or is that just early in the year? I wasn't sure.

It is a bit of a U-shape. So production equipment was very strong in the first half of 2013, then came off a bit. And we are expecting a reversal of that pattern in 2014, that we are building from the lower run rate coming out of 2013, building that up over the course of the year, and rebuilding the backlog there. That's beginning to happen, but it's going to build over the course of the year.

Is that a function of demand or is that a function of that transition? I think you made a transition in manufacturing facility, and are you sort of re-ramping into that new place?

We do have that up and running now. I think it is just some changes in the market that I think we commented on this last quarter, that there is a lot of fabrication capacity to serve the oil service and equipment market. As that capacity was not needed for pressure pumping spreads or frac tanks or that kind of thing, these fabricators were looking for other things that they could do, so we saw more entrance there.

Our response to that is to expand our customer base and to go after some, and more, of this growing opportunity in the multi-well pad sites and the modular large equipment that would be associated with those multi-well sites where there would be less competition, and we are executing on that strategy.

If I could steal one more. You made a reference to a negative mix shift in the fourth quarter in downhole, I think, lower margins on some international product. Could you elaborate a little on that? And then I will jump off.

The legacy domestic business, Brad, was shorter runs, lower volumes, quicker response, and as a result, higher margins. The international business tends to be well planned in advance, and large volumes, and very attractive margins, but not as high margins as that short-notice, low volume work on the domestic side.

We have seen a shift to significantly more international work over the past couple of years. We think that is a very attractive market that we can grow, but we are also looking to recover and have a significant presence in this higher margin domestic market, too.

Bob MacKenzie, Iberia Capital.

I wanted to follow up, Cris, on your comments in response to the prior questioner about the optimistic signs you said you were seeing in flow equipment. I guess one of your competitors earlier today is modeling that business flat and didn't talk as bullishly as you seem to be. Can you give us some more color as to what you're seeing there?

On flow equipment, let's be clear there. We are, and as we have said in our prepared remarks, we are being conservative in the sense that we are assuming a flattish rig count, and well counts increasing only modestly above the rig count. That is implicit in our assumptions.

As regards flow equipment, what we are saying is we have seen some additional orders and an uptick there, but it is too soon to say whether that is sustainable or not, or whether it is just catch-up on some previously deferred spending. Our emphasis in our flow equipment is on the consumable products, not on the capital side.

Correct, okay.

We will move with activity.

Right, fair enough. My next question comes back to subsea technologies. You have had a couple good back-to-back orders there in subsea. How does the outlook -- how do you think about the outlook now in what appears to be fairly rapidly weakening deepwater rig environment, albeit still growing in terms of number of active rigs, but are you seeing any impact on tenders or bidding for new ROVs in that business yet?

Let's keep in mind that the deepwater market is a very long lead indicator and the number of deepwater rigs working is at a high level. I think the issue with the rig companies is more about rate with the rapid increase in supply there.

Now, moving from the initial drilling to what we serve, which is the offshore construction and maintenance and repair base, that will be driven by new infrastructure installed on the sea floor, but also the need to maintain and service that infrastructure over time, which is obviously growing.

We are currently seeing, I think, a pretty good amount of discussion level and quote activity with our subsea customers. We are pleased to have won these big orders. But we are definitely looking for growth in our subsea business in 2014.

Great. That's very helpful, thanks. My next question is a little bit more strategic, even. You guys have historically relied on a lot of acquisitions to help position yourselves for growth here.

What is your view, Cris, on selling off or spinning out some of the pieces of which you've bought? Is that something you are looking at, or not?

The six product lines that we have within our two segments are ones that we feel are the right ones to grow and provide the balance that we have. And we think there are opportunities to add new products internally or through acquisition within those existing six product areas.

Are there some smaller pieces that don't provide as core a fit to our overall strategy? Yes, there probably are, and we will look at those over time as we refine our strategy. But I think there are compelling, attractive, strategic reasons and plans for our two segments and the six product lines that we have. I think that the -- any divestment opportunities we would look at would be pretty small.

Great, thanks. And then back on the acquisition front, is it still your guys' view that let's digest what we have before we get back into buying some more pieces?

We do have an internal focus, and I think there is more we can do in that regard. And that is where we are spending our time and attention.

We continue to monitor and follow and pursue potential acquisitions for the future, but one should not look for us closing any transactions in the first quarter, for sure. Prady, maybe you can address some of the opportunities that we might be addressing internally with this focus.

You can look at 2013, we've integrated about 13 acquisitions, and 3 of them in 2014. So we still have some work to do to make sure we get the benefit of integration and synergies of these acquisitions, which will be a focus area for us in 2014. But as Cris mentioned, our big focus this year in 2014 is on our operating performance quality, which is how we compete in the marketplace and improving the margins.

Also, some of the cost we are going to get from the focus and cost of quality and margins, we're going to invest that money in products from an organic growth standpoint. That is going to be our focus in 2014. Once we feel good about our operational performance, then we relook into our [inorganic] structure.

George O'Leary, Tudor Pickering.

Given you guys have shied away from providing annual earnings guidance, could you qualitatively talk about margin progression expectations for 2014, and then also the margins implicit in your Q1 2014 EPS guidance?

George, as we said in the prepared remarks, we do have a little overhang in the first quarter. So margin progression should be at, or possibly a little better than the fourth quarter, we should see in the first quarter. We would expect to see that to improve over the course of the year, and then ending the year about where we were in the third quarter. I think that is a good target and that is what is implicit in our current thinking.

Okay, that's very helpful. Then on the downhole tool side, some good results and good commentary there. Can you talk about your market penetration progression, whether that is actually incremental demand, or whether you guys think you're actually stealing share from competitors?

That is a delicate question there. Maybe some of both, and I think let's leave it at that.

Tom Dillon, William Blair.

Can you share your thoughts about the aging of the ROV maintenance and service fleet, i.e., not construction? What is the average age of that industry fleet right now, and are there any regulations that could render the older generations obsolete?

The age of ROVs and the need for replacement. On average, ROVs tend to be replaced in the work class area on a seven- or eight-year timeframe, but there is a wide range.

Some have unfortunate incidents and have a short life, and due to some operational issues that are not reliability-related, but giving away propellers and things like that. Others, when properly maintained and rebuilt and so forth, can last more than 10 or 12 years.

I think a growing opportunity that we have that has been probably under-exploited is for us to do more in the aftermarket side to rebuilding, reconditioning. That has not been an emphasis before, but is something that Bill Boyle, as he has joined us as heading up that product line has identified as a good opportunity.

These aren't just hardware, though. These are underwater robots with significant software and controls, and like anything driven by software, there are generational changes there. There is an obsolescence just from that capability standpoint as well.

Also, the needs of the customers change. I mentioned that the DOF subsea order that we have is for all 200 horsepower ROVs. That is a higher horsepower than we would have supplied a few years ago, as there is a need for greater payload, greater hydraulic power to do the installation work that our customers have in mind.

Darren Gacicia, Guggenheim Securities.

The first one, does it seem like there was some impact from the downhole tools to the positive side during the quarter? Is there any kind of end-of-year seasonality inventory restock that maybe happens as people try to go through the end of their budgets, or anything like that, that may not recur? And how do we quantify that, if that is the case?

Darren, I don't think it was seasonal from that regard. I think it was, there is some lumpiness in international orders. We can receive a large international order that we fulfill, and I think that was the reason for the sequential growth in Q4 relative to Q3.

We had a large amount of international orders that we filled there. That is not necessarily an absolute continuous flow, but I do not think it is driven by seasonality so much as the lumpiness in big international work.

How do your customers manage when they decide to order or not? What makes it lumpy? Is it a project-by-project management process, thought process? Is that how orders come, as they decide put projects on, then they come and talk to you, or do they have more of a holistic total company approach?

They would have -- we tend to supply for a particular project or region. So they would place their orders for the cementing and casing accessories but prepared to do the work for that project, yes.

Got it. Switching over -- switching gears a little bit, I know that there's been some talk about absorbing acquisitions and the rest. From a leverage on-plant and manufacturing perspective, and trying to drill down a little bit here, to what extent in terms of machining, tooling, and what is on the floor, do you have the ability to consolidate and cross-over product lines?

And in terms of what you have acquired, maybe get some more leverage out of your existing plant? Is that something you can do across product lines, or maybe on a limited basis? Can you expand on that a little bit?

We are definitely realizing some consolidation benefits on the distribution side. Some of you may have visited our Guhn Road facility, consolidated distribution facility, 250,000 square foot facility here in Houston.

We are bringing together, as we upgrade our manufacturing facilities, more capability. With this drilling facility we visited in Broussard, that is going to serve several different types of products there. But Prady, maybe you can address the opportunities that you've seen so far in the early days.

We'll continue to focus on consolidation of our operations. A good example is any global location, like the example of Singapore, we have already done that, have pretty much moved product lines. And again, I think the opportunity is there. We will take a look at it where it makes sense.

Obviously it's got to make the business sense for us before we do that, because in some cases the customer base and the products are different, even though the chip cutting is the same. We will look at the consolidation where it makes sense.

For a procurement standpoint, is a little different because our source base has increased significantly over the last few years as our revenue has gone up. And there is a synergy there and there's opportunity there for us to take the advantage of the scale we have on the source base, and that will be a focus area for us in 2014, not only from a cost perspective but also from a quality perspective that is impacting our operations.

Is that like a 100, 200, 300 basis point type of move? What is the order of magnitude you kind of wring out of that?

Darren, we're not going to get carried away on that. I think we understand it is got to be a show-me situation. We are, as Jim said, looking to get our EBITDA margins for the year to the 20% level this year.

We believe that there is additional potential beyond that, but we're not going to over-promise on that one. We have got to deliver. We see a lot of opportunity, Prady sees a great deal of opportunity, as we look around here. We will take it a step at a time. I think that wraps up our time here. We appreciate your interest and good questions. We will hand it over to Denise for closing.

This concludes today's conference. You may now disconnect. Have a great day.