Forum Energy Technologies Inc (FET) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Forum Energy Technologies Inc. Q4 2016 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will follow at that time. (Operator Instructions). As a reminder to our audience, this conference is being recorded for replay purposes.

It is now my pleasure to hand the conference over to Mr. Mark Traylor, Vice President of Investor Relations. Sir, the floor is yours.

Thank you Brian. Good morning and welcome to Forum Energy Technologies' fourth-quarter and full-year 2016 earnings conference call. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer, as well as Prady Iyyanki, President and Chief Operating Officer, and Jim Harris, our Chief Financial Officer.

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, may include 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 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 a reconciliation of these measures, please refer to our earnings release.

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

I'm now pleased to turn the call over to Cris Gaut, Chief Executive Officer.

Thanks Mark. Good morning. I will begin with some observations about the current market conditions and outlook, and talk about our plan for Forum going forward. And then I will turn it over to Jim, who will discuss our financial results and strong liquidity positions, and then Prady will address our preparedness for the recovery.

As we know, US land activity as measured by the rig count reached a trough in the second quarter of 2016 and has improved strongly since that time. We have seen a significant increase for two consecutive quarters in our inbound orders, which are a good indication of our near-term business prospects. And this confirms the alignment of our business with the key drivers of US land, drilling, and completion activity. With the recovery now underway, Forum is well-positioned with improving results in each of our three segments, continued free cash flow generation and a strong financial position.

Forum's total inbound orders during the fourth quarter were $183 million. That's a 26% increase from the level in the third quarter, and double the rate of increase we saw last quarter. The fourth-quarter book-to-bill ratio was 124% for the Company, and that's a new record for Forum since we've been public. The book-to-bill ratio was 118% for the Drilling & Subsea segment, 109% for the Completions segment, and 138% for the Production & Infrastructure segment. Our domestic completions business is largely a build-to-stock, sell-from-stock business, so one should expect our book-to-bill ratio will not depart there much from 100%. However, the lead times for our production equipment are longer than for our consumable products, which can lead to higher book-to-bill ratios for the Production & Infrastructure segment.

In the fourth quarter, five of six product lines generated sequential revenue growth, led by North America, which represented 76% of our total revenue in the quarter. Orders in our Completions segment increased 18% for the second consecutive quarter as customer spending improved on downhole products and pressure pumping consumable equipment. Completions activity typically lags the drilling of the well by several months. We expect the momentum in orders for our Completion products and equipment to continue as operators complete the wells they drilled previously.

Orders in our drilling product line were up 20%, resulting in a book-to-bill ratio of 111% during the quarter, primarily on the continuing demand for rig consumable products and mud pump upgrade packages for the US land market.

In the subsea product line, new orders were up 98% and the book-to-bill ratio was 136% in the fourth quarter as we received some very nice orders in Q4 for subsea equipment for non-oilfield use. Orders in this business are typically lumpy.

In our production equipment product line, orders were up 66% in the fourth quarter as operators are making plans to complete more wells and increase production. We received several awards totaling $16 million from one large US independent operator for wellsite production equipment to support their well completion activity over the course of 2017.

New orders during the fourth quarter for our valves product line were down 6% in the fourth quarter after exceptionally strong orders in Q3 when orders were up 26% sequentially.

As we look ahead to the first quarter of 2017, we expect our orders for consumable products to increase as the momentum builds in the North American activity, and our revenues should improve by around 10% to 15%, as some of our fourth-quarter orders for capital equipment are for delivery later in the year. In preparing for the upturn, it will be necessary to add back some costs, just as we have the additional costs in the fourth quarter of ending furloughs and returning to a full work schedule.

Beginning in 2017, like many companies that are seeing improvement, we will once again begin accruing for target level bonuses and be reinstating some other benefits that were reduced or suspended during the two years of the downturn. These are mostly SG&A costs and are about $5 million per quarter. This will impact our sequential incremental margins in the first quarter, but not thereafter. After taking into account these cost increases in the first quarter, we expect our EBITDA in Q1 will only be a few million dollars better than Q4.

We are ramping up our manufacturing volumes and incurring the upfront costs necessary to respond to the recovery. As the recovery progresses, we will have the benefit of better manufacturing cost absorption, lower procurement costs as we buy larger volumes, and, over time, some pricing recovery, all of which will drive higher incremental margins.

We are seeing an increase in acquisitions activity here in the early stages of the recovery. We substantially improved our liquidity position during the fourth quarter with our stock offering and credit facility enhancements, as well as continued to generate good free cash flow. In the fourth quarter of 2016, our free cash flow was $23 million. We are well-positioned to do more acquisitions, which will add to our already significant exposure to the unfolding recovery.

Let me ask Jim to take you through our financial results and our financial position. Jim?

Thank you, Cris, and good morning everyone. As we know, 2016 was a tough year for the industry and the second consecutive year of declining investment and capital spending by the exploration and production companies. Our revenue in 2016 was down 45% from 2015 and our net loss, excluding special items, was $69 million, or $0.76 per share.

Our fourth-quarter revenue was $147 million, a 6% increase sequentially. This is the first sequential increase in our quarterly revenue since this severe downturn began more than two years ago.

Our adjusted EBITDA increased $1 million, and our net loss per share was $0.16, excluding special items, an improvement from the third quarter as the industry began the transition to the upturn led by the momentum in US land drilling activity. The EBITDA increase would have been higher in the quarter, except that we incurred $2 million in incremental SG&A costs related to payroll.

Our balance sheet and financial position remain strong. Our free cash flow continues to exceed our net income. We generated free cash flow after net capital expenditures of $58 million in 2016. Including the proceeds from our equity offering, we ended the year with $234 million of cash on hand and with no bank debt outstanding. We are well-positioned to execute our acquisition strategy, and are pleased with the recent addition of the Cooper Valves product offering.

I will now summarize our segment results for the quarter and provide additional details on the fourth-quarter results. Our Drilling & Subsea segment revenue of $55 million was up 8%, primarily due to the 27% improvement in sales of drilling consumable products and capital equipment led by the increase in US land rig count, partially offset by lower demand for subsea equipment. The Completions segment revenue of $35 million increased 5% sequentially as customer spending improved on higher well construction and completions activity in North America. Our Production & Infrastructure segment revenue of $57 million was up 6% due to improved sales of our surface production equipment and midstream valves in the US.

The net loss for the fourth quarter was $13 million, or $0.14 per share. The quarter included special items on a pretax basis comprised of $7 million of foreign exchange gains partially offset by charges of $4 million, including the write-off of deferred loan costs associated with our credit facility amendment. The adjusted net loss, excluding these items and the associated income taxes, was $0.16 per share.

Our fourth-quarter adjusted operating loss was $21 million compared to an adjusted operating loss of $22 million from the third quarter. Our operating margins improved on the increased revenue but were partially offset by the $2 million of incremental SG&A expense related to ending the reduced work schedules for salaried employees during the quarter.

Our free cash flow after net capital expenditures in the fourth quarter was $23 million coming from a recovery of three days in our DSOs and further reduction in inventories. We also received $6 million in proceeds from the sale of our Robstown, Texas facility, which was part of our strategy to consolidate manufacturing operations. We offset these proceeds against capital expenditures in calculating free cash flow.

In the face of increasing activity levels and the demands of the business for investments in working capital, we expect another full year of positive cash flows. However, the first quarter will get off to a slower start as we pay our strategic vendors for critical supply chain items.

Drilling & Subsea recorded an adjusted operating loss of $10 million, completions $5 million, and Production & Infrastructure broke even in the quarter.

Our weighted average diluted share count for the fourth quarter was 91.9 million shares. Inclusive of the additional 4 million shares from our December equity offering, we expect the weighted average diluted share count for the first quarter 2017 to be approximately 96.5 million shares. When we turn profitable on a net income basis, the diluted share count will increase to approximately 98.6 million shares to once again include the impact of options.

Net debt at the end of the fourth quarter was $162 million, down $102 million, bringing our debt to total capitalization ratio to 11.6%. The amendment of our credit facility during the quarter provides greater flexibility to draw on the facility for acquisitions while preserving our cash position.

Interest expense was $6.7 million in the fourth quarter. Corporate expenses were $7 million. And with the structural costs returning, we expect corporate expenses to be around $9 million per quarter in 2017.

Our gross capital expenditures in the fourth quarter were $3 million and, for the full year, $16 million. Our budget for 2017 capital expenditures is approximately $30 million, which is sufficient for maintenance and select growth investments, primarily in the Middle East.

Depreciation and amortization expense was $15 million for the quarter and $62 million for the full year and should be similar in 2017.

Our full-year effective tax rate on our operating loss was 40.6% net benefit, which is 220 basis points higher than our estimated rate in the third quarter. Applying the higher rate to full-year losses results in a fourth-quarter effective tax rate of 50.3%. The higher effective tax rate is attributable to losses incurred in the US and benefited at a higher statutory rate offset by earnings outside the US taxed at lower rates. Although it is difficult to forecast an effective tax rate at these low activity levels, on the basis of current tax rates and laws applicable in the jurisdictions in which we operate, we expect our tax rate for 2017 will be around 38%.

We provided the full-year 2016 revenue for each product line in a supplemental schedule in the earnings release. For more information about our financial results, please review the earnings release on our website.

I will now turn the call over to Prady to update you on several of our initiatives. Prady?

Thanks Jim. Good morning everyone.

The growth in orders for our products and equipment that Cris previously mentioned is leading to increased demand load on our manufacturing facilities. We are now ramping up production at many of our manufacturing plants. We have the requisite manufacturing roofline needed to meet this growing demand. We are reinstating regular work schedules and adding headcount, allowing for increased manufacturing hours. However, our Drilling & Subsea segment capital equipment recovery will lag, and hence we continue to focus on cost and efficiency in those areas.

Our procurement team has secured capacity from our suppliers for long lead items and shortened auxiliary times of many critical items. Additionally, we are making some offensive bets on select inventory items which we anticipate our customers will require as the recovery unfolds. With the operational efficiency initiatives carried out during the downturn, we are well prepared for these high volumes.

Our commercial strategy and four brand initiatives are progressing well. We have strengthened our sales and service teams in the Permian Basin to the Middle East and in other key basins to support our customers across product lines.

Our sales and engineering teams continue to work with the customers to develop new products, to meet their needs and solve their evolving challenges. In that regard, we are developing a new composite frac plug which has newly designed slips, is shorter than current plugs, and is easier to mill out, which saves time and money for operators as they complete longer laterals and increases the stage count.

We are getting good traction from our customers of our pressure pumping ends due to the proven reliability and performance. For example, we recently received an order from a customer for 45,000 horsepower.

Additionally, Forum's engineering team recently qualified our drilling tubular handling tools for the new API standard that went into effect at year-end. As such, we offer a complete portfolio of handling tools compliant with the new standard and we believe we are the only supplier who can recertify their own handling tools to the new standard, inclusive of a patented RFID chip or API traceable deal requirements.

Also, I am particularly pleased with the collaborative report of our drilling engineering, design process and manufacturing teams in developing a 7,500 psi mud pump upgrade package. As customers' demands for drilling longer laterals and deeper depths made the existing 5,000 psi system inadequate. Our drilling team stepped up and solved the challenge. We continue to receive strong demand for our mud pump upgrade modules.

In the first quarter, we must absorb the upfront SG&A related costs necessary for full participation in the upturn. Thereafter, I'm confident we will see higher incremental operating margins from our enhanced operational efficiency initiatives as we place more volumes on our manufacturing plants and pricing improves as the recovery maintenance momentum.

I want to welcome the employees of Cooper Valves to Forum. The Cooper product offering includes the Accuseal brand of metal seated ball valves for use in severe service applications, as well as a complementary line of cast and forged gate, globe and check valves. Our M&A strategy remains focused primarily on expanding our completion and production businesses, followed by midstream and downstream opportunities.

In closing, Forum is among a select group of companies which demonstrated scalability, staying power throughout the severe downturn. We aggressively reduced our cost structure in line with declining activity levels, while focusing on improving our operational efficiency, generating free cash flow, and protecting our balance sheet, the appropriate defensive steps required for a declining market. As we enter 2017 and begin the early stages of the recovery, it is now time for Forum to demonstrate its scalability for growth with the implementation of offensive moves for the improving activity levels.

Thank you for your interest. At this point, we will open the line for questions. Operator, please take the first question.

(Operator Instructions). Jacob Lundberg, Credit Suisse.

Sorry guys. This is Jim Wicklund standing in for Jake. I hope that's okay. In the Completions segment, I'm not stopping at 18%. I noticed that Patterson, as an example, reported that their pressure pumping revenues were up 35%. You guys note that your business lags obviously the drilling area and all. Should we expect to see the ramp up? I mean the rig count is up 70% since the bottom and 44% in the last three months. Should we see that 18% accelerate on a quarterly basis through 2017? And if so, can you just give us some general idea as to magnitude?

Obviously, a lot of what we sell are the wear parts, the repetitive sale items that, as more equipment is working and as the hours that it's working increases, so utilization rates go up, more of those aftermarket parts will be necessary. So, we are beginning to see that acceleration, and we expect that will continue for the flow equipment business, for the pressure pumping consumables going forward, and for some of our other downhole tools.

Okay, they have to work a little bit before they wear something out, right?

Right, right.

Okay. And you talk about you're making offensive bets on inventory items, considering the direction of the market that doesn't seem to be in itself a risk, but how big a bet are we making?

These are strategic bets. In the case of long lead item, in the case of completions, or even on the drilling consumable side, and they're high turning material. So even if we take the risk on these material, we may sit on it for some time, but eventually we are going to deplete inventory. We are not taking inventory bets across the board. It's strategic bets on material which we think will be depleted in 2017. And some of them are long lead items and the others are high moving materials.

Okay, so those are bets, but they are pretty low-risk bets from the sound of it.

Yes.

Jim, I would add to Prady's comments that we are not losing sight also of moving, as activity picks up, other inventory items that we have. So there will be select places where we are increasing inventory, but we are still focused on improving those inventory turns through the year. So we will see other offsets.

Of course, we are talking about cash investment and inventory here, right? We are not talking about this flowing through the income statement until it's sold and sold with good margins.

Exactly, sold, right. And considering your net cash position again, that's not a high-end bet.

And my last one if I could, you noted you sold pressure pumping fluid ends, 45,000 horsepower fluid ends. There's been a great deal of talk in the industry, especially with all the IPOs that have come, that are coming in pressure pumping in terms of wear and tear on fluid ends, and different metallurgies and different lubricating technologies. Can you tell us what Forum is doing to take the lead in the provision of longer life fluid ends?

First, I'll get to your question, but first, Prady was talking about the very good reaction that we are getting to our power ends. (multiple speakers) 45,000 horsepower stale driven by the power ends side. So your question on the fluid ends side, yes. We are seeing that. As experience, and as the type of service changes, that one needs to continue to be on top of that, and of course there's the change not only from triplex to quintiplex but more recently the change to stainless steel in many areas. And we are very much in line with that, and spend a lot of engineering time, design time, to make sure we are with customers and helping them come up with solutions that help their efficiency and help them on their cost side. But hey, with these slick water fracs with so much sand loading, it's hard on the equipment no matter what you're using.

Thanks, guys, very much. I appreciate it.

George O'Leary, Tudor Pickering.

Good morning guys. Piling onto one of Jim's questions, I just wanted to dig in on kind of what you guys are seeing so far on the first quarter on the completion side, given much of that is book in turn work and it feels like what happens -- what happened in the fourth quarter was kind of spreads that were already marketed or working kind of ramping up utilization. Does it feel like there's some steam gaining on the pressure pumping side within that Completions segment as guys are actively, A, pulling spreads out of stack and having to spend on the consumable side, and B, to your point you've seen an order for power ends in the order of magnitude of 45,000 horsepower? So basically, just we're just two-thirds of the way through the quarter. What are you seeing on the Completions side in Q1 thus far?

Good question. We are seeing activity, George. In 3Q of last year, our Completions bookings were up 16%. In 4Q, it was up 18%. And the activity continues to gain momentum on the Completions side on the pressure pumping of the Completions side and also in the downhole products and also our global tubing product. But also, production equipment, which is not in the Completions segment, but as the wells get completed, it's a long lead item. And that's the reason why we saw a big increase in bookings in the fourth quarter. So I think the momentum continues to gain, and we expect to see stronger orders in the first quarter too.

And we see the stronger orders in fourth quarter for the production equipment because of the long lead time, so -- and that's what one would expect. If you're going to complete wells in Q1, Q2, you need to get those orders in for your production equipment, and then get on with the completion, and then install that production equipment that's been built. So, it's all kind of consistent with our expectations in terms of how the flow of orders is matching up with what's happening with the recovery.

So as far as a ramp up, George, we obviously reduced our inventory levels during the [downturn] (corrected by company after the call), and now we are ramping up our manpower and also the material piece so that we have a buffer from an inventory standpoint. And customers are already asking for us to keep inventory on our side as they start executing on their front.

Great, that's very helpful color. And then, on the drilling side, I know you guys have called for that segment to be a relative laggard versus maybe completions and production, and I fully understand that subsea will be a laggard within the D&S segment as a whole. But it seems like, in the press release, you guys called out both drilling, consumables and drilling capital equipment. A, did those orders in the fourth quarter surprise you to any magnitude? And maybe drilling down into that, I think, in the most recent investor presentation you put out where you highlighted in the ballpark of 200 fluid end -- sorry, 200 7,500 psi mud pump system upgrades through the end of the decade. Is there upside bias to that given how quickly we've seen rig count ramp in each of the last two quarters, really, and how quickly it continues to ramp?

So, we have seen good growth in our drilling consumables consistent with more rigs going to work. And I wouldn't describe that as later stage. The later stage of our drilling business we expected to be the capital equipment side of drilling. And without a lot of new builds, it's hard for that business to be hitting on all cylinders. However, with the upgrades that are going on with higher spec drilling rigs, and it looks like that is really going to continue for some time, these land rig upgrades, we are benefiting from that, both on the consumable side and on the capital equipment side with newer catwalks, handling tools, and the mud pump upgrades. So, it's been a positive surprise, but I think those upgrades are going to be continuing for a while, picking up pace actually.

Great. Thanks for the color guys.

Chase Mulvehill, Wolfe Research.

Hey, good morning. Hey, so, you know, I guess I'm going to come back to completions a little bit. You talked about I guess the orders in 3Q and 4Q were in the high teens. 4Q revenue was up mid-single digits. So I guess help us kind of understand when we are going to start seeing the flow through of the increase in orders. Should we think about that as 1Q and kind of modeling 20%, above 20% growth in 1Q?

In 3Q our book-to-bill ratio was 0.97. So pretty much everything we got you could translate that into revenue. But in 4Q, our bookings were 18%; our book-to-bill ratio was 1.09. Our revenue was up 5%. So primarily it was because, at the tail end of the quarter, we got some orders, especially in our downhole products, which will go out in 1Q. So that's the fourth-quarter revenue 5% versus the 18% bookings. And as we said, I think the activity continues to gain momentum, so we do expect One Quarter to be strong.

(technical difficulty)

That's helpful. And when we think about I guess your inventories and potentially kind of still having some hot price inventories, what's the difference in your average cost between the inventories running through the P&L today versus what you are buying and putting in inventory today?

As you know, we took a hard look at our inventories over the last year, and we've written down the values of inventory that was higher than what replacement costs would be. So, I would say it should be relatively consistent, what's coming through. As we start to buy more materials, we will see improvement. We've talked about what those dollars look like, but that's going to take some time still the flow through.

On an average cost basis.

Okay. The last one and then I'll turn it back over. Can you help us, maybe just for the fourth quarter, can you help us understand your fixed versus variable cost structure, excluding kind of D&A? So like what percentage of your cost of sales was more fixed, the fixed overhead and labor?

75% of our cost of sales on average would come from materials. And so that would obviously be variable. And of the remaining 25%, it's a very small portion of that. Less than 10% would be fixed costs, so obviously a highly variable cost structure.

But as a manufacturing company, it's about cost of goods sold, so when you sell something, you charge the labor and the material to it. And then the SG&A is more of a fixed nature, but it does change over time. And as we've described, during the downturn, we cut back a lot on the SG&A as well. But there are elements of the SG&A now that we are seeing this increase in demand and needing to hire folks and get going again and be competitive so we can bring folks back on. We need to put some of those reductions and things we are taking away back in place. And so that's part of the cost adjustments that we were describing in the prepared remarks.

That's very helpful. Thanks. I'll turn it back over.

Rob MacKenzie, Iberia Capital.

Thanks guys. A question for you on how costs should play out through the year. I fully understand kind of ramping cost as you prepare to meet the surge in demand, and that impacting incrementals near term. But how should we expect to see that reverse out, if you will, as the year plays out in 2017?

Picking up on what I was just saying about SG&A, we'll get that back to kind of a normalized run rate in Q1. So SG&A kind of will be at that level in Q1. And from that point forward, it's going to be about the operating leverage in the business. And some of the drivers that will help us from an operating leverage, from an incremental standpoint, are the manufacturing efficiencies that we have been driving for the past couple of years, the procurement savings that Jim described that will be coming in over time as we work through average costs. And with this pick-up in demand, hopefully there will be some pricing opportunities as well. So I think those are all good drivers for us once we get past the normalization of the SG&A.

And probably in the first half we'll get some benefit on the manufacturing absorption too, but that's limited once the shops are fully absorbed, which probably -- at the end of second quarter, most of the shops will be fully absorbed. But we will still see the other benefits which Cris just talked about.

When you say that, when you say shops fully absorbed, can you -- does that mean you're at fairly full capacity for what you're doing or --?

It's not capacity. Based on the utilization of the shop and the number of -- and the kind of people we have, they are not utilizing the people completely. So once the manufacturing volume starts coming in, we start utilizing the people to the full extent, and then the absorption benefits is what we will start seeing. But once the shop is fully absorbed, we will not see the absorption benefits, but we will see the efficiency benefits, we'll see the procurement benefits, and we'll also see the pricing benefits.

Got it. Where would you say you are right now in terms of shop capacity given your current shift structure?

From a capacity standpoint, we've got a lot of capacity. We've got a lot of rooftops. So you can pretty much assume the same capacity we had in 2014, if we still have it in spite of all the efficiency efforts we have done. So it's pretty much getting the people on board and getting the material on board to execute the plan in 2017.

Don't be confused by full absorption and full capacity. Those are very different concepts. During a really slack time like we've had over the past two years, we have not, when we are selling a lot out of inventory, we've not been producing a lot, so we've not been able to charge our costs of our manufacturing facility to production, and therefore the under absorbed manufacturing costs that we expense each quarter. But as we do have sufficient production running through the plant, we can absorb that manufacturing cost.

Now, capacity, a very different concept, because we can ramp up capacity by of course buying more material and increasing our labor hours over time, second shift, third shift, more employees. And so, as Prady says, we've got a lot of different -- a lot of levers still to pull on the capacity side. We are getting closer to full absorption. We are obviously not there yet, but we have a lot of roofline capacity.

Okay. And then coming back to kind of a revenue driver question, if I may, what do you guys see as the biggest potential from here? Is it continued growth in land rig, mud pump and other upgrades, or do you expect to see frac fleet refurbishment and new orders take over as a bigger factor as we go forward?

I think the good thing about Forum is it's both of those plus the production equipment as more of these wells are needed to be completed, and then building out more pipelines and using more valves. Man, I mean that's -- the thing about Forum is we can participate in all those things and they are all going to be good.

And then in the second half, you also expect the handling tools. As the cannibalization and destocking takes its course on the drilling side, we'll start seeing some activity in the handling tools too.

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

Blake Hutchinson, Howard Weil.

Good morning guys. I just wanted to circle back to the conversation around the Q4 results, kind of broader strokes. Typically, even in an expansionary environment, the last couple weeks of the year may see some kind of deferred deliveries, and some shutdown perhaps in manufacturing. Was there any notable impact around that in the Q4 as we kind of set our baseline here for your performance?

We saw some in production equipment. We maybe saw a couple of million on the completion side, we saw maybe less than 1 million, but for the most part, on the completion side, is especially, in the downhole products, at the tail end of the quarter, we get some lumpy orders from customers which they didn't want in the fourth quarter but they want in the fourth quarter. So that was the reason of the bookings variance versus the revenue variance. A little bit of impact by the end of the year, not much.

Got you. So that 10% to 15% revenue guidance for Q1 is pretty pure rather than some holdover going out the door at the start of the quarter.

Correct, for the most part.

Great. And sorry if I missed it, but you called out it in the release, Cris, as well as your commentary, obviously the mix of the order flow within Drilling & Subsea is probably a little different than other expansionary cycles as well. And you cautioned us with regard to delivery lead times. Can you help us, just in broad strokes, characterize what we should be thinking about in terms of gestation periods with your current mix, understanding it's consumable that still may have tend to have some longer lead times in there?

In the Drilling & Subsea segment, which I think is what you're asking about, Blake, they had a very good level of order increase on both sides. It was exceptionally high on the subsea side, first of all because we are coming off a really low rate in the prior quarter. But also, the orders for subsea equipment do have long delivery times. That will be over the course of the year. So we're talking about the segment Drilling & Subsea. It is -- does have a longer waiting there. And also we had some orders on the drilling side of Drilling & Subsea for some of these catwalks and other capital equipment that we will be delivering over the course of the next few quarters.

The other area where we have some longer lead time, longer delivery items, that were reflected in strong orders in Q4 was production equipment. We had some operators who are saying, gosh, we want to complete a lot of wells. Pricing is pretty good right now. We are going to put in our orders early. And so we did. It's normal, good business by them, allows us to plan for a baseload in our plants. And so we did see some higher orders in Q4 that were not reflective of just Q4/Q1 activity, but the longer-term increase in completions that's expected for US land.

Good, that's great. Thanks for the help guys. I'll turn it back.

Will Thompson, Barclays.

Good morning. Just to kind of reconcile the model before we get the 10-K coming out, I want to make sure I understand this clearly. The SG&A went up $2 million sequentially. And even assuming that, it looks like gross margins were down sequentially. Is there anything unusual in the cost of goods sold?

I wouldn't say anything terribly unusual. We have not, as Prady described it, we have not seen a lot of change in the under-absorption, because the activity in the plants was still relatively slow in the fourth quarter as we were selling out of inventories. So that improvement that we will see over the course of 2017 will come as we put more work through the plants, and more of those hours are applied towards the work on the inventory. So that's all that's really in the quarter.

It was, other than that, just mix, right? Production equipment, ramping up. It's not our highest margin business but, as we said before, it's an early mover business.

Yes.

The $2 million of costs that Jim was talking about, that was both in SG&A and also the variable cost side, because we've got people obviously on the flex schedules which are on the SG&A side and also on the variable side.

Can you just tell us what the SG&A was for the quarter maybe before we wait for the 10-K if you have that readily available? I'll ask my next question.

It's $53 million.

$53 million. And then just on -- Prady, I think you mentioned adding headcount. Just kind of reconcile that with the ability to flex up hours and the underutilization of the manufacturing capacity. How do we think about -- were those heads added for specific roles that you kind of maybe over-cut in the downturn?

It's mostly variable cost. So depending on how much volume we had in the manufacturing shop, we had to make reductions. We are not making any significant increase on the SG&A with the exception of what Cris talked about with the benefits and the accrual of the bonuses and whatnot. So it's primarily in the variable cost, is to get more manpower in the manufacturing plants, to execute the increased volume. Probably one on the other side is adding a few more salespeople to make sure we can maximize the topline.

I think you guys kind of put out soft guidance of 50% incrementals. And so starting in second quarter, once we start getting through these upfront costs, is that still the expectations? And if I recall correctly, that soft guidance didn't really affect any pricing. That was literally just throughput of the manufacturing capacity.

Well, the 50% incrementals role is a combination of getting the benefit of the absorption costs, the efficiencies, the manufacturing efficiencies which worked through the downturn, the procurement savings, and a little bit of pricing. We need all of that to get to the 50% incrementals. And as we said, I think efficiency gains and the procurement savings will be there throughout 2017. The pricing -- the level of pricing is what we need to maintain that 50% incrementals.

Okay. And if I can sneak one more in, just some of the segments that don't get as much love. On the production side, it was really interesting that the $16 million order for a large independent operator. Can you just give us a sense of maybe how many wells that covers, and then maybe if pad drilling or the higher IP rates, are there any implications for that business?

It is for some pad sites in certain basins, and for others, it's more individual gas wells. So it really is dependent upon what the operator's plans are in the various basins.

This particular order, it was a major operator, it was five basins.

Five basins. Okay. Thank you.

I don't have an exact well count for you.

Just a sense on what, on average, what a well requirement is? Is it a couple hundred thousand dollars?

It varies if it's a gas well or an oil well, or if it's a pad site, but yes, typically $100,000 to a few hundred thousand dollars per well.

That's helpful. Thank you.

Marc Bianchi, Cowen.

Thank you. Perhaps following up on the last question about the soft incremental guidance, is 50% the right number to be thinking about for Company-wide? I'm just curious if that's the baseline that we are talking about.

Thank you for the follow-up question. We did want to make sure it was clear that we are talking about the North American growth businesses that are going to see those 50% incrementals. Obviously, that is impacted by what's happening in subsea, in some of the capital equipment businesses and products in drilling, which would not be growing at the same pace.

Okay. So if we maybe think about it on a consolidated basis, is it something maybe closer to 40%, or how would you clarify that?

I would say more in the 35% to 40% kind of range on a consolidated basis.

Okay. Thanks for that. Just one more, switching over to the 45,000 horsepower order, very nice there. Is that replacement equipment, or is this a new order here for a new fleet?

I thought we weren't going to get into too much specifics, but I think there is new equipment beginning to be built. We've also seen good power end orders for other customers who are looking to rebuild their equipment. So, it's both.

Okay. Have you -- this has kind of been asked a few times already, but I just want to ask specifically on pressure pumping and horsepower here. How does the inquiry level look? And if we look at some of the other data points out there, we've seen I think 90,000 horsepower from one of the companies that's planning to IPO. One of your competitors talked about 75,000 horsepower on their call. How are you sort of seeing the ramp here in new capacity orders for pressure pumping over the next couple of quarters?

I think the activity level continues to gain momentum. The RFQs we are getting are pretty good -- horsepower of some of the sizes that we just talked about. When they're going to materialize and how much of that you need per quarter and all that, we don't know at this point in time. But I think our customers are planning for significant increase in horsepower and utilization on the pressure pumping side.

Yes, the commentary certainly seems to be very positive. Thanks for that. I'll turn it back.

Brandon Dobell, William Blair.

Thanks. Just a couple of quick ones. I would anticipate, at this point, you don't see any issues with finding good people to come back in the manufacturing facilities. But how do you think about that becoming a potential issue or a constraint on the business as you work through this year? And then kind of connected with that, how long or what's the trajectory on recovery in manufacturing have to look like before you start to think about constraints on the throughput?

I think it's a great question. Like the way we went through the downturn, I think it's a process, and we are going to through the upturn process of recruiting people. And I would say, at an average, of 50% to 60% of the people we have brought, I would say 40% to 50% of the people we brought into the manufacturing plants are the people we had to let go during the downturn, and then the other 50% came from outside. So the second phase of the recovery, as we start getting more people, I think we'll start getting more people from outside. But I think the team is all over it, and being the first beneficiary, we do it the benefit to recruit the people first.

Okay.

But it's a process, it's a process.

Okay, makes sense.

We are trying to get as many people as we can on the completion side, and the overtimes are very high right now, which is not sustainable.

Okay. As then you think about the inbound orders maybe across completion and production in particular, is it the same list of customers that you had previously dealt with primarily? A much different list? I guess I'm trying to get a different way to think about how much incremental share you think you're grabbing, and one way to think about that would be who you are talking to that, pre-2014, you weren't talking to?

We do plan to expand our customer base. That's part of our plan we have in 2017. Some of the new products which we've come up with in 2015, 2016, and 2017, they are in the process of being quantified and being tested in some cases. And as customers get more comfortable with those products, I think we'll start expanding to the new customer base than what we already have. But we do expect to improve our customer base and increase our market share.

Okay, thanks a lot. Appreciate it.

John Watson, Simmons & Company.

Good morning. Prady, are you receiving any orders for pressure pumping equipment that might be from new market entrants?

There are new players coming into the market. Probably some will go public too. And we are seeing some activity from those customers, and we have secured some lumpy orders in the last, I would say, 120 days.

But the bigger orders that we are referring to are from established players, public and private, but not what you are asking about, John, is brand-new entrants.

Okay, great. Makes sense. And then secondly, how would you characterize the quality or maybe the hours of the pressure pumping equipment you are seeing now or that you saw in Q4? Is it in a worse condition than equipment you saw early in 2016 as the fleets further down the bench, if you will, are brought in for refurbishment?

We are seeing some cases where what's being brought in to our service facilities is very old iron, so it's been sitting around a while, and that's not good. But we are going to have to run through that. Clearly, the service companies, the pressure pumping service companies, are putting their best stuff out first, and then they need to kind of work down the defense line and go with what the next best spread to come out is, and see what needs to be done on that. So, yes, I think that the cost per spread as they bring each additional unit out is probably likely to go up.

Right. That's what I'm getting at. Okay, great. I will turn it back. Thank you.

Brad Handler, Jefferies.

Thanks for squeezing me in guys. Good morning. I guess I'll come back to the line of inquiry around incrementals, maybe because I want to make sure I understand, an idea. As you talk about absorption of costs, it's a stair step because you need to hire in and add a shift here or something. And I guess there are lots of components. So maybe for our purposes, it is more fluid than that. But I guess the question ultimately is what keeps -- as you have this good problem of growth, what keeps you from hitting another 20% incremental quarter in 3Q, and then another in the first quarter of 2018 or something? What sustains you on more of that 40% kind of incremental path, I guess, if you do have to reabsorb these costs?

I think we're -- I've tried to describe the SG&A costs that we had to put back in to normalize. From there, it's the operating leverage, right? So the incremental margins are not the same in each business, Brad, so there will be -- one of the challenges here is the mix. Jim was describing that some of the businesses are still going to be more challenged, they are going to have lower incrementals, right, and those businesses that just fundamentally have lower gross margins are going to have a harder time having those really high incrementals as well. So, there is a mix element in there at it makes it kind of hard. And I would also say, Brad, I think we should all kind of agree that we are starting off from really low numbers here, and incrementals from really no numbers, it's hard to be really precise.

Fair. We obviously struggle with that in our models too, yes. Sure. Okay, I guess I do -- I guess I understand the point. But again, you've described it as a variable cost. And I guess the point, we need to consider that it's not that chunky once you get past the SG&A. It's just not -- the cost adds are not that chunky. Okay. I guess that makes sense. Can you at all size for us, even ballpark, how big Cooper Valves is? I know it's not really your style.

From an acquisition price, not real big. From a potential in terms of what we can do with it, when we own it, we think it's going to be material for us. But like a lot of things we buy, the idea here is to take a good brand and put it through our distribution system on a global basis and expand their markets. So that means it will start off small, but we are hopeful that, fairly quickly, it will be something we can grow rapidly.

It's a valve which also is going to be applicable in the Middle East and Far East, and the markets where we would like to penetrate with the rest of the core business. So, as we start growing the Cooper line, it will also benefit the rest of the core.

Got it. I appreciate that color. Okay guys, thanks. I'll turn it back.

Thank you all. We appreciate your time and good interest and good questions, and we will do it again next quarter. Thank you all very much.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.