| • FORM 10-Q FOR QUARTERLY PERIOD ENDED MARCH 31, 2012 • SECTION 302 CERTIFICATION OF CEO • SECTION 302 CERTIFICATION OF CFO • SECTION 906 CERTIFICATION OF CEO • SECTION 906 CERTIFICATION OF CFO • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2012 or
For the transition period from to Commission File Number 1-16489
FMC Technologies, Inc. (Exact name of registrant as specified in its charter)
(281) 591-4000 (Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Table of ContentsFMC Technologies, Inc. and Consolidated Subsidiaries Condensed Consolidated Statements of Income (Unaudited) (In millions, except per share data)
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of ContentsFMC Technologies, Inc. and Consolidated Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Unaudited) (In millions)
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of ContentsFMC Technologies, Inc. and Consolidated Subsidiaries Condensed Consolidated Balance Sheets (In millions, except par value data)
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of ContentsFMC Technologies, Inc. and Consolidated Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In millions)
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of ContentsFMC Technologies, Inc. and Consolidated Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements of FMC Technologies, Inc. and its consolidated subsidiaries (“FMC”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and rules and regulations of the Securities and Exchange Commission (“SEC”) pertaining to interim financial information. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted. Therefore, these statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2011. Our accounting policies are in accordance with U.S. GAAP. The preparation of financial statements in conformity with these accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from our estimates. In the opinion of management, the statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of our financial condition and operating results as of and for the periods presented. Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these statements may not be representative of the results that may be expected for the year ending December 31, 2012. On February 25, 2011, our Board of Directors approved a two-for-one stock split of our outstanding shares of common stock. The stock split was completed in the form of a stock dividend that was issued on March 31, 2011, to shareholders of record at the close of business on March 14, 2011. Note 2: Recently Adopted Accounting Standards Effective January 1, 2012, we adopted an amendment issued by the Financial Accounting Standards Board (“FASB”) to existing guidance on fair value measurements. This amendment clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The adoption of the update did not have a material impact on our condensed consolidated financial statements. Effective January 1, 2012, we adopted changes issued by the FASB to disclosure requirements for comprehensive income. The changes allow management the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. We elected the two-statement approach presenting other comprehensive income in a separate statement immediately following the statement of income. The updated requirements do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of the update concerns presentation only and did not have any financial impact on our condensed consolidated financial statements. Note 3: Earnings per Share A reconciliation of the number of shares used for the basic and diluted earnings per share (“EPS”) calculation was as follows:
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Table of ContentsNote 4: Inventories Inventories consisted of the following:
Note 5: Debt On March 26, 2012, we entered into a new $1.5 billion revolving credit agreement (“credit agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent. The credit agreement is a five-year, revolving credit facility expiring in March 2017. Subject to certain conditions, at our request and with the approval of the Administrative Agent, the aggregate commitments under the credit agreement may be increased by up to an additional $500 million. Borrowings under the credit agreement bear interest at a base rate or the London interbank offered rate (“LIBOR”), at our option, plus an applicable margin. Depending on our total leverage ratio, the applicable margin for revolving loans varies (i) in the case of LIBOR loans, from 1.125% to 1.75% and (ii) in the case of base rate loans, from 0.125% to 0.75%. The base rate is the highest of (1) the prime rate announced by JPMorgan Chase Bank, N.A., (2) the Federal Funds Rate plus 0.5% or (3) one-month LIBOR plus 1.0%. In connection with the new credit agreement, we terminated and repaid all outstanding amounts under our previously existing $600 million five-year revolving credit agreement and our $350 million three-year revolving credit agreement. Long-term debt consisted of the following:
Note 6: Income Taxes Our income tax provisions for the three months ended March 31, 2012 and 2011, reflected effective tax rates of 23.7% and 20.9%, respectively. Excluding a benefit related to recognizing a retroactive tax holiday in Singapore in the first quarter of 2011, our effective rate for income taxes for the first quarter of 2011 was 27.7%. The decrease from this adjusted rate to our first quarter 2012 effective tax rate is primarily due to changes in our international structure during the first quarter of 2012, partially offset by an unfavorable change in the forecasted country mix of earnings year-over-year. Our effective tax rate can fluctuate depending on our country mix of earnings, since our foreign earnings are generally subject to lower tax rates than in the United States. In certain jurisdictions, primarily Singapore and Malaysia, our tax rate is significantly less than the relevant statutory rate due to tax holidays.
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Table of ContentsNote 7: Warranty Obligations Warranty cost and accrual information was as follows:
Note 8: Pension and Other Postretirement Benefits The components of net periodic benefit cost were as follows:
Note 9: Stock-Based Compensation We have granted awards primarily in the form of nonvested stock units (also known as restricted stock in the plan document) under our Amended and Restated Incentive Compensation and Stock Plan (the “Plan”). We recognize compensation expense for awards under the Plan and the corresponding income tax benefits related to the expense. Stock-based compensation expense for nonvested stock awards was $7.3 million and $7.0 million for the three months ended March 31, 2012 and 2011, respectively. In the three months ended March 31, 2012, we granted the following restricted stock awards to employees:
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Table of ContentsFor current-year performance-based awards, actual payouts may vary from zero to 259 thousand shares and will be dependent upon our performance relative to a peer group of companies with respect to earnings growth and return on investment for the year ending December 31, 2012. Compensation cost is measured based on the current expected outcome of the performance conditions and may be adjusted until the performance period ends. For current-year market-based awards, actual payouts may vary from zero to 129 thousand shares, contingent upon our performance relative to the same peer group of companies with respect to total shareholder return (“TSR”). Beginning in 2012, the payout for the TSR metric will continue to be determined based on our performance relative to the peer group, but a payout is possible regardless of whether our TSR for the year is positive or negative. If our TSR for the year is not positive, the payout with respect to TSR is limited to the target established by the Compensation Committee of the Board of Directors. Compensation cost for these awards is calculated using the grant date fair market value, as estimated using a Monte Carlo simulation, and is not subject to change based on future events. Note 10: Stockholders’ Equity There were no cash dividends declared during the three months ended March 31, 2012 and 2011. In 2005, we announced a repurchase plan approved by our Board of Directors authorizing the repurchase of up to two million shares of our issued and outstanding common stock through open market purchases. The Board of Directors authorized extensions of this program, adding five million shares in February 2006 and eight million shares in February 2007 for a total of 15 million shares of common stock authorized for repurchase. As a result of the two-for-one stock splits (i) on August 31, 2007, the authorization was increased to 30 million shares; and (ii) on March 31, 2011, the authorization was increased to 60 million shares. In December 2011, the Board of Directors authorized an extension of our repurchase program, adding 15 million shares, for a total of 75 million shares. In addition to the 75 million shares, in July 2008, the Board of Directors authorized the repurchase of $95.0 million of our outstanding common stock, and as of September 2008, there was no remaining amount available for purchase under the $95.0 million authorization. Repurchase of shares of common stock was as follows:
As of March 31, 2012, approximately 17.3 million shares remained available for purchase under the current program which may be executed from time to time in the open market. We intend to hold repurchased shares in treasury for general corporate purposes, including issuances under our stock-based compensation plan. Treasury shares are accounted for using the cost method. During the three months ended March 31, 2012, 1.3 million shares were issued from treasury stock in connection with our stock-based compensation plan. During the year ended December 31, 2011, 975 thousand shares were issued from treasury stock. Accumulated other comprehensive loss consisted of the following:
Note 11: Derivative Financial Instruments We hold derivative financial instruments for the purpose of hedging the risks of certain identifiable and anticipated transactions. The types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates and interest rates. We hold the following types of derivative instruments: Interest rate swap instruments—The purpose of these instruments is to hedge the uncertainty of anticipated interest expense from variable-rate debt obligations and achieve a fixed net interest rate. At March 31, 2012, we held three instruments that in the aggregate, hedge the interest expense on $100.0 million of variable-rate debt.
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Table of ContentsForeign exchange rate forward contracts—The purpose of these instruments is to hedge the risk of changes in future cash flows of anticipated purchase or sale commitments denominated in foreign currencies. At March 31, 2012, we held the following material positions:
Foreign exchange rate instruments embedded in purchase and sale contracts—The purpose of these instruments is to match offsetting currency payments and receipts for particular projects, or comply with government restrictions on the currency used to purchase goods in certain countries. At March 31, 2012, our portfolio of these instruments included the following material positions:
The purpose of our foreign currency hedging activities is to manage the volatility associated with anticipated foreign currency purchases and sales created in the normal course of business. We primarily utilize forward exchange contracts with maturities of less than three years. Our policy is to hold derivatives only for the purpose of hedging risks and not for trading purposes where the objective is solely to generate profit. Generally, we enter into hedging relationships such that changes in the fair values or cash flows of the transactions being hedged are expected to be offset by corresponding changes in the fair value of the derivatives. For derivative instruments that qualify as a cash flow hedge, the effective portion of the gain or loss of the derivative, which does not include the time value component of a forward currency rate, is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The following table of all outstanding derivative instruments is based on estimated fair value amounts that have been determined using available market information and commonly accepted valuation methodologies. Refer to Note 12 for further disclosures related to the fair value measurement process. Accordingly, the estimates presented may not be indicative of the amounts that we would realize in a current market exchange and may not be indicative of the gains or losses we may ultimately incur when these contracts settle or mature.
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We recognized gains of $0.2 million on cash flow hedges for the three months ended March 31, 2012 and 2011, due to hedge ineffectiveness because it was probable that the original forecasted transaction would not occur. Cash flow hedges of forecasted transactions, net of tax, resulted in accumulated other comprehensive losses of $4.4 million and $16.7 million at March 31, 2012, and December 31, 2011, respectively. We expect to transfer an approximate $2.4 million gain from accumulated OCI to earnings during the next 12 months when the anticipated transactions actually occur. All anticipated transactions currently being hedged are expected to occur by the end of 2015. The following tables present the impact of derivative instruments in cash flow hedging relationships and their location within the accompanying condensed consolidated statements of income.
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Instruments that are not designated as hedging instruments are executed to hedge the effect of exposures in the condensed consolidated balance sheets, and occasionally forward foreign currency contracts or currency options are executed to hedge exposures which do not meet all of the criteria to qualify for hedge accounting.
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Table of ContentsNote 12: Fair Value Measurements Assets and liabilities measured at fair value on a recurring basis were as follows:
Investments—The fair value measurement of our equity securities, fixed income fund and other investment assets is based on quoted prices that we have the ability to access in public markets. Our stable value fund is valued at the net asset value of the shares held at the end of the quarter, which is based on the fair value of the underlying investments using information reported by the investment advisor at quarter-end. Derivative financial instruments—We use the income approach as the valuation technique to measure the fair value of foreign currency derivative instruments on a recurring basis. This approach calculates the present value of the future cash flow by measuring the change from the derivative contract rate and the published market indicative currency rate, multiplied by the contract notional values. Credit risk is then incorporated by reducing the derivative’s fair value in asset positions by the result of multiplying the present value of the portfolio by the counterparty’s published credit spread. Portfolios in a liability position are adjusted by the same calculation; however, a spread representing our credit spread is used. Our credit spread, and the credit spread of other counterparties not publicly available are approximated by using the spread of similar companies in the same industry, of similar size and with the same credit rating. At the present time, we have no credit-risk-related contingent features in our agreements with the financial institutions that would require us to post collateral for derivative positions in a liability position. See Note 11 for additional disclosure related to derivative financial instruments. Contingent earn-out consideration —We determined the fair value of the contingent earn-out consideration using a discounted cash flow model. The key assumptions used in applying the income approach are the expected profitability and debt, net of cash, of the acquired company during the earn-out period and the discount rate which approximates our debt credit rating. The fair value measurement is based upon significant inputs not observable in the market. Changes in the value of the contingent earn-out consideration are recorded as cost of service or other revenue in our condensed consolidated statements of income. Changes in the fair value of our Level 3 contingent earn-out consideration obligation were as follows:
Other fair value disclosures—The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, short-term debt, commercial paper and debt associated with our term loan and revolving credit facility, as well as amounts included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair value because of their short-term maturities.
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Table of ContentsCredit risk—By their nature, financial instruments involve risk including credit risk for non-performance by counterparties. Financial instruments that potentially subject us to credit risk primarily consist of trade receivables and derivative contracts. We manage the credit risk on financial instruments by transacting only with what management believes are financially secure counterparties, requiring credit approvals and credit limits, and monitoring counterparties’ financial condition. Our maximum exposure to credit loss in the event of non-performance by the counterparty is limited to the amount drawn and outstanding on the financial instrument. Allowances for losses on trade receivables are established based on collectability assessments. We mitigate credit risk on derivative contracts by executing contracts only with counterparties that consent to a master netting agreement, which permits the net settlement of the gross derivative assets against the gross derivative liabilities. Note 13: Commitments and Contingent Liabilities In the ordinary course of business with customers, vendors and others, we issue standby letters of credit, performance bonds, surety bonds and other guarantees. The majority of these financial instruments represent guarantees of our future performance. Additionally, we were the named guarantor on certain letters of credit and performance bonds issued by our former subsidiary, John Bean Technologies Corporation (“JBT”). Pursuant to the terms of the Separation and Distribution Agreement, dated July 31, 2008, between FMC and JBT (the “JBT Separation and Distribution Agreement”), we are fully indemnified by JBT with respect to certain residual obligations. Management does not expect any of these financial instruments to result in losses that, if incurred, would have a material adverse effect on our consolidated financial position, results of operations or cash flows. Contingent liabilities associated with legal matters— We are involved in various pending or potential legal actions in the ordinary course of our business. Management is unable to predict the ultimate outcome of these actions, because of the inherent uncertainty of litigation. However, management believes that the most probable, ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition, under the Separation and Distribution Agreement, dated May 31, 2001, between FMC Corporation and FMC, FMC Corporation is required to indemnify us for certain claims made prior to our spin-off from FMC Corporation, as well as for other claims related to discontinued operations. Under the JBT Separation and Distribution Agreement, JBT is required to indemnify us for certain claims made prior to the spin-off of our Airport and FoodTech businesses, as well as for other claims related to JBT products or business operations. We expect that FMC Corporation will bear responsibility for a majority of these claims initiated subsequent to the spin-off, and that JBT will bear responsibility for other claims initiated subsequent to the spin-off. Contingent liabilities associated with liquidated damages—Some of our contracts contain penalty provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a conforming claim under these provisions. These contracts define the conditions under which our customers may make claims against us for liquidated damages. Based upon the evaluation of our performance and other legal analysis, management believes that we have appropriately accrued for probable liquidated damages at March 31, 2012, and December 31, 2011, and that the ultimate resolution of such matters will not materially affect our consolidated financial position, results of operations or cash flows. Note 14: Business Segment Information Segment revenue and segment operating profit were as follows:
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Segment operating capital employed and assets were as follows:
Note 15: Subsequent Event On April 25, 2012, we completed the acquisition of the remaining 55% interest of Schilling Robotics LLC for the purchase price of $281.4 million. Schilling is a supplier of advanced robotic intervention products, including a line of remotely operated vehicle (ROV) systems, manipulator systems and subsea control systems. The acquisition of Schilling is expected to enhance our growth opportunities in the expanding subsea environment, where demand for ROVs and the need for maintenance activities of subsea equipment is expected to continue to increase. Purchase price accounting was not completed as of the filing date of this Quarterly Report on Form 10-Q, and as such, disclosure requirements for business combinations are not provided.
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Table of ContentsITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements are often identified by the words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “may,” “estimate,” “outlook” and similar expressions, including the negative thereof. The absence of these words, however, does not mean that the statements are not forward-looking. These forward-looking statements are based on our current expectations, beliefs and assumptions concerning future developments and business conditions and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All of our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Known material factors that could cause actual results to differ materially from those contemplated in the forward-looking statements, include those set forth in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as well as the following:
We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
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Table of ContentsCONSOLIDATED RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2012 AND 2011
Revenue increased by $314.7 million in the first quarter of 2012 compared to the prior-year quarter and reflected revenue growth in all business segments. Revenue in the first quarter of 2012 included a $14.4 million unfavorable impact of foreign currency translation, compared to the prior-year quarter. We entered 2012 with record backlog and continued to have strong order activity during the first quarter of 2012 for both subsea and surface products. The impact of the higher backlog coming into 2012 led to increased Subsea Technologies sales during the first quarter of 2012. Additionally, Surface Technologies posted higher revenue during the first quarter of 2012 from increased demand for Weco®/Chiksan® equipment and well service pumps due to the ongoing strength of the North American oil and gas shale markets. Gross profit (revenue less cost of sales) decreased as a percentage of sales to 21.0% in the first quarter of 2012, from 22.1% in the prior-year quarter. The margin decline was predominantly due to the conversion of lower margin subsea backlog from projects awarded prior to 2011, inefficiencies of integrating a rapidly increasing workforce and higher project execution costs, partially offset by margin improvements in Surface Technologies due to higher fluid control volumes. Gross profit for the first quarter of 2012, included a $2.9 million unfavorable impact of foreign currency translation. Selling, general and administrative expense increased by $21.0 million year-over-year, driven by increased bid activity and additional staffing to support operations. Research and development expense increased by $10.2 million year-over-year as we continued to advance new technologies pertaining primarily to subsea processing capabilities. Other income (expense), net, reflected $1.5 million and $0.2 million in gains during the three months ended March 31, 2012 and 2011, respectively, on foreign currency derivative instruments for which hedge accounting is not applied. Additionally, we recognized $2.2 million and $1.2 million in gains during the three months ended March 31, 2012 and 2011, respectively, associated with investments held in an employee benefit trust for our non-qualified deferred compensation plan. Our income tax provisions for the first quarter of 2012 and 2011 reflected effective tax rates of 23.7% and 20.9%, respectively. Excluding a benefit related to recognizing a retroactive tax holiday in Singapore in the first quarter of 2011, our effective rate for income taxes for the first quarter of 2011 was 27.7%. The decrease from this adjusted rate to our first quarter 2012 rate is primarily due to changes in the our international structure during the first quarter of 2012, partially offset by an unfavorable change in the forecasted country mix of earnings year-over-year. Our effective tax rate can fluctuate depending on our country mix of earnings, since our foreign earnings are generally subject to lower tax rates than in the United States. In certain jurisdictions, primarily Singapore and Malaysia, our tax rate is significantly less than the relevant statutory rate due to tax holidays. The cumulative balance of foreign earnings for which no provision for U.S. income taxes has been recorded was $1,149 million at March 31, 2012. The Company would need to accrue and pay U.S. tax on such undistributed earnings if these funds were repatriated. The Company has no current intention to repatriate these earnings.
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Table of ContentsBusiness Outlook Management remains optimistic about business activity for 2012. The current energy markets continue to reflect the slowly expanding global economies and firming expectations of increased energy demand. As a result of the rising expectations for energy demand, oil prices have remained strong in the first quarter of 2012 and at a level that remains conducive to oil and gas exploration and production. We expect the strength in oil prices to continue through the remainder of 2012. Demand continues to improve for our subsea products and services related to exploration and production activity, leading to expectations of higher subsea revenue and increasing margins during 2012. Although our margins over the last few quarters were negatively impacted due, in part, to our rapidly increasing workforce, we believe the workforce additions are preparing us for the anticipated subsea market growth. In addition, we believe economic factors will remain strong for our subsea technologies operations worldwide. Regarding our surface technologies portfolio, North American shale activity remained strong during the first quarter of 2012; however, we anticipate a possible slowdown in capital orders as a result of hydraulic fracturing fleets aligning with market demand. This could have an impact on segment revenue and profits. OPERATING RESULTS OF BUSINESS SEGMENTS THREE MONTHS ENDED MARCH 31, 2012 AND 2011
Segment operating profit is defined as total segment revenue less segment operating expenses. The following items have been excluded in computing segment operating profit: corporate staff expense, interest income and expense associated with corporate investments and debt facility, income taxes and other revenue and other expense, net. Subsea Technologies Subsea Technologies’ revenue increased $205.4 million year-over-year. Revenue for the first quarter of 2012 included a $10.9 million unfavorable impact of foreign currency translation, compared to the prior-year quarter. Excluding the impact of foreign currency translation, total revenue increased by $216.3 million year-over-year. Subsea Technologies revenue is primarily impacted by the level of backlog and trends in oil and gas exploration and production activity. We entered the year with record subsea backlog and continued to have strong order activity during the first quarter of 2012, including our Pre-Salt Tree award with Petrobras. The year-over-year increase in revenue was primarily attributable to the conversion of a higher level of subsea backlog in the first quarter of 2012, compared to the prior-year quarter.
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Table of ContentsSubsea Technologies’ operating profit in the first quarter of 2012 totaled $75.1 million, or 8.4% of revenue, compared to the prior-year quarter’s operating profit as a percentage of revenue of 10.2%. The year-over-year margin decline was predominantly due to the conversion of lower margin subsea backlog from projects awarded prior to 2011, inefficiencies of integrating a rapidly increasing workforce and higher project execution costs. Foreign currency translation unfavorably impacted operating profit in the first quarter of 2012 by $1.1 million compared to the prior-year quarter. Surface Technologies Surface Technologies’ revenue increased by $86.5 million year-over-year. The increase was driven by strong demand for fluid control products, particularly Weco®/Chiksan® equipment, coupled with an increased demand for well service pumps due to the strength of North American oil and gas shale activity. In addition, surface wellhead markets in North America also led to revenue growth year-over-year primarily due to conventional wellhead system sales and increased services related to hydraulic fracturing activity. Surface Technologies’ operating profit in the first quarter of 2012 totaled $78.0 million, or 20.6% of revenue, compared to the prior-year quarter’s operating profit as a percentage of revenue of 17.6%. The margin improvement was primarily driven by higher volumes in our fluid control business, which benefited from strong North American oil and gas shale activity, coupled with improved margins in surface wellhead due to increased services related to hydraulic fracturing activity and strengthening international performance. Energy Infrastructure Energy Infrastructure’s revenue increased by $34.0 million year-over-year. The increase was driven by strong demand for our measurement solutions products and services due to the strength of North American oil and gas shale activity. Energy Infrastructure’s operating profit in the first quarter of 2012 totaled $9.3 million, or 6.8% of revenue, compared to the prior-year quarter’s operating profit as a percentage of revenue of 4.4%. The margin improvement was primarily driven by our measurement solutions business from higher margins in product sales. Corporate Items Our corporate items reduced earnings by $32.9 million in 2012, compared to $18.1 million in 2011. The year-over-year increase primarily reflected the following:
Inbound Orders and Order Backlog Inbound orders represent the estimated sales value of confirmed customer orders received during the reporting period.
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Table of ContentsOrder backlog is calculated as the estimated sales value of unfilled, confirmed customer orders at the reporting date.
Order backlog for Subsea Technologies at March 31, 2012, increased by $598.5 million compared to December 31, 2011, reflecting a significant award of approximately $925 million from Petrobras related to our Pre-Salt Tree award. Backlog of $4.7 billion at March 31, 2012, was composed of various subsea projects, including Anadarko’s Lucius; BG Norge’s Knarr; BP’s Block 18; Chevron’s Wheatstone; ExxonMobil’s Hibernia Southern Extension; Petrobras’ Tree and Manifold Frame Agreements, Congro & Corvina, and Pre-Salt Tree award; Shell’s Prelude, BC-10 Stage II, Bonga, and West Boreas; Statoil’s Statfjord Workover System and Fram H Nord; Total’s CLOV, GirRI, and Laggan-Tormore; and Woodside’s Greater Western Flank. Surface Technologies’ order backlog at March 31, 2012, increased by $50.1 million compared to December 31, 2011. The increase was due to strong overall inbound orders, primarily in our surface wellhead business, during the three months ended March 31, 2012. Energy Infrastructure’s order backlog at March 31, 2012, increased by $58.5 million compared to December 31, 2011. The increase was due to strong overall inbound orders, primarily in our loading systems business, during the three months ended March 31, 2012. LIQUIDITY AND CAPITAL RESOURCES Our cash is held in numerous locations throughout the world, with substantially all of our cash balances held outside the United States. Cash held outside the United States is generally used to meet the liquidity needs of our non-U.S. operations. Most of our cash held outside the United States could be repatriated to the United States, but under current law, any such repatriation would be subject to U.S. federal income tax, as adjusted for applicable foreign tax credits. We have provided for U.S. federal income taxes on undistributed foreign earnings where we have determined that such earnings are not indefinitely reinvested. We expect to meet the continuing funding requirements of our U.S. operations with cash generated by such U.S. operations, with cash from earnings generated by non-U.S. operations that are not indefinitely reinvested and through our existing credit facility. If cash held by non-U.S. operations is required for funding operations in the United States, and if the applicable U.S. tax has not previously been provided on the earnings of such operations, we would make a provision for additional U.S. tax in connection with repatriating this cash, which may be material to our cash flows and results of operations. We were in a net debt position at March 31, 2012. Net debt, or net cash, is a non-GAAP measure reflecting debt, net of cash and cash equivalents. Management uses this non-GAAP measure to evaluate our capital structure and financial leverage. We believe that net (debt) cash is a meaningful measure of our financial leverage and can assist investors in understanding our results and recognizing underlying trends. This measure supplements disclosures required by GAAP. The following table provides details of the balance sheet classifications included in net (debt) cash.
The change in our net debt position was primarily due to capital expenditures and increased borrowings to fund working capital requirements, partially offset by higher net income during the three months ended March 31, 2012. Cash Flows We generated $1.7 million and $50.2 million in cash flows from operating activities during the three months ended March 31, 2012 and 2011, respectively. The decrease in cash flows from operating activities year-over-year was primarily due to changes in our working capital driven by our portfolio of projects. Our working capital balances can vary significantly depending on the payment and delivery terms on key contracts. This unfavorable change was partially offset by higher net income.
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Table of ContentsDuring the three months ended March 31, 2012, cash flows required by investing activities totaled $91.0 million, primarily consisting of amounts required to fund capital expenditures. Capital expenditures increased by $51.0 million year-over-year, primarily reflecting our investment in capacity expansion, tooling, rental tools and equipment upgrades. Cash provided by financing activities was $105.1 million and $49.6 million for the three months ended March 31, 2012 and 2011, respectively. The year-over-year change was primarily related to an increase in borrowings from our commercial paper program. Debt and Liquidity The following is a summary of our credit facility at March 31, 2012:
Committed credit available under our revolving credit facility provides the ability to issue our commercial paper obligations on a long-term basis. We had $576.3 million of commercial paper issued under our facility at March 31, 2012. As we had both the ability and intent to refinance these obligations on a long-term basis, our commercial paper borrowings were classified as long-term in the accompanying condensed consolidated balance sheets at March 31, 2012. Credit Risk Analysis Valuations of derivative assets and liabilities reflect the value of the instruments, including the values associated with counterparty risk. These values must also take into account our credit standing, thus including in the valuation of the derivative instrument the value of the net credit differential between the counterparties to the derivative contract. Our methodology includes the impact of both counterparty and our own credit standing. Additional information about credit risk is incorporated herein by reference from Note 12 to our condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. Outlook Historically, we have generated our capital resources primarily through operations and, when needed, through our credit facility. The volatility in credit, equity and commodity markets creates uncertainty for our businesses. Management believes, based on our current financial condition, existing backlog levels and current expectations for future market conditions, that we will continue to meet our short- and long-term liquidity needs with a combination of cash on hand, cash generated from operations and our credit facility. We project spending approximately $350 million during 2012 for capital expenditures, largely for capacity expansion in our subsea technologies manufacturing, and tools necessary to expand offshore service capabilities. We expect to make contributions of approximately $24.7 million to our international pension plans during the remainder of 2012. We may also make discretionary contributions to our domestic qualified pension plan during the remainder of 2012. Actual contribution amounts are dependent upon plan investment returns, changes in pension obligations, regulatory environments and other economic factors. We update our pension estimates annually during the fourth quarter or more frequently upon the occurrence of significant events. Further, we expect to continue our stock repurchases authorized by our Board, with the timing and amounts of these repurchases dependent upon market conditions and liquidity. We have $817.7 million of capacity available under our credit facility that we expect to utilize if working capital temporarily increases in response to market demand. We also continue to evaluate acquisitions, divestitures and joint ventures that meet our strategic priorities. Our intent is to maintain a level of financing sufficient to meet these objectives. We anticipate cash outlays during the second quarter of 2012 related to the closing of the acquisition of the remaining 55% of Schilling Robotics LLC and the closing of the 100% acquisition of Control Systems International, Inc. CRITICAL ACCOUNTING ESTIMATES Refer to our Annual Report on Form 10-K for the year ended December 31, 2011, for a discussion of our critical accounting estimates. During the three months ended March 31, 2012, there were no material changes in our judgments and assumptions associated with the development of our critical accounting estimates.
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Table of ContentsRECENTLY ISSUED ACCOUNTING STANDARDS In December 2011, the FASB issued an update to existing disclosure guidance for offsetting (netting) assets and liabilities. The updated guidance requires entities to disclose both gross information and net information of recognized financial instruments, derivative instruments, and transactions eligible for offset in the consolidated balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The updated guidance is to be applied retrospectively, effective January 1, 2013. We believe the adoption of this guidance concerns disclosure only and will not have an impact on our consolidated financial position or results of operations. Management believes that other recently issued accounting standards, which are not yet effective, will not have a material impact on our condensed consolidated financial statements upon adoption. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in reported market risks from the information reported in our Annual Report on Form 10-K for the year ended December 31, 2011. ITEM 4. CONTROLS AND PROCEDURES Under the direction of our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. Our disclosure controls and procedures are designed to:
There were no changes in internal controls identified in the evaluation for the quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. We are involved in various pending or potential legal actions in the ordinary course of our business. Management is unable to predict the ultimate outcome of these actions, because of the inherent uncertainty of litigation. However, management believes that the most probable, ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. As of the date of this filing, there have been no material changes or updates in our risk factors that were previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.
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Table of ContentsITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS We had no unregistered sales of equity securities during the three months ended March 31, 2012. The following table summarizes repurchases of our common stock during the three months ended March 31, 2012. ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. MINE SAFETY DISCLOSURES Not applicable None
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Table of Contents(a) Exhibits
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Table of ContentsSIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FMC Technologies, Inc. (Registrant)
Date: April 30, 2012
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Table of ContentsEXHIBIT INDEX
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