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Executives

John Gremp - President and Chief Operating Officer

Robert Potter - Executive Vice President of Energy Systems

Robert Cherry - Director of Investor Relations

William Schumann - Chief Financial Officer, Executive Vice President and Member of Employee Welfare Benefits Plan Committee

Peter Kinnear - Chairman and Chief Executive Officer

Analysts

Brian Uhlmer - Global Hunter Securities, LLC

Collin Gerry - Raymond James

Robert MacKenzie - FBR Capital Markets & Co.

Kurt Hallead - RBC Capital Markets, LLC

Geoff Kieburtz - Weeden & Co. Research

William Sanchez - Howard Weil Incorporated

Brad Handler - Crédit Suisse AG

Tom Curran - Wells Fargo Securities, LLC

Kevin Simpson - Miller Tabak & Co., LLC

Douglas Becker - BofA Merrill Lynch

Joseph Gibney - Capital One Southcoast, Inc.

Daniel Boyd - Goldman Sachs Group Inc.

FMC Technologies (FTI) Q4 2010 Earnings Call February 15, 2011 9:00 AM ET

Operator

Good morning, and welcome to the FMC Technologies Fourth Quarter 2010 Earnings Release Teleconference. [Operator Instructions] Your host is Rob Cherry, Director of Investor Relations. Mr. Cherry, you may begin your conference.

Robert Cherry

Thank you, operator. Good morning, and welcome to FMC Technologies Fourth Quarter 2010 Earnings Conference Call. Our news release and financial statements issued yesterday can be found on our website. I would like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current views and assumptions regarding future events, future business conditions and the outlook for us based on currently available information, these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. I refer you to our disclosures regarding risk factors in our SEC filings.

I will now turn the call over to Peter Kinnear, FMC Technologies Chairman and CEO.

Peter Kinnear

Good morning. Welcome to our fourth quarter 2010 conference call. With me today are Bill Schumann, our CFO; John Gremp, our President and COO; and Bob Potter, our Executive Vice President. First, I will share with you some highlights from the quarter and the year. Bill will then provide you with the details on our financial performance and our outlook for 2011. Finally, we'll open up the call for your questions.

I'm pleased to say we had another strong quarter and finished the year with record results. Our fourth quarter earnings per share were $0.82, including a benefit of $0.13 from some tax items. We earned $3.06 for the full year. Our full year EPS was another all-time high and represented our eighth consecutive year of earnings growth since our IPO.

In the quarter, the total company backlog rose 14% to $4.2 billion. This increase was led by $1.1 billion in subsea orders, including orders for 39 subsea trees. For 2010, our total company backlog increased 64%. This was the first full year increase since 2007. Our subsea backlog grew for the fourth consecutive quarter and now stands at $3.6 billion after starting the year at $2.0 billion. Our 2010 subsea inbound of $4.1 billion was a record for that business.

It was driven by solid fundamentals in the deepwater market, such as favorable oil prices, rig fleet expansion, capital spending increases and international growth. The price of oil remained at a level that has been conducive to deepwater economics. This strength in the oil prices continued into 2011 and does not appear to be showing any signs of weakness.

Expansion of the deepwater rig fleet is a critical enabler for our customers to expand their capacity to complete more subsea wells. After growing 27% since 2007, the fleet is expected to grow another 20% over the next two years. The reported 2011 capital spending estimates for the major oil companies shows an increase of almost 20%, driven in large part by deepwater activity. Typically, the actual capital spending exceeds these early industry estimates.

The deepwater market continues to grow internationally. In 2010, we received orders for projects offshore: Brazil, Nigeria, Angola, Russia, China and Norway. In 2011, we have potential subsea awards in all those locations, and in addition, there are other growth areas, such as Australia where we expect some long-awaited offshore gas projects to be awarded.

In the Gulf of Mexico, we've been executing our pre-moratorium backlog and have received a few new post-Macondo orders. However, the basin will remain a risk for us until the permitting issues are resolved. The Gulf of Mexico was approximately 11% of our total revenue in 2010, and we expect that it will be an even lower percentage in 2011. Fortunately for us, the Gulf of Mexico region has been largely offset by the combined continued strength that I just mentioned in the large growing international markets.

Overall, we believe the subsea market will remain robust. As we have suggested last quarter, we think that our 2011 subsea orders could equal the record we set in 2010. Our confidence is based on the market fundamentals, our strong customer alliances and on our technology leadership in areas like subsea processing.

Turning to our Surface Wellhead business, we had a strong fourth quarter for orders and sales. In fact, our Surface Wellhead orders in the fourth quarter were at the highest level since before the industry downturn.

Shifting to our Energy Processing businesses, the ongoing strength in the North American land rig count combined with the associated pressure pumping activity in both liquids and gas shale plays continue to drive growth in our Fluid Control business. In fact, we had record Fluid Control revenue in the quarter and its backlog reached another all-time high. Our Fluid Control business has recovered substantially since the downturn in the industry. Sales in 2010 for Fluid Control were up 70% from 2009 and orders more than doubled.

One of the key factors has been the successful market penetration of our Well Service Pump. After receiving almost no pump orders during the 2009 industry downturn, we booked record pump orders in 2010, and the near-term outlook for these pumps and other Fluid Control products remains very positive.

As for the other Energy Processing businesses, each one had sequential order growth in the fourth quarter, and we expect full year order growth in all these businesses for 2011.

So let me just say in summary, we had a record year for earnings in subsea orders. The market fundamentals for Deepwater continue to be very, very positive for subsea, and we experienced record performance from our Fluid Control business. So let me now turn the call over to Bill Schumann.

William Schumann

Thanks, Peter. Energy Production sales for the fourth quarter were $875 million, down 11% from last year but up 14% sequentially. The decrease from the prior year was mainly driven by a mix of early-stage subsea projects in our backlog relative to a year ago. In contrast, the sequential increase is an indication that the rate of execution on subsea projects and backlog is increasing.

Energy Production generated operating profit of $105 million in the quarter, down 20% from the prior year quarter, mainly due to lower subsea volume. Margins were 12% in the quarter and just under 15% for the full year. For 2011, we expect that the margin to be in a range of 12% to 13% with some fluctuation from quarter-to-quarter depending on timing and the effectiveness of our project execution.

Inbound orders in Energy Production were $1.3 billion in the quarter, including subsea orders of $1.1 billion. This brought the total subsea order amount for the year to a record $4.1 billion. We ended the year with a backlog of $3.9 billion, including subsea backlog of $3.6 billion. Not included in these amounts were the recently announced Total, GirRI, Statoil, Gygrid, CNOOC Liuhua awards, which will all be booked in the first quarter of 2011.

Turning to Energy Processing. Sales were $223 million, up 26% from the year-ago quarter. The increase was driven by our Fluid Control business led by our WECO/Chiksan flowline Products and our Well Service Pumps as Peter described. Their sales together set a record due to the continued strength of the North American pressure pumping activity. While the other Energy Processing businesses had lower sales in the quarter compared to last year, they were up 18% from the third quarter and all of them contributed to that increase.

Energy Processing generated record operating profit of $43 million, more than double the prior year quarter. The increase was primarily the result of our record volume in Fluid Control. The fourth quarter margin of 19.5% was also a new record. In 2011, we expect the full year margin for the segment to be in a range of 17% to 18%. I would caution, however, that our Fluid Control business is subject to the volatility of the North American lane rig count and the pressure pumping market, and that can drive significant changes in this segment margin.

Total inbound orders for Energy Processing reached an all-time high of $256 million, up 48% from last year's fourth quarter. The improvement was again driven by Fluid Control but was aided by order strength in Measurement Solutions also. Backlog ended the quarter at $296 million.

Now for the corporate items. Corporate expense in the quarter was $10.9 million. Other expense net was $3 million. This was less than we had anticipated due mainly to lower LIFO expenses. Our fourth quarter tax rate of 24.7% was impacted by a number of items that we don't expect to repeat at least with the same impact as we experienced in the past quarter. The quarter included the resolution of an IRS tax appeal as previously announced; other changes in reserves for uncertain tax positions; actions we took in the quarter related to changes in U.S. tax law that increased our tax expense; and the late receipt of confirmation for a tax incentive that we had anticipated receiving before year end. Removing these items from EPS would reduce earnings per share by $0.13 to $0.69 for the quarter.

Adjusting for these items still leaves us with a 36.3% tax rate in the quarter, which was still higher than anticipated due to higher U.S. taxes on undistributed foreign earnings. For the full year 2010, the tax rate was 32.7% after adjusting for those special items. We did receive a letter of confirmation for the tax incentives in January. It is retroactive to 2009 but the tax benefit will be recorded in the first quarter of 2011. Our guidance for 2011 tax rate is at an annual rate of 30% to 32%, which excludes the first quarter tax incentive benefit of $7 million.

We ramped up our capital spending this quarter to $47 million, bringing the full year capital spending to $112 million. This ramp up will continue into this year as we expect capital spending in 2011 to be in excess of $200 million. Facility improvements planned for Brazil and Asia make up a large portion of this increase, along with the expansion of our Fluid Control facilities in North America.

At the end of the quarter, we had net debt position of $48 million. This was comprised of $315 million of cash and $363 million of debt. We averaged $121.7 million diluted shares outstanding in the quarter. Due to a combination of the ramp up in capital spending, an increase in pension funding and a desire to keep our net debt near the current level, we did not repurchase any shares in the quarter.

Turning to the overall outlook for 2011. We expect another strong year in subsea orders. As Peter mentioned, we could potentially reach the same record amount of orders as 2010, driving our subsea backlog to a record level. However, the situation in the Gulf presents a risk to that level of orders. On the top line, we expect improvement in all of our businesses even in Fluid Control, where we're coming off a record year in sales.

Subsea and Surface Wellhead sales could also reach all-time highs. The Measurement Solutions and loading system sales will rebound and start to approach the levels they saw in 2008. The 2011 margins in Production will be in a range of 12% to 13%. In Processing, the 2011 margins will be in line with the 2010 average of 17% to 18%. And again, for earnings, our 2011 guidance for diluted EPS is $3.20 to $3.40 per share. Operator, you may now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC

I just wanted to follow up on a couple of your guide points here on the margin front. Energy Processing 17% to 18% coming off a 19½% fourth quarter run rate. Can you give us some insight as to now the ramp down in margins that you expect in 2011?

William Schumann

Yes, Kurt. We mentioned that was a record quarter for us in terms of margins, and really what happened was Fluid Control had a strong quarter, actually a little bit stronger than the third quarter even, but the real differential here was the other businesses. Measurement and Loading Systems had an outstanding fourth quarter, and while we expect them to improve their full year performance in 2011, it's not going to be as strong as their fourth quarter performance. So we anticipate that the Fluid business in 2011 will grow kind of in line with the rig count, and that the Loading and Measurement will improve their performance actually probably at the top line a little bit better than our Fluid Control business, and that will kind of dilute the margins a little bit. But in absolute terms, we're going to deliver increased earnings in the Energy Processing business in 2011.

Kurt Hallead - RBC Capital Markets, LLC

Are you seeing any slowdown whatsoever in the Frac Equipment business, any indications that the service companies feel there's enough capacity in the market at this point and are starting to ramp down their spend?

Robert Potter

Kurt, Bob Potter. No, we continue to see a robust environment for the Frac Equipment, and obviously, there's a couple of really important reasons for that. One is the rig count, which so far this year is averaging about 11% above the average for last year, and we're kind of expecting a similar number through the rest of the year in our guidance. And secondly, the frac intensity continues to increase. These operators have learned that there's not much incremental cost to additional frac stages longer laterals, and so kind of separated from rig count, we have the frac intensity increases, which are driving a lot of improvement in the Fluid Control business as well.

Kurt Hallead - RBC Capital Markets, LLC

And then the other follow-up I had on Energy Production margins, the indication of 12% to 13% range for '11 would imply that you think the fourth quarter was then your low point for margins in Energy Production. I was wondering if you could give us some insights as to your degree of confidence and how you derive that confidence in, say, the fourth quarter being your low point.

William Schumann

Well, Kurt, as we've laid out our budget and our plans, there really isn't a quarter that sticks out as an obvious trough in margins. That being said, the second half of 2011 looks better than the first half. So I guess I'm not ready to call a quarter for the trough.

Kurt Hallead - RBC Capital Markets, LLC

But that would indicate, though, that the pricing you've taken in on some of these orders through 2010 you're starting to see some improvement in the pricing that's in backlog? Or is it all through cost control? Can you give us some insights on that?

William Schumann

Well, we've gotten a little bit of both actually. We've made some improvements in our cost position that you've seen through 2010, and it looks as though we've got a little bit better pricing coming through probably the second half of the year in terms of our execution. And we also probably benefit a little bit from leverage as we go through the year, leveraging the SG&A spend.

Operator

Your next question comes from the line of Rob MacKenzie with FBR Capital Markets.

Robert MacKenzie - FBR Capital Markets & Co.

Peter, would you mind giving us some more color on what you're doing vis-à-vis your expansions and your CapEx from region to region, including in the Fluid Control segment?

Peter Kinnear

Sure, we formally announced investing in a technology center in Brazil, which we think is a great thing for us to do. We have been operating in Brazil since 1956 and have a great relationship with Petrobras, but they have a lot of particularly pre-salt a lot of new technology issues. So that's some capital going there. We're also reconfiguring our facility in Brazil to be a little bit more efficient particularly on the subsea manifold arena. So we're using some capital there. On the Fluid Control side, we have a major capital expansion going on to increase our capacity for Well Service Pumps as well as our Flowline products. And that's in our existing facility in Stephenville, Texas, and that adds machine tools, as well as floor space and that sort of stuff. And then in the Far East, to continue to drive some of our low-cost items and sourcing, we are expanding in both Singapore and Malaysia in terms of our facilities there to continue to drive down our low-cost source strategy work. I think we've talked about before, we've taken a lot of standard products that maybe we had made in two or three different plants and we moved all that to one central location. And that certainly has improved our margin over time in the business. So we continue to invest there. And there may be some additional offshore tooling like our Light Well Intervention Systems and service tools that we invest. So that's the bulk of it.

Robert MacKenzie - FBR Capital Markets & Co.

And my next question comes back to kind of an outlook-type question. Really not a lot of commentary early on about the outlook for separation, if you will. Can you give us some guidance on broadly on orders for the Subsea business, but how much of that includes expectations for future separation orders? And any change in your view of that market over the past couple of months?

John Gremp

Rob, this is John. The subsea processing, which includes separation and boosting is, I mean it continues as strong as we've seen it. Look out over the next two years and there's almost 15 named projects. Now some of them are strong or have a stronger probability of actually happening rather than others, but that's as strong as we've seen it. There were two subsea processing awards last year. There's a potential for three to four this year. Some of them are a little later in the year so they could slip into 2012, but the list of named processing projects is as healthy as we've seen plus the number of feed studies, for us anyway, has almost doubled. So I think there's a trend, and there's some momentum gaining in terms of the operators being interested in processing. So I'd say it's very healthy. Now the exact timing of these projects, and as I said, some are stronger than others, but it's very encouraging.

Robert MacKenzie - FBR Capital Markets & Co.

And of your order guidance, if you will, earlier in the call, can you share roughly how much of that is related to Processing?

John Gremp

Well, as I said there's three or four projects that could happen in 2011. Some of them may slip into 2012, and we would hope that we would continue to participate and have our more-than-fair share of that business.

Robert MacKenzie - FBR Capital Markets & Co.

And on a margin standpoint, should we think of those as being higher margin than the base business perhaps being less competitive? Or would they be lower margin incorporating a lot of funded R&D-type work?

John Gremp

No, I think we've said in the past, they're about the same as our Subsea Systems margins.

Operator

Your next question comes from the line of Bill Sanchez with Howard Weil.

William Sanchez - Howard Weil Incorporated

Bill, I just wanted to circle back on a comment made last quarter as it relates to how we think about backlog here in Subseas as we exit 2010 and just the conversion for 2011. Are we still thinking 60% of that turns here in 2011 plus you have the typical customer support revenue and then kind of the book and turn, if you will, during the course of the year? Is that still the mass at work there? I think we came in sum, about three.

William Schumann

That's exactly right, Bill. I think you'll see the K come out, and we'll say that about 66% of the backlog in Energy Production is going to turn into revenue in 2011, but if you're just looking at Subsea, it's closer to 60%. If you go through that arithmetic, you start with $3.6 billion in backlog and you end up with $2.2 billion of revenue coming out of backlog. We think we'll get about $700 million in customer support or aftermarket services and then another $400 million of book and turn revenues for a total of $3.3 billion with, I think, the same number we were at, at the third quarter call.

William Sanchez - Howard Weil Incorporated

That's exactly right. I'm curious just as far as the margin in the fourth quarter in Energy Production, was there any kind of percentage of completion true-up at all, Bill, that would have caused a bit more of a margin dip than you had been expecting there. It didn't sound like it in your prepared comments but I'm just curious.

William Schumann

No, it was just a series of -- each quarter we execute a little bit differently. And the fourth quarter wasn't as obviously as good as some of the other quarters throughout the year. There wasn't any one particular thing that stood out.

William Sanchez - Howard Weil Incorporated

I guess, Peter, you recently converted a strategic subsea launch you had with Shell to an enterprise frame agreement. Can you discuss what incrementally that brings to you and should we expect, I guess, more of these type of conversions going forward?

Peter Kinnear

Let me let John answer that.

John Gremp

Yes, Bill, we're obviously excited about expanding the Shell Gulf of Mexico relationship that goes back almost 15 years globally. It's something we want to do for a long time, and it really started with BC-10 in Brazil, where that was a direct award to us, and I think Shell clearly saw the benefits of moving the exclusive relationship beyond the Gulf of Mexico. So it was just natural that the enterprise frame agreement was the next logical step for our two companies. What it means in business is where its tendering is not required outside of a production sharing contract environment, we would expect that business to be direct awarded to us. So that's clearly a positive because we won't be competing for some of that business. In other cases where there's production sharing contractor environment in national oil companies and bidding is required, we'll still bid like we normally do but we'll obviously have some advantages in terms of equipment standardization, that sort of thing, that should help us even in a bidding environment.

William Sanchez - Howard Weil Incorporated

Is that something that Shell had pushed you about, John? Or how did that end up coming about?

John Gremp

Well, I said it's a natural evolution of our relationship, and they saw the benefits in other parts of the world, and it just made sense to make it official, and that's what we did.

Operator

Our next question comes from the line of Collin Gerry with Raymond James.

Collin Gerry - Raymond James

I just kind of want to follow up on the Production business. Could you remind us kind of what percentage of revenues is specifically the Surface Wellhead? And within that, what percentage is tied to North America versus International?

William Schumann

Yes, our Surface business is a little bit north of $600 million for 2011.

Collin Gerry - Raymond James

For 2011?

William Schumann

I'm sorry, 2010.

Collin Gerry - Raymond James

Of that $600 million, what percentage is driven by North America versus, say, International?

William Schumann

About 30%.

Collin Gerry - Raymond James

30% North America?

William Schumann

Right.

Collin Gerry - Raymond James

And then I guess switching gears a little bit, we talked about your Frac Pump business, which I guess you entered to a few years ago strategically. It must have been a homerun looking back. Is there any look to further expand into kind of the frac manufacturing market? Any other integration you could do within that? You have the Chiksan side, you have the Pump side. Are there any service lines that you'd like to add on?

Robert Potter

It's Bob again. The Frac Pump business didn't look like a homerun in '09. It's looking much better now, obviously.

Collin Gerry - Raymond James

But you all saw that coming. You knew that, right?

Robert Potter

Yes, we knew it was coming, and we also knew the acceleration of ramp-up was coming as fast as it did.

Collin Gerry - Raymond James

And the frac intensity and all that stuff?

Robert Potter

But things are going well in the Pump business. Now we are continuing to add some product lines in the Fluid Control business, most notably the manifold trailers, what we call the articulated arm manifold trailers, which are really gaining some traction in the market right now. Anything that the pressure pumpers can get in their hands that's tied to safety, time and efficiency has got a great chance of succeeding in today's environment, and so that's kind of where our focus is.

Operator

The next question comes from the line of Brian Uhlmer with Global Hunter.

Brian Uhlmer - Global Hunter Securities, LLC

I just want to follow up on some of the questions Collin was asking in North America. Obviously, you used some of that for your guidance for 2011, and I know you don't do a rig count projection but what are your views on kind of the ramp-up in that activity and the growth in that particular segment based on the North America business?

Robert Potter

Well, as I said earlier we're kind of projecting rig count to be in the 1,700 to 1,750 range. The only material changes that we continue to see are the shift between gas-directed rigs and those in the liquid-rich environment. So Bakken, Marcellus, Eagle Ford is getting a lot of concentration of activity. So for us, it's simply a matter of ensuring that our bases in those locations are ready to go for the market increase we expect to see.

Brian Uhlmer - Global Hunter Securities, LLC

And you're already fairly established in the basins?

Robert Potter

Yes, we are.

Brian Uhlmer - Global Hunter Securities, LLC

And with the ramp up, first, I think that's a conservative rig count forecast, but with the ramp up, do we believe that there will be pricing improvements and potential margin improvements in that particular segment of the business?

Robert Potter

Well, first of all, I hope you're right about the rig count, that it does go up above that. I think the focus that we have is trying to manage the supply chain very diligently right now as it becomes more and more called upon to supply increasingly greater levels of product. So that's our challenge. We think we're doing a reasonable job of that now. Obviously, pricing is something that we continually look at to ensure that our margins are maintained.

Brian Uhlmer - Global Hunter Securities, LLC

Moving on to subsea and kind of the rig count growth that we see in offshore, are we projecting or are you projecting as we move out further in 2011, and maybe, obviously, there's a little bit longer time frame, but out into 2012, that the efficiencies that we've gained in offshore drilling that you can actually grow in excess of the percentage growth in the actual number of rigs drilling? Is that a fair outlook for 2012?

Peter Kinnear

Yes, I would say yes, that's a fair outlook. We run trees on wire independent of the trees, the rig sometimes. The industry's always looking for ways to be more efficient that can gain better utilization of the assets offshore. And so we've been pretty progressive in helping that strategy take place.

Brian Uhlmer - Global Hunter Securities, LLC

So you feel, not to put words in your mouth, but a 20% growth from 2011 earnings to 2012 earnings isn't excessively aggressive?

William Schumann

Well, yes, it depends on the CapEx spending on individual projects and the timing of the projects, but our Subsea business is historically -- except for the dip in '08, we had growth in 20-plus percent per year, so certainly that's achievable.

Operator

Our next question comes from the line of Daniel Boyd with Goldman Sachs.

Daniel Boyd - Goldman Sachs Group Inc.

Peter, I was hoping to just follow up on some of the comments made about the Gulf of Mexico. You have booked some awards post-Macondo. I think we saw one in late December from Shell, and now it looks like Shell might be close to getting a permit for that. But how have the conversations with customers progressed over the past few months? Has there been any change at all?'

Peter Kinnear

Well, I think it's kind of a mixed bag a little bit. We see some dialogue with the government on the well containment issue, which probably is one of the stumbling blocks. What do they have to have in place for the government to get comfortable there? And yes, I think the operators that have major positions, I think they're assuming it's going to get worked out, and therefore, let's not lose one or two years on schedule and let's be smart here and plan ahead. And so like Shell, we're getting orders in advance in anticipation that the moratorium gets lifted and they can go back to drilling. Other customers, a bit more cautious. We had a Phase II with Petrobras and their Cascade project in the Gulf of Mexico that they were just about to let us, give us that award just before the Macondo situation. And they’ve kind of pulled back and said, no, we're going to wait and see what happens. So it's still kind of a mixed bag from that standpoint, but fortunately, we've diversified our portfolio and shifted quite a bit of our Eastern resources on to International projects. And so we're weathering through the situation quite well and anticipate that the Gulf of Mexico comes back and that we're going to need the oil and gas produced from deepwater.

Daniel Boyd - Goldman Sachs Group Inc.

Absolutely. Do you have any insight on maybe where the industry is on the well containment solution? Or any that you’d like to offer publicly?

Peter Kinnear

I think there's two solutions out there, one by the majors and one by Helix that try to do the same thing a little bit different way. And so it's good. We think those will both be assessed, and you could see -- smaller independents are working kind of with Helix, the bigger guys are working on the marine well containment company. And so you could see a consolidation of all that into one system once the government decides one's better than the other.

Operator

Your next question comes from the line of Kevin Simpson with Miller Tabak.

Kevin Simpson - Miller Tabak & Co., LLC

I guess I wanted to drill down a little bit more on that, the Gulf of Mexico impact on the potential order flow first. In the guidance, is there anything incremental to Shell, i.e. maybe the Cascade project that is -- do you need that to get to that $4 billion kind of level for orders for this year?

Peter Kinnear

No. We've discounted the order rate in '11 for the Gulf pretty heavily, so our $4 billion in orders assumes that not too much happens in terms of new orders.

Kevin Simpson - Miller Tabak & Co., LLC

And maybe a quick update on the Marlim system. When is that likely to be installed?

Peter Kinnear

John can give you an update on Marlim.

John Gremp

Kevin, it's scheduled to be delivered in the third quarter and installed I think also towards the very end of the third quarter. It’s on schedule. We completed most of the qualifications that were required, and so far Petrobras has been very pleased with our progress. So we look forward to getting it into the water. It's a pilot and pretty important to Petrobras for their future, so I know they're anxious to see the system operate.

Kevin Simpson - Miller Tabak & Co., LLC

And do you think it's unrealistically kind of too soon to assume that you could capture 12 orders for similar systems, at least out of Petrobras, if the Marlim system works as planned?

John Gremp

Well, we don't know how long the evaluation period's going to be. We don't know. Clearly, there are future requirements for this kind of system in Brazil. They're evaluating a number of different technologies, so it's not -- I mean Marlim is certainly key but they're looking at other processing systems. They came out with a bid for their Congo project, which is also boosting. So it's clear that Petrobras is gaining confidence in this technology and they’re determined to implement it. But to select when they're going to actually start issuing orders on a larger basis beyond the pilot, I think that's difficult to say. They need time to do their evaluation, but there's no question that they're getting confident with the technology, and this is a key trend in Brazil to apply processing to increase their oil recovery.

Kevin Simpson - Miller Tabak & Co., LLC

And then one quick one for Bob. We'll put Bob against Bill here. It just seems like the guidance vis-à-vis Processing and Fluid Control particularly sounds like it's on the conservative side. Are you guys capacity constrained? Is that kind of some of the issues in terms of how much increment you can get from Fluid Control in '11 given the substantial, the penetration relative to rig count that we're still seeing in the Fracs business?

Robert Potter

I'm actually going to agree with Bill here. As he said, Fluid Control is actually increasing year-over-year. Peter talked about the capacity expansion, which we're adding as quickly as we possibly can. But the bigger effect is the other Processing businesses, particularly Loading and Measurement are expecting much better years in 2011. And as Bill talked about, that'll have a bit of a dilutive effect on the overall margin segment.

Operator

The next question comes from the line of Brad Handler with Crédit Suisse.

Brad Handler - Crédit Suisse AG

Could you first speak to, I guess, use of cash? Bill, I think you made a comment I wasn't quite sure I heard it but you didn't repurchase shares in the quarter because you liked your net debt position? Can you first confirm that, that's what you said and maybe speak to how much share repurchase you might be targeting in your guidance for 2011, for example or I guess a diluted share count would get at that too?

William Schumann

Well, yes, I don't think I said I liked the debt level, but we had quite a few cash requirements in the fourth quarter. We ramped up spending, and as I mentioned -- capital spending, that is -- that's going to continue to ramp up throughout 2011. We had pretty significant pension funding during the year. We've put about $39 million into our combination of U.S. and foreign pension plans, and we had a working capital build in the quarter also. So we kind of maintained our debt level at about the current rate. We ended the year at 48, but our cash allocation has not changed. We want to support the growth of the business. That's our first priority. Second priority is acquisitions. And our third priority, if we have any cash left over, is repurchase of stock. We repurchased I think $168 million in 2010. We kind of expect a similar level of stock repurchase and maybe a little bit higher actually in 2011, and that will have the resultant reduction of the shares outstanding. The shares outstanding impact on the earnings guidance really isn't significant if you go through the arithmetic though.

Brad Handler - Crédit Suisse AG

Maybe speak to the acquisition landscape a little bit, guys? Presumably, that includes Bob and outside of the subsea world as well. But how's the bid-ask spread looking now relative to six or nine months ago? What is your general optimism that you’ll be able to find some opportunities here on the M&A front?

Peter Kinnear

That's a good question. Some of the properties you've seen being purchased have gone for quite high prices as has the most recent GE one. It seemed to be in the same range, so I think there's still opportunities out there. We've done a number of small deals that kind of were bolt-on acquisition deals for us that have been very successful, the little multi-phased meter company that we bought in Norway. In a year, we doubled their revenue in terms of exposure to our large customer base. And so those things are from an incremental payback and return are great. But they’re hard to find, and I have to find the right niche and the right company. The bigger deals, we certainly participate and look at those, and the numbers got to -- have to be right for us before we pull the trigger. So the deals have been pretty expensive in our point of view, so far.

Brad Handler - Crédit Suisse AG

Could you give us a little more color on the sources of optimism about growth, maybe particularly in the Loading area? Is that FPSO-driven? Or where are you seeing those opportunities?

Robert Potter

Yes, this is Bob again. The LNG market is for our loading arms is recovering nicely in 2011 particularly in areas like Australia. There's a big one in Singapore. There's a big one in India, so that's going along well. And also, to your point, the floating LNG environment is beginning to gain momentum, and that's a particularly important market segment for us.

Brad Handler - Crédit Suisse AG

And some of the inbound in ’10 reflected FLNG already?

Robert Potter

Yes, there will be some inbound reflected. I'm sorry, the inbound in '11 will reflect the orders in LNG. '10 was pretty modest in that regard.

Operator

Our next question comes from the line of Joe Gibney with Capital One Southcoast.

Joseph Gibney - Capital One Southcoast, Inc.

Bill, I was wondering if you could help me out a little bit with your other expense line item. You referenced lower LIFO expenses this quarter. I know normalized run rate can be significant higher, $10 million to $11 million per quarter. Could you help us with some expectations in '11 on that front?

William Schumann

Joe, I wish I could just -- it'd be '11 every quarter, but unfortunately, there's always some impacts that foreign currency flows through there. But in general, in the fourth quarter, the biggest issue was LIFO adjustment, and we had estimated a little bit higher ending inventory levels throughout the year, and we had also estimated higher inflation. And we do a survey in the fourth quarter, and that survey resulted in lower inflation. We ended with lower inventory. Consequently, the adjustment at the end in the fourth quarter was very low. And that was the major reason for the, if you will, $8 million difference between our normal guidance of '11 and the $3 million that we reported. For the full year, we had almost $49 million compared to $44 million guidance, and that difference was a combination of LIFO and foreign exchange throughout the year.

Joseph Gibney - Capital One Southcoast, Inc.

Bob, one quick one for you, just following up on the Fluid side. You referenced all the traction on the Pump front. I was curious what your aftermarket mix is now in this business, particularly as you look out to full year '11 versus where it's been historically. I was also curious if your delivery times you’re quoting on equipment are beginning to elongate a little bit now given the demand.

Robert Potter

First, with lead times, they're pushed out to about 12 months now. We're looking to reel those back in with the capacity expansions that we've got in process, which will be going on throughout this year. As it relates to the mix, we're still largely driven by the whole good pumps as our installed base grows. But to your point, the fluid cylinders, the fluid in aftermarket, which is the big component, is going to grow substantially as we get an installed base and the frac intensity continues to increase.

Joseph Gibney - Capital One Southcoast, Inc.

Just for point of reference, the 12-month delivery time, how does that compare to, say, six months ago?

Robert Potter

No, I think in the last quarter, when we said we were a little less than 12 months, we were in the eight- to nine-month range, but we're continuing to book orders and build backlog.

Operator

Your next question comes from the line of Doug Becker with Bank of America.

Douglas Becker - BofA Merrill Lynch

Bill, you mentioned that pricing for production looks better in the second half rather than the first half as you work through backlog. What's the prospect for moving pricing margins higher as orders pick up over the course of the year? And with rising steel prices, is there more of a risk or an opportunity to margins at this point?

John Gremp

This is John. Clearly, Peter pointed out the fundamentals improving in subsea, and that's manifesting itself in the number of major projects over $100 million, which is -- the list of those projects is clearly larger than what we saw in 2010. We rebuilt our backlog in 2010. The other subsea suppliers can be expected to do the same thing in 2011. And I would think, like Bill said, towards the back end of 2011, we would expect pricing to improve as the tendering activity increases and everybody starts rebuilding their backlog. So that's what we would see in subsea pricing, start to improve towards the end of this year. Now on the cost side, nickel prices have gone up and nickel’s an important component in our subsea equipment. Steel prices have gone up near term, but they're actually expected to be flat for the year as the construction industry being down’s had a negative impact on steel. So we don't see big increases in steel prices for the full year. We have seen increases in nickel, but we've been able to lock in nickel prices last year for most of this year. So we don't see a real big impact, at least in the near term, on raw material prices. At least the price increases that we'll see, we think we can mitigate.

Douglas Becker - BofA Merrill Lynch

Peter, just a quick one. How close a look did you take a look at the Wood Group Well Support assets?

Peter Kinnear

Yes, Doug, I really can't comment on that, sorry.

Operator

Your next question comes from the line of Geoff Kieburtz with Weeden & Co.

Geoff Kieburtz - Weeden & Co. Research

Bob, a couple of follow-up questions. You mentioned the lead time on the Pumps extending out to 12 months now, but you'd also made a comment earlier about the challenges of managing the supply chain. Is the lead time extension entirely your own capacity bottlenecks or are there some issues upstream of you?

Robert Potter

Yes, it's a combination of everything. Obviously, crankshafts, gearboxes, things like that, the lead times are going out. So it's a combination of both internal capacity and supply chain.

Geoff Kieburtz - Weeden & Co. Research

So can you help us just understand a little bit better. As you expand your capacity, are there also kind of parallel initiatives going on that make you comfortable you'll be able to exploit that capacity expansion?

Robert Potter

Yes, we're qualifying alternative suppliers on a global basis to support our expected demand.

Geoff Kieburtz - Weeden & Co. Research

And with this extending lead times, are you able to A, raise prices sufficiently to compensate for cost increases? Or B, raise prices more than what's necessary? Can you expand margins in this environment?

Robert Potter

Well, so far, as I mentioned earlier, our focus has been to raise prices to maintain margins, and it's still pretty competitive out there, despite the fact that the market is as strong as it is. So again, it's something we keep a constant eye on.

Geoff Kieburtz - Weeden & Co. Research

And on the Treating Iron side of the business, I don't know if you have the ability to tell this, but are you aware that the treating iron is wearing out significantly faster than it did, say, a couple of years ago?

Robert Potter

Sure. I mean It's a function of the frac intensity. It's a function of pressures and rates, probably more pressures than anything else, but yes, that's fact.

Geoff Kieburtz - Weeden & Co. Research

Can you guess for us sort of how much? Is it twice as fast?

Robert Potter

It would be a guess, so I'd just as soon not.

Geoff Kieburtz - Weeden & Co. Research

And with this growing intensity, I think you made a comment, if I understood you correctly, that you expect the Fluid Control business to grow kind of in line with the rig count. Why isn't it going to grow faster than rig count given this intensity?

Robert Potter

Yes, that's fair comment, and I think that’s what Bill mentioned that we expected it to grow consistent with rig count, which by the way is a historic pattern of Fluid Control, has been for years. But the frac intensity does add a new dimension to that. So really, again, our growth's going to come from whatever incremental increases we have in rig count plus frac intensity increases, which, by the way, just didn't start happening this year. That's something we began to see last year coupled with our continued penetration of Well Service Pump market share and additional scope like manifold trailers.

Geoff Kieburtz - Weeden & Co. Research

If I could shift for a moment to subsea, just looking at fourth quarter, and I know the limitations on looking at just one quarter but 39 trees, 1,100,000 in orders taken in, $28 million a tree. You guys have continued to expand the revenue opportunity per tree here. Are you reaching some kind of plateau?

Peter Kinnear

Geoff, it varies by project, but our strategy is to continue to try to do more and more things on the seabed, expand our product offering, our technology base. So it's been a clear strategy. You can remember when we started out, we were $8 million or $9 million a tree, and now last year, I think last couple of years, we've been over in the low 20s. A lot depends on the mix, but obviously, it's been a wonderful thing for us to be able to execute this strategy and adding more and more to the kit on the seabed.

William Schumann

And, Geoff, just to add to that, for the full year, we're about $18.5 million if you just look at the numbers, but that included the Petrobras frame agreement. If you take that out, we're closer to $26 million of orders per tree.

Geoff Kieburtz - Weeden & Co. Research

And what I'm hearing is that you don't see a boundary yet in that. Is that correct?

Peter Kinnear

Yes, there's probably some upper limit at some point, but I think we still probably can push it up a little bit.

Geoff Kieburtz - Weeden & Co. Research

And presumably, you're able to do this -- the expansion of the scope is coming at comparable margins to the...

Peter Kinnear

Yes, remember, we have our Subsea Processing is in the numbers, too. So there we’re adding equipment with zero trees normally, so I mean that certainly adds to the average. And our Light Well Intervention revenue's in there, so you have to balance it out. Our strategy has been to expand our tentacles in the subsea space and do more and more for the customer.

Geoff Kieburtz - Weeden & Co. Research

As you look at your guidance $3.20 to $3.40 for 2011, what would be the one or two biggest variables that would drive you to the high-end or low-end?

William Schumann

Well, Geoff, as always, the big two variables are Fluid Control and execution in subsea.

Operator

Your next question comes from the line of Tom Curran with Wells Fargo.

Tom Curran - Wells Fargo Securities, LLC

A fairly quick one, well, actually two left on my list here. First, Bob or Bill, would you disclose what the frac pump sales and orders were in this quarter and last?

William Schumann

I don't have that information with me, Tom.

Tom Curran - Wells Fargo Securities, LLC

How about maybe order of magnitude increase just for the revenues?

William Schumann

Sorry, Tom, I don't have that information with me today.

Tom Curran - Wells Fargo Securities, LLC

And then turning to the three or four potential subsea processing awards we could see here over the next I guess, call it, 12 months if you allow for slippage into 2012, could you specify which those are?

John Gremp

Well, there's a Petrobras processing project called Congo. That's public knowledge. It's a public tender. So that's out there under evaluation. There's a couple of West Africa processing projects that have not been bid yet, but they're named and they’re likely to go ahead. And then Peter mentioned Petrobras Cascade in the Gulf of Mexico. This is a Phase II. It has a additional boosting system on it. It was delayed because of Macondo, so that could possibly happen. So that's three or four.

Tom Curran - Wells Fargo Securities, LLC

And the two in West Africa, would those be Girassol and Pazflor with Total?

William Schumann

They're both in West Africa.

Operator

Your final question comes from the line of Rob MacKenzie with FBR Capital Markets.

Robert MacKenzie - FBR Capital Markets & Co.

Can you tell me roughly how much Fluid Control revenues were up year-over-year and quarter-over-quarter?

William Schumann

Let's see, year-over-year, well, year-over-year we're up 70% and quarter-over-quarter, we were up about 10% fourth quarter.

Operator

There are no further questions at this time. I will now turn the conference back over to Mr. Cherry for any closing remarks.

Robert Cherry

Thank you, operator. This concludes our fourth quarter conference call. A replay of our call will be available on our website beginning at approximately 2:00 p.m. Eastern Time today. If you have any further questions, please feel free to contact me. Thank you for joining us, and operator, you may end the call.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating, and you may now disconnect.

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