Attached files

file filename
EX-32.2 - SECTION 906 CERTIFICATION OF CFO - FMC TECHNOLOGIES INCfmc20160930ex322.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO - FMC TECHNOLOGIES INCfmc20160930ex321.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - FMC TECHNOLOGIES INCfmc20160930ex312.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - FMC TECHNOLOGIES INCfmc20160930ex311.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to            
Commission File Number 001-16489 

FMC Technologies, Inc.
(Exact name of registrant as specified in its charter) 

Delaware
36-4412642
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
5875 N. Sam Houston Parkway W., Houston, Texas
77086
(Address of principal executive offices)
(Zip Code)
(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  o
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.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer (Do not check if a smaller reporting company)
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o No  x 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 24, 2016
Common Stock, par value $0.01 per share
 
225,702,027
 



TABLE OF CONTENTS
 
Page
 

2


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 27A of the Securities Exchange Act of 1933, as amended, and 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 risks and uncertainties (some of which are significant or 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, 2015, as well as the following:
Demand for our products and services, which is affected by changes in the price of, and demand for, crude oil and natural gas in domestic and international markets;
Potential liabilities arising out of the installation or use of our products;
U.S. and international laws and regulations, including environmental regulations, that may increase our costs, limit the demand for our products and services or restrict our operations;
Disruptions in the political, regulatory, economic and social conditions of the countries in which we conduct business;
Fluctuations in currency markets worldwide;
Cost overruns that may affect profit realized on our fixed price contracts;
Disruptions in the timely delivery of our backlog and its effect on our future sales, profitability and our relationships with our customers;
The cumulative loss of major contracts or alliances;
Rising costs and availability of raw materials;
A failure of our information technology infrastructure or any significant breach of security;
Our ability to develop and implement new technologies and services, as well as our ability to protect and maintain critical intellectual property assets;
The outcome of uninsured claims and litigation against us;
Deterioration in future expected profitability or cash flows and its effect on our goodwill;
Downgrade in the ratings of our debt could restrict our ability to access the debt capital markets;
Continuing consolidation within our industry; and
Our dependence on the continuing services of certain of our key managers and employees.
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, except to the extent required by law.

3


PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FMC TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In millions, except per share data)
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Product revenue
$
875.9

 
$
1,207.9

 
$
2,754.7

 
$
3,936.7

Service revenue
165.9

 
268.5

 
548.2

 
790.7

Lease and other income (Note 8)
49.4

 
68.6

 
147.3

 
208.0

Total revenue
1,091.2

 
1,545.0

 
3,450.2

 
4,935.4

Costs and expenses:
 
 
 
 
 
 
 
Cost of product revenue
681.3

 
924.2

 
2,134.6

 
3,008.1

Cost of service revenue
116.8

 
196.7

 
429.1

 
596.7

Cost of lease and other revenue
48.6

 
53.0

 
136.6

 
148.7

Selling, general and administrative expense
132.9

 
144.3

 
430.0

 
482.6

Research and development expense
23.3

 
25.9

 
89.5

 
91.7

Restructuring and impairment expense (Note 5)
23.8

 
78.1

 
75.4

 
98.2

Merger transaction and integration costs (Note 2)
11.6

 

 
30.6

 

Total costs and expenses
1,038.3

 
1,422.2

 
3,325.8

 
4,426.0

Other expense, net
(8.7
)
 
(12.7
)
 
(29.4
)
 
(34.1
)
Income before net interest expense and income taxes
44.2

 
110.1

 
95.0

 
475.3

Net interest expense
(7.7
)
 
(8.1
)
 
(22.8
)
 
(24.4
)
Income from continuing operations before income taxes
36.5

 
102.0

 
72.2

 
450.9

Provision (benefit) for income taxes (Note 13)
(9.5
)
 
19.5

 
9.0

 
112.3

Income from continuing operations
46.0

 
82.5

 
63.2

 
338.6

Loss from discontinued operations, net of income taxes (Note 6)
(14.0
)
 

 
(14.0
)
 

Net income
32.0

 
82.5

 
49.2

 
338.6

Net (income) loss attributable to noncontrolling interests
0.3

 
(0.5
)
 
0.4

 
(1.1
)
Net income attributable to FMC Technologies, Inc.
$
32.3

 
$
82.0

 
$
49.6

 
$
337.5

Net income attributable to FMC Technologies, Inc.:
 
 
 
 
 
 
 
Income from continuing operations
$
46.3

 
$
82.0

 
$
63.6

 
$
337.5

Loss from discontinued operations
(14.0
)
 

 
(14.0
)
 

Net income attributable to FMC Technologies, Inc.
$
32.3

 
$
82.0

 
$
49.6

 
$
337.5

Basic earnings per share attributable to FMC Technologies, Inc. (Note 4):
 
 
 
 
 
 
 
Income from continuing operations
$
0.20

 
$
0.36

 
$
0.28

 
$
1.46

Loss from discontinued operations
(0.06
)
 

 
(0.06
)
 

Basic earnings per share
$
0.14

 
$
0.36

 
$
0.22

 
$
1.46

Diluted earnings per share attributable to FMC Technologies, Inc. (Note 4):
 
 
 
 
 
 
 
Income from continuing operations
$
0.20

 
$
0.35

 
$
0.28

 
$
1.45

Loss from discontinued operations
(0.06
)
 

 
(0.06
)
 

Diluted earnings per share
$
0.14

 
$
0.35

 
$
0.22

 
$
1.45

Weighted average shares outstanding (Note 4):
 
 
 
 
 
 
 
Basic
226.9

 
230.2

 
227.3

 
231.6

Diluted
228.2

 
231.0

 
228.5

 
232.5

The accompanying notes are an integral part of the condensed consolidated financial statements.

4


FMC TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In millions) 
2016
 
2015
 
2016
 
2015
Net income
$
32.0

 
$
82.5

 
$
49.2

 
$
338.6

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments (1)
(3.2
)
 
(110.3
)
 
54.6

 
(184.6
)
Net gains (losses) on hedging instruments:
 
 
 
 
 
 
 
Net gains (losses) arising during the period
1.7

 
(33.3
)
 
16.8

 
(50.5
)
Reclassification adjustment for net losses included in net income
13.3

 
11.5

 
41.7

 
44.6

Net gains (losses) on hedging instruments (2)
15.0

 
(21.8
)
 
58.5

 
(5.9
)
Pension and other post-retirement benefits:
 
 
 
 
 
 
 
Reclassification adjustment for settlement losses included in net income
1.1

 
1.2

 
1.1

 
1.2

Reclassification adjustment for amortization of prior service cost included in net income
0.1

 
0.1

 
0.5

 
0.1

Reclassification adjustment for amortization of net actuarial loss included in net income
4.3

 
5.2

 
12.8

 
15.9

Net pension and other post-retirement benefits (3)
5.5

 
6.5

 
14.4

 
17.2

Other comprehensive income (loss), net of tax
17.3

 
(125.6
)
 
127.5

 
(173.3
)
Comprehensive income (loss)
49.3

 
(43.1
)
 
176.7

 
165.3

Comprehensive (income) loss attributable to noncontrolling interest
0.3

 
(0.5
)
 
0.4

 
(1.1
)
Comprehensive income (loss) attributable to FMC Technologies, Inc.
$
49.6

 
$
(43.6
)
 
$
177.1

 
$
164.2

_______________________  
(1) 
Net of income tax (expense) benefit of $0.3 and nil for the three months ended September 30, 2016 and 2015, respectively, and $0.7 and $6.8 for the nine months ended September 30, 2016 and 2015, respectively.
(2) 
Net of income tax (expense) benefit of $(4.9) and $5.5 for the three months ended September 30, 2016 and 2015, respectively, and $(16.0) and $1.9 for the nine months ended September 30, 2016 and 2015, respectively.
(3) 
Net of income tax (expense) benefit of $(2.6) and $(3.1) for the three months ended September 30, 2016 and 2015, respectively, and $(6.5) and $(8.1) for the nine months ended September 30, 2016 and 2015, respectively.
The accompanying notes are an integral part of the condensed consolidated financial statements.

5


FMC TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
September 30, 2016
 
December 31, 2015
(In millions, except par value data) 
(Unaudited)
 
As Adjusted
Assets
 
 
 
Cash and cash equivalents
$
1,074.2

 
$
916.2

Trade receivables, net of allowances of $17.2 in 2016 and $19.2 in 2015
681.0

 
884.0

Costs in excess of billings
638.9

 
638.4

Inventories, net (Note 7)
641.6

 
764.1

Derivative financial instruments (Note 16)
128.3

 
333.9

Prepaid expenses
43.4

 
48.9

Income taxes receivable
71.9

 
68.7

Other current assets
223.0

 
276.0

Total current assets
3,502.3

 
3,930.2

Investments
26.4

 
29.6

Property, plant and equipment, net of accumulated depreciation of $993.9 in 2016 and $892.1 in 2015
1,309.6

 
1,371.5

Goodwill
523.9

 
514.7

Intangible assets, net of accumulated amortization of $158.7 in 2016 and $139.9 in 2015
225.0

 
246.3

Deferred income taxes
192.6

 
183.3

Derivative financial instruments (Note 16)
6.5

 
0.1

Other assets
177.4

 
143.7

Total assets
$
5,963.7

 
$
6,419.4

Liabilities and equity
 
 
 
Short-term debt and current portion of long-term debt
$
19.0

 
$
21.9

Accounts payable, trade
375.3

 
519.3

Advance payments
400.5

 
464.1

Billings in excess of costs
110.4

 
200.5

Accrued payroll
173.0

 
185.8

Derivative financial instruments (Note 16)
205.6

 
516.9

Income taxes payable
42.8

 
57.2

Other current liabilities
319.4

 
339.6

Total current liabilities
1,646.0

 
2,305.3

Long-term debt, less current portion (Note 10)
1,245.1

 
1,134.1

Accrued pension and other post-retirement benefits, less current portion
152.1

 
230.4

Derivative financial instruments (Note 16)
10.7

 
0.5

Deferred income taxes
128.8

 
105.4

Other liabilities
87.1

 
100.5

Commitments and contingent liabilities (Note 11)

 

Stockholders’ equity (Note 12):
 
 
 
Preferred stock, $0.01 par value, 12.0 shares authorized in 2016 and 2015; no shares issued in 2016 or 2015

 

Common stock, $0.01 par value, 600.0 shares authorized in 2016 and 2015; 286.3 shares issued in 2016 and 2015; 225.7 and 226.8 shares outstanding in 2016 and 2015, respectively
2.9

 
2.9

Common stock held in employee benefit trust, at cost; 0.2 shares in 2016 and 2015
(6.9
)
 
(7.0
)
Treasury stock, at cost; 60.4 and 59.4 shares in 2016 and 2015, respectively
(1,636.6
)
 
(1,607.8
)
Capital in excess of par value of common stock
764.1

 
759.0

Retained earnings
4,300.0

 
4,249.7

Accumulated other comprehensive loss
(745.2
)
 
(872.7
)
Total FMC Technologies, Inc. stockholders’ equity
2,678.3

 
2,524.1

Noncontrolling interests
15.6

 
19.1

Total equity
2,693.9

 
2,543.2

Total liabilities and equity
$
5,963.7

 
$
6,419.4

The accompanying notes are an integral part of the condensed consolidated financial statements.

6


FMC TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions) 
Nine Months Ended
September 30,
2016
 
2015
Cash provided (required) by operating activities:
 
 
 
Net income
$
49.2

 
$
338.6

Adjustments to reconcile net income to cash provided (required) by operating activities:
 
 
 
Depreciation
130.0

 
133.6

Amortization
51.1

 
48.9

Employee benefit plan and stock-based compensation costs
56.0

 
67.9

Unrealized loss on derivative instruments and foreign exchange
35.9

 
31.5

Deferred income tax provision (benefit)
(14.2
)
 
30.6

Impairments (Note 5)
40.2

 
64.4

Other
53.9

 
34.8

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Trade receivables, net and costs in excess of billings
240.4

 
181.3

Inventories, net
127.3

 
105.2

Accounts payable, trade
(155.7
)
 
(140.6
)
Advance payments and billings in excess of costs
(182.9
)
 
(241.3
)
Income taxes payable, net
(16.1
)
 
(127.9
)
Accrued pension and other post-retirement benefits, net
(67.3
)
 
(20.4
)
Other assets and liabilities, net
(112.4
)
 
(5.6
)
Cash provided by operating activities from continuing operations
235.4

 
501.0

Cash required by operating activities from discontinued operations (Note 6)
(8.1
)
 

Cash provided by operating activities
227.3

 
501.0

Cash provided (required) by investing activities:
 
 
 
Capital expenditures
(93.1
)
 
(211.0
)
Investments in joint ventures
(52.9
)
 
(5.0
)
Proceeds from sale of wireline assets
19.0

 

Other
6.8

 
4.3

Cash required by investing activities
(120.2
)
 
(211.7
)
Cash provided (required) by financing activities:
 
 
 
Net increase in short-term debt
4.0

 
1.5

Net increase (decrease) in commercial paper
110.5

 
(8.0
)
Repayments of long-term debt
(18.9
)
 
(1.2
)
Purchase of treasury stock
(54.8
)
 
(148.0
)
Acquisitions, payment of withheld purchase price

 
(9.6
)
Payments related to taxes withheld on stock-based compensation
(8.6
)
 
(8.8
)
Other
(2.8
)
 
(7.4
)
Cash provided (required) by financing activities
29.4

 
(181.5
)
Effect of exchange rate changes on cash and cash equivalents
21.5

 
(35.1
)
Increase in cash and cash equivalents
158.0

 
72.7

Cash and cash equivalents, beginning of period
916.2

 
638.8

Cash and cash equivalents, end of period
$
1,074.2

 
$
711.5

The accompanying notes are an integral part of the condensed consolidated financial statements.

7


FMC 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 Technologies”) 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 GAAP have been condensed or omitted. Therefore, these financial 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, 2015.
We revised our current derivative financial instrument asset and liability balances as of December 31, 2015 to eliminate certain intercompany derivative transactions. As a result, our total financial position as of December 31, 2015 decreased by $38.0 million.
Our accounting policies are in accordance with 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 accompanying unaudited condensed consolidated financial 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 financial statements may not be representative of the results that may be expected for the year ending December 31, 2016.
Reclassifications—Certain prior-year amounts have been reclassified to conform to the current year’s presentation.
NOTE 2. MERGER OF FMC TECHNOLOGIES AND TECHNIP
On June 14, 2016, FMC Technologies and Technip S.A. (“Technip”) entered into a definitive business combination agreement providing for the business combination among FMC Technologies, FMC Technologies SIS Limited, a private limited company incorporated under the laws of England and Wales and a wholly owned subsidiary of FMC Technologies, and Technip. On August 4, 2016, FMC Technologies SIS Limited changed its name to TechnipFMC Limited. The business combination agreement was unanimously approved by the board of directors of both companies. The entry into the business combination agreement followed FMC Technologies’ announcement on May 19, 2016, of its intention to enter into a business combination with Technip. At the effective completion of the merger, each issued and outstanding ordinary share of FMC Technologies and Technip, other than shares owned by each respective company or its subsidiaries, will be converted into the right to receive 1.0 and 2.0 ordinary shares of the new company, respectively.
Consummation of the merger is subject to customary closing conditions as specified in the business combination agreement, including but not limited to: (i) receipt of FMC Technologies and Technip stockholder approvals and (ii) clearance from certain competition and foreign investment authorities in the areas where the companies operate. Should FMC Technologies or Technip terminate the business combination agreement under specified circumstances, the terminating party would be required to pay the other party a termination fee equal to $250 million. The transaction is expected to close during the first quarter of 2017.

8


NOTE 3. NEW ACCOUNTING STANDARDS

Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” Among other amendments, this update requires that excess tax benefits or deficiencies be recognized as income tax expense or benefit in the income statement and eliminates the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing activities in the statement of cash flows. This updated guidance also gives an entity the election to either (i) estimate the forfeiture rate of employee stock-based awards or (ii) account for forfeitures as they occur. We early adopted ASU No. 2016-09 as of January 1, 2016. Prospectively beginning January 1, 2016, tax deficiencies have been reflected as income tax expense in the accompanying condensed consolidated statement of income resulting in $0.9 million and $5.8 million of additional tax expense in the three and nine months ended September 30, 2016, respectively. We elected to retrospectively classify excess tax benefits and deficiencies as operating activity and these amounts, which were immaterial for all periods presented, are reflected in the income taxes payable, net line item in the accompanying condensed consolidated statement of cash flows. In addition, we elected to change our accounting policy to account for forfeitures in compensation cost as they occur. We believe this method is preferable as it better reflects actual stock-based compensation expense.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This update requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU will supersede most existing GAAP related to revenue recognition and will supersede some cost guidance in existing GAAP related to construction-type and production-type contract accounting. Additionally, the ASU will significantly increase disclosures related to revenue recognition. In August 2015, the FASB issued ASU No. 2015-14 which deferred the effective date of ASU No. 2014-09 by one year, and as a result, is now effective for us on January 1, 2018. In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” which gives further guidance on identifying performance obligations and clarification of the licensing implementation guidance. Early application is permitted to the original effective date of January 1, 2017. Entities are permitted to apply the amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. During the third quarter of 2016, we completed the initial evaluation of the new standard and the related assessment and review of a representative sample of existing revenue contracts with our customers. We determined, on a preliminary basis, that although the timing and pattern of revenue recognition will remain largely unchanged, the analysis used to determine the timing and pattern of revenue recognition will differ. We also determined the primary impact of the adoption on our consolidated financial statements will be the additional required disclosures around revenue recognition in the notes to the consolidated financial statements. We have not determined the effect of the ASU on our internal control over financial reporting or other changes in business practices and processes but will do so in the design and implementation phase to occur over the next year.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This update requires in scope inventory to be measured at the lower of cost and net realizable value rather than at the lower of cost or market under existing guidance. The amendments in this ASU are effective for us on January 1, 2017. Early application is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” This update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The updated guidance leaves the accounting for leases by lessors largely unchanged from existing GAAP. Early application is permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The guidance will become effective for us on January 1, 2019. The impacts that adoption of the ASU is expected to have on our consolidated financial statements and related disclosures are being evaluated. Additionally, we have not determined the effect of the ASU on our internal control over financial reporting or other changes in business practices and processes.

9


In October 2016, the FASB issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” This update requires that income tax consequences are recognized on an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU are effective for us on January 1, 2018. Early application is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
Change in Accounting Principle
Effective January 1, 2016, we changed the method of valuing inventory for certain domestic inventories in our surface integrated services business from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method under GAAP. The cumulative effect, net of income taxes, of the change in accounting principle was approximately $12.3 million and was recorded as an increase to retained earnings as of January 1, 2013. The statements of income for the years ended December 31, 2013, 2014, and 2015, including interim periods therein, were not retroactively adjusted as the adjustment for each of the periods was not material. We believe the FIFO method is preferable as it better reflects the current value of inventory reported in the consolidated balance sheets, provides for better matching of costs of goods sold with related revenue, provides for greater consistency and uniformity across our operations with respect to the method of inventory valuation, and is the method used by management to monitor the financial results of the business for operational and financial planning.
NOTE 4. EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and diluted earnings per share calculation was as follows: 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In millions, except per share data)
2016
 
2015
 
2016
 
2015
Income from continuing operations attributable to FMC Technologies, Inc.
$
46.3

 
$
82.0

 
$
63.6

 
$
337.5

Weighted average number of shares outstanding
226.9

 
230.2

 
227.3

 
231.6

Dilutive effect of restricted stock units
1.3

 
0.8

 
1.2

 
0.9

Total shares and dilutive securities
228.2

 
231.0

 
228.5

 
232.5

 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations attributable to FMC Technologies, Inc.
$
0.20

 
$
0.36

 
$
0.28

 
$
1.46

Diluted earnings per share from continuing operations attributable to FMC Technologies, Inc.
$
0.20

 
$
0.35

 
$
0.28

 
$
1.45


10


NOTE 5. RESTRUCTURING AND IMPAIRMENT EXPENSE
Restructuring and impairment expense were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Restructuring expense:
 
 
 
 
 
 
 
Subsea Technologies
$
0.5

 
$
14.6

 
$
3.0

 
$
20.7

Surface Technologies
13.8

 
1.6

 
21.6

 
8.7

Energy Infrastructure
1.1

 
1.7

 
3.0

 
4.4

Corporate and other
7.6

 

 
7.6

 

Total restructuring expense
23.0

 
17.9


35.2

 
33.8

Impairment expense:
 
 
 
 
 
 
 
Subsea Technologies
0.5

 
2.2

 
2.8

 
2.6

Surface Technologies
0.3

 
58.0

 
36.2

 
61.8

Energy Infrastructure

 

 

 

Corporate and other

 

 
1.2

 

Total impairment expense
0.8

 
60.2


40.2

 
64.4

Total restructuring and impairment expense
$
23.8

 
$
78.1


$
75.4

 
$
98.2

Restructuring—As a result of the decline in crude oil prices and its effect on the demand for products and services in the oilfield services industry worldwide, beginning in 2015, we initiated a company-wide reduction in workforce and facility consolidation intended to reduce costs and better align our workforce with current and anticipated activity levels, which resulted in the continued recognition of severance costs relating to termination benefits and other restructuring charges.
Asset impairments—We conduct impairment tests on long-lived assets whenever events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition over the asset’s remaining useful life. Our review of recoverability of the carrying value of our assets considers several assumptions including the intended use and service potential of the asset.
The prolonged downturn in the energy market and its corresponding impact on our business outlook led us to conclude the carrying amount of certain long-lived assets in our U.S. surface integrated services business exceeded their fair values. The low commodity price environment’s impact on our outlook for revenue growth and profitability of our U.S. surface integrated services business led us to record impairment charges in our Surface Technologies segment during the nine months ended September 30, 2016. These asset impairments included impairment charges of our flowback plant, property and equipment and related customer relationships intangible assets of $12.4 million and $3.4 million, respectively, to record the assets to their combined fair value of $44.7 million as of March 31, 2016.
Also, we recorded impairment charges of $15.3 million and $2.8 million, to our wireline equipment and allocated goodwill, respectively, to record the assets to their combined fair value of $20.0 million as of March 31, 2016. The impairment charges, recorded in our Surface Technologies segment, include wireline operations in both the United States and Canada and relate to the sale of these assets. Refer to Note 6 for information related to the sale of these assets.
During the nine months ended September 30, 2015, we recorded impairment charges of $56.6 million to our wireline and flowback assets, customer relationships and related goodwill in our surface integrated services business in Canada. These impairment charges, recorded in our Surface Technologies segment, included charges against customer relationship intangible assets, wireline and flowback assets, and related goodwill in Canada.

11


NOTE 6. DISPOSITION OF BUSINESS AND DISCONTINUED OPERATIONS
Wireline Operations—On June 1, 2016, we completed the sale of property, plant, and equipment related to our wireline operations in our surface integrated services businesses in the United States and Canada to Reliance Oilfield Services, LLC. Results of operations related to our wireline operations were historically reported in our Surface Technologies segment. We recognized a $0.6 million loss on the sale during the nine months ended September 30, 2016.

Discontinued Operations—In 2007, the Algerian Tax Authority issued a notice of tax assessment against SOFEC Floating Systems, Inc. (“SOFEC”) for calendar years 2003 through 2006. SOFEC, a former wholly-owned subsidiary of FMC Technologies, issued a protest in 2009 in response to the assessment, and during 2016, we were notified the tax assessment protest was officially rejected. During the period assessed, SOFEC engaged in a multi-year supply and installation project for Sonatrach, Algeria’s national oil company. During the three months ended September 30, 2016, we expensed approximately $14.0 million, net of income taxes, related to this discontinued operation.
NOTE 7. INVENTORIES
Inventories consisted of the following:
(In millions)
September 30,
2016
 
December 31,
2015
 
 
 
As Adjusted
Raw materials
$
130.3

 
$
149.9

Work in process
101.6

 
114.8

Finished goods
649.8

 
723.4

 
881.7

 
988.1

LIFO and valuation adjustments
(240.1
)
 
(224.0
)
Inventories, net
$
641.6

 
$
764.1

NOTE 8. EQUITY METHOD INVESTMENTS
FTO Services—FMC Technologies Offshore, LLC (“FTO Services”) is an affiliated company in the form of a joint venture between FMC Technologies and Edison Chouest Offshore LLC. We have accounted for our 50% investment using the equity method of accounting, and its results are reported in our Subsea Technologies segment. Additionally, debt obligations under a revolving credit facility of FTO Services were jointly and severally guaranteed by FMC Technologies and Edison Chouest Offshore LLC. Refer to Note 11 for additional information regarding the guarantee.
FTO Services experienced net losses since formation due to expenses related to startup of operations and as a result of the downturn in the oilfield services industry. We recognized $5.2 million and $12.0 million of losses from equity earnings in affiliates for the three months ended September 30, 2016 and 2015, respectively, and $22.5 million and $30.4 million of losses from equity earnings in affiliates for the nine months ended September 30, 2016 and 2015, respectively, which are included in lease and other income in the accompanying condensed consolidated statements of income. As of September 30, 2016, the carrying value of our equity method investment in FTO Services was $(5.3) million and is included as a component of other current liabilities in the accompanying condensed consolidated balance sheets. Due to market conditions, FMC Technologies and Edison Chouest Offshore LLC agreed during the third quarter of 2016 to dissolve FTO Services. As of September 30, 2016, substantially all activities related to the joint venture have ceased. As part of this dissolution, we performed under the revolving credit facility guarantee with joint and equal payments of the maximum potential amount made by FMC Technologies and Edison Chouest Offshore LLC.
Forsys Subsea—Forsys Subsea Limited (“Forsys Subsea”) is an affiliated company in the form of a joint venture between FMC Technologies and Technip S.A. We have accounted for our 50% investment using the equity method of accounting, and its results are reported in our Subsea Technologies segment. Forsys Subsea has experienced net losses since formation due to expenses related to startup of operations and as a result of the downturn in the oilfield services industry. We recognized $3.9 million and $12.1 million of losses from equity earnings in affiliates for the three and nine months ended September 30, 2016, respectively, which are included in lease and other income in the accompanying consolidated statements of income.

12


NOTE 9. GOODWILL
The carrying amount of goodwill by business segment was as follows:
(In millions)
Subsea
Technologies
 
Surface
Technologies
 
Energy
Infrastructure
 
Total
December 31, 2015
$
357.4

 
$
71.9

 
$
85.4

 
$
514.7

UCOS® product group transfer (1)
2.7

 

 
(2.7
)
 

Impairment (2)

 
(2.8
)
 

 
(2.8
)
Translation
10.2

 
1.9

 
(0.1
)
 
12.0

September 30, 2016
$
370.3

 
$
71.0

 
$
82.6

 
$
523.9

______________________________
(1) 
Beginning in the first quarter of 2016, UCOS® product group results are included in Subsea Technologies. Refer to Note 18 for additional disclosure.
(2) 
Refer to Note 5 for additional disclosure related to impairment of goodwill during the nine months ended September 30, 2016.
NOTE 10. DEBT
As of September 30, 2016, all outstanding amounts under our term loan were repaid.
Long-term debt consisted of the following: 
(In millions)
September 30,
2016
 
December 31,
2015
Revolving credit facility
$

 
$

Commercial paper (1)
447.7

 
337.2

2.00% Notes due 2017
299.5

 
299.1

3.45% Notes due 2022
497.8

 
497.5

Term loan

 
15.6

Capital leases
0.4

 
0.7

Total long-term debt
1,245.4

 
1,150.1

Less: current portion
(0.3
)
 
(16.0
)
Long-term debt, less current portion
$
1,245.1

 
$
1,134.1

 _______________________  
(1) 
Committed credit available under our revolving credit facility provided the ability to refinance our commercial paper obligations on a long-term basis. As we have 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 condensed consolidated balance sheets at September 30, 2016 and December 31, 2015. As of September 30, 2016, our commercial paper borrowings had a weighted average interest rate of 1.01%.


13


NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments associated with leases—In March 2014, we entered into construction and operating lease agreements to finance the construction of manufacturing and office facilities located in Houston, TX. In January 2016 construction of the facilities was completed and rental payments under the operating lease commenced. Upon expiration of the operating lease in September 2021, we have the option to renew the lease, purchase the facilities or re-market the facilities on behalf of the lessor, including certain guarantees of residual value under the re-marketing option.
Contingent liabilities associated with guarantees—In the ordinary course of business, we enter into standby letters of credit, performance bonds, surety bonds and other guarantees with financial institutions for the benefit of our customers, vendors and other parties. At September 30, 2016, these financial instruments represented $504.9 million of guarantees related to our future performance and $49.0 million of guarantees to secure a portion of our existing financial obligations.
In August 2014, FMC Technologies entered into an arrangement to guarantee the debt obligations under a revolving credit facility of FMC Technologies Offshore, LLC (“FTO Services”), our joint venture with Edison Chouest Offshore LLC. Under the terms of the guarantee, FMC Technologies and Edison Chouest Offshore LLC jointly and severally guaranteed amounts under the revolving credit facility with a maximum potential amount of future payments of $40.0 million that would become payable if FTO Services defaults in payment under the terms of the revolving credit facility. The approximate term of the guarantee, which expired in August 2016, was two years. During the three months ended September 30, 2016, we performed under the guarantee with joint and equal payments of the maximum potential amount made by FMC Technologies and Edison Chouest Offshore LLC. Refer to Note 8 for additional information regarding the accounting for our investment in FTO Services.
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 or disputes in the ordinary course of our business. Management is unable to predict the ultimate outcome of these actions because of their inherent uncertainty. 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.

14


NOTE 12. STOCKHOLDERS’ EQUITY
The following table summarizes activity within certain components of stockholders’ equity during the nine months ended September 30, 2016:
(In millions)
Common Stock 
Held in Treasury 
and Employee
Benefit Trust
 
Capital in
Excess of Par
Value of
Common Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance as of December 31, 2015
$
(1,614.8
)
 
$
759.0

 
$
(872.7
)
Other comprehensive income (loss)

 

 
127.5

Excess tax benefits on stock-based payment arrangements

 
0.2

 

Taxes withheld on issuance of stock-based awards

 
(8.6
)
 

Purchases of treasury stock
(50.6
)
 

 

Reissuances of treasury stock
21.7

 
(21.7
)
 

Net purchases of common stock for employee benefit trust
0.2

 
(0.8
)
 

Stock-based compensation (Note 15)

 
36.0

 

Balance as of September 30, 2016
$
(1,643.5
)
 
$
764.1

 
$
(745.2
)
There were no cash dividends declared during the three and nine months ended September 30, 2016 and 2015.

The following is a summary of our treasury stock activity for the nine months ended September 30, 2016 and 2015:
(Number of shares in thousands)
Treasury Stock
Balance as of December 31, 2014
54,626

Stock awards
(523
)
Treasury stock purchases
3,934

Balance as of September 30, 2015
58,037

 
 
Balance as of December 31, 2015
59,356

Stock awards
(803
)
Treasury stock purchases
1,889

Balance as of September 30, 2016
60,442

We repurchased $50.6 million and $149.3 million of common stock during the nine months ended September 30, 2016 and September 30, 2015, respectively, under our authorized share repurchase program. As of September 30, 2016, our Board of Directors had authorized 90.0 million shares of common stock under our share repurchase program, and approximately 15.9 million shares of common stock remained available for purchase. Pursuant to the business combination agreement executed by FMC Technologies and Technip, repurchases of common stock during the period prior to the closing of the merger are suspended. 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.

15


Accumulated other comprehensive loss consisted of the following: 
(In millions)
Foreign Currency
Translation
 
Hedging
 
Defined Pension and Other Post-retirement Benefits
 
Accumulated Other
Comprehensive Loss
December 31, 2015
$
(494.2
)
 
$
(87.1
)
 
$
(291.4
)
 
$
(872.7
)
Other comprehensive income (loss) before reclassifications, net of tax
54.6

 
16.8

 

 
71.4

Reclassification adjustment for net losses (gains) included in net income, net of tax

 
41.7

 
14.4

 
56.1

Other comprehensive income (loss), net of tax
54.6

 
58.5

 
14.4

 
127.5

September 30, 2016
$
(439.6
)
 
$
(28.6
)
 
$
(277.0
)
 
$
(745.2
)
Reclassifications out of accumulated other comprehensive loss consisted of the following:
 
 
Three Months Ended
 
Nine Months Ended
 
 
(In millions)
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
 
Details about Accumulated Other Comprehensive Loss Components
 
Amount Reclassified out of Accumulated Other
Comprehensive Loss
 
Affected Line Item in the Condensed Consolidated Statement of Income
Gains (losses) on hedging instruments
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts:
 
$
(15.9
)
 
$
(29.9
)
 
$
(67.5
)
 
$
(91.6
)
 
Revenue
 
 
(1.1
)
 
17.8

 
14.1

 
36.8

 
Cost of sales
 
 

 
(0.4
)
 

 
(1.3
)
 
Selling, general and administrative expense
 
 
(0.4
)
 
0.1

 
(0.4
)
 

 
Research and development expense
 
 

 
(1.8
)
 

 
0.1

 
Net interest expense
 
 
(17.4
)
 
(14.2
)
 
(53.8
)
 
(56.0
)
 
Income from continuing operations before income taxes
 
 
4.1

 
2.7

 
12.1

 
11.4

 
Provision (benefit) for income taxes
 
 
$
(13.3
)
 
$
(11.5
)
 
$
(41.7
)
 
$
(44.6
)
 
Net income
Defined pension and other post-retirement benefits
 
 
 
 
 
 
 
 
 
 
Amortization of actuarial gain (loss)
 
$
(6.2
)
 
$
(7.7
)
 
$
(18.6
)
 
$
(23.3
)
 
(a) 
Amortization of prior service credit (cost)
 
(0.1
)
 

 
(0.5
)
 
(0.1
)
 
(a) 
Settlement cost
 
(1.8
)
 
(2.0
)
 
(1.8
)
 
(2.0
)
 
(a) 
 
 
(8.1
)
 
(9.7
)
 
(20.9
)
 
(25.4
)
 
Income from continuing operations before income taxes
 
 
2.6

 
3.2

 
6.5

 
8.2

 
Provision (benefit) for income taxes
 
 
$
(5.5
)
 
$
(6.5
)
 
$
(14.4
)
 
$
(17.2
)
 
Net income
_______________________
(a)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 14 for additional details).

16


NOTE 13. INCOME TAXES
Our income tax provision (benefit) for the three months ended September 30, 2016 and 2015, reflected effective tax rates of (25.8)% and 19.2%, respectively. The year-over-year decrease in the effective tax rate was primarily due to a favorable change in the forecasted country mix of earnings, partially offset by nondeductible reorganization costs associated with the pending merger with Technip.
Our income tax provisions for the nine months ended September 30, 2016 and 2015, reflected effective tax rates of 12.4% and 25.0%, respectively. The year-over-year decrease in the effective tax rate was primarily due to a favorable change in the forecasted country mix of earnings, partially offset by nondeductible reorganization costs associated with the pending merger with Technip.
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.
NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFITS
The components of net periodic benefit cost were as follows:
 
Pension Benefits
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
(In millions)
U.S.
 
Int’l
 
U.S.
 
Int’l
 
U.S.
 
Int’l
 
U.S.
 
Int’l
Service cost
$
3.2

 
$
3.0

 
$
3.5

 
$
4.0

 
$
9.6

 
$
9.1

 
$
10.8

 
$
12.2

Interest cost
7.0

 
3.3

 
6.6

 
3.8

 
21.2

 
10.4

 
19.8

 
11.2

Expected return on plan assets
(11.1
)
 
(5.9
)
 
(10.9
)
 
(7.1
)
 
(33.5
)
 
(18.8
)
 
(32.9
)
 
(21.0
)
Amortization of prior service cost (credit)

 

 

 

 

 
0.5

 

 

Amortization of actuarial loss (gain), net
3.9

 
2.4

 
4.7

 
3.0

 
11.7

 
7.4

 
14.5

 
9.4

Settlement cost
1.8

 

 
2.0

 
0.1

 
1.8

 

 
2.0

 
0.1

Net periodic benefit cost
$
4.8

 
$
2.8

 
$
5.9

 
$
3.8

 
$
10.8

 
$
8.6

 
$
14.2

 
$
11.9

 
Other Post-retirement Benefits
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Interest cost
$
0.1

 
$
0.2

 
$
0.3

 
$
0.4

Net periodic benefit cost
$
0.1

 
$
0.2

 
$
0.3

 
$
0.4


During the nine months ended September 30, 2016, we contributed $56.0 million to our domestic pension benefit plans and $11.3 million to our international pension benefit plans.

17


NOTE 15. STOCK-BASED COMPENSATION
Under the Amended and Restated FMC Technologies, Inc. Incentive Compensation and Stock Plan (the “Plan”), we have primarily granted awards in the form of nonvested stock units (also known as restricted stock units in the plan document). We recognize compensation expense and the corresponding tax benefits for awards under the Plan. Stock-based compensation expense for nonvested stock units was $5.1 million and $11.5 million for the three months ended September 30, 2016 and 2015, respectively, and $36.1 million and $43.2 million for the nine months ended September 30, 2016 and 2015, respectively.
During the nine months ended September 30, 2016, we granted the following restricted stock units to employees: 
(Number of restricted stock shares in thousands)
Shares
 
Weighted-
Average Grant
Date Fair Value (per share)
Time-based
1,018

  
 
Performance-based
387

 
Market-based
193

 
Total granted
1,598

  
$
23.83

_______________________  
*
Assumes grant date expected payout
For current-year performance-based awards, actual payouts may vary from zero to 774 thousand shares, contingent 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, 2016. Compensation cost is measured based on the current expected outcome of the performance conditions and may be adjusted until the performance period ends.
The following table summarizes the potential payouts for market-based awards for the nine months ended September 30, 2016:
(Number of market-based awards in thousands)
Minimum
 
Maximum
2014 Market-based awards

 
86

2015 Market-based awards

 
123

2016 Market-based awards

 
387

Our 2014, 2015 and 2016 market-based awards actual payouts are contingent upon our performance relative to the same peer group of companies with respect to total shareholder return (“TSR”) for the three year periods ending December 31, 2016, 2017 and 2018, respectively. The payout for the TSR metric is determined based on our performance relative to the peer group. A payout is possible regardless of whether our TSR for the three year period is positive or negative. However, if our TSR for the three year period is not positive, the payout with respect to TSR is limited to the target previously established by the Compensation Committee of the Board of Directors regardless of our relative ranking to the peer group. 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.

18


NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
For purposes of mitigating the effect of changes in exchange rates, we hold derivative financial instruments to hedge the risks of certain identifiable and anticipated transactions and recorded assets and liabilities in our consolidated balance sheets. 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. Our policy is to hold derivatives only for the purpose of hedging risks associated with anticipated foreign currency purchases and sales created in the normal course of business 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. For derivative instruments not designated as hedging instruments, any change in the fair value of those instruments are reflected in earnings in the period such change occurs.
We hold the following types of derivative instruments:
Foreign 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 and recorded assets and liabilities in our consolidated balance sheets. At September 30, 2016, we held the following material net positions:
 
Net Notional Amount
Bought (Sold)
(In millions)
 
 
USD Equivalent
Australian dollar
129.2

 
98.8

Brazilian real
469.2

 
144.5

British pound
106.5

 
138.2

Canadian dollar
(173.4
)
 
(132.3
)
Euro
136.5

 
152.5

Malaysian ringgit
124.9

 
30.2

Nigerian naira
(5,408.8
)
 
(17.2
)
Singapore dollar
168.4

 
123.5

U.S. dollar
(641.1
)
 
(641.1
)
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 September 30, 2016, our portfolio of these instruments included the following material net positions:
 
Net Notional Amount
Bought (Sold)
(In millions)
 
 
USD Equivalent
Euro
(34.3
)
 
(38.3
)
Norwegian krone
(240.9
)
 
(30.0
)
U.S. dollar
76.3

 
76.3

Fair value amounts for all outstanding derivative instruments have been determined using available market information and commonly accepted valuation methodologies. Refer to Note 17 to these consolidated financial statements 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 are settled.

19


The following table presents the location and fair value amounts of derivative instruments reported in the consolidated balance sheets.
 
September 30, 2016
 
December 31, 2015
(In millions)
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts:
 
 
 
 
 
 
 
Current – Derivative financial instruments
$
98.6

 
$
168.5

 
$
307.6

 
$
488.2

Long-term – Derivative financial instruments
5.1

 
5.6

 
0.1

 
0.5

Total derivatives designated as hedging instruments
103.7

 
174.1

 
307.7

 
488.7

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts:
 
 
 
 
 
 
 
Current – Derivative financial instruments
29.7

 
37.1

 
26.3

 
28.7

Long-term – Derivative financial instruments
1.4

 
5.1

 

 

Total derivatives not designated as hedging instruments
31.1

 
42.2

 
26.3

 
28.7

Total derivatives
$
134.8

 
$
216.3

 
$
334.0

 
$
517.4

We recognized losses of $1.4 million and $3.8 million on cash flow hedges for the three months ended September 30, 2016 and 2015, respectively, and losses of $1.4 million and $8.4 million for the nine months ended September 30, 2016 and 2015, respectively, due to hedge ineffectiveness as it was probable that the original forecasted transaction would not occur. Cash flow hedges of forecasted transactions, net of tax, resulted in an accumulated other comprehensive loss of $28.6 million and $87.1 million at September 30, 2016, and December 31, 2015 respectively. We expect to transfer an approximate $15.3 million loss 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 first half of 2019.

20


The following tables present the location of gains (losses) on the consolidated statements of income related to derivative instruments designated as cash flow hedges.
 
Gain (Loss) Recognized in
OCI (Effective Portion)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Foreign exchange contracts
$
2.5

 
$
(41.5
)
 
$
20.7

 
$
(63.8
)
Location of Gain (Loss) Reclassified from 
Accumulated OCI into Income
Gain (Loss) Reclassified from Accumulated
OCI into Income (Effective Portion)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Foreign exchange contracts:
 
 
 
 
 
 
 
Revenue
$
(15.9
)
 
$
(29.9
)
 
$
(67.5
)
 
$
(91.6
)
Cost of sales
(1.1
)
 
17.8

 
14.1

 
36.8

Selling, general and administrative expense

 
(0.4
)
 

 
(1.3
)
Research and development expense
(0.4
)
 
0.1

 
(0.4
)
 

Net interest expense

 
(1.8
)
 

 
0.1

Total
$
(17.4
)
 
$
(14.2
)
 
$
(53.8
)
 
$
(56.0
)
 
 
 
 
 
 
 
 
Location of Gain (Loss) Recognized in Income
Gain (Loss) Recognized in Income (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Foreign exchange contracts:
 
 
 
 
 
 
 
Revenue
$
4.0

 
$
4.4

 
$
11.0

 
$
11.3

Cost of sales
(3.2
)
 
(4.1
)
 
(13.0
)
 
(14.4
)
Selling, general and administrative expense
0.1

 

 
0.1

 

Net interest expense

 

 

 
(0.1
)
Other expense, net
(1.4
)
 

 
(1.4
)
 

Total
$
(0.5
)
 
$
0.3

 
$
(3.3
)
 
$
(3.2
)
The following table presents the location of gains (losses) on the consolidated statements of income related to derivative instruments not designated as hedging instruments.
Location of Gain (Loss) Recognized in Income
Gain (Loss) Recognized in Income on Derivatives
(Instruments Not Designated as Hedging Instruments)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Foreign exchange contracts:
 
 
 
 
 
 
 
Revenue
$
(2.0
)
 
$
(1.1
)
 
$
(4.8
)
 
$
(6.4
)
Cost of sales
(0.3
)
 
0.5

 
1.1

 
2.0

Other expense, net
(1.8
)
 
13.3

 
27.9

 
34.3

Total
$
(4.1
)
 
$
12.7

 
$
24.2

 
$
29.9



21


Balance Sheet Offsetting—We execute derivative contracts only with counterparties that consent to a master netting agreement which permits net settlement of the gross derivative assets against gross derivative liabilities. Each instrument is accounted for individually and assets and liabilities are not offset. As of September 30, 2016, and December 31, 2015 we had no collateralized derivative contracts. The following tables present both gross information and net information of recognized derivative instruments:
 
September 30, 2016
 
December 31, 2015
(In millions)
Gross Amount Recognized
 
Gross Amounts Not Offset Permitted Under Master Netting Agreements
 
Net Amount
 
Gross Amount Recognized
 
Gross Amounts Not Offset Permitted Under Master Netting Agreements
 
Net Amount
Derivative assets
$
134.8

 
$
(122.9
)
 
$
11.9

 
$
334.0

 
$
(316.8
)
 
$
17.2

 
September 30, 2016
 
December 31, 2015
(In millions)
Gross Amount Recognized
 
Gross Amounts Not Offset Permitted Under Master Netting Agreements
 
Net Amount
 
Gross Amount Recognized
 
Gross Amounts Not Offset Permitted Under Master Netting Agreements
 
Net Amount
Derivative liabilities
$
216.3

 
$
(122.9
)
 
$
93.4

 
$
517.4

 
$
(316.8
)
 
$
200.6

NOTE 17. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis were as follows: 
 
September 30, 2016
 
December 31, 2015
(In millions)
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
$
18.4

 
$
18.4

 
$

 
$

 
$
18.4

 
$
18.4

 
$

 
$

Fixed income
4.8

 
4.8

 

 

 
4.9

 
4.9

 

 

Money market fund
1.8

 

 
1.8

 

 
2.9

 

 
2.9

 

Other investments

 

 

 

 
1.0

 
1.0

 

 

Stable value fund (1)
1.1

 
 
 
 
 
 
 
1.2

 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
134.8

 

 
134.8

 

 
334.0

 

 
334.0

 

Total assets
$
160.9

 
$
23.2

 
$
136.6

 
$

 
$
362.4

 
$
24.3

 
$
336.9

 
$

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
216.3

 
$

 
$
216.3

 
$

 
$
517.4

 
$

 
$
517.4

 
$

Total liabilities
$
216.3

 
$

 
$
216.3

 
$

 
$
517.4

 
$

 
$
517.4

 
$

 _______________________  
(1) 
Certain investments that are measured at fair value using net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.

22


Investments—The fair value measurement of our equity securities, fixed income and other investment assets is based on quoted prices that we have the ability to access in public markets. Our stable value fund and money market fund are 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.
Refer to Note 16 for additional disclosure related to derivative financial instruments.
Assets measured at fair value on a non-recurring basis were as follows:
Fair value of long-lived non-financial assets—Long-lived, non-financial assets are measured at fair value on a non-recurring basis for the purposes of calculating impairment. The fair value of our wireline long-lived, non-financial assets measured on a non-recurring basis were determined by Level 1 observable inputs related to its held for sale classification during the first quarter of 2016. The fair value measurements of our flowback long-lived, non-financial assets measured on a non-recurring basis were determined by estimating the amount and timing of net future cash flows, which are Level 3 unobservable inputs, and discounting them using a risk-adjusted rate of interest. Significant increases or decreases in actual cash flows may result in valuation changes. During the nine months ended September 30, 2016, asset impairment charges recorded primarily related to our surface integrated services business. Refer to Note 5 for additional disclosure related to these asset impairments.
Other fair value disclosures:
Fair value of debt—The fair value, based on Level 1 quoted market rates, of our 2.00% Notes due 2017 and 3.45% Notes due 2022 (collectively, “Senior Notes”) was approximately $804.8 million at September 30, 2016 and approximately $761.9 million at December 31, 2015, as compared to the $800.0 million face value of the debt, net of issue discounts and issuance costs, recorded in the condensed consolidated balance sheets.
Other fair value disclosures—The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, short-term debt, commercial paper, debt associated with our term loan, as well as amounts included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair value.
Credit 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 gross derivative assets against gross derivative liabilities.

23


NOTE 18. BUSINESS SEGMENTS
Beginning in the first quarter of 2016, the Invalco product line, formally reported in the results of Surface Technologies, is now reported in Energy Infrastructure. In addition, beginning in the first quarter of 2016, the UCOS® product group, formally reported in the results of Energy Infrastructure, is now reported in Subsea Technologies. Prior year information has not been restated due to the immateriality of these businesses.
The results of our equity method joint ventures, FTO Services and Forsys Subsea, are included in the results of operations and capital employed of the Subsea Technologies segment. Refer to Note 8 for additional information.
Segment revenue and segment operating profit were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016
 
2015
 
2016
 
2015
Segment revenue
 
 
 
 
 
 
 
Subsea Technologies
$
798.4

 
$
1,093.7

 
$
2,516.6

 
$
3,490.3

Surface Technologies
218.1

 
361.0

 
702.3

 
1,170.6

Energy Infrastructure
77.1

 
97.1

 
246.3

 
299.4

Other revenue (1) and intercompany eliminations
(2.4
)
 
(6.8
)
 
(15.0
)
 
(24.9
)
Total revenue
$
1,091.2

 
$
1,545.0

 
$
3,450.2

 
$
4,935.4

Income before income taxes:
 
 
 
 
 
 
 
Segment operating profit (loss):
 
 
 
 
 
 
 
Subsea Technologies
$
119.7

 
$
170.7

 
$
326.4

 
$
522.9

Surface Technologies
(19.6
)
 
(22.5
)
 
(69.9
)
 
67.9

Energy Infrastructure
2.5

 
(2.0
)
 
7.0

 
6.2

Intercompany eliminations
(0.1
)
 

 
0.1

 

Total segment operating profit
102.5

 
146.2

 
263.6

 
597.0

Corporate items:
 
 
 
 
 
 
 
Corporate expense (2)
(14.2
)
 
(14.7
)
 
(41.6
)
 
(45.0
)
Other revenue (1) and other expense, net (3) 
(43.8
)
 
(21.9
)
 
(126.6
)
 
(77.8
)
Net interest expense
(7.7
)
 
(8.1
)
 
(22.8