FET 2014 Q3 10-Q
Table of Contents
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q
___________________________________

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended September 30, 2014
OR
o
 
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 001-35504
FORUM ENERGY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
61-1488595
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 

920 Memorial City Way, Suite 1000
Houston, Texas 77024
(Address of principal executive offices)
(281) 949-2500
(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 þ 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 þ No o
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. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 24, 2014, there were 94,148,831 common shares outstanding.

Table of Contents
 


Table of Contents



2
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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements
Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated statements of operations and comprehensive income
(Unaudited)
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share information)
2014
 
2013
 
2014
 
2013
Net sales
$
468,822

 
$
390,192

 
$
1,301,039

 
$
1,131,078

Cost of sales
316,784

 
265,021

 
883,070

 
776,618

Gross profit
152,038

 
125,171

 
417,969

 
354,460

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
81,316

 
71,594

 
230,087

 
202,697

Transaction expenses
1,516

 
376

 
2,326

 
2,191

Loss (gain) on sale of assets and other
(85
)
 
209

 
320

 
229

Total operating expenses
82,747

 
72,179

 
232,733

 
205,117

Earnings from equity investment
6,749

 
2,946

 
17,997

 
2,946

Operating income
76,040

 
55,938

 
203,233

 
152,289

Other expense (income)
 
 
 
 
 
 
 
Interest expense
7,699

 
4,373

 
23,174

 
10,847

Foreign exchange (gains) losses and other, net
(5,222
)
 
2,311

 
(616
)
 
1,863

Deferred loan costs written off
—

 
2,149

 
—

 
2,149

Total other expense
2,477

 
8,833

 
22,558

 
14,859

Income before income taxes
73,563

 
47,105

 
180,675

 
137,430

Provision for income tax expense
21,332

 
13,924

 
52,395

 
42,371

Net income
52,231

 
33,181

 
128,280

 
95,059

Less: Income attributable to noncontrolling interest
5

 
40

 
2

 
59

Net income attributable to common stockholders
52,226

 
33,141

 
128,278

 
95,000

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
93,331

 
91,443

 
92,728

 
90,347

Diluted
96,198

 
94,734

 
95,631

 
94,527

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.56

 
$
0.36

 
$
1.38

 
$
1.05

Diluted
$
0.54

 
$
0.35

 
$
1.34

 
$
1.01

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net income
52,231

 
33,181

 
128,280

 
95,059

Change in foreign currency translation, net of tax of $0
(34,474
)
 
24,114

 
(21,754
)
 
(789
)
Gain on pension liability
—

 
—

 
2

 
—

Comprehensive income
17,757

 
57,295

 
106,528

 
94,270

Less: comprehensive loss (income) attributable to noncontrolling interests
(32
)
 
(32
)
 
(20
)
 
50

Comprehensive income attributable to common stockholders
$
17,725

 
$
57,263

 
$
106,508

 
$
94,320

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


3
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Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated balance sheets
(Unaudited)
(in thousands, except share information)
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
74,084

 
$
39,582

Accounts receivable—trade, net
313,855

 
250,272

Inventories
454,470

 
441,049

Prepaid expenses and other current assets
38,309

 
29,707

Costs and estimated profits in excess of billings
28,230

 
24,012

Deferred income taxes, net
28,834

 
24,846

Total current assets
937,782

 
809,468

Property and equipment, net of accumulated depreciation
188,991

 
180,292

Deferred financing costs, net
13,746

 
15,658

Intangibles
281,850

 
295,352

Goodwill
808,762

 
802,318

Investment in unconsolidated subsidiary
57,199

 
60,292

Other long-term assets
5,797

 
5,489

Total assets
$
2,294,127

 
$
2,168,869

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
898

 
$
998

Accounts payable—trade
134,078

 
100,221

Accrued liabilities
123,402

 
96,529

Deferred revenue
14,816

 
15,837

Billings in excess of costs and profits recognized
19,043

 
6,398

Total current liabilities
292,237

 
219,983

Long-term debt, net of current portion
420,417

 
512,077

Deferred income taxes, net
100,282

 
97,774

Other long-term liabilities
13,135

 
8,069

Total liabilities
826,071

 
837,903

Commitments and contingencies

 


Equity
 
 
 
Common stock, $0.01 par value, 296,000,000 shares authorized, 94,250,854 and 92,803,389 shares issued
942

 
928

Additional paid-in capital
858,663

 
826,064

Treasury stock at cost, 3,627,259 and 3,585,098 shares
(31,578
)
 
(30,249
)
Warrants
26

 
687

Retained earnings
653,418

 
525,140

Accumulated other comprehensive income
(13,984
)
 
7,785

Total stockholders’ equity
1,467,487

 
1,330,355

Noncontrolling interest in subsidiary
569

 
611

Total equity
1,468,056

 
1,330,966

Total liabilities and equity
$
2,294,127

 
$
2,168,869

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

4
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Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated statements of cash flows
(Unaudited)
  
Nine Months Ended September 30,
(in thousands, except share information)
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
128,280

 
$
95,059

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation expense
28,274

 
26,498

Amortization of intangible assets
20,608

 
17,478

Share-based compensation expense
14,334

 
15,442

Deferred income taxes
(4,477
)
 
11,474

Deferred loan costs written off
—

 
2,149

Earnings from equity investment, net of distributions
3,092

 
(2,946
)
Other
3,644

 
582

Changes in operating assets and liabilities
 
 
 
Accounts receivable—trade
(67,793
)
 
441

Inventories
(14,520
)
 
35,264

Prepaid expenses and other current assets
(6,872
)
 
(12,175
)
Accounts payable, deferred revenue and other accrued liabilities
66,744

 
(9,012
)
Costs and estimated profits in excess of billings, net
8,439

 
(16,127
)
Net cash provided by operating activities
$
179,753

 
$
164,127

Cash flows from investing activities
 
 
 
Acquisition of businesses, net of cash acquired
(38,289
)
 
(181,717
)
Investment in unconsolidated subsidiary
—

 
(112,241
)
Distribution from unconsolidated subsidiary
—

 
64,228

Capital expenditures for property and equipment
(39,932
)
 
(44,717
)
Proceeds from sale of business, property and equipment
8,735

 
739

Net cash used in investing activities
$
(69,486
)
 
$
(273,708
)
Cash flows from financing activities
 
 
 
Borrowings under Credit Facility
—

 
345,520

Repayment of long-term debt
(91,760
)
 
(235,346
)
Payment of contingent consideration
—

 
(11,435
)
Excess tax benefits from stock based compensation
7,291

 
4,225

Repurchases of stock
(1,328
)
 
(850
)
Proceeds from stock issuance
10,332

 
4,768

Deferred financing costs
(6
)
 
(7,600
)
Net cash provided by (used in) financing activities
$
(75,471
)
 
$
99,282

Effect of exchange rate changes on cash
(294
)
 
(2,563
)
Net increase (decrease) in cash and cash equivalents
34,502

 
(12,862
)
Cash and cash equivalents
 
 
 
Beginning of period
39,582

 
41,063

End of period
$
74,084

 
$
28,201

Noncash investing and financing activities
 
 
 
Accrued purchases of property and equipment
$
1,443

 
$
—

Payment of contingent consideration via stock
—

 
4,075

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

5
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Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements
(Unaudited)
1. Organization and basis of presentation
Forum Energy Technologies, Inc. (the "Company"), a Delaware corporation, is a global oilfield products company, serving the subsea, drilling, completion, production and infrastructure sectors of the oil and natural gas industry. The Company designs, manufactures and distributes products and engages in aftermarket services, parts supply and related services that complement the Company’s product offering.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
The Company's investment in an operating entity where the Company has the ability to exert significant influence, but does not control operating and financial policies, is accounted for using the equity method. The Company's share of the net income of this entity is recorded as "Earnings from equity investment" in the condensed consolidated statements of operations and comprehensive income. The investment in this entity is included in "Investment in unconsolidated subsidiary" in the condensed consolidated balance sheets. The Company reports its share of equity earnings within operating income as the investee's operations are integral to the operations of the Company.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the Company's financial position, results of operations and cash flows have been included. Operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014 or any other interim period.
These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America ("GAAP") for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013, which are included in the Company’s 2013 Annual Report on Form 10-K filed with the SEC on February 28, 2014 (the "Annual Report").
2. Recent accounting pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB"), which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.
In August 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements - Going Concern. The new standard requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern for both annual and interim reporting periods. The guidance is effective for the Company for the fiscal year beginning January 1, 2016 and interim periods thereafter. The guidance is not expected to have a material impact on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The new standard will be effective January 1, 2017 and the Company is currently evaluating the impacts of adoption and the implementation approach to be used.
In April 2014, the FASB issued ASU 2014-08 — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The ASU raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a

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Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

discontinued operation. The guidance is effective for the Company for the fiscal year beginning January 1, 2015, and is not expected to have a material impact on the consolidated financial statements.
3. Acquisitions and investment in joint venture
2014 Acquisition
Effective May 1, 2014, the Company completed the acquisition of Quality Wireline & Cable, Inc. ("Quality") for consideration of $38.3 million. Quality is a Calgary, Alberta based manufacturer of high-performance cased-hole electro-mechanical wireline cables and specialty cables for the oil and gas industry. Quality is included in the Drilling & Subsea segment. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):
 
 
2014 Acquisition
Current assets, net of cash acquired
 
$
7,595

Property and equipment
 
3,837

Intangible assets (primarily customer relationships)
 
11,527

Non-tax-deductible goodwill
 
19,942

Current liabilities
 
(1,615
)
Deferred tax liabilities
 
(2,997
)
Net assets acquired
 
$
38,289

2013 Acquisitions
Effective July 1, 2013, the Company completed the following two acquisitions for aggregate consideration of approximately $180.0 million:
•
Blohm + Voss Oil Tools GmbH and related entities ("B+V"), a manufacturer of pipe handling equipment used on offshore and onshore drilling rigs with locations in Hamburg, Germany and Willis, Texas. B+V is included in the Drilling & Subsea segment; and
•
Moffat 2000 Ltd. ("Moffat"), a Newcastle, England based manufacturer of subsea pipeline inspection gauge launching and receiving systems, and subsea connectors. Moffat is included in the Drilling & Subsea segment.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):
 
 
2013 Acquisitions
Current assets, net of cash acquired
 
$
60,669

Property and equipment
 
4,545

Intangible assets (primarily customer relationships)
 
59,242

Non-tax-deductible goodwill
 
100,257

Current liabilities
 
(17,619
)
Long-term liabilities
 
(7,879
)
Deferred tax liabilities
 
(20,108
)
Net assets acquired
 
$
179,107

Revenues and net income related to the acquisitions were not significant for the year ended December 31, 2013. Pro forma results of operations for the 2014 and 2013 acquisitions have not been presented because the effects were not material to the consolidated financial statements on either an individual or aggregate basis.
Effective July 1, 2013, the Company jointly purchased Global Tubing, LLC ("Global Tubing") with an equal partner, with management retaining a small interest. Global Tubing is a Dayton, Texas based provider of coiled tubing strings and

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Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

related services. The Company's equity investment is reported in the Production & Infrastructure segment and is accounted for using the equity method of accounting. As Global Tubing's products are complementary to the Company’s well intervention and stimulation products and the investment's business is integral to the Company's operations, the earnings from the equity investment are included within operating income. 
4. Inventories
The Company's significant components of inventory at September 30, 2014 and December 31, 2013 were as follows (in thousands):
 
September 30,
2014
 
December 31,
2013
Raw materials and parts
$
150,270

 
$
139,573

Work in process
44,244

 
51,819

Finished goods
291,863

 
276,076

Gross inventories
486,377

 
467,468

Inventory reserve
(31,907
)
 
(26,419
)
Inventories
$
454,470

 
$
441,049

5. Goodwill and intangible assets
Goodwill
The changes in the carrying amount of goodwill from January 1, 2014 to September 30, 2014, were as follows (in thousands):
 
Drilling & Subsea
 
Production & Infrastructure
 
Total
Goodwill Balance at January 1, 2014 net
$
723,355

 
$
78,963

 
$
802,318

Acquisitions and divestitures
16,287

 
—

 
16,287

Impact of non-U.S. local currency translation
(9,634
)
 
(209
)
 
(9,843
)
Goodwill Balance at September 30, 2014 net
$
730,008

 
$
78,754

 
$
808,762


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Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

Intangible assets
Intangible assets consisted of the following as of September 30, 2014 and December 31, 2013, respectively (in thousands):
  
September 30, 2014
 
Gross carrying
amount
 
Accumulated
amortization
 
Net amortizable
intangibles
 
Amortization
period (in years)
Customer relationships
$
288,718

 
$
(82,100
)
 
$
206,618

 
4-15
Patents and technology
31,680

 
(7,546
)
 
24,134

 
5-17
Non-compete agreements
7,216

 
(5,618
)
 
1,598

 
3-6
Trade names
48,854

 
(14,514
)
 
34,340

 
10-15
Distributor relationships
22,160

 
(12,230
)
 
9,930

 
8-15
Trademark
5,230

 
—

 
5,230

 
Indefinite
Intangible Assets Total
$
403,858

 
$
(122,008
)
 
$
281,850

 
 

  
December 31, 2013
 
Gross carrying
amount
 
Accumulated
amortization
 
Net amortizable
intangibles
 
Amortization
period (in years)
Customer relationships
$
283,171

 
$
(67,435
)
 
$
215,736

 
4-15
Patents and technology
33,843

 
(6,510
)
 
27,333

 
5-17
Non-compete agreements
6,577

 
(5,108
)
 
1,469

 
3-6
Trade names
46,654

 
(11,948
)
 
34,706

 
10-15
Distributor relationships
22,160

 
(11,282
)
 
10,878

 
8-15
Trademark
5,230

 
—

 
5,230

 
Indefinite
Intangible Assets Total
$
397,635

 
$
(102,283
)
 
$
295,352

 
 
6. Debt
Notes payable and lines of credit as of September 30, 2014 and December 31, 2013 consisted of the following (in thousands): 
 
September 30,
2014
 
December 31,
2013
6.25% Senior Notes due October 2021
$
402,903

 
$
403,208

Senior secured revolving credit facility
17,004

 
108,000

Other debt
1,408

 
1,867

Total debt
421,315

 
513,075

Less: current maturities
(898
)
 
(998
)
Long-term debt
$
420,417

 
$
512,077

Senior Notes Due 2021
The Senior Notes bear interest at a rate of 6.250% per annum, payable on April 1 and October 1 of each year, and mature on October 1, 2021. The Senior Notes are senior unsecured obligations, and are guaranteed on a senior unsecured basis by the Company’s subsidiaries that guarantee the Credit Facility and rank junior to, among other indebtedness, the Credit Facility to the extent of the value of the collateral securing the Credit Facility.
In connection with the initial issuance and sale of the Senior Notes, the Company and the subsidiary guarantors entered into a Registration Rights Agreement. Pursuant to the Registration Rights Agreement, the Company and the subsidiary guarantors agreed for the benefit of the holders of the Senior Notes to use commercially reasonable efforts to register with the SEC and exchange offer for senior notes due 2021 having identical terms as the Senior Notes. In satisfaction

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Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

of its obligations under the Registration Rights Agreement, the Company completed the exchange offer on September 15, 2014.
Credit Facility
The Company has a Credit Facility with several financial institutions as lenders that provides for a $600.0 million revolving credit facility with up to $75.0 million available for letters of credit and up to $25.0 million in swingline loans. Subject to terms of the Credit Facility, the Company has the ability to increase the revolving Credit Facility by an additional $300.0 million. The Credit Facility matures in November 2018. Weighted average interest rates under the Credit Facility at September 30, 2014 and December 31, 2013 were 1.91% and 2.17%, respectively.
Availability under the Credit Facility was approximately $572.0 million at September 30, 2014. There have been no changes to the financial covenants disclosed in Item 7 of the Annual Report and the Company was in compliance with all financial covenants at September 30, 2014.
7. Income taxes
The Company's effective tax rate was 29.0% for the nine months ended September 30, 2014 and 30.8% for the nine months ended September 30, 2013. The tax provision is lower than the comparable period in 2013 primarily due to benefits received from certain domestic tax incentives and a higher proportion of our earnings being generated outside the United States in jurisdictions subject to lower tax rates. The effective tax rate can vary from period to period depending on the Company's relative mix of U.S. and non-U.S. earnings. The effective tax rate was 29.0% for the three months ended September 30, 2014 and 29.6% for the three months ended September 30, 2013. The tax provision for the three months ended September 30, 2014 is lower than the comparable period in 2013 primarily due to benefits received from certain domestic tax incentives and a higher proportion of our earnings being generated outside the United States in jurisdictions subject to lower tax rates.
8. Fair value measurements
At September 30, 2014, the carrying value of the Credit Facility was $17.0 million. Substantially all of the debt incurs interest at a variable interest rate and, therefore, the carrying amount approximates fair value. The fair value of the debt is classified as a Level 2 measurement because interest rates charged are similar to other financial instruments with similar terms and maturities.
The fair value of the Company’s Senior Notes is estimated using Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At September 30, 2014, the fair value and the carrying value of the Company’s Senior Notes approximated $415.8 million and $402.9 million, respectively. At December 31, 2013, the fair value and the carrying value of the Company’s Senior Notes approximated $419.3 million and $403.2 million, respectively.
There were no outstanding financial assets as of September 30, 2014 and December 31, 2013 that required measuring the amounts at fair value. The Company did not change its valuation techniques associated with recurring fair value measurements from prior periods and there were no transfers between levels of the fair value hierarchy during the nine months ended September 30, 2014.

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Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

9. Business segments
The Company’s operations are divided into the following two operating segments, which are our reportable segments: Drilling & Subsea ("D&S") and Production & Infrastructure ("P&I"). The amounts indicated below as "Corporate" relate to costs and assets not allocated to the reportable segments. Summary financial data by segment follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
307,454

 
$
248,344

 
$
848,474

 
$
679,482

Production & Infrastructure
161,696

 
142,731

 
453,640

 
452,845

Intersegment eliminations
(328
)
 
(883
)
 
(1,075
)
 
(1,249
)
Total Revenue
$
468,822

 
$
390,192

 
$
1,301,039

 
$
1,131,078

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Drilling & Subsea
$
57,929

 
$
42,568

 
$
155,330

 
$
110,630

Production & Infrastructure
29,816

 
21,402

 
80,260

 
65,600

Corporate
(10,274
)
 
(7,447
)
 
(29,711
)
 
(21,521
)
Total segment operating income
77,471

 
56,523

 
205,879

 
154,709

Transaction expenses
1,516

 
376

 
2,326

 
2,191

Loss (gain) on sale of assets and other
(85
)
 
209

 
320

 
229

Income from operations
$
76,040

 
$
55,938

 
$
203,233

 
$
152,289

A summary of consolidated assets by reportable segment is as follows (in thousands):
 
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
 
Drilling & Subsea
 
$
1,716,361

 
$
1,655,355

Production & Infrastructure
 
499,360

 
468,520

Corporate
 
78,406

 
44,994

Total assets
 
$
2,294,127

 
$
2,168,869


10. Earnings per share
The calculation of basic and diluted earnings per share for each period presented was as follows (dollars and shares in thousands, except per share amounts):
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net Income attributable to common stockholders
$
52,226

 
$
33,141

 
$
128,278

 
$
95,000

 
 
 
 
 
 
 
 
Average shares outstanding (basic)
93,331

 
91,443

 
92,728

 
90,347

Common stock equivalents
2,867

 
3,291

 
2,903

 
4,180

Diluted shares
96,198

 
94,734

 
95,631

 
94,527

Earnings per share
 
 
 
 
 
 
 
Basic earnings per share
$
0.56

 
$
0.36

 
$
1.38

 
$
1.05

Diluted earnings per share
$
0.54

 
$
0.35

 
$
1.34

 
$
1.01


11
Table of Contents
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

The diluted earnings per share calculation excludes approximately 0.4 million and 0.3 million stock options for the three months ended September 30, 2014 and 2013 respectively, and 0.5 million and 0.3 million stock options for the nine months ended September 30, 2014 and 2013, respectively, because they were anti-dilutive as the option exercise price was greater than the average market price of the common stock.
11. Commitments and contingencies
In the ordinary course of business, the Company is, and in the future could be, involved in various pending or threatened legal actions, that may or may not be covered by insurance. Management has reviewed such pending judicial and legal proceedings, the reasonably anticipated costs and expenses in connection with such proceedings, and the availability and limits of insurance coverage, and has established reserves that are believed to be appropriate in light of those outcomes that are considered to be probable and can be reasonably estimated. The reserves accrued at September 30, 2014 and December 31, 2013, respectively, are immaterial. It is management's opinion that the Company's ultimate liability, if any, with respect to these actions is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
12. Stockholders' equity
Share-based compensation
During the nine months ended September 30, 2014, the Company granted 368,054 options and 778,471 shares of restricted stock or restricted stock units, which includes 115,610 performance share awards with a market condition. The stock options were granted with an exercise price of $26.96. Of the restricted stock or restricted stock units granted, 621,128 vest ratably over four years on each anniversary of the grant date. 41,733 shares of restricted stock or restricted stock units were granted to the non-employee members of the Board of Directors, which have a twelve month vesting period from the date of grant. The performance share awards granted may settle for between zero and two shares of the Company's common stock. The number of shares issued pursuant to the performance share awards will be determined based on the total shareholder return of the Company's common stock as compared to a group of peer companies, measured annually over a three-year performance period.
13. Related party transactions
The Company entered into lease agreements for office and warehouse space with former owners of acquired companies or affiliates of a director. The Company has sold and purchased inventory, services and fixed assets to and from various affiliates of certain directors. The dollar amounts related to these related party activities are not significant to the Company’s condensed consolidated financial statements.

12
Table of Contents
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

14. Condensed consolidating financial statements
The Senior Notes are guaranteed by our domestic subsidiaries which are 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional, joint and several and on an unsecured basis.
Condensed consolidating statements of operations and comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$
—

 
$
330,772

 
$
179,458

 
$
(41,408
)
 
$
468,822

Cost of sales
 
—

 
230,938

 
127,423

 
(41,577
)
 
316,784

Gross profit
 
—

 
99,834

 
52,035

 
169

 
152,038

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
—

 
63,228

 
18,088

 
—

 
81,316

Other operating expense
 
—

 
1,419

 
12

 
—

 
1,431

Total operating expenses
 
—

 
64,647

 
18,100

 
—

 
82,747

Earnings from equity investment
 
—

 
6,749

 
—

 
—

 
6,749

Equity earnings from affiliate, net of tax
 
57,161

 
28,048

 
—

 
(85,209
)
 
—

Operating income
 
57,161

 
69,984

 
33,935

 
(85,040
)
 
76,040

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
7,593

 
75

 
31

 
—

 
7,699

Interest income with affiliate
 
—

 
(1,887
)
 
—

 
1,887

 
—

Interest expense with affiliate
 
—

 
—

 
1,887

 
(1,887
)
 
—

Foreign exchange (gains) losses and other, net
 
—

 
(744
)
 
(4,478
)
 
—

 
(5,222
)
Total other expense (income)
 
7,593

 
(2,556
)
 
(2,560
)
 
—

 
2,477

Income before income taxes
 
49,568

 
72,540

 
36,495

 
(85,040
)
 
73,563

Provision for income tax expense
 
(2,658
)
 
15,379

 
8,611

 
—

 
21,332

Net income
 
52,226

 
57,161

 
27,884

 
(85,040
)
 
52,231

Less: Income attributable to noncontrolling interest
 
—

 
—

 
5

 
—

 
5

Net income attributable to common stockholders
 
52,226

 
57,161

 
27,879

 
(85,040
)
 
52,226

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
52,226

 
57,161

 
27,884

 
(85,040
)
 
52,231

Change in foreign currency translation, net of tax of $0
 
(34,474
)
 
(34,474
)
 
(34,474
)
 
68,948

 
(34,474
)
Comprehensive income
 
17,752

 
22,687

 
(6,590
)
 
(16,092
)
 
17,757

Less: comprehensive (income) loss attributable to noncontrolling interests
 
—

 
—

 
(32
)
 
—

 
(32
)
Comprehensive income attributable to common stockholders
 
$
17,752

 
$
22,687

 
$
(6,622
)
 
$
(16,092
)
 
$
17,725



13
Table of Contents
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

Condensed consolidating statements of operations and comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$
—

 
$
287,551

 
$
139,986

 
$
(37,345
)
 
$
390,192

Cost of sales
 
—

 
203,657

 
98,369

 
(37,005
)
 
265,021

Gross profit
 
—

 
83,894

 
41,617

 
(340
)
 
125,171

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
—

 
55,957

 
15,637

 
—

 
71,594

Other operating expense
 
—

 
282

 
303

 
—

 
585

Total operating expenses
 
—

 
56,239

 
15,940

 
—

 
72,179

Earnings from equity investment
 
—

 
2,946

 
—

 
—

 
2,946

Equity earnings from affiliates, net of tax
 
37,369

 
16,633

 
—

 
(54,002
)
 
—

Operating income
 
37,369

 
47,234

 
25,677

 
(54,342
)
 
55,938

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
4,355

 
12

 
6

 
—

 
4,373

Interest income with affiliate
 
—

 
(2,001
)
 
—

 
2,001

 
—

Interest expense with affiliate
 
—

 
 
 
2,001

 
(2,001
)
 
—

Foreign exchange (gains) losses and other, net
 
—

 
(85
)
 
2,396

 
—

 
2,311

Deferred loan costs written off
 
2,149

 
—

 
—

 
—

 
2,149

Total other expense (income)
 
6,504

 
(2,074
)
 
4,403

 
—

 
8,833

Income before income taxes
 
30,865

 
49,308

 
21,274

 
(54,342
)
 
47,105

Provision for income tax expense
 
(2,276
)
 
11,939

 
4,261

 
—

 
13,924

Net income
 
33,141

 
37,369

 
17,013

 
(54,342
)
 
33,181

Less: Income attributable to noncontrolling interest
 
—

 
—

 
40

 
—

 
40

Net income attributable to common stockholders
 
33,141

 
37,369

 
16,973

 
(54,342
)
 
33,141

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
33,141

 
37,369

 
17,013

 
(54,342
)
 
33,181

Change in foreign currency translation, net of tax of $0
 
24,114

 
24,114

 
24,114

 
(48,228
)
 
24,114

Comprehensive income
 
57,255

 
61,483

 
41,127

 
(102,570
)
 
57,295

Less: comprehensive (income) loss attributable to noncontrolling interests
 
—

 
—

 
(32
)
 
—

 
(32
)
Comprehensive income attributable to common stockholders
 
$
57,255

 
$
61,483

 
$
41,095

 
$
(102,570
)
 
$
57,263


14
Table of Contents
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

Condensed consolidating statements of operations and comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$
—

 
$
941,885

 
$
480,049

 
$
(120,895
)
 
$
1,301,039

Cost of sales
 
—

 
659,444

 
342,269

 
(118,643
)
 
883,070

Gross profit
 
—

 
282,441

 
137,780

 
(2,252
)
 
417,969

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
—

 
176,331

 
53,756

 
—

 
230,087

Other operating expense
 
—

 
2,965

 
(319
)
 
—

 
2,646

Total operating expenses
 
—

 
179,296

 
53,437

 
—

 
232,733

Earnings from equity investment
 
—

 
17,997

 
—

 
—

 
17,997

Equity earnings from affiliate, net of tax
 
143,310

 
59,688

 
—

 
(202,998
)
 
—

Operating income
 
143,310

 
180,830

 
84,343

 
(205,250
)
 
203,233

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
23,126

 
77

 
(29
)
 
—

 
23,174

Interest income with affiliate
 
—

 
(5,770
)
 
—

 
5,770

 
—

Interest expense with affiliate
 
—

 
—

 
5,770

 
(5,770
)
 
—

Foreign exchange (gains) losses and other, net
 
—

 
274

 
(890
)
 
—

 
(616
)
Total other expense (income)
 
23,126

 
(5,419
)
 
4,851

 
—

 
22,558

Income before income taxes
 
120,184

 
186,249

 
79,492

 
(205,250
)
 
180,675

Provision for income tax expense
 
(8,094
)
 
42,939

 
17,550

 
—

 
52,395

Net income
 
128,278

 
143,310

 
61,942

 
(205,250
)
 
128,280

Less: Income attributable to noncontrolling interest
 
—

 
—

 
2

 
—

 
2

Net income attributable to common stockholders
 
128,278

 
143,310

 
61,940

 
(205,250
)
 
128,278

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
128,278

 
143,310

 
61,942

 
(205,250
)
 
128,280

Change in foreign currency translation, net of tax of $0
 
(21,754
)
 
(21,754
)
 
(21,754
)
 
43,508

 
(21,754
)
Change in pension liability
 
2

 
2

 
2

 
(4
)
 
2

Comprehensive income
 
106,526

 
121,558

 
40,190

 
(161,746
)
 
106,528

Less: comprehensive (income) loss attributable to noncontrolling interests
 
—

 
—

 
(20
)
 
—

 
(20
)
Comprehensive income attributable to common stockholders
 
$
106,526

 
$
121,558

 
$
40,170

 
$
(161,746
)
 
$
106,508


15
Table of Contents
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

Condensed consolidating statements of operations and comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$
—

 
$
852,560

 
$
366,417

 
$
(87,899
)
 
$
1,131,078

Cost of sales
 
—

 
598,804

 
264,441

 
(86,627
)
 
776,618

Gross profit
 
—

 
253,756

 
101,976

 
(1,272
)
 
354,460

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
—

 
160,956

 
41,741

 
—

 
202,697

Other operating expense
 
—

 
2,136

 
284

 
—

 
2,420

Total operating expenses
 
—

 
163,092

 
42,025

 
—

 
205,117

Earnings from equity investment
 
—

 
2,946

 
—

 
—

 
2,946

Equity earnings from affiliates, net of tax
 
103,366

 
43,015

 
—

 
(146,381
)
 
—

Operating income
 
103,366

 
136,625

 
59,951

 
(147,653
)
 
152,289

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense
 
10,722

 
85

 
40

 
—

 
10,847

Interest income with affiliate
 
—

 
(2,001
)
 
—

 
2,001

 
—

Interest expense with affiliate
 
—

 
—

 
2,001

 
(2,001
)
 
—

Foreign exchange (gains) losses and other, net
 
—

 
(608
)
 
2,471

 
—

 
1,863

Deferred loan costs written off
 
2,149

 
—

 
—

 
—

 
2,149

Total other expense (income)
 
12,871

 
(2,524
)
 
4,512

 
—

 
14,859

Income before income taxes
 
90,495

 
139,149

 
55,439

 
(147,653
)
 
137,430

Provision for income tax expense
 
(4,505
)
 
35,783

 
11,093

 
—

 
42,371

Net income
 
95,000

 
103,366

 
44,346

 
(147,653
)
 
95,059

Less: Income attributable to noncontrolling interest
 
—

 
—

 
59

 
—

 
59

Net income attributable to common stockholders
 
95,000

 
103,366

 
44,287

 
(147,653
)
 
95,000

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
95,000

 
103,366

 
44,346

 
(147,653
)
 
95,059

Change in foreign currency translation, net of tax of $0
 
(789
)
 
(789
)
 
(789
)
 
1,578

 
(789
)
Comprehensive income
 
94,211

 
102,577

 
43,557

 
(146,075
)
 
94,270

Less: comprehensive (income) loss attributable to noncontrolling interests
 
—

 
—

 
50

 
—

 
50

Comprehensive income attributable to common stockholders
 
$
94,211

 
$
102,577

 
$
43,607

 
$
(146,075
)
 
$
94,320



16
Table of Contents
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)

Condensed consolidating balance sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
12,421

 
$
61,663

 
$
—

 
$
74,084

Accounts receivable—trade, net
 
—

 
204,248

 
109,607

 
—

 
313,855

Inventories
 
—

 
332,730

 
129,056

 
(7,316
)
 
454,470

Other current assets
 
—

 
62,064

 
33,309

 
—

 
95,373

Total current assets
 
—

 
611,463

 
333,635

 
(7,316
)
 
937,782

Property and equipment, net of accumulated depreciation
 
—

 
149,409

 
39,582

 
—

 
188,991

Intangibles
 
—

 
203,926

 
77,924

 
—

 
281,850

Goodwill
 
—

 
522,898

 
285,864

 
—

 
808,762

Investment in unconsolidated subsidiary
 
—

 
57,199

 
—

 
—

 
57,199

Investment in affiliates
 
1,306,259

 
491,942

 
—

 
(1,798,201
)
 
—

Long-term loans and advances to affiliates
 
581,528

 
97,324

 
—

 
(678,852
)
 
—

Other long-term assets
 
13,746

 
4,861

 
936

 
—

 
19,543

Total assets
 
$
1,901,533

 
$
2,139,022

 
$
737,941

 
$
(2,484,369
)
 
$
2,294,127

Liabilities and equity
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Accounts payable—trade
 
$
—

 
$
89,761

 
$
44,317

 
$
—

 
$
134,078

Accrued liabilities
 
14,143

 
77,451

 
31,808

 
—

 
123,402

Current portion of debt and other current liabilities
 
—

 
9,476

 
25,281

 
—

 
34,757

Total current liabilities
 
14,143

 
176,688

 
101,406

 
—

 
292,237

Long-term debt, net of current portion
 
419,903

 
480

 
34

 
—

 
420,417

Long-term loans and payables to affiliates
 
—

 
572,467

 
106,385

 
(678,852
)
 
—

Other long-term liabilities
 
—

 
83,128

 
30,289

 
—

 
113,417

Total liabilities
 
434,046

 
832,763

 
238,114

 
(678,852
)
 
826,071

 
 
 
 
 
 
 
 
 
 
 
Total stockholder's equity
 
1,467,487

 
1,306,259

 
499,258

 
(1,805,517
)
 
1,467,487

Noncontrolling interest in subsidiary
 
—

 
—

 
569

 
—

 
569

Equity
 
1,467,487

 
1,306,259

 
499,827

 
(1,805,517
)
 
1,468,056

Total liabilities and equity
 
$
1,901,533

 
$
2,139,022

 
$
737,941

 
$
(2,484,369
)
 
$
2,294,127


17
Table of Contents
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)