FET 2015 Q1 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
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| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the Quarterly Period Ended March 31, 2015 |
OR
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| | |
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)
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| | |
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):
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| | | | | | |
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 April 24, 2015, there were 90,047,987 common shares outstanding.
Table of Contents
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 March 31, |
(in thousands, except per share information) | | 2015 | | 2014 |
Net sales | | $ | 348,096 |
| | $ | 403,938 |
|
Cost of sales | | 238,970 |
| | 276,000 |
|
Gross profit | | 109,126 |
| | 127,938 |
|
Operating expenses | | | | |
Selling, general and administrative expenses | | 73,560 |
| | 71,040 |
|
Transaction expenses | | 217 |
| | 128 |
|
Loss (gain) on sale of assets and other | | (312 | ) | | 689 |
|
Total operating expenses | | 73,465 |
| | 71,857 |
|
Earnings from equity investment | | 4,571 |
| | 5,308 |
|
Operating income | | 40,232 |
| | 61,389 |
|
Other expense (income) | | | | |
Interest expense | | 7,627 |
| | 7,750 |
|
Foreign exchange (gains) losses and other, net | | (6,656 | ) | | 1,477 |
|
Total other expense | | 971 |
| | 9,227 |
|
Income before income taxes | | 39,261 |
| | 52,162 |
|
Provision for income tax expense | | 10,605 |
| | 15,656 |
|
Net income | | 28,656 |
| | 36,506 |
|
Less: Income attributable to noncontrolling interest | | (16 | ) | | (24 | ) |
Net income attributable to common stockholders | | 28,672 |
| | 36,530 |
|
| | | | |
Weighted average shares outstanding | | | | |
Basic | | 89,482 |
| | 92,129 |
|
Diluted | | 91,469 |
| | 95,191 |
|
Earnings per share | | | | |
Basic | | $ | 0.32 |
| | $ | 0.40 |
|
Diluted | | $ | 0.31 |
| | $ | 0.38 |
|
| | | | |
| | | | |
Other comprehensive income, net of tax: | | | | |
Net income | | 28,656 |
| | 36,506 |
|
Change in foreign currency translation, net of tax of $0 | | (37,297 | ) | | 1,030 |
|
Gain on pension liability | | 99 |
| | 2 |
|
Comprehensive income (loss) | | (8,542 | ) | | 37,538 |
|
Less: comprehensive loss (income) attributable to noncontrolling interests | | 43 |
| | 27 |
|
Comprehensive income (loss) attributable to common stockholders | | $ | (8,499 | ) | | $ | 37,565 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated balance sheets
(Unaudited)
|
| | | | | | | |
(in thousands, except share information) | March 31, 2015 | | December 31, 2014 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 83,891 |
| | $ | 76,579 |
|
Accounts receivable—trade, net | 256,404 |
| | 287,045 |
|
Inventories | 521,212 |
| | 461,515 |
|
Prepaid expenses and other current assets | 31,202 |
| | 32,985 |
|
Costs and estimated profits in excess of billings | 15,548 |
| | 14,646 |
|
Deferred income taxes, net | 22,432 |
| | 22,389 |
|
Total current assets | 930,689 |
| | 895,159 |
|
Property and equipment, net of accumulated depreciation | 202,564 |
| | 189,974 |
|
Deferred financing costs, net | 12,467 |
| | 13,107 |
|
Intangibles | 270,255 |
| | 271,739 |
|
Goodwill | 795,394 |
| | 798,481 |
|
Investment in unconsolidated subsidiary | 54,247 |
| | 49,675 |
|
Other long-term assets | 3,381 |
| | 3,493 |
|
Total assets | $ | 2,268,997 |
| | $ | 2,221,628 |
|
Liabilities and equity | | | |
Current liabilities | | | |
Current portion of long-term debt | $ | 789 |
| | $ | 840 |
|
Accounts payable—trade | 162,908 |
| | 127,757 |
|
Accrued liabilities | 108,085 |
| | 126,890 |
|
Deferred revenue | 9,205 |
| | 10,919 |
|
Billings in excess of costs and profits recognized | 11,873 |
| | 15,785 |
|
Total current liabilities | 292,860 |
| | 282,191 |
|
Long-term debt, net of current portion | 467,804 |
| | 428,010 |
|
Deferred income taxes, net | 96,909 |
| | 98,188 |
|
Other long-term liabilities | 18,784 |
| | 17,318 |
|
Total liabilities | 876,357 |
| | 825,707 |
|
Commitments and contingencies |
| |
|
|
Equity | | | |
Common stock, $0.01 par value, 296,000,000 shares authorized, 98,125,999 and 97,865,278 shares issued | 981 |
| | 979 |
|
Additional paid-in capital | 869,857 |
| | 864,313 |
|
Treasury stock at cost, 8,124,290 and 8,108,983 shares | (132,765 | ) | | (132,480 | ) |
Retained earnings | 728,177 |
| | 699,505 |
|
Accumulated other comprehensive income (loss) | (74,132 | ) | | (36,961 | ) |
Total stockholders’ equity | 1,392,118 |
| | 1,395,356 |
|
Noncontrolling interest in subsidiary | 522 |
| | 565 |
|
Total equity | 1,392,640 |
| | 1,395,921 |
|
Total liabilities and equity | $ | 2,268,997 |
| | $ | 2,221,628 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated statements of cash flows
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands, except share information) | 2015 | | 2014 |
Cash flows from operating activities | | | |
Net income | $ | 28,656 |
| | $ | 36,506 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | |
Depreciation expense | 9,513 |
| | 9,123 |
|
Amortization of intangible assets | 6,769 |
| | 6,775 |
|
Share-based compensation expense | 5,031 |
| | 4,339 |
|
Deferred income taxes | (1,322 | ) | | 1,425 |
|
Earnings from equity investment | (4,571 | ) | | (5,308 | ) |
Other | 911 |
| | 1,992 |
|
Changes in operating assets and liabilities | | | |
Accounts receivable—trade | 30,238 |
| | (34,345 | ) |
Inventories | (37,610 | ) | | 533 |
|
Prepaid expenses and other current assets | 1,554 |
| | 8,790 |
|
Accounts payable, deferred revenue and other accrued liabilities | 12,593 |
| | 22,667 |
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Costs and estimated profits in excess of billings, net | (3,275 | ) | | 10,389 |
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Net cash provided by operating activities | $ | 48,487 |
| | $ | 62,886 |
|
Cash flows from investing activities | | | |
Acquisition of businesses, net of cash acquired | (60,836 | ) | | — |
|
Capital expenditures for property and equipment | (11,421 | ) | | (11,083 | ) |
Proceeds from sale of business, property and equipment | 662 |
| | 6,674 |
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Net cash used in investing activities | $ | (71,595 | ) | | $ | (4,409 | ) |
Cash flows from financing activities | | | |
Borrowings under Credit Facility | 65,008 |
| | — |
|
Repayment of long-term debt | (25,323 | ) | | (35,470 | ) |
Excess tax benefits from stock based compensation | — |
| | 1,854 |
|
Repurchases of stock | (5,885 | ) | | (220 | ) |
Proceeds from stock issuance | 884 |
| | 2,971 |
|
Deferred financing costs | — |
| | (6 | ) |
Net cash provided by (used in) financing activities | $ | 34,684 |
| | $ | (30,871 | ) |
Effect of exchange rate changes on cash | (4,264 | ) | | (234 | ) |
Net increase in cash and cash equivalents | 7,312 |
| | 27,372 |
|
Cash and cash equivalents | | | |
Beginning of period | 76,579 |
| | 39,582 |
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End of period | $ | 83,891 |
| | $ | 66,954 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015 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, 2014, which are included in the Company’s 2014 Annual Report on Form 10-K filed with the SEC on February 27, 2015 (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 April 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires deferred financing costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. The new standard will be 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 August 2014, the FASB issued 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 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 was initially scheduled to be effective January 1, 2017, however, on April 1, 2015, the FASB voted to propose to defer the effective date by one year. The Company is currently evaluating the impacts of adoption and the implementation approach to be used.
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)
3. Acquisitions
2015 Acquisition
Effective February 2, 2015, the Company completed the acquisition of J-Mac Tool, Inc. ("J-Mac") for approximate consideration of $64.2 million. J-Mac is a Fort Worth, Texas based manufacturer of high quality hydraulic fracturing pumps, power ends, fluid ends and other pump accessories. J-Mac is included in the Production & Infrastructure segment. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):
|
| | | | |
| | 2015 Acquisition |
Current assets, net of cash acquired | | $ | 36,964 |
|
Property and equipment | | 12,140 |
|
Intangible assets (primarily customer relationships) | | 10,835 |
|
Tax-deductible goodwill | | 14,478 |
|
Current liabilities | | (10,203 | ) |
Long-term liabilities | | (22 | ) |
Net assets acquired | | $ | 64,192 |
|
Pro forma results of operations for the 2015 acquisition have not been presented because the effects were not material to the condensed consolidated financial statements for the year ended December 31, 2014 or the three months ended March 31, 2015.
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 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 | | $ | 7,596 |
|
Property and equipment | | 3,837 |
|
Intangible assets (primarily customer relationships) | | 11,527 |
|
Non-tax-deductible goodwill | | 20,573 |
|
Current liabilities | | (1,615 | ) |
Deferred tax liabilities | | (3,629 | ) |
Net assets acquired | | $ | 38,289 |
|
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)
4. Inventories
The Company's significant components of inventory at March 31, 2015 and December 31, 2014 were as follows (in thousands):
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
Raw materials and parts | $ | 166,318 |
| | $ | 153,768 |
|
Work in process | 57,710 |
| | 50,913 |
|
Finished goods | 328,367 |
| | 286,290 |
|
Gross inventories | 552,395 |
| | 490,971 |
|
Inventory reserve | (31,183 | ) | | (29,456 | ) |
Inventories | $ | 521,212 |
| | $ | 461,515 |
|
5. Goodwill and intangible assets
Goodwill
The changes in the carrying amount of goodwill from December 31, 2014 to March 31, 2015, were as follows (in thousands):
|
| | | | | | | | | | | |
| Drilling & Subsea | | Production & Infrastructure | | Total |
Goodwill Balance at December 31, 2014 net | $ | 719,860 |
| | $ | 78,621 |
| | $ | 798,481 |
|
Acquisitions and divestitures | — |
| | 14,478 |
| | 14,478 |
|
Impact of non-U.S. local currency translation | (17,269 | ) | | (296 | ) | | (17,565 | ) |
Goodwill Balance at March 31, 2015 net | $ | 702,591 |
| | $ | 92,803 |
| | $ | 795,394 |
|
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)
Intangible assets
Intangible assets consisted of the following as of March 31, 2015 and December 31, 2014, respectively (in thousands):
|
| | | | | | | | | | | | | |
| March 31, 2015 |
| Gross carrying amount | | Accumulated amortization | | Net amortizable intangibles | | Amortization period (in years) |
Customer relationships | $ | 289,064 |
| | $ | (87,993 | ) | | $ | 201,071 |
| | 4-15 |
Patents and technology | 30,073 |
| | (8,492 | ) | | 21,581 |
| | 5-17 |
Non-compete agreements | 6,934 |
| | (5,819 | ) | | 1,115 |
| | 3-6 |
Trade names | 47,135 |
| | (15,175 | ) | | 31,960 |
| | 10-15 |
Distributor relationships | 22,160 |
| | (12,862 | ) | | 9,298 |
| | 8-15 |
Trademark | 5,230 |
| | — |
| | 5,230 |
| | Indefinite |
Intangible Assets Total | $ | 400,596 |
| | $ | (130,341 | ) | | $ | 270,255 |
| | |
|
| | | | | | | | | | | | | |
| December 31, 2014 |
| Gross carrying amount | | Accumulated amortization | | Net amortizable intangibles | | Amortization period (in years) |
Customer relationships | $ | 284,120 |
| | $ | (84,947 | ) | | $ | 199,173 |
| | 4-15 |
Patents and technology | 31,069 |
| | (8,074 | ) | | 22,995 |
| | 5-17 |
Non-compete agreements | 7,086 |
| | (5,761 | ) | | 1,325 |
| | 3-6 |
Trade names | 48,149 |
| | (14,747 | ) | | 33,402 |
| | 10-15 |
Distributor relationships | 22,160 |
| | (12,546 | ) | | 9,614 |
| | 8-15 |
Trademark | 5,230 |
| | — |
| | 5,230 |
| | Indefinite |
Intangible Assets Total | $ | 397,814 |
| | $ | (126,075 | ) | | $ | 271,739 |
| | |
6. Debt
Notes payable and lines of credit as of March 31, 2015 and December 31, 2014 consisted of the following (in thousands): |
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
6.25% Senior Notes due October 2021 | $ | 402,708 |
| | $ | 402,801 |
|
Senior secured revolving credit facility | 65,000 |
| | 25,000 |
|
Other debt | 885 |
| | 1,049 |
|
Total debt | 468,593 |
| | 428,850 |
|
Less: current maturities | (789 | ) | | (840 | ) |
Long-term debt | $ | 467,804 |
| | $ | 428,010 |
|
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.
Credit Facility
The Company has a Credit Facility with several financial institutions as lenders that provides for a $600.0 million 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 Credit Facility by an additional $300.0 million. The
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)
Credit Facility matures in November 2018. Weighted average interest rates under the Credit Facility at March 31, 2015 and December 31, 2014 were 1.93% and 1.91%, respectively.
As of March 31, 2015, we had $65.0 million of borrowings outstanding under the Credit Facility, $11.4 million of outstanding letters of credit and the capacity to borrow an additional $523.6 million. There have been no changes to the financial covenants disclosed in Item 8 of the Annual Report and the Company was in compliance with all financial covenants at March 31, 2015.
7. Income taxes
The Company's effective tax rate was 27.0% for the three months ended March 31, 2015 and 30.0% for the three months ended March 31, 2014. The tax provision is lower than the comparable period in 2014 primarily due to 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.
8. Fair value measurements
At March 31, 2015, the carrying value of the Credit Facility was $65.0 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 March 31, 2015, the fair value and the carrying value of the Company’s Senior Notes approximated $377.5 million and $402.7 million, respectively. At December 31, 2014, the fair value and the carrying value of the Company’s Senior Notes approximated $378.1 million and $402.8 million, respectively.
There were no outstanding financial assets as of March 31, 2015 and December 31, 2014 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 three months ended March 31, 2015.
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 March 31, |
| 2015 | | 2014 |
Revenue: | | | |
Drilling & Subsea | $ | 215,115 |
| | $ | 261,769 |
|
Production & Infrastructure | 133,163 |
| | 142,575 |
|
Intersegment eliminations | (182 | ) | | (406 | ) |
Total Revenue | $ | 348,096 |
| | $ | 403,938 |
|
| | | |
Operating income: | | | |
Drilling & Subsea | $ | 29,206 |
| | $ | 47,065 |
|
Production & Infrastructure | 19,192 |
| | 23,882 |
|
Corporate | (8,261 | ) | | (8,741 | ) |
Total segment operating income | 40,137 |
| | 62,206 |
|
Transaction expenses | 217 |
| | 128 |
|
Loss (gain) on sale of assets and other | (312 | ) | | 689 |
|
Income from operations | $ | 40,232 |
| | $ | 61,389 |
|
A summary of consolidated assets by reportable segment is as follows (in thousands):
|
| | | | | | | | |
| | March 31, 2015 | | December 31, 2014 |
Assets | | | | |
Drilling & Subsea | | $ | 1,627,592 |
| | $ | 1,674,934 |
|
Production & Infrastructure | | 568,064 |
| | 488,225 |
|
Corporate | | 73,341 |
| | 58,469 |
|
Total assets | | $ | 2,268,997 |
| | $ | 2,221,628 |
|
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 March 31, |
| 2015 | | 2014 |
Net Income attributable to common stockholders | $ | 28,672 |
| | $ | 36,530 |
|
| | | |
Average shares outstanding (basic) | 89,482 |
| | 92,129 |
|
Common stock equivalents | 1,987 |
| | 3,062 |
|
Diluted shares | 91,469 |
| | 95,191 |
|
Earnings per share | | | |
Basic earnings per share | $ | 0.32 |
| | $ | 0.40 |
|
Diluted earnings per share | $ | 0.31 |
| | $ | 0.38 |
|
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)
The diluted earnings per share calculation excludes approximately 1.6 million and 0.8 million stock options for the three months ended March 31, 2015 and 2014, 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 March 31, 2015 and December 31, 2014, 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 three months ended March 31, 2015, the Company granted 458,250 options and 854,899 shares of restricted stock or restricted stock units, which includes 161,660 performance share awards with a market condition. The stock options were granted with an exercise price of $18.68. Of the restricted stock or restricted stock units granted, 633,011 vest ratably over four years on each anniversary of the grant date. 60,228 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 has sold and purchased equipment and services 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.
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 March 31, 2015 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | | | | | (in thousands) | | | | |
Net sales | | $ | — |
| | $ | 269,198 |
| | $ | 120,317 |
| | $ | (41,419 | ) | | $ | 348,096 |
|
Cost of sales | | — |
| | 188,767 |
| | 89,676 |
| | (39,473 | ) | | 238,970 |
|
Gross profit | | — |
| | 80,431 |
| | 30,641 |
| | (1,946 | ) | | 109,126 |
|
Operating expenses | | | | | | | | | | |
Selling, general and administrative expenses | | — |
| | 57,372 |
| | 16,188 |
| | — |
| | 73,560 |
|
Transaction expense | | — |
| | 217 |
| | — |
| | — |
| | 217 |
|
Loss (gain) on sale of assets and other | | — |
| | (111 | ) | | (201 | ) | | — |
| | (312 | ) |
Total operating expenses | | — |
| | 57,478 |
| | 15,987 |
| | — |
| | 73,465 |
|
Earnings from equity investment | | — |
| | 4,571 |
| | — |
| | — |
| | 4,571 |
|
Equity earnings from affiliate, net of tax | | 33,604 |
| | 16,237 |
| | — |
| | (49,841 | ) | | — |
|
Operating income | | 33,604 |
| | 43,761 |
| | 14,654 |
| | (51,787 | ) | | 40,232 |
|
Other expense (income) | | | | | | | | | | |
Interest expense (income) | | 7,588 |
| | 14 |
| | 25 |
| | — |
| | 7,627 |
|
Foreign exchange (gains) losses and other, net | | — |
| | (185 | ) | | (6,471 | ) | | — |
| | (6,656 | ) |
Total other expense (income) | | 7,588 |
| | (171 | ) | | (6,446 | ) | | — |
| | 971 |
|
Income before income taxes | | 26,016 |
| | 43,932 |
| | 21,100 |
| | (51,787 | ) | | 39,261 |
|
Provision for income tax expense | | (2,656 | ) | | 10,328 |
| | 2,933 |
| | — |
| | 10,605 |
|
Net income | | 28,672 |
| | 33,604 |
| | 18,167 |
| | (51,787 | ) | | 28,656 |
|
Less: Income attributable to noncontrolling interest | | — |
| | — |
| | (16 | ) | | — |
| | (16 | ) |
Net income attributable to common stockholders | | 28,672 |
| | 33,604 |
| | 18,183 |
| | (51,787 | ) | | 28,672 |
|
| | | | | | | | | | |
Other comprehensive income, net of tax: | | | | | | | | | | |
Net income | | 28,672 |
| | 33,604 |
| | 18,167 |
| | (51,787 | ) | | 28,656 |
|
Change in foreign currency translation, net of tax of $0 | | (37,297 | ) | | (37,297 | ) | | (37,297 | ) | | 74,594 |
| | (37,297 | ) |
Gain on pension liability | | 99 |
| | 99 |
| | 99 |
| | (198 | ) | | 99 |
|
Comprehensive income | | (8,526 | ) | | (3,594 | ) | | (19,031 | ) | | 22,609 |
| | (8,542 | ) |
Less: comprehensive (income) loss attributable to noncontrolling interests | | — |
| | — |
| | 43 |
| | — |
| | 43 |
|
Comprehensive income attributable to common stockholders | | $ | (8,526 | ) | | $ | (3,594 | ) | | $ | (18,988 | ) | | $ | 22,609 |
| | $ | (8,499 | ) |
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 March 31, 2014 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | | | | | (in thousands) | | | | |
Net sales | | $ | — |
| | $ | 300,064 |
| | $ | 145,830 |
| | $ | (41,956 | ) | | $ | 403,938 |
|
Cost of sales | | — |
| | 209,002 |
| | 105,984 |
| | (38,986 | ) | | 276,000 |
|
Gross profit | | — |
| | 91,062 |
| | 39,846 |
| | (2,970 | ) | | 127,938 |
|
Operating expenses | | | | | | | | | | |
Selling, general and administrative expenses | | — |
| | 53,567 |
| | 17,473 |
| | — |
| | 71,040 |
|
Other operating expense | | — |
| | 1,033 |
| | (216 | ) | | — |
| | 817 |
|
Total operating expenses | | — |
| | 54,600 |
| | 17,257 |
| | — |
| | 71,857 |
|
Earnings from equity investment | | — |
| | 5,308 |
| | — |
| | — |
| | 5,308 |
|
Equity earnings from affiliates, net of tax | | 41,579 |
| | 11,837 |
| | — |
| | (53,416 | ) | | — |
|
Operating income | | 41,579 |
| | 53,607 |
| | 22,589 |
| | (56,386 | ) | | 61,389 |
|
Other expense (income) | | | | | | | | | | |
Interest expense (income) | | 7,767 |
| | 8 |
| | (25 | ) | | — |
| | 7,750 |
|
Interest income with affiliate | | — |
| | (1,950 | ) | | — |
| | 1,950 |
| | — |
|
Interest expense with affiliate | | — |
| | — |
| | 1,950 |
| | (1,950 | ) | | — |
|
Foreign exchange (gains) losses and other, net | | — |
| | 342 |
| | 1,135 |
| | — |
| | 1,477 |
|
Total other expense (income) | | 7,767 |
| | (1,600 | ) | | 3,060 |
| | — |
| | 9,227 |
|
Income before income taxes | | 33,812 |
| | 55,207 |
| | 19,529 |
| | (56,386 | ) | | 52,162 |
|
Provision for income tax expense | | (2,718 | ) | | 13,628 |
| | 4,746 |
| | — |
| | 15,656 |
|
Net income | | 36,530 |
| | 41,579 |
| | 14,783 |
| | (56,386 | ) | | 36,506 |
|
Less: Income attributable to noncontrolling interest | | — |
| | — |
| | (24 | ) | | — |
| | (24 | ) |
Net income attributable to common stockholders | | 36,530 |
| | 41,579 |
| | 14,807 |
| | (56,386 | ) | | 36,530 |
|
| | | | | | | | | | |
Other comprehensive income, net of tax: | | | | | | | | | | |
Net income | | 36,530 |
| | 41,579 |
| | 14,783 |
| | (56,386 | ) | | 36,506 |
|
Change in foreign currency translation, net of tax of $0 | | 1,030 |
| | 1,030 |
| | 1,030 |
| | (2,060 | ) | | 1,030 |
|
Gain on pension liability | | 2 |
| | 2 |
| | 2 |
| | (4 | ) | | 2 |
|
Comprehensive income | | 37,562 |
| | 42,611 |
| | 15,815 |
| | (58,450 | ) | | 37,538 |
|
Less: comprehensive (income) loss attributable to noncontrolling interests | | — |
| | — |
| | 27 |
| | — |
| | 27 |
|
Comprehensive income attributable to common stockholders | | $ | 37,562 |
| | $ | 42,611 |
| | $ | 15,842 |
| | $ | (58,450 | ) | | $ | 37,565 |
|
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating balance sheets |
| | | | | | | | | | |
| | March 31, 2015 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | | | | | (in thousands) | | | | |
Assets | | | | | | | | | | |
Current assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 97 |
| | $ | 24,223 |
| | $ | 59,571 |
| | $ | — |
| | $ | 83,891 |
|
Accounts receivable—trade, net | | — |
| | 181,110 |
| | 75,294 |
| | — |
| | 256,404 |
|
Inventories | | — |
| | 398,099 |
| | 133,040 |
| | (9,927 | ) | | 521,212 |
|
Cost and profits in excess of billings | | — |
| | 3,943 |
| | 11,605 |
| | — |
| | 15,548 |
|
Other current assets | | — |
| | 40,341 |
| | 13,293 |
| | — |
| | 53,634 |
|
Total current assets | | 97 |
| | 647,716 |
| | 292,803 |
| | (9,927 | ) | | 930,689 |
|
Property and equipment, net of accumulated depreciation | | — |
| | 166,262 |
| | 36,302 |
| | — |
| | 202,564 |
|
Deferred financing costs, net | | 12,467 |
| | — |
| | — |
| | — |
| | 12,467 |
|
Intangibles | | — |
| | 204,469 |
| | 65,786 |
| | — |
| | 270,255 |
|
Goodwill | | — |
| | 537,375 |
| | 258,019 |
| | — |
| | 795,394 |
|
Investment in unconsolidated subsidiary | | — |
| | 54,247 |
| | — |
| | — |
| | 54,247 |
|
Investment in affiliates | | 1,330,136 |
| | 567,487 |
| | — |
| | (1,897,623 | ) | | — |
|
Long-term loans and advances to affiliates | | 530,542 |
| | — |
| | 33,134 |
| | (563,676 | ) | | — |
|
Other long-term assets | | — |
| | 2,650 |
| | 731 |
| | — |
| | 3,381 |
|
Total assets | | $ | 1,873,242 |
| | $ | 2,180,206 |
| | $ | 686,775 |
| | $ | (2,471,226 | ) | | $ | 2,268,997 |
|
Liabilities and equity | | | | | | | | | | |
Current liabilities | | | | | | | | | | |
Accounts payable—trade | | $ | — |
| | $ | 118,277 |
| | $ | 44,631 |
| | $ | — |
| | $ | 162,908 |
|
Accrued liabilities | | 13,424 |
| | 70,850 |
| | 23,811 |
| | — |
| | 108,085 |
|
Current portion of debt and other current liabilities | | — |
| | 5,489 |
| | 16,378 |
| | — |
| | 21,867 |
|
Total current liabilities | | 13,424 |
| | 194,616 |
| | 84,820 |
| | — |
| | 292,860 |
|
Long-term debt, net of current portion | | 467,700 |
| | 83 |
| | 21 |
| | — |
| | 467,804 |
|
Long-term loans and payables to affiliates | | — |
| | 563,676 |
| | — |
| | (563,676 | ) | | — |
|
Deferred income taxes, net | | — |
| | 77,989 |
| | 18,920 |
| | — |
| | 96,909 |
|
Other long-term liabilities | | — |
| | 13,706 |
| | 5,078 |
| | — |
| | 18,784 |
|
Total liabilities | | 481,124 |
| | 850,070 |
| | 108,839 |
| | (563,676 | ) | | 876,357 |
|
| | | | | | | | | | |
Total stockholder's equity | | 1,392,118 |
| | 1,330,136 |
| | 577,414 |
| | (1,907,550 | ) | | 1,392,118 |
|
Noncontrolling interest in subsidiary | | — |
| | — |
| | 522 |
| | — |
| | 522 |
|
Equity | | 1,392,118 |
| | 1,330,136 |
| | 577,936 |
| | (1,907,550 | ) | | 1,392,640 |
|
Total liabilities and equity | | $ | 1,873,242 |
| | $ | 2,180,206 |
| | $ | 686,775 |
| | $ | (2,471,226 | ) | | $ | 2,268,997 |
|
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating balance sheets |
| | | | | | | | | | |
| | December 31, 2014 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | | | | | (in thousands) | | | | |
Assets | | | | | | | | | | |
Current assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 5,551 |
| | $ | 4,006 |
| | $ | 67,022 |
| | $ | — |
| | $ | 76,579 |
|
Accounts receivable—trade, net | | — |
| | 194,964 |
| | 92,081 |
| | — |
| | 287,045 |
|
Inventories | | — |
| | 343,902 |
| | 125,594 |
| | (7,981 | ) | | 461,515 |
|
Cost and profits in excess of billings | | — |
| | 4,871 |
| | 9,775 |
| | — |
| | 14,646 |
|
Other current assets | | — |
| | 38,920 |
| | 16,454 |
| | — |
| | 55,374 |
|
Total current assets | | 5,551 |
| | 586,663 |
| | 310,926 |
| | (7,981 | ) | | 895,159 |
|
Property and equipment, net of accumulated depreciation | | — |
| | 153,016 |
| | 36,958 |
| | — |
| | 189,974 |
|
Deferred financing costs, net | | 13,107 |
| | — |
| | — |
| | — |
| | 13,107 |
|
Intangibles | | — |
| | 198,819 |
| | 72,920 |
| | — |
| | 271,739 |
|
Goodwill | | — |
| | 522,898 |
| | 275,583 |
| | — |
| | 798,481 |
|
Investment in unconsolidated subsidiary | | — |
| | 49,675 |
| | — |
| | — |
| | 49,675 |
|
Investment in affiliates | | 1,333,701 |
| | 590,421 |
| | — |
| | (1,924,122 | ) | | — |
|
Long-term loans and advances to affiliates | | 483,534 |
| | — |
| | 22,531 |
| | (506,065 | ) | | — |
|
Other long-term assets | | — |
| | 2,760 |
| | 733 |
| | — |
| | 3,493 |
|
Total assets | | $ | 1,835,893 |
| | $ | 2,104,252 |
| | $ | 719,651 |
| | $ | (2,438,168 | ) | | $ | 2,221,628 |
|
Liabilities and equity | | | | | | | | | | |
Current liabilities | | | | | | | | | | |
Accounts payable—trade | | $ | — |
| | $ | 85,179 |
| | $ | 42,578 |
| | $ | — |
| | $ | 127,757 |
|
Accrued liabilities | | 12,733 |
| | 84,824 |
| | 29,333 |
| | — |
| | 126,890 |
|
Current portion of debt and other current liabilities | | — |
| | 5,800 |
| | 21,744 |
| | — |
| | 27,544 |
|
Total current liabilities | | 12,733 |
| | 175,803 |
| | 93,655 |
| | — |
| | 282,191 |
|
Long-term debt, net of current portion | | 427,801 |
| | 183 |
| | 26 |
| | — |
| | 428,010 |
|
Long-term loans and payables to affiliates | | — |
| | 506,065 |
| | — |
| | (506,065 | ) | | — |
|
Deferred income taxes, net | | — |
| | 77,311 |
| | 20,877 |
| | — |
| | 98,188 |
|
Other long-term liabilities | | — |
| | 11,189 |
| | 6,129 |
| | — |
| | 17,318 |
|
Total liabilities | | 440,534 |
| | 770,551 |
| | 120,687 |
| | (506,065 | ) | | 825,707 |
|
| | | | | | | | | | |
Total stockholder's equity | | 1,395,359 |
| | 1,333,701 |
| | 598,399 |
| | (1,932,103 | ) | | 1,395,356 |
|
Noncontrolling interest in subsidiary | | — |
| | — |
| | 565 |
| | — |
| | 565 |
|
Equity | | 1,395,359 |
| | 1,333,701 |
| | 598,964 |
| | (1,932,103 | ) | | 1,395,921 |
|
Total liabilities and equity | | $ | 1,835,893 |
| | $ | 2,104,252 |
| | $ | 719,651 |
| | $ | (2,438,168 | ) | | $ | 2,221,628 |
|
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating statements of cash flows |
| | | | | | | | | | |
| | Three months ended March 31, 2015 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | | | | | (in thousands) | | | | |
Cash flows from (used in) operating activities | | $ | 1,628 |
| | $ | 33,735 |
| | $ | 13,124 |
| | $ | — |
| | $ | 48,487 |
|
Cash flows from investing activities | | | | | | | | | | |
Acquisition of businesses, net of cash acquired | | — |
| | (60,836 | ) | | — |
| | — |
| | (60,836 | ) |
Capital expenditures for property and equipment | | — |
| | (7,626 | ) | | (3,795 | ) | | — |
| | (11,421 | ) |
Long-term loans and advances to affiliates | | (41,979 | ) | | 12,997 |
| | — |
| | 28,982 |
| | — |
|
Other | | — |
| | 175 |
| | 487 |
| | — |
| | 662 |
|
Net cash provided by (used in) investing activities | | $ | (41,979 | ) | | $ | (55,290 | ) | | $ | (3,308 | ) | | $ | 28,982 |
| | $ | (71,595 | ) |
Cash flows from financing activities | | | | | | | | | | |
Borrowings (repayment) of long-term debt | | 39,898 |
| | (207 | ) | | (6 | ) | | — |
| | 39,685 |
|
Long-term loans and advances to affiliates | | — |
| | 41,979 |
| | (12,997 | ) | | (28,982 | ) | | — |
|
Other | | (5,001 | ) | | — |
| | — |
| | — |
| | (5,001 | ) |
Net cash provided by (used in) financing activities | | $ | 34,897 |
| | $ | 41,772 |
| | $ | (13,003 | ) | | $ | (28,982 | ) | | $ | 34,684 |
|
Effect of exchange rate changes on cash | | — |
| | — |
| | (4,264 | ) | | — |
| | (4,264 | ) |
Net increase (decrease) in cash and cash equivalents | | (5,454 | ) | | 20,217 |
| | (7,451 | ) | | — |
| | 7,312 |
|
Cash and cash equivalents | | | | | | | | | | |
Beginning of period | | 5,551 |
| | 4,006 |
| | 67,022 |
| | — |
| | 76,579 |
|
End of period | | $ | 97 |
| | $ | 24,223 |
| | $ | 59,571 |
| | $ | — |
| | $ | 83,891 |
|
Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements (continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating statements of cash flows |
| | | | | | | | | | |
| | Three months ended March 31, 2014 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | | | | | (in thousands) | | | | |
Cash flows from (used in) operating activities | | $ | (10,878 | ) | | $ | 60,028 |
| | $ | 13,736 |
| | $ | — |
| | $ | 62,886 |
|
Cash flows from investing activities | | | | | | | | | | |
Proceeds from sale of business, property and equipment | | — |
| | 6,396 |
| | 278 |
| | — |
| | 6,674 |
|
Capital expenditures for property and equipment | | — |
| | (8,380 | ) | | (2,703 | ) | | — |
| | (11,083 | ) |
Long-term loans and advances to affiliates | | 43,233 |
| | — |
| | — |
| | (43,233 | ) | | — |
|
Net cash provided by (used in) investing activities | | $ | 43,233 |
| | $ | (1,984 | ) | | $ | (2,425 | ) | | $ | (43,233 | ) | | $ | (4,409 | ) |
Cash flows from financing activities | | | | | | | | | | |
Repayment of long-term debt | | (35,100 | ) | | (356 | ) | | (14 | ) | | — |
| | (35,470 | ) |
Long-term loans and advances to affiliates | | — |
| | (53,519 | ) | | 10,286 |
| | 43,233 |
| | — |
|
Other | | 2,745 |
| | 1,854 |
| | — |
| | — |
| | 4,599 |
|
Net cash provided by (used in) financing activities | | $ | (32,355 | ) | | $ | (52,021 | ) | | $ | 10,272 |
| | $ | 43,233 |
| | $ | (30,871 | ) |
Effect of exchange rate changes on cash | | — |
| | — |
| | (234 | ) | | — |
| | (234 | ) |
Net increase (decrease) in cash and cash equivalents | | — |
| | 6,023 |
| | 21,349 |
| | — |
| | 27,372 |
|
Cash and cash equivalents | | | | | | | | | | |
Beginning of period | | — |
| | — |
| | 39,582 |
| | — |
| | 39,582 |
|
End of period | | $ | — |
| | $ | 6,023 |
| | $ | 60,931 |
| | $ | — |
| | $ | 66,954 |
|
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Item 2. Management’s discussion and analysis of financial condition and results of operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
Forward-looking statements may include statements about:
•business strategy;
•cash flows and liquidity;
•the volatility of oil and natural gas prices;
•our ability to successfully manage our growth, including risks and uncertainties associated with integrating
and retaining key employees of the businesses we acquire;
•the availability of raw materials and specialized equipment;
•availability of skilled and qualified labor;
•our ability to accurately predict customer demand;
•competition in the oil and gas industry;
•governmental regulation and taxation of the oil and natural gas industry;
•environmental liabilities;
•political, social and economic issues affecting the countries in which we do business;
•fluctuations in currency markets;
•our ability to deliver our backlog in a timely fashion;
•our ability to implement new technologies and services;
•availability and terms of capital;
•general economic conditions;
•benefits of our acquisitions;
•availability of key management personnel;
•operating hazards inherent in our industry;
•the continued influence of our largest shareholder;
•the ability to establish and maintain effective internal control over financial reporting for companies we acquire;
•the ability to operate effectively as a publicly traded company;
•financial strategy, budget, projections and operating results;
•uncertainty regarding our future operating results; and
•plans, objectives, expectations and intentions contained in this report that are not historical.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on February 27, 2015 and elsewhere in this Quarterly Report on Form 10-Q. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Overview
We are a global oilfield products company, serving the subsea, drilling, completion, production and infrastructure sectors of the oil and natural gas industry. We design, manufacture and distribute products, and engage in aftermarket services, parts supply and related services that complement our product offering. Our product offering includes a mix of highly engineered capital products and frequently replaced items that are used in the exploration, development, production and transportation of oil and natural gas. Our capital products are directed at: drilling rig equipment for new rigs, upgrades and refurbishment projects; subsea construction and development projects; the placement of production equipment on new producing wells; pressure pumping equipment; and downstream capital projects. Our engineered systems are critical components used on drilling rigs, for completions or in the course of subsea operations, while our consumable products are used to maintain efficient and safe operations at well sites in the well construction process, within the supporting infrastructure and at processing centers and refineries. Historically, just over half of our revenue is derived from activity-based consumable products, while the balance is derived from capital products and a small amount from rental and other services.
We seek to design, manufacture and supply reliable products that create value for our diverse customer base, which includes, among others, oil and gas operators, land and offshore drilling contractors, oilfield service companies, subsea construction and service companies, and pipeline and refinery operators.
We operate two business segments:
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• | Drilling & Subsea segment. We design and manufacture products and provide related services to the subsea, drilling, well construction, completion and intervention markets. Through this segment, we offer subsea technologies, including robotic vehicles and other capital equipment, specialty components and tooling, a broad suite of complementary subsea technical services and rental items, and applied products for subsea pipelines; drilling technologies, including capital equipment and a broad line of products consumed in the drilling and well intervention process; and downhole technologies, including cementing and casing tools, completion products, and a range of downhole protection solutions. |
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• | Production & Infrastructure segment. We design and manufacture products and provide related equipment and services to the well stimulation, production and infrastructure markets. Through this segment, we supply flow equipment, including pumps and well stimulation consumable products and related recertification and refurbishment services; production equipment, including well site production equipment and process equipment; and valve solutions, which includes a broad range of industrial and process valves. |
Market Conditions
The level of demand for our products and services is directly related to activity levels and the capital and operating budgets of our customers, which in turn are influenced heavily by energy prices and the expectation as to future trends in those prices. Energy prices have historically been cyclical in nature, as exemplified by the significant decrease in oil prices beginning in the middle of last year. Energy prices are affected by a wide range of factors, and although the extent and duration of the decline in energy prices are difficult to predict, we expect the current market conditions to have a significant, adverse impact on our business at least through 2015.
The table below shows average crude oil and natural gas prices for West Texas Intermediate crude oil (WTI), United Kingdom Brent crude oil (Brent), and Henry Hub natural gas:
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| | Three months ended |
| | March 31, | | December 31, | | March 31, |
| | 2015 | | 2014 | | 2014 |
Average global oil, $/bbl | | | | | | |
West Texas Intermediate | | $ | 48.50 |
| | $ | 73.21 |
| | $ | 98.65 |
|
United Kingdom Brent | | $ | 53.98 |
| | $ | 76.43 |
| | $ | 107.19 |
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Average North American Natural Gas, $/Mcf | | | | | | |
Henry Hub | | $ | 2.90 |
| | $ | 3.77 |
| | $ | 5.15 |
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Average oil prices were approximately 32% and 51% lower in the first quarter of 2015 than in the fourth quarter of 2014 and the first quarter of 2014, respectively. Average natural gas prices were approximately 23% and 44% lower in the first quarter of 2015 than in the fourth quarter of 2014 and the first quarter of 2014, respectively. Oil prices began a significant decline in the second half of 2014 and have declined over 54% from peak prices in June 2014 to the end of March 2015. This precipitous decline in oil prices has resulted in a significant decrease in exploration and production activity and spending by our customers. We expect oil and natural gas prices to have a significant, adverse impact on our results of operations until they increase substantially.
The table below shows the average number of active drilling rigs, based on the weekly Baker Hughes Incorporated rig count, operating by geographic area and drilling for different purposes.
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| | | | | | | | | |
| | Three months ended |
| | March 31, | | December 31, | | March 31, |
| | 2015 | | 2014 | | 2014< |