FET 2015 Q2 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 June 30, 2015
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 July 24, 2015, there were 90,282,646 common shares outstanding.


Table of Contents
 


Table of Contents



2

Table of Contents
 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated statements of comprehensive income
(Unaudited)
  
Three months ended June 30,
 
Six months ended June 30,
(in thousands, except per share information)
2015
 
2014
 
2015
 
2014
Net sales
$
284,415

 
$
428,279

 
$
632,511

 
$
832,217

Cost of sales
199,532

 
290,286

 
438,502

 
566,286

Gross profit
84,883

 
137,993

 
194,009

 
265,931

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
66,225

 
77,731

 
139,785

 
148,771

Transaction expenses
23

 
682

 
240

 
810

Loss (gain) on sale of assets and other
37

 
(284
)
 
(275
)
 
405

Total operating expenses
66,285

 
78,129

 
139,750

 
149,986

Earnings from equity investment
3,840

 
5,940

 
8,411

 
11,248

Operating income
22,438

 
65,804

 
62,670

 
127,193

Other expense (income)
 
 
 
 
 
 
 
Interest expense
7,607

 
7,725

 
15,234

 
15,475

Foreign exchange (gains) losses and other, net
4,055

 
3,129

 
(2,601
)
 
4,606

Total other expense
11,662

 
10,854

 
12,633

 
20,081

Income before income taxes
10,776

 
54,950

 
50,037

 
107,112

Provision for income tax expense
1,911

 
15,407

 
12,516

 
31,063

Net income
8,865

 
39,543

 
37,521

 
76,049

Less: Income (loss) attributable to noncontrolling interest
(9
)
 
21

 
(25
)
 
(3
)
Net income attributable to common stockholders
8,874

 
39,522

 
37,546

 
76,052

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
89,767

 
92,649

 
89,625

 
92,391

Diluted
91,884

 
95,695

 
91,597

 
95,363

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.10

 
$
0.43

 
$
0.42

 
$
0.82

Diluted
$
0.10

 
$
0.41

 
$
0.41

 
$
0.80

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net income
8,865

 
39,543

 
37,521

 
76,049

Change in foreign currency translation, net of tax of $0
25,491

 
11,690

 
(11,806
)
 
12,720

Gain (loss) on pension liability
(29
)
 

 
70

 
2

Comprehensive income
34,327

 
51,233

 
25,785

 
88,771

Less: comprehensive loss (income) attributable to noncontrolling interests
11

 
(15
)
 
54

 
12

Comprehensive income attributable to common stockholders
$
34,338

 
$
51,218

 
$
25,839

 
$
88,783

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


3

Table of Contents
 

Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated balance sheets
(Unaudited)
(in thousands, except share information)
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
57,841

 
$
76,579

Accounts receivable—trade, net
199,620

 
287,045

Inventories
522,817

 
461,515

Prepaid expenses and other current assets
41,458

 
32,985

Costs and estimated profits in excess of billings
16,819

 
14,646

Deferred income taxes, net
23,066

 
22,389

Total current assets
861,621

 
895,159

Property and equipment, net of accumulated depreciation
202,430

 
189,974

Deferred financing costs, net
11,828

 
13,107

Intangibles
265,811

 
271,739

Goodwill
808,374

 
798,481

Investment in unconsolidated subsidiary
55,308

 
49,675

Other long-term assets
4,001

 
3,493

Total assets
$
2,209,373

 
$
2,221,628

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
623

 
$
840

Accounts payable—trade
114,948

 
127,757

Accrued liabilities
82,176

 
126,890

Deferred revenue
8,604

 
10,919

Billings in excess of costs and profits recognized
9,811

 
15,785

Total current liabilities
216,162

 
282,191

Long-term debt, net of current portion
437,673

 
428,010

Deferred income taxes, net
97,831

 
98,188

Other long-term liabilities
22,396

 
17,318

Total liabilities
774,062

 
825,707

Commitments and contingencies

 


Equity
 
 
 
Common stock, $0.01 par value, 296,000,000 shares authorized, 98,299,697 and 97,865,278 shares issued
983

 
979

Additional paid-in capital
878,508

 
864,313

Treasury stock at cost, 8,138,667 and 8,108,983 shares
(133,074
)
 
(132,480
)
Retained earnings
737,051

 
699,505

Accumulated other comprehensive income (loss)
(48,668
)
 
(36,961
)
Total stockholders’ equity
1,434,800

 
1,395,356

Noncontrolling interest in subsidiary
511

 
565

Total equity
1,435,311

 
1,395,921

Total liabilities and equity
$
2,209,373

 
$
2,221,628

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

4

Table of Contents
 

Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated statements of cash flows
(Unaudited)
  
Six Months Ended June 30,
(in thousands, except share information)
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
37,521

 
$
76,049

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation expense
18,996

 
18,650

Amortization of intangible assets
13,671

 
13,678

Share-based compensation expense
11,814

 
9,414

Deferred income taxes
69

 
6,307

Earnings from equity investment, net of distributions
(5,633
)
 
2,171

Other
2,588

 
2,337

Changes in operating assets and liabilities
 
 
 
Accounts receivable—trade
90,944

 
(24,780
)
Inventories
(39,009
)
 
(11,695
)
Prepaid expenses and other current assets
(4,729
)
 
10,971

Accounts payable, deferred revenue and other accrued liabilities
(62,388
)
 
11,924

Costs and estimated profits in excess of billings, net
(7,960
)
 
(1,943
)
Net cash provided by operating activities
$
55,884

 
$
113,083

Cash flows from investing activities
 
 
 
Acquisition of businesses, net of cash acquired
(60,836
)
 
(37,682
)
Capital expenditures for property and equipment
(19,680
)
 
(28,718
)
Proceeds from sale of business, property and equipment
1,408

 
8,596

Net cash used in investing activities
$
(79,108
)
 
$
(57,804
)
Cash flows from financing activities
 
 
 
Borrowings under Credit Facility
79,943

 

Repayment of long-term debt
(70,580
)
 
(75,511
)
Excess tax benefits from stock based compensation
106

 
5,179

Repurchases of stock
(6,194
)
 
(881
)
Proceeds from stock issuance
2,280

 
6,746

Deferred financing costs

 
(5
)
Net cash provided by (used in) financing activities
$
5,555

 
$
(64,472
)
Effect of exchange rate changes on cash
(1,069
)
 
2,253

Net decrease in cash and cash equivalents
(18,738
)
 
(6,940
)
Cash and cash equivalents
 
 
 
Beginning of period
76,579

 
39,582

End of period
$
57,841

 
$
32,642

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

5

Table of Contents
 

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 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 six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending 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 July 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-11, Simplifying the Measurement of Inventory, the objective of which is to clearly articulate the requirements for the measurement and disclosure of inventory.  The new standard will be effective for the Company for the fiscal year beginning after December 15, 2016, including interim periods within those fiscal years. The guidance is not expected to have a material impact on the consolidated financial statements.
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

6

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

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 is to be effective December 15, 2017. Companies are able to early adopt the pronouncement, however not before December 15, 2016. The Company is currently evaluating the impacts of the adoption and the implementation approach to be used.
3. Acquisitions
2015 Acquisition
Effective February 2, 2015, the Company completed the acquisition of J-Mac Tool, Inc. ("J-Mac") for 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. As the value of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances that existed at the acquisition date. When the valuation is final, any changes to the preliminary valuation of acquired assets and liabilities could result in adjustments to identified intangibles and goodwill. 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
 
$
37,106

Property and equipment
 
11,659

Intangible assets (primarily customer relationships)
 
10,408

Tax-deductible goodwill
 
15,249

Current liabilities
 
(10,209
)
Long-term liabilities
 
(22
)
Net assets acquired
 
$
64,191

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

Revenues and net income related to the acquisitions were not significant for the year ended December 31, 2014 or the six months ended June 30, 2015. Pro forma results of operations for the 2015 and 2014 acquisitions have not been presented because the effects were not material to the consolidated financial statements on either an individual or aggregate basis.

7

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

4. Inventories
The Company's significant components of inventory at June 30, 2015 and December 31, 2014 were as follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Raw materials and parts
$
169,761

 
$
153,768

Work in process
51,581

 
50,913

Finished goods
333,856

 
286,290

Gross inventories
555,198

 
490,971

Inventory reserve
(32,381
)
 
(29,456
)
Inventories
$
522,817

 
$
461,515

5. Goodwill and intangible assets
Goodwill
The changes in the carrying amount of goodwill from December 31, 2014 to June 30, 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

 
15,249

 
15,249

Impact of non-U.S. local currency translation
(5,107
)
 
(249
)
 
(5,356
)
Goodwill Balance at June 30, 2015 net
$
714,753

 
$
93,621

 
$
808,374


8

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

Intangible assets
Intangible assets consisted of the following as of June 30, 2015 and December 31, 2014, respectively (in thousands):
  
June 30, 2015
 
Gross carrying
amount
 
Accumulated
amortization
 
Net amortizable
intangibles
 
Amortization
period (in years)
Customer relationships
$
292,973

 
$
(94,781
)
 
$
198,192

 
4-15
Patents and technology
30,536

 
(9,373
)
 
21,163

 
5-17
Non-compete agreements
7,029

 
(6,071
)
 
958

 
3-6
Trade names
47,866

 
(16,580
)
 
31,286

 
10-15
Distributor relationships
22,160

 
(13,178
)
 
8,982

 
8-15
Trademark
5,230

 

 
5,230

 
Indefinite
Intangible Assets Total
$
405,794

 
$
(139,983
)
 
$
265,811

 
 

  
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 June 30, 2015 and December 31, 2014 consisted of the following (in thousands): 
 
June 30,
2015
 
December 31,
2014
6.25% Senior Notes due October 2021
$
402,600

 
$
402,801

Senior secured revolving credit facility
35,000

 
25,000

Other debt
696

 
1,049

Total debt
438,296

 
428,850

Less: current maturities
(623
)
 
(840
)
Long-term debt
$
437,673

 
$
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

9

Table of Contents
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 June 30, 2015 and December 31, 2014 were 1.94% and 1.91%, respectively.
As of June 30, 2015, we had $35.0 million of borrowings outstanding under the Credit Facility, $12.2 million of outstanding letters of credit and the capacity to borrow an additional $552.8 million subject to certain limitations in the Credit Facility. 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 June 30, 2015.
7. Income taxes
The Company's effective tax rate was 25.0% for the six months ended June 30, 2015 and 29.0% for the six months ended June 30, 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. The effective tax rate was 17.7% for the three months ended June 30, 2015 and 28.0% for the three months ended June 30, 2014. The tax provision for the three months ended June 30, 2015 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.
8. Fair value measurements
At June 30, 2015, the carrying value of the Credit Facility was $35.0 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 June 30, 2015, the fair value and the carrying value of the Company’s Senior Notes approximated $398.6 million and $402.6 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 June 30, 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 six months ended June 30, 2015.

10

Table of Contents
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 June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
169,662

 
$
279,251

 
$
384,777

 
$
541,020

Production & Infrastructure
114,929

 
149,369

 
248,092

 
291,944

Intersegment eliminations
(176
)
 
(341
)
 
(358
)
 
(747
)
Total Revenue
$
284,415

 
$
428,279

 
$
632,511

 
$
832,217

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Drilling & Subsea
$
15,380

 
$
50,336

 
$
44,586

 
$
97,401

Production & Infrastructure
15,201

 
26,562

 
34,393

 
50,444

Corporate
(8,083
)
 
(10,696
)
 
(16,344
)
 
(19,437
)
Total segment operating income
22,498

 
66,202

 
62,635

 
128,408

Transaction expenses
23

 
682

 
240

 
810

Loss (gain) on sale of assets and other
37

 
(284
)
 
(275
)
 
405

Income from operations
$
22,438

 
$
65,804

 
$
62,670

 
$
127,193

A summary of consolidated assets by reportable segment is as follows (in thousands):
 
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
 
Drilling & Subsea
 
$
1,577,801

 
$
1,674,934

Production & Infrastructure
 
558,770

 
488,225

Corporate
 
72,802

 
58,469

Total assets
 
$
2,209,373

 
$
2,221,628

Corporate assets include, among other items, prepaid assets, cash and deferred loan costs.

11

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

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net Income attributable to common stockholders
$
8,874

 
$
39,522

 
$
37,546

 
$
76,052

 
 
 
 
 
 
 
 
Average shares outstanding (basic)
89,767

 
92,649

 
89,625

 
92,391

Common stock equivalents
2,117

 
3,046

 
1,972

 
2,972

Diluted shares
91,884

 
95,695

 
91,597

 
95,363

Earnings per share
 
 
 
 
 
 
 
Basic earnings per share
$
0.10

 
$
0.43

 
$
0.42

 
$
0.82

Diluted earnings per share
$
0.10

 
$
0.41

 
$
0.41

 
$
0.80

The diluted earnings per share calculation excludes approximately 1.3 million and 0.4 million stock options for the three months ended June 30, 2015 and 2014, respectively, and 1.7 million and 0.5 million stock options for the six months ended June 30, 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 June 30, 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 six months ended June 30, 2015, the Company granted 458,250 options and 861,599 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, 639,711 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 one year, two year and 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.

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 comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2015
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
209,234

 
$
102,363

 
$
(27,182
)
 
$
284,415

Cost of sales
 

 
155,127

 
71,771

 
(27,366
)
 
199,532

Gross profit
 

 
54,107

 
30,592

 
184

 
84,883

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
52,426

 
13,799

 

 
66,225

Transaction expenses
 

 
23

 

 

 
23

Loss (gain) on sale of assets and other
 

 
53

 
(16
)
 

 
37

Total operating expenses
 

 
52,502

 
13,783

 

 
66,285

Earnings from equity investment
 

 
3,840

 

 

 
3,840

Equity earnings from affiliate, net of tax
 
13,830

 
10,594

 

 
(24,424
)
 

Operating income
 
13,830

 
16,039

 
16,809

 
(24,240
)
 
22,438

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
7,624

 

 
(17
)
 

 
7,607

Foreign exchange (gains) losses and other, net
 

 
31

 
4,024

 

 
4,055

Total other expense (income)
 
7,624

 
31

 
4,007

 

 
11,662

Income before income taxes
 
6,206

 
16,008

 
12,802

 
(24,240
)
 
10,776

Provision for income tax expense
 
(2,668
)
 
2,178

 
2,401

 

 
1,911

Net income
 
8,874

 
13,830

 
10,401

 
(24,240
)
 
8,865

Less: Income (loss) attributable to noncontrolling interest
 

 

 
(9
)
 

 
(9
)
Net income attributable to common stockholders
 
8,874

 
13,830

 
10,410

 
(24,240
)
 
8,874

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
8,874

 
13,830

 
10,401

 
(24,240
)
 
8,865

Change in foreign currency translation, net of tax of $0
 
25,491

 
25,491

 
25,491

 
(50,982
)
 
25,491

Change in pension liability
 
(29
)
 
(29
)
 
(29
)
 
58

 
(29
)
Comprehensive income (loss)
 
34,336

 
39,292

 
35,863

 
(75,164
)
 
34,327

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
11

 

 
11

Comprehensive income (loss) attributable to common stockholders
 
$
34,336

 
$
39,292

 
$
35,874

 
$
(75,164
)
 
$
34,338



13

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

Condensed consolidating statements of comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
312,663

 
$
154,761

 
$
(39,145
)
 
$
428,279

Cost of sales
 

 
221,119

 
108,861

 
(39,694
)
 
290,286

Gross profit
 

 
91,544

 
45,900

 
549

 
137,993

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
59,536

 
18,195

 

 
77,731

Other operating expense
 

 
512

 
(114
)
 

 
398

Total operating expenses
 

 
60,048

 
18,081

 

 
78,129

Earnings from equity investment
 

 
5,940

 

 

 
5,940

Equity earnings from affiliates, net of tax
 
44,571

 
19,805

 

 
(64,376
)
 

Operating income
 
44,571

 
57,241

 
27,819

 
(63,827
)
 
65,804

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
7,768

 
(7
)
 
(36
)
 

 
7,725

Interest income with affiliate
 

 
(1,933
)
 

 
1,933

 

Interest expense with affiliate
 

 

 
1,933

 
(1,933
)
 

Foreign exchange (gains) losses and other, net
 

 
676

 
2,453

 

 
3,129

Total other expense (income)
 
7,768

 
(1,264
)
 
4,350

 

 
10,854

Income before income taxes
 
36,803

 
58,505

 
23,469

 
(63,827
)
 
54,950

Provision for income tax expense
 
(2,719
)
 
13,934

 
4,192

 

 
15,407

Net income
 
39,522

 
44,571

 
19,277

 
(63,827
)
 
39,543

Less: Income (loss) attributable to noncontrolling interest
 

 

 
21

 

 
21

Net income attributable to common stockholders
 
39,522

 
44,571

 
19,256

 
(63,827
)
 
39,522

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
39,522

 
44,571

 
19,277

 
(63,827
)
 
39,543

Change in foreign currency translation, net of tax of $0
 
11,690

 
11,690

 
11,690

 
(23,380
)
 
11,690

Comprehensive income (loss)
 
51,212

 
56,261

 
30,967

 
(87,207
)
 
51,233

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(15
)
 

 
(15
)
Comprehensive income (loss) attributable to common stockholders
 
$
51,212

 
$
56,261

 
$
30,952

 
$
(87,207
)
 
$
51,218



14

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

Condensed consolidating statements of comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
478,433

 
$
222,680

 
$
(68,602
)
 
$
632,511

Cost of sales
 

 
343,894

 
161,446

 
(66,838
)
 
438,502

Gross profit
 

 
134,539

 
61,234

 
(1,764
)
 
194,009

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
109,798

 
29,987

 

 
139,785

Transaction expenses
 

 
240

 

 

 
 
Loss (gain) on sale of assets and other
 

 
(58
)
 
(217
)
 

 
(275
)
Total operating expenses
 

 
109,980

 
29,770

 

 
139,750

Earnings from equity investment
 

 
8,411

 

 

 
8,411

Equity earnings from affiliates, net of tax
 
47,434

 
26,830

 

 
(74,264
)
 

Operating income
 
47,434

 
59,800

 
31,464

 
(76,028
)
 
62,670

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
15,212

 
14

 
8

 

 
15,234

Foreign exchange (gains) losses and other, net
 

 
(154
)
 
(2,447
)
 

 
(2,601
)
Total other expense (income)
 
15,212

 
(140
)
 
(2,439
)
 

 
12,633

Income before income taxes
 
32,222

 
59,940

 
33,903

 
(76,028
)
 
50,037

Provision for income tax expense
 
(5,324
)
 
12,506

 
5,334

 

 
12,516

Net income
 
37,546

 
47,434

 
28,569

 
(76,028
)
 
37,521

Less: Income (loss) attributable to noncontrolling interest
 

 

 
(25
)
 

 
(25
)
Net income attributable to common stockholders
 
37,546

 
47,434

 
28,594

 
(76,028
)
 
37,546

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
37,546

 
47,434

 
28,569

 
(76,028
)
 
37,521

Change in foreign currency translation, net of tax of $0
 
(11,806
)
 
(11,806
)
 
(11,806
)
 
23,612

 
(11,806
)
Change in pension liability
 
70

 
70

 
70

 
(140
)
 
70

Comprehensive income (loss)
 
25,810

 
35,698

 
16,833

 
(52,556
)
 
25,785

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
54

 

 
54

Comprehensive income (loss) attributable to common stockholders
 
$
25,810

 
$
35,698

 
$
16,887

 
$
(52,556
)
 
$
25,839




15

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

Condensed consolidating statements of comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
610,695

 
$
300,591

 
$
(79,069
)
 
$
832,217

Cost of sales
 

 
428,088

 
214,846

 
(76,648
)
 
566,286

Gross profit
 

 
182,607

 
85,745

 
(2,421
)
 
265,931

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
113,103

 
35,668

 

 
148,771

Other operating expense
 

 
1,546

 
(331
)
 

 
1,215

Total operating expenses
 

 
114,649

 
35,337

 

 
149,986

Earnings from equity investment
 

 
11,248

 

 

 
11,248

Equity earnings from affiliates, net of tax
 
86,139

 
31,640

 

 
(117,779
)
 

Operating income
 
86,139

 
110,846

 
50,408

 
(120,200
)
 
127,193

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
15,518

 
16

 
(59
)
 

 
15,475

Interest income with affiliate
 

 
(3,883
)
 

 
3,883

 

Interest expense with affiliate
 

 

 
3,883

 
(3,883
)
 

Foreign exchange (gains) losses and other, net
 

 
1,018

 
3,588

 

 
4,606

Total other expense (income)
 
15,518

 
(2,849
)
 
7,412

 

 
20,081

Income before income taxes
 
70,621

 
113,695

 
42,996

 
(120,200
)
 
107,112

Provision for income tax expense
 
(5,431
)
 
27,556

 
8,938

 

 
31,063

Net income
 
76,052

 
86,139

 
34,058

 
(120,200
)
 
76,049

Less: Income (loss) attributable to noncontrolling interest
 

 

 
(3
)
 

 
(3
)
Net income attributable to common stockholders
 
76,052

 
86,139

 
34,061

 
(120,200
)
 
76,052

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
76,052

 
86,139

 
34,058

 
(120,200
)
 
76,049

Change in foreign currency translation, net of tax of $0
 
12,720

 
12,720

 
12,720

 
(25,440
)
 
12,720

Change in pension liability
 
2

 
2

 
2

 
(4
)
 
2

Comprehensive income (loss)
 
88,774

 
98,861

 
46,780

 
(145,644
)
 
88,771

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
12

 

 
12

Comprehensive income (loss) attributable to common stockholders
 
$
88,774

 
$
98,861

 
$
46,792

 
$
(145,644
)
 
$
88,783






16

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

Condensed consolidating balance sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
15,133

 
$
42,708

 
$

 
$
57,841

Accounts receivable—trade, net
 

 
124,376

 
75,244

 

 
199,620

Inventories
 

 
397,487

 
135,074

 
(9,744
)
 
522,817

Cost and profits in excess of billings
 

 
3,879

 
12,940

 

 
16,819

Other current assets
 

 
54,263

 
10,261

 

 
64,524

Total current assets
 

 
595,138

 
276,227

 
(9,744
)
 
861,621

Property and equipment, net of accumulated depreciation
 

 
165,638

 
36,792

 

 
202,430

Deferred financing costs, net
 
11,828

 

 

 

 
11,828

Intangibles
 

 
198,725

 
67,086

 

 
265,811

Goodwill
 

 
538,147

 
270,227

 

 
808,374

Investment in unconsolidated subsidiary
 

 
55,308

 

 

 
55,308

Investment in affiliates
 
1,369,431

 
603,545

 

 
(1,972,976
)
 

Long-term advances to affiliates
 
498,290

 

 
57,089

 
(555,379
)
 

Other long-term assets
 

 
3,223

 
778

 

 
4,001

Total assets
 
$
1,879,549

 
$
2,159,724

 
$
708,199

 
$
(2,538,099
)
 
$
2,209,373

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

 
$
612

 
$
11

 
$

 
$
623

Accounts payable—trade
 

 
80,997

 
33,951

 

 
114,948

Accrued liabilities
 
7,151

 
55,101

 
19,924

 

 
82,176

Deferred revenue
 

 
2,791

 
5,813

 

 
8,604

Billings in excess of costs and profits
 

 
211

 
9,600

 

 
9,811

Total current liabilities
 
7,151

 
139,712

 
69,299

 

 
216,162

Long-term debt, net of current portion
 
437,598

 
57

 
18

 

 
437,673

Long-term payables to affiliates
 

 
555,379

 

 
(555,379
)
 

Deferred income taxes, net
 

 
78,056

 
19,775

 

 
97,831

Other long-term liabilities
 

 
17,089

 
5,307

 

 
22,396

Total liabilities
 
444,749

 
790,293

 
94,399

 
(555,379
)
 
774,062

 
 
 
 
 
 
 
 
 
 
 
Total stockholder's equity
 
1,434,800

 
1,369,431

 
613,289

 
(1,982,720
)
 
1,434,800

Noncontrolling interest in subsidiary
 

 

 
511

 

 
511

Equity
 
1,434,800

 
1,369,431

 
613,800

 
(1,982,720
)
 
1,435,311

Total liabilities and equity
 
$
1,879,549

 
$
2,159,724

 
$
708,199

 
$
(2,538,099
)
 
$
2,209,373


17

Table of Contents
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 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 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


18

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

Condensed consolidating statements of cash flows
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Cash flows from (used in) operating activities
 
$
(8,592
)
 
$
45,908

 
$
18,568

 
$

 
$
55,884

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
Acquisition of businesses, net of cash acquired
 

 
(60,836
)
 

 

 
(60,836
)
Capital expenditures for property and equipment
 

 
(14,646
)
 
(5,034
)
 

 
(19,680
)
Long-term loans and advances to affiliates
 
(2,947
)
 
37,346

 

 
(34,399
)
 

Other
 

 
833

 
575

 

 
1,408

Net cash provided by (used in) investing activities
 
$
(2,947
)
 
$
(37,303
)
 
$
(4,459
)
 
$
(34,399
)
 
$
(79,108
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Borrowings (repayment) of long-term debt
 
9,796

 
(425
)
 
(8
)
 

 
9,363

Long-term loans and advances to affiliates
 

 
2,947

 
(37,346
)
 
34,399

 

Other
 
(3,808
)
 

 

 

 
(3,808
)
Net cash provided by (used in) financing activities
 
$
5,988

 
$
2,522

 
$
(37,354
)
 
$
34,399

 
$
5,555

Effect of exchange rate changes on cash
 

 

 
(1,069
)
 

 
(1,069
)
Net increase (decrease) in cash and cash equivalents
 
(5,551
)
 
11,127

 
(24,314
)
 

 
(18,738
)
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
Beginning of period
 
5,551

 
4,006

 
67,022

 

 
76,579

End of period
 
$

 
$
15,133

 
$
42,708

 
$

 
$
57,841


19

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

Condensed consolidating statements of cash flows
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Cash flows from (used in) operating activities
 
$
(16,013
)
 
$
102,411

 
$
26,685

 
$

 
$
113,083

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
Acquisition of businesses, net of cash acquired
 

 

 
(37,682
)
 

 
(37,682
)
Capital expenditures for property and equipment
 

 
(22,267
)
 
(6,451
)
 

 
(28,718
)
Long-term loans and advances to affiliates
 
85,357

 

 

 
(85,357
)
 

Other
 

 
8,299

 
297

 

 
8,596

Net cash provided by (used in) investing activities
 
$
85,357

 
$
(13,968
)
 
$
(43,836
)
 
$
(85,357
)
 
$
(57,804
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Repayment of long-term debt
 
(75,203
)
 
(187
)
 
(121
)
 

 
(75,511
)
Long-term loans and advances to affiliates
 

 
(82,946
)
 
(2,411
)
 
85,357

 

Other
 
5,859

 
5,180

 

 

 
11,039

Net cash provided by (used in) financing activities
 
$
(69,344
)
 
$
(77,953
)
 
$
(2,532
)
 
$
85,357

 
$
(64,472
)
Effect of exchange rate changes on cash
 

 

 
2,253

 

 
2,253

Net increase (decrease) in cash and cash equivalents
 

 
10,490

 
(17,430
)
 

 
(6,940
)
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
Beginning of period
 

 

 
39,582

 

 
39,582

End of period
 
$

 
$
10,490

 
$
22,152

 
$

 
$
32,642



20

Table of Contents
 

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.


21


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:
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.
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 and are affected by a wide range of factors. 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.

22


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:
 
 
Three months ended
 
 
June 30,
 
March 31,
 
June 30,
 
 
2015
 
2015
 
2014
Average global oil, $/bbl
 
 
 
 
 
 
West Texas Intermediate
 
$
57.85

 
$
48.50

 
$
103.06

United Kingdom Brent
 
$
61.65

 
$
53.98

 
$
109.06

 
 
 
 
 
 
 
Average North American Natural Gas, $/Mcf
 
 
 
 
 
 
Henry Hub
 
$
2.75

 
$
2.90

 
$
4.59

Average WTI and Brent oil prices were 44% lower in the second quarter of 2015 than in the second quarter of 2014. Average natural gas prices were 40% lower in the second quarter of 2015 than in the prior year period. Crude oil prices began a significant decline in the second half of 2014 and have declined 48% from peak prices in June 2014 to the end of June 2015 primarily as a result of weak demand and excess supply. This precipitous decline in oil and natural gas prices has resulted in a significant decrease in exploration and production activity and spending by our customers. These lower oil and natural gas prices had a significant, adverse impact on our results of operations which we expect to continue until prices rise 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.
 
 
Three months ended
 
 
June 30,
 
March 31,
 
June 30,
 
 
2015
 
2015
 
2014
Active Rigs by Location
 
 
 
 
 
 
United States
 
907

 
1,403

 
1,852

Canada
 
98

 
343

 
199

International
 
1,169

 
1,261

 
1,348

Global Active Rigs
 
2,174

 
3,007


3,399

 
 
 
 
 
 
 
Land vs. Offshore Rigs
 
 
 
 
 
 
Land
 
1,853

 
2,636

 
3,016

Offshore
 
321

 
371

 
383

Global Active Rigs
 
2,174

 
3,007


3,399

 
 
 
 
 
 
 
U.S. Commodity Target
 
 
 
 
 
 
Oil/Gas
 
681

 
1,110

 
1,529

Gas
 
223

 
291

 
319

Unclassified
 
3

 
2

 
4

Total U.S. Rigs
 
907

 
1,403


1,852

 
 
 
 
 
 
 
U.S. Well Path
 
 
 
 
 
 
Horizontal
 
701

 
1,055

 
1,242

Vertical
 
114

 
217

 
395

Directional
 
92

 
131

 
215

Total U.S. Active Rigs
 
907

 
1,403


1,852

As a result of lower oil and natural gas prices, the average U.S. rig count decreased 51% from the second quarter of 2014, while the international rig count and the Canadian rig count decreased 13% and 51%, respectively, from the second quarter of 2014. The U.S. rig count declined 55% from its peak of 1,931 rigs in September 2014 to 859 rigs at the end of June 2015. A substantial portion of our revenue is impacted by the level of rig activity and the number of

23


wells completed. This precipitous decrease in the rig count had a significant negative impact on our results of operations in the second quarter of 2015 and is expected to have a continuing adverse effect on our results at least through 2015.
The current low energy price environment has caused a steep reduction in activity and spending by our customers. Many exploration and production companies, especially those with operations in North America or offshore, have curtailed operations, reduced the number of wells being drilled, or chosen to defer the completion of wells that have been drilled. This has also resulted in a substantial reduction in activity and revenue for energy service companies, resulting in both exploration and production companies and energy service companies significantly reducing their purchases of both capital and consumable equipment from Forum and other equipment manufacturers. This widespread reduction in spending had a negative impact on our results and new orders in the second quarter of 2015 and is expected to have a continuing adverse effect at least through 2015.
The table below shows the amount of total inbound orders by segment for the three and six months ended June 30, 2015 and 2014:
(in millions of dollars)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Orders:
 
 
 
 
 
 
 
Drilling & Subsea
$
111.0

 
$
308.7

 
$
275.2

 
$
631.1

Production & Infrastructure
87.3

 
136.0

 
210.8

 
299.4

Total Orders
$
198.3

 
$
444.7

 
$
486.0

 
$
930.5


24


Results of operations
We made one acquisition in the first quarter of 2015 and one acquisition in the second quarter of 2014. For additional information about these acquisitions, see Note 3 to the condensed consolidated financial statements in Item 1 of Part I of this quarterly report. For this reason, our results of operations for the 2015 periods presented may not be comparable to historical results of operations for the 2014 periods.
Three months ended June 30, 2015 compared with three months ended June 30, 2014
 
Three months ended June 30,
 
Favorable / (Unfavorable)
 
2015
 
2014
 
$
 
%
(in thousands of dollars, except per share information)
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
169,662

 
$
279,251

 
$
(109,589
)
 
(39.2
)%
Production & Infrastructure
114,929

 
149,369

 
(34,440
)
 
(23.1
)%
Eliminations
(176
)
 
(341
)
 
165

 
*

Total revenue
$
284,415

 
$
428,279

 
$
(143,864
)
 
(33.6
)%
Operating income:
 
 
 
 
 
 
 
Drilling & Subsea
$
15,380

 
$
50,336

 
$
(34,956
)
 
(69.4
)%
Operating income margin %
9.1
%
 
18.0
%
 
 
 
 
Production & Infrastructure
15,201

 
26,562

 
(11,361
)
 
(42.8
)%
Operating income margin %
13.2
%
 
17.8
%
 
 
 
 
Corporate
(8,083
)
 
(10,696
)
 
2,613

 
24.4
 %
Total segment operating income
$
22,498

 
$
66,202

 
$
(43,704
)
 
(66.0
)%
Operating income margin %
7.9
%
 
15.5
%
 
 
 
 
Transaction expenses
23

 
682

 
659

 
*

Loss (gain) on sale of assets and other
37

 
(284
)
 
(321
)
 
*

Income from operations
22,438

 
65,804

 
(43,366
)
 
(65.9
)%
Interest expense, net
7,607

 
7,725

 
118

 
1.5
 %
Foreign exchange (gains) losses and other, net
4,055

 
3,129

 
(926
)
 
*

Other (income) expense, net
11,662

 
10,854

 
(808
)
 
*

Income before income taxes
10,776

 
54,950

 
(44,174
)
 
(80.4
)%
Income tax expense
1,911

 
15,407

 
13,496

 
87.6
 %
Net income
8,865

 
39,543

 
(30,678
)
 
(77.6
)%
Less: Income (loss) attributable to non-controlling interest
(9
)
 
21

 
(30
)
 
*

Income attributable to common stockholders
$
8,874

 
$
39,522

 
$
(30,648
)
 
(77.5
)%
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
89,767

 
92,649

 
 
 
 
Diluted
91,884

 
95,695

 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.10

 
$
0.43

 
 
 
 
Diluted
$
0.10

 
$
0.41

 
 
 
 
* not meaningful
 
 
 
 
 
 
 

25


Revenue
Our revenue for the three months ended June 30, 2015 decreased $143.9 million, or 33.6%, to $284.4 million compared to the three months ended June 30, 2014. For the three months ended June 30, 2015, our Drilling & Subsea segment and our Production & Infrastructure segment comprised 59.7% and 40.3% of our total revenue, respectively, which compared to 65.2% and 34.8% of total revenue, respectively, for the three months ended June 30, 2014. The changes in revenue by operating segment consisted of the following:
Drilling & Subsea segment — Revenue decreased $109.6 million, or 39.2%, to $169.7 million during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 primarily attributable to decreased oil and gas drilling and well completions activity in North America. The U.S. average rig count decreased 51% compared to the prior year period resulting in decreased sales of our drilling equipment and our completions and production products. We also recognized lower revenue compared to the prior year period on our subsea products as investment in deepwater oil and gas activity has declined.
Production & Infrastructure segment — Revenue decreased $34.4 million, or 23.1%, to $114.9 million during the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The decrease in revenue was primarily attributable to lower sales of our surface production equipment to exploration and production operators, and to lower sales of our consumable flow equipment products to pressure pumping service providers as fewer wells were completed offset by the addition of J-Mac sales from the first quarter 2015 acquisition.
Segment operating income and segment operating margin percentage
Segment operating income for the three months ended June 30, 2015, decreased $43.7 million, or 66.0%, to $22.5 million compared to the three months ended June 30, 2014. The segment operating margin percentage is calculated by dividing segment operating income by revenue for the period. For the three months ended June 30, 2015, the segment operating margin percentage of 7.9% represents a decrease of 760 basis points from the 15.5% operating margin percentage for three months ended June 30, 2014. The change in operating margin percentage for each segment is explained as follows:
Drilling & Subsea segment — The operating margin percentage for this segment decreased 890 basis points to 9.1% for the three months ended June 30, 2015, from 18.0% for the three months ended June 30, 2014. The second quarter of 2015 included $2.8 million of severance and facility closure costs incurred to further reduce our cost structure in line with current activity levels. Excluding these charges, the operating margin for this segment is down 740 basis points in the second quarter of 2015 compared to the same period in 2014. The reason for this decrease in operating margin percentage is lower activity levels causing a loss of manufacturing scale efficiencies and more intense competition pressuring prices. We believe that adjusted operating margins excluding the costs described above are useful for investors to assess operating performance especially when comparing periods.
Production & Infrastructure segment — The operating margin percentage for this segment decreased 460 basis points to 13.2% for the three months ended June 30, 2015, from 17.8% for the three months ended June 30, 2014. The decrease in operating margin percentage was attributable to higher competition for fewer sales on lower activity levels, and reduced operating leverage on lower volumes. Also impacting margins was lower earnings from our investment in Global Tubing, LLC.
Corporate — Selling, general and administrative expenses for Corporate decreased by $2.6 million, or 24.4%, for the three months ended June 30, 2015 compared to the three months ended June 30, 2014, due to lower professional fees and personnel costs. Corporate costs include, among other items, payroll related costs for general management and management of finance and administration, legal, human resources and information technology; professional fees for legal, accounting and related services; and marketing costs.
Other items not included in segment operating income
Several items are not included in segment operating income, but are included in total operating income. These items include transaction expenses, and gains and losses from the sale of assets. Transaction expenses relate to legal and other advisory costs incurred in acquiring businesses and are not considered to be part of segment operating income. These costs were negligible for the three months ended June 30, 2015 and $0.7 million for the three months ended June 30, 2014.

26


Other income and expense
Other income and expense includes interest expense and foreign exchange gains and losses. We incurred $7.6 million of interest expense during the three months ended June 30, 2015, a decrease of $0.1 million from the three months ended June 30, 2014. The change in foreign exchange gains or losses is primarily the result of movements in the British pound and the Euro relative to the U.S. dollar.
Taxes
Tax expense includes current income taxes expected to be due based on taxable income to be reported during the periods in the various jurisdictions in which we conduct business, and deferred income taxes based on changes in the tax effect of temporary differences between the bases of assets and liabilities for financial reporting and tax purposes at the beginning and end of the respective periods. The effective tax rate, calculated by dividing total tax expense by income before income taxes, was 17.7% for the three months ended June 30, 2015 and 28.0% for the three months ended June 30, 2014. The annual effective tax rate for 2015 is currently estimated to be 25%. The tax provision for the three months ended June 30, 2015 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.

27


Six months ended June 30, 2015 compared with six months ended June 30, 2014
 
Six Months Ended June 30,
 
Favorable / (Unfavorable)
 
2015
 
2014
 
$
 
%
(in thousands of dollars, except per share information)
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
384,777

 
$
541,020

 
(156,243
)
 
(28.9
)%
Production & Infrastructure
248,092

 
291,944

 
(43,852
)
 
(15.0
)%
Eliminations
(358
)
 
(747
)
 
389

 
*

Total revenue
$
632,511

 
$
832,217

 
$
(199,706
)
 
(24.0
)%
Operating income:
 
 
 
 
 
 
 
Drilling & Subsea
$
44,586

 
$
97,401

 
$
(52,815
)
 
(54.2
)%
Operating income margin %
11.6
%
 
18.0
%
 
 
 
 
Production & Infrastructure
34,393

 
50,444

 
(16,051
)
 
(31.8
)%
Operating income margin %
13.9
%
 
17.3
%
 
 
 
 
Corporate
(16,344
)
 
(19,437
)
 
3,093

 
(15.9
)%
Total segment operating income
$
62,635

 
$
128,408

 
$
(65,773
)
 
(51.2
)%
Operating income margin %
9.9
%
 
15.4
%
 
 
 
 
Transaction expenses
240

 
810

 
570

 
*

Loss (gain) on sale of assets and other
(275
)
 
405

 
680

 
*

Income from operations
62,670

 
127,193

 
(64,523
)
 
(50.7
)%
Interest expense, net
15,234

 
15,475

 
(241
)
 
(1.6
)%
Foreign exchange (gains) losses and other, net
(2,601
)
 
4,606

 
7,207

 
*

Other (income) expense, net
12,633

 
20,081

 
7,448

 
*

Income before income taxes
50,037

 
107,112

 
(57,075
)
 
(53.3
)%
Income tax expense
12,516

 
31,063

 
18,547

 
59.7
 %
Net income
37,521

 
76,049

 
(38,528
)
 
(50.7
)%
Less: Income (loss) attributable to non-controlling interest
(25
)
 
(3
)
 
(22
)
 
*

Income attributable to common stockholders
$
37,546

 
$
76,052

 
$
(38,506
)
 
(50.6
)%
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
89,625

 
92,391

 
 
 
 
Diluted
91,597

 
95,363

 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.42

 
$
0.82

 
 
 
 
Diluted
$
0.41

 
$
0.80

 
 
 
 
* not meaningful
 
 
 
 
 
 
 
Revenue
Our revenue for the six months ended June 30, 2015 decreased $199.7 million, or 24.0%, to $632.5 million compared to the six months ended June 30, 2014. For the six months ended June 30, 2015, our Drilling & Subsea segment and our Production & Infrastructure segment comprised 60.8% and 39.2% of our total revenue, respectively, which compared to 65.0% and 35.0% of total revenue, respectively, for the six months ended June 30, 2014. The changes in revenue by operating segment consisted of the following:
Drilling & Subsea segment — Revenue decreased $156.2 million, or 28.9%, to $384.8 million during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 primarily attributable to decreased oil and gas drilling and well completions activity in North America. The U.S. average rig count decreased 36% compared to the prior year six-month period resulting in decreased sales of our drilling capital and consumable equipment and our completions and downhole products. We recognized lower revenue compared to the prior year period on our subsea products, such as our remotely operated vehicles, as investment in deepwater oil and gas activity has declined.
Production & Infrastructure segment — Revenue decreased $43.9 million, or 15.0%, to $248.1 million during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 primarily attributable to decreased sales of our surface production equipment to exploration and production operators and lower sales of our valves products. These revenue decreases were partially offset by revenue from our first quarter 2015 acquisition.

28


Segment operating income and segment operating margin percentage
Segment operating income for the six months ended June 30, 2015, decreased $65.8 million, or 51.2%, to $62.6 million compared to the six months ended June 30, 2014. The segment operating margin percentage is calculated by dividing segment operating income by revenue for the period. For the six months ended June 30, 2015, the segment operating margin percentage of 9.9% represents a decrease of 550 basis points from the 15.4% operating margin percentage for six months ended June 30, 2014. The change in operating margin percentage for each segment is explained as follows:
Drilling & Subsea segment — The operating margin percentage decreased 640 basis points to 11.6% for the six months ended June 30, 2015, from 18.0% for the six months ended June 30, 2014. The six months ended June 30, 2015 included $7.3 million of severance and facility closure costs incurred to further reduce our cost structure in line with current activity levels. Excluding these charges, the operating margin is down 450 basis points in the six months ended June 30, 2015 compared to the same period in 2014. The reason for this decrease is a combination of lower activity levels and more intense competition pressuring prices and reduced operating leverage on lower volumes. We believe that adjusted operating margins excluding the costs described above are useful for investors to assess operating performance especially when comparing periods.
Production & Infrastructure segment — The operating margin percentage decreased 340 basis points to 13.9% for the six months ended June 30, 2015, from 17.3% for the six months ended June 30, 2014. The decrease in operating margin percentage was attributable to higher competition for fewer sales on lower activity levels, and reduced operating leverage on lower volumes. Also impacting margins was lower earnings from our investment in Global Tubing, LLC.
Corporate — Selling, general and administrative expenses for Corporate decreased by $3.1 million, or 15.9%, for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, due to lower professional fees and personnel costs. Corporate costs include, among other items, payroll related costs for general management and management of finance and administration, legal, human resources and information technology; professional fees for legal, accounting and related services; and marketing costs.
Other items not included in segment operating income
Several items are not included in segment operating income, but are included in total operating income. These items include transaction expenses, and gains and losses from the sale of assets. Transaction expenses relate to legal and other advisory costs incurred in acquiring businesses and are not considered to be part of segment operating income. These costs were $0.2 million and $0.8 million for the six months ended June 30, 2015 and 2014, respectively. In the first quarter of 2014, we incurred a loss of $0.8 million on the sale of our subsea pipe joint protective coatings business.
Other income and expense
Other income and expense includes interest expense and foreign exchange gains and losses. We incurred $15.2 million of interest expense during the six months ended June 30, 2015, a decrease of $0.2 million from the six months ended June 30, 2014. The increase in interest expense was attributable to slightly higher outstanding debt balances incurred to finance two acquisitions, offset by repayments of outstanding balances on our Credit Facility out of operating cash flow. The change in foreign exchange gains or losses is primarily the result of movements in the British pound and the Euro relative to the U.S. dollar.
Taxes
Tax expense includes current income taxes expected to be due based on taxable income to be reported during the periods in the various jurisdictions in which we conduct business, and deferred income taxes based on changes in the tax effect of temporary differences between the bases of assets and liabilities for financial reporting and tax purposes at the beginning and end of the respective periods. The effective tax rate, calculated by dividing total tax expense by income before income taxes, was 25.0% for the six months ended June 30, 2015 and 29.0% for the six months ended June 30, 2014. The annual effective tax rate for 2015 is currently estimated to be 25%. 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.

29


Liquidity and capital resources
Sources and uses of liquidity
At June 30, 2015, we had cash and cash equivalents of $57.8 million and total debt of $438.3 million. We believe that cash on hand, cash generated from operations and amounts available under the Credit Facility will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations for the foreseeable future.
Our total 2015 capital expenditure budget is approximately $35.0 million, which consists of, among other items, investments in maintaining and expanding certain manufacturing facilities, replacing end of life machinery and equipment, maintaining our rental fleet of subsea equipment, and general capital expenditures. This budget does not include expenditures for potential business acquisitions.
Although we do not budget for acquisitions, pursuing growth through acquisitions is a significant part of our business strategy. We expanded and diversified our product portfolio with the acquisition of one business in the first quarter of 2015 for total consideration of $64.2 million and one business in the second quarter of 2014 for total consideration of $38.3 million. We used cash on hand and borrowings under the Credit Facility to finance these acquisitions. We continue to actively review acquisition opportunities on an ongoing basis. Our ability to make significant additional acquisitions for cash may require us to obtain additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.

In October 2014, our Board of Directors approved a share repurchase program for the repurchase of outstanding shares of our common stock with an aggregate purchase price of up to $150 million. Shares may be repurchased under the program from time to time, in amounts and at prices that we deem appropriate, subject to market and business conditions, applicable legal requirements and other considerations. We have purchased approximately 4.5 million shares of stock under this program for aggregate consideration of approximately $100.2 million. Remaining authorization under this program is $49.8 million.
Our cash flows for the six months ended June 30, 2015 and 2014 are presented below (in millions):
  
Six Months Ended June 30,
 
2015
 
2014
Net cash provided by operating activities
$
55.9

 
$
113.1

Net cash used in investing activities
(79.1
)
 
(57.8
)
Net cash provided by (used in) financing activities
5.6

 
(64.5
)
Net decrease in cash and cash equivalents
$
(18.7
)
 
$
(6.9
)
Cash flows provided by operating activities
Net cash provided by operating activities was $55.9 million and $113.1 million for the six months ended June 30, 2015 and 2014, respectively. Cash provided by operations decreased primarily as a result of lower earnings, as well as incremental investments in working capital.
Cash flows used in investing activities
Net cash used in investing activities was $79.1 million and $57.8 million for the six months ended June 30, 2015 and 2014, respectively. The increase was primarily due to consideration paid for an acquisition in the first quarter of 2015 of $60.8 million compared to $37.7 million of consideration paid for an acquisition in the second quarter of 2014. Capital expenditures for the six months ended June 30, 2015 were $19.7 million as compared to $28.7 million for the comparable prior period.
Cash flows provided by (used in) financing activities
Net cash provided by financing activities was $5.6 million for the six months ended June 30, 2015, compared to cash used in financing activities of $64.5 million for the six months ended June 30, 2014. The cash provided by financing activities for the six months ended June 30, 2015 was primarily due to borrowings related to an acquisition offset by the repayment of long-term debt during the period. The cash used in financing activities for the six months ended June 30, 2014 primarily consisted of a pay down of long-term debt during the period.

30


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 guaranteed on a senior unsecured basis by our 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
We have a Credit Facility with Wells Fargo Bank, National Association, as administrative agent, and several financial institutions as lenders, which provides for a $600.0 million revolving credit facility, including 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, we have the ability to increase the Credit Facility by an additional $300.0 million. Our Credit Facility matures in November 2018. Weighted average interest rates under the Credit Facility at June 30, 2015 and December 31, 2014 were 1.94% and 1.91%, respectively.
Future borrowings under the Credit Facility will be available for working capital and other general corporate purposes, including permitted acquisitions. It is anticipated that the Credit Facility will be available to be drawn on and repaid during the term thereof as long as we are in compliance with the terms of the credit agreement, including certain financial covenants. As of June 30, 2015, we had $35.0 million of borrowings outstanding under our Credit Facility, $12.2 million of outstanding letters of credit and the capacity to borrow an additional $552.8 million. This availability and our ability to increase the Credit Facility by an additional $300.0 million is subject to certain limitations, including a maximum ratio of total funded debt to adjusted EBITDA (as defined in the Credit Facility) for the most recent four fiscal quarter period. If our adjusted EBITDA levels do not increase in future quarters, our borrowing capacity under the Credit Facility may be reduced.
There have been no changes to the Credit Facility financial covenants disclosed in Item 7 of our 2014 Annual Report on Form 10-K and we were in compliance with all financial covenants at June 30, 2015 and December 31, 2014.
Off-balance sheet arrangements
As of June 30, 2015, we had no off-balance sheet instruments or financial arrangements, other than operating leases entered into in the ordinary course of business.
Contractual obligations
Except for net repayments under the Credit Facility, as of June 30, 2015, there have been no material changes in our contractual obligations and commitments disclosed in the Annual Report.
Critical accounting policies and estimates
There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2015. For a detailed discussion of our critical accounting policies and estimates, refer to our 2014 Annual Report on Form 10-K.
Recent accounting pronouncements
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 us for the fiscal year beginning January 1, 2016 and interim periods thereafter. The guidance is not expected to have a material impact on our 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

31


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 is to be effective December 15, 2017. Companies are able to early adopt the pronouncement, however not before December 15, 2016. The Company is currently evaluating the impacts of the adoption and the implementation approach to be used
Item 3. Quantitative and qualitative disclosures about market risk
We are currently exposed to market risk from changes in foreign currency and changes in interest rates. From time to time, we may enter into derivative financial instrument transactions to manage or reduce our market risk, but we do not enter into derivative transactions for speculative purposes.
There have been no significant changes to our market risk since December 31, 2014. For a discussion of our exposure to market risk, refer to Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in our 2014 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of June 30, 2015. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2015 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 11, Commitments and Contingencies, in Part I, Item 1, Financial Statements, for a discussion of our legal proceedings, which is incorporated into this Item 1 of Part II by reference.
Item 1A. Risk Factors
For additional information about our risk factors, see "Risk Factors" in Item 1A of our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Board of Directors authorized on October 27, 2014, a share repurchase program for the repurchase of outstanding shares of our common stock having an aggregate purchase price of up to $150 million. Shares may be repurchased under the program from time to time, in amounts and at prices that the company deems appropriate, subject to market and business conditions, applicable legal requirements and other considerations. The program may be executed using open market purchases pursuant to Rule 10b-18 under the Exchange Act in privately negotiated agreements, by way of issuer tender offers, Rule 10b5-1 plans or other transactions.

32


Shares of common stock purchased and placed in treasury during the three months ended June 30, 2015 were as follows:
Period
 
Total number of shares purchased (a)
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plan or programs
 
Maximum value of shares that may yet be purchased under the plan or program
(in thousands)
April 1, 2015 - April 30, 2015
 
9,150

 
$
22.24

 

 
$
49,752

May 1, 2015 - May 31, 2015
 

 
$

 

 

June 1, 2015 - June 30, 2015
 
2,727

 
$
22.03

 

 

Total
 
11,877

 
$
22.19

 

 
$
49,752

(a) All of the 11,877 shares purchased during the three months ended June 30, 2015 were acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from the vesting of restricted stock grants.

33

Table of Contents
 

Item 6. Exhibits
Exhibit
 
 
Number
 
DESCRIPTION
 
 
 
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1**
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2**
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS*
XBRL Instance Document.
 
 
 
101.SCH*
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.


* Filed herewith.

** Furnished herewith.

34

Table of Contents
 

SIGNATURES
As required by Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has authorized this report to be signed on its behalf by the undersigned authorized individuals.
 
 
 
 
 
 
 
 
FORUM ENERGY TECHNOLOGIES, INC. 
 
 
Date:
July 31, 2015
By:
/s/ James W. Harris
 
 
 
 
James W. Harris
 
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
 
(As Duly Authorized Officer and Principal Financial Officer)
 
 
 
 
 
 
 
 
 
By:
/s/ Tylar K. Schmitt
 
 
 
 
Tylar K. Schmitt
 
 
 
 
Vice President and Corporate Controller
 
 
 
 
(As Duly Authorized Officer and Principal Accounting Officer)
 



35