10-Q
Table of Contents
 

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

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended September 30, 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 October 23, 2015, there were 90,411,485 common shares outstanding.


Table of Contents
 


Table of Contents



2

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated statements of comprehensive income
(Unaudited)
  
Three months ended September 30,
 
Nine months ended September 30,
(in thousands, except per share information)
2015
 
2014
 
2015
 
2014
Net sales
$
244,993

 
$
468,822

 
$
877,504

 
$
1,301,039

Cost of sales
179,231

 
316,784

 
617,733

 
883,070

Gross profit
65,762

 
152,038

 
259,771

 
417,969

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
57,235

 
81,316

 
197,020

 
230,087

Transaction expenses
193

 
1,516

 
433

 
2,326

Loss (gain) on sale of assets and other
11

 
(85
)
 
(264
)
 
320

Total operating expenses
57,439

 
82,747

 
197,189

 
232,733

Earnings from equity investment
3,870

 
6,749

 
12,281

 
17,997

Operating income
12,193

 
76,040

 
74,863

 
203,233

Other expense (income)
 
 
 
 
 
 
 
Interest expense
7,453

 
7,699

 
22,687

 
23,174

Foreign exchange (gains) losses and other, net
(2,910
)
 
(5,222
)
 
(5,511
)
 
(616
)
Total other expense
4,543

 
2,477

 
17,176

 
22,558

Income before income taxes
7,650

 
73,563

 
57,687

 
180,675

Provision for income tax expense
932

 
21,332

 
13,448

 
52,395

Net income
6,718

 
52,231

 
44,239

 
128,280

Less: Income (loss) attributable to noncontrolling interest
(2
)
 
5

 
(27
)
 
2

Net income attributable to common stockholders
6,720

 
52,226

 
44,266

 
128,278

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
90,058

 
93,331

 
89,770

 
92,728

Diluted
91,687

 
96,198

 
91,576

 
95,631

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.07

 
$
0.56

 
$
0.49

 
$
1.38

Diluted
$
0.07

 
$
0.54

 
$
0.48

 
$
1.34

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net income
6,718

 
52,231

 
44,239

 
128,280

Change in foreign currency translation, net of tax of $0
(18,747
)
 
(34,474
)
 
(30,553
)
 
(21,754
)
Gain (loss) on pension liability
(2
)
 

 
68

 
2

Comprehensive income (loss)
(12,031
)
 
17,757

 
13,754

 
106,528

Less: comprehensive loss (income) attributable to noncontrolling interests
64

 
(32
)
 
118

 
(20
)
Comprehensive income (loss) attributable to common stockholders
$
(11,967
)
 
$
17,725

 
$
13,872

 
$
106,508

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


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Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated balance sheets
(Unaudited)
(in thousands, except share information)
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
76,185

 
$
76,579

Accounts receivable—trade, net
157,591

 
287,045

Inventories
504,756

 
461,515

Prepaid expenses and other current assets
39,430

 
32,985

Costs and estimated profits in excess of billings
18,449

 
14,646

Deferred income taxes, net
20,380

 
22,389

Total current assets
816,791

 
895,159

Property and equipment, net of accumulated depreciation
196,804

 
189,974

Deferred financing costs, net
11,189

 
13,107

Intangibles
257,050

 
271,739

Goodwill
799,601

 
798,481

Investment in unconsolidated subsidiary
56,457

 
49,675

Other long-term assets
3,494

 
3,493

Total assets
$
2,141,386

 
$
2,221,628

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
335

 
$
840

Accounts payable—trade
92,244

 
127,757

Accrued liabilities
79,241

 
126,890

Deferred revenue
9,342

 
10,919

Billings in excess of costs and profits recognized
9,111

 
15,785

Total current liabilities
190,273

 
282,191

Long-term debt, net of current portion
402,556

 
428,010

Deferred income taxes, net
94,205

 
98,188

Other long-term liabilities
23,409

 
17,318

Total liabilities
710,443

 
825,707

Commitments and contingencies

 


Equity
 
 
 
Common stock, $0.01 par value, 296,000,000 shares authorized, 98,522,054 and 97,865,278 shares issued
985

 
979

Additional paid-in capital
886,221

 
864,313

Treasury stock at cost, 8,141,445 and 8,108,983 shares
(133,126
)
 
(132,480
)
Retained earnings
743,771

 
699,505

Accumulated other comprehensive income (loss)
(67,355
)
 
(36,961
)
Total stockholders’ equity
1,430,496

 
1,395,356

Noncontrolling interest in subsidiary
447

 
565

Total equity
1,430,943

 
1,395,921

Total liabilities and equity
$
2,141,386

 
$
2,221,628

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

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Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated statements of cash flows
(Unaudited)
  
Nine Months Ended September 30,
(in thousands, except share information)
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
44,239

 
$
128,280

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation expense
28,721

 
28,274

Amortization of intangible assets
20,558

 
20,608

Share-based compensation expense
17,090

 
14,334

Deferred income taxes
(1,528
)
 
(4,477
)
Earnings from equity investment, net of distributions
(6,782
)
 
3,092

Other
4,523

 
3,644

Changes in operating assets and liabilities
 
 
 
Accounts receivable—trade
129,601

 
(67,793
)
Inventories
(24,729
)
 
(14,520
)
Prepaid expenses and other current assets
(2,019
)
 
(6,872
)
Accounts payable, deferred revenue and other accrued liabilities
(81,496
)
 
66,744

Costs and estimated profits in excess of billings, net
(10,472
)
 
8,439

Net cash provided by operating activities
$
117,706

 
$
179,753

Cash flows from investing activities
 
 
 
Acquisition of businesses, net of cash acquired
(60,836
)
 
(38,289
)
Capital expenditures for property and equipment
(28,046
)
 
(39,932
)
Proceeds from sale of business, property and equipment
1,699

 
8,735

Net cash used in investing activities
$
(87,183
)
 
$
(69,486
)
Cash flows from financing activities
 
 
 
Borrowings under Credit Facility
79,943

 

Repayment of long-term debt
(105,985
)
 
(91,760
)
Excess tax benefits from stock based compensation
206

 
7,291

Repurchases of stock
(6,246
)
 
(1,328
)
Proceeds from stock issuance
4,618

 
10,332

Deferred financing costs

 
(6
)
Net cash used in financing activities
$
(27,464
)
 
$
(75,471
)
Effect of exchange rate changes on cash
(3,453
)
 
(294
)
Net increase (decrease) in cash and cash equivalents
(394
)
 
34,502

Cash and cash equivalents
 
 
 
Beginning of period
76,579

 
39,582

End of period
$
76,185

 
$
74,084

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

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Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements
(Unaudited)
1. Organization and basis of presentation
Forum Energy Technologies, Inc. (the "Company"), a Delaware corporation, is a global oilfield products company, serving the subsea, drilling, completion, production and infrastructure sectors of the oil and natural gas industry. The Company designs, manufactures and distributes products and engages in aftermarket services, parts supply and related services that complement the Company’s product offering.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
The Company's investment in an operating entity where the Company has the ability to exert significant influence, but does not control operating and financial policies, is accounted for using the equity method. The Company's share of the net income of this entity is recorded as "Earnings from equity investment" in the condensed consolidated statements of comprehensive income. The investment in this entity is included in "Investment in unconsolidated subsidiary" in the condensed consolidated balance sheets. The Company reports its share of equity earnings within operating income as the investee's operations are integral to the operations of the Company.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the Company's financial position, results of operations and cash flows have been included. Operating results for the nine months ended September 30, 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 September 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. This new standard specifies that an acquirer in a business combination should recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, eliminating the current requirement to retrospectively account for these adjustments. Additionally, the full effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts should be recognized in the same period as the adjustments to the provisional amounts. The new standard will be effective for the Company for the fiscal year beginning January 1, 2016 and interim periods thereafter.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires companies to measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. 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 Company is currently evaluating the impacts of the adoption of this guidance.
In April 2015, the FASB issued 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.

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

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 is to be effective for the fiscal year beginning after December 15, 2017. Companies are able to early adopt the pronouncement, however not before fiscal years beginning after 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, including any post-closing purchase price adjustments. 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 current 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
 
$
37,095

Property and equipment
 
11,506

Intangible assets (primarily customer relationships)
 
10,400

Tax-deductible goodwill
 
15,350

Current liabilities
 
(10,138
)
Long-term liabilities
 
(22
)
Net assets acquired
 
$
64,191


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

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 nine months ended September 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.
4. Inventories
The Company's significant components of inventory at September 30, 2015 and December 31, 2014 were as follows (in thousands):
 
September 30,
2015
 
December 31,
2014
Raw materials and parts
$
156,595

 
$
153,768

Work in process
51,636

 
50,913

Finished goods
330,180

 
286,290

Gross inventories
538,411

 
490,971

Inventory reserve
(33,655
)
 
(29,456
)
Inventories
$
504,756

 
$
461,515

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

 
15,350

 
15,350

Impact of non-U.S. local currency translation
(13,756
)
 
(474
)
 
(14,230
)
Goodwill Balance at September 30, 2015 net
$
706,104

 
$
93,497

 
$
799,601


Goodwill and intangible assets with indefinite lives are assessed for impairment annually or whenever an event indicating impairment may have occurred. During the quarter ended September 30, 2015, the Company elected to change the

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

date of the Company's annual assessments of goodwill and indefinite lived intangible assets impairment from December 31 to October 1. This is a change in method of applying an accounting principle, which management believes is a preferable alternative as it better aligns the timing of the assessment with our planning and forecasting process and alleviates constraints on accounting resources during our annual reporting process. The change in the assessment date does not delay, accelerate, or avoid a potential impairment charge.
At December 31, 2014, the Company performed its annual impairment test on each of the reporting units and concluded that there had been no impairment because the estimated fair values of each of those reporting units exceeded its carrying value. Relevant events and circumstances which could have a negative impact on goodwill include macroeconomic conditions; industry and market conditions, such as commodity prices; operating cost factors; overall financial performance; the impact of dispositions and acquisitions; and other entity-specific events. Further declines in commodity prices or sustained lower valuation for the Company's common stock could indicate a reduction in the estimate of reporting unit fair value which, in turn, could lead to an impairment of reporting unit goodwill. The Company will continue to monitor events and circumstances which could have a negative impact on estimates of reporting unit fair value. Commodity prices have remained at low levels and the active rig count has continued to decline resulting in a significant decline in the Company’s market capitalization. While the Company incorporated a downturn into its forecasts in the previous annual test, should current conditions worsen, or continue for an extended period of time, the Company may identify and record an impairment charge related to the reporting units previously identified or other intangible assets as a result of an interim impairment test.
Intangible assets
Intangible assets consisted of the following as of September 30, 2015 and December 31, 2014, respectively (in thousands):
  
September 30, 2015
 
Gross carrying
amount
 
Accumulated
amortization
 
Net amortizable
intangibles
 
Amortization
period (in years)
Customer relationships
$
282,989

 
$
(98,177
)
 
$
184,812

 
4-15
Patents and technology
34,425

 
(9,721
)
 
24,704

 
5-17
Non-compete agreements
7,339

 
(6,233
)
 
1,106

 
3-6
Trade names
49,834

 
(17,302
)
 
32,532

 
10-15
Distributor relationships
22,160

 
(13,494
)
 
8,666

 
8-15
Trademark
5,230

 

 
5,230

 
Indefinite
Intangible Assets Total
$
401,977

 
$
(144,927
)
 
$
257,050

 
 

  
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. Investment in unconsolidated subsidiary
Effective July 1, 2013, the Company jointly purchased Global Tubing, LLC ("Global Tubing") with an equal partner, with management retaining a small interest. Global Tubing is a Dayton, Texas based provider of coiled tubing strings and related services. The Company's equity investment is reported in the Production & Infrastructure segment and is accounted for using the equity method of accounting. As Global Tubing's products are complementary to the Company’s

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

well intervention and stimulation products and the investment's business is integral to the Company's operations, the earnings from the equity investment are included within operating income.
Condensed financial data for the equity investment in the unconsolidated subsidiary is summarized as follows (in thousands):
 
Three months ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net revenues
$
26,033

 
$
37,204

 
$
81,513

 
$
102,113

Gross profit
11,731

 
18,253

 
36,505

 
49,160

Net income
8,063

 
14,060

 
25,588

 
37,659

The Company's earnings from equity investment
3,870

 
6,749

 
12,281

 
17,997


7. Debt
Notes payable and lines of credit as of September 30, 2015 and December 31, 2014 consisted of the following (in thousands): 
 
September 30,
2015
 
December 31,
2014
6.25% Senior Notes due October 2021
$
402,497

 
$
402,801

Senior secured revolving credit facility

 
25,000

Other debt
394

 
1,049

Total debt
402,891

 
428,850

Less: current maturities
(335
)
 
(840
)
Long-term debt
$
402,556

 
$
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 Credit Facility matures in November 2018. Weighted average interest rates under the Credit Facility for the nine months ended September 30, 2015 and for the twelve months ended December 31, 2014 were approximately 2.00%.
As of September 30, 2015, we had no borrowings outstanding under the Credit Facility, $13.3 million of outstanding letters of credit and the capacity to borrow an additional $586.7 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 September 30, 2015.
8. Income taxes
The Company's effective tax rate was 23.3% for the nine months ended September 30, 2015 and 29.0% for the nine months ended September 30, 2014. The tax rate 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 12.2% for the three months ended September 30, 2015 and 29.0% for the three months ended September 30, 2014. The tax rate for the three months ended September 30, 2015 is lower than the comparable

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

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.
9. Fair value measurements
At September 30, 2015, the carrying value of the Credit Facility was $0.0 million. Substantially all of the debt incurs interest at a variable interest rate and, therefore, the carrying amount approximates fair value. The fair value of the debt is classified as a Level 2 measurement because interest rates charged are similar to other financial instruments with similar terms and maturities.
The fair value of the Company’s Senior Notes is estimated using Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At September 30, 2015, the fair value and the carrying value of the Company’s Senior Notes approximated $351.8 million and $402.5 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 September 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 nine months ended September 30, 2015.
10. Business segments
The Company’s operations are divided into the following two operating segments, which are our reportable segments: Drilling & Subsea ("D&S") and Production & Infrastructure ("P&I"). The amounts indicated below as "Corporate" relate to costs and assets not allocated to the reportable segments. Summary financial data by segment follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
139,073

 
$
307,454

 
$
523,850

 
$
848,474

Production & Infrastructure
106,186

 
161,696

 
354,278

 
453,640

Intersegment eliminations
(266
)
 
(328
)
 
(624
)
 
(1,075
)
Total Revenue
$
244,993

 
$
468,822

 
$
877,504

 
$
1,301,039

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Drilling & Subsea
$
6,675

 
$
57,929

 
$
51,261

 
$
155,330

Production & Infrastructure
10,715

 
29,816

 
45,108

 
80,260

Corporate
(4,993
)
 
(10,274
)
 
(21,337
)
 
(29,711
)
Total segment operating income
12,397

 
77,471

 
75,032

 
205,879

Transaction expenses
193

 
1,516

 
433

 
2,326

Loss (gain) on sale of assets and other
11

 
(85
)
 
(264
)
 
320

Income from operations
$
12,193

 
$
76,040

 
$
74,863

 
$
203,233


11

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

A summary of consolidated assets by reportable segment is as follows (in thousands):
 
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
 
Drilling & Subsea
 
$
1,525,824

 
$
1,674,934

Production & Infrastructure
 
546,712

 
488,225

Corporate
 
68,850

 
58,469

Total assets
 
$
2,141,386

 
$
2,221,628

Corporate assets include, among other items, prepaid assets, cash and deferred loan costs.
11. Earnings per share
The calculation of basic and diluted earnings per share for each period presented was as follows (dollars and shares in thousands, except per share amounts):
  
Three months ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net Income attributable to common stockholders
$
6,720

 
$
52,226

 
$
44,266

 
$
128,278

 
 
 
 
 
 
 
 
Average shares outstanding (basic)
90,058

 
93,331

 
89,770

 
92,728

Common stock equivalents
1,629

 
2,867

 
1,806

 
2,903

Diluted shares
91,687

 
96,198

 
91,576

 
95,631

Earnings per share
 
 
 
 
 
 
 
Basic earnings per share
$
0.07

 
$
0.56

 
$
0.49

 
$
1.38

Diluted earnings per share
$
0.07

 
$
0.54

 
$
0.48

 
$
1.34

The diluted earnings per share calculation excludes approximately 2.0 million and 0.4 million stock options for the three months ended September 30, 2015 and 2014, respectively, and 1.8 million and 0.5 million stock options for the nine months ended September 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.
12. Commitments and contingencies
In the ordinary course of business, the Company is, and in the future could be, involved in various pending or threatened legal actions that may or may not be covered by insurance. Management has reviewed such pending judicial and legal proceedings, the reasonably anticipated costs and expenses in connection with such proceedings, and the availability and limits of insurance coverage, and has established reserves that are believed to be appropriate in light of those outcomes that are considered to be probable and can be reasonably estimated. The reserves accrued at September 30, 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.
13. Stockholders' equity
Share-based compensation
During the nine months ended September 30, 2015, the Company granted 564,950 options and 987,411 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 exercise prices of $18.68 and $13.92. Of the restricted stock or restricted stock units granted, 765,523 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

12

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

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.
14. 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 material to the Company’s condensed consolidated financial statements.
15. 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 September 30, 2015
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
182,986

 
$
83,751

 
$
(21,744
)
 
$
244,993

Cost of sales
 

 
140,444

 
60,494

 
(21,707
)
 
179,231

Gross profit
 

 
42,542

 
23,257

 
(37
)
 
65,762

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
41,157

 
16,078

 

 
57,235

Transaction expenses
 

 
193

 

 

 
193

Loss (gain) on sale of assets and other
 

 
(15
)
 
26

 

 
11

Total operating expenses
 

 
41,335

 
16,104

 

 
57,439

Earnings from equity investment
 

 
3,870

 

 

 
3,870

Equity earnings from affiliate, net of tax
 
11,568

 
8,286

 

 
(19,854
)
 

Operating income
 
11,568

 
13,363

 
7,153

 
(19,891
)
 
12,193

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
7,458

 
(1
)
 
(4
)
 

 
7,453

Foreign exchange (gains) losses and other, net
 

 
(253
)
 
(2,657
)
 

 
(2,910
)
Total other expense (income)
 
7,458

 
(254
)
 
(2,661
)
 

 
4,543

Income before income taxes
 
4,110

 
13,617

 
9,814

 
(19,891
)
 
7,650

Provision for income tax expense
 
(2,610
)
 
2,049

 
1,493

 

 
932

Net income
 
6,720

 
11,568

 
8,321

 
(19,891
)
 
6,718

Less: Income (loss) attributable to noncontrolling interest
 

 

 
(2
)
 

 
(2
)
Net income attributable to common stockholders
 
6,720

 
11,568

 
8,323

 
(19,891
)
 
6,720

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
6,720

 
11,568

 
8,321

 
(19,891
)
 
6,718

Change in foreign currency translation, net of tax of $0
 
(18,747
)
 
(18,747
)
 
(18,747
)
 
37,494

 
(18,747
)
Change in pension liability
 
(2
)
 
(2
)
 
(2
)
 
4

 
(2
)
Comprehensive income (loss)
 
(12,029
)
 
(7,181
)
 
(10,428
)
 
17,607

 
(12,031
)
Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
64

 

 
64

Comprehensive income (loss) attributable to common stockholders
 
$
(12,029
)
 
$
(7,181
)
 
$
(10,364
)
 
$
17,607

 
$
(11,967
)

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 September 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
330,772

 
$
179,458

 
$
(41,408
)
 
$
468,822

Cost of sales
 

 
230,938

 
127,423

 
(41,577
)
 
316,784

Gross profit
 

 
99,834

 
52,035

 
169

 
152,038

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
63,228

 
18,088

 

 
81,316

Other operating expense
 

 
1,419

 
12

 

 
1,431

Total operating expenses
 

 
64,647

 
18,100

 

 
82,747

Earnings from equity investment
 

 
6,749

 

 

 
6,749

Equity earnings from affiliates, net of tax
 
57,161

 
28,048

 

 
(85,209
)
 

Operating income
 
57,161

 
69,984

 
33,935

 
(85,040
)
 
76,040

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

 
75

 
31

 

 
7,699

Interest income with affiliate
 

 
(1,887
)
 

 
1,887

 

Interest expense with affiliate
 

 

 
1,887

 
(1,887
)
 

Foreign exchange (gains) losses and other, net
 

 
(744
)
 
(4,478
)
 

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

 
(2,556
)
 
(2,560
)
 

 
2,477

Income before income taxes
 
49,568

 
72,540

 
36,495

 
(85,040
)
 
73,563

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

 
8,611

 

 
21,332

Net income
 
52,226

 
57,161

 
27,884

 
(85,040
)
 
52,231

Less: Income (loss) attributable to noncontrolling interest
 

 

 
5

 

 
5

Net income attributable to common stockholders
 
52,226

 
57,161

 
27,879

 
(85,040
)
 
52,226

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

 
57,161

 
27,884

 
(85,040
)
 
52,231

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

 
(34,474
)
Comprehensive income (loss)
 
17,752

 
22,687

 
(6,590
)
 
(16,092
)
 
17,757

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(32
)
 

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

 
$
22,687

 
$
(6,622
)
 
$
(16,092
)
 
$
17,725



14

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

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

 
$
661,419

 
$
306,431

 
$
(90,346
)
 
$
877,504

Cost of sales
 

 
484,338

 
221,940

 
(88,545
)
 
617,733

Gross profit
 

 
177,081

 
84,491

 
(1,801
)
 
259,771

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
150,955

 
46,065

 

 
197,020

Transaction expenses
 

 
433

 

 

 
433

Loss (gain) on sale of assets and other
 

 
(73
)
 
(191
)
 

 
(264
)
Total operating expenses
 

 
151,315

 
45,874

 

 
197,189

Earnings from equity investment
 

 
12,281

 

 

 
12,281

Equity earnings from affiliates, net of tax
 
59,002

 
35,116

 

 
(94,118
)
 

Operating income
 
59,002

 
73,163

 
38,617

 
(95,919
)
 
74,863

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
22,670

 
13

 
4

 

 
22,687

Foreign exchange (gains) losses and other, net
 

 
(407
)
 
(5,104
)
 

 
(5,511
)
Total other expense (income)
 
22,670

 
(394
)
 
(5,100
)
 

 
17,176

Income before income taxes
 
36,332

 
73,557

 
43,717

 
(95,919
)
 
57,687

Provision for income tax expense
 
(7,934
)
 
14,555

 
6,827

 

 
13,448

Net income
 
44,266

 
59,002

 
36,890

 
(95,919
)
 
44,239

Less: Income (loss) attributable to noncontrolling interest
 

 

 
(27
)
 

 
(27
)
Net income attributable to common stockholders
 
44,266

 
59,002

 
36,917

 
(95,919
)
 
44,266

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
44,266

 
59,002

 
36,890

 
(95,919
)
 
44,239

Change in foreign currency translation, net of tax of $0
 
(30,553
)
 
(30,553
)
 
(30,553
)
 
61,106

 
(30,553
)
Change in pension liability
 
68

 
68

 
68

 
(136
)
 
68

Comprehensive income (loss)
 
13,781

 
28,517

 
6,405

 
(34,949
)
 
13,754

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
118

 

 
118

Comprehensive income (loss) attributable to common stockholders
 
$
13,781

 
$
28,517

 
$
6,523

 
$
(34,949
)
 
$
13,872




15

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

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

 
$
941,885

 
$
480,049

 
$
(120,895
)
 
$
1,301,039

Cost of sales
 

 
659,444

 
342,269

 
(118,643
)
 
883,070

Gross profit
 

 
282,441

 
137,780

 
(2,252
)
 
417,969

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
176,331

 
53,756

 

 
230,087

Transaction expenses
 

 
2,326

 

 

 
2,326

Loss (gain) on sale of assets and other
 

 
639

 
(319
)
 

 
320

Total operating expenses
 

 
179,296

 
53,437

 

 
232,733

Earnings from equity investment
 

 
17,997

 

 

 
17,997

Equity earnings from affiliates, net of tax
 
143,310

 
59,688

 

 
(202,998
)
 

Operating income
 
143,310

 
180,830

 
84,343

 
(205,250
)
 
203,233

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

 
77

 
(29
)
 

 
23,174

Interest income with affiliate
 

 
(5,770
)
 

 
5,770

 

Interest expense with affiliate
 

 

 
5,770

 
(5,770
)
 

Foreign exchange (gains) losses and other, net
 

 
274

 
(890
)
 

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

 
(5,419
)
 
4,851

 

 
22,558

Income before income taxes
 
120,184

 
186,249

 
79,492

 
(205,250
)
 
180,675

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

 
17,550

 

 
52,395

Net income
 
128,278

 
143,310

 
61,942

 
(205,250
)
 
128,280

Less: Income (loss) attributable to noncontrolling interest
 

 

 
2

 

 
2

Net income attributable to common stockholders
 
128,278

 
143,310

 
61,940

 
(205,250
)
 
128,278

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

 
143,310

 
61,942

 
(205,250
)
 
128,280

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

 
(21,754
)
Change in pension liability
 
2

 
2

 
2

 
(4
)
 
2

Comprehensive income (loss)
 
106,526

 
121,558

 
40,190

 
(161,746
)
 
106,528

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(20
)
 

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

 
$
121,558

 
$
40,170

 
$
(161,746
)
 
$
106,508






16

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

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

 
$
16,104

 
$
60,081

 
$

 
$
76,185

Accounts receivable—trade, net
 

 
101,485

 
56,106

 

 
157,591

Inventories
 

 
386,531

 
128,007

 
(9,782
)
 
504,756

Cost and profits in excess of billings
 

 
8,295

 
10,154

 

 
18,449

Other current assets
 

 
51,104

 
8,706

 

 
59,810

Total current assets
 

 
563,519

 
263,054

 
(9,782
)
 
816,791

Property and equipment, net of accumulated depreciation
 

 
161,710

 
35,094

 

 
196,804

Deferred financing costs, net
 
11,189

 

 

 

 
11,189

Intangibles
 

 
193,333

 
63,717

 

 
257,050

Goodwill
 

 
538,248

 
261,353

 

 
799,601

Investment in unconsolidated subsidiary
 

 
56,457

 

 

 
56,457

Investment in affiliates
 
1,362,309

 
593,121

 

 
(1,955,430
)
 

Long-term advances to affiliates
 
472,899

 

 
59,628

 
(532,527
)
 

Other long-term assets
 

 
2,574

 
920

 

 
3,494

Total assets
 
$
1,846,397

 
$
2,108,962

 
$
683,766

 
$
(2,497,739
)
 
$
2,141,386

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

 
$
325

 
$
10

 
$

 
$
335

Accounts payable—trade
 

 
69,069

 
23,175

 

 
92,244

Accrued liabilities
 
13,405

 
47,117

 
18,719

 

 
79,241

Deferred revenue
 

 
2,582

 
6,760

 

 
9,342

Billings in excess of costs and profits
 

 
2,432

 
6,679

 

 
9,111

Total current liabilities
 
13,405

 
121,525

 
55,343

 

 
190,273

Long-term debt, net of current portion
 
402,497

 
44

 
15

 

 
402,556

Long-term payables to affiliates
 

 
532,528

 

 
(532,528
)
 

Deferred income taxes, net
 

 
75,002

 
19,203

 

 
94,205

Other long-term liabilities
 

 
17,554

 
5,855

 

 
23,409

Total liabilities
 
415,902

 
746,653

 
80,416

 
(532,528
)
 
710,443