UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 23, 2016
FORUM ENERGY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 001-35504 | 61-1488595 | ||
(State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||
920 Memorial City Way, Suite 1000
Houston, Texas 77024
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (281) 949-2500
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01 Other Events.
Forum Energy Technologies, Inc. (the “Company”) is filing this Current Report on Form 8-K to recast certain previously reported amounts to conform with the segment reporting changes made in connection with realignment of our organization structure, with respect to the financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”).
In the first quarter of 2016, the Company realigned its segments. Completions was designated as a separate segment in recognition of its expanded operations and its significant growth potential. The Company is reporting its results of operations in the three reportable segments: Drilling & Subsea, Completions and Production & Infrastructure, instead of the original two reportable segments. Management’s change in the composition of the Company’s reporting segments was made in order to align with activity drivers and the customers of our product group, and how management reviews and evaluates operating performance. We provided a brief description of the new reporting structure in a press release issued on April 28, 2016, including a comprehensive summary of the effects of these changes, and the impact on the Company’s historical segment results for fiscal years 2015 and 2014.
The rules of the Securities and Exchange Commission require that when a registrant prepares, on or after the date a registrant reports an accounting change such as the change noted above, a new registration, proxy or information statement (or amends a previously filed registration, proxy, or information statement) that includes or incorporates by reference financial statements, the registrant must recast the prior period financial statements included or incorporated by reference in the registration, proxy or information statement to reflect these types of changes. Accordingly, the Company is filing this Form 8-K to recast our consolidated financial statements for each of the three years in the period ended December 31, 2015, to reflect the changes in segment reporting as described above. The updates do not represent a restatement of previously issued financial statements. The recast information of Items contained in the Company’s 2015 Form 10-K is presented in Exhibits 99.1, 99.2, 99.3, and 99.4 to this Form 8-K.
The information included in this Form 8-K is presented for informational purposes only in connection with the reporting changes described above and does not amend or restate our audited consolidated financial statements, which were included in our 2015 Form 10-K. This Form 8-K does not reflect events occurring after we filed our 2015 Form 10-K and does not modify or update the disclosures therein in any way, other than to illustrate the realignment of our organizational structure as described above. For developments subsequent to the filing of the 2015 Form 10-K, refer to our Quarterly Report on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
The following exhibit is furnished as an exhibit to this Current Report on Form 8-K:
Exhibit No. | Exhibit Title or Description | |
23.1 | Consent of Independent Registered Public Accounting Firm | |
99.1 | Updates, where applicable, to Part I, Item 1. Business, from Forum Energy Technologies, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on February 26, 2016 | |
99.2 | Updates, where applicable, to Part I, Item 2. Properties, from Forum Energy Technologies, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on February 26, 2016 | |
99.3 | Updates, where applicable, to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, from Forum Energy Technologies, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on February 26, 2016 | |
99.4 | Updated Part II, Item 8. Financial Statements and Supplementary Data, from Forum Energy Technologies, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on February 26, 2016 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | XBRL Taxonomy Extension Label Linkbase | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: August 23, 2016 | FORUM ENERGY TECHNOLOGIES, INC. | |||
/s/ James W. Harris | ||||
James W. Harris | ||||
Executive Vice President and Chief Financial Officer | ||||
Exhibit Index
Exhibit No. | Exhibit Title or Description | |
23.1 | Consent of Independent Registered Public Accounting Firm | |
99.1 | Updates, where applicable, to Part I, Item 1. Business, from Forum Energy Technologies, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on February 26, 2016 | |
99.2 | Updates, where applicable, to Part I, Item 2. Properties, from Forum Energy Technologies, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on February 26, 2016 | |
99.3 | Updates, where applicable, to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, from Forum Energy Technologies, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on February 26, 2016 | |
99.4 | Updated Part II, Item 8. Financial Statements and Supplementary Data, from Forum Energy Technologies, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on February 26, 2016 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | XBRL Taxonomy Extension Label Linkbase | |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S‑3 (No. 333-191294) and Forms S-8 (Nos. 333-180769, 333-188915, and 333-213158) of Forum Energy Technologies, Inc. of our report dated February 26, 2016, except with respect to our opinion on the consolidated financial statements insofar as it relates to the change in reportable segments in Notes 3,4,7, and 15 as to which the date is August 23, 2016, relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 8-K.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
August 23, 2016
Exhibit 99.1
PART I
Item 1. Business
Forum Energy Technologies, Inc., 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. Our common shares are listed on the New York Stock Exchange ("NYSE") under the symbol "FET." Our principal executive offices are located at 920 Memorial City Way, Suite 1000, Houston, Texas 77024, our telephone number is (281) 949-2500, and our website is www.f-e-t.com. Our Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, are available free of charge on our Internet website as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). These reports are also available at the SEC's Internet website at www.sec.gov. Information contained on or accessible from our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.
Overview
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 targeted 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 three business segments, Drilling & Subsea, Completions, and Production & Infrastructure. The table below provides a summary of proportional revenue contributions from our three business segments and our primary geographic markets over the last three years:
Percentage of revenue | ||||||||
Year ended December 31, | ||||||||
2015 | 2014 | 2013 | ||||||
Drilling & Subsea | 45 | % | 50 | % | 48 | % | ||
Completions | 25 | % | 25 | % | 22 | % | ||
Production & Infrastructure | 30 | % | 25 | % | 30 | % | ||
Total | 100 | % | 100 | % | 100 | % | ||
United States | 60 | % | 60 | % | 60 | % | ||
Canada | 5 | % | 6 | % | 6 | % | ||
Other International | 35 | % | 34 | % | 34 | % | ||
Total | 100 | % | 100 | % | 100 | % | ||
We incorporate by reference in response to this item the segment and geographic information for the last three years set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations – Results of operations" in Exhibit 99.3 of 8-K and Note 15 of the Notes to consolidated financial statements included in Exhibit 99.4 of this 8-K. We also incorporate by reference in response to this item the information with respect to acquisitions set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations – Acquisitions" in Exhibit 99.3 and in Note 3 of our Notes to consolidated financial statements included in Exhibit 99.4 of this 8-K.
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Drilling & Subsea segment
In our Drilling & Subsea segment, we design, manufacture and supply products and provide related services to the drilling and subsea construction markets. Through this segment, we offer drilling technologies, including capital equipment and a broad line of products consumed in the drilling process; and 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 products used in pipeline infrastructure.
There are several factors driving demand for our Drilling & Subsea segment. Our Drilling Technologies product line is influenced by global drilling activity, the level of capital investment in drilling rigs, rig upgrades and equipment replacement as drilling contractors modify their existing rigs to improve efficiency and safety, and the severity of the conditions under which the rigs and well service equipment operate. Demand for our subsea products is impacted by global offshore activity, subsea equipment and pipeline installation, repair and maintenance spending, and growth in offshore resource development.
Drilling Technologies. We provide both drilling capital equipment and consumables, with a focus on products that enhance our customers' handling of tubulars on the drilling rig. Our product offering includes powered and manual tubular handling equipment; specialized torque equipment; customized offline crane systems; drilling data acquisition management systems; pumps, pump parts, valves, and manifolds; drilling, well servicing and hydraulic fracturing fluid end components and a broad line of items consumed in the drilling process.
Drilling equipment. We design and manufacture powered tubular handling equipment used on onshore and offshore drilling rigs. Our equipment reduces direct human involvement in the handling of pipe during drilling operations, improving safety, speed and efficiency of operations. Our hydraulic catwalks mechanize the lifting and lowering of tubulars to and from the drill floor, eliminating or reducing the need for traditional drill pipe and casing "pick-up and lay-down" operations with associated personnel. In addition, we manufacture make-up and break-out tools, called Forum B+V Oil Tools Floorhand™ and Wrangler Roughneck™, which automate a potentially dangerous rig floor task and improve rig drilling speed and safety. We also design and manufacture specialized torque equipment and related control systems for tubular connections, including high torque stroking, or bucking units, fully rotational torque units, portable torque units for field deployment, and provide aftermarket service. In addition, we design and manufacture a range of rig-based offline activity cranes, multi-purpose cranes and personnel transfer solutions. Many of these cranes are fit-for-purpose multi-axis cranes that provide access to hard-to-reach places and eliminate the need for manual interface.
In addition to powered tubular handling equipment, materials handling and personnel transfer equipment, we manufacture drilling manifold systems and high pressure piping packages. We also manufacture data acquisition products that include integrated drill floor instrumentation and monitoring systems. These systems provide real-time monitoring and logging of drilling data to drilling contractors, and oil and gas producers on the rig and at remote locations. They measure, collect, store and display drilling data on a real-time basis, as is expected by our customers in the current drilling environment.
We repair and service drilling equipment for both land and offshore rigs. Many of our service employees work in the field to address problems at the rig site.
Tubular handling tools. We provide a range of powered and manual tubular handling tools used on onshore and offshore drilling rigs. Our Forum B+V Oil Tools and Wrangler™ branded tools reduce direct human involvement in the handling of pipe during drilling operations. Our tubular handling tools include elevators, clamps, slip handles, tong handles, powered slips, spiders and kelly spinners.
Consumable products. We manufacture a range of consumable products used on drilling rigs, well servicing rigs, pressure pumping units, and hydraulic fracturing systems. Our consumable products include valves, centrifugal pumps, mud pump parts, rig sensors, inserts, and dies. We are also a supplier of oilfield bearings to original equipment manufacturers and repair businesses for use on drilling and well stimulation equipment.
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Subsea Technologies. We design and manufacture capital equipment and specialty components used in the subsea sector and provide a broad suite of complementary subsea technical services and rental items. We have a core focus on the design and manufacture of remotely operated vehicle ("ROV") systems and other specialty subsea vehicles, as well as critical components of these vehicles. Many of our related technical services complement our vehicle offerings. We operate primarily from facilities in Houston, Texas; Kirkbymoorside and Newcastle, England; Aberdeen, Scotland; Singapore and Macae, Brazil.
Subsea vehicles. We are a leading designer and manufacturer of a wide range of ROVs that we supply to the offshore subsea construction, observation and related service markets. The market for subsea ROVs can be segmented into three broad classes of vehicles based on size and category of operations: (1) large work-class vehicles and trenchers for subsea construction and installation activities, (2) drilling-class vehicles deployed from and for use around an offshore rig and (3) observation-class vehicles for inspection and light manipulation. We are a leading provider of work-class and observation-class vehicles.
We design and manufacture large work-class ROVs through our Perry brand. These vehicles are principally used in deepwater construction applications with the largest vehicles providing up to 200 horsepower, exceeding 1,200 pounds of payload capacity and having the capability of working in depths up to 4,000 meters. In addition to work-class ROVs, we design and manufacture large subsea trenchers that travel along the sea floor for digging, installation and burial operations. The largest of these subsea trenchers provide up to 1,500 horsepower and are able to cut over three meters deep into the seafloor to lay pipelines, power cables or communications cables.
Our Sub-Atlantic branded observation-class vehicles are electrically powered and are principally used for inspection, survey and light manipulation, and serve a wide range of industries.
Our subsea vehicle customers are primarily large offshore construction companies, but also include non-oil and gas industry entities, such as a range of governmental organizations including navies, maritime science and geosciences research organizations, offshore wind power companies and other industries operating in marine environments.
Subsea products. In addition to subsea vehicles, we are a leading manufacturer of subsea products and components. We design and manufacture a group of products that are used in and around the ROV. For example, we manufacture Dynacon™ branded ROV launch and recovery systems, Syntech™ branded syntactic foam buoyancy components, Sub-Atlantic branded ROV thrusters, and a wide range of hydraulic power units and valve packs. We design and manufacture these ROV components for incorporation into our own vehicles as well as for sale to other ROV manufacturers. We also provide a broad suite of subsea tooling, both industry standard and custom designed.
In addition to vehicle-related subsea products, we provide products used in subsea infrastructure, including subsea pipeline inspection gauge launching and receiving systems, and subsea connectors. Our primary customers in this product line are offshore pipeline construction companies.
Subsea technical services and rental. We maintain a fleet of subsea rental items, primarily subsea positioning equipment. Our customers for rental items are primarily subsea construction and offshore service companies. In addition, we offer a system that offers a complete solution for digital video capture, playback, processing and reporting of subsea inspection survey data. We also maintain a geophysical and geotechnical engineering group that provides consulting services to the oil and gas, and marine industries, typically to interpret and analyze third party subsea data provided by clients.
Completions segment
In our Completions segment, we design, manufacture and supply products and provide related services to the well construction, completion, stimulation and intervention markets. Through this segment, we offer downhole technologies, including cementing and casing tools, completion products, and a range of downhole cable protection solutions; and stimulation and Intervention technologies, including pumps and well stimulation consumable products and related recertification and refurbishment services.
There are several factors driving demand for our Completions segment. Our Downhole Technologies product line is impacted by the level of well completion activity, and complexity of well construction and completion. Our Stimulation and Intervention product line is impacted by the use of hydraulic fracturing to develop oil and gas reserves in shale or tight sand basins across North America and the level of workover and intervention activity.
Downhole Technologies. We manufacture a broad line of downhole products that are consumed during the well construction, completion and production enhancement processes.
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Casing and cementing tools. Through our Davis-Lynch™ branded downhole well construction and completion tools business, we design and manufacture products used in the construction of oil and gas wells. We design and manufacture a full range of centralizers, float equipment, stage cementing tools, inflatable packers, flotation collars, cementing plugs, fill and circulation tools for running casing, casing hangers and surge reduction equipment. Our products are used in the construction of onshore and offshore wells.
Completion products. We manufacture a line of downhole completion tools, including composite plugs and wireline flow-control products. Our composite plugs are primarily used for zonal isolation during multi-stage hydraulic fracturing in horizontal and vertical wells. The composite construction with metal slips allows the plugs to be drilled out quickly to improve service efficiency. We offer a variety of plug sizes to fit various casings as well as a range of temperature and pressure ratings to accommodate different well environments. Our wireline flow-control products include a number of components included in most completions such as landing nipples, circulating sleeves, blanking plugs and separation tools.
Downhole protection systems. We offer a full range of downhole protection solutions through our Cannon Services™ brand. The clamp and protection system is used to shield downhole control lines, cables and gauges during installation and to provide protection during production enhancement operations. We design and manufacture a full range of downhole protection solutions for electrical submersible pump ("ESP") cabling, encapsulated control lines, sub-surface safety valves and permanent downhole gauges. We provide both standard and customized protection systems, and we utilize a range of materials in our products for various downhole environments.
Our primary customers in this product line are oil and gas producers and service companies providing completion, ESP and other intervention services to producers.
Stimulation and Intervention. We provide a broad range of high pressure pumps and flow equipment used by well stimulation, or pressure pumping, companies during the stimulation, intervention and flowback processes. We manufacture pressure control products that are used for well intervention operations and are sold directly to oilfield service companies and equipment rental companies. These products include both coiled tubing and wireline blowout preventers and their accessories. We also conduct aftermarket refurbishment and recertification services for pressure control equipment. In addition to blowout preventers for wireline units, we manufacture electro-mechanical wireline cables.
In 2015, we acquired J-Mac Tool, Inc., a manufacturer of a complete line of high pressure pumps and pump parts. This acquisition enabled us to provide a complete suite of equipment used in pressure pumping operations. The addition of a pump product offering complements our historical focus on consumable products that experience high rates of wear and replacement. We design and manufacture pressure control plug, choke and relief valves, swivel joints, pup joints and integral fittings, manifolds and manifold trailers, as well as triplex and quintuplex fluid-end assemblies. Frequent refurbishment and recertification of flow equipment is critical to ensuring the reliable and safe operation of a pressure pumping company's fleet. We perform these services at eight locations and operate a fleet of mobile refurbishment and recertification tractor trailers, which can deploy to the customer's yard. We serve many of the unconventional basins across North America and seek to position our stocking and service locations in proximity to our customers' operations. Our primary customers in the Stimulation and Intervention product line are pressure pumping and flowback service companies, although we also generate sales to original equipment manufacturers of pressure pumping units.
In 2013, we acquired Global Tubing, LLC ("Global Tubing") jointly with an equal partner, with Global Tubing's management retaining a small interest. Global Tubing is a manufacturer of coiled tubing strings and related services. Global Tubing® coiled tubing strings are consumable components of coiled tubing units that perform well completion and intervention activities. Our investment in Global Tubing is reported in the Completions segment using the equity method of accounting.
Production & Infrastructure segment
In our Production & Infrastructure segment, we design, manufacture and supply products and provide related equipment and services to production and infrastructure markets. Through this segment, we supply production equipment, including well site production equipment and process equipment; and valve solutions, including a broad range of industrial and process valves.
The level of spending to bring new wells on production and the related infrastructure is the primary driver for our Production & Infrastructure segment. Our Production Equipment product line also has exposure to the amount of spending on midstream and downstream projects as it offers products that go from the well site to inside the refinery
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fence. Our Valve Solutions product line is impacted by the level of infrastructure additions, upgrades and maintenance activities across the oil and gas industry, including the upstream, midstream and downstream sectors. This includes heavy oil development in Canada and investments in new petrochemical facilities. In addition, our valves are used in the process and mining industries.
Production Equipment. Our surface Production Equipment product line provides engineered process systems and field services for capital equipment used at the wellsite, for production processing, and at the refinery. We serve the upstream, midstream and downstream segments in oil and gas production equipment and services. Once a well has been drilled, completed and brought on stream, we provide the well operator-producer with the process equipment necessary to make the oil or gas ready for transmission. We also provide desalination and dehydration equipment. We engineer, fabricate and install tanks, separators, packaged production systems and American Society of Mechanical Engineers ("ASME") and American Petroleum Institute ("API") coded and non-coded pressure vessels, skidded vessels with gas measurement, modular process plants, header and manifold skids, process and flow control equipment and separators to help clean and process oil or gas as it travels from the wellhead and along the transmission line to the refinery. Our customers are principally oil and gas operators/producers, and our manufacturing and staging locations are positioned across North America to best serve the key emerging shale and unconventional resource plays.
A key to our competiveness is manufacturing tanks and pressure vessels in relatively close proximity to their location of use to reduce freight costs, as well as helping our customers manage their production equipment needs as their drilling programs progress. We have five North American manufacturing locations and two service centers. To ensure smooth delivery of equipment, we maintain a fleet of specialized trucks and crews that can deliver and install the production equipment on the well site.
Valve Solutions. We design, manufacture and provide a wide range of industrial valves that principally serve the upstream, midstream and downstream markets of the oil and gas industry. To a lesser extent, our valves serve general industrial, power and process industry customers as well as the mining industry. We provide ball, gate, globe, check and butterfly valves across a range of sizes and applications.
We market our valves to our customers and end users through our four recognized brands: PBV™, DSI®, Quadrant® and ABZ™. Much of our production is sold through distribution supply companies, with our marketing efforts targeting end users for pull through of our products. Our global sales force and representatives cover approximately 30 countries, with local sales and distribution in Australia, Canada and South Africa. Our Canadian company provides significant exposure to the heavy oil projects, while our South African affiliate serves chemical, petrochemical and refining customers.
Our manufacturing and supply chain systems enable us to design and produce high-quality engineered valves, as well as provide standardized products, while maintaining competitive pricing and minimizing capital requirements. We manufacture and warehouse our engineered PBV ball valves at our 200,000 square foot valve manufacturing facility in Stafford, Texas and our 250,000 square foot warehouse in Houston, Texas, which is also utilized by our other product lines. We also utilize our international manufacturing partners to produce components and completed products for a number of our other valve brands.
Depending on the product, we manufacture our valves to conform to the standards of one or more of the API, American National Standards Institute, American Bureau of Shipping, and International Organization for Standardization and/or other relevant standards governing the design and manufacture of industrial valves. Through our Valve Solutions product line, we participate in the API's standard-setting process.
Business history
Forum was incorporated in 2005 and formed through a series of acquisitions. In August 2010, Forum Oilfield Technologies, Inc. (“FOT”), was renamed Forum Energy Technologies, Inc. On April 17, 2012, we completed our initial public offering.
Backlog
As we provide a mix of capital goods, consumable products, repair parts, and rental services, a majority of our business does not require lengthy lead times. A majority of the orders and commitments included in our backlog as of December 31, 2015 were scheduled to be delivered within six months. Our backlog, net of cancellations, was approximately $194 million at December 31, 2015 and approximately $464 million at December 31, 2014.
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Sales of our products are affected by prices for oil and natural gas, which have decreased significantly since June 2014. Until oil and natural gas prices stabilize, we expect that the level of customer orders will decline from prior levels, causing a decrease in our future backlog levels. Substantially all of the projects currently included in our backlog are subject to change and/or termination at the option of the customer. In the case of a change or termination, the customer is generally required to pay us for work performed and other costs necessarily incurred as a result of the change or termination. Prior to 2015, terminations and cancellations have not been material to our overall operating results. It is difficult to predict how much of our current backlog will be delayed or terminated, or subject to changes, as well as our ability to collect termination or change fees.
Our consumable and repair products are predominantly off-the-shelf items requiring short lead-times, generally less than six months, and our related refurbishment or other services are also not contracted with significant lead time. The composition of our backlog is reflective of our mix of capital equipment, consumable products, aftermarket and other related items. Our bookings, which consist of written orders or commitments for our products or related services, during the years ended December 31, 2015 and 2014 were approximately $0.9 billion and $1.8 billion, respectively.
Customers
No customer represented more than 10% of consolidated revenue in any of the last three years.
Seasonality
A substantial portion of our business is not significantly impacted by seasonality. We do, however, generally experience lower sales and profitability in the fourth quarter due to a decrease in working days caused by the U.S. Thanksgiving and calendar year-end holidays, and manufacturing and shipping delays caused by weather. A small portion of the revenue we generate from selected Canadian operations often benefits from higher first quarter activity levels, as operators take advantage of the winter freeze to gain access to remote drilling and production areas. We also experience some exposure to seasonality through the portion of our subsea rental business that serves the North Sea. Due to the harsh winter environment, it is customary for North Sea activity to slow down between the months of November and February. Revenue exposed to this type of seasonality, however, comprised less than 5% of our overall revenue in 2015.
Competition
The markets in which we operate are highly competitive. We compete with a number of companies, some of which have greater financial and other resources than we do. The principal competitive factors in our markets are product quality, price, breadth of product offering, availability of products and services, performance, distribution capabilities, responsiveness to customer needs and reputation for service. We believe our products and services in each segment are at least comparable in price, quality, performance and dependability with our competitors' offerings. We seek to differentiate ourselves from our competitors by providing a rapid response to the needs of our customers, a high level of customer service, and innovative product development initiatives. Some of our competitors expend greater amounts of money on formal research and engineering efforts than we do. We believe, however, that our product development efforts are enhanced by the investment of management time we make to improve our customer service and to work with our customers on their specific product needs and challenges.
Although we have no single competitor across all of our product lines, the companies we compete with across the greatest number of our product lines include Cameron International Corporation (a subsidiary of Schlumberger) and FMC Technologies, Inc.
We have no one direct competitor across all of the products and services within our Drilling & Subsea segment. We hold what we consider to be market leading positions in several of our core products on a global basis, and we generally compete with a small number of competitors. The significant competitors within our Drilling & Subsea segment include FMC Technologies, Inc., Cameron International Corporation (a subsidiary of Schlumberger), National Oilwell Varco, Inc. and Weatherford International, Ltd.
We have no one direct competitor across all of the products and services within our Completions and Production & Infrastructure segments, although Cameron International Corporation (a subsidiary of Schlumberger) is a significant competitor for many of our products. Other competitors include Exterran Corp., FMC Technologies, Inc. and Weir SPM, a subsidiary of The Weir Group PLC.
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Patents, trademarks and other intellectual property
We currently hold multiple U.S. and international patents and trademarks and have a number of pending patent and trademark applications. Although in the aggregate our patents, trademarks and licenses are important to us, we do not regard any single patent, trademark or license as critical or essential to our business as a whole.
Raw materials
We acquire component parts, products and raw materials from suppliers, including foundries, forge shops, and original equipment manufacturers. The prices we pay for our raw materials may be affected by, among other things, energy, steel and other commodity prices, tariffs and duties on imported materials and foreign currency exchange rates. Certain of our component parts, products or raw materials, such as bearings, are only available from a limited number of suppliers. Please see "Risk factors—Risks related to our business—We are subject to the risk of supplier concentration."
We cannot assure you that we will be able to continue to purchase raw materials on a timely basis or at acceptable prices. We generally try to purchase our raw materials from multiple suppliers so we are not dependent on any one supplier, but this is not always possible.
Working capital
We fund our business operations through a combination of available cash and equivalents, short-term investments, and cash flow generated from operations. In addition, the revolving portion of our senior secured credit facility is available for working capital needs. For a summary of our credit facility, please read "Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and capital resources."
Inventory
An important consideration for many of our customers in selecting a vendor is timely availability of the product. Often customers will pay a premium for earlier or immediate availability because of the cost of delays in critical operations. We stock our consumable products in regional warehouses around the world so that we can have these products available for our customers when needed. This availability is especially critical for certain consumable products, causing us to carry substantial inventories for these products. For critical capital items in which demand is expected to be strong, we often build certain items before we have a firm order. Our having such goods available on short notice can be of great value to our customers.
We typically offer our customers payment terms of net 30 days. For sales into certain countries or for select customers, we might require payment upfront or credit support through a letter of credit. For longer term projects we typically require progress payments as important milestones are reached. On average we collect our receivables in about 60 days from shipment resulting in a substantial investment in accounts receivable. Likewise, standard terms with our vendors are net 30 days. For critical items sourced from significant vendors we have settled accounts more quickly, sometimes in exchange for early payment discounts.
Environmental, transportation, health and safety regulation
Our operations are subject to numerous stringent and complex laws and regulations governing the discharge of materials into the environment, health and safety aspects of our operations, or otherwise relating to human health and environmental protection. We also operate vehicles that are subject to federal and state transportation regulations. Failure to comply with these laws or regulations or to obtain or comply with permits may result in the assessment of administrative, civil and criminal penalties, imposition of remedial or corrective action requirements, and the imposition of injunctions to prohibit certain activities or force future compliance.
The trend in environmental regulation has been to impose increasingly stringent restrictions and limitations on activities that may impact the environment, and thus, any changes in environmental laws and regulations or in enforcement policies that result in more stringent and costly waste handling, storage, transport, disposal, or remediation requirements could have a material adverse effect on our operations and financial position. Moreover, accidental releases or spills of regulated substances may occur in the course of our operations, and we cannot assure you that we will not incur significant costs and liabilities as a result of such releases or spills, including any third party claims for damage to property, natural resources or persons.
The following is a summary of the more significant existing environmental, health and safety laws and regulations to which our business operations are subject and for which compliance may have a material adverse impact on our capital expenditures, results of operations or financial position.
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Hazardous substances and waste
The Resource Conservation and Recovery Act (the "RCRA") and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the Environmental Protection Agency (the "EPA"), the individual states administer some or all of the provisions of the RCRA, sometimes in conjunction with their own, more stringent requirements. We are required to manage the transportation, storage and disposal of hazardous and non-hazardous wastes in compliance with the RCRA.
The Comprehensive Environmental Response, Compensation, and Liability Act (the "CERCLA"), also known as the Superfund law, imposes joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the owner or operator of the site where the release occurred, and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. We currently own, lease, or operate numerous properties that have been used for manufacturing and other operations for many years. We also contract with waste removal services and landfills. These properties and the substances disposed or released on them may be subject to the CERCLA, RCRA and analogous state laws. Under such laws, we could be required to remove previously disposed substances and wastes, remediate contaminated property, or perform remedial operations to prevent future contamination. In addition, it is not uncommon for neighboring landowners and other third-parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment.
Water discharges
The Federal Water Pollution Control Act (the "Clean Water Act") and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. A responsible party includes the owner or operator of a facility from which a discharge occurs. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the Oil Pollution Act of 1990, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges.
Air emissions
The Federal Clean Air Act (the "Clean Air Act") and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other emission control requirements. In addition, the EPA has developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants at specified sources. Non-compliance with air permits or other requirements of the Clean Air Act and associated state laws and regulations can result in the imposition of administrative, civil and criminal penalties, as well as the issuance of orders or injunctions limiting or prohibiting non-compliant operations.
Climate change
In December 2009, the EPA determined that emissions of carbon dioxide, methane and other "greenhouse gases" present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth's atmosphere and other climatic changes. Based on these findings, the EPA has begun adopting and implementing regulations to restrict emissions of greenhouse gases under existing provisions of the Clean Air Act. The EPA adopted two sets of rules regulating greenhouse gas emissions under the Clean Air Act, one of which requires a reduction in emissions of greenhouse gases from motor vehicles and the other of which regulates emissions of greenhouse gases from certain large stationary sources, effective January 2, 2011. In September 2015, the EPA proposed new rules that would affect aggregation of sources in the oil and gas industry and set new source performance standards for methane and volatile organic compounds. The EPA has also adopted rules requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the U.S., including oil and gas systems.
The U.S. also participated in the 2015 United Nations Climate Change Conference in Paris. Prior to the conference, the U.S. submitted its intended nationally determined contribution, committing to reduce its greenhouse gas emissions by 25-28% below 2005 levels by 2025. The U.S. was actively involved in negotiations at the Climate Change Conference, which resulted in the creation of the Paris Agreement. The Paris Agreement will be open for signing on April 22, 2016 and will require countries to review and “represent a progression” in their intended nationally determined contributions every five years, beginning in 2020. Parties are also expected to meet in 2018 to “take stock” of collective efforts. The
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Paris Agreement set a goal of keeping warming well below 2 degrees Celsius and sets a target limit of 1.5 degrees Celsius. This could ultimately drive stricter climate policies in the U.S.
In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal.
The adoption of legislation or regulatory programs to reduce emissions of greenhouse gases could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas produced by our customers. Consequently, legislation and regulatory programs to reduce emissions of greenhouse gases could have an adverse effect on our business, financial condition and results of operations. Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the earth's atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our business, financial condition, results of operations and cash flow.
Hydraulic fracturing
A significant percentage of our customers' oil and natural gas production is being developed from unconventional sources, such as hydrocarbon shales. These formations require hydraulic fracturing completion processes to release the oil or natural gas from the rock so that it can flow through the formations. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate production. A number of federal agencies, including the EPA and the U.S. Department of Energy, are analyzing, or have been requested to review, a variety of environmental issues associated with shale development, including hydraulic fracturing. Along these lines, on May 16, 2013, the Bureau of Land Management (the "BLM") issued a proposed rule that would require the public disclosure of chemicals used in hydraulic fracturing operations, set requirements for well-bore integrity and establish flowback water standards for all hydraulic fracturing operations on federal public lands and American Indian Tribal lands. The rule became final on March 20, 2015. The rule was initially set to go into effect June 24, 2015, but implementation of the rule is being vigorously contested by industry and several states. In September 2015, the U.S. District Court of Wyoming granted a preliminary injunction temporarily preventing enforcement of the rule. A final decision is pending.
In addition, the EPA has asserted federal regulatory authority over hydraulic fracturing involving diesel additives under the Safe Drinking Water Act's "Underground Injection Control Program" and issued guidance documents related to this assertion of regulatory authority in February 2014. EPA also issued a proposed rule in April 2015 requiring federal pre-treatment standards for wastewater generated during hydraulic fracturing that is sent to a treatment facility. Further, some states and municipalities have adopted, and other states and municipalities are considering adopting, regulations that could prohibit hydraulic fracturing in certain areas or impose more stringent disclosure and/or well construction requirements on hydraulic fracturing operations. At the same time, certain environmental groups have suggested that additional laws may be needed to more closely and uniformly regulate the hydraulic fracturing process, and legislation has been proposed by some members of Congress to provide for such regulation. We cannot predict whether any such legislation will ever be enacted and if so, what its provisions would be. If additional levels of regulation and permits were required through the adoption of new laws and regulations at the federal or state level, that could lead to delays, increased operating costs and process prohibitions for our customers that could reduce demand for our products and services, which would materially adversely affect our revenues, results of operations and cash flows.
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Employee health and safety
We are subject to a number of federal and state laws and regulations, including the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes, establishing requirements to protect the health and safety of workers. In addition, the OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require that information be maintained concerning hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and the public. Substantial fines and penalties can be imposed and orders or injunctions limiting or prohibiting certain operations may be issued in connection with any failure to comply with laws and regulations relating to worker health and safety.
Offshore regulation
Events in recent years have heightened environmental and regulatory concerns about the offshore oil and natural gas industry. From time to time, governing bodies may propose and have enacted legislation or regulations that may materially limit or prohibit offshore drilling in certain areas. If laws are enacted or other governmental action is taken that delay, restrict or prohibit offshore operations in our customers' expected areas of operation, our business could be materially adversely affected. New or newly interpreted regulations and other regulatory initiatives by U.S. governmental agencies have created significant uncertainty regarding the outlook of offshore activity in the U.S. Gulf of Mexico and possible implications for regions outside of the U.S. Gulf of Mexico. Third party challenges to industry operations in the U.S. Gulf of Mexico may also serve to further delay or restrict activities. If the new regulations, operating procedures and possibility of increased legal liability are viewed by our current or future customers as a significant impairment to expected profitability on projects, then they could discontinue or curtail their offshore operations thereby reducing demand for our offshore products and services.
We also operate in non-U.S. jurisdictions, which may impose similar liabilities against us.
Operating risk and insurance
We maintain insurance coverage of types and amounts that we believe to be customary and reasonable for companies of our size and with similar operations. In accordance with industry practice, however, we do not maintain insurance coverage against all of the operating risks to which our business is exposed. Therefore, there is a risk our insurance program may not be sufficient to cover any particular loss or all losses. Currently, our insurance program includes coverage for, among other things, general liability, umbrella liability, sudden and accidental pollution, personal property, vehicle, workers' compensation, and employer's liability coverage.
Employees
As of December 31, 2015, we had approximately 2,500 employees. Of our total employees, approximately 1,750 were in the United States, 400 were in the United Kingdom, 100 were in Germany, 90 were in Canada and 160 were in other locations. We are not a party to any collective bargaining agreements, other than in our Hamburg, Germany and Monterrey, Mexico facilities, and we consider our relations with our employees to be satisfactory.
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Exhibit 99.2
Item 2. Properties
The following tables describe the material facilities owned or leased by us as of December 31, 2015:
Country | Location | Leased or Owned | Country | Location | Leased or Owned | |||||
Drilling & Subsea Segment Locations | Production & Infrastructure Segment Locations | |||||||||
Canada | Alberta | Leased | Canada | Calgary | Leased | |||||
Germany | Hamburg | Leased | Canada | Edmonton | Leased | |||||
Mexico | Monterrey | Leased | United States | Madison, KS | Leased | |||||
Singapore | Singapore | Leased | Broussard, LA | Leased | ||||||
UAE | Dubai | Leased | Elmore City, OK | Owned | ||||||
United Kingdom | Aberdeen | Leased | Guthrie, OK | Leased | ||||||
Kirkbymoorside | Leased | Clearfield, PA | Owned | |||||||
Findon | Leased | Brownsville, PA | Leased | |||||||
Newcastle | Leased | Gainesville, TX | Leased | |||||||
United States | Bryan, TX | Owned | Houston, TX | Leased | ||||||
Houston, TX | Leased | Stafford, TX | Leased | |||||||
Plantersville, TX | Owned | |||||||||
Tyler, TX | Leased | |||||||||
Completions Segment Locations | Shared between Segments | |||||||||
United States | Pearland, TX | Owned | Brazil | Macae | Leased | |||||
Pearland, TX | Leased | Rio de Janeiro | Leased | |||||||
Sanger, TX | Leased | United States | Williston, ND | Leased | ||||||
Stafford, TX | Owned | Houston, TX | Leased | |||||||
Davis, OK | Owned | San Antonio, TX | Owned | |||||||
Corpus Christi, TX | Owned | Broussard, LA | Owned | |||||||
Odessa, TX | Leased | |||||||||
Dayton, TX | Owned | |||||||||
We believe our facilities are suitable for their present and intended purposes, and are adequate for our current and anticipated level of operations.
We incorporate by reference in response to this item the information set forth in Exhibit 99.1 and Exhibit 99.3 of this 8-K and the information set forth in Note 6 and Note 11 of the Notes to Consolidated Financial Statements included in Exhibit 99.4 of this 8-K.
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Exhibit 99.3
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected historical consolidated financial data" included under Item 6 of this Annual Report on Form 10-K and our financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements based on our current expectations, estimates and projections about our operations and the industry in which we operate. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in "Risk factors", "—Cautionary note regarding forward-looking statements" and elsewhere in this Annual Report on Form 10-K. We assume no obligation to update any of these forward-looking statements.
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.
Beginning with the first quarter of 2016, we realigned our segments. Completions was designated as a separate segment in recognition of the expansion in these operations and its significant growth potential. We are reporting our results of operations in the following reportable segments: Drilling & Subsea, Completions, and Production & Infrastructure, instead of the original two segments. Management’s change in the composition of our reporting segments was made in order to align with activity drivers and the customers of our product group, and how management reviews and evaluates operating performance. This change is reflected on a retrospective basis in accordance with generally accepted accounting principles, with current and prior years adjusted to reflect the change in reporting segments. The new segments are composed of the following:
• | Drilling & Subsea segment. This segment designs, manufactures and supplies products and provides related services to the drilling and subsea construction and services markets. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable drilling products consumed in the drilling process; and (ii) subsea capital equipment, specialty components and tooling, products used in subsea pipeline infrastructure, and a broad suite of complementary subsea technical services and rental items. |
• | Completions segment. This segment designs, manufactures and supplies products and provides related services to the well construction, completion, stimulation and intervention markets. The products and related services consist primarily of: (i) well construction casing and cementing equipment, cable protectors used in completions, composite plugs used for zonal isolation in hydraulic fracturing and wireline flow-control products; and (ii) capital and consumable products sold to the pressure pumping, hydraulic fracturing and flowback services markets, including hydraulic fracturing pumps, pump consumables and flow iron as well as coiled tubing, wireline cable, and pressure control equipment used in the well completion and intervention service markets. |
• | Production & Infrastructure segment. This segment designs, manufactures and supplies products and provides related equipment and services for production and infrastructure markets. The products and related services consist primarily of: (i) engineered process systems, production equipment and related field services, as well |
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as desalinization equipment; and (ii) a wide range of industrial valves focused on serving upstream, midstream, downstream oil and gas customers.
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 2014 and are affected by a wide range of factors. Prices for oil and natural gas are currently at extremely low levels, supply continues to exceed demand and there is a very high level of oil in storage. Many oil companies are in significant financial distress, and energy service companies are, in some cases, working at break-even profit levels or less. Although the extent and duration of the decline in energy prices are difficult to predict, the current market conditions could have a material, adverse impact on our earnings continuing through 2016.
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:
2015 | 2014 | 2013 | ||||||||||
Average global oil, $/bbl | ||||||||||||
West Texas Intermediate | $ | 48.66 | $ | 93.21 | $ | 97.98 | ||||||
United Kingdom Brent | $ | 52.32 | $ | 98.97 | $ | 108.64 | ||||||
Average North American Natural Gas, $/Mcf | ||||||||||||
Henry Hub | $ | 2.62 | $ | 4.37 | $ | 3.73 | ||||||
Average WTI and Brent oil prices were 48% and 47% lower, respectively, in 2015 than 2014. The WTI oil price was $37.13 and $53.45 per barrel on December 31, 2015 and 2014, respectively. Average natural gas prices were 40% lower in 2015 than 2014. Crude oil prices began a significant decline in the second half of 2014 and have declined 68% from peak prices in June 2014 to the end of December 2015 primarily as a result of increasing supply and insufficient demand growth. The precipitous decline in oil and natural gas prices since the middle of 2014 has resulted in a significant decrease in exploration and production activity and spending by our customers. This has had a significant, adverse impact on our results of operations which we expect to continue until oil and natural gas prices rise substantially.
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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.
2015 | 2014 | 2013 | |||||||
Active Rigs by Location | |||||||||
United States | 978 | 1,862 | 1,761 | ||||||
Canada | 192 | 379 | 353 | ||||||
International | 1,167 | 1,337 | 1,296 | ||||||
Global Active Rigs | 2,337 | 3,578 | 3,410 | ||||||
Land vs. Offshore Rigs | |||||||||
Land | 2,016 | 3,193 | 3,033 | ||||||
Offshore | 321 | 385 | 377 | ||||||
Global Active Rigs | 2,337 | 3,578 | 3,410 | ||||||
U.S. Commodity Target, Land | |||||||||
Oil/Gas | 750 | 1,526 | 1,373 | ||||||
Gas | 227 | 333 | 383 | ||||||
Unclassified | 1 | 3 | 5 | ||||||
Total U.S. Land Rigs | 978 | 1,862 | 1,761 | ||||||
U.S. Well Path, Land | |||||||||
Horizontal | 744 | 1,273 | 1,102 | ||||||
Vertical | 139 | 377 | 435 | ||||||
Directional | 95 | 212 | 224 | ||||||
Total U.S. Active Land Rigs | 978 | 1,862 | 1,761 | ||||||
As a result of lower oil and natural gas prices, the average U.S. rig count decreased 48% from 2014, while the international rig count and the Canadian rig count decreased 13% and 49%, respectively, from 2014. The U.S. rig count declined 62% from its peak of 1,811 rigs in January 2015 to 698 rigs at the end of December 2015 and has continued to decrease since that time. A substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed. This significant decrease in the rig count had a negative impact on our results of operations in 2015 and is expected to have a continuing adverse effect on our results through 2016.
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 2015 and is expected to have a continuing adverse effect through 2016.
The table below shows the amount of total inbound orders by segment for the years ended December 31, 2015, 2014 and 2013:
(in millions of dollars) | 2015 | 2014 | 2013 | |||||||||
Orders: | ||||||||||||
Drilling & Subsea | $ | 363.5 | $ | 1,002.2 | $ | 812.1 | ||||||
Completions | 209.2 | 373.9 | 272.2 | |||||||||
Production & Infrastructure | 297.3 | 470.1 | 398.0 | |||||||||
Total Orders | $ | 870.0 | $ | 1,846.2 | $ | 1,482.3 | ||||||
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Acquisitions
On February 2, 2015, we completed the acquisition of J-Mac Tool, Inc. (“J-Mac”) for aggregate consideration of approximately $61.9 million. J-Mac, located in Fort Worth, Texas, manufactures hydraulic fracturing pumps, power ends, fluid ends and other pump accessories. The acquired business also provides repair and refurbishment services at its main location in Fort Worth and at other service center locations. J-Mac is included in the Completions segment.
On May 1, 2014, we 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.
On July 1, 2013, we completed two acquisitions and an investment in a joint venture for aggregate consideration of approximately $230.0 million, each of which were financed with cash on hand and borrowings under our Credit Facility. The three transactions included the following:
• | B+V Oil Tools, a manufacturer of pipe handling equipment used on offshore and onshore drilling rigs with locations in Hamburg, Germany and Willis, Texas. B+V Oil Tools is included in the Drilling & Subsea segment; |
• | Moffat, a Newcastle, England based manufacturer of subsea pipeline inspection gauge launching and receiving systems, and subsea connectors. Moffat is included in the Drilling & Subsea segment; and |
• | The joint purchase of 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. Our equity investment is reported in the Completions segment and is accounted for using the equity method of accounting. |
None of these transactions included potential future payments contingent on financial performance.
There are factors related to the businesses we have acquired that may result in lower net profit margins on a going-forward basis, primarily the federal income tax status of the legal entity and the level of depreciation and amortization charges arising out of the accounting for the purchase.
For additional information regarding our 2015, 2014, and 2013 acquisitions, please read Note 3 of the Notes to the Consolidated Financial Statements in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Evaluation of operations
We manage our operations through the three business segments described above. We have focused on implementing financial reporting and controls at all of our operations to accelerate the availability of critical information necessary to support informed decision making. We use a number of financial and non-financial measures to routinely analyze and evaluate, on a segment and corporate level, the performance of our business. As an example of a non-financial measure, we measure our safety by tracking the total recordable incident rate and we consider this as an indication of the quality of our products. Financial measures include the following:
Revenue growth. We compare actual revenue achieved each month to the most recent estimate for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the relative performance of each of our product lines as compared to standard revenue drivers or market metrics applicable to that product. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes. In addition, we review these metrics on a quarterly basis. We also evaluate changes in the mix of products sold and the resultant impact on reported gross margins.
Gross margin percentage. We define gross margin percentage as our gross margin, or net sales minus cost of sales, divided by our net sales. Our management continually evaluates our consolidated gross margin percentage and our gross margin percentage by segment to determine how each segment is performing. This metric aids management in capital resource allocation and pricing decisions.
Selling, general and administrative expenses as a percentage of total revenue. Selling, general and administrative expenses include payroll related costs for sales, marketing, administrative, accounting, information technology, certain engineering and human resources functions; audit, legal and other professional fees; insurance; franchise taxes not based on income; travel and entertainment; advertising and promotions; depreciation and amortization expense; bad debt expense; and other office and administrative related costs. Our management continually evaluates the level of our selling, general and administrative expenses in relation to our revenue and makes appropriate changes in light of activity levels to preserve and improve our profitability while meeting the on-going support and regulatory requirements of the business.
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Operating income and operating margin percentage. We define operating income as revenue less cost of goods sold less selling, general and administrative expenses. We define our operating margin percentage as operating income divided by revenue. These metrics assist management in evaluating the performance of each segment as a whole, especially to determine whether the amount of administrative burden is appropriate to support current business activity levels.
Earnings per share. We calculate fully-diluted earnings per share as prescribed under generally accepted accounting principles ("GAAP"), that is net income divided by common shares outstanding, giving effect for the assumed exercise of all outstanding options and warrants with a strike price less than the average fair value of the shares over the period covered for the calculation. We believe this measure is important as it reflects the sum total of operating results and all attendant capital decisions, showing in one number the amount earned for the stockholders of our Company.
Free cash flow. We define free cash flow as net income, increased by non-cash charges included in net income (e.g., depreciation and amortization and deferred income taxes), increased or decreased by changes in net working capital, less capital expenditures. We believe that this measure is important because it encompasses both profitability and capital management in evaluating results. Free cash flow represents the business’ contribution in the generation of funds available to pay debt outstanding, invest in other areas, or return funds to our stockholders.
Factors affecting the comparability of our future results of operations to our historical results of operations
Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the following reasons:
• | Since our initial public offering in 2012, we have grown our business both organically and through strategic acquisitions. We have expanded and diversified our product portfolio and business lines with the acquisition of one business in 2015, one business in 2014, and two businesses and our joint venture investment in 2013. The historical financial data for periods prior to the acquisitions does not include the results of any of the acquired companies for the periods presented and, as such, does not provide an accurate indication of our future results. |
• | As we integrate acquired companies and further implement internal controls, processes and infrastructure to operate in compliance with the regulatory requirements applicable to companies with publicly traded shares, it is likely that we will incur incremental selling, general and administrative expenses relative to historical periods. |
Our future results will depend on our ability to efficiently manage our combined operations and execute our business strategy.
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Results of operations
Year ended December 31, 2015 compared with year ended December 31, 2014
Year ended December 31, | Favorable / (Unfavorable) | |||||||||||||
2015 | 2014 | $ | % | |||||||||||
(in thousands of dollars, except per share information) | ||||||||||||||
Revenue: | ||||||||||||||
Drilling & Subsea | $ | 487,299 | $ | 864,320 | $ | (377,021 | ) | (43.6 | )% | |||||
Completions | 267,236 | 441,345 | (174,109 | ) | (39.4 | )% | ||||||||
Production & Infrastructure | 320,442 | 436,271 | (115,829 | ) | (26.5 | )% | ||||||||
Eliminations | (1,325 | ) | (2,219 | ) | 894 | * | ||||||||
Total revenue | $ | 1,073,652 | $ | 1,739,717 | $ | (666,065 | ) | (38.3 | )% | |||||
Cost of sales: | ||||||||||||||
Drilling & Subsea | $ | 359,004 | $ | 580,195 | $ | 221,191 | 38.1 | % | ||||||
Completions | 212,238 | 279,961 | 67,723 | 24.2 | % | |||||||||
Production & Infrastructure | 241,058 | 322,328 | 81,270 | 25.2 | % | |||||||||
Eliminations | (1,325 | ) | (2,219 | ) | (894 | ) | * | |||||||
Total cost of sales | $ | 810,975 | $ | 1,180,265 | $ | 369,290 | 31.3 | % | ||||||
Gross profit: | ||||||||||||||
Drilling & Subsea | $ | 128,295 | $ | 284,125 | $ | (155,830 | ) | (54.8 | )% | |||||
Completions | 54,998 | 161,384 | (106,386 | ) | (65.9 | )% | ||||||||
Production & Infrastructure | 79,384 | 113,943 | (34,559 | ) | (30.3 | )% | ||||||||
Total gross profit | $ | 262,677 | $ | 559,452 | $ | (296,775 | ) | (53.0 | )% | |||||
Selling, general and administrative expenses: | ||||||||||||||
Drilling & Subsea | $ | 121,405 | $ | 153,052 | $ | 31,647 | 20.7 | % | ||||||
Completions | 58,698 | 59,959 | 1,261 | 2.1 | % | |||||||||
Production & Infrastructure | 56,726 | 57,795 | 1,069 | 1.8 | % | |||||||||
Corporate | 28,077 | 42,015 | 13,938 | 33.2 | % | |||||||||
Total selling, general and administrative expenses | $ | 264,906 | $ | 312,821 | $ | 47,915 | 15.3 | % | ||||||
Operating income (loss): | ||||||||||||||
Drilling & Subsea | $ | 6,890 | $ | 131,072 | $ | (124,182 | ) | (94.7 | )% | |||||
Operating income margin % | 1.4 | % | 15.2 | % | ||||||||||
Completions | 11,124 | 126,590 | (115,466 | ) | (91.2 | )% | ||||||||
Operating income margin % | 4.2 | % | 28.7 | % | ||||||||||
Production & Infrastructure | 22,658 | 56,148 | (33,490 | ) | (59.6 | )% | ||||||||
Operating income margin % | 7.1 | % | 12.9 | % | ||||||||||
Corporate | (28,077 | ) | (42,015 | ) | 13,938 | 33.2 | % | |||||||
Total segment operating income | $ | 12,595 | $ | 271,795 | $ | (259,200 | ) | (95.4 | )% | |||||
Operating income margin % | 1.2 | % | 15.6 | % | ||||||||||
Goodwill and Intangible asset impairment | 125,092 | — | (125,092 | ) | * | |||||||||
Transaction expenses | 480 | 2,326 | 1,846 | * | ||||||||||
Loss on sale of assets | 746 | 1,431 | 685 | * | ||||||||||
Income (loss) from operations | (113,723 | ) | 268,038 | (381,761 | ) | (142.4 | )% | |||||||
Interest expense, net | 29,945 | 29,847 | 98 | 0.3 | % | |||||||||
Other (income) expense, net | (9,345 | ) | (4,331 | ) | 5,014 | * | ||||||||
Other (income) expense, net | 20,600 | 25,516 | 4,916 | 19.3 | % | |||||||||
Income (loss) before income taxes | (134,323 | ) | 242,522 | (376,845 | ) | (155.4 | )% | |||||||
Income tax expense (benefit) | (14,939 | ) | 68,145 | 83,084 | 121.9 | % | ||||||||
Net income (loss) | (119,384 | ) | 174,377 | (293,761 | ) | (168.5 | )% | |||||||
Less: Income (loss) attributable to non-controlling interest | (31 | ) | 12 | (43 | ) | * | ||||||||
Income (loss) attributable to common stockholders | $ | (119,353 | ) | $ | 174,365 | $ | (293,718 | ) | (168.5 | )% | ||||
Weighted average shares outstanding | ||||||||||||||
Basic | 89,908 | 92,628 | ||||||||||||
Diluted | 89,908 | 95,308 | ||||||||||||
Earnings (losses) per share | ||||||||||||||
Basic | $ | (1.33 | ) | $ | 1.88 | |||||||||
Diluted | $ | (1.33 | ) | $ | 1.83 | |||||||||
* not meaningful | ||||||||||||||
6
Revenue
Our revenue for the year ended December 31, 2015 decreased $666.1 million, or 38.3%, to $1,073.7 million compared to the year ended December 31, 2014. For the year ended December 31, 2015, our Drilling & Subsea segment, Completions segment, and Production & Infrastructure segment comprised 45.3%, 24.9% and 29.8% of our total revenue, respectively, compared to 49.6%, 25.3% and 25.1%, respectively, for the year ended December 31, 2014. The revenue changes by operating segment consisted of the following:
Drilling & Subsea segment — Revenue decreased $377.0 million, or 43.6%, to $487.3 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease is primarily attributable to decreased oil and natural gas drilling activity in North America and, to a lesser extent lower international activity. The U.S. average rig count decreased 48% compared to the prior year period, and the number of rigs working in the U.S. was down 62% from the beginning to the end of the year, resulting in decreased sales of our drilling equipment. We also recognized lower revenue compared to the prior year period on our subsea products such as workclass ROVs as investment in deepwater oil and natural gas projects has declined.
Completions segment — Revenue decreased $174.1 million, or 39.4%, to $267.2 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease is primarily attributable to decreased oil and natural gas drilling and well completions activity primarily in North America, and resulting in decreased sales of our completions products. The decrease in revenue was also due to lower sales of our consumable flow equipment products to pressure pumping service providers, offset by the addition of J-Mac sales from the first quarter 2015 acquisition.
Production & Infrastructure segment - Revenue decreased $115.8 million, or 26.5%, to $320.4 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease in revenue was due to lower sales of our surface production equipment to exploration and production operators. Our customers, exploration and production operators, completed fewer wells in the current year resulting in lower spending with their suppliers, including us. Unlike our other product lines, Valve Solutions derives a significant portion of its revenue from the midstream, downstream and processing sectors, which have not suffered the same decline in activity experienced as the upstream sector. Revenue for the product line decreased, primarily due to reduced sales in the upstream sector including the slower Canadian market activity, and fewer large project orders in the downstream sector. However, the decrease was less than that experienced by our other product lines.
Segment operating income and segment operating margin percentage
Segment operating income for the year ended December 31, 2015 decreased $259.2 million, or 95.4%, to $12.6 million compared to the year ended December 31, 2014. The 2015 results include total charges of $63.7 million related to several facility consolidations and closures, inventory write-downs across all product lines attributable to expected continuing lower activity levels, and severance paid to employees under our policy for reductions in force. In 2014, similar charges totaled $3.8 million. The segment operating margin percentage is calculated by dividing segment operating income by revenue. For the year ended December 31, 2015, the adjusted segment operating margin percentage, excluding charges, decreased to 7.1% from the 15.8% adjusted operating margin percentage for the year ended December 31, 2014. We believe that adjusted operating margins excluding the costs described above are useful for assessing operating performance, especially when comparing periods. The change in adjusted operating margin percentage for each segment, excluding charges, is explained as follows:
Drilling & Subsea segment — The operating margin percentage decreased to 1.4% for the year ended December 31, 2015 from 15.2% for the year ended December 31, 2014. The charges described above that were excluded from this segment’s adjusted operating margin for 2015 and 2014, respectively, were approximately $32.1 million and $1.6 million. Excluding these charges, the adjusted operating margin percentage decreased to 8.0%, for the year ended December 31, 2015, from 15.3% for the year ended December 31, 2014. The primary reasons for the decrease in adjusted operating margin percentage are lower activity levels, causing a loss of manufacturing scale efficiencies, and more intense competition for fewer sales opportunities which reduces prices charged to the customer.
Completions segment — The operating margin percentage decreased to 4.2% for the year ended December 31, 2015 from 28.7% for the year ended December 31, 2014. The charges described above that were excluded from this segment’s adjusted operating margin for 2015 and 2014 were approximately $25.2 million and $0.1 million, respectively. Excluding these charges, the adjusted operating margin percentage decreased to 13.6%, for the year ended December 31, 2015, from 28.7% for the year ended December 31, 2014. The overall decrease in operating margin percentage is due to reduced operating leverage on lower volumes and pricing pressure especially on consumable
7
flow equipment sold to pressure pumping service companies. Also impacting margins was lower earnings from our investment in Global Tubing, LLC.
Production & Infrastructure segment — The operating margin percentage decreased to 7.1% for the year ended December 31, 2015 from 12.9% for the year ended December 31, 2014. The charges described above that were excluded from this segment’s adjusted operating margin for 2015 and 2014, respectively, were approximately $5.1 million and $0.4 million. Excluding these charges, adjusted operating margin percentage decreased to 8.7% for the year ended December 31, 2015, from 13.0% for the year ended December 31, 2014. The decrease in adjusted operating margin percentage was attributable to higher competition for fewer sales on lower activity levels, and reduced operating leverage on lower volumes.
Corporate — Selling, general and administrative expenses for Corporate decreased $13.9 million, or 33.2%, for the year ended December 31, 2015 compared to the year ended December 31, 2014 due to lower personnel costs, including reduced bonus accruals, and lower professional fees. 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, gains/losses from the sale of assets, and impairment losses of intangible assets and goodwill. Transaction expenses relate to legal and other advisory costs incurred in acquiring businesses, including fees to accomplish an internal legal entity restructuring, and are not considered to be part of segment operating income. These costs were $0.5 million and $2.3 million for the years ended December 31, 2015 and 2014, respectively. In the year ended December 31, 2015, we recognized a net loss of $0.7 million on sales of assets, primarily related to plant consolidations.
The 2015 impairment losses for intangible assets and goodwill were $1.9 million and $123.2 million, respectively. The intangible assets that were written off related to certain trade names that were no longer in use. Due to the further deterioration of market conditions for our products, the goodwill impairment test showed that goodwill in our subsea product line was impaired, and based on a valuation of the applicable assets we recorded a charge in the fourth quarter 2015. No impairment losses were recorded on goodwill or indefinite-lived intangible assets for the year ended December 31, 2014.
Other income and expense
Other income and expense includes interest expense, and foreign exchange gains and losses. We incurred $29.9 million of interest expense during the year ended December 31, 2015, a decrease of $0.1 million from the year ended December 31, 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 a benefit of 11.1% and a provision of 28.1% for the years ended December 31, 2015 and 2014, respectively. The effective tax rate for the year ended December 31, 2015 is significantly different 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 and because the majority of the goodwill impairment loss was not tax deductible. The effective tax rate can vary from period to period depending on our relative mix of U.S. and non-U.S. earnings. Excluding the goodwill and intangible asset impairment and the charges discussed above in the segment operating margin discussion, our effective tax rate would have been approximately 22% for the year ended December 31, 2015.
8
Year ended December 31, 2014 compared to year ended December 31, 2013
Year ended December 31, | Favorable / (Unfavorable) | |||||||||||||
2014 | 2013 | $ | % | |||||||||||
(in thousands of dollars, except per share information) | ||||||||||||||
Revenue: | ||||||||||||||
Drilling & Subsea | $ | 864,320 | $ | 727,779 | $ | 136,541 | 18.8 | % | ||||||
Completions | 441,345 | 336,076 | 105,269 | 31.3 | % | |||||||||
Production & Infrastructure | 436,271 | 462,534 | (26,263 | ) | (5.7 | )% | ||||||||
Eliminations | (2,219 | ) | (1,578 | ) | (641 | ) | * | |||||||
Total revenue | $ | 1,739,717 | $ | 1,524,811 | $ | 214,906 | 14.1 | % | ||||||
Cost of sales: | ||||||||||||||
Drilling & Subsea | $ | 580,195 | $ | 491,896 | $ | (88,299 | ) | (18.0 | )% | |||||
Completions | 279,961 | 214,167 | (65,794 | ) | (30.7 | )% | ||||||||
Production & Infrastructure | 322,328 | 345,101 | 22,773 | 6.6 | % | |||||||||
Eliminations | (2,219 | ) | (1,578 | ) | 641 | * | ||||||||
Total cost of sales | $ | 1,180,265 | $ | 1,049,586 | $ | (130,679 | ) | (12.5 | )% | |||||
Gross profit: | ||||||||||||||
Drilling & Subsea | $ | 284,125 | $ | 235,883 | $ | 48,242 | 20.5 | % | ||||||
Completions | 161,384 | 121,909 | 39,475 | 32.4 | % | |||||||||
Production & Infrastructure | 113,943 | 117,433 | (3,490 | ) | (3.0 | )% | ||||||||
Total gross profit | $ | 559,452 | $ | 475,225 | $ | 84,227 | 17.7 | % | ||||||
Selling, general and administrative expenses: | ||||||||||||||
Drilling & Subsea | $ | 153,052 | $ | 135,841 | $ | (17,211 | ) | (12.7 | )% | |||||
Completions | 59,959 | 48,282 | (11,677 | ) | (24.2 | )% | ||||||||
Production & Infrastructure | 57,795 | 56,115 | (1,680 | ) | (3.0 | )% | ||||||||
Corporate | 42,015 | 29,431 | (12,584 | ) | (42.8 | )% | ||||||||
Total selling, general and administrative expenses | $ | 312,821 | $ | 269,669 | $ | (43,152 | ) | (16.0 | )% | |||||
Operating income: | ||||||||||||||
Drilling & Subsea | $ | 131,072 | $ | 100,042 | $ | 31,030 | 31.0 | % | ||||||
Operating income margin % | 15.2 | % | 13.7 | % | ||||||||||
Completions | 126,590 | 80,939 | 45,651 | 56.4 | % | |||||||||
Operating income margin % | 28.7 | % | 24.1 | % | ||||||||||
Production & Infrastructure | 56,148 | 61,318 | (5,170 | ) | (8.4 | )% | ||||||||
Operating income margin % | 12.9 | % | 13.3 | % | ||||||||||
Corporate | (42,015 | ) | (29,431 | ) | (12,584 | ) | (42.8 | )% | ||||||
Total segment operating income | $ | 271,795 | $ | 212,868 | $ | 58,927 | 27.7 | % | ||||||
Operating income margin % | 15.6 | % | 14.0 | % | ||||||||||
Transaction expenses | 2,326 | 2,700 | 374 | (13.9 | )% | |||||||||
(Gain)/loss on sale of assets | 1,431 | 614 | (817 | ) | * | |||||||||
Income from operations | 268,038 | 209,554 | 58,484 | 27.9 | % | |||||||||
Interest expense, net | 29,847 | 18,370 | (11,477 | ) | (62.5 | )% | ||||||||
Other, net | (4,331 | ) | 2,953 | 7,284 | * | |||||||||
Deferred loan costs written off | — | 2,149 | 2,149 | 100.0 | % | |||||||||
Other (income) expense, net | 25,516 | 23,472 | (2,044 | ) | (8.7 | )% | ||||||||
Income before income taxes | 242,522 | 186,082 | 56,440 | 30.3 | % | |||||||||
Income tax expense | 68,145 | 56,478 | (11,667 | ) | (20.7 | )% | ||||||||
Net income | 174,377 | 129,604 | 44,773 | 34.5 | % | |||||||||
Less: Income attributable to non-controlling interest | 12 | 65 | (53 | ) | * | |||||||||
Income attributable to common stockholders | $ | 174,365 | $ | 129,539 | $ | 44,826 | 34.6 | % | ||||||
Weighted average shares outstanding | ||||||||||||||
Basic | 92,628 | 90,697 | ||||||||||||
Diluted | 95,308 | 94,604 | ||||||||||||
Earnings per share | ||||||||||||||
Basic | $ | 1.88 | $ | 1.43 | ||||||||||
Diluted | $ | 1.83 | $ | 1.37 | ||||||||||
* not meaningful | ||||||||||||||
Revenue
9
Our revenue for the year ended December 31, 2014 increased $214.9 million, or 14.1%, to $1,739.7 million compared to the year ended December 31, 2013. For the year ended December 31, 2014, our Drilling & Subsea segment, Completions segment, and Production & Infrastructure segment comprised 49.6%, 25.3% and 25.1% of our total revenue, respectively, compared to 47.7%, 22.0% and 30.3%, respectively, for the year ended December 31, 2013. The revenue changes by operating segment consisted of the following:
Drilling & Subsea segment — Revenue increased $136.5 million, or 18.8%, to $864.3 million during the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase is primarily attributable to increased market activity as reflected in higher average rig counts as compared to the prior year. We have had particularly strong increases in sales of our pipe handling tools, other drilling capital and consumable products, and workclass remotely operated vehicles. A portion of the increase is attributable to two acquisitions closed in the third quarter 2013 and one in the second quarter 2014, offset by a small divestiture in the first quarter 2014.
Completions segment — Revenue increased $105.3 million, or 31.3%, to $441.3 million during the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase is primarily attributable to increased market activity as reflected in higher average rig counts as compared to the prior year. The increase in revenue was primarily due to a strong recovery in the market for our flow equipment products as sales of well stimulation products increased 45% over the prior year.
Production & Infrastructure segment — Revenue decreased $26.3 million, or 5.7%, to $436.3 million during the year ended December 31, 2014 compared to the year ended December 31, 2013. This revenue decrease was due to lower shipments of surface production equipment products during the year as we experienced more intense competition for projects.
Segment operating income and segment operating margin percentage
Segment operating income for the year ended December 31, 2014 increased $58.9 million, or 27.7%, to $271.8 million compared to the year ended December 31, 2013. The segment operating margin percentage is calculated by dividing segment operating income by revenue. For the year ended December 31, 2014, the segment operating margin increased to 15.6% from 14.0% operating margin percentage for the year ended December 31, 2013. The change in operating margin percentage for each segment is explained as follows:
Drilling & Subsea segment — The operating margin percentage improved to 15.2% for the year ended December 31, 2014 from 13.7% for the year ended December 31, 2013. Severance and facility closure costs of $6.1 million were incurred in the third quarter 2013 to bring our cost structure in line with activity levels at that time and additional severance costs of $1.5 million were incurred in the fourth quarter 2014. Excluding these costs, the operating margin increased from 14.5% in 2013 to 15.3% in 2014. We believe these operating margins, that have excluded the costs described above, are useful to investors to assess operating performance especially when comparing periods. This increase of 160 basis points in the normalized operating margin is primarily attributable to greater volumes of higher margin drilling products, and overall lower selling, general and administrative costs as a percentage of revenue.
Completions segment — The operating margin percentage improved to 28.7% for the year ended December 31, 2014 from 24.1% for the year ended December 31, 2013. The improvement in operating margin percentage was attributable to improved margins in flow equipment on higher activity levels and higher equity earnings from the investment in Global Tubing, LLC joint venture acquired mid-year in 2013.
Production & Infrastructure segment — Operating margin percentage decreased to 12.9% for the year ended December 31, 2014, from 13.3% for the year ended December 31, 2013. 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.
Corporate — Selling, general and administrative expenses for Corporate increased $12.6 million, or 42.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013 due to higher personnel costs and professional fees. Included in the 2014 and 2013 expenses are severance charges of $1.5 million and $0.4 million, respectively. Corporate costs include, among other items, payroll related costs for general management and management of finance and administration, legal, human resources, information technology, professional fees for legal, accounting and related services, and marketing costs.
10
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/losses from the sale of assets. Transaction expenses relate to legal and other advisory costs incurred in acquiring businesses, including fees to accomplish an internal legal entity restructuring, and are not considered to be part of segment operating income. These costs were $2.3 million and $2.7 million for the years ended December 31, 2014 and 2013, respectively. Included as a reduction to the equity earnings of Global Tubing LLC for the year ended December 31, 2013 were $0.8 million of transaction expenses. In the year ended December 31, 2014, we recognized a loss of $1.4 million on sales of assets, primarily from 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, foreign exchange gains and losses and deferred loan costs written off. We incurred $29.8 million of interest expense during the year ended December 31, 2014, an increase of $11.5 million from the year ended December 31, 2013. The increase in interest expense was attributable to the higher interest rate on our Senior Notes issued in the fourth quarter 2013 compared to the relatively lower variable interest rate under our Credit Facility. The term loan under our Credit Facility was paid off from the net proceeds on our Senior Notes. Accordingly, unamortized debt issue costs of $2.1 million associated with the term loan were charged to expense during 2013. The change in foreign exchange gains or losses is primarily the result of movements in the British pound relative to the U.S. dollar, resulting in net losses in 2013 and net gains in 2014.
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 28.1% and 30.4% for the years ended December 31, 2014 and 2013, respectively. The effective tax rate for the year ended December 31, 2014 is lower than the comparable period in 2013 primarily due to a higher proportion of our earnings being generated outside the United States in jurisdictions subject to lower tax rates and benefits received from certain domestic tax incentives. The effective tax rate can vary from period to period depending on our relative mix of U.S. and non-U.S. earnings.
Liquidity and capital resources
Sources and uses of liquidity
Our internal sources of liquidity are cash on hand and cash flows from operations, while our primary external sources have included Credit Facility and Amended Facility described below, trade credit, and the issuance of our senior notes described below. Our primary uses of capital have been for acquisitions, ongoing maintenance and growth capital expenditures, inventories and sales on credit to our customers. We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue to access outside sources of capital.
At December 31, 2015, we had cash and cash equivalents of $109.2 million and total debt of $396.3 million. We believe that cash on hand and cash generated from operations will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations for the foreseeable future.
Our total 2016 capital expenditure budget is approximately $20.0 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 continuing implementation of our enterprise resource planning and attendant systems. This budget does not include expenditures for potential business acquisitions.
The amount of capital expenditures incurred in 2015 was $32.3 million. These expenditures were paid for from internally generated funds. We believe cash flows from operations should be sufficient to fund our capital requirements for 2016.
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 2015 for total consideration (net of cash acquired) of $61.9 million, one business in the second quarter 2014 for total consideration (net of cash acquired) of $38.3 million, and two businesses and our joint venture investment in 2013 for total consideration (net of cash acquired) of approximately $230.0 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
11
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. 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. However, our Amended Facility prohibits us from repurchasing shares.
Our cash flows for the years ended December 31, 2015, 2014 and 2013 are presented below (in millions):
Year ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Net cash provided by operating activities | $ | 155.9 | $ | 270.0 | $ | 211.4 | |||||
Net cash used in investing activities | (91.3 | ) | (70.7 | ) | (289.0 | ) | |||||
Net cash provided by (used in) financing activities | (26.9 | ) | (162.0 | ) | 77.1 | ||||||
Net increase (decrease) in cash and cash equivalents | 32.7 | 37.0 | (1.5 | ) | |||||||
Free cash flow, before acquisitions | $ | 125.4 | $ | 218.9 | $ | 152.1 | |||||
Free cash flow, a non-GAAP financial measure, is defined as net income, increased by non-cash charges included in net income (e.g., depreciation and amortization and deferred income taxes), increased or decreased by changes in net working capital, less capital expenditures for property and equipment net of proceeds from sale of property and equipment and other, plus the payment of contingent consideration included in operating activities. Management believes free cash flow is an important measure because it encompasses both profitability and capital management in evaluating results. A reconciliation of cash flow from operating activities to free cash flow, before acquisitions, is as follows (in millions):
Year ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Cash flow from operating activities | $ | 155.9 | $ | 270.0 | $ | 211.4 | |||||
Capital expenditures for property and equipment | (32.3 | ) | (53.8 | ) | (60.3 | ) | |||||
Proceeds from sale of property and equipment | 1.8 | 2.7 | 1.0 | ||||||||
Free cash flow, before acquisitions | $ | 125.4 | $ | 218.9 | $ | 152.1 | |||||
Cash flows provided by operating activities
Net cash provided by operating activities was $155.9 million and $270.0 million for the years ended December 31, 2015 and 2014, respectively. Cash provided by operations decreased primarily as a result of lower earnings, offset by the positive cash flow resulting from changes in working capital, such as accounts receivable, compared to the year ended December 31, 2014.
Net cash provided by operating activities was $270.0 million and $211.4 million for the years ended December 31, 2014 and 2013, respectively. Cash provided by operations increased as a result of higher earnings offset slightly by higher incremental investments in working capital as a result of higher activity levels as compared to the year ended December 31, 2013.
Our operating cash flows are sensitive to a number of variables, the most significant of which is the level of drilling and production activity for oil and natural gas reserves. These activity levels are in turn impacted by the volatility of oil and natural gas prices, regional and worldwide economic activity and its effect on demand for hydrocarbons, weather, infrastructure capacity to reach markets and other variable factors. These factors are beyond our control and are difficult to predict.
Cash flows used in investing activities
Net cash used in investing activities was $91.3 million and $70.7 million for the years ended December 31, 2015 and 2014, respectively, a $20.6 million increase. The increase was primarily due to consideration of $60.8 million paid for an acquisition during the year ended December 31, 2015 compared to consideration of $38.3 million paid for an acquisition during the year ended December 31, 2014. A lower investment in property and equipment of $32.3 million was made during the year ended December 31, 2015 compared to an investment of $53.8 million during the year
12
ended December 31, 2014. The proceeds from the sale of business and properties was $1.8 million during the year ended December 31, 2015, compared to $12.2 million during the year ended December 31, 2014. In addition, there was no return of investment in our unconsolidated subsidiary during the year ended December 31, 2015, compared to $9.2 million during the year ended December 31, 2014.
Net cash used in investing activities was $70.7 million and $289.0 million for the years ended December 31, 2014 and December 31, 2013, respectively, a $218.3 million decrease. The decrease was primarily due to consideration of $38.3 million paid for an acquisition during the year ended December 31, 2014 compared to consideration of $229.7 million paid for two acquisitions and an investment in a joint venture that closed during the year ended December 31, 2013. Additionally, a lower investment in property and equipment of $53.8 million was made during the year ended December 31, 2014 compared an investment of $60.3 million during the year ended December 31, 2013.
Other than capital required for acquisitions, we expect to fund all maintenance and other growth capital expenditures from our current cash on hand, and from internally generated funds.
Cash flows provided by (used in) financing activities
Net cash used in financing activities was $26.9 million for the year ended December 31, 2015 and was primarily due to the net pay down of debt of 25.8 million.
Net cash used in financing activities was $162.0 million for the year ended December 31, 2014 and was primarily due to the repurchase of our stock for $96.6 million and the net pay down of long-term debt during the period of $84.2 million.
Net cash provided by financing activities was $77.1 million for the year ended December 31, 2013 and consisted primarily of net proceeds from our issuance of the senior notes and other borrowings under our Credit Facility, net of long-term debt repayment, contingent consideration payment and deferred financing costs. The net proceeds from the senior notes issuance were used to repay amounts outstanding under our Credit Facility.
Senior Notes Due 2021
In October 2013, we issued $300.0 million of 6.25% senior unsecured notes due 2021 at par, and in November 2013 we issued an additional $100.0 million aggregate principal amount of the notes at 103.25% of par, plus accrued interest from October 2, 2013 (the "Senior Notes"). The Senior Notes bear interest at a rate of 6.25% per annum, payable on April 1 and October 1 of each year, and mature on October 1, 2021. Net proceeds from the issuances of approximately $394.0 million, after deducting initial purchasers' discounts and offering expenses and excluding accrued interest paid by the purchasers, were used for the repayment of the then-outstanding term loan balance and a portion of the revolving Credit Facility balance.
The terms of the Senior Notes are governed by the indenture, dated October 2, 2013 (the “Indenture”), by and among us, the guarantors named therein and Wells Fargo Bank, National Association, as trustee (the “Trustee”). The Senior Notes are senior unsecured obligations, are guaranteed on a senior unsecured basis by our subsidiaries that guarantee the Amended Facility and rank junior to, among other indebtedness, the Amended Facility to the extent of the value of the collateral securing the Amended Facility. The Senior Notes contain customary covenants including some limitations and restrictions on our ability to pay dividends on, purchase or redeem our common stock or purchase or redeem our subordinated debt; make certain investments; incur or guarantee additional indebtedness or issue certain types of equity securities; create certain liens, sell assets, including equity interests in our restricted subsidiaries; redeem or prepay subordinated debt; restrict dividends or other payments of our restricted subsidiaries; consolidate, merge or transfer all or substantially all of our assets; engage in transactions with affiliates; and create unrestricted subsidiaries. Many of these restrictions will terminate if the Senior Notes become rated investment grade. The Indenture also contains customary events of default, including nonpayment, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness, failure to pay certain judgments and certain events of bankruptcy and insolvency. We are required to offer to repurchase the Senior Notes in connection with specified change in control events or with excess proceeds of asset sales not applied for permitted purposes.
We may redeem the Senior Notes due 2021:
• | beginning on October 1, 2016 at a redemption price of 104.688% of their principal amount plus accrued and unpaid interest and additional interest, if any; then |
• | at a redemption price of 103.125% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning October 1, 2017; then |
• | at a redemption price of 101.563% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning October 1, 2018; and then |
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• | at a redemption price of 100.000% of their principal amount plus accrued interest and unpaid interest and additional interest, if any, beginning on October 1, 2019. |
• | We may also redeem some or all of the Senior Notes due 2021 before October 1, 2016 at a redemption price of 100.000% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the redemption date, plus an applicable premium. |
• | In addition, before October 1, 2016, we may redeem up to 35% of the aggregate principal amount with the proceeds of certain equity offerings at 106.250% of their principal amount plus accrued and unpaid interest and additional interest, if any; we may make such redemption only if, after any such redemption, at least 65% of the aggregate principal amount originally issued remains outstanding. |
Credit Facility
As of December 31, 2015, we had a Credit Facility with Wells Fargo Bank, National Association, as administrative agent, and several financial institutions as lenders, which provided 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. We had no borrowings outstanding under our Credit Facility, $12.7 million of outstanding letters of credit, and the capacity to borrow an additional $323.7 million under the Credit Facility. Our Credit Facility matures in November 2018. Weighted average interest rates under the Credit Facility for the twelve months ended December 31, 2015 and 2014 were approximately 2.00%.
On February 25, 2016, we amended our senior secured Credit Facility to reduce commitment fees and provide borrowing capacity for general corporate purposes. Our Amended Facility provides for a $200.0 million revolving credit line, including up to $25.0 million available for letters of credit and up to $10.0 million in swingline loans. Availability under the Amended Facility is subject to a borrowing base calculated by reference to eligible accounts receivable in the United States, United Kingdom and Canada, eligible inventory in the United States, and cash on hand.
We were in compliance with all financial covenants under the Credit Facility at December 31, 2015 and through the effective date of the Amended Facility. We anticipate that we will continue to be in compliance with the Amended Facility throughout 2016.
Subject to the terms of the Amended Facility, we have the ability to increase the credit facility by an additional $150.0 million.
All of the obligations under the Amended Facility are secured by first priority liens (subject to permitted liens) on substantially all of the assets of the Company and its wholly-owned domestic restricted subsidiaries, with exceptions for real property and certain other assets. Additionally, all of the obligations under the Amended Facility are guaranteed by the wholly-owned domestic restricted subsidiaries of the Company.
The Amended Facility contains various covenants that, among other things, limit our ability to incur additional indebtedness, grant certain liens, make certain loans and investments, make distributions, enter into mergers or acquisitions unless certain conditions are satisfied, enter into hedging transactions, change our lines of business, prepay certain indebtedness, enter into certain affiliate transactions or engage in certain asset dispositions. Additionally, the Amended Facility limits our ability to incur additional indebtedness with certain exceptions, including the ability to incur up to $150.0 million of additional unsecured debt, $10.0 million of capital leases, $30.0 million of foreign overdraft lines, $10.0 million of letters of credit outside the facility, and $50.0 million of other debt.
The Amended Facility also contains financial covenants, which, among other things, require us, on a consolidated basis, to maintain specified financial ratios or conditions summarized as follows:
• | Senior secured debt to adjusted EBITDA of not more than 4.50 to 1.0 for the period from February 25, 2016 through December 31, 2016, not more than 4.0 to 1.0 for the period from January 1, 2017 through December 31, 2017 and not more than 3.50 to 1.0 for the period from January 1, 2018 through the termination of the facility; and |
• | A fixed charge coverage ratio of not more than 1.25 to 1.0. This ratio is measured as EBITDA minus maintenance capital expenditures minus taxes paid in cash divided by scheduled principal and interest payments. The fixed charge coverage ratio is tested only if availability under the Amended Facility falls below certain levels. |
Under the Amended Facility, EBITDA is defined to generally exclude the effect of non-cash items, and to give pro forma effect to acquisitions and non-ordinary course asset sales (with adjustments to EBITDA of the acquired businesses or related to the sold assets to be made in accordance with the guidelines for pro forma presentations set forth by the SEC or in a manner otherwise reasonably acceptable to the Administrative Agent under the Amended Facility). The EBITDA of Global Tubing is excluded until such time as it is distributed cash to the Company.
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We have the ability to elect the interest rate applicable to borrowings under the Amended Facility. Interest under the Amended Facility may be determined by reference to (1) the London interbank offered rate, or LIBOR, plus an applicable margin which ranges from 3.0% to 4.0% per annum or (2) the Adjusted Base Rate plus an applicable margin which ranges from 0.00% to 1.50% per annum, in each case with the applicable margin depending upon availability under the Amended Facility. The Adjusted Base Rate is equal to the highest of (1) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus one half of 1.0%, (2) the prime rate of Wells Fargo Bank, National Association, as established from time to time at its principal U.S. office and (3) daily LIBOR for an interest period of one-month plus 1.0%.
Interest is payable quarterly for base rate loans and at the end of each interest period for LIBOR loans, except that if the interest period for a LIBOR loan is longer than three months, interest is paid at the end of each three-month period.
The Amended Facility also provides for a commitment fee in the amount of 0.375% per annum on the unused portion of commitments.
If an event of default exists under the Amended Facility, lenders holding greater than 50% of the aggregate outstanding loans and letter of credit obligations and unfunded commitments have the right to accelerate the maturity of the obligations outstanding under the Amended Facility and exercise other rights and remedies. Obligations outstanding under the Amended Facility, however, will be automatically accelerated upon an event of default arising from a bankruptcy or insolvency event. Each of the following constitutes an event of default under the Amended Facility:
• | Failure to pay any principal when due or any interest, fees or other amount within certain grace periods; |
• | Representations and warranties in the Amended Facility or other loan documents being incorrect or misleading in any material respect; |
• | Failure to perform or otherwise comply with the covenants in the Amended Facility or other loan documents, subject, in certain instances, to grace periods; |
• | Impairment of security under the loan documents affecting collateral having a fair market value in excess of $25 million; |
• | The actual or asserted invalidity of any material provisions of the guarantees of the indebtedness under the Amended Facility; |
• | Default by us or our restricted subsidiaries in the payment of any other indebtedness with a principal amount in excess of $25 million, any default in the performance of any obligation or condition with respect to such indebtedness beyond the applicable grace period if the effect of the default is to permit or cause the acceleration of the indebtedness, or such indebtedness will be declared due and payable prior to its scheduled maturity; |
• | Bankruptcy or insolvency events involving us or our restricted subsidiaries; |
• | The entry, and failure to pay, of one or more adverse judgments in excess of $25 million, upon which enforcement proceedings are commenced or that are not stayed pending appeal; and |
• | The occurrence of a change in control (as defined in the Amended Facility). |
Off-balance sheet arrangements
As of December 31, 2015, we had no off-balance sheet instruments or financial arrangements, other than operating leases and letters of credit entered into in the ordinary course of business.
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Contractual obligations
Our debt, lease and financial obligations as of December 31, 2015 will mature and become due and payable according to the following table (in thousands):
2016 | 2017 | 2018 | 2019 | 2020 | After 2020 | Total | ||||||||||||||||||||||
Senior notes due October 2021 (1) | $ | 25,000 | $ | 25,000 | $ | 25,000 | $ | 25,000 | $ | 25,000 | $ | 418,750 | $ | 543,750 | ||||||||||||||
Senior secured credit facility | — | — | — | — | — | — | — | |||||||||||||||||||||
Other debt | 253 | 46 | — | — | — | — | 299 | |||||||||||||||||||||
Operating leases | 18,153 | 13,379 | 9,672 | 8,522 | 7,485 | 16,158 | 73,369 | |||||||||||||||||||||
Letters of credit | 9,543 | 928 | 2,249 | — | — | — | 12,720 | |||||||||||||||||||||
Pension | 356 | 325 | 331 | 329 | 343 | 5,981 | 7,665 | |||||||||||||||||||||
Total | $ | 53,305 | $ | 39,678 | $ | 37,252 | $ | 33,851 | $ | 32,828 | $ | 440,889 | $ | 637,803 | ||||||||||||||
(1) Includes 6 years of interest on $400 million of senior notes at 6.25% that become due in 2021. | ||||||||||||||||||||||||||||
Inflation
Global inflation has been relatively low in recent years and did not have a material impact on our results of operations during 2015, 2014 or 2013. Although the impact of inflation has been insignificant in recent years, it is still a factor in the global economy and we tend to experience inflationary pressure on the cost of raw materials and components used in our products.
Critical accounting policies and estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements. We provide expanded discussion of our most critical accounting policies, estimates and judgments below. We believe that these accounting policies reflect our more significant estimates and assumptions used in preparation of our consolidated financial statements.
Revenue recognition
The substantial majority of our revenue is recognized when the associated goods are shipped and title passes to the customer or when services have been rendered, as long as all of the criteria for recognition described in Note 2 of the Notes to the Consolidated Financial Statements in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K have been met. The only revenue recognition criteria requiring judgment on these sales is assurance of collectability. We carefully evaluate creditworthiness of our customers before extending payment terms other than cash upfront, and historically we have not incurred significant losses for bad debt.
Revenue generated from long-term contracts, typically longer than six months in duration, is recognized on the percentage-of-completion method of accounting. Approximately 8% of our 2015 revenue was accounted for on this basis. There are significant estimates and judgments involved in recognizing revenue over the term of the contract. For that portion of our business accounted for on the percentage-of-completion method, we generally recognize revenue and cost of goods sold each period based upon the advancement of the work-in-progress. The percentage complete is determined based on the ratio of costs incurred to date to total estimated costs for the project. The percentage-of-completion method requires management to calculate reasonably dependable estimates of progress towards completion and total contract costs. Each period these long-term contracts are reevaluated and may result in upward or downward revisions in estimated total costs, which are accounted for in the period of the change to reflect a catch up adjustment for the cumulative impact from inception of the contract to date in the period of the revision. Whenever
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revisions of estimated contract costs and contract value indicates that the contract costs will exceed estimated revenue, thus creating a loss, a provision for the total estimated loss is recorded in that period.
Revenue from the rental of equipment or providing of services is recognized over the period when the asset is rented or services are rendered and collectability is reasonably assured. Rates for asset rental and service provision are priced on a per day, per man hour, or similar basis. There are typically delays in receiving some field tickets reporting utilization of equipment or personnel requiring us to make estimates for revenue recognition in the period. In the following period, these estimates are adjusted to actual field tickets received late.
Share-based compensation
We account for awards of share-based compensation at fair value on the date granted to employees and recognize the compensation expense in the financial statements over the requisite service period. Fair value of the share-based compensation was measured using the fair value of the common stock for restricted stock and restricted stock units, the Black-Scholes model for most of the outstanding options, and a lattice model for performance share units. These models require assumptions and estimates for inputs, especially the estimate of the volatility in the value of the underlying share price, that affect the resultant values and hence the amount of compensation expense recognized.
Inventories
Inventory, consisting of finished goods and materials and supplies held for resale, is carried at the lower of cost or market. We evaluate our inventories, based on an analysis of stocking levels, historical sales experience and future sales forecasts, to determine obsolete, slow-moving and excess inventory. While we have policies for calculating and recording reserves against inventory carrying values, we exercise judgment in establishing and applying these policies.
Business combinations, goodwill and other intangible assets
Goodwill acquired in connection with business combinations represents the excess of consideration over the fair value of net assets acquired. Certain assumptions and estimates are employed in evaluating the fair value of assets acquired and liabilities assumed. These estimates may be affected by factors such as changing market conditions, technological advances in the oil and natural gas industry or changes in regulations governing that industry. The most significant assumptions requiring judgment involve identifying and estimating the fair value of intangible assets and the associated useful lives for establishing amortization periods. To finalize purchase accounting for significant acquisitions, we utilize the services of independent valuation specialists to assist in the determination of the fair value of acquired intangible assets.
For goodwill and intangible assets with indefinite lives, an assessment for impairment is performed annually or when there is an indication an impairment may have occurred. We typically complete our annual impairment test for goodwill and other indefinite-lived intangibles using an assessment date of October 1. Goodwill is reviewed for impairment by comparing the carrying value of each of our six reporting unit’s net assets, including allocated goodwill, to the estimated fair value of the reporting unit. We determine the fair value of our reporting units using a discounted cash flow approach. We selected this valuation approach because we believe it, combined with our best judgment regarding underlying assumptions and estimates, provides the best estimate of fair value for each of our reporting units. Determining the fair value of a reporting unit requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, future operating margins, the weighted average cost of capital, a terminal growth value, and future market conditions, among others. We believe that the estimates and assumptions used in our impairment assessments are reasonable. If the reporting unit’s carrying value is greater than its calculated fair value, a second step is performed whereby the implied fair value of goodwill is estimated by allocating the fair value of the reporting unit in a hypothetical purchase price allocation analysis. We recognize a goodwill impairment charge for the amount by which the carrying value of goodwill exceeds its reassessed fair value.
At October 1, 2015, we performed our annual impairment test on each of our 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. However, several factors occurred late in the fourth quarter of 2015 that indicated an occurrence of further declines in market activity. These factors include: 1) the Organization of Petroleum Exporting Countries confirmed that its members would not reduce production even in the face of low commodity prices and excess global oil supply; 2) oil prices declined further; 3) a consensus expectation developed that oil prices would stay lower for longer than previously expected; 4) exploration and production companies significantly decreased their budgets as the demand for oil and gas was lower and production was significantly less economical for them; and 5) macroeconomic concerns developed regarding a slowdown in the global economy. Due to this further deterioration of market conditions for our products, we re-performed the goodwill impairment test on all six reporting units, and recorded $123.2 million of impairment losses for our Subsea reporting unit for the year ended December 31, 2015. If these market conditions continue to exist, we may have additional impairment charges in our reporting units in the future. No impairment losses were recorded on goodwill for the years ended December 31, 2014 and 2013.
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Intangible assets with definite lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In the fourth quarter of 2015, an impairment loss of $1.9 million related to certain trade names that were no longer in use was recorded. No impairments to intangible assets were recorded in 2014 and 2013.
Income taxes
We follow the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon temporary differences between the carrying amounts and tax bases of our assets and liabilities at the balance sheet date, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance whenever management believes that it is more likely than not that any deferred tax asset will not be realized. We must apply judgment in assessing the realizability of deferred tax assets, including estimating our future taxable income, to predict whether a future cash tax reduction will be realized from the deferred tax asset. Any changes in the valuation allowance due to changes in circumstances and estimates are recognized in income tax expense in the period the change occurs.
The accounting guidance for income taxes requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. If a tax position meets the "more likely than not" recognition criteria, the accounting guidance requires the tax position be measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement. If management determines that likelihood of sustaining the realization of the tax benefit is less than or equal to 50%, then the tax benefit is not recognized in the financial statements.
We have operations in countries other than the United States. Consequently, we are subject to the jurisdiction of a number of taxing authorities. The final determination of tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction. Changes in the operating environment, including changes in tax law or interpretation of tax law and currency repatriation controls, could impact the determination of our tax liabilities for a given tax year.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of assets, generally 3 to 30 years. We have established standard lives for certain classes of assets.
We review long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the estimated fair value of the asset. The fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows based on expected utilization. The impairment loss recognized represents the excess of the assets carrying value as compared to its estimated fair value.
Recognition of provisions for contingencies
In the ordinary course of business, we are subject to various claims, suits and complaints. We, in consultation with internal and external advisors, will provide for a contingent loss in the consolidated financial statements if it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount can be reasonably estimated. If it is determined that the reasonable estimate of the loss is a range and that there is no best estimate within the range, provision will be made for the lower amount of the range. Legal costs are expensed as incurred.
An assessment is made of the areas where potential claims may arise under the contract warranty clauses. Where a specific risk is identified and the potential for a claim is assessed as probable and can be reasonably estimated, an appropriate warranty provision is recorded. Warranty provisions are eliminated at the end of the warranty period except where warranty claims are still outstanding. The liability for product warranty is included in other accrued liabilities on the consolidated balance sheet.
Recent accounting pronouncements
In February 2016, the FASB issued Accounting Standards Update ("ASU") No.2016-02, Leases. Under this new guidance, lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than twelve months. The standard will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. We are currently evaluating the impact of the adoption of this guidance.
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In November 2015, the FASB issued ASU No. 2015-17, Simplifying the Presentation of Deferred Income Tax, which requires deferred tax liabilities and assets to be classified as non-current in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. The new standard will be effective for public companies for the fiscal year beginning after December 15, 2016, including interim periods within those fiscal years. We have early adopted the guidance prospectively as of December 31, 2015, which resulted in the reclassification of our current deferred tax assets and liabilities into non-current in our consolidated balance sheet as of December 31, 2015. No prior periods were retrospectively adjusted. Refer to Note 9 Income taxes for further information related to the early adoption of this guidance.
In September 2015, the FASB issued 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 us 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 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Cost Associated with Line of Credit Arrangements, which confirms that fees related to line of credit arrangements are not addressed in ASU 2015-03, and the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The new standard will be effective for us for the fiscal year beginning January 1, 2016 and interim periods thereafter. We have elected to continue to present the debt issuance costs associated with line of credit arrangements as assets.
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 us 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 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 us 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. We have early adopted the guidance retrospectively for the debt issuance costs related to our Senior Notes as of December 31, 2015 and have adjusted financial statements of prior years.
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 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. We are currently evaluating the impacts of the adoption and the implementation approach to be used.
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Cautionary note regarding forward-looking statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K, the words "will," "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 and impact of recent significant declines in oil and natural gas prices;
•the availability of raw materials and specialized equipment;
•our ability to accurately predict customer demand;
•customer order cancellations or deferrals;
•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;
•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;
•our ability to successfully manage our growth, including risks and uncertainties associated with integrating and retaining key employees of the businesses we acquire;
•benefits of our acquisitions;
•availability of key management personnel;
•availability of skilled and qualified labor;
•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;
•financial strategy, budget, projections and operating results;
•uncertainty regarding our future operating results; and
•plans, objectives, expectations and intentions contained in this report that are not historical.
All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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" and elsewhere in this Annual Report on Form 10-K. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Exhibit 99.4
Item 8. Financial Statements and Supplementary Data
Note: The information contained in this Item has been updated to recast certain previously reported amounts to conform to segment reporting changes made in connection with realignment of our organization structure. These changes are discussed further in the Notes to Financial Statements as described below.
• | Notes 3 Acquisitions: under the new segments structure, J-Mac is reported in the Completions segment instead of the original Production and Infrastructure segment. |
• | Notes 4 Investment in unconsolidated subsidiaries: under the new segments structure, Global Tubing is reported in the Completions segment instead of the original Production and Infrastructure segment. |
• | Notes 7 Goodwill: Reclassifications were made to goodwill balances by business segment to reflect the change in organizational structure and resulting segment realignments for all periods presented. No goodwill impairments resulted from this new business segment structure. |
• | Notes 15 Business segments: Revenue and operating income have been recast to reflect the change in organizational structure and resulting segment realignments for all periods presented. |
This Item has not been updated for any other changes since the filing of the 2015 Annual Report on Form 10-K (“2015 Form 10-K”). For developments subsequent to the filing of the 2015 Form 10-K, refer to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and June 30, 2016.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Forum Energy Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income (loss), of changes in stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Forum Energy Technologies, Inc. and its subsidiaries at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed its annual goodwill impairment testing date from December 31 to October 1. The Company also changed the manner in which it accounts for deferred tax assets and liabilities based upon the early adoption of Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes in 2015.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 26, 2016, except Notes 3,4,7 and 15 as to which the date is August 23, 2016.
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Forum Energy Technologies, Inc. and subsidiaries
Consolidated statements of comprehensive income (loss)
Year ended December 31, | |||||||||||
(in thousands, except per share information) | 2015 | 2014 | 2013 | ||||||||
Net sales | $ | 1,073,652 | $ | 1,739,717 | $ | 1,524,811 | |||||
Cost of sales | 810,975 | 1,180,265 | 1,049,586 | ||||||||
Gross profit | 262,677 | 559,452 | 475,225 | ||||||||
Operating expenses | |||||||||||
Selling, general and administrative expenses | 264,906 | 312,821 | 269,669 | ||||||||
Goodwill and Intangible asset impairment | 125,092 | — | — | ||||||||
Transaction expenses | 480 | 2,326 | 2,700 | ||||||||
Loss on sale of assets | 746 | 1,431 | 614 | ||||||||
Total operating expenses | 391,224 | 316,578 | 272,983 | ||||||||
Earnings from equity investment | 14,824 | 25,164 | 7,312 | ||||||||
Operating income (loss) | (113,723 | ) | 268,038 | 209,554 | |||||||
Other expense (income) | |||||||||||
Interest expense | 29,945 | 29,847 | 18,370 | ||||||||
Foreign exchange (gains) losses and other, net | (9,345 | ) | (4,331 | ) | 2,953 | ||||||
Deferred loan costs written off | — | — | 2,149 | ||||||||
Total other expense | 20,600 | 25,516 | 23,472 | ||||||||
Income (loss) before income taxes | (134,323 | ) | 242,522 | 186,082 | |||||||
Provision for income tax expense (benefit) | (14,939 | ) | 68,145 | 56,478 | |||||||
Net income (loss) | (119,384 | ) | 174,377 | 129,604 | |||||||
Less: Income (loss) attributable to noncontrolling interest | (31 | ) | 12 | 65 | |||||||
Net income (loss) attributable to common stockholders | (119,353 | ) | 174,365 | 129,539 | |||||||
Weighted average shares outstanding | |||||||||||
Basic | 89,908 | 92,628 | 90,697 | ||||||||
Diluted | 89,908 | 95,308 | 94,604 | ||||||||
Earnings (losses) per share | |||||||||||
Basic | $ | (1.33 | ) | $ | 1.88 | $ | 1.43 | ||||
Diluted | $ | (1.33 | ) | $ | 1.83 | $ | 1.37 | ||||
Other comprehensive income (loss), net of tax: | |||||||||||
Net income (loss) | (119,384 | ) | 174,377 | 129,604 | |||||||
Change in foreign currency translation, net of tax of $0 | (45,270 | ) | (43,694 | ) | 7,525 | ||||||
Gain (loss) on pension liability | 46 | (1,110 | ) | 223 | |||||||
Comprehensive income (loss) | (164,608 | ) | 129,573 | 137,352 | |||||||
Less: comprehensive loss attributable to noncontrolling interests | 168 | 46 | 72 | ||||||||
Comprehensive income (loss) attributable to common stockholders | $ | (164,440 | ) | $ | 129,619 | $ | 137,424 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Forum Energy Technologies, Inc. and subsidiaries
Consolidated balance sheets
(in thousands, except share information) | December 31, 2015 | December 31, 2014 | |||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 109,249 | $ | 76,579 | |||
Accounts receivable—trade, net | 138,597 | 287,045 | |||||
Inventories, net | 424,121 | 461,515 | |||||
Prepaid expenses and other current assets | 33,836 | 32,985 | |||||
Costs and estimated profits in excess of billings | 12,009 | 14,646 | |||||
Deferred income taxes, net | — | 22,389 | |||||
Total current assets | 717,812 | 895,159 | |||||
Property and equipment, net of accumulated depreciation | 186,667 | 189,974 | |||||
Deferred financing costs, net | 4,125 | 5,581 | |||||
Intangibles, net | 246,650 | 271,739 | |||||
Goodwill | 669,036 | 798,481 | |||||
Investment in unconsolidated subsidiary | 57,719 | 49,675 | |||||
Deferred income taxes, net | 780 | — | |||||
Other long-term assets | 3,253 | 3,493 | |||||
Total assets | $ | 1,886,042 | $ | 2,214,102 | |||
Liabilities and equity | |||||||
Current liabilities | |||||||
Current portion of long-term debt | $ | 253 | $ | 840 | |||
Accounts payable—trade | 76,823 | 127,757 | |||||
Accrued liabilities | 58,563 | 126,890 | |||||
Deferred revenue | 7,283 | 10,919 | |||||
Billings in excess of costs and profits recognized | 8,631 | 15,785 | |||||
Total current liabilities | 151,553 | 282,191 | |||||
Long-term debt, net of current portion | 396,016 | 420,484 | |||||
Deferred income taxes, net | 51,100 | 98,188 | |||||
Other long-term liabilities | 29,956 | 17,318 | |||||
Total liabilities | 628,625 | 818,181 | |||||
Commitments and contingencies | |||||||
Equity | |||||||
Common stock, $0.01 par value, 296,000,000 shares authorized, 98,605,902 and 97,865,278 shares issued | 986 | 979 | |||||
Additional paid-in capital | 891,248 | 864,313 | |||||
Treasury stock at cost, 8,145,802 and 8,108,983 shares | (133,318 | ) | (132,480 | ) | |||
Retained earnings | 580,152 | 699,505 | |||||
Accumulated other comprehensive loss | (82,048 | ) | (36,961 | ) | |||
Total stockholders’ equity | 1,257,020 | 1,395,356 | |||||
Noncontrolling interest in subsidiary | 397 | 565 | |||||
Total equity | 1,257,417 | 1,395,921 | |||||
Total liabilities and equity | $ | 1,886,042 | $ | 2,214,102 | |||
4
Forum Energy Technologies, Inc. and subsidiaries
Consolidated statements of cash flows
Year ended December 31, | |||||||||||
(in thousands, except share information) | 2015 | 2014 | 2013 | ||||||||
Cash flows from operating activities | |||||||||||
Net income (loss) | $ | (119,384 | ) | $ | 174,377 | $ | 129,604 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
Depreciation expense | 38,388 | 37,414 | 36,166 | ||||||||
Amortization of intangible assets | 27,295 | 27,658 | 24,413 | ||||||||
Impairment of intangible assets and goodwill | 125,092 | — | — | ||||||||
Inventory reserves | 51,917 | 8,171 | 10,093 | ||||||||
Share-based compensation expense | 21,675 | 18,770 | 19,038 | ||||||||
Earnings from equity investment, net of distributions | (8,044 | ) | 1,376 | (1,376 | ) | ||||||
Deferred income taxes | (23,246 | ) | (3,270 | ) | 15,622 | ||||||
Deferred loan costs written off | — | — | 2,149 | ||||||||
Provision for doubtful accounts | 4,358 | 2,492 | 2,925 | ||||||||
Other | 3,867 | 4,109 | (1,842 | ) | |||||||
Changes in operating assets and liabilities | |||||||||||
Accounts receivable—trade | 145,753 | (44,727 | ) | 1,188 | |||||||
Inventories | 344 | (34,051 | ) | 23,042 | |||||||
Prepaid expenses and other current assets | 3,576 | (4,107 | ) | (20,415 | ) | ||||||
Cost and estimated profit in excess of billings | 2,215 | 8,742 | (16,705 | ) | |||||||
Accounts payable, deferred revenue and other accrued liabilities | (111,264 | ) | 62,772 | (1,475 | ) | ||||||
Billings in excess of costs and estimated profits earned | (6,629 | ) | 10,240 | (11,034 | ) | ||||||
Net cash provided by operating activities | $ | 155,913 | $ | 269,966 | $ | 211,393 | |||||
Cash flows from investing activities | |||||||||||
Acquisition of businesses, net of cash acquired | (60,836 | ) | (38,289 | ) | (181,718 | ) | |||||
Investment in unconsolidated subsidiary | — | — | (112,241 | ) | |||||||
Distribution from unconsolidated subsidiary | — | — | 64,228 | ||||||||
Capital expenditures for property and equipment | (32,291 | ) | (53,792 | ) | (60,263 | ) | |||||
Return of investment in unconsolidated subsidiary | — | 9,240 | — | ||||||||
Proceeds from sale of business, property and equipment | 1,821 | 12,150 | 964 | ||||||||
Net cash used in investing activities | $ | (91,306 | ) | $ | (70,691 | ) | $ | (289,030 | ) | ||
Cash flows from financing activities | |||||||||||
Borrowings under Credit Facility | 94,984 | 15,423 | 404,953 | ||||||||
Issuance of Senior Notes | — | — | 403,250 | ||||||||
Repayment of long-term debt | (120,077 | ) | (98,415 | ) | (715,131 | ) | |||||
Payment of contingent consideration accrued at acquisition | — | — | (11,435 | ) | |||||||
Repurchases of stock | (6,438 | ) | (96,632 | ) | (4,316 | ) | |||||
Excess tax benefits from stock based compensation | (8 | ) | 7,742 | 7,202 | |||||||
Proceeds from stock issuance | 5,275 | 11,101 | 5,458 | ||||||||
Payment of capital lease obligation | (673 | ) | (1,231 | ) | (924 | ) | |||||
Deferred financing costs | — | (6 | ) | (12,003 | ) | ||||||
Net cash provided by (used in) financing activities | $ | (26,937 | ) | $ | (162,018 | ) | $ | 77,054 | |||
Effect of exchange rate changes on cash | (5,000 | ) | (260 | ) | (898 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 32,670 | 36,997 | (1,481 | ) | |||||||
Cash and cash equivalents | |||||||||||
Beginning of period | 76,579 | 39,582 | 41,063 | ||||||||
End of period | $ | 109,249 | $ | 76,579 | $ | 39,582 | |||||
Supplemental cash flow disclosures | |||||||||||
Interest paid | 27,870 | 27,628 | 17,977 | ||||||||
Income taxes paid | 19,919 | 55,576 | 41,356 | ||||||||
Noncash investing and financing activities | |||||||||||
Payment of contingent consideration via stock | $ | — | $ | — | $ | 4,075 | |||||
Accrued purchases of property and equipment | 929 | 765 | 1,526 | ||||||||
Accrued consideration for acquisition | 1,070 | — | — | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Forum Energy Technologies, Inc. and subsidiaries
Consolidated statements of changes in stockholders’ equity
Common Stock | Additional paid in capital | Treasury Shares | Warrants | Retained earnings | Accumulated other comprehensive income / (loss) | Total common Stockholders’ equity | Non controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
(in thousands of dollars, except share information) | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2012 | 91,046,537 | $ | 911 | $ | 764,599 | (3,377,599 | ) | $ | (25,933 | ) | $ | 26,394 | $ | 395,601 | $ | (100 | ) | $ | 1,161,472 | $ | 683 | $ | 1,162,155 | |||||||||||||||||||
Restricted stock issuance, net of forfeitures | 26,017 | — | (1 | ) | — | — | — | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||||||||||||||
Stock based compensation expense | — | — | 19,038 | — | — | — | — | — | 19,038 | — | 19,038 | |||||||||||||||||||||||||||||||
Exercised stock options | 796,848 | 8 | 5,453 | — | — | — | — | — | 5,461 | — | 5,461 | |||||||||||||||||||||||||||||||
Exercise of warrants | 4,272,775 | 43 | 25,664 | — | — | (25,707 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Treasury stock | — | — | — | (207,499 | ) | (4,316 | ) | — | — | — | (4,316 | ) | — | (4,316 | ) | |||||||||||||||||||||||||||
Excess tax benefits | — | — | 7,202 | — | — | — | — | — | 7,202 | — | 7,202 | |||||||||||||||||||||||||||||||
Equity related to contingent consideration | 164,576 | 2 | 4,073 | — | — | — | — | — | 4,075 | — | 4,075 | |||||||||||||||||||||||||||||||
Change in pension liability | — | — | — | — | — | — | — | 223 | 223 | — | 223 | |||||||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | — | 7,662 | 7,662 | (137 | ) | 7,525 | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 129,539 | — | 129,539 | 65 | 129,604 | |||||||||||||||||||||||||||||||
Balance at December 31, 2013 | 96,306,753 | $ | 964 | $ | 826,028 | (3,585,098 | ) | $ | (30,249 | ) | $ | 687 | $ | 525,140 | $ | 7,785 | $ | 1,330,355 | $ | 611 | $ | 1,330,966 | ||||||||||||||||||||
Restricted stock issuance, net of forfeitures | 70,179 | 1 | (680 | ) | — | — | — | — | — | (679 | ) | — | (679 | ) | ||||||||||||||||||||||||||||
Stock based compensation expense | — | — | 18,770 | — | — | — | — | — | 18,770 | — | 18,770 | |||||||||||||||||||||||||||||||
Exercised stock options | 1,108,045 | 11 | 9,174 | — | — | — | — | — | 9,185 | — | 9,185 | |||||||||||||||||||||||||||||||
Exercise of warrants | 248,189 | 2 | 685 | — | — | (687 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Issuance of performance shares | 21,603 | — | (70 | ) | — | — | — | — | — | (70 | ) | — | (70 | ) | ||||||||||||||||||||||||||||
Shares issued in employee stock purchase plan | 110,509 | 1 | 2,664 | — | — | — | — | — | 2,665 | — | 2,665 | |||||||||||||||||||||||||||||||
Treasury stock | — | — | — | (4,523,885 | ) | (102,231 | ) | — | — | — | (102,231 | ) | — | (102,231 | ) | |||||||||||||||||||||||||||
Excess tax benefits | — | — | 7,742 | — | — | — | — | — | 7,742 | — | 7,742 | |||||||||||||||||||||||||||||||
Change in pension liability | — | — | — | — | — | — | — | (1,110 | ) | (1,110 | ) | — | (1,110 | ) | ||||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | — | (43,636 | ) | (43,636 | ) | (58 | ) | (43,694 | ) | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 174,365 | — | 174,365 | 12 | 174,377 | |||||||||||||||||||||||||||||||
Balance at December 31, 2014 | 97,865,278 | $ | 979 | $ | 864,313 | (8,108,983 | ) | $ | (132,480 | ) | $ | — | $ | 699,505 | $ | (36,961 | ) | $ | 1,395,356 | $ | 565 | $ | 1,395,921 | |||||||||||||||||||
Restricted stock issuance, net of forfeitures | 157,577 | 1 | (875 | ) | — | — | — | — | — | (874 | ) | — | (874 | ) | ||||||||||||||||||||||||||||
Stock based compensation expense | — | — | 21,675 | — | — | — | — | — | 21,675 | — | 21,675 | |||||||||||||||||||||||||||||||
Exercised stock options | 419,363 | 4 | 3,618 | — | — | — | — | — | 3,622 | — | 3,622 | |||||||||||||||||||||||||||||||
Issuance of performance shares | 17,282 | — | (22 | ) | — | — | — | — | — | (22 | ) | — | (22 | ) | ||||||||||||||||||||||||||||
Shares issued in employee stock purchase plan | 146,402 | 2 | 2,547 | — | — | — | — | — | 2,549 | — | 2,549 | |||||||||||||||||||||||||||||||
Treasury stock | — | — | — | (36,819 | ) | (838 | ) | — | — | — | (838 | ) | — | (838 | ) | |||||||||||||||||||||||||||
Excess tax benefits | — | — | (8 | ) | — | — | — | — | — | (8 | ) | — | (8 | ) | ||||||||||||||||||||||||||||
Change in pension liability | — | — | — | — | — | — | — | 46 | 46 | — | 46 | |||||||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | — | (45,133 | ) | (45,133 | ) | (137 | ) | (45,270 | ) | |||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (119,353 | ) | — | (119,353 | ) | (31 | ) | (119,384 | ) | |||||||||||||||||||||||||||
Balance at December 31, 2015 | 98,605,902 | $ | 986 | $ | 891,248 | (8,145,802 | ) | $ | (133,318 | ) | $ | — | $ | 580,152 | $ | (82,048 | ) | $ | 1,257,020 | $ | 397 | $ | 1,257,417 | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements
1. Nature of operations
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.
2. Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries after elimination of intercompany balances and transactions. Noncontrolling interest principally represents ownership by others of the equity in our consolidated majority owned South African subsidiary.
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 consolidated statements of comprehensive income (loss). The investment in this entity is included in "Investment in unconsolidated subsidiary" in the consolidated balance sheets. The Company reports its share of equity earnings within operating income as the investee's operations are similar in nature to the operations of the Company.
Reclassifications
Certain reclassifications, such as the one related to debt issuance cost, have been made in prior period financial statements to conform with the current period presentation. Reclassifications have no impact on the Company's financial position, results of operations or cash flows.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
In the preparation of these consolidated financial statements, estimates and assumptions have been made by management including, among others, costs to complete contracts, an assessment of percentage of completion of projects, the selection of useful lives of tangible and intangible assets, fair value of reporting units used for goodwill impairment testing, expected future cash flows from long lived assets to support impairment tests, provisions necessary for trade receivables, amounts of deferred taxes and income tax contingencies. Actual results could differ from these estimates.
The financial reporting of contracts depends on estimates, which are assessed continually during the term of those contracts. Recognized revenues and income are subject to revisions as the contract progresses to completion and changes in estimates are reflected in the period in which the facts that give rise to the revisions become known. Additional information that enhances and refines the estimating process that is obtained after the balance sheet date, but before issuance of the financial statements is reflected in the financial statements.
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and high quality, short term money market instruments with an original maturity of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.
7
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Accounts receivable-trade
Trade accounts receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus receivables do not bear interest, although a finance charge may be applied to amounts past due. The Company maintains an allowance for doubtful accounts for estimated losses that may result from the inability of its customers to make required payments. Such allowances are based upon several factors including, but not limited to, credit approval practices, industry and customer historical experience as well as the current and projected financial condition of the specific customer. Accounts receivable outstanding longer than contractual terms are considered past due. The Company writes off accounts receivable to the allowance for doubtful accounts when they become uncollectible. Any payments subsequently received on receivables previously written off are credited to bad debt expense.
The change in amounts of the allowance for doubtful accounts during the three year period ended December 31, 2015 is as follows (in thousands):
Period ended | Balance at beginning of period | Charged to expense | Deductions or other | Balance at end of period | ||||||||||||
December 31, 2013 | $ | 5,891 | $ | 2,925 | $ | (3,091 | ) | $ | 5,725 | |||||||
December 31, 2014 | 5,725 | 2,492 | (2,571 | ) | 5,646 | |||||||||||
December 31, 2015 | 5,646 | 4,358 | (1,885 | ) | 8,119 | |||||||||||
Inventories
Inventory consisting of finished goods and materials and supplies held for resale is carried at the lower of cost or market. For certain operations, cost, which includes the cost of raw materials and labor for finished goods, is determined on a first-in first-out basis. For other operations, this cost is determined on an average cost basis. Market means current replacement cost except that (1) market should not exceed net realizable value and (2) market should not be less than net realizable value reduced by an allowance for a normal profit margin. The Company continuously evaluates inventories, based on an analysis of inventory levels, historical sales experience and future sales forecasts, to determine obsolete, slow-moving and excess inventory. Adjustments to reduce such inventory to its estimated recoverable value have been recorded by management.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation. Equipment held under capital leases are stated at the present value of minimum lease payments. Expenditures for property and equipment and for items which substantially increase the useful lives of existing assets are capitalized at cost and depreciated over their estimated useful life utilizing the straight-line method. Routine expenditures for repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method based on the estimated useful lives of assets, generally three to thirty years. Property and equipment held under capital leases are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. Gains or losses resulting from the disposition of assets are recognized in income, and the related asset cost and accumulated depreciation are removed from the accounts. Assets acquired in connection with business combinations are recorded at fair value.
Rental equipment consists of equipment leased to customers under operating leases. Rental equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of three to ten years.
The Company reviews long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the estimated fair value of the asset. The fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows based on expected utilization. The impairment loss recognized represents the excess of the assets carrying value as compared to its estimated fair value. For the years ended December 31, 2015, 2014 and 2013, no impairments were recorded.
To the extent that asset retirement obligations are incurred, the Company records the fair value of an asset retirement obligation as a liability in the period in which the associated legal obligation is incurred. The fair values of these
8
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
obligations are recorded as liabilities on a discounted basis. The costs associated with these liabilities are capitalized as part of the related assets and depreciated. Over time, the liabilities are accreted for any change in their present value.
Goodwill and intangible assets
For goodwill and intangible assets with indefinite lives, an assessment for impairment is performed annually or when there is an indication an impairment may have occurred. The Company completes its annual impairment test for goodwill and other indefinite-lived intangibles using an assessment date of October 1. Goodwill is reviewed for impairment by comparing the carrying value of each of our six reporting unit’s net assets (including allocated goodwill) to the fair value of the reporting unit. The fair value of the reporting units is determined using a discounted cash flow approach. Determining the fair value of a reporting unit requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating margins, weighted average costs of capital, a terminal growth rate, and future market conditions, among others. The Company believes that the estimates and assumptions used in impairment assessments are reasonable. If the reporting unit’s carrying value is greater than its fair value, a second step is performed whereby the implied fair value of goodwill is estimated by allocating the fair value of the reporting unit in a hypothetical purchase price allocation analysis. The Company recognizes a goodwill impairment charge for the amount by which the carrying value of goodwill exceeds its fair value. Any impairment losses are reflected in operating income. Due to the further deterioration of market conditions for our products, the Company performed the impairment test on all six reporting units, and recorded $123.2 million of impairment losses for its Subsea reporting unit for the year ended December 31, 2015. If these market conditions continue to exist, the Company may have additional impairment charges in its reporting units in the future. In 2014 and 2013, no goodwill impairment losses were recorded.
Intangible assets with definite lives comprised of customer and distributor relationships, non-compete agreements, and patents are amortized on a straight-line basis over the life of the intangible asset, generally three to seventeen years. These assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In the fourth quarter of 2015, $1.9 million of intangible assets were written off related to trade names no longer in use. No impairments to intangible assets were recorded in 2014 and 2013. Refer to Note 7, Goodwill and intangible assets, for further discussion.
Recognition of provisions for contingencies
In the ordinary course of business, the Company is subject to various claims, suits and complaints. The Company, in consultation with internal and external advisors, will provide for a contingent loss in the consolidated financial statements if it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount can be reasonably estimated. If it is determined that the reasonable estimate of the loss is a range and that there is no best estimate within the range, provision will be made for the lower amount of the range. Legal costs are expensed as incurred.
An assessment is made of the areas where potential claims may arise under the contract warranty clauses. Where a specific risk is identified and the potential for a claim is assessed as probable and can be reasonably estimated, an appropriate warranty provision is recorded. Warranty provisions are eliminated at the end of the warranty period except where warranty claims are still outstanding. The liability for product warranty is included in other accrued liabilities on the consolidated balance sheet.
Changes in the Company’s warranty liability were as follows (in thousands):
Period ended | Balance at beginning of period | Charged to expense | Deductions or other | Balance at end of period | ||||||||||||
December 31, 2013 | $ | 3,777 | $ | 3,442 | $ | (1,939 | ) | $ | 5,280 | |||||||
December 31, 2014 | 5,280 | 2,588 | (2,554 | ) | 5,314 | |||||||||||
December 31, 2015 | 5,314 | 5,539 | (5,156 | ) | 5,697 | |||||||||||
Revenue recognition and deferred revenue
Revenue is recognized when all of the following criteria have been met: (a) persuasive evidence of an arrangement exists, (b) delivery of the equipment has occurred or services have been rendered, (c) the price of the product or service
9
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
is fixed and determinable and (d) collectability is reasonably assured. Revenue from product sales, including shipping costs, is recognized as title passes to the customer, which generally occurs when items are shipped from the Company’s facilities. Revenue from services is recognized when the service is completed to the customer’s specifications.
Customers are sometimes billed in advance of services performed or products manufactured, and the Company recognizes the associated liability as deferred revenue.
Revenue generated from long-term contracts typically longer than six months in duration are recognized on the percentage-of-completion method of accounting. The Company recognizes revenue and cost of goods sold each period based upon the advancement of the work-in-progress unless the stage of completion is insufficient to enable a reasonably certain forecast of profit to be established. In such cases, no profit is recognized during the period. The percentage-of-completion is calculated based on the ratio of costs incurred to-date to total estimated costs, taking into account the level of completion. The percentage-of-completion method requires management to calculate reasonably dependable estimates of progress toward completion of contract revenues and contract costs. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.
Primarily related to the remotely operated vehicles ("ROVs"), which may take longer to manufacture, accounting estimates during the course of the project may change. The effect of such a change, which can be upward as well as downward, is accounted for in the period of change and the cumulative income recognized to date is adjusted to reflect the latest estimates. These revisions to estimates are accounted for on a prospective basis.
On a contract by contract basis, cost and profit in excess of billings represents the cumulative revenue recognized less the cumulative billings to the customer. Similarly, billings in excess of costs and profits represent the cumulative billings to the customer less the cumulative revenue recognized.
Revenue from the rental of equipment or providing of services is recognized over the period when the asset is rented or services are rendered and collectability is reasonably assured. Rates for asset rental and service provision are priced on a per day, per man hour, or similar basis.
Concentration of credit risk
Financial instruments which potentially subject the Company to credit risk include trade accounts receivable. Trade accounts receivable consist of uncollateralized receivables from domestic and internationally based customers. For the years ended December 31, 2015, 2014 and 2013, no one customer accounted for 10% or more of the total revenue or 10% more of the total accounts receivable balance at the end of the respective period.
Share-based compensation
The Company measures all share-based compensation awards at fair value on the date they are granted to employees and directors, and recognizes compensation cost, net of forfeitures, over the requisite service period for awards with only a service condition, and over a graded vesting period for awards with service and performance or market conditions.
The fair value of share-based compensation awards with market conditions is measured using a lattice model and in accordance with Accounting Standards Codification ("ASC") 718, is not adjusted based on actual achievement of the performance goals. The Black-Scholes option pricing model is used to measure the fair value of options. The following sections address the assumptions used related to the Black-Scholes option pricing model:
Expected life
The expected term of stock options represents the period the stock options are expected to remain outstanding and is based on the simplified method, which is the weighted average vesting term plus the original contractual term divided by two. The Company uses the simplified method due to a lack of sufficient historical share option exercise experience upon which to estimate an expected term.
Expected volatility
Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period and is estimated based on a weighted average of the Company's historical stock price.
Dividend yield
The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future. Therefore, a zero expected dividend yield was used in the valuation model.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Risk-free interest rate
The risk-free interest rate is based on United States Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Forfeitures
The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be different from what the Company has recorded in the current period. Historically, estimated forfeitures have been in line with actual forfeitures.
Income taxes
The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon temporary differences between the carrying amounts and tax bases of the Company’s assets and liabilities at the balance sheet date, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period in which the change occurs. The Company records a valuation allowance in each reporting period when management believes that it is more likely than not that any deferred tax asset created will not be realized.
Accounting guidance for income taxes requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. If a tax position meets the "more likely than not" recognition criteria, accounting guidance requires the tax position be measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement.
Earnings per share
Basic earnings per share for all periods presented equals net income divided by the weighted average number of the shares of the Company’s common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of the Company’s common stock outstanding during the period as adjusted for the dilutive effect of the Company’s stock options, restricted share plans and warrants.
The exercise price of each option is based on the Company’s stock price at the date of grant. There is no dilutive effect for the year 2015 since the Company is in a net loss position. The diluted earnings per share calculation excludes approximately 0.5 million stock options, and 0.3 million stock options and warrants for the years ended December 31, 2014 and 2013, respectively, because they were anti-dilutive as the option exercise price or warrant conversion price was greater than the average market price of the common stock.
The following is a reconciliation of the number of shares used for the basic and diluted earnings per share computations (shares in thousands):
December 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Basic weighted average shares outstanding | 89,908 | 92,628 | 90,697 | ||||||
Dilutive effect of stock option, restricted share plan and warrants | — | 2,680 | 3,907 | ||||||
Diluted weighted average shares outstanding | 89,908 | 95,308 | 94,604 | ||||||
Non-U.S. local currency translation
The Company operates globally and its primary functional currency is the U.S. dollar ($). The majority of the Company’s non-U.S. operations have designated the local currency as their functional currency. Financial statements of these non-U.S. operations are translated into U.S. dollars using the current rate method whereby assets and liabilities are translated at the balance sheet rate and income and expenses are translated into U.S. dollars at the average exchange rates in effect during the period. The resultant translation adjustments are reported as a component of accumulated other comprehensive income (loss) within stockholders’ equity.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Noncontrolling interest
Noncontrolling interests are classified as equity in the consolidated balance sheets. Net earnings include the net earnings for both controlling and noncontrolling interests, with disclosure of both amounts on the consolidated statements of earnings.
Fair value
The carrying amounts for financial instruments classified as current assets and current liabilities approximate fair value, due to the short maturity of such instruments. The book values of other financial instruments, such as the Company’s debt related to the Credit Facility, approximates fair value because interest rates charged are similar to other financial instruments with similar terms and maturities and the rates vary in accordance with a market index.
For the financial assets and liabilities disclosed at fair value, fair value is determined as the exit price, or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The established fair value hierarchy divides fair value measurement into three broad levels:
• | Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; |
• | Level 2 - inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly or indirectly; and |
• | Level 3 - inputs are unobservable for the asset or liability, which reflect the best judgment of management. |
The financial assets and liabilities that are disclosed at fair value for disclosure purposes are categorized in one of the above three levels based on the lowest level input that is significant to the fair value measurement in its entirety. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
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 February 2016, the FASB issued Accounting Standards Update ("ASU") No.2016-02, Leases. Under this new guidance, lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than twelve months. The standard will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. The Company is currently evaluating the impact of the adoption of this guidance.
In November 2015, the FASB issued ASU No. 2015-17, Simplifying the Presentation of Deferred Income Tax, which requires deferred tax liabilities and assets to be classified as non-current in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. The new standard will be effective for public companies for the fiscal year beginning after December 15, 2016, including interim periods within those fiscal years. The Company has early adopted the guidance prospectively as of December 31, 2015, which resulted in the reclassification of its current deferred tax assets and liabilities into non-current in the consolidated balance sheet as of December 31, 2015. No prior periods were retrospectively adjusted. Refer to Note 9 Income taxes for further information related to the early adoption of this guidance.
In September 2015, the FASB issued 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. 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 consolidated financial statements (continued)
In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Cost Associated with Line of Credit Arrangements, which confirms that fees related to line of credit arrangements are not addressed in ASU 2015-03, and the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The new standard will be effective for us for the fiscal year beginning January 1, 2016 and interim periods thereafter. The Company has elected to continue to present the debt issuance costs associated with line of credit arrangements as assets.
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. The Company has early adopted the guidance retrospectively for the debt issuance costs related to its Senior Notes as of December 31, 2015 and has adjusted financial statements of prior years.
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.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
3. Acquisitions
2015 Acquisition
Effectively February 2015, the Company completed the acquisition of J-Mac Tool, Inc. (“J-Mac”) for aggregate consideration of approximately $61.9 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 Completions 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 fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):
2015 Acquisition | ||||
Current assets, net of cash acquired | $ | 36,174 | ||
Property and equipment | 11,506 | |||
Intangible assets (primarily customer relationships) | 10,400 | |||
Tax-deductible goodwill | 13,977 | |||
Current liabilities | (10,129 | ) | ||
Long term liabilities | (22 | ) | ||
Net assets acquired | $ | 61,906 | ||
Revenue and net income related to the 2015 acquisition were not significant for the year ended December 31, 2015. Pro forma results of operations for the 2015 acquisition have not been presented because the effects were not material to the consolidated financial statements.
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 | ||
Revenue and net income related to the 2014 acquisition were not significant for the year ended December 31, 2014. Pro forma results of operations for the 2014 acquisition have not been presented because the effects were not material to the consolidated financial statements.
4. Investment in unconsolidated subsidiary
Effective July 1, 2013, the Company jointly purchased Global Tubing, LLC ("Global Tubing") with an equal partner, with Global Tubing's 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 Completions segment and is
14
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
accounted for using the equity method of accounting. As Global Tubing's products are complementary to the Company’s well intervention and stimulation products and the investment's business is integral to the Company's operations, the earnings from the equity investment are included within operating income (loss).
Condensed financial data for the equity investment in the unconsolidated subsidiary is summarized as follows:
December 31, 2015 | December 31, 2014 | ||||||
Current assets | $ | 56,160 | $ | 69,281 | |||
Long-term assets | 145,965 | 143,764 | |||||
Current liabilities | 10,861 | 17,835 | |||||
Long-term liabilities | 95,000 | 115,000 | |||||
Year ended December 31, | |||||||
2015 | 2014 | ||||||
Net revenues | $ | 103,532 | $ | 141,708 | |||
Gross profit | 45,333 | 68,086 | |||||
Net income | 30,888 | 52,590 | |||||
The Company's earnings from equity investment | 14,824 | 25,164 | |||||
5. Inventories
The Company's significant components of inventory at December 31, 2015 and 2014 were as follows (in thousands):
December 31, 2015 | December 31, 2014 | ||||||
Raw materials and parts | $ | 148,372 | $ | 153,768 | |||
Work in process | 38,381 | 50,913 | |||||
Finished goods | 315,256 | 286,290 | |||||
Gross inventories | 502,009 | 490,971 | |||||
Inventory reserve | (77,888 | ) | (29,456 | ) | |||
Inventories | $ | 424,121 | $ | 461,515 | |||
The change in the amounts of the inventory reserve during the three year period ended December 31, 2015 is as follows (in thousands):
Period ended | Balance at beginning of period | Charged to expense | Deductions or other | Balance at end of period | ||||||||||||
December 31, 2013 | $ | 21,125 | $ | 10,093 | $ | (4,799 | ) | $ | 26,419 | |||||||
December 31, 2014 | 26,419 | 8,171 | (5,134 | ) | $ | 29,456 | ||||||||||
December 31, 2015 | 29,456 | 51,917 | (3,485 | ) | $ | 77,888 | ||||||||||
15
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
6. Property and equipment
Property and equipment consists of the following (in thousands):
Estimated useful lives | December 31, | |||||||||
2015 | 2014 | |||||||||
Land | $ | 11,467 | $ | 10,200 | ||||||
Buildings and leasehold improvements | 7-30 | 83,983 | 74,829 | |||||||
Computer equipment | 3-5 | 39,986 | 35,419 | |||||||
Machinery & equipment | 5-10 | 128,879 | 116,157 | |||||||
Furniture & fixtures | 3-10 | 6,866 | 7,125 | |||||||
Vehicles | 3-5 | 10,090 | 10,615 | |||||||
Construction in progress | 5,841 | 16,023 | ||||||||
287,112 | 270,368 | |||||||||
Less: accumulated depreciation | (121,713 | ) | (105,806 | ) | ||||||
Property & equipment, net | 165,399 | 164,562 | ||||||||
Rental equipment | 3-10 | 76,908 | 78,709 | |||||||
Less: accumulated depreciation | (55,640 | ) | (53,297 | ) | ||||||
Rental equipment, net | 21,268 | 25,412 | ||||||||
Total property & equipment, net | $ | 186,667 | $ | 189,974 | ||||||
Depreciation expense was $38.4 million, $37.4 million and $36.2 million for the years ended December 31, 2015, 2014 and 2013.
7. Goodwill and intangible assets
Goodwill
The changes in the carrying amount of goodwill from January 1, 2014 to December 31, 2015, were as follows (in thousands):
Drilling & Subsea | Completions | Production & Infrastructure | Total | |||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||
Goodwill Balance at January 1, net | $ | 472,891 | $ | 495,270 | $ | 307,448 | $ | 288,564 | $ | 18,142 | $ | 18,484 | $ | 798,481 | $ | 802,318 | ||||||||
Acquisitions, net of dispositions | — | (3,655 | ) | 13,977 | 20,573 | — | — | 13,977 | 16,918 | |||||||||||||||
Impairment | (123,200 | ) | — | — | — | — | — | (123,200 | ) | — | ||||||||||||||
Impact of non-U.S. local currency translation | (15,096 | ) | (18,724 | ) | (4,511 | ) | (1,689 | ) | (615 | ) | (342 | ) | (20,222 | ) | (20,755 | ) | ||||||||
Goodwill Balance at December 31, net | $ | 334,595 | $ | 472,891 | $ | 316,914 | $ | 307,448 | $ | 17,527 | $ | 18,142 | $ | 669,036 | $ | 798,481 | ||||||||
Goodwill and intangible assets with indefinite lives are assessed for impairment annually or whenever an event indicating impairment may have occurred. During the year ended December 31, 2015, the Company elected to change the 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.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
At October 1, 2015, 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.
After October 1, 2015, the Company continued 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 this October 1 annual test, several factors occurred late in the fourth quarter of 2015 that indicated an occurrence of further declines in market activity. These factors include: 1) the Organization of Petroleum Exporting Countries confirmed that its members would not reduce production even in the face of low commodity prices and excess global oil supply; 2) oil prices declined further; 3) a consensus expectation developed that oil prices would stay lower for longer than previously expected; 4) exploration and production companies significantly decreased their budgets as the demand for oil and gas was lower and production was significantly less economical for them; and 5) macroeconomic concerns developed regarding a slowdown in the global economy. Due to this further deterioration of market conditions for our products, the Company performed an impairment test on all six reporting units. The Company identified and recorded an impairment charge of $123.2 million for its Subsea reporting unit for the year ended December 31, 2015. If these market conditions continue to exist, the Company may have additional impairment charges in its reporting units in the future. Following the impairment charge, at December 31, 2015, our Subsea reporting unit has a remaining balance of $73 million in goodwill. 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 additional impairment charges associated with goodwill.
The fair values were determined using the net present value of the expected future cash flows for each reporting unit. During the Company’s goodwill impairment analysis, the Company determines the fair value of each of its reporting units as a whole using a discounted cash flow analysis, which requires significant assumptions and estimates about the future operations of each reporting unit. The assumptions about future cash flows and growth rates are based on our current budget for 2016 and for future periods, as well as our strategic plans and management’s beliefs about future activity levels. The discount rate we used for future periods could change substantially if the cost of debt or equity were to significantly increase or decrease, or if we were to choose different comparable companies in determining the appropriate discount rate for our reporting units. Forecasted cash flows in future periods were estimated using a terminal value calculation, which considered long-term earnings growth rates. Accumulated impairment losses on goodwill were $168.8 million and $45.6 million as of December 31, 2015, and 2014. There was no impairment of goodwill during the years ended December 31, 2014 and 2013.
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Notes to consolidated financial statements (continued)
Intangible assets
At December 31, 2015 and 2014, intangible assets consisted of the following, respectively (in thousands):
December 31, 2015 | |||||||||||||
Gross carrying amount | Accumulated amortization | Net amortizable intangibles | Amortization period (in years) | ||||||||||
Customer relationships | $ | 280,297 | $ | (101,636 | ) | $ | 178,661 | 4-15 | |||||
Patents and technology | 34,140 | (10,264 | ) | 23,876 | 5-17 | ||||||||
Non-compete agreements | 7,269 | (6,292 | ) | 977 | 3-6 | ||||||||
Trade names | 45,446 | (15,890 | ) | 29,556 | 10-15 | ||||||||
Distributor relationships | 22,160 | (13,810 | ) | 8,350 | 8-15 | ||||||||
Trademark | 5,230 | — | 5,230 | Indefinite | |||||||||
Intangible Assets Total | $ | 394,542 | $ | (147,892 | ) | $ | 246,650 | ||||||
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 | ||||||
Intangible assets with definite lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. During the year ended December 31, 2015, an impairment loss of $1.9 million was recorded on certain intangible assets within the Drilling and Subsea segment. The impaired intangible assets included trade names that were no longer in use and is recorded under "Impairment of intangible assets and goodwill" in the consolidated statement of comprehensive income (loss). No indicators of intangible asset impairment occurred during the years ended December 31, 2014 and 2013.
Amortization expense was $27.3 million, $27.7 million and $24.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. The total weighted average amortization period is 14 years and the estimated future amortization expense for the next five years is as follows (in thousands):
Year ending December 31, | ||||
2016 | $ | 26,993 | ||
2017 | 26,647 | |||
2018 | 26,566 | |||
2019 | 26,324 | |||
2020 | 24,295 | |||
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Notes to consolidated financial statements (continued)
8. Debt
Notes payable and lines of credit as of December 31, 2015 and 2014 consisted of the following (in thousands):
December 31, 2015 | December 31, 2014 | ||||||
6.25% Senior notes due October 2021 | $ | 400,000 | $ | 400,000 | |||
Unamortized debt premium | 2,395 | 2,801 | |||||
Debt issuance cost | (6,425 | ) | (7,526 | ) | |||
Senior secured revolving credit facility | — | 25,000 | |||||
Other debt | 299 | 1,049 | |||||
Total debt | 396,269 | 421,324 | |||||
Less: current maturities | (253 | ) | (840 | ) | |||
Long-term debt | $ | 396,016 | $ | 420,484 | |||
Senior Notes Due 2021
In October 2013, the Company issued $300.0 million of 6.25% senior unsecured notes due 2021 at par, and in November 2013, the Company issued an additional $100.0 million aggregate principal amount of the notes at a price of 103.25% of par, plus accrued interest from October 2, 2013 (the "Senior Notes"). The Senior Notes bear interest at a rate of 6.25% per annum, payable on April 1 and October 1 of each year, and mature on October 1, 2021. Net proceeds from the issuance of approximately $394.0 million, after deducting initial purchasers' discounts and offering expenses and excluding accrued interest paid by the purchasers, were used for the repayment of the then-outstanding term loan balance and a portion of the revolving Credit Facility balance.
The terms of the Senior Notes are governed by the indenture, dated October 2, 2013 (the “Indenture”), between the Company, the guarantors named therein and Wells Fargo Bank, National Association, as trustee (the “Trustee”). The Senior Notes are senior unsecured obligations, and are guaranteed on a senior unsecured basis by the Company’s subsidiaries that guarantee the Amended Facility and rank junior to, among other indebtedness, the Amended Facility to the extent of the value of the collateral securing the Amended Facility. The Senior Notes contain customary covenants including some limitations and restrictions on the Company’s ability to pay dividends on, purchase or redeem its common stock or purchase or redeem its subordinated debt; make certain investments; incur or guarantee additional indebtedness or issue certain types of equity securities; create certain liens, sell assets, including equity interests in its restricted subsidiaries; redeem or prepay subordinated debt; restrict dividends or other payments of its restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with affiliates; and create unrestricted subsidiaries. Many of these restrictions will terminate if the Senior Notes become rated investment grade. The Indenture also contains customary events of default, including nonpayment, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness, failure to pay certain judgments and certain events of bankruptcy and insolvency. The Company is required to offer to repurchase the Senior Notes in connection with specified change in control events or with excess proceeds of asset sales not applied for permitted purposes.
The Company may redeem the Senior Notes due 2021:
• | beginning on October 1, 2016 at a redemption price of 104.688% of their principal amount plus accrued and unpaid interest and additional interest, if any; then |
• | at a redemption price of 103.125% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning October 1, 2017; then |
• | at a redemption price of 101.563% of their principal amount plus accrued and unpaid interest and additional interest, if any, for the twelve-month period beginning October 1, 2018; and then |
• | at a redemption price of 100.000% of their principal amount plus accrued interest and unpaid interest and additional interest, if any, beginning on October 1, 2019. |
• | We may also redeem some or all of the Senior Notes due 2021 before October 1, 2016 at a redemption price of 100.000% of the principal amount, plus accrued and unpaid interest and additional interest, if any, to the redemption date, plus an applicable premium. |
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Notes to consolidated financial statements (continued)
• | In addition, before October 1, 2016, we may redeem up to 35% of the aggregate principal amount with the proceeds of certain equity offerings at 106.250% of their principal amount plus accrued and unpaid interest and additional interest, if any; we may make such redemption only if, after any such redemption, at least 65% of the aggregate principal amount originally issued remains outstanding. |
Credit Facility
The Company had a Credit Facility, with a maturity date of November 2018, with several financial institutions as lenders, which 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. As of December 31, 2015, we had no of borrowings outstanding under our Credit Facility, $12.7 million of outstanding letters of credit and the capacity to borrow an additional $323.7 million under the Credit Facility. Weighted average interest rates under the Credit Facility at December 31, 2015 and 2014 were approximately 2.00%
On February 25, 2016, the Company amended its senior secured Credit Facility to reduce commitment fees and provide borrowing capacity for general corporate purposes. The Amended Facility provides for a $200.0 million revolving credit line, including up to $25.0 million available for letters of credit and up to $10.0 million in swingline loans. Availability under the Amended Facility is subject to a borrowing base calculated by reference to eligible accounts receivable in the United States, United Kingdom and Canada, eligible inventory in the United States, and cash on hand.
The Company was in compliance with all financial covenants under the Credit Facility at December 31, 2015 and through the effective date of the Amended Facility. The Company anticipates that it will continue to be in compliance with the Amended Facility throughout 2016.
Subject to terms of the Amended Facility, the Company has the ability to increase the revolving credit facility by an additional $150.0 million.
The Amended Facility contains covenants which require the Company, on a consolidated basis, to maintain specified financial ratios or conditions summarized as follows:
• | Senior secured debt to adjusted EBITDA of not more than 4.50 to 1.0 for the period from February 25, 2016 through December 31, 2016, not more than 4.0 to 1.0 for the period from January 1, 2017 through December 31, 2017 and not more than 3.50 to 1.0 for the period from January 1, 2018 through the termination of the facility; and |
• | A fixed charge coverage ratio of not more than 1.25 to 1.0. This ratio is measured as EBITDA minus maintenance capital expenditures minus taxes paid in cash divided by scheduled principal and interest payments.The fixed charge coverage ratio is tested only if availability under the Amended Facility falls below certain levels. |
Other debt
Other debt consists primarily of various capital leases of equipment.
Debt issue costs
The Company has incurred loan costs that have been capitalized and are amortized to interest expense over the term of the Senior Notes and the Credit Facility. As a result, approximately $2.6 million, $2.6 million and $2.2 million were amortized to interest expense for the years ended December 31, 2015, 2014 and 2013, respectively. The estimated term over which debt issue costs related to the term loan were being amortized was revised in connection with the repayment of the term loan from the issuance of the Senior Notes. Accordingly, debt issue costs of $2.1 million that had been previously capitalized were charged to expense in 2013.
The Company reclassified $6.4 million and $7.5 million of deferred loan costs related to the Senior Notes to Long term Debt as of December 31, 2015 and December 31, 2014, respectively.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Future payments
Future principal payments under long-term debt for each of the years ending December 31 are as follows (in thousands):
2016 | $ | 253 | ||
2017 | 46 | |||
2018 | — | |||
2019 | — | |||
2020 | — | |||
Thereafter | 400,000 | |||
Total future payment | $ | 400,299 | ||
Add: Unamortized debt premium | 2,395 | |||
Less: Debt issuance cost | (6,425 | ) | ||
Total debt | $ | 396,269 | ||
9. Income taxes
The components of the Company's income before income taxes for the years ended December 31, 2015, 2014 and 2013 are as follows (in thousands):
2015 | 2014 | 2013 | |||||||||
U.S. | $ | (114,862 | ) | $ | 127,270 | $ | 108,680 | ||||
Non-U.S. | (19,461 | ) | 115,252 | 77,402 | |||||||
Income (loss) before income taxes | $ | (134,323 | ) | $ | 242,522 | $ | 186,082 | ||||
The Company’s provision (benefit) for income taxes from continuing operations for the years ended December 31, 2015, 2014 and 2013 are as follows (in thousands):
2015 | 2014 | 2013 | |||||||||
Current | |||||||||||
U.S. Federal and state | $ | 43 | $ | 47,100 | $ | 20,589 | |||||
Non-U.S. | 8,264 | 24,315 | 20,748 | ||||||||
Total current | 8,307 | 71,415 | 41,337 | ||||||||
Deferred | |||||||||||
U.S. Federal and state | (19,071 | ) | (2,080 | ) | 16,317 | ||||||
Non-U.S. | (4,175 | ) | (1,190 | ) | (1,176 | ) | |||||
Total deferred | (23,246 | ) | (3,270 | ) | 15,141 | ||||||
Provision for income tax expense (benefit) | $ | (14,939 | ) | $ | 68,145 | $ | 56,478 | ||||
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
The reconciliation between the actual provision for income taxes from continuing operations and that computed by applying the U.S. statutory rate to income before income taxes and noncontrolling interests are outlined below (in thousands):
2015 | 2014 | 2013 | |||||||||||||||
Income tax expense (benefit) at the statutory rate | $ | (47,013 | ) | 35.0 | % | $ | 84,882 | 35.0 | % | $ | 65,129 | 35.0 | % | ||||
State taxes, net of federal tax benefit | (1,157 | ) | 0.9 | % | 4,132 | 1.7 | % | 3,428 | 1.9 | % | |||||||
Non-U.S. operations | 6,300 | (4.7 | )% | (15,060 | ) | (6.2 | )% | (6,908 | ) | (3.7 | )% | ||||||
Domestic incentives | (250 | ) | 0.2 | % | (4,412 | ) | (1.8 | )% | (2,544 | ) | (1.4 | )% | |||||
Prior year federal, non-U.S. and state tax | (518 | ) | 0.4 | % | (1,692 | ) | (0.7 | )% | (4,059 | ) | (2.2 | )% | |||||
Nondeductible expenses | 279 | (0.2 | )% | 663 | 0.3 | % | 1,341 | 0.7 | % | ||||||||
Goodwill impairment | 27,210 | (20.3 | )% | — | — | % | — | — | % | ||||||||
Other | 210 | (0.2 | )% | (368 | ) | (0.2 | )% | 91 | 0.1 | % | |||||||
Provision for income tax expense (benefit) | $ | (14,939 | ) | 11.1 | % | $ | 68,145 | 28.1 | % | $ | 56,478 | 30.4 | % | ||||
The primary components of deferred taxes include (in thousands):
2015 | 2014 | ||||||
Deferred tax assets | |||||||
Reserves and accruals | $ | 7,174 | $ | 10,387 | |||
Inventory | 29,154 | 12,679 | |||||
Stock awards | 9,350 | 7,892 | |||||
Other | 544 | 820 | |||||
Net operating loss and other tax credit carryforwards | 1,673 | 365 | |||||
Total deferred tax assets | 47,895 | 32,143 | |||||
Deferred tax liabilities | |||||||
Property and equipment | (16,925 | ) | (21,947 | ) | |||
Goodwill and intangible assets | (68,635 | ) | (73,215 | ) | |||
Investment in unconsolidated subsidiary | (10,764 | ) | (11,259 | ) | |||
Unremitted non-U.S. earnings | (740 | ) | (740 | ) | |||
Prepaid expenses and other | (1,151 | ) | (781 | ) | |||
Total deferred tax liabilities | (98,215 | ) | (107,942 | ) | |||
Net deferred tax liabilities | $ | (50,320 | ) | $ | (75,799 | ) | |
At December 31, 2015, the Company had $1.9 million U.S. net operating loss carryforwards and $0.7 million state net operating losses. The losses will expire no later than 2035 if they are not utilized prior to that date. The Company had $3.5 million of non-U.S. net operating loss carryforwards with indefinite expiration dates. The Company anticipates being able to fully utilize the losses prior to their expiration.
At December 31, 2015, the Company had no foreign tax credit carryforwards.
Goodwill from certain acquisitions is tax deductible due to the acquisition structure as an asset purchase or due to tax elections made by the Company and the respective sellers at the time of acquisition.
The Company believes that it is more likely than not that deferred tax assets at December 31, 2015 and 2014 will be utilized to offset future taxable income and the reversal of taxable temporary differences. Consequently, no valuation allowance has been recorded in the financial statements.
As discussed in Note 2, "Recent Accounting Pronouncements", during the fourth quarter of 2015, the Company elected to early adopt the recently issued guidance requiring all deferred tax assets and deferred tax liabilities to be presented as non-current on the consolidated balance sheet. Adoption of this guidance resulted in the reclassification of the current deferred tax assets and liabilities to non-current in our consolidated balance sheet as of December 31, 2015.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
This guidance has been adopted on a prospective basis, and therefore, prior periods have not been retrospectively adjusted and continue to reflect current and non-current classification as historically presented.
Taxes are provided as necessary with respect to non-U.S. earnings that are not permanently reinvested. For all other non-U.S. earnings, no U.S. taxes are provided because such earnings are intended to be reinvested indefinitely to finance non-U.S. activities. The determination of the amount of the unrecognized deferred tax liability for temporary differences related to investments in non-US subsidiaries is not practicable.
The Company files income tax returns in the U.S. as well as in various states and non-U.S. jurisdictions. With few exceptions, the Company is no longer subject to income tax examination by tax authorities in these jurisdictions prior to 2009.
The Company accounts for uncertain tax positions in accordance with guidance in FASB ASC 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. A reconciliation of the beginning and ending amount of uncertain tax positions is as follows (in thousands):
Balance at January 1, 2015 | $ | 6,256 | ||
Additional based on tax positions related to prior years | 2,810 | |||
Reduction based on tax positions related to prior years | — | |||
Lapse of statute of limitations | (656 | ) | ||
Balance at December 31, 2015 | 8,410 | |||
Deferred tax benefits on uncertain tax position related to U.S. and non-U.S. income tax | — | |||
Net balance at December 31, 2015 | $ | 8,410 | ||
The total amount of unrecognized tax benefits at December 31, 2015 was $8.4 million, of which it is reasonably possible that $2.2 million could be settled during the next twelve-month period as a result of the conclusion of various tax audits or due to the expiration of the applicable statute of limitations. Substantially all of the unrecognized tax benefits at December 31, 2015 would impact the Company’s future effective income tax rate, if recognized.
The Company recognizes interest and penalties related to uncertain tax positions within the provision for income taxes in the consolidated statement of income. As of December 31, 2015 and 2014, we had accrued approximately $0.4 million and $0.2 million, respectively, in interest and penalties. During the years ended December 31, 2015 and 2014, we recognized no material change in the interest and penalties related to uncertain tax positions.
10. Fair value measurements
At December 31, 2015, the Company had no debt outstanding under the Credit Facility and all of the debt under this facility 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 December 31, 2015, the fair value and the carrying value of the Company’s unsecured Senior Notes approximated $334.1 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 other outstanding financial instruments as of December 31, 2015 and 2014 that required measuring the amounts at fair value on a recurring basis. 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 year ended December 31, 2015.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
11. Commitments and contingencies
Litigation
In the ordinary course of business, the Company is, and in the future, could be involved in various pending or threatened legal actions, some of which 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 believed to be probable and can be estimated. The reserves accrued at December 31, 2015 and 2014 are immaterial. In the opinion of management, 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.
Asbestos litigation
One of our subsidiaries has been named as one of many defendants in a number of product liability claims for alleged exposure to asbestos. These lawsuits are typically filed on behalf of plaintiffs who allege exposure to asbestos, against numerous defendants, often 40 or more, who may have manufactured or distributed products containing asbestos. The injuries alleged by plaintiffs in these cases range from mesothelioma and other cancers to asbestosis. The earliest claims against our subsidiary were filed in New Jersey in 1998, and our subsidiary currently has active cases in Missouri, New Jersey, New York, and Illinois. These complaints do not typically include requests for a specific amount of damages. The trademark for the product line with asbestos exposure was acquired in 1985. Our subsidiary has been successful in obtaining dismissals in many lawsuits where the exposure is alleged to have occurred prior to our acquisition of the trademark. The law in some states does not find purchasers of product lines to have tort liability for incidents occurring prior to the acquisition date unless they assumed the responsibility or in certain other circumstances. The law in certain other states on so called “successor liability” may be different or ambiguous in this regard. Most claimants alleging illnesses due to asbestos sue on the basis of exposure prior to 1985, as by that date the hazards of asbestos exposure were well known and asbestos had begun to fall into disuse in industrial settings. To date, asbestos claims have not had a material adverse effect on our business, financial condition, results of operations, or cash flow, as our annual out-of-pocket costs over the last five years has been less than $200,000. There are typically fewer than 100 cases filed against our subsidiary each year, and a similar number of cases are dismissed, settled or otherwise disposed of each year. We currently have fewer than 200 lawsuits pending against this subsidiary. Our subsidiary has over $17 million in face amount of insurance per occurrence and over $23 million of aggregate primary insurance coverage; a portion of the coverage has been eroded by payments made by insurers. In addition, our subsidiary has over $950 million in face amount of excess coverage applicable to the claims. There can be no guarantee that all of this can be collected due to policy terms and conditions and insurer insolvencies in the past or in the future. In January 2011, we entered into an agreement with seven of our primary insurers under which they have agreed to pay 80% of the costs of handling and settling each asbestos claim against the affected subsidiary. After an initial period, and under certain circumstances, our subsidiary and the subscribing insurers may withdraw from this agreement.
Portland Harbor Superfund litigation
In May 2009, one of the Company's subsidiaries (which is presently a dormant company with nominal assets except for rights under insurance policies) was named along with many defendants in a suit filed by the Port of Portland, Oregon seeking reimbursement of costs related to a five-year study of contaminated sediments at the port. In March 2010, the subsidiary also received a notice letter from the Environmental Protection Agency indicating that it had been identified as a potentially responsible party with respect to environmental contamination in the "study area" for the Portland Harbor Superfund Site. Under a 1997 indemnity agreement, the subsidiary is indemnified by a third party with respect to losses relating to environmental contamination. As required under the indemnity agreement, the subsidiary provided notice of these claims, and the indemnitor has assumed responsibility and is providing a defense of the claims. Although the Company believes that it is unlikely that the subsidiary contributed to the contamination at the Portland Harbor Superfund Site, the potential liability of the subsidiary and the ability of the indemnitor to fulfill its indemnity obligations cannot be quantified at this time.
Flow Valve litigation
On March 28, 2013 Flow Valve, LLC filed suit against the Company and others in the Eastern District of Oklahoma alleging patent infringement and requesting an injunction against continued infringement, accounting for damages, interest and attorneys’ fees. The case was transferred to the Western District of Oklahoma by agreement on November 27, 2013. The plaintiff filed an amended complaint on April 4, 2014 that added a request for trebling of
24
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
damages on the patent infringement claim. The amended complaint also added a count for violation of Oklahoma’s Uniform Trade Secrets Act, and requested actual and punitive damages in addition to their existing requests for relief. Subsequent to the filing of the amended complaint, the plaintiff provided an expert damages report stating that their damages amounted to approximately $61 million. The Company believes that this action is without merit and intends to vigorously defend this litigation.
Operating leases
The Company has operating leases for warehouse, office space, manufacturing facilities and equipment. The leases generally require the Company to pay certain expenses including taxes, insurance, maintenance, and utilities. The minimum future lease commitments under noncancelable leases in effect at December 31, 2015 are as follows:
2016 | $ | 18,153 | |
2017 | 13,379 | ||
2018 | 9,672 | ||
2019 | 8,522 | ||
2020 | 7,485 | ||
Thereafter | 16,158 | ||
$ | 73,369 | ||
Total rent expense was $20.9 million, $20.8 million and $19.0 million under operating leases for the years ended December 31, 2015, 2014 and 2013, respectively.
Letters of credit and guarantees
The Company executes letters of credit in the normal course of business to secure the delivery of product from specific vendors and also to guarantee the Company fulfilling certain performance obligations relating to certain large contracts. At December 31, 2015, the Company had $12.7 million in letters of credit.
12. Stockholders' equity and employee benefit plans
Warrants
The warrants outstanding as of December 31, 2013 were recorded to stockholders’ equity at their fair value at the time of issuance. During the year ended December 31, 2013, the Company's largest shareholder converted all of its 6,366,072 warrants pursuant to the terms of a warrant agreement and received 4,227,358 shares of the Company's common stock. All outstanding warrants expired on October 11, 2014 and were converted into shares of the Company's common stock. There were no outstanding warrants as of December 31, 2015.
Employee benefit plans
The Company sponsors a 401(k) savings plan for US employees and related savings plans for certain non-US employees. These plans benefit eligible employees by allowing them the opportunity to make contributions up to certain limits. The Company contributes by matching a percentage of each employee's contributions. In 2015, for certain plans, the Company suspended the matching of contributions. Subsequent to the closing of all acquisitions, employees of those acquired entities will generally be eligible to participate in the Company's 401(k) savings plan. The Company also has the discretion to provide a profit sharing contribution to each participant depending on the Company’s performance for the applicable year. The expense under the Company's plan was $2.2 million, $10.8 million and $8.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company has an Employee Stock Purchase Plan, which allows eligible employees to purchase shares of the Company's common stock at six-month intervals through periodic payroll deductions at a price per share equal to 85% of the lower of the fair market value at the beginning and ending of the six-month intervals.
Stock repurchases
In October 2014, the Board of Directors approved a share repurchase program for the repurchase of outstanding shares of the Company's common stock with an aggregate purchase price of up to $150.0 million. Shares may be repurchased under the program from time to time, in amounts and at prices that are deemed appropriate, subject to market and business conditions, credit facility restrictions, applicable legal requirements and other considerations. The
25
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Company has purchased approximately 4.5 million shares under this program for aggregate consideration of approximately $100.2 million.
13. Stock based compensation
FET share-based compensation plan
In August 2010, the Company created the 2010 Stock Incentive Plan (the "Plan") to allow for employees, directors and consultants of the Company and its subsidiaries to maintain stock ownership in the Company through the award of stock options, restricted stock, restricted stock units or any combination thereof. Under the terms of the Plan, 18.5 million shares have been authorized for awards and approximately 9.1 million shares remained available for future grants as of December 31, 2015.
The total amount of share-based compensation expense recorded was approximately $21.7 million, $18.8 million and $19.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015, the Company expects to record share-based compensation expense of approximately $34.8 million over the remaining term of the restricted stock and options of approximately 2 years. Future stock option grants will result in additional compensation expense.
Stock options
The exercise price of each option is based on the fair market value of the Company’s stock at the date of grant. Options generally have a ten-year life and vest annually in equal increments over three or four years. The Company’s policy for issuing stock upon a stock option exercise is to issue new shares. Compensation expense is generally recognized on a straight line basis over the vesting period. The following tables provide additional information related to the options:
2015 Activity | Number of shares (in millions) | Weighted average exercise price | Remaining weighted average contractual life in years | Intrinsic value (in millions) | ||||||||
Beginning balance | 5.2 | $ | 12.23 | 6.2 | $ | 44.5 | ||||||
Granted | 0.6 | $ | 17.78 | — | ||||||||
Exercised | (0.4 | ) | $ | 8.58 | — | |||||||
Forfeited/expired | (0.1 | ) | $ | 19.30 | — | |||||||
Total outstanding | 5.3 | $ | 12.94 | 5.7 | $ | 15.1 | ||||||
Options exercisable | 4.2 | $ | 10.80 | 5.0 | $ | 6.9 | ||||||
The assumptions used in the Black-Scholes pricing model to estimate the fair value of the options granted in 2015, 2014 and 2013 are as follows:
2015 | 2014 | 2013 | |||
Weighted average fair value | $6.36 | $8.47 | $8.41 | ||
Assumptions | |||||
Expected life (in years) | 6.30 | 6.25 | 6.25 | ||
Volatility | 33% | 27% | 30% | ||
Dividend yield | —% | —% | —% | ||
Risk free interest rate | 1.81% | 1.96% | 1.17% | ||
The intrinsic value of the options exercised was $3.9 million in 2015, $24.8 million in 2014 and $19.2 million 2013. The intrinsic value is the amount by which the fair value of the underlying share exceeds the exercise price of an option.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Restricted stock
Restricted stock generally vests over a three or four year period from the date of grant. Further information about the restricted stock follows (shares in thousands):
2015 Activity | ||
Nonvested at beginning of year | 421.9 | |
Granted | 38.9 | |
Vested | (225.7 | ) |
Forfeited | (30.9 | ) |
Nonvested at the end of year | 204.2 | |
The weighted average grant date fair value of the restricted stock was $18.87, $31.71 and $29.83 per share during the years ended December 31, 2015, 2014 and 2013, respectively. The total fair value of shares vested was $5.1 million during 2015, $10.9 million during 2014 and $13.5 million during 2013.
Restricted stock units
Restricted stock units generally vest over a four year period from the date of grant. Further information about the restricted stock units follows (shares in thousands):
Restricted stock units | ||
2015 Activity | ||
Nonvested at beginning of year | 849.1 | |
Granted | 797.5 | |
Vested | (246.5 | ) |
Forfeited | (187.9 | ) |
Nonvested at the end of year | 1,212.2 | |
The weighted average grant date fair value of the restricted stock units was $18.06 and $27.81 per share during the years ended December 31, 2015 and 2014, respectively. The total fair value of units vested was $6.7 million, $3.0 million, and $0.4 million during 2015, 2014 and 2013 .
Performance share awards
During 2015, the Company granted 161,660 performance share awards with service-vesting and market-vesting conditions. These awards may settle 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 entered into lease agreements for office and warehouse space and has sold and purchased inventory, services and fixed assets to and from various affiliates of certain directors. The dollar amounts related to these related party activities are not significant to the Company’s consolidated financial statements.
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Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
15. Business segments
Beginning with the first quarter of 2016, the Company realigned its segments. Completions was designated as a separate segment in recognition of its expanded operations and its significant growth potential. The Company is reporting its results of operations in the following three reportable segments: Drilling & Subsea ("D&S"), Completions and Production & Infrastructure ("P&I"), instead of the original two reportable segments. Management’s change in the composition of the Company’s reporting segments was made in order to align with activity drivers and the customers of our product group, and how management reviews and evaluates operating performance. This change is reflected on a retrospective basis in accordance with generally accepted accounting principles.
The D&S segment designs, manufactures and supplies products and provides related services to the drilling and subsea construction and services markets. The Completions segment designs, manufactures and supplies products and provides related services to the well construction, completion, stimulation, and intervention markets. The P&I segment designs, manufactures and supplies products, and provides related equipment and services for production and infrastructure markets.
The Company’s reportable segments are strategic units that offer distinct products and services. They are managed separately since each business segment requires different marketing strategies. Operating segments have not been aggregated as part of a reportable segment. The Company evaluates the performance of its reportable segments based on operating income. This segmentation is representative of the manner in which our Chief Operating Decision Maker ("CODM") and our Board of Directors view the business. We consider the CODM to be the Chief Executive Officer.
28
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
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):
Year ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Net sales: | ||||||||||||
Drilling & Subsea | $ | 487,299 | $ | 864,320 | $ | 727,779 | ||||||
Completions | 267,236 | 441,345 | 336,076 | |||||||||
Production & Infrastructure | 320,442 | 436,271 | 462,534 | |||||||||
Intersegment eliminations | (1,325 | ) | (2,219 | ) | (1,578 | ) | ||||||
Total net sales | $ | 1,073,652 | $ | 1,739,717 | $ | 1,524,811 | ||||||
Operating income (loss): | ||||||||||||
Drilling & Subsea | $ | 6,890 | $ | 131,072 | $ | 100,042 | ||||||
Completions | 11,124 | 126,590 | 80,939 | |||||||||
Production & Infrastructure | 22,658 | 56,148 | 61,318 | |||||||||
Corporate | (28,077 | ) | (42,015 | ) | (29,431 | ) | ||||||
Total segment operating income | 12,595 | 271,795 | 212,868 | |||||||||
Intangible asset and goodwill impairment | 125,092 | — | — | |||||||||
Transaction expenses | 480 | 2,326 | 2,700 | |||||||||
(Gain)/loss on sale of assets | 746 | 1,431 | 614 | |||||||||
Income (loss) from operations | $ | (113,723 | ) | $ | 268,038 | $ | 209,554 | |||||
Depreciation and amortization | ||||||||||||
Drilling & Subsea | $ | 33,348 | $ | 36,148 | $ | 32,984 | ||||||
Completions | 24,317 | 20,135 | 18,405 | |||||||||
Production & Infrastructure | 7,377 | 7,856 | 8,815 | |||||||||
Corporate | 641 | 933 | 375 | |||||||||
Total depreciation and amortization | $ | 65,683 | $ | 65,072 | $ | 60,579 | ||||||
Capital expenditures | ||||||||||||
Drilling & Subsea | $ | 13,803 | $ | 22,891 | $ | 35,915 | ||||||
Completions | 8,401 | 19,942 | 7,787 | |||||||||
Production & Infrastructure | 3,102 | 4,569 | 8,229 | |||||||||
Corporate | 6,985 | 6,390 | 8,332 | |||||||||
Total capital expenditures | $ | 32,291 | $ | 53,792 | $ | 60,263 | ||||||
29
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
A summary of consolidated assets by reportable segment is as follows (in thousands):
As of December 31, | ||||||||||||
Assets | 2015 | 2014 | 2013 | |||||||||
Drilling & Subsea | $ | 912,324 | $ | 1,204,416 | $ | 1,220,369 | ||||||
Completions | 728,745 | 726,972 | 671,772 | |||||||||
Production & Infrastructure | 187,741 | 231,771 | 231,734 | |||||||||
Corporate | 57,232 | 50,943 | 36,372 | |||||||||
Total assets | $ | 1,886,042 | $ | 2,214,102 | $ | 2,160,247 | ||||||
Corporate assets include primarily deferred tax assets and deferred loan costs.
Net sales by shipping destination and long-lived assets by country were as follows (in thousands):
Year ended December 31, | ||||||||||||||||||
Net sales: | 2015 | 2014 | 2013 | |||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||
United States | $ | 646,928 | 60.3 | % | $ | 1,049,609 | 60.3 | % | $ | 918,795 | 60.2 | % | ||||||
Europe & Africa | 188,414 | 17.5 | % | 305,376 | 17.6 | % | 225,381 | 14.8 | % | |||||||||
Asia-Pacific | 69,923 | 6.5 | % | 154,669 | 8.9 | % | 151,790 | 10.0 | % | |||||||||
Middle East | 59,680 | 5.6 | % | 65,498 | 3.8 | % | 65,724 | 4.3 | % | |||||||||
Canada | 57,837 | 5.4 | % | 103,077 | 5.9 | % | 99,081 | 6.5 | % | |||||||||
Latin America | 50,870 | 4.7 | % | 61,488 | 3.5 | % | 64,040 | 4.2 | % | |||||||||
Total net sales | $ | 1,073,652 | 100.0 | % | $ | 1,739,717 | 100.0 | % | $ | 1,524,811 | 100.0 | % | ||||||
As of December 31, | ||||||||||||
Long-lived assets: | 2015 | 2014 | 2013 | |||||||||
United States | $ | 869,388 | $ | 932,173 | $ | 961,487 | ||||||
Europe & Africa | 202,852 | 313,589 | 346,017 | |||||||||
Canada | 83,688 | 59,207 | 28,839 | |||||||||
Asia-Pacific | 8,192 | 9,132 | 9,465 | |||||||||
Middle East | 3,189 | 3,192 | 3,182 | |||||||||
Latin America | 921 | 1,650 | 1,789 | |||||||||
Total long-lived assets | $ | 1,168,230 | $ | 1,318,943 | $ | 1,350,779 | ||||||
Net sales by product lines were as follows (in thousands):
Year ended December 31, | ||||||||||||||||||
Net sales: | 2015 | 2014 | 2013 | |||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||
Drilling Technologies | $ | 298,209 | 27.7 | % | $ | 543,281 | 31.1 | % | $ | 411,361 | 26.9 | % | ||||||
Subsea Technologies | 189,090 | 17.6 | % | 321,039 | 18.5 | % | 316,418 | 20.8 | % | |||||||||
Downhole Technologies | 106,532 | 9.9 | % | 190,771 | 11.0 | % | 161,970 | 10.6 | % | |||||||||
Stimulation and Intervention | 160,704 | 15.0 | % | 250,574 | 14.4 | % | 174,106 | 11.4 | % | |||||||||
Production Equipment | 145,927 | 13.6 | % | 228,815 | 13.2 | % | 251,009 | 16.5 | % | |||||||||
Valve Solutions | 174,515 | 16.3 | % | 207,456 | 11.9 | % | 211,525 | 13.9 | % | |||||||||
Eliminations | (1,325 | ) | (0.1 | )% | (2,219 | ) | (0.1 | )% | (1,578 | ) | (0.1 | )% | ||||||
Total net sales | $ | 1,073,652 | 100.0 | % | $ | 1,739,717 | 100.0 | % | $ | 1,524,811 | 100.0 | % | ||||||
30
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
16. Condensed consolidating financial statements
The Senior Notes are guaranteed by our domestic subsidiaries which are 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional, joint and several and on an unsecured basis.
Condensed consolidating statements of operations and comprehensive income (loss) | ||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||
FET (Parent) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net sales | $ | — | $ | 810,890 | $ | 369,186 | $ | (106,424 | ) | $ | 1,073,652 | |||||||||
Cost of sales | — | 646,076 | 269,900 | (105,001 | ) | 810,975 | ||||||||||||||
Gross profit | — | 164,814 | 99,286 | (1,423 | ) | 262,677 | ||||||||||||||
Operating expenses | ||||||||||||||||||||
Selling, general and administrative expenses | — | 201,904 | 63,002 | — | 264,906 | |||||||||||||||
Goodwill and intangible assets impairment | — | 57,392 | 67,700 | — | 125,092 | |||||||||||||||
Transaction expenses | — | 480 | — | — | 480 | |||||||||||||||
(Gain) loss on sale of assets | — | 943 | (197 | ) | — | 746 | ||||||||||||||
Total operating expenses | — | 260,719 | 130,505 | — | 391,224 | |||||||||||||||
Earnings from equity investment | — | 14,824 | — | — | 14,824 | |||||||||||||||
Equity earnings from affiliate, net of tax | (99,908 | ) | (28,419 | ) | — | 128,327 | — | |||||||||||||
Operating income (loss) | (99,908 | ) | (109,500 | ) | (31,219 | ) | 126,904 | (113,723 | ) | |||||||||||
Other expense (income) | ||||||||||||||||||||
Interest expense | 29,914 | 10 | 21 | — | 29,945 | |||||||||||||||
Foreign exchange (gains) losses and other, net | — | (479 | ) | (8,866 | ) | — | (9,345 | ) | ||||||||||||
Total other expense (income) | 29,914 | (469 | ) | (8,845 | ) | — | 20,600 | |||||||||||||
Income (loss) before income taxes | (129,822 | ) | (109,031 | ) | (22,374 | ) | 126,904 | (134,323 | ) | |||||||||||
Provision for income tax expense (benefit) | (10,469 | ) | (9,123 | ) | 4,653 | — | (14,939 | ) | ||||||||||||
Net income (loss) | (119,353 | ) | (99,908 | ) | (27,027 | ) | 126,904 | (119,384 | ) | |||||||||||
Less: Loss attributable to noncontrolling interest | — | — | (31 | ) | — | (31 | ) | |||||||||||||
Net income (loss) attributable to common stockholders | (119,353 | ) | (99,908 | ) | (26,996 | ) | 126,904 | (119,353 | ) | |||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
Net income (loss) | (119,353 | ) | (99,908 | ) | (27,027 | ) | 126,904 | (119,384 | ) | |||||||||||
Change in foreign currency translation, net of tax of $0 | (45,270 | ) | (45,270 | ) | (45,270 | ) | 90,540 | (45,270 | ) | |||||||||||
Change in pension liability | 46 | 46 | 46 | (92 | ) | 46 | ||||||||||||||
Comprehensive income (loss) | (164,577 | ) | (145,132 | ) | (72,251 | ) | 217,352 | (164,608 | ) | |||||||||||
Less: comprehensive (income) loss attributable to noncontrolling interests | — | — | 168 | — | 168 | |||||||||||||||
Comprehensive income (loss) attributable to common stockholders | $ | (164,577 | ) | $ | (145,132 | ) | $ | (72,083 | ) | $ | 217,352 | $ | (164,440 | ) | ||||||
31
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Condensed consolidating statements of operations and comprehensive income | ||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||
FET (Parent) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net sales | $ | — | $ | 1,266,376 | $ | 637,205 | $ | (163,864 | ) | $ | 1,739,717 | |||||||||
Cost of sales | — | 887,428 | 453,785 | (160,948 | ) | 1,180,265 | ||||||||||||||
Gross profit | — | 378,948 | 183,420 | (2,916 | ) | 559,452 | ||||||||||||||
Operating expenses | ||||||||||||||||||||
Selling, general and administrative expenses | — | 244,577 | 68,244 | — | 312,821 | |||||||||||||||
Other operating expense (income) | — | 3,564 | 193 | — | 3,757 | |||||||||||||||
Total operating expenses | — | 248,141 | 68,437 | — | 316,578 | |||||||||||||||
Earnings from equity investment | — | 25,164 | — | — | 25,164 | |||||||||||||||
Equity earnings from affiliate, net of tax | 193,724 | 90,067 | — | (283,791 | ) | — | ||||||||||||||
Operating income | 193,724 | 246,038 | 114,983 | (286,707 | ) | 268,038 | ||||||||||||||
Other expense (income) | ||||||||||||||||||||
Interest expense | 29,783 | 78 | (14 | ) | — | 29,847 | ||||||||||||||
Interest income with affiliate | — | (5,770 | ) | — | 5,770 | — | ||||||||||||||
Interest expense with affiliate | — | — | 5,770 | (5,770 | ) | — | ||||||||||||||
Foreign exchange (gains) losses and other, net | — | 116 | (4,447 | ) | — | (4,331 | ) | |||||||||||||
Total other expense (income) | 29,783 | (5,576 | ) | 1,309 | — | 25,516 | ||||||||||||||
Income before income taxes | 163,941 | 251,614 | 113,674 | (286,707 | ) | 242,522 | ||||||||||||||
Provision for income tax expense | (10,424 | ) | 57,890 | 20,679 | — | 68,145 | ||||||||||||||
Net income | 174,365 | 193,724 | 92,995 | (286,707 | ) | 174,377 | ||||||||||||||
Less: Income attributable to noncontrolling interest | — | — | 12 | — | 12 | |||||||||||||||
Net income attributable to common stockholders | 174,365 | 193,724 | 92,983 | (286,707 | ) | 174,365 | ||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||
Net income | 174,365 | 193,724 | 92,995 | (286,707 | ) | 174,377 | ||||||||||||||
Change in foreign currency translation, net of tax of $0 | (43,694 | ) | (43,694 | ) | (43,694 | ) | 87,388 | (43,694 | ) | |||||||||||
Change in pension liability | (1,110 | ) | (1,110 | ) | (1,110 | ) | 2,220 | (1,110 | ) | |||||||||||
Comprehensive income | 129,561 | 148,920 | 48,191 | (197,099 | ) | 129,573 | ||||||||||||||
Less: comprehensive (income) loss attributable to noncontrolling interests | — | — | 46 | — | 46 | |||||||||||||||
Comprehensive income attributable to common stockholders | $ | 129,561 | $ | 148,920 | $ | 48,237 | $ | (197,099 | ) | $ | 129,619 | |||||||||
32
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Condensed consolidating statements of operations and comprehensive income | ||||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||
FET (Parent) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net sales | $ | — | $ | 1,142,000 | $ | 510,460 | $ | (127,649 | ) | $ | 1,524,811 | |||||||||
Cost of sales | — | 804,413 | 370,517 | (125,344 | ) | 1,049,586 | ||||||||||||||
Gross profit | — | 337,587 | 139,943 | (2,305 | ) | 475,225 | ||||||||||||||
Operating expenses | ||||||||||||||||||||
Selling, general and administrative expenses | — | 211,863 | 57,806 | — | 269,669 | |||||||||||||||
Other operating expense | — | 2,821 | 493 | — | 3,314 | |||||||||||||||
Total operating expenses | — | 214,684 | 58,299 | — | 272,983 | |||||||||||||||
Earnings from equity investment | — | 7,312 | — | — | 7,312 | |||||||||||||||
Equity earnings from affiliate, net of tax | 142,799 | 53,520 | — | (196,319 | ) | — | ||||||||||||||
Operating income | 142,799 | 183,735 | 81,644 | (198,624 | ) | 209,554 | ||||||||||||||
Other expense (income) | ||||||||||||||||||||
Interest expense | 18,251 | 101 | 18 | — | 18,370 | |||||||||||||||
Interest income with affiliate | — | (3,987 | ) | — | 3,987 | — | ||||||||||||||
Interest expense with affiliate | — | — | 3,987 | (3,987 | ) | — | ||||||||||||||
Foreign exchange (gains) losses and other, net | — | (624 | ) | 3,577 | — | 2,953 | ||||||||||||||
Deferred loan costs written off | 2,149 | — | — | — | 2,149 | |||||||||||||||
Total other expense (income) | 20,400 | (4,510 | ) | 7,582 | — | 23,472 | ||||||||||||||
Income before income taxes | 122,399 | 188,245 | 74,062 | (198,624 | ) | 186,082 | ||||||||||||||
Provision for income tax expense | (7,140 | ) | 45,446 | 18,172 | — | 56,478 | ||||||||||||||
Net income | 129,539 | 142,799 | 55,890 | (198,624 | ) | 129,604 | ||||||||||||||
Less: Income attributable to noncontrolling interest | — | — | 65 | — | 65 | |||||||||||||||
Net income attributable to common stockholders | 129,539 | 142,799 | 55,825 | (198,624 | ) | 129,539 | ||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||
Net income | 129,539 | 142,799 | 55,890 | (198,624 | ) | 129,604 | ||||||||||||||
Change in foreign currency translation, net of tax of $0 | 7,525 | 7,525 | 7,525 | (15,050 | ) | 7,525 | ||||||||||||||
Change in pension liability | 223 | 223 | 223 | (446 | ) | 223 | ||||||||||||||
Comprehensive income | 137,287 | 150,547 | 63,638 | (214,120 | ) | 137,352 | ||||||||||||||
Less: comprehensive (income) loss attributable to noncontrolling interests | — | — | 72 | — | 72 | |||||||||||||||
Comprehensive income attributable to common stockholders | $ | 137,287 | $ | 150,547 | $ | 63,710 | $ | (214,120 | ) | $ | 137,424 | |||||||||
33
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Condensed consolidating balance sheets | ||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||
FET (Parent) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 36,884 | $ | 72,365 | $ | — | $ | 109,249 | ||||||||||
Accounts receivable—trade, net | — | 85,537 | 53,060 | — | 138,597 | |||||||||||||||
Inventories | — | 318,360 | 115,165 | (9,404 | ) | 424,121 | ||||||||||||||
Cost and profits in excess of billings | — | 6,477 | 5,532 | — | 12,009 | |||||||||||||||
Other current assets | — | 25,447 | 8,389 | — | 33,836 | |||||||||||||||
Total current assets | — | 472,705 | 254,511 | (9,404 | ) | 717,812 | ||||||||||||||
Property and equipment, net of accumulated depreciation | — | 153,995 | 32,672 | — | 186,667 | |||||||||||||||
Deferred financing costs, net | 4,125 | — | — | — | 4,125 | |||||||||||||||
Deferred income taxes, net | — | — | 780 | — | 780 | |||||||||||||||
Intangibles | — | 186,234 | 60,416 | — | 246,650 | |||||||||||||||
Goodwill | — | 481,374 | 187,662 | — | 669,036 | |||||||||||||||
Investment in unconsolidated subsidiary | — | 57,719 | — | — | 57,719 | |||||||||||||||
Investment in affiliates | 1,188,707 | 514,893 | — | (1,703,600 | ) | — | ||||||||||||||
Long-term loan and advances to affiliates | 467,184 | — | 60,221 | (527,405 | ) | — | ||||||||||||||
Other long-term assets | — | 2,549 | 704 | — | 3,253 | |||||||||||||||
Total assets | $ | 1,660,016 | $ | 1,869,469 | $ | 596,966 | $ | (2,240,409 | ) | $ | 1,886,042 | |||||||||
Liabilities and equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Current portion of long-term debt | $ | — | $ | 243 | $ | 10 | $ | — | $ | 253 | ||||||||||
Accounts payable—trade | — | 57,529 | 19,294 | — | 76,823 | |||||||||||||||
Accrued liabilities | 7,027 | 40,874 | 10,662 | — | 58,563 | |||||||||||||||
Deferred revenue | — | 1,334 | 5,949 | — | 7,283 | |||||||||||||||
Billings in excess of costs and profits recognized | — | 1,872 | 6,759 | — | 8,631 | |||||||||||||||
Total current liabilities | 7,027 | 101,852 | 42,674 | — | 151,553 | |||||||||||||||
Long-term debt, net of current portion | 395,970 | 34 | 12 | — | 396,016 | |||||||||||||||
Long-term loans and payables to affiliates | — | 527,406 | — | (527,406 | ) | — | ||||||||||||||
Deferred income taxes, net | — | 36,937 | 14,163 | — | 51,100 | |||||||||||||||
Other long-term liabilities | — | 14,533 | 15,423 | — | 29,956 | |||||||||||||||
Total liabilities | 402,997 | 680,762 | 72,272 | (527,406 | ) | 628,625 | ||||||||||||||
Total stockholder's equity | 1,257,019 | 1,188,707 | 524,297 | (1,713,003 | ) | 1,257,020 | ||||||||||||||
Noncontrolling interest in subsidiary | — | — | 397 | — | 397 | |||||||||||||||
Equity | 1,257,019 | 1,188,707 | 524,694 | (1,713,003 | ) | 1,257,417 | ||||||||||||||
Total liabilities and equity | $ | 1,660,016 | $ | 1,869,469 | $ | 596,966 | $ | (2,240,409 | ) | $ | 1,886,042 | |||||||||
34
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
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 | 5,581 | — | — | — | 5,581 | |||||||||||||||
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 | $ | 1,828,367 | $ | 2,104,252 | $ | 719,651 | $ | (2,438,168 | ) | $ | 2,214,102 | |||||||||
Liabilities and equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Current portion of long-term debt | $ | — | $ | 828 | $ | 12 | $ | — | $ | 840 | ||||||||||
Accounts payable—trade | — | 85,179 | 42,578 | — | 127,757 | |||||||||||||||
Accrued liabilities | 12,733 | 84,824 | 29,333 | — | 126,890 | |||||||||||||||
Deferred revenue | — | 3,783 | 7,136 | — | 10,919 | |||||||||||||||
Billings in excess of cost and profit recognized | — | 1,189 | 14,596 | — | $ | 15,785 | ||||||||||||||
Total current liabilities | 12,733 | 175,803 | 93,655 | — | 282,191 | |||||||||||||||
Long-term debt, net of current portion | 420,275 | 183 | 26 | — | 420,484 | |||||||||||||||
Long-term payables to affiliates | — | 506,065 | — | (506,065 | ) | — | ||||||||||||||
Deferred income tax, net | $ | — | $ | 77,311 | $ | 20,877 | $ | — | 98,188 | |||||||||||
Other long-term liabilities | — | 11,189 | 6,129 | — | 17,318 | |||||||||||||||
Total liabilities | 433,008 | 770,551 | 120,687 | (506,065 | ) | 818,181 | ||||||||||||||
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 | $ | 1,828,367 | $ | 2,104,252 | $ | 719,651 | $ | (2,438,168 | ) | $ | 2,214,102 | |||||||||
35
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Condensed consolidating statements of cash flows | ||||||||||||||||||||
Year ended December 31, 2015 | ||||||||||||||||||||
FET (Parent) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Cash flows from (used in) operating activities | $ | (17,306 | ) | $ | 112,629 | $ | 60,590 | $ | — | $ | 155,913 | |||||||||
Cash flows from investing activities | ||||||||||||||||||||
Acquisition of businesses, net of cash acquired | — | (60,836 | ) | — | — | (60,836 | ) | |||||||||||||
Investment in unconsolidated subsidiary | — | — | — | — | — | |||||||||||||||
Capital expenditures for property and equipment | — | (23,035 | ) | (9,256 | ) | — | (32,291 | ) | ||||||||||||
Long-term loans and advances to affiliates | 38,019 | 41,755 | — | (79,774 | ) | — | ||||||||||||||
Other | — | 1,057 | 764 | — | 1,821 | |||||||||||||||
Net cash provided by (used in) investing activities | 38,019 | (41,059 | ) | (8,492 | ) | (79,774 | ) | (91,306 | ) | |||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Borrowings under Credit Facility due to acquisitions | — | — | — | — | — | |||||||||||||||
Borrowings under Credit Facility | 94,984 | — | — | — | 94,984 | |||||||||||||||
Issuance of Senior Notes | — | — | — | — | — | |||||||||||||||
Repayment of long-term debt | (120,077 | ) | — | — | — | (120,077 | ) | |||||||||||||
Long-term loans and advances to affiliates | — | (38,019 | ) | (41,755 | ) | 79,774 | — | |||||||||||||
Repurchases of stock | (6,438 | ) | — | — | — | (6,438 | ) | |||||||||||||
Proceeds from stock issuance | 5,275 | — | — | — | 5,275 | |||||||||||||||
Other | (8 | ) | (673 | ) | — | — | (681 | ) | ||||||||||||
Net cash provided by (used in) financing activities | (26,264 | ) | (38,692 | ) | (41,755 | ) | 79,774 | (26,937 | ) | |||||||||||
Effect of exchange rate changes on cash | — | — | (5,000 | ) | — | (5,000 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents | (5,551 | ) | 32,878 | 5,343 | — | 32,670 | ||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 5,551 | 4,006 | 67,022 | — | 76,579 | |||||||||||||||
End of period | $ | — | $ | 36,884 | $ | 72,365 | $ | — | $ | 109,249 | ||||||||||
36
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Condensed consolidating statements of cash flows | ||||||||||||||||||||
Year ended December 31, 2014 | ||||||||||||||||||||
FET (Parent) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Cash flows from (used in) operating activities | $ | (16,796 | ) | $ | 175,700 | $ | 111,062 | $ | — | $ | 269,966 | |||||||||
Cash flows from investing activities | ||||||||||||||||||||
Acquisition of businesses, net of cash acquired | — | — | (38,289 | ) | — | (38,289 | ) | |||||||||||||
Investment in unconsolidated subsidiary | — | — | — | — | — | |||||||||||||||
Capital expenditures for property and equipment | — | (42,334 | ) | (11,458 | ) | — | (53,792 | ) | ||||||||||||
Long-term loans and advances to affiliates | 191,290 | 34,010 | — | (225,300 | ) | — | ||||||||||||||
Other | — | 20,862 | 528 | — | 21,390 | |||||||||||||||
Net cash provided by (used in) investing activities | 191,290 | 12,538 | (49,219 | ) | (225,300 | ) | (70,691 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Borrowings under Credit Facility | 15,000 | 423 | — | — | 15,423 | |||||||||||||||
Repayment of long-term debt | (98,406 | ) | 124 | (133 | ) | — | (98,415 | ) | ||||||||||||
Long-term loans and advances to affiliates | — | (191,290 | ) | (34,010 | ) | 225,300 | — | |||||||||||||
Repurchases of stock | (96,632 | ) | — | — | — | (96,632 | ) | |||||||||||||
Proceeds from stock issuance | 11,101 | — | — | — | 11,101 | |||||||||||||||
Other | (6 | ) | 6,511 | — | — | 6,505 | ||||||||||||||
Net cash provided by (used in) financing activities | (168,943 | ) | (184,232 | ) | (34,143 | ) | 225,300 | (162,018 | ) | |||||||||||
Effect of exchange rate changes on cash | — | — | (260 | ) | — | (260 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 5,551 | 4,006 | 27,440 | — | 36,997 | |||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | — | — | 39,582 | — | 39,582 | |||||||||||||||
End of period | $ | 5,551 | $ | 4,006 | $ | 67,022 | $ | — | $ | 76,579 | ||||||||||
37
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
Condensed consolidating statements of cash flows | ||||||||||||||||||||
Year ended December 31, 2013 | ||||||||||||||||||||
FET (Parent) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Cash flows from (used in) operating activities | $ | (3,683 | ) | $ | 157,198 | $ | 57,878 | $ | — | $ | 211,393 | |||||||||
Cash flows from investing activities | ||||||||||||||||||||
Acquisition of businesses, net of cash acquired | — | (54,389 | ) | (127,329 | ) | — | (181,718 | ) | ||||||||||||
Investment in unconsolidated subsidiary | — | (48,013 | ) | — | — | (48,013 | ) | |||||||||||||
Capital expenditures for property and equipment | — | (48,270 | ) | (11,993 | ) | — | (60,263 | ) | ||||||||||||
Long-term loans and advances to affiliates | (77,933 | ) | (97,316 | ) | — | 175,249 | — | |||||||||||||
Other | — | 392 | 572 | — | 964 | |||||||||||||||
Net cash provided by (used in) investing activities | (77,933 | ) | (247,596 | ) | (138,750 | ) | 175,249 | (289,030 | ) | |||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Borrowings under Credit Facility due to acquisitions | — | 54,389 | 127,329 | — | 181,718 | |||||||||||||||
Borrowings under Credit Facility | 402,748 | (52,184 | ) | (127,329 | ) | — | 223,235 | |||||||||||||
Issuance of Senior Notes | 403,250 | — | — | — | 403,250 | |||||||||||||||
Repayment of long-term debt | (713,521 | ) | (1,639 | ) | 29 | — | (715,131 | ) | ||||||||||||
Long-term loans and advances to affiliates | — | 86,897 | 88,352 | (175,249 | ) | — | ||||||||||||||
Deferred financing costs | (12,003 | ) | — | — | — | (12,003 | ) | |||||||||||||
Payment of contingent consideration | — | (11,435 | ) | — | — | (11,435 | ) | |||||||||||||
Other | 1,142 | 6,278 | — | — | 7,420 | |||||||||||||||
Net cash provided by (used in) financing activities | 81,616 | 82,306 | 88,381 | (175,249 | ) | 77,054 | ||||||||||||||
Effect of exchange rate changes on cash | — | — | (898 | ) | — | (898 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents | — | (8,092 | ) | 6,611 | — | (1,481 | ) | |||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | — | 8,092 | 32,971 | — | 41,063 | |||||||||||||||
End of period | $ | — | $ | — | $ | 39,582 | $ | — | $ | 39,582 | ||||||||||
38
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
17. Quarterly results of operations (unaudited)
The following tables summarize the Company's results by quarter for the years ended December 31, 2015 and 2014. The quarterly results may not be comparable primarily due to acquisitions in 2015, 2014 and 2013. Refer to Note 3, Acquisitions, for further information.
2015 | |||||||||||||||
(in thousands, except per share information) | Q1 | Q2 | Q3 | Q4 | |||||||||||
Net sales | $ | 348,096 | $ | 284,415 | $ | 244,993 | $ | 196,148 | |||||||
Cost of sales | 238,970 | 199,532 | 179,231 | 193,242 | |||||||||||
Gross profit | 109,126 | 84,883 | 65,762 | 2,906 | |||||||||||
Total operating expenses(1) | 73,465 | 66,285 | 57,439 | 194,035 | |||||||||||
Earnings from equity investment | 4,571 | 3,840 | 3,870 | 2,543 | |||||||||||
Operating income (loss) | 40,232 | 22,438 | 12,193 | (188,586 | ) | ||||||||||
Total other expense | 971 | 11,662 | 4,543 | 3,424 | |||||||||||
Income (loss) before income taxes | 39,261 | 10,776 | 7,650 | (192,010 | ) | ||||||||||
Provision for income tax expense (benefit) | 10,605 | 1,911 | 932 | (28,387 | ) | ||||||||||
Net income (loss) | 28,656 | 8,865 | 6,718 | (163,623 | ) | ||||||||||
Less: loss attributable to noncontrolling interest | (16 | ) | (9 | ) | (2 | ) | (4 | ) | |||||||
Net income (loss) attributable to common stockholders | $ | 28,672 | $ | 8,874 | $ | 6,720 | $ | (163,619 | ) | ||||||
Weighted average shares outstanding | |||||||||||||||
Basic | 89,482 | 89,767 | 90,058 | 90,175 | |||||||||||
Diluted | 91,469 | 91,884 | 91,687 | 90,175 | |||||||||||
Earnings (losses) per share | |||||||||||||||
Basic | $ | 0.32 | $ | 0.10 | $ | 0.07 | $ | (1.81 | ) | ||||||
Diluted | $ | 0.31 | $ | 0.10 | $ | 0.07 | $ | (1.81 | ) | ||||||
(1) Total Operating expenses in Q4 included $125,092 goodwill and intangible assets impairment.
39
Forum Energy Technologies, Inc. and subsidiaries
Notes to consolidated financial statements (continued)
2014 | |||||||||||||||
(in thousands, except per share information) | Q1 | Q2 | Q3 | Q4 | |||||||||||
Net sales | $ | 403,938 | $ | 428,279 | $ | 468,822 | $ | 438,678 | |||||||
Cost of sales | 276,000 | 290,286 | 316,784 | 297,195 | |||||||||||
Gross profit | 127,938 | 137,993 | 152,038 | 141,483 | |||||||||||
Total operating expenses | 71,857 | 78,129 | 82,747 | 83,845 | |||||||||||
Earnings from equity investment | 5,308 | 5,940 | 6,749 | 7,167 | |||||||||||
Operating income | 61,389 | 65,804 | 76,040 | 64,805 | |||||||||||
Total other expense | 9,227 | 10,854 | 2,477 | 2,958 | |||||||||||
Income before income taxes | 52,162 | 54,950 | 73,563 | 61,847 | |||||||||||
Provision for income tax expense | 15,656 | 15,407 | 21,332 | 15,750 | |||||||||||
Net income | 36,506 | 39,543 | 52,231 | 46,097 | |||||||||||
Less: Income (loss) attributable to noncontrolling interest | (24 | ) | 21 | 5 | 10 | ||||||||||
Net income attributable to common stockholders | $ | 36,530 | $ | 39,522 | $ | 52,226 | $ | 46,087 | |||||||
Weighted average shares outstanding | |||||||||||||||
Basic | 92,129 | 92,649 | 93,331 | 92,376 | |||||||||||
Diluted | 95,191 | 95,695 | 96,198 | 94,666 | |||||||||||
Earnings per share | |||||||||||||||
Basic | $ | 0.40 | $ | 0.43 | $ | 0.56 | $ | 0.50 | |||||||
Diluted | $ | 0.38 | $ | 0.41 | $ | 0.54 | $ | 0.49 | |||||||
40