FET 2014 Q3 10-Q
Table of Contents
 

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

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

920 Memorial City Way, Suite 1000
Houston, Texas 77024
(Address of principal executive offices)
(281) 949-2500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 24, 2014, there were 94,148,831 common shares outstanding.


Table of Contents
 


Table of Contents



2

Table of Contents
 

PART I — FINANCIAL INFORMATION

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

 
$
390,192

 
$
1,301,039

 
$
1,131,078

Cost of sales
316,784

 
265,021

 
883,070

 
776,618

Gross profit
152,038

 
125,171

 
417,969

 
354,460

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
81,316

 
71,594

 
230,087

 
202,697

Transaction expenses
1,516

 
376

 
2,326

 
2,191

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

 
320

 
229

Total operating expenses
82,747

 
72,179

 
232,733

 
205,117

Earnings from equity investment
6,749

 
2,946

 
17,997

 
2,946

Operating income
76,040

 
55,938

 
203,233

 
152,289

Other expense (income)
 
 
 
 
 
 
 
Interest expense
7,699

 
4,373

 
23,174

 
10,847

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

 
(616
)
 
1,863

Deferred loan costs written off

 
2,149

 

 
2,149

Total other expense
2,477

 
8,833

 
22,558

 
14,859

Income before income taxes
73,563

 
47,105

 
180,675

 
137,430

Provision for income tax expense
21,332

 
13,924

 
52,395

 
42,371

Net income
52,231

 
33,181

 
128,280

 
95,059

Less: Income attributable to noncontrolling interest
5

 
40

 
2

 
59

Net income attributable to common stockholders
52,226

 
33,141

 
128,278

 
95,000

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
93,331

 
91,443

 
92,728

 
90,347

Diluted
96,198

 
94,734

 
95,631

 
94,527

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.56

 
$
0.36

 
$
1.38

 
$
1.05

Diluted
$
0.54

 
$
0.35

 
$
1.34

 
$
1.01

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

 
33,181

 
128,280

 
95,059

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

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

 

 
2

 

Comprehensive income
17,757

 
57,295

 
106,528

 
94,270

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

Comprehensive income attributable to common stockholders
$
17,725

 
$
57,263

 
$
106,508

 
$
94,320

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


3

Table of Contents
 

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

 
$
39,582

Accounts receivable—trade, net
313,855

 
250,272

Inventories
454,470

 
441,049

Prepaid expenses and other current assets
38,309

 
29,707

Costs and estimated profits in excess of billings
28,230

 
24,012

Deferred income taxes, net
28,834

 
24,846

Total current assets
937,782

 
809,468

Property and equipment, net of accumulated depreciation
188,991

 
180,292

Deferred financing costs, net
13,746

 
15,658

Intangibles
281,850

 
295,352

Goodwill
808,762

 
802,318

Investment in unconsolidated subsidiary
57,199

 
60,292

Other long-term assets
5,797

 
5,489

Total assets
$
2,294,127

 
$
2,168,869

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

 
$
998

Accounts payable—trade
134,078

 
100,221

Accrued liabilities
123,402

 
96,529

Deferred revenue
14,816

 
15,837

Billings in excess of costs and profits recognized
19,043

 
6,398

Total current liabilities
292,237

 
219,983

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

 
512,077

Deferred income taxes, net
100,282

 
97,774

Other long-term liabilities
13,135

 
8,069

Total liabilities
826,071

 
837,903

Commitments and contingencies

 


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

 
928

Additional paid-in capital
858,663

 
826,064

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

 
687

Retained earnings
653,418

 
525,140

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

Total stockholders’ equity
1,467,487

 
1,330,355

Noncontrolling interest in subsidiary
569

 
611

Total equity
1,468,056

 
1,330,966

Total liabilities and equity
$
2,294,127

 
$
2,168,869

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

4

Table of Contents
 

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

 
$
95,059

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

 
26,498

Amortization of intangible assets
20,608

 
17,478

Share-based compensation expense
14,334

 
15,442

Deferred income taxes
(4,477
)
 
11,474

Deferred loan costs written off

 
2,149

Earnings from equity investment, net of distributions
3,092

 
(2,946
)
Other
3,644

 
582

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

Inventories
(14,520
)
 
35,264

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

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

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

 
$
164,127

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

 
(112,241
)
Distribution from unconsolidated subsidiary

 
64,228

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

 
739

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

 
345,520

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

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

 
4,225

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

 
4,768

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

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

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

 
41,063

End of period
$
74,084

 
$
28,201

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

 
$

Payment of contingent consideration via stock

 
4,075

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

5

Table of Contents
 

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

6

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

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

Property and equipment
 
3,837

Intangible assets (primarily customer relationships)
 
11,527

Non-tax-deductible goodwill
 
19,942

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

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

Property and equipment
 
4,545

Intangible assets (primarily customer relationships)
 
59,242

Non-tax-deductible goodwill
 
100,257

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

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

7

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

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

 
$
139,573

Work in process
44,244

 
51,819

Finished goods
291,863

 
276,076

Gross inventories
486,377

 
467,468

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

 
$
441,049

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

 
$
78,963

 
$
802,318

Acquisitions and divestitures
16,287

 

 
16,287

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

 
$
78,754

 
$
808,762


8

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

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

 
$
(82,100
)
 
$
206,618

 
4-15
Patents and technology
31,680

 
(7,546
)
 
24,134

 
5-17
Non-compete agreements
7,216

 
(5,618
)
 
1,598

 
3-6
Trade names
48,854

 
(14,514
)
 
34,340

 
10-15
Distributor relationships
22,160

 
(12,230
)
 
9,930

 
8-15
Trademark
5,230

 

 
5,230

 
Indefinite
Intangible Assets Total
$
403,858

 
$
(122,008
)
 
$
281,850

 
 

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

 
$
(67,435
)
 
$
215,736

 
4-15
Patents and technology
33,843

 
(6,510
)
 
27,333

 
5-17
Non-compete agreements
6,577

 
(5,108
)
 
1,469

 
3-6
Trade names
46,654

 
(11,948
)
 
34,706

 
10-15
Distributor relationships
22,160

 
(11,282
)
 
10,878

 
8-15
Trademark
5,230

 

 
5,230

 
Indefinite
Intangible Assets Total
$
397,635

 
$
(102,283
)
 
$
295,352

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

 
$
403,208

Senior secured revolving credit facility
17,004

 
108,000

Other debt
1,408

 
1,867

Total debt
421,315

 
513,075

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

 
$
512,077

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

9

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

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

10

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

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

 
$
248,344

 
$
848,474

 
$
679,482

Production & Infrastructure
161,696

 
142,731

 
453,640

 
452,845

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

 
$
390,192

 
$
1,301,039

 
$
1,131,078

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Drilling & Subsea
$
57,929

 
$
42,568

 
$
155,330

 
$
110,630

Production & Infrastructure
29,816

 
21,402

 
80,260

 
65,600

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

 
56,523

 
205,879

 
154,709

Transaction expenses
1,516

 
376

 
2,326

 
2,191

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

 
320

 
229

Income from operations
$
76,040

 
$
55,938

 
$
203,233

 
$
152,289

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

 
$
1,655,355

Production & Infrastructure
 
499,360

 
468,520

Corporate
 
78,406

 
44,994

Total assets
 
$
2,294,127

 
$
2,168,869


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

 
$
33,141

 
$
128,278

 
$
95,000

 
 
 
 
 
 
 
 
Average shares outstanding (basic)
93,331

 
91,443

 
92,728

 
90,347

Common stock equivalents
2,867

 
3,291

 
2,903

 
4,180

Diluted shares
96,198

 
94,734

 
95,631

 
94,527

Earnings per share
 
 
 
 
 
 
 
Basic earnings per share
$
0.56

 
$
0.36

 
$
1.38

 
$
1.05

Diluted earnings per share
$
0.54

 
$
0.35

 
$
1.34

 
$
1.01


11

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

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

12

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

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

 
$
330,772

 
$
179,458

 
$
(41,408
)
 
$
468,822

Cost of sales
 

 
230,938

 
127,423

 
(41,577
)
 
316,784

Gross profit
 

 
99,834

 
52,035

 
169

 
152,038

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
63,228

 
18,088

 

 
81,316

Other operating expense
 

 
1,419

 
12

 

 
1,431

Total operating expenses
 

 
64,647

 
18,100

 

 
82,747

Earnings from equity investment
 

 
6,749

 

 

 
6,749

Equity earnings from affiliate, net of tax
 
57,161

 
28,048

 

 
(85,209
)
 

Operating income
 
57,161

 
69,984

 
33,935

 
(85,040
)
 
76,040

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

 
75

 
31

 

 
7,699

Interest income with affiliate
 

 
(1,887
)
 

 
1,887

 

Interest expense with affiliate
 

 

 
1,887

 
(1,887
)
 

Foreign exchange (gains) losses and other, net
 

 
(744
)
 
(4,478
)
 

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

 
(2,556
)
 
(2,560
)
 

 
2,477

Income before income taxes
 
49,568

 
72,540

 
36,495

 
(85,040
)
 
73,563

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

 
8,611

 

 
21,332

Net income
 
52,226

 
57,161

 
27,884

 
(85,040
)
 
52,231

Less: Income attributable to noncontrolling interest
 

 

 
5

 

 
5

Net income attributable to common stockholders
 
52,226

 
57,161

 
27,879

 
(85,040
)
 
52,226

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

 
57,161

 
27,884

 
(85,040
)
 
52,231

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

 
(34,474
)
Comprehensive income
 
17,752

 
22,687

 
(6,590
)
 
(16,092
)
 
17,757

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(32
)
 

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

 
$
22,687

 
$
(6,622
)
 
$
(16,092
)
 
$
17,725



13

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

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

 
$
287,551

 
$
139,986

 
$
(37,345
)
 
$
390,192

Cost of sales
 

 
203,657

 
98,369

 
(37,005
)
 
265,021

Gross profit
 

 
83,894

 
41,617

 
(340
)
 
125,171

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
55,957

 
15,637

 

 
71,594

Other operating expense
 

 
282

 
303

 

 
585

Total operating expenses
 

 
56,239

 
15,940

 

 
72,179

Earnings from equity investment
 

 
2,946

 

 

 
2,946

Equity earnings from affiliates, net of tax
 
37,369

 
16,633

 

 
(54,002
)
 

Operating income
 
37,369

 
47,234

 
25,677

 
(54,342
)
 
55,938

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

 
12

 
6

 

 
4,373

Interest income with affiliate
 

 
(2,001
)
 

 
2,001

 

Interest expense with affiliate
 

 
 
 
2,001

 
(2,001
)
 

Foreign exchange (gains) losses and other, net
 

 
(85
)
 
2,396

 

 
2,311

Deferred loan costs written off
 
2,149

 

 

 

 
2,149

Total other expense (income)
 
6,504

 
(2,074
)
 
4,403

 

 
8,833

Income before income taxes
 
30,865

 
49,308

 
21,274

 
(54,342
)
 
47,105

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

 
4,261

 

 
13,924

Net income
 
33,141

 
37,369

 
17,013

 
(54,342
)
 
33,181

Less: Income attributable to noncontrolling interest
 

 

 
40

 

 
40

Net income attributable to common stockholders
 
33,141

 
37,369

 
16,973

 
(54,342
)
 
33,141

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

 
37,369

 
17,013

 
(54,342
)
 
33,181

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

 
24,114

 
24,114

 
(48,228
)
 
24,114

Comprehensive income
 
57,255

 
61,483

 
41,127

 
(102,570
)
 
57,295

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(32
)
 

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

 
$
61,483

 
$
41,095

 
$
(102,570
)
 
$
57,263


14

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

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

 
$
941,885

 
$
480,049

 
$
(120,895
)
 
$
1,301,039

Cost of sales
 

 
659,444

 
342,269

 
(118,643
)
 
883,070

Gross profit
 

 
282,441

 
137,780

 
(2,252
)
 
417,969

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
176,331

 
53,756

 

 
230,087

Other operating expense
 

 
2,965

 
(319
)
 

 
2,646

Total operating expenses
 

 
179,296

 
53,437

 

 
232,733

Earnings from equity investment
 

 
17,997

 

 

 
17,997

Equity earnings from affiliate, net of tax
 
143,310

 
59,688

 

 
(202,998
)
 

Operating income
 
143,310

 
180,830

 
84,343

 
(205,250
)
 
203,233

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

 
77

 
(29
)
 

 
23,174

Interest income with affiliate
 

 
(5,770
)
 

 
5,770

 

Interest expense with affiliate
 

 

 
5,770

 
(5,770
)
 

Foreign exchange (gains) losses and other, net
 

 
274

 
(890
)
 

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

 
(5,419
)
 
4,851

 

 
22,558

Income before income taxes
 
120,184

 
186,249

 
79,492

 
(205,250
)
 
180,675

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

 
17,550

 

 
52,395

Net income
 
128,278

 
143,310

 
61,942

 
(205,250
)
 
128,280

Less: Income attributable to noncontrolling interest
 

 

 
2

 

 
2

Net income attributable to common stockholders
 
128,278

 
143,310

 
61,940

 
(205,250
)
 
128,278

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

 
143,310

 
61,942

 
(205,250
)
 
128,280

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

 
(21,754
)
Change in pension liability
 
2

 
2

 
2

 
(4
)
 
2

Comprehensive income
 
106,526

 
121,558

 
40,190

 
(161,746
)
 
106,528

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(20
)
 

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

 
$
121,558

 
$
40,170

 
$
(161,746
)
 
$
106,508


15

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

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

 
$
852,560

 
$
366,417

 
$
(87,899
)
 
$
1,131,078

Cost of sales
 

 
598,804

 
264,441

 
(86,627
)
 
776,618

Gross profit
 

 
253,756

 
101,976

 
(1,272
)
 
354,460

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
160,956

 
41,741

 

 
202,697

Other operating expense
 

 
2,136

 
284

 

 
2,420

Total operating expenses
 

 
163,092

 
42,025

 

 
205,117

Earnings from equity investment
 

 
2,946

 

 

 
2,946

Equity earnings from affiliates, net of tax
 
103,366

 
43,015

 

 
(146,381
)
 

Operating income
 
103,366

 
136,625

 
59,951

 
(147,653
)
 
152,289

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense
 
10,722

 
85

 
40

 

 
10,847

Interest income with affiliate
 

 
(2,001
)
 

 
2,001

 

Interest expense with affiliate
 

 

 
2,001

 
(2,001
)
 

Foreign exchange (gains) losses and other, net
 

 
(608
)
 
2,471

 

 
1,863

Deferred loan costs written off
 
2,149

 

 

 

 
2,149

Total other expense (income)
 
12,871

 
(2,524
)
 
4,512

 

 
14,859

Income before income taxes
 
90,495

 
139,149

 
55,439

 
(147,653
)
 
137,430

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

 
11,093

 

 
42,371

Net income
 
95,000

 
103,366

 
44,346

 
(147,653
)
 
95,059

Less: Income attributable to noncontrolling interest
 

 

 
59

 

 
59

Net income attributable to common stockholders
 
95,000

 
103,366

 
44,287

 
(147,653
)
 
95,000

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

 
103,366

 
44,346

 
(147,653
)
 
95,059

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

 
(789
)
Comprehensive income
 
94,211

 
102,577

 
43,557

 
(146,075
)
 
94,270

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
50

 

 
50

Comprehensive income attributable to common stockholders
 
$
94,211

 
$
102,577

 
$
43,607

 
$
(146,075
)
 
$
94,320



16

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

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

 
$
12,421

 
$
61,663

 
$

 
$
74,084

Accounts receivable—trade, net
 

 
204,248

 
109,607

 

 
313,855

Inventories
 

 
332,730

 
129,056

 
(7,316
)
 
454,470

Other current assets
 

 
62,064

 
33,309

 

 
95,373

Total current assets
 

 
611,463

 
333,635

 
(7,316
)
 
937,782

Property and equipment, net of accumulated depreciation
 

 
149,409

 
39,582

 

 
188,991

Intangibles
 

 
203,926

 
77,924

 

 
281,850

Goodwill
 

 
522,898

 
285,864

 

 
808,762

Investment in unconsolidated subsidiary
 

 
57,199

 

 

 
57,199

Investment in affiliates
 
1,306,259

 
491,942

 

 
(1,798,201
)
 

Long-term loans and advances to affiliates
 
581,528

 
97,324

 

 
(678,852
)
 

Other long-term assets
 
13,746

 
4,861

 
936

 

 
19,543

Total assets
 
$
1,901,533

 
$
2,139,022

 
$
737,941

 
$
(2,484,369
)
 
$
2,294,127

Liabilities and equity
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Accounts payable—trade
 
$

 
$
89,761

 
$
44,317

 
$

 
$
134,078

Accrued liabilities
 
14,143

 
77,451

 
31,808

 

 
123,402

Current portion of debt and other current liabilities
 

 
9,476

 
25,281

 

 
34,757

Total current liabilities
 
14,143

 
176,688

 
101,406

 

 
292,237

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

 
480

 
34

 

 
420,417

Long-term loans and payables to affiliates
 

 
572,467

 
106,385

 
(678,852
)
 

Other long-term liabilities
 

 
83,128

 
30,289

 

 
113,417

Total liabilities
 
434,046

 
832,763

 
238,114

 
(678,852
)
 
826,071

 
 
 
 
 
 
 
 
 
 
 
Total stockholder's equity
 
1,467,487

 
1,306,259

 
499,258

 
(1,805,517
)
 
1,467,487

Noncontrolling interest in subsidiary
 

 

 
569

 

 
569

Equity
 
1,467,487

 
1,306,259

 
499,827

 
(1,805,517
)
 
1,468,056

Total liabilities and equity
 
$
1,901,533

 
$
2,139,022

 
$
737,941

 
$
(2,484,369
)
 
$
2,294,127


17

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

Condensed consolidating balance sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$

 
$
39,582

 
$

 
$
39,582

Accounts receivable—trade, net
 

 
172,563

 
77,709

 

 
250,272

Inventories
 

 
310,191

 
135,924

 
(5,066
)
 
441,049

Other current assets
 
63

 
41,495

 
37,007

 

 
78,565

Total current assets
 
63

 
524,249

 
290,222

 
(5,066
)
 
809,468

Property and equipment, net of accumulated depreciation
 

 
143,180

 
37,112

 

 
180,292

Intangibles
 

 
220,980

 
74,372

 

 
295,352

Goodwill
 

 
526,083

 
276,235

 

 
802,318

Investment in unconsolidated subsidiary
 

 
60,292

 

 

 
60,292

Investment in affiliates
 
1,209,699

 
454,024

 

 
(1,663,723
)
 

Long-term loans and advances to affiliates
 
623,337

 
97,316

 

 
(720,653
)
 

Other long-term assets
 
15,658

 
4,168

 
1,321

 

 
21,147

Total assets
 
$
1,848,757

 
$
2,030,292

 
$
679,262

 
$
(2,389,442
)
 
$
2,168,869

Liabilities and equity
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Accounts payable—trade
 
$

 
$
69,467

 
$
30,754

 
$

 
$
100,221

Accrued liabilities
 
7,194

 
43,693

 
45,642

 

 
96,529

Current portion of debt and other current liabilities
 

 
9,217

 
14,016

 

 
23,233

Total current liabilities
 
7,194

 
122,377

 
90,412

 

 
219,983

Long-term debt, net of current portion
 
511,208

 
824

 
45

 

 
512,077

Long-term loans and payables to affiliates
 

 
619,778

 
100,875

 
(720,653
)
 

Other long-term liabilities
 

 
77,614

 
28,229

 

 
105,843

Total liabilities
 
518,402

 
820,593

 
219,561

 
(720,653
)
 
837,903

 
 
 
 
 
 
 
 
 
 
 
Total stockholder's equity
 
1,330,355

 
1,209,699

 
459,090

 
(1,668,789
)
 
1,330,355

Noncontrolling interest in subsidiary
 

 

 
611

 

 
611

Equity
 
1,330,355

 
1,209,699

 
459,701

 
(1,668,789
)
 
1,330,966

Total liabilities and equity
 
$
1,848,757

 
$
2,030,292

 
$
679,262

 
$
(2,389,442
)
 
$
2,168,869


18

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

Condensed consolidating statements of cash flows
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Cash flows from (used in) operating activities
 
$
(6,101
)
 
$
120,323

 
$
65,531

 
$

 
$
179,753

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

 

 
(38,289
)
 

 
(38,289
)
Capital expenditures for property and equipment
 

 
(30,808
)
 
(9,124
)
 

 
(39,932
)
Long-term loans and advances to affiliates
 
88,410

 

 

 
(88,410
)
 

Other
 

 
8,421

 
314

 

 
8,735

Net cash provided by (used in) investing activities
 
$
88,410

 
$
(22,387
)
 
$
(47,099
)
 
$
(88,410
)
 
$
(69,486
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Repayment of long-term debt
 
(91,307
)
 
(328
)
 
(125
)
 

 
(91,760
)
Long-term loans and advances to affiliates
 

 
(92,478
)
 
4,068

 
88,410

 

Other
 
8,998

 
7,291

 

 

 
16,289

Net cash provided by (used in) financing activities
 
$
(82,309
)
 
$
(85,515
)
 
$
3,943

 
$
88,410

 
$
(75,471
)
Effect of exchange rate changes on cash
 

 

 
(294
)
 

 
(294
)
Net increase (decrease) in cash and cash equivalents
 

 
12,421

 
22,081

 

 
34,502

Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
Beginning of period
 

 

 
39,582

 

 
39,582

End of period
 
$

 
$
12,421

 
$
61,663

 
$

 
$
74,084


19

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

Condensed consolidating statements of cash flows
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Cash flows from (used in) operating activities
 
$
(6,581
)
 
$
125,915

 
$
44,793

 
$

 
$
164,127

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

 
(53,951
)
 
(127,766
)
 

 
(181,717
)
Investment in unconsolidated subsidiary
 

 
(112,241
)
 

 

 
(112,241
)
Distribution from unconsolidated subsidiary
 

 
64,228

 

 

 
64,228

Capital expenditures for property and equipment
 

 
(35,090
)
 
(9,627
)
 

 
(44,717
)
Long-term loans and advances to affiliates
 
(100,007
)
 

 

 
100,007

 

Other
 

 
291

 
448

 

 
739

Net cash provided by (used in) investing activities
 
$
(100,007
)
 
$
(136,763
)
 
$
(136,945
)
 
$
100,007

 
$
(273,708
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Borrowings under Credit Facility
 
342,614

 
2,906

 

 

 
345,520

Repayment of long-term debt
 
(232,344
)
 
(3,068
)
 
66

 

 
(235,346
)
Payment of contingent consideration
 

 
(11,435
)
 

 

 
(11,435
)
Long-term loans and advances to affiliates
 

 
10,128

 
89,879

 
(100,007
)
 

Other
 
(3,682
)
 
4,225

 

 

 
543

Net cash provided by (used in) financing activities
 
$
106,588

 
$
2,756

 
$
89,945

 
$
(100,007
)
 
$
99,282

Effect of exchange rate changes on cash
 

 

 
(2,563
)
 

 
(2,563
)
Net increase (decrease) in cash and cash equivalents
 

 
(8,092
)
 
(4,770
)
 

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

 
8,092

 
32,971

 

 
41,063

End of period
 
$

 
$

 
$
28,201

 
$

 
$
28,201



20

Table of Contents
 

Management's Discussion and Analysis
of Financial Condition and Results of Operations
Item 2. Management’s discussion and analysis of financial condition and results of operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
Forward-looking statements may include statements about:
business strategy;
cash flows and liquidity;
the volatility of oil and natural gas prices;
our ability to successfully manage our growth, including risks and uncertainties associated with integrating
and retaining key employees of the businesses we acquire;
the availability of raw materials and specialized equipment;
availability of skilled and qualified labor;
our ability to accurately predict customer demand;
competition in the oil and gas industry;
governmental regulation and taxation of the oil and natural gas industry;
environmental liabilities;
political, social and economic issues affecting the countries in which we do business;
our ability to deliver our backlog in a timely fashion;
our ability to implement new technologies and services;
availability and terms of capital;
general economic conditions;
benefits of our acquisitions;
availability of key management personnel;
operating hazards inherent in our industry;
the continued influence of our largest shareholder;
the ability to establish and maintain effective internal control over financial reporting;
the ability to operate effectively as a publicly traded company;
financial strategy, budget, projections and operating results;
uncertainty regarding our future operating results; and
plans, objectives, expectations and intentions contained in this report that are not historical.

All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or


21


suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on February 28, 2014 and elsewhere in this Quarterly Report on Form 10-Q. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Overview
We are a global oilfield products company, serving the subsea, drilling, completion, production and infrastructure sectors of the oil and natural gas industry. We design, manufacture and distribute products, and engage in aftermarket services, parts supply and related services that complement our product offering. Our product offering includes a mix of highly engineered capital products and frequently replaced items that are used in the exploration, development, production and transportation of oil and natural gas. Our capital products are directed at: drilling rig equipment for new rigs, upgrades and refurbishment projects; subsea construction and development projects; the placement of production equipment on new producing wells; and downstream capital projects. Our engineered systems are critical components used on drilling rigs 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, well stimulation and intervention service providers, subsea construction and service companies, and pipeline and refinery operators.
We operate two business segments:
Drilling & Subsea segment. We design and manufacture products and provide related services to the subsea, drilling, well construction, completion and intervention markets. Through this segment, we offer subsea technologies, including robotic vehicles and other capital equipment, specialty components and tooling, a broad suite of complementary subsea technical services and rental items, and applied products for subsea pipelines; drilling technologies, including capital equipment and a broad line of products consumed in the drilling and well intervention process; and downhole technologies, including cementing and casing tools, completion products, and a range of downhole protection solutions.
Production & Infrastructure segment. We design and manufacture products and provide related equipment and services to the well stimulation, completion, production and infrastructure markets. Through this segment, we supply flow equipment, including well stimulation consumable products and related recertification and refurbishment services; production equipment, including well site production equipment and process equipment; and valves, which includes a broad range of industrial and process valves.
Market Conditions
Management believes that the long-term fundamentals underlying the global demand for energy, such as long-term economic and demographic trends, remain strong. 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 the outlook for energy prices over a shorter term. Energy prices have historically been cyclical in nature, as exemplified by the recent decrease in oil prices. Current energy prices are affected by a wide range of factors, and changes in direction are difficult to predict.

22



The table below shows average crude oil and natural gas prices for West Texas Intermediate crude oil (WTI), United Kingdom Brent crude oil (Brent), and Henry Hub natural gas:
 
 
Three months ended
 
 
September 30,
 
June 30,
 
September 30,
 
 
2014
 
2014
 
2013
Average global oil, $/bbl
 
 
 
 
 
 
West Texas Intermediate
 
$
91.16

 
$
103.06

 
$
105.78

United Kingdom Brent
 
$
94.87

 
$
109.06

 
$
110.07

 
 
 
 
 
 
 
Average North American Natural Gas, $/Mcf
 
 
 
 
 
 
Henry Hub
 
$
4.12

 
$
4.59

 
$
3.55

In the third quarter 2014, average oil prices were approximately 12% and 14% lower than in the second quarter of 2014 and the third quarter 2013, respectively. Average natural gas prices were approximately 10% lower than in the second quarter 2014, but 16% higher than in the third quarter 2013. These oil and natural gas price levels during the quarter were sufficient to support high levels of exploration and production activity, including the continued development of offshore projects, which stimulates demand for our subsea products. Since the end of the quarter, oil prices have declined to the mid-to-low $80s. If these decreases continue, they could lead to lower levels of activity and a decrease in demand for our products.
In addition to the commodity price levels, the average active rig count data below, based on the weekly Baker Hughes Incorporated rig count, reflect a broad measure of industry activity and resultant demand for our drilling and production related products and services.

 
 
Three months ended
 
 
September 30,
 
June 30,
 
September 30,
 
 
2014
 
2014
 
2013
Active Rigs by Location
 
 
 
 
 
 
United States
 
1,903

 
1,852

 
1,770

Canada
 
386

 
199

 
350

International
 
1,348

 
1,348

 
1,285

Global Active Rigs
 
3,637

 
3,399


3,405

 
 
 
 
 
 
 
Land vs. Offshore Rigs
 
 
 
 
 
 
Land
 
3,245

 
3,016

 
3,026

Offshore
 
392

 
383

 
379

Global Active Rigs
 
3,637

 
3,399


3,405

 
 
 
 
 
 
 
U.S. Commodity Target
 
 
 
 
 
 
Oil/Gas
 
1,577

 
1,529

 
1,383

Gas
 
324

 
319

 
380

Unclassified
 
2

 
4

 
7

Total U.S. Rigs
 
1,903

 
1,852


1,770

 
 
 
 
 
 
 
U.S. Well Path
 
 
 
 
 
 
Horizontal
 
1,314

 
1,242

 
1,073

Vertical
 
372

 
395

 
436

Directional
 
217

 
215

 
261

Total U.S. Active Rigs
 
1,903

 
1,852


1,770


23


Generally, our sales are impacted by changes in rig activity and wells completed. Rig counts were at high levels during the third quarter 2014.The average U.S. rig count increased 3% from the second quarter 2014 and 8% from the third quarter 2013. The international rig count remained stable, while the Canadian rig count increased from its seasonally low second quarter and was up over 10% from the third quarter 2013. To the extent that future oil price declines result in lower levels of exploration and production capital expenditure plans in the future, the number of active rigs could decline.
In addition to the absolute number of active rigs, due to greater application of improved drilling and completion technologies, the current rig fleet is becoming more efficient allowing more wells to be drilled per rig. The trends in the capabilities of the rig fleet are reflected in the table above through the increases in horizontal and directional drilling rigs as a portion of the total rig count. If this trend continues, well completions could grow at a faster pace than the drilling rig count in the future. Higher drilling and completions activities should result in increased demand for our products.

Results of operations
We made two acquisitions and an investment in a joint venture at the beginning of the third quarter 2013 and one acquisition in the second quarter 2014. For additional information about these acquisitions, see Note 3 to the condensed consolidated financial statements in Item 1 of Part I of this quarterly report. For this reason, our results of operations for the nine months ended September 30, 2014 may not be comparable to historical results of operations for the same 2013 period.




































24


Three months ended September 30, 2014 compared with three months ended September 30, 2013
 
Three Months Ended September 30,
 
Favorable / (Unfavorable)
 
2014
 
2013
 
$
 
%
(in thousands of dollars, except per share information)
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
307,454

 
$
248,344

 
$
59,110

 
23.8
 %
Production & Infrastructure
161,696

 
142,731

 
18,965

 
13.3
 %
Eliminations
(328
)
 
(883
)
 
555

 
*

Total revenue
$
468,822

 
$
390,192

 
$
78,630

 
20.2
 %
Operating income:
 
 
 
 
 
 
 
Drilling & Subsea
$
57,929

 
$
42,568

 
$
15,361

 
36.1
 %
Operating income margin %
18.8
%
 
17.1
%
 
 
 
 
Production & Infrastructure
29,816

 
21,402

 
8,414

 
39.3
 %
Operating income margin %
18.4
%
 
15.0
%
 
 
 
 
Corporate
(10,274
)
 
(7,447
)
 
(2,827
)
 
(38.0
)%
Total segment operating income
$
77,471

 
$
56,523

 
$
20,948

 
37.1
 %
Operating income margin %
16.5
%
 
14.5
%
 
 
 
 
Transaction expenses
1,516

 
376

 
(1,140
)
 
*

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

 
294

 
*

Income from operations
76,040

 
55,938

 
20,102

 
35.9
 %
Interest expense, net
7,699

 
4,373

 
(3,326
)
 
(76.1
)%
Foreign exchange (gains) losses and other, net
(5,222
)
 
2,311

 
7,533

 
*

Deferred loan costs written off

 
2,149

 
2,149

 
100.0
 %
Other (income) expense, net
2,477

 
8,833

 
6,356

 
*

Income before income taxes
73,563

 
47,105

 
26,458

 
56.2
 %
Income tax expense
21,332

 
13,924

 
(7,408
)
 
(53.2
)%
Net income
52,231

 
33,181

 
19,050

 
57.4
 %
Less: Income attributable to non-controlling interest
5

 
40

 
(35
)
 
*

Income attributable to common stockholders
$
52,226

 
$
33,141

 
$
19,085

 
57.6
 %
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
93,331

 
91,443

 
 
 
 
Diluted
96,198

 
94,734

 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.56

 
$
0.36

 
 
 
 
Diluted
$
0.54

 
$
0.35

 
 
 
 
* not meaningful
 
 
 
 
 
 
 













25


Revenue
Our revenue for the three months ended September 30, 2014 increased $78.6 million, or 20.2%, to $468.8 million compared to the three months ended September 30, 2013. For the three months ended September 30, 2014, our Drilling & Subsea segment and our Production & Infrastructure segment comprised 65.6% and 34.4% of our total revenue, respectively, which compared to 63.6% and 36.4% of total revenue, respectively, for the three months ended September 30, 2013. The changes in revenue by operating segment consisted of the following:
Drilling & Subsea segment — Revenue increased $59.1 million, or 23.8%, to $307.5 million during the three months ended September 30, 2014 compared to the three months ended September 30, 2013 primarily attributable to increased activity in North America, as demonstrated by the 7.5% increase in the U.S. average rig count compared to the prior year period, which resulted in increased sales of our pipe handling and downhole products. We also realized revenue gains compared to the prior year period on workclass remotely operated vehicles used by the offshore construction companies to install subsea trees and infrastructure.
Production & Infrastructure segment — Revenue increased $19.0 million, or 13.3%, to $161.7 million during the three months ended September 30, 2014 compared to the three months ended September 30, 2013 attributable to increased sales of our consumable flow equipment products to pressure pumping service providers as U.S. activity levels continue to improve. We also saw an increase in valve sales into upstream areas in line with market activity.
Segment operating income and segment operating margin percentage
Segment operating income for the three months ended September 30, 2014, increased $20.9 million, or 37.1%, to $77.5 million compared to the three months ended September 30, 2013. The segment operating margin percentage is calculated by dividing segment operating income by revenue for the period. For the three months ended September 30, 2014, the segment operating margin percentage of 16.5% represents an increase of 200 basis points from the 14.5% operating margin percentage for three months ended September 30, 2013. The change in operating margin percentage for each segment is explained as follows:
Drilling & Subsea segment — The operating margin percentage increased 170 basis points to 18.8% for the three months ended September 30, 2014, from 17.1% for the three months ended September 30, 2013. Excluding severance and facility closure costs of $6.1 million incurred in the third quarter of 2013 to reduce our cost structure in line with activity levels at the time, the operating margin is down 80 basis points in the third quarter 2014. Some of this margin decrease is due to a collection in the prior year of a receivable that had been previously determined uncollectible.
Production & Infrastructure segment — The operating margin percentage improved 340 basis points to 18.4% for the three months ended September 30, 2014, from 15.0% for the three months ended September 30, 2013. The improvement in operating margin percentage was attributable to higher activity levels in flow equipment and valves, and higher equity earnings from our joint venture in Global Tubing, LLC.
Corporate — Selling, general and administrative expenses for Corporate increased by $2.8 million, or 38.0%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, due to higher personnel costs and higher 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, and gains and losses from the sale of assets. Transaction expenses relate to legal and other advisory costs incurred in acquiring businesses, including internal legal entity structuring, and are not considered to be part of segment operating income. These costs were $1.5 million and $0.4 million for the three months ended September 30, 2014 and 2013, respectively.

26


Other income and expense
Other income and expense includes interest expense and foreign exchange gains and losses. We incurred $7.7 million of interest expense during the three months ended September 30, 2014, an increase of $3.3 million from the three months ended September 30, 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 variable interest rate under our Credit Facility. The change in foreign exchange gains or losses is primarily the result of movements in the British pound 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 29.0% for the three months ended September 30, 2014 and 29.6% for the three months ended September 30, 2013. The tax provision for the three months ended September 30, 2014 is lower than the comparable period in 2013 primarily due to benefits received from certain domestic tax incentives and a higher proportion of our earnings being generated outside the United States in jurisdictions subject to lower tax rates.























27


Nine months ended September 30, 2014 compared with nine months ended September 30, 2013
 
Nine months ended September 30,
 
Favorable / (Unfavorable)
 
2014
 
2013
 
$
 
%
(in thousands of dollars, except per share information)
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
848,474

 
$
679,482

 
$
168,992

 
24.9
 %
Production & Infrastructure
453,640

 
452,845

 
795

 
0.2
 %
Eliminations
(1,075
)
 
(1,249
)
 
174

 
(13.9
)%
Total revenue
$
1,301,039

 
$
1,131,078

 
$
169,961

 
15.0
 %
Operating income:
 
 
 
 
 
 
 
Drilling & Subsea
$
155,330

 
$
110,630

 
$
44,700

 
40.4
 %
Operating income margin %
18.3
%
 
16.3
%
 
 
 
 
Production & Infrastructure
80,260

 
65,600

 
14,660

 
22.3
 %
Operating income margin %
17.7
%
 
14.5
%
 
 
 
 
Corporate
(29,711
)
 
(21,521
)
 
(8,190
)
 
(38.1
)%
Total segment operating income
$
205,879

 
$
154,709

 
$
51,170

 
33.1
 %
Operating income margin %
15.8
%
 
13.7
%
 
 
 
 
Transaction expenses
2,326

 
2,191

 
(135
)
 
(6.2
)%
Loss (gain) on sale of assets and other
320

 
229

 
(91
)
 
*

Income from operations
203,233

 
152,289

 
50,944

 
33.5
 %
Interest expense, net
23,174

 
10,847

 
(12,327
)
 
(113.6
)%
Foreign exchange (gains) losses and other, net
(616
)
 
1,863

 
2,479

 
*

Deferred loan costs written off

 
2,149

 
2,149

 
100.0
 %
Other (income) expense, net
22,558

 
14,859

 
(7,699
)
 
*

Income before income taxes
180,675

 
137,430

 
43,245

 
31.5
 %
Income tax expense
52,395

 
42,371

 
(10,024
)
 
(23.7
)%
Net income
128,280

 
95,059

 
33,221

 
34.9
 %
Less: Income attributable to non-controlling interest
2

 
59

 
(57
)
 
*

Income attributable to common stockholders
$
128,278

 
$
95,000

 
$
33,278

 
35.0
 %
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
92,728

 
90,347

 
 
 
 
Diluted
95,631

 
94,527

 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
1.38

 
$
1.05

 
 
 
 
Diluted
$
1.34

 
$
1.01

 
 
 
 
* not meaningful
 
 
 
 
 
 
 












28


Revenue
Our revenue for the nine months ended September 30, 2014 increased $170.0 million, or 15.0%, to $1,301.0 million compared to the nine months ended September 30, 2013. For the nine months ended September 30, 2014, our Drilling & Subsea segment and our Production & Infrastructure segment comprised 65.2% and 34.8% of our total revenue, respectively, which compared to 60.1% and 39.9% of total revenue, respectively, for the nine months ended September 30, 2013. The changes in revenue by operating segment consisted of the following:
Drilling & Subsea segment — Revenue increased $169.0 million, or 24.9%, to $848.5 million during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily attributable to increased market activity as reflected in the average rig counts. We have had particularly strong increases in sales of our pipe handling tools, other drilling and consumable products, downhole products and workclass remotely operated vehicles. A portion of the increase is attributable to acquisitions closed in the third quarter 2013 and in the second quarter 2014.
Production & Infrastructure segment — Revenue increased $0.8 million, or 0.2%, to $453.6 million during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily due to lower shipments of surface production equipment products and slower project activity in the first half of 2014 for valve products offset by a good recovery in the market for our flow equipment products.
Segment operating income and segment operating margin percentage
Segment operating income for the nine months ended September 30, 2014, increased $51.2 million, or 33.1%, to $205.9 million compared to the nine months ended September 30, 2013. The segment operating margin percentage is calculated by dividing segment operating income by revenue for the period. For the nine months ended September 30, 2014, the segment operating margin percentage of 15.8% represents an increase of 210 basis points from the 13.7% operating margin percentage for nine months ended September 30, 2013. The change in operating margin percentage for each segment is explained as follows:
Drilling & Subsea segment — The operating margin percentage increased 200 basis points to 18.3% for the nine months ended September 30, 2014, from 16.3% for the nine months ended September 30, 2013. Excluding severance and facility closure costs of $6.1 million incurred in the third quarter 2013 to bring our cost structure in line with activity levels at that time, the operating margin percentage is up 110 basis points for the nine months ended September 30, 2014. This increase is primarily attributable to higher volumes in certain higher margin drilling and downhole products, and overall lower selling, general and administrative costs as a percentage of revenue.
Production & Infrastructure segment — Operating margin percentage improved 320 basis points to 17.7% for the nine months ended September 30, 2014, from 14.5% for the nine months ended September 30, 2013. The improvement in operating margin percentage was attributable to improved margins in flow equipment on higher activity levels and equity earnings from the investment in Global Tubing, LLC joint venture acquired mid-year in 2013.
Corporate — Selling, general and administrative expenses for Corporate increased by $8.2 million, or 38.1%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, due to higher personnel costs and higher professional fees. 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.
Other items not included in segment operating income
Several items are not included in segment operating income, but are included in total operating income. These items include transaction expenses, and gains and losses from the sale of assets. Transaction expenses relate to legal and other advisory costs incurred in acquiring businesses, including legal entity restructuring, and are not considered to be part of segment operating income. These costs were $2.3 million for the nine months ended September 30, 2014 and, including $0.8 million reported as part of equity in earnings from Global Tubing LLC, these costs were $3.0 million for the nine months ended September 30, 2013, primarily attributable to three acquisitions closed effective July 2, 2013. In the nine months ended September 30, 2014, we recognized a loss of $0.3 million on sales of assets, primarily from a loss of $0.8 million on the sale of our subsea pipe joint protective coatings business.


29


Other income and expense
Other income and expense includes interest expense, and foreign exchange gains and losses. We incurred $23.2 million of interest expense during the nine months ended September 30, 2014, an increase of $12.3 million from the nine months ended September 30, 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 variable interest rate under our Credit Facility. The change in foreign exchange gains or losses is primarily the result of movements in the British pound 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 29.0% for the nine months ended September 30, 2014 and 30.8% for the nine months ended September 30, 2013. The tax provision is lower than the comparable period in 2013 primarily due to benefits received from certain domestic tax incentives and a higher proportion of our earnings being generated outside the United States in jurisdictions subject to lower tax rates. The effective tax rate can vary from period to period depending on our relative mix of U.S. and non-U.S. earnings.
Liquidity and capital resources
Sources and uses of liquidity
At September 30, 2014, we had cash and cash equivalents of $74.1 million and total debt of $421.3 million. We believe that cash on hand, cash generated from operations and amounts available under the Credit Facility will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations for the foreseeable future.
Capital expenditures for 2014 are expected to be approximately $55.0 million, which consists of, among other items, investments in constructing or expanding certain manufacturing facilities, purchases of machinery and equipment, expansion of our subsea rental fleet equipment, and general maintenance capital expenditures of approximately $25.0 million. This budget does not include possible expenditures for future business acquisitions.
Although we do not budget for acquisitions, pursuing growth through acquisitions is a significant part of our business strategy. We expanded and diversified our product portfolio with the acquisition of one business in the second quarter 2014 for total consideration of $38.3 million, and two businesses and an investment in a joint venture in 2013 for total consideration (net of cash acquired) of $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 ongoing basis. Our ability to make significant additional acquisitions for cash may require us to obtain additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.

In October 2014, our Board of Directors approved a share repurchase program for the repurchase of outstanding shares of our common stock with an aggregate purchase price of up to $150 million. Shares may be repurchased under the program from time to time, in amounts and at prices that we deem appropriate, subject to market and business conditions, applicable legal requirements and other considerations.
Our cash flows for the nine months ended September 30, 2014 and 2013 are presented below (in millions):
  
Nine Months Ended September 30,
 
2014
 
2013
Net cash provided by operating activities
$
179.8

 
$
164.1

Net cash used in investing activities
(69.5
)
 
(273.7
)
Net cash provided by (used in) financing activities
(75.5
)
 
99.3

Net increase (decrease) in cash and cash equivalents
$
34.5

 
$
(12.9
)
Cash flows provided by operating activities

30


Net cash provided by operating activities was $179.8 million and $164.1 million for the nine months ended September 30, 2014 and 2013, respectively. Cash provided by operations increased primarily as a result of higher earnings offset by incremental investments in working capital as a result of higher activity levels as compared to the prior year.

Cash flows used in investing activities
Net cash used in investing activities was $69.5 million and $273.7 million for the nine months ended September 30, 2014 and 2013, respectively. The decrease was primarily due to lower consideration paid for an acquisition in 2014 compared to the consideration paid for acquisitions and an investment in a joint venture closed in 2013. Capital expenditures for the nine months ended September 30, 2014 were $41.4 million as compared to $44.7 million for the comparable prior period.
Cash flows provided by (used in) financing activities
Net cash used in financing activities was $75.5 million for the nine months ended September 30, 2014, compared to cash provided by financing activities of $99.3 million for the nine months ended September 30, 2013. The cash used in financing activities for the nine months ended September 30, 2014 was primarily due to the pay down of long-term debt during the period. The cash provided by financing activities for the nine months ended September 30, 2013 consisted primarily of net borrowings of $110.2 million, related to acquisitions made during that period.
Senior Notes Due 2021
The Senior Notes bear interest at a rate of 6.250% per annum, payable on April 1 and October 1 of each year, and mature on October 1, 2021. The Senior Notes are senior unsecured obligations guaranteed on a senior unsecured basis by our subsidiaries that guarantee the Credit Facility and rank junior to, among other indebtedness, the Credit Facility to the extent of the value of the collateral securing the Credit Facility.
In connection with the initial issuance and sale of the Senior Notes, the Company and the subsidiary guarantors entered into a Registration Rights Agreement. Pursuant to the Registration Rights Agreement, the Company and the subsidiary guarantors agreed for the benefit of the holders of the Senior Notes to use commercially reasonable efforts to register with the SEC and exchange offer for senior notes due 2021 having identical terms as the Senior Notes. In satisfaction of its obligations under the Registration Rights Agreement, the Company completed the exchange offer on September 15, 2014.
Credit Facility
We have a Credit Facility with Wells Fargo Bank, National Association, as administrative agent, and several financial institutions as lenders, which provides for a $600.0 million revolving credit line, with up to $75.0 million available for letters of credit and up to $25.0 million in swingline loans. Subject to terms of the Credit Facility, we have the ability to increase the revolving Credit Facility by an additional $300.0 million. Our revolving Credit Facility matures in November 2018. Weighted average interest rates under the Credit Facility at September 30, 2014 and December 31, 2013 were 1.91% and 2.17%, respectively.
Future borrowings under the Credit Facility will be available for working capital and other general corporate purposes, including permitted acquisitions. It is anticipated that the Credit Facility will be available to be drawn on and repaid during the term thereof as long as we are in compliance with the terms of the credit agreement, including certain financial covenants. As of September 30, 2014, we had $17.0 million of borrowings outstanding under our Credit Facility and $11.0 million of outstanding letters of credit and the capacity to borrow an additional $572.0 million under our Credit Facility.
There have been no changes to the Credit Facility financial covenants disclosed in Item 7 of our 2013 Annual Report on Form 10-K and we were in compliance with all financial covenants at September 30, 2014 and December 31, 2013.
Off-balance sheet arrangements
As of September 30, 2014, we had no off-balance sheet instruments or financial arrangements, other than operating leases entered into in the ordinary course of business.
Contractual obligations
Except for net repayments under the Credit Facility, as of September 30, 2014, there have been no material changes in our contractual obligations and commitments disclosed in the Annual Report.

31




Critical accounting policies and estimates
There have been no material changes in our critical accounting policies and procedures during the nine months ended September 30, 2014. For a detailed discussion of our critical accounting policies and estimates, refer to our 2013 Annual Report on Form 10-K.
Recent accounting pronouncements
In August 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements - Going Concern. The new standard requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern for both annual and interim reporting periods. The guidance is effective for us for the fiscal year beginning January 1, 2016 and interim periods thereafter. The guidance is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. We are currently evaluating the impacts of adoption and the implementation approach to be used.
In April 2014, the FASB issued ASU 2014-08 — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The ASU raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is effective for us for the fiscal year beginning January 1, 2015, and is not expected to have a material impact on our consolidated financial statements.

Item 3. Quantitative and qualitative disclosures about market risk
We are currently exposed to market risk from changes in foreign currency and changes in interest rates. From time to time, we may enter into derivative financial instrument transactions to manage or reduce our market risk, but we do not enter into derivative transactions for speculative purposes.
There have been no significant changes to our market risk since December 31, 2013. For a discussion of our exposure to market risk, refer to Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in our 2013 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of September 30, 2014. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.



32

Table of Contents
 

Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 11, Commitments and Contingencies, in Part I, Item 1, Financial Statements, for a discussion of our legal proceedings, which is incorporated into this Item 1 of Part II by reference.
Item 1A. Risk Factors
For additional information about our risk factors, see "Risk Factors" in Item 1A of our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Shares of common stock purchased and placed in treasury during the three months ended September 30, 2014 were as follows:
Period
 
Total number of shares purchased (a)
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plan or programs
 
Maximum number of shares that may yet be purchased under the plan or program (b)
July 1, 2014 - July 31, 2014
 
11,967

 
$
36.27

 

 

August 1, 2014 - August 31, 2014
 

 
$

 

 

September 1, 2014 - September 30, 2014
 
406

 
$
32.25

 

 

Total
 
12,373

 
$
36.14

 

 


(a) All of the 12,373 shares purchased during the three months ended September 30, 2014 were acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from the vesting of restricted stock grants. None of these shares were part of a publicly announced program to purchase common shares.
(b) In October 2014, our Board of Directors approved a share repurchase program for the repurchase of outstanding shares of our common stock with an aggregate purchase price of up to $150 million. Shares may be repurchased under the program from time to time, in amounts and at prices that we deem appropriate, subject to market and business conditions, applicable legal requirements and other considerations.

33

Table of Contents
 

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


* Filed herewith.

** Furnished herewith.

34

Table of Contents
 

SIGNATURES
As required by Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has authorized this report to be signed on its behalf by the undersigned authorized individuals.
 
 
 
 
 
 
 
 
FORUM ENERGY TECHNOLOGIES, INC. 
 
 
Date:
October 31, 2014
By:
/s/ James W. Harris
 
 
 
 
James W. Harris
 
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
 
(As Duly Authorized Officer and Principal Financial Officer)
 
 
 
 
 
 
 
 
 
By:
/s/ Tylar K. Schmitt
 
 
 
 
Tylar K. Schmitt
 
 
 
 
Vice President and Corporate Controller
 
 
 
 
(As Duly Authorized Officer and Principal Accounting Officer)
 



35