FET 2014 Q2 10-Q
Table of Contents
 

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

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended June 30, 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 July 25, 2014, there were 93,853,381 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 June 30,
 
Six Months Ended June 30,
(in thousands, except per share information)
2014
 
2013
 
2014
 
2013
Net sales
$
428,279

 
$
367,887

 
$
832,217

 
$
740,886

Cost of sales
290,286

 
253,404

 
566,286

 
511,597

Gross profit
137,993

 
114,483

 
265,931

 
229,289

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
77,731

 
65,654

 
148,771

 
131,103

Transaction expenses
682

 
1,806

 
810

 
1,815

Loss (gain) on sale of assets and other
(284
)
 
(115
)
 
405

 
20

Total operating expenses
78,129

 
67,345

 
149,986

 
132,938

Earnings from equity investment
5,940

 

 
11,248

 

Operating income
65,804

 
47,138

 
127,193

 
96,351

Other expense (income)
 
 
 
 
 
 
 
Interest expense
7,725

 
3,111

 
15,475

 
6,474

Foreign exchange (gains) losses and other, net
3,129

 
1,019

 
4,606

 
(448
)
Total other expense
10,854

 
4,130

 
20,081

 
6,026

Income before income taxes
54,950

 
43,008

 
107,112

 
90,325

Provision for income tax expense
15,407

 
13,068

 
31,063

 
28,447

Net income
39,543

 
29,940

 
76,049

 
61,878

Less: Income attributable to noncontrolling interest
21

 
21

 
(3
)
 
19

Net income attributable to common stockholders
39,522

 
29,919

 
76,052

 
61,859

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
92,649

 
91,032

 
92,391

 
89,790

Diluted
95,695

 
94,606

 
95,363

 
94,501

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.43

 
$
0.33

 
$
0.82

 
$
0.69

Diluted
$
0.41

 
$
0.32

 
$
0.80

 
$
0.65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net income
39,543

 
29,940

 
76,049

 
61,878

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

 
(2,154
)
 
12,720

 
(24,903
)
Gain on pension liability

 

 
2

 

Comprehensive income
51,233

 
27,786

 
88,771

 
36,975

Less: comprehensive loss (income) attributable to noncontrolling interests
(15
)
 
20

 
12

 
82

Comprehensive income attributable to common stockholders
$
51,218

 
$
27,806

 
$
88,783

 
$
37,057

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


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Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated balance sheets
(Unaudited)
(in thousands, except share information)
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
32,642

 
$
39,582

Accounts receivable—trade, net
276,604

 
250,272

Inventories
458,004

 
441,049

Prepaid expenses and other current assets
21,730

 
29,707

Costs and estimated profits in excess of billings
34,656

 
24,012

Deferred income taxes, net
26,316

 
24,846

Total current assets
849,952

 
809,468

Property and equipment, net of accumulated depreciation
188,080

 
180,292

Deferred financing costs, net
14,385

 
15,658

Intangibles
295,710

 
295,352

Goodwill
824,400

 
802,318

Investment in unconsolidated subsidiary
58,121

 
60,292

Other long-term assets
4,696

 
5,489

Total assets
$
2,235,344

 
$
2,168,869

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
914

 
$
998

Accounts payable—trade
129,639

 
100,221

Accrued liabilities
82,444

 
96,529

Deferred revenue
12,850

 
15,837

Billings in excess of costs and profits recognized
14,642

 
6,398

Total current liabilities
240,489

 
219,983

Long-term debt, net of current portion
436,650

 
512,077

Deferred income taxes, net
105,998

 
97,774

Other long-term liabilities
12,015

 
8,069

Total liabilities
795,152

 
837,903

Commitments and contingencies

 


Equity
 
 
 
Common stock, $0.01 par value, 296,000,000 shares authorized, 93,883,314 and 92,803,389 shares issued
938

 
928

Additional paid-in capital
847,996

 
826,064

Treasury stock at cost, 3,615,194 and 3,585,098 shares
(31,130
)
 
(30,249
)
Warrants
82

 
687

Retained earnings
601,192

 
525,140

Accumulated other comprehensive income
20,515

 
7,785

Total stockholders’ equity
1,439,593

 
1,330,355

Noncontrolling interest in subsidiary
599

 
611

Total equity
1,440,192

 
1,330,966

Total liabilities and equity
$
2,235,344

 
$
2,168,869

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

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Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated statements of cash flows
(Unaudited)
  
Six Months Ended June 30,
(in thousands, except share information)
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
76,049

 
$
61,878

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation expense
18,650

 
17,191

Amortization of intangible assets
13,678

 
11,060

Share-based compensation expense
9,414

 
8,173

Deferred income taxes
6,307

 
3,153

Earnings from equity investment, net of distributions
2,171

 

Other
2,337

 
907

Changes in operating assets and liabilities
 
 
 
Accounts receivable—trade
(24,780
)
 
(20,325
)
Inventories
(11,695
)
 
23,905

Prepaid expenses and other current assets
10,971

 
(2,840
)
Accounts payable, deferred revenue and other accrued liabilities
11,924

 
(8,362
)
Costs and estimated profits in excess of billings, net
(1,943
)
 
(5,285
)
Net cash provided by operating activities
$
113,083

 
$
89,455

Cash flows from investing activities
 
 
 
Acquisition of businesses, net of cash acquired
(37,682
)
 
(2,611
)
Capital expenditures for property and equipment
(28,718
)
 
(30,065
)
Proceeds from sale of business, property and equipment
8,596

 
382

Net cash used in investing activities
$
(57,804
)
 
$
(32,294
)
Cash flows from financing activities
 
 
 
Borrowings under Credit Facility

 
177,923

Repayment of long-term debt
(75,511
)
 
(68,083
)
Payment of contingent consideration

 
(11,435
)
Excess tax benefits from stock based compensation
5,179

 
2,791

Repurchases of stock
(881
)
 
(531
)
Proceeds from stock issuance
6,746

 
3,314

Deferred financing costs
(5
)
 
(13
)
Net cash provided by (used in) financing activities
$
(64,472
)
 
$
103,966

Effect of exchange rate changes on cash
2,253

 
(2,710
)
Net increase (decrease) in cash and cash equivalents
(6,940
)
 
158,417

Cash and cash equivalents
 
 
 
Beginning of period
39,582

 
41,063

End of period
$
32,642

 
$
199,480

Noncash investing and financing activities
 
 
 
Payment of contingent consideration via stock
$

 
$
4,075

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

5

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Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements
(Unaudited)
1. Organization and basis of presentation
Forum Energy Technologies, Inc. (the "Company"), a Delaware corporation, is a global oilfield products company, serving the subsea, drilling, completion, production and infrastructure sectors of the oil and natural gas industry. The Company designs, manufactures and distributes products and engages in aftermarket services, parts supply and related services that complement the Company’s product offering.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
The Company's investment in an operating entity where the Company has the ability to exert significant influence, but does not control operating and financial policies, is accounted for using the equity method. The Company's share of the net income of this entity is recorded as "Earnings from equity investment" in the condensed consolidated statements of 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 six months ended June 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 May 2014, the FASB issued Accounting Standards Update ("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 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.

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

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
 
$
7,463

Property and equipment
 
3,837

Intangible assets (primarily customer relationships)
 
13,335

Non-tax-deductible goodwill
 
19,007

Current liabilities
 
(1,914
)
Deferred tax liabilities
 
(3,467
)
Net assets acquired
 
$
38,261

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 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 w

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

ell 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 June 30, 2014 and December 31, 2013 were as follows (in thousands):
 
June 30,
2014
 
December 31,
2013
Raw materials and parts
$
138,949

 
$
139,573

Work in process
53,160

 
51,819

Finished goods
295,898

 
276,076

Gross inventories
488,007

 
467,468

Inventory reserve
(30,003
)
 
(26,419
)
Inventories
$
458,004

 
$
441,049

5. Goodwill and intangible assets
Goodwill
The changes in the carrying amount of goodwill from January 1, 2014 to June 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
15,352

 

 
15,352

Impact of non-U.S. local currency translation
6,749

 
(19
)
 
6,730

Goodwill Balance at June 30, 2014 net
$
745,456

 
$
78,944

 
$
824,400


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

Intangible assets
Intangible assets consisted of the following as of June 30, 2014 and December 31, 2013, respectively (in thousands):
  
June 30, 2014
 
Gross carrying
amount
 
Accumulated
amortization
 
Net amortizable
intangibles
 
Amortization
period (in years)
Customer relationships
$
295,665

 
$
(78,429
)
 
$
217,236

 
4-15
Patents and technology
32,403

 
(7,234
)
 
25,169

 
5-17
Non-compete agreements
7,323

 
(5,322
)
 
2,001

 
3-6
Trade names
49,822

 
(13,994
)
 
35,828

 
10-15
Distributor relationships
22,160

 
(11,914
)
 
10,246

 
8-15
Trademark
5,230

 

 
5,230

 
Indefinite
Intangible Assets Total
$
412,603

 
$
(116,893
)
 
$
295,710

 
 

  
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 June 30, 2014 and December 31, 2013 consisted of the following (in thousands): 
 
June 30,
2014
 
December 31,
2013
6.25% Senior Notes due October 2021
$
403,005

 
$
403,208

Senior secured revolving credit line
33,004

 
108,000

Other debt
1,555

 
1,867

Total debt
437,564

 
513,075

Less: current maturities
(914
)
 
(998
)
Long-term debt
$
436,650

 
$
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.
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

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

additional $300.0 million. The Credit Facility matures in November 2018. Weighted average interest rates under the Credit Facility at June 30, 2014 and December 31, 2013 were 2.16% and 2.17%, respectively.
Availability under the Credit Facility was approximately $552.7 million at June 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 June 30, 2014.
7. Income taxes
The Company's effective tax rate was 29.0% for the six months ended June 30, 2014 and 31.5% for the six months ended June 30, 2013. The tax provision 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 tax incentives. 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 28.0% for the three months ended June 30, 2014 and 30.4% for the three months ended June 30, 2013. The tax provision for the three months ended June 30, 2014 is lower than the comparable period in 2013 primarily due to benefits received from certain tax incentives.
8. Fair value measurements
At June 30, 2014, the carrying value of the Credit Facility was $33.0 million. Substantially all of the debt incurs interest at a variable interest rate and, therefore, the carrying amount approximates fair value. The fair value of the debt is classified as a Level 2 measurement because interest rates charged are similar to other financial instruments with similar terms and maturities.
The fair value of the Company’s Senior Notes is estimated using Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At June 30, 2014, the fair value and the carrying value of the Company’s Senior Notes approximated $430.2 million and $403.0 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 June 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 six months ended June 30, 2014.

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

9. Business segments
The Company’s operations are divided into the following two operating segments, which are our reportable segments: Drilling & Subsea ("D&S") and Production & Infrastructure ("P&I"). The amounts indicated below as "Corporate" relate to costs and assets not allocated to the reportable segments. Summary financial data by segment follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
279,251

 
$
209,198

 
$
541,020

 
$
431,137

Production & Infrastructure
149,369

 
158,905

 
291,944

 
310,115

Intersegment eliminations
(341
)
 
(216
)
 
(747
)
 
(366
)
Total Revenue
$
428,279

 
$
367,887

 
$
832,217

 
$
740,886

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Drilling & Subsea
$
50,336

 
$
32,906

 
$
97,401

 
$
68,062

Production & Infrastructure
26,562

 
22,824

 
50,444

 
44,198

Corporate
(10,696
)
 
(6,901
)
 
(19,437
)
 
(14,074
)
Total segment operating income
66,202

 
48,829

 
128,408

 
98,186

Transaction expenses
682

 
1,806

 
810

 
1,815

Loss (gain) on sale of assets and other
(284
)
 
(115
)
 
405

 
20

Income from operations
$
65,804

 
$
47,138

 
$
127,193

 
$
96,351

A summary of consolidated assets by reportable segment is as follows (in thousands):
 
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
 
Drilling & Subsea
 
$
1,693,929

 
$
1,655,355

Production & Infrastructure
 
482,245

 
468,520

Corporate
 
59,170

 
44,994

Total assets
 
$
2,235,344

 
$
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 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net Income attributable to common stockholders
$
39,522

 
$
29,919

 
$
76,052

 
$
61,859

 
 
 
 
 
 
 
 
Average shares outstanding (basic)
92,649

 
91,032

 
92,391

 
89,790

Common stock equivalents
3,046

 
3,574

 
2,972

 
4,711

Diluted shares
95,695

 
94,606

 
95,363

 
94,501

Earnings per share
 
 
 
 
 
 
 
Basic earnings per share
$
0.43

 
$
0.33

 
$
0.82

 
$
0.69

Diluted earnings per share
$
0.41

 
$
0.32

 
$
0.80

 
$
0.65


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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 June 30, 2014 and 2013 respectively, and 0.5 million and 0.2 million stock options for the six months ended June 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 June 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 six months ended June 30, 2014, the Company granted 368,054 options and 733,777 shares of restricted stock or restricted stock units, which includes 115,610 performance share awards with a market condition. The stock options were granted on February 21, 2014 with an exercise price of $26.96. Of the restricted stock or restricted stock units granted, 576,434 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 June 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
312,663

 
$
154,761

 
$
(39,145
)
 
$
428,279

Cost of sales
 

 
221,119

 
108,861

 
(39,694
)
 
290,286

Gross profit
 

 
91,544

 
45,900

 
549

 
137,993

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
59,536

 
18,195

 

 
77,731

Other operating expense
 

 
512

 
(114
)
 

 
398

Total operating expenses
 

 
60,048

 
18,081

 

 
78,129

Earnings from equity investment
 

 
5,940

 

 

 
5,940

Equity earnings from affiliate, net of tax
 
44,571

 
19,805

 

 
(64,376
)
 

Operating income
 
44,571

 
57,241

 
27,819

 
(63,827
)
 
65,804

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

 
(7
)
 
(36
)
 

 
7,725

Interest income with affiliate
 

 
(1,933
)
 

 
1,933

 

Interest expense with affiliate
 

 

 
1,933

 
(1,933
)
 

Foreign exchange (gains) losses and other, net
 

 
676

 
2,453

 

 
3,129

Total other expense (income)
 
7,768

 
(1,264
)
 
4,350

 

 
10,854

Income before income taxes
 
36,803

 
58,505

 
23,469

 
(63,827
)
 
54,950

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

 
4,192

 

 
15,407

Net income
 
39,522

 
44,571

 
19,277

 
(63,827
)
 
39,543

Less: Income attributable to noncontrolling interest
 

 

 
21

 

 
21

Net income attributable to common stockholders
 
39,522

 
44,571

 
19,256

 
(63,827
)
 
39,522

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

 
44,571

 
19,277

 
(63,827
)
 
39,543

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

 
11,690

 
11,690

 
(23,380
)
 
11,690

Comprehensive income
 
51,212

 
56,261

 
30,967

 
(87,207
)
 
51,233

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(15
)
 

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

 
$
56,261

 
$
30,952

 
$
(87,207
)
 
$
51,218



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 June 30, 2013
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
284,334

 
$
109,960

 
$
(26,407
)
 
$
367,887

Cost of sales
 

 
199,759

 
80,575

 
(26,930
)
 
253,404

Gross profit
 

 
84,575

 
29,385

 
523

 
114,483

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
52,616

 
13,038

 

 
65,654

Other operating expense
 

 
1,665

 
26

 

 
1,691

Total operating expenses
 

 
54,281

 
13,064

 

 
67,345

Equity earnings from affiliates, net of tax
 
31,950

 
13,389

 

 
(45,339
)
 

Operating income
 
31,950

 
43,683

 
16,321

 
(44,816
)
 
47,138

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
3,124

 

 
(13
)
 

 
3,111

Foreign exchange (gains) losses and other, net
 

 
15

 
1,004

 

 
1,019

Total other expense (income)
 
3,124

 
15

 
991

 

 
4,130

Income before income taxes
 
28,826

 
43,668

 
15,330

 
(44,816
)
 
43,008

Provision for income tax expense
 
(1,093
)
 
11,718

 
2,443

 

 
13,068

Net income
 
29,919

 
31,950

 
12,887

 
(44,816
)
 
29,940

Less: Income attributable to noncontrolling interest
 

 

 
21

 

 
21

Net income attributable to common stockholders
 
29,919

 
31,950

 
12,866

 
(44,816
)
 
29,919

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
29,919

 
31,950

 
12,887

 
(44,816
)
 
29,940

Change in foreign currency translation, net of tax of $0
 
(2,154
)
 
(2,154
)
 
(2,154
)
 
4,308

 
(2,154
)
Comprehensive income
 
27,765

 
29,796

 
10,733

 
(40,508
)
 
27,786

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
20

 

 
20

Comprehensive income attributable to common stockholders
 
$
27,765

 
$
29,796

 
$
10,753

 
$
(40,508
)
 
$
27,806


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
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
610,695

 
$
300,591

 
$
(79,069
)
 
$
832,217

Cost of sales
 

 
428,088

 
214,846

 
(76,648
)
 
566,286

Gross profit
 

 
182,607

 
85,745

 
(2,421
)
 
265,931

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
113,103

 
35,668

 

 
148,771

Other operating expense
 

 
1,546

 
(331
)
 

 
1,215

Total operating expenses
 

 
114,649

 
35,337

 

 
149,986

Earnings from equity investment
 

 
11,248

 

 

 
11,248

Equity earnings from affiliate, net of tax
 
86,139

 
31,640

 

 
(117,779
)
 

Operating income
 
86,139

 
110,846

 
50,408

 
(120,200
)
 
127,193

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

 
16

 
(59
)
 

 
15,475

Interest income with affiliate
 

 
(3,883
)
 

 
3,883

 

Interest expense with affiliate
 

 

 
3,883

 
(3,883
)
 

Foreign exchange (gains) losses and other, net
 

 
1,018

 
3,588

 

 
4,606

Total other expense (income)
 
15,518

 
(2,849
)
 
7,412

 

 
20,081

Income before income taxes
 
70,621

 
113,695

 
42,996

 
(120,200
)
 
107,112

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

 
8,938

 

 
31,063

Net income
 
76,052

 
86,139

 
34,058

 
(120,200
)
 
76,049

Less: Income attributable to noncontrolling interest
 

 

 
(3
)
 

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

 
86,139

 
34,061

 
(120,200
)
 
76,052

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

 
86,139

 
34,058

 
(120,200
)
 
76,049

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

 
12,720

 
12,720

 
(25,440
)
 
12,720

Change in pension liability
 
2

 
2

 
2

 
(4
)
 
2

Comprehensive income
 
88,774

 
98,861

 
46,780

 
(145,644
)
 
88,771

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
12

 

 
12

Comprehensive income attributable to common stockholders
 
$
88,774

 
$
98,861

 
$
46,792

 
$
(145,644
)
 
$
88,783


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
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Net sales
 
$

 
$
565,009

 
$
226,432

 
$
(50,555
)
 
$
740,886

Cost of sales
 

 
395,149

 
166,072

 
(49,624
)
 
511,597

Gross profit
 

 
169,860

 
60,360

 
(931
)
 
229,289

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
104,999

 
26,104

 

 
131,103

Other operating expense
 

 
1,854

 
(19
)
 

 
1,835

Total operating expenses
 

 
106,853

 
26,085

 

 
132,938

Equity earnings from affiliates, net of tax
 
65,998

 
26,383

 

 
(92,381
)
 

Operating income
 
65,998

 
89,390

 
34,275

 
(93,312
)
 
96,351

Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense
 
6,367

 
71

 
36

 

 
6,474

Foreign exchange (gains) losses and other, net
 

 
(523
)
 
75

 

 
(448
)
Total other expense (income)
 
6,367

 
(452
)
 
111

 

 
6,026

Income before income taxes
 
59,631

 
89,842

 
34,164

 
(93,312
)
 
90,325

Provision for income tax expense
 
(2,228
)
 
23,844

 
6,831

 

 
28,447

Net income
 
61,859

 
65,998

 
27,333

 
(93,312
)
 
61,878

Less: Income attributable to noncontrolling interest
 

 

 
19

 

 
19

Net income attributable to common stockholders
 
61,859

 
65,998

 
27,314

 
(93,312
)
 
61,859

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Net income
 
61,859

 
65,998

 
27,333

 
(93,312
)
 
61,878

Change in foreign currency translation, net of tax of $0
 
(24,903
)
 
(24,903
)
 
(24,903
)
 
49,806

 
(24,903
)
Comprehensive income
 
36,956

 
41,095

 
2,430

 
(43,506
)
 
36,975

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
82

 

 
82

Comprehensive income attributable to common stockholders
 
$
36,956

 
$
41,095

 
$
2,512

 
$
(43,506
)
 
$
37,057



16

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

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

 
$
10,490

 
$
22,152

 
$

 
$
32,642

Accounts receivable—trade, net
 

 
181,657

 
94,947

 

 
276,604

Inventories
 

 
326,626

 
138,865

 
(7,487
)
 
458,004

Other current assets
 
77

 
42,875

 
39,750

 

 
82,702

Total current assets
 
77

 
561,648

 
295,714

 
(7,487
)
 
849,952

Property and equipment, net of accumulated depreciation
 

 
146,245

 
41,835

 

 
188,080

Intangibles
 

 
209,120

 
86,590

 

 
295,710

Goodwill
 

 
522,898

 
301,502

 

 
824,400

Investment in unconsolidated subsidiary
 

 
58,121

 

 

 
58,121

Investment in affiliates
 
1,283,587

 
498,394

 

 
(1,781,981
)
 

Long-term loans and advances to affiliates
 
577,549

 
97,316

 

 
(674,865
)
 

Other long-term assets
 
14,385

 
3,789

 
907

 

 
19,081

Total assets
 
$
1,875,598

 
$
2,097,531

 
$
726,548

 
$
(2,464,333
)
 
$
2,235,344

Liabilities and equity
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Accounts payable—trade
 
$

 
$
91,889

 
$
37,750

 
$

 
$
129,639

Accrued liabilities
 

 
54,890

 
27,554

 

 
82,444

Current portion of debt and other current liabilities
 

 
7,599

 
20,807

 

 
28,406

Total current liabilities
 

 
154,378

 
86,111

 

 
240,489

Long-term debt, net of current portion
 
436,005

 
606

 
39

 

 
436,650

Long-term loans and payables to affiliates
 

 
575,381

 
99,484

 
(674,865
)
 

Other long-term liabilities
 

 
83,579

 
34,434

 

 
118,013

Total liabilities
 
436,005

 
813,944

 
220,068

 
(674,865
)
 
795,152

 
 
 
 
 
 
 
 
 
 
 
Total stockholder's equity
 
1,439,593

 
1,283,587

 
505,881

 
(1,789,468
)
 
1,439,593

Noncontrolling interest in subsidiary
 

 

 
599

 

 
599

Equity
 
1,439,593

 
1,283,587

 
506,480

 
(1,789,468
)
 
1,440,192

Total liabilities and equity
 
$
1,875,598

 
$
2,097,531

 
$
726,548

 
$
(2,464,333
)
 
$
2,235,344


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