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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, 2016
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 August 1, 2016, there were 91,349,252 common shares outstanding.


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2

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Forum Energy Technologies, Inc. and subsidiaries
Condensed consolidated statements of comprehensive income (loss)
(Unaudited)
  
Three months ended June 30,
 
Six months ended June 30,
(in thousands, except per share information)
2016
 
2015
 
2016
 
2015
Revenue
$
142,723

 
$
284,415

 
$
302,164

 
$
632,511

Cost of sales
137,442

 
199,532

 
262,326

 
438,502

Gross profit
5,281

 
84,883

 
39,838

 
194,009

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
58,263

 
66,225

 
118,276

 
139,785

Transaction expenses
64

 
23

 
230

 
240

Loss (gain) on sale of assets and other
48

 
37

 
16

 
(275
)
Total operating expenses
58,375

 
66,285

 
118,522

 
139,750

Earnings from equity investment
216

 
3,840

 
793

 
8,411

Operating income (loss)
(52,878
)
 
22,438

 
(77,891
)
 
62,670

Other expense (income)
 
 
 
 
 
 
 
Interest expense
6,785

 
7,607

 
13,918

 
15,234

Deferred financing costs written off

 

 
2,588

 

Foreign exchange (gains) losses and other, net
(10,014
)
 
4,055

 
(11,394
)
 
(2,601
)
Total other expense (income)
(3,229
)
 
11,662

 
5,112

 
12,633

Income (loss) before income taxes
(49,649
)
 
10,776

 
(83,003
)
 
50,037

Provision (benefit) for income tax expense
(21,147
)
 
1,911

 
(31,553
)
 
12,516

Net income (loss)
(28,502
)
 
8,865

 
(51,450
)
 
37,521

Less: Income (loss) attributable to noncontrolling interest
35

 
(9
)
 
30

 
(25
)
Net income (loss) attributable to common stockholders
(28,537
)
 
8,874

 
(51,480
)
 
37,546

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
90,707

 
89,767

 
90,592

 
89,625

Diluted
90,707

 
91,884

 
90,592

 
91,597

Earnings (losses) per share
 
 
 
 
 
 
 
Basic
$
(0.31
)
 
$
0.10

 
$
(0.57
)
 
$
0.42

Diluted
$
(0.31
)
 
$
0.10

 
$
(0.57
)
 
$
0.41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net income (loss)
(28,502
)
 
8,865

 
(51,450
)
 
37,521

Change in foreign currency translation, net of tax of $0
(22,847
)
 
25,491

 
(19,375
)
 
(11,806
)
Gain (loss) on pension liability
24

 
(29
)
 
(19
)
 
70

Comprehensive income (loss)
(51,325
)
 
34,327

 
(70,844
)
 
25,785

Less: comprehensive loss (income) attributable to noncontrolling interests
(36
)
 
11

 
(129
)
 
54

Comprehensive income (loss) attributable to common stockholders
$
(51,361
)
 
$
34,338

 
$
(70,973
)
 
$
25,839

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,
2016
 
December 31,
2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
137,229

 
$
109,249

Accounts receivable—trade, net
94,414

 
138,597

Inventories, net
375,035

 
424,121

Prepaid expenses and other current assets
23,954

 
33,836

Costs and estimated profits in excess of billings
9,882

 
12,009

Total current assets
640,514

 
717,812

Property and equipment, net of accumulated depreciation
173,580

 
186,667

Deferred financing costs, net
1,581

 
4,125

Intangibles, net
232,519

 
246,650

Goodwill
662,929

 
669,036

Investment in unconsolidated subsidiary
58,109

 
57,719

Deferred income taxes, net
736

 
780

Other long-term assets
3,218

 
3,253

Total assets
$
1,773,186

 
$
1,886,042

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
44

 
$
253

Accounts payable—trade
69,041

 
76,823

Accrued liabilities
51,137

 
58,563

Deferred revenue
9,092

 
7,283

Billings in excess of costs and profits recognized
2,387

 
8,631

Total current liabilities
131,701

 
151,553

Long-term debt, net of current portion
396,334

 
396,016

Deferred income taxes, net
18,684

 
51,100

Other long-term liabilities
30,859

 
29,956

Total liabilities
577,578

 
628,625

Commitments and contingencies (Note 11)

 


Equity
 
 
 
Common stock, $0.01 par value, 296,000,000 shares authorized, 99,410,389 and 98,605,902 shares issued
994

 
986

Additional paid-in capital
900,469

 
891,248

Treasury stock at cost, 8,154,226 and 8,145,802 shares
(133,511
)
 
(133,318
)
Retained earnings
528,672

 
580,152

Accumulated other comprehensive income (loss)
(101,542
)
 
(82,048
)
Total stockholders’ equity
1,195,082

 
1,257,020

Noncontrolling interest in subsidiary
526

 
397

Total equity
1,195,608

 
1,257,417

Total liabilities and equity
$
1,773,186

 
$
1,886,042

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)
2016
 
2015
Cash flows from operating activities
 
 
 
Net income (loss)
$
(51,450
)
 
$
37,521

Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Depreciation expense
18,329

 
18,996

Amortization of intangible assets
13,231

 
13,671

Share-based compensation expense
10,322

 
11,814

Deferred income taxes
(33,412
)
 
69

Deferred financing cost written off
2,588

 

Inventory write down
22,733

 
3,285

Earnings from equity investment, net of distributions
(389
)
 
(5,633
)
Other
2,068

 
2,588

Changes in operating assets and liabilities
 
 
 
Accounts receivable—trade
41,679

 
90,944

Inventories
27,279

 
(42,294
)
Prepaid expenses and other current assets
6,342

 
(4,729
)
Accounts payable, deferred revenue and other accrued liabilities
(10,220
)
 
(62,388
)
Costs and estimated profits in excess of billings, net
(4,183
)
 
(7,960
)
Net cash provided by operating activities
$
44,917

 
$
55,884

Cash flows from investing activities
 
 
 
Acquisition of businesses, net of cash acquired
(2,700
)
 
(60,836
)
Capital expenditures for property and equipment
(10,040
)
 
(19,680
)
Proceeds from sale of business, property and equipment
3,710

 
1,408

Net cash used in investing activities
$
(9,030
)
 
$
(79,108
)
Cash flows from financing activities
 
 
 
Borrowings under Credit Facility

 
79,943

Repayment of long-term debt
(238
)
 
(70,580
)
Excess tax benefits from stock based compensation

 
106

Repurchases of stock
(192
)
 
(6,194
)
Proceeds from stock issuance
203

 
2,280

Deferred financing costs
(513
)
 

Net cash provided by (used in) financing activities
$
(740
)
 
$
5,555

Effect of exchange rate changes on cash
(7,167
)
 
(1,069
)
Net increase (decrease) in cash and cash equivalents
27,980

 
(18,738
)
Cash and cash equivalents
 
 
 
Beginning of period
109,249

 
76,579

End of period
$
137,229

 
$
57,841

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

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Forum Energy Technologies, Inc. and subsidiaries
Notes to condensed consolidated financial statements
(Unaudited)
1. Organization and basis of presentation
Forum Energy Technologies, Inc. (the "Company"), a Delaware corporation, is a global oilfield products company, serving the subsea, drilling, completion, production and infrastructure sectors of the oil and natural gas industry. The Company designs, manufactures and distributes products and engages in aftermarket services, parts supply and related services that complement the Company’s product offering.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
The Company's investment in an operating entity where the Company has the ability to exert significant influence, but does not control operating and financial policies, is accounted for using the equity method. The Company's share of the net income (loss) of this entity is recorded as "Earnings from equity investment" in the unaudited condensed consolidated statements of comprehensive income (loss). The investment in this entity is included in "Investment in unconsolidated subsidiary" in the unaudited condensed consolidated balance sheets. The Company reports its share of equity earnings within operating income (loss) 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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 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, 2015, which are included in the Company’s 2015 Annual Report on Form 10-K filed with the SEC on February 26, 2016 (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 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-11 Revenue recognition (Topic 605) and Derivatives and Hedging (Topic 815) - Rescission of SEC Guidance Because of Accounting Standards Updates No. 2014-09 and No. 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. This new guidance rescinded certain SEC staff observer comments in Topic 605 related to revenue and expense recognition for freight services in process and accounting for shipping and handling fees and costs, Topic 932 related to gas-balancing arrangements, and Topic 815 nature of a host contract related to a hybrid instrument issued in the form of a share. ASU 2016-11 is effectively immediately and is not expected to have a material impact on the Company's consolidated financial statements.
In March, April and May 2016, the FASB issued a series of ASUs on revenue standards, including No. 2016-08 Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations, No.2016-10, Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing, and No. 2016-12 Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients. ASU No. 2016-08 amended the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction, which impacts whether an entity reports revenue on a gross or net basis. ASU No. 2016-10 amended and clarified the guidance in the new revenue standard on identifying performance obligation and accounting for licenses of intellectual property and addressed the implementation issues. ASU No. 2016-12 amended and updated only the narrow aspects of Topic 606. The above standards will take effect for public companies for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Earlier application is permitted

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

only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the adoption of the above guidance.
In March 2016, the FASB issued ASU No.2016-09, Improvements to Employee Share-Based Payment Accounting.  This new guidance includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements: a) All excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement; b) Excess tax benefits should be classified along with other income tax cash flows as an operating activity; c) An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur; d) The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions; e) Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. There are also two additional provisions for non-public entities that do not apply to the Company. The standard will take effect for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of the adoption of this guidance.
In February 2016, the FASB issued ASU No.2016-02, Leases.  Under this new guidance, lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of greater than twelve months. The standard will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company is currently evaluating the impact of the adoption of this guidance.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The new standard is to be effective for the fiscal year beginning after December 15, 2017. Companies are able to early adopt the pronouncement, however not before fiscal years beginning after December 15, 2016. The Company is currently evaluating the impacts of the adoption and the implementation approach to be used.

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

3. Acquisitions
2016 Acquisition
In April 2016, the Company completed the acquisition of the wholesale completion packers business of Team Oil Tools, Inc. The acquisition includes a wide variety of completion and service tools, including retrievable and permanent packers, bridge plugs, and accessories which are sold to the oilfield service providers, packer repair companies and distributors on a global basis, and is included in the Completions segment. The fair values of the assets acquired and liabilities assumed have not been presented because it is not material to the unaudited condensed consolidated financial statements.
2015 Acquisition
Effective February 2, 2015, the Company completed the acquisition of J-Mac Tool, Inc. ("J-Mac") for consideration of $61.9 million, including $1.1 million not yet paid until the review of working capital is finalized. J-Mac is a Fort Worth, Texas based manufacturer of high quality hydraulic fracturing pumps, power ends, fluid ends and other pump accessories. J-Mac is included in the Completions segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):
 
 
2015 Acquisition
Current assets, net of cash acquired
 
$
36,174

Property and equipment
 
11,506

Intangible assets (primarily customer relationships)
 
10,400

Tax-deductible goodwill
 
13,977

Current liabilities
 
(10,129
)
Long-term liabilities
 
(22
)
Net assets acquired
 
$
61,906

Revenues and net income (loss) related to the acquisitions were not significant for the current and prior periods presented in this report. Pro forma results of operations for 2015 and 2016 acquisitions have not been presented because the effects were not material to the unaudited condensed consolidated financial statements on either an individual or aggregate basis.
4. Inventories
The Company's significant components of inventory at June 30, 2016 and December 31, 2015 were as follows (in thousands):
 
June 30,
2016
 
December 31,
2015
Raw materials and parts
$
121,140

 
$
148,372

Work in process
29,071

 
38,381

Finished goods
311,004

 
315,256

Gross inventories
461,215

 
502,009

Inventory reserve
(86,180
)
 
(77,888
)
Inventories
$
375,035

 
$
424,121


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

5. Goodwill and intangible assets
Goodwill
The changes in the carrying amount of goodwill from December 31, 2015 to June 30, 2016, were as follows (in thousands):
 
Drilling & Subsea
 
Completions
 
Production & Infrastructure
 
Total
Goodwill Balance at December 31, 2015, net
$
334,595

 
$
316,914

 
$
17,527

 
$
669,036

Acquisitions

 

 

 

Impact of non-U.S. local currency translation
(8,014
)
 
1,689

 
218

 
(6,107
)
Goodwill Balance at June 30, 2016, net
$
326,581

 
$
318,603

 
$
17,745

 
$
662,929


The Company performs its annual impairment tests of goodwill as of October 1. There was no impairment of goodwill during the three months and six months ended June 30, 2016. Accumulated impairment losses on goodwill were $168.8 million as of June 30, 2016 and December 31, 2015.

Intangible assets
Intangible assets consisted of the following as of June 30, 2016 and December 31, 2015, respectively (in thousands):
  
June 30, 2016
 
Gross carrying
amount
 
Accumulated
amortization
 
Net amortizable
intangibles
 
Amortization
period (in years)
Customer relationships
$
275,707

 
$
(108,591
)
 
$
167,116

 
4-15
Patents and technology
34,271

 
(11,228
)
 
23,043

 
5-17
Non-compete agreements
7,550

 
(6,494
)
 
1,056

 
3-6
Trade names
45,113

 
(16,757
)
 
28,356

 
10-15
Distributor relationships
22,160

 
(14,442
)
 
7,718

 
8-15
Trademark
5,230

 

 
5,230

 
Indefinite
Intangible Assets Total
$
390,031

 
$
(157,512
)
 
$
232,519

 
 

  
December 31, 2015
 
Gross carrying
amount
 
Accumulated
amortization
 
Net amortizable
intangibles
 
Amortization
period (in years)
Customer relationships
$
280,297

 
$
(101,636
)
 
$
178,661

 
4-15
Patents and technology
34,140

 
(10,264
)
 
23,876

 
5-17
Non-compete agreements
7,269

 
(6,292
)
 
977

 
3-6
Trade names
45,446

 
(15,890
)
 
29,556

 
10-15
Distributor relationships
22,160

 
(13,810
)
 
8,350

 
8-15
Trademark
5,230

 

 
5,230

 
Indefinite
Intangible Assets Total
$
394,542

 
$
(147,892
)
 
$
246,650

 
 


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

6. Debt
Notes payable and lines of credit as of June 30, 2016 and December 31, 2015 consisted of the following (in thousands): 
 
June 30,
2016
 
December 31,
2015
6.25% Senior Notes due October 2021
$
400,000

 
$
400,000

Unamortized debt premium
2,192

 
2,395

Deferred financing cost
(5,874
)
 
(6,425
)
Senior secured revolving credit facility

 

Other debt
60

 
299

Total debt
396,378

 
396,269

Less: current maturities
44

 
253

Long-term debt
$
396,334

 
$
396,016

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
On February 25, 2016, the Company amended its senior secured credit facility (the "Credit Facility" and such amendment, the "Amended Facility") to reduce commitment fees and provide borrowing capacity for general corporate purposes. The Amended Facility provides for a revolving credit line of up to $200.0 million, including up to $25.0 million available for letters of credit and up to $10.0 million in swingline loans. Availability under the Amended Facility is subject to a borrowing base calculated by reference to eligible accounts receivable in the United States, United Kingdom and Canada, eligible inventory in the United States, and cash on hand.
The Amended Facility reduced the borrowing capacity from $600.0 million to $200.0 million. Accordingly, the Company has written off $2.6 million of the deferred financing costs related to the Credit Facility.
The Credit Facility matures in November 2018. As of June 30, 2016, we had no borrowings outstanding under the Credit Facility, and $10.5 million of outstanding letters of credit. As of June 30, 2016, the Company had the capacity to borrow an additional $189.5 million subject to certain limitations in the Credit Facility.
There have been no changes to the financial covenants disclosed in Item 8 of the Annual Report and the Company was in compliance with all financial covenants at June 30, 2016.
7. Income taxes
The Company's effective tax rate was 38.0% for the six months ended June 30, 2016 and 25.0% for the six months ended June 30, 2015. The effective tax rate was 42.6% for the three months ended June 30, 2016 and 17.7% for the three months ended June 30, 2015. The tax rates for the three months ended and six months ended June 30, 2016 are higher than the comparable period in 2015 primarily due to the losses incurred in the United States, which are benefited at a higher statutory tax rate, offset by earnings 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 and losses.
8. Fair value measurements
At June 30, 2016, the Company had no debt outstanding under the Credit Facility, and $10.5 million of outstanding letters of credit. Substantially all of the debt, if any, under the Credit Facility incurs interest at a variable interest rate and, therefore, the carrying amount approximates fair value. The fair value of the debt is classified as a Level 2 measurement because interest rates charged are similar to other financial instruments with similar terms and maturities.

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

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, 2016, the fair value and the carrying value of the Company’s Senior Notes approximated $371.0 million and $402.2 million, respectively. At December 31, 2015, the fair value and the carrying value of the Company’s Senior Notes approximated $334.1 million and $402.5 million, respectively.
There were no outstanding financial assets as of June 30, 2016 and December 31, 2015 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, 2016.
9. Business segments
Beginning with the first quarter of 2016, the Company realigned its segments. Completions was designated as a separate segment in recognition of its expanded operations and its significant growth potential. The Company is reporting its results of operations in the following three reportable segments: Drilling & Subsea, Completions and Production & Infrastructure, instead of the original two reportable segments. Management’s change in the composition of the Company’s reporting segments was made in order to align with activity drivers and the customers of our product group, and how management reviews and evaluates operating performance. This change will be reflected on a retrospective basis in accordance with GAAP, with prior years adjusted to reflect the change in reporting segments. The amounts indicated below as "Corporate" relate to costs and assets not allocated to the reportable operating segments. Summary financial data by segment follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
56,734

 
$
129,719

 
$
122,029

 
$
293,272

Completions
24,467

 
72,342

 
58,771

 
166,838

Production & Infrastructure
61,823

 
82,536

 
122,334

 
173,059

Intersegment eliminations
(301
)
 
(182
)
 
(970
)
 
(658
)
Total revenue
$
142,723

 
$
284,415

 
$
302,164

 
$
632,511

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
Drilling & Subsea
$
(20,533
)
 
$
10,292

 
$
(30,356
)
 
$
30,131

Completions
(28,024
)
 
10,856

 
(34,482
)
 
31,425

Production & Infrastructure
2,578

 
9,433

 
1,207

 
17,423

Corporate
(6,787
)
 
(8,083
)
 
(14,014
)
 
(16,344
)
Total segment operating income (loss)
(52,766
)
 
22,498

 
(77,645
)
 
62,635

Transaction expenses
64

 
23

 
230

 
240

Loss (gain) on sale of assets and other
48

 
37

 
16

 
(275
)
Income (loss) from operations
$
(52,878
)
 
$
22,438

 
$
(77,891
)
 
$
62,670


11

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

A summary of consolidated assets by reportable segment is as follows (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Assets
 
 
 
 
Drilling & Subsea
 
$
818,996

 
$
912,324

Completions
 
700,588

 
728,745

Production & Infrastructure
 
183,770

 
187,741

Corporate
 
69,832

 
57,232

Total assets
 
$
1,773,186

 
$
1,886,042

Corporate assets include, among other items, prepaid assets, cash and deferred financing costs.
10. Earnings per share
The calculation of basic and diluted earnings (losses) 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,
 
2016
 
2015
 
2016
 
2015
Net Income (loss) attributable to common stockholders
$
(28,537
)
 
$
8,874

 
$
(51,480
)
 
$
37,546

 
 
 
 
 
 
 
 
Average shares outstanding (basic)
90,707

 
89,767

 
90,592

 
89,625

Common stock equivalents

 
2,117

 

 
1,972

Diluted shares
90,707

 
91,884

 
90,592

 
91,597

Earnings (losses) per share
 
 
 
 
 
 
 
Basic earnings (losses) per share
$
(0.31
)
 
$
0.10

 
$
(0.57
)
 
$
0.42

Diluted earnings (losses) per share
$
(0.31
)
 
$
0.10

 
$
(0.57
)
 
$
0.41

The diluted earnings per share calculation excludes all stock options for the three months and six months ended June 30, 2016, because there is a net loss for each period. The diluted earnings per share calculation excludes approximately 1.3 million stock options for the three months ended June 30, 2015, and 1.7 million stock options for the six months ended June 30, 2015, 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. Reserves have been established that are believed to be appropriate in light of the outcomes that are considered to be probable and can be reasonably estimated. The reserves accrued at June 30, 2016 and December 31, 2015, respectively, are immaterial.
12. Stockholders' equity
Share-based compensation
During the six months ended June 30, 2016, the Company granted 818,620 options and 1,712,639 shares of restricted stock or restricted stock units, which includes 257,900 performance share awards with a market condition. The stock options were granted with exercise prices of $9.39. Of the restricted stock or restricted stock units granted, 1,334,922 vest ratably over four years on each anniversary of the grant date. 119,817 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

12

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

from the grant date. The performance share awards granted may settle for between zero and two shares of the Company's common stock. The number of shares issued pursuant to the performance share awards will be determined based on the total shareholder return of the Company's common stock as compared to a group of peer companies, measured annually over a one year, two year and three-year performance period.
13. Related party transactions
The Company has sold and purchased equipment and services to and from various affiliates of certain directors. The dollar amounts related to these related party activities are not material to the Company’s unaudited condensed consolidated financial statements.
14. Condensed consolidating financial statements
The Senior Notes are guaranteed by our domestic subsidiaries which are 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional, joint and several and on an unsecured basis.
Condensed consolidating statements of comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2016
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Revenue
 
$

 
$
103,062

 
$
50,880

 
$
(11,219
)
 
$
142,723

Cost of sales
 

 
107,801

 
41,734

 
(12,093
)
 
137,442

Gross profit
 

 
(4,739
)
 
9,146

 
874

 
5,281

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
46,866

 
11,397

 

 
58,263

Transaction expenses
 

 
64

 

 

 
64

Loss (gain) on sale of assets and other
 

 
215

 
(167
)
 

 
48

Total operating expenses
 

 
47,145

 
11,230

 

 
58,375

Earnings from equity investment
 

 
216

 

 

 
216

Equity earnings from affiliate, net of tax
 
(24,128
)
 
7,235

 

 
16,893

 

Operating income (loss)
 
(24,128
)
 
(44,433
)
 
(2,084
)
 
17,767

 
(52,878
)
Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
6,783

 
(2
)
 
4

 

 
6,785

Foreign exchange (gains) losses and other, net
 

 
(451
)
 
(9,563
)
 

 
(10,014
)
Total other expense (income)
 
6,783

 
(453
)
 
(9,559
)
 

 
(3,229
)
Income (loss) before income taxes
 
(30,911
)
 
(43,980
)
 
7,475

 
17,767

 
(49,649
)
Provision (benefit) for income tax expense
 
(2,374
)
 
(19,852
)
 
1,079

 

 
(21,147
)
Net income (loss)
 
(28,537
)
 
(24,128
)
 
6,396

 
17,767

 
(28,502
)
Less: Income (loss) attributable to noncontrolling interest
 

 

 
35

 

 
35

Net income (loss) attributable to common stockholders
 
(28,537
)
 
(24,128
)
 
6,361

 
17,767

 
(28,537
)
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
(28,537
)
 
(24,128
)
 
6,396

 
17,767

 
(28,502
)
Change in foreign currency translation, net of tax of $0
 
(22,847
)
 
(22,847
)
 
(22,847
)
 
45,694

 
(22,847
)
Change in pension liability
 
24

 
24

 
24

 
(48
)
 
24

Comprehensive income (loss)
 
(51,360
)
 
(46,951
)
 
(16,427
)
 
63,413

 
(51,325
)
Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(36
)
 

 
(36
)
Comprehensive income (loss) attributable to common stockholders
 
$
(51,360
)
 
$
(46,951
)
 
$
(16,463
)
 
$
63,413

 
$
(51,361
)

13

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


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

 
$
209,234

 
$
102,363

 
$
(27,182
)
 
$
284,415

Cost of sales
 

 
155,127

 
71,771

 
(27,366
)
 
199,532

Gross profit
 

 
54,107

 
30,592

 
184

 
84,883

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
52,426

 
13,799

 

 
66,225

Transaction expenses
 

 
23

 

 

 
23

Loss (gain) on sale of assets and other
 

 
53

 
(16
)
 

 
37

Total operating expenses
 

 
52,502

 
13,783

 

 
66,285

Earnings from equity investment
 

 
3,840

 

 

 
3,840

Equity earnings from affiliates, net of tax
 
13,830

 
10,594

 

 
(24,424
)
 

Operating income (loss)
 
13,830

 
16,039

 
16,809

 
(24,240
)
 
22,438

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

 

 
(17
)
 

 
7,607

Foreign exchange (gains) losses and other, net
 

 
31

 
4,024

 

 
4,055

Total other expense (income)
 
7,624

 
31

 
4,007

 

 
11,662

Income (loss) before income taxes
 
6,206

 
16,008

 
12,802

 
(24,240
)
 
10,776

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

 
2,401

 

 
1,911

Net income (loss)
 
8,874

 
13,830

 
10,401

 
(24,240
)
 
8,865

Less: Income (loss) attributable to noncontrolling interest
 

 

 
(9
)
 

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

 
13,830

 
10,410

 
(24,240
)
 
8,874

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
8,874

 
13,830

 
10,401

 
(24,240
)
 
8,865

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

 
25,491

 
25,491

 
(50,982
)
 
25,491

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

 
(29
)
Comprehensive income (loss)
 
34,336

 
39,292

 
35,863

 
(75,164
)
 
34,327

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
11

 

 
11

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

 
$
39,292

 
$
35,874

 
$
(75,164
)
 
$
34,338



14

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

Condensed consolidating statements of comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Revenue
 
$

 
$
220,377

 
$
106,514

 
$
(24,727
)
 
$
302,164

Cost of sales
 

 
200,417

 
86,864

 
(24,955
)
 
262,326

Gross profit
 

 
19,960

 
19,650

 
228

 
39,838

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
94,530

 
23,746

 

 
118,276

Transaction expenses
 

 
230

 

 

 
230

Loss (gain) on sale of assets and other
 

 
180

 
(164
)
 

 
16

Total operating expenses
 

 
94,940

 
23,582

 

 
118,522

Earnings from equity investment
 

 
793

 

 

 
793

Equity earnings from affiliates, net of tax
 
(40,741
)
 
6,147

 

 
34,594

 

Operating income (loss)
 
(40,741
)
 
(68,040
)
 
(3,932
)
 
34,822

 
(77,891
)
Other expense (income)
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
 
13,931

 
(16
)
 
3

 

 
13,918

Deferred loan costs written off
 
2,588

 

 

 

 
2,588

Foreign exchange (gains) losses and other, net
 

 
(533
)
 
(10,861
)
 

 
(11,394
)
Total other expense (income)
 
16,519

 
(549
)
 
(10,858
)
 

 
5,112

Income (loss) before income taxes
 
(57,260
)
 
(67,491
)
 
6,926

 
34,822

 
(83,003
)
Provision (benefit) for income tax expense
 
(5,780
)
 
(26,750
)
 
977

 

 
(31,553
)
Net income (loss)
 
(51,480
)
 
(40,741
)
 
5,949

 
34,822

 
(51,450
)
Less: Income (loss) attributable to noncontrolling interest
 

 

 
30

 

 
30

Net income (loss) attributable to common stockholders
 
(51,480
)
 
(40,741
)
 
5,919

 
34,822

 
(51,480
)
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
(51,480
)
 
(40,741
)
 
5,949

 
34,822

 
(51,450
)
Change in foreign currency translation, net of tax of $0
 
(19,375
)
 
(19,375
)
 
(19,375
)
 
38,750

 
(19,375
)
Change in pension liability
 
(19
)
 
(19
)
 
(19
)
 
38

 
(19
)
Comprehensive income (loss)
 
(70,874
)
 
(60,135
)
 
(13,445
)
 
73,610

 
(70,844
)
Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
(129
)
 

 
(129
)
Comprehensive income (loss) attributable to common stockholders
 
$
(70,874
)
 
$
(60,135
)
 
$
(13,574
)
 
$
73,610

 
$
(70,973
)



15

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

Condensed consolidating statements of comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Revenue
 
$

 
$
478,433

 
$
222,680

 
$
(68,602
)
 
$
632,511

Cost of sales
 

 
343,894

 
161,446

 
(66,838
)
 
438,502

Gross profit
 

 
134,539

 
61,234

 
(1,764
)
 
194,009

Operating expenses
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 

 
109,798

 
29,987

 

 
139,785

Transaction expenses
 

 
240

 

 

 
240

Loss (gain) on sale of assets and other
 

 
(58
)
 
(217
)
 

 
(275
)
Total operating expenses
 

 
109,980

 
29,770

 

 
139,750

Earnings from equity investment
 

 
8,411

 

 

 
8,411

Equity earnings from affiliates, net of tax
 
47,434

 
26,830

 

 
(74,264
)
 

Operating income (loss)
 
47,434

 
59,800

 
31,464

 
(76,028
)
 
62,670

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

 
14

 
8

 

 
15,234

Foreign exchange (gains) losses and other, net
 

 
(154
)
 
(2,447
)
 

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

 
(140
)
 
(2,439
)
 

 
12,633

Income (loss) before income taxes
 
32,222

 
59,940

 
33,903

 
(76,028
)
 
50,037

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

 
5,334

 

 
12,516

Net income (loss)
 
37,546

 
47,434

 
28,569

 
(76,028
)
 
37,521

Less: Income (loss) attributable to noncontrolling interest
 

 

 
(25
)
 

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

 
47,434

 
28,594

 
(76,028
)
 
37,546

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
37,546

 
47,434

 
28,569

 
(76,028
)
 
37,521

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

 
(11,806
)
Change in pension liability
 
70

 
70

 
70

 
(140
)
 
70

Comprehensive income (loss)
 
25,810

 
35,698

 
16,833

 
(52,556
)
 
25,785

Less: comprehensive (income) loss attributable to noncontrolling interests
 

 

 
54

 

 
54

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

 
$
35,698

 
$
16,887

 
$
(52,556
)
 
$
25,839






16

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

Condensed consolidating balance sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
 
FET (Parent)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
(in thousands)
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
56,637

 
$
80,592

 
$

 
$
137,229

Accounts receivable—trade, net
 

 
57,119

 
37,295

 

 
94,414

Inventories
 

 
289,728

 
94,483

 
(9,176
)
 
375,035

Cost and profits in excess of billings
 

 
6,574

 
3,308

 

 
9,882

Other current assets
 

 
16,759

 
7,195

 

 
23,954

Total current assets
 

 
426,817

 
222,873

 
(9,176
)
 
640,514

Property and equipment, net of accumulated depreciation
 

 
145,035

 
28,545

 

 
173,580

Deferred financing costs, net
 
1,581

 

 

 

 
1,581

Deferred income taxes, net
 

 

 
736

 

 
736

Intangibles
 

 
176,649

 
55,870

 

 
232,519

Goodwill
 

 
481,374

 
181,555

 

 
662,929

Investment in unconsolidated subsidiary
 

 
58,109

 

 

 
58,109

Investment in affiliates
 
1,128,470

 
481,545

 

 
(1,610,015
)
 

Long-term advances to affiliates
 
468,023

 

 
60,621

 
(528,644
)
 

Other long-term assets
 

 
2,485

 
733

 

 
3,218

Total assets
 
$
1,598,074

 
$
1,772,014

 
$
550,933

 
$
(2,147,835
)
 
$
1,773,186

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

 
$
33

 
$
11

 
$

 
$
44

Accounts payable—trade
 

 
54,250

 
14,791

 

 
69,041

Accrued liabilities
 
6,674

 
35,939

 
8,524

 

 
51,137

Deferred revenue
 

 
1,831

 
7,261

 

 
9,092

Billings in excess of costs and profits
 

 
365

 
2,022

 

 
2,387

Total current liabilities
 
6,674

 
92,418

 
32,609

 

 
131,701

Long-term debt, net of current portion
 
396,318

 
9

 
7

 

 
396,334

Long-term payables to affiliates
 

 
528,644

 

 
(528,644
)
 

Deferred income taxes, net
 

 
6,353

 
12,331

 

 
18,684

Other long-term liabilities
 

 
16,120

 
14,739

 

 
30,859

Total liabilities
 
402,992

 
643,544

 
59,686

 
(528,644
)
 
577,578