Forum Energy Technologies(FET) - 2018 Q4 - Annual Report

PART I Item 1. Business Forum Energy Technologies, Inc. is a global oilfield products company serving the drilling, subsea, completions, production, and infrastructure sectors, with 80% of 2018 revenue from consumable products - Forum Energy Technologies, Inc. is a global oilfield products company serving the drilling, subsea, completions, production, and infrastructure sectors of the oil and natural gas industry[8][9] - In 2018, approximately 80% of the company's revenue was derived from consumable products and activity-based equipment, with the remainder from capital products and rental/other services[9] - The company operates three business segments: Drilling & Subsea, Completions, and Production & Infrastructure, covering all stages of the well cycle[9] Drilling & Subsea Segment This segment designs, manufactures, and supplies products and services for drilling and subsea markets, including capital equipment and consumables, influenced by global drilling activity and offshore development - The Drilling & Subsea segment offers drilling technologies (capital equipment and consumables) and subsea technologies (robotic vehicles, capital equipment, specialty components, technical services, pipeline infrastructure products)[10] - Demand drivers for this segment include global drilling activity, capital investment in drilling rigs, rig upgrades, equipment replacement, global offshore activity, defense spending, and subsea equipment/pipeline installation, repair, and maintenance[11] - On January 3, 2018, the company contributed its Forum Subsea Rentals (FSR) business into Ashtead Technology, receiving a 40% interest in the combined entity, which is now an equity method investment[24] Completions Segment The Completions segment focuses on products and services for well construction, completion, stimulation, and intervention, including downhole technologies and stimulation equipment - The Completions segment provides downhole technologies (cementing/casing tools, completion products, cable protection solutions) and stimulation/intervention technologies (pumps, well stimulation consumables, heat exchanger systems, refurbishment services)[26][27] - Demand for this segment is driven by the level of well completion activity, complexity of well construction, use of hydraulic fracturing in shale/tight sand basins, and workover/intervention activity[28] - The company acquired the remaining membership interests in Global Tubing, LLC in the fourth quarter of 2017, which manufactures coiled tubing strings and coiled line pipe[36] Production & Infrastructure Segment This segment supplies products and services to production and infrastructure markets, including well site production and process equipment, and industrial valves, driven by new well spending and midstream projects - The Production & Infrastructure segment supplies production equipment (well site production/process equipment, oil/produced water treatment equipment) and industrial/process valves[39][41][43] - Demand is primarily driven by spending to bring new wells on production, including related infrastructure, and capital investment in midstream and downstream projects[40] Business History Forum Energy Technologies, Inc. was incorporated in 2005, grew through acquisitions, and completed its initial public offering on April 17, 2012 - Forum was incorporated in 2005 and formed through a series of acquisitions, with its initial public offering completed on April 17, 2012[47] Backlog The company's backlog was approximately $276 million at December 31, 2018, an increase from $222 million in 2017, with most orders scheduled for delivery within six months Backlog and Bookings (in millions) | Metric | 2018 | 2017 | | :----- | :--- | :--- | | Backlog (as of Dec 31) | $276 | $222 | | Bookings (year ended Dec 31) | $1,116 | $870 | - The majority of orders in the backlog as of December 31, 2018, were scheduled for delivery within six months, but are subject to change and/or termination at the customer's option[49] Customers No single customer accounted for more than 10% of the company's consolidated revenue in any of the last three years - No customer represented more than 10% of consolidated revenue in any of the last three years[51] Seasonality A substantial portion of the business is not significantly impacted by seasonality, though lower sales and profitability are generally experienced in the fourth quarter due to holidays and weather - The company generally experiences lower sales and profitability in the fourth quarter due to a decrease in working days from year-end holidays and manufacturing/shipping delays caused by weather[52] - A small portion of revenue from Canadian operations often benefits from higher first-quarter activity levels, but this comprised less than 5% of overall revenue in 2018[52] Competition The company operates in highly competitive markets, competing on product quality, price, breadth of offering, availability, distribution, customer responsiveness, and reputation - The markets in which the company operates are highly competitive, with some competitors possessing greater financial and other resources[53] - Principal competitive factors include product quality and performance, price, breadth of product offering, availability of products and services, distribution capabilities, responsiveness to customer needs, reputation for service, and intellectual property rights[53] - Key competitors across multiple product lines include Cameron International Corporation, Gardner Denver Holdings, Inc., National Oilwell Varco, Inc., TechnipFMC plc, Tenaris S.A., Weatherford International, Ltd., and Weir SPM[54] Patents, Trademarks and Other Intellectual Property The company holds multiple U.S. and international patents and trademarks, with additional applications pending, though no single one is considered material to the business - The company holds multiple U.S. and international patents and trademarks, and has a number of pending patent and trademark applications[55] - No single patent, trademark, or license is regarded as material to the business as a whole[55] Raw Materials The company sources component parts, products, and raw materials from various suppliers, with prices subject to fluctuations in energy, steel, other commodities, tariffs, and foreign currency exchange rates - The company acquires component parts, products, and raw materials from suppliers, including foundries, forge shops, and original equipment manufacturers[57] - Prices for raw materials may be affected by energy, steel, other commodity prices, tariffs, duties on imported materials, and foreign currency exchange rates[57] - Certain component parts, products, or raw materials, such as bearings, are only available from a limited number of suppliers, leading to supplier concentration risk[57] Working Capital Business operations are funded through available cash, short-term investments, cash flow from operations, and a senior secured revolving credit facility, maintaining substantial inventories and typically offering 30-day payment terms - The company funds its business operations through a combination of available cash and cash equivalents, short-term investments, cash flow generated from operations, and its senior secured revolving credit facility[60] - Substantial inventories are carried for consumable products to ensure timely availability for customers, who may pay a premium for immediate access[61] - Payment terms for customers are typically 30 days, but can extend to 60 days or more during downturns, resulting in a substantial investment in accounts receivable[62] Environmental, Transportation, Health and Safety Regulation The company's operations are subject to numerous stringent and complex laws and regulations concerning environmental protection, health, and safety, with non-compliance leading to significant penalties and liabilities - Operations are subject to stringent laws and regulations governing material discharge, health and safety, and environmental protection[63] - Failure to comply with these laws or obtain/comply with permits can result in administrative, civil, and criminal penalties, remedial actions, and injunctions[63] - The trend in environmental regulation is to impose increasingly stringent restrictions, which could materially adversely affect operations and financial position[64] Employees As of December 31, 2018, the company had approximately 2,500 employees globally, with the majority in the U.S., and is not a party to any collective bargaining agreements except for facilities in Germany and Mexico - As of December 31, 2018, the company had approximately 2,500 employees, with 2,000 in the U.S., 200 in the United Kingdom, 100 in Germany, 100 in Canada, and 100 in other locations[82] - The company is not a party to any collective bargaining agreements, except for its Hamburg, Germany, and Monterrey, Mexico facilities[82] Item 1A. Risk Factors The company faces significant risks primarily due to the cyclical nature of the oil and natural gas industry, which impacts demand and pricing, alongside intense competition, potential for excess inventory, substantial indebtedness, trade tariffs, and operational challenges - The company's revenues and operating results are significantly affected by the cyclicality of the oil and natural gas industry, influenced by factors like commodity prices, supply/demand, and drilling activity[84] - The company has substantial indebtedness, including $400.0 million in senior unsecured notes and $119.0 million outstanding under its Credit Facility, which could restrict operations and increase vulnerability to adverse economic conditions[91] - In 2018, the company recognized goodwill impairment charges totaling $298.8 million and intangible asset impairment charges totaling $64.7 million, indicating significant asset valuation risks[106] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments were reported[141] Item 2. Properties The company's significant facilities as of December 31, 2018, include a mix of owned and leased properties across various countries, serving its segments and deemed suitable for current and anticipated operations Significant Facilities by Country (as of Dec 31, 2018) | Country | Number of facilities | Description | Leased or Owned | Segments | | :------ | :------------------- | :---------- | :-------------- | :------- | | Canada | 6 | Service/Distribution | Leased | D&S, C, All | | Germany | 1 | Manufacturing | Leased | D&S, C | | Mexico | 1 | Manufacturing | Leased | D&S, C | | Saudi Arabia | 1 | Manufacturing | Owned | P&I | | Singapore | 1 | Manufacturing/Service/Distribution | Leased | D&S, C | | UAE | 1 | Service/Distribution | Leased | D&S, C | | United Kingdom | 5 | Distribution/Manufacturing | Leased/Owned | D&S, C | | United States | 29 | Manufacturing/Service/Distribution/Corporate | Leased/Owned | D&S, C, P&I, All | - The company believes its facilities are suitable for their present and intended purposes and are adequate for current and anticipated levels of operations[145] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 11 Commitments and Contingencies, with no anticipated material adverse effect on financial condition or results - Information related to legal proceedings is included in Note 11 Commitments and Contingencies[146] - Management does not believe that any of the current legal proceedings will have a material adverse effect on the company's financial condition, results of operation, or cash flows[146] Item 4. Mine Safety Disclosures This item is not applicable to the company - Item 4. Mine Safety Disclosures is not applicable[147] Executive Officers of the Registrant The report lists the executive officers of Forum Energy Technologies, Inc. as of February 22, 2019, including their ages, positions, and professional backgrounds Executive Officers (as of Feb 22, 2019) | Name | Age | Position | | :-------------------- | :-- | :--------------------------------------------------- | | C. Christopher Gaut | 62 | President, Chief Executive Officer and Chairman of the Board | | Pablo G. Mercado | 42 | Senior Vice President, Chief Financial Officer and Treasurer | | John C. Ivascu | 41 | Senior Vice President, General Counsel and Secretary | | Michael D. Danford | 56 | Senior Vice President - Human Resources | | D. Lyle Williams | 49 | Senior Vice President - Operations | - C. Christopher Gaut has served as President and CEO since November 2018 and Chairman since December 2017, with a long history in oilfield services and finance[148] - Pablo G. Mercado was appointed Chief Financial Officer in March 2018, having held various finance and strategy roles within the company since 2011[149] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'FET', with approximately 59 shareholders of record as of February 22, 2019, no dividends declared in 2018 or 2017, and a stock repurchase program with $49.8 million remaining authorization - The company's common stock trades on the New York Stock Exchange (NYSE) under the symbol 'FET'[154] - No dividends were declared or issued during 2018 or 2017, and there are no current plans to pay cash dividends in the future[155] Stock Repurchase Program Status (as of Dec 31, 2018) | Metric | Amount (in thousands) | | :---------------------------------------------------------------- | :-------------------- | | Total authorization for repurchase program (Oct 2014) | $150,000 | | Aggregate consideration for shares repurchased to date | $100,200 | | Remaining authorization under the program | $49,752 | Item 6. Selected Financial Data This section provides selected historical consolidated financial data for the years ended December 31, 2014, through 2018, including key figures from the income statement, balance sheet, and cash flow statement, highlighting significant changes over this period Selected Income Statement Data (in thousands, except per share) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :-------------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Revenues | $1,064,219 | $818,620 | $587,635 | $1,073,652 | $1,739,717 | | Operating income (loss) | $(396,998) | $(141,595) | $(128,952) | $(113,723) | $268,038 | | Net income (loss) | $(374,080) | $(59,400) | $(81,948) | $(119,384) | $174,377 | | Basic EPS | $(3.44) | $(0.60) | $(0.90) | $(1.33) | $1.88 | Selected Balance Sheet Data (in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :----------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Cash and cash equivalents | $47,241 | $115,216 | $234,422 | $109,249 | $76,579 | | Total assets | $1,829,652 | $2,195,228 | $1,835,192 | $1,886,042 | $2,214,102 | | Long-term debt | $517,544 | $506,750 | $396,747 | $396,016 | $420,484 | | Total stockholders' equity | $1,030,126 | $1,409,016 | $1,235,202 | $1,257,020 | $1,395,356 | Selected Cash Flow Data (in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :------------------------------------------ | :--------- | :--------- | :--------- | :--------- | :--------- | | Net cash provided by (used in) operating activities | $2,407 | $(40,033) | $64,742 | $155,913 | $269,966 | | Net cash used in investing activities | $(75,407) | $(187,968) | $(11,137) | $(91,306) | $(70,691) | | Net cash provided by (used in) financing activities | $6,522 | $100,563 | $86,195 | $(26,937) | $(162,018) | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an in-depth analysis of the company's financial performance, market conditions, acquisitions, and liquidity, highlighting a 30% revenue increase in 2018 but also significant goodwill and intangible asset impairments - Total revenue for the year ended December 31, 2018, increased by 30.0% to $1,064.2 million compared to 2017, primarily due to higher market activity from increased oil prices[191] - The company recognized $363.5 million in goodwill and intangible asset impairments in 2018, primarily in the Drilling and Downhole reporting units, due to declining oil prices and lowered industry expectations[195] - As of December 31, 2018, the company had $47.2 million in cash and cash equivalents, $167.3 million available under its Credit Facility, and total debt of $518.7 million[211] Overview Forum Energy Technologies is a global oilfield products company serving various sectors of the oil and natural gas industry, with 80% of 2018 revenue from consumable products, operating through three segments - Forum Energy Technologies, Inc. is a global oilfield products company, serving the drilling, subsea, completions, production and infrastructure sectors of the oil and natural gas industry[170] - In 2018, approximately 80% of the company's revenue was derived from consumable products and activity-based equipment[170] - The company operates three business segments: Drilling & Subsea, Completions, and Production & Infrastructure, each offering distinct products and services across the well cycle[170][171][172] Market Conditions Demand for the company's products is directly linked to customer activity and budgets, heavily influenced by energy prices, which strengthened in 2017 and most of 2018 but declined sharply in Q4 2018 - Demand for products is directly related to customer activity levels and capital/operating budgets, which are heavily influenced by energy prices and future price expectations[174] - Oil prices strengthened in 2017 and through much of 2018, but declined sharply in the fourth quarter of 2018 due to concerns over slowing global oil demand and a surge in U.S. oil production[174][175] Average Active Rigs by Location | Location | 2018 | 2017 | 2016 | | :----------- | :--- | :--- | :--- | | United States | 1,032 | 877 | 509 | | Canada | 191 | 206 | 130 | | International | 989 | 948 | 955 | | Global Active Rigs | 2,212 | 2,031 | 1,594 | Acquisitions In 2018, the company acquired Houston Global Heat Transfer LLC (GHT) for $57.3 million and certain assets of ESP Completion Technologies LLC (ESPCT) for $8.0 million, both enhancing the Completions segment, following significant acquisitions in 2017 - On October 5, 2018, the company acquired 100% of Houston Global Heat Transfer LLC (GHT) for $57.3 million (net of cash acquired), adding premium industrial heat exchanger and cooling systems to the Completions segment[181] - On July 2, 2018, the company acquired certain assets of ESP Completion Technologies LLC (ESPCT) for $8.0 million, expanding its portfolio of technologies for artificial lift systems in the Completions segment[181] - In 2017, key acquisitions included the remaining membership interests in Global Tubing, LLC for approximately $290.3 million, Multilift for $39.2 million, and Cooper Valves for $14.0 million, all contributing to segment growth[181][183] Factors Affecting Comparability of Future Results Future financial results may not be comparable to historical data due to strategic acquisitions in 2017 and 2018, which expanded the product portfolio and business lines, leading to anticipated incremental selling, general, and administrative expenses - Future results of operations may not be comparable to historical results due to strategic acquisitions in 2017 and 2018, which expanded and diversified the product portfolio and business lines[184] - Incremental selling, general, and administrative expenses are anticipated as the company integrates acquired companies and implements internal controls and infrastructure for public company compliance[184] Results of Operations The company experienced a 30.0% revenue increase in 2018, primarily driven by the Completions segment, but also recorded significant goodwill and intangible asset impairments, widening the operating loss Revenue by Segment (in thousands) | Segment | 2018 | 2017 | Change $ | Change % | | :-------------------------- | :--------- | :--------- | :--------- | :--------- | | Drilling & Subsea | $229,078 | $234,742 | $(5,664) | (2.4)% | | Completions | $477,987 | $260,191 | $217,796 | 83.7% | | Production & Infrastructure | $361,407 | $327,287 | $34,120 | 10.4% | | Total revenue | $1,064,219 | $818,620 | $245,599 | 30.0% | Segment Operating Income (Loss) and Margin (in thousands) | Segment | 2018 Operating Income (Loss) | 2018 Operating Margin % | 2017 Operating Income (Loss) | 2017 Operating Margin % | | :-------------------------- | :--------------------------- | :---------------------- | :--------------------------- | :---------------------- | | Drilling & Subsea | $(33,688) | (14.7)% | $(31,563) | (13.4)% | | Completions | $32,277 | 6.8% | $(6,746) | (2.6)% | | Production & Infrastructure | $6,022 | 1.7% | $7,811 | 2.4% | | Corporate | $(35,079) | - | $(33,427) | - | | Total segment operating loss | $(30,468) | (2.9)% | $(63,925) | (7.8)% | Key Financial Highlights (in thousands) | Metric | 2018 | 2017 | 2016 | | :------------------------------------------ | :--------- | :--------- | :--------- | | Total revenue | $1,064,219 | $818,620 | $587,635 | | Gross profit | $256,372 | $188,788 | $99,735 | | Goodwill and intangible asset impairments | $363,522 | $69,062 | $0 | | Operating loss | $(396,998) | $(141,595) | $(128,952) | | Net loss | $(374,080) | $(59,400) | $(81,948) | | Basic Loss per share | $(3.44) | $(0.60) | $(0.90) | Liquidity and Capital Resources The company's liquidity is derived from cash on hand, operating cash flows, trade credit, and its Credit Facility, with net cash provided by operating activities improving to $2.4 million in 2018 from a $40.0 million use in 2017 - Internal liquidity sources include cash on hand and cash flows from operations; external sources include trade credit, the Credit Facility, and Senior Notes[210] Cash Flow Summary (in thousands) | Metric | 2018 | 2017 | 2016 | | :------------------------------------------ | :--------- | :--------- | :--------- | | Net cash provided by (used in) operating activities | $2,407 | $(40,033) | $64,742 | | Net cash used in investing activities | $(75,407) | $(187,968) | $(11,137) | | Net cash provided by financing activities | $6,522 | $100,563 | $86,195 | - As of December 31, 2018, the company had $47.2 million in cash and cash equivalents, $167.3 million in remaining availability under its Credit Facility, and total debt of $518.7 million[211] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in foreign currency exchange rates and interest rates, particularly against the Canadian dollar, British pound, and Euro, and from variable-rate borrowings under the Credit Facility - The company is exposed to market risk from changes in foreign currency exchange rates and interest rates, and may use derivative financial instruments to manage or reduce this risk[261] - Primary foreign currency exposure relates to fluctuations between the U.S. dollar and the Canadian dollar, British pound sterling, and Euro[262] - As of December 31, 2018, $400.0 million of Senior Notes bear a fixed interest rate of 6.25%, while $119.0 million of Credit Facility borrowings are subject to a variable interest rate[265] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, including statements of comprehensive loss, balance sheets, cash flows, and changes in stockholders' equity for the periods ended December 31, 2018, 2017, and 2016, along with detailed notes and the independent auditor's report - The consolidated financial statements include the statements of comprehensive loss, balance sheets, cash flows, and changes in stockholders' equity for the years ended December 31, 2018, 2017, and 2016[268] - PricewaterhouseCoopers LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2018[271] - Detailed notes to the consolidated financial statements provide further information on the nature of operations, significant accounting policies, acquisitions, debt, income taxes, and business segments[296] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure to report - No changes in and disagreements with accountants on accounting and financial disclosure were reported[461] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2018, having remediated a previously identified material weakness related to fair value measurements - Management, with CEO and CFO participation, evaluated and concluded that disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2018[462] - Management concluded that the company's internal control over financial reporting is effective as of December 31, 2018, based on the COSO framework[463][465] - A material weakness identified in 2017 regarding fair value measurements for business combinations and goodwill impairment testing was remediated as of December 31, 2018, through the implementation of additional controls and procedures[466] Item 9B. Other Information There is no other information to report under this item - No other information was reported under this item[468] PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Stockholders, including the adoption of a Financial Code of Ethics - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2019 Annual Meeting of Stockholders[469] - The company has adopted a Financial Code of Ethics, applicable to its Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and other senior financial officers, available on its website[470] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Stockholders - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2019 Annual Meeting of Stockholders[472] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Stockholders - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2019 Annual Meeting of Stockholders[473] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Stockholders - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2019 Annual Meeting of Stockholders[474] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Stockholders - Information required by this item is incorporated by reference to the company's Proxy Statement for the 2019 Annual Meeting of Stockholders[475] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists all financial statements and schedules filed as part of the Annual Report on Form 10-K, along with a comprehensive index to various exhibits, including organizational documents, agreements, and certifications - The section includes an index to consolidated financial statements, which are filed as part of this report[479] - All financial statement schedules have been omitted as the required information is not applicable or is included in the Consolidated Financial Statements and Notes[476] - A comprehensive index to exhibits is provided, detailing various agreements, certificates, and other documents incorporated by reference or filed herewith[480] Item 16. Form 10-K Summary There is no Form 10-K Summary provided in this report - No Form 10-K Summary is included in this report[521] SIGNATURES The report is duly signed on behalf of Forum Energy Technologies, Inc. by its authorized officers, including the President, Chief Executive Officer and Chairman of the Board, and the Senior Vice President, Chief Financial Officer and Treasurer, along with the Directors - The report is signed by C. Christopher Gaut (President, CEO, and Chairman), Pablo G. Mercado (SVP, CFO, and Treasurer), and Tylar K. Schmitt (VP and Chief Accounting Officer) as duly authorized officers[527] - The report also includes signatures from the company's directors, dated February 28, 2019[527]