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FET > SEC Filings for FET > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for FORUM ENERGY TECHNOLOGIES, INC.

Form 10-Q for FORUM ENERGY TECHNOLOGIES, INC.


6-Nov-2012

Quarterly Report


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

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


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Prospectus dated April 11, 2012 and filed with the Securities and Exchange Commission (the "SEC") on April 13, 2012 (the "Prospectus") and elsewhere in this Quarterly Report on Form 10-Q. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Overview
Organization
We are a global oilfield products company, serving the subsea, drilling, completion, production and infrastructure sectors of the oil and natural gas industry. We design, manufacture and distribute products, and engage in aftermarket services, parts supply and related services that complement our product offering. Our product offering and related services include a mix of highly engineered capital products and frequently replaced items that are consumed in the exploration and development of oil and natural gas reserves. Historically, a little more than half of our revenue is derived from activity-based consumable products, while the balance is derived principally from capital products and a small amount from rentals and other services. We seek to design, manufacture and supply reliable, cost effective products that create value for our broad and diverse customer base, which includes oil and gas operators, land and offshore drilling contractors, well stimulation and intervention service providers, subsea construction and service companies, and pipeline and refinery operators, among others. We believe that we differentiate ourselves from our competitors on the basis of the quality of our products, the level of related service and support we provide and the collaborative approach we take with our customers to help them solve critical problems. We operate in two business segments:
• Drilling & Subsea Segment. We design and manufacture products and provide related services to the subsea, drilling, well construction, completion and intervention markets. Through this segment, we offer drilling products, including capital equipment and a broad line of products consumed in the drilling and well intervention process; downhole products, including cementing and casing tools and a range of downhole protection solutions; and subsea products, including robotic vehicles and other capital equipment, specialty components and tooling, and applied products for subsea pipelines. We also provide a broad suite of complementary subsea technical services and rental items.

• Production & Infrastructure Segment. We design and manufacture products and provide related equipment and services to the well stimulation, completion, production and infrastructure markets. Through this segment, we supply production equipment, including well site production and process equipment and specialty pipeline construction equipment; valves products, which includes a broad range of industrial and process valves; and flow equipment, including well stimulation consumable products and related recertification and refurbishment services.

Market Conditions
The demand for our products and services is ultimately driven by energy prices and the expectations of exploration and production companies as to future trends in those prices. Management believes that the long-term fundamentals underlying the global demand for energy, such as long-term economic and demographic trends, remain strong. Recently, however, the outlook for commodity prices has become less strong, as evidenced by the reduced rig activity in North America. The level of demand for our products and services is directly related to the capital budgets of our customers, which in turn are influenced heavily by the outlook for energy prices.


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The table below shows average crude oil and natural gas prices for West Texas Intermediate crude oil (WTI), United Kingdom Brent crude oil (Brent), and Henry Hub natural gas:

                                                    Three Months Ended
                                                September 30,        June 30,
                                              2012        2011         2012
Average oil, $/bbl
West Texas Intermediate                     $  91.49    $  90.37    $   93.51
United Kingdom Brent                        $ 108.80    $ 113.98    $  108.60

Average North American Natural Gas, $/Mcf
Henry Hub                                   $   2.85    $   4.28    $    2.43

Crude oil prices appear adequate to generally maintain the current level of global exploration and production activity, including the development of deepwater prospects, which stimulates demand for our subsea products and services. Current oil prices are also supporting a generally steady level of oil related activity, both offshore and onshore. Low North American natural gas prices have, however, negatively impacted certain areas of our business, principally those tied to products and services we provide to the drilling and pressure pumping service sectors. At the same time, abundant natural gas at low prices appears to be leading to redevelopment of U.S. petrochemical and process industry facilities, promoting increased demand for our valve products. Corresponding to the commodity price levels, the active rig count data below, based on the weekly Baker Hughes Incorporated rig count, reflect a broad measure of industry activity and resultant demand for our drilling and production related products and services.

                                   Three Months Ended
                                September 30,     June 30,
                                2012      2011      2012
Active Rigs by Location
United States                   1,905    1,945       1,959
Canada                            325      443         261
International                   1,259    1,169       1,285
Global Active Rigs              3,489    3,557       3,505

Land vs. Offshore Rigs
Land                            3,145    3,212       3,154
Offshore                          344      345         351
Global Active Rigs              3,489    3,557       3,505

U.S. Commodity Target, Land
Oil/Gas                         1,419    1,048       1,421
Gas                               486      897         534
Unclassified                        -        -           4
Total U.S. Land Rigs            1,905    1,945       1,959

U.S. Well Path, Land
Horizontal                      1,153    1,114       1,171
Vertical                          531      590         553
Directional                       221      241         235
Total U.S. Active Land Rigs     1,905    1,945       1,959

Increased activity in the refurbishment and upgrade of petrochemical facilities and projects to ensure pipeline integrity have strengthened the demand for our valve products. We have also continued to see strong demand in our production equipment, subsea and downhole product lines. The decline in drilling activity levels in North America has resulted in reduced demand for products and services in our drilling technologies and flow equipment


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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

product lines. Those portions of our business that supply parts and equipment relating to pressure pumping, primarily flow equipment, have experienced a decline in revenue and a compression of margins due to a shift in activity towards oil drilling, which generally places less of a demand on pressure pumping equipment. This shift and an overstocking of parts and supplies by our customers during prior periods has necessitated a destocking of that inventory beginning in the second quarter. We expect this destocking to continue through the end of the year.
Results of operations
We have grown our business both organically and through strategic acquisitions, including eight acquisitions in 2011, all of which were completed during the nine months ended September 30, 2011. For additional information about these acquisitions, see Note 3 of the notes to condensed consolidated financial statements in Item 1 of Part I of this quarterly report. For this reason, our results of operations for the 2012 periods presented may not be comparable to historical results of operations for the 2011 periods. There are factors related to the businesses we have acquired that may result in lower net profit margins on a going-forward basis, including the fact that several of these acquired businesses were organized as tax pass-through entities without federal income tax incurred or recognized at the entity level, and the fact that post-acquisition we have recorded higher depreciation and amortization expenses.


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Three months ended September 30, 2012 compared to three months ended September 30, 2011
Three Months Ended September 30, Favorable / (Unfavorable) 2012 2011 $ % (in thousands of dollars, except per

share information)
Revenue:
Drilling & Subsea                         $       203,823       $       197,933     $        5,890            3.0  %
Production & Infrastructure                       144,095               132,973             11,122            8.4  %
Eliminations                                         (151 )                   -               (151 )            *
Total revenue                             $       347,767       $       330,906     $       16,861            5.1  %
Cost of sales:
Drilling & Subsea                         $       129,326       $       124,853     $       (4,473 )         (3.6 )%
Production & Infrastructure                       102,098                93,462             (8,636 )         (9.2 )%
Eliminations                                         (151 )                   -                151              *
Total cost of sales                       $       231,273       $       218,315     $      (12,958 )         (5.9 )%
Gross profit:
Drilling & Subsea                         $        74,497       $        73,080     $        1,417            1.9  %
Production & Infrastructure                        41,997                39,511              2,486            6.3  %
Total gross profit                        $       116,494       $       112,591     $        3,903            3.5  %
Selling, general and administrative
expenses:
Drilling & Subsea                         $        33,091       $        29,668     $       (3,423 )        (11.5 )%
Production & Infrastructure                        16,477                15,808               (669 )         (4.2 )%
Corporate                                           6,253                 5,270               (983 )        (18.7 )%
Total selling, general and administrative
expenses                                  $        55,821       $        50,746     $       (5,075 )        (10.0 )%
Operating income:
Drilling & Subsea                         $        41,406       $        43,412     $       (2,006 )         (4.6 )%
Operating income margin %                            20.3 %                21.9 %
Production & Infrastructure                        25,520                23,703              1,817            7.7  %
Operating income margin %                            17.7 %                17.8 %
Corporate                                          (6,253 )              (5,270 )             (983 )        (18.7 )%
Total segment operating income            $        60,673       $        61,845     $       (1,172 )         (1.9 )%
Operating income margin %                            17.4 %                18.7 %
Contingent consideration expense
(benefit)                                            (700 )                 200                900              *
Transaction expenses                                   85                   818                733           89.6  %
(Gain)/loss on sale of assets                      (1,616 )                (100 )            1,516              *
Income from operations                             62,904                60,927              1,977            3.2  %
Interest expense, net                               3,592                 6,034              2,442           40.5  %
Other, net                                            764                   510               (254 )        (49.8 )%
Other (income) expense, net                         4,356                 6,544              2,188           33.4  %
Income before income taxes                         58,548                54,383              4,165            7.7  %
Income tax expense                                 17,605                18,793              1,188            6.3  %
Net income                                         40,943                35,590              5,353           15.0  %
Less: Income attributable to
non-controlling interest                               20                    80                (60 )        (75.0 )%
Income attributable to common
stockholders                              $        40,923       $        35,510     $        5,413           15.2  %

Weighted average shares outstanding
Basic                                              84,993                67,655
Diluted                                            92,339                73,635
Earnings per share
Basic                                     $          0.48       $          0.52
Diluted                                   $          0.44       $          0.48


* not meaningful


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Revenue
Our revenue for the three months ended September 30, 2012 increased $16.9 million, or 5.1%, to $347.8 million compared to the three months ended September 30, 2011. For the three months ended September 30, 2012, our Drilling & Subsea segment and our Production & Infrastructure segment comprised 58.6% and 41.4% of our total revenue, respectively, compared to 59.8% and 40.2%, respectively, for the three months ended September 30, 2011. Both of our operating segments had increased revenue in the three months ended September 30, 2012 compared to the comparable prior year period. The revenue increase by operating segment consisted of the following:
Drilling & Subsea Segment - Revenue increased $5.9 million, or 3.0%, to $203.8 million during the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase is mostly attributable to our downhole product line, the majority of which was owned for only two of the three months ended September 30, 2011. Adding to the increase in revenue was higher shipments of various types of capital equipment items in our drilling product line, such as tubular handling products and coiled tubing blowout preventer equipment. These increases were offset by fewer shipments of remote operating vehicles (ROV's) in our subsea product line as our customers have delayed orders and shipments.
Production & Infrastructure Segment - Revenue increased $11.1 million, or 8.4%, to $144.1 million during the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The growth was attributable to increased shipments in both production equipment and valve solutions products as each experienced increased orders from existing and new customers. The higher shipments were made possible for production equipment by the expansion of existing facilities and the addition of new facilities in Pennsylvania, each completed in 2011. These increases were offset by lower revenue in flow equipment products as the market decline experienced in the three months ended June 30, 2012 continued into the three months ended September 30, 2012. Segment operating income and segment operating margin percentage Segment operating income for the three months ended September 30, 2012 decreased $1.2 million, or 1.9%, to $60.7 million compared to the three months ended September 30, 2011. The segment operating margin percentage is calculated by dividing segment operating income by revenue. For the three months ended September 30, 2012, the segment operating margin percentage of 17.4% represents a decline of 130 basis points from an 18.7% operating margin percentage for the three months ended September 30, 2011. The decline in operating margin percentage in each segment was derived as follows:
Drilling & Subsea Segment - The operating margin percentage declined 160 basis points to 20.3% for the three months ended September 30, 2012, from 21.9% for the three months ended September 30, 2011. Of this decline in operating margin percentage, 120 basis points is due to increased spending on sales and engineering initiatives, while 30 basis points is attributable to pricing pressure in certain product lines.
Production & Infrastructure Segment - The operating margin percentage declined by 10 basis points to 17.7% for the three months ended September 30, 2012, from 17.8% for the three months ended September 30, 2011. We experienced margin improvement in both production equipment and valve solutions as a result of manufacturing efficiencies on higher volumes and modest price increases, offset by reduced sales of our higher margin flow equipment product line coupled with pricing pressure on some of those products.
Corporate - Selling, general and administrative expenses for Corporate increased $1.0 million, or 18.7%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 due to higher compensation expense and professional fees. Corporate costs included, among other items, payroll related costs for general management and management of finance and administration, legal, and human resources; professional fees for legal, accounting and related services; and marketing costs. Other items
Several items are not included in segment operating income but are included in total operating income. These items include: Contingent consideration, impairment of intangible assets, transaction expenses and gains/losses from the sale of assets. Contingent consideration is related to two acquisitions in 2011 where part of the purchase price is payable in cash and/or shares of the Company's common stock based on the earnings of the acquired entities. The change in the amount of the accrual is recorded as part of operating income, an increase of $0.7 million for the three months ended September 30, 2012 due to lower projected earnings of an acquired entity, and a decrease to operating income for $0.2 million for the three months ended September 30, 2011. Transaction


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

expenses relate to costs incurred in acquiring businesses and are not considered part of on-going segment operating income. These costs were $0.1 million and $0.8 million for the three months ended September 30, 2012 and 2011, respectively.
Interest expense
We incurred $3.6 million of interest expense during the three months ended September 30, 2012, a decrease of $2.4 million from the amount incurred in the three months ended September 30, 2011. The decrease in interest expense was attributable to the decrease in debt levels as we repaid a portion of our debt from the net proceeds of the initial public offering (the "IPO") and concurrent private placement of our common shares in April 2012. Taxes
Tax expense includes current income taxes expected to be due based on taxable income to be reported during the periods in the various jurisdictions in which we conduct business, and deferred income taxes based on changes in the tax effect of temporary differences between the bases of assets and liabilities for financial reporting and tax purposes at the beginning and end of the respective periods. The effective tax rate, calculated by dividing total tax expense by income before income taxes, was 30.1% and 34.6% for the three months ended September 30, 2012 and 2011, respectively. The effective tax rate for the three months ended September 30, 2012 is lower than the comparable period in 2011 primarily due to a reduction in the tax provision from the finalization of certain prior year tax returns.


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011
Nine Months Ended September 30, Favorable / (Unfavorable) 2012 2011 $ % (in thousands of dollars, except per

share information)
Revenue:
Drilling & Subsea                       $         639,538       $      465,898     $       173,640           37.3  %
Production & Infrastructure                       445,770              325,514             120,256           36.9  %
Eliminations                                         (540 )                  -                (540 )            *
Total revenue                           $       1,084,768       $      791,412     $       293,356           37.1  %
Cost of sales:
Drilling & Subsea                       $         405,015       $      310,116     $       (94,899 )        (30.6 )%
Production & Infrastructure                       314,554              232,716             (81,838 )        (35.2 )%
Eliminations                                         (540 )                  -                 540              *
Total cost of sales                     $         719,029       $      542,832     $      (176,197 )        (32.5 )%
Gross profit:
Drilling & Subsea                       $         234,523       $      155,782     $        78,741           50.5  %
Production & Infrastructure                       131,216               92,798              38,418           41.4  %
Total gross profit                      $         365,739       $      248,580     $       117,159           47.1  %
Selling, general and administrative
expenses:
Drilling & Subsea                       $         100,739       $       72,304     $       (28,435 )        (39.3 )%
Production & Infrastructure                        51,145               42,069              (9,076 )        (21.6 )%
Corporate                                          14,996               15,253                 257            1.7  %
Total selling, general and
administrative expenses                 $         166,880       $      129,626     $       (37,254 )        (28.7 )%
Operating income:
Drilling & Subsea                       $         133,784       $       83,478     $        50,306           60.3  %
Operating income margin %                            20.9 %               17.9 %
Production & Infrastructure                        80,071               50,729              29,342           57.8  %
Operating income margin %                            18.0 %               15.6 %
Corporate                                         (14,996 )            (15,253 )               257            1.7  %
Total segment operating income          $         198,859       $      118,954     $        79,905           67.2  %
Operating income margin %                            18.3 %               15.0 %
Contingent consideration expense
(benefit)                                          (4,600 )              6,000              10,600              *
Impairment of intangible assets                     1,161                    -              (1,161 )            *
Transaction expenses                                  882                3,434               2,552           74.3  %
(Gain)/loss on sale of assets                      (1,539 )               (520 )             1,019          196.0  %
. . .
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