10-K 1 fet201710-k.htm FORM 10-K Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-K
____________________________________
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Fiscal Year Ended December 31, 2017
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 incorporation or organization)
 
(I.R.S. Employer Identification No.)
920 Memorial City Way, Suite 1000
Houston, Texas 77024
(Address of principal executive offices)
Registrant’s telephone number, including area code: (281) 949-2500
Securities registered pursuant to Section 12(b) of the Act:
Common stock, $0.01 par value
 
New York Stock Exchange
(Title of Each Class)
 
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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
 
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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
The aggregate market value of Common Stock held by non-affiliates on June 30, 2017, determined using the per share closing price on the New York Stock Exchange Composite tape of $15.60 on June 30, 2017, was approximately $1.1 billion. For this purpose, our executive officers and directors and SCF Partners L.P. and its affiliates are considered affiliates.
As of February 23, 2018, there were 108,539,940 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

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Forum Energy Technologies, Inc.
Index to Form 10-K

PART I
PART II
PART III
PART IV
 
 
 


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PART I

Item 1. Business
Forum Energy Technologies, Inc., a Delaware corporation (“Forum,” the “Company,” “we” or “us”), is a global oilfield products company, serving the drilling, subsea, completions, production and infrastructure sectors of the oil and natural gas industry. Our common shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “FET.” Our principal executive offices are located at 920 Memorial City Way, Suite 1000, Houston, Texas 77024, our telephone number is (281) 949-2500, and our website is www.f-e-t.com. Our Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, are available free of charge on our website as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). These reports are also available on the SEC’s website at www.sec.gov. Information contained on or accessible from our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.
Overview
We are a global oilfield products company, serving the drilling, subsea, completions, production and infrastructure sectors of the oil and natural gas industry. We design, manufacture and distribute products and engage in aftermarket services, parts supply and related services that complement our product offering. Our product offering includes frequently replaced consumable products that are used in the exploration, development, production and transportation of oil and natural gas, as well as a mix of highly engineered capital products. Our consumable products are used in drilling, well construction and completions activities, within the supporting infrastructure, and at processing centers and refineries. Our engineered capital products are directed at: drilling rig equipment for new rigs, upgrades and refurbishment projects; subsea construction and development projects; pressure pumping equipment; the placement of production equipment on new producing wells; and downstream capital projects. In 2017, approximately 80% of our revenue was derived from consumable products and activity-based equipment, while the balance was derived from capital products, and a small amount from rental and other services.
We seek to design, manufacture and supply reliable products that create value for our diverse customer base, which includes, among others, oil and natural gas operators, land and offshore drilling contractors, oilfield service companies, subsea construction and service companies in both oil and natural gas and non-oil and natural gas industries, and pipeline and refinery operators.
We operate three business segments that cover all stages of the well cycle, Drilling & Subsea, Completions, and Production & Infrastructure. The table below provides a summary of proportional revenue contributions from our three business segments and our primary geographic markets over the last three years:
 
Percentage of revenue
 
Year ended December 31,
 
2017
 
2016
 
2015
Drilling & Subsea
28
%
 
38
%
 
44
%
Completions
32
%
 
22
%
 
26
%
Production & Infrastructure
40
%
 
40
%
 
30
%
   Total
100
%
 
100
%
 
100
%
 
 
 
 
 
 
United States
76
%
 
62
%
 
60
%
Canada
7
%
 
7
%
 
5
%
Other International
17
%
 
31
%
 
35
%
   Total
100
%
 
100
%
 
100
%
We incorporate by reference the segment and geographic information for the last three years set forth in Note 16 Business Segments and the information with respect to acquisitions set forth in Note 4 Acquisitions.

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Drilling & Subsea segment
In our Drilling & Subsea segment, we design, manufacture and supply products and provide related services to the drilling and subsea construction markets. Through this segment, we offer drilling technologies, including capital equipment and a broad line of products consumed in the drilling process; and subsea technologies, including robotic vehicles and other capital equipment, specialty components and tooling, a broad suite of complementary subsea technical services and rental items, and products used in pipeline infrastructure.
There are several factors that drive demand for our Drilling & Subsea segment. Our Drilling Technologies product line is influenced by global drilling activity; the level of capital investment in drilling rigs; rig upgrades and equipment replacement as drilling contractors modify their existing rigs to improve efficiency and safety; and the number of rigs and amount of well service equipment in use and the severity of the conditions under which they operate. Demand for our subsea products is impacted by global offshore activity, subsea equipment and pipeline installation, repair and maintenance spending, and growth in offshore resource development.
Drilling Technologies. We provide both drilling capital equipment and consumables, with a focus on products that enhance our customers handling of tubulars and drilling fluids on the drilling rig. Our product offering includes powered and manual tubular handling equipment; customized offline crane systems; drilling data acquisition management systems; pumps, pump parts, valves, and manifolds; drilling fluid end components, and a broad line of items consumed in the drilling process.
Drilling capital equipment. We design and manufacture a range of powered and manual tubular handling tools used on onshore and offshore drilling rigs. Our Forum B+V Oil Tools and Wrangler™ branded tools reduce direct human involvement in the handling of pipe during drilling operations, improving safety, speed and efficiency of operations. Our tubular handling tools include elevators, clamps, slip handles, tong handles, powered slips, spiders and kelly spinners. Our hydraulic catwalks mechanize the lifting and lowering of tubulars to and from the drill floor, eliminating or reducing the need for traditional drill pipe and casing “pick-up and lay-down” operations with associated personnel. In addition, our make-up and break-out tools, called Forum B+V Oil Tools Floorhand™ and Wrangler Roughneck™, automate a potentially dangerous rig floor task and improve rig drilling speed and safety. In addition, we design and manufacture a range of rig-based offline activity cranes, multi-purpose cranes and personnel transfer solutions. Many of these cranes are fit-for-purpose multi-axis cranes that provide access to hard-to-reach places and eliminate the need for manual interface.
In addition to powered tubular handling equipment, materials handling and personnel transfer equipment, we design and manufacture drilling manifold systems and high pressure piping packages.
Finally, we repair and service drilling equipment for both land and offshore rigs. Many of our service employees work in the field to address problems at the rig site.
Consumable products. We manufacture a range of consumable products used on drilling rigs, well servicing rigs, pressure pumping units, and hydraulic fracturing systems. Our consumable products include valves, centrifugal pumps, mud pump parts, rig sensors, inserts, and dies. We are also a supplier of oilfield bearings to original equipment manufacturers and repair businesses for use in drilling and well stimulation equipment.
Subsea Technologies. We design and manufacture capital equipment and specialty components used in the subsea sector and provide a broad suite of complementary subsea technical services and rental items. We have a core focus on the design and manufacture of remotely operated vehicle (“ROV”) systems, other specialty subsea vehicles, and rescue submarines, as well as critical components of these vehicles. Many of our related technical services complement our vehicle offerings.
Subsea vehicles. We are a leading designer and manufacturer of a wide range of ROVs that we supply to the offshore subsea construction, observation and related service markets. The market for subsea ROVs can be segmented into three broad classes of vehicles based on size and category of operations: (1) large work-class vehicles and trenchers for subsea construction and installation activities, (2) drilling-class vehicles deployed from and for use around an offshore rig and (3) observation-class vehicles for inspection and light manipulation. We are a leading provider of work-class and observation-class vehicles.
We design and manufacture large work-class ROVs through our Perry brand. These vehicles are principally used in deepwater construction applications with the largest vehicles providing up to 200 horsepower, exceeding 1,200 pounds of payload capacity and having the capability to work in depths up to 4,000 meters. In addition to work-class ROVs, we design and manufacture large subsea trenchers that travel along the sea floor for digging, installation and burial

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operations. The largest of these subsea trenchers provides up to 1,500 horsepower and is able to cut over three meters deep into the seafloor to lay pipelines, power cables or communications cables.
Our Sub-Atlantic branded observation-class vehicles are electrically powered and are principally used for inspection, survey and light manipulation, and serve a wide range of industries.
Our subsea vehicle customers are primarily large offshore construction companies, including non-oil and natural gas industry entities, such as a range of governmental organizations including navies, maritime science and geoscience research organizations, offshore wind power companies, and other industries operating in marine environments.
Subsea products. In addition to subsea vehicles, we are a leading manufacturer of subsea products and components. We design and manufacture a group of products that are used in and around the ROV. For example, we manufacture Dynacon™ branded ROV launch and recovery systems, Syntech™ branded syntactic foam buoyancy components, Sub-Atlantic branded ROV thrusters, and a wide range of hydraulic power units and valve packs. We design and manufacture these ROV components for incorporation into our own vehicles as well as for sale to other ROV manufacturers. We also provide a broad suite of subsea tooling, both industry standard and custom designed.
In addition to vehicle-related subsea products, we provide products used in subsea infrastructure, including subsea pipeline inspection gauge launching and receiving systems, and subsea connectors. Our primary customers in this product line are offshore pipeline construction companies.
Subsea technical services and rental. Our Forum Subsea Rentals (“FSR”) business maintains a fleet of subsea rental items, primarily subsea positioning equipment. Our customers for rental items are primarily subsea construction and offshore service companies. In addition, we offer a system that offers a complete solution for digital video capture, playback, processing and reporting of subsea inspection survey data. On January 3, 2018, we contributed FSR into Ashtead Technology, a competing business, in exchange for a 40% interest in the combined business. The transaction creates a market leading independent provider of subsea survey and ROV equipment rental services. After the transaction, our interest in the combined business will be presented as an equity method investment.
Completions segment
In our Completions segment, we design, manufacture and supply products and provide related services to the well construction, completion, stimulation and intervention markets. Through this segment, we offer downhole technologies, including cementing and casing tools, completion products, and a range of downhole cable protection solutions; and we also offer stimulation and intervention technologies, including pumps and well stimulation consumable products and related recertification and refurbishment services.
There are several factors driving demand for our Completions segment. Our Downhole Technologies product line is impacted by the level of well completion activity and complexity of well construction and completion. Our Stimulation and Intervention product line and Coiled Tubing product line are impacted by the use of hydraulic fracturing to develop oil and natural gas reserves in shale or tight sand basins across North America and the level of workover and intervention activity.
Downhole Technologies. We manufacture a broad line of downhole products that are consumed during the well construction, completion and production enhancement processes.
Casing and cementing tools. Through our Davis-Lynch branded downhole well construction and completion tools operations, we design and manufacture products used in the construction of oil and natural gas wells. We design and manufacture a full range of centralizers, float equipment, stage cementing tools, inflatable packers, flotation collars, cementing plugs, fill and circulation tools for running casing, casing hangers and surge reduction equipment. Our products are used in the construction of onshore and offshore wells.
Completion products. We manufacture a line of downhole completion tools, including composite plugs, and wireline flow-control products. Our composite plugs are primarily used for zonal isolation during multi-stage hydraulic fracturing in horizontal and vertical wells. The design of the plugs allows them to be drilled out quickly to improve service efficiency. We offer a variety of plug sizes to fit various casings as well as a range of temperature and pressure ratings to accommodate different well environments. Our wireline flow-control products include a number of components included in most completions such as landing nipples, circulating sleeves, blanking plugs and separation tools.
Downhole protection systems. We offer a full range of downhole protection solutions through our Cannon Services and Multilift brands. The Cannon Services clamp and protection system is used to shield downhole control lines, cables and gauges during installation and to provide protection during production enhancement operations. We design and

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manufacture a full range of downhole protection solutions for electrical submersible pump (“ESP”) cabling, encapsulated control lines, sub-surface safety valves and permanent downhole gauges. We provide both standard and customized protection systems, and we utilize a range of materials in our products for various downhole environments. Multilift SandGuard™ and Cyclone™ completion tools extend the useful life of an ESP by protecting it against sand and other solids after shutdown.
Specialized torque equipment. We also design and manufacture specialized torque equipment and related control systems for tubular connections, including high torque stroking, or bucking units; fully rotational torque units; and portable torque units for field deployment. In addition, we provide aftermarket service.
Our primary customers in this product line are oil and natural gas producers, and service companies providing completion, ESP and other intervention services to producers.
Stimulation and Intervention. We provide a broad range of high pressure pumps and flow equipment used by well stimulation, or pressure pumping, companies during stimulation, intervention and flowback processes. We design and manufacture pressure control plug, choke and relief valves, swivel joints, pup joints and integral fittings, manifolds and manifold trailers, as well as triplex and quintuplex fluid-end assemblies. Frequent refurbishment and recertification of flow equipment is critical to ensuring the reliable and safe operation of a pressure pumping companys fleet. We perform these services at various locations and operate a fleet of mobile refurbishment and recertification tractor trailers, which can be deployed to the customers yard. We serve many of the unconventional basins across North America and seek to position our stocking and service locations in proximity to our customers operations.
We manufacture pressure control products that are used for well intervention operations and sold directly to oilfield service companies and equipment rental companies. These products include both coiled tubing and wireline blowout preventers and their accessories. We also conduct aftermarket refurbishment and recertification services for pressure control equipment. In addition to blowout preventers for wireline units, we manufacture electro-mechanical wireline cables.
Our primary customers in the Stimulation and Intervention product line are pressure pumping and flowback service companies, although we also generate sales to original equipment manufacturers of pressure pumping units.
Coiled Tubing. We manufacture Global Tubing® branded coiled tubing strings, coiled line pipe and provide related services. Coiled tubing strings are consumable components of coiled tubing units that perform well completion and intervention activities. Our coiled line pipe offering serves as an alternative to the conventional line pipe in onshore and subsea applications.
We invested in Global Tubing, LLC (“Global Tubing”) with a joint venture partner (with Global Tubing’s management retaining a small interest) in 2013. In the fourth quarter of 2017, we acquired the remaining membership interests in Global Tubing. Additional details about the acquisition and investment are included in Note 4 Acquisitions and Note 5 Investment in Unconsolidated Subsidiary, respectively.
Our primary customers in the Coiled Tubing product line are service companies that provide coiled tubing services globally.
Production & Infrastructure segment
In our Production & Infrastructure segment, we design, manufacture and supply products and provide related equipment and services to production and infrastructure markets. Through this segment, we supply production equipment, including well site production and process equipment, and a broad range of industrial and process valves.
The level of spending to bring new wells on production, including the related infrastructure, is the primary driver for our Production & Infrastructure segment. Our Production Equipment product line also has exposure to the amount of spending on midstream and downstream projects as it offers products that go from the well site to inside the refinery fence. Our Valve Solutions product line is impacted by the level of infrastructure additions, upgrades and maintenance activities across the oil and natural gas industry, including the upstream, midstream and downstream sectors. This includes heavy oil development in Canada and investments in new petrochemical facilities. In addition, our valves are used in the power, process and mining industries.
Production Equipment. Our surface Production Equipment product line provides engineered process systems and field services for capital equipment used at the wellsite and, for production processing, in the U.S. Once a well has been drilled, completed and brought on stream, we provide the well operator or producer with the process equipment necessary to make the oil or natural gas ready for transmission. We engineer, fabricate and install separators, packaged

6


production systems and American Society of Mechanical Engineers (ASME) and American Petroleum Institute (API) coded pressure vessels, skidded vessels with gas measurement, modular process plants, header and manifold skids, process and flow control equipment and separators to help clean and process oil or natural gas as it travels from the wellhead and along the transmission line to the refinery. Our customers are principally oil and natural gas operators or producers.
We have several North American manufacturing locations and service centers. To ensure smooth delivery of equipment, we maintain a fleet of specialized trucks and crews that can deliver and install the production equipment on the well site.
We also design and provide process oil and produced water treatment equipment, including desalters and dehydrators, used in refineries worldwide. We have a team of technicians and field service engineers for repair and installation, and we supply a broad range of replacement parts for our equipment and other manufacturers. This equipment removes sand, water and suspended solids from hydrocarbons prior to their refining.
Valve Solutions. We design, manufacture and provide a wide range of industrial valves that principally serve the upstream, midstream and downstream markets of the oil and natural gas industry. To a lesser extent, our valves serve general industrial, power and process industry customers as well as the mining industry. We provide ball, gate, globe, check and butterfly valves across a range of sizes and applications.
We market our valves to our customers and end users through our recognized brands: PBV™, DSI®, Quadrant®, Accuseal®, Cooper Alloy®, and ABZ™. Much of our production is sold through distribution supply companies, with our marketing efforts targeting end users for pull through of our products. Our global sales force and representatives cover approximately 30 countries, with local sales and distribution in Australia and Canada. Our Canadian operations provide significant exposure to the heavy oil projects.
Our manufacturing and supply chain systems enable us to design and produce high-quality engineered valves, as well as provide standardized products, while maintaining competitive pricing and minimizing capital requirements. We also utilize our international manufacturing partners to produce components and completed products for a number of our other valve brands.
Depending on the product, we manufacture our valves to conform to the standards of one or more of the API, American National Standards Institute, American Bureau of Shipping, and International Organization for Standardization and/or other relevant standards governing the design and manufacture of industrial valves. Through our Valve Solutions product line, we participate in the API’s standard-setting process.
Business history
Forum was incorporated in 2005 and formed through a series of acquisitions. In August 2010, Forum Oilfield Technologies, Inc. was renamed Forum Energy Technologies, Inc. On April 17, 2012, we completed our initial public offering.
Backlog
As we provide a mix of capital goods, consumable products, repair parts, and rental services, a majority of our business does not require lengthy lead times. A majority of the orders and commitments included in our backlog as of December 31, 2017 were scheduled to be delivered within six months. Our backlog, net of cancellations, was approximately $222 million at December 31, 2017 and approximately $165 million at December 31, 2016. Substantially all of the projects currently in our backlog are subject to change and/or termination at the option of the customer. In the case of a change or termination, the customer is generally required to pay us for work performed and other costs necessarily incurred as a result of the change or termination. It is difficult to predict how much of our current backlog will be delayed or terminated, or subject to changes, as well as our ability to collect termination or change fees.
Our consumable and repair products are predominantly off-the-shelf items requiring short lead-times, generally less than six months, and our related refurbishment or other services are also not contracted with significant lead time. The composition of our backlog is reflective of our mix of capital equipment, consumable products, aftermarket and other related items. Our bookings, which consist of written orders or commitments for our products or related services, during the years ended December 31, 2017 and 2016 were approximately $870 million and $597 million, respectively.
Customers
No customer represented more than 10% of consolidated revenue in any of the last three years.

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Seasonality
A substantial portion of our business is not significantly impacted by seasonality. We do, however, generally experience lower sales and profitability in the fourth quarter due to a decrease in working days caused by calendar year-end holidays, and manufacturing and shipping delays caused by weather. In addition, given the geographic proximity of a number of our facilities to the Gulf Coast, we are subject to business interruptions caused by hurricanes and tropical storms. A small portion of the revenue we generate from selected Canadian operations often benefits from higher first quarter activity levels, as operators take advantage of the winter freeze to gain access to remote drilling and production areas. Revenue exposed to this type of seasonality, however, comprised less than 5% of our overall revenue in 2017.
Competition
The markets in which we operate are highly competitive. We compete with a number of companies, some of which have greater financial and other resources than we do. The principal competitive factors in our markets are product quality and performance, price, breadth of product offering, availability of products and services, distribution capabilities, responsiveness to customer needs and reputation for service. We believe our products and services in each segment are at least comparable in price, quality, performance and dependability with our competitors’ offerings. We seek to differentiate ourselves from our competitors by providing a rapid response to the needs of our customers, a high level of customer service, and innovative product development initiatives. Some of our competitors expend greater amounts of money on formal research and engineering efforts than we do. We believe, however, that our product development efforts are enhanced by the investment of management time we make to improve our customer service and to work with our customers on their specific product needs and challenges.
Although we have no single competitor across all of our product lines, the companies we compete with across the greatest number of our product lines include Cameron International Corporation (a subsidiary of Schlumberger), Exterran Corp., National Oilwell Varco, Inc., TechnipFMC plc, Weatherford International, Ltd., and Weir SPM, a subsidiary of The Weir Group.
Patents, trademarks and other intellectual property
We currently hold multiple U.S. and international patents and trademarks and have a number of pending patent and trademark applications. Although in the aggregate our patents, trademarks and licenses are important to us, we do not regard any single patent, trademark or license as critical or essential to our business as a whole.
Raw materials
We acquire component parts, products and raw materials from suppliers, including foundries, forge shops, and original equipment manufacturers. The prices we pay for our raw materials may be affected by, among other things, energy, steel and other commodity prices, tariffs and duties on imported materials and foreign currency exchange rates. Certain of our component parts, products or raw materials, such as bearings, are only available from a limited number of suppliers. Please see “Risk factors—Risks related to our business—We are subject to the risk of supplier concentration.”
We cannot assure you that we will be able to continue to purchase raw materials on a timely basis or at acceptable prices. We generally try to purchase our raw materials from multiple suppliers so we are not dependent on any one supplier, but this is not always possible.
Working capital
We fund our business operations through a combination of available cash and equivalents, short-term investments, and cash flow generated from operations. In addition, our senior secured revolving credit facility is available for working capital needs. For a summary of our credit facility, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and capital resources.”
Inventory
An important consideration for many of our customers in selecting a vendor is timely availability of the product. Customers may pay a premium for earlier or immediate availability because of the cost of delays in critical operations. We stock our consumable products in regional warehouses around the world so that we can have these products available for our customers when needed. This availability is especially critical for certain consumable products, causing us to carry substantial inventories for these products. For critical capital items in which demand is expected to be strong, we often build certain items before we have a firm order. Our having such goods available on short notice can

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be of great value to our customers. We also stockpile raw materials and components in order to be in a position to build products in response to market demand.
We typically offer our customers payment terms of 30 days, although during downturns in activity such as our industry experienced beginning in the second half of 2014, customers often take 60 days or more to settle accounts. For sales into certain countries or for select customers, we might require payment upfront or credit support through a letter of credit. For longer term projects, we typically require progress payments as important milestones are reached. On average, we collect our receivables in about 60 days from shipment resulting in a substantial investment in accounts receivable. Likewise, standard terms with our vendors are 60 days. For critical items sourced from significant vendors, we have settled accounts more quickly, sometimes in exchange for early payment discounts.
Environmental, transportation, health and safety regulation
Our operations are subject to numerous stringent and complex laws and regulations governing the discharge of materials into the environment, health and safety aspects of our operations, or otherwise relating to human health and environmental protection. We also operate vehicles that are subject to federal and state transportation regulations. Failure to comply with these laws or regulations or to obtain or comply with permits may result in the assessment of administrative, civil and criminal penalties, imposition of remedial or corrective action requirements, and the imposition of injunctions to prohibit certain activities or force future compliance.
The trend in environmental regulation has been to impose increasingly stringent restrictions and limitations on activities that may impact the environment, and thus, any changes in environmental laws and regulations or in enforcement policies that result in more stringent and costly waste handling, storage, transport, disposal, or remediation requirements could have a material adverse effect on our operations and financial position. Moreover, accidental releases or spills of regulated substances may occur in the course of our operations, and we cannot assure you that we will not incur significant costs and liabilities as a result of such releases or spills, including any third party claims for damage to property, natural resources or persons.
The following is a summary of the more significant existing environmental, health and safety laws and regulations to which our business operations are subject and for which compliance may have a material adverse impact on our capital expenditures, results of operations or financial position.
Hazardous substances and waste
The Resource Conservation and Recovery Act (the “RCRA”) and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the Environmental Protection Agency (the “EPA”), the individual states administer some or all of the provisions of the RCRA, sometimes in conjunction with their own, more stringent requirements. We are required to manage the transportation, storage and disposal of hazardous and non-hazardous wastes in compliance with the RCRA.
The Comprehensive Environmental Response, Compensation, and Liability Act (the “CERCLA”), also known as the Superfund law, imposes joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the owner or operator of the site where the release occurred, and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. We currently own, lease, or operate numerous properties that have been used for manufacturing and other operations for many years. We also contract with waste removal services and landfills. These properties and the substances disposed or released on them may be subject to the CERCLA, RCRA and analogous state laws. Under such laws, we could be required to remove previously disposed substances and wastes, remediate contaminated property, or perform remedial operations to prevent future contamination. In addition, it is not uncommon for neighboring landowners and other third-parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment.

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Water discharges
The Federal Water Pollution Control Act (the “Clean Water Act”) and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the U.S. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. A responsible party includes the owner or operator of a facility from which a discharge occurs. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the Oil Pollution Act of 1990, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges.
Air emissions
The Federal Clean Air Act (the “Clean Air Act”) and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other emission control requirements. In addition, the EPA has developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants at specified sources. Non-compliance with air permits or other requirements of the Clean Air Act and associated state laws and regulations can result in the imposition of administrative, civil and criminal penalties, as well as the issuance of orders or injunctions limiting or prohibiting non-compliant operations.
Climate change
In December 2009, the EPA determined that emissions of carbon dioxide, methane and other “greenhouse gases” (“GHGs”) present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has begun adopting and implementing regulations to restrict emissions of greenhouse gases under existing provisions of the Clean Air Act.
In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal. In April 2016, the U.S. signed the Paris Agreement, which requires member countries to review and “represent a progression” in their nationally determined contributions, which set GHG emission reduction goals, every five years. In June 2017, President Trump announced that the U.S. will withdraw from the Paris Agreement unless it is renegotiated. The State Department informed the United Nations of the U.S. withdrawal in August 2017.
The adoption of legislation or regulatory programs to reduce emissions of greenhouse gases could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas produced by our customers. Consequently, legislation and regulatory programs to reduce emissions of greenhouse gases could have an adverse effect on our business, financial condition and results of operations. Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our business, financial condition, results of operations and cash flow. For more information, please read “Risk Factors-Climate change legislation or regulations restricting emissions of greenhouse gases could increase our operating costs or reduce demand for our products.”

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Hydraulic fracturing
A significant percentage of our customers’ oil and natural gas production is being developed from unconventional sources, such as hydrocarbon shales. These formations require hydraulic fracturing completion processes to release the oil or natural gas from the rock so that it can flow through the formations. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate production. A number of federal agencies, including the EPA and the U.S. Department of Energy, are analyzing, or have been requested to review, a variety of environmental issues associated with shale development, including hydraulic fracturing. In addition, some states have adopted, and other states are considering adopting, regulations that could impose more stringent disclosure and/or well construction requirements on hydraulic fracturing operations. Local governments may also seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular, in some cases banning hydraulic fracturing entirely. We cannot predict whether any such legislation will ever be enacted and if so, what its provisions would be. If additional levels of regulation and permits were required through the adoption of new laws and regulations at the federal or state level, that could lead to delays, increased operating costs and process prohibitions for our customers that could reduce demand for our products and services, which would materially adversely affect our revenues, results of operations and cash flows.
Employee health and safety
We are subject to a number of federal and state laws and regulations, including the federal Occupational Safety and Health Act (“OSHA”) and comparable state statutes, establishing requirements to protect the health and safety of workers. In addition, the OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require that information be maintained concerning hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and the public. Substantial fines and penalties can be imposed and orders or injunctions limiting or prohibiting certain operations may be issued in connection with any failure to comply with laws and regulations relating to worker health and safety. For more information, please read “Risk Factors-Potential legislation or regulations restricting the use of hydraulic fracturing could reduce demand for our products.”
Offshore regulation
Events in recent years have heightened environmental and regulatory concerns about the offshore oil and natural gas industry. From time to time, governing bodies may propose and have enacted legislation or regulations that may materially limit or prohibit offshore drilling in certain areas. If laws are enacted or other governmental actions are taken that delay, restrict or prohibit offshore operations in our customers’ expected areas of operation, our business could be materially adversely affected. New or newly interpreted regulations and other regulatory initiatives by U.S. governmental agencies have created significant uncertainty regarding the outlook for offshore activity in the U.S. Gulf of Mexico and possible implications for regions outside of the U.S. Gulf of Mexico. Third party challenges to industry operations in the U.S. Gulf of Mexico may also serve to further delay or restrict activities. If the new regulations, operating procedures and possibility of increased legal liability are viewed by our current or future customers as a significant impairment to expected profitability on projects, then they could discontinue or curtail their offshore operations thereby reducing demand for our offshore products and services.
We also operate in non-U.S. jurisdictions, which may impose similar regulations, prohibitions or liabilities.
Operating risk and insurance
We maintain insurance coverage of types and amounts that we believe to be customary and reasonable for companies of our size and with similar operations. In accordance with industry practice, however, we do not maintain insurance coverage against all of the operating risks to which our business is exposed. Therefore, there is a risk our insurance program may not be sufficient to cover any particular loss or all losses. Currently, our insurance program includes coverage for, among other things, general liability, umbrella liability, sudden and accidental pollution, personal property, vehicle, workers’ compensation, and employer’s liability coverage.
Employees
As of December 31, 2017, we had approximately 2,600 employees. Of our total employees, approximately 2,000 were in the U.S., 250 were in the United Kingdom, 100 were in Germany, 100 were in Canada and 150 were in other locations. We are not a party to any collective bargaining agreements, other than in our Hamburg, Germany and Monterrey, Mexico facilities, and we consider our relations with our employees to be satisfactory.

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Item 1A. Risk Factors
Risks related to our business
We derive a substantial portion of our revenues from companies in or affiliated with the oil and natural gas industry, a historically cyclical industry, with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices. As a result, this cyclicality has caused, and will continue to cause fluctuations in our revenues and results of our operations.
We have experienced, and will continue to experience, fluctuations in revenues and operating results due to economic and business cycles. The willingness of oil and natural gas operators to make capital expenditures to explore for and produce oil and natural gas, the willingness of oilfield service companies to invest in capital equipment and the need of these customers to replenish consumable parts depends largely upon prevailing industry conditions that are influenced by numerous factors over which we have no control. Such factors include:
supply of and demand for oil and natural gas;
level of prices, and expectations about future prices, of oil and natural gas;
cost of exploring for, developing, producing and delivering oil and natural gas;
level of drilling activity and drilling day rates;
expected decline in rates of current and future production;
discovery rates of new oil and natural gas reserves;
ability of our customers to access new markets or areas of production or to continue to access current markets;
weather conditions, including hurricanes, that can affect oil and natural gas operations over a wide area;
more stringent restrictions in environmental regulation on activities that may impact the environment;
moratoriums on drilling activity resulting in a cessation or disruption of operations;
domestic and worldwide economic conditions;
financial stability of our customers and other industry participants;
political instability in oil and natural gas producing countries;
conservation measures and technological advances affecting energy consumption;
price and availability of alternative fuels; and
merger and divestiture activity among oil and natural gas producers, drilling contractors and oilfield service companies.
In the second half of 2014 the oil and natural gas industry began to experience a prolonged reduction in the overall level of exploration and development activities as a result of the decline in commodity prices that continued into late 2016. As a result, many of our customers reduced or delayed their oil and natural gas exploration and production spending, reducing the demand for our products and services and exerting downward pressure on the prices that we charge. These conditions adversely impacted our business in 2015 and 2016. Although crude oil prices increased by approximately 17% over the course of 2017, and we have experienced strong incremental demand growth over the last year, it is uncertain whether commodity prices and demand will maintain these levels or increase materially in 2018. Furthermore, there can be no assurance that the demand or pricing for oil and natural gas will follow historic patterns or continue to recover meaningfully in the near term. Declines in oil and natural gas prices and decreased levels of exploration, development, and production activity relative to historical norms may negatively affect:
revenues, cash flows, and profitability;
the ability to maintain or increase borrowing capacity;
the ability to obtain additional capital to finance our business and the cost of that capital;
the ability to collect outstanding amounts from our customers; and
the ability to attract and retain skilled personnel to maintain our business or that will be needed in the event of an upturn in the demand for our products.

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Our inability to control the inherent risks of acquiring and integrating businesses could disrupt our business operations and adversely affect our operating results going forward.
We continuously evaluate acquisitions and dispositions and may elect to acquire or dispose of assets in the future. For example, in 2017 we acquired Multilift Welltec, LLC, Multilift Wellbore Technology Limited, the remaining membership interests of Global Tubing, LLC, substantially all of the assets of Cooper Valves, LLC, and 100% of the general partnership interests of Innovative Valve Components. Furthermore, in January 2018, we contributed our subsea rentals business into a competing business in exchange for a 40% interest in the combined business. These activities may distract management from day-to-day tasks. Acquisitions involve numerous risks, including:
unanticipated costs and exposure to unforeseen liabilities;
difficulty in integrating the operations and assets of the acquired businesses;
potential inability to retain key employees and customers of the acquired company;
potential inability to properly establish and maintain effective internal controls over an acquired company;
risk of entering markets in which we have limited prior experience; and
failure to realize the full range of synergies that were expected when assessing the value to be paid for the acquisition.
Achieving the anticipated or desired benefits of our past or future acquisitions will depend, in part, upon whether the integration of the various businesses, products, services, technology and employees is accomplished in an efficient and effective manner. There can be no assurance that we will obtain these anticipated or desired benefits of our past or future acquisitions, and if we fail to manage these risks successfully, our results of operations could be adversely affected.
Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our business. In addition, we may incur liabilities arising from events prior to the acquisition or prior to our establishment of adequate compliance oversight. While we generally seek to obtain indemnities for liabilities for events occurring before such acquisitions, these are limited in amount and duration, may be held to be unenforceable or the seller may not be able to indemnify us. We may also incur indebtedness or issue additional equity securities to finance future acquisitions. Debt service requirements could represent a burden on our results of operations and financial condition, and the issuance of additional equity securities could be dilutive to our existing stockholders. In addition, we may dispose of assets or products that investors may consider beneficial to us.
Our operating history may not be sufficient for investors to evaluate our business and prospects.
We have a relatively short operating history as a public company. In addition, we have completed fourteen acquisitions since our initial public offering. These factors may make it more difficult for investors to evaluate our business and prospects, and to forecast our future operating results. As a result, historical financial data may not give you an accurate indication of what our actual results would have been if subsequent acquisitions had been completed at the beginning of the periods presented or of what our future results of operations are likely to be. Our future results will depend on our ability to efficiently manage our combined operations and execute our business strategy.
Facility consolidations or expansions may subject us to risks of operating inefficiencies, construction delays and cost overruns.
We have consolidated and may continue to consolidate facilities to achieve operating efficiencies and reduce costs. These facility consolidations may be delayed and cause us to incur increased costs, product or service delivery delays, decreased responsiveness to customer needs, liabilities under terms and conditions of sale or other operational inefficiencies, or may not provide the benefits we anticipate. We may lose key personnel and operational knowledge that might lead to quality issues or delays in production.
In the future, we may grow our businesses through the construction of new facilities and expansions of our existing facilities. These projects, and any other capital asset construction projects which we may commence, are subject to similar risks of delay or cost overrun inherent in any construction project resulting from numerous factors, including the following:

difficulties or delays in obtaining land;
shortages of key equipment, materials or skilled labor;

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unscheduled delays in the delivery of ordered materials and equipment;
unanticipated cost increases;
weather interferences; and
difficulties in obtaining necessary permits or in meeting permit conditions.    
Our common stock price has been volatile, and we expect it to continue to remain volatile in the future.
The market price of common stock of companies engaged in the oil and natural gas equipment manufacturing and services industry has been volatile. Likewise, the market price of our common stock has varied significantly in the past. For example, in 2017, the market price of our common stock reached a high of $26.25 per share on February 10, 2017 and a low of $10.05 per share on August 21, 2017. We expect it to continue to remain volatile given the cyclical nature of our industry.

Given the uncertainty relating to long-term commodity prices and associated customer demand, we may hold excess or obsolete inventory and experience a reduction in gross margins and financial results.
We cannot accurately predict what or how many products our customers will need in the future. Orders are placed with our suppliers based on forecasts of customer demand and, in some instances, we may establish buffer inventories to accommodate anticipated demand. For example, at certain times, we have built capital equipment before receiving customer orders, and we have kept our standardized downhole protection systems and certain of our flow iron products in stock and readily available for delivery on short notice from customers. Our forecasts of customer demand are based on multiple assumptions, each of which may introduce errors into the estimates. In addition, many of our suppliers, such as those for certain of our standardized valves, require a longer lead time to provide products than our customers demand for delivery of our finished products. If we overestimate customer demand, we may allocate resources to the purchase of material or manufactured products that we may not be able to sell when we expect to, if at all. As a result, we would hold excess or obsolete inventory, which would reduce gross margin and adversely affect financial results upon writing down the value of inventory. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would miss revenue opportunities and potentially lose market share and damage our customer relationships. For example, we did not maintain sufficient inventory of power ends and treating iron as we underestimated the acceleration in demand from pressure pumping customers in 2017. In addition, any future significant cancellations or deferrals of product orders or the return of previously sold products could materially and adversely affect profit margins, increase product obsolescence and restrict our ability to fund our operations.
A substantial portion of our business has historically been driven by our customers’ spending on capital equipment such as drilling rigs. As a result of the high levels of construction of capital equipment in prior years, we expect capital spending by our customers may remain at its current low level for a significant period of time.
In various segments of the energy industry, there have been high levels of demand for construction of capital intensive equipment in recent years, some of which has a long life once introduced into the industry. High levels of investment can produce excess supply of equipment for many years, reducing day rates and undermining the economics for new capital equipment orders. In addition, decreases in commodity prices reduce activity, exacerbating the effect of oversupply. As a result of both the prior high levels of capital investment and decreased levels of activity, the demand for capital equipment construction fell significantly in recent years. When spending levels by our customers fall, we experience decreased demand for our capital equipment products. For example, starting in the second half of 2014 we saw spending levels on drilling rigs decrease relative to the pace of investment in the previous two years, which has continued due to the overhang of capital equipment. This reduction in capital spending is spread across most energy sectors that we supply. Our financial results have been negatively impacted by the recent and ongoing reduction in capital equipment spending in the oilfield services industry, and we expect that this will continue until oil prices increase substantially and the oversupply of capital equipment is eliminated.
Technological advances have rendered drilling more efficient, reducing the amount of capital equipment required to drill the same number of wells and the demand for our products.
New techniques and technological advances have reduced the number of days required to drill wells. The number of days required for a drilling rig to be on a site to drill a well has in many areas been reduced by at least half over the last several years. This has exacerbated the oversupply of drilling rigs and may lengthen the time until the next round of significant capital investment by our drilling company customers. These advances may also result in a lower overall level of capital investment when the current generation of drilling rigs is required to be replaced.

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Our indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.
We currently have a substantial amount of indebtedness, including $400.0 million of 6.25% senior unsecured notes due October 2021, and $108.4 million outstanding under our $300.0 million senior secured revolving credit facility. Our level of indebtedness may adversely affect our operations and limit our growth, and we may have difficulty making debt service payments on our indebtedness as such payments become due. Our level of indebtedness may affect our operations in several ways, including the following:
our indebtedness may increase our vulnerability to general adverse economic and industry conditions;
the covenants contained in the agreements that govern our indebtedness limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments;
our debt covenants also affect our flexibility in planning for, and reacting to, changes in the economy and in its industry;
any failure to comply with the financial or other covenants of our indebtedness could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable;
our indebtedness could impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; and
our business may not generate sufficient cash flow from operations to enable us to meet our debt obligations.
The indenture governing our notes and our credit facility contains operating and financial restrictions that may restrict our business and financing activities.
Our indenture and credit facility contain, and any future indebtedness we incur may contain, a number of restrictive covenants that will impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:

pay dividends on, purchase or redeem our common stock;
make certain investments;
incur or guarantee additional indebtedness or issue certain types of equity securities;
create certain liens;
sell assets, including equity interests in our restricted subsidiaries;
redeem or prepay subordinated debt;
restrict dividends or other payments of our restricted subsidiaries;
consolidate, merge or transfer all or substantially all of our assets;    
engage in transactions with affiliates;
create unrestricted subsidiaries; or
execute our acquisition strategy.

Our credit facility also contains covenants, which, among other things, require us in certain circumstances, on a consolidated basis, to maintain specified financial ratios or conditions. As a result of these covenants, we may be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. Our ability to borrow under the credit facility and comply with some of the covenants, ratios or tests contained in our indenture and credit facility may be affected by events beyond our control. If market or other economic conditions deteriorate, and there is a decrease in our accounts receivable and inventory, our ability to borrow under our credit facility will be reduced and our ability to comply with these covenants, ratios or tests may be impaired. A failure to comply with the covenants, ratios or tests or any future indebtedness could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations.
We are subject to the risk of supplier concentration.
Certain of our product lines depend on a limited number of third party suppliers. In some cases, the suppliers own the intellectual property rights to the products we sell, or possess the technology or specialized tooling required to

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manufacture them. As a result of this concentration in part of our supply chain, our business and operations could be negatively affected if our key suppliers were to experience significant disruptions affecting the price, quality, availability or timely delivery of their products, or if they were to decide to terminate their relationships with us. For example, we have a limited number of suppliers for our bearings product lines and certain of our valve product lines. The partial or complete loss of any one of our key suppliers, or a significant adverse change in the relationship with any of these suppliers, through consolidation or otherwise, would limit our ability to manufacture and sell certain of our products.
We may not realize revenue on our current backlog due to customer order reductions, cancellations and acceptance delays, which may negatively impact our financial results.
Decreases in oil and natural gas prices and the resulting uncertainty regarding demand for our customers’ services have resulted in order reductions, cancellations and acceptance delays in the past, and we may experience more of these in the future. We may be unable to collect revenue for all of the orders reflected in our backlog, or we may be unable to collect cancellation penalties, to the extent we have the right to impose them, or the revenues may be pushed into future periods. In addition, customers who are more highly leveraged or otherwise unable to pay their creditors in the ordinary course of business may become insolvent or be unable to operate as a going concern. We may be unable to collect amounts due or damages we are awarded from these customers, and our efforts to collect such amounts may damage our customer relationships. Our results of operations and overall financial condition may be negatively impacted by a reduction in revenue as a result of these circumstances.
The markets in which we operate are highly competitive, and some of our competitors hold substantial market share and have substantially greater resources than we do. We may not be able to compete successfully in this environment and, in particular, against a much larger competitor.
The markets in which we operate are highly competitive and our products and services are subject to competition from significantly larger businesses. One competitor in particular holds a substantially greater market share than us in one of our product lines and has substantially greater resources than we do. We also have several other competitors that are large national and multinational companies that have longer operating histories, greater financial, technical and other resources and greater name recognition than we do. Some of our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. In addition, several of our competitors provide a much broader array of services, and have a stronger presence in more geographic markets. Our larger competitors may be able to use their size and purchasing power to seek economies of scale and pricing concessions. Furthermore, some of our customers are also our competitors and they may cease buying from us. We also have competitors outside of the U.S. with lower structural costs due to labor and raw material cost in and around their manufacturing centers. Moreover, our competitors may utilize available capacity during a period of depressed energy prices to gain market share.
New competitors could also enter the markets in which we compete. We consider product quality, price, breadth of product offering, availability of products and services, performance, distribution capabilities, responsiveness to customer needs and reputation for service to be the primary competitive factors. Competitors may be able to offer more attractive pricing, duplicate strategies, or develop enhancements to products that could offer performance features that are superior to our products. In addition, we may not be able to retain key employees of entities that we acquire in the future and those employees may choose to compete against us. Competitive pressures, including those described above, and other factors could adversely affect our competitive position, resulting in a loss of market share or decreases in prices. In addition, some competitors are based in foreign countries and have cost structures and prices based on foreign currencies. Accordingly, currency fluctuations could cause U.S. dollar-priced products to be less competitive than our competitors’ products that are priced in other currencies. For more information about our competitors, please read “Business—Competition.”
We may be unable to employ a sufficient number of skilled and qualified workers.
The delivery of our products and services requires personnel with specialized skills and experience. Our ability to be productive and profitable depends upon our ability to employ and retain skilled workers. During periods of increasing activity in our industry, such as we are now experiencing in some of our product lines, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force. In addition, during those periods the demand for skilled workers is high, the supply is limited and the cost to attract and retain qualified personnel increases, especially for skilled workers. For example, we experienced shortages of engineers, mechanical assemblers, machinists and welders, which in some instances slowed the productivity of certain of our operations. During periods of low activity in our industry, we reduce the size of our labor force to match declining revenue levels, and other employees may choose to leave in order to find more stable employment. This may cause us to lose skilled personnel, the absence

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of which could cause us to incur quality, efficiency and deliverability issues in our operations, or delay our response to an upturn in the market. Furthermore, a significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. If any of these events were to occur, our ability to respond quickly to customer demands may be inhibited and our growth potential could be impaired.
Our business depends upon our ability to obtain key raw materials and specialized equipment from suppliers. Increased costs of raw materials and other components may result in increased operating expenses.
Should our suppliers be unable to provide the necessary raw materials or finished products or otherwise fail to deliver such materials and products timely and in the quantities required, resulting delays in the provision of products or services to customers could have a material adverse effect on our business. In particular, because many of our products are manufactured out of steel, we are particularly susceptible to fluctuations in steel prices. Our results of operations may be adversely affected by our inability to manage the rising costs and availability of raw materials and components used in our products.
If suppliers cannot provide adequate quantities of materials to meet customers’ demands on a timely basis or if the quality of the materials provided does not meet established standards, we may lose customers or experience lower profitability.
Some of our customer contracts require us to compensate customers if we do not meet specified delivery obligations. We rely on suppliers to provide required materials and in many instances these materials must meet certain specifications. Managing a geographically diverse supply base poses inherently significant logistical challenges. Furthermore, the ability of third party suppliers to deliver materials to our specifications may be affected by events beyond our control. As a result, there is a risk that we could experience diminished supplier performance resulting in longer than expected lead times and/or product quality issues. For example, in the past, we have experienced issues with the quality of certain forgings used to produce materials utilized in our products. As a result, we were required to seek alternative suppliers for those forgings, which resulted in increased costs and a disruption in our supply chain. We have also been required in certain circumstances to provide better economic terms to some of our suppliers in exchange for their agreement to increase their capacity to satisfy our supply needs. The occurrence of any of the foregoing factors could have a negative impact on our ability to deliver products to customers within committed time frames.
Our products are used in operations that are subject to potential hazards inherent in the oil and natural gas industry and, as a result, we are exposed to potential liabilities that may affect our financial condition and reputation.
Our products are used in potentially hazardous completion, production and drilling applications in the oil and natural gas industry where an accident or a failure of a product can potentially have catastrophic consequences. Risks inherent to these applications, such as equipment malfunctions; failures; explosions; blowouts or uncontrollable flows of oil, natural gas or well fluids; and natural disasters on land or in deepwater or shallow-water environments, can cause personal injury; loss of life; suspension of operations; damage to formations; damage to facilities; business interruption and damage to or destruction of property, surface water and drinking water resources, equipment and the environment. These risks can be caused or contributed to by failure of, defects in or misuse of our products. In addition, we provide certain services that could cause, contribute to or be implicated in these events. If our products or services fail to meet specifications or are involved in accidents or failures, we could face warranty, contract or other litigation claims, which could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, and pollution or other environmental damages. Our insurance policies may not be adequate to cover all liabilities. Further, insurance may not be generally available in the future or, if available, insurance premiums may make such insurance commercially unjustifiable. Moreover, even if we are successful in defending a claim, it could be time-consuming and costly to defend.
In addition, the frequency and severity of such incidents could affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our products or services if they view our safety record as unacceptable, which could cause us to lose customers and revenues. In addition, these risks may be greater for us because we may acquire companies that have not allocated significant resources and management focus to quality or safety, requiring rehabilitative efforts during the integration process. We may incur liabilities for losses associated with these newly acquired companies before we are able to rehabilitate such companies’ quality, safety and environmental programs.

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A failure or breach of our information technology infrastructure, including as a result of cyber attacks, could adversely impact our business and results of operations.
The efficient operation of our business is dependent on our information technology (“IT”) systems. Accordingly, we rely upon the capacity, reliability and security of our IT hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs. Despite our implementation of security measures, our IT systems are vulnerable to computer viruses, natural disasters, incursions by intruders or hackers, failures in hardware or software, power fluctuations, cyber terrorists and other similar disruptions. The failure of our IT systems to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse consequences, including reduced effectiveness and efficiency of our operations and that of our customers, inappropriate disclosure of confidential information, increased overhead costs, and loss of intellectual property, which could lead to liability to third parties or otherwise and have a material adverse effect on our business and results of operations. In addition, we may be required to incur significant costs to prevent damage caused by these disruptions or security breaches in the future.
Our success depends on our ability to implement new technologies and services more efficiently and quickly than our competitors.
Our success depends on our ability to develop and implement new product designs and improvements that meet our customer’s needs in a manner equal to or more effective than those offered by our competitors. If we are not able to continue to provide new and innovative services and technologies in a manner that allows us to meet evolving industry requirements at prices acceptable to our customers, our financial results may be negatively affected. In addition, some of our competitors are large national and multinational companies that may be able to devote greater financial, technical, manufacturing and marketing resources to research and develop more or better systems, services and technologies than we are able to do. Moreover, during the industry downturn, we were unable to allocate material amounts of capital to research and new product development activities, which may limit our ability to compete in the market and generate revenue.
Our success will be affected by the use and protection of our proprietary technology. There are limitations to our intellectual property rights in our proprietary technology, and thus our right to exclude others from the use of such proprietary technology.
Our success will be affected by our development and implementation of new product designs and improvements and by our ability to protect and maintain critical intellectual property assets related to these developments. Although in many cases our products are not protected by any registered intellectual property rights, in other cases we rely on a combination of patents and trade secret laws to establish and protect this proprietary technology.
We currently hold multiple U.S. and international patents and have multiple pending patent applications for products and processes in the U.S. and certain non-U.S. countries. Patent rights give the owner of a patent the right to exclude third parties from making, using, selling, and offering for sale the inventions claimed in the patents in the applicable country. Patent rights do not necessarily grant the owner of a patent the right to practice the invention claimed in a patent, but merely the right to exclude others from practicing the invention claimed in the patent. It may also be possible for a third party to design around our patents. Furthermore, patent rights have strict territorial limits. Some of our work will be conducted in international waters and may, therefore, not fall within the scope of any country’s patent jurisdiction. We may not be able to enforce our patents against infringement occurring in international waters and other “non-covered” territories. Also, we do not have patents in every jurisdiction in which we conduct business and our patent portfolio will not protect all aspects of our business and may relate to obsolete or unusual methods, which would not prevent third parties from entering the same market.
In addition, by customarily entering into confidentiality and/or license agreements with our employees, customers and potential customers and suppliers, we attempt to limit access to and distribution of our technology. Our efforts to maintain information as trade secrets or proprietary technology are subject to determination by the judicial system and may not be successful. Our rights in our confidential information, trade secrets, and confidential know-how will not prevent third parties from independently developing similar information. Publicly available information (e.g. information in expired issued patents, published patent applications, and scientific literature) can also be used by third parties to independently develop technology. We cannot provide assurance that this independently developed technology will not be equivalent or superior to our proprietary technology.
Our competitors may infringe upon, misappropriate, violate or challenge the validity or enforceability of our intellectual property and we may not able to adequately protect or enforce our intellectual property rights in the future.

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We may be adversely affected by disputes regarding intellectual property rights and the value of our intellectual property rights is uncertain.
As discussed above, we may become involved in legal proceedings from time to time to protect and enforce our intellectual property rights. Third parties from time to time may initiate litigation against us by asserting that the conduct of our business infringes, misappropriates or otherwise violates intellectual property rights. We may not prevail in any such legal proceedings related to such claims, and our products and services may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. Any legal proceeding concerning intellectual property could be protracted and costly and is inherently unpredictable and could have a material adverse effect on our business, regardless of its outcome. Further, our intellectual property rights may not have the value that management believes them to have and such value may change over time as we and others develop new product designs and improvements.
During periods of high market activity, if we cannot continue operating our manufacturing facilities at adequate levels, our results of operations could be adversely affected.
We operate a number of manufacturing facilities. The equipment and management systems necessary for such operations may break down, perform poorly or fail, resulting in fluctuations in manufacturing efficiencies. Such fluctuations may affect our ability to deliver quality products to our customers on a timely basis.
During the years ended December 31, 2017 and 2015, we incurred impairment charges, and we may incur additional impairment charges in the future.
For goodwill and intangible assets with indefinite lives, an assessment for impairment is performed annually or when there is an indication an impairment may have occurred. Goodwill is reviewed for impairment by comparing the carrying value of each reporting unit’s net assets, including allocated goodwill, to the estimated fair value of the reporting unit. We determine the fair value of each of our seven reporting units using a discounted cash flow approach. Determining the fair value of a reporting unit requires the use of estimates and assumptions. If the reporting unit’s carrying value is greater than its calculated fair value, we recognize a goodwill impairment charge for the amount by which the carrying value of goodwill exceeds its fair value. Due to the deterioration of market conditions for our products, we recorded impairment losses totaling $68.0 million and $123.2 million for our Subsea reporting unit for the years ended December 31, 2017 and December 31, 2015, respectively. No impairment loss was recorded for the year ended December 31, 2016. Following these impairment charges, the Subsea reporting unit has no remaining goodwill balance. Further declines in commodity prices or sustained lower valuation for the Company’s common stock could indicate a reduction in the estimate of reporting unit fair value which, in turn, could lead to additional impairment charges associated with goodwill.
We evaluate our long-lived assets, including property and equipment and intangible assets with definite lives, for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. In performing our review for impairment, future cash flows expected to result from the use of the asset and its eventual value upon disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the estimated fair value of the asset. The fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows based on expected utilization. In 2017, impairment losses totaling $1.1 million were recorded on certain intangible assets within the Subsea and Downhole reporting units related to the decision to abandon specific product lines. No impairment loss was recorded for the year ended December 31, 2016. In the fourth quarter of 2015, we recognized an impairment loss of $1.9 million related to certain trade names that were no longer in use.
If we determine that the carrying value of our long-lived assets, goodwill or intangible assets is less than their fair value, we may be required to record additional charges in the future, which could adversely affect our financial condition and results of operations.

Our operations and our customers’ operations are subject to a variety of governmental laws and regulations that may increase our and our customers’ costs, prohibit or curtail our customers’ operations in certain areas, limit the demand for our products and services or restrict our operations.
Our business and our customers’ businesses may be significantly affected by:

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federal, state and local U.S. and non-U.S. laws and other regulations relating to oilfield operations, worker safety and protection of the environment;
changes in these laws and regulations; and
the level of enforcement of these laws and regulations.
In addition, we depend on the demand for our products and services from the oil and natural gas industry. This demand is affected by changing taxes, price controls and other laws and regulations relating to the oil and natural gas industry in general. For example, the adoption of laws and regulations curtailing exploration and development drilling for oil and natural gas for economic or other policy reasons could adversely affect our operations by limiting demand for our products. In addition, some non-U.S. countries may adopt regulations or practices that provide an advantage to local oil companies in bidding for oil leases, or require local companies to perform oilfield services currently supplied by international service companies. To the extent that such companies are not our customers, or we are unable to develop relationships with them, our business may suffer. We cannot determine the extent to which our future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations.
Because of our non-U.S. operations and sales, we are also subject to changes in non-U.S. laws and regulations that may encourage or require hiring of local contractors or require non-U.S. contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. If we fail to comply with any applicable law or regulation, our business, results of operations or financial condition may be adversely affected.
Our tax position may be adversely affected by changes in tax laws relating to multinational corporations, or increased scrutiny by tax authorities.
We have operations in multiple countries which are subject to the jurisdiction of a significant number of taxing authorities. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each jurisdiction, as well as the significant use of estimates and assumptions. The U.S. Congress and government agencies in non-U.S. jurisdictions where we, and our affiliates, do business have recently focused on issues related to the taxation of multinational corporations.
Additionally, we are currently evaluating the provisions of U.S. tax reform recently enacted in December 2017, informally known as the Tax Cuts and Jobs Act of 2017 (the “Act”). The Act made substantial changes in the taxation of U.S. and multinational corporations, which included, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries. As a result, we recorded a net charge of $10.1 million during the fourth quarter of 2017 based on our preliminary assessment of the impact of the Act. This amount consists of a $27.7 million charge for the one-time mandatory tax on previously deferred earnings of certain non-U.S. subsidiaries that are owned by Forum and an $17.6 million credit resulting from the re-measurement of net deferred tax liabilities in the U.S. based on the new lower corporate income tax rate. The taxes recognized related to the Act are provisional in nature and subject to adjustment as further guidance is provided by the U.S. Internal Revenue Service regarding the application of the new tax laws. We will continue to evaluate the impacts of tax reform as additional information is obtained and will adjust the provisional amounts, as necessary. We expect to complete our detailed analysis no later than the fourth quarter of 2018. Furthermore, we cannot predict whether any additional legislation or any regulatory or other administrative guidance could materially adversely affect us.
If the U.S. were to withdraw from or modify the North American Free Trade Agreement our financial performance and results of operations may be negatively affected.
We utilize our facility located in Mexico to manufacture products and export them to the U.S. under the North American Free Trade Agreement (“NAFTA”). The Trump Administration has made comments suggesting that it is not supportive of NAFTA. As a result, it is unclear what may or may not be done with respect to this trade agreement. Withdrawal from or modifications to NAFTA could impose additional tariffs or duties on imports from our facility.  Under either of these scenarios, the use of our facility in Mexico may be rendered uneconomical for our operations. This may cause us to lose the value of our investment in this facility, interrupt our operations and may negatively impact our financial performance and results of operations.

Our operations are subject to environmental and operational safety laws and regulations that may expose us to significant costs and liabilities.
Our operations are subject to numerous stringent and complex laws and regulations governing the discharge of materials into the environment, health and safety aspects of our operations, or otherwise relating to human health and environmental protection. These laws and regulations may, among other things, regulate the management and disposal

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of hazardous and nonhazardous wastes; require acquisition of environmental permits related to our operations; restrict the types, quantities, and concentrations of various materials that can be released into the environment; limit or prohibit operational activities in certain ecologically sensitive and other protected areas; regulate specific health and safety criteria addressing worker protection; require compliance with operational and equipment standards; impose testing, reporting and recordkeeping requirements; and require remedial measures to mitigate pollution from former and ongoing operations. Failure to comply with these laws and regulations or to obtain or comply with permits may result in the assessment of administrative, civil and criminal penalties, imposition of remedial or corrective action requirements and the imposition of injunctions to prohibit certain activities or force future compliance. Certain environmental laws may impose joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. In addition, these risks may be greater for us because the companies we acquire or have acquired may not have allocated sufficient resources and management focus to environmental compliance, potentially requiring rehabilitative efforts during the integration process or exposing us to liability before such rehabilitation occurs.
The trend in environmental regulation has been to impose increasingly stringent restrictions and limitations on activities that may impact the environment. The implementation of new laws and regulations could result in materially increased costs, stricter standards and enforcement, larger fines and liability and increased capital expenditures and operating costs, particularly for our customers.
We may incur liabilities, fines, penalties or additional costs, or we may be unable to sell to certain customers if we do not maintain safe operations.
If we fail to comply with safety regulations or maintain an acceptable level of safety at our facilities, we may incur fines, penalties or other liabilities, or we may be held criminally liable. In addition, in connection with the recent increase in manufacturing activity through 2017, a substantial portion of our work force is made up of newer employees who are less experienced and therefore more prone to injury. As a result, new employees require ongoing training and a higher degree of oversight. We may incur additional costs to encourage training and ensure proper oversight of these shorter service employees. Moreover, we may incur costs in connection with equipment upgrades, or other costs to facilitate our compliance with safety regulations. Failure to maintain safe operations or achieve certain safety performance metrics could disqualify us from doing business with certain customers, particularly major oil companies.
Our executive officers and certain key personnel are critical to our business and these officers and key personnel may not remain with us in the future.
Our future success depends in substantial part on our ability to hire and retain our executive officers and other key personnel. In particular, we are highly dependent on certain of our executive officers. These individuals possess extensive expertise, talent and leadership, and they are critical to our success. The diminution or loss of the services of these individuals, or other integral key personnel affiliated with entities that we acquire in the future, could have a material adverse effect on our business. Furthermore, we may not be able to enforce all of the provisions in any employment agreement we have entered into with certain of our executive officers and such employment agreements may not otherwise be effective in retaining such individuals.
The industry in which we operate is undergoing continuing consolidation that may impact our results of operations.
Some of our largest customers have consolidated and are using their size and purchasing power to achieve economies of scale and pricing concessions. This consolidation could result in reduced capital spending by such customers or decreased demand for our products and services. If we cannot maintain sales levels for customers that have consolidated or replace such revenues with increased business activities from other customers, this consolidation activity could have a significant negative impact on our results of operations or financial condition. We are unable to predict what effect consolidations in the industry may have on prices, capital spending by customers, selling strategies, competitive position, customer retention or our ability to negotiate favorable agreements with customers.
If we are unable to continue operating successfully overseas or to successfully expand into new international markets, our revenues may decrease.
For the year ended December 31, 2017, we derived approximately 24% of our revenue from sales outside the U.S. (based on product destination). In addition, one of our key growth strategies is to market products in international markets. We may not succeed in selling, marketing, branding, and distributing products to generate revenues in these new international markets.

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Our non-U.S. operations will subject us to special risks.
We are subject to various risks inherent in conducting business operations in locations outside of the U.S. These risks may include changes in regional, political or economic conditions, local laws and policies, including taxes, trade protection measures, and unexpected changes in regulatory requirements governing the operations of companies that operate outside of the U.S. In addition, if a dispute arises from international operations, courts outside of the U.S. may have exclusive jurisdiction over the dispute, or we may not be able to subject persons outside of the U.S. to the jurisdiction of U.S. courts.
Our exposure to currency exchange rate fluctuations may result in fluctuations in our cash flows and could have an adverse effect on our results of operations.
Fluctuations in currency exchange rates could be material to us depending upon, among other things, our manufacturing locations and the sourcing for our raw materials and components. In particular, we are sensitive to fluctuations in currency exchange rates between the U.S. dollar and each of the Canadian dollar, the British pound sterling, the Euro, and, to a lesser degree, the Mexican Peso, the Chinese Yuan and the Singapore dollar. There may be instances in which costs and revenue will not be matched with respect to currency denomination. As a result, to the extent that we continue our expansion on a global basis, management expects that increasing portions of revenue, costs, assets and liabilities will be subject to fluctuations in foreign currency valuations. We may experience economic loss and a negative impact on earnings or net assets solely as a result of foreign currency exchange rate fluctuations. Further, the markets in which we operate could restrict the removal or conversion of the local currency, resulting in our inability to hedge against these risks.
Our business operations in countries outside of the U.S. are subject to a number of U.S. federal laws and regulations, including restrictions imposed by the U.S. Foreign Corrupt Practices Act as well as trade sanctions administered by the Office of Foreign Assets Control and the Commerce Department, as well as similar laws in non-U.S. jurisdictions that govern our operations by virtue of our presence or activities there.
We rely on a large number of agents in non-U.S. countries that pose a high risk of corrupt activities and whose local laws and customs differ significantly from those in the U.S. In many countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by the regulations applicable to us. The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions, including the UK Bribery Act 2010, (“anti-corruption laws”) prohibit corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. We may be held responsible for violations by our employees, contractors and agents for violations of anti-corruption laws. We may also be held responsible for any violations by an acquired company that occurs prior to an acquisition, or subsequent to an acquisition but before we are able to institute our compliance procedures. In addition, our non-U.S. competitors that are not subject to the FCPA or similar laws may be able to secure business or other preferential treatment in such countries by means that such laws prohibit with respect to us. The UK Bribery Act 2010 is broader in scope than the FCPA and applies to public and private sector corruption and contains no facilitating payments exception. A violation of any of these laws, even if prohibited by our policies, could have a material adverse effect on our business. Actual or alleged violations could damage our reputation, be expensive to defend, impair our ability to do business, and cause us to incur civil and criminal fines, penalties and sanctions.
Compliance with regulations relating to export controls, trade sanctions and embargoes administered by the countries in which we operate, including the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and similar regulations in non-U.S. jurisdictions also pose a risk to us. We cannot provide products or services to certain countries, companies or individuals subject to trade sanctions of the U.S. and other countries. Furthermore, the laws and regulations concerning import activity, export recordkeeping and reporting, export control and economic sanctions are complex and constantly changing. Any failure to comply with applicable legal and regulatory trading obligations could result in criminal and civil penalties and sanctions, such as fines, imprisonment, debarment from governmental contracts, seizure of shipments and loss of import and export privileges.
Unionization efforts and labor regulations in certain areas in which we operate could materially increase our costs or limit our flexibility.
We are not a party to any collective bargaining agreements, other than in our Monterrey, Mexico and Hamburg, Germany facilities. We operate in certain states within the U.S. and in international areas that have a history of unionization and we may become the subject of a unionization campaign. If some or all of our workforce were to become unionized and collective bargaining agreement terms, including any renegotiation of our Monterrey, Mexico and Hamburg, Germany

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collective bargaining agreements, were significantly different from our current compensation arrangements or work practices, our costs could be increased, our flexibility in terms of work schedules and reductions in force could be limited, and we could be subject to strikes or work slowdowns, among other things.
We may incur liabilities to customers as a result of warranty claims.
We provide warranties as to the proper operation and conformance to specifications of the products we manufacture or install. Failure of our products to operate properly or to meet specifications may increase costs by requiring additional engineering resources and services, replacement of parts and equipment or monetary reimbursement to a customer. We have in the past received warranty claims, and we expect to continue to receive them in the future. To the extent that we incur substantial warranty claims in any period, our reputation, ability to obtain future business and earnings could be adversely affected.
We are subject to litigation risks that may not be covered by insurance.
In the ordinary course of business, we become the subject of various claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters, including occasional claims by individuals alleging exposure to hazardous materials as a result of our products or operations. Some of these claims relate to the activities of businesses that we have acquired, even though these activities may have occurred prior to our acquisition of such businesses. Our insurance does not cover all of our potential losses, and we are subject to various self-insured retentions and deductibles under our insurance. A judgment may be rendered against us in cases in which we could be uninsured or which exceed the amounts that we currently have reserved or anticipate incurring for such matters.
The number and cost of our current and future asbestos claims could be substantially higher than we have estimated and the timing of payment of claims could be sooner than we have estimated.
One of our subsidiaries has been and continues to be named as a defendant in asbestos related product liability actions. The actual amounts expended on asbestos-related claims in any year may be impacted by the number of claims filed, the nature of the allegations asserted in the claims, the jurisdictions in which claims are filed, and the number of settlements. As of December 31, 2017, our subsidiary has a net liability of $0.3 million for the estimated indemnity cost associated with the resolution of its current open claims and future claims anticipated to be filed during the next five years.
Due to a number of uncertainties, the actual costs of resolving these pending claims could be substantially higher than the current estimate. Among these are uncertainties as to the ultimate number and type of claims filed, the amounts of claim costs, the impact of bankruptcies of other companies with asbestos claims or of our insurers, and potential legislative changes and uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case. In addition, future claims beyond the five-year forecast period are possible, but the accrual does not cover losses that may arise from such additional future claims. Therefore, any such future claims could result in a loss.
Significant costs are incurred in defending asbestos claims and these costs are recorded at the time incurred. Receipt of reimbursement from our insurers may be delayed for a variety of reasons. In particular, if our primary insurers claim that certain policy limits have been exhausted, we may be delayed in receiving reimbursement as a result of the transition from one set of insurers to another. Our excess insurers may also dispute the claims of exhaustion, or may rely on certain policy requirements to delay or deny claims. Furthermore, the various per occurrence and aggregate limits in different insurance policies may result in extended negotiations or the denial of reimbursement for particular claims. For more information on the cost sharing agreements related to this risk, refer to Note 12 Commitments and Contingencies.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
Effective internal control over financial processes and reporting are necessary for us to provide reliable financial reports that effectively prevent fraud and operate successfully. Our efforts to maintain internal control systems may not be successful. In addition, the entities that we acquire in the future may not maintain effective systems of internal control or we may encounter difficulties integrating our system of internal control with those of acquired entities. If we are unable to maintain effective internal control and, as a result, fail to provide reliable financial reports and effectively prevent fraud, our reputation and operating results would be harmed.

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We have identified a material weakness in our internal control over financial reporting that could, if not remediated, adversely affect our ability to report our financial and operating results accurately or on a timely basis, and impact overall investor confidence and the value of our common stock.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2017, we identified a material weakness in our internal control over financial reporting relating to the development of fair value measurements utilized in the application of the acquisition method of accounting for business combinations and for purposes of testing goodwill for impairment. As a result of this material weakness, we concluded that our disclosure controls and procedures and internal controls over financial reporting were not effective as of December 31, 2017.
Under the SEC’s rules and regulations, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We, with oversight from our Audit Committee, are in the process of developing and implementing remediation plans in response to the identified material weakness. The specific material weakness and our remediation efforts are described in Part II Item 9A “Management’s Report on Internal Control Over Financial Reporting.” There can be no assurance as to when the remediation plan will be fully implemented or whether the remediation efforts will be successful. As we continue to evaluate and work to improve our internal controls, we may take additional measures to address these material weaknesses or modify our remediation plan.
Until the remediation plan is fully implemented, we will continue to devote time and attention to these efforts. If the remediation of the material weakness is not completed in a timely fashion, or at all, or if the plan is inadequate, there will be an increased risk that we may be unable to timely file future periodic reports with the SEC and that future consolidated financial statements could contain errors that will be undetected. The existence of a material weakness in the effectiveness of our internal controls could also affect our ability to obtain financing or could increase the cost of any such financing. The identification of the material weakness could also cause investors to lose confidence in the reliability of the Company’s financial statements and could result in a decrease in the value of our common stock.
We may be impacted by disruptions in the political, regulatory, economic and social conditions of the foreign countries in which we are expected to conduct business.
Instability and unforeseen changes in the international markets in which we conduct business, including economically and politically volatile areas such as North Africa, the Middle East, Latin America and the Asia Pacific region, could cause or contribute to factors that could have an adverse effect on the demand for the products and services we provide. For example, we have previously transferred management and operations from certain Latin American countries, due to the presence of political turmoil, to other countries in the region that are more politically stable.
In addition, worldwide political, economic, and military events have contributed to oil and natural gas price volatility and are likely to continue to do so in the future. Depending on the market prices of oil and natural gas, oil and natural gas exploration and development companies may cancel or curtail their drilling programs, thereby reducing demand for our products and services.
Climate change legislation or regulations restricting emissions of greenhouse gases could increase our operating costs or reduce demand for our products.
Environmental advocacy groups and regulatory agencies in the U.S. and other countries have focused considerable attention on the emissions of carbon dioxide, methane and other greenhouse gases and their potential role in climate change. In response to scientific studies suggesting that emissions of GHGs, including carbon dioxide and methane, are contributing to the warming of the Earth’s atmosphere and other climatic conditions, the U.S. Congress has considered adopting comprehensive legislation to reduce emissions of GHGs, and almost half of the states have already taken legal measures to reduce emissions of GHGs, primarily through measures to promote the use of renewable energy and/or regional GHG cap-and-trade programs. The Environmental Protection Agency (the “EPA”) has already begun to regulate greenhouse gas emissions under the federal Clean Air Act. In December 2009, the EPA determined that emissions of carbon dioxide, methane and certain other GHGs endanger public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the Earth’s atmosphere and other climatic changes. Accordingly, the EPA has begun adopting rules under the Clean Air Act that, among other things, cover reductions in GHG emissions from motor vehicles, permits for certain large stationary sources of GHGs, and monitoring and annual reporting of GHG emissions from specified GHG emission sources, including oil and natural gas exploration and production operations. Additionally, in May 2016, the EPA issued final

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new source performance standards governing methane emissions that impose more stringent controls on methane and volatile organic compounds emissions at new and modified oil and natural gas production, processing, storage and transmission facilities. The EPA announced its intention to reconsider those standards in April 2017 and has sought to stay those requirements. However, they remain in effect. The EPA has also announced that it intends to impose methane emission standards for existing sources and issued information collection requests to companies with production, gathering and boosting, gas processing, storage and transmission facilities in December 2016. The EPA withdrew those information collection requests in March 2017. The EPA has also adopted rules requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the U.S., including oil and gas systems. Similarly, the Department of the Interior’s Bureau of Land Management (“BLM”) issued final rules in November 2016 relating to the venting, flaring and leaking of natural gas by oil and natural gas producers who operate on federal and Indian lands. Certain provisions of the BLM rule went into effect in January 2017, while others were scheduled to go into effect in January 2018. In December 2017, BLM published a final rule delaying the 2018 provisions until 2019. BLM proposed a rule in February 2018 that would revise the 2016 rule and rescind some of its requirements.
Finally, efforts have also been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues. In 2015, the U.S. participated in the United Nations Conference on Climate Change, which led to the creation of the Paris Agreement, which requires member countries to review and “represent a progression” in their nationally determined contributions, which set GHG emission reduction goals every five years. In June 2017, President Trump announced that the U.S. will withdraw from the Paris Agreement unless it is renegotiated. The State Department informed the United Nations of the U.S.’ withdrawal in August 2017.
The adoption of additional legislation or regulatory programs to reduce emissions of greenhouse gases could require us to incur increased operating costs to comply with new emissions-reduction or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, hydrocarbons that certain of our customers produce and reduce revenues by other of our customers who provide services to those exploration and production customers. Consequently, legislation and regulatory programs to reduce emissions of greenhouse gases could have an adverse effect on our business, financial condition and results of operations. Finally, some scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events.
Adverse weather conditions adversely affect demand for services and operations.
Adverse weather conditions, such as hurricanes, tornadoes, ice or snow may damage or destroy our facilities, interrupt or curtail our operations, or our customers’ operations, cause supply disruptions and result in a loss of revenue, which may or may not be insured. For example, certain of our facilities located in Oklahoma and Pennsylvania have experienced suspensions in operations due to tornado activity or extreme cold weather conditions.
A natural disaster, catastrophe or other event could result in severe property damage, which could curtail our operations.
Some of our operations involve risks of, among other things, property damage, which could curtail our operations. Disruptions in operations or damage to a manufacturing plant could reduce our ability to produce products and satisfy customer demand. In particular, we have offices and manufacturing facilities in Houston, Texas, and in various places throughout the U.S. Gulf Coast region. These offices and facilities are particularly susceptible to severe tropical storms and hurricanes, which may disrupt our operations. If one or more of our manufacturing facilities are damaged by severe weather or any other disaster, accident, catastrophe or event, our operations could be significantly interrupted. Similar interruptions could result from damage to production or other facilities that provide supplies or other raw materials to our plants or other stoppages arising from factors beyond our control. These interruptions might involve significant damage to property, among other things, and repairs might take from a week or less for a minor incident to many months or more for a major interruption. For example, in the third quarter 2017, we were impacted by idled facilities and operations directly related to Hurricane Harvey’s widespread damage in Texas and Louisiana. As a result, our financial results were negatively impacted by foregone revenue and under-absorption of manufacturing costs, and, indirectly, due to supplier and logistical delays.

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Potential legislation or regulations restricting the use of hydraulic fracturing could reduce demand for our products.
Hydraulic fracturing is an important and common practice in the oil and natural gas industry which involves the injection of water, sand and chemicals under pressure into a formation to fracture the surrounding rock and stimulate production of hydrocarbons. Certain environmental advocacy groups have suggested that additional federal, state and local laws and regulations may be needed to more closely regulate the hydraulic fracturing process, and have made claims that hydraulic fracturing techniques are harmful to surface water and drinking water resources. Various governmental entities (within and outside the U.S.) are in the process of studying, restricting, regulating or preparing to regulate hydraulic fracturing, directly or indirectly
For example, the EPA released the final results of its comprehensive research study on the potential adverse impacts that hydraulic fracturing may have on drinking water resources in December 2016. The EPA concluded that hydraulic fracturing activities can impact drinking water resources under some circumstances, including large volume spills and inadequate mechanical integrity of wells. In May 2016, the EPA issued final new source performance standard requirements that impose more stringent controls on methane and volatile organic compounds emissions from oil and natural gas development and production operations, including hydraulic fracturing and other well completion activity. The EPA announced its intention to reconsider the rule in April 2017 and has sought to stay its requirements. However, the rule remains in effect.  The EPA has also issued the federal Safe Drinking Water Act (“SDWA”) permitting guidance for hydraulic fracturing operations involving the use of diesel fuel in fracturing fluids in those states where the EPA is the permitting authority.  Additionally, the BLM issued final rules to regulate hydraulic fracturing on federal lands in March 2015.  These rules were struck down by a federal court in Wyoming in June 2016, but reinstated on appeal by the Tenth Circuit in September 2017. While this appeal was pending, BLM proposed a rulemaking in July 2017 to rescind these rules in their entirety. BLM published a final rule rescinding the 2015 rules on December 29, 2017.
In past sessions, Congress has considered, but not passed, the adoption of legislation to provide for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process. Some states have adopted, and other states are considering adopting, legal requirements that could impose more stringent permitting, public disclosure or well construction requirements on hydraulic fracturing activities. Local government also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular, in some cases banning hydraulic fracturing entirely.
If new or more stringent federal, state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where our oil and natural gas exploration and production customers operate, they could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development, and production activities, and perhaps even be precluded from drilling wells, some or all of which could adversely affect demand for our products and services from those customers.
Compliance with government regulations regarding the use of “conflict minerals” may result in increased costs and risks to us.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), the SEC has promulgated disclosure requirements regarding the use of certain minerals, which are mined from the Democratic Republic of Congo and adjoining countries, known as conflict minerals. We are required to publicly disclose our determination as to whether the products we sell contain conflict minerals and could incur significant costs related to implementing a process that will meet the mandates of Dodd-Frank. Additionally, customers may rely on us to provide critical data regarding the parts they purchase and will likely request conflict mineral information. We have many suppliers and each will provide conflict mineral information in a different manner, if at all. Accordingly, because the supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify the origins of certain minerals used in our products. Additionally, customers may demand that the products they purchase be free of conflict minerals. The implementation of this requirement could affect the sourcing and availability of products we purchase from our suppliers. This may reduce the number of suppliers that are able to provide conflict free products, and may affect our ability to obtain products in sufficient quantities to meet customer demand or at competitive prices. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of any relevant minerals used in our products, as well as costs arising from any changes as a consequence of such verification activities.
Our financial results could be adversely impacted by changes in regulation of oil and natural gas exploration and development activity in response to significant environmental incidents.

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The U.S. Department of the Interior implemented additional safety and certification requirements applicable to drilling activities in the U.S. Gulf of Mexico, imposed additional requirements with respect to exploration, development and production activities in U.S. waters and imposed a moratorium that delayed the approval of drilling plans and well permits in both deepwater and shallow-water areas due to the Macondo well incident. Although neither we nor our products were involved in the incident, the delays caused by the new regulations and requirements had an overall negative effect on drilling activity in U.S. waters, and to a certain extent, our financial results. Another similar environmental incident could result in similar drilling moratoria, and could result in increased federal, state, and international regulation of our and our customers’ operations that could negatively impact our earnings, prospects and the availability and cost of insurance coverage. Any additional regulation of the exploration and production industry as a whole could result in fewer companies being financially qualified to operate offshore or onshore in the U.S. or in non-U.S. jurisdictions, resulting in higher operating costs for our customers and reduced demand for our products and services.
We may not be able to satisfy technical requirements, testing requirements, code requirements or other specifications under contracts and contract tenders.
Many of our products are used in harsh environments and severe service applications. Our contracts with customers and customer requests for bids often set forth detailed specifications or technical requirements (including that they meet certain industrial code requirements, such as API, ASME or similar codes, or that our processes and facilities maintain ISO or similar certifications) for our products and services, which may also include extensive testing requirements. We anticipate that such code testing requirements will become more common in our contracts. We cannot assure you that our products or facilities will be able to satisfy the specifications or requirements, or that we will be able to perform the full-scale testing necessary to prove that the product specifications are satisfied in future contract bids or under existing contracts, or that the costs of modifications to our products or facilities to satisfy the specifications and testing will not adversely affect our results of operations. If our products or facilities are unable to satisfy such requirements, or we are unable to perform or satisfy any required full-scale testing, we may suffer reputational harm and our customers may cancel their contracts and/or seek new suppliers, and our business, results of operations or financial position may be adversely affected.
Provisions in our organizational documents and under Delaware law could delay or prevent a change in control of our company, which could adversely affect the price of our common stock.
The existence of some provisions in our organizational documents and under Delaware law could delay or prevent a change in control of our company that a stockholder may consider favorable, which could adversely affect the price of our common stock. Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of our company, even if the change of control would be beneficial to our stockholders. These provisions include:
a classified board of directors, so that only approximately one-third of our directors are elected each year;
authority of our board to fill vacancies and determine its size;
the ability of our board of directors to issue preferred stock without stockholder approval;
limitations on the removal of directors; and
limitations on the ability of our stockholders to call special meetings.
In addition, our amended and restated bylaws establish advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders.
L.E. Simmons & Associates, Incorporated (“LESA”), through SCF Partners (“SCF”), may significantly influence the outcome of stockholder voting and may exercise this voting power in a manner adverse to our other stockholders.
As of February 23, 2018, SCF held approximately 20.5 million shares of our common stock, equal to approximately 19% of the outstanding common stock at that date. LESA is the ultimate general partner of SCF and will exert significant influence over us, including over the outcome of most matters requiring a stockholder vote, such as the election of directors, adoption of amendments to our charter and bylaws and approval of transactions involving a change of control. LESA’s interests may differ from our other stockholders, and SCF may vote its common stock in a manner that may adversely affect those stockholders.

27


SCF is a party to a registration rights agreement with us which requires us to effect the registration of its shares in certain circumstances. SCF exercised such rights in 2013, 2014 and 2016 with respect to 6.0 million, 11.5 million and 3.7 million shares, respectively, which were offered and sold in November 2013, May 2014 and December 2016, respectively. Additional sales of substantial amounts of our common stock by SCF, or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock.
Certain of our directors may have conflicts of interest because they are also directors or officers of SCF. The resolution of these conflicts of interest may not be in the best interests of our Company or our other stockholders.
Certain of our directors, namely David C. Baldwin and Andrew L. Waite, are currently officers of LESA. In addition, a trust in which the children of the Chairman of our board of directors, C. Christopher Gaut, are primary beneficiaries holds an ownership interest in the general partner of each of SCF-VI, L.P. and SCF-VII, L.P. These positions may create conflicts of interest because these directors and Mr. Gaut have an ownership interest in SCF-VI, L.P. and SCF-VII, L.P. and/or responsibilities to SCF Partners and its owners. Duties as directors or officers of LESA may conflict with such individuals’ duties as one of our directors or officers regarding business dealings and other matters between SCF Partners and us. The resolution of these conflicts may not always be in the best interest of our Company or our other stockholders. Please read “We have renounced any interest in specified business opportunities, and SCF Partners and its director nominees on our board of directors generally have no obligation to offer us those opportunities.”
We have renounced any interest in specified business opportunities, and SCF Partners and its director nominees on our board of directors generally have no obligation to offer us those opportunities.
Our certificate of incorporation provides that, so long as we have a director or officer who is affiliated with SCF Partners (an “SCF Nominee”) and for a continuous period of one year thereafter, we renounce any interest or expectancy in any business opportunity in which any member of the SCF group participates or desires or seeks to participate in and that involves any aspect of the energy equipment or services business or industry, other than (i) any business opportunity that is brought to the attention of an SCF Nominee solely in such person’s capacity as a director or officer of our Company and with respect to which no other member of the SCF group independently receives notice or otherwise identifies such opportunity and (ii) any business opportunity that is identified by the SCF group solely through the disclosure of information by or on behalf of our Company. We refer to SCF Partners and its other affiliates and its portfolio companies as the SCF group. We are not prohibited from pursuing any business opportunity with respect to which we have renounced any interest.
SCF Partners has investments in other oilfield service companies that may compete with us, and SCF Partners and its affiliates, other than our Company, may invest in other such companies in the future. LESA, the ultimate general partner of SCF Partners, has an internal policy that discourages it from investing in two or more portfolio companies with substantially overlapping industry segments and geographic areas. However, LESA’s internal policy does not restrict the management or operation of its other individual portfolio companies from competing with us. Pursuant to LESA’s policy, LESA may allocate any potential opportunities to the existing portfolio company where LESA determines, in its discretion, such opportunities are the most logical strategic and operational fit. As a result, LESA or its affiliates may become aware, from time to time, of certain business opportunities, such as acquisition opportunities, and may direct such opportunities to its other portfolio companies, in which case we may not become aware of or otherwise have the ability to pursue such opportunities. Furthermore, LESA does not have a specific policy with regard to allocation of financial professionals and they are under no obligation to provide us with financial professionals.
Item 1B. Unresolved Staff Comments
Not applicable.


28


Item 2. Properties
The following table describes the significant facilities owned or leased by us as of December 31, 2017 for our Drilling and Subsea (“D&S”), Completions (“C”) and Production and Infrastructure (“P&I”) segments:
Country
 
Location
 
Number of facilities
 
Description
 
Leased or Owned
 
Segments
 
 
 
Canada
 
Alberta
 
3
 
Service/Distribution
 
Leased
 
D&S and C
 
 
Calgary
 
2
 
Service/Distribution
 
Leased
 
C and P&I
 
 
Edmonton
 
1
 
Distribution
 
Leased
 
P&I
Germany
 
Hamburg
 
1
 
Manufacturing
 
Leased
 
D&S
Mexico
 
Monterrey
 
1
 
Manufacturing
 
Leased
 
D&S
Saudi Arabia
 
Dammam
 
1
 
Manufacturing
 
Leased
 
P&I
Singapore
 
Singapore
 
1
 
Manufacturing/Service
 
Leased
 
D&S
UAE
 
Dubai
 
2
 
Service/Distribution
 
Leased
 
D&S and P&I
United Kingdom
 
Aberdeen
 
3
 
Distribution
 
Leased
 
D&S
 
 
Kirkbymoorside
 
1
 
Manufacturing
 
Leased
 
D&S
 
 
Findon
 
1
 
Manufacturing
 
Leased
 
D&S
 
 
Ashington
 
1
 
Manufacturing
 
Leased
 
D&S
United States
 
Broussard, LA
 
3
 
Manufacturing
 
Owned
 
D&S and P&I
 
 
Brownsville, PA
 
1
 
Manufacturing
 
Leased
 
C
 
 
Bryan, TX
 
1
 
Manufacturing
 
Owned
 
D&S
 
 
Clearfield, PA
 
1
 
Manufacturing/Service/Distribution
 
Owned
 
Shared P&I and C
 
 
Davis, OK
 
1
 
Manufacturing
 
Owned
 
C
 
 
Dayton, TX
 
1
 
Manufacturing
 
Owned
 
C
 
 
Elmore City, OK
 
1
 
Manufacturing
 
Owned
 
P&I
 
 
Fort Worth, TX
 
1
 
Manufacturing
 
Leased
 
C
 
 
Guthrie, OK
 
1
 
Manufacturing
 
Leased
 
P&I
 
 
Houston, TX
 
3
 
Corporate/Distribution
 
Leased
 
Shared with all
 
 
Madison, KS
 
5
 
Manufacturing
 
Leased
 
P&I
 
 
Midland, TX
 
2
 
Service/Distribution
 
Leased
 
C
 
 
Odessa, TX
 
2
 
Service/Distribution
 
Leased
 
P&I and C
 
 
Pearland, TX
 
1
 
Manufacturing
 
Owned
 
C
 
 
Pearland, TX
 
1
 
Distribution
 
Leased
 
P&I
 
 
Plantersville, TX
 
1
 
Manufacturing
 
Owned
 
D&S
 
 
San Antonio, TX
 
1
 
Service/Distribution
 
Owned
 
C
 
 
Stafford, TX
 
3
 
Manufacturing/Distribution
 
Leased
 
P&I
 
 
Stafford, TX
 
1
 
Manufacturing
 
Owned
 
C
 
 
Tyler, TX
 
1
 
Distribution
 
Leased
 
D&S
 
 
Williston, ND
 
3
 
Service/Distribution
 
Leased
 
Shared D&S and C
We believe our facilities are suitable for their present and intended purposes, and are adequate for our current and anticipated level of operations.
We incorporate by reference the information set forth in Item 1 and Item 7 of this Annual Report on Form 10-K and the information set forth in Note 7 Property and Equipment and Note 12 Commitments and Contingencies.

29


Item 3. Legal Proceedings
Information related to Item 3. Legal Proceedings is included in Note 12 Commitments and Contingencies, which is incorporated herein by reference. In addition to these matters, we are involved in various other legal proceedings incidental to the conduct of our business. We do not believe that any of these legal proceedings will have a material adverse effect on our financial condition, results of operation or cash flows.

Item 4. Mine Safety Disclosures
Not applicable.
Executive officers of the registrant
The following table indicates the names, ages and positions of the executive officers of Forum as of February 23, 2018:
Name
Age
Position
Prady Iyyanki
47
President and Chief Executive Officer
James W. Harris
58
Executive Vice President and Chief Financial Officer
James L. McCulloch
65
Executive Vice President, General Counsel and Secretary
Michael D. Danford
55
Senior Vice President-Human Resources
Pablo G. Mercado
41
Senior Vice President-Finance
D. Lyle Williams
48
Senior Vice President-Operations
Prady Iyyanki. Mr. Iyyanki has served as our President and Chief Executive Officer and as a member of our board of directors since May 2017. From May 2016 to May 2017, Mr. Iyyanki served as President and Chief Operating Officer, and from January 2014 to May 2016, he served as Executive Vice President and Chief Operating Officer.  Mr. Iyyanki was a private investor from March 2013 to December 2013. From April 2011 to March 2013, Mr. Iyyanki served as Vice President of GE Oil and Gas, a manufacturer of capital equipment and service provider for the oil and natural gas industry, and from April 2011 to December 2012 he served as President & Chief Executive Officer of the GE Oil and Gas Turbo Machinery business. From June 2006 to April 2011, Mr. Iyyanki served as President and Chief Executive Officer of the GE Power and Water Gas Engines business. Mr. Iyyanki holds a B.S. in Mechanical Engineering from Jawaharlal Nehru Technology University and an M.S. in Engineering from South Dakota State University.
James W. Harris. Mr. Harris has served as our Executive Vice President and Chief Financial Officer since February 2015. From December 2005 to February 2015, Mr. Harris held various titles, the most recent of which was Senior Vice President and Chief Financial Officer. Mr. Harris was Vice President, Controller of VeriCenter, Inc., a provider of information technology services, and General Manager of its AppSite Hosting service line from January 2004 through November 2005. Prior to joining VeriCenter, from August 1999 through December 2001, Mr. Harris worked for Enron Energy Services, Inc., as a Vice President and thereafter served as a consultant to Enron through December 2003. Mr. Harris began his career at Price Waterhouse from January 1985 until February 1994, with his final position being a Senior Tax Manager, and at Baker Hughes Incorporated from February 1994 until May 1999 in various positions, including Vice President, Tax and Controller. Mr. Harris holds a B.S. and Masters of Accounting from Brigham Young University and an M.B.A. from Rice University. Mr. Harris is a certified public accountant. On February 21, 2018, we announced that Mr. Harris will transition to serve as Executive Vice President - Drilling and Subsea on a full-time basis, effective March 1, 2018.
James L. McCulloch. Mr. McCulloch has served as our Executive Vice President, General Counsel and Secretary since May 2016. From October 2010 to May 2016 he served as Senior Vice President, General Counsel and Secretary. Mr. McCulloch was a private investor from January 2008 until October 2010, and since February 2008 he has also served on the board of directors of Sunland Inc., a privately held pipeline construction and services company. In 1983, Mr. McCulloch joined Global Marine Inc., a leading international offshore drilling contractor, as Assistant General Counsel and served in a variety of capacities within the legal department until being named Senior Vice President and General Counsel in 1995. In 2001, Global Marine merged with Santa Fe International Corporation, an international land and offshore drilling contractor, to form GlobalSantaFe Corporation, where Mr. McCulloch continued to serve as Senior Vice President and General Counsel until the company’s merger with Transocean Inc. in December 2007. Mr. McCulloch holds a B.A. from Tulane University and a J.D. from Tulane University School of Law.

30


Michael D. Danford. Mr. Danford has served as our Senior Vice President - Human Resources since February 2015. Prior to that, Mr. Danford served as Vice President - Human Resources from November 2007 to February 2015. Prior to joining Forum and, from August 2007 through November 2007, he worked at Trico Marine Services Inc., a privately held provider of subsea and marine support vessels and services to the oil and gas industry, as Vice President - Human Resources. From 1997 through July 2007, Mr. Danford served as Director of Human Resources and Vice President - Human Resources for Hydril Company, a publicly traded manufacturer of connections used for oil and gas drilling and production. From 1991 to 1997, Mr. Danford served in various human resources roles for Baker Hughes Incorporated, a publicly traded oilfield services company. Prior to joining Baker Hughes, from 1990 to 1991, Mr. Danford served as a recruiter and as an employee relations representative in the human resources department for Compaq Computer, a publicly traded developer and manufacturer of computer systems. Mr. Danford holds a B.S. degree in Computer Science from the University of Louisiana at Monroe (formerly Northeast Louisiana University).
Pablo G. Mercado. Mr. Mercado has served as our Senior Vice President - Finance since June 2017. Prior to that, he served as Vice President, Operations Finance from August 2015 to June 2017; Vice President, Corporate Strategy and Treasurer from January 2014 to August 2015; Vice President, Corporate Development & Strategy from February 2013 to January 2014; and Vice President, Corporate Development from November 2011 to February 2013. From May 2005 to October 2011, Mr. Mercado was an investment banker in the Oil and Gas Group of Credit Suisse Securities (USA) LLC where he worked with oilfield services companies and other companies in the oil and gas industry, most recently as a Director. From 1998 to 2001 and 2003 to May 2005, Mr. Mercado was an investment banker at other firms, primarily working with companies in the oil and gas industry. Mr. Mercado holds a B.B.A. from the Cox School of Business and a B.A. in Economics from the Dedman College at Southern Methodist University, and an M.B.A. from The University of Chicago Booth School of Business. On February 21, 2018, we announced Mr. Mercado’s appointment as Senior Vice President and Chief Financial Officer, effective March 1, 2018.
D. Lyle Williams, Jr. Mr. Williams has served as our Senior Vice President - Operations since May 2017. Since January 2007, Mr. Williams has held various financial and operations roles with us, including Vice President - Corporate Development and Treasury; Vice President - Operations Finance; Vice President - Finance and Accounting, Drilling & Subsea segment; Senior Vice President - Downhole Technologies; Vice President - Subsea Products; and Vice President - Drilling Capital Equipment. Prior to joining Forum, Mr. Williams held various operations positions with Cooper Cameron Corporation, including Director of Operations - Engineered Products. He holds a B.A. in Economics and English from Rice University, and an M.B.A. from Harvard University Graduate School of Business Administration.

31


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the NYSE under the trading symbol “FET.” The following table sets forth, for each full quarterly period indicated, the high and low sales prices for our common stock as quoted on the NYSE:
Year Ended December 31, 2017
 
High
 
Low
First Quarter
 
$
26.25

 
$
18.05

Second Quarter
 
$
21.68

 
$
14.55

Third Quarter
 
$
16.50

 
$
10.05

Fourth Quarter
 
$
15.85

 
$
12.55

Year Ended December 31, 2016
 
High
 
Low
First Quarter
 
$
13.52

 
$
8.54

Second Quarter
 
$
19.00

 
$
12.54

Third Quarter
 
$
19.86

 
$
15.09

Fourth Quarter
 
$
23.55

 
$
17.10

As of February 23, 2018, there were approximately 78 shareholders of record of our common stock. In calculating the number of shareholders, we consider clearing agencies and security position listings as one shareholder for each agency or listing.
No dividends were declared or issued during 2017 or 2016, and we do not currently have any plans to pay cash dividends in the future. The indenture governing our senior notes restricts the payment of dividends. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors, including our results of operations, financial condition, capital requirements, investment opportunities, and other loan agreements.
Purchase of Equity Securities
On October 27, 2014, our board of directors authorized a share repurchase program for the repurchase of outstanding shares of our common stock having an aggregate purchase price of up to $150 million.
The number of shares of common stock purchased and placed in treasury during the three months ended December 31, 2017 is provided in the table below. No shares were purchased during the three months ended December 31, 2017 from employees in connection with the settlement of income tax and related benefit withholding obligations arising from the vesting of restricted stock grants.
Period
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plan or programs
 
Maximum value of shares that may yet be purchased under the plan or program
(in thousands)
October 1, 2017 - October 31, 2017
 

 
$

 

 
$
49,752

November 1, 2017 - November 30, 2017
 

 
$

 

 
$
49,752

December 1, 2017 - December 31, 2017
 

 
$

 

 
$
49,752

Total
 

 
$

 

 



Acquisition of Innovative Valve Components

On January 9, 2017, we acquired all of the issued and outstanding partnership interests of Innovative Valve Components. As partial consideration for the acquisition we issued 196,249 shares of our common stock. On January 9, 2018, we issued 8,400 shares of our common stock in connection with the first anniversary of the closing pursuant to the terms of the purchase agreement. The issuance of our common stock was exempt from registration under the Securities Act pursuant to Rule 4(a)(2) thereof and the safe harbor provided by Rule 506 of Regulation D promulgated thereunder.


32


Acquisition of Global Tubing, LLC

On October 2, 2017, we acquired the remaining membership interests in Global Tubing from its joint venture partner and members of management. As partial consideration for the acquisition we issued 11,488,208 shares of our common stock. The issuance of our common stock in connection with the acquisitions was exempt from registration under the Securities Act pursuant to Rule 4(a)(2) thereof and the safe harbor provided by Rule 506 of Regulation D promulgated thereunder.
Performance Graph
The following graph compares total shareholder return on our common stock with the Standard & Poor’s 500 Stock Index and the Philadelphia Oil Service Sector Index (“OSX”), an index of oil and natural gas related companies that represents an industry composite of our peers. This graph covers the period from January 1, 2013 through December 31, 2017. This comparison assumes the investment of $100 on January 1, 2013, and the reinvestment of all dividends. The shareholder return set forth is not necessarily indicative of future performance.
chart-5e1b51afd54b565c924a04.jpg
The performance graph above is furnished and not filed for purposes of Section 18 of the Exchange Act and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933 (the “Securities Act”) unless specifically identified therein as being incorporated therein by reference. The performance graph is not soliciting material subject to Regulation 14A.

Item 6. Selected Financial Data
The following selected historical consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K to fully understand the factors that may affect the comparability of the information presented below.
The selected historical financial data as of December 31, 2017 and 2016, and for the years ended December 31, 2017, 2016 and 2015 are derived from our audited consolidated financial statements and related notes thereto that are

33


included herein. The selected historical data as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2014 and 2013 have been derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results to be expected in any future period.
  
Year ended December 31,
(in thousands, except per share information)
2017
 
2016
 
2015
 
2014
 
2013
Income Statement Data:
 
 
 
 
 
 
 
 
 
Net sales
$
818,620

 
$
587,635

 
$
1,073,652

 
$
1,739,717

 
$
1,524,811

Total operating expenses
961,215

 
718,411

 
1,202,199

 
1,496,843

 
1,322,569

Earnings from equity investment
1,000

 
1,824

 
14,824

 
25,164

 
7,312

Operating income (loss)
(141,595
)
 
(128,952
)
 
(113,723
)
 
268,038

 
209,554

Total other expense (income)
(86,316
)
 
9,047

 
20,600

 
25,516

 
23,472

Income (loss) before income taxes
(55,279
)
 
(137,999
)
 
(134,323
)
 
242,522

 
186,082

Provision for income tax expense (benefit)
4,121

 
(56,051
)
 
(14,939
)
 
68,145

 
56,478

Net income (loss)
(59,400
)
 
(81,948
)
 
(119,384
)
 
174,377

 
129,604

Less: Income (loss) attributable to noncontrolling interest

 
30

 
(31
)
 
12

 
65

Net income (loss) attributable to common stockholders
(59,400
)
 
(81,978
)
 
(119,353
)
 
174,365

 
129,539

 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
 
 
Basic
98,689

 
91,226

 
89,908

 
92,628

 
90,697

Diluted
98,689

 
91,226

 
89,908

 
95,308

 
94,604

Earnings (loss) per share
 
 
 
 
 
 
 
 
 
Basic
$
(0.60
)
 
$
(0.90
)
 
$
(1.33
)
 
$
1.88

 
$
1.43

Diluted
$
(0.60
)
 
$
(0.90
)
 
$
(1.33
)
 
$
1.83

 
$
1.37

 
As of December 31,
(in thousands)
2017
 
2016
 
2015
 
2014
 
2013
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
115,216

 
$
234,422

 
$
109,249

 
$
76,579

 
$
39,582

Net property, plant and equipment
197,281

 
152,212

 
186,667

 
189,974

 
180,292

Total assets
2,195,228

 
1,835,192

 
1,886,042

 
2,214,102

 
2,160,247

Long-term debt
506,750

 
396,747

 
396,016

 
420,484

 
503,455

Total stockholders’ equity
1,409,016

 
1,235,202

 
1,257,020

 
1,395,356

 
1,330,355

 
Year ended December 31,
(in thousands)
2017
 
2016
 
2015
 
2014
 
2013
Other financial data:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(40,033
)
 
$
64,742

 
$
155,913

 
$
269,966

 
$
211,393

Capital expenditures for property and equipment
(26,709
)
 
(16,828
)
 
(32,291
)
 
(53,792
)
 
(60,263
)
Proceeds from sale of property and equipment
1,971

 
9,763

 
1,821

 
2,718

 
964

Acquisition of businesses, net of cash acquired
(162,189
)
 
(4,072
)
 
(60,836
)
 
(38,289
)
 
(181,718
)
Net cash used in investing activities
(187,968
)
 
(11,137
)
 
(91,306
)
 
(70,691
)
 
(289,030
)
Net cash provided by (used in) financing activities
100,563

 
86,195

 
(26,937
)
 
(162,018
)
 
77,054



34


 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected historical consolidated financial data” included under Item 6 of this Annual Report on Form 10-K and our financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements based on our current expectations, estimates and projections about our operations and the industry in which we operate. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in “Risk factors—Cautionary note regarding forward-looking statements” and elsewhere in this Annual Report on Form 10-K. We assume no obligation to update any of these forward-looking statements.
Overview
We are a global oilfield products company, serving the drilling, subsea, completion, production and infrastructure sectors of the oil and natural gas industry. We design, manufacture and distribute products and engage in aftermarket services, parts supply and related services that complement our product offering. Our product offering includes frequently replaced items that are used in the exploration, development, production and transportation of oil and natural gas, as well as a mix of highly engineered capital products. Our consumable products are used in drilling, well construction and completions activities, within the supporting infrastructure, and at processing centers and refineries. Our engineered capital products are directed at: drilling rig equipment for new rigs, upgrades and refurbishment projects; subsea construction and development projects; the placement of production equipment on new producing wells; pressure pumping equipment; and downstream capital projects. In 2017, approximately 80% of our revenue was derived from consumable products and activity-based equipment, while the balance was derived from capital products, and a small amount from rental and other services.
We seek to design, manufacture and supply reliable products that create value for our diverse customer base, which includes, among others, oil and natural gas operators, land and offshore drilling contractors, oilfield service companies, subsea construction and service companies, and pipeline and refinery operators.
We operate three business segments that cover all stages of the well cycle. A summary of the products and services offered by each segment is as follows:
Drilling & Subsea segment. This segment designs and manufactures products and provides related services to the drilling, energy subsea construction and services markets, and other markets such as alternative energy, defense and communications. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable drilling products consumed in the drilling process; and (ii) subsea remotely operated vehicles and trenchers, specialty components and tooling, products used in subsea pipeline infrastructure, and a broad suite of complementary subsea technical services and rental items.
Completions segment. This segment designs, manufactures and supplies products and provides related services to the well construction, completion, stimulation and intervention markets. The products and related services consist primarily of: (i) well construction casing and cementing equipment, cable protectors and electrical submersible pump protectors used in completions and artificial lift, and composite plugs used for zonal isolation in hydraulic fracturing; and (ii) capital and consumable products sold to the pressure pumping, hydraulic fracturing and flowback services markets, including hydraulic fracturing pumps, pump consumables and flow iron as well as coiled tubing, wireline cable, and pressure control equipment used in the well completion and intervention service markets.
Production & Infrastructure segment. This segment designs, manufactures and supplies products and provides related equipment and services for production and infrastructure markets. The products and related services consist primarily of: (i) engineered process systems, production equipment and related field services, as well as oil and produced water treatment equipment; and (ii) a wide range of industrial valves focused on serving upstream, midstream, and downstream oil and natural gas customers as well as power and other general industries.
Market Conditions
The level of demand for our products and services is directly related to activity levels and the capital and operating budgets of our customers, which in turn are influenced heavily by energy prices and the expectation as to future trends in those prices.

35


The probability of any cyclical change in energy prices and the extent and duration of such a change are difficult to predict. In November 2016, the Organization of Petroleum Exporting Countries (“OPEC”) and other unaffiliated countries announced that their production levels would be capped or reduced. In November 2017, the OPEC coalition agreed to extend the reductions previously agreed in November 2016 through year end 2018. These OPEC actions led to a modest increase in oil prices in late 2016 and 2017. These increases in prices and the expectation of an improvement in supply and demand balance led to higher drilling and completions activity and spending by our customers, primarily in North America. The volume of rigs drilling for oil and natural gas in North America is a driver for our revenue from this region, and the number of those rigs has increased substantially over the past year. Exploration and production operators have continued to drill and complete wells and have improved well economics derived from concentrating activity in basins with the best returns on investment, and enhanced drilling and completion techniques. This increased activity resulted in improved revenue and orders in 2017. Activity in high cost areas, however, especially offshore and in some international areas, is lagging the North America onshore activity recovery. The pace and strength of a recovery in energy markets and in our results remain uncertain.
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:
 
 
2017
 
2016
 
2015
Average global oil, $/bbl
 
 
 
 
 
 
West Texas Intermediate
 
$
50.80

 
$
43.29

 
$
48.66

United Kingdom Brent
 
$
54.12

 
$
43.67

 
$
52.32

 
 
 
 
 
 
 
Average North American Natural Gas, $/Mcf
 
 
 
 
 
 
Henry Hub
 
$
2.99

 
$
2.52

 
$
2.62

Average WTI and Brent oil prices were 17% and 24% higher, respectively, for the year ended December 31, 2017 compared to 2016. The WTI oil price was $60.46 and $53.75 per barrel as of the year ended December 31, 2017 and 2016, respectively. Average natural gas prices were 19% higher in 2017 than 2016.
The table below shows the average number of active drilling rigs operating by geographic area and drilling for different purposes based on the weekly rig count information published by Baker Hughes, a GE Company.
 
 
2017
 
2016
 
2015
Active Rigs by Location
 
 
 
 
 
 
United States
 
877

 
509

 
978

Canada
 
206

 
130

 
192

International
 
948

 
955

 
1,167

Global Active Rigs
 
2,031

 
1,594

 
2,337

 
 
 
 
 
 
 
Land vs. Offshore Rigs
 
 
 
 
 
 
Land
 
1,812

 
1,348

 
2,016

Offshore
 
219

 
246

 
321

Global Active Rigs
 
2,031

 
1,594

 
2,337

 
 
 
 
 
 
 
U.S. Commodity Target, Land
 
 
 
 
 
 
Oil/Gas
 
704

 
408

 
750

Gas
 
172

 
100

 
227

Unclassified
 
1

 
1

 
1

Total U.S. Land Rigs
 
877

 
509

 
978

 
 
 
 
 
 
 
U.S. Well Path, Land
 
 
 
 
 
 
Horizontal
 
737

 
400

 
744

Vertical
 
70

 
60

 
139

Directional
 
70

 
49

 
95

Total U.S. Active Land Rigs
 
877

 
509

 
978


36


As a result of higher oil and natural gas prices, the average U.S. and Canadian rig counts in 2017 increased 72% and 58%, respectively, as compared to 2016, while the international rig count remained flat in 2017 compared to 2016. The U.S. rig count reached a trough of 404 rigs in the second quarter of 2016. Since then, the number of working rigs in the U.S. has increased steadily to 929 rigs at the end of December 2017. A substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed. While the U.S. land rig count has continued to recover, it remains low compared to historical norms.
The table below shows the amount of total inbound orders by segment for the years ended December 31, 2017, 2016 and 2015:
(in millions of dollars)
 
2017
 
2016
 
2015
Orders:
 
 
 
 
 
 
Drilling & Subsea
 
$
219.8

 
$
215.3

 
$
355.5

Completions
 
291.8

 
130.7

 
217.2

Production & Infrastructure
 
358.3

 
250.8

 
297.3

Total Orders
 
$
869.9

 
$
596.8

 
$
870.0

Acquisitions
On October 2, 2017, we acquired all the remaining membership interests in Global Tubing, LLC (“Global Tubing”) from our joint venture partner and management for total consideration of approximately $290.3 million, including approximately $116.8 million in cash and approximately 11.5 million shares of our common stock. We originally invested in Global Tubing with a joint venture partner in 2013. Prior to acquiring a 100% ownership interest in Global Tubing, we reported this investment using the equity method of accounting. Located in Dayton, Texas, Global Tubing provides coiled tubing, coiled line pipe and related services to customers worldwide. Global Tubing is included in the Completions segment.
On July 3, 2017, we acquired Multilift Welltec, LLC and Multilift Wellbore Technology Limited (collectively, “Multilift”) for approximately $39.2 million in cash consideration. Multilift, located in Houston, Texas, manufactures the patented SandGuardTM and the CycloneTM completion tools. This acquisition increased our product offering related to artificial lift to our completions customers. Multilift is included in the Completion Segment.
On January 9, 2017, we acquired substantially all of the assets of Cooper Valves, LLC as well as 100% of the general partnership interests of Innovative Valve Components (collectively, “Cooper”) for total aggregate consideration of $14.0 million. The aggregate consideration includes the issuance of stock valued at $4.5 million and certain contingent cash payments. These acquisitions are included in the Production & Infrastructure segment.
On April 28, 2016, we 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 oilfield service providers, packer repair companies and distributors on a global basis, and is included in the Completions segment.
On February 2, 2015, we completed the acquisition of J-Mac Tool, Inc. (“J-Mac”) for aggregate consideration of approximately $61.9 million. J-Mac, located in Fort Worth, Texas, manufactures hydraulic fracturing pumps, power ends, fluid ends and other pump accessories. The acquired business also provides repair and refurbishment services at its main location in Fort Worth and at other service center locations. J-Mac is included in the Completions segment.
There are factors related to the businesses we have acquired that may result in lower net profit margins on a going-forward basis, primarily the federal income tax status of the legal entity and the level of depreciation and amortization charges arising out of the accounting for the purchase.
For additional information regarding our 2017, 2016, and 2015 acquisitions, refer to Note 4 Acquisitions.
Evaluation of operations
We manage our operations through our three business segments. We have focused on implementing financial reporting and controls at all of our operations to accelerate the availability of critical information necessary to support informed decision making. We use a number of financial and non-financial measures to routinely analyze and evaluate, on a segment and corporate level, the performance of our business. As an example of a non-financial measure, we measure our safety by tracking the total recordable incident rate, and we believe that there is a relationship between safety and the quality of our products. Financial measures include the following:

37


Revenue growth. We compare actual revenue achieved each month to the most recent estimate for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the relative performance of each of our product lines as compared to standard revenue drivers or market metrics applicable to that product line. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes. In addition, we review these metrics on a quarterly basis. We also evaluate changes in the mix of products sold and the resultant impact on reported gross margins.
Gross margin percentage. We define gross margin percentage as our gross margin, or net sales minus cost of sales, divided by our net sales. Our management continually evaluates our consolidated gross margin percentage and our gross margin percentage by segment to determine how each segment is performing. This metric aids management in capital resource allocation and pricing decisions.
Selling, general and administrative expenses as a percentage of total revenue. Selling, general and administrative expenses include payroll related costs for sales; marketing; administrative; accounting; information technology; certain engineering and human resources functions; audit, legal and other professional fees; insurance; franchise taxes not based on income; travel and entertainment; advertising and promotions; certain depreciation and amortization expense; bad debt expense; and other office and administrative related costs. Our management continually evaluates the level of our selling, general and administrative expenses in relation to our revenue and makes appropriate changes in light of activity levels to preserve and improve our profitability while meeting the on-going support and regulatory requirements of the business.
Operating income and operating margin percentage. We define operating income as revenue less cost of goods sold less selling, general and administrative expenses. We define our operating margin percentage as operating income divided by revenue. These metrics assist management in evaluating the performance of each segment as a whole, especially to determine whether the amount of administrative burden is appropriate to support current business activity levels.
Earnings per share. We calculate fully-diluted earnings per share, as prescribed under GAAP, as net income divided by common shares outstanding, giving effect for unvested restricted shares and the assumed exercise of outstanding options with a strike price less than the average fair value of the shares over the period covered for the calculation. There is no dilutive effect for 2017, 2016 and 2015 since we are in a net loss position. We believe this measure is important as it reflects the sum total of operating results and all attendant capital decisions, showing in one number the amount earned for the stockholders of our Company.
Free cash flow. We define free cash flow as net cash provided by operating activities, less capital expenditures for property and equipment net of proceeds from the sale of property and equipment and other. We believe that this measure is important because it encompasses both profitability and capital management in evaluating results. Free cash flow represents the business’s contribution in the generation of funds available to pay debt outstanding, invest in other areas, or return funds to our stockholders. Free cash flow is a non-GAAP financial measure and should not be considered as an alternative to cash provided by operating activities as a cash flow measurement.
Factors affecting the comparability of our future results of operations to our historical results of operations
Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the following reasons:
Since our initial public offering in 2012, we have grown our business both organically and through strategic acquisitions. We have expanded and diversified our product portfolio and business lines with the acquisition of businesses in each of 2017, 2016, and 2015. We acquired three businesses in 2017, one business in 2016, and one business in 2015. The historical financial data for periods prior to the acquisitions does not include the results of any of the acquired companies for the periods presented and, as such, does not provide an accurate indication of our future results.
As we integrate acquired companies and further implement internal controls, processes and infrastructure to operate in compliance with the regulatory requirements applicable to companies with publicly traded shares, it is likely that we will incur incremental selling, general and administrative expenses relative to historical periods.
Our future results will depend on our ability to efficiently manage our combined operations and execute our business strategy.


38


Results of operations
Year ended December 31, 2017 compared with year ended December 31, 2016
 
Year ended December 31,
 
Favorable / (Unfavorable)
 
2017
 
2016
 
$
 
%
(in thousands of dollars, except per share information)
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
234,742

 
$
224,447

 
$
10,295

 
4.6
 %
Completions
260,191

 
131,786

 
128,405

 
97.4
 %
Production & Infrastructure
327,287

 
233,754

 
93,533

 
40.0
 %
Eliminations
(3,600
)
 
(2,352
)
 
(1,248
)
 
*

Total revenue
$
818,620

 
$
587,635

 
230,985

 
39.3
 %
Cost of sales:
 
 
 
 
 
 
 
Drilling & Subsea
$
179,978

 
$
186,820

 
$
6,842

 
3.7
 %
Completions
201,631

 
126,789

 
(74,842
)
 
(59.0
)%
Production & Infrastructure
251,823

 
176,643

 
(75,180
)
 
(42.6
)%
Eliminations
(3,600
)
 
(2,352
)
 
1,248

 
*

Total cost of sales
$
629,832

 
$
487,900

 
$
(141,932
)
 
(29.1
)%
Gross profit:
 
 
 
 
 
 
 
Drilling & Subsea
$
54,764

 
$
37,627

 
$
17,137

 
45.5
 %
Completions
58,560

 
4,997

 
53,563

 
*

Production & Infrastructure
75,464

 
57,111

 
18,353

 
32.1
 %
Total gross profit
$
188,788

 
$
99,735

 
$
89,053

 
89.3
 %
Selling, general and administrative expenses:
 
 
 
 
 
 
 
Drilling & Subsea
$
86,327

 
$
90,682

 
$
4,355

 
4.8
 %
Completions
66,306

 
52,430

 
(13,876
)
 
(26.5
)%
Production & Infrastructure
67,653

 
56,456

 
(11,197
)
 
(19.8
)%
Corporate
33,427

 
27,440

 
(5,987
)
 
(21.8
)%
Total selling, general and administrative expenses
$
253,713

 
$
227,008

 
$
(26,705
)
 
(11.8
)%
Segment operating income (loss):
 
 
 
 
 
 
 
Drilling & Subsea
$
(31,563
)
 
$
(53,055
)
 
$
21,492

 
40.5
 %
Operating margin %
(13.4
)%
 
(23.6
)%
 
 
 
 
Completions
(6,746
)
 
(45,609
)
 
38,863

 
85.2
 %
Operating margin %
(2.6
)%
 
(34.6
)%
 
 
 
 
Production & Infrastructure
7,811

 
655

 
7,156

 
*

Operating margin %
2.4
 %
 
0.3
 %
 
 
 
 
Corporate
(33,427
)
 
(27,440
)
 
(5,987
)
 
(21.8
)%
Total segment operating loss
$
(63,925
)
 
$
(125,449
)
 
$
61,524

 
49.0
 %
Operating margin %
(7.8
)%
 
(21.3
)%
 
 
 
 
Goodwill and intangible asset impairments
69,062

 

 
(69,062
)
 
*

Transaction expenses
6,511

 
865

 
(5,646
)
 
*

Loss on disposal of assets
2,097

 
2,638

 
541

 
*

Loss from operations
(141,595
)
 
(128,952
)
 
(12,643
)
 
(9.8
)%
Interest expense, net
26,808

 
27,410

 
602

 
2.2
 %
Foreign exchange losses (gains) and other, net
7,268

 
(21,341
)
 
(28,609
)
 
*

Gain realized on previously held equity investment
(120,392
)
 

 
120,392

 
*

Deferred loan cost written off

 
2,978

 
2,978

 
*

Other (income) expense, net
(86,316
)
 
9,047

 
95,363

 
*

Loss before income taxes
(55,279
)
 
(137,999
)
 
82,720

 
59.9
 %
Income tax expense (benefit)
4,121

 
(56,051
)
 
(60,172
)
 
(107.4
)%
Net loss
(59,400
)
 
(81,948
)
 
22,548

 
27.5
 %
Less: Income attributable to non-controlling interest

 
30

 
(30
)
 
*

Net loss attributable to common stockholders
$
(59,400
)
 
$
(81,978
)
 
$
22,578

 
27.5
 %
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
98,689

 
91,226

 
 
 
 
Diluted
98,689

 
91,226

 
 
 
 
Loss per share
 
 
 
 
 
 
 
Basic
$
(0.60
)
 
$
(0.90
)
 
 
 
 
Diluted
$
(0.60
)
 
$
(0.90
)
 
 
 
 
* not meaningful
 
 
 
 
 
 
 

39


Revenue
Our revenue for the year ended December 31, 2017 increased $231.0 million, or 39.3%, to $818.6 million compared to the year ended December 31, 2016. In general, the increase in revenue is due to higher market activity resulting from higher commodity prices. In the third quarter of 2017, we were adversely affected by Hurricane Harvey, which temporarily idled facilities and operations, resulting in foregone revenue. For the year ended December 31, 2017, our Drilling & Subsea segment, Completions segment, and Production & Infrastructure segment comprised 28.2%, 31.8% and 40.0% of our total revenue, respectively, compared to 37.8%, 22.4% and 39.8%, respectively, for the year ended December 31, 2016. The revenue changes by operating segment consisted of the following:
Drilling & Subsea segment — Revenue increased $10.3 million, or 4.6%, to $234.7 million during the year ended December 31, 2017 compared to the year ended December 31, 2016. Approximately $33 million of the increase relates to improved sales volumes of our drilling products primarily associated with the 72% increase in the average U.S. rig count compared to the prior year. The improvement in volumes was particularly strong for consumable products sold to drilling contractors both for rig mud pump upgrades and rig operations. The increase in drilling products was partially offset by lower sales volumes and demand for our remotely operated subsea vehicles, associated subsea systems and other offshore products, which was largely attributable to reduced investment in global offshore projects.
Completions segment — Revenue increased $128.4 million, or 97.4%, to $260.2 million during the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in drilling and completions budgets of exploration and production companies has led to an increase in market demand for our completions products. Approximately $76 million of the increase is a result of higher sales volumes for our well stimulation and intervention products, particularly in North America. In addition, segment revenue includes $36 million of revenue from the acquisition of the remaining membership interests of Global Tubing in the fourth quarter of 2017. The remaining increase in segment revenues was due to higher sales of our downhole products, including revenue from our acquisition of Multilift in the third quarter of 2017.
Production & Infrastructure segment — Revenue increased $93.5 million, or 40.0%, to $327.3 million during the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in drilling and completions budgets of exploration and production companies and resulting infrastructure spending have led to increased sales of our surface production equipment and valve products. Approximately half of the increase is attributable to higher sales volumes in our activity-based production equipment. The remaining segment revenue increase was due to higher sales of valves, including revenue from our acquisition of Cooper in the first quarter of 2017.
Segment operating income (loss) and segment operating margin percentage
Segment operating loss for the year ended December 31, 2017 improved $61.5 million to a loss of $63.9 million for the year ended December 31, 2017 compared to a loss of $125.4 million the year ended December 31, 2016. In the third quarter of 2017, we were adversely affected by Hurricane Harvey, which temporarily idled facilities and operations, resulting in foregone revenue and under-absorption of manufacturing costs. The operating margin percentage improved to (7.8)% for the year ended December 31, 2017 from (21.3)% for the year ended December 31, 2016. The segment operating margin percentage is calculated by dividing segment operating loss by revenue for the period. The change in operating margin percentage for each segment is explained as follows:
Drilling & Subsea segment — The operating margin percentage improved to (13.4)% for the year ended December 31, 2017 compared to (23.6)% for the year ended December 31, 2016. The year ended December 31, 2017 included $3.6 million of severance and facility closure costs. The year ended December 31, 2016 included $12.6 million of inventory write-downs attributable to lower activity levels and reduced pricing, severance and facility closure costs. The remaining increase in operating margins was driven by higher activity levels, which caused an improvement in manufacturing scale efficiencies, as well as a better mix of higher margin product sales. For the segment, the margin improvement for our drilling products was partially offset by lower margins for our subsea products.
Completions segment — The operating margin percentage improved to (2.6)% for the year ended December 31, 2017 from (34.6)% for the year ended December 31, 2016. The year ended December 31, 2017 included $9.2 million of inventory write-downs attributable to the decision to exit specific product lines in the fourth quarter 2017. The year ended December 31, 2016 included $21.1 million of charges for inventory write-downs attributable to lower activity levels and reduced pricing, severance and facility closure costs. The remaining increase in operating margin percentage is due to increased operating leverage on higher revenue and volumes. Operating results were also positively impacted by an improvement in earnings for Global Tubing, LLC which was reported as an equity method investment until our acquisition of the remaining membership interests in October 2017.

40


Production & Infrastructure segment — The operating margin percentage improved to 2.4% for the year ended December 31, 2017 from 0.3% for the year ended December 31, 2016. The years ended December 31, 2017 and December 31, 2016 included costs related to inventory write-downs, facility closure costs and severance totaling $4.9 million and $3.9 million, respectively. The remaining increase in operating margins was primarily attributable to higher activity levels leading to increased operating leverage in our activity-based production equipment products.
Corporate — Selling, general and administrative expenses for Corporate increased $6.0 million, or 21.8%, for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to higher personnel costs, including bonus accruals, and higher professional fees. Corporate costs include payroll, professional fees and other costs for general management, administration, marketing, finance, legal, information technology and human resources.
Other items not included in segment operating income (loss)
Several items are not included in segment operating income (loss), but are included in total operating loss. These items include goodwill and intangible asset impairments, transaction expenses, and gains/losses from the disposal of assets. Transaction expenses include legal, advisory and other costs incurred in acquiring businesses which are not considered to be part of segment operating income (loss). These costs were $6.5 million and $0.9 million for the years ended December 31, 2017 and 2016, respectively, with the increase primarily related to the acquisition of Global Tubing in the fourth quarter of 2017.
The Company recorded a goodwill impairment charge of $68.0 million in the second quarter of 2017 related to the subsea reporting unit. In addition, the Company also recorded impairment charges totaling $1.1 million in 2017 related to intangible assets in the Subsea and Downhole reporting units. Refer to Note 8 Goodwill and Intangible Assets for further discussion.
Other income and expense
Other income and expense includes interest expense, foreign exchange gains and losses, a gain realized on the previously held equity investment in Global Tubing, and the write-off of deferred loan costs. We incurred $26.8 million of interest expense during the year ended December 31, 2017, a decrease of $0.6 million compared to the year ended December 31, 2016 primarily due to lower commitment fees on the unused portion of our revolving credit line. The foreign exchange loss was $7.3 million for the year ended December 31, 2017 compared to a gain of $21.3 million for the year ended December 31, 2016. The foreign exchange gains and losses are primarily the result of movements in the British pound and the Euro relative to the U.S. dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S. dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than U.S. dollar. In 2017, we recognized a gain of $120.4 million on the previously held equity investment in Global Tubing upon acquiring the remaining interest in the fourth quarter of 2017. In year ended December 31, 2016, we wrote off $3.0 million of deferred financing costs as a result of the amendments of our credit facility in the first and fourth quarters of 2016 which reduced the size of our revolving credit line.
Taxes
Tax expense (benefit) 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 (benefit) by income before income taxes, was 7.5% and 40.6% for the years ended December 31, 2017 and 2016, respectively. Items reducing the effective tax rate for the year ended December 31, 2017 include $14.7 million associated with the non-tax deductible goodwill impairment for the subsea reporting unit and a net $10.1 million expense associated with U.S. tax reform. Also impacting the tax rate in 2017 is the change in the proportion of losses generated in the U.S., which are benefited at a higher statutory tax rate, as compared to losses generated outside the U.S. in jurisdictions subject to lower tax rates. Partially offsetting these items was a $9.2 million reduction in tax expense associated with the gain on acquisition of the remaining 52% membership interest of Global Tubing.


41


Year ended December 31, 2016 compared to year ended December 31, 2015
 
Year ended December 31,
 
Favorable / (Unfavorable)
 
2016
 
2015
 
$
 
%
(in thousands of dollars, except per share information)
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Drilling & Subsea
$
224,447

 
$
469,778

 
$
(245,331
)
 
(52.2
)%
Completions
131,786

 
285,177

 
(153,391
)
 
(53.8
)%
Production & Infrastructure
233,754

 
320,442

 
(86,688
)
 
(27.1
)%
Eliminations
(2,352
)
 
(1,745
)
 
(607
)
 
*

Total revenue
$
587,635

 
$
1,073,652

 
(486,017
)
 
(45.3
)%
Cost of sales:
 
 
 
 
 
 
 
Drilling & Subsea
$
186,820

 
$
347,936

 
$
161,116

 
46.3
 %
Completions
126,789

 
223,726

 
96,937

 
43.3
 %
Production & Infrastructure
176,643

 
241,058

 
64,415

 
26.7
 %
Eliminations
(2,352
)
 
(1,745
)
 
607

 
*

Total cost of sales
$
487,900

 
$
810,975

 
$
323,075

 
39.8
 %
Gross profit:
 
 
 
 
 
 
 
Drilling & Subsea
$
37,627

 
$
121,842

 
$
(84,215
)
 
(69.1
)%
Completions
4,997

 
61,451

 
(56,454
)
 
(91.9
)%
Production & Infrastructure
57,111

 
79,384

 
(22,273
)
 
(28.1
)%
Total gross profit
$
99,735

 
$
262,677

 
$
(162,942
)
 
(62.0
)%
Selling, general and administrative expenses:
 
 
 
 
 
 
 
Drilling & Subsea
$
90,682

 
$
119,121

 
$
28,439

 
23.9
 %
Completions
52,430

 
60,982

 
8,552

 
14.0
 %
Production & Infrastructure
56,456

 
56,726

 
270

 
0.5
 %
Corporate
27,440

 
28,077

 
637

 
2.3
 %
Total selling, general and administrative expenses
$
227,008

 
$
264,906

 
$
37,898

 
14.3
 %
Operating income (loss):
 
 
 
 
 
 
 
Drilling & Subsea
$
(53,055
)
 
$
2,721

 
$
(55,776
)
 
*

Operating income margin %
(23.6
)%
 
0.6
%
 
 
 
 
Completions
(45,609
)
 
15,293

 
(60,902
)
 
*

Operating income margin %
(34.6
)%
 
5.4
%
 
 
 
 
Production & Infrastructure
655

 
22,658

 
(22,003
)
 
(97.1
)%
Operating income margin %
0.3
 %
 
7.1
%
 
 
 
 
Corporate
(27,440
)
 
(28,077
)
 
637

 
(2.3
)%
Total segment operating income (loss)
$
(125,449
)
 
$
12,595

 
(138,044
)
 
*

Operating income margin %
(21.3
)%
 
1.2
%
 
 
 
 
Goodwill and Intangible asset impairment

 
125,092

 
125,092

 
*

Transaction expenses
865

 
480

 
(385
)
 
*

Loss on sale of assets
2,638

 
746

 
(1,892
)
 
*

Loss from operations
(128,952
)
 
(113,723
)
 
(15,229
)
 
(13.4
)%
Interest expense, net
27,410

 
29,945

 
2,535

 
8.5
 %
Foreign exchange gains and other, net
(21,341
)
 
(9,345
)
 
11,996

 
*

Deferred loan costs written off
2,978

 

 
(2,978
)
 
*

Other expense, net
9,047

 
20,600

 
11,553

 
56.1
 %
Loss before income taxes
(137,999
)
 
(134,323
)
 
(3,676
)
 
(2.7
)%
Income tax benefit
(56,051
)
 
(14,939
)
 
41,112

 
*

Net loss
(81,948
)
 
(119,384
)
 
37,436

 
31.4
 %
Less: Income (loss) attributable to non-controlling interest
30

 
(31
)
 
61

 
*

Loss attributable to common stockholders
$
(81,978
)
 
$
(119,353
)
 
$
37,375

 
31.3
 %
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
91,226

 
89,908

 
 
 
 
Diluted
91,226

 
89,908

 
 
 
 
Loss per share
 
 
 
 
 
 
 
Basic
$
(0.90
)
 
$
(1.33
)
 
 
 
 
Diluted
$
(0.90
)
 
$
(1.33
)
 
 
 
 
* not meaningful
 
 
 
 
 
 
 

42


Revenue
Our revenue for the year ended December 31, 2016 decreased $486.0 million, or 45.3%, to $587.6 million compared to the year ended December 31, 2015. The low commodity prices throughout 2016 resulted in a substantial reduction in activity as our customers’ budgets for capital and consumable equipment were significantly reduced. For the year ended December 31, 2016, our Drilling & Subsea segment, Completions segment, and Production & Infrastructure segment comprised 37.8%, 22.4% and 39.8% of our total revenue, respectively, compared to 43.7%, 26.5% and 29.8%, respectively, for the year ended December 31, 2015. The revenue changes by operating segment consisted of the following:
Drilling & Subsea segment — Revenue decreased $245.3 million, or 52.2%, to $224.4 million during the year ended December 31, 2016 compared to the year ended December 31, 2015. Approximately 60% of the decline in segment revenue was the result of lower sales volumes of our drilling products and was caused by the 48% decrease in U.S. average rig count compared to the prior year period. Lower demand for our remotely operated vehicles and associated systems and other offshore products, which was largely attributable to reduced investment in global offshore projects, resulted in lower sales volumes and was approximately 30% of our reduced segment revenue for the period. The remaining 10% reduction in revenue was due to lower product pricing to our customers and changes in foreign exchange rates.
Completions segment — Revenue decreased $153.4 million, or 53.8%, to $131.8 million during the year ended December 31, 2016 compared to the year ended December 31, 2015. Approximately 80% of the reduction in segment revenue was attributable to decreased volumes, as the global market experienced lower well completions activity, including in North America, and the remainder was due to lower product pricing to our customers. These items led to lower revenue from our casing and cementing equipment products sold to pressure pumping service providers and pressure control equipment.
Production & Infrastructure segment — Revenue decreased $86.7 million, or 27.1%, to $233.8 million during the year ended December 31, 2016 compared to the year ended December 31, 2015. Approximately 75% of the decrease in segment revenue was due to reduced sales volumes in production equipment and valves products. The decrease in exploration and production budgets led to lower sales of our surface production equipment and, to a lesser extent, lower sales of valve products to the upstream sector. The remaining 25% of the decline in segment revenue was due to reduced product pricing to our customers. The demand for our midstream and downstream valves has been more resilient through the downturn relative to our other product lines.
Segment operating income (loss) and segment operating margin percentage
Segment operating income (loss) for the year ended December 31, 2016 decreased $138.0 million, to a loss of $125.4 million compared to the year ended December 31, 2015. The 2016 results include total charges of $38.3 million related to several facility consolidations and closures, inventory write-downs across all product lines attributable to continuing lower activity levels, and severance paid to employees under our policy for reductions in force. In 2015, similar charges totaled $63.7 million. The segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue. Excluding the charges described above, the adjusted segment operating margin percentage decreased to (14.8)% for the year ended December 31, 2016 compared to 7.1% for the year ended December 31, 2015. We believe that adjusted operating margins excluding the costs described above are useful for assessing operating performance, especially when comparing periods. The change in operating margin percentage for each segment is explained as follows:
Drilling & Subsea segment — The operating margin percentage decreased to (23.6)% for the year ended December 31, 2016 from 0.6% for the year ended December 31, 2015. The years ended December 31, 2016 and 2015 included $12.6 million and $32.1 million, respectively, of inventory write-downs, severance and facility closure costs as described above. Excluding these charges, the adjusted operating margin percentage decreased to (18.0)%, for the year ended December 31, 2016, from 7.4% for the year ended December 31, 2015. The main driver for this decrease in adjusted operating margin percentage is the lower activity levels, which has caused a loss of manufacturing scale efficiencies and more intense competition for fewer sales opportunities reducing our prices.
Completions segment — The operating margin percentage decreased to (34.6)% for the year ended December 31, 2016 from 5.4% for the year ended December 31, 2015. The years ended December 31, 2016 and 2015 included $21.2 million and $25.2 million, respectively, of inventory write-downs and facility closure costs as described above. Excluding these charges, the adjusted operating margin percentage decreased to (18.6)%, for the year ended December 31, 2016, from 14.2% for the year ended December 31, 2015. The decrease in adjusted operating margin percentage is due to reduced operating leverage on lower volumes and pricing pressure especially on

43


consumable flow equipment sold to pressure pumping service companies. Also impacting margins were lower earnings from our investment in Global Tubing.
Production & Infrastructure segment — The operating margin percentage decreased to 0.3% for the year ended December 31, 2016, from 7.1% for the year ended December 31, 2015. The years ended December 31, 2016 and 2015 included $3.9 million and $5.1 million, respectively, of costs related to facility consolidation and severance as described above. Excluding these charges, the adjusted operating margin percentage decreased to 1.9%, for the year ended December 31, 2016, from 8.7% for the year ended December 31, 2015. The decrease in adjusted operating margin percentage was attributable to reduced operating leverage on lower volumes, and pricing pressure on our surface production equipment on lower activity levels. The operating margins for our valve products have been more resilient as demand for midstream and downstream valves remains steady.
Corporate — Selling, general and administrative expenses for Corporate decreased $0.6 million, or 2.3%, for the year ended December 31, 2016 compared to the year ended December 31, 2015 due to lower personnel costs and lower professional fees. Corporate costs include, among other items, payroll related costs for general management and management of finance and administration, legal, human resources and information technology; professional fees for legal, accounting and related services; and marketing costs.
Other items not included in segment operating income
Several items are not included in segment operating income, but are included in total operating income (loss). These items include goodwill and intangible asset impairments, transaction expenses, and gains/losses from the disposal of assets. Transaction expenses include legal, advisory and other costs incurred in acquiring businesses which are not considered to be part of segment operating income (loss). These costs were $0.9 million and $0.5 million for the years ended December 31, 2016 and 2015, respectively. In the year ended December 31, 2016, we recognized a net loss of $2.6 million on sales of assets, primarily related to plant consolidations.
The 2015 impairment losses for intangible assets and goodwill were $1.9 million and $123.2 million, respectively. The intangible assets that were written off related to certain trade names that were no longer in use. Due to the further deterioration of market conditions for our products, the goodwill impairment test showed that goodwill in our subsea product line was impaired, and based on a valuation of the applicable assets, we recorded a charge in the fourth quarter 2015. No impairment losses were recorded on goodwill or indefinite-lived intangible assets for the year ended December 31, 2016.    
Other income and expense
Other income and expense includes interest expense, and foreign exchange gains and losses. We incurred $27.4 million of interest expense during the year ended December 31, 2016, a decrease of $2.5 million from the year ended December 31, 2015 on lower outstanding indebtedness and lower commitment fees on the unused portion of our revolving credit line. The foreign exchange gain was $21.3 million for the year ended December 31, 2016, an increase of $12.0 million from the year ended December 31, 2015, and was primarily the result of movements in the British pound and the Euro relative to the U.S. dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S. dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than U.S. dollar. In year ended December 31, 2016, we wrote off $3.0 million of deferred financing costs as a result of the amendments to our credit facility in the first and fourth quarter of 2016 which reduced the size of our undrawn revolving credit line.
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 a benefit of 40.6% and a provision of 11.1% for the years ended December 31, 2016 and 2015, respectively. The effective tax rate for the year ended December 31, 2016 is significantly different than the comparable period in 2015 primarily due to net operating losses incurred in the U.S. offset by earnings generated outside the U.S. in jurisdictions subject to lower tax rates. In addition, the majority of the goodwill impairment loss in 2015 was not tax deductible. The effective tax rate can vary from period to period depending on our relative mix of U.S. and non-U.S. earnings. Excluding the goodwill and intangible asset impairment and the charges discussed above in the segment operating margin discussion, our effective tax rate would have been approximately 22% for the year ended December 31, 2015.

44


Liquidity and capital resources
Sources and uses of liquidity
Our internal sources of liquidity are cash on hand and cash flows from operations, while our primary external sources have included our credit facility, trade credit, and the issuance of our senior notes described below. Our primary uses of capital have been for acquisitions, ongoing maintenance and growth capital expenditures, inventories and sales on credit to our customers. We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue to access outside sources of capital.
At December 31, 2017, we had cash and cash equivalents of $115.2 million and total debt of $507.9 million. We believe that cash on hand and cash generated from operations will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations for the foreseeable future.
The amount of capital expenditures incurred in 2017 was $26.7 million, including our investment in a new production facility in Saudi Arabia. Our total 2018 capital expenditure budget is approximately $35.0 million, which consists of, among other items, investments in certain manufacturing facilities, replacing end of life machinery and equipment, continuing the implementation of our enterprise resource planning solution globally, and general capital expenditures. This budget does not include expenditures for potential business acquisitions. We believe cash flows from operations should be sufficient to fund our capital requirements for 2018.
Although we do not budget for acquisitions, pursuing growth through acquisitions is a significant part of our business strategy. We expanded and diversified our product portfolio with the acquisition of three businesses in 2017 for total cash and stock consideration of approximately $340.7 million, net of cash acquired. We used cash on hand, borrowings under our credit facility, and the issuance of shares to finance these acquisitions. We continue to actively review acquisition opportunities on an ongoing basis, and we may fund future acquisitions with cash and/or equity. Our ability to make significant additional acquisitions for cash may require us to pursue additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.
In October 2014, our board of directors approved a program for the repurchase of outstanding shares of our common stock with an aggregate purchase amount of up to $150 million. We have purchased approximately 4.5 million shares of stock under this program for aggregate consideration of approximately $100.2 million. Remaining authorization under this program is $49.8 million.
Our cash flows for the years ended December 31, 2017, 2016 and 2015 are presented below (in millions):
  
Year ended December 31,
 
2017
 
2016
 
2015
Net cash provided by (used in) operating activities
$
(40.0
)
 
$
64.7

 
$
155.9

Net cash used in investing activities
(188.0
)
 
(11.1
)
 
(91.3
)
Net cash provided by (used in) financing activities
100.6

 
86.2

 
(26.9
)
Effect of exchange rate changes on cash
8.2

 
(14.6
)
 
(5.0
)
Net increase (decrease) in cash and cash equivalents
(119.2
)
 
125.2

 
32.7

Free cash flow, before acquisitions
$
(64.7
)
 
$
57.7

 
$
125.4


45


Free cash flow, a non-GAAP financial measure, is defined as net cash provided by operating activities, less capital expenditures for property and equipment net of proceeds from sale of property and equipment and other, plus the payment of contingent consideration included in operating activities. Management believes free cash flow is an important measure because it encompasses both profitability and capital management in evaluating results. Free cash flow should not be considered an alternative to net cash provided by operating activities as a cash flow measurement. A reconciliation of cash flow from operating activities to free cash flow, before acquisitions, is as follows (in millions):
  
Year ended December 31,
 
2017
 
2016
 
2015
Cash flow from operating activities