FORUM ENERGY TECHNOLOGIES, INC.FET
FORUM ENERGY TECHNOLOGIES, INC. Goodwill & Intangibles Disclosure
Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill were as follows (in thousands):
Drilling & Downhole | Completions | Production | Total | |||||||||
Goodwill balance at December 31, 2017 | $ | 494,983 | $ | 240,816 | $ | 19,446 | $ | 755,245 | ||||
Acquisitions, net of dispositions | 1,753 | 20,559 | — | 22,312 | ||||||||
Impairment | (298,789 | ) | — | — | (298,789 | ) | ||||||
Impact of non-U.S. local currency translation | (6,796 | ) | (2,095 | ) | (230 | ) | (9,121 | ) | ||||
Goodwill balance at December 31, 2018 | 191,151 | 259,280 | 19,216 | 469,647 | ||||||||
Acquisitions, net of dispositions | 427 | 187 | — | 614 | ||||||||
Impairment | (191,485 | ) | (260,238 | ) | (19,287 | ) | (471,010 | ) | ||||
Impact of non-U.S. local currency translation | (93 | ) | 771 | 71 | $ | 749 | ||||||
Goodwill balance at December 31, 2019 | $ | — | $ | — | $ | — | $ | — | ||||
We perform our annual impairment tests of goodwill as of October 1 or when there is an indication an impairment may have occurred. Relevant events and circumstances which could be an indicator of impairment include: macroeconomic
conditions; industry and market conditions; commodity prices; operating cost factors; overall financial performance; the impact of dispositions and acquisitions; valuation of the Company’s common stock and other entity-specific events.
During the third quarter 2019, there was a significant decline in the quoted market prices of our common stock and a continued decline in U.S. onshore drilling and completions activity, which led us to evaluate all of our reporting units for a triggering event as of September 30, 2019. Upon evaluation, we considered these developments to be a triggering event that required us to update our goodwill impairment evaluation for all reporting units as of September 30, 2019 based on our current forecast and expectations for market conditions. As a result, we determined that the carrying value of each of our Downhole, Stimulation and Intervention, Coiled Tubing, Production Equipment and Valve Solutions reporting units exceeded their respective estimated fair value and we recorded non-cash goodwill impairment charges of $191.5 million, $126.3 million, $133.9 million, $4.6 million, and $14.7 million, respectively. These charges are included in Impairments of goodwill, intangible assets, property and equipment in the consolidated statements of comprehensive loss. Following these impairment charges, there is no remaining goodwill balance for any of our reporting units.
During the fourth quarter 2018, we completed the annual evaluation of goodwill related to all of our reporting units as of October 1, 2018, our annual testing date. Based on this evaluation, we determined that the carrying value of our Drilling reporting unit exceeded its estimated fair value. As a result, we recorded a non-cash impairment charge of $245.4 million to write-off the goodwill in our Drilling reporting unit. Additionally, during the fourth quarter 2018, there was a significant decline in oil prices, lowered industry expectations for U.S. drilling and completions activities and a substantial decline in the quoted market prices of our common stock, which led us to evaluate all of our reporting units for a triggering event as of December 31, 2018. Upon evaluation, we considered these developments to be a triggering event for our Downhole reporting unit that required us to update our goodwill impairment evaluation as of December 31, 2018 based on our current forecast and expectations for market conditions. As a result, we determined that the carrying value of our Downhole reporting unit exceeded its estimated fair value and we recorded a non-cash impairment charge of $53.4 million to write-off a portion of the goodwill in our Downhole reporting unit. These charges are included in Impairments of goodwill, intangible assets, property and equipment in the consolidated statements of comprehensive loss.
In the second quarter of 2017, there was a decline in oil prices and a developing consensus view that production from lower cost oil basins would be sufficient to meet anticipated demand for a longer period, delaying the need for production from higher cost basins. With this indication of further delays in the recovery of the offshore market, we performed an impairment test and determined that the carrying value of the goodwill in our Subsea reporting unit was impaired. As a result, we recorded an impairment charge of $68.0 million in the second quarter of 2017.
Accumulated impairment losses on goodwill were $1,006.6 million, $535.6 million and $236.8 million as of December 31, 2019, 2018, and 2017, respectively.
The fair values used in each impairment analysis were determined using the net present value of the expected future cash flows for each reporting unit (classified within level 3 of the fair value hierarchy). We determine the fair value of each reporting unit using a combination of discounted cash flow and guideline public company methodologies, which requires significant assumptions and estimates about the future operations of each reporting unit. The assumptions about future cash flows and growth rates are based on our current estimates, strategic plans and management’s estimates for future activity levels. Forecasted cash flows in future periods were estimated using a terminal value calculation, which considered long-term earnings growth rates.
Intangible assets
At December 31, 2019 and 2018, intangible assets consisted of the following, respectively (in thousands):
December 31, 2019 | |||||||||||||
Gross carrying amount | Accumulated amortization | Net intangibles | Amortization period (in years) | ||||||||||
Customer relationships | $ | 281,052 | $ | (110,410 | ) | $ | 170,642 | 10 - 15 | |||||
Patents and technology | 92,498 | (20,819 | ) | 71,679 | 5 - 19 | ||||||||
Non-compete agreements | 190 | (100 | ) | 90 | 2 - 6 | ||||||||
Trade names | 43,284 | (21,015 | ) | 22,269 | 7 - 19 | ||||||||
Distributor relationships | 22,160 | (18,866 | ) | 3,294 | 15 - 22 | ||||||||
Trademark | 5,089 | (763 | ) | 4,326 | 15 | ||||||||
Intangible Assets Total | $ | 444,273 | $ | (171,973 | ) | $ | 272,300 | ||||||
December 31, 2018 | |||||||||||||
Gross carrying amount | Accumulated amortization | Net intangibles | Amortization period (in years) | ||||||||||
Customer relationships | $ | 337,546 | $ | (110,228 | ) | $ | 227,318 | 4 - 15 | |||||
Patents and technology | 104,394 | (17,148 | ) | 87,246 | 5 - 17 | ||||||||
Non-compete agreements | 6,245 | (5,600 | ) | 645 | 3 - 6 | ||||||||
Trade names | 47,493 | (18,107 | ) | 29,386 | 10 - 15 | ||||||||
Distributor relationships | 22,160 | (17,602 | ) | 4,558 | 8 - 15 | ||||||||
Trademark | 10,319 | (424 | ) | 9,895 | 15 - Indefinite | ||||||||
Intangible Assets Total | $ | 528,157 | $ | (169,109 | ) | $ | 359,048 | ||||||
Intangible assets with definite lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
In the third quarter of 2019, due to the impairment indicators discussed above, we determined that certain intangibles in our Stimulation and Intervention and our Valve Solutions reporting units were impaired. As a result, we recognized an aggregate $53.5 million of impairment charges on these intangible assets (primarily customer relationships, technology and trademarks) in the third quarter of 2019.
In the fourth quarter of 2018, due to the impairment indicators discussed above, we determined that certain intangible assets in our Downhole Technologies reporting unit were impaired. As a result, we recognized $50.2 million of impairment charges on these intangible assets (primarily customer relationships and trade names) in the fourth quarter of 2018. In the second quarter of 2018, we made the decision to exit specific products within the Subsea Technologies and Downhole Technologies product lines. As a result, we recognized $14.5 million of impairment losses on certain intangible assets (primarily customer relationships).
In 2017, impairment charges totaling $1.1 million were recorded on certain intangible assets within the Subsea Technologies and Downhole Technologies reporting units related to management’s decision to abandon specific product lines.
All of the intangible asset impairment charges discussed above are included in Impairments of goodwill, intangible assets, property and equipment in the consolidated statements of comprehensive loss. The amount of the impairment charges were measured as the difference between the carrying value and the estimated fair value of the assets. The fair value was determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows (classified within level 3 of the fair value hierarchy).
Amortization expense was $32.6 million, $41.4 million and $30.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. The estimated future amortization expense for the next five years is as follows (in thousands):
Year ending December 31, | Amount | |||
2020 | $ | 27,974 | ||
2021 | 26,951 | |||
2022 | 25,976 | |||
2023 | 24,413 | |||
2024 | 22,872 | |||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2019 | Feb 25, 2020 | Showing above |
| 2018 | Feb 28, 2019 | |
| 2017 | Feb 27, 2018 | |
| 2016 | Feb 28, 2017 | |
| 2015 | Feb 29, 2016 | |
About Goodwill & Intangibles Disclosures
Goodwill and intangible asset disclosures reveal the premium paid in acquisitions and how management assesses whether that premium retains its value. Since goodwill is no longer amortized under US GAAP, the annual impairment test is the only mechanism that adjusts carrying values downward — making the assumptions behind that test critically important for investors.
Key signals: a history of goodwill impairments suggests management consistently overpays for acquisitions. Watch the gap between reporting unit fair value and carrying amount — when fair value exceeds carrying amount by less than 10-20%, a small decline in business performance could trigger a write-down. For finite-lived intangibles, examine useful life assumptions across customer relationships, technology, and trade names; aggressive estimates inflate near-term earnings. Compare total intangibles-to-total-assets ratios against peers to assess acquisition dependency. Rising goodwill as a percentage of equity can signal balance sheet fragility.