Forum Energy Technologies, Inc. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies is a global oilfield products company serving drilling, downhole, subsea, completions, production and infrastructure markets. The unaudited filing covers the three and six months ended June 30, 2019, compared primarily with the same periods in 2018. Beginning in the first quarter of 2019, the company reported three recast segments: Drilling & Downhole, Completions, and Production.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $245.6 million | $274.0 million | $517.5 million | $524.2 million |
| Gross profit | $63.2 million | $72.7 million | $133.3 million | $140.0 million |
| Gross margin | 25.7% | 26.5% | 25.8% | 26.7% |
| Operating income (loss) | $0.7 million | $(11.7) million | $5.0 million | $(18.4) million |
| Net income (loss) | $(13.7) million | $(15.3) million | $(21.6) million | $12.7 million |
| Diluted EPS | $(0.12) | $(0.14) | $(0.20) | $0.11 |
| Operating cash flow | Not separately provided for the quarter | $40.8 million | $(25.7) million |
At June 30, 2019, cash and cash equivalents were $37.4 million, total debt was $479.2 million, and revolving-credit availability was $205.1 million. The $400.0 million of 6.25% senior notes mature in October 2021; the revolving facility matures in July 2021, subject to a potential extension. The borrowing base was $299.4 million, with $79.0 million drawn and $15.2 million supporting letters of credit.
Total assets were $1.82 billion and total equity was $1.02 billion. Adoption of ASC 842 added approximately $54.0 million of operating lease assets and $64.5 million of operating lease liabilities at January 1, 2019; operating lease liabilities were $53.2 million at June 30, 2019.
Material changes versus the prior comparable period
- Second-quarter revenue declined 10.3%, driven by lower Completions revenue of 18.5%, lower Production revenue of 6.0%, and lower Drilling & Downhole revenue of 4.8%. The six-month revenue decline was 1.3%.
- Second-quarter operating income improved by $12.4 million, primarily because the prior-year period included a $14.5 million intangible-asset impairment. Six-month operating income improved by $23.4 million, including the absence of that impairment and a $4.6 million contingent-consideration benefit in 2019.
- Six-month net results deteriorated versus 2018 because the prior-year period included a $33.5 million gain from contributing the subsea rentals business and an $11.3 million tax benefit, including a $15.9 million U.S. tax-reform adjustment. The 2019 period included $10.1 million of tax expense and a $5.9 million increase in the valuation allowance for U.S. and Saudi Arabia deferred tax assets.
- Operating cash flow improved to $40.8 million from a $25.7 million use of cash, primarily due to a $13.7 million working-capital source of cash versus a $55.2 million use in the prior-year period.
- Net debt repayments were approximately $41.1 million in the first half of 2019. Capital expenditures were $9.3 million, compared with $14.1 million in the prior-year period.
- Orders declined to $224.6 million in the second quarter from $310.0 million and to $466.8 million for six months from $571.0 million. The largest six-month order declines were in Completions and Production.
Outlook, commentary, risks and unusual items
Management stated that lower oil prices and customer budget discipline reduced 2019 U.S. drilling and completions activity. Average U.S. rig activity in the second quarter was 5% below both the first quarter of 2019 and the second quarter of 2018, and management projected activity for the remainder of 2019 to remain below prior-year levels. No specific quantitative revenue or earnings guidance was provided.
Demand remains sensitive to oil and natural-gas prices, rig counts, well-completion activity, customer capital budgets, inventory reductions, order cancellations or deferrals and the availability of idle equipment. Steel tariffs increased raw-material costs, particularly in Coiled Tubing and Valve Solutions; the company is attempting to mitigate the impact through supply-chain diversification.
Other significant items include the 2018 acquisitions of Houston Global Heat Transfer and ESP Completion Technologies, the 2018 contribution of the subsea rentals business, and the 2019 contingent-consideration remeasurement benefit. Legal reserves were immaterial, and management did not expect pending proceedings to materially affect financial position, results or cash flows. Foreign-currency and variable-interest-rate exposure remain market risks. Management concluded that disclosure controls were effective as of June 30, 2019.
Important facts for investors to verify
- Ability to sustain positive operating cash flow while revenue, orders and U.S. activity remain below prior-year levels.
- Refinancing or repayment capacity for the $400.0 million senior notes due October 2021 and the revolving facility maturity in 2021.
- Compliance with borrowing-base and fixed-charge coverage requirements if credit-facility availability declines.
- Impact of steel tariffs, customer inventory reductions, energy-price volatility and international demand on segment margins.
- Recoverability of goodwill, intangible assets and deferred tax assets, including the $5.9 million valuation-allowance increase recorded in 2019.
- Comparability of reported results because of the 2018 acquisitions, the subsea rentals disposition and the change in segment presentation.