Forum Energy Technologies, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; filed February 27, 2017. The filing also provides unaudited fourth-quarter 2016 results. Forum is a global oilfield products company serving drilling, subsea, completions, production and infrastructure markets through Drilling & Subsea, Completions, and Production & Infrastructure segments.
Business context
- Demand remained depressed following the oil-price decline that began in mid-2014. Lower customer capital budgets, reduced rig activity, offshore project delays and pricing pressure affected most product lines.
- 2016 revenue mix was approximately 38% Drilling & Subsea, 22% Completions and 40% Production & Infrastructure. Geographic revenue was approximately 62% United States, 7% Canada and 31% other international markets.
- Forum had approximately 2,050 employees at December 31, 2016. No customer represented more than 10% of consolidated revenue.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|
| Revenue | $587.6 million | $1,073.7 million | Down 45.3% |
| Gross profit | $99.7 million | $262.7 million | Down 62.0% |
| Gross margin | 17.0% | 24.5% | Down 7.5 percentage points |
| Operating loss | $129.0 million | $113.7 million | Worsened by $15.2 million |
| Operating margin | (21.9%) | (10.6%) | Down 11.3 percentage points |
| Net loss attributable to common stockholders | $82.0 million | $119.4 million | Improved by $37.4 million |
| Diluted loss per share | $0.90 | $1.33 | Improved |
| Cash flow from operations | $64.7 million | $155.9 million | Down 58.5% |
| Free cash flow before acquisitions | $57.7 million | $125.4 million | Down 54.0% |
Liquidity, debt and balance sheet
- Cash and cash equivalents were $234.4 million at December 31, 2016, compared with $109.2 million at December 31, 2015.
- Total debt was $396.9 million, consisting primarily of $400.0 million of 6.25% senior unsecured notes due October 2021, net of debt issuance costs and including an unamortized premium.
- The amended revolving credit facility was reduced to $140.0 million. Forum had no borrowings outstanding, $17.0 million of letters of credit and stated additional borrowing capacity of $103.7 million at year-end. The facility matures in November 2018 and availability may be reduced based on future EBITDA.
- Forum reported compliance with all credit-facility financial covenants and expected continued compliance for the following twelve months.
- Working capital included $338.6 million of inventory, net of a $68.4 million reserve, and $105.3 million of net trade receivables.
- Capital expenditures were $16.8 million in 2016. Management budgeted approximately $30.0 million for 2017, excluding potential acquisitions.
- No cash dividends were declared or paid. The credit facility prohibits cash dividends and share repurchases.
Material changes versus the prior comparable period
- Revenue declined in all segments: Drilling & Subsea fell 53.2% to $227.9 million; Completions fell 52.3% to $127.4 million; and Production & Infrastructure fell 27.1% to $233.8 million.
- Segment operating income declined from $12.6 million of income to a $125.4 million loss. Segment operating margins fell from 1.2% to negative 21.3%.
- Forum recorded $38.3 million of facility consolidation, closure, inventory write-down and severance charges in 2016, compared with $63.7 million in 2015.
- Unlike 2015, when Forum recorded a $123.2 million subsea goodwill impairment and a $1.9 million intangible-asset impairment, no goodwill or intangible-asset impairment was recorded in 2016. Management cautioned that further market deterioration could result in future subsea impairment.
- Inventory declined from $424.1 million to $338.6 million, while the inventory reserve remained substantial at $68.4 million.
- Forum raised approximately $85.1 million, net of expenses, through a December 2016 public offering of approximately 4.0 million common shares.
- Bookings declined to approximately $596.8 million from $870.0 million, and year-end backlog declined to approximately $165 million from $183 million. Most backlog was scheduled for delivery within six months and was generally subject to customer change or termination.
- Global Tubing, Forum’s equity-method investment, reported revenue of $71.5 million and net income of $3.8 million in 2016, compared with revenue of $103.5 million and net income of $30.9 million in 2015. Forum’s equity earnings declined to $1.8 million from $14.8 million.
Fourth-quarter 2016
| Metric | Q4 2016 |
|---|
| Revenue | $147.2 million |
| Gross profit | $30.6 million |
| Operating loss | $24.8 million |
| Net loss attributable to common stockholders | $12.5 million |
| Diluted loss per share | $0.14 |
Guidance, outlook and management commentary
- Management cited signs of a possible recovery, including higher fourth-quarter inbound orders and customer capital-budget increases following the OPEC production agreement.
- Management expected North American land activity to lead any recovery, while high-cost offshore and certain international markets were expected to lag.
- The pace and strength of the recovery remained uncertain entering 2017. Management stated that oil prices were not expected to increase materially in 2017 based on market reports available at filing.
- Management believed cash on hand and operating cash flow would fund operations, working capital, 2017 capital expenditures and financing obligations for the foreseeable future. It expected an approximately $33 million tax refund in the third quarter of 2017 from carrying back the 2016 U.S. net operating loss.
- Forum acquired substantially all assets of Cooper Valves and interests in Innovative Valve Components on January 9, 2017 for aggregate consideration of $14.5 million.
Principal risks, contingencies and unusual items
- Results are highly sensitive to oil and natural gas prices, rig counts, customer capital spending, offshore activity, pricing competition and customer financial condition.
- Backlog may be delayed, reduced or terminated; the company may not collect all cancellation fees or amounts owed by financially stressed customers.
- Substantial inventory, including finished goods and raw materials, may become excess or obsolete if demand remains weak.
- Further declines in commodity prices or equity valuation could trigger additional goodwill or long-lived-asset impairment charges, particularly in subsea operations.
- Debt covenants restrict additional borrowing, dividends, repurchases, investments, asset sales and other corporate actions. The $400 million senior notes mature in 2021.
- Forum is exposed to environmental, health and safety, hydraulic-fracturing, offshore-drilling, climate-change, anti-corruption, trade, tax, currency and supplier-concentration risks.
- Asbestos litigation involved fewer than 200 pending lawsuits at year-end. The subsidiary reported a $0.3 million net liability for estimated indemnity costs associated with current and anticipated claims over the next five years; actual costs could be materially higher. The filing states that annual out-of-pocket asbestos costs had been less than $0.2 million over the prior five years.
- A subsidiary is involved in the Portland Harbor Superfund matter; an indemnitor has assumed the defense, but potential liability and the indemnitor’s ability to perform could not be quantified.
- The company recorded a $45.9 million net foreign-currency translation loss in other comprehensive income in 2016, primarily from weakening of the British pound and euro against the U.S. dollar.
Investor verification checklist
- Verify whether North American rig activity, customer spending and oil prices support the anticipated 2017 recovery.
- Track operating cash flow, free cash flow, inventory reserves and receivables collections against the company’s liquidity assumptions.
- Review borrowing-base availability, EBITDA-related covenant headroom and the November 2018 credit-facility maturity.
- Assess the ability to refinance or repay the $400 million senior notes due in 2021.
- Monitor backlog conversion, customer cancellations and the sharp decline in bookings.
- Evaluate potential future goodwill, intangible-asset and facility-related charges, especially for subsea operations.
- Confirm receipt and timing of the expected approximately $33 million tax refund and the utilization of tax attributes.
- Review the financial impact and integration results of the January 2017 Cooper Valves and Innovative Valve Components acquisition.
- Monitor asbestos, environmental, regulatory and other litigation exposures, including insurance recoverability.
