Forum Energy Technologies, Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. is a global oilfield products company serving drilling, subsea, completions, production and infrastructure markets. The unaudited report covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Beginning in 2016, the company reported three segments: Drilling & Subsea, Completions, and Production & Infrastructure.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $138.3 million | $245.0 million | $440.4 million | $877.5 million |
| Gross profit | $29.3 million | $65.8 million | $69.1 million | $259.8 million |
| Gross margin | 21.2% | 26.8% | 15.7% | 29.6% |
| Operating income (loss) | $(26.2) million | $12.2 million | $(104.1) million | $74.9 million |
| Net income (loss) | $(18.0) million | $6.7 million | $(69.4) million | $44.2 million |
| Net loss attributable to common stockholders | $(18.0) million | $6.7 million | $(69.5) million | $44.3 million |
| Diluted EPS | $(0.20) | $0.07 | $(0.77) | $0.48 |
| Cash flow from operations | Not separately provided for the quarter | $44.2 million | $117.7 million |
Q3 segment operating loss was $23.7 million, or a negative 17.1% margin, versus $12.4 million of operating income and a 5.1% margin in the prior-year quarter. Nine-month segment operating loss was $101.3 million, or a negative 23.0% margin, versus $75.0 million of operating income and an 8.6% margin in 2015.
At September 30, 2016, cash and cash equivalents were $132.5 million, total current assets were $660.7 million and current liabilities were $126.4 million. Total debt was $396.5 million, consisting primarily of $400.0 million of 6.25% senior notes due October 2021. Cash flow resulted in approximately $264.0 million of net debt. The company had no borrowings under its revolving credit facility, $17.3 million of outstanding letters of credit and approximately $108.0 million of additional borrowing capacity, subject to facility limitations.
Material changes versus the prior comparable period
- Q3 revenue declined 43.6%; nine-month revenue declined 49.8%, reflecting lower drilling, completions and production activity, reduced customer spending and pricing pressure.
- Q3 revenue declined 54.1% in Drilling & Subsea, 39.7% in Completions and 31.4% in Production & Infrastructure. Nine-month declines were 57.2%, 58.5% and 30.0%, respectively.
- All three segments experienced lower margins in Q3. Lower volumes reduced operating leverage, while competition increased and product pricing weakened.
- Operating results included significant inventory write-downs, facility consolidation and severance costs. For the nine months, inventory write-downs were $24.5 million, compared with $6.6 million in 2015.
- Foreign exchange gains increased to $14.5 million for the nine months from $5.5 million in 2015, partly offsetting operating weakness.
- Operating cash flow fell to $44.2 million from $117.7 million, although working-capital reductions and lower capital spending supported cash generation.
- Capital expenditures were $13.4 million versus $28.0 million in the prior-year period. Investing cash use declined to $12.4 million from $87.2 million, principally because the 2016 acquisition cost $2.7 million versus $60.8 million for the 2015 acquisition.
- Inventories declined to $355.2 million from $424.1 million at December 31, 2015, while accounts receivable declined to $100.3 million from $138.6 million.
Guidance, outlook, risks and unusual items
- Management expected depressed oilfield conditions to materially affect earnings through at least the remainder of 2016 and into 2017. North American drilling and completions activity improved sequentially, but international and subsea activity had not recovered materially.
- Average Q3 2016 U.S. active rigs were 479, down 45% from 866 in Q3 2015; international rigs were 936, down 17% from 1,131.
- Q3 inbound orders were $145.2 million, down from $213.0 million; nine-month orders were $414.5 million, down from $699.0 million.
- The 2016 capital expenditure budget was approximately $20.0 million. Management expected cash on hand and operating cash flow to fund operations, working capital, capital expenditures and financing obligations for the foreseeable future.
- The company expected an approximately $33 million tax refund in the third quarter of 2017 from carrying back its 2016 U.S. net operating loss. The related $32.8 million tax benefit was reclassified to an income tax receivable.
- The company amended its credit facility in February 2016, reducing total commitments from $600 million to $200 million and writing off $2.6 million of deferred financing costs. Future borrowing capacity could be reduced or eliminated if adjusted EBITDA does not improve.
- A $2.1 million write-down was recorded for Robstown, Texas land and buildings classified as held for sale; the assets were expected to be sold in the fourth quarter of 2016.
- The company completed a $3.0 million acquisition of Team Oil Tools’ wholesale completion packers business in April 2016. Management stated that the acquisition was not material to reported results.
- Key risks include continued oil and gas price weakness, customer order cancellations or deferrals, pricing competition, low rig activity, delayed offshore projects, foreign currency movements, access to capital, covenant constraints, environmental and operating liabilities, and the ability to realize forecast tax refunds and cost savings.
- Management reported effective disclosure controls and procedures as of September 30, 2016, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether oilfield activity and inbound orders continued to recover after September 30, 2016, particularly in North America versus international and subsea markets.
- Whether operating margins improved after the inventory write-downs, facility closures and severance actions, and whether additional restructuring charges were incurred.
- The sustainability of positive operating cash flow given the substantial decline in earnings and the company’s reliance on working-capital reductions.
- The company’s compliance with credit-facility covenants and the amount of borrowing capacity available as adjusted EBITDA changes.
- The timing and collectability of the approximately $33 million expected tax refund.
- Progress and proceeds from the planned sale of the Robstown assets and any other assets or operations held for sale.
- Potential impairment risk for the company’s $661.0 million of goodwill and $225.5 million of intangible assets amid prolonged industry weakness.