Forum Energy Technologies, Inc. — 2016 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 3, 2016. The unaudited statements cover a global oilfield products company serving drilling, subsea, completions, production and infrastructure markets. Beginning in 2016, the company reported three segments: Drilling & Subsea, Completions, and Production & Infrastructure.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $159.4 million | $348.1 million | (54.2%) |
| Gross profit | $34.6 million | $109.1 million | (68.3%) |
| Gross margin | 21.7% | 31.3% | Down 9.6 points |
| Operating income (loss) | $(25.0) million | $40.2 million | Declined $65.2 million |
| Operating margin | (15.7%) | 11.6% | Down 27.3 points |
| Net income (loss) | $(22.9) million | $28.7 million | Declined $51.6 million |
| Net income (loss) attributable to common stockholders | $(22.9) million | $28.7 million | Declined $51.6 million |
| Diluted EPS | $(0.25) | $0.31 | Declined $0.56 |
| Cash flow from operations | $26.9 million | $48.5 million | Down $21.6 million |
- Segment revenue was $65.3 million for Drilling & Subsea, $34.3 million for Completions and $60.5 million for Production & Infrastructure. Segment operating margins were (15.0%), (18.8%) and (2.3%), respectively.
- Inbound orders declined to $141.0 million from $287.7 million, including decreases in all three segments.
- Cash and cash equivalents totaled $132.0 million at March 31, 2016, compared with $109.2 million at December 31, 2015.
- Total debt was $396.3 million, consisting primarily of $400.0 million of 6.25% senior notes due October 2021, net of premium and issuance costs. The company had no borrowings under its revolving credit facility and $10.5 million of outstanding letters of credit.
- On February 25, 2016, the revolving credit facility was amended and reduced from $600.0 million to $200.0 million. Following a subsequent borrowing-base audit, the company reported $189.5 million of additional borrowing capacity, subject to facility limitations.
- Capital expenditures were $4.3 million, compared with $11.4 million in the prior-year quarter. Management identified an approximately $20.0 million capital expenditure budget for 2016, excluding acquisitions.
- Net cash increased $22.7 million during the quarter. Investing cash use was $4.0 million, compared with $71.6 million in the prior-year period, which included the J-Mac acquisition.
- Total assets were $1.85 billion and total equity was $1.24 billion at March 31, 2016. Inventory was $416.1 million after a $72.3 million reserve.
Material changes versus the prior comparable period
- Revenue fell 54.2%, reflecting sharply lower North American drilling and completion activity, delayed deepwater projects, lower surface production equipment demand and pricing pressure.
- U.S. average active rigs declined 61% year over year to 551, while global active rigs declined to 1,740 from 3,007. Average WTI and Brent prices fell 31% and 37%, respectively, year over year.
- All operating segments moved from operating profit in Q1 2015 to operating loss in Q1 2016. Lower volumes reduced manufacturing scale efficiency and increased competitive pricing pressure.
- Foreign exchange gains decreased to $1.4 million from $6.7 million. The company also recorded a $2.6 million write-off of deferred financing costs related to the amended credit facility.
- Operating cash flow declined despite favorable working-capital movements, primarily because of the substantially lower earnings.
- Unlike Q1 2015, the company completed no acquisition during Q1 2016. In April 2016, it acquired the wholesale completion packer product line of Team Oil Tools, Inc.; financial terms were not provided in the filing.
- The company realigned its reporting segments, separating Completions from Drilling & Subsea. Prior periods were to be presented retrospectively under the revised structure.
Outlook, commentary, risks and unusual items
- Management stated that low oil and natural gas prices, reduced customer capital and operating budgets, declining rig activity, order cancellations or deferrals and delayed projects could continue to materially adversely affect results throughout 2016.
- Although oil prices had risen from February lows by quarter-end, management reported no meaningful recovery in industry activity or bookings. It indicated that revenue could improve if oversupply subsides and prices continue to increase, but provided no quantitative revenue or earnings guidance.
- Management expects cash on hand and operating cash flow to fund operations, working capital, capital expenditures and financing obligations for the foreseeable future. However, lower adjusted EBITDA could reduce borrowing capacity under the amended facility.
- Cost-reduction actions included facility consolidation, severance and closure costs. Q1 2016 included approximately $0.5 million of severance and facility closure costs in Drilling & Subsea and $2.0 million of facility-consolidation costs in Production & Infrastructure.
- The company reported compliance with all financial covenants at March 31, 2016. Its amended credit facility prohibits share repurchases; no shares were repurchased during the quarter.
- Material risks include energy-price volatility, customer spending reductions, competition and pricing pressure, demand uncertainty, order cancellations or deferrals, execution and integration of acquisitions, foreign-currency exposure, availability of capital and potential environmental or operating liabilities.
- Legal reserves were immaterial, and management did not expect pending or threatened proceedings to have a material adverse effect. Disclosure controls were deemed effective, with no material changes in internal control over financial reporting.
- The company was evaluating the effects of new accounting standards concerning revenue recognition, share-based payments and leases; the filing did not provide a quantified impact.
Investor verification points
- Verify whether oil-price improvement translates into higher rig counts, customer spending, bookings and revenue in subsequent quarters.
- Monitor segment margins, particularly whether Drilling & Subsea and Completions return to positive operating margins as volumes recover.
- Assess liquidity and covenant headroom, including the borrowing-base availability and the potential effect of lower adjusted EBITDA on credit capacity.
- Review the maturity, refinancing risk and market value of the senior notes, whose carrying value was approximately $402.3 million versus an estimated fair value of approximately $346.0 million at March 31, 2016.
- Evaluate inventory levels and reserves, goodwill and intangible assets for potential impairment if market conditions remain depressed.
- Confirm the financial terms and contribution of the April 2016 Team Oil Tools product-line acquisition.
- Track the effect of facility-consolidation and other restructuring actions, as well as the company’s ability to achieve its approximately $20.0 million 2016 capital expenditure plan.