Forum Energy Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. is a global oilfield products company serving subsea, drilling, completion, production and infrastructure markets. It operates through Drilling & Subsea and Production & Infrastructure segments. This unaudited report covers the three and nine months ended September 30, 2015, compared primarily with the corresponding 2014 periods.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $245.0 million | $468.8 million | $877.5 million | $1,301.0 million |
| Gross profit | $65.8 million | $152.0 million | $259.8 million | $418.0 million |
| Gross margin | 26.8% | 32.4% | 29.6% | 32.1% |
| Operating income | $12.2 million | $76.0 million | $74.9 million | $203.2 million |
| Operating margin | 5.0% | 16.2% | 8.5% | 15.6% |
| Net income attributable to common stockholders | $6.7 million | $52.2 million | $44.3 million | $128.3 million |
| Diluted EPS | $0.07 | $0.54 | $0.48 | $1.34 |
Segment revenue declined in Q3 2015 by 54.8% for Drilling & Subsea and 34.3% for Production & Infrastructure. Segment operating margins were 4.8% and 10.1%, respectively, compared with 18.8% and 18.4% in Q3 2014.
For the first nine months, net cash provided by operating activities was $117.7 million, compared with $179.8 million in 2014. Investing cash flow was negative $87.2 million, including $60.8 million for the J-Mac Tool acquisition and $28.0 million of capital expenditures. Financing cash flow was negative $27.5 million. Cash decreased by $0.4 million to $76.2 million at September 30, 2015.
At September 30, 2015, total assets were $2.14 billion, total equity was $1.43 billion, and total debt was $402.9 million. Inventory increased to $504.8 million from $461.5 million at December 31, 2014, while trade receivables decreased to $157.6 million from $287.0 million.
The company had no borrowings under its $600.0 million revolving credit facility, $13.3 million of outstanding letters of credit and reported $586.7 million of additional borrowing capacity, subject to covenants and other limitations. The company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Q3 revenue decreased 47.7%; nine-month revenue decreased 32.6%.
- Q3 net income attributable to common stockholders decreased 87.1%; nine-month net income decreased 65.5%.
- Q3 segment operating income decreased 84.0%, and the segment operating margin fell to 5.1% from 16.5%.
- Management attributed the deterioration primarily to lower oil and gas prices, reduced drilling and completion activity, lower deepwater spending, pricing pressure, reduced manufacturing scale and weaker operating leverage.
- Q3 Drilling & Subsea included approximately $2.0 million of severance and facility-closure costs; the nine-month period included approximately $9.3 million of such costs.
- Inbound orders declined to $213.0 million in Q3 2015 from $495.2 million and to $699.0 million for the first nine months from $1.43 billion.
- The company completed the $64.2 million acquisition of J-Mac Tool on February 2, 2015. Management stated that acquisition-related revenue and income were not significant to the reported periods.
- Earnings from the Global Tubing equity investment declined to $3.9 million in Q3 from $6.7 million and to $12.3 million for nine months from $18.0 million.
Guidance, outlook, risks and unusual items
Management stated that low oil and natural gas prices and reduced customer spending could materially adversely affect earnings through at least 2015 and into 2016. Average Q3 WTI and Brent prices were $46.53 and $50.54 per barrel, respectively, and the U.S. average rig count was 55% below the prior-year quarter. The company expects these conditions to continue adversely affecting results unless energy prices rise substantially.
Management estimated a 2015 annual effective tax rate of approximately 23%. The 2015 capital expenditure budget was approximately $35.0 million, excluding potential acquisitions. Management believes cash on hand and operating cash flow will fund operations, working capital, capital expenditures and financing obligations for the foreseeable future.
Key risks include commodity-price and rig-count volatility, customer spending reductions, competition and pricing pressure, inventory and goodwill impairment, foreign currency movements, interest rates, acquisition integration, availability of capital and skilled labor, environmental and operating hazards, regulation, and legal contingencies. Goodwill totaled $799.6 million; management noted that continued low commodity prices, declining rig activity or a sustained lower stock valuation could trigger an impairment review or charge. Legal reserves were immaterial, and management did not expect pending proceedings to have a material adverse effect.
The company changed its annual goodwill and indefinite-lived intangible asset impairment assessment date from December 31 to October 1. It also reported that recently issued accounting standards, including inventory measurement, debt issuance cost presentation and revenue recognition guidance, were not expected to have a material impact based on the information available, although the company was evaluating certain impacts.
Important facts for investors to verify
- Whether oil prices, rig counts and customer capital budgets stabilize or decline further during 2015 and 2016.
- Whether the company can maintain positive operating cash flow while inventory remains elevated and orders remain depressed.
- Compliance with revolving-credit covenants and the availability of the stated $586.7 million borrowing capacity.
- The potential for goodwill or intangible-asset impairment given the decline in market capitalization and commodity prices.
- The magnitude and duration of severance, facility-closure and other restructuring costs.
- Execution and integration of the J-Mac acquisition and the company’s capacity to pursue additional acquisitions without excessive leverage.
- The sustainability of reported tax benefits from the company’s geographic earnings mix.