Business Context and Reporting Period
Forum Energy Technologies, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The company is a global oilfield products and services provider serving subsea, drilling, completion, production and infrastructure markets through its Drilling & Subsea and Production & Infrastructure segments.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $373.0 million | $363.5 million | +2.6% |
| Gross profit | $114.8 million | $126.4 million | -9.2% |
| Gross margin | 30.8% | 34.8% | -400 bps |
| Operating income | $49.2 million | $70.2 million | -29.9% |
| Operating margin | 13.2% | 19.3% | -610 bps |
| Net income | $31.9 million | $42.5 million | -24.9% |
| Net income attributable to common stockholders | $31.9 million | $42.5 million | -24.8% |
| Diluted EPS | $0.34 | $0.57 | -40.4% |
| Cash flow from operations | $28.5 million | $20.9 million | +36.2% |
| Capital expenditures | $10.1 million | $12.3 million | Lower by $2.2 million |
Balance Sheet and Liquidity
- Cash and cash equivalents were $26.9 million at March 31, 2013, down from $41.1 million at December 31, 2012.
- Total debt was $388.6 million, consisting principally of $292.5 million under the term loan and $95.8 million under the revolving credit facility.
- Debt declined from $420.7 million at December 31, 2012. The company repaid $42.0 million of long-term debt during the quarter.
- The $600.0 million senior secured revolving credit facility and term loan mature in October 2016. Availability under the facility was approximately $495.7 million, and the company was in compliance with all financial covenants.
- Net cash decreased $14.1 million during the quarter, primarily because financing uses of $28.9 million exceeded operating cash flow and investing uses.
- Management stated that cash on hand, operating cash flow and available credit were expected to fund operations, working capital, capital expenditures and financing obligations for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, primarily from the four acquisitions completed in the fourth quarter of 2012. Those acquisitions contributed approximately $27.8 million of Drilling & Subsea revenue in Q1 2013.
- Drilling & Subsea revenue increased 4.2% to $221.9 million, but segment operating income fell 23.6% to $35.2 million and margin declined to 15.8% from 21.6%.
- Production & Infrastructure revenue was essentially flat at $151.2 million, while segment operating income decreased 28.0% to $21.4 million and margin declined to 14.1% from 19.7%.
- Consolidated profitability weakened because of lower activity levels, production challenges in tubular handling products, manufacturing-throughput investments, weaker Flow Equipment demand and increased price competition.
- Corporate expenses increased $3.1 million, or 75.0%, primarily because of higher personnel and professional costs associated with operating as a public company.
- Interest expense decreased $2.4 million to $3.4 million because of lower debt levels, partially offset by acquisition-related borrowings.
- The effective tax rate declined to 32.5% from 34.0%, primarily because of lower tax rates on non-U.S. earnings.
- Operating cash flow improved despite lower net income, reflecting lower incremental working-capital investment, particularly in inventory.
- Weighted average diluted shares increased to 94.4 million from 74.7 million, contributing to the decline in diluted EPS.
Guidance, Outlook, Risks and Unusual Items
- The company provided no specific revenue or earnings guidance in the filing.
- Management characterized crude oil prices as generally adequate to support exploration and production activity, including deepwater development. Low North American natural gas prices continued to pressure pressure-pumping and land-drilling-related businesses.
- Refinery and petrochemical expansion, pipeline integrity projects, Production Equipment demand and Subsea vehicle orders were described as sources of continuing or improving demand.
- The average U.S. rig count declined 3% sequentially and 11% year over year; management indicated that drilling and flow-equipment demand was recovering slowly.
- The 2013 capital expenditure budget was approximately $64.0 million, including approximately $25.0 million for general maintenance capital expenditures. The budget excluded potential acquisitions.
- The company paid or expected to pay approximately $15.7 million of finalized contingent consideration during the quarter ending June 30, 2013.
- Interest-rate swaps with a $75.0 million notional amount expire in August 2013 and had a $0.5 million short-term liability at March 31, 2013.
- Goodwill declined to $685.2 million from $695.8 million, primarily because of foreign-currency translation. Goodwill and intangible assets represented a significant portion of total assets.
- Key disclosed risks include oil and gas price volatility, customer capital budgets, acquisition integration, raw-material and skilled-labor availability, customer-demand forecasting, competition, regulation, environmental liabilities, international conditions, operating hazards, access to capital and dependence on key personnel.
- Management reported no material litigation reserves, no material changes in contractual obligations other than debt repayment, and no off-balance-sheet arrangements other than ordinary-course operating leases.
Important Facts for Investors to Verify
- Whether segment margins recover from the significant Q1 deterioration, particularly in Drilling Technologies and Flow Equipment.
- Progress against the approximately $64.0 million 2013 capital expenditure plan and the effect on free cash flow.
- Debt repayment, revolving-facility utilization, covenant compliance and liquidity after the contingent consideration payments due in June 2013.
- Demand trends for North American drilling, pressure pumping, subsea products, valves and Production Equipment.
- Integration, retention and financial contribution of the four fourth-quarter 2012 acquisitions.
- Foreign-currency effects and the carrying values of goodwill and acquired intangible assets.
- The effect of higher public-company costs and increased share count on future earnings per share.