Forum Energy Technologies, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
Forum Energy Technologies is a global oilfield products company serving subsea, drilling, completion, production and infrastructure markets. It operates through Drilling & Subsea and Production & Infrastructure. This filing covers the fiscal year ended December 31, 2013; fourth-quarter results are also presented. Approximately 60% of revenue was shipped to U.S. destinations and 40% was generated outside the United States.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,524.8 million | $1,414.9 million | +7.8% |
| Gross profit | $475.2 million | $463.1 million | +2.6% |
| Gross margin | 31.2% | 32.7% | Down 150 bps |
| Operating income | $209.6 million | $240.9 million | -13.0% |
| Operating margin | 13.7% | 17.0% | Down 330 bps |
| Net income | $129.6 million | $151.5 million | -14.5% |
| Net income attributable to common stockholders | $129.5 million | $151.5 million | -14.5% |
| Diluted EPS | $1.37 | $1.74 | -21.3% |
| Cash flow from operations | $211.4 million | $137.9 million | +53.2% |
| Free cash flow before acquisitions | $152.1 million | $100.4 million | +51.5% |
Drilling & Subsea revenue increased 13.8% to $940.8 million, representing 61.6% of consolidated revenue. Production & Infrastructure revenue declined 0.6% to $585.5 million. Segment operating income was $212.9 million, compared with $237.8 million in 2012, and segment operating margin declined to 14.0% from 16.8%.
At December 31, 2013, cash and cash equivalents were $39.6 million, total debt was $513.1 million and total stockholders’ equity was $1.33 billion. The company had $108.0 million drawn under its revolving credit facility, $16.6 million of letters of credit and approximately $475.4 million of additional borrowing capacity. Capital expenditures were $60.3 million.
Fourth-quarter results
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Revenue | $393.7 million | $330.2 million |
| Gross profit | $120.8 million | $97.3 million |
| Operating income | $57.3 million | $37.9 million |
| Net income attributable to common stockholders | $34.5 million | $23.9 million |
| Diluted EPS | $0.36 | $0.26 |
Fourth-quarter revenue increased approximately 19.3%, operating income increased approximately 51%, and diluted EPS increased approximately 38%. Fourth-quarter operating margin was approximately 14.5%, compared with approximately 11.5% in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by 2013 and late-2012 acquisitions, particularly in Drilling & Subsea. Acquisitions contributed approximately $166.0 million of incremental Drilling & Subsea revenue.
- Lower North American drilling activity and depressed pressure-pumping utilization reduced drilling and well-stimulation demand. The average U.S. rig count declined 8% in 2013.
- Production & Infrastructure well-stimulation revenue declined 18.7%, partially offset by a 10.6% increase in surface production equipment revenue.
- Margins weakened because lower activity increased fixed costs per unit, while pricing competition affected well-stimulation products. Management implemented cost reductions in the second half of 2013.
- Corporate selling, general and administrative expense increased 42.7% to $29.4 million, reflecting higher personnel and professional costs associated with public-company compliance.
- The company completed the B+V and Moffat acquisitions and invested in Global Tubing effective July 1, 2013, for aggregate consideration of approximately $230.0 million. Global Tubing contributed $7.3 million of equity earnings during the second half of the year.
- Backlog was approximately $395 million at year-end 2013, compared with $399 million at year-end 2012. Bookings increased to approximately $1.5 billion from $1.4 billion.
Guidance, outlook, risks and unusual items
- Management stated that cash on hand, operating cash flow and available credit capacity should fund operations, working capital, capital expenditures and financing obligations for the foreseeable future. The 2014 capital expenditure budget was approximately $60 million, excluding acquisitions.
- Management cited adequate oil prices and continued deepwater and oil-related activity, but noted that low natural-gas prices continued to pressure land drilling and pressure-pumping-related businesses.
- The company issued $400 million of 6.25% senior unsecured notes due 2021 and used the approximately $394 million of net proceeds to repay term-loan and revolving-credit borrowings. Interest expense increased to $18.4 million, and $2.1 million of deferred loan costs were written off.
- Credit facility covenants require total funded debt to adjusted EBITDA of no more than 4.50 to 1.0, senior secured debt to adjusted EBITDA of no more than 3.50 to 1.0, and EBITDA to interest expense of at least 3.0 to 1.0. The company reported compliance at year-end.
- 2013 segment operating income included approximately $7.7 million of primarily non-cash severance and facility-closure charges. Transaction expenses totaled approximately $3.5 million including amounts recorded through Global Tubing.
- No goodwill impairment was recorded in 2013. The company had approximately $802.3 million of goodwill and $295.4 million of intangible assets at year-end, making impairment assumptions significant.
- Material risks include cyclical oil and gas activity, commodity-price volatility, customer order cancellations, acquisition integration, raw-material and supplier concentration, environmental and hydraulic-fracturing regulation, offshore restrictions, foreign currency exposure, product liability, asbestos litigation, and debt covenant compliance.
- Asbestos litigation remained subject to fewer than 200 pending lawsuits, with a recorded liability of $250,000 for estimated indemnity costs associated with current and anticipated five-year claims. The company stated that historical annual out-of-pocket costs had been less than $200,000, but actual future costs could be higher.
- Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective. However, B+V and Moffat, representing approximately 12% of total assets and 4% of 2013 revenue, were excluded from management’s internal-control assessment because they were acquired during 2013.
Important facts for investors to verify
- Assess whether margin recovery in the second half of 2013 can continue despite lower North American rig and pressure-pumping activity.
- Review acquisition integration, purchase accounting, goodwill and intangible-asset impairment sensitivity, particularly for B+V, Moffat and Global Tubing.
- Reconcile the company’s debt maturity schedule, fixed 6.25% senior notes, floating-rate credit facility and covenant headroom.
- Evaluate working-capital requirements, including $441.0 million of inventory and $250.3 million of trade receivables.
- Monitor backlog conversion, customer cancellation rights and the relationship between bookings and realized revenue.
- Review asbestos, environmental, warranty and other litigation exposures, including insurance recoverability and indemnification arrangements.
- Consider dilution and ownership risks: SCF held approximately 38% of outstanding common stock as of February 26, 2014, and the company paid no dividends.