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. Operations are reported in two segments: Drilling & Subsea and Production & Infrastructure. This unaudited report covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods.
The company completed its initial public offering on April 17, 2012, selling 13.9 million primary shares at $20.00 per share and raising approximately $256.9 million net. It also raised $50.0 million through a concurrent private placement. Proceeds were used to repay revolving credit facility borrowings.
Financial performance and key metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $373.5 million | $257.5 million | $737.0 million | $460.5 million |
| Gross profit | $122.8 million | $77.2 million | $249.2 million | $136.0 million |
| Gross margin | 32.9% | 30.0% | 33.8% | 29.5% |
| Operating income | $69.8 million | $26.5 million | $140.1 million | $49.1 million |
| Operating margin | 18.7% | 10.3% | 19.0% | 10.7% |
| Net income attributable to common stockholders | $44.1 million | $13.7 million | $86.6 million | $26.1 million |
| Net margin | 11.8% | 5.3% | 11.8% | 5.7% |
| Diluted EPS | $0.49 | $0.22 | $1.06 | $0.43 |
Second-quarter revenue increased 45.1%, while first-half revenue increased 60.0%. Drilling & Subsea revenue increased 51.2% in the quarter and 62.6% year to date; Production & Infrastructure revenue increased 37.1% and 56.7%, respectively.
Six-month operating cash flow was $25.1 million, compared with $1.9 million in the prior-year period. Capital expenditures were $25.1 million, and net cash used in investing activities was $25.3 million. Cash declined by $5.7 million to $14.8 million at June 30, 2012, primarily reflecting capital spending, debt repayments and contingent consideration payments.
At June 30, 2012, total debt was $366.6 million, including $61.0 million outstanding under the revolving facility and a $300.0 million term loan. Credit facility availability was approximately $528.9 million, and the company was in compliance with its financial covenants. Total assets were $1.706 billion and total equity was $1.063 billion.
Material changes versus the prior comparable period
- Revenue growth reflected both organic expansion and the inclusion of businesses acquired during 2011. Approximately 36% of second-quarter Drilling & Subsea growth and 41% of first-half growth was organic; the remainder was principally acquisition-related.
- Segment operating margin improved to 17.8% in the second quarter from 13.4%, and to 18.7% for the first half from 12.4%. Improvements reflected manufacturing efficiencies, pricing, operating leverage and acquired products with higher margins.
- Operating income benefited from a $4.9 million second-quarter and $3.9 million first-half favorable adjustment to contingent consideration, compared with unfavorable adjustments of $5.8 million in the comparable 2011 periods.
- The company recorded a $1.2 million impairment of certain intangible assets related to a Production & Infrastructure service line with limited business and orders.
- Debt declined by approximately $299.0 million from December 31, 2011, primarily because IPO and private-placement proceeds were applied to revolving borrowings.
- Inventory increased to $402.6 million from $324.6 million at year-end 2011, contributing materially to working-capital use and limiting operating cash conversion.
- The effective tax rate decreased to 33.0% in the second quarter and 33.5% for the first half, from 34.9% and 35.4%, respectively, primarily because a greater proportion of earnings arose in lower-tax foreign jurisdictions.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a specific revenue or earnings forecast in the filing. It expects cash on hand, operating cash flow and available credit capacity to fund operations, working capital, capital expenditures and financing obligations for the foreseeable future. The 2012 capital expenditure budget was approximately $55 million, including approximately $20 million of maintenance spending; the budget excluded potential acquisitions.
Management reported steady oil-related activity and robust demand in drilling, subsea, downhole and surface production equipment. Low natural-gas prices adversely affected pressure-pumping-related products, while petrochemical and process-facility redevelopment supported valve demand. Customers in the pressure-pumping market were destocking previously accumulated inventory, and management expected destocking to continue through year-end, creating revenue and margin pressure in Flow Equipment.
Key risks include volatility in oil and natural-gas prices, customer demand and rig activity, raw-material and skilled-labor availability, competition, integration of acquisitions, acquisition financing, foreign currency and interest-rate exposure, environmental and operating hazards, governmental regulation, political conditions, dependence on key personnel, and the ability to maintain effective controls as a public company.
Contingent consideration liabilities declined to $16.3 million from $41.8 million at December 31, 2011, reflecting payments, a $3.9 million favorable remeasurement and a $3.3 million reclassification to equity. The company had approximately $1.2 million of interest-rate derivative liabilities at June 30, 2012. Legal-proceeding reserves were immaterial, and management did not expect pending matters to have a material adverse effect.
Important facts for investors to verify
- Whether the reported margin expansion is sustainable after the favorable contingent-consideration adjustment and the effects of acquisitions.
- The duration and magnitude of customer destocking in Flow Equipment and its effect on Production & Infrastructure revenue and margins.
- Inventory growth, receivables and future working-capital requirements relative to operating cash flow.
- Debt repayment progress, variable-rate exposure and continued compliance with credit-facility covenants.
- The company’s ability to fund its approximately $55 million capital expenditure plan while pursuing additional acquisitions.
- Whether the impaired Production & Infrastructure service line requires further intangible-asset or goodwill impairment.
- Organic growth versus acquisition-driven growth and the ongoing costs of integrating the 2011 acquisitions.
- Future oil and natural-gas prices, rig counts and demand across drilling, subsea, pressure-pumping and valve markets.