Business Context and Reporting Period
Forum Energy Technologies, Inc. is a global oilfield products company serving drilling, downhole, subsea, completions, production and infrastructure markets. The unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company reports three recast segments: Drilling & Downhole, Completions, and Production.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $271.8 million | $250.2 million | Up 8.6% |
| Gross profit | $70.1 million | $67.3 million | Up 4.2% |
| Gross margin | 25.8% | 26.9% | Down 110 basis points |
| Operating income (loss) | $4.3 million | $(6.7) million | Improved $11.0 million |
| Operating margin | 1.6% | (2.7)% | Improved |
| Net income (loss) | $(7.9) million | $28.1 million | Down $36.0 million |
| Diluted EPS | $(0.07) | $0.25 | Declined |
| Cash flow from operations | $17.9 million | $(19.3) million | Improved $37.2 million |
| Capital expenditures | $3.7 million | $5.1 million | Decreased |
Segment revenue increased across all businesses: Drilling & Downhole rose 11.8% to $85.9 million, Completions rose 7.5% to $94.7 million, and Production rose 6.4% to $92.0 million. Segment operating income improved to $0.3 million from a $5.8 million loss.
Segment margins were (2.9)% for Drilling & Downhole, 7.2% for Completions and 4.7% for Production. Completions margin declined from 10.2%, primarily due to lower pressure-pumping volumes, steel tariffs and acquisition-related costs.
At March 31, 2019, cash and cash equivalents were $29.7 million, total debt was $488.0 million, and total assets were $1.85 billion. The company had $194.4 million of availability under its revolving credit facility, against a $299.4 million borrowing base, after $89.0 million of borrowings and $16.0 million of letters of credit.
Material Changes Versus the Prior Comparable Period
- Revenue grew $21.6 million, supported by higher Downhole, Subsea, Coiled Tubing, Production Equipment and valve sales, including contributions from 2018 acquisitions.
- Operating results improved despite lower gross margin. Selling, general and administrative expense declined to $69.0 million from $72.1 million, and transaction expense declined to $0.6 million from $1.3 million.
- The company recorded a $4.6 million contingent consideration benefit from reducing the estimated liability related to the Houston Global Heat Transfer acquisition.
- Q1 2018 included a nonrecurring $33.5 million gain from contributing the subsea rentals business to Ashtead Technology; no comparable gain was recorded in Q1 2019.
- Q1 2018 included a $12.9 million income tax benefit, including a $16.2 million benefit related to U.S. tax reform adjustments. Q1 2019 included $1.7 million of tax expense.
- Operating cash flow improved primarily because working capital provided $5.1 million of cash in Q1 2019 versus using $39.1 million in Q1 2018.
- Debt declined by approximately $30.7 million from December 31, 2018, primarily due to net debt repayments of approximately $31.1 million.
- The company adopted the new lease standard on January 1, 2019, recording approximately $54.1 million of operating lease assets and $64.5 million of operating lease liabilities at adoption.
- Inbound orders totaled $242.2 million, down from $261.0 million in Q1 2018 and $270.8 million in Q4 2018.
Outlook, Commentary, Risks and Unusual Items
Management stated that cash on hand, operating cash flow and available credit are expected to be sufficient to fund operations, working capital and capital expenditures for the foreseeable future. No specific revenue or earnings guidance was provided in the filing.
Management described demand as sensitive to oil and natural gas prices, customer capital and operating budgets, drilling and completion activity, and the availability of existing capital equipment. Lower 2019 customer spending plans, continued oversupply of newer capital equipment and uncertainty in offshore and international markets may constrain demand.
Average Q1 2019 WTI and Brent prices were $54.82 and $63.10 per barrel, respectively, below Q1 2018 averages. The average U.S. rig count was 1,043, up 8% year over year but down 3% from Q4 2018. Steel and other tariffs increased raw material costs, particularly in Coiled Tubing and Valve Solutions; management is attempting to mitigate the effects through supply-chain diversification.
Key risks include oil and gas price volatility, customer order cancellations or deferrals, raw-material availability and tariffs, foreign currency movements, interest rates, competition, environmental and operating hazards, acquisition integration, access to capital, and the ability to refinance or repay debt maturing in 2021. Revolver availability depends on eligible receivables and inventory and could be reduced by declines in those balances.
The company had $400.0 million of 6.25% senior notes due October 2021. The revolving credit facility matures in July 2021, subject to a possible extension to October 2022 if qualifying refinancing occurs. Outstanding letters of credit were $16.5 million. Management reported that legal reserves were immaterial and did not expect pending proceedings to have a material adverse effect.
Investor Verification Items
- Verify whether revenue growth and the improved Drilling & Downhole results are sustainable given lower inbound orders and energy-price volatility.
- Assess the effect of steel tariffs, input costs and product mix on gross margin and Completions profitability.
- Monitor cash generation, inventory and receivables because revolving-credit availability is borrowing-base dependent.
- Evaluate the company’s refinancing plan for the $400.0 million senior notes and the 2021 revolving-credit maturity.
- Separate recurring operating performance from the $4.6 million contingent consideration benefit and the prior-year $33.5 million subsea-rentals gain.
- Review tax-rate volatility, valuation allowances and the potential utilization of U.S. and foreign tax-loss carryforwards.
- Confirm the impact of the 2018 acquisitions, including Houston Global Heat Transfer and ESP Completion Technologies, on comparable results and future cash requirements.