Business Context and Reporting Period
Forum Energy Technologies, Inc. is a global oilfield products company serving drilling, subsea, completions, production and infrastructure markets. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, filed August 1, 2017. The company reports three segments: Drilling & Subsea, Completions, and Production & Infrastructure.
Financial Highlights
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $201.1 million | $142.7 million | $372.2 million | $302.2 million |
| Gross profit | $49.3 million | $5.3 million | $88.2 million | $39.8 million |
| Gross margin | 24.5% | 3.7% | 23.7% | 13.2% |
| Operating loss | $(80.0) million | $(52.9) million | $(100.6) million | $(77.9) million |
| Net loss attributable to common stockholders | $(77.9) million | $(28.5) million | $(93.6) million | $(51.5) million |
| Diluted loss per share | $(0.81) | $(0.31) | $(0.98) | $(0.57) |
| Cash flow from operations | Not separately provided | Not separately provided | $4.8 million | $44.9 million |
- Q2 revenue increased 40.9%; six-month revenue increased 23.2% year over year.
- Q2 segment operating loss improved to $10.1 million from $52.8 million, excluding transaction expenses, asset-sale losses and goodwill impairment.
- Six-month segment operating loss improved to $30.3 million from $77.6 million.
- Q2 operating results included a $68.0 million goodwill impairment charge related to the Subsea reporting unit. After the charge, the Subsea reporting unit had no remaining goodwill.
- Cash and cash equivalents were $220.5 million at June 30, 2017, compared with $234.4 million at December 31, 2016.
- Total debt was $399.2 million, primarily consisting of $400.0 million of 6.25% senior notes due October 2021.
- The company had no borrowings under its revolving credit facility, $11.4 million of outstanding letters of credit and approximately $109.5 million of additional borrowing capacity, subject to limitations.
- Capital expenditures were $13.0 million during the first six months, versus $10.0 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger North American drilling and completions activity, higher commodity prices and increased customer spending.
- Drilling & Subsea revenue increased 16.2% in Q2, but subsea revenue declined by approximately $7 million because offshore investment remained weak.
- Completions revenue increased 107.5% in Q2, primarily from higher North American well-stimulation volumes.
- Production & Infrastructure revenue increased 34.4% in Q2, supported by activity-based production equipment and valve sales, including the Cooper acquisition.
- Gross margin improved substantially from the prior year, partly because 2016 included significant inventory write-downs and facility-closure costs.
- Despite improved segment performance, consolidated operating and net losses worsened because of the $68.0 million goodwill impairment and unfavorable foreign-exchange results compared with a gain in Q2 2016.
- Operating cash flow declined to $4.8 million from $44.9 million, principally due to increased accounts receivable and inventory investment associated with higher activity.
- On January 9, 2017, the company acquired Cooper Valves and Innovative Valve Components for total consideration of approximately $14.0 million, including $4.5 million of stock consideration.
Outlook, Commentary, Risks and Unusual Items
- Management reported improved orders and revenue during the first half of 2017, driven primarily by recovering North American onshore activity. Total orders increased to $214.1 million in Q2 and $408.0 million for the first six months.
- Management stated that offshore and certain international markets continued to lag the North American recovery. Lower oil prices and expectations that lower-cost basins could satisfy demand for longer delayed recovery in higher-cost basins and triggered the Subsea goodwill impairment.
- The company expects its cash on hand and operating cash flow to fund operations, working capital, capital expenditures and financing obligations for the foreseeable future. The 2017 capital expenditure budget was approximately $30.0 million.
- On July 3, 2017, after the reporting date, the company acquired Multilift Welltec for approximately $40 million in cash. Multilift manufactures completion tools designed to extend electrical-submersible-pump life.
- Key risks include oil and natural-gas price volatility, customer budget reductions or order deferrals, weak offshore activity, competition, foreign-currency exposure, availability of capital and skilled labor, acquisition integration, environmental and operating liabilities, and potential reductions in revolving-credit availability if future EBITDA declines.
- The company was in compliance with all credit-facility financial covenants at June 30, 2017. Legal reserves were immaterial, and management did not expect pending proceedings to have a material adverse effect.
- The company anticipates adopting the new revenue-recognition standard using the modified retrospective method, but had not finalized its impact on financial statements, internal controls or business processes.
Important Facts for Investors to Verify
- Whether the North American activity recovery can offset continued weakness in offshore and international markets.
- The assumptions underlying the Subsea goodwill impairment test, including forecast cash flows, discount rates and long-term growth rates, and the possibility of additional impairments.
- Working-capital requirements, inventory levels and the company’s ability to convert revenue growth into operating cash flow.
- Liquidity after the $40 million Multilift acquisition and the company’s ability to maintain revolving-credit availability and comply with covenants.
- Progress toward improved profitability in Drilling & Subsea and Completions, which remained unprofitable for the six-month period.
- The eventual effect of the revenue-recognition standard and lease-accounting changes on reported results, controls and disclosures.
- Execution and integration of the Cooper and Multilift acquisitions and the amount of any future acquisition-related financing.