Forum Energy Technologies, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Forum Energy Technologies, Inc. is a global oilfield products company serving drilling, subsea, completions, production and infrastructure markets. It operates through Drilling & Subsea, Completions, and Production & Infrastructure segments. Approximately 80% of 2018 revenue came from consumable products and activity-based equipment, with the balance primarily from capital products.
This Form 10-K covers the fiscal year ended December 31, 2018, with comparisons primarily to fiscal 2017. The filing was signed on February 28, 2019. The company reported approximately 2,500 employees and 24% of revenue from sales outside the United States.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1,064.2 million | $818.6 million | +30.0% |
| Gross profit | $256.4 million | $188.8 million | +35.8% |
| Gross margin | 24.1% | 23.1% | +100 bps |
| Operating loss | $397.0 million | $141.6 million | Higher loss |
| Net loss attributable to common stockholders | $374.1 million | $59.4 million | Higher loss |
| Basic and diluted loss per share | $3.44 | $0.60 | Higher loss |
| Cash flow from operations | $2.4 million | $(40.0) million | Improved |
| Free cash flow before acquisitions | $(12.4) million | $(64.8) million | Improved |
Segment revenue was $229.1 million for Drilling & Subsea, $478.0 million for Completions, and $361.4 million for Production & Infrastructure. Segment operating margins were negative 14.7%, positive 6.8%, and positive 1.7%, respectively. Consolidated segment operating loss improved to $30.5 million, or negative 2.9% of revenue, from $63.9 million, or negative 7.8%, in 2017.
Fourth-quarter revenue was $272.9 million, while gross profit was $41.9 million, implying a gross margin of approximately 15.3%. The company recorded a fourth-quarter net loss of $383.7 million, or $3.52 per share, primarily because of impairment charges.
Liquidity, debt and capital resources
- Cash and cash equivalents were $47.2 million at December 31, 2018, down from $115.2 million a year earlier.
- Total debt was $518.7 million, consisting primarily of $400.0 million of 6.25% senior notes due October 2021 and $119.0 million drawn under the senior secured revolving credit facility.
- Credit Facility availability was $167.3 million, based on a $299.4 million borrowing base, $119.0 million drawn and $13.1 million supporting letters of credit.
- Capital expenditures were $24.0 million in 2018. Management expected 2019 capital expenditures of approximately $20 million to $25 million, excluding acquisitions.
- Operating cash flow was largely offset by working-capital investment, including $60.9 million used for inventory growth. The company stated that cash on hand, operating cash flow and available revolver capacity should fund operations, working capital and planned capital expenditures for the foreseeable future.
- No cash dividends were declared or paid in 2018 or 2017, and the company did not currently plan to pay cash dividends.
Material changes versus the prior comparable period
- Revenue increased 30.0%, principally from higher oilfield activity and acquisitions. Completions revenue rose 83.7%, including the full-year effect of Global Tubing, higher stimulation and intervention volumes, and contributions from ESP Completion Technologies and Houston Global Heat Transfer.
- Drilling & Subsea revenue declined 2.4%, partly because the subsea rentals business was contributed to Ashtead Technology in exchange for a 40% equity interest. Production & Infrastructure revenue increased 10.4%.
- Segment operating performance improved, especially in Completions, which moved from a 2.6% operating loss margin to a 6.8% operating margin. Higher volumes and operating leverage were partly offset by inventory write-downs.
- Inventory write-downs increased to $36.6 million from $14.6 million. Ending inventory increased to $479.0 million from $443.2 million.
- Goodwill and intangible-asset impairment charges increased to $363.5 million from $69.1 million. The 2018 charges included $245.4 million of Drilling goodwill, $53.4 million of Downhole goodwill and $64.7 million of intangible-asset impairments.
- The company acquired Houston Global Heat Transfer for approximately $57.3 million and certain ESP Completion Technologies assets for $8.0 million. It also recorded a $33.5 million gain on the contribution of the subsea rentals business.
- Foreign exchange and other items changed from a $7.3 million net expense in 2017 to a $6.3 million net gain in 2018. The 2017 results also included a $120.4 million gain on the previously held Global Tubing investment, which did not recur.
- The company adopted ASC Topic 606 using the modified retrospective method. Management reported no material impact on revenue, profit, equity or cash flows.
- Management stated that the material weakness in controls over fair-value measurements for acquisitions and goodwill impairment testing, reported at December 31, 2017, was remediated during 2018. Management and the independent auditor concluded that internal control over financial reporting was effective at December 31, 2018.
Outlook, commentary, risks and unusual items
Management reported that oil prices and North American drilling and completions activity strengthened through much of 2018, but activity weakened in the fourth quarter as oil prices declined, global demand growth slowed, U.S. production increased and Permian pipeline constraints reduced completion activity. Offshore and international recovery remained weaker than U.S. onshore activity, and demand for new drilling capital equipment remained constrained by excess equipment capacity and customer capital discipline.
The filing does not provide formal revenue or earnings guidance. It provides 2019 capital-expenditure expectations of $20 million to $25 million and notes that additional pipeline capacity in the Permian was expected to come online during 2019. Backlog was approximately $276 million at December 31, 2018, compared with $222 million at year-end 2017; most orders were expected to ship within six months, but substantially all backlog was subject to customer changes or termination.
- Primary risks include oil and gas price cyclicality, customer spending reductions, order cancellations, competitive pressure and excess or obsolete inventory.
- Debt maturities and covenant compliance are material considerations: approximately $519.0 million of principal was scheduled for 2021, including the senior notes and revolver balance reflected in the contractual-obligations schedule.
- Steel and other raw-material inflation, U.S. tariffs, supplier concentration, foreign-exchange movements and variable-rate debt could pressure margins and cash flow.
- Environmental, hydraulic-fracturing, offshore-drilling, climate-change, health-and-safety, anti-corruption and trade-sanctions regulations could increase costs or reduce customer demand.
- Asbestos litigation, environmental claims involving the Portland Harbor Superfund site, product warranties and other legal matters remain contingencies. Management considered the recorded reserves immaterial, but asbestos exposure and insurance recoverability remain uncertain.
- Goodwill and intangible-asset valuations depend on forecasts, discount rates, commodity prices and market valuations. The filing states that certain remaining reporting units had estimated fair values less than 30% above carrying values, indicating sensitivity to further deterioration.
Most important facts for investors to verify
- Whether the company can convert higher revenue and backlog into sustained positive segment operating income and free cash flow.
- Liquidity, borrowing-base availability, leverage and covenant compliance ahead of the 2021 debt maturities.
- The sustainability of Completions’ 6.8% operating margin and the recovery prospects for Drilling & Subsea and offshore markets.
- Inventory levels, reserve adequacy and the likelihood of additional write-downs.
- Goodwill and intangible-asset sensitivity, particularly for Downhole, Stimulation & Intervention and Coiled Tubing reporting units.
- Customer order cancellations, Permian pipeline developments, commodity-price trends and the timing of international and offshore recovery.
- The effect of tariffs, steel prices, supplier constraints and regulatory developments on costs and demand.
- The status and potential cash exposure of asbestos, environmental, warranty and other contingent liabilities.