Forum Energy Technologies, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; filed February 27, 2018. The filing also presents unaudited fourth-quarter results. Forum is a global oilfield products company serving drilling, subsea, completions, production and infrastructure markets through three segments: Drilling & Subsea, Completions, and Production & Infrastructure.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $818.6 million | $587.6 million | +39.3% |
| Gross profit | $188.8 million | $99.7 million | +89.3% |
| Gross margin | 23.1% | 17.0% | +610 bps |
| Operating loss | $141.6 million | $129.0 million | Worsened by $12.6 million |
| Operating margin | (17.3%) | (21.9%) | Improved 460 bps |
| Net loss attributable to common stockholders | $59.4 million | $82.0 million | Improved $22.6 million |
| Diluted loss per share | $0.60 loss | $0.90 loss | Improved |
| Cash flow from operations | $(40.0) million | $64.7 million | Declined $104.8 million |
| Capital expenditures | $26.7 million | $16.8 million | Increased |
| Free cash flow before acquisitions | $(64.7) million | $57.7 million | Declined |
Segment results
| Segment | 2017 revenue | Revenue change | 2017 operating income/(loss) | 2017 margin |
|---|---|---|---|---|
| Drilling & Subsea | $234.7 million | +4.6% | $(31.6) million | (13.4%) |
| Completions | $260.2 million | +97.4% | $(6.7) million | (2.6%) |
| Production & Infrastructure | $327.3 million | +40.0% | $7.8 million | 2.4% |
Approximately 80% of 2017 revenue came from consumable products and activity-based equipment. Revenue was geographically concentrated in the United States, which represented 76% of sales; Canada represented 7% and other international markets 17%.
Liquidity, balance sheet and debt
- Cash and cash equivalents were $115.2 million at December 31, 2017, down from $234.4 million in 2016.
- Total debt was $507.9 million, including $400.0 million of 6.25% senior unsecured notes due October 2021 and $108.4 million drawn under the revolving credit facility.
- The amended senior secured revolving credit facility increased commitments to $300.0 million. Borrowing-base availability was $184.0 million after $108.4 million of borrowings and $7.0 million of letters of credit.
- Total assets were $2.20 billion and stockholders’ equity was $1.41 billion at year-end.
- Accounts receivable increased to $202.9 million and inventory increased to $443.2 million, contributing to the use of operating cash.
- Management stated that cash on hand and operating cash flow should fund operations, working capital, capital expenditures and financing obligations for the foreseeable future. The 2018 capital expenditure budget was approximately $35.0 million.
Material changes versus the prior comparable period
- Improved industry conditions and higher commodity prices increased customer activity, particularly North American drilling and completions activity. Average U.S. and Canadian rig counts increased 72% and 58%, respectively.
- Orders increased to approximately $869.9 million from $596.8 million, while backlog increased to approximately $222 million from $165 million.
- Completions revenue nearly doubled, driven by stimulation and intervention demand, the Multilift acquisition and the consolidation of Global Tubing in the fourth quarter.
- Production & Infrastructure became modestly profitable, while Drilling & Subsea remained loss-making because offshore and subsea activity continued to lag the North American onshore recovery.
- Forum acquired Cooper Valves and Innovative Valve Components, Multilift, and the remaining interests in Global Tubing. Total 2017 acquisition consideration was approximately $340.7 million net of cash acquired, funded with cash, debt and equity.
- Global Tubing contributed $35.5 million of revenue and $3.8 million of net income after the October 2, 2017 acquisition. Forum recognized a $120.4 million gain on remeasurement of its previously held Global Tubing investment.
- Results included $68.0 million of Subsea goodwill impairment and $1.1 million of intangible-asset impairments. Inventory write-downs totaled $14.6 million.
- Hurricane Harvey temporarily idled facilities and caused foregone revenue, under-absorption of manufacturing costs and supplier and logistics delays.
Fourth-quarter 2017 snapshot
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Revenue | $247.7 million | $147.2 million |
| Gross profit | $53.0 million | $30.6 million |
| Operating loss | $27.1 million | $24.8 million |
| Net income/(loss) attributable to common stockholders | $49.1 million | $(12.5) million |
| Diluted EPS | $0.45 | $(0.14) |
Fourth-quarter net income was materially affected by the $120.4 million Global Tubing remeasurement gain, while the quarter also included a $36.0 million income-tax provision.
Outlook, risks and unusual items
- Management cited improved North American activity but stated that the pace and durability of the energy-market recovery remained uncertain. Offshore and certain international markets continued to lag.
- Key risks include oil and natural-gas price volatility, customer spending reductions, backlog cancellations or delays, excess or obsolete inventory, supplier concentration, raw-material costs, competition and skilled-labor shortages.
- Debt covenants restrict additional borrowing, dividends, investments, asset sales and certain acquisitions. The credit facility includes a fixed-charge coverage requirement if excess availability falls below specified thresholds.
- The Company recorded a provisional $10.1 million net tax expense from the Tax Cuts and Jobs Act, consisting primarily of a $27.7 million deemed-repatriation tax charge partly offset by a $17.6 million deferred-tax remeasurement benefit. The amount was subject to adjustment as additional guidance became available.
- Management and the auditor identified a material weakness in internal control over financial reporting involving fair-value measurements used for business combinations and goodwill impairment testing. Remediation was in process and had not been completed as of the filing date. Global Tubing was excluded from the control assessment because it was acquired during 2017.
- On January 3, 2018, Forum contributed its subsea-rental business to Ashtead Technology for a 40% interest in the combined business, which will be accounted for using the equity method.
- Asbestos-related litigation remains a contingency. The Company reported fewer than 150 pending lawsuits and a $0.3 million net liability for estimated indemnity costs associated with current and anticipated claims over the next five years, while noting that actual costs could be higher.
- No dividends were declared in 2017 or 2016, and the Company stated that it did not currently plan to pay cash dividends.
Most important facts for investors to verify
- Whether revenue growth and order strength continue after the 2017 North American activity rebound.
- Progress toward segment profitability, particularly in Drilling & Subsea and Completions.
- Cash conversion, working-capital requirements and the ability to generate positive free cash flow while carrying elevated inventory.
- Debt repayment or refinancing plans for the $400.0 million senior notes due in 2021 and compliance with credit-facility covenants.
- Integration performance and valuation assumptions related to Global Tubing and other 2017 acquisitions.
- Whether the material weakness in internal control is remediated successfully and whether future fair-value or impairment adjustments are required.
- Potential additional goodwill impairment if offshore-market recovery, commodity prices or equity valuation weaken.
- Final tax effects of the 2017 U.S. tax reform and the treatment of uncertain tax positions.