Business Context and Reporting Period
Forum Energy Technologies, Inc. is a global oilfield products company serving subsea, drilling, completions, production and infrastructure markets. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Beginning in 2016, the Company reported three segments: Drilling & Subsea, Completions, and Production & Infrastructure. The change was made to align reporting with management’s operating review and was applied retrospectively.
Financial Performance and Liquidity
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $142.7 million | $284.4 million | $302.2 million | $632.5 million |
| Gross profit | $5.3 million | $84.9 million | $39.8 million | $194.0 million |
| Gross margin | 3.7% | 29.8% | 13.2% | 30.7% |
| Operating income (loss) | $(52.9) million | $22.4 million | $(77.9) million | $62.7 million |
| Net income (loss) attributable to common stockholders | $(28.5) million | $8.9 million | $(51.5) million | $37.5 million |
| Basic EPS | $(0.31) | $0.10 | $(0.57) | $0.42 |
| Operating cash flow | Not separately provided | Not separately provided | $44.9 million | $55.9 million |
- Second-quarter operating margin was negative 37.0%, compared with positive 7.9% in the prior-year quarter. Six-month operating margin was negative 25.7%, compared with positive 9.9% in 2015.
- Second-quarter revenue declined 49.8%; six-month revenue declined 52.2%.
- At June 30, 2016, cash and cash equivalents were $137.2 million, total debt was $396.4 million, and total equity was $1.20 billion.
- Net cash increased $28.0 million during the first six months, ending at $137.2 million. Investing cash use was $9.0 million and financing cash use was $0.7 million.
- Capital expenditures were $10.0 million for the six months. Management reported an approximately $20.0 million 2016 capital expenditure budget.
- Inventory declined to $375.0 million from $424.1 million at December 31, 2015, but the inventory reserve increased to $86.2 million from $77.9 million.
Material Changes Versus the Prior Comparable Period
- Drilling & Subsea revenue decreased 56.3% in the second quarter and 58.4% for the six months, reflecting lower drilling and offshore activity, pricing pressure and delayed subsea projects.
- Completions revenue decreased 66.2% in the second quarter and 64.8% for the six months, primarily due to reduced North American completion activity and lower sales to pressure-pumping customers.
- Production & Infrastructure revenue decreased 25.1% in the second quarter and 29.3% for the six months. Midstream and downstream valve demand was more resilient than upstream demand.
- Inbound orders fell to $128.3 million in the second quarter from $198.2 million and to $269.3 million for the six months from $485.9 million.
- Inventory write-downs and facility closure or severance costs materially reduced margins. Second-quarter inventory write-downs were $8.6 million in Drilling & Subsea and $19.6 million in Completions. Six-month write-downs were $9.1 million and $20.4 million, respectively; Production & Infrastructure also incurred $3.2 million of facility consolidation and severance costs.
- The Company completed a $3.0 million acquisition of the wholesale completion packers business of Team Oil Tools in April 2016. The acquired business had a nominal quarterly loss and was not material to reported results.
- Interest expense declined to $13.9 million for the six months from $15.2 million, while a $2.6 million deferred financing-cost write-off was recorded following the credit-facility amendment.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that the decline in oil and natural gas prices had a material adverse impact on first-half earnings and could continue to adversely affect results at least through 2016.
- Second-quarter average WTI and Brent prices were 21% and 26% below the prior-year period, respectively; Henry Hub natural gas prices were 22% lower. Global active rigs averaged 1,413 versus 2,174 in the prior-year quarter.
- Management expects customer spending, bookings and operating results to remain pressured until higher energy prices produce a meaningful recovery in industry activity. No quantitative revenue or earnings guidance was provided.
- The Company amended its revolving credit facility in February 2016, reducing total commitments from $600 million to $200 million. At June 30, 2016, there were no borrowings, $10.5 million of letters of credit, and approximately $189.5 million of stated additional borrowing capacity, subject to borrowing-base and other limitations.
- The Company was in compliance with all financial covenants at June 30, 2016, but disclosed that borrowing capacity could be reduced or eliminated if adjusted EBITDA does not improve.
- The 6.25% senior notes have a $400 million principal amount and mature in October 2021. Their carrying value, including premium and excluding certain financing adjustments, was approximately $402.2 million; estimated fair value was approximately $371.0 million.
- Risks include energy-price volatility, reduced rig and completion activity, customer order cancellations or deferrals, pricing pressure, excess inventory, foreign-exchange movements, availability of capital and borrowing capacity, acquisition integration, environmental and operating liabilities, and international political and economic conditions.
- Legal proceedings are described as ordinary-course matters; accrued reserves at June 30, 2016 were immaterial. The filing reports no material changes in contractual obligations or off-balance-sheet arrangements other than ordinary-course operating leases and letters of credit.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2016, with no material changes in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether oilfield activity, rig counts, bookings and customer capital spending recover sufficiently to reverse the substantial revenue and margin declines.
- The sustainability of positive operating cash flow despite reported operating losses and continued inventory reductions or write-downs.
- Compliance with credit-facility covenants and the extent to which lower adjusted EBITDA could restrict the stated $189.5 million borrowing capacity.
- Progress in reducing excess inventory, facility costs and other restructuring-related charges, particularly in Drilling & Subsea and Completions.
- The potential effect of the $400 million senior notes maturity in 2021 and the Company’s future refinancing capacity.
- The eventual effect and implementation approach for the pending revenue-recognition, share-based-payment and lease accounting standards.