Forum Energy Technologies, Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. is a global oilfield products company serving subsea, drilling, completion, production and infrastructure markets. Its reportable segments are Drilling & Subsea and Production & Infrastructure. This unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $348.1 million | $403.9 million | Down 13.8% |
| Gross profit | $109.1 million | $127.9 million | Down 14.7% |
| Gross margin | 31.3% | 31.7% | Down 0.3 percentage points |
| Operating income | $40.2 million | $61.4 million | Down 34.5% |
| Operating margin | 11.6% | 15.2% | Down 3.6 percentage points |
| Net income | $28.7 million | $36.5 million | Down 21.5% |
| Net income attributable to common stockholders | $28.7 million | $36.5 million | Down 21.5% |
| Diluted EPS | $0.31 | $0.38 | Down $0.07 |
| Operating cash flow | $48.5 million | $62.9 million | Down 22.9% |
Drilling & Subsea revenue declined 17.8% to $215.1 million, while Production & Infrastructure revenue declined 6.6% to $133.2 million. Segment operating margins were 13.6% and 14.4%, respectively, compared with 18.0% and 16.8% in the prior-year quarter.
At March 31, 2015, cash and cash equivalents were $83.9 million, total debt was $468.6 million, and total current assets and current liabilities were $930.7 million and $292.9 million, respectively. The company had $65.0 million drawn on its $600.0 million revolving credit facility, $11.4 million of letters of credit outstanding and $523.6 million of additional borrowing capacity. The company was in compliance with all financial covenants.
Cash used in investing activities was $71.6 million, including $60.8 million paid for an acquisition and $11.4 million of capital expenditures. Financing activities provided $34.7 million, primarily from $65.0 million of credit-facility borrowings, partially offset by $25.3 million of debt repayments. Management stated that available cash, operating cash flow and credit-facility capacity should fund operations, working capital, capital expenditures and financing obligations for the foreseeable future.
Material changes versus the prior comparable period
- Revenue fell $55.8 million, primarily because of lower North American drilling and well-completion activity, reduced deepwater activity and lower production-equipment and flow-equipment sales.
- Operating income declined $21.2 million. Drilling & Subsea included approximately $4.5 million of severance and facility-closure costs; excluding those costs, management reported a 230-basis-point decline in that segment’s margin.
- Lower volumes, increased competition, pricing pressure and reduced operating leverage compressed margins.
- Foreign exchange and other items shifted from a $1.5 million expense in Q1 2014 to a $6.7 million gain in Q1 2015, materially reducing total other expense.
- The effective tax rate declined to 27.0% from 30.0%, primarily because a greater proportion of earnings arose in lower-tax foreign jurisdictions.
- The company completed the $64.2 million acquisition of J-Mac Tool, Inc. on February 2, 2015. J-Mac manufactures hydraulic fracturing pumps and related components and was added to Production & Infrastructure.
- Inventory increased to $521.2 million from $461.5 million at December 31, 2014, while accounts receivable declined to $256.4 million from $287.0 million.
- Debt increased by $39.7 million from year-end, largely reflecting acquisition-related borrowing.
- Accumulated other comprehensive loss increased by $37.2 million, primarily because of foreign-currency translation losses.
Guidance, outlook, risks and unusual items
The filing does not provide specific revenue, earnings or margin guidance. Management expects low oil and natural-gas prices, reduced customer capital and operating budgets, lower rig activity and deferred well completions to have a significant adverse effect on the business at least through 2015.
Average WTI and Brent prices in Q1 2015 were $48.50 and $53.98 per barrel, respectively, and Henry Hub natural gas averaged $2.90 per Mcf. Global active rigs averaged 3,007, down from 3,641 in Q1 2014; the U.S. average rig count declined to 1,403 from 1,779. Management stated that the U.S. rig count had fallen 46% from its September 2014 peak by the end of March 2015.
Other key risks include oilfield-cycle volatility, customer demand and budget reductions, competition and pricing pressure, foreign-exchange movements, acquisition integration, availability of raw materials and skilled labor, operating hazards, environmental liabilities, regulatory and political conditions, access to capital and the company’s ability to deliver backlog. Legal proceedings are considered ordinary-course matters; accrued reserves were immaterial and management did not expect a material adverse effect.
The company’s 2015 capital-expenditure budget was approximately $35.0 million, excluding potential acquisitions. A share-repurchase program authorizes up to $150 million of purchases; 11,298 shares were repurchased under the program during the quarter for approximately $0.2 million. Internal controls and disclosure controls were assessed as effective at March 31, 2015.
Investor verification checklist
- Verify whether oil prices, rig counts and well-completion activity continued to pressure revenue and margins after March 31, 2015.
- Assess the integration, contribution and cash requirements of the J-Mac acquisition.
- Monitor inventory levels, working-capital conversion and operating cash flow.
- Review debt maturities, variable-rate exposure, credit-facility availability and covenant compliance.
- Determine whether the $4.5 million of severance and facility-closure costs were nonrecurring and whether further restructuring was required.
- Evaluate foreign-currency effects, particularly the substantial Q1 translation loss and the reported foreign-exchange gain in earnings.
- Track the company’s adoption assessment and expected implementation approach for the new revenue-recognition standard.