Forum Energy Technologies, Inc. — 2015 Form 10-K Summary
Business context and reporting period
Forum Energy Technologies is a global oilfield products company serving drilling, subsea, completion, production and infrastructure markets. Operations are reported through Drilling & Subsea and Production & Infrastructure. The filing covers the fiscal year ended December 31, 2015, including fourth-quarter results. Approximately 60% of revenue was generated in the United States, 5% in Canada and 35% internationally.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $1,073.7 million | $1,739.7 million | Down 38.3% |
| Gross profit | $262.7 million | $559.5 million | Down 53.0% |
| Gross margin | 24.5% | 32.2% | Down 770 bps |
| Operating income (loss) | $(113.7) million | $268.0 million | Decline of $381.8 million |
| Operating margin | (10.6)% | 15.4% | Down 2,600 bps |
| Net income (loss) | $(119.4) million | $174.4 million | Decline of $293.8 million |
| Loss per diluted share | $(1.33) | $1.83 | Changed to a loss |
| Cash flow from operations | $155.9 million | $270.0 million | Down 42.2% |
| Free cash flow before acquisitions | $125.4 million | $218.9 million | Down 42.7% |
- Drilling & Subsea revenue fell 44.3% to $627.9 million, with segment operating margin declining to 1.5% from 17.9%.
- Production & Infrastructure revenue fell 27.3% to $446.7 million, with segment operating margin declining to 7.1% from 18.3%.
- Fourth-quarter revenue was $196.1 million and the company recorded a quarterly net loss attributable to common stockholders of $163.6 million, or $1.81 per share. Fourth-quarter operating loss was $188.6 million.
- At December 31, 2015, cash and cash equivalents were $109.2 million, total debt was $396.3 million, and stockholders’ equity was $1.257 billion.
- Capital expenditures were $32.3 million, compared with $53.8 million in 2014. The company budgeted approximately $20.0 million of 2016 capital expenditures.
Material changes versus the prior comparable period
- Revenue and orders contracted sharply as oil and natural gas prices declined. Total orders fell to $870.0 million from $1.846 billion, while backlog declined to approximately $194 million from $464 million.
- Average WTI and Brent prices fell 48% and 47%, respectively, and average Henry Hub natural gas prices fell 40%. The global active rig count declined to 2,337 from 3,578, with the U.S. average rig count down 48%.
- 2015 operating results included $63.7 million of facility consolidation, closure, inventory write-down and severance charges, compared with $3.8 million in 2014.
- The company recorded a $123.2 million goodwill impairment charge related to the Subsea reporting unit and a $1.9 million impairment charge for trade names no longer in use. Remaining Subsea goodwill was $73 million at year-end.
- Inventory reserves increased to $77.9 million from $29.5 million, reflecting lower expected activity and demand.
- Forum acquired J-Mac Tool for approximately $61.9 million in February 2015. The acquisition added hydraulic fracturing pumps and related refurbishment services but was not material to 2015 revenue or net income.
- Foreign currency translation generated a $45.3 million loss in other comprehensive income, primarily due to weakening of the euro and British pound against the U.S. dollar.
- The company reduced debt by approximately $25.8 million during 2015. The board’s share repurchase authorization had approximately $49.8 million remaining, but the amended credit facility prohibits further repurchases.
Guidance, outlook, risks and unusual items
Management did not provide formal numerical revenue or earnings guidance. Management expects low energy prices, reduced customer capital spending and lower drilling activity to continue adversely affecting earnings through 2016. The company stated that cash on hand and operating cash flow should fund operations, working capital, capital expenditures and financing obligations for the foreseeable future, but continued access to external capital remains important.
- On February 25, 2016, after year-end, the senior secured credit facility was amended to a $200 million revolving facility, subject to a borrowing base, with a potential $150 million expansion feature. The company reported compliance with its covenants through the amendment date and expected continued compliance during 2016.
- The amended facility and senior notes restrict dividends, share repurchases, additional indebtedness, investments and certain acquisitions. No dividends were declared in 2015 or 2014.
- The company’s $400 million principal amount of 6.25% senior notes mature in October 2021. Fair value was approximately $334.1 million versus carrying value of approximately $402.5 million at year-end.
- Backlog is subject to customer delay, reduction or cancellation, and most backlog contracts may be changed or terminated by customers. The filing states that the amount ultimately realized from backlog is difficult to predict.
- Key risks include prolonged commodity-price weakness, customer insolvency and credit losses, excess or obsolete inventory, further goodwill impairment, covenant compliance, supplier concentration, foreign exchange, environmental and hydraulic-fracturing regulation, offshore restrictions, product liability, asbestos claims and pending litigation.
- Asbestos-related claims involved fewer than 200 pending lawsuits and a recorded net liability of $250,000 for estimated indemnity costs over the next five years. A patent and trade-secret lawsuit asserted approximately $61 million of damages; management considers the claim without merit and intends to defend it.
- Auditors reported that the financial statements fairly presented the company’s financial position and that internal control over financial reporting was effective as of December 31, 2015.
Important facts for investors to verify
- Whether oil and gas prices and rig activity recover sufficiently to improve orders, backlog conversion and segment margins.
- The company’s borrowing-base availability and compliance with the amended facility’s leverage and fixed-charge covenants.
- Whether further Subsea goodwill, intangible-asset or inventory impairments are required.
- The sustainability of operating cash flow after considering working-capital requirements, customer credit quality and required debt service.
- The status and potential exposure from the Flow Valve litigation, asbestos claims and the Portland Harbor environmental matter.
- The timing and economics of the 2021 senior-notes maturity and the company’s refinancing or repayment capacity.