Business Context and Reporting Period
Forum Energy Technologies, Inc. filed an unaudited Form 10-Q for the quarter ended March 31, 2014. The company is a global oilfield products manufacturer and services provider serving subsea, drilling, completion, production and infrastructure markets. Reportable segments are Drilling & Subsea and Production & Infrastructure.
Results include the effects of two July 2013 acquisitions and the company’s equity investment in Global Tubing, LLC; therefore, management cautions that the 2014 and 2013 periods may not be fully comparable.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $403.9 million | $373.0 million | Up 8.3% |
| Gross profit | $127.9 million | $114.8 million | Up 11.4% |
| Operating income | $61.4 million | $49.2 million | Up 24.7% |
| Net income | $36.5 million | $31.9 million | Up 14.3% |
| Net income attributable to common stockholders | $36.5 million | $31.9 million | Up 14.4% |
| Diluted earnings per share | $0.38 | $0.34 | Up $0.04 |
| Cash flow from operations | $62.9 million | $28.5 million | Up $34.4 million |
Gross margin was approximately 31.7%, compared with approximately 30.8% in the prior-year quarter. Operating margin was approximately 15.2%, compared with 13.2%. The company reported a 30.0% effective tax rate, down from 32.5%, primarily because a greater proportion of earnings was generated in lower-tax jurisdictions and because of other tax incentives.
- Drilling & Subsea: Revenue increased 17.9% to $261.8 million; operating income increased 33.9% to $47.1 million; operating margin improved to 18.0% from 15.8%.
- Production & Infrastructure: Revenue decreased 5.7% to $142.6 million; operating income increased 11.7% to $23.9 million; operating margin improved to 16.8% from 14.1%, partly due to Global Tubing equity earnings.
- Cash and liquidity: Cash and cash equivalents were $67.0 million at March 31, 2014, compared with $39.6 million at December 31, 2013. The company had approximately $513.9 million of availability under its revolving credit facility.
- Debt: Total debt was $477.6 million, including $403.1 million of 6.25% senior notes due 2021 and $73.0 million outstanding under the revolving credit facility. The facility matures in November 2018, and the company was in compliance with all financial covenants.
- Cash flow and investment: Investing cash use was $4.4 million, including $11.1 million of capital expenditures and $6.7 million of proceeds from asset and business sales. Financing cash use was $30.9 million, primarily reflecting $35.5 million of debt repayment.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the 2013 acquisitions, higher sales of pipe-handling tools and downhole products, and increased flow-equipment sales.
- Production & Infrastructure revenue declined because of lower valve shipments for large projects and weather-related delays affecting production-equipment shipments.
- Operating performance benefited from higher drilling-product volumes, cost-saving measures implemented in the third quarter of 2013, and Global Tubing equity earnings.
- Interest expense increased $4.4 million to $7.8 million because of acquisition-related Credit Facility borrowings and the higher rate on the 6.25% senior notes issued in the fourth quarter of 2013.
- Operating cash flow more than doubled, primarily because of higher earnings and lower incremental working-capital investment. Accounts receivable increased $34.3 million during the quarter.
- Goodwill decreased from $802.3 million at December 31, 2013 to $799.2 million at March 31, 2014, primarily due to acquisition, divestiture and measurement-period adjustments.
Guidance, Outlook, Risks and Unusual Items
Management provided no formal revenue or earnings guidance in the filing. It stated that its 2014 capital expenditure budget was approximately $60.0 million, including approximately $25.0 million of general maintenance capital expenditures. The budget excludes potential future acquisitions.
Management viewed crude oil prices as generally adequate to sustain exploration and production activity and noted higher North American natural gas prices and a 2% year-over-year increase in average global active rigs. It also indicated that improving drilling and completion technology could increase wells completed per rig. These comments are not a guarantee of future results.
- Key risks include oil and gas price volatility, customer capital and operating budgets, competition, demand forecasting, raw-material and skilled-labor availability, acquisition integration, geopolitical and regulatory conditions, environmental liabilities, operating hazards, and the ability to deliver backlog.
- Foreign exchange losses and other expense were $1.5 million in Q1 2014, compared with a $1.5 million gain in Q1 2013.
- The company recorded $0.7 million of loss on sales of assets and other items, including an approximately $0.8 million loss on the sale of its subsea pipe-joint protective-coatings business.
- Legal proceedings were described as ordinary-course matters; accrued reserves were immaterial, and management did not expect a material adverse effect.
- The filing reported no material changes in contractual obligations, critical accounting policies, market risk, or internal control over financial reporting. Disclosure controls were considered effective.
- The company had no material off-balance-sheet arrangements other than ordinary-course operating leases.
Important Facts for Investors to Verify
- Assess how much of the revenue and earnings growth reflects the July 2013 acquisitions and Global Tubing rather than organic demand.
- Monitor the decline in Production & Infrastructure revenue, including project-related valve shipments and weather-related delays.
- Verify working-capital trends, particularly the increase in trade receivables and the company’s ability to convert earnings into cash.
- Review leverage, interest expense and repayment requirements under the senior notes and revolving credit facility.
- Evaluate whether the $60.0 million capital expenditure budget and any future acquisitions could increase financing needs.
- Consider exposure to oil and gas prices, rig activity, foreign currency movements, customer demand, acquisition integration and industry cyclicality.