Forum Energy Technologies, Inc. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies is a global oilfield products company serving subsea, drilling, completion, production and infrastructure markets. The company operates through Drilling & Subsea and Production & Infrastructure segments. This unaudited report covers the three and nine months ended September 30, 2013, compared primarily with the corresponding 2012 periods.
Financial highlights
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $390.2 million | $347.8 million | $1,131.1 million | $1,084.8 million |
| Gross profit | $125.2 million | $116.5 million | $354.5 million | $365.7 million |
| Operating income | $55.9 million | $62.9 million | $152.3 million | $203.0 million |
| Net income attributable to common stockholders | $33.1 million | $40.9 million | $95.0 million | $127.5 million |
| Diluted EPS | $0.35 | $0.44 | $1.01 | $1.50 |
| Operating margin | 14.3% | 18.1% | 13.5% | 18.7% |
Gross margin was approximately 32.1% in Q3 2013 versus 33.5% in Q3 2012, and approximately 31.3% for the first nine months versus 33.7% in the prior-year period. The filing reports effective tax rates of 29.6% for Q3 and 30.8% for the nine-month period, compared with 30.1% and 32.4%, respectively.
- Segment revenue: Q3 Drilling & Subsea revenue increased 21.8% to $248.3 million, while Production & Infrastructure revenue declined 0.9% to $142.7 million.
- Segment margins: Q3 Drilling & Subsea operating margin was 17.1% versus 20.3%; Production & Infrastructure was 15.0% versus 17.7%.
- Operating cash flow: $164.1 million for the first nine months, compared with $74.7 million in 2012.
- Investing cash flow: $273.7 million used in the first nine months, including $181.7 million for acquisitions, $112.2 million invested in an unconsolidated subsidiary and $44.7 million of capital expenditures, partially offset by a $64.2 million distribution from the subsidiary.
- Liquidity: Cash was $28.2 million at September 30, 2013, compared with $41.1 million at December 31, 2012. Total debt was $531.1 million, including $244.0 million outstanding on the revolving facility and a $285.0 million term loan. Credit facility availability was approximately $343.1 million at quarter-end; management stated that the company was in compliance with its covenants.
- Balance sheet: Total assets increased to $2.17 billion from $1.89 billion at year-end 2012, primarily reflecting acquisitions, goodwill, intangibles and the Global Tubing investment. Goodwill was $791.8 million and intangible assets were $307.6 million at September 30.
Material changes versus the prior comparable period
- Revenue increased 12.2% in Q3 and 4.3% for the first nine months, largely from recent acquisitions and higher remotely operated vehicle sales.
- Operating income declined 11.1% in Q3 and 25.0% for the first nine months. Management cited lower North American activity, reduced drilling-product volumes, lower-margin international work, manufacturing delays, product mix and pricing pressure.
- Q3 segment operating income included $6.5 million of severance and facility-closure charges. Corporate expenses also rose because of higher personnel and public-company compliance costs.
- Q3 2013 included $2.1 million of deferred loan costs written off in anticipation of refinancing. The prior-year periods included contingent consideration credits of $0.7 million in Q3 and $4.6 million for nine months, as well as a $1.2 million intangible-asset impairment in the 2012 nine-month period.
- Effective July 1, 2013, Forum acquired Blohm + Voss Oil Tools and Moffat for aggregate consideration of approximately $180.0 million and jointly acquired Global Tubing. Forum’s net investment in Global Tubing was approximately $48.8 million after receiving a $64.2 million distribution.
- Weighted average diluted shares increased to 94.7 million in Q3 and 94.5 million for nine months, versus 92.3 million and 84.9 million, respectively, in the prior-year periods, contributing to EPS pressure.
Guidance, outlook, risks and unusual items
Management expected approximately $60.0 million of total 2013 capital expenditures, including approximately $25.0 million for maintenance capital. The budget excluded potential acquisitions, which remain an important component of the company’s growth strategy.
Management indicated that oil prices were generally adequate to support exploration and production activity, including deepwater development. However, low North American natural-gas prices continued to pressure products serving pressure-pumping and land-drilling markets. The company reported modest recovery in certain drilling and flow-equipment demand, while valve demand softened as infrastructure projects were delayed.
Subsequent to September 30, 2013, Forum issued $300.0 million of 6.25% senior unsecured notes due October 1, 2021. Net proceeds of approximately $293.0 million were used to repay the term loan and part of the revolving facility. The notes impose customary restrictions on additional debt, liens, distributions, investments, asset sales and other transactions, and include change-in-control and asset-sale repurchase provisions.
Principal risks include oilfield commodity-price and activity volatility, customer demand, acquisition integration, availability of materials and skilled labor, competition, foreign currency and interest-rate exposure, regulation, environmental liabilities, operating hazards, political and economic conditions, backlog execution and reliance on key personnel. Legal reserves were described as immaterial, and management did not expect pending proceedings to have a material adverse effect.
Investor verification checklist
- Verify the post-quarter-end refinancing, its effect on interest expense, debt maturities, liquidity and covenant headroom.
- Assess whether the $6.5 million of severance and facility-closure charges and the Production & Infrastructure manufacturing issues were temporary or indicate continuing margin pressure.
- Review acquisition integration, preliminary purchase-price allocations, pension obligations and the earnings contribution from Blohm + Voss, Moffat and Global Tubing.
- Monitor goodwill and intangible-asset exposure, including the planned fourth-quarter 2013 indefinite-lived intangible-asset assessment.
- Evaluate working-capital conversion and whether strong operating cash flow can sustain capital expenditures, debt service and acquisition activity.
- Track North American gas prices, rig counts, delayed infrastructure projects, well-stimulation demand and pricing pressure from excess inventory.
- Confirm the effect of higher diluted share counts and remaining warrants on future per-share results.