Forum Energy Technologies, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
Forum Energy Technologies is a global oilfield products company serving subsea, drilling, completion, production and infrastructure markets through its Drilling & Subsea and Production & Infrastructure segments. The filing covers the fiscal year ended December 31, 2012, including fourth-quarter results. Forum completed its initial public offering on April 17, 2012.
- Drilling & Subsea represented 58.4% of 2012 revenue; Production & Infrastructure represented 41.6%.
- Revenue mix by destination was 63.3% United States, 8.1% Canada and 28.6% other international markets.
- Backlog was approximately $399 million at December 31, 2012, compared with $408 million at December 31, 2011; most backlog was scheduled for delivery within six months.
Financial performance and key metrics
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $1,414.9 million | $1,128.1 million | +25.4% |
| Gross profit | $463.1 million | $362.5 million | +27.8% |
| Gross margin | 32.7% | 32.1% | +60 bps |
| Operating income | $240.9 million | $160.6 million | +50.0% |
| Operating margin | 17.0% | 14.2% | +280 bps |
| Net income | $151.5 million | $93.6 million | +61.9% |
| Net income attributable to common stockholders | $151.5 million | $93.3 million | +62.3% |
| Diluted EPS | $1.74 | $1.38 | +26.1% |
| Operating cash flow | $137.9 million | $39.3 million | +251.4% |
| Free cash flow before acquisitions | $100.5 million | $(0.8) million | Improved |
- Fourth-quarter 2012 revenue was $330.2 million, gross profit was $97.3 million, operating income was $37.9 million and net income attributable to common stockholders was $23.9 million. Fourth-quarter diluted EPS was $0.26.
- At December 31, 2012, cash and cash equivalents were $41.1 million, total debt was $420.7 million and total stockholders’ equity was $1.16 billion.
- Current assets were $774.9 million versus current liabilities of $280.9 million. Inventory increased to $455.1 million from $324.6 million, reflecting business growth and stocking levels.
- The senior secured credit facility matures in October 2016. Borrowings were $418.7 million, outstanding letters of credit were $7.2 million and approximately $474.1 million of revolving capacity remained available.
- The company reported compliance with all financial covenants at year-end. The weighted-average borrowing rate under the credit facility was 2.21%.
Material changes versus the prior comparable period
- Drilling & Subsea revenue increased 25.3% to $826.5 million, with operating margin improving to 19.5% from 17.9%. Growth reflected higher hydraulic catwalk, blowout preventer and work-class ROV sales, plus acquired businesses.
- Production & Infrastructure revenue increased 25.7% to $589.2 million, but operating margin declined slightly to 16.5% from 16.6%. Flow Equipment margins were pressured by excess customer capacity, inventory destocking and weaker pressure-pumping demand.
- Four fourth-quarter acquisitions—Syntech, Wireline Solutions, Dynacon and Merrimac—were acquired for aggregate consideration of approximately $139.3 million. Their 2012 revenue and net income contributions were not material.
- The company used IPO and private-placement proceeds of approximately $306.4 million to repay revolving debt. Total debt declined from $665.6 million at year-end 2011 to $420.7 million at year-end 2012.
- Operating cash flow benefited from improved receivables collections, although inventory increased by $100.3 million during the year. Capital expenditures were $49.7 million, compared with $41.2 million in 2011.
- Operating results included a $4.6 million benefit from lower contingent consideration, a $1.2 million intangible-asset impairment charge and $1.8 million of transaction expenses.
Guidance, outlook, management commentary and risks
- Management budgeted approximately $65.0 million of 2013 capital expenditures, including approximately $25.0 million of maintenance capital spending. The budget excludes potential acquisitions.
- Management expected customer destocking in Flow Equipment to moderate and orders to normalize during 2013. It also cited steady valve demand, strong Production Equipment demand and anticipated higher orders for Subsea and Downhole products.
- Management believed cash on hand, operating cash flow and available credit capacity would fund operations, working capital, capital expenditures and financing obligations for the foreseeable future.
- Key external risks include oil and natural gas price volatility, low North American natural gas prices, declining land-rig activity, customer inventory reductions, cyclical capital spending and excess industry capacity.
- Other material risks include acquisition integration, supplier concentration and steel-price inflation, skilled-labor shortages, foreign currency exposure, environmental and hydraulic-fracturing regulation, offshore drilling restrictions, product liability and warranty claims, cybersecurity and compliance risks.
- Asbestos litigation remained a contingency. The company reported fewer than 150 pending lawsuits, a recorded liability of $0.25 million net of anticipated insurance recoveries of $1.0 million, and substantial stated insurance coverage; actual recoveries and ultimate costs remain uncertain.
- Portland Harbor Superfund claims remain unresolved and cannot be quantified, although an indemnitor has assumed the defense under a 1997 indemnity agreement.
- SCF held approximately 48% of outstanding common stock as of February 28, 2013, giving it significant influence over stockholder matters. The company paid no dividends and did not plan to pay cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether the company can reduce leverage while continuing its acquisition strategy and funding the planned 2013 capital program.
- Whether Flow Equipment demand and margins recover after customer destocking and whether the expected 2013 order improvement occurs.
- Organic growth, margins and cash generation of the four 2012 acquisitions after a full year of ownership.
- Inventory turns, reserve adequacy and working-capital requirements, particularly given the year-end inventory increase.
- Compliance with progressively tighter credit-facility leverage covenants, including the 3.50-to-1.0 maximum leverage ratio beginning in 2013.
- Potential exposure from asbestos claims, the Portland Harbor matter, warranties, environmental regulation and other uninsured or underinsured liabilities.
- The filing’s audited financial statements and notes for acquisition accounting, goodwill and intangible-asset valuations, contingent consideration and debt maturities.