Forum Energy Technologies, Inc. — 2012 First-Quarter Form 10-Q
Business context and reporting period
Forum Energy Technologies is a global oilfield products company serving subsea, drilling, completion, production and infrastructure markets. Operations are reported through Drilling and Subsea and Production and Infrastructure segments. This unaudited report covers the three months ended March 31, 2012, with comparison to the three months ended March 31, 2011. The company completed its initial public offering on April 17, 2012, after the reporting date.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $363.5 million | $203.1 million | 79.0% |
| Gross profit | $126.4 million | $58.8 million | 115.1% |
| Gross margin | 34.8% | 29.0% | Up 580 basis points |
| Operating income | $70.2 million | $22.6 million | 210.2% |
| Operating margin | 19.3% | 11.1% | Up 820 basis points |
| Net income | $42.5 million | $12.4 million | 243.0% |
| Net income attributable to common stockholders | $42.5 million | $12.4 million | 243.5% |
| Diluted EPS | $0.57 | $0.20 | 185.0% |
| Operating cash flow | $20.9 million | $(4.4) million | Improved $25.3 million |
Drilling and Subsea revenue increased 76.5% to $213.1 million, while Production and Infrastructure revenue increased 82.9% to $150.6 million. Segment operating margins were 21.6% and 19.7%, respectively, compared with 12.7% and 12.6% in the prior-year quarter.
At March 31, 2012, cash and cash equivalents were $15.8 million, accounts receivable were $247.7 million, inventories were $361.1 million and total assets were $1.67 billion. Total debt was $655.3 million, including a $354.7 million revolving credit facility balance and a $300.0 million term loan. Credit Facility availability was approximately $240 million, and the company was in compliance with its financial covenants.
Capital expenditures were $12.3 million. Net cash used in investing activities was $13.8 million, including $2.8 million for an acquisition. Cash decreased by $4.7 million during the quarter, ending at $15.8 million.
Material changes versus the prior comparable period
- Revenue growth reflected both organic expansion and the inclusion of 2011 acquisitions, particularly AMC, P-Quip, Davis-Lynch, Cannon, WFP and Phoinix.
- Management attributed approximately 310 basis points of consolidated operating-margin improvement to productivity gains in the base business and 510 basis points to higher-margin acquired products.
- Working capital investment increased, including an $18.1 million increase in trade receivables and a $34.8 million increase in inventories.
- Interest expense increased $2.5 million to $5.8 million, primarily because debt was used to finance the 2011 acquisitions.
- Contingent consideration expense was $1.0 million in Q1 2012, and the related liability was $39.5 million at March 31, 2012.
- The effective tax rate declined to 34.0% from 35.9%, primarily because of lower tax rates on non-U.S. earnings.
- Average global active rigs increased to 3,904 from 3,690 in the prior-year quarter, while average Henry Hub natural gas prices fell to $2.60 per Mcf from $4.24.
Guidance, outlook, commentary, risks and unusual items
Management did not provide formal revenue or earnings guidance. It reported favorable long-term energy-demand fundamentals and strong oil prices, but noted that declining North American natural gas prices and the migration of drilling and service assets from gas basins to oil and liquids basins could adversely affect demand or change the product mix.
The company expects approximately $60 million of capital expenditures for 2012, including approximately $20 million of maintenance capital expenditures. Management stated that cash on hand, operating cash flow and available borrowing capacity should fund operations, working capital, capital expenditures and financing obligations for the foreseeable future.
On April 17, 2012, the company received approximately $257.9 million of net IPO proceeds and $50.0 million from a concurrent private placement. It used the proceeds to repay part of the revolving Credit Facility. Selling stockholders received approximately $147.2 million from their shares; the company received no proceeds from those sales.
Key risks include oil and natural gas price volatility, reduced gas-directed activity, acquisition integration and retention of personnel, raw-material and skilled-labor availability, customer-demand forecasting, competition, regulation, environmental liabilities, international political and economic conditions, operating hazards, interest-rate and foreign-currency exposure, and the company's ability to operate effectively as a public company. Legal reserves were immaterial, and management did not expect pending proceedings to have a material adverse effect.
Important facts for investors to verify
- Confirm the post-IPO debt balance and resulting interest expense after the $307.9 million of net IPO and private-placement proceeds were applied to the revolving facility.
- Assess whether the substantial Q1 margin expansion is sustainable or materially reflects 2011 acquisitions and favorable product mix.
- Monitor receivables, inventories and operating cash conversion as revenue growth continues.
- Review the valuation assumptions and settlement timing for the $39.5 million contingent consideration liability.
- Evaluate exposure to declining natural gas prices, oil-versus-gas rig shifts and changes in global drilling activity.
- Reconcile the 2012 capital-expenditure plan with actual spending and acquisition-related financing needs.
- Consider the comparability limitations caused by eight 2011 acquisitions and the company's transition to a public company.