Business Context and Reporting Period
Forum Energy Technologies, Inc. is a global oilfield products company serving drilling, subsea, completions, production and infrastructure markets. Its reportable segments are Drilling & Subsea, Completions, and Production & Infrastructure. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared primarily with the corresponding 2017 periods.
Management stated that approximately 80% of first-half 2018 revenue came from consumable products and activity-based equipment. The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method; management reported no material impact on revenue, gross profit, equity or cash flows.
Key Financial Metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $274.0 million | $201.1 million | $524.2 million | $372.2 million |
| Gross profit | $72.7 million | $49.3 million | $140.0 million | $88.2 million |
| Gross margin | 26.5% | 24.5% | 26.7% | 23.7% |
| Operating income (loss) | $(11.7) million | $(80.0) million | $(18.4) million | $(100.6) million |
| Operating margin | (4.3)% | (39.8)% | (3.5)% | (27.0)% |
| Net income (loss) | $(15.3) million | $(77.9) million | $12.7 million | $(93.6) million |
| Diluted EPS | $(0.14) | $(0.81) | $0.11 | $(0.98) |
- First-half operating cash flow was $(25.7) million versus $4.8 million of cash provided in the prior-year period. The shortfall primarily reflected a $55.2 million working-capital investment, including increased inventory to support expected demand.
- Capital expenditures were $14.1 million versus $13.0 million. Investing cash outflow was $5.3 million versus $21.1 million in 2017, aided by $8.8 million of proceeds from asset and business sales.
- Financing cash outflow was $43.9 million, including $91.7 million of debt repayments and $50.0 million of borrowings. Cash, cash equivalents and restricted cash declined $76.1 million to $39.1 million.
- At June 30, 2018, total debt was $466.9 million, including $400.0 million of 6.25% senior notes due October 2021 and $68.0 million drawn under the revolving credit facility. Credit-facility availability was $218.5 million after $12.9 million of letters of credit.
- Current assets were $765.5 million and current liabilities were $229.4 million. Inventory increased to $486.2 million from $443.2 million at December 31, 2017.
Material Changes Versus the Prior Comparable Period
- Revenue increased 36.2% in the second quarter and 40.8% for the first six months, primarily due to stronger oilfield activity, higher North American completions spending and contributions from the 2017 Global Tubing and Multilift acquisitions.
- Second-quarter segment revenue changed as follows: Drilling & Subsea declined 6.4% to $59.9 million; Completions increased 132.2% to $126.6 million; and Production & Infrastructure increased 6.6% to $88.6 million.
- First-half segment operating results improved materially. Completions generated $21.4 million of operating income versus a $2.8 million loss; Production & Infrastructure generated $7.9 million versus $2.9 million; while Drilling & Subsea worsened to a $16.1 million loss from a $14.7 million loss.
- The second quarter included a $14.5 million intangible-asset impairment associated with the decision to exit selected Subsea and Downhole products. This compared with a $68.0 million Subsea goodwill impairment in the second quarter of 2017.
- First-half 2018 results included a $33.5 million gain from contributing the subsea rentals business to Ashtead Technology in exchange for cash, a note receivable and a 40% equity interest. The resulting investment was recorded at $41.2 million at June 30, 2018.
- Interest expense increased to $15.9 million for the first half from $13.0 million, primarily because of higher revolving-credit borrowings. The company also recorded an $11.3 million tax benefit, including a $15.9 million adjustment related to provisional Tax Cuts and Jobs Act accounting.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific revenue or earnings outlook in the filing. It stated that higher oil prices in 2018 had increased drilling, completions and customer spending, particularly in North America. The company reported first-half orders of $571.0 million, up from $408.0 million in the prior-year period, and stated that cash on hand and expected operating cash flow should be sufficient for operations, working capital, capital expenditures and financing obligations for the foreseeable future.
- Management’s 2018 capital-expenditure budget was approximately $35.0 million, excluding potential acquisitions. The filing notes that future acquisitions may require additional debt or equity financing.
- Risks include oil and natural-gas price volatility, customer demand fluctuations, order cancellations or deferrals, offshore and international market weakness, Permian Basin pipeline constraints, tariffs and higher raw-material costs, foreign-exchange exposure, interest-rate exposure, competition, skilled-labor availability and operating hazards.
- Offshore and subsea activity remained historically low, although management noted early signs of improving international activity. The company exited selected Subsea and Downhole products, resulting in the $14.5 million impairment.
- Disclosure controls were not effective as of June 30, 2018 because of an unremediated material weakness in controls over fair-value measurements used for business combinations and goodwill impairment testing. Management had begun remediation, but the weakness would continue until the controls were tested and shown to operate effectively.
- Outstanding letters of credit totaled $13.5 million. Management stated that legal reserves were immaterial and that pending proceedings were not expected to have a material adverse effect.
- On July 2, 2018, the company acquired certain assets of ESP Completion Technologies LLC for cash; the filing did not provide the consideration or pro forma results because the transaction was deemed immaterial.
Important Facts for Investors to Verify
- Whether the substantial revenue and order growth converts into sustained positive operating and free cash flow after working-capital investment.
- The level and composition of inventory, including the effect of the $8.0 million first-half inventory write-down and continued inventory growth.
- Progress in remediating the material weakness in fair-value and goodwill-impairment controls, including results of the planned 2018 testing.
- Liquidity and refinancing plans for the $400.0 million senior notes due October 2021 and compliance with revolving-credit availability and fixed-charge covenants.
- Whether Completions and Production & Infrastructure momentum offsets continued weakness in Drilling & Subsea and offshore markets.
- The sustainability of reported first-half net income after excluding the $33.5 million subsea-rentals contribution gain and $15.9 million tax-reform adjustment.
- The financial impact of tariffs, raw-material inflation, Permian Basin infrastructure constraints and the July 2018 ESPCT acquisition.