Forum Energy Technologies, Inc. — 2017 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 2, 2017. Forum Energy Technologies is a global oilfield products company serving drilling, subsea, completions, production and infrastructure markets. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $171.1 million | $159.4 million | Up 7.3% |
| Gross profit | $39.0 million | $34.6 million | Up 12.8% |
| Gross margin | 22.8% | 21.7% | Up 1.1 percentage points |
| Operating loss | $(20.6) million | $(25.0) million | Improved $4.4 million |
| Operating margin | (12.0)% | (15.7)% | Improved 3.7 percentage points |
| Net loss attributable to common stockholders | $(15.8) million | $(22.9) million | Improved $7.2 million |
| Loss per diluted share | $(0.16) | $(0.25) | Improved $0.09 |
| Cash flow from operations | $(15.0) million | $26.9 million | Decrease of $41.9 million |
- Segment revenue was $62.1 million for Drilling & Subsea, $42.2 million for Completions and $67.6 million for Production & Infrastructure. Drilling & Subsea revenue declined 4.9%, while Completions increased 22.9% and Production & Infrastructure increased 11.7%.
- Segment operating loss improved to $20.2 million from $24.9 million. Completions and Production & Infrastructure showed the largest margin improvements, although all three segments remained loss-making.
- Interest expense was $6.6 million, compared with $7.1 million in the prior-year quarter. Q1 2016 included a $2.6 million deferred financing-cost write-off that did not recur.
- The effective tax rate was 45.1%, compared with 31.2% in Q1 2016. The 2017 tax benefit included a $2.4 million benefit from share-based compensation accounting changes.
- Cash and cash equivalents were $204.9 million at March 31, 2017, down from $234.4 million at December 31, 2016. Total assets were $1.843 billion and total equity was $1.233 billion.
- Total debt was $399.2 million, consisting primarily of $400.0 million of 6.25% senior notes due October 2021. No borrowings were outstanding under the revolving credit facility; $18.3 million of letters of credit were outstanding.
- After a post-quarter-end borrowing-base audit, the company reported additional borrowing capacity of $102.6 million, subject to facility limitations. The company was in compliance with all financial covenants at March 31, 2017.
Material changes versus the prior comparable period
- Revenue increased primarily because higher oil and gas prices supported greater North American drilling and completions activity. Average WTI and Brent prices rose 55% and 58%, respectively, year over year; average Henry Hub natural gas prices rose 51%.
- Average U.S. active rigs increased to 742 from 551, and average Canadian rigs increased to 295 from 173. International rigs declined to 939 from 1,016, reflecting continued weakness in higher-cost offshore and international markets.
- Orders increased to $193.9 million from $141.0 million, including increases in all three segments.
- Operating losses narrowed because of higher volumes, improved manufacturing absorption and operating leverage. Completions benefited particularly from increased North American activity.
- Operating cash flow turned negative because of investments in inventory in anticipation of a recovery and higher accounts receivable associated with increased revenue.
- The company acquired substantially all assets of Cooper Valves, LLC and the general partnership interests of Innovative Valve Components on January 9, 2017, for aggregate consideration of $14.5 million, including $4.5 million of stock and contingent cash payments. The acquisition contributed principally to Production & Infrastructure revenue.
- Investing cash outflows increased to $13.2 million from $4.0 million, primarily because of the Cooper acquisition and a $1.0 million investment in an unconsolidated subsidiary.
Outlook, risks and unusual items
- Management stated that market conditions showed signs of recovery, supported by higher oil prices, stable natural gas prices and increased North American activity. However, the pace and strength of the recovery remained uncertain, and U.S. rig activity remained below historical norms.
- Management expects cash on hand and operating cash flow to fund operations, working capital, capital expenditures and financing obligations for the foreseeable future. The company expected approximately $33 million of tax refunds in 2017 from carrying back its 2016 U.S. net operating loss.
- The 2017 capital expenditure budget was approximately $30 million, excluding potential acquisitions. First-quarter capital expenditures were $3.5 million.
- Key risks include commodity-price volatility, customer demand and order cancellations or deferrals, offshore and international weakness, competition, regulatory and environmental matters, availability of capital and skilled labor, acquisition integration, foreign-currency exposure and the possibility that borrowing capacity could be reduced or eliminated depending on future EBITDA.
- Legal proceedings are described as ordinary-course matters; reserves were immaterial and management did not expect a material adverse effect. The filing reported no material off-balance-sheet arrangements other than ordinary-course operating leases and letters of credit.
- The company early adopted the simplified goodwill impairment guidance in the first quarter of 2017; management did not expect a material impact. The company anticipated adopting the new revenue-recognition standard using the modified retrospective method.
Investor verification checklist
- Verify whether the improving North American rig count and order levels translate into sustained revenue growth and positive segment margins.
- Monitor working-capital requirements, inventory levels and the conversion of revenue growth into operating cash flow.
- Assess liquidity relative to $399.2 million of debt, the October 2021 senior-note maturity and the company’s dependence on borrowing-base availability.
- Evaluate the integration and financial contribution of the Cooper and Innovative Valve Components acquisition.
- Review exposure to offshore and international markets, commodity prices, foreign exchange and potential customer order deferrals.
- Confirm receipt and timing of the anticipated approximately $33 million tax refund and progress against the approximately $30 million 2017 capital expenditure budget.
- Reconcile the reported tax benefit, including the share-based compensation impact, when assessing sustainable earnings.