Forum Energy Technologies, Inc. — 2014 Q3 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. The filing covers the unaudited three and nine months ended September 30, 2014, compared primarily with the corresponding 2013 periods. Reportable segments are Drilling & Subsea and Production & Infrastructure.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $468.8 million | $390.2 million | $1,301.0 million | $1,131.1 million |
| Gross profit | $152.0 million | $125.2 million | $418.0 million | $354.5 million |
| Gross margin | 32.4% | 32.1% | 32.1% | 31.3% |
| Operating income | $76.0 million | $55.9 million | $203.2 million | $152.3 million |
| Operating margin | 16.2% | 14.3% | 15.6% | 13.5% |
| Net income attributable to common stockholders | $52.2 million | $33.1 million | $128.3 million | $95.0 million |
| Net margin | 11.1% | 8.5% | 9.9% | 8.4% |
| Diluted EPS | $0.54 | $0.35 | $1.34 | $1.01 |
| Cash flow from operations | Not separately provided | Not separately provided | $179.8 million | $164.1 million |
At September 30, 2014, cash and cash equivalents were $74.1 million, total debt was $421.3 million, and total assets were $2.294 billion. The company had approximately $572.0 million of additional borrowing capacity under its $600.0 million revolving credit facility, with $17.0 million drawn and $11.0 million of letters of credit outstanding. The company was in compliance with all financial covenants.
Material changes versus the prior comparable period
- Q3 revenue increased 20.2%; nine-month revenue increased 15.0%.
- Drilling & Subsea revenue increased 23.8% in Q3 and 24.9% for nine months, driven by higher North American activity, pipe-handling and downhole products, and workclass remotely operated vehicles.
- Production & Infrastructure revenue increased 13.3% in Q3 but was essentially flat for nine months, reflecting stronger flow-equipment demand offset by weaker surface-production-equipment shipments and slower valve project activity earlier in 2014.
- Q3 segment operating income increased 37.1% and the segment margin improved to 16.5% from 14.5%. Nine-month segment operating income increased 33.1% and the margin improved to 15.8% from 13.7%.
- Interest expense increased to $7.7 million in Q3 and $23.2 million for nine months, primarily because the 6.25% Senior Notes issued in late 2013 replaced lower-rate variable-rate Credit Facility borrowings.
- Foreign-exchange results improved, with a $5.2 million gain in Q3 and a $0.6 million gain for nine months, compared with losses in the 2013 periods.
- Operating cash flow increased to $179.8 million from $164.1 million. Investing cash use declined to $69.5 million from $273.7 million, largely because 2013 included substantially larger acquisitions and a joint-venture investment.
- Financing cash flow was a use of $75.5 million versus a source of $99.3 million, primarily reflecting $91.8 million of debt repayment in 2014.
Guidance, outlook, risks and unusual items
- Management expected 2014 capital expenditures of approximately $55 million, including approximately $25 million of maintenance capital expenditures. This estimate excluded potential acquisitions.
- Management stated that cash on hand, operating cash flow and available credit were expected to fund operations, working capital, capital expenditures and financing obligations for the foreseeable future.
- The company completed the $38.3 million acquisition of Quality Wireline & Cable, Inc. effective May 1, 2014. The business was included in Drilling & Subsea.
- Management noted that average Q3 oil prices declined approximately 12% from Q2 and that oil prices had subsequently fallen into the mid-to-low $80s. Continued declines could reduce customer activity, rig counts and demand.
- Key risks include commodity-price volatility, cyclical customer capital spending, competition, raw-material and skilled-labor availability, acquisition integration, foreign currency, regulation, environmental liabilities, operating hazards and geopolitical conditions.
- Q3 2013 included $6.1 million of Drilling & Subsea severance and facility-closure costs, which affected year-over-year margin comparisons. Q3 2014 included $1.5 million of transaction expenses.
- In October 2014, the board authorized a share-repurchase program of up to $150 million. Repurchases during Q3 were limited to 12,373 shares withheld for employee tax obligations and were not part of a public repurchase program.
- Legal-proceeding reserves were immaterial, and management did not expect pending matters to have a material adverse effect. The filing reported no material off-balance-sheet arrangements other than ordinary-course operating leases.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower oil prices after September 30, 2014 reduce drilling, completion, subsea and production activity.
- The sustainability of improved segment margins after adjusting for the $6.1 million of 2013 restructuring costs and other prior-period items.
- Integration progress and contribution from Quality Wireline & Cable and prior-year acquisitions.
- Working-capital trends, particularly the increases in trade receivables and inventories.
- Debt repayment progress, interest-rate exposure and continued compliance with credit-facility covenants.
- The timing and funding impact of the newly authorized $150 million share-repurchase program and any future acquisitions.
- The effect of foreign-currency movements and the future adoption of the new revenue-recognition standard, which management was still evaluating.