Forum Energy Technologies, Inc. — 2012 Q3 Form 10-Q Summary
Business context and reporting period
Forum is a global oilfield products company serving subsea, drilling, completion, production and infrastructure markets. It operates through Drilling & Subsea and Production & Infrastructure segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $347.8 million | $330.9 million | $1,084.8 million | $791.4 million |
| Gross profit | $116.5 million | $112.6 million | $365.7 million | $248.6 million |
| Gross margin | 33.5% | 34.0% | 33.7% | 31.4% |
| Operating income | $62.9 million | $60.9 million | $203.0 million | $110.0 million |
| Net income attributable to common stockholders | $40.9 million | $35.5 million | $127.5 million | $61.6 million |
| Diluted EPS | $0.44 | $0.48 | $1.50 | $0.94 |
| Operating cash flow | Not separately provided | Not separately provided | $74.7 million | $18.6 million |
Q3 segment operating margin was 17.4%, compared with 18.7% in the prior-year quarter. Nine-month segment operating margin improved to 18.3% from 15.0%. The effective tax rate declined to 30.1% from 34.6% for Q3 and to 32.4% from 34.9% for the nine-month period.
At September 30, 2012, cash and cash equivalents were $17.9 million, total debt was $317.6 million, and credit-facility availability was approximately $578.3 million. The company reported compliance with all financial covenants. The $900 million credit facility, consisting of a $600 million revolving facility and a $300 million term loan, matures in October 2016.
Material changes versus the prior comparable periods
- Q3 revenue increased 5.1%; nine-month revenue increased 37.1%. Nine-month growth reflected both organic expansion and the inclusion of 2011 acquisitions for a full or larger portion of the period.
- Q3 net income attributable to common stockholders increased 15.2%, while nine-month net income more than doubled, increasing 106.9%.
- Q3 operating income increased 3.2%, but segment operating income declined 1.9% because of higher selling, general and administrative costs and margin pressure. Nine-month operating income increased 84.4%.
- Drilling & Subsea Q3 revenue rose 3.0%, while Production & Infrastructure revenue rose 8.4%. ROV shipments were lower because of delayed customer orders, while production equipment and valve shipments increased.
- Lower debt following the April 2012 IPO and private placement reduced Q3 interest expense by $2.4 million year over year. Net proceeds used for debt repayment were approximately $306.4 million according to the financial statements.
- Inventory increased to $423.6 million from $324.6 million at December 31, 2011, contributing to working-capital usage despite stronger operating cash flow.
Outlook, commentary, risks and unusual items
- Management stated that oil prices were generally adequate to support global exploration and production activity, but low North American natural-gas prices and declining North American rig activity weakened drilling and pressure-pumping-related demand.
- Customer destocking of flow-equipment parts and supplies began in the second quarter and was expected to continue through year-end, creating revenue and margin pressure in flow equipment.
- Management projected a 2012 capital-expenditure budget of approximately $50 million, including approximately $25 million of maintenance capital expenditures. The budget excluded potential acquisitions.
- Management believed cash on hand, operating cash flow and available credit would fund operations, working capital, capital expenditures and financing obligations for the foreseeable future.
- The company continued to pursue acquisitions. Two acquisitions were completed after September 30, 2012 and were financed with cash and credit-facility borrowings; purchase prices and financial effects are not provided in the filing text.
- Unusual or nonrecurring items included a $4.6 million nine-month benefit from remeasuring contingent consideration, a $1.2 million intangible-asset impairment, $0.9 million of transaction expenses and a $1.5 million gain on asset sales.
- Principal risks include oil and gas price volatility, reduced rig activity, customer demand and inventory destocking, acquisition integration, raw-material and labor availability, competition, foreign-currency and interest-rate exposure, environmental and operational liabilities, and access to capital.
- Legal reserves were immaterial, and management did not expect pending or threatened legal proceedings to have a material adverse effect. No off-balance-sheet arrangements were reported.
- Management concluded that disclosure controls were effective as of September 30, 2012, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether continued customer destocking and lower North American rig activity reduce flow-equipment revenue and margins beyond 2012.
- The sustainability of the improved nine-month margins and the weaker Q3 segment margin.
- Working-capital trends, particularly the $99.0 million increase in inventories from year-end and the resulting effect on cash conversion.
- The terms, financing and operating contribution of the two acquisitions completed after September 30, 2012.
- The valuation assumptions and settlement timing for the remaining $15.6 million contingent-consideration liability.
- Exposure to variable interest rates, foreign-currency movements and the company’s ability to maintain credit-facility covenant compliance.
- The effect of higher diluted shares outstanding following the IPO and private placement, which contributed to diluted EPS declining in Q3 despite higher earnings.