Forum Energy Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies is a global oilfield products company serving drilling, subsea, completions, production and infrastructure markets. The report covers the unaudited three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017. The company reports three segments: Drilling & Subsea, Completions, and Production & Infrastructure.
Management attributed stronger demand largely to higher oil and natural gas prices and increased North American drilling and completions activity. The 2018 results are not fully comparable with 2017 because of the 2017 acquisitions of Global Tubing and Multilift and the January 2018 contribution of the subsea rentals business to Ashtead Technology.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $250.2 million | $171.1 million | Up 46.3% |
| Gross profit | $67.3 million | $39.0 million | Up 72.6% |
| Gross margin | 26.9% | 22.8% | Up 4.1 percentage points |
| Operating loss | $6.7 million | $20.6 million | Improved $13.9 million |
| Net income (loss) | $28.1 million | $(15.8) million | Improved $43.8 million |
| Diluted EPS | $0.25 | $(0.16) | Improved |
| Net cash used in operating activities | $(19.3) million | $(15.0) million | More cash used |
| Capital expenditures | $5.1 million | $3.5 million | Higher |
| Total debt at March 31 | $457.7 million | Not provided in the filing excerpt |
SG&A increased to $72.1 million from $60.7 million, while transaction expenses increased to $1.3 million from $0.6 million. Interest expense increased to $8.1 million from $6.6 million, and foreign exchange losses and other expense increased to $3.6 million from $1.5 million.
The reported net income included a $33.5 million gain on the contribution of the subsea rentals business to Ashtead. The company also recorded a $12.9 million income tax benefit, including a $16.2 million benefit from updating provisional Tax Cuts and Jobs Act estimates. The effective tax benefit rate was 85.1%, compared with 45.1% in the prior-year quarter.
Segment results and material changes
- Drilling & Subsea: Revenue declined 15.4% to $52.3 million, and the operating margin declined to negative 19.5% from negative 13.5%. The decline reflected the subsea rentals contribution to Ashtead, lower remotely operated vehicle and subsea activity, and reduced manufacturing scale efficiencies.
- Completions: Revenue increased 165.4% to $112.5 million, including $37.0 million from Global Tubing and $5.2 million from Multilift. Operating margin improved to 7.9% from negative 8.3%, driven by higher volumes and operating leverage. The segment included a $2.5 million obsolete inventory write-down.
- Production & Infrastructure: Revenue increased 27.9% to $86.4 million. Operating margin improved to 4.8% from negative 0.8%, primarily due to higher valve and surface production equipment volumes.
- Orders: Total inbound orders increased to $261.0 million from $193.9 million. Completions orders increased to $111.1 million, Production & Infrastructure orders to $96.8 million, while Drilling & Subsea orders declined to $53.1 million.
Forum adopted ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective method. Management stated that adoption had no material impact on revenue, gross profit, financial position, equity or cash flows.
Cash flow, debt and liquidity
Cash and cash equivalents declined to $42.3 million at March 31, 2018 from $115.2 million at December 31, 2017. The $72.9 million decrease in cash included $19.3 million of operating cash outflow, $52.7 million of financing cash outflow and $0.9 million of unfavorable foreign exchange effects.
Operating cash flow was pressured by a $39.1 million investment in working capital, principally inventory accumulated in anticipation of increased demand. Inventory increased to $468.9 million from $443.2 million at year-end.
Total debt was $457.7 million, consisting primarily of $400.0 million of 6.25% senior notes due October 2021 and $58.8 million drawn under the revolving credit facility. The facility had a $299.4 million borrowing base, $5.7 million of letter-of-credit usage and $234.9 million of remaining availability at March 31, 2018. Outstanding letters of credit totaled $6.5 million.
Management stated that cash on hand and expected operating cash flow should fund operations, working capital, capital expenditures and financing obligations for the foreseeable future. The 2018 capital expenditure budget was approximately $35.0 million, excluding potential acquisitions.
Outlook, risks, contingencies and unusual items
- Management reported improving oilfield activity, particularly in North America, but noted that future commodity prices and the sustainability of current price levels remain uncertain. Higher-cost offshore and international activity continued to lag North American onshore activity.
- Key risks include oil and gas price volatility, customer demand changes, order cancellations or deferrals, competition, raw-material availability and potential tariffs, foreign exchange, access to capital, acquisition integration, skilled labor availability, operating hazards, environmental liabilities and regulatory changes.
- The company expects to complete its detailed analysis of the Tax Cuts and Jobs Act no later than the fourth quarter of 2018. Related tax amounts remain provisional and may change as additional IRS guidance becomes available.
- Legal proceedings are described as ordinary-course matters. Reserves were immaterial, and management did not expect the ultimate liability to have a material adverse effect.
- Disclosure controls were not effective as of March 31, 2018 because a previously reported material weakness remained outstanding. The weakness relates to controls over fair-value measurements used for business combinations and goodwill impairment testing. Management had begun remediation, but the weakness had not been remediated or tested as of the filing date.
- The company had no material changes in market risk from December 31, 2017 and no material off-balance-sheet arrangements other than operating leases and ordinary-course letters of credit.
Most important facts for investors to verify
- Whether the $33.5 million subsea-rentals gain and the $12.9 million tax benefit are appropriately separated from recurring operating performance.
- Whether operating cash flow improves as inventory and other working-capital investments convert to sales.
- Progress in remediating the material weakness over acquisition and goodwill fair-value controls, including the results of subsequent testing.
- Debt maturities, revolving-credit availability and compliance with borrowing-base and fixed-charge coverage requirements.
- The sustainability of Completions and Production & Infrastructure margin improvements and the continuing losses in Drilling & Subsea.
- Potential adjustments to provisional Tax Cuts and Jobs Act accounting and the final effective tax rate.
- The effect of Global Tubing and Multilift integration and the ongoing economic contribution from the 40% Ashtead investment.