Forum Energy Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Forum Energy Technologies, Inc. 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 report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Revenue | $428.3 million | $367.9 million | $832.2 million | $740.9 million |
| Gross profit | $138.0 million | $114.5 million | $265.9 million | $229.3 million |
| Gross margin | 32.2% | 31.1% | 32.0% | 31.0% |
| Operating income | $65.8 million | $47.1 million | $127.2 million | $96.4 million |
| Net income attributable to common stockholders | $39.5 million | $29.9 million | $76.1 million | $61.9 million |
| Diluted EPS | $0.41 | $0.32 | $0.80 | $0.65 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $113.1 million | $89.5 million |
Q2 revenue increased 16.4%, operating income increased 39.6%, and net income attributable to common stockholders increased 32.1%. For the six-month period, revenue increased 12.3%, operating income increased 32.0%, and net income attributable to common stockholders increased 22.9%.
Six-month segment operating income was $128.4 million, with a 15.4% margin compared with 13.3% in the prior-year period. Q2 segment operating income was $66.2 million, with a 15.5% margin compared with 13.3%. Consolidated operating margins were approximately 15.4% in Q2 and 15.3% for the six-month period.
Material Changes Versus Prior Comparable Period
- Drilling & Subsea revenue increased 33.5% in Q2 and 25.5% for the six-month period, driven by acquisitions and higher activity across drilling, subsea and downhole product lines.
- Production & Infrastructure revenue declined 6.0% in Q2 and 5.9% for the six-month period, primarily because of lower production-equipment and valve sales and slower project activity.
- Drilling & Subsea margins improved to 18.0% in both Q2 and the six-month period, reflecting higher volumes and cost-saving measures implemented in the third quarter of 2013.
- Production & Infrastructure margins improved to 17.8% in Q2 and 17.3% for the six-month period, benefiting from Global Tubing joint-venture earnings and improved flow-equipment margins.
- Interest expense rose to $7.7 million in Q2 and $15.5 million for the six-month period, primarily because of the 6.25% Senior Notes issued in the fourth quarter of 2013 and acquisition-related debt.
- The effective tax rate declined to 28.0% in Q2 and 29.0% for the six-month period, compared with 30.4% and 31.5%, respectively, due primarily to a greater proportion of earnings in lower-tax jurisdictions and tax incentives.
- On May 1, 2014, the Company acquired Quality Wireline & Cable, Inc. for approximately $38.3 million. The business was included in Drilling & Subsea.
Cash Flow, Debt and Liquidity
At June 30, 2014, cash and cash equivalents were $32.6 million, down from $39.6 million at December 31, 2013. Total debt was $437.6 million, including $403.0 million of 6.25% Senior Notes due October 2021 and $33.0 million outstanding under the revolving credit facility.
For the six months ended June 30, 2014, operating cash flow was $113.1 million, investing cash flow was negative $57.8 million and financing cash flow was negative $64.5 million. Investing outflows included the Quality acquisition and $28.7 million of capital expenditures. Financing outflows primarily reflected $75.5 million of debt repayment.
The Company had approximately $552.7 million of additional borrowing capacity under its $600.0 million revolving credit facility, after $33.0 million of borrowings and $14.3 million of letters of credit. The facility matures in November 2018, and the Company was in compliance with all financial covenants. Management stated that cash, operating cash flow and available credit should be sufficient for operations, working capital, capital expenditures and financing obligations for the foreseeable future.
The 2014 capital expenditure budget was approximately $60.0 million, including approximately $25.0 million of general maintenance capital expenditures. The budget excluded potential acquisitions.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided in the filing.
- Management viewed current and forecasted oil and natural gas prices as adequate to support existing exploration and production activity. It noted that customer capital expenditure plans were expected to increase in 2014 and 2015, which could increase demand.
- Global active rigs averaged 3,399 in Q2 2014 versus 3,219 in Q2 2013; U.S. rigs increased 5% year over year, while Canada experienced seasonal weakness.
- Management cautioned that acquisitions make current results less comparable with prior periods and create integration and retention risks.
- Principal risks include oil and gas price volatility, customer demand and capital budgets, availability of raw materials and skilled labor, competition, regulation and taxation, foreign currency exposure, operating hazards, environmental liabilities, political and economic conditions, acquisition execution, and access to capital.
- Foreign exchange gains and losses and other items produced $3.1 million of expense in Q2 and $4.6 million of expense for the six-month period, compared with a $0.4 million gain in the prior-year six-month period.
- The Company recorded a $0.4 million loss on sales of assets and other items for the six-month period, including a $0.8 million loss on the sale of its subsea pipe joint protective coatings business.
- Legal proceedings were described as ordinary-course matters with immaterial reserves; management did not expect a material adverse effect. No material changes to contractual obligations or critical accounting policies were reported.
- The Company is evaluating the effect of the new revenue-recognition standard, effective January 1, 2017. The filing states that adoption could affect the timing of revenue recognition.
Important Facts for Investors to Verify
- Whether Drilling & Subsea growth and improved margins are sustainable after incorporating the 2013 and 2014 acquisitions.
- Whether weakness in Production & Infrastructure production-equipment and valve activity persists.
- The effect of higher interest expense and the Company’s ability to continue reducing debt while funding acquisitions and capital expenditures.
- Working-capital trends, particularly the increases in accounts receivable and inventories.
- Integration performance and contribution from Quality Wireline & Cable and the Global Tubing investment.
- Exposure to oil and gas prices, rig counts, foreign exchange movements and international operating conditions.
- The eventual impact and implementation method selected for ASC 606 revenue recognition.