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 Form 10-Q covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2013 | Year-over-Year Change | Six Months Ended June 30, 2013 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $367.9 million | Down 1.5% | $740.9 million | Up 0.5% |
| Operating income | $47.1 million | Down 32.5% | $96.4 million | Down 31.2% |
| Net income attributable to common stockholders | $29.9 million | Down 32.2% | $61.9 million | Down 28.6% |
| Diluted EPS | $0.32 | Down from $0.49 | $0.65 | Down from $1.06 |
| Segment operating margin | 13.3% | Down from 17.8% | 13.3% | Down from 18.7% |
Gross profit was $114.5 million in the second quarter and $229.3 million for the first six months. Gross margin was approximately 31.1% and 30.9%, respectively; the filing does not provide a directly stated comparable gross-margin percentage for 2012. The effective tax rate was 30.4% in the quarter and 31.5% for the six months, compared with 33.0% and 33.5% in the prior-year periods.
- Drilling & Subsea revenue declined 6.0% in the quarter and 1.1% year to date, while its operating margin fell to 15.7% and 15.8%, respectively.
- Production & Infrastructure revenue increased 5.2% in the quarter and 2.8% year to date, but operating margin declined to 14.4% and 14.3%, respectively.
- Operating cash flow was $89.5 million for the six months, compared with $25.1 million in 2012. Capital expenditures were $30.1 million, and investing cash outflow was $32.3 million.
- Cash and cash equivalents were $199.5 million at June 30, 2013, compared with $41.1 million at December 31, 2012.
- Total debt was $530.5 million, including $241.5 million outstanding under the revolving facility and a $288.8 million term loan. Credit Facility availability was approximately $346.1 million, and the company was in compliance with its financial covenants.
- The $600.0 million senior secured Credit Facility matures in October 2016. Its weighted-average interest rate was 2.20% before hedging effects.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable, but profitability declined materially because of lower activity, reduced shipments of higher-margin capital equipment, weaker Drilling Technologies demand and pricing pressure in Flow Equipment.
- North American rig activity was lower, particularly in the Drilling Technologies product line. Management stated that orders increased sequentially, but many orders were destined outside North America and had longer lead times.
- Production Equipment and Valve Solutions benefited from stronger shipments, new customers, capacity investments and improved automation. These gains were partly offset by weaker Flow Equipment demand.
- Corporate selling, general and administrative expense increased $2.3 million in the quarter and $5.3 million year to date, primarily from higher personnel costs and public-company compliance and professional fees.
- The 2012 comparison benefited from contingent consideration credits of $4.9 million in the quarter and $3.9 million year to date. The 2013 period included $1.8 million of transaction expenses in the quarter and $1.8 million year to date, primarily related to acquisitions completed after quarter-end.
- Net cash provided by financing activities was $104.0 million, primarily reflecting net long-term borrowings of $109.8 million. Cash was raised in advance of acquisitions completed on July 1, 2013.
Guidance, Outlook, Risks and Unusual Items
Management expects cash on hand, operating cash flow and available Credit Facility capacity to fund operations, working capital, capital expenditures and financing obligations for the foreseeable future. The 2013 capital expenditure budget was approximately $64.0 million, including approximately $25.0 million of maintenance capital expenditures. The filing does not provide formal revenue or earnings guidance.
On July 1, 2013, the company completed three acquisitions for aggregate consideration of approximately $232.0 million: Blohm + Voss Oil Tools, Moffat 2000 and a joint purchase of Global Tubing. The acquisitions were financed with cash on hand and Credit Facility borrowings. Global Tubing will be accounted for using the equity method.
- Management viewed crude oil prices as generally adequate to support current exploration and production activity, including deepwater activity. Low North American natural gas prices continued to pressure pressure-pumping and land-drilling-related businesses.
- Key risks include oil and gas price volatility, customer capital spending, demand forecasting, competition, raw-material and skilled-labor availability, acquisition integration, international political and economic conditions, environmental liabilities, operating hazards, access to capital and variable-rate debt exposure.
- The company had $75.0 million of interest-rate swaps expiring in August 2013. Foreign-currency translation reduced comprehensive income by $24.9 million for the first six months.
- Legal reserves were immaterial, and management did not expect pending proceedings to have a material adverse effect. There were no material changes to contractual obligations or critical accounting policies, and no material off-balance-sheet arrangements other than ordinary-course operating leases.
- Disclosure controls and procedures were determined to be effective as of June 30, 2013, with no material changes to internal control over financial reporting.
Investor Verification Priorities
- Verify the funding, purchase-price allocation, debt impact and operating contribution of the three acquisitions completed July 1, 2013.
- Monitor whether North American rig activity and Drilling Technologies volumes recover sufficiently to improve fixed-cost absorption and margins.
- Assess sustainability of the Flow Equipment business amid lower orders, excess industry inventory and pricing pressure.
- Reconcile cash generation with the increased debt balance and evaluate remaining Credit Facility capacity after the July acquisitions.
- Track the company’s ability to achieve its approximately $64.0 million 2013 capital expenditure budget while funding acquisitions and working capital.
- Review foreign-currency exposure, variable-rate debt and the maturity or replacement of the interest-rate swaps expiring in August 2013.