Forum Energy Technologies, Inc. — 2017 Q3 Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2017. The company is a global oilfield products manufacturer and service provider serving drilling, subsea, completions, production and infrastructure markets through three reportable segments: Drilling & Subsea, Completions, and Production & Infrastructure.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $198.7 million | $138.3 million | $570.9 million | $440.4 million |
| Gross profit | $47.6 million | $29.3 million | $135.8 million | $69.1 million |
| Gross margin | 23.9% | 21.2% | 23.8% | 15.7% |
| Operating loss | $(13.9) million | $(26.2) million | $(114.5) million | $(104.1) million |
| Net loss attributable to common stockholders | $(14.8) million | $(18.0) million | $(108.5) million | $(69.5) million |
| Diluted loss per share | $(0.15) | $(0.20) | $(1.13) | $(0.77) |
| Operating cash flow | Not separately provided | Not separately provided | $(17.1) million | $44.2 million |
- Segment revenue, Q3: Drilling & Subsea $54.7 million, Completions $60.0 million, and Production & Infrastructure $85.0 million.
- Segment operating results, Q3: Drilling & Subsea $(8.9) million, Completions $1.6 million, Production & Infrastructure $4.3 million, and Corporate $(9.3) million.
- Orders: Q3 orders increased to $230.4 million from $145.0 million; nine-month orders increased to $638.4 million from $414.5 million.
- Cash and debt: Cash and cash equivalents were $156.4 million at September 30, 2017, compared with $234.4 million at December 31, 2016. Total debt was $399.3 million, principally $400.0 million of 6.25% senior notes due October 2021.
- Liquidity: The company had no borrowings under its revolving credit facility, $7.3 million of outstanding letters of credit, and approximately $113.3 million of borrowing capacity under the facility in effect at September 30, 2017. The company was in compliance with its financial covenants.
- Cash investing: Nine-month investing cash outflows were $66.7 million, including $47.9 million for acquisitions and $19.7 million of capital expenditures.
Material changes versus the prior comparable period
- Q3 revenue increased 43.7%, driven by higher North American drilling and completions activity, increased production equipment and valve sales, and acquisition-related revenue.
- Nine-month revenue increased 29.6%. Completions revenue rose 63.6%, Production & Infrastructure rose 33.6%, and Drilling & Subsea rose 6.2%.
- Q3 segment operating loss improved to $(12.3) million from $(23.7) million, while the segment operating margin improved to negative 6.2% from negative 17.1%.
- Despite improved operating performance, nine-month consolidated operating loss worsened because the company recorded $68.0 million of goodwill impairment in the second quarter and $0.6 million of intangible-asset impairment in the third quarter.
- Operating cash flow declined to $(17.1) million from $44.2 million, primarily due to increased accounts receivable and inventory investment associated with higher activity and anticipated recovery.
- Cash declined by $78.0 million during the first nine months, compared with a $23.3 million increase in the prior-year period.
Outlook, commentary, risks and unusual items
- Management attributed improved demand to higher commodity prices, increased U.S. rig activity and stronger North American customer budgets. The average U.S. active rig count was 946 in Q3 2017 versus 479 in Q3 2016.
- Offshore and certain international markets remained weak. Management stated that the pace and strength of the energy-market recovery remained uncertain.
- Hurricane Harvey temporarily idled facilities and operations during the third quarter, causing foregone revenue and under-absorption of manufacturing costs.
- Drilling & Subsea included approximately $2.0 million of severance and facility-closure costs in Q3; the company also abandoned a specific Subsea product line and recorded the related $0.6 million intangible impairment.
- In January 2017, the company acquired Cooper for total consideration of approximately $14.0 million. In July 2017, it acquired Multilift for approximately $39.4 million in cash.
- After quarter-end, on October 2, 2017, the company acquired the remaining interests in Global Tubing for approximately $294.0 million, consisting of approximately $120.5 million in cash and 11.5 million common shares. This transaction is a material subsequent event and was not reflected in the September 30 balance sheet.
- On October 30, 2017, the revolving credit facility was amended and expanded from $140.0 million to $300.0 million, subject to a borrowing base and other limitations. The facility matures in July 2021, with a potential extension to October 2022 if specified refinancing conditions are met.
- The company expects cash on hand and operating cash generation to fund operations, working capital, capital expenditures and financing obligations for the foreseeable future, but the filing provides no formal revenue, earnings or cash-flow guidance.
- Key risks include oil and gas price volatility, customer demand and order deferrals, weak offshore activity, acquisition integration, access to capital, foreign exchange, operating hazards, regulation, environmental liabilities and covenant or borrowing-base constraints.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2017, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess the effect of the Global Tubing acquisition, including the $120.5 million cash payment, 11.5 million share issuance, incremental debt or liquidity needs, and purchase accounting.
- Monitor whether North American activity and orders convert into sustained revenue and positive operating and free cash flow.
- Evaluate the remaining risk of further goodwill or intangible impairments, particularly in the Subsea business, given continuing offshore weakness.
- Reconcile the company’s liquidity after the Global Tubing transaction with the expanded borrowing-base facility and the $400.0 million of senior notes due in 2021.
- Track working-capital requirements, especially accounts receivable and inventory, which drove negative operating cash flow in the first nine months.
- Verify the impact of Hurricane Harvey, acquisition integration, facility closures and product-line abandonment on future margins.
- Review the company’s adoption of the new revenue-recognition standard, which it planned to implement using the modified retrospective method and expected not to produce a material transition adjustment.