Business Context and Reporting Period
Forum Energy Technologies, Inc. is a global oilfield products company serving subsea, drilling, completion, production and infrastructure markets. The unaudited Form 10-Q covers the quarter and six months ended June 30, 2015, with comparisons to the corresponding 2014 periods. Reportable segments are Drilling & Subsea and Production & Infrastructure.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $284.4 million | $428.3 million | $632.5 million | $832.2 million |
| Gross profit | $84.9 million | $138.0 million | $194.0 million | $265.9 million |
| Gross margin | 29.9% | 32.2% | 30.7% | 32.0% |
| Operating income | $22.4 million | $65.8 million | $62.7 million | $127.2 million |
| Operating margin | 7.9% | 15.4% | 9.9% | 15.3% |
| Net income attributable to common stockholders | $8.9 million | $39.5 million | $37.5 million | $76.1 million |
| Diluted EPS | $0.10 | $0.41 | $0.41 | $0.80 |
- Q2 revenue fell 33.6%; six-month revenue fell 24.0%.
- Q2 segment operating income declined 66.0% to $22.5 million, while the segment margin decreased to 7.9% from 15.5%.
- Six-month operating cash flow was $55.9 million, down from $113.1 million in 2014.
- Six-month investing cash outflow was $79.1 million, including $60.8 million for the J-Mac acquisition and $19.7 million of capital expenditures.
- Cash and equivalents were $57.8 million at June 30, 2015, compared with $76.6 million at December 31, 2014.
- Total debt was $438.3 million, consisting primarily of $402.6 million of 6.25% senior notes due 2021 and $35.0 million drawn on the revolving credit facility. Approximate net debt was $380.5 million.
- The $600 million revolving facility had $552.8 million of additional borrowing capacity, subject to limitations, and $12.2 million of outstanding letters of credit. The company was in compliance with all financial covenants.
Material Changes Versus the Prior Comparable Period
- Drilling & Subsea revenue declined 39.2% in Q2 and 28.9% for the six-month period, primarily because of lower North American drilling and completion activity and weaker deepwater subsea investment.
- Production & Infrastructure revenue declined 23.1% in Q2 and 15.0% for the six-month period, reflecting lower surface production equipment, flow equipment and valve sales; J-Mac partially offset the decline.
- Q2 Drilling & Subsea operating margin fell to 9.1% from 18.0%; the quarter included $2.8 million of severance and facility-closure costs. Six-month results included $7.3 million of such costs.
- Production & Infrastructure operating margin fell to 13.2% in Q2 from 17.8%, partly because of lower volumes, pricing pressure and reduced earnings from the Global Tubing investment.
- Inbound orders declined to $198.3 million in Q2 from $444.7 million and to $486.0 million for six months from $930.5 million.
- The company completed the $64.2 million acquisition of J-Mac Tool, Inc. on February 2, 2015. The acquisition was included in Production & Infrastructure and was not material to consolidated results during the period.
- Share repurchases totaled approximately $100.2 million since program inception, leaving approximately $49.8 million of authorization. Q2 employee tax-withholding share purchases were 11,877 shares and were not purchases under the public program.
Outlook, Commentary, Risks and Unusual Items
Management stated that the sharp decline in oil and natural gas prices had materially reduced customer exploration, production, drilling and completion activity. Average Q2 WTI and Brent prices were 44% below the prior-year quarter, while Henry Hub natural gas prices were 40% lower. Global active rigs declined 36% year over year, including a 51% decline in the U.S. rig count. Management expects adverse market conditions to continue at least through 2015 and did not provide specific revenue or earnings guidance in the filing.
- Key risks include oil and gas price volatility, reduced customer capital and operating budgets, competition and pricing pressure, lower manufacturing utilization, demand forecasting, acquisition integration, availability of capital and skilled labor, foreign currency movements, environmental and operating hazards, political and regulatory conditions, and potential changes in borrowing capacity if adjusted EBITDA declines.
- The 2015 capital expenditure budget was approximately $35.0 million, excluding potential acquisitions.
- Legal proceedings are considered ordinary-course matters; reserves were immaterial and management did not expect a material adverse effect.
- Foreign exchange results were a $4.1 million loss in Q2 but a $2.6 million gain for the six-month period, compared with a $4.6 million loss for the 2014 six-month period.
- The effective tax rate was 17.7% in Q2 and 25.0% for six months; management estimated a 25% full-year 2015 effective tax rate.
- Management reported effective disclosure controls as of June 30, 2015, with no material changes in internal control over financial reporting.
Investor Verification Priorities
- Verify whether oil prices, rig counts, customer capital spending and inbound orders recover or remain depressed after June 30, 2015.
- Assess whether cost reductions offset continued volume declines and whether the $2.8 million Q2 and $7.3 million year-to-date severance and facility-closure costs recur.
- Monitor operating cash conversion, inventory growth, working-capital requirements and the decline in cash from $76.6 million to $57.8 million.
- Confirm compliance with credit-facility covenants and available borrowing capacity, particularly if EBITDA weakens.
- Evaluate J-Mac integration and the financial returns from continued acquisition activity.
- Review the impact of foreign currency movements, subsea exposure, Global Tubing earnings and the pending adoption of new revenue-recognition guidance.