Business Context and Reporting Period
Forum Energy Technologies, Inc. (FET) is a global manufacturer serving oil, natural gas, industrial, renewable energy, defense and communications markets. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023. Following the Variperm acquisition, FET reports two segments: Drilling and Completions and Artificial Lift and Downhole.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $202.4 million | $189.0 million | Up 7.1% |
| Gross profit | $63.8 million | $52.1 million | Up 22.4% |
| Gross margin | 31.5% | 27.6% | Up 3.9 percentage points |
| Operating income | $3.2 million | $6.9 million | Down 53.3% |
| Operating margin | 1.6% | 3.6% | Down 2.0 percentage points |
| Net loss | $10.3 million | $3.5 million | Loss increased |
| Loss per diluted share | $0.85 | $0.34 | Loss increased |
| Cash flow from operations | $5.0 million | $(23.1) million | Improved by $28.2 million |
| Capital expenditures | $2.9 million | $1.1 million | Increased |
Artificial Lift and Downhole revenue increased 34.0% to $83.3 million, primarily due to Variperm and higher casing equipment sales. Drilling and Completions revenue declined 6.1% to $119.1 million, reflecting lower drilling and completions activity, partly offset by stronger Subsea revenue. Segment operating income increased 38.0% to $9.1 million, but reported operating income declined because of $5.9 million of acquisition-related transaction expenses.
At March 31, 2024, cash and cash equivalents were $48.5 million. Total assets were $1.02 billion, including $303.0 million of net inventory, $261.4 million of net intangible assets and $63.2 million of goodwill. Total equity was $446.2 million.
Debt, Liquidity and Cash Flow
- Principal debt outstanding included $134.2 million of 2025 Notes, $96.5 million under the revolving Credit Facility and $59.7 million under the Seller Term Loan. Carrying-value long-term debt, net of current maturities, was $282.3 million.
- The 2025 Notes bear interest at 9.00% and mature in August 2025. The Seller Term Loan matures in December 2026 and bears interest of 11.00% during its first year, increasing to 17.00% and then 17.50% in later periods.
- The Credit Facility matures, subject to certain exceptions, in September 2028. At quarter-end, the borrowing base was $189.1 million, borrowings were $96.5 million, letters of credit were $21.0 million and remaining availability was $71.6 million.
- Operating cash flow was positive primarily because of working-capital benefits from accounts receivable and inventories. Investing cash outflows were $152.8 million, including $150.1 million for the Variperm acquisition. Financing cash inflows were $151.8 million, largely from Credit Facility and Seller Term Loan borrowings.
- Management expects approximately $10.0 million of 2024 capital expenditures, primarily for replacement machinery and equipment, and believes cash on hand, operating cash flow and Credit Facility availability will be adequate to fund operations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased $13.4 million, driven principally by the Variperm contribution and higher Artificial Lift and Downhole activity.
- Gross margin improved, while operating margin declined because of $5.9 million of transaction expenses and higher corporate costs.
- Interest expense increased 92.6% to $8.8 million because of additional Credit Facility borrowings and the Seller Term Loan used to fund Variperm.
- Net loss increased to $10.3 million from $3.5 million, despite lower foreign exchange and other losses.
- FET completed the Variperm acquisition on January 4, 2024, for approximately $150.0 million of cash and 2.0 million common shares. Preliminary purchase accounting recorded $63.9 million of goodwill and increased intangible assets materially.
- Weighted average shares outstanding increased to 12.2 million from 10.2 million, primarily reflecting shares issued in connection with the acquisition.
- Total orders increased to $204.4 million from $178.9 million, with Artificial Lift and Downhole orders rising to $87.8 million from $57.6 million.
Outlook, Risks and Unusual Items
Management expects long-term energy demand to continue rising and anticipates that international markets will outperform the United States in 2024. Near-term demand remains influenced by oil and natural gas prices, customer capital budgets, global rig counts and equipment utilization. Global active rigs averaged 1,796 in the first quarter, down 5.3% from the prior-year quarter; North American rig activity declined while international activity increased.
- Average natural gas prices were 18.6% lower year over year, and U.S. customers are expected to maintain disciplined capital spending.
- Geopolitical tensions, possible disruptions to energy markets and international supply chains, commodity-price volatility and lower rig activity could reduce demand.
- Liquidity risk is heightened by the August 2025 maturity of the 2025 Notes, elevated interest rates and increased acquisition-related leverage. Credit Facility availability depends on eligible receivables and inventory and may decline with changes in those balances.
- The Seller Term Loan and Credit Facility include covenants and fixed-charge coverage requirements that may apply if excess availability falls below specified thresholds.
- Variperm purchase accounting remains preliminary and may change based on final valuations of inventory, property and equipment, intangible assets, deferred taxes and leases.
- FET is integrating Variperm into its internal control framework. Management concluded that disclosure controls were effective as of March 31, 2024.
- Legal reserves were immaterial, and management does not expect pending proceedings to have a material adverse effect. The filing does not identify a material litigation contingency.
Investor Verification Checklist
- Verify the integration performance, standalone contribution and expected synergies of Variperm relative to the acquisition financing burden.
- Monitor refinancing or repayment plans for the $134.2 million of 2025 Notes maturing in August 2025.
- Track Credit Facility borrowing-base availability, covenant compliance and the applicable fixed-charge coverage test.
- Assess whether higher gross margins and order growth can offset lower North American activity, elevated interest expense and acquisition-related costs.
- Reconcile future segment results using the recast Drilling and Completions and Artificial Lift and Downhole reporting structure.
- Review final Variperm purchase-price allocations and any resulting changes to goodwill, intangible assets, amortization or deferred taxes.
- Confirm 2024 capital expenditures, operating cash flow conversion and the remaining $2.4 million authorization under the share-repurchase program.