FORUM ENERGY TECHNOLOGIES, INC. annual report, FY2023

Forum Energy Technologies, Inc. — FY2023 Form 10-K Summary

Business context and reporting period

Forum Energy Technologies, Inc. is a global manufacturer serving oil, natural gas, industrial and renewable energy markets. It operates through Drilling & Downhole, Completions and Production segments. The filing covers the fiscal year ended December 31, 2023; it does not provide separate fourth-quarter financial statements in the supplied text.

More than 60% of 2023 revenue came from consumable products and activity-based equipment, with the balance primarily from capital products. The company had approximately 1,600 employees and no customer represented more than 10% of consolidated revenue.

Key financial metrics

Metric	2023	2022	Change
Revenue	$738.9 million	$699.9 million	5.6% increase
Gross profit	$204.2 million	$188.5 million	8.3% increase
Gross margin	27.6%	26.9%	Approximately 70 bps increase
Operating income	$20.7 million	$17.3 million	19.6% increase
Operating margin	2.8%	2.5%	Improved
Net income (loss)	$(18.9) million	$3.7 million	Decline
Diluted earnings (loss) per share	$(1.85)	$0.62	Decline
Cash flow from operations	$8.2 million	$(17.1) million	Improved
Capital expenditures	$7.9 million	$7.5 million	Increase

Revenue growth reflected higher international activity and a 3.6% increase in the global rig count. International rig activity increased 9.6%, while the U.S. rig count declined 5.0%. Average WTI and Brent prices declined to $77.58 and $82.49 per barrel, respectively, and average Henry Hub natural gas prices declined 60.8% from 2022.

Drilling & Downhole: Revenue increased 8.2% to $329.6 million; operating income increased to $33.8 million, although margin declined to 10.2% from 10.6%.
Completions: Revenue was essentially flat at $265.6 million; operating income declined 6.7% to $10.8 million, primarily due to unfavorable sales mix.
Production: Revenue increased 10.9% to $145.9 million; operating income improved to $6.5 million from a $0.4 million loss, supported by higher project revenue, lower freight costs and operating leverage.

Net loss was driven primarily by $10.2 million of foreign exchange losses and other expense, compared with a $24.5 million gain in 2022, and $11.1 million of income tax expense despite the pretax loss. The effective tax rate was 141.6%, including an $8.3 million increase in valuation allowances against deferred tax assets.

Balance sheet, debt and liquidity

Cash and cash equivalents were $46.2 million at December 31, 2023, compared with $51.0 million at year-end 2022.
Net inventories increased to $299.6 million from $269.8 million. The inventory reserve was $38.2 million, and 2023 inventory write-downs were $2.8 million.
Total debt was $130.8 million, compared with $239.9 million in 2022. The reduction primarily reflected the mandatory conversion of $122.8 million principal amount of 2025 Notes into approximately 4.5 million common shares in January 2023.
The company had $134.2 million principal amount of 9.00% convertible secured 2025 Notes outstanding at December 31, 2023. The notes mature in August 2025.
No Credit Facility borrowings were outstanding at year-end. Availability was $147.1 million after $20.3 million of letters of credit.
Operating cash flow improved to $8.2 million, but inventory growth used $31.9 million of cash. Net cash decreased by $4.9 million during the year.
The company expects approximately $10 million of 2024 capital expenditures and stated that cash on hand, operating cash flow and expected Credit Facility availability should fund operations for the next 12 months.

Material changes versus the prior comparable period

Revenue, gross profit and operating income increased, while consolidated net income moved from a profit to a loss.
Corporate selling, general and administrative expense declined 20.5% to $27.3 million, primarily due to lower variable compensation.
Interest expense declined 42.0% to $18.3 million following the 2025 Notes conversion.
Foreign exchange and other expense changed from a $24.5 million gain in 2022 to a $10.2 million loss in 2023.
Operating cash flow improved by $25.2 million, primarily because working-capital cash usage declined from $65.1 million to $21.5 million.
Bookings declined to $724.3 million from $780.7 million, and year-end backlog declined to $241.6 million from $264.8 million.
The company repurchased approximately 139,000 shares for $3.5 million during 2023. Remaining authorization was $2.4 million; no shares were repurchased during the fourth quarter.

Guidance, outlook, commentary and unusual items

Management expects long-term global energy demand to rise and believes hydrocarbons will remain important while renewable energy develops. Management expects international markets to continue growing in 2024, while U.S. exploration and production companies are expected to maintain disciplined capital spending. The company is developing products intended to reduce customer costs and emissions and is pursuing renewable-energy applications.

For 2024, management indicated expected capital expenditures of approximately $10 million and stated that liquidity should be adequate for current operations over the next 12 months. This is liquidity commentary rather than revenue or earnings guidance.

On January 4, 2024, FET completed the Variperm acquisition for approximately $150.0 million in cash and 2.0 million common shares. The transaction was funded in part by $90.0 million drawn under the Credit Facility and a $60.0 million Seller Term Loan. The Seller Term Loan matures in December 2026 and carries interest rates of 11.0% initially, increasing to 17.0% and then 17.5% over successive periods.

Transaction expenses were $2.9 million in 2023.
The 2022 results included a $7.0 million gain from sale-leaseback transactions; no comparable gain occurred in 2023.
Asbestos litigation remained a contingency. The estimated net liability for current and anticipated five-year claims was $0.3 million at year-end, but actual costs could be higher.
Management reported no material cybersecurity incidents and stated that disclosure controls and internal control over financial reporting were effective. Deloitte issued unqualified audit opinions.

Principal risks and contingencies

Revenue and profitability remain highly sensitive to oil and natural gas prices, drilling and completion activity, customer capital budgets and industry consolidation.
Backlog may be delayed, reduced or cancelled, and the company may not collect expected termination or change fees.
High inventory levels create exposure to excess or obsolete inventory and future margin write-downs.
Key supplier concentration, steel and component costs, tariffs, inflation, labor shortages and supply-chain disruptions may constrain production or margins.
The 2025 Notes mature in August 2025, and debt agreements impose financial and operating covenants. Variable-rate debt creates interest-rate exposure.
The Variperm acquisition creates integration, financing, employee-retention and unknown-liability risks.
Hydraulic-fracturing restrictions, environmental and safety regulation, climate-related rules, tariffs, litigation and asbestos claims could increase costs or reduce demand.
Cybersecurity incidents, adverse weather, geopolitical tensions, foreign-exchange movements and restricted access to capital markets could adversely affect results and liquidity.

Investor verification checklist

Verify the post-acquisition debt balance, borrowing-base availability and covenant compliance after the January 2024 Variperm closing.
Assess the company’s ability to refinance or repay the $134.2 million of 2025 Notes before maturity.
Monitor Variperm integration, acquisition synergies, purchase accounting and the effect of the 2.0 million share issuance on per-share economics.
Review inventory aging, reserve adequacy and working-capital requirements, particularly given $299.6 million of net inventory.
Track backlog conversion, bookings trends and customer cancellation or acceptance risks.
Evaluate whether international growth offsets weaker U.S. activity and lower commodity prices.
Review the effective tax rate, valuation allowances and potential realization of deferred tax assets.
Follow asbestos, Tenaris, environmental and other legal contingencies, including insurance recoverability.