Forum Energy Technologies, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Forum Energy Technologies, Inc. is a global supplier of engineered capital equipment, consumable products, and related services to the oil, natural gas, industrial, subsea, and renewable energy markets. The filing covers the fiscal year ended December 31, 2022, with comparisons to fiscal 2021. The company reports through Drilling & Downhole, Completions, and Production segments.
More than 68% of 2022 revenue came from consumable products and activity-based equipment. The company had approximately 1,500 employees, and no customer represented more than 10% of consolidated revenue.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $699.9 million | $541.1 million | +29.4% |
| Gross profit | $188.5 million | $123.3 million | +52.8% |
| Gross margin | 26.9% | 22.8% | +410 basis points |
| Operating income (loss) | $17.3 million | $(44.5) million | Improved $61.8 million |
| Operating margin | 2.5% | (8.2)% | Improved |
| Net income (loss) | $3.7 million | $(82.7) million | Improved $86.4 million |
| Diluted EPS | $0.62 | $(14.65) | Returned to profitability |
| Cash flow from operations | $(17.1) million | $(15.8) million | More cash used |
| Capital expenditures | $7.5 million | $2.4 million | Increased |
| Cash and equivalents | $51.0 million | $46.9 million | +$4.2 million |
| Net debt carrying amount | Approximately $239.1 million | $233.2 million | Increased |
Segment revenue was $304.6 million for Drilling & Downhole, $265.0 million for Completions, and $131.5 million for Production. Segment operating income was $32.2 million, $11.6 million, and a $0.4 million loss, respectively.
At December 31, 2022, inventory was $269.8 million, including a $39.3 million reserve; trade receivables were $154.2 million. The company had $156.1 million of remaining availability under its revolving Credit Facility, with no borrowings outstanding and $21.8 million of letters of credit outstanding.
Material changes versus the prior comparable period
- Revenue increased primarily from higher drilling, completions, hydraulic fracturing, artificial lift, and production-equipment activity as energy prices and global rig activity improved.
- Global average active rigs increased to 1,749 from 1,365; average U.S. active rigs increased to 723 from 478.
- Orders increased to $780.7 million from $632.3 million, and year-end backlog increased to $264.8 million from $196.5 million.
- Gross profit and margins improved across all three operating segments, although freight, labor, material, and inflation-related costs remained a constraint.
- Production reduced its operating loss to $0.4 million from $14.4 million; Drilling & Downhole and Completions returned stronger operating profits.
- Operating cash flow remained negative because working capital used $65.1 million, primarily for higher inventory and receivables to support customer demand.
- The company generated $32.1 million from sale-leaseback transactions and recognized a $7.0 million gain. The related properties were leased back for an initial annual rent of $2.7 million and an initial term of 12 years.
- Foreign exchange and other items produced a net gain of $24.5 million in 2022, compared with a $0.2 million loss in 2021, materially benefiting pretax results.
- The company repurchased approximately 103,000 common shares for approximately $3.0 million in the fourth quarter. Approximately $5.9 million remained available under the repurchase authorization at year-end.
Debt, liquidity, outlook, and management commentary
The 2025 Notes had $257.0 million of principal outstanding at year-end and carry a 9.0% interest rate, of which 6.25% is payable in cash and 2.75% may be paid in cash or additional notes. Approximately $122.8 million of principal mandatorily converted into approximately 4.5 million common shares in January 2023 after year-end, reducing the remaining principal balance.
Management expected 2023 capital expenditures to be less than $15.0 million and stated that cash on hand, operating cash flow, and expected Credit Facility availability should be adequate to fund operations for the next 12 months. The filing does not provide formal revenue or earnings guidance.
Management attributed the 2022 recovery to higher energy prices, improved drilling and completions activity, increased international and subsea activity, and stronger customer demand. Management also noted that public exploration and production companies continue to emphasize capital discipline and that activity remained below pre-pandemic levels.
Key contingencies and unusual items include inventory obsolescence risk, customer backlog cancellations or delays, inflation and supply-chain pressures, the 2025 Notes conversion, sale-leaseback proceeds and gain, asbestos litigation, and patent litigation involving Tenaris and DURACOIL coiled tubing products. The company reported fewer than 150 pending asbestos lawsuits and a $0.3 million net liability estimate for current and anticipated five-year claims. Management stated that ordinary-course litigation reserves were immaterial and that identified proceedings were not expected to have a material adverse effect, although the Tenaris matter could affect product sales or result in damages or royalties.
Principal risks
- Results remain highly dependent on oil and natural gas prices, drilling and completions activity, customer capital budgets, and broader economic conditions.
- Customer capital discipline, energy-transition investment, technological changes, and industry consolidation could limit demand for capital equipment.
- Raw-material inflation, tariffs, supplier concentration, labor shortages, and logistics disruptions could pressure margins and delivery performance.
- Backlog is subject to customer delays, reductions, cancellations, and acceptance issues; customers may not pay all termination or change fees.
- Substantial inventory and receivables require ongoing liquidity, while operating cash flow was negative in 2022.
- Debt covenants and the 2025 Notes create refinancing, interest-rate, conversion, and liquidity risks, particularly because a significant maturity was scheduled for 2025 before the January 2023 conversion.
- Environmental, hydraulic-fracturing, climate-change, emissions, safety, sanctions, anti-corruption, cybersecurity, currency, and product-liability requirements could increase costs or reduce demand.
Important facts for investors to verify
- Confirm the post-January 2023 principal balance of the 2025 Notes and the resulting increase in shares outstanding after the mandatory conversion.
- Assess whether negative operating cash flow and elevated inventory and receivables improve as demand normalizes.
- Evaluate the sustainability of the 2022 margin recovery after excluding the $7.0 million sale-leaseback gain and the $24.5 million foreign-exchange gain.
- Review Credit Facility borrowing-base requirements, covenant thresholds, letters of credit, and remaining liquidity.
- Monitor backlog conversion, order cancellations, customer concentration, and the quality of the $264.8 million backlog.
- Review inventory reserves, impairment sensitivity, deferred tax valuation allowances, and the $10.5 million of unrecognized tax benefits.
- Track asbestos claims, insurance recoveries, the Tenaris patent litigation, and any environmental or product-liability developments.
- Note that Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; inventory valuation was identified as the critical audit matter.