Forum Energy Technologies, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. (FET) is a global supplier of engineered equipment, consumable products and related services to the oil, natural gas, industrial and renewable energy industries. The company reports three segments: Drilling & Downhole, Completions, and Production. This unaudited filing covers the three and six months ended June 30, 2022, compared primarily with the corresponding 2021 periods.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $172.2 million | $137.4 million | $327.4 million | $251.9 million |
| Gross profit | $48.6 million | $32.2 million | $87.2 million | $58.4 million |
| Gross margin | 28.2% | 23.4% | 26.6% | 23.2% |
| Operating income (loss) | $6.0 million | $(9.6) million | $0.3 million | $(24.0) million |
| Net income (loss) | $9.3 million | $(21.8) million | $0.1 million | $(51.5) million |
| Diluted EPS | $1.15 | $(3.87) | $0.01 | $(9.15) |
| Operating cash flow | Not separately provided | Not separately provided | $(50.6) million | $2.4 million |
Q2 operating margin was 3.5%, compared with negative 7.0% in the prior-year quarter. Six-month operating margin was approximately 0.1%, compared with negative 9.5% in the prior-year period. Q2 results benefited from a $12.8 million foreign-exchange and other gain; the prior-year quarter included a $4.2 million loss on extinguishment of debt.
Segment revenue and Q2 operating results were: Drilling & Downhole revenue of $76.5 million and operating income of $8.5 million; Completions revenue of $66.1 million and operating income of $3.6 million; and Production revenue of $29.9 million and operating loss of $0.2 million.
At June 30, 2022, cash and cash equivalents were $26.9 million, compared with $46.9 million at December 31, 2021. Total assets were $807.5 million and total equity was $308.5 million. Inventories increased to $271.2 million from $241.7 million at year-end, while trade receivables increased to $147.1 million from $123.9 million.
Total debt was $269.5 million, including $257.0 million principal amount of 2025 Notes and $33.6 million drawn under the revolving Credit Facility, partially offset by debt discount and issuance costs. The 2025 Notes mature in August 2025 and the Credit Facility matures in September 2026. Credit Facility availability was $114.3 million after $33.6 million of borrowings and $14.5 million of letters of credit. Outstanding letters of credit totaled $14.8 million.
Material changes versus the prior comparable period
- Q2 revenue increased 25.3%; six-month revenue increased 30.0%, driven by stronger drilling, completions, hydraulic fracturing, well intervention and subsea activity.
- Q2 Drilling & Downhole revenue increased 24.2%, with operating margin improving to 11.1% from 4.4%.
- Q2 Completions revenue increased 42.1%, turning to a 5.4% operating margin from a 0.8% operating loss margin.
- Production revenue increased only 1.8%, but its operating loss narrowed to $0.2 million from $4.0 million.
- Six-month operating results improved substantially, but the company remained slightly below segment operating breakeven before the gain on asset disposals.
- Operating cash flow deteriorated to a $50.6 million use, primarily because inventory and receivables absorbed cash. Working-capital changes used approximately $75.2 million, compared with providing $16.8 million in the prior-year period.
- Financing activities provided $32.6 million, principally from net borrowings under the revolving Credit Facility, compared with $70.8 million used in the prior-year period, which included repurchases of 2025 Notes.
Guidance, outlook, risks and unusual items
Management expects 2022 capital expenditures to be less than $10.0 million, primarily for replacement of end-of-life machinery and equipment. Management stated that available cash, operating cash flow and estimated Credit Facility availability are expected to fund current operations for the next 12 months; however, this assessment depends on market conditions and the company’s ability to generate positive operating cash flow and maintain borrowing-base availability.
Management linked the improved outlook to higher energy prices and activity levels. Average Q2 WTI and Brent prices were $108.83 and $113.84 per barrel, respectively, while Henry Hub natural gas averaged $7.50 per Mcf. Global active rigs averaged 1,642, up from 1,256 in the prior-year quarter, and the U.S. rig count ended the quarter at 753.
Key risks include volatility in oil and natural gas prices, potential recessionary effects from higher interest rates, COVID-19 disruptions, supply-chain constraints, labor shortages, inflation in freight and materials, foreign-exchange volatility, and reliance on customer capital and operating budgets. Public North American exploration and production companies continue to face investor pressure to limit capital expenditures.
Unusual items included the $12.8 million Q2 foreign-exchange and other gain, significant working-capital investment, a $0.9 million gain on disposal of assets and other, and the dilutive effect of the convertible 2025 Notes in Q2 EPS. The filing states that legal reserves are immaterial and that pending proceedings are not expected to have a material adverse effect.
Important facts for investors to verify
- Whether improving revenue and segment profitability translate into sustained positive operating cash flow after inventory and receivables normalize.
- The company’s ability to refinance or repay the $257.0 million principal amount of 2025 Notes before the August 2025 maturity.
- Borrowing-base availability under the Credit Facility, including the impact of changes in eligible receivables and inventory and the associated financial covenants.
- Whether Q2 foreign-exchange gains and other unusual items recur; the filing does not provide a clear recurring earnings measure excluding these items.
- The effect of inflation, supply-chain constraints and higher freight and employee costs on gross margins.
- Future demand sensitivity to oil and gas prices, rig counts, customer capital budgets and macroeconomic conditions.
- The potential dilution from convertible 2025 Notes; approximately $123 million principal amount was subject to mandatory conversion provisions under specified stock-price conditions as of June 30, 2022.
- The company’s stated expectation of less than $10.0 million in 2022 capital expenditures and its assumption that liquidity will be adequate for the next 12 months.