Forum Energy Technologies, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. is a global supplier of engineered equipment, consumable products and services to the oil, natural gas, industrial and renewable energy industries. The filing covers the unaudited quarter and nine months ended September 30, 2021. Reportable segments are Drilling & Downhole, Completions and Production.
Market conditions improved from the COVID-19-affected prior-year period as oil and natural gas prices, drilling activity and hydraulic fracturing activity recovered. However, supply-chain disruptions, labor constraints and inflationary pressures continued.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $141.0 million | $103.6 million | $392.9 million | $399.5 million |
| Gross profit | $34.9 million | $13.1 million | $93.3 million | $48.1 million |
| Gross margin | 24.7% | 12.7% | 23.7% | 12.0% |
| Operating loss | $7.4 million | $37.0 million | $31.4 million | $127.5 million |
| Net loss | $11.6 million | $21.6 million | $63.1 million | $64.2 million |
| Diluted loss per share | $2.05 | $3.86 | $11.19 | $11.52 |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $(8.1) million | $1.7 million |
Q3 revenue increased 36.1% year over year, while nine-month revenue declined 1.7%. The company remained unprofitable, but operating loss and segment operating loss improved materially. Q3 segment operating margin improved to negative 5.3% from negative 31.7%; nine-month segment operating margin improved to negative 8.3% from negative 26.6%.
- Drilling & Downhole: Q3 revenue rose 46.4% to $63.2 million and segment operating income was $4.0 million, compared with a $13.2 million loss. Nine-month revenue rose 3.8% to $173.4 million.
- Completions: Q3 revenue increased 153.1% to $49.7 million and segment operating income was $0.3 million, compared with an $11.9 million loss. Nine-month revenue increased 52.3% to $134.1 million.
- Production: Q3 revenue declined 30.3% to $28.5 million and segment operating loss widened to $3.4 million. Nine-month revenue declined 40.8% to $85.8 million.
Liquidity, debt and cash flow
- Cash and cash equivalents were $50.0 million at September 30, 2021, down from $128.6 million at December 31, 2020.
- Total debt was $232.1 million, including $257.0 million principal amount of 2025 Notes, net of discounts and issuance costs, compared with $294.7 million at year-end 2020.
- The company repurchased $59.9 million principal amount of 2025 Notes for $58.6 million during the first nine months, resulting in a $5.3 million loss on extinguishment.
- The amended revolving Credit Facility has commitments of $179.0 million, matures in September 2026, and had no borrowings at September 30, 2021. The borrowing base was $146.0 million, with $15.2 million reserved for letters of credit and $130.8 million of remaining availability.
- Operating activities used $8.1 million of cash. Investing activities provided $4.5 million, primarily due to $6.8 million of asset-sale proceeds. Financing activities used $74.6 million, principally for debt repurchases and repayment of the revolving facility.
- Management expected 2021 capital expenditures to be less than $5.0 million and believed available cash, operating cash flow and Credit Facility availability would be adequate for current operations over the next 12 months.
Material changes versus the prior comparable period
- Improved energy-market activity drove substantially higher Drilling & Downhole and Completions sales, especially subsea, stimulation and intervention, and coiled tubing products.
- Production results were negatively affected by the December 2020 sale of the ABZ and Quadrant valve brands. The disposition reduced nine-month revenue by approximately $32.5 million compared with the prior year.
- Operating results benefited from higher volumes, lower employee and facility costs, and lower inventory and lease impairments. No long-lived-asset impairments were recorded in the first nine months of 2021, compared with $34.5 million of long-lived-asset impairments in the comparable 2020 period.
- Comparability of net loss was affected by 2020 nonrecurring debt gains, including a $72.5 million gain on extinguishment of debt, versus a $5.3 million loss in 2021.
- The nine-month 2021 tax expense was $3.8 million, compared with a $13.8 million tax benefit in 2020, which included a $16.6 million CARES Act loss-carryback benefit.
- Total inbound orders increased to $472.6 million for the first nine months of 2021 from $348.5 million in the prior-year period.
Outlook, commentary, risks and unusual items
Management reported improving demand as commodity prices and rig activity recovered. Average Q3 2021 WTI and Brent prices were $70.54 and $73.51 per barrel, respectively, versus $40.89 and $42.91 in Q3 2020. Average global active rigs increased to 1,419 from 1,032, and the U.S. rig count ended the quarter at 521.
Key risks include dependence on oil and natural gas prices and customer capital budgets, continued COVID-19 outbreaks, supply-chain and labor disruptions, inflation, foreign-exchange movements, borrowing-base volatility, high debt and interest costs, and the ability to generate positive operating cash flow. The 2025 Notes are secured and bear 9.00% interest, with 6.25% payable in cash and 2.75% payable in cash or additional notes at the company’s option. Approximately $116.0 million principal amount was subject to mandatory conversion provisions at specified stock-price thresholds.
Management stated that the company may use operating cash flow, divestiture proceeds or other capital to reduce the 2025 Notes. It also may pursue acquisitions, which could require additional financing. Legal proceedings were described as ordinary-course matters with immaterial reserves and no expected material adverse effect.
No material changes in internal control over financial reporting were reported, and management concluded that disclosure controls and procedures were effective as of September 30, 2021.
Most important facts for investors to verify
- Whether improving orders and rig activity translate into sustained positive operating cash flow and profitability.
- The availability, borrowing-base requirements and financial covenant triggers under the amended Credit Facility.
- Cash interest requirements, conversion provisions and refinancing or repayment capacity for the 2025 Notes.
- The extent to which Production segment weakness reflects the valve-brand divestiture versus continuing underlying demand pressure.
- The effect of supply-chain delays, labor shortages and inflation on gross margins and working capital.
- The company’s ability to use tax attributes, given valuation allowances and losses in multiple jurisdictions.
- The November 2021 board approval of a common-stock repurchase program of up to $10 million, which occurred after the reported quarter and was not reflected in the September 30, 2021 financial statements.