Forum Energy Technologies, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. (FET) is a global manufacturer and service provider for the oil, natural gas, industrial, renewable energy and related markets. Its reporting segments are Drilling & Downhole, Completions, and Production. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $181.8 million | $141.0 million | $509.3 million | $392.9 million |
| Gross profit | $51.4 million | $34.9 million | $138.6 million | $93.3 million |
| Gross margin | 28.2% | 24.7% | 27.2% | 23.7% |
| Operating income (loss) | $7.7 million | $(7.4) million | $8.0 million | $(31.4) million |
| Net income (loss) | $16.5 million | $(11.6) million | $16.5 million | $(63.1) million |
| Diluted EPS | $1.82 | $(2.05) | $2.37 | $(11.19) |
| Cash flow from operations | Not separately provided | Not separately provided | $(32.1) million | $(8.1) million |
- Q3 revenue increased 29.0%; nine-month revenue increased 29.6%, driven by higher drilling, completions and energy-related activity.
- Q3 segment operating margin improved to 4.2% from negative 5.3%; nine-month segment operating margin improved to 1.4% from negative 8.3%.
- Q3 foreign exchange and other gains were $18.3 million; nine-month gains were $37.1 million. These gains were a major contributor to reported net income.
- Q3 interest expense increased 14.2% to $8.1 million, primarily due to higher Credit Facility rates. Nine-month interest expense was $23.6 million, modestly below 2021.
- Cash and cash equivalents were $19.8 million at September 30, 2022, down from $46.9 million at December 31, 2021. Total assets were $790.3 million and total equity was $302.6 million.
- Operating cash usage increased primarily because accounts receivable and inventory consumed cash. Inventory was $270.6 million, up from $241.7 million at year-end 2021.
- Capital expenditures were $4.8 million through nine months; management expected full-year 2022 capital expenditures to be less than $10.0 million.
Debt and liquidity
- Principal amount outstanding under the 2025 Notes was $257.0 million. The notes carry a 9.0% interest rate and mature in August 2025; approximately $123 million of principal was subject to mandatory conversion conditions at September 30, 2022.
- Credit Facility borrowings were $10.7 million. The borrowing base was $160.0 million, with $22.1 million used for letters of credit and $127.2 million of remaining availability.
- The Credit Facility matures in September 2026, subject to specified exceptions and covenant terms. Availability depends on eligible receivables and inventory and could decline with changes in those balances.
- Management stated that cash on hand, operating cash flow and estimated Credit Facility availability were expected to fund current operations for the next 12 months.
Material changes versus the prior comparable periods
- Drilling & Downhole revenue increased 19.9% in Q3 and 28.9% for nine months; nine-month operating income rose to $24.0 million from $2.2 million.
- Completions revenue increased 45.4% in Q3 and 42.4% for nine months; the segment returned to profitability, with nine-month operating income of $8.8 million versus a small loss in 2021.
- Production revenue increased 20.3% in Q3 and 11.4% for nine months; the nine-month operating loss narrowed to $1.2 million from $11.3 million.
- Orders increased to $197.7 million in Q3 and $565.6 million for nine months, compared with $175.8 million and $472.6 million, respectively, in the prior-year periods.
- Gross margin improved, but freight, employee, material and other supply-chain costs remained elevated.
- Comprehensive loss was $6.1 million in Q3 and $29.5 million for nine months, despite net income, because of foreign-currency translation losses of $22.7 million and $46.2 million, respectively.
Outlook, commentary, risks and unusual items
Management attributed improving demand to higher global energy prices, increased drilling and completions activity, and recovery in international, offshore and subsea markets. The average global active rig count was 1,817 in Q3 2022 versus 1,419 in Q3 2021, while the average U.S. rig count increased to 761 from 496.
Management noted that public exploration and production companies remained focused on capital discipline, while private operators increased activity. The company expects hydrocarbons to remain important while it continues developing products for emissions reduction and renewable-energy applications.
- Key risks include commodity-price volatility, changes in customer capital budgets, recession risk from higher interest rates, COVID-19 disruptions, labor constraints, inflation, supply-chain delays, foreign-exchange volatility and activity levels below pre-pandemic norms.
- Operating cash flow was negative despite improved earnings, reflecting substantial working-capital investment.
- Reported earnings benefited materially from foreign-exchange gains; these gains may not recur and may reverse.
- Debt service and refinancing risk remain significant given the 2025 Notes, variable-rate Credit Facility borrowings and limited cash balance.
- Legal proceedings and contingencies were described as ordinary-course matters with immaterial reserves and no expected material adverse effect. No material changes to previously disclosed litigation were reported.
- The company repurchased approximately 56,000 shares for $1.1 million since approval of its $10.0 million repurchase program, leaving $8.9 million authorized; no shares were purchased during the first nine months of 2022.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting.
Investor verification points
- Verify whether revenue growth and order levels continue as commodity prices, rig counts and customer capital budgets change.
- Assess recurring operating profitability excluding the unusually large foreign-exchange gains.
- Monitor inventory and receivables growth, working-capital conversion and the ability to return to positive operating cash flow.
- Review Credit Facility borrowing-base availability, fixed-charge coverage requirements and 2025 Notes maturity and conversion conditions.
- Track freight, labor, material and supply-chain inflation and its effect on gross margins.
- Evaluate foreign-currency translation exposure and the potential volatility of comprehensive income.
- Confirm the company’s ability to maintain adequate liquidity through the next 12 months and fund the 2025 Notes obligations.