Forum Energy Technologies, Inc. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; filed March 4, 2022. The filing is an annual report, not a standalone fourth-quarter filing. Forum Energy Technologies is a global supplier of engineered capital equipment, consumable products, and related services to the oil, natural gas, industrial, subsea, renewable-energy, and other energy markets. Operations are organized into Drilling & Downhole, Completions, and Production.
Financial Performance and Position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $541.1 million | $512.5 million | Up 5.6% |
| Gross profit | $123.3 million | $(11.0) million | Improved $134.4 million |
| Gross margin | 22.8% | (2.2)% | Improved 25.0 points |
| Operating loss | $(44.5) million | $(231.6) million | Improved $187.1 million |
| Operating margin | (8.2)% | (45.2)% | Improved 37.0 points |
| Net loss | $(82.7) million | $(96.9) million | Improved $14.2 million |
| Diluted loss per share | $(14.65) | $(17.37) | Improved $2.72 |
| Cash flow from operations | $(15.8) million | $3.9 million | Declined $19.7 million |
| Capital expenditures | $2.4 million | $2.2 million | Up $0.2 million |
- Revenue mix: Drilling & Downhole revenue was $239.9 million, Completions revenue was $185.0 million, and Production revenue was $116.7 million. More than 78% of revenue came from consumable products and activity-based equipment.
- Segment profitability: Drilling & Downhole generated $4.7 million of operating income versus a $48.0 million loss in 2020. Completions reduced its operating loss to $4.5 million from $97.3 million. Production reduced its operating loss to $14.4 million from $33.4 million.
- Balance sheet: Cash and cash equivalents were $46.9 million, compared with $128.6 million at year-end 2020. Total assets were $791.3 million and total equity was $329.1 million.
- Working capital: Trade receivables increased to $123.9 million from $80.6 million. Net inventory was $241.7 million, including a $62.9 million reserve.
- Debt and liquidity: Total debt was $233.2 million, including $257.0 million principal amount of 9.00% convertible secured notes due 2025, net of discounts and issuance costs. The $179.0 million revolving Credit Facility had no borrowings outstanding and $127.4 million of availability at year-end, after $18.7 million of letters of credit.
- Margins and unusual charges: Cost of sales fell 20.2% despite higher revenue, primarily reflecting substantially lower inventory write-downs. Inventory write-downs were $8.1 million in 2021 versus $100.8 million in 2020. No long-lived-asset impairment charges were recorded in 2021.
Material Changes Versus 2020
- Improving oil and gas activity, higher commodity prices, and increased hydraulic-fracturing and intervention activity drove higher Drilling & Downhole and Completions revenue. U.S. average rig count increased 10%, while international average rig count declined 8%.
- Completions revenue increased 55.9%, led by a 71.3% increase in Stimulation and Intervention and a 42.0% increase in Coiled Tubing.
- Drilling & Downhole revenue increased 10.6%, including an 18.5 million increase in Subsea Technologies revenue from higher international Work Class ROV sales.
- Production revenue declined 34.3%, principally because 2020 included the ABZ and Quadrant valve businesses before their December 2020 divestiture. The divestiture generated an $88.4 million gain in 2020 and $104.6 million of cash proceeds.
- Operating results benefited from cost reductions, lower restructuring and employee-related costs, and materially lower inventory write-downs. The company continued facility closures and headcount actions initiated in 2020.
- Operating cash flow turned negative because working-capital benefits decreased to $6.7 million from $57.3 million. Accounts receivable increased by $45.0 million on a cash-flow basis.
- Forum repurchased $59.9 million principal amount of its 2025 Notes for $58.6 million, recording a $5.3 million loss on extinguishment. It also repaid the $13.1 million drawn on its revolving facility.
- Forum acquired certain Hawker Equipment Solutions assets for $5.1 million, with $3.4 million paid in 2021 and the balance payable over five years.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2022 capital expenditures to be less than $10.0 million and stated that cash on hand, operating cash flow, and expected Credit Facility availability should fund current operations for the next 12 months.
- Management indicated it may use operating cash flow, divestiture proceeds, securities offerings, or other eligible capital to reduce the 2025 Notes. No formal revenue or earnings guidance was provided.
- Energy-market recovery continued in 2021, but drilling and completions activity remained below pre-pandemic levels. Customer capital discipline, industry consolidation, technological efficiency, and pressure to transition toward renewable energy may limit recovery in capital-equipment demand.
- COVID-19 effects continued through supply-chain disruption, labor shortages, logistics constraints, and inflationary pressure. The company reported difficulty sourcing sufficient steel for Coiled Tubing orders in the third and fourth quarters.
- Key risks include oil and gas price volatility, customer cancellations or delays affecting the $196 million backlog, excess or obsolete inventory, dependence on key suppliers, steel and tariff exposure, skilled-labor shortages, cybersecurity, foreign-exchange volatility, environmental and hydraulic-fracturing regulation, climate-related policy, and competition.
- The 2025 Notes carry a 9.00% rate, with 6.25% payable in cash and 2.75% payable in cash or additional notes at the company’s option. Approximately $257.0 million principal amount remained outstanding at year-end, with substantial principal due in 2025.
- Asbestos-related litigation remains a contingency. The company reported fewer than 150 pending lawsuits, a $0.3 million net liability estimate for current and anticipated five-year claims, and significant insurance coverage, although collectability is not guaranteed.
- Tenaris litigation involves alleged patent infringement concerning DURACOIL coiled-tubing products; an adverse outcome could restrict sales of certain products. Potential Portland Harbor Superfund liability could not be quantified, although an indemnitor has assumed responsibility and is providing a defense.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Inventory valuation was identified as the critical audit matter because of significant judgments regarding demand forecasts and excess or obsolete inventory.
Important Facts for Investors to Verify
- Whether improving revenue and gross profit represent sustainable operating recovery or are substantially dependent on unusually low 2021 inventory write-downs and prior restructuring actions.
- Whether operating cash flow improves sufficiently to fund working capital, debt service, and any share or debt repurchases without materially drawing the Credit Facility.
- The company’s ability to refinance or repay the approximately $257.0 million principal amount of 2025 Notes and comply with related covenants.
- The quality, aging, and future demand profile of the $241.7 million net inventory balance and the adequacy of the $62.9 million reserve.
- The collectability and timing of the $196 million backlog, including customer cancellation, delay, and acceptance risks.
- The effect of supply-chain constraints, steel prices, tariffs, labor shortages, inflation, and future COVID-19 disruptions on margins and delivery obligations.
- Potential financial exposure from asbestos, environmental, patent, product-liability, and regulatory matters beyond recorded reserves and available insurance.
- Whether the Production segment can recover after the ABZ and Quadrant divestiture and whether renewable-energy and subsea diversification can offset long-term pressure on traditional oilfield demand.