Forum Energy Technologies, Inc. — 2022 Q1 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. (FET) is a global provider of engineered equipment, consumable products and related services to the oil, natural gas, industrial and renewable energy industries. Its reporting segments are Drilling & Downhole, Completions and Production. The filing covers the unaudited three months ended March 31, 2022, compared with the same period in 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $155.2 million | $114.5 million | 35.5% increase |
| Gross profit | $38.6 million | $26.2 million | 47.5% increase |
| Gross margin | 24.9% | 22.9% | Expanded approximately 200 bps |
| Operating loss | $5.7 million | $14.4 million | Improved $8.7 million |
| Operating margin | (3.7%) | (12.6%) | Improved |
| Net loss | $9.2 million | $29.7 million | Improved $20.5 million |
| Diluted loss per share | $1.62 loss | $5.28 loss | Improved |
| Cash flow from operations | $24.9 million use | $1.3 million use | Declined |
| Cash and equivalents at period end | $20.6 million | $100.8 million at March 31, 2021 | Declined |
Segment revenue increased across all businesses: Drilling & Downhole rose 46.5% to $71.3 million, Completions rose 38.8% to $52.5 million, and Production rose 12.4% to $31.5 million. Drilling & Downhole generated $6.0 million of operating income, while Completions reported a $0.7 million operating loss and Production reported a $1.8 million operating loss.
At March 31, 2022, total assets were $790.9 million and total liabilities were $476.2 million. Inventory was $263.8 million, up from $241.7 million at December 31, 2021, while trade receivables were $132.2 million, up from $123.9 million.
Debt and liquidity
- Principal amount of 2025 convertible secured notes outstanding was $257.0 million; the notes mature in August 2025 and carry a 9.00% interest rate, of which 6.25% is payable in cash and 2.75% may be paid in cash or additional notes.
- Carrying value of total debt was $234.5 million, including $233.7 million of long-term debt.
- No borrowings were outstanding under the revolving Credit Facility. Borrowing-base availability was $141.2 million after $17.6 million of outstanding letters of credit.
- Cash, cash equivalents and restricted cash decreased by $26.3 million during the quarter, primarily reflecting operating working-capital investment.
- Capital expenditures were $0.9 million. Management expected full-year 2022 capital expenditures to be less than $10.0 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher drilling and completions activity, increased global rig counts, stronger international subsea demand and higher pressure-pumping equipment sales.
- Gross margin improved as increased volume and sales leverage more than offset higher raw-material, freight and employee-related costs.
- Drilling & Downhole moved from a $4.5 million operating loss to $6.0 million of operating income, aided partly by lower inventory write-downs.
- Production reduced its operating loss by $2.1 million through higher revenue and prior cost-reduction actions, although inflationary freight and material costs remained a headwind.
- Corporate expenses increased by $2.2 million, including a $2.7 million charge related to modification of long-term incentive awards following an executive leadership transition.
- Interest expense decreased by $1.5 million, and foreign-exchange and other items shifted from a $3.5 million loss in Q1 2021 to a $6.0 million gain in Q1 2022. The prior-year period also included a $0.9 million loss on extinguishment of debt.
- Operating cash flow deteriorated because inventory and receivables absorbed cash; working capital used approximately $29.7 million in Q1 2022 versus providing approximately $10.4 million in Q1 2021.
Guidance, outlook, management commentary, risks and unusual items
Management stated that available cash, expected operating cash flow and Credit Facility availability were expected to be adequate to fund current operations during the following 12 months. The filing did not provide formal revenue or earnings guidance. Management indicated that energy prices, rig activity and customer capital budgets remain key demand drivers.
Market conditions improved materially: average U.S. active rigs increased to 633 in Q1 2022 from 393 in Q1 2021, global active rigs increased to 1,654 from 1,236, and average WTI increased to $95.18 per barrel from $58.09. Total inbound orders increased to $165.0 million from $138.0 million.
- Russia-Ukraine-related political and social responses increased energy prices, particularly in Europe.
- COVID-19 disruptions, including shutdowns in China, continued to affect global supply chains and contributed to inflation in goods and services.
- Labor constraints, freight costs and raw-material inflation could pressure margins.
- Activity remained below pre-pandemic levels, and publicly owned North American exploration and production customers continued to face pressure to limit capital expenditures and generate cash flow.
- Liquidity depends on positive operating cash flow and continued access to external capital. Credit Facility availability can decline if eligible receivables or inventory fall.
- The company reported that legal reserves were immaterial and that pending proceedings were not expected to have a material adverse effect. No material litigation changes were reported.
- The company had valuation allowances against certain deferred tax assets because it does not expect to fully utilize certain tax losses before expiration.
Important facts for investors to verify
- Whether revenue growth and the $165.0 million order level translate into sustained positive operating cash flow.
- Whether inventory and receivables growth normalizes or continues to consume liquidity.
- Progress toward profitability in Completions and Production and the effect of inflationary costs on margins.
- Available liquidity relative to the August 2025 maturity of the convertible notes and related conversion or refinancing requirements.
- Compliance with Credit Facility availability and fixed-charge coverage triggers if excess availability declines.
- Execution of the stated less-than-$10.0-million 2022 capital-expenditure expectation.
- Potential effects of energy-price volatility, geopolitical conditions, COVID-19 disruptions and customer capital-spending discipline.