Forum Energy Technologies, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. is a Houston-based global manufacturer and service provider serving the oil, natural gas, industrial, renewable energy and related markets. Its reportable segments are Drilling & Downhole, Completions and Production. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Approximately 65% of first-quarter 2023 revenue came from consumable products and activity-based equipment, with the remainder primarily from capital products, rentals and services.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $189.0 million | $155.2 million | Up 21.8% |
| Gross profit | $52.1 million | $38.6 million | Up 34.9% |
| Gross margin | 27.6% | 24.9% | Up 270 basis points |
| Operating income (loss) | $6.9 million | $(5.7) million | Improved $12.6 million |
| Operating margin | 3.6% | (3.7)% | Improved |
| Net loss | $(3.5) million | $(9.2) million | Improved $5.7 million |
| Diluted loss per share | $(0.34) | $(1.62) | Improved |
| Cash flow from operations | $(23.1) million | $(24.9) million | Use decreased $1.7 million |
Segment revenue and operating results improved across all three segments. Drilling & Downhole revenue increased 7.8% to $76.8 million, with operating margin rising to 11.0% from 8.4%. Completions revenue increased 40.2% to $73.7 million and returned to a 4.8% operating margin from a 1.4% loss margin. Production revenue increased 23.8% to $39.0 million and achieved a 4.2% operating margin versus a 5.6% loss margin.
At March 31, 2023, cash and cash equivalents were $46.8 million, compared with $51.0 million at December 31, 2022. Total debt was $153.0 million, including $134.2 million principal amount of 2025 Notes and $25.0 million drawn under the Credit Facility. Credit Facility availability was $129.3 million after considering borrowings and letters of credit. Outstanding letters of credit totaled $24.0 million.
Inventories increased to $287.6 million from $269.8 million at year-end 2022, while trade receivables increased to $164.0 million from $154.2 million. Capital expenditures were $1.1 million. Net cash decreased $4.3 million during the quarter, ending at $46.8 million.
Material changes versus the prior comparable period
- Revenue growth was driven by higher market activity and global rig counts, particularly in Stimulation & Intervention, Drilling Technologies and Production Equipment.
- Gross profit and margins improved, reflecting increased volumes, favorable product mix and operating leverage, partly offset by higher steel, freight and employee-related costs.
- Interest expense declined 40.3% to $4.5 million, primarily because $122.8 million principal amount of the 2025 Notes mandatorily converted into approximately 4.5 million common shares in January 2023.
- Foreign exchange and other losses were $3.0 million in Q1 2023, compared with a $6.0 million gain in Q1 2022, materially reducing the benefit from improved operating performance.
- Corporate selling, general and administrative expense declined to $7.0 million from $9.2 million, partly because Q1 2022 included a $2.7 million charge related to modification of executive long-term incentive awards.
- Operating cash use remained significant, primarily reflecting increases in accounts receivable and inventories.
- The company repurchased 138,638 shares for approximately $3.5 million during March 2023. Remaining authorization under the repurchase program was $2.4 million.
Guidance, outlook, risks and unusual items
Management expects 2023 capital expenditures to be less than $15.0 million and believes cash on hand, operating cash flow and expected Credit Facility availability will be adequate to fund operations for the next 12 months. The filing does not provide specific revenue or earnings guidance.
Management noted that oil and natural gas prices softened in the first quarter, natural gas prices declined substantially year over year, and inflation, higher interest rates, banking-sector volatility and recession concerns remain risks. U.S. customers are expected to maintain disciplined capital spending, while international activity is expected to grow and outpace U.S. activity during 2023. Demand remains dependent on energy prices, customer capital and operating budgets, rig counts and equipment utilization.
The 2025 Notes mature in August 2025 and the Credit Facility generally matures in September 2026. Credit Facility borrowing capacity is subject to eligible receivables and inventory and could decline with changes in those balances. If excess availability falls below specified thresholds, the company may be required to satisfy a fixed charge coverage ratio. In April 2023, the Credit Facility was amended to replace LIBOR with SOFR for U.S.-dollar borrowings and increase the domestic letter-of-credit sublimit to $70.0 million.
Global Tubing prevailed in patent litigation with Tenaris on March 20, 2023; the court found the asserted patents unenforceable and dismissed the infringement claims. Global Tubing intends to seek recovery of attorneys’ fees and costs. Management states that other legal reserves are immaterial and does not expect pending matters to have a material adverse effect.
The company recorded a $2.8 million income tax expense despite the pretax loss, because tax benefits are unavailable in certain loss jurisdictions. Management also disclosed that some tax loss carryforwards may not be fully utilized before expiration.
Important facts for investors to verify
- Whether operating cash flow turns positive as inventories and receivables normalize.
- The pace of debt reduction and the company’s ability to refinance or repay the $134.2 million of 2025 Notes before maturity.
- Credit Facility availability, borrowing-base changes, covenant headroom and the impact of higher interest rates.
- Whether revenue growth and segment margin improvements persist if oil, natural gas or customer capital spending weakens.
- Inventory quality, reserve adequacy and working-capital requirements.
- The effect of foreign exchange movements and geographically mixed earnings on reported results and tax expense.
- Progress toward the stated 2023 capital expenditure target of less than $15.0 million.
- Final resolution of Global Tubing’s request for attorneys’ fees and costs and any other litigation developments.