Forum Energy Technologies, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. (FET) is a Houston-based global supplier of engineered products and services for the oil, natural gas, industrial, renewable energy and related markets. The filing covers the unaudited three and six months ended June 30, 2023, compared with the corresponding 2022 periods. FET reports through Drilling & Downhole, Completions and Production segments.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $185.4 million | $172.2 million | $374.4 million | $327.4 million |
| Gross profit | $51.3 million | $48.6 million | $103.4 million | $87.2 million |
| Gross margin | 27.7% | 28.2% | 27.6% | 26.6% |
| Operating income | $6.4 million | $6.0 million | $13.3 million | $0.3 million |
| Operating margin | 3.5% | 3.5% | 3.5% | 0.1% |
| Net income (loss) | $(6.6) million | $9.3 million | $(10.1) million | $0.1 million |
| Diluted EPS | $(0.64) | $1.15 | $(0.99) | $0.01 |
Six-month operating cash flow was negative $29.5 million, compared with negative $50.6 million in the prior-year period. Investing cash flow was negative $1.7 million, including $2.8 million of capital expenditures, while financing cash flow was positive $4.1 million. Cash, cash equivalents and restricted cash declined by $26.3 million to $24.8 million at June 30, 2023.
At June 30, 2023, total debt was $138.9 million, including $134.2 million of principal amount outstanding under the 2025 Notes and $10.0 million drawn on the revolving Credit Facility. The balance sheet reported $137.8 million of long-term debt, net of current portion. Credit Facility availability was $145.5 million after $22.8 million of outstanding letters of credit. Total assets were $843.7 million and total equity was $419.3 million.
Material changes versus the prior comparable period
- Second-quarter revenue increased 7.7%; six-month revenue increased 14.4%, primarily from higher market activity and global rig counts.
- Six-month revenue increased in all segments: Drilling & Downhole 6.6%, Completions 22.9% and Production 17.4%.
- Six-month segment operating income improved to $13.5 million from a $0.6 million loss. Completions and Production generated substantial improvements, while Drilling & Downhole benefited from higher revenue and mix.
- Second-quarter Drilling & Downhole margin declined to 10.3% from 11.1%, mainly because of lower volume and profitability in Subsea Technologies. Subsea revenue declined 38.0% year over year in the quarter.
- Interest expense declined 40.2% in the second quarter and 40.3% for the first six months, following the conversion of $122.8 million principal amount of the 2025 Notes into approximately 4.5 million common shares in January 2023.
- Despite improved operating income, net results deteriorated because foreign exchange and other expense was $6.4 million in the second quarter and $9.4 million for the first six months, compared with substantial gains in the corresponding 2022 periods.
- Inventories increased to $302.5 million from $269.8 million at December 31, 2022, while accounts receivable increased to $169.0 million from $154.2 million.
Guidance, outlook, risks and unusual items
Management expects 2023 capital expenditures to be less than $10.0 million and believes available cash, operating cash flow and Credit Facility availability will be adequate to fund operations for the next 12 months. No specific revenue or earnings guidance was provided.
Management described near-term risks from softer oil and natural gas prices, inflation, higher interest rates, banking-sector volatility and recession concerns. Average second-quarter WTI and Brent prices were $73.54 and $77.99 per barrel, respectively, while Henry Hub natural gas averaged $2.16 per Mcf; natural gas prices declined 71.2% from the second quarter of 2022. U.S. rig activity weakened sequentially, although international activity increased.
The 2025 Notes mature in August 2025 and the Credit Facility matures in September 2026. Credit Facility borrowing capacity depends on eligible receivables and inventory and could decline with working-capital fluctuations. The facility includes financial-covenant requirements if excess availability falls below specified thresholds and includes a cross-default to the 2025 Notes.
Global Tubing prevailed in patent litigation against Tenaris in March 2023; Tenaris appealed and Global Tubing filed a cross-appeal. Management considers reserves for legal proceedings immaterial and does not expect material adverse effects from pending matters. The company repurchased approximately 139,000 shares for $3.5 million during the first half, with $2.4 million remaining under the authorization.
Important facts for investors to verify
- Whether operating cash flow turns positive as elevated receivables and inventories convert to cash.
- The company’s ability to refinance or repay the $134.2 million principal amount of 2025 Notes before the August 2025 maturity.
- Changes in Credit Facility availability, borrowing-base eligibility and covenant headroom.
- Whether lower commodity prices and U.S. activity affect orders, margins and capital-product demand; second-quarter orders were $186.3 million, down from $202.9 million year over year.
- The sustainability of improved Completions and Production margins and the recovery trajectory of Subsea Technologies.
- Foreign exchange volatility and its effect on reported earnings, given the sharp comparison against prior-year foreign exchange gains.
- The outcome and potential costs or recoveries associated with the Tenaris appeal and cross-appeal.