Forum Energy Technologies, Inc. — 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 reporting segments are Drilling & Downhole, Completions and Production. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared primarily with the same periods in 2022.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $179.3 million | $181.8 million | $553.7 million | $509.3 million |
| Gross profit | $51.0 million | $51.4 million | $154.4 million | $138.6 million |
| Gross margin | 28.5% | 28.2% | 27.9% | 27.2% |
| Operating income | $5.7 million | $7.7 million | $18.9 million | $8.0 million |
| Net income (loss) | $8.0 million | $16.5 million | $(2.1) million | $16.5 million |
| Diluted EPS | $0.77 | $1.82 | $(0.21) | $2.37 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(3.1) million | $(32.1) million |
Q3 consolidated operating margin was 3.2% of revenue, compared with 4.2% in the prior-year quarter. Nine-month operating margin improved to 3.4% from 1.6%. Segment operating margin was 3.1% in Q3 and 3.4% for the nine-month period, compared with 4.2% and 1.4%, respectively, in the comparable periods.
- Q3 revenue declined 1.4%, primarily because of lower U.S. hydraulic fracturing activity and delays in customer capital spending.
- Nine-month revenue increased 8.7%, reflecting higher global activity and rig counts.
- Q3 segment revenue was $81.2 million for Drilling & Downhole, $62.5 million for Completions and $36.9 million for Production.
- Nine-month segment revenue was $238.7 million for Drilling & Downhole, $208.2 million for Completions and $108.9 million for Production.
- Cash, cash equivalents and restricted cash decreased to $37.2 million at September 30, 2023 from $51.0 million at December 31, 2022.
- Total debt was $129.6 million at September 30, 2023, including $134.2 million principal amount of the 2025 Notes and $2.6 million of other debt, net of discounts and issuance costs.
- No borrowings were outstanding under the revolving Credit Facility. Borrowing-base availability was $154.8 million after $18.5 million of letters of credit.
- Inventory increased to $302.3 million from $269.8 million at December 31, 2022; trade receivables increased modestly to $157.8 million.
Material changes versus the prior comparable periods
- Q3 Completions revenue fell 13.5% and segment operating income fell 63.7%, primarily due to lower U.S. stimulation activity and delayed capital equipment spending.
- Q3 Drilling & Downhole revenue increased 7.2%, but segment operating income declined 11.0% because of lower volume and profitability in subsea projects.
- Q3 Production revenue increased 7.7% and segment operating income increased to $1.8 million from $0.7 million.
- For the first nine months, all three segments increased revenue. Production moved from a $1.2 million operating loss to $4.5 million of operating income.
- Interest expense declined by $3.6 million in Q3 and $9.9 million year to date because $122.8 million of 2025 Notes principal mandatorily converted into approximately 4.5 million common shares in January 2023.
- Despite improved operating income and lower interest expense, nine-month net results turned negative because 2022 included substantial foreign-exchange and other gains, while 2023 recorded $1.1 million of foreign-exchange and other losses.
- Basic weighted-average shares increased substantially, to 10.2 million for the first nine months from 5.7 million, primarily reflecting the debt conversion.
- Comprehensive loss was $2.8 million in Q3, driven largely by a $10.7 million unfavorable foreign-currency translation adjustment.
Guidance, outlook, risks and unusual items
- Management expects 2023 capital expenditures to be less than $10.0 million.
- Management expects cash on hand, operating cash flow and estimated Credit Facility availability to fund current operations for the next 12 months, but notes that future liquidity depends on operating cash generation and access to external capital.
- Management cites inflation, rising interest rates, recession concerns, energy-price volatility, lower natural gas prices, reduced U.S. rig activity and geopolitical disruption in the Middle East as risks to demand and supply chains.
- Global active rigs averaged 1,788 in Q3 2023, down from 1,817 in Q3 2022. The U.S. average rig count fell 14.7% year over year, while the international count increased 11.0%.
- Total inbound orders were $198.8 million in Q3 and $564.0 million for the first nine months, compared with $197.7 million and $565.6 million, respectively, in the prior-year periods.
- The 2025 Notes mature in August 2025. The Credit Facility originally matured in September 2026 and had $179.0 million of revolving commitments at September 30, 2023.
- After quarter-end, FET agreed to acquire Variperm for approximately $150.0 million of cash and 2.0 million common shares, subject to adjustments, with closing expected in January 2024.
- Also after quarter-end, the Credit Facility was amended to permit the acquisition, increase commitments to $250.0 million, extend maturity to September 2028 and permit up to $200.0 million of new secured notes or other financing.
- The company repurchased approximately 139,000 shares for $3.5 million during the first nine months. Remaining share-repurchase authorization was $2.4 million at September 30, 2023.
- Legal reserves were immaterial. Tenaris appealed a judgment in favor of FET subsidiary Global Tubing concerning patent litigation; Global Tubing also filed a cross-appeal and intends to seek attorneys’ fees and costs.
- The company disclosed that tax benefits may be unavailable in certain loss jurisdictions and that approximately $1.5 million of noncurrent unrecognized tax benefits may lapse by year-end 2023.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the company can refinance or repay the $134.2 million principal amount of 2025 Notes before their August 2025 maturity.
- The final financing, purchase price adjustments, closing status and integration performance of the Variperm acquisition.
- Whether operating cash flow turns positive as inventory and working-capital requirements normalize.
- The sustainability of improved nine-month segment margins, particularly in Production and Completions.
- Exposure to U.S. hydraulic fracturing activity, global rig counts, oil and natural gas prices, customer capital budgets and geopolitical conditions.
- Borrowing-base availability, letters-of-credit requirements and compliance with Credit Facility liquidity and fixed-charge coverage provisions.
- The impact of foreign-exchange movements, tax valuation allowances and potential unrecognized-tax-benefit reversals on future earnings.