Forum Energy Technologies(FET) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited financial statements for the nine months ended September 30, 2023, reflect a net loss of $2.1 million and a significant reduction in total liabilities Condensed Consolidated Statements of Comprehensive Loss For the nine months ended September 30, 2023, revenue increased year-over-year, but the company recorded a net loss compared to a net income in the prior year Condensed Consolidated Statements of Comprehensive Loss (in thousands) | | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $179,253 | $181,835 | $553,659 | $509,255 | | Gross Profit | $51,022 | $51,363 | $154,430 | $138,555 | | Operating Income | $5,671 | $7,702 | $18,929 | $7,978 | | Net Income (Loss) | $7,969 | $16,477 | $(2,096) | $16,542 | | Diluted EPS | $0.77 | $1.82 | $(0.21) | $2.37 | Condensed Consolidated Balance Sheets The balance sheet as of September 30, 2023, shows a slight decrease in total assets and a significant reduction in liabilities, boosting total equity Condensed Consolidated Balance Sheet Highlights (in thousands) | | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $37,151 | $51,029 | | Inventories, net | $302,304 | $269,828 | | Total Assets | $828,871 | $834,757 | | Long-term debt, net | $128,537 | $239,128 | | Total Liabilities | $411,751 | $527,722 | | Total Equity | $417,120 | $307,035 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities improved significantly for the nine months ended September 30, 2023, compared to the prior year period Condensed Consolidated Statements of Cash Flows (in thousands) | | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(3,077) | $(32,132) | | Net cash used in investing activities | $(4,156) | $(2,592) | | Net cash provided by (used in) financing activities | $(6,906) | $9,168 | | Net decrease in cash | $(13,878) | $(27,080) | | Cash at end of period | $37,151 | $19,778 | - A significant noncash financing activity during the nine months ended September 30, 2023, was the conversion of $113.65 million of debt to common stock[18] Condensed Consolidated Statements of Changes in Stockholders' Equity Total equity increased substantially during the first nine months of 2023, primarily driven by the conversion of debt to common stock - The company's total equity increased by $110.1 million during the first nine months of 2023, primarily driven by a $113.65 million conversion of debt to common stock, which was partially offset by a net loss of $3.5 million in Q1 and $6.6 million in Q2, before a net income of $8.0 million in Q3[20] Notes to Condensed Consolidated Financial Statements The notes detail a significant debt conversion, segment performance, and the subsequent agreement to acquire Variperm Holdings Ltd - During the nine months ended September 30, 2023, contract assets decreased by $7.6 million while contract liabilities increased by $4.2 million, primarily due to the timing of milestone billings for projects in the Subsea Technologies product line[36] - In the first nine months of 2023, $122.8 million (48%) of the principal amount of the 9.00% convertible secured notes due 2025 (2025 Notes) mandatorily converted into approximately 4.5 million shares of common stock[43] - On November 1, 2023, the company entered into an agreement to acquire Variperm Holdings Ltd for approximately $150.0 million in cash and 2.0 million shares of common stock, and amended its Credit Facility to support the acquisition[73][74][75] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses an 8.7% year-over-year revenue growth for the nine-month period, improved operating income, and the strategic acquisition of Variperm Overview The company provides engineered equipment and consumable products to the energy and industrial sectors through three operating segments - The company operates through three main segments: Drilling & Downhole, Completions, and Production[80][81] Market Conditions Market conditions in Q3 2023 were mixed, with declining U.S. rig counts contrasting with a significant year-over-year increase in international rigs - The average U.S. rig count for Q3 2023 was 14.7% lower than Q3 2022, whereas the international rig count was 11.0% higher over the same period[85] Average Commodity Prices | | Q3 2023 | Q2 2023 | Q3 2022 | | :--- | :--- | :--- | :--- | | WTI Crude Oil ($/bbl) | $82.25 | $73.54 | $93.06 | | Brent Crude Oil ($/bbl) | $86.65 | $77.99 | $100.71 | | Henry Hub Natural Gas ($/Mcf) | $2.59 | $2.16 | $8.03 | Total Inbound Orders (in millions) | Segment | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | :--- | :--- | | Drilling & Downhole | $95.0 | $73.3 | $258.1 | $218.6 | | Completions | $65.1 | $78.7 | $193.8 | $197.1 | | Production | $38.7 | $45.7 | $112.1 | $149.9 | | Total Orders | $198.8 | $197.7 | $564.0 | $565.6 | Results of Operations Nine-month revenue grew 8.7% year-over-year, though Q3 revenue saw a slight decline due to lower U.S. hydraulic fracturing activity Q3 2023 vs Q3 2022 Revenue by Segment (in thousands) | Segment | Q3 2023 | Q3 2022 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Drilling & Downhole | $81,181 | $75,723 | $5,458 | 7.2% | | Completions | $62,473 | $72,246 | $(9,773) | (13.5)% | | Production | $36,877 | $34,238 | $2,639 | 7.7% | | Total Revenue | $179,253 | $181,835 | $(2,582) | (1.4)% | 9M 2023 vs 9M 2022 Revenue by Segment (in thousands) | Segment | 9M 2023 | 9M 2022 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Drilling & Downhole | $238,652 | $223,476 | $15,176 | 6.8% | | Completions | $208,239 | $190,867 | $17,372 | 9.1% | | Production | $108,918 | $95,622 | $13,296 | 13.9% | | Total Revenue | $553,659 | $509,255 | $44,404 | 8.7% | - The decrease in Q3 2023 Completions segment revenue was primarily due to lower U.S. hydraulic fracturing activity levels and customer delays in capital equipment spending[92] - The Production segment's operating income improved from a loss of $1.2 million in the first nine months of 2022 to an income of $4.5 million in the same period of 2023, driven by a 13.9% increase in revenues and increased operating leverage[109] Liquidity and Capital Resources The company maintains adequate liquidity with $37.2 million in cash and $154.8 million available under its credit facility as of September 30, 2023 - As of September 30, 2023, the company had $37.2 million in cash and cash equivalents and $154.8 million of availability under its Credit Facility[117] - Net cash used in operating activities improved to $3.1 million for the first nine months of 2023, compared to $32.1 million used in the same period of 2022, primarily due to a smaller increase in working capital[120][121] - The company repurchased approximately 139 thousand shares for $3.5 million in the first nine months of 2023, with $2.4 million remaining under its share repurchase program[119] Quantitative and Qualitative Disclosures About Market Risk This section is not required as the company qualifies as a smaller reporting company - Disclosure is not required as the company qualifies as a "smaller reporting company"[133] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls - Based on an evaluation as of September 30, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[135] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[136] PART II - OTHER INFORMATION Legal Proceedings The company references a favorable judgment in a patent infringement lawsuit involving its subsidiary, which is currently under appeal by the opposing party - The company refers to Note 10, which discusses a patent litigation matter where its subsidiary, Global Tubing, received a favorable judgment against Tenaris, which has appealed the decision[66][138] Risk Factors No material changes have been made to the risk factors disclosed in the company's 2022 Annual Report on Form 10-K - The company directs readers to the risk factors section in its 2022 Annual Report on Form 10-K for detailed information[139] Unregistered Sales of Equity Securities and Use of Proceeds The company has $2.4 million remaining under its stock repurchase program, with no shares repurchased during the third quarter of 2023 - From the program's inception through September 30, 2023, the company has repurchased approximately 298 thousand shares for about $7.6 million[140] - The remaining authorization under the stock repurchase program is $2.4 million, with no shares purchased in Q3 2023[140][141] Exhibits This section lists the exhibits filed with the report, including required CEO and CFO certifications and Inline XBRL documents - The exhibits filed include certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as various Inline XBRL data files[145]