FORUM ENERGY TECHNOLOGIES, INC. 10-Q

Item 2. Management’s discussion and analysis of financial condition and results of operations CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “will,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause actual results to differ materially from our plans, intentions or expectations. This may be the result of various factors, including, but not limited to, those factors discussed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on February 28, 2023, and elsewhere in this Quarterly Report on Form 10-Q. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. Overview We are a global company serving the oil, natural gas, industrial and renewable energy industries. With headquarters located in Houston, Texas, FET provides value added solutions aimed at improving the safety, efficiency, and environmental impact of our customers' operations. Our highly engineered products include capital equipment and consumable products. FET’s customers include oil and natural gas operators, land and offshore drilling contractors, oilfield service companies, pipeline and refinery operators, and renewable energy and new energy companies. Consumable products are used by our customers in drilling, well construction and completions activities and at processing centers and refineries. Our capital products are directed at drilling rig equipment for constructing new and upgrading existing rigs, subsea construction and development projects, pressure pumping equipment, the placement of production equipment on new producing wells, downstream capital projects and capital equipment for renewable energy projects. For the three months ended March 31, 2023, approximately 65% of our revenue was derived from consumable products and activity-based equipment, while the balance was primarily derived from capital products with a small amount from rental and other services. A summary of the products and services offered by each segment is as follows: • Drilling & Downhole . This segment designs, manufactures and supplies products and provides related services to the drilling, well construction, artificial lift and subsea energy construction markets, including applications in oil and natural gas, renewable energy, defense, and communications. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable products consumed in the drilling process; (ii) well construction casing and cementing equipment and protection products for artificial lift equipment and cables; and (iii) subsea remotely operated vehicles (“ROVs”) and trenchers, submarine rescue vehicles, specialty components and tooling, and complementary subsea technical services. • Completions. This segment designs, manufactures and supplies products and provides related services to the coiled tubing, well stimulation and intervention markets. The products and related services consist primarily of: (i) capital and consumable products sold to the pressure pumping, hydraulic fracturing and flowback services markets, including hydraulic fracturing pumps, cooling systems, high-pressure flexible hoses and flow iron as well as wireline cable and pressure control equipment used in the well completion and intervention service markets; and (ii) coiled tubing strings and coiled line pipe and related services. 16 • Production . This segment designs, manufactures and supplies products and provides related equipment and services for production and infrastructure markets. The products and related services consist primarily of: (i) engineered process systems, production equipment, as well as specialty separation equipment; and (ii) a wide range of industrial valves focused on serving oil and natural gas customers as well as power generation, renewable energy and other general industrial applications. Market Conditions Demand for our products and services is directly related to our customers' capital and operating budgets. These budgets are heavily influenced by current and expected energy prices. In addition, demand for our capital products is driven by the utilization of service company equipment. Utilization is a function of equipment capacity and durability in demanding environments. Recent inflationary pressures, rising interest rates and volatility in the banking sector have created a heightened concern of a global recession. Oil and natural gas prices softened in the first quarter 2023 in part as a result of such recessionary fears. Despite these macroeconomic challenges, we expect that the world's long-term energy demand will continue to rise and may outpace global supply as China's economy recovers from the COVID-19 pandemic shutdowns and OPEC+ remains committed to maintaining stable oil prices. We expect that hydrocarbons will continue to play a vital role in meeting the world's energy needs while renewable energy sources continue to develop. The price of oil has varied dramatically over the last several years. The spot prices for WTI and Brent fell from $61.14 and $67.77 per barrel, respectively, as of December 31, 2019 to lows below $15.00 per barrel in April 2020. Since that time, oil prices rebounded to highs above $120.00 per barrel in March 2022 but have softened in the first quarter 2023 to an average of $75.93 and $81.07, for WTI and Brent, respectively. In addition, natural gas prices have decreased by 43.5% comparing the first quarter 2023 to the first quarter 2022. Our revenues, over the long-term, are highly correlated to the global drilling rig count, which has increased to 1,896 rigs as of the end of the first quarter 2023 from a low of 1,030 rigs in the third quarter 2020. The average U.S. rig count for the first quarter 2023 was 2.1% lower and 20.1% higher compared to the fourth quarter 2022 and first quarter 2022, respectively. The international rig count for the first quarter 2023 was 0.9% higher and 11.2% higher compared to the fourth quarter 2022 and first quarter 2022, respectively. Global drilling and completions activity remains below pre-pandemic levels. However, international markets are expected to grow throughout 2023 and outpace the U.S. In the U.S., publicly owned exploration and production companies are expected to continue to exercise disciplined capital spending while privately owned exploration and production companies fluctuate their activity in response to changes in oil and natural gas prices. The table below shows average crude oil and natural gas prices for West Texas Intermediate crude oil (“WTI”), United Kingdom Brent crude oil (“Brent”), and Henry Hub natural gas: Three Months Ended March 31, December 31, March 31, 2023 2022 2022 Average global oil, $/bbl West Texas Intermediate $ 75.93 $ 82.79 $ 95.18 United Kingdom Brent $ 81.07 $ 88.72 $ 100.87 Average North American Natural Gas, $/Mcf Henry Hub $ 2.64 $ 5.55 $ 4.67 17 The table below shows the average number of active drilling rigs operating by geographic area and drilling for different purposes, based on the weekly rig count information published by Baker Hughes Company. Three Months Ended March 31, December 31, March 31, 2023 2022 2022 Active Rigs by Location United States 760 776 633 Canada 221 187 198 International 915 907 823 Global Active Rigs 1,896 1,870 1,654 Land vs. Offshore Rigs Land 1,655 1,634 1,446 Offshore 241 236 208 Global Active Rigs 1,896 1,870 1,654 U.S. Commodity Target Oil/Gas 603 618 510 Gas 155 156 122 Unclassified 2 2 1 Total U.S. Active Rigs 760 776 633 U.S. Well Path Horizontal 697 708 575 Vertical 18 24 24 Directional 45 44 34 Total U.S. Active Rigs 760 776 633 The table below shows the amount of total inbound orders by segment: (in millions of dollars) Three Months Ended March 31, December 31, March 31, 2023 2022 2022 Drilling & Downhole $ 81.0 $ 87.2 $ 70.9 Completions 66.0 81.4 53.7 Production 31.9 46.5 40.4 Total Orders $ 178.9 $ 215.1 $ 165.0 18 Results of operations Three months ended March 31, 2023 compared with three months ended March 31, 2022 Three Months Ended March 31, Change (in thousands of dollars, except per share information) 2023 2022 $ % Revenue Drilling & Downhole $ 76,794 $ 71,260 $ 5,534 7.8 % Completions 73,667 52,542 21,125 40.2 % Production 38,995 31,505 7,490 23.8 % Eliminations (499) (133) (366) * Total revenue 188,957 155,174 33,783 21.8 % Segment operating income (loss) Drilling & Downhole 8,438 5,986 2,452 41.0 % Operating margin % 11.0 % 8.4 % Completions 3,556 (715) 4,271 * Operating margin % 4.8 % (1.4) % Production 1,629 (1,752) 3,381 193.0 % Operating margin % 4.2 % (5.6) % Corporate (7,032) (9,205) 2,173 23.6 % Total segment operating income (loss) 6,591 (5,686) 12,277 215.9 % Operating margin % 3.5 % (3.7) % Loss (gain) on disposal of assets and other (260) 22 (282) * Operating income (loss) 6,851 (5,708) 12,559 220.0 % Interest expense 4,549 7,624 (3,075) (40.3) % Foreign exchange losses (gains) and other, net 2,972 (5,986) 8,958 * Total other expense 7,521 1,638 5,883 359.2 % Loss before income taxes (670) (7,346) 6,676 90.9 % Income tax expense 2,816 1,853 963 52.0 % Net loss $ (3,486) $ (9,199) $ 5,713 62.1 % Weighted average shares outstanding Basic 10,179 5,683 Diluted 10,179 5,683 Loss per share Basic $ (0.34) $ (1.62) Diluted $ (0.34) $ (1.62) * not meaningful 19 Revenue Our revenue for the three months ended March 31, 2023 was $189.0 million, an increase of $33.8 million, or 21.8%, compared to the three months ended March 31, 2022. For the three months ended March 31, 2023, our Drilling & Downhole, Completions, and Production segments comprised 40.6%, 38.8%, and 20.6% of our total revenue, respectively, which compared to 45.9%, 33.8%, and 20.3% of our total revenue, respectively, for the three months ended March 31, 2022. The overall increase in revenue is primarily related to increases in market activity and global rig count in the first quarter 2023 compared to the first quarter 2022. The changes in revenue by operating segment consisted of the following: Drilling & Downhole segment — Revenue was $76.8 million for the three months ended March 31, 2023, an increase of $5.5 million, or 7.8%, compared to the three months ended March 31, 2022. This increase was led by a $11.5 million, or 39.5%, increase in revenue for our Drilling Technologies product line due to higher sales volumes of both consumable products and capital equipment driven by increased market activity and global rig count. Revenue for our Downhole Technologies product line increased by $3.6 million, or 18.6%, primarily due to higher sales volumes of artificial lift products and casing equipment in the first quarter 2023 compared to the first quarter 2022. Revenue for our Subsea Technologies product line decreased by $9.7 million, or 43.0%, from lower volumes of ROVs partially offset by an increase in after-market part sales and service. Completions segment — Revenue was $73.7 million for the three months ended March 31, 2023, an increase of $21.1 million, or 40.2%, compared to the three months ended March 31, 2022. This significant improvement includes a revenue increase of $17.2 million, or 56.9%, for our Stimulation & Intervention product line primarily due to higher demand of power ends, radiators and wireline cable. Revenue for our Coiled Tubing product line increased by $4.0 million, or 17.7% in the first quarter 2023 compared to the first quarter 2022. These higher revenue levels were driven by increased hydraulic fracturing and well intervention service activity levels. Production segment — Revenue was $39.0 million for the three months ended March 31, 2023, an increase of $7.5 million, or 23.8%, compared to the three months ended March 31, 2022. The increase was driven by a $4.7 million, or 31.2%, primarily due to increased demand for our processing equipment and technologies within our Production Equipment product line, and a $2.8 million, or 16.9%, increase in sales of our valve products within our Valve Solutions product line. Segment operating income (loss) and segment operating margin percentage Segment operating income for the three months ended March 31, 2023 was $6.6 million, a $12.3 million improvement compared to a loss of $5.7 million for the three months ended March 31, 2022. For the three months ended March 31, 2023, segment operating margin percentage was 3.5% compared to (3.7)% for the three months ended March 31, 2022. Segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue for the period. The change in operating income (loss) for each segment is explained as follows: Drilling & Downhole segment — Segment operating income was $8.4 million, or 11.0%, for the three months ended March 31, 2023 compared to operating income of $6.0 million, or 8.4%, for the three months ended March 31, 2022. The $2.5 million improvement in segment operating results is primarily attributable to higher gross profit from the 7.8% increase in segment revenues, favorable product mix and improved operating leverage. These gains were partially offset by higher freight and employee related costs. Completions segment — Segment operating income was $3.6 million, or 4.8%, for the three months ended March 31, 2023 compared to segment operating loss of $0.7 million, or (1.4)%, for the three months ended March 31, 2022. The $4.3 million improvement in segment operating results was primarily due to higher gross profit from the 40.2% increase in revenues discussed above and from favorable product mix. These gains were partially offset by higher steel, freight and employee related costs. Production segment — Segment operating income was $1.6 million, or 4.2%, for the three months ended March 31, 2023 compared to a loss of $1.8 million, or (5.6)%, for the three months ended March 31, 2022. The $3.4 million improvement in segment operating results was driven by the 23.8% increase in revenues discussed above as well as lower depreciation and freight costs. Corporate — Selling, general and administrative expenses for Corporate were $7.0 million for the three months ended March 31, 2023 compared to $9.2 million for the three months ended March 31, 2022. Corporate costs include, among other items, payroll related costs for management, administration, finance, legal, and human resources personnel; professional fees for legal, accounting and related services; and marketing costs. This decline was primarily due to a $2.7 million charge recognized in the three months ended March 31, 2022 related to a modification of long-term incentive awards associated with the executive leadership transition. 20 Other items not included in segment operating income (loss) Gain on the disposal of assets and other is not included in segment operating income (loss), but is included in total operating loss. Other income and expense Other income and expense includes interest expense and foreign exchange gains (losses) and other. We incurred $4.5 million of interest expense during the three months ended March 31, 2023, a decrease of $3.1 million compared to the three months ended March 31, 2022, mainly due to the decline in the balance of 2025 Notes upon conversion of $122.8 million aggregate principal amount of our 2025 Notes to common stock in January 2023. See Note 6 Debt for further details related to the our 2025 Notes and Credit Facility. The foreign exchange gains (losses) are primarily the result of movements in the British pound, Euro and Canadian dollar relative to the U.S. dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S. dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than the U.S. dollar. Taxes We recorded tax expense of $2.8 million and tax expense of $1.9 million for the three months ended March 31, 2023 and 2022, respectively. The estimated annual effective tax rates for the three months ended March 31, 2023 and 2022 were impacted by losses in jurisdictions where the recording of a tax benefit is not available. Furthermore, the tax expense or benefit recorded can vary from period to period depending on the Company’s relative mix of earnings and losses by jurisdiction. 21 Liquidity and capital resources Sources and uses of liquidity Our internal sources of liquidity are cash on hand and cash flows from operations, while our primary external sources include trade credit, the Credit Facility and the 2025 Notes. Our primary uses of capital have been for inventory, sales on credit to our customers, maintenance and growth capital expenditures, and debt repayments. We continually monitor other potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to generate positive operating cash flow and access outside sources of capital. As of March 31, 2023, we had $134.2 million principal amount of 2025 Notes outstanding and $25.0 million of borrowings outstanding under our revolving Credit Facility. The 2025 Notes mature in August 2025 and, subject to certain exceptions, the Credit Facility matures in September 2026. See Note 6 Debt for further details related to the terms for our 2025 Notes and Credit Facility. As of March 31, 2023, we had cash and cash equivalents of $46.8 million and $129.3 million of availability under the Credit Facility. We anticipate that our future working capital requirements for our operations will fluctuate directionally with revenues. Furthermore, availability under the Credit Facility will fluctuate directionally based on the level of our eligible accounts receivable and inventory subject to applicable sublimits. In addition, we continue to expect total 2023 capital expenditures to be less than $15.0 million, consisting of, among other items, replacing end of life machinery and equipment. We expect our available cash on-hand, cash generated by operations, and estimated availability under the Credit Facility to be adequate to fund current operations during the next 12 months. In addition, based on existing market conditions and our expected liquidity needs, among other factors, we may use a portion of our cash flows from operations, proceeds from divestitures, securities offerings or other eligible capital to reduce the principal amount of our 2025 Notes outstanding or repurchase shares of our common stock under our repurchase program. In November 2021, our board of directors approved a program for the repurchase of outstanding shares of our common stock with an aggregate purchase amount of up to $10.0 million. Shares may be repurchased under the program from time to time, in amounts and at prices that the company deems appropriate, subject to market and business conditions, applicable legal requirements and other considerations. During the first quarter 2023, we repurchased approximately 139 thousand shares of our common stock for aggregate consideration of approximately $3.5 million with remaining authorization under this program of $2.4 million. Our cash flows for the three months ended March 31, 2023 and 2022 are presented below (in millions): Three Months Ended March 31, 2023 2022 Net cash used in operating activities $ (23.1) $ (24.9) Net cash used in investing activities (0.8) (0.7) Net cash provided by (used in) financing activities 19.3 (0.6) Effect of exchange rate changes on cash 0.3 (0.1) Net decrease in cash, cash equivalents and restricted cash $ (4.3) $ (26.3) Net cash used in operating activities Net cash used in operating activities was $23.1 million for the three months ended March 31, 2023 compared to $24.9 million for the three months ended March 31, 2022. This increase in operating cash flows is primarily attributable to the improvement in net income adjusted for non-cash items, which provided $8.7 million of cash for the three months ended March 31, 2023 compared to provided $4.8 million for the three months ended March 31, 2022. Net cash used in investing activities Net cash used in investing activities was $0.8 million for the three months ended March 31, 2023, including $1.1 million of capital expenditures, partially offset by $0.3 million of proceeds from the sale of property and equipment. Net cash used in investing activities was $0.7 million for the three months ended March 31, 2022, including $0.9 million of capital expenditures, partially offset by $0.1 million of proceeds from the sale of property and equipment. 22 Net cash provided by (used in) financing activities Net cash provided by financing activities was $19.4 million for the three months ended March 31, 2023 compared to $0.6 million of cash used in financing activities for the three months ended March 31, 2022, respectively. The change in net cash provided by (used in) financing activities primarily resulted from $25.0 million of net borrowings on the revolving Credit Facility, offset by $5.4 million of repurchases of common stock under our share repurchase program and long-term incentive awards during the three months ended March 31, 2023. Supplemental Guarantor Financial Information The Company’s 2025 Notes are guaranteed by our domestic subsidiaries which are 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional, joint and several. The guarantees of the 2025 Notes are (i) pari passu in right of payment with all existing and future senior indebtedness of such guarantor, including all obligations under our Credit Facility; (ii) secured by certain collateral of such guarantor, subject to permitted liens under the indenture governing the 2025 Notes; (iii) effectively senior to all unsecured indebtedness of that guarantor, to the extent of the value of the collateral securing the 2025 Notes (after giving effect to the liens securing our Credit Facility and any other senior liens on the collateral); and (iv) senior in right of payment to any future subordinated indebtedness of that guarantor. In the event of a bankruptcy, liquidation or reorganization of any of the non-guarantor subsidiaries of the 2025 Notes, the non-guarantor subsidiaries of such notes will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Company or to any guarantors. The 2025 Notes guarantees shall each be released upon (i) any sale or other disposition of all or substantially all of the assets of such guarantor (by merger, consolidation or otherwise) to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary, if the sale or other disposition does not violate the applicable provisions of the indenture governing such notes; (ii) any sale, exchange or transfer (by merger, consolidation or otherwise) of the equity interests of such guarantor after which the applicable guarantor is no longer a subsidiary, which sale, exchange or transfer does not violate the applicable provisions of the indenture governing such notes; (iii) legal or covenant defeasance or satisfaction and discharge of the indenture governing such notes; or (iv) dissolution of such guarantor, provided no default or event of default has occurred that is continuing. The obligations of each guarantor of the 2025 Notes under its guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such guarantor (including, without limitation, any guarantees under the Credit Facility) and any collections from or payments made by or on behalf of any other guarantor in respect of the obligations of such other guarantor under its guarantee or pursuant to its contribution obligations under the applicable indenture, result in the obligations of such guarantor under its guarantee not constituting a fraudulent conveyance, fraudulent preference or fraudulent transfer or otherwise reviewable transaction under applicable law. Nonetheless, in the event of the bankruptcy, insolvency or financial difficulty of a guarantor, such guarantor’s obligations under its guarantee may be subject to review and avoidance under applicable fraudulent conveyance, fraudulent preference, fraudulent transfer and insolvency laws. We are presenting the following summarized financial information for the Company and the subsidiary guarantors (collectively referred to as the “Obligated Group”) pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Company and the subsidiary guarantors, presented on a combined basis, have been eliminated and information for the non-guarantor subsidiaries have been excluded. Amounts due to the non-guarantor subsidiaries and other related parties, as applicable, have been separately presented within the summarized financial information below. 23 Summarized financial information for the year-to-date interim period and the most recent annual period was as follows (in thousands): Three Months Ended March 31, Summarized Statements of Operations 2023 2022 Revenue $ 151,263 $ 116,360 Cost of sales 116,471 90,525 Operating income (loss) 2,667 (2,643) Net loss (3,486) (9,199) March 31, 2023 December 31, 2022 Summarized Balance Sheet Current assets $ 397,664 $ 378,812 Non-current assets 271,288 279,389 Current liabilities $ 160,534 $ 175,155 Payables to non-guarantor subsidiaries 145,730 132,839 Non-current liabilities 204,644 293,150 Critical accounting policies and estimates There have been no material changes in our critical accounting policies and procedures during the three months ended March 31, 2023. For a detailed discussion of our critical accounting policies and estimates, refer to our 2022 Annual Report on Form 10-K. For recent accounting pronouncements, refer to Note 2 Recent Accounting Pronouncements . Item 3. Quantitative and qualitative disclosures about market risk Not required under Regulation S-K for “smaller reporting companies.”