FORUM ENERGY TECHNOLOGIES, INC. 10-K

Item 7A. Quantitative and qualitative disclosures about market risk Not required under Regulation S-K for “smaller reporting companies.” 46 Item 8. Consolidated Financial Statements and Supplementary Data Page Report of independent registered public accounting firm - Deloitte & Touche LLP 48 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2023 and 2022 50 Consolidated balance sheets as of December 31, 2023 and 2022 51 Consolidated statements of cash flows for the years ended December 31, 2023 and 2022 52 Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2023 and 2022 53 Notes to consolidated financial statements 54 47 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Forum Energy Technologies, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Forum Energy Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2024, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Inventory — Refer to Notes 2 and 5 to the financial statements Critical Audit Matter Description Inventory consists of finished goods and materials and supplies which are carried at the lower of cost or net realizable value. The Company evaluates the net realizable values of inventories based on analysis of inventory levels including excess, obsolete and slow-moving items, historical sales experience and future sales forecasts. The Company’s evaluation of net realizable value is performed at each location and is based on information and assumptions specific to that location. Changes in these assumptions could have a significant impact on the recorded inventory amounts or the amount of inventory write-downs. The inventory, net balance at December 31, 2023 was $299.6 million and the amount of inventory reserve was $38.2 million. 48 Given the significant judgments and assumptions made by management in applying the methodology used to determine net realizable value, future sales forecasts, and the reports utilized to determine inventory levels and historical sales experiences, performing audit procedures required a high degree of auditor judgment and increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the net realizable value of inventory included the following, among others: • We made inquiries of business unit managers as well as executives, sales, and operations personnel about the expected product lifecycles and product development plans and historical usage by product. • We have tested the forecasted demand by comparing internal and external information (e.g. historical usage, contracts, communications with customers, product development plans, and macroeconomic conditions) with the Company’s forecasted demand. • We evaluated management’s overall forecasted demand by comparing actual results to historical forecasts. • We considered the existence of contradictory evidence based on reading of internal communications to management and the board of directors, Company press releases, and analysts’ reports, as well as our observations and inquiries as to changes within the business. /s/ Deloitte & Touche LLP Houston, Texas March 5, 2024 We have served as the Company’s auditor since 2019. 49 Forum Energy Technologies, Inc. and subsidiaries Consolidated statements of comprehensive income (loss) Year ended December 31, (in thousands, except per share information) 2023 2022 Revenue $ 738,864 $ 699,913 Cost of sales 534,711 511,387 Gross profit 204,153 188,526 Operating expenses Selling, general and administrative expenses 180,389 179,471 Transaction expenses 2,892 — Gain on sale-leaseback transactions — ( 7,000 ) Loss (gain) on disposal of assets and other 156 ( 1,271 ) Total operating expenses 183,437 171,200 Operating income 20,716 17,326 Other expense (income) Interest expense 18,297 31,525 Foreign exchange losses (gains) and other, net 10,233 ( 24,548 ) Total other expense, net 28,530 6,977 Income (loss) before income taxes ( 7,814 ) 10,349 Income tax expense 11,062 6,637 Net income (loss) $ ( 18,876 ) $ 3,712 Weighted average shares outstanding Basic 10,212 5,747 Diluted 10,212 5,951 Earnings (loss) per share Basic $ ( 1.85 ) $ 0.65 Diluted $ ( 1.85 ) $ 0.62 Other comprehensive income (loss), net of tax of $ 0 : Net income (loss) $ ( 18,876 ) $ 3,712 Change in foreign currency translation 12,757 ( 28,713 ) Gain (loss) on pension liability ( 508 ) 2,256 Comprehensive loss $ ( 6,627 ) $ ( 22,745 ) The accompanying notes are an integral part of these consolidated financial statements. 50 Forum Energy Technologies, Inc. and subsidiaries Consolidated balance sheets (in thousands, except share information) December 31, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 46,165 $ 51,029 Accounts receivable—trade, net of allowances of $ 10,850 and $ 10,690 146,747 154,247 Inventories, net 299,639 269,828 Prepaid expenses and other current assets 21,887 21,957 Costs and estimated profits in excess of billings 13,365 15,139 Accrued revenue 1,801 665 Total current assets 529,604 512,865 Property and equipment, net of accumulated depreciation 61,401 62,963 Operating lease assets 55,399 57,270 Deferred financing costs, net 1,159 1,166 Intangible assets, net 167,970 191,481 Deferred tax assets, net 368 184 Other long-term assets 5,160 8,828 Total assets $ 821,061 $ 834,757 Liabilities and equity Current liabilities Current portion of long-term debt $ 1,186 $ 782 Accounts payable—trade 125,918 118,261 Accrued liabilities 62,463 76,544 Deferred revenue 10,551 14,401 Billings in excess of costs and profits recognized 4,221 305 Total current liabilities 204,339 210,293 Long-term debt, net of current portion 129,567 239,128 Deferred tax liabilities, net 940 902 Operating lease liabilities 61,450 64,626 Other long-term liabilities 12,132 12,773 Total liabilities 408,428 527,722 Commitments and contingencies Equity Common stock, $ 0.01 par value, 14,800,000 shares authorized, 10,901,878 and 6,223,454 shares issued 109 62 Additional paid-in capital 1,369,288 1,253,613 Treasury stock at cost, 708,900 and 570,247 shares ( 142,057 ) ( 138,560 ) Retained deficit ( 699,471 ) ( 680,595 ) Accumulated other comprehensive loss ( 115,236 ) ( 127,485 ) Total equity 412,633 307,035 Total liabilities and equity $ 821,061 $ 834,757 The accompanying notes are an integral part of these consolidated financial statements. 51 Forum Energy Technologies, Inc. and subsidiaries Consolidated statements of cash flows Year ended December 31, (in thousands, except share information) 2023 2022 Cash flows from operating activities Net income (loss) $ ( 18,876 ) $ 3,712 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation expense 10,799 12,441 Amortization of intangible assets 23,929 24,537 Stock-based compensation expense 4,571 4,205 Inventory write downs 2,784 2,698 Provision for doubtful accounts 1,527 2,249 Deferred income taxes ( 204 ) ( 130 ) Gain on sale-leaseback transactions — ( 7,000 ) Other 5,116 5,350 Changes in operating assets and liabilities Accounts receivable—trade 6,678 ( 34,802 ) Inventories ( 31,928 ) ( 34,611 ) Prepaid expenses and other current assets 2,686 590 Cost and estimated profits in excess of billings 2,144 ( 7,824 ) Accounts payable, deferred revenue and other accrued liabilities ( 4,894 ) 20,764 Billings in excess of costs and profits recognized 3,851 ( 9,233 ) Net cash provided by (used in) operating activities 8,183 ( 17,054 ) Cash flows from investing activities Capital expenditures for property and equipment ( 7,944 ) ( 7,492 ) Proceeds from sale of property and equipment 1,371 3,007 Acquisition of businesses, net of cash acquired — ( 485 ) Proceeds from sale-leaseback transactions — 32,109 Net cash provided by (used in) investing activities ( 6,573 ) 27,139 Cash flows from financing activities Borrowings on revolving Credit Facility 451,738 544,126 Repayments on revolving Credit Facility ( 451,738 ) ( 544,126 ) Repurchases of stock ( 5,996 ) ( 3,826 ) Payment of capital lease obligations ( 1,275 ) ( 1,250 ) Deferred financing costs ( 311 ) — Net cash used in financing activities ( 7,582 ) ( 5,076 ) Effect of exchange rate changes on cash 1,108 ( 838 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 4,864 ) 4,171 Cash, cash equivalents and restricted cash at beginning of period 51,029 46,858 Cash, cash equivalents and restricted cash at end of period $ 46,165 $ 51,029 Supplemental cash flow disclosures Cash paid for interest $ 17,088 $ 25,325 Cash paid (refunded) for income taxes 8,804 ( 383 ) Noncash investing and financing activities Operating lease assets obtained in exchange for lease obligations $ 7,535 $ 40,516 Finance lease assets obtained in exchange for lease obligations 2,108 2,026 Accrued purchases of property and equipment 6 50 The accompanying notes are an integral part of these consolidated financial statements. 52 Forum Energy Technologies, Inc. and subsidiaries Consolidated statements of changes in stockholders’ equity (in thousands) Common stock Additional paid-in capital Treasury stock Retained deficit Accumulated other comprehensive income / (loss) Total common stockholders’ equity Balance at December 31, 2021 $ 61 $ 1,249,962 $ ( 135,562 ) $ ( 684,307 ) $ ( 101,028 ) $ 329,126 Restricted stock issuance, net of forfeitures 1 ( 829 ) — — — ( 828 ) Stock-based compensation expense — 4,205 — — — 4,205 Liability awards converted to share settled — 275 — — — 275 Treasury stock — — ( 2,998 ) — — ( 2,998 ) Change in pension liability — — — — 2,256 2,256 Currency translation adjustment — — — — ( 28,713 ) ( 28,713 ) Net income — — — 3,712 — 3,712 Balance at December 31, 2022 $ 62 $ 1,253,613 $ ( 138,560 ) $ ( 680,595 ) $ ( 127,485 ) $ 307,035 Restricted stock issuance, net of forfeitures 1 ( 2,500 ) — — — ( 2,499 ) Stock-based compensation expense — 4,571 — — — 4,571 Treasury stock — — ( 3,497 ) — — ( 3,497 ) Conversion of debt to common stock 46 113,604 — — — 113,650 Change in pension liability — — — — ( 508 ) ( 508 ) Currency translation adjustment — — — — 12,757 12,757 Net loss — — — ( 18,876 ) — ( 18,876 ) Balance at December 31, 2023 $ 109 $ 1,369,288 $ ( 142,057 ) $ ( 699,471 ) $ ( 115,236 ) $ 412,633 The accompanying notes are an integral part of these consolidated financial statements. 53 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements 1. Nature of Operations Forum Energy Technologies, Inc. (the “Company,” “FET,” “we,” “our,” or “us”), a Delaware corporation, is a global manufacturing company serving the oil, natural gas, industrial and renewable energy industries. With headquarters located in Houston, Texas, FET provides value added solutions that increase the safety and efficiency of energy exploration and production. 2. Summary of Significant Accounting Policies Basis of presentation The Company’s accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain reclassifications have been made to prior year amounts to conform with the current year presentation. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries after elimination of intercompany balances and transactions. Use of estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. In the preparation of these consolidated financial statements, estimates and assumptions have been made by management including, among others, an assessment of percentage of completion of projects based on costs to complete contracts, the selection of useful lives of tangible and intangible assets, expected future cash flows from long lived assets to support impairment tests, provisions necessary for trade receivables, amounts of deferred taxes and income tax contingencies. Actual results could differ from these estimates. The financial reporting of contracts depends on estimates, which are assessed continually during the term of those contracts. The amounts of revenues and income recognized are subject to revisions as the contract progresses to completion and changes in estimates are reflected in the period in which the facts that give rise to the revisions become known. Additional information that enhances and refines the estimating process that is obtained after the balance sheet date, but before issuance of the consolidated financial statements, is reflected in the consolidated financial statements. Cash and cash equivalents Cash and cash equivalents consist of cash on deposit and high quality, short-term money market instruments with an original maturity of three months or less. Cash equivalents are based on quoted market prices, a Level 1 fair value measure. Accounts receivable-trade Trade accounts receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus receivables do not bear interest, although a finance charge may be applied to amounts past due. We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. Such allowances are based upon several factors including, but not limited to, credit approval practices, industry and customer historical experience as well as the current and projected financial condition of the specific customer. Accounts receivable outstanding longer than contractual terms are considered past due. We write-off accounts receivable to the allowance for doubtful accounts when they become uncollectible. Any payments subsequently received on receivables previously written-off are credited to bad debt expense. The changes in allowance for doubtful account during the years ended December 31, 2023 and 2022 were as follows (in thousands): 54 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) Period ended Balance at beginning of period Charged to expense Deductions or other Balance at end of period December 31, 2022 11,114 2,249 ( 2,673 ) 10,690 December 31, 2023 10,690 1,527 ( 1,367 ) 10,850 Inventories Inventories, consisting of finished goods and materials and supplies held for resale, are carried at the lower of cost or net realizable value. For certain operations, cost, which includes the cost of raw materials and labor for finished goods, is determined using standard cost which approximates a first-in first-out basis. For other operations, this cost is determined on an average cost, first-in first-out or specific identification basis. Net realizable value means estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. We continuously evaluate inventories based on an analysis of inventory levels, historical sales experience and future sales forecasts, to determine obsolete, slow-moving and excess inventory. For the years ended December 31, 2023 and 2022, we recognized inventory write downs totaling $ 2.8 million and $ 2.7 million, respectively. These charges are all included in cost of sales in the consolidated statements of comprehensive income (loss). See Note 5 Inventories for further information related to these charges. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Finance leases of property and equipment are stated at the present value of future minimum lease payments. Expenditures for property and equipment and for items which substantially increase the useful lives of existing assets are capitalized at cost and depreciated over their estimated useful life utilizing the straight-line method. Routine expenditures for repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method based on the estimated useful lives of assets, generally two to 30 years. Property and equipment held under finance leases are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. Gains or losses resulting from the disposition of assets are recognized in income with the related asset cost and accumulated depreciation removed from the balance sheet. Assets acquired in connection with business combinations are recorded at fair value. We review long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the estimated fair value of the asset. The fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows based on expected utilization. Lease obligations We determine if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded in our consolidated balance sheets. Leases with an initial term greater than 12 months are recognized in our consolidated balance sheets based on lease classification as either operating or financing. Operating leases are included in operating lease assets, accrued liabilities and operating lease liabilities. Finance leases are included in property and equipment, current portion of long-term debt, and long-term debt. Some of our lease agreements include lease and non-lease components for which we have elected to not separate for all classes of underlying assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We sublease certain real estate to third parties when we have no future use for the property. Our lease portfolio primarily consists of operating leases for certain manufacturing facilities, warehouses, service facilities, office spaces, equipment and vehicles. Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Our leases have remaining terms of one to 11 years and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. The operating lease assets also include any upfront lease payments made 55 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) and exclude lease incentives and initial direct costs incurred. Lease expense for operating leases is recognized on a straight-line basis over the lease term. We review operating lease assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the asset, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the estimated fair value of the asset. The fair value is determined by means of an analysis of discounted future cash flows based on expected utilization. Intangible assets Intangible assets with definite lives are comprised of customer and distributor relationships, patents and technology, trade names, trademarks and non-compete agreements which are amortized on a straight-line basis over the life of the intangible asset, generally five to 35 years. These assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset are estimated. If the undiscounted future cash flows are less than the carrying amount of the asset, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the estimated fair value of the asset. The fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows. The impairment loss recognized represents the excess of an asset’s carrying value as compared to its estimated fair value. Recognition of provisions for contingencies In the ordinary course of business, we are subject to various claims, suits and complaints. We, in consultation with internal and external legal advisors, will provide for a contingent loss in the consolidated financial statements if, at the date of the consolidated financial statements, it is probable that a liability has been incurred and the amount can be reasonably estimated. If it is determined that the reasonable estimate of the loss is a range and that there is no best estimate within that range, a provision will be made for the lower amount of the range. Legal costs are expensed as incurred. An assessment is made of the areas where potential claims may arise under contract warranty clauses. Where a specific risk is identified, and the potential for a claim is assessed as probable and can be reasonably estimated, an appropriate warranty provision is recorded. Warranty provisions are eliminated at the end of the warranty period except where warranty claims are still outstanding. The liability for product warranty is included in accrued liabilities in the consolidated balance sheets. Revenue recognition and deferred revenue Revenue is recognized in accordance with Accounting Standards Codification Topic (“ASC”) 606, when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Contract Identification . We account for a contract when it is approved, both parties are committed, the rights of the parties are identified, payment terms are defined, the contract has commercial substance and collection of consideration is probable. Performance Obligations . A performance obligation is a promise in a contract to transfer a distinct good or service to the customer under ASC 606. The majority of our contracts with customers contain a single performance obligation to provide agreed-upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. In accordance with ASC 606, we do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. We have elected to apply the practical expedient to account for shipping and handling costs associated with outbound freight after control of a product has transferred to a customer as a fulfillment cost which is included in cost of sales. Furthermore, since our customer payment terms are short-term in nature, we have also elected to apply the practical expedient which allows an entity to not adjust for the effects of a significant financing component if it expects that the customer’s payment period will be less than one year in duration. 56 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) Contract Value . Revenue is measured based on the amount of consideration specified in the contracts with our customers and excludes any amounts collected on behalf of third parties. We have elected the practical expedient to exclude amounts collected from customers for all sales (and other similar) taxes. The estimation of total revenue from a customer contract is subject to elements of variable consideration. Certain customers may receive rebates or discounts which are accounted for as variable consideration. We estimate variable consideration as the most likely amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is resolved. Our estimate of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historic, current, forecast) that is reasonably available to us. Timing of Recognition . We recognize revenue when we satisfy a performance obligation by transferring control of a product or service to a customer. Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from goods transferred to customers at a point in time accounted for 94 % of revenues for the year ended December 31, 2023. The majority of this revenue is product sales, which are generally recognized when items are shipped from our facilities and title passes to the customer. The amount of revenue recognized for products is adjusted for expected returns, which are estimated based on historical data. Revenue from goods transferred to customers over time accounted for 6 % of revenues for the year ended December 31, 2023, which is related to certain contracts in our Subsea and Production Equipment product lines. Recognition over time for these contracts is supported by our assessment of the products supplied as having no alternative use to us and by clauses in the contracts that provide us with an enforceable right to payment for performance completed to date. We use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of assets to the customer which occurs as costs are incurred on the contract. The amount of revenue recognized is calculated based on the ratio of costs incurred to-date compared to total estimated costs which requires management to calculate reasonably dependable estimates of total contract costs. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period. We recognize revenue and cost of sales each period based upon the advancement of the work-in-progress unless the stage of completion is insufficient to enable a reasonably certain forecast of profit to be established. In such cases, no profit is recognized during the period. Accounting estimates during the course of projects may change, primarily related to our remotely operated vehicles (“ROVs”) which may take longer to manufacture. The effect of such a change, which can be upward as well as downward, is accounted for in the period of change, and the cumulative income recognized to date is adjusted to reflect the latest estimates. These revisions to estimates are accounted for on a prospective basis. Contracts are sometimes modified to account for changes in product specifications or requirements. Most of our contract modifications are for goods and services that are not distinct from the existing contract. As such, these modifications are accounted for as if they were part of the existing contract, and therefore, the effect of the modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue on a cumulative catch-up basis. No adjustment to any one contract was material to our consolidated financial statements for the years ended December 31, 2023 and 2022. We sell our products through a number of channels including a direct sales force, marketing representatives, and distributors. We have elected to expense sales commissions when incurred as the amortization period would be less than one year. These costs are recorded within cost of sales. Portfolio Approach . We have elected to apply ASC 606 to a portfolio of contracts with similar characteristics as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio. Disaggregated Revenue . Refer to Note 17 Business Segments for disaggregated revenue by product line and geography. Contract Balances . Contract balances are determined on a contract by contract basis. Contract assets represent revenue recognized for goods and services provided to our customers when payment is conditioned on something other than the passage of time. Similarly, when we receive consideration, or such consideration is unconditionally 57 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record a contract liability. Such contract liabilities typically result from billings in excess of costs incurred and advance payments received on product sales. Concentration of credit risk Trade accounts receivable are financial instruments which potentially subject the Company to credit risk. Trade accounts receivable consist of uncollateralized receivables from domestic and international customers. For the years ended December 31, 2023 and 2022, no customer accounted for 10% or more of the total revenue or 10% or more of the total accounts receivable balance at the end of the respective period. Stock-based compensation We measure all stock-based compensation awards at fair value on the date they are granted to employees and directors, and recognize compensation cost over the requisite service period for awards with only a service condition, and over a graded vesting period for awards with service and performance or market conditions. The fair value of stock-based compensation awards with market conditions is measured using a Monte Carlo Simulation model and, in accordance with ASC 718, is not adjusted based on actual achievement of the performance goals. The Black-Scholes option pricing model is used to measure the fair value of options. Forfeitures are accounted for as they occur. Income taxes We follow the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon temporary differences between the carrying amounts and tax bases of our assets and liabilities at the balance sheet date, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period in which the change occurs. We record a valuation allowance in each reporting period when management believes that it is more likely than not that any deferred tax asset created will not be realized. See Note 10 Income Taxes for more information on valuation allowances recognized. Accounting guidance for income taxes requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. If a tax position meets the “more likely than not” recognition criteria, accounting guidance requires the tax position be measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement. Non-U.S. local currency translation We have global operations and the majority of our non-U.S. operations have designated the local currency as the functional currency. Realized and unrealized gains and losses resulting from re-measurements of monetary assets and liabilities denominated in a currency other than the local entity’s functional currency are included in the consolidated statements of comprehensive income (loss) as incurred. Financial statements of our foreign operations where the functional currency is not the U.S. dollar are translated into U.S. dollars using the current rate method whereby assets and liabilities are translated at the balance sheet rate and income and expenses are translated at the average exchange rates in effect during the period. The resultant translation adjustments are reported as a component of accumulated other comprehensive loss within equity in our consolidated balance sheets. Fair value The carrying amounts for financial instruments classified as current assets and current liabilities approximate fair value, due to the short maturity of such instruments. The book values of other financial instruments, such as our debt related to the Credit Facility, approximates fair value because interest rates charged are similar to other financial instruments with similar terms and maturities and the rates vary in accordance with a market index. For financial assets and liabilities disclosed at fair value, fair value is determined as the exit price, or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The established fair value hierarchy divides fair value measurement into three broad levels: 58 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) • Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; • Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and • Level 3 - inputs are unobservable for the asset or liability, which reflect the best judgment of management. The financial assets and liabilities that are disclosed at fair value for disclosure purposes are categorized in one of the above three levels based on the lowest level input that is significant to the fair value measurement in its entirety. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. Recent accounting pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which the Company adopts as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption. Accounting Standards Adopted in 2023 Inflation Reduction Act of 2022. In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA, among other provisions, imposes a 15% corporate alternative minimum tax on the adjusted financial statement income of certain large corporations effective for tax years beginning after December 31, 2022 and a 1% excise tax on stock repurchases made by publicly traded U.S. corporations after December 31, 2022. The adoption of this standard did not have a material impact on our consolidated financial statements. Reference Rate Reform (Topic 848) . In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04 , which provides temporary, optional practical expedients and exceptions to enable a smoother transition to the new reference rates which will replace the London Interbank Offered Rate (“LIBOR”) and other reference rates expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, which expanded the scope to include derivative instruments impacted by the discounting transition. In December 2022, the FASB issued ASU 2022-06, which extended the temporary accounting rules from December 31, 2022 to December 31, 2024. Effective April 2023, the Company transitioned its Credit Facility from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Accounting Standards Issued But Not Yet Adopted Segment Reporting (Topic 280) . In November 2023, FASB issued ASU 2023-07, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. This update is effective retrospectively for fiscal years beginning after December 15, 2023, and interim periods within fiscal years after December 15, 2024, early adoption is permitted. The Company is in the process of evaluating the impact it may have on our consolidated financial statements. Income Taxes (Topic 740). In December 2023, FASB issued ASU 2023-09, which improves income tax disclosures. This update is effective for fiscal years beginning after December 15, 2025, early adoption is permitted. This update should be applied prospectively but retrospective application is permitted. The Company is in the process of evaluating the impact it may have on our consolidated financial statements. 59 3. Revenues Disaggregated revenues Refer to Note 17 Business Segments for disaggregated revenues by product line and geography. Contract balances The following table reflects the changes in our contract assets and contract liabilities balances for the years ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 Increase / (Decrease) $ % Accrued revenue $ 1,801 $ 665 Costs and estimated profits in excess of billings 13,365 15,139 Contract assets - current 15,166 15,804 Contract assets - non-current 1,828 2,638 Contract assets $ 16,994 $ 18,442 $ ( 1,448 ) ( 8 ) % Deferred revenue $ 10,551 $ 14,401 Billings in excess of costs and profits recognized 4,221 305 Contract liabilities $ 14,772 $ 14,706 $ 66 — % During the year ended December 31, 2023, our contract assets decreased by $ 1.4 million and our contract liabilities increased by $ 0.1 million primarily due to the timing of milestone billings in our Subsea Technologies product line. The noncurrent portion of contract assets is recorded on the consolidated balance sheets as other Iong-term assets. During the year ended December 31, 2023, we recognized revenue of $ 13.1 million that was included in the contract liability balance at the beginning of the period. Substantially all of our contracts are less than one year in duration. As such, we have elected to apply the practical expedient which allows an entity to exclude disclosures about its remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. 4. Acquisition On November 1, 2023, the Company and its wholly owned subsidiary entered into a purchase agreement with Variperm Holdings Ltd. (“Variperm”) and its shareholders to acquire all of the issued and outstanding common shares of Variperm (the “Variperm Acquisition”). The transaction closed on January 4, 2024. Variperm, headquartered in Canada, is a manufacturer of downhole technology solutions, providing sand and flow control products for heavy oil applications. Total consideration for the Variperm Acquisition includes approximately $ 150.0 million of cash and 2.0 million shares of the Company’s common stock, subject to customary purchase price adjustments set forth in the purchase agreement. In connection with the closing, to fund the cash portion of the purchase price, the Company borrowed $ 90.0 million under its senior secured asset-based lending facility (“Credit Facility”) on January 2, 2024 and entered into a $ 60.0 million second lien seller term loan credit agreement (“Seller Term Loan”) on January 4, 2024. 60 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) 5. Inventories The Company’s significant components of inventories at December 31, 2023 and 2022 were as follows (in thousands): December 31, 2023 2022 Raw materials and parts $ 92,563 $ 94,182 Work in process 28,693 27,489 Finished goods 216,570 187,448 Total Inventories 337,826 309,119 Less: inventory reserve ( 38,187 ) ( 39,291 ) Inventories, net $ 299,639 $ 269,828 The changes in inventory reserve during the two-year period ended December 31, 2023 were as follows (in thousands): Period ended Balance at beginning of period Charged to expense Deductions or other Balance at end of period December 31, 2022 $ 62,885 $ 2,698 $ ( 26,292 ) $ 39,291 December 31, 2023 39,291 2,784 ( 3,888 ) 38,187 6. Property and Equipment Property and equipment consisted of the following (in thousands): Estimated useful lives December 31, 2023 2022 Land $ 4,843 $ 4,763 Buildings and leasehold improvements 5 - 30 46,596 49,705 Computer equipment 3 - 5 44,944 42,545 Machinery & equipment 5 - 10 119,687 117,145 Other 2 - 10 18,115 15,292 Construction in progress 1,562 4,530 235,747 233,980 Less: accumulated depreciation ( 174,346 ) ( 171,017 ) Property and equipment, net $ 61,401 $ 62,963 Depreciation expense was $ 10.8 million and $ 12.4 million for the years ended December 31, 2023 and 2022, respectively. During 2022, the Company disposed land and buildings related to a sale-leaseback transaction with a net book value of approximately $ 25.1 million and received net proceeds of $ 32.1 million. The Company recognized a gain of $ 7.0 million as a result, which is reported in operating expense in the consolidated statements of comprehensive income (loss). 61 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) 7. Intangible Assets At December 31, 2023 and 2022, intangible assets consisted of the following (in thousands): December 31, 2023 Cost Accumulated amortization Net Amortization period (in years) Customer relationships $ 267,838 $ ( 164,672 ) $ 103,166 10 - 35 Patents and technology 89,151 ( 41,189 ) 47,962 5 - 19 Non-compete agreements 190 ( 190 ) — 5 Trade names 42,847 ( 28,974 ) 13,873 7 - 19 Trademark 5,089 ( 2,120 ) 2,969 15 Total intangible assets $ 405,115 $ ( 237,145 ) $ 167,970 December 31, 2022 Cost Accumulated amortization Net Amortization period (in years) Customer relationships $ 266,537 $ ( 147,496 ) $ 119,041 10 - 35 Patents and technology 88,863 ( 35,298 ) 53,565 5 - 19 Non-compete agreements 188 ( 188 ) — 5 Trade names 42,638 ( 27,071 ) 15,567 7 - 19 Trademark 5,089 ( 1,781 ) 3,308 15 Total intangible assets $ 403,315 $ ( 211,834 ) $ 191,481 Intangible assets with definite lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Amortization expense was $ 23.9 million and $ 24.5 million for the years ended December 31, 2023 and 2022, respectively. The estimated future amortization expense for the next five years is as follows (in thousands): Year ending December 31, Amount 2024 $ 22,938 2025 21,608 2026 20,356 2027 19,296 2028 17,997 62 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) 8. Debt Notes payable and lines of credit consisted of the following as of (in thousands): December 31, 2023 2022 2025 Notes $ 134,208 $ 256,970 Unamortized debt discount ( 5,074 ) ( 15,314 ) Debt issuance cost ( 1,245 ) ( 3,759 ) Credit Facility — — Other debt 2,864 2,013 Total debt 130,753 239,910 Less: current portion ( 1,186 ) ( 782 ) Long-term debt, net of current portion $ 129,567 $ 239,128 2025 Notes Our 9.00 % convertible secured notes due August 2025 (“2025 Notes”), of which $ 134.2 million principal amount was outstanding at December 31, 2023, pay interest at the rate of 9.00 %, of which 6.25 % is payable in cash and 2.75 % is payable in cash or additional notes, at the Company’s option. The 2025 Notes are secured by a first lien on substantially all of the Company’s assets, except for Credit Facility priority collateral, which secures the 2025 Notes on a second lien basis. During January 2023, $ 122.8 million or 48 % of the then-outstanding principal amount of the 2025 Notes mandatorily converted into approximately 4.5 million shares of common stock. Credit Facility In November 2023, the Credit Facility was modified to (i) permit the Variperm Acquisition, (ii) permit the incurrence of new secured notes in an amount not to exceed $ 200.0 million (which notes will, in part, refinance the 2025 Notes) and (iii) update the applicable base rate for loans denominated in Canadian dollars from CDOR to term Canadian Overnight Repo Rate Average (“CORRA”); and effective upon consummation of the Variperm Acquisition, (a) extend the maturity date of the Credit Facility to September 8, 2028, (b) permit the incurrence of the Seller Term Loan in an amount not to exceed $ 60.0 million in connection with the consummation of the Variperm Acquisition, and (c) increase the aggregate revolving commitments from $ 179.0 million to $ 250.0 million . Following such amendment, our Credit Facility provides revolving credit commitments of $ 250.0 million (with a sublimit of up to $ 70.0 million available for the issuance of letters of credit for the account of the Company and certain of its domestic subsidiaries) (“U.S. Line”), of which up to $ 50.0 million is available to certain of our Canadian subsidiaries for loans in U.S. or Canadian dollars (with a sublimit of up to $ 10.0 million available for the issuance of letters of credit for the account of our Canadian subsidiaries) (the “Canadian Line”). Lender commitments under the Credit Facility, subject to certain limitations, may be increased by an additional $ 100.0 million . The Credit Facility matures in September 2028. Availability under the Credit Facility is subject to a borrowing base calculated by reference to eligible accounts receivable in the U.S., Canada and certain other jurisdictions (subject to a cap) and eligible inventory in the U.S. and Canada. Our borrowing capacity under the Credit Facility could be reduced or eliminated, depending on future fluctuations in our receivables and inventory. As of December 31, 2023, our total borrowing base was $ 167.4 million, of which no amount was drawn and $ 20.3 million was used as security for outstanding letters of credit, resulting in remaining availability of $ 147.1 million. Borrowings under the U.S. Line bear interest at a rate equal to, at our option, either (a) the SOFR, subject to a floor of 0.00 %, plus a margin of 2.25 % to 2.75 %, or (b) a base rate plus a margin of 1.25 % to 1.75 %, in each case based upon the Company’s quarterly total net leverage ratio. The U.S. line base rate is determined by reference to the greatest of (i) the federal funds rate plus 0.50 % per annum, (ii) the one-month adjusted term SOFR plus 1.00 % per annum, and (iii) the “prime rate” of interest announced by Wells Fargo Bank, National Association, subject to a floor of 0.00 %. 63 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) Borrowings under the Canadian Line bear interest at a rate equal to, at our Canadian borrowers’ option, either (a) CORRA, subject to a floor of 0.00 %, plus a margin of 2.25 % to 2.75 %, or (b) a base rate plus a margin of 1.25 % to 1.75 %, in each case based upon the Company’s quarterly net leverage ratio. The Canadian Line base rate is determined by reference to the greater of (i) the Floor, (ii) the one-month CORRA and (iii) the prime rate for Canadian dollar commercial loans made in Canada as reported by Thomson Reuters, subject to a floor of 0.00 %. The weighted average interest rate under the Credit Facility was approximately 8.36 % and 6.83 % for the years ended December 31, 2023 and 2022. The Credit Facility also provides for a commitment fee in the amount of (a) 0.375 % on the unused portion of revolving commitments if average usage of the Credit Facility is greater than 50 % and (b) 0.500 % on the unused portion of revolving commitments if average usage of the Credit Facility is less than or equal to 50 %. If excess availability under the Credit Facility falls below the greater of 12.5 % of the borrowing base and $ 31.25 million, we will be required to maintain a fixed charge coverage ratio of at least 1.00 :1.00 as of the end of each fiscal quarter until excess availability under the Credit Facility exceeds such threshold for 60 consecutive days. Subject to customary exceptions, all obligations under the Credit Facility are guaranteed, jointly and severally, by our wholly-owned U.S. subsidiaries and, in the case of the Canadian Line, our wholly-owned Canadian subsidiaries, and are secured by substantially all assets of each such entity and the Company, subject to customary exclusions. The Credit Facility contains various covenants that, among other things, limit our ability (none of which are absolute) to incur additional indebtedness or issue certain preferred shares, grant certain liens, make certain loans and investments, pay dividends, make distributions or make other restricted payments, enter into mergers or acquisitions unless certain conditions are satisfied, change our lines of business, prepay certain indebtedness, enter into certain affiliate transactions or engage in certain asset dispositions. If an event of default exists under the Credit Facility, the lenders will have the right to accelerate the maturity of the obligations outstanding under the Credit Facility and exercise other rights and remedies. Obligations outstanding under the Credit Facility, however, will be automatically accelerated upon an event of default arising from a bankruptcy or insolvency event. An event of default includes, among other things, nonpayment of principal, interest, fees or other amounts within certain grace periods; representations and warranties proving to be untrue in any material respect; failure to perform or otherwise comply with covenants in the Credit Facility or other loan documents, subject, in certain instances, to grace periods; cross-defaults to certain other indebtedness if such default occurs at the final maturity of such indebtedness or if the effect of such default is to cause, or permit the holders of such indebtedness to cause, the acceleration of such indebtedness; bankruptcy or insolvency events; material monetary judgment defaults; invalidity or unenforceability of the Credit Facility or any other loan document; and the occurrence of a Change of Control (as defined in the Credit Facility). Other Debt Other debt consists of various finance leases of equipment. See Note 18 Subsequent Events for further information related to the Seller Term Loan entered into on January 4, 2024. 64 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) Future principal payments under long-term debt for each of the years ending December 31 are as follows (in thousands): Year ending December 31, Amount 2024 $ 1,347 2025 135,492 2026 415 2027 93 2028 — Thereafter — Total future payment $ 137,347 Less: unamortized debt discount ( 5,074 ) Less: debt issuance cost ( 1,245 ) Less: present value discount on finance leases ( 275 ) Total debt $ 130,753 9. Leases Our lease portfolio primarily consists of operating leases for certain manufacturing facilities, warehouses, service facilities, office spaces, equipment and vehicles. The following table summarizes the supplemental consolidated balance sheet information related to leases as of December 31, 2023 and 2022 (in thousands): December 31, Classification 2023 2022 Assets Operating lease assets Operating lease assets $ 55,399 $ 57,270 Finance lease assets Property and equipment, net 3,063 2,500 Total lease assets $ 58,462 $ 59,770 Liabilities Current Operating Accrued liabilities $ 9,200 $ 8,776 Finance Current portion of long-term debt 1,186 782 Noncurrent Operating Operating lease liabilities 61,450 64,626 Finance Long-term debt, net of current portion 1,678 1,231 Total lease liabilities $ 73,514 $ 75,415 65 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) The following table summarizes the components of lease expenses (in thousands): Year ended December 31, Lease Cost Classification 2023 2022 Operating lease cost Cost of sales and Selling, general and administrative expenses $ 14,641 $ 11,591 Finance lease cost Amortization of leased assets Selling, general and administrative expenses 1,265 887 Interest on lease liabilities Interest expense 180 77 Sublease income Cost of sales and Selling, general and administrative expenses ( 1,238 ) ( 2,437 ) Net lease cost $ 14,848 $ 10,118 The maturities of lease liabilities as of December 31, 2023 are as follows (in thousands): Operating Leases Finance Leases Total 2024 $ 13,312 $ 1,347 $ 14,659 2025 12,674 1,284 13,958 2026 11,650 415 12,065 2027 11,098 93 11,191 2028 9,297 — 9,297 Thereafter 32,977 — 32,977 Total lease payments 91,008 3,139 94,147 Less: present value discount ( 20,358 ) ( 275 ) ( 20,633 ) Present value of lease liabilities $ 70,650 $ 2,864 $ 73,514 The following table summarizes the weighted-average remaining term and weighted average discount rates related to leases as of December 31, 2023 and 2022: Year ended December 31, 2023 2022 Weighted-average remaining lease term (years) Operating leases 7.9 8.8 Financing leases 2.3 2.8 Weighted-average discount rate Operating leases 6.60 % 6.58 % Financing leases 6.89 % 6.43 % 66 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) The following table summarizes the supplemental cash flow information related to leases for the years ended December 31, 2023 and 2022 (in thousands): Year ended December 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 14,027 $ 11,518 Operating cash flows from finance leases 180 78 Financing cash flows from finance leases 1,247 1,184 Sale-leaseback transactions During 2022, the Company sold and leased back land and buildings for net proceeds of $ 32.1 million. The initial annual rent for the assets is $ 2.7 million with initial term of 12 years, subject to annual increase. The transactions met the requirements of sale-leaseback accounting. The related assets were removed from property and equipment and the appropriate operating lease asset and liabilities of approximately $ 24.8 million were recorded in the consolidated balance sheets. 10. Income Taxes The components of income (loss) before income taxes were as follows (in thousands): Year ended December 31, 2023 2022 U.S. $ ( 43,450 ) $ ( 43,587 ) Non-U.S. 35,636 53,936 Income (loss) before income taxes $ ( 7,814 ) $ 10,349 The components of income tax expense (benefit) were as follows (in thousands): Year ended December 31, 2023 2022 Current U.S. federal and state $ 101 $ 196 Non-U.S. 11,165 6,571 Total current 11,266 6,767 Deferred U.S. federal and state 85 26 Non-U.S. ( 289 ) ( 156 ) Total deferred ( 204 ) ( 130 ) Income tax expense $ 11,062 $ 6,637 67 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) The reconciliation between the actual provision for income taxes and that computed by applying the U.S. statutory rate to loss before income taxes are outlined below (in thousands): Year ended December 31, 2023 2022 Income tax benefit at the statutory rate $ ( 1,641 ) 21.0 % $ 2,173 21.0 % State taxes, net of federal tax benefit ( 114 ) 1.5 % 879 8.5 % Non-U.S. operations ( 274 ) 3.5 % ( 7,242 ) ( 70.0 ) % Domestic incentives 448 ( 5.7 ) % 166 1.6 % Prior year federal, non-U.S. and state tax 3,536 ( 45.3 ) % ( 591 ) ( 5.7 ) % Nondeductible expenses 806 ( 10.3 ) % 3,157 30.5 % Valuation allowance 8,313 ( 106.4 ) % 8,077 78.0 % Other ( 12 ) 0.1 % 18 0.2 % Income tax expense $ 11,062 ( 141.6 ) % $ 6,637 64.1 % Our effective tax rate was 141.6 % and 64.1 % for the years ended December 31, 2023 and 2022, respectively. The tax expense for the years ended December 31, 2023 and 2022 includes an increase in our valuation allowance of $ 8.3 million and $ 8.1 million, respectively, consisting of a full valuation allowance against our deferred tax assets in the U.S., U.K., Germany, Singapore, China and Saudi Arabia as further described below under the primary components of deferred taxes. The Organization for Economic Co-operation and Development (“OECD”) introduced Base Erosion and Profit Shifting (“BEPS”) Pillar 2 rules that impose a global minimum tax rate of 15%. Numerous countries, including European Union member states, have enacted or are expected to enact legislation to be effective as early as January 1, 2024, with general implementation of a global minimum tax by January 1, 2025. We are currently evaluating the potential impact on our consolidated financial statements and related disclosures. This may have an impact on our future effective tax rate. 68 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) The primary components of deferred taxes include (in thousands): December 31, 2023 2022 Deferred tax assets Reserves and accruals $ 3,821 $ 3,940 Operating lease liabilities 17,384 17,596 Inventories 10,170 12,964 Stock awards 1,829 1,862 Net operating loss and other tax carryforwards 160,127 124,024 Goodwill and intangible assets 20,091 26,607 Fair value discount on 2025 Notes 19,751 26,301 Property and equipment 6,619 4,570 Other 5,896 3,991 Gross deferred tax assets 245,688 221,855 Valuation allowance ( 231,907 ) ( 208,139 ) Total deferred tax assets $ 13,781 $ 13,716 Deferred tax liabilities Operating lease assets $ ( 13,903 ) $ ( 13,989 ) Prepaid expenses and other ( 450 ) ( 445 ) Total deferred tax liabilities ( 14,353 ) ( 14,434 ) Net deferred tax liabilities $ ( 572 ) $ ( 718 ) Goodwill from certain acquisitions is tax deductible due to the acquisition structure as an asset purchase or due to tax elections made by the Company and the respective sellers at the time of acquisition. We have deferred tax assets related to net operating loss and other tax carryforwards in the U.S., and in certain states and foreign jurisdictions. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. At December 31, 2023, we had $ 316.4 million of U.S. net operating loss carryforwards and $ 10.0 million of state net operating losses. Of these losses, $ 33.5 million will expire no later than 2037 if they are not utilized prior to that date. The remaining $ 292.9 million will not expire. We also had $ 227.6 million of non-U.S. net operating loss carryforwards with indefinite expiration dates. In addition to our net operating loss carryforwards, we also had U.S. interest limitation carryforwards of $ 36.0 million with indefinite expiration dates. The ultimate realization of income tax benefits for these net operating loss and interest limitation carryforwards depends on our ability to generate sufficient taxable income in the respective taxing jurisdictions. Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of our domestic net operating losses may be limited in future periods depending upon future changes in ownership. Where we have unrecognized tax benefits in jurisdictions with existing net operating losses, we utilize the unrecognized tax benefits as a source of income to offset such losses. We do not anticipate being able to fully utilize all of the losses prior to their expiration in the following jurisdictions: the U.S, the U.K, Germany, Singapore, China and Saudi Arabia. During 2023, we recognized $ 8.3 million of tax expense related to the increase in our valuation allowance provided against our deferred tax assets to write down our deferred tax assets in these jurisdictions to what is more likely than not realizable. We increased our valuation allowance related to our U.S. and foreign deferred tax assets by $ 6.5 million and $ 1.8 million, respectively. In making such a determination for each of these jurisdictions, we considered all available positive and negative evidence, including our recent history of pretax losses over the prior three year period, the goodwill and intangible asset impairments for various reporting units, the future reversals of existing taxable temporary differences, the projected future taxable income or loss and tax-planning. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive 69 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) evidence may become available to allow us to reach a conclusion that a portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve. Deferred tax liabilities arising from the difference between the financial reporting and income tax bases inherent in our foreign subsidiaries, referred to as outside basis differences, have not been provided for U.S. income tax purposes because we do not intend to sell, liquidate or otherwise trigger the recognition of U.S. taxable income with regard to our investment in these foreign subsidiaries. Determining the amount of U.S. deferred tax liabilities associated with outside basis differences is not practicable at this time. We file income tax returns in the U.S. as well as in various states and non-U.S. jurisdictions. With few exceptions, we are no longer subject to income tax examination by tax authorities in these jurisdictions prior to 2016. We account for uncertain tax positions in accordance with guidance in ASC Topic 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. A reconciliation of the beginning and ending amount of uncertain tax positions is as follows (in thousands): 2023 Activity Amount Balance at January 1, 2023 $ 10,512 Additional based on tax positions related to prior years 501 Additional based on tax positions related to current year 1,477 Lapse of statute of limitations ( 1,587 ) Balance at December 31, 2023 $ 10,903 The total amount of unrecognized tax benefits at December 31, 2023 was $ 10.9 million, of which it is reasonably possible that $ 4.4 million could be settled during the next twelve-month period as a result of the conclusion of various tax audits or due to the expiration of the applicable statute of limitations. We estimate that $ 8.0 million of the unrecognized tax benefits at December 31, 2023, excluding consideration of valuation allowance, would impact our future effective income tax rate, if recognized. We recognize interest and penalties related to uncertain tax positions within the provision for income taxes in the consolidated statements of comprehensive income (loss). As of December 31, 2023 and 2022, we had accrued approximately $ 0.3 million and $ 0.4 million in interest and penalties, respectively. During the years ended December 31, 2023 and 2022, we recognized no material change in the interest and penalties related to uncertain tax positions. 11. Fair Value Measurements The Company had zero outstanding balance under the Credit Facility at December 31, 2023 and December 31, 2022. The Credit Facility incurs interest at a variable interest rate and therefore, the carrying amount approximates fair value. The fair value of the debt is classified as a Level 2 measurement because interest rates charged are similar to other financial instruments with similar terms and maturities. The fair value of the Company’s Senior Notes is estimated using Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At December 31, 2023, the fair value and the carrying value of the Company’s 2025 Notes approximated $ 130.9 million and $ 127.9 million, respectively. At December 31, 2022, the fair value and the carrying value of the Company’s 2025 Notes approximated $ 272.8 million and $ 237.9 million, respectively. There were no other significant outstanding financial instruments as of December 31, 2023 and 2022 that required measuring the amounts at fair value on a recurring basis. The Company did not change its valuation techniques associated with recurring fair value measurements from prior periods and there were no transfers between levels of the fair value hierarchy during the years ended December 31, 2023 and 2022. 70 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) 12. Commitments and Contingencies Litigation In the ordinary course of business, the Company is, and in the future, could be involved in various pending or threatened legal actions, some of which may or may not be covered by insurance. Management has reviewed such pending judicial and legal proceedings, the reasonably anticipated costs and expenses in connection with such proceedings, and the availability and limits of insurance coverage, and has established reserves that are believed to be appropriate in light of those outcomes that are believed to be probable and can be estimated. The reserves accrued at December 31, 2023 and 2022 are immaterial. In the opinion of management, the Company’s ultimate liability, if any, with respect to these actions is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows. Asbestos litigation One of our subsidiaries has been named as one of many defendants in a number of product liability claims for alleged exposure to asbestos used in valves. These lawsuits are typically filed on behalf of plaintiffs who allege exposure to asbestos, against numerous defendants, often forty or more, who are alleged to have manufactured or distributed products containing asbestos. The injuries alleged by plaintiffs in these cases range from mesothelioma and other cancers to asbestosis. The earliest claims against our subsidiary were filed in New Jersey in 1998, and our subsidiary currently has active cases in New Jersey, New York, and Illinois. These complaints do not typically include requests for a specific amount of damages. Our subsidiary acquired the trademark for the product line in question in 1985. To date, most of the claims against our subsidiary alleging illnesses due to asbestos have generally been based on products manufactured by the previous owner prior to 1985 that are alleged to have contained asbestos. Many claimants alleging illnesses due to asbestos sue on the basis of exposure prior to 1985, as by that date the hazards of asbestos exposure were well known and asbestos had begun to fall into disuse. Our subsidiary has been successful in obtaining dismissals in most lawsuits without any cash contribution including because the “successor liability” law in most states does not hold a purchaser in good faith liable for the actions of the seller prior to the acquisition date unless the purchaser contractually assumed the liabilities, which our subsidiary did not. There are exceptions to the successor liability doctrine in many states, so there are no assurances that our subsidiary will not be found liable for the actions of its predecessor. The law in other states on so called “successor liability” may be different or ambiguous in this regard, and could also expose our subsidiary to liability. Our subsidiary could also be found liable should a trier of fact reject our subsidiary’s position that it is not responsible for the alleged asbestos injuries, such as in a case where a plaintiff alleges post-1985 exposure. To date, asbestos claims had no material adverse effect on our business, financial condition, results of operations, or cash flow, as our annual out-of-pocket costs over the last five years have been less than $ 300,000 . There were approximately 22 new cases filed against our subsidiary in each of last two years, and a significant number of existing cases were dismissed, settled or otherwise disposed of over the last year. We currently have fewer than 110 lawsuits pending against this subsidiary. Our subsidiary has over $ 17 million in face amount of insurance per occurrence and over $ 23 million of aggregate primary insurance coverage. In addition, our subsidiary has over $ 950 million in face amount of excess coverage applicable to the claims. There can be no guarantee that all of this can be collected due to policy terms and conditions and insurer insolvencies in the past or in the future. In January 2011, we entered into an agreement with seven of our primary insurers under which they have agreed to pay 80 % of the costs of handling and settling each asbestos claim against the affected subsidiary. The insurers’ portion of the settlements is funded by our primary insurance limits, which are eroded only by settlements and not legal fees. Approximately $ 2.1 million in settlements has been paid by insurers and our subsidiary to date, with approximately $ 100,000 paid over the course of the last two years. Our subsidiary and the subscribing insurers have the right to withdraw from this agreement, but to date, no party has exercised this right or expressed an intent to do so. Tenaris litigation In October of 2017, one of our subsidiaries, Global Tubing LLC (“Global Tubing”), filed suit against Tenaris Coiled Tubes, LLC and Tenaris, S.A. (together “Tenaris”) in the United States District Court for the Southern District of Texas seeking a declaration that its DURACOIL TM products do not infringe certain Tenaris patents related to coiled tubing. Tenaris filed counterclaims against Global Tubing alleging DURACOIL TM products infringe three patents. Tenaris sought unspecified damages and a permanent injunction. In response, Global Tubing alleged that its products do not infringe and the Tenaris patents are invalid and unenforceable. On March 20, 2023, the court agreed with Global Tubing, finding all patents unenforceable and dismissing all Tenaris infringement claims. Global Tubing intends to seek an award of its attorneys’ fees and costs incurred as a result of the litigation. Tenaris has appealed the final judgment and Global Tubing has filed a cross-appeal. 71 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) Portland Harbor Superfund One of the Company’s dormant subsidiaries is one of several named defendants in a suit filed by the Port of Portland, Oregon in May 2009 seeking reimbursement of costs related to an environmental study at the Port of Portland, and in March 2010, was identified as a potentially responsible party by the EPA with respect to the Portland Harbor Superfund Site. The subsidiary is indemnified for environmental contamination losses by a third party that has assumed responsibility and is providing a defense of the claims. Based on information currently available, the Company does not believe that these matters will have a material adverse effect on the financial condition, results of operations, cash flows or capital expenditures of the Company. Operating leases The Company has operating leases for warehouses, office space, manufacturing facilities and equipment. The leases generally require the Company to pay certain expenses including taxes, insurance, maintenance, and utilities. See Note 9 Leases for further information. Letters of credit and guarantees The Company executes letters of credit in the normal course of business to secure the delivery of product from specific vendors and also to guarantee the Company fulfills certain performance obligations relating to certain large contracts. At December 31, 2023, the Company had $ 20.3 million in letters of credit outstanding. 13. Earnings (Loss) Per Share The reconciliation of basic and diluted earnings per share for each period presented was as follows (dollars and shares in thousands, except per share amounts): Year ended December 31, 2023 2022 Net income (loss) attributable to common stockholders $ ( 18,876 ) $ 3,712 Basic - weighted average shares outstanding 10,212 5,747 Dilutive effect of stock options and restricted stock — 204 Dilutive effect of convertible 2025 Notes — — Diluted - weighted average shares outstanding 10,212 5,951 Earnings (loss) per share Basic $ ( 1.85 ) $ 0.65 Diluted $ ( 1.85 ) $ 0.62 For the year ended December 31, 2023, we excluded all potentially dilutive restricted shares and stock options in calculating diluted earnings per share as the effect was anti-dilutive due to net losses incurred for the period. For 2022, the diluted earnings per share calculation excludes approximately 84 thousand shares because they were anti-dilutive. For the year ended December 31, 2022, we excluded the assumed conversion of the 2025 Notes in calculating diluted earnings per share as the effect was anti-dilutive. Diluted earnings per share was calculated using treasury stock method for the restricted shares and stock options; and if-converted method for the convertible notes. 14. Employee Benefits We sponsor a 401(k) savings plan for U.S. employees and similar savings plans for certain non-U.S. employees. These plans benefit eligible employees by allowing them the opportunity to make contributions up to certain limits. We contribute by matching a percentage of each employee’s contributions. Subsequent to the closing of all acquisitions, employees of those acquired entities will generally be eligible to participate in the Company’s 401(k) savings plan. We also have the discretion to provide a profit sharing contribution to each participant depending on the Company’s performance for the applicable year. The expense under the Company’s retirement plan was $ 4.4 million and $ 3.4 million for the years ended December 31, 2023 and 2022, respectively. 72 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) 15. Long-Term Incentive Compensation Stock-based compensation In August 2010, we adopted the 2010 Stock Incentive Plan (“2010 Plan”) to allow for employees, directors and consultants of the Company and its subsidiaries to share in stock ownership in the Company through the award of stock options, restricted stock, restricted stock units, performance shares or any combination thereof. Under the terms of the 2010 Plan, a total of 925 thousand shares were authorized for issuance pursuant to awards. In connection with the adoption of the 2016 Plan (as described below), no further awards will be granted under the 2010 Plan, but outstanding awards under the 2010 Plan will continue to be governed by its terms. In May 2016, we adopted a new 2016 Stock and Incentive Plan (the “2016 Plan”), under which we initially reserved a total of 285 thousand shares. Our stockholders approved amendments to the 2016 Plan in May 2019, May 2020 and May 2022, increasing the shares authorized for issuance thereunder to 605 thousand shares. Approximately 152 thousand shares remained available under the 2016 Plan for future grants as of December 31, 2023. The total amount of stock based compensation expense recorded was $ 4.6 million and $ 4.2 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, the Company expects to record stock based compensation expense of approximately $ 5.2 million over a weighted average remaining term of approximately two years . Future grants will result in additional compensation expense. Stock options The exercise price of each option is based on the fair market value of the Company’s stock at the date of grant. Options generally have a ten-year life and vest annually in equal increments over four years . Our policy for issuing stock upon a stock option exercise is to issue new shares. Compensation expense is recognized on a straight line basis over the vesting period. The following table provides additional information related to stock options: 2023 Activity Number of shares (in thousands) Weighted average exercise price Weighted average remaining term (in years) Aggregate intrinsic value (in millions) Outstanding at December 31, 2022 53 $ 349.07 2.5 $ — Granted — $ — Exercised — $ — Forfeited/expired ( 7 ) $ 521.00 Outstanding at December 31, 2023 46 $ 322.88 1.9 $ — Exercisable at December 31, 2023 46 $ 322.88 1.9 $ — The intrinsic value is the amount by which the fair value of the underlying share exceeds the exercise price of the stock option. No stock options were exercised in 2023 or 2022. As of December 31, 2023 and 2022, the share price of the Company was less than the exercise price for all outstanding stock options. Therefore, the intrinsic value for stock options outstanding and exercisable was zero as of each such date. No stock options were granted in 2023 or 2022. Restricted stock Restricted stock generally vests over a period of one to four years from the date of grant. The following table provides additional information related to our restricted stock: 2023 Activity Restricted stock (shares in thousands) Nonvested at December 31, 2022 — Granted 7 Vested — Nonvested at December 31, 2023 7 73 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) Restricted stock units Restricted stock units generally vest over a three or four year period from the date of grant. The following table provides additional information related to our restricted stock units: 2023 Activity Restricted stock units (shares in thousands) Nonvested at December 31, 2022 412 Granted 174 Vested ( 236 ) Forfeited ( 2 ) Nonvested at December 31, 2023 348 Of the restricted stock units granted during 2023, 87 thousand shares vest ratably over three years . The remaining 87 thousand shares are performance restricted stock units to employees (assuming target performance) that vest based upon the total shareholder return of the Company’s common stock as compared to a group of peer companies over three different performance periods. The performance periods run from January 1, 2023 through December 31, 2023, January 1, 2023 through December 31, 2024 and January 1, 2023 through December 31, 2025, and 1/3 of each award is allocated to each performance period. The performance restricted stock units may settle for between 0 % and 200 % of the target units granted in shares of the Company’s common stock. The weighted average grant date fair value of the restricted stock units was $ 31.70 and $ 18.94 per share during the years ended December 31, 2023, and 2022, respectively. The total grant date fair value of units vested was $ 3.8 million and $ 4.3 million during 2023 and 2022, respectively. 74 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) 16. Related Party Transactions The Company has sold and purchased inventory, services and fixed assets to and from affiliates of certain directors. The dollar amounts related to these related party activities are not significant to our consolidated financial statements. 17. Business Segments The Company reports results of operations in the following three reporting segments: Drilling & Downhole, Completions and Production. The amounts indicated below as “Corporate” relate to costs and assets not allocated to the reportable segments. The Drilling & Downhole segment designs and manufactures products and provides related services to the drilling, well construction, artificial lift and subsea energy construction and services markets, including applications in oil and natural gas, renewable energy, defense, and communications. The Completions segment designs, manufactures and supplies products and provides related services to the coiled tubing, well stimulation and intervention markets. The Production segment designs, manufactures and supplies products, and provides related equipment and services for production and infrastructure markets. The Company’s reportable segments are strategic units that offer distinct products and services. They are managed separately since each business segment requires different marketing strategies. Operating segments have not been aggregated as part of a reportable segment. The Company evaluates the performance of its reportable segments based on operating income. This segmentation is representative of the manner in which our Chief Operating Decision Maker and our board of directors view the business. We consider the Chief Operating Decision Maker to be the Chief Executive Officer. 75 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) Summary financial data by reportable segment follows (in thousands): Year ended December 31, 2023 2022 Revenue Drilling & Downhole $ 329,576 $ 304,565 Completions 265,628 264,951 Production 145,864 131,519 Eliminations ( 2,204 ) ( 1,122 ) Total revenue $ 738,864 $ 699,913 Segment operating income (loss) Drilling & Downhole $ 33,767 $ 32,201 Completions 10,788 11,565 Production 6,462 ( 443 ) Corporate ( 27,253 ) ( 34,268 ) Total segment operating income 23,764 9,055 Transaction expenses 2,892 — Gain on sale-leaseback transactions — ( 7,000 ) Loss (gain) on disposal of assets and other 156 ( 1,271 ) Operating income $ 20,716 $ 17,326 Depreciation and amortization Drilling & Downhole $ 10,564 $ 11,872 Completions 21,813 21,866 Production 2,105 2,906 Corporate 246 334 Total depreciation and amortization $ 34,728 $ 36,978 A summary of capital expenditures by reportable segment is as follows (in thousands): Year ended December 31, Capital expenditures 2023 2022 Drilling & Downhole $ 3,128 $ 1,462 Completions 3,526 5,145 Production 543 510 Corporate 747 375 Total capital expenditures $ 7,944 $ 7,492 76 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) A summary of consolidated assets by reportable segment is as follows (in thousands): Year ended December 31, Assets 2023 2022 Drilling & Downhole $ 347,035 $ 340,819 Completions 350,216 366,771 Production 96,567 95,089 Corporate 27,243 32,078 Total assets $ 821,061 $ 834,757 Corporate assets primarily include cash, certain prepaid expenses and deferred loan costs. A summary of long-lived assets by geography is as follows (in thousands): December 31, Long-lived assets 2023 2022 United States $ 251,901 $ 279,390 Europe 24,846 26,962 Canada 11,131 11,659 Asia-Pacific 67 20 Middle East 3,508 3,806 Latin America 4 55 Total long-lived assets $ 291,457 $ 321,892 The following table presents our revenues disaggregated by geography based on shipping destination (in thousands): Year ended December 31, 2023 2022 Revenue $ % $ % United States $ 455,871 61.7 % $ 470,765 67.3 % Middle East 89,346 12.1 % 51,891 7.4 % Europe & Africa 64,245 8.7 % 57,533 8.2 % Canada 52,833 7.2 % 48,279 6.9 % Asia-Pacific 38,624 5.2 % 36,832 5.3 % Latin America 37,945 5.1 % 34,613 4.9 % Total Revenue $ 738,864 100.0 % $ 699,913 100.0 % 77 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) The following table presents our revenues disaggregated by product line (in thousands): Year ended December 31, 2023 2022 Revenue $ % $ % Drilling Technologies $ 170,650 23.2 % $ 143,389 20.6 % Downhole Technologies 90,448 12.2 % 84,987 12.1 % Subsea Technologies 68,478 9.3 % 76,189 10.9 % Stimulation and Intervention 158,327 21.4 % 156,331 22.3 % Coiled Tubing 107,301 14.5 % 108,620 15.5 % Production Equipment 81,989 11.1 % 69,914 10.0 % Valve Solutions 63,875 8.6 % 61,605 8.8 % Eliminations ( 2,204 ) ( 0.3 ) % ( 1,122 ) ( 0.2 ) % Total revenue $ 738,864 100.0 % $ 699,913 100.0 % 78 Table of Contents Forum Energy Technologies, Inc. and subsidiaries Notes to consolidated financial statements (continued) 18. Subsequent Events On January 4, 2024, the Company entered into the Seller Term Loan in connection with the closing of the Variperm Acquisition, which has an initial principal amount of $ 60.0 million and matures in December 2026. The Seller Term Loan bears interest at the rate of (i) 11.0 % per year for the period commencing on the Closing Date to (but excluding) the first anniversary of the Closing Date, (ii) 17.0 % per annum for the period commencing on the first anniversary of the Closing Date to (but excluding) the second anniversary of the Closing Date and (iii) 17.5 % per annum for the period commencing on the second anniversary of the Closing Date to (but excluding) the maturity date. 79 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.