Item 2. Management’s Discussion and Analysis
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 March 5, 2024, 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 manufacturing company serving the oil, natural gas, industrial and renewable energy industries. With headquarters 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 completion activities and at processing centers and refineries. Our capital products are directed at drilling rig equipment for constructing new or 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, 2024, approximately 80% 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.
We expect that the world’s long-term energy demand will continue to rise for many decades. We also expect hydrocarbons will continue to play a vital role in meeting the world’s long-term energy needs while renewable energy sources develop to scale. As such, we remain focused on serving our customers in both oil and natural gas as well as renewable energy applications. We are continuing to develop products to help oil and gas operators lower expenses, increase production and reduce their emissions while also deploying our technologies in renewable energy applications.
In the first quarter 2024, following the Variperm Acquisition, we aligned our reportable segments with business activity drivers, our customer base, and the manner in which we review and evaluate operating performance. FET now operates in the following two reportable segments: (1) Drilling and Completions and (2) Artificial Lift and Downhole. Refer to Note 10 Business Segments for the product lines making up each segment. Our historical results of operations were recast retrospectively to reflect these changes in accordance with U.S. GAAP.
20
A summary of the products and services offered by each segment is as follows:
• Drilling and Completions . This segment designs, manufactures and supplies products and solutions to the drilling, subsea, coiled tubing, well stimulation and intervention markets, including applications in the oil and natural gas, renewable energy, defense and communications industries. The products and solutions consist primarily of (i) capital equipment and consumable products used in the drilling process; (ii) capital equipment and aftermarket products including subsea remotely operated vehicles (“ROVs”) and trenchers, submarine rescue vehicles, specialty components and tooling, and technical services; (iii) capital equipment and consumable products sold to the pressure pumping market, including hydraulic fracturing pumps, cooling systems, and high-pressure flexible hoses and flow iron; (iv) wireline cable and pressure control equipment used in the well completion and intervention service markets; and (v) coiled tubing strings and pressure control equipment used in coiled tubing operations, as well as coiled line pipe and related services.
• Artificial Lift and Downhole . This segment designs, manufactures and supplies products and solutions for the artificial lift, well construction, production and infrastructure markets. The products and solutions consist primarily of: (i) products designed to safeguard artificial lift equipment and downhole cables: (ii) well construction casing and cementing equipment; (iii) customized downhole technology solutions, providing sand and flow control products for heavy oil applications; (iv) engineered process systems, production equipment, as well as specialty separation equipment; and (v) a wide range of industrial valves focused on oil and natural gas as well as power generation, renewable energy and other general industrial applications.
Market Conditions
Generally, 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.
Compared to fourth quarter 2023, oil and natural gas prices have remained relatively flat despite tightened supply from OPEC+ production cuts and continued geopolitical tensions in Ukraine and the Middle East. These tensions could lead to a disruption to world energy markets and international supply chains. Although these near-term macroeconomic events have presented challenges, we expect that the world’s long-term energy demand will continue to rise and may outpace global supply as OPEC+ remains committed to maintaining stable oil prices. We expect that hydrocarbons will continue to play a vital role in meeting the world’s long-term energy needs while renewable energy sources become increasingly prominent.
The price of oil has varied dramatically over the last several years. Average West Texas Intermediate (“WTI”) and United Kingdom Brent (“Brent”) oil prices were slightly higher in the first quarter 2024 compared to the first quarter 2023. In addition, average natural gas prices were 18.6% lower in the first quarter 2024 compared to the first quarter 2023.
Our revenues, over the long-term, are highly correlated to the global drilling rig count, which decreased 5.3% during the first quarter 2024 compared to average global rig count during first quarter 2023. The decrease was driven by decline in North America rig count of 15.3%, offset by growth in international rig count of 5.5% compared to first quarter 2023. International markets are expected to continue to outpace the U.S. in 2024. 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.
21
The table below shows average crude oil and natural gas prices for WTI, Brent, and Henry Hub:
Three Months Ended
March 31, December 31, March 31,
2024 2023 2023
Average global oil, $/bbl
West Texas Intermediate $ 77.50 $ 78.53 $ 75.93
United Kingdom Brent $ 82.92 $ 84.01 $ 81.07
Average North American Natural Gas, $/Mcf
Henry Hub $ 2.15 $ 2.74 $ 2.64
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,
2024 2023 2023
Active Rigs by Location
United States 623 622 760
Canada 208 181 221
International 965 965 915
Global Active Rigs 1,796 1,768 1,896
Land vs. Offshore Rigs
Land 1,547 1,526 1,655
Offshore 249 242 241
Global Active Rigs 1,796 1,768 1,896
U.S. Commodity Target
Oil/Gas 502 500 603
Gas 118 118 155
Unclassified 3 4 2
Total U.S. Active Rigs 623 622 760
U.S. Well Path
Horizontal 560 557 697
Vertical 13 14 18
Directional 50 51 45
Total U.S. Active Rigs 623 622 760
The table below shows the amount of total inbound orders by segment:
Three Months Ended
March 31, December 31, March 31,
(in millions of dollars) 2024 2023 2023
Drilling and Completions $ 116.6 $ 113.8 $ 121.3
Artificial Lift and Downhole 87.8 46.5 57.6
Total Orders $ 204.4 $ 160.3 $ 178.9
22
Results of operations
Three months ended March 31, 2024 compared with three months ended March 31, 2023
Three Months Ended March 31, Change
(in thousands of dollars, except per share information) 2024 2023 $ %
Revenue
Drilling and Completions $ 119,071 $ 126,764 $ (7,693) (6.1) %
Artificial Lift and Downhole 83,342 62,207 21,135 34.0 %
Eliminations (21) (14) (7) *
Total revenue 202,392 188,957 13,435 7.1 %
Segment operating income
Drilling and Completions 4,559 4,990 (431) (8.6) %
Operating margin % 3.8 % 3.9 %
Artificial Lift and Downhole 11,786 8,633 3,153 36.5 %
Operating margin % 14.1 % 13.9 %
Corporate (7,252) (7,032) (220) (3.1) %
Total segment operating income 9,093 6,591 2,502 38.0 %
Operating margin % 4.5 % 3.5 %
Transaction expenses 5,921 — 5,921 *
Gain on disposal of assets and other (28) (260) 232 *
Operating income 3,200 6,851 (3,651) (53.3) %
Interest expense 8,760 4,549 4,211 92.6 %
Foreign exchange losses and other, net 1,227 2,972 (1,745) *
Total other expense 9,987 7,521 2,466 32.8 %
Loss before income taxes (6,787) (670) (6,117) (913.0) %
Income tax expense 3,528 2,816 712 25.3 %
Net loss $ (10,315) $ (3,486) $ (6,829) (195.9) %
Weighted average shares outstanding
Basic 12,201 10,179
Diluted 12,201 10,179
Loss per share
Basic $ (0.85) $ (0.34)
Diluted $ (0.85) $ (0.34)
* not meaningful
23
Revenue
Our revenue for the three months ended March 31, 2024 was $202.4 million, an increase of $13.4 million, or 7.1%, compared to the three months ended March 31, 2023. For the three months ended March 31, 2024, our Drilling and Completions and Artificial Lift and Downhole segments comprised 58.8% and 41.2% of our total revenue, respectively, which compared to 67.1% and 32.9% of our total revenue, respectively, for the three months ended March 31, 2023. The overall increase in revenue is primarily related to the revenue contributed from the acquired Variperm business, partially offset by the decline in overall global drilling and completions activities in 2024 compared to 2023. The changes in revenue by operating segment consisted of the following:
Drilling and Completions segment — Revenue was $119.1 million for the three months ended March 31, 2024, a decrease of $7.7 million, or 6.1%, compared to the three months ended March 31, 2023. Due to the decline in overall global drilling and completions activities, the decrease in revenue was led by an $8.8 million, or 18.5%, decrease in the Stimulation & Intervention product line, a $4.1 million, or 15.7%, decrease in the Coiled Tubing product line, and a $3.8 million, or 9.5%, decrease in the Drilling product line. The decrease was partially offset by an increase of $9.0 million, or 70.5%, in our Subsea product line due to higher project revenue recognized from ROVs and cable management systems.
Artificial Lift and Downhole segment — Revenue was $83.3 million for the three months ended March 31, 2024, an increase of $21.1 million, or 34.0%, compared to the three months ended March 31, 2023. Revenue for our Downhole product line increased by $29.0 million, or 125.1%, primarily due to revenue contributed from the acquired Variperm business and an increase in casing equipment sales. This increase was partially offset by an $6.5 million, or 33.9% decrease, in sales of our valve products, and $1.4 million, or 7.1%, decrease in sales within our Production Equipment product line.
Segment operating income (loss) and segment operating margin percentage
Segment operating income for the three months ended March 31, 2024 was $9.1 million, a $2.5 million increase compared to $6.6 million for the three months ended March 31, 2023. For the three months ended March 31, 2024, segment operating margin percentage was 4.5% compared to 3.5% for the three months ended March 31, 2023. Segment operating margin percentage is calculated by dividing segment operating income by revenue for the period. The change in operating income for each segment is explained as follows:
Drilling and Completions segment — Segment operating income was $4.6 million, or 3.8%, for the three months ended March 31, 2024 compared to $5.0 million, or 3.9%, for the three months ended March 31, 2023. The $0.4 million decrease in segment operating results is primarily attributable to lower demand for capital equipment that was nearly offset by higher project revenue in Subsea product line.
Artificial Lift and Downhole segment — Segment operating income was $11.8 million, or 14.1%, for the three months ended March 31, 2024 compared to $8.6 million, or 13.9%, for the three months ended March 31, 2023. The $3.2 million increase in segment operating results was primarily driven by the acquisition of Variperm and an increase in project revenue recognized from process oil treatment equipment, partially offset by the decline in sales of our valve products.
Corporate — Selling, general and administrative expenses for Corporate were $7.3 million for the three months ended March 31, 2024 compared to $7.0 million for the three months ended March 31, 2023. 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.
Other items not included in segment operating income (loss)
Transaction expenses, gain (loss) on the disposal of assets and other are not included in segment operating income, but are included in total operating income.
Other income and expense
Other income and expense includes interest expense and foreign exchange gains (losses) and other. We incurred $8.8 million of interest expense during the three months ended March 31, 2024, an increase of $4.2 million compared to the three months ended March 31, 2023, due to the increased borrowings under our revolving Credit Facility and borrowings under the Seller Term Loan entered into in connection with the Variperm Acquisition. See Note 7 Debt for further details related to the Credit Facility and Seller Term Loan.
24
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 $3.5 million and $2.8 million for the three months ended March 31, 2024 and 2023, respectively. The estimated annual effective tax rates for the three months ended March 31, 2024 and 2023 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.
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, the 2025 Notes and the Seller Term Loan. Our primary uses of capital have been for inventory, sales on credit to our customers, maintenance and growth capital expenditures, debt repayments and the acquisition of Variperm. 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, 2024, we had $134.2 million principal amount of 2025 Notes outstanding, $96.5 million of borrowings under our revolving Credit Facility and $59.7 million principal amount of the Seller Term Loan outstanding. The 2025 Notes mature in August 2025 and, subject to certain exceptions, the Credit Facility matures in September 2028 a nd the Seller Term Loan matures in December 2026. See Note 7 Debt for further details related to the terms for our debt arrangements.
As of March 31, 2024, we had cash and cash equivalents of $48.5 million and $71.6 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 expect total 2024 capital expenditures to be approximately $10.0 million, primarily for replacement of 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 outstanding debt 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 three months ended March 31, 2024 , we did not repurchase shares of our common stock and the remaining authorization under this program is $2.4 million.
In January 2024, we completed the Variperm Acquisition for consideration of approximately $150.0 million of cash (subject to customary purchase price adjustments) and 2.0 million shares of our common stock. We may pursue additional acquisitions in the future, which may be funded with cash and/or equity.
25
Our cash flows for the three months ended March 31, 2024 and 2023 are presented below (in millions):
Three Months Ended March 31,
2024 2023
Net cash provided by (used in) operating activities $ 5.0 $ (23.1)
Net cash used in investing activities (152.8) (0.8)
Net cash provided by financing activities 151.8 19.3
Effect of exchange rate changes on cash (1.7) 0.3
Net increase (decrease) in cash, cash equivalents and restricted cash $ 2.3 $ (4.3)
Net cash provided by (used in) operating activities
Net cash provided by operating activities was $5.0 million for the three months ended March 31, 2024 compared to net cash used in operating activities of $23.1 million for the three months ended March 31, 2023. This improvement in operating cash flow usage is primarily attributable to an increase in cash provided from working capital, mainly accounts receivable and inventories. It was offset by an increase in cash used for accounts payable and accrued liabilities of $24.1 million for the three months ended March 31, 2024 compared to $5.5 million for the three months ended March 31, 2023.
Net cash used in investing activities
Net cash used in investing activities was $152.8 million for the three months ended March 31, 2024, mainly related to Variperm Acquisition of $150.1 million and $2.9 million of capital expenditures, partially offset by $0.2 million of proceeds from the sale of property and equipment. 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 provided by financing activities
Net cash provided by financing activities was $151.8 million for the three months ended March 31, 2024 compared to $19.4 million of cash provided by financing activities for the three months ended March 31, 2023, respectively. The change in net cash provided by financing activities primarily resulted from $96.5 million in borrowings from the revolving Credit Facility and net $59.7 million from the Seller Term Loan during the three months ended March 31, 2024 compared to a net $25.0 million of borrowings on the revolving Credit Facility 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 and the Seller Term Loan; (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
26
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 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.
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 2024 2023
Revenue $ 131,926 $ 151,263
Cost of sales 100,005 116,471
Operating income (1,751) 2,667
Net loss (10,315) (3,486)
March 31, 2024 December 31, 2023
Summarized Balance Sheet
Current assets $ 363,462 $ 388,817
Non-current assets 249,886 251,901
Current liabilities $ 130,647 $ 144,493
Payables to non-guarantor subsidiaries 5,480 190,816
Non-current liabilities 318,849 178,811
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, 2024. For a detailed discussion of our critical accounting policies and estimates, refer to our 2023 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.”
27