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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
Form 10-Q
___________________________________
| | | | | | | | |
| | |
| ☑ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
For the Quarterly Period Ended September 30, 2023
OR
| | | | | | | | |
| | |
| ☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 001-35504
FORUM ENERGY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| | | |
| |
| Delaware | | | 61-1488595 |
| (State or other jurisdiction of | | | (I.R.S. Employer Identification No.) |
| incorporation or organization) | | | |
| | | | | | | | | | | | | | |
| 10344 Sam Houston Park Drive | Suite 300 | Houston | Texas | 77064 |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act | | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock | FET | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | | Accelerated filer | ☑ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☑ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of October 27, 2023, there were 10,192,978 common shares outstanding.
Table of Contents
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands, except per share information) | 2023 | | 2022 | | 2023 | | 2022 |
| Revenue | $ | 179,253 | | | $ | 181,835 | | | $ | 553,659 | | | $ | 509,255 | |
| Cost of sales | 128,231 | | | 130,472 | | | 399,229 | | | 370,700 | |
| Gross profit | 51,022 | | | 51,363 | | | 154,430 | | | 138,555 | |
| Operating expenses | | | | | | | |
| Selling, general and administrative expenses | 45,496 | | | 43,713 | | | 135,364 | | | 131,515 | |
| Loss (gain) on disposal of assets and other | (145) | | | (52) | | | 137 | | | (938) | |
| Total operating expenses | 45,351 | | | 43,661 | | | 135,501 | | | 130,577 | |
| Operating income | 5,671 | | | 7,702 | | | 18,929 | | | 7,978 | |
| Other expense (income) | | | | | | | |
| Interest expense | 4,504 | | | 8,143 | | | 13,742 | | | 23,609 | |
| Foreign exchange and other losses (gains), net | (8,279) | | | (18,288) | | | 1,129 | | | (37,112) | |
| | | | | | | |
| Total other expense (income), net | (3,775) | | | (10,145) | | | 14,871 | | | (13,503) | |
| Income before taxes | 9,446 | | | 17,847 | | | 4,058 | | | 21,481 | |
| Income tax expense | 1,477 | | | 1,370 | | | 6,154 | | | 4,939 | |
| Net income (loss) | $ | 7,969 | | | $ | 16,477 | | | $ | (2,096) | | | $ | 16,542 | |
| | | | | | | |
| Weighted average shares outstanding | | | | | | | |
| Basic | 10,235 | | | 5,778 | | | 10,208 | | | 5,736 | |
| Diluted | 10,393 | | | 10,552 | | | 10,208 | | | 10,489 | |
| Earnings (loss) per share | | | | | | | |
| Basic | $ | 0.78 | | | $ | 2.85 | | | $ | (0.21) | | | $ | 2.88 | |
| Diluted | $ | 0.77 | | | $ | 1.82 | | | $ | (0.21) | | | $ | 2.37 | |
| | | | | | | |
Other comprehensive income (loss), net of tax of $0: | | | | | | | |
| Net income (loss) | $ | 7,969 | | | $ | 16,477 | | | $ | (2,096) | | | $ | 16,542 | |
| Change in foreign currency translation | (10,710) | | | (22,690) | | | 1,197 | | | (46,199) | |
| Gain (loss) on pension liability | (36) | | | 66 | | | (15) | | | 153 | |
| Comprehensive loss | $ | (2,777) | | | $ | (6,147) | | | $ | (914) | | | $ | (29,504) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited) | | | | | | | | | | | |
| (in thousands, except share information) | September 30, 2023 | | December 31, 2022 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 37,151 | | | $ | 51,029 | |
Accounts receivable—trade, net of allowances of $10,945 and $10,690 | 157,820 | | | 154,247 | |
| Inventories, net | 302,304 | | | 269,828 | |
| Prepaid expenses and other current assets | 24,670 | | | 21,957 | |
| Accrued revenue | 771 | | | 665 | |
| Costs and estimated profits in excess of billings | 8,440 | | | 15,139 | |
| Total current assets | 531,156 | | | 512,865 | |
| Property and equipment, net of accumulated depreciation | 61,397 | | | 62,963 | |
| Operating lease assets | 56,363 | | | 57,270 | |
| Deferred financing costs, net | 927 | | | 1,166 | |
| Intangible assets, net | 173,394 | | | 191,481 | |
| Deferred income taxes, net | 368 | | | 184 | |
| Other long-term assets | 5,266 | | | 8,828 | |
| Total assets | $ | 828,871 | | | $ | 834,757 | |
| Liabilities and equity | | | |
| Current liabilities | | | |
| Current portion of long-term debt | $ | 1,076 | | | $ | 782 | |
| Accounts payable—trade | 124,146 | | | 118,261 | |
| Accrued liabilities | 64,184 | | | 76,544 | |
| Deferred revenue | 14,140 | | | 14,401 | |
| Billings in excess of costs and profits recognized | 4,739 | | | 305 | |
| Total current liabilities | 208,285 | | | 210,293 | |
| Long-term debt, net of current portion | 128,537 | | | 239,128 | |
| Deferred income taxes, net | 904 | | | 902 | |
| Operating lease liabilities | 62,569 | | | 64,626 | |
| Other long-term liabilities | 11,456 | | | 12,773 | |
| Total liabilities | 411,751 | | | 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 | 1,368,062 | | | 1,253,613 | |
Treasury stock at cost, 708,900 and 570,247 shares | (142,057) | | | (138,560) | |
| Retained deficit | (682,691) | | | (680,595) | |
| Accumulated other comprehensive loss | (126,303) | | | (127,485) | |
| Total equity | 417,120 | | | 307,035 | |
| Total liabilities and equity | $ | 828,871 | | | $ | 834,757 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| (in thousands) | 2023 | | 2022 |
| Cash flows from operating activities | | | |
| Net income (loss) | $ | (2,096) | | | $ | 16,542 | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | |
| Depreciation expense | 7,920 | | | 9,678 | |
| Amortization of intangible assets | 18,074 | | | 18,487 | |
| Inventory write down | 1,918 | | | 1,580 | |
| Stock-based compensation expense | 3,345 | | | 3,537 | |
| | | |
| Deferred income taxes | (93) | | | (1,870) | |
| Noncash losses and other, net | 4,702 | | | 5,480 | |
| Changes in operating assets and liabilities | | | |
| Accounts receivable—trade | (4,779) | | | (28,729) | |
| Inventories | (35,613) | | | (37,160) | |
| Prepaid expenses and other assets | 413 | | | 1,408 | |
| Cost and estimated profit in excess of billings | 6,819 | | | (10,251) | |
| Accounts payable, deferred revenue and other accrued liabilities | (8,257) | | | (2,022) | |
| Billings in excess of costs and estimated profits earned | 4,570 | | | (8,812) | |
| Net cash used in operating activities | (3,077) | | | (32,132) | |
| Cash flows from investing activities | | | |
| Capital expenditures for property and equipment | (5,497) | | | (4,779) | |
| Proceeds from sale of property and equipment | 1,341 | | | 2,672 | |
| Payments related to business acquisitions and dispositions | — | | | (485) | |
| Net cash used in investing activities | (4,156) | | | (2,592) | |
| Cash flows from financing activities | | | |
| Borrowings on Credit Facility | 351,635 | | | 423,945 | |
| Repayments on Credit Facility | (351,635) | | | (413,205) | |
| | | |
| Payment of capital lease obligations | (910) | | | (746) | |
| Repurchases of stock | (5,996) | | | (826) | |
| | | |
| | | |
| Net cash provided by (used in) financing activities | (6,906) | | | 9,168 | |
| | | |
| Effect of exchange rate changes on cash | 261 | | | (1,524) | |
| | | |
| Net decrease in cash, cash equivalents and restricted cash | (13,878) | | | (27,080) | |
| Cash, cash equivalents and restricted cash at beginning of period | 51,029 | | | 46,858 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 37,151 | | | $ | 19,778 | |
| | | |
| Noncash activities | | | |
| Operating lease right of use assets obtained in exchange for lease obligations | $ | 5,194 | | | $ | 3,248 | |
| Finance lease right of use assets obtained in exchange for lease obligations | 1,521 | | | 458 | |
| Conversion of debt to common stock | 113,650 | | | — | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 | | | | | |
| (in thousands) | | Common stock | | Additional paid-in capital | | Treasury stock | | Retained
deficit | | Accumulated
other
comprehensive
income / (loss) | | Total equity | | | | | |
| Balance at December 31, 2022 | | $ | 62 | | | $ | 1,253,613 | | | $ | (138,560) | | | $ | (680,595) | | | $ | (127,485) | | | $ | 307,035 | | | | | | |
| Stock-based compensation expense | | — | | | 841 | | | — | | | — | | | — | | | 841 | | | | | | |
| Restricted stock issuance, net of forfeitures | | 1 | | | (1,874) | | | — | | | — | | | — | | | (1,873) | | | | | | |
| Conversion of debt to common stock | | 46 | | | 113,604 | | | — | | | — | | | — | | | 113,650 | | | | | | |
| Treasury stock | | — | | | — | | | (3,497) | | | — | | | — | | | (3,497) | | | | | | |
| Currency translation adjustment | | — | | | — | | | — | | | — | | | 4,158 | | | 4,158 | | | | | | |
| Change in pension liability | | — | | | — | | | — | | | — | | | 15 | | | 15 | | | | | | |
| Net loss | | — | | | — | | | — | | | (3,486) | | | — | | | (3,486) | | | | | | |
| Balance at March 31, 2023 | | $ | 109 | | | $ | 1,366,184 | | | $ | (142,057) | | | $ | (684,081) | | | $ | (123,312) | | | $ | 416,843 | | | | | | |
| Stock-based compensation expense | | — | | | 1,257 | | | — | | | — | | | — | | | 1,257 | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Currency translation adjustment | | — | | | — | | | — | | | — | | | 7,749 | | | 7,749 | | | | | | |
| Change in pension liability | | — | | | — | | | — | | | — | | | 6 | | | 6 | | | | | | |
| Net loss | | — | | | — | | | — | | | (6,579) | | | — | | | (6,579) | | | | | | |
| Balance at June 30, 2023 | | $ | 109 | | | $ | 1,367,441 | | | $ | (142,057) | | | $ | (690,660) | | | $ | (115,557) | | | $ | 419,276 | | | | | | |
| Stock-based compensation expense | | — | | | 1,247 | | | — | | | — | | | — | | | 1,247 | | | | | | |
| Restricted stock issuance, net of forfeitures | | — | | | (626) | | | — | | | — | | | — | | | (626) | | | | | | |
| | | | | | | | | | | | | | | | | |
| Currency translation adjustment | | — | | | — | | | — | | | — | | | (10,710) | | | (10,710) | | | | | | |
| Change in pension liability | | — | | | — | | | — | | | — | | | (36) | | | (36) | | | | | | |
| Net income | | — | | | — | | | — | | | 7,969 | | | — | | | 7,969 | | | | | | |
| Balance at September 30, 2023 | | $ | 109 | | | $ | 1,368,062 | | | $ | (142,057) | | | $ | (682,691) | | | $ | (126,303) | | | $ | 417,120 | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| (in thousands) | | Common stock | | Additional paid-in capital | | Treasury stock | | Retained
deficit | | Accumulated
other
comprehensive
income / (loss) | | Total equity |
| Balance at December 31, 2021 | | $ | 61 | | | $ | 1,249,962 | | | $ | (135,562) | | | $ | (684,307) | | | $ | (101,028) | | | $ | 329,126 | |
| Stock-based compensation expense | | — | | | 2,151 | | | — | | | — | | | — | | | 2,151 | |
| Restricted stock issuance, net of forfeitures | | 1 | | | (361) | | | — | | | — | | | — | | | (360) | |
| Currency translation adjustment | | — | | | — | | | — | | | — | | | (6,992) | | | (6,992) | |
| Change in pension liability | | — | | | — | | | — | | | — | | | 30 | | | 30 | |
| Net loss | | — | | | — | | | — | | | (9,199) | | | — | | | (9,199) | |
| Balance at March 31, 2022 | | $ | 62 | | | $ | 1,251,752 | | | $ | (135,562) | | | $ | (693,506) | | | $ | (107,990) | | | $ | 314,756 | |
| Stock-based compensation expense | | — | | | 621 | | | — | | | — | | | — | | | 621 | |
| Restricted stock issuance, net of forfeitures | | — | | | (1) | | | — | | | — | | | — | | | (1) | |
| Liability awards converted to share settled | | — | | | 275 | | | — | | | — | | | — | | | 275 | |
| Currency translation adjustment | | — | | | — | | | — | | | — | | | (16,518) | | | (16,518) | |
| Change in pension liability | | — | | | — | | | — | | | — | | | 57 | | | 57 | |
| Net income | | — | | | — | | | — | | | 9,264 | | | — | | | 9,264 | |
| Balance at June 30, 2022 | | $ | 62 | | | $ | 1,252,647 | | | $ | (135,562) | | | $ | (684,242) | | | $ | (124,451) | | | $ | 308,454 | |
| Stock-based compensation expense | | — | | | 765 | | | — | | | — | | | — | | | 765 | |
| Restricted stock issuance, net of forfeitures | | — | | | (467) | | | — | | | — | | | — | | | (467) | |
| Currency translation adjustment | | — | | | — | | | — | | | — | | | (22,690) | | | (22,690) | |
| Change in pension liability | | — | | | — | | | — | | | — | | | 66 | | | 66 | |
| Net income | | — | | | — | | | — | | | 16,477 | | | — | | | 16,477 | |
| Balance at September 30, 2022 | | $ | 62 | | | $ | 1,252,945 | | | $ | (135,562) | | | $ | (667,765) | | | $ | (147,075) | | | $ | 302,605 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Table of Contents
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
1. Organization and Basis of Presentation
Forum Energy Technologies, Inc. (the “Company,” “FET,” “we,” “our,” or “us”), a Delaware corporation, is a global 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.
Basis of Presentation
The Company's accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated in consolidation.
In management's opinion, all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the Company’s financial position, results of operations and cash flows have been included. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any other interim period.
These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2022, which are included in the Company’s 2022 Annual Report on Form 10-K filed with the SEC on February 28, 2023.
2. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, 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 Standard 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.
3. Revenue
Revenue is recognized 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 receive in exchange for those goods or services. For a detailed discussion of our revenue recognition policies, refer to the Company’s 2022 Annual Report on Form 10-K.
Disaggregated Revenue
Refer to Note 9 Business Segments for disaggregated revenue by product line and geography.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
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, the Company records contract liability when we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract. Such contract liabilities typically result from billings in excess of costs incurred on construction contracts and advance payments received on product sales.
The following table reflects the changes in our contract assets and contract liabilities balances for the nine months ended September 30, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | Increase / (Decrease) |
| | | $ | | % |
| Accrued revenue | $ | 771 | | | $ | 665 | | | | | |
| Costs and estimated profits in excess of billings | 8,440 | | | 15,139 | | | | | |
| Contract assets - current | 9,211 | | | 15,804 | | | | | |
| Contract assets - noncurrent | 1,637 | | | 2,638 | | | | | |
| Contract assets | $ | 10,848 | | | $ | 18,442 | | | $ | (7,594) | | | (41) | % |
| | | | | | | |
| Deferred revenue | $ | 14,140 | | | $ | 14,401 | | | | | |
| Billings in excess of costs and profits recognized | 4,739 | | | 305 | | | | | |
| Contract liabilities | $ | 18,879 | | | $ | 14,706 | | | $ | 4,173 | | | 28 | % |
During the nine months ended September 30, 2023, our contract assets decreased by $7.6 million and our contract liabilities increased by $4.2 million primarily due to the timing of milestone billings for projects in our Subsea Technologies product line.
During the nine months ended September 30, 2023, we recognized $12.6 million of revenue 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. Inventories
The Company's significant components of inventory at September 30, 2023 and December 31, 2022 were as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Raw materials and parts | $ | 98,100 | | | $ | 94,182 | |
| Work in process | 31,529 | | | 27,489 | |
| Finished goods | 211,035 | | | 187,448 | |
| Total inventories | 340,664 | | | 309,119 | |
| Less: inventory reserve | (38,360) | | | (39,291) | |
| Inventories, net | $ | 302,304 | | | $ | 269,828 | |
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
5. Intangible Assets
Intangible assets consisted of the following as of September 30, 2023 and December 31, 2022, respectively (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Intangibles | | Amortization Period (In Years) |
| Customer relationships | $ | 266,409 | | | $ | (159,402) | | | $ | 107,007 | | | 10 - 35 |
| Patents and technology | 88,793 | | | (39,568) | | | 49,225 | | | 5 - 19 |
| Non-compete agreements | 188 | | | (188) | | | — | | | 5 |
| Trade names | 42,605 | | | (28,496) | | | 14,109 | | | 7 - 19 |
| Trademarks | 5,089 | | | (2,036) | | | 3,053 | | | 15 |
| Total intangible assets | $ | 403,084 | | | $ | (229,690) | | | $ | 173,394 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Intangibles | | 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 |
| Trademarks | 5,089 | | | (1,781) | | | 3,308 | | | 15 |
| Total intangible assets | $ | 403,315 | | | $ | (211,834) | | | $ | 191,481 | | | |
6. Debt
Notes payable and lines of credit as of September 30, 2023 and December 31, 2022 consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| 2025 Notes | $ | 134,208 | | | $ | 256,970 | |
| Unamortized debt discount | (5,785) | | | (15,314) | |
| Debt issuance cost | (1,420) | | | (3,759) | |
| Credit Facility | — | | | — | |
| Other debt | 2,610 | | | 2,013 | |
| Total debt | 129,613 | | | 239,910 | |
| Less: current portion | (1,076) | | | (782) | |
| Long-term debt, net of current portion | $ | 128,537 | | | $ | 239,128 | |
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2025 Notes
In August 2020, we exchanged $315.5 million principal amount of our previous 6.25% unsecured notes due 2021 for new 9.00% convertible secured notes due August 2025 (the “2025 Notes”). The 2025 Notes 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 the nine months ended September 30, 2023, $122.8 million or 48% of the principal amount of the 2025 Notes mandatorily converted into approximately 4.5 million shares of common stock.
Credit Facility
Our senior secured revolving credit facility (“Credit Facility”), which has a maturity date of September 2026, provides revolving credit commitments of $179.0 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) (the “U.S. Line”), of which up to $20.0 million is available to certain of our Canadian subsidiaries for loans in U.S. or Canadian dollars (with a sublimit of up to $3.0 million available for the issuance of letters of credit for the account of our Canadian subsidiaries) (the “Canadian Line”).
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. Such eligible accounts receivable and eligible inventory serve as priority collateral for the Credit Facility, which is also secured on a second lien basis by substantially all of the Company's other assets. The amount of eligible inventory included in the borrowing base is restricted to the lesser of $124.0 million (subject to a quarterly reduction of $0.5 million) and 80.0% of the total borrowing base. Our borrowing capacity under the Credit Facility could be reduced or eliminated, depending on future fluctuations in our receivables and inventory. As of September 30, 2023, our total borrowing base was $173.3 million, of which no amount was drawn and $18.5 million was used for security of outstanding letters of credit, resulting in remaining availability of $154.8 million.
Borrowings under the U.S. Line are subject to an interest rate equal to, at the Company's 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, with the U.S. Line base rate determined by reference to the greatest of (i) the federal funds rate plus 0.50% per annum, (ii) the one-month adjusted SOFR plus 1.00% per annum, and (iii) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its prime rate, subject to a floor of 0.00%.
Borrowings under the Canadian Line were subject to an interest rate during the reporting period equal to, our subsidiary's option, either (a) the Canadian Dollar Offered Rate (“CDOR”), 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 one-month CDOR plus 1.00% and (ii) 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 8.28% for the nine months ended September 30, 2023.
The Credit Facility also provides for a commitment fee in the amount of (a) 0.375% on the unused portion of commitments if average usage of the Credit Facility is greater than 50% and (b) 0.500% on the unused portion of 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 $22.4 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 thresholds for at least 60 consecutive days. Furthermore, the Credit Facility includes an obligation to prepay outstanding loans with cash on hand in excess of certain thresholds and includes a cross-default to the 2025 Notes.
Deferred Loan Costs
We have incurred loan costs that have been deferred and are amortized to interest expense over the term of the 2025 Notes and the Credit Facility. In connection with the September 2021 Credit Facility amendment, we deferred approximately $1.6 million of loan costs that will be amortized over the facility's remaining life.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Other Debt
Other debt consists primarily of various finance leases of equipment.
Letters of Credit and Guarantees
We execute letters of credit in the normal course of business to secure the delivery of product from specific vendors and also to guarantee our fulfillment of performance obligations relating to certain large contracts. The Company had $18.5 million and $21.8 million in total outstanding letters of credit as of September 30, 2023 and December 31, 2022, respectively.
7. Income Taxes
For interim periods, our income tax expense or benefit is computed based on our estimated annual effective tax rate and any discrete items that impact the interim periods. For the three and nine months ended September 30, 2023, the Company recorded a tax expense of $1.5 million and $6.2 million, respectively. For the three and nine months ended September 30, 2022, the Company recorded a tax expense of $1.4 million and $4.9 million, respectively. The estimated annual effective tax rates for all periods 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. Finally, the Company believes that it is reasonably possible that a decrease of approximately $1.5 million of noncurrent unrecognized tax benefits may occur by the end of 2023 as a result of a lapse of the statute of limitations.
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. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning and recent operating results. As of September 30, 2023, 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. As a result, we have certain valuation allowances against our deferred tax assets as of September 30, 2023.
8. Fair Value Measurements
The Company had no borrowings outstanding under the Credit Facility as of September 30, 2023. 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 our 2025 Notes is estimated using Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At September 30, 2023, the fair value and the carrying value of our 2025 Notes approximated $130.1 million and $127.0 million, respectively. At December 31, 2022, the fair value and the carrying value of our 2025 Notes approximated $272.8 million and $237.9 million, respectively.
There were no other significant outstanding financial instruments as of September 30, 2023 and December 31, 2022 that required measuring the amounts at fair value on a recurring basis. We did not change our 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 nine months ended September 30, 2023.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
9. 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. Summary financial data by segment follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Revenue | | | | | | | |
| Drilling & Downhole | $ | 81,181 | | | $ | 75,723 | | | $ | 238,652 | | | $ | 223,476 | |
| Completions | 62,473 | | | 72,246 | | | 208,239 | | | 190,867 | |
| Production | 36,877 | | | 34,238 | | | 108,918 | | | 95,622 | |
| Eliminations | (1,278) | | | (372) | | | (2,150) | | | (710) | |
| Total revenue | $ | 179,253 | | | $ | 181,835 | | | $ | 553,659 | | | $ | 509,255 | |
| | | | | | | |
| Segment operating income | | | | | | | |
| Drilling & Downhole | $ | 8,437 | | | $ | 9,481 | | | $ | 25,165 | | | $ | 23,995 | |
| Completions | 2,147 | | | 5,915 | | | 9,893 | | | 8,787 | |
| Production | 1,803 | | | 665 | | | 4,546 | | | (1,241) | |
| Corporate | (6,861) | | | (8,411) | | | (20,538) | | | (24,501) | |
| Segment operating income | 5,526 | | | 7,650 | | | 19,066 | | | 7,040 | |
| Loss (gain) on disposal of assets and other | (145) | | | (52) | | | 137 | | | (938) | |
| Operating income | $ | 5,671 | | | $ | 7,702 | | | $ | 18,929 | | | $ | 7,978 | |
A summary of consolidated assets by reportable segment is as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Drilling & Downhole | $ | 347,503 | | | $ | 340,819 | |
| Completions | 357,174 | | | 366,771 | |
| Production | 100,149 | | | 95,089 | |
| Corporate | 24,045 | | | 32,078 | |
| Total assets | $ | 828,871 | | | $ | 834,757 | |
Corporate assets primarily include cash, certain prepaid assets and deferred loan costs.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents our revenues disaggregated by product line (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Drilling Technologies | $ | 42,953 | | | $ | 38,159 | | | $ | 128,995 | | | $ | 100,934 | |
| Downhole Technologies | 23,480 | | | 21,916 | | | 68,763 | | | 62,902 | |
| Subsea Technologies | 14,748 | | | 15,648 | | | 40,894 | | | 59,640 | |
| Stimulation and Intervention | 32,545 | | | 43,647 | | | 126,266 | | | 111,143 | |
| Coiled Tubing | 29,928 | | | 28,599 | | | 81,973 | | | 79,724 | |
| Production Equipment | 21,706 | | | 18,463 | | | 59,268 | | | 50,055 | |
| Valve Solutions | 15,171 | | | 15,775 | | | 49,650 | | | 45,567 | |
| Eliminations | (1,278) | | | (372) | | | (2,150) | | | (710) | |
| Total revenue | $ | 179,253 | | | $ | 181,835 | | | $ | 553,659 | | | $ | 509,255 | |
The following table presents our revenues disaggregated by geography (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| United States | $ | 103,453 | | | $ | 124,896 | | | $ | 352,183 | | | $ | 336,754 | |
| Middle East | 27,359 | | | 12,751 | | | 64,058 | | | 38,700 | |
| Canada | 12,333 | | | 14,169 | | | 40,400 | | | 35,761 | |
| Europe & Africa | 16,832 | | | 14,291 | | | 39,177 | | | 45,186 | |
| Latin America | 9,185 | | | 6,191 | | | 30,218 | | | 25,891 | |
| Asia-Pacific | 10,091 | | | 9,537 | | | 27,623 | | | 26,963 | |
| Total revenue | $ | 179,253 | | | $ | 181,835 | | | $ | 553,659 | | | $ | 509,255 | |
10. Commitments and Contingencies
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 September 30, 2023 and December 31, 2022, respectively, 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.
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 DURACOILTM products do not infringe certain Tenaris patents related to coiled tubing. Tenaris filed counterclaims against Global Tubing alleging DURACOILTM 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.
For further disclosure regarding certain litigation matters, refer to Note 12 of the notes to the consolidated financial statements included in Item 8 of the Company’s 2022 Annual Report on Form 10-K filed with the SEC on February 28, 2023.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
11. Earnings (Loss) Per Share
The calculation of basic and diluted earnings per share for each period presented was as follows (dollars and shares in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Net income (loss) - basic | $ | 7,969 | | | $ | 16,477 | | | $ | (2,096) | | | $ | 16,542 | |
| Interest on dilutive convertible notes due 2025 | — | | | 2,762 | | | — | | | 8,286 | |
| Net income (loss) - diluted | $ | 7,969 | | | $ | 19,239 | | | $ | (2,096) | | | $ | 24,828 | |
| | | | | | | |
| Weighted average shares outstanding - basic | 10,235 | | | 5,778 | | | 10,208 | | | 5,736 | |
| Dilutive effect of stock options and restricted stock | 158 | | | 227 | | | — | | | 206 | |
| Dilutive effect of convertible notes due 2025 | — | | | 4,547 | | | — | | | 4,547 | |
| Weighted average shares outstanding - diluted | 10,393 | | | 10,552 | | | 10,208 | | | 10,489 | |
| | | | | | | |
| Earnings (loss) per share | | | | | | | |
| Basic | $ | 0.78 | | | $ | 2.85 | | | $ | (0.21) | | | $ | 2.88 | |
| Diluted | $ | 0.77 | | | $ | 1.82 | | | $ | (0.21) | | | $ | 2.37 | |
The calculation of diluted earnings per share excluded approximately 46 thousand shares that were anti-dilutive for the three months ended September 30, 2023. For the nine months ended September 30, 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 the three months and nine months ended September 30, 2022, the diluted earnings per share calculation excluded approximately 54 thousand and 95 thousand shares, respectively. 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.
12. Stockholders' Equity
Stock-based compensation
During the nine months ended September 30, 2023, the Company granted 86,912 time-based restricted stock units to employees that vest ratably over three years.
In addition, during the nine months ended September 30, 2023, the Company granted 86,912 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.
13. Related Party Transactions
The Company has sold and purchased inventory, services and fixed assets to and from various affiliates of certain directors. The dollar amounts of these related party activities are not significant to the Company’s unaudited condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
14. Subsequent Events
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 Company expects the transaction to close during January 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 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. The purchase agreement was filed in the Company's Current Report on Form 8-K on November 3, 2023.
On November 1, 2023, the Company entered into an amendment to the Credit Facility that, among other things, permits the acquisition of Variperm, permits the incurrence of either new secured notes in an amount not to exceed $200.0 million or other financing, extends the maturity date of the Credit Agreement to September 8, 2028, increases the aggregate revolving commitments to $250.0 million from $179.0 million, and updates the CDOR provisions with Canadian Overnight Repo Rate Average.
Item 2. Management’s discussion and analysis of financial condition and results of operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “will,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause actual results to differ materially from our plans, intentions or expectations. This may be the result of various factors, including, but not limited to, those factors discussed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on February 28, 2023, and elsewhere in this Quarterly Report on Form 10-Q. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Overview
We are a global company serving the oil, natural gas, industrial and renewable energy industries. With headquarters located in Houston, Texas, FET provides value added solutions aimed at improving the safety, efficiency, and environmental impact of our customers' operations. Our highly engineered products include capital equipment and consumable products. FET’s customers include oil and natural gas operators, land and offshore drilling contractors, oilfield service companies, pipeline and refinery operators, and renewable energy and new energy companies. Consumable products are used by our customers in drilling, well construction and completions activities and at processing centers and refineries. Our capital products are directed at drilling rig equipment for constructing new and upgrading existing rigs, subsea construction and development projects, pressure pumping equipment, the placement of production equipment on new producing wells, downstream capital projects and capital equipment for renewable energy projects. For the nine months ended September 30, 2023, approximately 65% of our revenue was derived from consumable products and activity-based equipment, while the balance was primarily derived from capital products with a small amount from rental and other services.
A summary of the products and services offered by each segment is as follows:
•Drilling & Downhole. This segment designs, manufactures and supplies products and provides related services to the drilling, well construction, artificial lift and subsea energy construction markets, including applications in oil and natural gas, renewable energy, defense, and communications. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable products consumed in the drilling process; (ii) well construction casing and cementing equipment and protection products for artificial lift equipment and cables; and (iii) subsea remotely operated vehicles (“ROVs”) and trenchers, submarine rescue vehicles, specialty components and tooling, and complementary subsea technical services.
•Completions. This segment designs, manufactures and supplies products and provides related services to the coiled tubing, well stimulation and intervention markets. The products and related services consist primarily of: (i) capital and consumable products sold to the pressure pumping, hydraulic fracturing and flowback services markets, including hydraulic fracturing pumps, cooling systems, high-pressure flexible hoses and flow iron as well as wireline cable and pressure control equipment used in the well completion and intervention service markets; and (ii) coiled tubing strings and coiled line pipe and related services.
•Production. This segment designs, manufactures and supplies products and provides related equipment and services for production and infrastructure markets. The products and related services consist primarily of: (i) engineered process systems, production equipment, as well as specialty separation equipment; and (ii) a wide range of industrial valves focused on serving oil and natural gas customers as well as power generation, renewable energy and other general industrial applications.
Market Conditions
Demand for our products and services is directly related to our customers' capital and operating budgets. These budgets are heavily influenced by current and expected energy prices. In addition, demand for our capital products is driven by the utilization of service company equipment. Utilization is a function of equipment capacity and durability in demanding environments.
Recent inflationary pressures and rising interest rates have created a heightened concern of a global recession. Oil and natural gas prices softened in the first half of 2023 as a result of such global recessionary fears, but rebounded during the third quarter as supply tightened from further OPEC+ production cuts. The recent conflict in the Middle East could lead to a disruption to world energy markets and international supply chains. Despite these near-term macroeconomic 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. The spot prices for West Texas Intermediate (“WTI”) and United Kingdom Brent (“Brent”) crude oil fell from $61.14 and $67.77 per barrel, respectively, as of December 31, 2019 to lows below $15.00 per barrel in April 2020. Since that time, oil prices rebounded to highs above $120.00 per barrel in March 2022 but have softened to an average of $82.25 and $86.65, for WTI and Brent, respectively, in the third quarter 2023. In addition, natural gas prices have decreased by 67.7% comparing the third quarter 2023 to the third quarter 2022.
Our revenues, over the long-term, are highly correlated to the global drilling rig count, which averaged 1,788 rigs during the third quarter 2023 from an average of 1,030 rigs in the third quarter 2020. The average U.S. rig count for the third quarter 2023 was 9.7% lower and 14.7% lower compared to the second quarter 2023 and third quarter 2022, respectively. The international rig count for the third quarter 2023 was 0.9% lower and 11.0% higher compared to the second quarter 2023 and third quarter 2022, respectively.
Global drilling and completions activity remains below pre-pandemic levels. Markets outside North America are expected to grow and outpace the U.S. in 2023. In the U.S., publicly owned exploration and production companies are expected to continue to exercise disciplined capital spending. Privately owned exploration and production companies tend to fluctuate their activity more readily in response to changes in oil and natural gas prices.
The table below shows average crude oil and natural gas prices for WTI, Brent, and Henry Hub:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, | | June 30, | | September 30, |
| | 2023 | | 2023 | | 2022 |
| Average global oil, $/bbl | | | | | | |
| West Texas Intermediate | | $ | 82.25 | | | $ | 73.54 | | | $ | 93.06 | |
| United Kingdom Brent | | $ | 86.65 | | | $ | 77.99 | | | $ | 100.71 | |
| | | | | | |
| Average North American Natural Gas, $/Mcf | | | | | | |
| Henry Hub | | $ | 2.59 | | | $ | 2.16 | | | $ | 8.03 | |
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 |
| | September 30, | | June 30, | | September 30, |
| | 2023 | | 2023 | | 2022 |
| Active Rigs by Location | | | | | | |
| United States | | 649 | | | 719 | | | 761 | |
| Canada | | 188 | | | 117 | | | 199 | |
| International | | 951 | | | 960 | | | 857 | |
| Global Active Rigs | | 1,788 | | | 1,796 | | | 1,817 | |
| | | | | | |
| Land vs. Offshore Rigs | | | | | | |
| Land | | 1,539 | | | 1,546 | | | 1,590 | |
| Offshore | | 249 | | | 250 | | | 227 | |
| Global Active Rigs | | 1,788 | | | 1,796 | | | 1,817 | |
| | | | | | |
| U.S. Commodity Target | | | | | | |
| Oil/Gas | | 521 | | | 572 | | | 599 | |
| Gas | | 122 | | | 143 | | | 158 | |
| Unclassified | | 6 | | | 4 | | | 4 | |
| Total U.S. Active Rigs | | 649 | | | 719 | | | 761 | |
| | | | | | |
| U.S. Well Path | | | | | | |
| Horizontal | | 578 | | | 650 | | | 692 | |
| Vertical | | 17 | | | 19 | | | 28 | |
| Directional | | 54 | | | 50 | | | 41 | |
| Total U.S. Active Rigs | | 649 | | | 719 | | | 761 | |
The table below shows the amount of total inbound orders by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | June 30, | | September 30, | | September 30, | | September 30, |
| (in millions of dollars) | 2023 | | 2023 | | 2022 | | 2023 | | 2022 |
| Drilling & Downhole | $ | 95.0 | | | $ | 82.1 | | | $ | 73.3 | | | $ | 258.1 | | | $ | 218.6 | |
| Completions | 65.1 | | | 62.7 | | | 78.7 | | | 193.8 | | | 197.1 | |
| Production | 38.7 | | | 41.5 | | | 45.7 | | | 112.1 | | | 149.9 | |
| Total Orders | $ | 198.8 | | | $ | 186.3 | | | $ | 197.7 | | | $ | 564.0 | | | $ | 565.6 | |
Results of operations
Three months ended September 30, 2023 compared with three months ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| (in thousands of dollars, except per share information) | 2023 | | 2022 | | $ | | % |
| Revenue | | | | | | | |
| Drilling & Downhole | $ | 81,181 | | | $ | 75,723 | | | $ | 5,458 | | | 7.2 | % |
| Completions | 62,473 | | | 72,246 | | | (9,773) | | | (13.5) | % |
| Production | 36,877 | | | 34,238 | | | 2,639 | | | 7.7 | % |
| Eliminations | (1,278) | | | (372) | | | (906) | | | * |
| Total revenue | 179,253 | | | 181,835 | | | (2,582) | | | (1.4) | % |
| Segment operating income | | | | | | | |
| Drilling & Downhole | 8,437 | | | 9,481 | | | (1,044) | | | (11.0) | % |
| Operating margin % | 10.4 | % | | 12.5 | % | | | | |
| Completions | 2,147 | | | 5,915 | | | (3,768) | | | (63.7) | % |
| Operating margin % | 3.4 | % | | 8.2 | % | | | | |
| Production | 1,803 | | | 665 | | | 1,138 | | | 171.1 | % |
| Operating margin % | 4.9 | % | | 1.9 | % | | | | |
| Corporate | (6,861) | | | (8,411) | | | 1,550 | | | 18.4 | % |
| Total segment operating income | 5,526 | | | 7,650 | | | (2,124) | | | (27.8) | % |
| Operating margin % | 3.1 | % | | 4.2 | % | | | | |
| Gain on disposal of assets and other | (145) | | | (52) | | | (93) | | | * |
| Operating income | 5,671 | | | 7,702 | | | (2,031) | | | (26.4) | % |
| Interest expense | 4,504 | | | 8,143 | | | (3,639) | | | (44.7) | % |
| Foreign exchange gains and other, net | (8,279) | | | (18,288) | | | 10,009 | | | * |
| | | | | | | |
| Total other income | (3,775) | | | (10,145) | | | 6,370 | | | 62.8 | % |
| Income before income taxes | 9,446 | | | 17,847 | | | (8,401) | | | (47.1) | % |
| Income tax expense | 1,477 | | | 1,370 | | | 107 | | | 7.8 | % |
| Net income | $ | 7,969 | | | $ | 16,477 | | | $ | (8,508) | | | (51.6) | % |
| | | | | | | |
| Weighted average shares outstanding | | | | | | | |
| Basic | 10,235 | | | 5,778 | | | | | |
| Diluted | 10,393 | | | 10,552 | | | | | |
| Earnings per share | | | | | | | |
| Basic | $ | 0.78 | | | $ | 2.85 | | | | | |
| Diluted | $ | 0.77 | | | $ | 1.82 | | | | | |
| * not meaningful | | | | | | | |
Revenue
Our revenue for the three months ended September 30, 2023 was $179.3 million, a decrease of $2.6 million, or 1.4%, compared to the three months ended September 30, 2022. For the three months ended September 30, 2023, our Drilling & Downhole, Completions, and Production segments comprised 45.3%, 34.1%, and 20.6% of our total revenue, respectively, which compared to 41.6%, 39.6%, and 18.8% of our total revenue, respectively, for the three months ended September 30, 2022. The overall decrease in revenue is primarily related to lower U.S. hydraulic fracturing activity in the third quarter 2023 compared to the third quarter 2022. The changes in revenue by operating segment consisted of the following:
Drilling & Downhole segment — Revenue was $81.2 million for the three months ended September 30, 2023, an increase of $5.5 million, or 7.2%, compared to the three months ended September 30, 2022. This increase was led by a $4.8 million, or 12.6%, increase in revenue for our Drilling Technologies product line due to higher sales volumes of capital equipment, partially offset by lower sales volumes of consumable products. Revenue for our Downhole Technologies product line increased by $1.6 million, or 7.1%, primarily due to higher sales volumes of artificial lift products in the third quarter 2023 compared to the third quarter 2022. Revenue for our Subsea Technologies product line decreased by $0.9 million, or 5.8%, from lower volumes of cable management systems partially offset by an increase from higher project revenue recognized from ROVs and after-market part sales.
Completions segment — Revenue was $62.5 million for the three months ended September 30, 2023, a decrease of $9.8 million, or 13.5%, compared to the three months ended September 30, 2022. This change includes a revenue decrease of $11.1 million, or 25.4%, for our Stimulation & Intervention product line primarily due to lower U.S. hydraulic fracturing activity levels and delays in capital equipment spending by customers during the third quarter 2023. This decline was partially offset by a $1.3 million increase in revenue for our Coiled Tubing product line due to higher international sales volumes.
Production segment — Revenue was $36.9 million for the three months ended September 30, 2023, an increase of $2.6 million, or 7.7%, compared to the three months ended September 30, 2022. The increase was driven by a $3.2 million, or 17.6%, increase in sales for our Production Equipment product line primarily due to an increase in revenues recognized from our processing oil treatment equipment, partially offset by a $0.6 million, or 3.8%, decrease in sales of our valve products within our Valve Solutions product line.
Segment operating income (loss) and segment operating margin percentage
Segment operating income for the three months ended September 30, 2023 was $5.5 million, a $2.1 million decrease compared to an income of $7.7 million for the three months ended September 30, 2022. For the three months ended September 30, 2023, segment operating margin percentage was 3.1% compared to 4.2% for the three months ended September 30, 2022. Segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue for the period. The change in operating income (loss) for each segment is explained as follows:
Drilling & Downhole segment — Segment operating income was $8.4 million, or 10.4%, for the three months ended September 30, 2023 compared to operating income of $9.5 million, or 12.5%, for the three months ended September 30, 2022. The $1.0 million decrease in segment operating results is primarily attributable to lower volume and profitability of our Subsea product line projects, partially offset by higher gross profit from our Downhole Technologies product line.
Completions segment — Segment operating income was $2.1 million, or 3.4%, for the three months ended September 30, 2023 compared to segment operating income of $5.9 million, or 8.2%, for the three months ended September 30, 2022. The $3.8 million decrease in segment operating results was primarily due to lower sales volumes of our well stimulation products.
Production segment — Segment operating income was $1.8 million, or 4.9%, for the three months ended September 30, 2023 compared to an income of $0.7 million, or 1.9%, for the three months ended September 30, 2022. The $1.1 million increase in segment operating results was driven by an increase in project revenue recognized from our process oil treatment equipment driving higher gross profit.
Corporate — Selling, general and administrative expenses for Corporate were $6.9 million for the three months ended September 30, 2023 compared to $8.4 million for the three months ended September 30, 2022. This decrease was primarily related to lower variable compensation costs. 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)
Gain (loss) on the disposal of assets and other is not included in segment operating income (loss), but is included in total operating income (loss).
Other income and expense
Other income and expense includes interest expense and foreign exchange gains (losses) and other. We incurred $4.5 million of interest expense during the three months ended September 30, 2023, a decrease of $3.6 million compared to the three months ended September 30, 2022, due to the decline in the balance of 2025 Notes upon conversion of $122.8 million aggregate principal amount of our 2025 Notes to common stock in January 2023. See Note 6 Debt for further details related to the 2025 Notes and Credit Facility.
The foreign exchange gains (losses) are primarily the result of movements in the British pound, Euro and Canadian dollar relative to the U.S. dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S. dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than the U.S. dollar.
Taxes
We recorded tax expense of $1.5 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively. The estimated annual effective tax rates for the three months ended September 30, 2023 and 2022 were impacted by losses in jurisdictions where the recording of a tax benefit is not available. Furthermore, the tax expense or benefit recorded can vary from period to period depending on the Company’s relative mix of earnings and losses by jurisdiction.
Nine months ended September 30, 2023 compared with nine months ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| (in thousands of dollars, except per share information) | 2023 | | 2022 | | $ | | % |
| Revenue | | | | | | | |
| Drilling & Downhole | $ | 238,652 | | | $ | 223,476 | | | $ | 15,176 | | | 6.8 | % |
| Completions | 208,239 | | | 190,867 | | | 17,372 | | | 9.1 | % |
| Production | 108,918 | | | 95,622 | | | 13,296 | | | 13.9 | % |
| Eliminations | (2,150) | | | (710) | | | (1,440) | | | * |
| Total revenue | 553,659 | | | 509,255 | | | 44,404 | | | 8.7 | % |
| Segment operating income | | | | | | | |
| Drilling & Downhole | 25,165 | | | 23,995 | | | 1,170 | | | 4.9 | % |
| Operating margin % | 10.5 | % | | 10.7 | % | | | | |
| Completions | 9,893 | | | 8,787 | | | 1,106 | | | 12.6 | % |
| Operating margin % | 4.8 | % | | 4.6 | % | | | | |
| Production | 4,546 | | | (1,241) | | | 5,787 | | | 466.3 | % |
| Operating margin % | 4.2 | % | | (1.3) | % | | | | |
| Corporate | (20,538) | | | (24,501) | | | 3,963 | | | 16.2 | % |
| Total segment operating income | 19,066 | | | 7,040 | | | 12,026 | | | 170.8 | % |
| Operating margin % | 3.4 | % | | 1.4 | % | | | | |
| Loss (gain) on disposal of assets and other | 137 | | | (938) | | | 1,075 | | | * |
| Operating income | 18,929 | | | 7,978 | | | 10,951 | | | 137.3 | % |
| Interest expense | 13,742 | | | 23,609 | | | (9,867) | | | (41.8) | % |
| Foreign exchange losses (gains) and other, net | 1,129 | | | (37,112) | | | 38,241 | | | * |
| | | | | | | |
| Total other (income) expense, net | 14,871 | | | (13,503) | | | 28,374 | | | 210.1 | % |
| Income before income taxes | 4,058 | | | 21,481 | | | (17,423) | | | (81.1) | % |
| Income tax expense | 6,154 | | | 4,939 | | | 1,215 | | | 24.6 | % |
| Net income (loss) | $ | (2,096) | | | $ | 16,542 | | | $ | (18,638) | | | (112.7) | % |
| | | | | | | |
| Weighted average shares outstanding | | | | | | | |
| Basic | 10,208 | | | 5,736 | | | | | |
| Diluted | 10,208 | | | 10,489 | | | | | |
| Earnings per share | | | | | | | |
| Basic | $ | (0.21) | | | $ | 2.88 | | | | | |
| Diluted | $ | (0.21) | | | $ | 2.37 | | | | | |
| * not meaningful | | | | | | | |
Revenue
Our revenue for the nine months ended September 30, 2023 was $553.7 million, an increase of $44.4 million, or 8.7%, compared to the nine months ended September 30, 2022. For the nine months ended September 30, 2023, our Drilling & Downhole, Completions, and Production segments comprised 43.1%, 37.2%, and 19.7% of our total revenue, respectively, which compared to 43.9%, 37.3%, and 18.8% of our total revenue, respectively, for the nine months ended September 30, 2022. The overall increase in revenue is primarily related to increases in market activity and global rig count in 2023 compared to 2022. The changes in revenue by operating segment consisted of the following:
Drilling & Downhole segment — Revenue was $238.7 million for the nine months ended September 30, 2023, an increase of $15.2 million, or 6.8%, compared to the nine months ended September 30, 2022. This increase was led by a $28.1 million, or 27.8%, increase in revenue for our Drilling Technologies product line due to higher sales volumes of both consumable products and capital equipment driven by increased market activity. Revenue for our Downhole Technologies product line increased by $5.9 million, or 9.3%, primarily due to higher sales volumes of artificial lift products in 2023 compared to 2022. Revenue for our Subsea Technologies product line decreased by $18.7 million, or 31.4%, from lower project revenue recognized from ROVs and cable management systems, partially offset by an increase in part sales.
Completions segment — Revenue was $208.2 million for the nine months ended September 30, 2023, an increase of $17.4 million, or 9.1%, compared to the nine months ended September 30, 2022. This change includes a revenue increase of $15.1 million, or 13.6%, for our Stimulation & Intervention product line primarily due to higher demand of radiators and wireline cable, partially offset by lower sales volumes in power ends and high-pressure hoses.
Production segment — Revenue was $108.9 million for the nine months ended September 30, 2023, an increase of $13.3 million, or 13.9%, compared to the nine months ended September 30, 2022. The increase was driven by a $9.2 million, or 18.4%, increase in project revenue recognized from our process oil treatment equipment within our Production Equipment product line, and a $4.1 million, or 9.0%, increase in sales of our valve products.
Segment operating income (loss) and segment operating margin percentage
Segment operating income for the nine months ended September 30, 2023 was $19.1 million, a $12.0 million increase compared to an income of $7.0 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, segment operating margin percentage was 3.4% compared to 1.4% for the nine months ended September 30, 2022. Segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue for the period. The change in operating income (loss) for each segment is explained as follows:
Drilling & Downhole segment — Segment operating income was $25.2 million, or 10.5%, for the nine months ended September 30, 2023 compared to operating income of $24.0 million, or 10.7%, for the nine months ended September 30, 2022. The $1.2 million increase in segment operating results is primarily attributable to higher gross profit from the 6.8% increase in segment revenues and favorable product mix. These gains were partially offset by lower project revenue in Subsea Technologies product line.
Completions segment — Segment operating income was $9.9 million, or 4.8%, for the nine months ended September 30, 2023 compared to segment operating income of $8.8 million, or 4.6%, for the nine months ended September 30, 2022. The $1.1 million increase in segment operating results was primarily due to higher gross profit from the 9.1% increase in revenues and favorable product mix, partially offset by higher freight costs.
Production segment — Segment operating income was $4.5 million, or 4.2%, for the nine months ended September 30, 2023 compared to a loss of $1.2 million, or 1.3%, for the nine months ended September 30, 2022. The $5.8 million increase in segment operating results was driven by the 13.9% increase in revenues and increased operating leverage.
Corporate — Selling, general and administrative expenses for Corporate were $20.5 million for the nine months ended September 30, 2023 compared to $24.5 million for the nine months ended September 30, 2022. This decrease was primarily related to a charge recognized in the nine months ended September 30, 2022 related to a modification of long-term incentive awards associated with executive leadership transition and lower variable compensation costs. 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)
Gain (loss) on the disposal of assets and other is not included in segment operating income (loss), but is included in total operating income (loss).
Other income and expense
Other income and expense includes interest expense and foreign exchange gains (losses) and other. We incurred $13.7 million of interest expense during the nine months ended September 30, 2023, a decrease of $9.9 million compared to the nine months ended September 30, 2022, due to the decline in the balance of our 2025 Notes upon conversion of $122.8 million aggregate principal amount of our 2025 Notes to common stock in January 2023. See Note 6 Debt for further details related to the 2025 Notes and Credit Facility.
The foreign exchange gains (losses) are primarily the result of movements in the British pound, Euro and Canadian dollar relative to the U.S. dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S. dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than the U.S. dollar.
Taxes
We recorded tax expense of $6.2 million and $4.9 million for the nine months ended September 30, 2023 and 2022, respectively. The estimated annual effective tax rates for the nine months ended September 30, 2023 and 2022 were impacted by losses in jurisdictions where the recording of a tax benefit is not available. Furthermore, the tax expense or benefit recorded can vary from period to period depending on the Company’s relative mix of earnings and losses by jurisdiction.
Liquidity and capital resources
Sources and uses of liquidity
Our internal sources of liquidity are cash on hand and cash flows from operations, while our primary external sources include trade credit, the Credit Facility and the 2025 Notes. Our primary uses of capital have been for inventory, sales on credit to our customers, maintenance and growth capital expenditures, and debt repayments. We continually monitor other potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to generate positive operating cash flow and access outside sources of capital.
As of September 30, 2023, we had $134.2 million principal amount of 2025 Notes outstanding and no borrowings outstanding under our revolving Credit Facility. The 2025 Notes mature in August 2025 and, subject to certain exceptions, the Credit Facility matures in September 2026. See Note 6 Debt for further details related to the terms for our 2025 Notes and Credit Facility.
As of September 30, 2023, we had cash and cash equivalents of $37.2 million and $154.8 million of availability under the Credit Facility. We anticipate that our future working capital requirements for our operations will fluctuate directionally with revenues. Furthermore, availability under the Credit Facility will fluctuate directionally based on the level of our eligible accounts receivable and inventory subject to applicable sublimits. In addition, we continue to expect total 2023 capital expenditures to be less than $10.0 million, consisting of, among other items, replacing end of life machinery and equipment.
We expect our available cash on-hand, cash generated by operations, and estimated availability under the Credit Facility to be adequate to fund current operations during the next 12 months. In addition, based on existing market conditions and our expected liquidity needs, among other factors, we may use a portion of our cash flows from operations, proceeds from divestitures, securities offerings or other eligible capital to reduce the principal amount of our 2025 Notes outstanding or repurchase shares of our common stock under our repurchase program.
In November 2021, our board of directors approved a program for the repurchase of outstanding shares of our common stock with an aggregate purchase amount of up to $10.0 million. Shares may be repurchased under the program from time to time, in amounts and at prices that the company deems appropriate, subject to market and business conditions, applicable legal requirements and other considerations. During the first nine months of 2023, we repurchased approximately 139 thousand shares of our common stock for aggregate consideration of approximately $3.5 million with remaining authorization under this program of $2.4 million.
Our cash flows for the nine months ended September 30, 2023 and 2022 are presented below (in millions):
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| 2023 | | 2022 |
| Net cash used in operating activities | $ | (3.1) | | | $ | (32.1) | |
| Net cash used in investing activities | (4.2) | | | (2.6) | |
| Net cash provided by (used in) financing activities | (6.9) | | | 9.2 | |
| Effect of exchange rate changes on cash | 0.3 | | | (1.6) | |
| Net decrease in cash, cash equivalents and restricted cash | $ | (13.9) | | | $ | (27.1) | |
Net cash used in operating activities
Net cash used in operating activities was $3.1 million for the nine months ended September 30, 2023 compared to $32.1 million for the nine months ended September 30, 2022. This improvement in operating cash flow usage is primarily attributable to net decrease in cash used for working capital, mainly accounts receivable, which used cash of $36.8 million for the nine months ended September 30, 2023 compared to used cash of $85.6 million for the nine months ended September 30, 2022.
Net cash used in investing activities
Net cash used in investing activities was $4.2 million for the nine months ended September 30, 2023, including $5.5 million of capital expenditures, partially offset by $1.3 million of proceeds from the sale of property and equipment. Net cash used in investing activities was $2.6 million for the nine months ended September 30, 2022, including $4.8 million of capital expenditures, partially offset by $2.7 million of proceeds from the sale of property and equipment.
Net cash provided by (used in) financing activities
Net cash used in financing activities was $6.9 million for the nine months ended September 30, 2023 compared to $9.2 million of cash provided by financing activities for the nine months ended September 30, 2022, respectively. The change in net cash used in financing activities primarily resulted from $6.0 million of repurchases of common stock under our share repurchase program and long-term incentive awards during the nine months ended September 30, 2023 compared to a net $10.7 million of borrowings on the revolving Credit Facility during the nine months ended September 30, 2022.
Supplemental Guarantor Financial Information
The Company’s 2025 Notes are guaranteed by our domestic subsidiaries which are 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional, joint and several.
The guarantees of the 2025 Notes are (i) pari passu in right of payment with all existing and future senior indebtedness of such guarantor, including all obligations under our Credit Facility; (ii) secured by certain collateral of such guarantor, subject to permitted liens under the indenture governing the 2025 Notes; (iii) effectively senior to all unsecured indebtedness of that guarantor, to the extent of the value of the collateral securing the 2025 Notes (after giving effect to the liens securing our Credit Facility and any other senior liens on the collateral); and (iv) senior in right of payment to any future subordinated indebtedness of that guarantor.
In the event of a bankruptcy, liquidation or reorganization of any of the non-guarantor subsidiaries of the 2025 Notes, the non-guarantor subsidiaries of such notes will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Company or to any guarantors.
The 2025 Notes guarantees shall each be released upon (i) any sale or other disposition of all or substantially all of the assets of such guarantor (by merger, consolidation or otherwise) to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary, if the sale or other disposition does not violate the applicable provisions of the indenture governing such notes; (ii) any sale, exchange or transfer (by merger, consolidation or otherwise) of the equity interests of such guarantor after which the applicable guarantor is no longer a subsidiary, which sale, exchange or transfer does not violate the applicable provisions of the indenture governing such notes; (iii) legal or covenant defeasance or satisfaction and discharge of the indenture governing such notes; or (iv) dissolution of such guarantor, provided no default or event of default has occurred that is continuing.
The obligations of each guarantor of the 2025 Notes under its guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such guarantor (including, without limitation, any guarantees under the Credit Facility) and any collections from or payments made by or on behalf of any other guarantor in respect of the obligations of such other guarantor under its guarantee or pursuant to its contribution
obligations under the applicable indenture, result in the obligations of such guarantor under its guarantee not constituting a fraudulent conveyance, fraudulent preference or fraudulent transfer or otherwise reviewable transaction under applicable law. Nonetheless, in the event of the bankruptcy, insolvency or financial difficulty of a guarantor, such guarantor’s obligations under its guarantee may be subject to review and avoidance under applicable fraudulent conveyance, fraudulent preference, fraudulent transfer and insolvency laws.
We are presenting the following summarized financial information for the Company and the subsidiary guarantors (collectively referred to as the “Obligated Group”) pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Company and the subsidiary guarantors, presented on a combined basis, have been eliminated and information for the non-guarantor subsidiaries have been excluded. Amounts due to the non-guarantor subsidiaries and other related parties, as applicable, have been separately presented within the summarized financial information below.
Summarized financial information for the year-to-date interim period and the most recent annual period was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| Summarized Statements of Operations | | 2023 | | 2022 | | 2023 | | 2022 |
| Revenue | | $ | 133,202 | | | $ | 145,028 | | | $ | 424,210 | | | $ | 398,412 | |
| Cost of sales | | 100,361 | | | 108,175 | | | 324,421 | | | 299,714 | |
| Operating income | | 6,034 | | | 19,013 | | | 14,910 | | | 39,096 | |
| Net income (loss) | | 7,969 | | | 16,477 | | | (2,096) | | | 16,542 | |
| | | | | | | | | | | | |
| | September 30, 2023 | | December 31, 2022 |
| Summarized Balance Sheet | | | | |
| Current assets | | $ | 393,783 | | | $ | 378,812 | |
| Non-current assets | | 258,480 | | | 279,389 | |
| | | | |
| Current liabilities | | $ | 157,492 | | | $ | 175,155 | |
| Payables to non-guarantor subsidiaries | | 174,264 | | | 132,839 | |
| Non-current liabilities | | 179,358 | | | 293,150 | |
Critical accounting policies and estimates
There have been no material changes in our critical accounting policies and procedures during the nine months ended September 30, 2023. For a detailed discussion of our critical accounting policies and estimates, refer to our 2022 Annual Report on Form 10-K. For recent accounting pronouncements, refer to Note 2 Recent Accounting Pronouncements.
Item 3. Quantitative and qualitative disclosures about market risk
Not required under Regulation S-K for “smaller reporting companies.”
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures have been designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Our disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of September 30, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Information related to Item 1. Legal Proceedings is included in Note 10 Commitments and Contingencies, which is incorporated herein by reference.
Item 1A. Risk Factors
For additional information about our risk factors, see “Risk Factors” in Item 1A of our 2022 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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. The program may be executed using open market purchases pursuant to Rule 10b-18 under the Exchange Act, in privately negotiated agreements, or by way of issuer tender offers, Rule 10b5-1 plans or other transactions. From the inception of the program through September 30, 2023, we have repurchased approximately 298 thousand shares of our common stock for aggregate consideration of approximately $7.6 million. Remaining authorization under this program is $2.4 million.
No shares were purchased during the three months ended September 30, 2023.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits | | | | | | | | |
| Exhibit | | |
| Number | | DESCRIPTION |
| | |
| 10.1** | — | |
| | |
| | |
| | |
| 22.1* | — | |
| | |
31.1** | — | |
| | |
31.2** | — | |
| | |
32.1** | — | |
| | |
32.2** | — | |
| | |
| 101.INS** | — | Inline XBRL Instance Document |
| | |
| 101.SCH** | — | Inline XBRL Taxonomy Extension Schema Document. |
| | |
| 101.CAL** | — | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
| 101.LAB** | — | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
| 101.PRE** | — | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
| 101.DEF** | — | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
| 104** | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Previously filed.
**Filed herewith.
#Identifies management contracts and compensatory plans or arrangements.
SIGNATURES
As required by Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has authorized this report to be signed on its behalf by the undersigned authorized individuals. | | | | | | | | | | | | | | |
| | | | |
| | FORUM ENERGY TECHNOLOGIES, INC. | |
| Date: | November 3, 2023 | By: | /s/ D. Lyle Williams, Jr. | |
| | | D. Lyle Williams, Jr. | |
| | | Executive Vice President and Chief Financial Officer | |
| | | (As Duly Authorized Officer and Principal Financial Officer) | |
| | | | |
| | By: | /s/ Katherine C. Keller | |
| | | Katherine C. Keller | |
| | | Vice President and Principal Accounting Officer | |
| | | (As Duly Authorized Officer and Principal Accounting Officer) | |
