8-K: Forum Energy Technologies Recasts Financials Following Segment Realignment

Forum Energy Technologies has recast its historical financial statements to reflect a new two-segment reporting structure following the acquisition of Variperm Holdings Ltd.

Summary

• Forum Energy Technologies has filed an 8-K to recast its financial statements for 2022 and 2023.
• This recasting is due to a change in segment reporting following the acquisition of Variperm Holdings Ltd.
• The company now operates under two segments: Drilling and Completions, and Artificial Lift and Downhole.
• Previously, the company reported under three segments: Drilling & Downhole, Completions, and Production.
• The changes are intended to align reporting with business activity drivers, customer base, and management's review of operating performance.
• The recast information is included as an exhibit to the 8-K and does not represent a restatement of previously issued financial statements.
• The company's historical financial information will reflect these segment changes going forward.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While revenue increased, the company experienced a significant net loss and a decrease in bookings. The segment realignment and acquisition are positive strategic moves, but the financial results indicate challenges. The company's future outlook is cautiously optimistic, but the risks are significant.

Positives

• The company's revenue increased by 5.6% in 2023 compared to 2022.
• Both the Drilling and Completions and Artificial Lift and Downhole segments saw revenue growth in 2023.
• The Artificial Lift and Downhole segment experienced a significant increase in operating income, up 55.1% in 2023.
• The company has a substantial backlog of $241.6 million as of December 31, 2023.
• The company has $147.1 million of availability under its Credit Facility as of December 31, 2023.
• The company has a share repurchase program in place.

Negatives

• The company reported a net loss of $18.9 million in 2023, compared to a net income of $3.7 million in 2022.
• The Drilling and Completions segment saw a decrease in operating income in 2023.
• The company's bookings decreased from $780.7 million in 2022 to $724.3 million in 2023.
• The company's cash and cash equivalents decreased from $51 million in 2022 to $46.2 million in 2023.

Risks

• The company's business is subject to fluctuations in energy prices and customer capital budgets.
• The company faces competition from larger and smaller companies in its markets.
• The company is subject to environmental and worker safety regulations.
• The company relies on key suppliers for raw materials and components.
• The company's ability to make significant acquisitions may require additional financing.
• The company's future success depends on its ability to generate positive operating cash flow and access outside sources of capital.
• The company's insurance program may not be sufficient to cover all losses.
• The company is subject to potential business interruptions caused by hurricanes and tropical storms.
• The company's customers are susceptible to exhausting their capital and operating budgets in the fourth quarter.

Future Outlook

The company expects that the world's long-term energy demand will continue to rise and that hydrocarbons will continue to play a vital role in meeting the world's long-term energy needs while renewable energy sources develop to scale. The company expects its available cash on-hand, cash generated by operations, and estimated availability under its Credit Facility to be adequate to fund current operations during the next 12 months. The company may use a portion of its cash flows from operations, proceeds from divestitures, securities offerings or other eligible capital to reduce outstanding debt or repurchase shares of its common stock under its repurchase program.

Management Comments

• The company is focused on serving customers in both oil and natural gas as well as renewable energy applications.
• The company is continuing to develop products to help oil and gas operators lower expenses, increase production, and reduce their emissions while also deploying technologies in renewable energy applications.

Industry Context

The realignment of reporting segments reflects a strategic shift in response to the company's recent acquisition and evolving market dynamics. The company is positioning itself to capitalize on both traditional oil and gas markets and the growing renewable energy sector. The company's focus on consumable products and activity-based equipment aligns with industry trends towards operational efficiency and cost management.

Comparison to Industry Standards

• Forum Energy Technologies competes with large multinational companies such as National Oilwell Varco, Cameron International Corporation (a subsidiary of Schlumberger), TechnipFMC plc, Tenaris S.A., and Caterpillar, Inc.
• These competitors have longer operating histories, greater financial, technical, and other resources, and greater name recognition.
• The company also competes with smaller regional and local competitors who are often quick to respond to new technologies and customer requirements.
• The company believes its products and services are comparable in price, quality, performance, and dependability with its competitors' offerings.
• The company seeks to differentiate itself through rapid response to customer needs, expert knowledge, high customer service, and innovative product development.

Legal Proceedings

• One of the company's subsidiaries is involved in asbestos litigation, but the company believes the ultimate liability will not have a material adverse effect.
• One of the company's subsidiaries, Global Tubing LLC, was involved in patent litigation with Tenaris, which was resolved in Global Tubing's favor, but Tenaris has appealed the decision.
• One of the company's dormant subsidiaries is a named defendant in a suit related to the Portland Harbor Superfund Site, but the subsidiary is indemnified by a third party.

Related Party Transactions

• The company has engaged in transactions with affiliates of certain directors, but the amounts are not significant.

Stakeholder Impact

• Shareholders will be impacted by the company's net loss and the potential for future capital raises.
• Employees will be impacted by the company's strategic changes and performance.
• Customers will be impacted by the company's product offerings and service capabilities.
• Suppliers will be impacted by the company's purchasing decisions and payment terms.
• Creditors will be impacted by the company's debt levels and financial performance.

Next Steps

• The company will continue to operate under the new two-segment structure.
• The company will continue to monitor market conditions and adjust its strategies accordingly.
• The company will continue to evaluate potential acquisitions and financing opportunities.

Key Dates

Keywords

segment reporting, financial recast, drilling and completions, artificial lift, downhole, variperm acquisition, oil and gas, energy, consumable products, capital equipment