Forum Energy Technologies, Inc. — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
Forum Energy Technologies is a global oilfield products company serving drilling, downhole, subsea, completions and production markets. This unaudited filing covers the three and nine months ended September 30, 2020, with comparative periods in 2019. Results were materially affected by COVID-19, lower oil prices, reduced customer capital spending and sharply lower drilling and completion activity.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 |
|---|---|---|---|---|
| Revenue | $103.6 million | $239.3 million | $399.5 million | $756.8 million |
| Gross profit | $13.1 million | $62.6 million | $48.1 million | $195.9 million |
| Gross margin | 12.7% | 26.2% | 12.0% | 25.9% |
| Operating loss | $37.0 million | $533.4 million | $127.5 million | $528.3 million |
| Net loss | $21.6 million | $533.0 million | $64.2 million | $554.6 million |
| Loss per diluted share | $0.19 | $4.83 | $0.58 | $5.04 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $1.7 million | $75.7 million |
All amounts are presented as reported, except margins, which are calculated from reported revenue and gross profit. Segment revenue declines in Q3 were 51.1% for Drilling & Downhole, 72.2% for Completions and 49.6% for Production. Nine-month segment operating margins were negative across all three segments: (16.0)% for Drilling & Downhole, (53.4)% for Completions and (6.4)% for Production.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $20.0 million at September 30, 2020, down from $57.9 million at December 31, 2019.
- Total debt was $291.3 million, including $12.7 million of 2021 Notes, $315.5 million principal amount of 2025 Notes, and other debt, net of discounts and issuance costs.
- The company exchanged $315.5 million principal amount of 2021 Notes for 9.00% convertible secured 2025 Notes and recognized a $28.7 million gain on extinguishment. It had also repurchased $71.9 million principal amount of 2021 Notes during the first half of 2020, recognizing a $43.8 million gain.
- No borrowings were outstanding under the amended $250.0 million revolving Credit Facility. Borrowing-base availability was $108.6 million after $31.9 million of letters of credit.
- Total assets were $924.0 million and total equity was $427.3 million at September 30, 2020, compared with $1.160 billion and $486.0 million, respectively, at December 31, 2019.
- Nine-month investing cash flow was positive $2.0 million, including $4.2 million of asset-sale proceeds and $2.2 million of capital expenditures. Financing cash flow was negative $41.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined 56.7% in Q3 and 47.2% for the first nine months, primarily from lower sales volumes, reduced U.S. rig activity and depressed completions spending.
- Gross margin fell substantially as fixed costs were absorbed over lower volumes and the company recorded inventory write-downs, lease impairments, severance and facility-related costs.
- Q3 2020 included $2.96 million of impairment charges, compared with $532.3 million in Q3 2019, when goodwill and other long-lived assets were impaired. Nine-month 2020 impairments totaled $20.4 million versus $532.3 million in 2019.
- Nine-month net loss improved mainly because of the prior-year impairment comparison and $72.5 million of debt-extinguishment gains. These gains were non-recurring and do not represent operating cash generation.
- Operating cash flow fell to $1.7 million from $75.7 million, while cash declined by $37.9 million during the first nine months.
- The company adopted the current expected credit loss standard on January 1, 2020, recording a $1.4 million noncash increase to retained deficit.
Guidance, Outlook, Commentary and Risks
- Management expects activity levels and revenue to remain substantially below prior-year levels, with continued downward pressure on product pricing and operating margins.
- Average Q3 2020 U.S. active rigs were 254, down 72% year over year; global active rigs were 1,032, down 53% year over year.
- Management expects 2020 capital expenditures to be less than $5.0 million and stated that cash on hand, operating cash flow and expected Credit Facility availability should fund current operations and debt maturities over the next 12 months.
- The company received a $14.1 million cash tax refund during Q3 under the CARES Act; the nine-month tax benefit included a $16.6 million benefit from the associated federal loss carryback claim.
- Management implemented headcount, salary, facility, furlough and retirement-plan contribution reductions. Manufacturing facilities continued operating without COVID-19-related work stoppages, although operational inefficiencies occurred.
- Key risks include prolonged COVID-19 effects, low oil and gas prices, additional rig-count declines, customer bankruptcies or delayed payments, supply-chain and tariff pressures, further asset impairments, liquidity constraints, refinancing risk, foreign-exchange exposure and potential contract or force-majeure disputes.
- In October 2020, the company announced its intention to redeem the remaining $12.7 million of 2021 Notes in November 2020. The Credit Facility maturity was expected to extend to October 30, 2022 after completion of the redemption.
- The company approved a one-for-20 reverse stock split expected to become effective after market close on November 9, 2020, primarily to support compliance with NYSE listing requirements.
Important Facts for Investors to Verify
- Whether the company generated sustainable positive operating cash flow after the quarter and maintained sufficient borrowing-base availability as receivables and inventory changed.
- The terms, cash-versus-in-kind interest elections and potential dilution associated with the 2025 convertible secured Notes.
- Completion and effect of the remaining 2021 Notes redemption and the resulting Credit Facility maturity extension.
- Whether oil prices, rig counts, completions activity and customer capital budgets recover or deteriorate further.
- The potential for additional inventory, lease, property, equipment or intangible-asset impairments.
- The effect of the reverse stock split and any future equity issuance or conversion of the 2025 Notes on share count and shareholder dilution.
- The filing states that legal reserves were immaterial and that no material adverse legal outcome was expected, but investors should continue monitoring customer bankruptcies, contract disputes and COVID-19-related contingencies.