Forum Energy Technologies, Inc. — 2019 Q3 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. The unaudited filing covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods. Reporting segments are Drilling & Downhole, Completions and Production; prior-period segment results were recast to reflect the 2019 segment realignment.
Approximately 86% of nine-month revenue came from consumable products and activity-based equipment. The company reported 110.5 million common shares outstanding as of October 29, 2019.
Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $239.3 million | $267.0 million | $756.8 million | $791.3 million |
| Gross profit | $62.6 million | $74.5 million | $195.9 million | $214.5 million |
| Gross margin | 26.2% | 27.9% | 25.9% | 27.1% |
| Operating income (loss) | $(533.4) million | $2.4 million | $(528.3) million | $(16.0) million |
| Net income (loss) | $(533.0) million | $(3.1) million | $(554.6) million | $9.7 million |
| Diluted EPS | $(4.83) | $(0.03) | $(5.04) | $0.09 |
| Cash flow from operations | Not separately provided | Not separately provided | $75.7 million | $(24.3) million |
- Segment operating income was $(0.9) million in Q3 2019 versus $3.4 million in Q3 2018; the corresponding segment margin was negative 0.4% versus 1.3%.
- Nine-month segment operating income was $0.3 million versus a loss of $0.8 million, with a margin of approximately zero versus negative 0.1%.
- At September 30, 2019, cash and cash equivalents were $28.9 million, total assets were $1.2 billion and total equity was $485.5 million.
- Total debt was $401.0 million, including $400.0 million of 6.25% senior notes due October 2021. No borrowings were outstanding under the revolving credit facility; reported availability was $279.5 million, after $16.1 million used for letters of credit.
- Capital expenditures were $12.6 million during the first nine months. Net cash decreased by $18.3 million to $28.9 million.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 10.4%, while nine-month revenue declined 4.4%. The primary pressure was lower U.S. drilling, completions and production activity.
- Drilling & Downhole revenue increased 7.6% in Q3 and 4.6% for the first nine months, supported by subsea and downhole products.
- Completions revenue decreased 22.4% in Q3 and 11.6% for the first nine months, primarily because pressure-pumping customers reduced capital spending and coiled-tubing activity weakened.
- Production revenue decreased 15.0% in Q3 and 5.2% for the first nine months, reflecting lower production-equipment and valve sales.
- Q3 included $532.3 million of impairment charges: $471.0 million for goodwill, $53.5 million for intangible assets and $7.9 million for property and equipment. Goodwill was fully impaired, leaving no goodwill balance at September 30, 2019.
- Management cited a significant decline in the company’s stock price and continued weakness in U.S. onshore drilling and completions activity as impairment indicators.
- The company sold its 40% interest in Ashtead Technology on September 3, 2019, receiving $39.3 million in cash and a new £6.9 million note receivable. It recognized a $1.6 million gain.
- Working-capital changes contributed $33.1 million of operating cash flow in the first nine months, compared with an $85.1 million use of cash in the prior-year period.
- SG&A declined 11.5% in Q3 and 9.3% for the first nine months, primarily due to lower employee-related costs and professional fees.
Guidance, Outlook, Commentary and Risks
The filing does not provide a specific quantitative revenue, earnings or cash-flow guidance target. Management expected average activity levels for the remainder of 2019 to remain below prior-year levels. It also noted that many exploration and production companies had substantially spent their 2019 budgets, creating additional pressure on customer activity through year end.
- Average U.S. active rigs were 920 in Q3 2019, down from 1,051 in Q3 2018. Total orders were $199.7 million in Q3 and $666.5 million for the first nine months, down from $274.5 million and $845.5 million, respectively.
- Lower oil and natural-gas prices, customer budget constraints, idle equipment, inventory reductions and deferred maintenance were cited as demand risks.
- Steel and other tariffs increased raw-material costs, particularly in Coiled Tubing and Valve Solutions. Mitigation actions include pricing, supply-chain diversification and seeking tariff exemptions.
- Liquidity depends on cash from operations, asset-sale proceeds and access to the revolving credit facility. Borrowing-base availability could decline if receivables or inventory decrease.
- The senior notes and credit facility mature in 2021, creating refinancing or repayment requirements. The credit facility can require a fixed-charge coverage ratio of at least 1.00:1.00 if excess availability falls below specified thresholds.
- The company adopted ASC 842 in 2019, recording approximately $50.7 million of operating lease assets and $51.7 million of operating lease liabilities at September 30, 2019.
- Management stated that pending legal matters were not expected to have a material adverse effect, and reserves for such matters were immaterial.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the $532.3 million impairment charge accurately reflects current and expected fair values and whether further impairments may arise from continued oilfield weakness.
- The company’s ability to refinance or repay the $400.0 million senior notes due October 2021.
- Actual borrowing-base availability and covenant headroom under the revolving credit facility.
- Whether operating cash flow remains positive after the one-time benefit from working-capital reductions and the Ashtead divestiture proceeds.
- Demand trends, order intake and margins in Completions and Production, which experienced the largest declines.
- The effect of lower U.S. rig counts, customer capital-spending reductions, tariffs and potential changes in oil and gas prices.
- The recoverability of deferred tax assets, given the $5.9 million increase in valuation allowances and the company’s reported losses.