Forum Energy Technologies, Inc. — 2019 Form 10-K Summary
Business context and reporting period
Forum Energy Technologies, Inc. is a global oilfield products company serving drilling, downhole, subsea, completions and production markets. The filing covers the fiscal year ended December 31, 2019, with quarterly information for the fourth quarter ended December 31, 2019. The company reports three segments: Drilling & Downhole, Completions and Production. More than 80% of 2019 revenue came from consumable products and activity-based equipment.
Demand weakened during 2019 as North American drilling, completions and customer capital spending declined. International, offshore and subsea activity showed modest recovery, but remained below prior newbuild-cycle levels.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $956.5 million | $1,064.2 million | Down 10.1% |
| Gross profit | $244.9 million | $256.4 million | Down 4.5% |
| Gross margin | 25.6% | 24.1% | Up approximately 150 bps |
| Operating loss | $(536.1) million | $(397.0) million | Worsened by $139.1 million |
| Net loss attributable to common stockholders | $(567.1) million | $(374.1) million | Worsened by $193.0 million |
| Diluted loss per share | $(5.15) | $(3.44) | Worsened by $1.71 |
| Net cash provided by operating activities | $104.1 million | $2.4 million | Improved by $101.7 million |
| Capital expenditures | $15.1 million | $24.0 million | Down $8.9 million |
| Cash and cash equivalents | $57.9 million | $47.2 million | Up $10.7 million |
| Total debt | $399.6 million | $518.7 million | Down $119.1 million |
| Total stockholders’ equity | $486.0 million | $1,030.1 million | Down $544.1 million |
2019 segment revenue was $334.8 million for Drilling & Downhole, $305.1 million for Completions and $321.0 million for Production, before eliminations. Segment operating margins were 2.2%, 2.2% and 2.4%, respectively. Total segment operating loss improved to $7.2 million from $30.5 million in 2018, excluding major impairment and other items.
Fourth-quarter 2019 revenue was $199.8 million, gross profit was $48.9 million and net loss was $12.4 million, or $0.11 per diluted share. Fourth-quarter results included a $2.3 million gain on the sale of certain Cooper Alloy assets.
Material changes versus the prior comparable period
- Revenue declined $107.7 million, primarily due to lower North American drilling, completions and valve demand.
- Completions revenue fell 18.2%, driven mainly by a $66.7 million decline in Stimulation and Intervention revenue.
- Production revenue fell 11.2%, reflecting lower valve and surface production equipment sales.
- Drilling & Downhole revenue was broadly flat; higher Downhole and Subsea sales offset weaker Drilling consumables.
- Gross margin improved despite lower sales, aided by lower inventory write-downs and cost-reduction actions.
- Operating cash flow improved substantially as working capital provided $63.5 million of cash, compared with a $75.3 million use in 2018.
- Debt declined primarily through $119.9 million of net debt repayments. The company had no outstanding borrowings under its revolving Credit Facility at year-end.
- The company adopted ASC 842 for leases, recording approximately $54 million of operating lease assets and $65 million of operating lease liabilities at adoption.
Impairments, transactions and unusual items
- 2019 included $532.3 million of impairment charges: $471.0 million of goodwill, $53.5 million of intangible assets and $7.9 million of property and equipment. Following the charges, no goodwill remained.
- The impairments reflected lower quoted share prices, weaker U.S. onshore drilling and completions activity and reduced forecasts for several reporting units.
- The company recognized a $98.9 million increase in tax valuation allowances and a $27.2 million tax expense related to non-deductible goodwill impairment.
- Forum sold its 40% interest in Ashtead Technology for total consideration of $47.7 million, including $39.3 million of cash and a new £6.9 million note receivable, recognizing a $1.6 million gain.
- Forum sold certain Cooper Alloy assets for $4.0 million and recognized a $2.3 million gain.
- Backlog was approximately $173 million at December 31, 2019, down from $276 million at December 31, 2018. 2019 bookings were approximately $863 million, down from $1.116 billion.
Liquidity, debt and outlook
At December 31, 2019, Forum had $57.9 million of cash, $229.1 million of availability under its $300 million senior secured revolving Credit Facility and total debt of approximately $399.6 million. The $400 million of 6.25% senior unsecured notes mature in October 2021. The Credit Facility matures in July 2021, subject to a potential extension if qualifying refinancing occurs. Management stated that cash on hand, operating cash flow and Credit Facility availability should be sufficient for foreseeable operating, working capital and capital expenditure needs.
The filing provides no formal revenue or earnings guidance. Management expects results to remain sensitive to oil and natural gas prices, rig and completion activity, customer capital discipline, international demand, tariffs, raw-material costs and the coronavirus outbreak emerging in early 2020. The company specifically identified Chinese suppliers and Chinese market demand as potential areas of coronavirus-related exposure.
Principal risks include industry cyclicality, continued weakness in North American activity, customer cancellations or backlog delays, significant debt maturities in 2021, borrowing-base reductions, covenant compliance, limited access to capital markets, tariffs, supplier concentration, foreign exchange, environmental and hydraulic-fracturing regulation, product liability, asbestos and other litigation, cyber incidents, adverse weather and the potential inability to realize deferred tax assets. Asbestos claims remained below materiality historically, but fewer than 150 lawsuits were pending at year-end and the company reported a $0.3 million net liability for estimated indemnity costs in its risk-factor discussion.
The 2019 financial statements received an unqualified audit opinion, and management and Deloitte & Touche LLP concluded that internal control over financial reporting was effective as of December 31, 2019.
Most important facts for investors to verify
- Whether North American drilling, completions and valve demand recover sufficiently to stabilize revenue and margins.
- Forum’s ability to refinance or repay the $400 million senior notes due October 2021 and maintain Credit Facility availability.
- Whether operating cash flow remains positive after the 2019 working-capital benefit reverses.
- The sustainability of the company’s improved segment margins excluding impairment and other nonrecurring items.
- The impact of coronavirus-related supply-chain disruption, tariffs and steel costs on 2020 results.
- The collectability and timing of the $173 million backlog, given that substantially all projects may be changed or terminated by customers.
- Whether additional impairment charges, tax valuation allowances or inventory write-downs will be required.
- Potential exposure from asbestos litigation, environmental matters, product liability and other contingencies.