Forum Energy Technologies, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Forum Energy Technologies, Inc. is a global manufacturer and distributor serving the oil, natural gas, industrial, renewable energy and related markets. Its reporting segments are Drilling & Downhole, Completions and Production. This unaudited filing covers the three months ended March 31, 2021, compared primarily with the three months ended March 31, 2020.
Results remained affected by the COVID-19 pandemic, lower energy-industry activity and customer capital-spending constraints. The company also sold its ABZ and Quadrant valve brands on December 31, 2020, limiting comparability of Production results.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $114.5 million | $182.6 million | Down 37.3% |
| Gross profit | $26.2 million | $22.1 million | Up $4.1 million |
| Gross margin | 22.9% | 12.1% | Up 10.8 percentage points |
| Operating loss | $14.4 million | $55.4 million | Improved $41.0 million |
| Operating margin | (12.6%) | (30.3%) | Improved 17.7 percentage points |
| Net loss | $29.7 million | $37.1 million | Improved $7.5 million |
| Loss per diluted share | $5.28 | $6.68 | Improved |
| Operating cash flow | $(1.3) million | $1.6 million | Declined $2.9 million |
Revenue declined across all segments: Drilling & Downhole fell 36.5% to $48.7 million, Completions fell 25.5% to $37.8 million, and Production fell 49.6% to $28.0 million. The Production decline included $12.9 million attributable to the divested valve brands.
Gross profit and operating results benefited from lower inventory write-downs, the absence of prior-year impairment charges and cost reductions. No long-lived asset impairments were recorded in Q1 2021, compared with $26.8 million of long-lived asset and operating lease impairments in Q1 2020. Approximately 80% of Q1 2021 revenue came from consumable products and activity-based equipment.
At March 31, 2021, cash and cash equivalents were $100.8 million, down from $128.6 million at December 31, 2020. Total assets were $844.0 million and total equity was $381.6 million. Inventories were $236.4 million, including a $109.5 million inventory reserve.
Total debt was $268.4 million, including $300.3 million principal amount of 2025 Notes, net of discounts and issuance costs, and $1.8 million of other debt. The company had no borrowings under its revolving Credit Facility, $141.5 million of remaining availability, and $15.3 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Revenue decreased $68.1 million, primarily because U.S. drilling, completions and well activity remained substantially below pre-pandemic levels.
- Operating loss improved by $41.0 million, primarily because Q1 2020 included significant impairment charges and higher inventory write-downs, while cost-reduction actions lowered employee and facility expenses.
- Interest expense increased 36.3% to $9.2 million, principally due to the higher rate and noncash discount amortization associated with the 9.0% convertible secured 2025 Notes.
- Q1 2021 included a $0.9 million loss on repurchase of 2025 Notes, compared with a $7.5 million gain on repurchase of the former 2021 Notes in Q1 2020.
- Income tax expense was $1.7 million, compared with a $14.4 million tax benefit in Q1 2020, which included a $16.6 million CARES Act-related federal tax-loss carryback benefit.
- The company repurchased $16.5 million principal amount of 2025 Notes for $15.6 million and repaid $13.1 million outstanding under the Credit Facility.
- Orders were $138.0 million, up from $124.1 million in Q4 2020 but down from $170.6 million in Q1 2020.
Guidance, outlook, risks and unusual items
Management expects total 2021 capital expenditures to be less than $10.0 million. Based on existing market conditions and expected liquidity needs, management expects cash on hand, operating cash flow and Credit Facility availability to be adequate to fund current operations for the next 12 months. The filing does not provide formal revenue, earnings or margin guidance.
Management reported that U.S. rig activity and hydraulic fracturing activity improved sequentially, but remained materially below Q1 2020 levels. Average global and North American energy prices increased, and the U.S. average rig count rose to 393 in Q1 2021 from 311 in Q4 2020, but remained below the prior-year average of 785.
COVID-19, energy-price volatility, customer bankruptcies and consolidation, constrained customer capital spending, reduced drilling and completion activity, supply-chain and operational disruptions, and fluctuations in receivables and inventory could adversely affect results and Credit Facility availability. The borrowing base was $156.8 million at March 31, 2021 and can decline with lower eligible receivables or inventory.
The Credit Facility matures October 30, 2022, while the 2025 Notes mature in August 2025. If excess Credit Facility availability falls below specified thresholds, the company may be required to maintain a fixed-charge coverage ratio of at least 1.00:1.00. The 2025 Notes are secured and guaranteed by certain domestic subsidiaries.
Cost-reduction measures included facility exits, headcount and salary reductions, suspension of certain retirement-plan matching contributions and employee furloughs. Certain facility closures and headcount reductions were expected to be completed in the first half of 2021.
Management stated that legal reserves were immaterial, no material litigation changes occurred during the quarter, and there were no material changes in critical accounting policies or internal controls. Disclosure controls and procedures were deemed effective as of March 31, 2021.
Most important facts for investors to verify
- Whether recovering rig counts, energy prices and customer activity translate into sustained revenue and positive operating cash flow.
- The company’s ability to service or refinance the $300.3 million principal amount of 2025 Notes and manage the 9.0% interest burden.
- Whether cash of $100.8 million and Credit Facility availability of $141.5 million remain sufficient as borrowing-base availability fluctuates.
- The adequacy of the $109.5 million inventory reserve and the risk of further inventory or long-lived-asset impairments.
- The effect of the ABZ and Quadrant divestiture on future Production revenue, margins and comparability.
- Potential dilution from the convertible 2025 Notes if conversion conditions are met.
- Execution and savings from facility closures, headcount reductions and other restructuring actions.
- COVID-19 developments, customer credit quality, bankruptcies and litigation or other contingencies not currently considered material.