Forum Energy Technologies, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
Forum Energy Technologies is a global energy-products company serving drilling and downhole, subsea, completions, production, and related infrastructure markets. Its three reporting segments are Drilling & Downhole, Completions, and Production. This Form 10-K covers the fiscal year ended December 31, 2020, with comparative results for 2019. The company reported approximately 1,400 employees and completed a 1-for-20 reverse stock split effective November 9, 2020.
More than 80% of 2020 revenue came from consumable products and activity-based equipment. Demand was materially affected by COVID-19, lower oil and gas prices, reduced drilling and completions activity, customer bankruptcies and consolidation, and capital-spending discipline.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $512.5 million | $956.5 million | Down 46.4% |
| Gross profit | $(11.0) million | $244.9 million | Down $255.9 million |
| Operating loss | $(231.6) million | $(536.1) million | Improved $304.5 million |
| Net loss | $(96.9) million | $(567.1) million | Improved $470.2 million |
| Diluted loss per share | $(17.37) | $(103.01) | Improved |
| Operating cash flow | $3.9 million | $104.1 million | Down $100.3 million |
| Capital expenditures | $2.2 million | $15.1 million | Down $12.9 million |
| Cash and equivalents at year-end | $128.6 million | $57.9 million | Up $70.7 million |
| Total debt | $294.7 million | $399.6 million | Down $104.9 million |
Gross margin was approximately negative 2.2% in 2020 versus approximately 25.6% in 2019. The total segment operating margin was negative 40.7% versus negative 0.8% in 2019. Results included $100.8 million of inventory write-downs, $20.4 million of impairments of intangible assets and property and equipment, and $15.4 million of operating lease asset impairments.
- Drilling & Downhole revenue was $216.8 million, down 35.2%; segment operating loss was $48.0 million.
- Completions revenue was $118.7 million, down 61.1%; segment operating loss was $97.3 million.
- Production revenue was $177.5 million, down 44.7%; segment operating loss was $33.4 million.
Material changes versus the prior comparable period
- Average WTI and Brent prices declined 31% and 35%, respectively, while average Henry Hub natural gas prices declined 21%.
- Average global active rigs fell to 1,347 from 2,175. Average U.S. rigs declined 54%, Canadian rigs 34%, and international rigs 25%.
- Orders declined to $472.6 million from $863.4 million, and year-end backlog declined to approximately $114 million from $173 million.
- Revenue fell across all segments, led by the Completions segment, where pressure-pumping and coiled-tubing activity declined sharply.
- Inventory write-downs increased to $100.8 million from $10.3 million. Net inventory declined to $251.7 million, while the inventory reserve increased to $144.9 million.
- The company reduced headcount and compensation, exited facilities, furloughed employees, discontinued certain products, changed sourcing and manufacturing strategies, and suspended certain retirement-plan matching contributions.
- On December 31, 2020, Forum sold assets associated with its ABZ and Quadrant valve brands for $104.6 million and recorded an $88.4 million gain. The divestiture will reduce future Valve Solutions revenue.
- Forum repurchased $71.9 million principal amount of its 2021 Notes for $27.7 million, exchanged $315.5 million principal amount for new 2025 Notes, and redeemed the remaining $12.6 million of 2021 Notes. No 2021 Notes remained outstanding at year-end.
Debt, liquidity and cash flow
At December 31, 2020, Forum had $316.9 million principal amount of 9.00% convertible secured notes due August 2025 and $13.1 million drawn under its $250.0 million senior secured revolving Credit Facility. Credit Facility availability was $110.5 million after considering the borrowing base and outstanding letters of credit. The facility is scheduled to mature October 30, 2022. The 2025 Notes are secured and include cash or additional-note interest features and conversion provisions.
Operating cash flow was only $3.9 million despite working-capital reductions, reflecting the significant operating loss. Investing cash flow of $108.3 million was primarily supported by the ABZ and Quadrant divestiture. Financing cash flow used $41.8 million, including debt repurchases, financing costs and bond-exchange payments.
Management stated that available cash, expected operating cash flow and estimated Credit Facility availability should be adequate to fund current operations and debt maturities over the next 12 months. It expects 2021 capital expenditures to be less than $10 million and may use cash flow, divestiture proceeds or other capital to reduce 2025 Notes or other debt.
Outlook, management commentary and risks
Management expected activity levels to remain substantially below prior-year levels, with continued pressure on product pricing, revenue and operating margins. The filing does not provide specific revenue or earnings guidance. Restructuring actions were expected to be completed during the first half of 2021.
- COVID-19, oil and gas price volatility, low rig counts and reduced customer capital budgets may continue to depress demand and liquidity.
- Customer order reductions, cancellations, acceptance delays, bankruptcies and inability to collect receivables could reduce backlog conversion and cash flow.
- High inventory levels and forecast uncertainty create risk of additional obsolescence and write-downs.
- Debt service, restrictive covenants, the 2022 Credit Facility maturity and the 2025 Notes maturity constrain financial flexibility. The fair value of the 2025 Notes was approximately $200.3 million versus a carrying value of approximately $279.3 million at year-end.
- Potential additional impairments, supply-chain disruption, tariffs, foreign-exchange volatility, cybersecurity events, environmental and safety regulations, hydraulic-fracturing restrictions, climate-related policies and litigation could adversely affect results.
- Asbestos litigation remained a contingency: fewer than 150 lawsuits were pending, with a reported net liability of $0.3 million for estimated current and five-year future claims. Management stated that overall litigation reserves were immaterial and did not expect ordinary-course matters to have a material adverse effect.
- The company was involved in ongoing Tenaris patent litigation involving DURACOIL products and a Portland Harbor environmental matter for which an indemnitor had assumed responsibility; potential Portland Harbor liability could not be quantified.
Important facts for investors to verify
- Whether operating activity, rig counts, completions demand and pricing recover sufficiently to restore positive operating cash flow.
- Whether the company can refinance or repay the Credit Facility and 2025 Notes while complying with borrowing-base and fixed-charge coverage requirements.
- The sustainability of liquidity after the one-time $104.6 million divestiture proceeds and the effect of the valve-brand sale on future revenue.
- Whether inventory reserves and long-lived-asset valuations adequately reflect demand, product discontinuations and future forecasts.
- The timing and cash cost of restructuring, facility exits, severance and other cost-reduction actions.
- The potential financial impact of COVID-19, customer defaults, asbestos claims, Tenaris litigation and the Portland Harbor matter.
- The filing’s financial statements were audited by Deloitte & Touche LLP with an unqualified opinion; management reported effective disclosure controls and internal control over financial reporting, but the company was not required to obtain an external internal-control attestation.