Forum Energy Technologies, Inc. — 1Q 2020 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2020. Forum is a global oilfield-products company serving drilling, downhole, subsea, completions and production markets through its Drilling & Downhole, Completions and Production segments. Results were materially affected by the COVID-19 pandemic, the collapse in oil prices and reduced North American drilling and completions activity.
Key financial metrics
| Metric | 1Q 2020 | 1Q 2019 | Change |
|---|---|---|---|
| Revenue | $182.6 million | $271.8 million | Down 32.8% |
| Gross profit | $22.1 million | $70.1 million | Down $48.0 million |
| Gross margin | 12.1% | 25.8% | Down 13.7 percentage points |
| Operating income (loss) | $(55.4) million | $4.3 million | Down $59.7 million |
| Net loss | $(37.1) million | $(7.9) million | Loss increased $29.3 million |
| Basic and diluted loss per share | $(0.33) | $(0.07) | Worsened |
| Cash flow from operations | $1.6 million | $17.9 million | Down $16.3 million |
| Capital expenditures | $1.0 million | $3.7 million | Down $2.7 million |
Segment revenue declined 10.8% in Drilling & Downhole, 46.3% in Completions and 39.6% in Production. Segment operating margins were negative 5.4%, negative 34.1% and negative 14.7%, respectively, compared with negative 2.9%, positive 7.2% and positive 4.7% in the prior-year quarter.
At March 31, 2020, cash and cash equivalents were $108.9 million, compared with $57.9 million at December 31, 2019. Total debt was $446.0 million, including $389.2 million of 6.25% Senior Notes due October 2021 and $55.0 million drawn under the revolving credit facility. Credit-facility availability was $152.6 million after borrowings and letters of credit. Total equity was $442.1 million, compared with $486.0 million at year-end 2019.
Material changes versus the prior comparable period
- Revenue fell $89.2 million, primarily because of lower U.S. drilling, hydraulic-fracturing, completions and production activity.
- Gross margin contracted sharply because of lower volume and operating deleverage.
- Operating results included $17.3 million of impairment charges for property and equipment and intangible assets, plus $9.5 million of operating lease-asset impairments and $11.6 million of inventory write-downs.
- Cash from operations declined to $1.6 million, with working capital using $11.9 million of cash compared with providing $5.1 million in 1Q 2019.
- Financing activities provided $51.1 million, principally from $55.0 million of revolver borrowings. In 1Q 2019, financing activities used $32.0 million.
- Forum repurchased $10.9 million principal amount of Senior Notes for $3.4 million, recognizing a $7.5 million gain on extinguishment. It also wrote off $1.8 million of deferred loan costs after terminating discussions regarding a potential note exchange offer.
- The tax benefit was $14.4 million versus tax expense of $1.7 million. The 2020 benefit included a $16.6 million benefit from a CARES Act-related federal net operating loss carryback.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings guidance in the filing. It expected a substantial decline in activity from 1Q 2020 levels, continued pressure on product pricing, and corresponding reductions in revenue and operating margins. Management described 2020 as a challenging year and expected U.S. rig activity to continue declining below the prior trough of 404 rigs; the U.S. rig count was 408 as of May 1, 2020.
Management expected 2020 capital expenditures to be less than $5.0 million and anticipated approximately $14.3 million of cash tax refunds from the CARES Act carryback. It stated that available cash, operating cash flow, tax refunds and estimated revolver availability were expected to fund operations for the next 12 months, while noting that this assessment depended on highly uncertain market conditions.
- COVID-19, lower oil demand, excess production and limited storage capacity were expected to reduce customer capital and maintenance spending.
- Supply-chain disruptions affected key suppliers in China, while tariffs increased raw-material costs, particularly for Coiled Tubing and Valve Solutions.
- Potential risks included customer payment delays or defaults, bankruptcies, lower borrowing availability, higher financing costs, additional asset impairments, facility closures, workforce reductions and contract or force-majeure disputes.
- The revolver matures in July 2021 and the Senior Notes mature in October 2021. Subsequent to quarter-end, Forum announced a tender offer for up to $80.0 million of Senior Notes and drew an additional $30.0 million under the revolver.
- Excess revolver availability below the greater of 10% of borrowing base or $20.0 million would trigger a fixed-charge coverage requirement of at least 1.00:1.00.
- Outstanding letters of credit totaled $27.2 million. Legal reserves were immaterial, and management did not expect pending proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether revenue, margins and operating cash flow continued to decline after March 31, 2020 as projected by management.
- Liquidity after the additional $30.0 million revolver draw, the Senior Note tender offer and any further changes in borrowing-base availability.
- Forum’s ability to refinance or repay the $389.2 million of Senior Notes due October 2021.
- The collectability of accounts receivable and the effect of customer liquidity problems or bankruptcies.
- Whether additional impairments, inventory write-downs, restructuring costs or facility-closure costs were recorded in subsequent periods.
- The realization and timing of the anticipated $14.3 million CARES Act-related tax refund.
- The duration and severity of COVID-19, oil-price volatility, OPEC+ actions, storage constraints and related customer spending reductions.