Forum Energy Technologies, Inc. — 2020 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2020. Forum is a global oilfield products company serving drilling, downhole, subsea, completions, production and related energy markets through its Drilling & Downhole, Completions and Production segments.
Results were materially affected by the COVID-19 pandemic, the oil-price collapse and reduced customer drilling, completions, capital and maintenance spending. Approximately 83% of first-half revenue came from consumable products and activity-based equipment.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $113.3 million | $245.6 million | $295.9 million | $517.5 million |
| Gross profit | $12.9 million | $63.2 million | $35.0 million | $133.3 million |
| Gross margin | 11.4% | 25.7% | 11.8% | 25.8% |
| Operating income (loss) | $(35.0) million | $0.7 million | $(90.4) million | $5.0 million |
| Net loss | $(5.5) million | $(13.7) million | $(42.6) million | $(21.6) million |
| Diluted loss per share | $(0.05) | $(0.12) | $(0.38) | $(0.20) |
| Operating cash flow | Not separately provided for the quarter | $(2.1) million | $40.8 million |
- Q2 revenue declined 53.9%; first-half revenue declined 42.8%.
- Q2 segment operating margin was negative 31.3%, compared with positive 0.4% in the prior-year quarter. First-half segment operating margin was negative 24.8%, compared with positive 0.2%.
- At June 30, cash and cash equivalents were $109.7 million, compared with $57.9 million at December 31, 2019. Total assets were $1.07 billion and total equity was $441.0 million.
- First-half operating cash flow was negative despite working-capital benefits, primarily because of sharply weaker operating results. Financing activities provided $54.4 million, including $85.0 million of revolving-credit borrowings, partly offset by debt repurchases.
- Capital expenditures were $1.5 million in the first half. Management expected full-year 2020 capital expenditures to be less than $5.0 million.
Debt and liquidity
- At June 30, total debt was $413.8 million, including $328.1 million of 6.25% notes due October 2021 and $85.0 million drawn under the revolving credit facility.
- The credit facility had a $197.4 million borrowing base, $28.2 million of letters of credit, and $84.2 million of remaining availability at June 30. Letters of credit totaled $29.0 million.
- Subsequent to quarter-end, Forum exchanged $315.5 million of the 2021 notes for 9.00% convertible secured notes due July 2025. The new notes are secured by substantially all assets, subject to the credit facility’s collateral priority.
- Following the exchange, $12.7 million of the 2021 notes remained outstanding. Management planned to retire that balance before March 2021.
- Management stated that cash on hand, operating cash flow, expected tax refunds and credit-facility availability were expected to fund current operations and debt maturities for the next 12 months.
Material changes versus the prior comparable period
- Revenue declines affected all segments: Q2 Drilling & Downhole decreased 42.7%, Completions decreased 78.4%, and Production decreased 41.6%.
- First-half segment operating results deteriorated to losses of $13.5 million for Drilling & Downhole, $35.1 million for Completions and $9.2 million for Production.
- First-half results included $26.8 million of long-lived-asset impairments, $16.4 million of inventory write-downs, operating-lease impairments and severance-related costs. The filing separately reported $17.4 million of property and intangible-asset impairments in operating expenses.
- Forum repurchased $71.9 million principal amount of the 2021 notes for $27.6 million and recognized a $43.7 million gain on extinguishment. This noncash-related accounting gain substantially reduced the reported pretax loss.
- The first-half tax benefit was $14.8 million, including a $16.6 million benefit from a CARES Act tax-loss carryback claim. The company expected an approximately $14.1 million cash tax refund in 2020.
- Inbound orders fell to $85.6 million in Q2 from $224.6 million in Q2 2019 and to $256.2 million for the first half from $466.8 million.
Guidance, outlook, management commentary, risks and unusual items
- Management expected activity, revenue and operating margins to remain substantially below prior-year levels, with a continued substantial decline in activity from first-half 2020 levels.
- Average global active rigs fell to 1,251 in Q2 2020 from 2,180 in Q2 2019; average U.S. rigs fell to 392 from 989. The U.S. rig count was 251 at July 31, 2020, approximately 69% below the beginning-of-year level.
- COVID-19, oil-price volatility, OPEC+ actions, customer budget reductions, supply-chain disruption, delayed or uncollectible receivables, facility rationalization, additional impairments and potential workforce reductions were identified as material risks.
- The new convertible notes were subject to a conversion cap pending stockholder approval. Failure to obtain approval by June 30, 2021 would constitute an event of default and could accelerate the notes.
- The amended credit facility reduced commitments from $300 million to $250 million, increased borrowing margins, added collateral and cross-default provisions, and changed maturity and excess-availability requirements.
- Management implemented facility exits, headcount and salary reductions, furloughs and suspension of employer retirement-plan matching contributions. Manufacturing operations did not experience COVID-19-related work stoppages as of the filing.
- Legal reserves were immaterial, and management did not expect pending proceedings to have a material adverse effect. The company reported no material off-balance-sheet arrangements other than ordinary-course letters of credit.
Important facts for investors to verify
- Completion and terms of the post-quarter-end 2021-note exchange, including the remaining $12.7 million balance and the 2025-note conversion and default provisions.
- Compliance with amended credit-facility borrowing-base, excess-availability, cash-balance and covenant requirements.
- Actual cash tax refunds and the sustainability of liquidity given negative operating cash flow and continued industry weakness.
- Subsequent revenue, orders, rig counts and margins, particularly in Completions and North American markets.
- Potential additional inventory, lease, property, equipment or intangible-asset impairments.
- Whether cost reductions and facility actions offset the impact of lower volumes without impairing operational capacity.