UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☑ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended June 30, 20192020
OR
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☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 001-35504
FORUM ENERGY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | | 61-1488595 |
Delaware | | | 61-1488595 |
(State or other jurisdiction of | | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | | |
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10344 Sam Houston Park Drive | Suite 300 | Houston | Texas | 77064 |
(Address of Principal Executive Offices) | | | | (Zip Code) |
(Registrant’s telephone number, including area code)
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______________________________________________ | | |
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock | FET | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer | ☑☐ | | Accelerated filer | ☐☑ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of July 29, 2019August 4, 2020 there were 110,374,606111,340,535 common shares outstanding.
Table of Contents
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)Loss
(Unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(in thousands, except per share information) | 2019 | | 2018 | | 2019 | | 2018 | (in thousands, except per share information) | 2020 | | 2019 | | 2020 | | 2019 |
Revenue | $ | 245,648 |
| | $ | 274,003 |
| | $ | 517,490 |
| | $ | 524,234 |
| Revenue | $ | 113,275 | | | $ | 245,648 | | | $ | 295,907 | | | $ | 517,490 | |
Cost of sales | 182,460 |
| | 201,334 |
| | 384,204 |
| | 384,278 |
| Cost of sales | 100,373 | | | 182,460 | | | 260,915 | | | 384,204 | |
Gross profit | 63,188 |
| | 72,669 |
| | 133,286 |
| | 139,956 |
| Gross profit | 12,902 | | | 63,188 | | | 34,992 | | | 133,286 | |
Operating expenses | | | | | | | | Operating expenses | | | | | | | |
Selling, general and administrative expenses | 62,881 |
| | 71,488 |
| | 131,849 |
| | 143,579 |
| Selling, general and administrative expenses | 48,362 | | | 62,881 | | | 108,523 | | | 131,849 | |
Transaction expenses | 125 |
| | 59 |
| | 718 |
| | 1,395 |
| Transaction expenses | 150 | | | 125 | | | 187 | | | 718 | |
Intangible asset impairments | — |
| | 14,477 |
| | — |
| | 14,477 |
| |
Impairments of intangible assets, property and equipment | | Impairments of intangible assets, property and equipment | 112 | | | — | | | 17,432 | | | — | |
Contingent consideration benefit | — |
| | — |
| | (4,629 | ) | | — |
| Contingent consideration benefit | — | | | — | | | — | | | (4,629) | |
Loss (gain) on disposal of assets and other | 16 |
| | (1,303 | ) | | 36 |
| | (1,700 | ) | Loss (gain) on disposal of assets and other | (700) | | | 16 | | | (721) | | | 36 | |
Total operating expenses | 63,022 |
| | 84,721 |
| | 127,974 |
| | 157,751 |
| Total operating expenses | 47,924 | | | 63,022 | | | 125,421 | | | 127,974 | |
Earnings (loss) from equity investment | 570 |
| | 350 |
| | (279 | ) | | (613 | ) | Earnings (loss) from equity investment | — | | | 570 | | | — | | | (279) | |
Operating income (loss) | 736 |
| | (11,702 | ) | | 5,033 |
| | (18,408 | ) | Operating income (loss) | (35,022) | | | 736 | | | (90,429) | | | 5,033 | |
Other expense (income) | | | | | | | | Other expense (income) | | | | | | | |
Interest expense | 8,223 |
| | 7,861 |
| | 16,404 |
| | 15,948 |
| Interest expense | 6,420 | | | 8,223 | | | 13,144 | | | 16,404 | |
Foreign exchange and other losses (gains), net | (2,146 | ) | | (5,860 | ) | | 131 |
| | (2,309 | ) | Foreign exchange and other losses (gains), net | 631 | | | (2,146) | | | (4,376) | | | 131 | |
Gain on contribution of subsea rentals business | — |
| | — |
| | — |
| | (33,506 | ) | |
Gain on extinguishment of debt | | Gain on extinguishment of debt | (36,285) | | | — | | | (43,744) | | | — | |
Deferred loan costs written off | | Deferred loan costs written off | 130 | | | — | | | 1,959 | | | — | |
Total other expense (income), net | 6,077 |
| | 2,001 |
| | 16,535 |
| | (19,867 | ) | Total other expense (income), net | (29,104) | | | 6,077 | | | (33,017) | | | 16,535 | |
Income (loss) before income taxes | (5,341 | ) | | (13,703 | ) | | (11,502 | ) | | 1,459 |
| |
Loss before income taxes | | Loss before income taxes | (5,918) | | | (5,341) | | | (57,412) | | | (11,502) | |
Income tax expense (benefit) | 8,393 |
| | 1,646 |
| | 10,120 |
| | (11,258 | ) | Income tax expense (benefit) | (424) | | | 8,393 | | | (14,774) | | | 10,120 | |
Net income (loss) | (13,734 | ) | | (15,349 | ) | | (21,622 | ) | | 12,717 |
| |
Net loss | | Net loss | (5,494) | | | (13,734) | | | (42,638) | | | (21,622) | |
| | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | Weighted average shares outstanding | |
Basic | 109,987 |
| | 108,714 |
| | 109,816 |
| | 108,569 |
| Basic | 111,590 | | | 109,987 | | | 111,381 | | | 109,816 | |
Diluted | 109,987 |
| | 108,714 |
| | 109,816 |
| | 110,821 |
| Diluted | 111,590 | | | 109,987 | | | 111,381 | | | 109,816 | |
Earnings (loss) per share | | | | | | | | |
Loss per share | | Loss per share | |
Basic | $ | (0.12 | ) | | $ | (0.14 | ) | | $ | (0.20 | ) | | $ | 0.12 |
| Basic | $ | (0.05) | | | $ | (0.12) | | | $ | (0.38) | | | $ | (0.20) | |
Diluted | (0.12 | ) | | (0.14 | ) | | (0.20 | ) | | 0.11 |
| Diluted | (0.05) | | | (0.12) | | | (0.38) | | | (0.20) | |
| | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | Other comprehensive income (loss), net of tax: | |
Net income (loss) | (13,734 | ) | | (15,349 | ) | | (21,622 | ) | | 12,717 |
| |
Net loss | | Net loss | (5,494) | | | (13,734) | | | (42,638) | | | (21,622) | |
Change in foreign currency translation, net of tax of $0 | (1,407 | ) | | (18,635 | ) | | 3,427 |
| | (12,348 | ) | Change in foreign currency translation, net of tax of $0 | 1,900 | | | (1,407) | | | (6,946) | | | 3,427 | |
Gain (loss) on pension liability | 5 |
| | 55 |
| | (4 | ) | | 71 |
| Gain (loss) on pension liability | (22) | | | 5 | | | (1) | | | (4) | |
Comprehensive income (loss) | $ | (15,136 | ) | | $ | (33,929 | ) | | $ | (18,199 | ) | | $ | 440 |
| |
Comprehensive loss | | Comprehensive loss | $ | (3,616) | | | $ | (15,136) | | | $ | (49,585) | | | $ | (18,199) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
| | | | | | | |
(in thousands, except share information) | June 30, 2019 | | December 31, 2018 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 37,365 |
| | $ | 47,241 |
|
Accounts receivable—trade, net of allowances of $8,920 and $7,432 | 180,613 |
| | 206,055 |
|
Inventories, net | 469,073 |
| | 479,023 |
|
Prepaid expenses and other current assets | 31,520 |
| | 23,677 |
|
Accrued revenue | 873 |
| | 862 |
|
Costs and estimated profits in excess of billings | 8,438 |
| | 9,159 |
|
Total current assets | 727,882 |
| | 766,017 |
|
Property and equipment, net of accumulated depreciation | 171,546 |
| | 177,358 |
|
Operating lease assets | 53,958 |
| | — |
|
Deferred financing costs, net | 1,657 |
| | 2,071 |
|
Intangible assets | 341,920 |
| | 359,048 |
|
Goodwill | 471,466 |
| | 469,647 |
|
Investment in unconsolidated subsidiary | 44,537 |
| | 44,982 |
|
Deferred income taxes, net | — |
| | 1,234 |
|
Other long-term assets | 8,745 |
| | 9,295 |
|
Total assets | $ | 1,821,711 |
| | $ | 1,829,652 |
|
Liabilities and equity | | | |
Current liabilities | | | |
Current portion of long-term debt | $ | 1,169 |
| | $ | 1,167 |
|
Accounts payable—trade | 137,819 |
| | 143,186 |
|
Accrued liabilities | 74,978 |
| | 81,032 |
|
Deferred revenue | 8,046 |
| | 8,335 |
|
Billings in excess of costs and profits recognized | 2,284 |
| | 3,210 |
|
Total current liabilities | 224,296 |
| | 236,930 |
|
Long-term debt, net of current portion | 477,982 |
| | 517,544 |
|
Deferred income taxes, net | 20,112 |
| | 15,299 |
|
Operating lease liabilities | 53,206 |
| | — |
|
Other long-term liabilities | 25,904 |
| | 29,753 |
|
Total liabilities | 801,500 |
| | 799,526 |
|
Commitments and contingencies |
| |
|
|
Equity | | | |
Common stock, $0.01 par value, 296,000,000 shares authorized, 118,288,651 and 117,411,158 shares issued | 1,183 |
| | 1,174 |
|
Additional paid-in capital | 1,223,251 |
| | 1,214,928 |
|
Treasury stock at cost, 8,208,588 and 8,200,477 shares | (134,482 | ) | | (134,434 | ) |
Retained earnings | 42,066 |
| | 63,688 |
|
Accumulated other comprehensive loss | (111,807 | ) | | (115,230 | ) |
Total equity | 1,020,211 |
| | 1,030,126 |
|
Total liabilities and equity | $ | 1,821,711 |
| | $ | 1,829,652 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
| | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2019 | | 2018 |
Cash flows from operating activities | | | |
Net income (loss) | $ | (21,622 | ) | | $ | 12,717 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Depreciation expense | 15,067 |
| | 16,358 |
|
Amortization of intangible assets | 17,608 |
| | 20,932 |
|
Intangible asset impairments | — |
| | 14,477 |
|
Inventory write down | 1,564 |
| | 8,002 |
|
Stock-based compensation expense | 8,262 |
| | 10,616 |
|
Loss from unconsolidated subsidiary | 279 |
| | 613 |
|
Contingent consideration benefit | (4,629 | ) | | — |
|
Gain on contribution of subsea rentals business | — |
| | (33,506 | ) |
Deferred income taxes | 6,047 |
| | (22,247 | ) |
Noncash losses (gains) and other, net | 4,493 |
| | 1,528 |
|
Changes in operating assets and liabilities | | | |
Accounts receivable—trade | 24,087 |
| | (15,636 | ) |
Inventories | 8,333 |
| | (52,679 | ) |
Prepaid expenses and other assets | (1,268 | ) | | (2,122 | ) |
Cost and estimated profit in excess of billings | 705 |
| | 109 |
|
Accounts payable, deferred revenue and other accrued liabilities | (17,216 | ) | | 10,978 |
|
Billings in excess of costs and estimated profits earned | (926 | ) | | 4,123 |
|
Net cash provided by (used in) operating activities | $ | 40,784 |
| | $ | (25,737 | ) |
Cash flows from investing activities | | | |
Capital expenditures for property and equipment | (9,271 | ) | | (14,140 | ) |
Proceeds from sale of business, property and equipment | 425 |
| | 8,809 |
|
Net cash used in investing activities | $ | (8,846 | ) | | $ | (5,331 | ) |
Cash flows from financing activities | | | |
Borrowings of debt | 82,000 |
| | 50,000 |
|
Repayments of debt | (123,083 | ) | | (91,678 | ) |
Repurchases of stock | (1,037 | ) | | (2,212 | ) |
Net cash used in financing activities | $ | (42,120 | ) | | $ | (43,890 | ) |
| | | |
Effect of exchange rate changes on cash | 306 |
| | (1,153 | ) |
| | | |
Net decrease in cash, cash equivalents and restricted cash | (9,876 | ) | | (76,111 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 47,241 |
| | 115,216 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 37,365 |
| | $ | 39,105 |
|
| | | |
Noncash activities (1) | | | |
Assets contributed for equity method investment | $ | — |
| | $ | 18,070 |
|
Note receivable related to equity method investment transaction | $ | — |
| | $ | 4,067 |
|
(1) See Note 8 Leases for additional information about noncash activities related to leases and the impact from adoption of ASU 842.
| | | | | | | | | | | |
(in thousands, except share information) | June 30, 2020 | | December 31, 2019 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 109,678 | | | $ | 57,911 | |
Accounts receivable—trade, net of allowances of $9,450 and $9,048 | 89,254 | | | 154,182 | |
Inventories, net | 377,562 | | | 414,640 | |
Prepaid expenses and other current assets | 46,997 | | | 33,820 | |
Accrued revenue | 1,303 | | | 1,260 | |
Costs and estimated profits in excess of billings | 4,993 | | | 4,104 | |
Total current assets | 629,787 | | | 665,917 | |
Property and equipment, net of accumulated depreciation | 131,479 | | | 154,836 | |
Operating lease assets | 35,476 | | | 48,682 | |
Deferred financing costs, net | 828 | | | 1,243 | |
Intangible assets, net | 252,989 | | | 272,300 | |
Deferred income taxes, net | 346 | | | 654 | |
Other long-term assets | 15,953 | | | 16,365 | |
Total assets | $ | 1,066,858 | | | $ | 1,159,997 | |
Liabilities and equity | | | |
Current liabilities | | | |
Current portion of long-term debt | $ | 1,320 | | | $ | 717 | |
Accounts payable—trade | 70,200 | | | 98,720 | |
Accrued liabilities | 70,620 | | | 86,625 | |
Deferred revenue | 3,557 | | | 4,877 | |
Billings in excess of costs and profits recognized | 2,540 | | | 5,911 | |
Total current liabilities | 148,237 | | | 196,850 | |
Long-term debt, net of current portion | 412,442 | | | 398,862 | |
Deferred income taxes, net | 1,943 | | | 2,465 | |
Operating lease liabilities | 44,086 | | | 49,938 | |
Other long-term liabilities | 19,169 | | | 25,843 | |
Total liabilities | 625,877 | | | 673,958 | |
Commitments and contingencies | | | |
Equity | | | |
Common stock, $0.01 par value, 296,000,000 shares authorized, 119,609,017 and 118,840,611 shares issued | 1,196 | | | 1,189 | |
Additional paid-in capital | 1,237,574 | | | 1,231,650 | |
Treasury stock at cost, 8,216,637 and 8,211,919 shares | (134,499) | | | (134,493) | |
Retained deficit | (547,405) | | | (503,369) | |
Accumulated other comprehensive loss | (115,885) | | | (108,938) | |
Total equity | 440,981 | | | 486,039 | |
Total liabilities and equity | $ | 1,066,858 | | | $ | 1,159,997 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
(in thousands) | 2020 | | 2019 |
Cash flows from operating activities | | | |
Net loss | $ | (42,638) | | | $ | (21,622) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Depreciation expense | 13,296 | | | 15,067 | |
Amortization of intangible assets | 13,371 | | | 17,608 | |
Impairments of intangible assets, property and equipment | 17,432 | | | — | |
Impairments of operating lease assets | 9,338 | | | 2,022 | |
Inventory write down | 16,379 | | | 1,564 | |
Stock-based compensation expense | 5,760 | | | 8,262 | |
Loss from unconsolidated subsidiary | — | | | 279 | |
Contingent consideration benefit | — | | | (4,629) | |
Gain on extinguishment of debt | (43,744) | | | — | |
Deferred loan costs written off | 1,959 | | | — | |
Deferred income taxes | 385 | | | 6,047 | |
Noncash losses and other, net | 686 | | | 2,471 | |
Changes in operating assets and liabilities | | | |
Accounts receivable—trade | 60,900 | | | 24,087 | |
Inventories | 18,279 | | | 8,333 | |
Prepaid expenses and other assets | (13,236) | | | (1,268) | |
Cost and estimated profit in excess of billings | (957) | | | 705 | |
Accounts payable, deferred revenue and other accrued liabilities | (56,198) | | | (17,216) | |
Billings in excess of costs and estimated profits earned | (3,089) | | | (926) | |
Net cash provided by (used in) operating activities | $ | (2,077) | | | $ | 40,784 | |
Cash flows from investing activities | | | |
Capital expenditures for property and equipment | (1,538) | | | (9,271) | |
Proceeds from sale of business, property and equipment | 1,336 | | | 425 | |
Net cash used in investing activities | $ | (202) | | | $ | (8,846) | |
Cash flows from financing activities | | | |
Borrowings of debt | 85,000 | | | 82,000 | |
Repayments of debt | (28,180) | | | (123,083) | |
Repurchases of stock | (181) | | | (1,037) | |
Deferred financing costs | (2,259) | | | — | |
Net cash provided by (used in) financing activities | $ | 54,380 | | | $ | (42,120) | |
| | | |
Effect of exchange rate changes on cash | (334) | | | 306 | |
| | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 51,767 | | | (9,876) | |
Cash, cash equivalents and restricted cash at beginning of period | 57,911 | | | 47,241 | |
Cash, cash equivalents and restricted cash at end of period | $ | 109,678 | | | $ | 37,365 | |
| | | |
Noncash activities | | | |
Operating lease right of use assets obtained in exchange for lease obligations | 690 | | | 8,798 | |
Finance lease right of use assets obtained in exchange for lease obligations | 1,384 | | | 525 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2020 | | | | | | | | | | | | |
(in thousands) | | Common stock | | Additional paid-in capital | | Treasury stock | | Retained deficit | | Accumulated other comprehensive income / (loss) | | Total equity |
Balance at December 31, 2019 | | $ | 1,189 | | | $ | 1,231,650 | | | $ | (134,493) | | | $ | (503,369) | | | $ | (108,938) | | | $ | 486,039 | |
Stock-based compensation expense | | — | | | 3,223 | | | — | | | — | | | — | | | 3,223 | |
Restricted stock issuance, net of forfeitures | | 5 | | | (178) | | | — | | | — | | | — | | | (173) | |
Shares issued in employee stock purchase plan | | 2 | | | 344 | | | — | | | — | | | — | | | 346 | |
Adjustment for adoption of ASU 2016-13 | | — | | | — | | | — | | | (1,398) | | | — | | | (1,398) | |
Treasury stock | | — | | | — | | | (6) | | | — | | | — | | | (6) | |
Currency translation adjustment | | — | | | — | | | — | | | — | | | (8,846) | | | (8,846) | |
Change in pension liability | | — | | | — | | | — | | | — | | | 21 | | | 21 | |
Net loss | | — | | | — | | | — | | | (37,144) | | | — | | | (37,144) | |
Balance at March 31, 2020 | | $ | 1,196 | | | $ | 1,235,039 | | | $ | (134,499) | | | $ | (541,911) | | | $ | (117,763) | | | $ | 442,062 | |
Stock-based compensation expense | | — | | | 2,537 | | | — | | | — | | | — | | | 2,537 | |
Restricted stock issuance, net of forfeitures | | — | | | (2) | | | — | | | — | | | — | | | (2) | |
Currency translation adjustment | | — | | | — | | | — | | | — | | | 1,900 | | | 1,900 | |
Change in pension liability | | — | | | — | | | — | | | — | | | (22) | | | (22) | |
Net loss | | — | | | — | | | — | | | (5,494) | | | — | | | (5,494) | |
Balance at June 30, 2020 | | $ | 1,196 | | | $ | 1,237,574 | | | $ | (134,499) | | | $ | (547,405) | | | $ | (115,885) | | | $ | 440,981 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 |
(in thousands) | | Common stock | | Additional paid-in capital | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income / (loss) | | Total equity |
Balance at December 31, 2018 | | $ | 1,174 |
| | $ | 1,214,928 |
| | $ | (134,434 | ) | | $ | 63,688 |
| | $ | (115,230 | ) | | $ | 1,030,126 |
|
Stock-based compensation expense | | — |
| | 3,910 |
| | — |
| | — |
| | — |
| | 3,910 |
|
Restricted stock issuance, net of forfeitures | | 6 |
| | (931 | ) | | — |
| | — |
| | — |
| | (925 | ) |
Shares issued in employee stock purchase plan | | 2 |
| | 682 |
| | — |
| | — |
| | — |
| | 684 |
|
Contingent shares issued for acquisition of Cooper | | 1 |
| | 374 |
| | — |
| | — |
| | — |
| | 375 |
|
Treasury stock | | — |
| | — |
| | (48 | ) | | — |
| | — |
| | (48 | ) |
Currency translation adjustment | | — |
| | — |
| | — |
| | — |
| | 4,834 |
| | 4,834 |
|
Change in pension liability | | — |
| | — |
| | — |
| | — |
| | (9 | ) | | (9 | ) |
Net loss | | — |
| | — |
| | — |
| | (7,888 | ) | | — |
| | (7,888 | ) |
Balance at March 31, 2019 | | $ | 1,183 |
| | $ | 1,218,963 |
| | $ | (134,482 | ) | | $ | 55,800 |
| | $ | (110,405 | ) | | $ | 1,031,059 |
|
Stock-based compensation expense | | — |
| | 4,352 |
| | — |
| | — |
| | — |
| | 4,352 |
|
Restricted stock issuance, net of forfeitures | | — |
| | (64 | ) | | — |
| | — |
| | — |
| | (64 | ) |
Currency translation adjustment | | — |
| | — |
| | — |
| | — |
| | (1,407 | ) | | (1,407 | ) |
Change in pension liability | | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
Net loss | | — |
| | — |
| | — |
| | (13,734 | ) | | — |
| | (13,734 | ) |
Balance at June 30, 2019 | | $ | 1,183 |
| | $ | 1,223,251 |
| | $ | (134,482 | ) | | $ | 42,066 |
| | $ | (111,807 | ) | | $ | 1,020,211 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 | | | | | | | | | | | | |
(in thousands) | | Common stock | | Additional paid-in capital | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income / (loss) | | Total equity |
Balance at December 31, 2018 | | $ | 1,174 | | | $ | 1,214,928 | | | $ | (134,434) | | | $ | 63,688 | | | $ | (115,230) | | | $ | 1,030,126 | |
Stock-based compensation expense | | — | | | 3,910 | | | — | | | — | | | — | | | 3,910 | |
Restricted stock issuance, net of forfeitures | | 6 | | | (931) | | | — | | | — | | | — | | | (925) | |
Shares issued in employee stock purchase plan | | 2 | | | 682 | | | — | | | — | | | — | | | 684 | |
Contingent shares issued for acquisition of Cooper Valves | | 1 | | | 374 | | | — | | | — | | | — | | | 375 | |
Treasury stock | | — | | | — | | | (48) | | | — | | | — | | | (48) | |
Currency translation adjustment | | — | | | — | | | — | | | — | | | 4,834 | | | 4,834 | |
Change in pension liability | | — | | | — | | | — | | | — | | | (9) | | | (9) | |
Net loss | | — | | | — | | | — | | | (7,888) | | | — | | | (7,888) | |
Balance at March 31, 2019 | | $ | 1,183 | | | $ | 1,218,963 | | | $ | (134,482) | | | $ | 55,800 | | | $ | (110,405) | | | $ | 1,031,059 | |
Stock-based compensation expense | | — | | | 4,352 | | | — | | | — | | | — | | | 4,352 | |
Restricted stock issuance, net of forfeitures | | — | | | (64) | | | — | | | — | | | — | | | (64) | |
Currency translation adjustment | | — | | | — | | | — | | | — | | | (1,407) | | | (1,407) | |
Change in pension liability | | — | | | — | | | — | | | — | | | 5 | | | 5 | |
Net loss | | — | | | — | | | — | | | (13,734) | | | — | | | (13,734) | |
Balance at June 30, 2019 | | $ | 1,183 | | | $ | 1,223,251 | | | $ | (134,482) | | | $ | 42,066 | | | $ | (111,807) | | | $ | 1,020,211 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Forum Energy Technologies, Inc. and subsidiaries
Condensed Consolidated StatementsTable of Changes in Stockholders’ Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2018 |
(in thousands) | | Common stock | | Additional paid-in capital | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income / (loss) | | Total equity |
Balance at December 31, 2017 | | $ | 1,163 |
| | $ | 1,195,339 |
| | $ | (134,293 | ) | | $ | 438,774 |
| | $ | (91,967 | ) | | $ | 1,409,016 |
|
Stock-based compensation expense | | — |
| | 5,302 |
| | — |
| | — |
| | — |
| | 5,302 |
|
Restricted stock issuance, net of forfeitures | | 4 |
| | (1,611 | ) | | — |
| | — |
| | — |
| | (1,607 | ) |
Issuance of performance shares | | 2 |
| | (275 | ) | | — |
| | — |
| | — |
| | (273 | ) |
Shares issued in employee stock purchase plan | | 1 |
| | 995 |
| | — |
| | — |
| | — |
| | 996 |
|
Contingent shares issued for acquisition of Cooper | | — |
| | 125 |
| | — |
| | — |
| | — |
| | 125 |
|
Treasury stock | | — |
| | — |
| | (66 | ) | | — |
| | — |
| | (66 | ) |
Adjustment for adoption of ASU 2016-16 (Intra-entity asset transfers) | | — |
| | — |
| | — |
| | (1,006 | ) | | — |
| | (1,006 | ) |
Currency translation adjustment | | — |
| | — |
| | — |
| | — |
| | 6,287 |
| | 6,287 |
|
Change in pension liability | | — |
| | — |
| | — |
| | — |
| | 16 |
| | 16 |
|
Net income | | — |
| | — |
| | — |
| | 28,066 |
| | — |
| | 28,066 |
|
Balance at March 31, 2018 | | $ | 1,170 |
| | $ | 1,199,875 |
| | $ | (134,359 | ) | | $ | 465,834 |
| | $ | (85,664 | ) | | $ | 1,446,856 |
|
Stock-based compensation expense | | — |
| | 5,314 |
| | — |
| | — |
| | — |
| | 5,314 |
|
Restricted stock issuance, net of forfeitures | | 1 |
| | (222 | ) | | — |
| | — |
| | — |
| | (221 | ) |
Treasury stock | | — |
| | — |
| | (45 | ) | | — |
| | — |
| | (45 | ) |
Currency translation adjustment | | — |
| | — |
| | — |
| | — |
| | (18,635 | ) | | (18,635 | ) |
Change in pension liability | | — |
| | — |
| | — |
| | — |
| | 55 |
| | 55 |
|
Net loss | | — |
| | — |
| | — |
| | (15,349 | ) | | — |
| | (15,349 | ) |
Balance at June 30, 2018 | | $ | 1,171 |
| | $ | 1,204,967 |
| | $ | (134,404 | ) | | $ | 450,485 |
| | $ | (104,244 | ) | | $ | 1,417,975 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Contents
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
1. Organization and Basis of Presentation
Forum Energy Technologies, Inc. (the “Company,” “we,” “our,” or “us”), a Delaware corporation, is a global oilfield products company, serving the drilling, downhole, subsea, completions production and infrastructureproduction sectors of the oil and natural gas industry. The Company designs, manufacturesCompany's products include highly engineered capital equipment as well as products that are consumed in the drilling, well construction, production and distributes productstransportation of oil and engagesnatural gas. Forum is headquartered in aftermarket services, parts supplyHouston, TX with manufacturing and related services that complementdistribution facilities strategically located around the Company’s product offering.globe.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
Our investmentsPrior to the sale of our aggregate 40% interest in operating entities where we have the ability to exert significant influence, but do not control operating and financial policies, arethird quarter of 2019, our investment in Ashtead Technology (”Ashtead”) was accounted for using the equity method of accounting withas we had the ability to exert significant influence, but did not control operating and financial policies. Prior to the sale, our share of the net income (loss) from Ashtead was reported in “Earnings (loss) from equity investment” in the condensed consolidated statements of comprehensive income (loss). These investments areloss and the investment was included in “Investment in unconsolidated subsidiary” in the condensed consolidated balance sheets. The Company’sOur share of equity earnings arewere reported within operating income (loss), as the investee’s operations arewere integral to the operations of the Company. See Note 4 Dispositions for further information related to the sale of our aggregate 40% interest in Ashtead.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the Company’s financial position, results of operations and cash flows have been included. Operating results for the six months ended June 30, 20192020 are not necessarily indicative of the results that may be expected for the year ending December 31, 20192020 or any other interim period.
These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2018,2019, which are included in the Company’s 20182019 Annual Report on Form 10-K filed with the SEC on February 28, 2019 (the “Annual Report”).25, 2020.
Change of SegmentCOVID-19 Impacts
On March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In the first quarter 2019, we changed our reporting segments in orderresponse to align with business activity driversthese declarations and the mannerrapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities, including quarantine and “stay-at-home” orders in the areas in which management reviews and evaluates operating performance. Forum now operates in the following three reporting segments: Drilling & Downhole, Completions and Production. This move better aligns with the key phaseswe operate. We have experienced resulting disruptions to our business operations, as these restrictions have significantly impacted many sectors of the well cycleeconomy, with businesses curtailing or ceasing normal operations. The ultimate impacts will depend on future developments, including, among others, the consequences of governmental and provides improvedother measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other thirds parties, workforce availability, and the timing and extent to which normal economic and operating efficiencies. Historically,conditions resume. While we operated in three business segments: Drilling & Subsea, Completions,cannot estimate with any degree of certainty the full impact of the COVID-19 outbreak on our liquidity, financial condition and Production & Infrastructure. We have moved the Downhole product line from Completions to Drilling & Subsea to form the new Drilling & Downhole segment. Completions retains the Stimulation & Intervention and Coiled Tubing product lines. Finally, we renamed Production & Infrastructure as the Production segment. Our historicalfuture results of operations, have been recastwe expect the adverse impacts on our financial results from COVID-19 to retrospectively reflect these changescontinue in accordance with generally accepted accounting principles. Refer to Note 11 Business Segments for further information.future quarters.
2. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which we adopt as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.
Accounting Standards Adopted in 2019
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
from the Tax Cuts and Jobs Act. The underlying guidance that requires that the effect of a changeAccounting Standards Adopted in tax laws or rates be included in income from continuing operations is not affected. In addition, the amendments in this update also require certain disclosures about stranded tax effects. We applied the update beginning January 1, 2019. The adoption of this new guidance had no material impact on our unaudited condensed consolidated financial statements.2020
Leases.Financial Instruments—Credit Losses. In FebruaryJune 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 842”). Under this new guidance, lessees are required to recognize assets and liabilities on the balance sheet2016-13 Financial Instruments—Credit Losses (Topic 326), which introduced an expected credit loss methodology for the rights and obligations created by all leases (finance and operating). The classification as either a financing or operating lease determines whether lease expense is recognized onimpairment of financial assets measured at amortized cost basis. It requires an effective interest method basis or on a straight-line basisentity to estimate credit losses expected over the termlife of an exposure based on historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the lease, respectively.
scope that have the contractual right to receive cash. We adopted this new standard as of January 1, 2019 using the modified retrospective transition method which requires leases existing at, or entered into after, January 1, 2019 to be recognized and measured. As such, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We took advantage of various practical expedients provided by the new standard, including:
use of the transition package of practical expedients which, among other things, allows us to carry forward the historical lease classification for existing leases;
making an accounting policy election for leases with an initial term of 12 months or less to be excluded from the balance sheet; and
electing to not separate non-lease components from lease components for all classes of underlying lease assets.
2020. The adoption of this standard resulted in the recording of net operating lease assets of approximately $54 milliona noncash cumulative effect adjustment to increase our allowance for doubtful accounts and operating lease liabilities of approximately $65 million as of January 1, 2019.increase our retained deficit by $1.4 million. The new standard did not materially affect our unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)Loss for the three and six months ended June 30, 2019. For additional information, please refer to Note 8 2020.Leases.
Accounting Standards Issued But Not Yet Adopted
Accounting for Implementation Costs Related to a Cloud Computing Arrangement. In August 2018, the FASB issued ASU No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This new guidance aligns the requirements for capitalizing implementation costs incurred by an entity related to a cloud computing arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, this guidance requires an entity to capitalize certain implementation costs incurred and then amortize them over the term of the cloud hosting arrangement. Furthermore, this guidance also requires an entity to present the expense, cash flows, and capitalized implementation costs in the same financial statement line items as the associated hosting service. ThisWe adopted this new guidance will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and earlystandard as of January 1, 2020. The adoption is permitted. The amendments inof this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating thenew standard did not have a material impact of adopting this guidance.on our unaudited condensed consolidated financial statements.
Fair Value Measurement Disclosure. In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement. This new guidance eliminated, modified and added certain disclosure requirements related to fair value measurements. The amended disclosure requirements are effective for all entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We are evaluating the impactadopted this new standard as of adopting this guidance. However, we currently expect that the adoption of this guidance willJanuary 1, 2020. This new standard did not have a material impact on our unaudited condensed consolidated financial statements.
Subsidiary Guarantees. In March 2020, the SEC adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees, in Rule 3-10 of Regulation S-X. The amended rule focuses on providing material, relevant and decision-useful information regarding guarantees and other credit enhancements, while eliminating certain prescriptive requirements. We adopted these amendments as of June 30, 2020. Accordingly, combined summarized financial information has been presented only for the issuers and guarantors of our registered securities for the most recent fiscal year and the year-to-date interim period. In addition, the previous disclosures have been removed from the Notes to Condensed Consolidated Financial Instruments—Credit Losses. Statements and the new required disclosures are included in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Accounting Standards Issued But Not Yet Adopted
Income Tax.In June 2016,December 2019, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses2019-12 Income Taxes (Topic 326),740) - Disclosure Framework - Simplifying the Accounting for Income Taxes, which introduced an expected credit loss methodologysimplified the accounting for income taxes by removing certain exceptions to the impairmentgeneral principles of financial assets measured at amortized cost basis. It requires an entity to estimate credit losses expected over the life of an exposure based on historical information, current information,Topic 740 and reasonableclarifying and supportable forecasts, including estimates of prepayments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.amending existing guidance. This guidance will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.2020. We are currently evaluating the impact of adopting this new guidance. However, we currently expect that the adoption of this guidance will not have a material impact on our consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. RevenuesRevenue
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For a detailed discussion of our revenue recognition policies, refer to the Company’s 20182019 Annual Report on Form 10-K.
Disaggregated Revenue
Refer to Note 11 Business Segments for disaggregated revenue by product line and geography.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Contract Balances
Contract balances are determined on a contract by contract basis. Contract assets represent revenue recognized for goods and services provided to our customers when payment is conditioned on something other than the passage of time. Similarly, we record a contract liability when we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract. Such contract liabilities typically result from billings in excess of costs incurred on construction contracts and advance payments received on product sales.
The following table reflects the changes in our contract assets and contract liabilities balances for the six months ended June 30, 2019:2020 (in thousands):
|
| | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 | | Decrease |
| | | $ | | % |
Accrued revenue | $ | 873 |
| | $ | 862 |
| | | | |
Costs and estimated profits in excess of billings | 8,438 |
| | 9,159 |
| | | | |
Contract assets | $ | 9,311 |
| | $ | 10,021 |
| | $ | (710 | ) | | (7 | )% |
| | | | | | | |
Deferred revenue | $ | 8,046 |
| | $ | 8,335 |
| | | | |
Billings in excess of costs and profits recognized | 2,284 |
| | 3,210 |
| | | | |
Contract liabilities | $ | 10,330 |
| | $ | 11,545 |
| | $ | (1,215 | ) | | (11 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 | | Increase / (Decrease) | | |
| | | | | $ | | % |
Accrued revenue | $ | 1,303 | | | $ | 1,260 | | | | | |
Costs and estimated profits in excess of billings | 4,993 | | | 4,104 | | | | | |
Contract assets | $ | 6,296 | | | $ | 5,364 | | | $ | 932 | | | 17 | % |
| | | | | | | |
Deferred revenue | $ | 3,557 | | | $ | 4,877 | | | | | |
Billings in excess of costs and profits recognized | 2,540 | | | 5,911 | | | | | |
Contract liabilities | $ | 6,097 | | | $ | 10,788 | | | $ | (4,691) | | | (43) | % |
During the six months ended June 30, 2019,2020, our contract assets decreasedincreased by $0.7$0.9 million primarily due to the timing of orders and billings in our Production Equipment product line and our contract liabilities decreased by $1.2$4.7 million primarily due to the timing of billings for customer projects inwithin our Subsea Technologies product line.
During the six months ended June 30, 2019,2020, we recognized revenue of $8.0$8.8 million that was included in the contract liability balance at the beginning of the period.
In the second quarter 2018, our Subsea Technologies product line received an order to supply a submarine rescue vehicle and related equipment that we expect to deliver in 2020. We use the cost-to-cost method to measure progress on this contract to recognize revenue over time. Other than this contract,As all of our other contracts are less than one year in duration. As such,duration, we have elected to apply the practical expedient which allows an entity to exclude disclosures about its remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
4. Acquisitions & Dispositions
2018 Acquisition2019 Disposition of Houston Global Heat Transfer LLCCooper Alloy®
On October 5, 2018,December 4, 2019, we acquired 100%sold certain assets of the stockour Cooper Alloy® brand of Houston Global Heat Transfer LLC (“GHT”)valve products for total aggregate consideration of $57.3$4.0 million net of cash acquired. The aggregate consideration includes the estimated fair value (as of the acquisition date) of certain contingent cash payments due to the former owners of GHT if certain conditions are met in 2019 and 2020. Based in Houston, Texas, GHT designs, engineers, and manufactures premium industrial heat exchanger and cooling systems used primarily on hydraulic fracturing equipment. GHT’s flagship product, the Jumbotron, is an innovative cube-style radiator that substantially reduces customer maintenance expense. This acquisition is included in the Completions segment. In the first quarter of 2019, we updated the estimated fair value of the contingent cash payments and recognized a $4.6 million reduction in the contingent cash liability. This gain is included in contingent consideration benefit in the condensed consolidated statement of comprehensive income.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):
|
| | | | |
Current assets, net of cash acquired | | $ | 18,468 |
|
Property and equipment | | 2,408 |
|
Non-current assets | | 238 |
|
Intangible assets (primarily customer relationships) | | 30,400 |
|
Tax-deductible goodwill | | 20,746 |
|
Current liabilities | | (12,633 | ) |
Long-term liabilities | | $ | (2,355 | ) |
Net assets acquired, net of cash acquired | | $ | 57,272 |
|
Revenue and net income for this acquisition were not significant for the six months ended June 30, 2019.on disposition totaling $2.3 million. Pro forma results of operations for this acquisitiondisposition have not been presented because the effects were not material to the unaudited condensed consolidated financial statements.
2018 Acquisition of ESP Completion Technologies LLC
On July 2, 2018, we acquired certain assets of ESP Completion Technologies LLC ("ESPCT"), a subsidiary of C&J Energy Services, for cash consideration of $8.0 million. ESPCT consists of a portfolio of early stage technologies that maximize the run life of artificial lift systems, primarily electric submersible pumps. This acquisition is included in the Drilling and Downhole segment. The fair values of the assets acquired and liabilities assumed as well as the pro forma results of operations for this acquisition have not been presented because they are not material to the consolidated financial statements.
20182019 Disposition of Forum Subsea RentalsEquity Interest in Ashtead Technology
On JanuarySeptember 3, 2018,2019, we contributedsold our subsea rentals business to Ashtead Technology to create an independent provider of subsea survey and equipment rental services. In exchange, we received a 40% interest in the combined business (“Ashtead”), a cash payment of £2.7 million British Pounds and a note receivable from Ashtead of £3.0 million British Pounds. Ouraggregate 40% interest in Ashtead is accounted for as an equity method investment and reported as Investment in unconsolidated subsidiary in our condensed consolidated balance sheets. In the first quarter of 2018, we recognized a gain of $33.5 million as a result of the deconsolidation of our Forum Subsea Rentals business, which is classified as Gain on contribution of subsea rentals business in the condensed consolidated statements of comprehensive income (loss). This gain is equal to the summajority owners of theAshtead. Total consideration received, which includes the fair value of ourfor Forum’s 40% interest in Ashtead, £2.7 million British Pounds in cash, and the settlement of a £3.0 million British Pounds note receivable from Ashtead lesswas $47.7 million. Forum received $39.3 million in cash proceeds and a new £6.9 million British Pounds note receivable with a three year maturity. In the $18.1third quarter of 2019, we recognized a gain of $1.6 million carrying valueas a result of the Forum subsea rentals assets at the time of closing. The fair value of our 40% interest in Ashtead was determined based on the present value of estimated future cash flows of the combined entity as of January 3, 2018. The difference between the fair value of our 40% interest in Ashtead of $43.8 million and the book value of the underlying net assets resulted in a basis difference, which was allocated to fixed assets, intangible assets and goodwill based on their respective fair values as of January 3, 2018. The basis difference allocated to fixed assets and intangible assets is amortized through equity earnings (loss) over the estimated life of the respective assets.this transaction. Pro forma results of operations for this transaction have not been presented because the effects were not material to the unaudited condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
5. Inventories
Our significant components of inventory at June 30, 20192020 and December 31, 2018 were as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Raw materials and parts | $ | 189,834 |
| | $ | 212,526 |
|
Work in process | 36,113 |
| | 39,494 |
|
Finished goods | 304,938 |
| | 302,590 |
|
Gross inventories | 530,885 |
| | 554,610 |
|
Inventory reserve | (61,812 | ) | | (75,587 | ) |
Inventories | $ | 469,073 |
| | $ | 479,023 |
|
6. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill from December 31, 2018 to June 30, 2019 were as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Raw materials and parts | $ | 173,725 | | | $ | 172,082 | |
Work in process | 19,427 | | | 29,972 | |
Finished goods | 253,329 | | | 278,661 | |
Gross inventories | 446,481 | | | 480,715 | |
Inventory reserve | (68,919) | | | (66,075) | |
Inventories | $ | 377,562 | | | $ | 414,640 | |
|
| | | | | | | | | | | | | | | |
| Drilling & Downhole | | Completions | | Production | | Total |
Goodwill Balance at December 31, 2018 | $ | 191,151 |
| | $ | 259,280 |
| | $ | 19,216 |
| | $ | 469,647 |
|
Purchase accounting adjustments | 427 |
| | 187 |
| | — |
| | 614 |
|
Impact of non-U.S. local currency translation | (12 | ) | | 1,110 |
| | 107 |
| | 1,205 |
|
Goodwill Balance at June 30, 2019 | $ | 191,566 |
| | $ | 260,577 |
| | $ | 19,323 |
| | $ | 471,466 |
|
We perform our annual impairment tests of goodwill as of October 1 or when there is an indication an impairment may have occurred. There were no impairments of goodwill during the three and six months ended June 30, 2019 and 2018. Accumulated impairment losses on goodwill were $535.6 million as of June 30, 2019 and December 31, 2018.
6. Intangible assetsAssets
Intangible assets consisted of the following as of June 30, 20192020 and December 31, 2018,2019, respectively (in thousands):
| | | June 30, 2019 | | June 30, 2020 | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Amortizable Intangibles | | Amortization Period (In Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Intangibles | | Amortization Period (In Years) |
Customer relationships | $ | 337,838 |
| | $ | (121,150 | ) | | $ | 216,688 |
| | 4-15 | Customer relationships | $ | 268,245 | | | $ | (109,828) | | | $ | 158,417 | | | 10-15 |
Patents and technology | 104,548 |
| | (20,624 | ) | | 83,924 |
| | 5-17 | Patents and technology | 90,504 | | | (22,827) | | | 67,677 | | | 5-19 |
Non-compete agreements | 6,261 |
| | (5,765 | ) | | 496 |
| | 3-6 | Non-compete agreements | 188 | | | (118) | | | 70 | | | 2-6 |
Trade names | 47,546 |
| | (20,385 | ) | | 27,161 |
| | 10-15 | Trade names | 42,045 | | | (21,053) | | | 20,992 | | | 7-19 |
Distributor relationships | 22,160 |
| | (18,234 | ) | | 3,926 |
| | 8-15 | Distributor relationships | 14,120 | | | (12,443) | | | 1,677 | | | 15-22 |
Trademarks | 10,319 |
| | (594 | ) | | 9,725 |
| | 15 - Indefinite | Trademarks | 5,089 | | | (933) | | | 4,156 | | | 15 |
Intangible Assets Total | $ | 528,672 |
| | $ | (186,752 | ) | | $ | 341,920 |
| | Intangible Assets Total | $ | 420,191 | | | $ | (167,202) | | | $ | 252,989 | | | |
Forum Energy Technologies, Inc. and Subsidiaries | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Intangibles | | Amortization Period (In Years) |
Customer relationships | $ | 281,052 | | | $ | (110,410) | | | $ | 170,642 | | | 10 - 15 |
Patents and technology | 92,498 | | | (20,819) | | | 71,679 | | | 5 - 19 |
Non-compete agreements | 190 | | | (100) | | | 90 | | | 2 - 6 |
Trade names | 43,284 | | | (21,015) | | | 22,269 | | | 7 - 19 |
Distributor relationships | 22,160 | | | (18,866) | | | 3,294 | | | 15 - 22 |
Trademarks | 5,089 | | | (763) | | | 4,326 | | | 15 |
Intangible Assets Total | $ | 444,273 | | | $ | (171,973) | | | $ | 272,300 | | | |
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | | | | | | | |
| December 31, 2018 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Amortizable Intangibles | | Amortization Period (In Years) |
Customer relationships | $ | 337,546 |
| | $ | (110,228 | ) | | $ | 227,318 |
| | 4-15 |
Patents and technology | 104,394 |
| | (17,148 | ) | | 87,246 |
| | 5-17 |
Non-compete agreements | 6,245 |
| | (5,600 | ) | | 645 |
| | 3-6 |
Trade names | 47,493 |
| | (18,107 | ) | | 29,386 |
| | 10-15 |
Distributor relationships | 22,160 |
| | (17,602 | ) | | 4,558 |
| | 8-15 |
Trademarks | 10,319 |
| | (424 | ) | | 9,895 |
| | 15 - Indefinite |
Intangible Assets Total | $ | 528,157 |
| | $ | (169,109 | ) | | $ | 359,048 |
| | |
Intangible
7. Impairments of Long-Lived Assets
Long-lived assets with definite lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. InDuring the second quarter 2018, we madesix months ended June 30, 2020, the decisionCOVID-19 pandemic and associated preventative actions taken around the world to exit specific products within the Subseamitigate its spread caused oil demand to deteriorate and Downhole product lines.economic activity to decrease. As a result, oil prices declined significantly during the period and created an extremely challenging market for all sub-sectors of the oil and natural gas industry. In addition, responses to the spread of COVID-19, including significant government restrictions on movement, are continuing to drive sharp declines in global economic activity.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
As a result, and in connection with the preparation of our financial statements, we determined that certain long-lived assets were impaired as their carrying values exceeded their fair values. We recognized $14.5the following impairment charges during the six months ended June 30, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Impairments of: | | Drilling & Downhole | | Completions | | Production | | Total Impairments |
Property and equipment (1) | | $ | 1,068 | | | $ | 9,608 | | | $ | 1,498 | | | $ | 12,174 | |
Intangible assets (2) | | 5,258 | | — | | — | | $ | 5,258 | |
Operating lease right of use assets (3) | | 1,284 | | 6,139 | | 1,915 | | $ | 9,338 | |
Total impairments | | $ | 7,610 | | | $ | 15,747 | | | $ | 3,413 | | | $ | 26,770 | |
(1) These charges are included in Impairments of intangible assets, property and equipment in the condensed consolidated statements of comprehensive loss.
(2) These charges are included in Impairments of intangible assets, property and equipment in the condensed consolidated statements of comprehensive loss and include primarily customer relationships, technology and distributor relationships.
(3) $8.6 million of these charges are included in Cost of sales and $0.7 million is included in Selling, general and administrative expenses in the condensed consolidated statements of comprehensive loss.
The amount of the impairment lossescharges were measured as the difference between the carrying value and the estimated fair value of the assets. The fair value was determined either through analysis of discounted future cash flows or, for certain real estate, based on certain intangible assets (primarily customer relationships)a third party's sales price estimate (classified within level 3 of the fair value hierarchy).
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
8. Debt
Notes payable and lines of credit as of June 30, 20192020 and December 31, 20182019 consisted of the following (in thousands): |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
6.25% Senior Notes due October 2021 | $ | 400,000 |
| | $ | 400,000 |
|
Unamortized debt premium | 973 |
| | 1,176 |
|
Debt issuance cost | (2,570 | ) | | (3,121 | ) |
Senior secured revolving credit facility | 79,000 |
| | 119,000 |
|
Other debt | 1,748 |
| | 1,656 |
|
Total debt | 479,151 |
| | 518,711 |
|
Less: current maturities | (1,169 | ) | | (1,167 | ) |
Long-term debt | $ | 477,982 |
| | $ | 517,544 |
|
Senior | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
6.25% Notes due October 2021 | $ | 328,144 | | | $ | 400,000 | |
Unamortized debt premium | 466 | | | 770 | |
Debt issuance cost | (2,692) | | | (3,232) | |
Senior secured revolving credit facility | 85,000 | | | — | |
Other debt | 2,844 | | | 2,041 | |
Total debt | 413,762 | | | 399,579 | |
Less: current maturities | (1,320) | | | (717) | |
Long-term debt | $ | 412,442 | | | $ | 398,862 | |
6.25%Notes Due 2021
In October 2013, we issued $300.0 million of 6.25% senior unsecured notes due 2021 at par, and in November 2013, we issued an additional $100.0 million aggregate principal amount of the notes at a price of 103.25% of par (the “Senior“2021 Notes”). The Senior2021 Notes bear interest at a rate of 6.25% per annum, payable on April 1 and October 1 of each year, and mature on October 1, 2021. The Senior2021 Notes are senior unsecured obligations, and are guaranteed on a senioran unsecured basis by our subsidiaries that guarantee the Credit Facility and rank junior to, among other indebtedness, the Credit Facility to the extent of the value of the collateral securing the Credit Facility. During the six months ended June 30, 2020, we repurchased an aggregate $71.9 million of principal amount of our 2021 Notes for $27.6 million and recognized a net gain of $43.7 million reflecting the difference in the amount paid and the net carrying value of the extinguished debt, including debt issuance costs and unamortized debt premium.
During the third quarter, we exchanged $315.5 million of the existing 2021 Notes for new 9.00% convertible secured notes due July 2025 (the “2025 Notes”). The 2025 Notes pay interest at a rate of 9.00%, of which 6.25% will be payable in cash and 2.75% will be payable at the Company's option in cash or additional notes. The 2025 Notes are secured by a first lien on substantially all of the Company’s assets, except for Credit Facility collateral, which secures the 2025 Notes on a second lien basis. A portion of the 2025 Notes equal to $150.0 million total principal amount is mandatorily convertible into common stock on a pro rata basis at a conversion price of $1.35 per share, subject, however, to the condition that the average of the daily trading prices for the common stock over the preceding 20-trading day period is at least $1.50 per share. Holders of the 2025 Notes also have optional conversion rights in the event that the Company elects to redeem the 2025 Notes in cash and at the final maturity of the new notes.
Credit Facility
On October 30, 2017,In August 2020, we amended and restatedthe Credit Facility as further discussed below. As of June 30, 2020, our credit facility (such amended and restated credit facility, the “Credit Facility”("Credit Facility") to, among other things, increaseprovides revolving credit commitments from $140.0 million toof $300.0 million (with a sublimit of up to $25.0$45.0 million available for the issuance of letters of credit for the account of the Company and certain of ourits domestic subsidiaries) (the “U.S. Line”), of which up to $30.0 million is available to certain of our Canadian subsidiaries for loans in U.S. or Canadian dollars (with a sublimit of up to $3.0 million available for the issuance of letters of credit for the account of our Canadian subsidiaries) (the “Canadian Line”). LenderLender commitments under the Credit Facility, subject to certain limitations, may be increased by an additional $100.0 million. The Credit Facility matures in July 2021, but if our outstanding Notes due October 2021 are refinanced or replaced with indebtedness maturing in or after February 2023, the final maturity of the Credit Facility will automatically extend to October 2022.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Availability under the Credit Facility is subject to a borrowing base calculated by reference to eligible accounts receivable in the U.S., Canada and certain other jurisdictions (subject to a cap) and eligible inventory in the U.S. and Canada. Such eligible accounts receivable and eligible inventory serve as collateral for the Credit Facility. Our borrowing capacity under the Credit Facility could be reduced or eliminated, depending on future fluctuations in our balances of receivables and inventory. As of June 30, 2019,2020, our total borrowing base was $299.4was $197.4 million, of which $79.0$85.0 million was drawn and $15.2$28.2 million was used for security of outstanding letters of credit, resulting in remaining availability of $205.1$84.2 million.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Borrowings under the U.S. Line bear interest at a rate equal to, at our option, either (a) the LIBOR rate or (b) a base rate determined by reference to the highest of (i) the rate of interest per annum determined from time to time by Wells Fargo as its prime rate in effect at its principal office in San Francisco, (ii) the federal funds rate plus 0.50% per annum and (iii) the one-month adjusted LIBOR plus 1.00% per annum, in each case plus an applicable margin. Borrowings under the Canadian Line bear interest at a rate equal to, at Forum Canada’s option, either (a) the CDOR rate or (b) a base rate determined by reference to the highestgreater of (i) the prime rate for Canadian dollar commercial loans made in Canada as reported from time to time by Thomson Reuters and (ii) the CDOR rate plus 1.00%, in each case plus an applicable margin. The applicable margin for LIBOR and CDOR loans will initially range from 1.75% to 2.25%, depending upon average excess availability under the Credit Facility. After the first quarter in which our total net leverage ratio is less than or equal to 4.00:1.00, the applicable margin for LIBOR and CDOR loans will range from 1.50% to 2.00%, depending upon average excess availability under the Credit Facility. The weighted average interest rate under the Credit Facility was approximately 4.48%2.30% for the six months ended June 30, 2019.2020.
The Credit Facility also provides for a commitment fee in the amount of (a) 0.375% per annum on the unused portion of commitments if average usage of the Credit Facility is greater than 50% and (b) 0.500% per annum on the unused portion of commitments if average usage of the Credit Facility is less than or equal to 50%. After the first quarter in which our total leverage ratio is less than or equal to 4.00:1.00, the commitment fees will range from 0.25% to 0.375%, depending upon average usage of the Credit Facility.
If excess availability under the Credit Facility falls below the greater of 10% of the borrowing base and $20.0 million, we will be required to maintain a fixed charge coverage ratio of at least 1.00:1.00 as of the end of each fiscal quarter until excess availability under the Credit Facility exceeds such thresholds for at least 60 consecutive days.
Concurrent with the completion of the 2021 Notes exchange, the Credit Facility was amended to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million; allow the holders of the 2025 Notes to hold a second lien on the accounts receivable and inventory assets backing the Credit Facility and a first lien on all other assets; increase the applicable margin for LIBOR and CDOR loans to 2.50% per annum and the applicable margin for base rate loans to 1.50% per annum; change the maturity date to March 31, 2021, subject to an extension to October 30, 2022 upon the occurrence of certain events; add a limit on the borrowing base so that the amount of eligible inventory included in the borrowing base is restricted to the lesser of 80% of the total borrowing base or $130 million; establish a limit on our cash balance if there are outstanding borrowings on the Credit Facility; add a cross-default to the 2025 Notes; and modify the financial covenant testing clause to require excess availability under the Credit Facility to be at least the greater of 12.5% of the borrowing base and $31.25 million.
Deferred Loan Costs
We have incurred loan costs that have been deferred and are amortized to interest expense over the term of the Senior2021 Notes and the Credit Facility. During the six months ended June 30, 2020, we wrote off $2.0 million of deferred loan costs due to the termination of previous discussions related to a potential exchange offer for our 2021 Notes.
Other Debt
Other debt consists primarily of various capital leases.
Letters of Credit and Guarantees
We execute letters of credit in the normal course of business to secure the delivery of product from specific vendors and also to guarantee our fulfillment of performance obligations relating to certain large contracts. We had $15.8$29.0 million and $13.6$24.5 million in total outstanding letters of credit as of June 30, 20192020 and December 31, 2018,2019, respectively.
8. Leases9. Income Taxes
We determine if an arrangementFor interim periods, our income tax expense or benefit is a lease at inception. Leases with an initial term of 12 months or less are not recorded in our condensed consolidated balance sheets. Leases with an initial term greater than 12 months are recognized in our condensed consolidated balance sheetscomputed based on lease classification as either operating or financing. Operating leases are included in operating lease assets, accrued liabilitiesour estimated annual effective tax rate and operating lease liabilities. Finance leases are included in propertyany discrete items that impact the interim periods. For the three months and equipment, current portion of long-term debt, and long-term debt. Some of our lease agreements include lease and non-lease components for which we have elected to not separate for all classes of underlying assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We sublease certain real estate to third parties when we have no future use for the property.
Our lease portfolio primarily consists of operating leases for certain manufacturing facilities, warehouses, service facilities, office spaces, equipment and vehicles. Operating lease Right of Use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Our leases have
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
remaining terms of 1 year to 14 years and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. The operating lease ROU assets also include any upfront lease payments made and exclude lease incentives and initial direct costs incurred. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The following table summarizes the supplemental balance sheet information related to leases as of six months endedJune 30, 2019 (in thousands, unaudited):
|
| | | | | |
| | | | As of |
| | Classification | | June 30, 2019 |
Assets | | | | |
Operating lease assets | | Operating lease assets | | 53,958 |
|
Finance lease assets | | Property and equipment, net of accumulated depreciation | | 1,045 |
|
Total lease assets | | | | 55,003 |
|
Liabilities | | | | |
Current | | | | |
Operating | | Accrued liabilities | | 13,416 |
|
Finance | | Current portion of long-term debt | | 269 |
|
Noncurrent | | | | |
Operating | | Operating lease liabilities | | 53,206 |
|
Finance | | Long-term debt, net of current portion | | 578 |
|
Total lease liabilities | | | | 67,469 |
|
The following table summarizes the components2020, we recorded a tax benefit of lease expenses$0.4 million and $14.8 million, respectively, compared to tax expense of $8.4 million and $10.1 million for the three months and six months ended June 30, 2019, (in thousands, unaudited):respectively.
On March 27, 2020, President Trump signed the U.S. Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in response to the COVID-19 pandemic. The CARES Act provides relief to corporate taxpayers by permitting a
|
| | | | | | | | | |
Lease Cost | | Classification | | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 |
Operating lease cost | | Cost of sales and Selling, general and administrative expenses | | $ | 4,072 |
| $ | 8,212 |
|
Finance lease cost | | | | | |
Amortization of leased assets | | Selling, general and administrative expenses | | 93 |
| 165 |
|
Interest on lease liabilities | | Interest expense | | 16 |
| 32 |
|
Sublease income | | Cost of sales and Selling, general and administrative expenses | | (357 | ) | (566 | ) |
Net lease cost | | | | $ | 3,824 |
| $ | 7,843 |
|
14
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
five-year carryback of 2018-2020 NOLs, increasing the 30% limitation on interest expense deductibility to 50% of adjusted taxable income for 2019 and 2020, and accelerating refunds for minimum tax credit carryforwards, among other provisions. The maturitiestax effects of lease liabilities as of June 30, 2019changes in tax laws are as follows (in thousands, unaudited): |
| | | | | | | | | | | | |
| | Operating Leases | | Finance Leases | | Total |
Remainder of 2019 | | $ | 8,974 |
| | $ | 73 |
| | $ | 9,047 |
|
2020 | | 15,931 |
| | 365 |
| | 16,296 |
|
2021 | | 13,561 |
| | 365 |
| | 13,926 |
|
2022 | | 10,473 |
| | 67 |
| | 10,540 |
|
2023 | | 7,407 |
| | 17 |
| | 7,424 |
|
2024 | | 6,237 |
| | 10 |
| | 6,247 |
|
Thereafter | | 25,218 |
| | 1 |
| | 25,219 |
|
Total lease payments | | 87,801 |
| | 898 |
| | 88,699 |
|
Less: present value discount | | (21,179 | ) | | (51 | ) | | (21,230 | ) |
Present value of lease liabilities | | $ | 66,622 |
| | $ | 847 |
| | $ | 67,469 |
|
The following table summarizesrecognized in the weighted-average remaining lease term and weighted average discount rates related to leases as of June 30, 2019:
|
| | | |
Lease Term and Discount Rate | | June 30, 2019 |
Weighted-average remaining lease term (years) | | |
Operating leases | | 8.0 years |
|
Financing leases | | 3.0 years |
|
Weighted-average discount rate | | |
Operating leases | | 6.58 | % |
Financing leases | | 6.58 | % |
The following table summarizesperiod in which the supplemental cash flow information related to leases as of June 30, 2019:
|
| | | | |
| | Six Months Ended June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | | $ | 9,050 |
|
Operating cash flows from finance leases | | 32 |
|
Financing cash flows from finance leases | | 1,083 |
|
Noncash activities from right-of-use assets obtained in exchange for lease obligations: | | |
Operating leases | | $ | 8,798 |
|
Finance leases | | 525 |
|
Noncash activities from adoption of ASC 842 as of January 1, 2019 | | |
Prepaid expenses and other current assets | | $ | (884 | ) |
Operating lease assets | | 54,069 |
|
Operating lease liabilities | | 64,506 |
|
Accrued liabilities | | (11,321 | ) |
9. Income Taxes
Forlaw is enacted. As such, the three and six months ended June 30, 2019, we recorded a tax expense of $8.4 million and $10.1 million, respectively, including $5.9 million of tax expense to increase our valuation allowance as discussed further below. For
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
the three and six months ended June 30, 2018, we recorded a tax expense of $1.6 million and a tax benefit of $11.3 million, respectively.
For interim periods, our income tax expense or benefit is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods. The estimated annual effective tax rate for the six months ended June 30, 2020 includes a $16.6 million benefit related to a carryback claim for U.S. federal tax losses based on new provisions in the CARES Act. These losses had previously been offset by a valuation allowance. The provisions in the CARES Act enable the company to now realize these losses and the related valuation allowance has been released.
The estimated annual effective tax rates for the six months ended June 30, 2020 and 2019 is different than the comparable period in 2018 primarily due towere impacted by losses in jurisdictions where the recording of a tax benefit is not available. For the three and six months ended June 30, 2019, tax expense includes an increase in our valuation allowance of $5.9 million to write down our deferred tax assets in the U.S. and Saudi Arabia to what, in our judgment, is more likely than not realizable. In addition, incomeFurthermore, the tax benefit for the six months ended June 30, 2018 includes a $15.9 million tax benefit related to an adjustment of the provisional tax impact of U.S. tax reform as discussed further below. The tax benefitexpense or expensebenefit recorded can vary from period to period depending on the Company’sCompany's relative mix of U.S. and non-U.S. earnings and losses by jurisdiction.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017, a comprehensive U.S. tax reform package that, effective January 1, 2018, among other things, lowered the corporate income tax rate from 35% to 21% and moved the country towards a territorial tax system with a one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries. The effects of U.S. tax reform on us include two major categories: (i) recognition of liabilities for taxes on mandatory deemed repatriation and (ii) re-measurement of deferred taxes.
During 2018, we completed our analysis of the impact of U.S. tax reform based on further guidance provided on the new tax law by the U.S. Treasury Department and Internal Revenue Service. We finalized our accounting for the effects of U.S. tax reform during 2018 based on the additional guidance issued and recognized an income tax benefit of $15.6 million for the year ended December 31, 2018, including the $15.9 million provisional tax benefit recorded for the six months ended June 30, 2018.
We have deferred tax assets related to net operating loss carryforwards in the U.S. and in certain states and foreign jurisdictions. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, including the effect of U.S. tax reform, tax-planning and recent operating results. As of June 30, 2019,2020, we do not anticipate being able to fully utilize all of the losses prior to their expiration in the following jurisdictions: the U.S., the U.K., Germany, Singapore, Saudi Arabia and Singapore.China. As a result, we have certain valuation allowances against our deferred tax assets as of June 30, 2019.2020.
10. Fair Value Measurements
At June 30, 2019 and December 31, 2018, theThe Company had $79.0$85.0 million and $119.0 million, respectively, of debt0 borrowings outstanding under the Credit Facility whichat June 30, 2020 and December 31, 2019, respectively. The Credit Facility incurs interest at a variable interest rate, and therefore, the carrying amount approximates fair value. The fair value of the debt is classified as a Level 2 measurement because interest rates charged are similar to other financial instruments with similar terms and maturities.
The fair value of our Senior2021 Notes is estimated using Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At June 30, 2020, the fair value and the carrying value of our 2021 Notes approximated $137.1 million and $325.9 million, respectively. At December 31, 2019, the fair value and the carrying value of our Senior2021 Notes approximated $369.5$354.0 million and $398.4 million, respectively. At December 31, 2018, the fair value and the carrying value of our Senior Notes approximated $362.0 million and $398.1$397.5 million, respectively.
There were no other outstanding financial assets as of June 30, 20192020 and December 31, 20182019 that required measuring the amounts at fair value. We did not change our valuation techniques associated with recurring fair value measurements from prior periods, and there were no transfers between levels of the fair value hierarchy during the six months ended June 30, 2019.2020.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
11. Business Segments
In the first quarter 2019, we changed our reporting segments in order to align with business activity drivers and the manner in which management reviews and evaluates operating performance. Forum now operatesThe Company reports results of operations in the following three reporting segments: Drilling & Downhole, Completions and Production. This move better aligns with the key phases of the well cycle and provides improved operating efficiencies. Historically, we operated in three business segments: Drilling & Subsea, Completions, and Production & Infrastructure. We have moved the Downhole product line from Completions to Drilling & Subsea to form the new Drilling & Downhole segment. Completions retains the Stimulation & Intervention and Coiled Tubing product lines. Finally, we renamed Production & Infrastructure as the Production segment. Our historical results of operations have been recast to retrospectively reflect these changes in accordance with generally accepted accounting principles.
The Drilling & Downhole segment designs and manufactures products and provides related services to the drilling, well construction, artificial lift and subsea energy construction and services markets as well as other markets such as alternative energy, defense and communications. The Completions segment designs, manufactures and supplies products and provides related services to the completion, stimulation and intervention markets. The Production segment designs, manufactures and supplies products, and provides related equipment and services for production and infrastructure markets.
The Company’s reportable segments are strategic units that offer distinct products and services. They are managed separately since each business segment requires different marketing strategies. Operating segments have not been aggregated as part of a reportable segment. The Company evaluates the performance of its reportable segments based on operating income. This segmentation is representative of the manner in which our Chief Operating Decision Maker and our board of directors view the business. We consider the Chief Operating Decision Maker to be the Chief Executive Officer.
The amounts indicated below as “Corporate” relate to costs and assets not allocated to the reportable segments. Summary financial data by segment follows (in thousands):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenue: | | | | | | | | Revenue: | | | | | | | |
Drilling & Downhole | $ | 82,352 |
| | $ | 86,476 |
| | $ | 168,292 |
| | $ | 163,340 |
| Drilling & Downhole | $ | 47,183 | | | $ | 82,352 | | | 123,826 | | | 168,292 | |
Completions | 81,520 |
| | 100,049 |
| | 176,179 |
| | 188,103 |
| Completions | 17,583 | | | 81,520 | | | 68,406 | | | 176,179 | |
Production | 83,255 |
| | 88,599 |
| | 175,250 |
| | 175,020 |
| Production | 48,597 | | | 83,255 | | | 104,202 | | | 175,250 | |
Eliminations | (1,479 | ) | | (1,121 | ) | | (2,231 | ) | | (2,229 | ) | Eliminations | (88) | | | (1,479) | | | (527) | | | (2,231) | |
Total revenue | $ | 245,648 |
| | $ | 274,003 |
| | $ | 517,490 |
| | $ | 524,234 |
| Total revenue | $ | 113,275 | | | $ | 245,648 | | | $ | 295,907 | | | $ | 517,490 | |
| | | | | | | | | | | | | | | |
Operating income (loss) | | | | | | | | Operating income (loss) | |
Drilling & Downhole | $ | 1,342 |
| | $ | (7,520 | ) | | $ | (1,157 | ) | | $ | (17,830 | ) | Drilling & Downhole | $ | (9,399) | | | $ | 1,342 | | | $ | (13,544) | | | $ | (1,157) | |
Completions | 2,841 |
| | 14,190 |
| | 9,692 |
| | 23,151 |
| Completions | (17,813) | | | 2,841 | | | (35,131) | | | 9,692 | |
Production | 3,589 |
| | 3,704 |
| | 7,924 |
| | 7,866 |
| Production | (1,057) | | | 3,589 | | | (9,236) | | | 7,924 | |
Corporate | (6,895 | ) | | (8,843 | ) | | (15,301 | ) | | (17,423 | ) | Corporate | (7,191) | | | (6,895) | | | (15,620) | | | (15,301) | |
Segment operating income (loss) | 877 |
| | 1,531 |
| | 1,158 |
| | (4,236 | ) | Segment operating income (loss) | (35,460) | | | 877 | | | (73,531) | | | 1,158 | |
Transaction expenses | 125 |
| | 59 |
| | 718 |
| | 1,395 |
| Transaction expenses | 150 | | | 125 | | | 187 | | | 718 | |
Intangible asset impairments | — |
| | 14,477 |
| | — |
| | 14,477 |
| |
Impairments of intangible assets, property and equipment | | Impairments of intangible assets, property and equipment | 112 | | | — | | | 17,432 | | | — | |
Contingent consideration benefit | — |
| | — |
| | (4,629 | ) | | — |
| Contingent consideration benefit | — | | | — | | | — | | | (4,629) | |
Loss (gain) on disposal of assets and other | 16 |
| | (1,303 | ) | | 36 |
| | (1,700 | ) | Loss (gain) on disposal of assets and other | (700) | | | 16 | | | (721) | | | 36 | |
Operating income (loss) | $ | 736 |
| | $ | (11,702 | ) | | $ | 5,033 |
| | $ | (18,408 | ) | Operating income (loss) | $ | (35,022) | | | $ | 736 | | | $ | (90,429) | | | $ | 5,033 | |
A summary of consolidated assets by reportable segment is as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Drilling & Downhole | $ | 351,412 | | | $ | 407,779 | |
Completions | 425,128 | | | 496,714 | |
Production | 151,914 | | | 186,786 | |
Corporate | 138,404 | | | 68,718 | |
Total assets | $ | 1,066,858 | | | $ | 1,159,997 | |
Corporate assets primarily include cash, certain prepaid assets and deferred loan costs.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Drilling & Downhole | $ | 670,333 |
| | $ | 663,414 |
|
Completions | 848,010 |
| | 872,731 |
|
Production | 247,030 |
| | 243,354 |
|
Corporate | 56,338 |
| | 50,153 |
|
Total assets | $ | 1,821,711 |
| | $ | 1,829,652 |
|
Corporate assets include, among other items, cash, prepaid assets and deferred financing costs.
The following table presents our revenues disaggregated by product line (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Drilling Technologies | $ | 37,311 |
| | $ | 46,393 |
| | $ | 79,237 |
| | $ | 89,150 |
|
Downhole Technologies | 28,785 |
| | 26,571 |
| | 59,210 |
| | 51,098 |
|
Subsea Technologies | 16,256 |
| | 13,512 |
| | 29,845 |
| | 23,092 |
|
Stimulation and Intervention | 46,898 |
| | 60,526 |
| | 98,209 |
| | 111,586 |
|
Coiled Tubing | 34,622 |
| | 39,523 |
| | 77,970 |
| | 76,517 |
|
Production Equipment | 33,009 |
| | 35,269 |
| | 69,577 |
| | 66,725 |
|
Valve Solutions | 50,246 |
| | 53,330 |
| | 105,673 |
| | 108,295 |
|
Eliminations | (1,479 | ) | | (1,121 | ) | | (2,231 | ) | | (2,229 | ) |
Total revenue | $ | 245,648 |
| | $ | 274,003 |
| | $ | 517,490 |
| | $ | 524,234 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Drilling Technologies | $ | 19,971 | | | $ | 37,311 | | | $ | 56,609 | | | $ | 79,237 | |
Downhole Technologies | 12,673 | | | 28,785 | | | 37,624 | | | 59,210 | |
Subsea Technologies | 14,539 | | | 16,256 | | | 29,593 | | | 29,845 | |
Stimulation and Intervention | 8,520 | | | 46,898 | | | 32,996 | | | 98,209 | |
Coiled Tubing | 9,063 | | | 34,622 | | | 35,410 | | | 77,970 | |
Production Equipment | 19,430 | | | 33,009 | | | 38,179 | | | 69,577 | |
Valve Solutions | 29,167 | | | 50,246 | | | 66,023 | | | 105,673 | |
Eliminations | (88) | | | (1,479) | | | (527) | | | (2,231) | |
Total revenue | $ | 113,275 | | | $ | 245,648 | | | $ | 295,907 | | | $ | 517,490 | |
The following table presents our revenues disaggregated by geography (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
United States | $ | 70,296 | | | $ | 183,700 | | | $ | 194,186 | | | $ | 380,667 | |
Canada | 11,599 | | | 13,754 | | | 19,551 | | | 30,217 | |
Europe & Africa | 8,458 | | | 17,815 | | | 19,604 | | | 35,412 | |
Middle East | 10,007 | | | 12,460 | | | 23,147 | | | 31,745 | |
Asia-Pacific | 4,030 | | | 11,459 | | | 22,823 | | | 26,218 | |
Latin America | 8,885 | | | 6,460 | | | 16,596 | | | 13,231 | |
Total Revenue | $ | 113,275 | | | $ | 245,648 | | | $ | 295,907 | | | $ | 517,490 | |
|
| | | | | | | | | | | | | | |
| Three months ended June 30, | Six Months Ended June 30, |
| 2019 | | 2018 | 2019 | | 2018 |
United States | $ | 183,700 |
| | $ | 203,966 |
| $ | 380,667 |
| | $ | 394,030 |
|
Canada | 13,754 |
| | 16,511 |
| 30,217 |
| | 35,705 |
|
Europe & Africa | 17,815 |
| | 17,237 |
| 35,412 |
| | 31,127 |
|
Middle East | 12,460 |
| | 16,388 |
| 31,745 |
| | 26,958 |
|
Asia-Pacific | 11,459 |
| | 14,087 |
| 26,218 |
| | 22,937 |
|
Latin America | 6,460 |
| | 5,814 |
| 13,231 |
| | 13,477 |
|
Total Revenue | $ | 245,648 |
| | $ | 274,003 |
| $ | 517,490 |
| | $ | 524,234 |
|
12. Commitments and Contingencies
In the ordinary course of business, the Company is, and in the future could be, involved in various pending or threatened legal actions that may or may not be covered by insurance. Management has reviewed such pending judicial and legal proceedings and the availability and limits of insurance coverage, and has established reserves that are believed to be appropriate in light of those outcomes that are considered to be probable and can be reasonably estimated. The reserves accrued at June 30, 20192020 and December 31, 2018,2019, respectively, are immaterial. It is management’s opinion that the Company’s ultimate liability, if any, with respect to these actions is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
13. Earnings Per Share
The calculation of basic and diluted earnings per share for each period presented was as follows (dollars and shares in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income (loss) | $ | (13,734 | ) | | $ | (15,349 | ) | | $ | (21,622 | ) | | $ | 12,717 |
|
| | | | | | | |
Basic - weighted average shares outstanding | 109,987 |
| | 108,714 |
| | 109,816 |
| | 108,569 |
|
Dilutive effect of stock options and restricted stock | — |
| | — |
| | — |
| | 2,252 |
|
Diluted - weighted average shares outstanding | 109,987 |
| | 108,714 |
| | 109,816 |
| | 110,821 |
|
| | | | | | | |
Earnings (loss) per share | | | | | | | |
Basic | $ | (0.12 | ) | | $ | (0.14 | ) | | $ | (0.20 | ) | | $ | 0.12 |
|
Diluted | $ | (0.12 | ) | | $ | (0.14 | ) | | $ | (0.20 | ) | | $ | 0.11 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net loss | $ | (5,494) | | | $ | (13,734) | | | (42,638) | | | (21,622) | |
| | | | | | | |
Basic - weighted average shares outstanding | 111,590 | | | 109,987 | | | 111,381 | | | 109,816 | |
Dilutive effect of stock options and restricted stock | — | | | — | | | — | | | — | |
Diluted - weighted average shares outstanding | 111,590 | | | 109,987 | | | 111,381 | | | 109,816 | |
| | | | | | | |
Loss per share | | | | | | | |
Basic | $ | (0.05) | | | $ | (0.12) | | | $ | (0.38) | | | $ | (0.20) | |
Diluted | $ | (0.05) | | | $ | (0.12) | | | $ | (0.38) | | | $ | (0.20) | |
The calculation of diluted earnings per share excludes approximately 3.5 million shares that were anti-dilutive for the six months ended June 30, 2018. The calculation of diluted loss per share excludes all potentially dilutive shares for the three months ended June 30, 2018, and three and six months ended June 30, 2020 and 2019 becauseas there was awere net losslosses for these periods.
14. Stockholders' Equity
Stock-based compensation
During the six months ended June 30, 2019,2020, the Company granted 1,362,6212,250,360 shares of restricted stock and restricted stock units and 390,896 performance share awards with a market condition.
The 1,362,621 shares of restricted stock and restricted stock units include 1,128,173 shares granted to employees that vest ratably over 3 years and 234,448years.
During the six months ended June 30, 2020, the Company granted performance awards with a market condition that are payable in either cash or shares granted to non-employee members of the Board of Directors that have a vesting period of 12 months.
Company's common stock. The performance share awards granted may settle for between zero0 and two shares of3 times the Company’s common stock.award's cash target amount. The number of sharesaward amount issued pursuant to the performance share award agreements will be determined based on the total shareholder return of the Company’s common stock as compared to a group of peer companies. The performance share awards granted in February 2019 arecompanies measured over a three year performance period. As our intention is to settle the awards in cash, we will account for these as liability classified awards. As such, compensation expense will be recognized over the requisite three-year service period with subsequent changes in the estimated fair value of the award recognized as a cumulative adjustment to compensation cost in the period in which the change in estimate occurs.
15. Related Party Transactions
The Company has sold and purchased equipment and services to and from certain affiliates of our directors. The dollar amounts related to these related party activities are not material to the Company’s unaudited condensed consolidated financial statements.
Forum Energy Technologies, Inc. and Subsidiaries18
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
16. Condensed Consolidating Financial Statements
The Senior Notes are guaranteed by our domestic subsidiaries which are 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional, joint and several, and on an unsecured basis.
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating statements of comprehensive income (loss) |
| | | | | | | | | | |
| | Three Months Ended June 30, 2019 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Revenue | | $ | — |
| | $ | 205,953 |
| | $ | 49,964 |
| | $ | (10,269 | ) | | $ | 245,648 |
|
Cost of sales | | — |
| | 157,317 |
| | 35,780 |
| | (10,637 | ) | | 182,460 |
|
Gross Profit | | — |
| | 48,636 |
| | 14,184 |
| | 368 |
| | 63,188 |
|
Operating Expenses | | | | | | | | | | |
Selling, general and administrative expenses | | — |
| | 52,148 |
| | 10,733 |
| | — |
| | 62,881 |
|
Transaction Expenses | | — |
| | 175 |
| | (50 | ) | | — |
| | 125 |
|
Loss (gain) on disposal of assets and other | | — |
| | 81 |
| | (65 | ) | | — |
| | 16 |
|
Total operating expenses | | — |
| | 52,404 |
| | 10,618 |
| | — |
| | 63,022 |
|
Earnings from equity investment | | — |
| | 107 |
| | 463 |
| | — |
| | 570 |
|
Equity earnings (loss) from affiliate, net of tax | | (5,386 | ) | | 4,187 |
| | — |
| | 1,199 |
| | — |
|
Operating income (loss) | | (5,386 | ) | | 526 |
| | 4,029 |
| | 1,567 |
| | 736 |
|
Other expense (income) | | | | | | | | | | |
Interest expense (income) | | 8,348 |
| | (70 | ) | | (55 | ) | | — |
| | 8,223 |
|
Foreign exchange and other gains, net | | — |
| | (123 | ) | | (2,023 | ) | | — |
| | (2,146 | ) |
Total other (income) expense, net | | 8,348 |
| | (193 | ) | | (2,078 | ) | | — |
| | 6,077 |
|
Income (loss) before income taxes | | (13,734 | ) | | 719 |
| | 6,107 |
| | 1,567 |
| | (5,341 | ) |
Income tax expense | | — |
| | 6,105 |
| | 2,288 |
| | — |
| | 8,393 |
|
Net income (loss) | | (13,734 | ) | | (5,386 | ) | | 3,819 |
| | 1,567 |
| | (13,734 | ) |
| | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Net income (loss) | | (13,734 | ) | | (5,386 | ) | | 3,819 |
| | 1,567 |
| | (13,734 | ) |
Change in foreign currency translation, net of tax of $0 | | (1,407 | ) | | (1,407 | ) | | (1,407 | ) | | 2,814 |
| | (1,407 | ) |
Gain on pension liability | | 5 |
| | 5 |
| | 5 |
| | (10 | ) | | 5 |
|
Comprehensive income (loss) | | $ | (15,136 | ) | | $ | (6,788 | ) | | $ | 2,417 |
| | $ | 4,371 |
| | $ | (15,136 | ) |
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating statements of comprehensive loss |
| | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | |
Revenue | | $ | — |
| | $ | 241,127 |
| | $ | 47,987 |
| | $ | (15,111 | ) | | $ | 274,003 |
|
Cost of sales | | — |
| | 177,090 |
| | 39,801 |
| | (15,557 | ) | | 201,334 |
|
Gross Profit | | — |
| | 64,037 |
| | 8,186 |
| | 446 |
| | 72,669 |
|
Operating Expenses | | | | | | | | | | |
Selling, general and administrative expenses | | — |
| | 58,739 |
| | 12,749 |
| | — |
| | 71,488 |
|
Transaction Expenses | | — |
| | 59 |
| | — |
| | — |
| | 59 |
|
Goodwill and intangible asset impairments | | — |
| | — |
| | 14,477 |
| | — |
| | 14,477 |
|
Loss (gain) on disposal of assets and other | | — |
| | (1,703 | ) | | 400 |
| | — |
| | (1,303 | ) |
Total operating expenses | | — |
| | 57,095 |
| | 27,626 |
| | — |
| | 84,721 |
|
Earnings from equity investment | | — |
| | 15 |
| | 335 |
| | — |
| | 350 |
|
Equity loss from affiliate, net of tax | | (9,072 | ) | | (18,300 | ) | | — |
| | 27,372 |
| | — |
|
Operating loss | | (9,072 | ) | | (11,343 | ) | | (19,105 | ) | | 27,818 |
| | (11,702 | ) |
Other expense (income) | | | | | | | | | | |
Interest expense (income) | | 7,946 |
| | 31 |
| | (116 | ) | | — |
| | 7,861 |
|
Foreign exchange and other gains, net | | — |
| | (109 | ) | | (5,751 | ) | | — |
| | (5,860 | ) |
Total other expense (income), net | | 7,946 |
| | (78 | ) | | (5,867 | ) | | — |
| | 2,001 |
|
Loss before income taxes | | (17,018 | ) | | (11,265 | ) | | (13,238 | ) | | 27,818 |
| | (13,703 | ) |
Income tax expense (benefit) | | (1,669 | ) | | (2,193 | ) | | 5,508 |
| | — |
| | 1,646 |
|
Net loss | | (15,349 | ) | | (9,072 | ) | | (18,746 | ) | | 27,818 |
| | (15,349 | ) |
| | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Net loss | | (15,349 | ) | | (9,072 | ) | | (18,746 | ) | | 27,818 |
| | (15,349 | ) |
Change in foreign currency translation, net of tax of $0 | | (18,635 | ) | | (18,635 | ) | | (18,635 | ) | | 37,270 |
| | (18,635 | ) |
Gain on pension liability | | 55 |
| | 55 |
| | 55 |
| | (110 | ) | | 55 |
|
Comprehensive loss | | $ | (33,929 | ) | | $ | (27,652 | ) | | $ | (37,326 | ) | | $ | 64,978 |
| | $ | (33,929 | ) |
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating statements of comprehensive income (loss) |
| | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Revenue | | $ | — |
| | $ | 442,759 |
| | $ | 100,177 |
| | $ | (25,446 | ) | | $ | 517,490 |
|
Cost of sales | | — |
| | 333,171 |
| | 75,873 |
| | (24,840 | ) | | 384,204 |
|
Gross Profit | | — |
| | 109,588 |
| | 24,304 |
| | (606 | ) | | 133,286 |
|
Operating Expenses | | | | | | | | | | |
Selling, general and administrative expenses | | — |
| | 109,558 |
| | 22,291 |
| | — |
| | 131,849 |
|
Transaction Expenses | | — |
| | 718 |
| | — |
| | — |
| | 718 |
|
Contingent consideration benefit | | — |
| | (4,629 | ) | | — |
| | — |
| | (4,629 | ) |
Loss (gain) on disposal of assets and other | | — |
| | 159 |
| | (123 | ) | | — |
| | 36 |
|
Total operating expenses | | — |
| | 105,806 |
| | 22,168 |
| | — |
| | 127,974 |
|
Earnings (loss) from equity investment | | — |
| | (364 | ) | | 85 |
| | — |
| | (279 | ) |
Equity loss from affiliate, net of tax | | (5,028 | ) | | (2,421 | ) | | — |
| | 7,449 |
| | — |
|
Operating income (loss) | | (5,028 | ) | | 997 |
| | 2,221 |
| | 6,843 |
| | 5,033 |
|
Other expense (income) | | | | | | | | | | |
Interest expense (income) | | 16,594 |
| | (81 | ) | | (109 | ) | | — |
| | 16,404 |
|
Foreign exchange and other losses (gains), net | | — |
| | (51 | ) | | 182 |
| | — |
| | 131 |
|
Total other (income) expense, net | | 16,594 |
| | (132 | ) | | 73 |
| | — |
| | 16,535 |
|
Income (loss) before income taxes | | (21,622 | ) | | 1,129 |
| | 2,148 |
| | 6,843 |
| | (11,502 | ) |
Income tax expense | | — |
| | 6,157 |
| | 3,963 |
| | — |
| | 10,120 |
|
Net loss | | (21,622 | ) | | (5,028 | ) | | (1,815 | ) | | 6,843 |
| | (21,622 | ) |
| | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Net loss | | (21,622 | ) | | (5,028 | ) | | (1,815 | ) | | 6,843 |
| | (21,622 | ) |
Change in foreign currency translation, net of tax of $0 | | 3,427 |
| | 3,427 |
| | 3,427 |
| | (6,854 | ) | | 3,427 |
|
Loss on pension liability | | (4 | ) | | (4 | ) | | (4 | ) | | 8 |
| | (4 | ) |
Comprehensive income (loss) | | $ | (18,199 | ) | | $ | (1,605 | ) | | $ | 1,608 |
| | $ | (3 | ) | | $ | (18,199 | ) |
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating statements of comprehensive income (loss) |
| | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Revenue | | $ | — |
| | $ | 460,076 |
| | $ | 91,740 |
| | $ | (27,582 | ) | | $ | 524,234 |
|
Cost of sales | | — |
| | 336,395 |
| | 75,699 |
| | (27,816 | ) | | 384,278 |
|
Gross Profit | | — |
| | 123,681 |
| | 16,041 |
| | 234 |
| | 139,956 |
|
Operating Expenses | | | | | | | | | | |
Selling, general and administrative expenses | | — |
| | 118,812 |
| | 24,767 |
| | — |
| | 143,579 |
|
Transaction Expenses | | — |
| | 1,388 |
| | 7 |
| | — |
| | 1,395 |
|
Goodwill and intangible asset impairments | | — |
| | — |
| | 14,477 |
| | — |
| | 14,477 |
|
Loss (gain) on disposal of assets and other | | — |
| | (2,334 | ) | | 634 |
| | — |
| | (1,700 | ) |
Total operating expenses | | — |
| | 117,866 |
| | 39,885 |
| | — |
| | 157,751 |
|
Earnings (loss) from equity investment | | — |
| | 5 |
| | (618 | ) | | — |
| | (613 | ) |
Equity earnings from affiliate, net of tax | | 25,249 |
| | 10,007 |
| | — |
| | (35,256 | ) | | — |
|
Operating income (loss) | | 25,249 |
| | 15,827 |
| | (24,462 | ) | | (35,022 | ) | | (18,408 | ) |
Other expense (income) | | | | | | | | | | |
Interest expense (income) | | 15,864 |
| | 374 |
| | (290 | ) | | — |
| | 15,948 |
|
Foreign exchange and other gains, net | | — |
| | (109 | ) | | (2,200 | ) | | — |
| | (2,309 | ) |
(Gain) loss on contribution of subsea rentals business | | — |
| | 5,856 |
| | (39,362 | ) | | — |
| | (33,506 | ) |
Total other (income) expense, net | | 15,864 |
| | 6,121 |
| | (41,852 | ) | | — |
| | (19,867 | ) |
Income before taxes | | 9,385 |
| | 9,706 |
| | 17,390 |
| | (35,022 | ) | | 1,459 |
|
Income tax expense (benefit) | | (3,332 | ) | | (15,543 | ) | | 7,617 |
| | — |
| | (11,258 | ) |
Net income | | 12,717 |
| | 25,249 |
| | 9,773 |
| | (35,022 | ) | | 12,717 |
|
| | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Net income | | 12,717 |
| | 25,249 |
| | 9,773 |
| | (35,022 | ) | | 12,717 |
|
Change in foreign currency translation, net of tax of $0 | | (12,348 | ) | | (12,348 | ) | | (12,348 | ) | | 24,696 |
| | (12,348 | ) |
Gain on pension liability | | 71 |
| | 71 |
| | 71 |
| | (142 | ) | | 71 |
|
Comprehensive income (loss) | | $ | 440 |
| | $ | 12,972 |
| | $ | (2,504 | ) | | $ | (10,468 | ) | | $ | 440 |
|
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating balance sheets |
| | | | | | | | | | |
| | June 30, 2019 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Assets | | | | | | | | | | |
Current assets | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 20,277 |
| | $ | 17,088 |
| | $ | — |
| | $ | 37,365 |
|
Accounts receivable—trade, net | | — |
| | 148,730 |
| | 31,883 |
| | — |
| | 180,613 |
|
Inventories, net | | — |
| | 396,518 |
| | 80,253 |
| | (7,698 | ) | | 469,073 |
|
Prepaid expenses and other current assets | | — |
| | 30,230 |
| | 1,290 |
| | — |
| | 31,520 |
|
Accrued revenue | | — |
| | 376 |
| | 497 |
| | — |
| | 873 |
|
Costs and estimated profits in excess of billings | | — |
| | 4,037 |
| | 4,401 |
| | — |
| | 8,438 |
|
Total current assets | | — |
| | 600,168 |
| | 135,412 |
| | (7,698 | ) | | 727,882 |
|
Property and equipment, net of accumulated depreciation | | — |
| | 151,462 |
| | 20,084 |
| | — |
| | 171,546 |
|
Operating lease assets | | — |
| | 33,973 |
| | 19,985 |
| | — |
| | 53,958 |
|
Deferred financing costs, net | | 1,657 |
| | — |
| | — |
| | — |
| | 1,657 |
|
Intangible assets | | — |
| | 304,866 |
| | 37,054 |
| | — |
| | 341,920 |
|
Goodwill | | — |
| | 434,029 |
| | 37,437 |
| | — |
| | 471,466 |
|
Investment in unconsolidated subsidiary | | — |
| | 858 |
| | 43,679 |
| | — |
| | 44,537 |
|
Deferred income taxes, net | | — |
| | — |
| | — |
| | — |
| | — |
|
Other long-term assets | | — |
| | 4,331 |
| | 4,414 |
| | — |
| | 8,745 |
|
Investment in affiliates | | 876,161 |
| | 266,720 |
| | — |
| | (1,142,881 | ) | | — |
|
Long-term advances to affiliates | | 626,446 |
| | — |
| | 97,481 |
| | (723,927 | ) | | — |
|
Total assets | | $ | 1,504,264 |
| | $ | 1,796,407 |
| | $ | 395,546 |
| | $ | (1,874,506 | ) | | $ | 1,821,711 |
|
Liabilities and equity | | | | | | | | | | |
Current liabilities | | | | | | | | | | |
Current portion of long-term debt | | $ | — |
| | $ | 1,143 |
| | $ | 26 |
| | $ | — |
| | $ | 1,169 |
|
Accounts payable—trade | | — |
| | 110,500 |
| | 27,319 |
| | — |
| | 137,819 |
|
Accrued liabilities | | 6,650 |
| | 30,554 |
| | 37,774 |
| | — |
| | 74,978 |
|
Deferred revenue | | — |
| | 2,651 |
| | 5,395 |
| | — |
| | 8,046 |
|
Billings in excess of costs and profits recognized | | — |
| | 1,567 |
| | 717 |
| | — |
| | 2,284 |
|
Total current liabilities | | 6,650 |
| | 146,415 |
| | 71,231 |
| | — |
| | 224,296 |
|
Long-term debt, net of current portion | | 477,403 |
| | 525 |
| | 54 |
| | — |
| | 477,982 |
|
Deferred income taxes, net | | — |
| | 4,632 |
| | 15,480 |
| | — |
| | 20,112 |
|
Operating lease liabilities | | — |
| | 32,255 |
| | 20,951 |
| | — |
| | 53,206 |
|
Other long-term liabilities | | — |
| | 12,492 |
| | 13,412 |
| | — |
| | 25,904 |
|
Long-term payables to affiliates | | — |
| | 723,927 |
| | — |
| | (723,927 | ) | | — |
|
Total liabilities | | 484,053 |
| | 920,246 |
| | 121,128 |
| | (723,927 | ) | | 801,500 |
|
| | | | | | | | | | |
Total equity | | 1,020,211 |
| | 876,161 |
| | 274,418 |
| | (1,150,579 | ) | | 1,020,211 |
|
Total liabilities and equity | | $ | 1,504,264 |
| | $ | 1,796,407 |
| | $ | 395,546 |
| | $ | (1,874,506 | ) | | $ | 1,821,711 |
|
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating balance sheets |
| | | | | | | | | | |
| | December 31, 2018 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | | | | | (in thousands) | | | | |
Assets | | | | | | | | | | |
Current assets | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 24,977 |
| | $ | 22,264 |
| | $ | — |
| | $ | 47,241 |
|
Accounts receivable—trade, net | | — |
| | 177,986 |
| | 28,069 |
| | — |
| | 206,055 |
|
Inventories, net | | — |
| | 416,237 |
| | 69,878 |
| | (7,092 | ) | | 479,023 |
|
Prepaid expenses and other current assets | | — |
| | 23,585 |
| | 92 |
| | — |
| | 23,677 |
|
Accrued revenue | | — |
| | — |
| | 862 |
| | — |
| | 862 |
|
Costs and estimated profits in excess of billings | | — |
| | 6,202 |
| | 2,957 |
| | — |
| | 9,159 |
|
Total current assets | | — |
| | 648,987 |
| | 124,122 |
| | (7,092 | ) | | 766,017 |
|
Property and equipment, net of accumulated depreciation | | — |
| | 156,434 |
| | 20,924 |
| | — |
| | 177,358 |
|
Deferred financing costs, net | | 2,071 |
| | — |
| | — |
| | — |
| | 2,071 |
|
Intangible assets | | — |
| | 320,056 |
| | 38,992 |
| | — |
| | 359,048 |
|
Goodwill | | — |
| | 433,415 |
| | 36,232 |
| | — |
| | 469,647 |
|
Investment in unconsolidated subsidiary | | — |
| | 1,222 |
| | 43,760 |
| | | | 44,982 |
|
Deferred income taxes, net | | — |
| | 1,170 |
| | 64 |
| | — |
| | 1,234 |
|
Other long-term assets | | — |
| | 4,194 |
| | 5,101 |
| | — |
| | 9,295 |
|
Investment in affiliates | | 877,764 |
| | 265,714 |
| | — |
| | (1,143,478 | ) | | — |
|
Long-term advances to affiliates | | 674,220 |
| | — |
| | 98,532 |
| | (772,752 | ) | | — |
|
Total assets | | $ | 1,554,055 |
| | $ | 1,831,192 |
| | $ | 367,727 |
| | $ | (1,923,322 | ) | | $ | 1,829,652 |
|
Liabilities and equity | | | | | | | | | | |
Current liabilities | | | | | | | | | | |
Current portion of long-term debt | | $ | — |
| | $ | 1,150 |
| | $ | 17 |
| | $ | — |
| | $ | 1,167 |
|
Accounts payable—trade | | — |
| | 121,019 |
| | 22,167 |
| | — |
| | 143,186 |
|
Accrued liabilities | | 6,873 |
| | 40,913 |
| | 33,246 |
| | — |
| | 81,032 |
|
Deferred revenue | | — |
| | 4,742 |
| | 3,593 |
| | — |
| | 8,335 |
|
Billings in excess of costs and profits recognized | | — |
| | 84 |
| | 3,126 |
| | — |
| | 3,210 |
|
Total current liabilities | | 6,873 |
| | 167,908 |
| | 62,149 |
| | — |
| | 236,930 |
|
Long-term debt, net of current portion | | 517,056 |
| | 480 |
| | 8 |
| | — |
| | 517,544 |
|
Deferred income taxes, net | | — |
| | — |
| | 15,299 |
| | — |
| | 15,299 |
|
Other long-term liabilities | | — |
| | 12,288 |
| | 17,465 |
| | — |
| | 29,753 |
|
Long-term payables to affiliates | | — |
| | 772,752 |
| | — |
| | (772,752 | ) | | — |
|
Total liabilities | | 523,929 |
| | 953,428 |
| | 94,921 |
| | (772,752 | ) | | 799,526 |
|
| | | | | | | | | | |
Total equity | | 1,030,126 |
| | 877,764 |
| | 272,806 |
| | (1,150,570 | ) | | 1,030,126 |
|
Total liabilities and equity | | $ | 1,554,055 |
| | $ | 1,831,192 |
| | $ | 367,727 |
| | $ | (1,923,322 | ) | | $ | 1,829,652 |
|
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating statements of cash flows |
| | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Cash flows from operating activities | | $ | (7,138 | ) | | $ | 53,246 |
| | $ | (5,324 | ) | | $ | — |
| | $ | 40,784 |
|
Cash flows from investing activities | | | | | | | | | | |
Capital expenditures for property and equipment | | — |
| | (8,452 | ) | | (819 | ) | | — |
| | (9,271 | ) |
Proceeds from sale of business, property and equipment | | — |
| | 425 |
| | — |
| | — |
| | 425 |
|
Long-term loans and advances to affiliates | | 48,175 |
| | (606 | ) | | — |
| | (47,569 | ) | | — |
|
Net cash provided by (used in) investing activities | | $ | 48,175 |
| | $ | (8,633 | ) | | $ | (819 | ) | | $ | (47,569 | ) | | $ | (8,846 | ) |
Cash flows from financing activities | | | | | | | | | | |
Borrowings of debt | | 82,000 |
| | — |
| | �� |
| | — |
| | 82,000 |
|
Repayments of debt | | (122,000 | ) | | (1,138 | ) | | 55 |
| | — |
| | (123,083 | ) |
Repurchases of stock | | (1,037 | ) | | — |
| | — |
| | — |
| | (1,037 | ) |
Long-term loans and advances from affiliates | | — |
| | (48,175 | ) | | 606 |
| | 47,569 |
| | — |
|
Net cash provided by (used in) financing activities | | $ | (41,037 | ) | | $ | (49,313 | ) | | $ | 661 |
| | $ | 47,569 |
| | $ | (42,120 | ) |
| | | | | | | | | | |
Effect of exchange rate changes on cash | | — |
| | — |
| | 306 |
| | — |
| | 306 |
|
| | | | | | | | | | |
Net decrease in cash, cash equivalents and restricted cash | | — |
| | (4,700 | ) | | (5,176 | ) | | — |
| | (9,876 | ) |
Cash, cash equivalents and restricted cash at beginning of period | | — |
| | 24,977 |
| | 22,264 |
| | — |
| | 47,241 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | — |
| | $ | 20,277 |
| | $ | 17,088 |
| | $ | — |
| | $ | 37,365 |
|
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Condensed consolidating statements of cash flows |
| | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | FET (Parent) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| | (in thousands) |
Cash flows from operating activities | | $ | (34 | ) | | $ | (3,738 | ) | | $ | 1,985 |
| | $ | (23,950 | ) | | $ | (25,737 | ) |
Cash flows from investing activities | | | | | | | | | | |
Capital expenditures for property and equipment | | — |
| | (12,339 | ) | | (1,801 | ) | | — |
| | (14,140 | ) |
Proceeds from sale of business, property and equipment | | — |
| | 4,743 |
| | 4,066 |
| | — |
| | 8,809 |
|
Long-term loans and advances to affiliates | | 43,049 |
| | (6,282 | ) | | — |
| | (36,767 | ) | | — |
|
Net cash provided by (used in) investing activities | | $ | 43,049 |
| | $ | (13,878 | ) | | $ | 2,265 |
| | $ | (36,767 | ) | | $ | (5,331 | ) |
Cash flows from financing activities | | | | | | | | | | |
Borrowings of debt | | 50,000 |
| | — |
| | — |
| | — |
| | 50,000 |
|
Repayments of debt | | (90,803 | ) | | (805 | ) | | (70 | ) | | — |
| | (91,678 | ) |
Repurchases of stock | | (2,212 | ) | | — |
| | — |
| | — |
| | (2,212 | ) |
Long-term loans and advances to affiliates | | — |
| | (43,049 | ) | | 6,282 |
| | 36,767 |
| | — |
|
Dividend paid to affiliates | | — |
| | — |
| | (23,950 | ) | | 23,950 |
| | — |
|
Net cash used in financing activities | | $ | (43,015 | ) | | $ | (43,854 | ) | | $ | (17,738 | ) | | $ | 60,717 |
| | $ | (43,890 | ) |
| | | | | | | | | | |
Effect of exchange rate changes on cash | | — |
| | — |
| | (1,153 | ) | | — |
| | (1,153 | ) |
| | | | | | | | | | |
Net decrease in cash, cash equivalents and restricted cash | | — |
| | (61,470 | ) | | (14,641 | ) | | — |
| | (76,111 | ) |
Cash, cash equivalents and restricted cash at beginning of period | | — |
| | 73,981 |
| | 41,235 |
| | — |
| | 115,216 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | — |
| | $ | 12,511 |
| | $ | 26,594 |
| | $ | — |
| | $ | 39,105 |
|
Item 2. Management’s discussion and analysis of financial condition and results of operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “will,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
Forward-looking statements may include, but are not limited to, statements about the following subjects:
•business strategy;
•cash flows and liquidity;
•the volatility and impact of changes in oil and natural gas prices;
the availability of raw materials and specialized equipment;
•our ability to accurately predict customer demand;
•customer order cancellations or deferrals;
•competition in the oil and natural gas industry;
governmental regulation and taxation of the oil and natural gas industry, including the application of tariffs by governmental authorities;
•environmental liabilities;
•political, social and economic issues affecting the countries in which we do business;
•changes in relative activities of U.S. and international operations;
•our ability to deliver our backlog in a timely fashion;
•our ability to implement new technologies and services;
•availability and terms of capital;
•general economic conditions;
our ability to successfully manage our growth, including risks and uncertainties associated with integrating and retaining key employees of the businesses we acquire;
•benefits of our acquisitions;
•availability of key management personnel;
•availability of skilled and qualified labor;
•operating hazards inherent in our industry;
•the continued influence of our largest shareholder;
•the ability to establish and maintain effective internal control over financial reporting;
•financial strategy, budget, projections and operating results;
•uncertainty regarding our future operating results; and
•plans, objectives, expectations and intentions contained in this report that are not historical.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2019,25, 2020, and elsewhere in this Quarterly Report on Form 10-Q. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Overview
We are a global oilfield products company, serving the drilling, downhole, subsea, completions and production sectors of the oil and natural gas industry. We design, manufacture and distribute products and engage in aftermarket services, parts supply and related services that complement our product offering. The Company's products include highly engineered capital equipment as well as products that are consumed in the drilling, well construction, production and transportation of oil and natural gas. Our product offering includes a mix of frequently replaced consumable products and highly engineered capital products that are used in the exploration, development, production and transportation of oil and natural gas.products. Our consumable products are used in drilling, well construction and completions activities, within the supporting infrastructure, and at processing centers and refineries. Our engineered capital products are directed at:at drilling rig equipment for new rigs, upgrades and refurbishment projects;projects, subsea construction and development projects;projects, pressure pumping equipment;equipment, the placement of production equipment on new producing wells;wells, and downstream capital projects. For the six months ended June 30, 2019,2020, approximately 86% 83% of our revenue was derived from consumable products and activity-based equipment, while the balance was primarily derived from capital products with a small amount from rental and other services.
We seek to design, manufacture and supply high quality reliable products that create value for our diverse customer base, which includes, among others, oil and natural gas operators, land and offshore drilling contractors, oilfield service companies, subsea construction and service companies, and pipeline and refinery operators.
In the first quarter 2019, we changed our reporting segments in order to align with business activity drivers and the manner in which management reviews and evaluates operating performance. Forum now operates in the following three reporting segments: Drilling & Downhole, Completions and Production. This move better aligns with the key phases of the well cycle and provides improved operating efficiencies. Historically, we operated in three business segments: Drilling & Subsea, Completions, and Production & Infrastructure. We have moved the Downhole product line from Completions to Drilling & Subsea to form the new Drilling & Downhole segment. Completions retains the Stimulation & Intervention and Coiled Tubing product lines. Finally, we renamed Production & Infrastructure as the Production segment. Our historical results of operations have been recast to retrospectively reflect these changes in accordance with generally accepted accounting principles.
A summary of the products and services offered by each segment is as follows:
| |
•Drilling & Downhole. This segment designs and manufactures products and provides related services to the drilling, well construction, artificial lift and subsea energy construction and services markets as well as other sectors such as alternative energy, defense and communications. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable drilling products consumed in the drilling process; (ii) well construction casing and cementing equipment, protection products for artificial lift equipment and cables, and composite plugs used for zonal isolation in hydraulic fracturing; and (iii) subsea remotely operated vehicles and trenchers, specialty components and tooling, products used in subsea pipeline infrastructure, and complementary subsea technical services. •Completions. This segment designs, manufactures and supplies products and provides related services to the coiled tubing, stimulation and intervention markets. The products and related services consist primarily of: (i) capital and consumable products sold to the pressure pumping, hydraulic fracturing and flowback services markets, including hydraulic fracturing pumps, pump consumables, cooling systems and flow iron as well as wireline cable, and pressure control equipment used in the well completion and intervention service markets; and (ii) coiled tubing strings and coiled line pipe and related services.
• | Drilling & Downhole segment. This segment designs and manufactures products and provides related services to the drilling, well construction, artificial lift and subsea energy construction and services markets as well as other markets such as alternative energy, defense and communications. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable drilling products consumed in the drilling process; (ii) well construction casing and cementing equipment, protectors for artificial lift equipment and cables used in completions, and composite plugs used for zonal isolation in hydraulic fracturing; and (iii) subsea remotely operated vehicles and trenchers, specialty components and tooling, products used in subsea pipeline infrastructure, and a broad suite of complementary subsea technical services and rental items.
|
| |
• | Completions segment. This segment designs, manufactures and supplies products and provides related services to the completion, stimulation and intervention markets. The products and related services consist primarily of: (i) capital and consumable products sold to the pressure pumping, hydraulic fracturing and flowback services markets, including hydraulic fracturing pumps, pump consumables, cooling systems and flow iron as well as wireline cable, and pressure control equipment used in the well completion and intervention service markets; and (ii) coiled tubing strings and coiled line pipe and related services.
|
| |
• | Production segment. This segment designs, manufactures and supplies products and provides related equipment and services for production and infrastructure markets. The products and related services consist primarily of: (i) engineered process systems, production equipment, and related field services, as well as specialty separation equipment; and (ii) a wide range of industrial valves focused on serving upstream, midstream, and downstream oil and natural gas customers as well as power and other general industries. |
Market Conditions
The level of demand for our products is directly related to the activity levels and the capital and operating budgets of our customers, which in turn are heavily influenced by energy prices and expectations as to future price trends. In addition, the availability of existing capital equipment adequate to serve exploration and production requirements, or lack thereof, drives demand for our capital equipment products.
The probabilityDuring the first half of any cyclical change2020, the COVID-19 pandemic and associated actions taken around the world to mitigate the spread of COVID-19 caused a significant decline in energy prices and the extent and duration of such a change are difficult to predict. Oil prices strengthened through much of 2018, giving rise to higher drilling and completionseconomic activity and spending by our customers, primarilyoil demand. At the same time, the OPEC+ oil producing nations ("OPEC+") increased production in North America.an effort to grow market share, which further exacerbated the imbalance between supply and demand. The volumecombination of rigs drillingthese shocks in both supply and demand caused a significant decline in oil prices during the first quarter of 2020 and created an extremely challenging market for all sub-sectors of the oil and natural gas in North America andindustry throughout the second quarter of 2020.
In response to the low level of hydraulic fracturing and other well completion activities are drivers for our revenue from this region. In the fourth quarter of 2018, oil prices declined significantly as a result of slowing growth in global oil demand and a surge in U.S. oil production. This decline in prices occurred during the time when oil and natural gas operators were establishing their 2019 capital expenditure budgets, resulting in lower levels of drilling and completions activity in the U.S. in 2019. As a result, oilfield service companies are reducing spending on new capital equipment by utilizing idle equipment and reducing the amount of consumable items in their inventories. This decrease in spending negatively impacts the demand for our products.
Drilling and completions activity for the U.S. onshore market has recovered significantly from the low point reached in the second quarter of 2016. 2020, the OPEC+ agreed to a significant cut in oil production and North American exploration and production companies significantly reduced supply by shutting in producing wells and aggressively decreasing drilling and completion activities. Although oil demand and prices have increased from the lows reached at the beginning of the second quarter, they remain at levels that are uneconomic for many exploration and production companies. This has driven further declines in the global rig count and North America completions activities.
Due to the poor market conditions, exploration and production companies in North America are under pressure to reduce existing production and minimize capital and maintenance expenditures. As a result, we have experienced a material reduction in demand for many of our products and consequently, our revenue. We expect this to have a significant negative impact on demand for our products and results of operations.
Activity levels in international regions, has lagged the U.S. onshore recovery; however, increases in certain international regions have started to materialize in 2019. Globalas well as global offshore and subsea activity, have recently seen a modest recovery but still remain at low levels compared to historical activity. Current demandalso been impacted by COVID-19 related activity disruptions. However, international revenue for our drilling and completionssubsea capital equipment offerings remainshave not declined as sharply due to longer project timelines for international drilling customers and diversification of our subsea product line revenue outside of the oil and natural gas industry. Despite this, we anticipate that revenue for our international regions will continue to remain far below the level achieved during the last newbuild cycle due to thelower oil demand and oversupply of relatively new or recently upgraded equipment, especially onshore and offshore drilling rigs. In addition, publicly traded exploration and production and oilfield service companies are under pressure from their investors to live within their budgets and generate positive cash flow. This factor has contributed to recent declines in U.S. onshore completions activity and has led service companies to reduce capital expenditures and defer maintenance of existing equipment.
The revenue of
Demand for products in our Valve Solutions product line is driven by capital projects and maintenance spending for refineries, petrochemical plants and pipelines. As such, revenue for our Valve Solutions product line has also influencedbeen affected by lower energy prices, but to a lesser extent compared to our other product lines, resulting in more stable operating and financial results over time. Demand for valves fromlines. The impacts of COVID-19 on the oil and natural gas industry worldwide is driven by planned investments in global refinery and petrochemical projects, as well as the construction of additional pipeline capacity. While totaleconomy have also negatively impacted demand for our valves is relatively stable,products. In addition, revenue for our valve distribution customers have alsoValve Solutions product line has been under pressure due to produce positive free cash flow. This has led them to decreaseour distribution customers’ increased focus on decreasing the amountquantity of valves in their inventories causing whatin order to generate positive free cash flow.
Although we believehave experienced some operational inefficiencies as a result of COVID-19, our manufacturing facilities and business operations have not experienced work stoppages due to be a short term decreaseCOVID-19 or resulting government regulations. However, in orders fromresponse to the decline in demand for our valve distribution customers until their inventories reach targeted levels.products and reductions in revenue, we have implemented several cost reduction actions, including exiting certain facilities, lowering headcount, reducing salaries for executive officers and the broader workforce, suspension of the Company’s matching contribution to the U.S. and Canada defined contribution retirement plans, and furloughs for select employee groups.
The table below shows average crude oil and natural gas prices for West Texas Intermediate crude oil (“WTI”), United Kingdom Brent crude oil (“Brent”), and Henry Hub natural gas:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | June 30, | | March 31, | | June 30, |
| | 2020 | | 2020 | | 2019 |
Average global oil, $/bbl | | | | | | |
West Texas Intermediate | | $ | 27.96 | | | $ | 45.34 | | | $ | 59.88 | |
United Kingdom Brent | | $ | 29.70 | | | $ | 50.27 | | | $ | 69.04 | |
| | | | | | |
Average North American Natural Gas, $/Mcf | | | | | | |
Henry Hub | | $ | 1.70 | | | $ | 1.90 | | | $ | 2.57 | |
The price of oil varied dramatically during the first half of 2020 with the spot prices for WTI and Brent falling from $61.14 and $67.77 per barrel, respectively, as of December 31, 2019 to lows below $15.00 per barrel in April 2020 followed by a partial recovery to $39.27 and $41.64 per barrel, respectively, as of June 30, 2020. We expect oil prices to remain below prior year levels due to lower demand due to the impacts of COVID-19 and supply surpluses. Natural gas prices also declined in the second quarter of 2020 with average price levels approximately 11% and 34% lower compared to the first quarter of 2020 and the second quarter of 2019, respectively.
The table below shows the average number of active drilling rigs, based on the weekly Baker Hughes Incorporated rig count, operating by geographic area and drilling for different purposes.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | June 30, | | March 31, | | June 30, |
| | 2020 | | 2020 | | 2019 |
Active Rigs by Location | | | | | | |
United States | | 392 | | | 785 | | | 989 | |
Canada | | 25 | | | 205 | | | 82 | |
International | | 834 | | | 1,074 | | | 1,109 | |
Global Active Rigs | | 1,251 | | | 2,064 | | | 2,180 | |
| | | | | | |
Land vs. Offshore Rigs | | | | | | |
Land | | 1,029 | | | 1,796 | | | 1,908 | |
Offshore | | 222 | | | 268 | | | 272 | |
Global Active Rigs | | 1,251 | | | 2,064 | | | 2,180 | |
| | | | | | |
U.S. Commodity Target | | | | | | |
Oil/Gas | | 308 | | | 671 | | | 805 | |
Gas | | 82 | | | 112 | | | 184 | |
Unclassified | | 2 | | | 2 | | | — | |
Total U.S. Active Rigs | | 392 | | | 785 | | | 989 | |
| | | | | | |
U.S. Well Path | | | | | | |
Horizontal | | 353 | | | 704 | | | 868 | |
Vertical | | 14 | | | 34 | | | 50 | |
Directional | | 25 | | | 47 | | | 71 | |
Total U.S. Active Rigs | | 392 | | | 785 | | | 989 | |
A substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed. The average U.S. rig count for the second quarter of 2020 was 50% and 60% lower compared to the first quarter of 2020 and the second quarter of 2019, respectively. The U.S. rig count was 805 at the beginning of 2020. Since then, the number of working rigs has fallen approximately 69% to 251 rigs as of July 31, 2020. Active rig levels for the remainder of 2020 are projected to remain significantly below prior year levels.
Beginning in 2018, the U.S. government has imposed tariffs on imports of selected products, including those sourced from China. In response, China and other countries have imposed retaliatory tariffs on a wide range of U.S. products, including those containing steel and aluminum. These tariffs have caused our cost of raw materials to increase, primarily in our Coiled Tubing and Valve Solutions product lines. In response, we are taking actions to mitigate the impact, including through the diversification of our supply chain.
The table below shows average crude oilchain and natural gas pricesapplying for West Texas Intermediate crude oil (“WTI”), United Kingdom Brent crude oil (“Brent”), and Henry Hub natural gas:
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | June 30, | | March 31, | | June 30, |
| | 2019 | | 2019 | | 2018 |
Average global oil, $/bbl | | | | | | |
West Texas Intermediate | | $ | 59.88 |
| | $ | 54.82 |
| | $ | 68.07 |
|
United Kingdom Brent | | $ | 69.04 |
| | $ | 63.10 |
| | $ | 74.53 |
|
| | | | | | |
Average North American Natural Gas, $/Mcf | | | | | | |
Henry Hub | | $ | 2.57 |
| | $ | 2.92 |
| | $ | 2.85 |
|
The price of oil has increased over the first half of 2019 with the spot pricestariff exemptions for WTI and Brent increasing from $45.15 and $50.57 per barrel, respectively, as of December 31, 2018 to $58.20 and $67.52 per barrel, respectively, as of June 30, 2019. Average WTI and Brent oil prices in the second quarter of 2019 increased 9% compared to the first quarter of 2019, but were 12% and 7% lower, respectively, compared to the second quarter of 2018. In addition, average natural gas prices in the second quarter of 2019 were 12% lower compared to the first quarter of 2019 and 10% lower compared to the second quarter of 2018.
The table below shows the average number of active drilling rigs, based on the weekly Baker Hughes Incorporated rig count, operating by geographic area and drilling for different purposes.
|
| | | | | | | | | |
| | Three Months Ended |
| | June 30, | | March 31, | | June 30, |
| | 2019 | | 2019 | | 2018 |
Active Rigs by Location | | | | | | |
United States | | 989 |
| | 1,043 |
| | 1,039 |
|
Canada | | 82 |
| | 183 |
| | 108 |
|
International | | 1,109 |
| | 1,030 |
| | 968 |
|
Global Active Rigs | | 2,180 |
| | 2,256 |
| | 2,115 |
|
| | | | | | |
Land vs. Offshore Rigs | | | | | | |
Land | | 1,908 |
| | 1,987 |
| | 1,898 |
|
Offshore | | 272 |
| | 269 |
| | 217 |
|
Global Active Rigs | | 2,180 |
| | 2,256 |
| | 2,115 |
|
| | | | | | |
U.S. Commodity Target | | | | | | |
Oil/Gas | | 805 |
| | 848 |
| | 842 |
|
Gas | | 184 |
| | 195 |
| | 195 |
|
Unclassified | | — |
| | — |
| | 2 |
|
Total U.S. Active Rigs | | 989 |
| | 1,043 |
| | 1,039 |
|
| | | | | | |
U.S. Well Path | | | | | | |
Horizontal | | 868 |
| | 919 |
| | 914 |
|
Vertical | | 50 |
| | 61 |
| | 58 |
|
Directional | | 71 |
| | 63 |
| | 67 |
|
Total U.S. Active Rigs | | 989 |
| | 1,043 |
| | 1,039 |
|
A substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed. The average U.S. rig count for the second quarter of 2019 was 5% lower compared to the first quarter of 2019 and the second quarter of 2018. Average activity levels for the remainder of 2019 are projected to remain below prior year levels.certain products.
The table below shows the amount of total inbound orders by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions of dollars) | Three Months Ended | | | | | | Six Months Ended | | |
| June 30, | | March 31, | | June 30, | | June 30, | | June 30, |
| 2020 | | 2020 | | 2019 | | 2020 | | 2019 |
Drilling & Downhole | $ | 42.3 | | | $ | 70.0 | | | $ | 78.3 | | | $ | 112.3 | | | $ | 160.3 | |
Completions | 14.2 | | | 49.9 | | | 70.7 | | | 64.1 | | | 151.0 | |
Production | 29.1 | | | 50.7 | | | 75.6 | | | 79.8 | | | 155.5 | |
Total Orders | $ | 85.6 | | | $ | 170.6 | | | $ | 224.6 | | | $ | 256.2 | | | $ | 466.8 | |
|
| | | | | | | | | | | | | | | | | | | |
(in millions of dollars) | Three months ended | | Six Months Ended |
| June 30, | | March 31, | | June 30, | | June 30, | | June 30, |
| 2019 | | 2019 | | 2018 | | 2019 | | 2018 |
Drilling & Downhole | $ | 78.3 |
| | $ | 82.0 |
| | $ | 115.1 |
| | $ | 160.3 |
| | $ | 192.2 |
|
Completions | 70.7 |
| | 80.3 |
| | 96.1 |
| | 151.0 |
| | 183.2 |
|
Production | 75.6 |
| | 79.9 |
| | 98.8 |
| | 155.5 |
| | 195.6 |
|
Total Orders | $ | 224.6 |
| | $ | 242.2 |
| | $ | 310.0 |
| | $ | 466.8 |
| | $ | 571.0 |
|
Results of operations
Three months ended June 30, 20192020 compared with three months ended June 30, 20182019
| | | Three Months Ended June 30, | | Change | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | $ | | % | | Three Months Ended June 30, | | | Change | |
(in thousands of dollars, except per share information) | | | | | | | | (in thousands of dollars, except per share information) | 2020 | | 2019 | | $ | | % |
Revenue: | | | | | | | | Revenue: | | | | | | | |
Drilling & Downhole | $ | 82,352 |
| | $ | 86,476 |
| | $ | (4,124 | ) | | (4.8 | )% | Drilling & Downhole | $ | 47,183 | | | $ | 82,352 | | | $ | (35,169) | | | (42.7) | % |
Completions | 81,520 |
| | 100,049 |
| | (18,529 | ) | | (18.5 | )% | Completions | 17,583 | | | 81,520 | | | (63,937) | | | (78.4) | % |
Production | 83,255 |
| | 88,599 |
| | (5,344 | ) | | (6.0 | )% | Production | 48,597 | | | 83,255 | | | (34,658) | | | (41.6) | % |
Eliminations | (1,479 | ) | | (1,121 | ) | | (358 | ) | | * |
| Eliminations | (88) | | | (1,479) | | | 1,391 | | | * |
Total revenue | 245,648 |
| | 274,003 |
| | (28,355 | ) | | (10.3 | )% | Total revenue | 113,275 | | | 245,648 | | | (132,373) | | | (53.9) | % |
Operating income (loss): | | | | | | | | Operating income (loss): | |
Drilling & Downhole | $ | 1,342 |
| | $ | (7,520 | ) | | $ | 8,862 |
| | 117.8 | % | Drilling & Downhole | $ | (9,399) | | | $ | 1,342 | | | $ | (10,741) | | | (800.4) | % |
Operating margin % | 1.6 | % | | (8.7 | )% | | | | | Operating margin % | (19.9) | % | | 1.6 | % | |
Completions | 2,841 |
| | 14,190 |
| | (11,349 | ) | | (80.0 | )% | Completions | (17,813) | | | 2,841 | | | (20,654) | | | (727.0) | % |
Operating margin % | 3.5 | % | | 14.2 | % | | | | | Operating margin % | (101.3) | % | | 3.5 | % | |
Production | 3,589 |
| | 3,704 |
| | (115 | ) | | (3.1 | )% | Production | (1,057) | | | 3,589 | | | (4,646) | | | (129.5) | % |
Operating margin % | 4.3 | % | | 4.2 | % | | | | | Operating margin % | (2.2) | % | | 4.3 | % | |
Corporate | (6,895 | ) | | (8,843 | ) | | 1,948 |
| | 22.0 | % | Corporate | (7,191) | | | (6,895) | | | (296) | | | (4.3) | % |
Total segment operating income | 877 |
| | 1,531 |
| | (654 | ) | | (42.7 | )% | |
Total segment operating income (loss) | | Total segment operating income (loss) | (35,460) | | | 877 | | | (36,337) | | | (4,143.3) | % |
Operating margin % | 0.4 | % | | 0.6 | % | | | | | Operating margin % | (31.3) | % | | 0.4 | % | |
Transaction expenses | 125 |
| | 59 |
| | 66 |
| | * |
| Transaction expenses | 150 | | | 125 | | | 25 | | | * |
Intangible asset impairments | — |
| | 14,477 |
| | (14,477 | ) | | * |
| |
Impairments of property and equipment | | Impairments of property and equipment | 112 | | | — | | | 112 | | | * |
Loss (gain) on disposal of assets and other | 16 |
| | (1,303 | ) | | 1,319 |
| | * |
| Loss (gain) on disposal of assets and other | (700) | | | 16 | | | (716) | | | * |
Operating income (loss) | 736 |
| | (11,702 | ) | | 12,438 |
| | 106.3 | % | Operating income (loss) | (35,022) | | | 736 | | | (35,758) | | | (4,858.4) | % |
Interest expense | 8,223 |
| | 7,861 |
| | 362 |
| | 4.6 | % | Interest expense | 6,420 | | | 8,223 | | | (1,803) | | | (21.9) | % |
Foreign exchange gains and other, net | (2,146 | ) | | (5,860 | ) | | 3,714 |
| | * |
| |
Total other expense | 6,077 |
| | 2,001 |
| | 4,076 |
| | 203.7 | % | |
Foreign exchange losses (gains) and other, net | | Foreign exchange losses (gains) and other, net | 631 | | | (2,146) | | | 2,777 | | | * |
Gain on extinguishment of debt | | Gain on extinguishment of debt | (36,285) | | | — | | | (36,285) | | | * |
Deferred loan costs written off | | Deferred loan costs written off | 130 | | | — | | | 130 | | | * |
Total other (income) expense, net | | Total other (income) expense, net | (29,104) | | | 6,077 | | | (35,181) | | | (578.9) | % |
Loss before income taxes | (5,341 | ) | | (13,703 | ) | | 8,362 |
| | 61.0 | % | Loss before income taxes | (5,918) | | | (5,341) | | | (577) | | | (10.8) | % |
Income tax expense | 8,393 |
| | 1,646 |
| | 6,747 |
| | 409.9 | % | |
Income tax expense (benefit) | | Income tax expense (benefit) | (424) | | | 8,393 | | | (8,817) | | | (105.1) | % |
Net loss | $ | (13,734 | ) | | $ | (15,349 | ) | | $ | 1,615 |
| | 10.5 | % | Net loss | $ | (5,494) | | | $ | (13,734) | | | $ | 8,240 | | | 60.0 | % |
| | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | Weighted average shares outstanding | |
Basic | 109,987 |
| | 108,714 |
| | | | | Basic | 111,590 | | | 109,987 | | |
Diluted | 109,987 |
| | 108,714 |
| | | | | Diluted | 111,590 | | | 109,987 | | |
Loss per share | | | | | | | | Loss per share | |
Basic | $ | (0.12 | ) | | $ | (0.14 | ) | | | | | Basic | $ | (0.05) | | | $ | (0.12) | | |
Diluted | $ | (0.12 | ) | | $ | (0.14 | ) | | | | | Diluted | $ | (0.05) | | | $ | (0.12) | | |
* not meaningful | | | | | | | | * not meaningful | |
We acquired two businessessold our equity interest in 2018.Ashtead in the third quarter of 2019. Therefore, our results of operations for the second quarter of 20192020 may not be comparable to the results of operations for the second quarter of 2018.2019. Refer to Note 4 Acquisitions & Dispositions for additional information.
Revenue
Our revenue for the three months ended June 30, 20192020 was $245.6$113.3 million, a decrease of $28.4$132.4 million, or 10.3%53.9%, compared to the three months ended June 30, 2018.2019. For the three months ended June 30, 2019,2020, our Drilling & Downhole, Completions, and Production segments comprised 41.7%, 15.4%, and 42.9% of our total revenue, respectively, which compared to 33.5%, 32.6%, and 33.9% of our total revenue, respectively, which compared to 31.6%, 36.1%, and 32.3% of total revenue, respectively, for the three months ended June 30, 2018.2019. The overall decline in revenue is primarily related to lower sales volumes in the U.S. market due to the significant decrease in U.S. drilling and completions activity levels. The changes in revenue by operating segment consisted of the following:
Drilling & Downhole segment — Revenue was $82.4$47.2 million for the three months ended June 30, 2019,2020, a decrease of $4.1$35.2 million, or 4.8%42.7%, compared to the three months ended June 30, 2018.2019. This changedecrease was driven by a $9.1$17.3 million decreasedecline in revenue for our Drilling Technologies product line primarily due to lower sales volumes of consumable products and capital equipment as a result of a 60% decline in U.S. rig activity year-over-year. Revenue for our consumable products. ThisDownhole Technologies product line decreased by $16.1 million due to lower sales volumes of artificial lift products and well construction equipment due to the significant decrease in drilling activity and the number of wells completed in the second quarter of 2020. The $1.7 million decline was partially offset by a $2.7 million increase in revenue for our Subsea Technologies product line primarilywas relatively less than other product lines due to higherthe diversification of sales of non-oilcapital equipment to customers outside the oil and natural gas capital equipment and a $2.2 million increase in revenue for our Downhole product line due to continued sales volume growth for our artificial lift products, including the revenue contribution from ESPCT which was acquired in the third quarter of 2018.industry.
Completions segment — Revenue was $81.5$17.6 million for the three months ended June 30, 2019,2020, a decrease of $18.5$63.9 million, or 18.5%78.4%, compared to the three months ended June 30, 2018.2019. This changedecrease includes a $13.6$38.4 million decrease in revenue for our Stimulation and Intervention product line primarily attributable to lower capital spending by our pressure pumping service customers partially offset bydue to the revenue contribution from GHT, which was acquiredsignificant decline in hydraulic fracturing activity levels in the fourth quarter of 2018.U.S. The remaining decline was driven by a $4.9$25.6 million decrease in sales volumes for our Coiled Tubing product line.line primarily attributable to lower U.S. completions activity.
Production segment — Revenue was $83.3$48.6 million for the three months ended June 30, 2019,2020, a decrease of $5.3$34.7 million, or 6.0%41.6%, compared to the three months ended June 30, 2018.2019. This decrease was primarily driven by a $3.1$21.1 million decline in sales volumes of our valve products, particularly sales into the North America upstream and midstream oil and natural gas market, and a $2.3$13.6 million decrease in salesrevenue for our Production Equipment product line as a result of lower sales volumes of our oil treatmentsurface production equipment useddue to a decline in downstream applications.well completions activity.
Segment operating income (loss) and segment operating margin percentage
Segment operating incomeloss for the three months ended June 30, 20192020 was $0.9$35.5 million, a decline of $0.7$36.3 million compared to segment operating income of $0.9 million for the three months ended June 30, 2018.2019. For the three months ended June 30, 2019,2020, segment operating margin percentage was 0.4%(31.3)% compared to 0.6%0.4% for the three months ended June 30, 2018. The segment2019. Segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue for the period. The change in operating marginincome (loss) for each segment is explained as follows:
Drilling & Downhole segment — TheSegment operating margin percentage for this segmentloss was 1.6%$9.4 million, or (19.9)%, for the three months ended June 30, 20192020 compared to (8.7)%segment operating income of $1.3 million, or 1.6%, for the three months ended June 30, 2018.2019. The improvement$10.7 million decline in segment operating marginsresults is primarily attributable to a more favorable sales mixlower gross profit from the 42.7% decline in segment revenues as well as employee severance and facility closure costs incurred in the second quarter of 2020. These declines in segment operating results were partially offset by lower selling, general and administration expenses including a decrease in employee related costs as a result ofdue to headcount, salary and other cost reduction actions and a $2.2 million reduction in amortization expense following intangible asset impairments recognized inreductions implemented since the fourthsecond quarter of 2018.2019.
Completions segment — TheSegment operating margin percentage for this segmentloss was 3.5%$17.8 million, or (101.3)%, for the three months ended June 30, 20192020 compared to 14.2%segment operating income of $2.8 million, or 3.5%, for the three months ended June 30, 2018.2019. The $20.7 million decline in segment operating margin percentageresults is due to decreased operating leverage onthe reduction in gross profit from the 78.4% decline in revenues, partially offset by lower sales volumesemployee related costs and facilities costs due to cost reductions implemented since the second quarter of our well stimulation products. In addition, the three months ended June 30, 2019 includes incremental costs from steel tariffs in our Coiled Tubing product line and incremental selling, general and administrative expenses following the fourth quarter 2018 acquisition of GHT.2019.
Production segment — TheSegment operating margin percentage for this segmentloss was 4.3%$1.1 million, or (2.2)%, for the three months ended June 30, 2019 which was consistent with2020 compared to segment operating income of $3.6 million, or 4.3%, for the comparable three months ended June 30, 2018. Segment2019. The decline in segment operating margins have been negatively impacted by incremental costresults is due to lower gross profit from steel tariffsthe 41.6% decline in our Valves product line,revenue, partially offset by a reduction in selling, general and administrative expenses, primarily lower employee related costs as a resultdue to headcount, salary and other cost reductions implemented since the second quarter of cost reduction actions.2019.
Corporate — Selling, general and administrative expenses for Corporate decreased by $1.9 million, or 22.0%, to $6.9were $7.2 million for the three months ended June 30, 20192020, a $0.3 million increase compared to $8.8 million for the three months ended June 30, 2018. This decrease was primarily attributable to lower2019. Reductions in employee related costs from headcount, salary and a decreaseother cost reductions were more than offset by higher legal professional fees in professional fees.the three months ended June 30, 2020. Corporate costs include, among other items, payroll related costs for management, administration, finance, legal, and human resources personnel; professional fees for legal, accounting and related services; and marketing costs.
Other items not included in segment operating income (loss)
Several items are not included in segment operating income (loss), but are included in total operating income (loss). These items include transaction expenses, intangible asset impairments of property and gainequipment, and loss (gain) on the disposal of assets and other. Transaction expenses relate to legal and other advisory costs incurred in acquiring or disposing of businesses and are not considered to be part of segment operating income (loss). In the second quarter of 2018, we made the decision to exit specific products within the Subsea and Downhole product lines. As a result, we recognized $14.5 million of impairment losses on certain intangible assets (primarily customer relationships).
Other income and expense
Other income and expense includes interest expense, and foreign exchange gainslosses (gains) and other, net.gain on extinguishment of debt and deferred loan costs written off. We incurred $8.2$6.4 million of interest expense during the three months ended June 30, 2019, an increase2020, a decrease of $0.4$1.8 million fromcompared to the three months ended June 30, 2018.2019 due to lower outstanding balances on our revolving Credit Facility and a reduction in the amount of 2021 Notes outstanding.
The foreign exchange losses (gains) are primarily the result of movements in the British pound and Euro relative to the U.S. dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S. dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than the U.S. dollar.
During the three months ended June 30, 2020, we repurchased an aggregate $61.0 million of principal amount of our 2021 Notes for $24.3 million and recognized a net gain of $36.3 million reflecting the difference in the amount paid and the net carrying value of the extinguished debt, including debt issuance costs and unamortized debt premium.
Taxes
We recorded a tax benefit of $0.4 million for the three months ended June 30, 2020, compared to a tax expense of $8.4 million for the three months ended June 30, 2019. Tax expense for the three months ended June 30, 2019 included an increase in our valuation allowance of $5.9 million to write down our deferred tax assets in the U.S. and Saudi Arabia. In addition, the estimated annual effective tax rate for the three months ended June 30, 2020 is different than the comparable period in 2019 primarily due to losses in jurisdictions where the recording of a tax benefit is not available. Furthermore, the tax expense or benefit recorded can vary from period to period depending on the Company’s relative mix of earnings and losses by jurisdiction.
Six months ended June 30, 2020 compared with six months ended June 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | Favorable / (Unfavorable) | | |
| 2020 | | 2019 | | $ | | % |
(in thousands of dollars, except per share information) | | | | | | | |
Revenue: | | | | | | | |
Drilling & Downhole | $ | 123,826 | | | $ | 168,292 | | | $ | (44,466) | | | (26.4) | % |
Completions | 68,406 | | | 176,179 | | | (107,773) | | | (61.2) | % |
Production | 104,202 | | | 175,250 | | | (71,048) | | | (40.5) | % |
Eliminations | (527) | | | (2,231) | | | 1,704 | | | * |
Total revenue | 295,907 | | | 517,490 | | | (221,583) | | | (42.8) | % |
Operating income (loss): | | | | | | | |
Drilling & Downhole | (13,544) | | | (1,157) | | | (12,387) | | | (1,070.6) | % |
Operating margin % | (10.9) | % | | (0.7) | % | | | | |
Completions | (35,131) | | | 9,692 | | | (44,823) | | | (462.5) | % |
Operating margin % | (51.4) | % | | 5.5 | % | | | | |
Production | (9,236) | | | 7,924 | | | (17,160) | | | (216.6) | % |
Operating margin % | (8.9) | % | | 4.5 | % | | | | |
Corporate | (15,620) | | | (15,301) | | | (319) | | | (2.1) | % |
Total segment operating income (loss) | (73,531) | | | 1,158 | | | (74,689) | | | (6,449.8) | % |
Operating margin % | (24.8) | % | | 0.2 | % | | | | |
Transaction expenses | 187 | | | 718 | | | 531 | | | 74.0 | % |
Impairments of intangible assets, property and equipment | 17,432 | | | — | | | (17,432) | | | * |
Contingent consideration benefit | — | | | (4,629) | | | (4,629) | | | * |
Loss (gain) on disposal of assets and other | (721) | | | 36 | | | 757 | | | * |
Operating income (loss) | (90,429) | | | 5,033 | | | (95,462) | | | (1,896.7) | % |
Interest expense | 13,144 | | | 16,404 | | | 3,260 | | | 19.9 | % |
Foreign exchange losses (gains) and other, net | (4,376) | | | 131 | | | 4,507 | | | 3,440.5 | % |
Gain on extinguishment of debt | (43,744) | | | — | | | 43,744 | | | * |
Deferred loan costs written off | 1,959 | | | — | | | (1,959) | | | * |
Total other (income) expense | (33,017) | | | 16,535 | | | 49,552 | | | * |
Loss before income taxes | (57,412) | | | (11,502) | | | (45,910) | | | (399.1) | % |
Income tax expense (benefit) | (14,774) | | | 10,120 | | | 24,894 | | | 246.0 | % |
Net loss | $ | (42,638) | | | $ | (21,622) | | | $ | (21,016) | | | (97.2) | % |
| | | | | | | |
Weighted average shares outstanding | | | | | | | |
Basic | 111,381 | | | 109,816 | | | | | |
Diluted | 111,381 | | | 109,816 | | | | | |
Loss per share | | | | | | | |
Basic | $ | (0.38) | | | $ | (0.20) | | | | | |
Diluted | $ | (0.38) | | | $ | (0.20) | | | | | |
* not meaningful | | | | | | | |
We sold our equity interest in Ashtead in the third quarter of 2019. Therefore, our results of operations for the six months ended June 30, 2020 may not be comparable to historical results of operations for the six months ended June 30, 2019. Refer to Note 4 Dispositions for additional information.
Revenue
Our revenue for the six months ended June 30, 2020 was $295.9 million, a decrease of $221.6 million, or 42.8%, compared to the six months ended June 30, 2019. For the six months ended June 30, 2020, our Drilling & Downhole, Completions, and Production segments comprised 41.8%, 23.0%, and 35.2% of our total revenue, respectively, which compared to 32.5%, 33.6%, and 33.9% of our total revenue, respectively, for the six months ended June 30, 2019. The changes in revenue by operating segment consisted of the following:
Drilling & Downhole segment — Revenue was $123.8 million for the six months ended June 30, 2020, a decrease of $44.5 million, or 26.4%, compared to the six months ended June 30, 2019. This decrease includes a $22.6 million decline in revenue for our Drilling Technologies product line due to lower sales volumes of consumable products and capital equipment as a result of a 42% decline in U.S. rig activity year-over-year. Revenue for our Downhole Technologies product line decreased by $21.6 million primarily due to lower sales volumes of well construction equipment and artificial lift products due to the significant decrease in drilling activity and the number of wells completed in the first half of 2020. Revenue for our Subsea Technologies product line in the first half of 2020 was consistent with the first half of 2019 due to the diversification of sales of capital equipment to customers outside the oil and natural gas industry.
Completions segment — Revenue was $68.4 million for the six months ended June 30, 2020, a decrease of $107.8 million, or 61.2%, compared to the six months ended June 30, 2019. This decline was driven by a $65.2 million decline in revenue for our Stimulation and Intervention product line primarily attributable to lower spending by our pressure pumping service customers due to the significant decline in hydraulic fracturing activity levels in the U.S. The remaining decline was driven by a $42.6 million decrease in sales volumes for our Coiled Tubing product line primarily attributable to lower U.S. completions activity and, to a lesser extent, the completion of a significant international coiled line pipe project in the first quarter of 2019
Production segment — Revenue was $104.2 million for the six months ended June 30, 2020, a decrease of $71.0 million, or 40.5%, compared to the six months ended June 30, 2019. This decrease was primarily driven by a $39.7 million decline in sales volumes of our valve products, particularly sales into the North America upstream and midstream oil and natural gas market, and a $31.4 million decrease in revenue for our Production Equipment product line as a result of lower sales volumes of our surface production equipment due to the significant decline in well completions activity.
Segment operating income (loss) and segment operating margin percentage
Segment operating loss for the six months ended June 30, 2020 was $73.5 million, a decline of $74.7 million compared to the six months ended June 30, 2019. For the six months ended June 30, 2020, segment operating margin percentage was (24.8)% compared to 0.2% for the six months ended June 30, 2019. Segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue for the period. The change in operating margin percentage for each segment is explained as follows:
Drilling & Downhole segment — Segment operating loss was $13.5 million, or (10.9)%, for the six months ended June 30, 2020 compared to a loss of $1.2 million, or (0.7)% for the six months ended June 30, 2019. The $12.4 million decline in segment operating results is primarily attributable to lower gross profit from the 26.4% decline in segment revenues. In addition, segment operating loss for the first half of 2020 includes approximately $5.3 million of inventory write-downs and $2.5 million of employee severance costs. These declines in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented since the second quarter of 2019.
Completions segment — Segment operating loss was $35.1 million, or (51.4)%, for the six months ended June 30, 2020 compared to income of $9.7 million, or 5.5% for the six months ended June 30, 2019. The $44.8 million decline in segment operating results is primarily attributable to lower gross profit from the 61.2% decline in segment revenues. In addition, segment operating loss for the first half of 2020 includes $7.9 million of inventory write-downs, $6.1 million of impairments of operating lease right of use assets, and $1.4 million of employee severance costs. These declines in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented since the second quarter of 2019.
Production segment — Segment operating loss was $9.2 million, or (8.9)%, for the six months ended June 30, 2020 compared to income of $7.9 million, or 4.5% for the six months ended June 30, 2019. The $17.2 million decline in segment operating results is primarily attributable to lower gross profit from the 40.5% decline in segment revenues. In addition, segment operating loss for the first half of 2020 includes $3.1 million of inventory write-downs, $1.9 million of impairments of operating lease right of use assets, and $1.0 million of employee severance costs. These
declines in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented since the second quarter of 2019.
Corporate — Selling, general and administrative expenses for Corporate were $15.6 million for the six months ended June 30, 2020, a $0.3 million increase compared to the six months ended June 30, 2019. Reductions in employee related costs from headcount, salary and other cost reductions were more than offset by higher legal professional fees in the first half of 2020. Corporate costs include, among other items, payroll related costs for management, administration, finance, legal, and human resources personnel; professional fees for legal, accounting and related services; and marketing costs.
Other items not included in segment operating income (loss)
Several items are not included in segment operating income (loss), but are included in total operating income (loss). These items include transaction expenses, impairments of intangible assets, property and equipment, contingent consideration benefit and loss (gain) on the disposal of assets and other. Transaction expenses relate to legal and other advisory costs incurred in acquiring or disposing of businesses and are not considered to be part of segment operating income.
In the first quarter of 2020, there was a significant decline in oil prices and a deteriorating outlook for industry market conditions with further declines forecasted for drilling and completions activity. As a result, we recognized non-cash impairment charges of $17.4 million including impairments of $12.2 million of property and equipment and $5.3 million of intangible assets.
The $4.6 million contingent consideration benefit recognized in the six months ended June 30, 2019 is related to reducing the estimated fair value of the contingent cash liability associated with the acquisition of Houston Global Heat Transfer LLC.
Other expense
Other expense includes interest expense, foreign exchange losses (gains) and other, gain on extinguishment of debt and deferred loan costs written off. We incurred $13.1 million of interest expense during the six months ended June 30, 2020, a decrease of $3.3 million from the six months ended June 30, 2019 due to lower outstanding balances on our revolving Credit Facility and a reduction in the amount of 2021 Notes outstanding.
The foreign exchange (gains) losses are primarily the result of movements in the British pound and the Euro relative to the U.S. dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S. dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than the U.S. dollar.
Taxes
We recorded tax expense of $8.4 million forDuring the threesix months ended June 30, 2019,2020, we repurchased an aggregate $71.9 million of principal amount of our 2021 Notes for $27.6 million and recognized a net gain of $43.7 million reflecting the difference in the amount paid and the net carrying value of the extinguished debt, including debt issuance costs and unamortized debt premium. In addition, we wrote off $2.0 million of deferred loan costs due to the termination of previous discussions related to a potential exchange offer for our 2021 Notes.
Taxes
We recorded a tax benefit of $14.8 million for the six months ended June 30, 2020, compared to a tax expense of $1.6$10.1 million for the threesix months ended June 30, 2018. 2019.
On March 27, 2020, President Trump signed the U.S. Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in response to the COVID-19 pandemic. The CARES Act provides relief to corporate taxpayers by permitting a five-year carryback of 2018-2020 NOLs, increasing the 30% limitation on interest expense deductibility to 50% of adjusted taxable income for 2019 and 2020, and accelerating refunds for minimum tax credit carryforwards, among other provisions. The tax effects of changes in tax laws are recognized in the period in which the law is enacted. As such, the tax benefit for the six months ended June 30, 2020 includes a $16.6 million benefit related to a carryback claim for U.S. federal tax losses based on new provisions in the CARES Act.
Tax expense for the threesix months ended June 30, 2019 includes an increase in our valuation allowance of $5.9 million to write down our deferred tax assets in the U.S. and Saudi Arabia. In addition, the estimated annual effective tax raterates for the threesix months ended June 30, 2020 and 2019 is different than the comparable period in 2018 primarily due towere impacted by losses in jurisdictions where the recording of a tax benefit is not available. Furthermore, the tax expense or benefit recorded can vary from period to period depending on the Company’s relative mix of U.S. and non-U.S. earnings and losses by jurisdiction.
Six months ended June 30, 2019 compared with six months ended June 30, 2018
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Favorable / (Unfavorable) |
| 2019 | | 2018 | | $ | | % |
(in thousands of dollars, except per share information) | | | | | | | |
Revenue: | | | | | | | |
Drilling & Downhole | $ | 168,292 |
| | $ | 163,340 |
| | $ | 4,952 |
| | 3.0 | % |
Completions | 176,179 |
| | 188,103 |
| | (11,924 | ) | | (6.3 | )% |
Production | 175,250 |
| | 175,020 |
| | 230 |
| | 0.1 | % |
Eliminations | (2,231 | ) | | (2,229 | ) | | (2 | ) | | * |
|
Total revenue | 517,490 |
| | 524,234 |
| | (6,744 | ) | | (1.3 | )% |
Operating income (loss): | | | | | | | |
Drilling & Downhole | (1,157 | ) | | (17,830 | ) | | 16,673 |
| | 93.5 | % |
Operating margin % | (0.7 | )% | | (10.9 | )% | | | | |
Completions | 9,692 |
| | 23,151 |
| | (13,459 | ) | | (58.1 | )% |
Operating margin % | 5.5 | % | | 12.3 | % | | | | |
Production | 7,924 |
| | 7,866 |
| | 58 |
| | 0.7 | % |
Operating margin % | 4.5 | % | | 4.5 | % | | | | |
Corporate | (15,301 | ) | | (17,423 | ) | | 2,122 |
| | 12.2 | % |
Total segment operating income (loss) | 1,158 |
| | (4,236 | ) | | 5,394 |
| | 127.3 | % |
Operating margin % | 0.2 | % | | (0.8 | )% | | | | |
Transaction expenses | 718 |
| | 1,395 |
| | 677 |
| | 48.5 | % |
Intangible asset impairments | — |
| | 14,477 |
| | 14,477 |
| | * |
|
Contingent consideration benefit | (4,629 | ) | | — |
| | 4,629 |
| | * |
|
Loss (gain) on disposal of assets and other | 36 |
| | (1,700 | ) | | (1,736 | ) | | * |
|
Operating income (loss) | 5,033 |
| | (18,408 | ) | | 23,441 |
| | 127.3 | % |
Interest expense | 16,404 |
| | 15,948 |
| | (456 | ) | | (2.9 | )% |
Foreign exchange losses (gains) and other, net | 131 |
| | (2,309 | ) | | (2,440 | ) | | (105.7 | )% |
Gain on contribution of subsea rentals business | — |
| | (33,506 | ) | | (33,506 | ) | | * |
|
Total other (income) expense, net | 16,535 |
| | (19,867 | ) | | (36,402 | ) | | * |
|
Income (loss) before income taxes | (11,502 | ) | | 1,459 |
| | (12,961 | ) | | (888.3 | )% |
Income tax expense (benefit) | 10,120 |
| | (11,258 | ) | | (21,378 | ) | | (189.9 | )% |
Net income (loss) | $ | (21,622 | ) | | $ | 12,717 |
| | $ | (34,339 | ) | | (270.0 | )% |
| | | | | | | |
Weighted average shares outstanding | | | | | | | |
Basic | 109,816 |
| | 108,569 |
| | | | |
Diluted | 109,816 |
| | 110,821 |
| | | | |
Earnings (loss) per share | | | | | | | |
Basic | $ | (0.20 | ) | | $ | 0.12 |
| | | | |
Diluted | $ | (0.20 | ) | | $ | 0.11 |
| | | | |
* not meaningful | | | | | | | |
We acquired two businesses in 2018. Therefore, our results of operations for the six months ended June 30, 2019 may not be comparable to historical results of operations for the six months ended June 30, 2018. Refer to Note 4 Acquisitions & Dispositions for additional information.
Revenue
Our revenue for the six months ended June 30, 2019 was $517.5 million, a decrease of $6.7 million, or 1.3%, compared to the six months ended June 30, 2018. For the six months ended June 30, 2019, our Drilling & Downhole, Completions, and Production segments comprised 32.5%, 33.6%, and 33.9% of our total revenue, respectively, which compared to 31.2%, 35.4%, and 33.4% of total revenue, respectively, for the six months ended June 30, 2018. The changes in revenue by operating segment consisted of the following:
Drilling & Downhole segment — Revenue was $168.3 million for the six months ended June 30, 2019, an increase of $5.0 million, or 3.0%, compared to the six months ended June 30, 2018. This change includes an $8.1 million increase in revenue for our Downhole product line due to continued sales volume growth for our artificial lift products, including the revenue contribution from ESPCT which was acquired in the third quarter of 2018. Revenue for our Subsea product line increased by $6.8 million primarily due to higher sales of ROVs and other subsea capital equipment in the six months ended June 30, 2019. These increases were partially offset by a $9.9 million decrease in revenues for our Drilling product line primarily due to lower sales volumes for our consumable products.
Completions segment — Revenue was $176.2 million for the six months ended June 30, 2019, a decrease of $11.9 million, or 6.3%, compared to the six months ended June 30, 2018. This decline was driven by a $13.4 million decrease in revenue for our Stimulation and Intervention product line attributable to lower capital spending by our pressure pumping service customers partially offset by the revenue contribution from GHT, which was acquired in the fourth quarter of 2018, and a $1.5 million increase in revenue for our Coiled Tubing product line due to higher sales into international markets.
Production segment — Revenue was $175.3 million for the six months ended June 30, 2019, an increase of $0.2 million, or 0.1%, compared to the six months ended June 30, 2018.The increase was primarily driven by a $2.9 million increase in sales for our Production Equipment product line as a result of higher sales volumes of surface production equipment to oil and natural gas operators. This increase was partially offset by a $2.6 million decline in sales volumes of valve products, particularly sales into the North America oil and natural gas market.
Segment operating income (loss) and segment operating margin percentage
Segment operating income for the six months ended June 30, 2019 was $1.2 million, an improvement of $5.4 million compared to the six months ended June 30, 2018. For the six months ended June 30, 2019, segment operating margin percentage was 0.2% compared to (0.8)% for the six months ended June 30, 2018. The segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue for the period. The change in operating margin percentage for each segment is explained as follows:
Drilling & Downhole segment — The operating margin percentage for this segment was (0.7)% for the six months ended June 30, 2019 compared to (10.9)% for the six months ended June 30, 2018. The improvement in operating margins is attributable to increased operating leverage and a more favorable sales mix on the higher sales volumes described above. In addition, segment operating margins increased due to lower selling, general and administration expenses as a result of a $4.4 million reduction in amortization expense following intangible asset impairments recognized in the fourth quarter of 2018 and lower employee related costs as a result of cost reduction actions.
Completions segment — The operating margin percentage for this segment was 5.5% for the six months ended June 30, 2019 compared to 12.3% for the six months ended June 30, 2018. The decline in operating margin percentage is due to decreased operating leverage on lower sales volumes of our well stimulation products. In addition, the six months ended June 30, 2019 includes incremental costs from steel tariffs in our Coiled Tubing product line and incremental selling, general and administrative expenses following the fourth quarter 2018 acquisition of GHT.
Production segment — The operating margin percentage for this segment was 4.5% for the six months ended June 30, 2019 which was consistent with the comparable six months ended June 30, 2018. Segment operating margins have been negatively impacted by incremental cost from steel tariffs in our Valves product line, offset by a reduction in selling, general and administrative expenses, primarily lower employee related costs as a result of cost reduction actions.
Corporate — Selling, general and administrative expenses for Corporate were $15.3 million for the six months ended June 30, 2019, a decrease of $2.1 million, or 12.2%, compared to the six months ended June 30, 2018. This decrease was primarily attributable to lower employee related costs and a decrease in professional fees, partially offset by an increase in employee severance costs. Corporate costs include, among other items, payroll related costs for management, administration, finance, legal, and human resources personnel; professional fees for legal, accounting and related services; and marketing costs.
Other items not included in segment operating income (loss)
Several items are not included in segment operating income (loss), but are included in total operating income (loss). These items include transaction expenses, intangible asset impairments, contingent consideration benefit and gains on the disposal of assets and other. Transaction expenses relate to legal and other advisory costs incurred in acquiring businesses and are not considered to be part of segment operating income (loss). These costs were $0.7 million for the six months ended June 30, 2019 and $1.4 million for the six months ended June 30, 2018.
In the second quarter of 2018, we made the decision to exit specific products within the Subsea and Downhole product lines. As a result, we recognized $14.5 million of impairment losses on certain intangible assets (primarily customer relationships).
The contingent consideration benefit relates to a gain of $4.6 million recognized in the first quarter of 2019 due to reducing the estimated fair value of the contingent cash liability associated with the acquisition of GHT. Refer to Note 4 Acquisitions & Dispositions for additional information.
Other income and expense
Other income and expense includes interest expense, foreign exchange losses (gains) and a gain recognized on the contribution of our subsea rentals business. We incurred $16.4 million of interest expense during the six months ended June 30, 2019, an increase of $0.5 million from the six months ended June 30, 2018 primarily due to an increase in average outstanding borrowings under our revolving line of credit.
The foreign exchange losses (gains) are primarily the result of movements in the British pound and the Euro relative to the U.S. dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S. dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than the U.S. dollar.
In the first quarter of 2018, we recognized a gain of $33.5 million as a result of the deconsolidation of our Forum Subsea Rentals business. Refer to Note 4 Acquisitions & Dispositions for additional information.
Taxes
We recorded a tax expense of $10.1 million for the six months ended June 30, 2019, compared to a tax benefit of $11.3 million for the six months ended June 30, 2018. Tax expense for the three months ended June 30, 2019 includes an increase in our valuation allowance of $5.9 million to write down our deferred tax assets in the U.S. and Saudi Arabia. The tax benefit for the six months ended June 30, 2018 included a $15.9 million tax benefit related to an adjustment of the provisional tax impact of U.S. tax reform. See Note 9 Income Taxes for additional information on the impact of U.S. Tax Reform. In addition, the estimated annual effective tax rate for 2019 is significantly different than the comparable period in 2018 primarily due to losses in jurisdictions where the recording of a tax benefit is not available. Furthermore, the tax benefit or expense recorded can vary from period to period depending on the Company’s relative mix of U.S. and non-U.S. earnings and losses by jurisdiction.
Liquidity and capital resources
Sources and uses of liquidity
Our internal sources of liquidity are cash on hand and cash flows from operations, while our primary external sources include trade credit, and our Credit Facility and Seniorthe 2025 Notes described below. Our primary uses of capital have been for inventories, sales on credit to our customers and ongoing maintenance and growth capital expenditures. We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue generatinggenerate positive operating cash flow and access outside sources of capital. Based
As of June 30, 2020, we had cash and cash equivalents of $109.7 million and $84.2 million of availability under our Credit Facility. We anticipate that our future working capital requirements for our operations will fluctuate directionally with revenues. In addition, we expect total 2020 capital expenditures to be less than $5.0 million, consisting of, among other items, replacing end of life machinery and equipment.
Availability under our Credit Facility will fluctuate directionally based on the level of our eligible accounts receivable and inventory. We also expect to receive a cash refund for income taxes in 2020 of approximately $14.1 million from filing a carryback claim for U.S. federal tax losses based on provisions in the CARES Act.
During the six months ended June 30, 2020, we repurchased an aggregate $71.9 million of principal amount of our 2021 Notes for $27.6 million and recognized a net gain of $43.7 million reflecting the difference in the amount paid and the net carrying value of the extinguished debt, including debt issuance costs and unamortized debt premium. Following these repurchases, we had $328.1 million of 2021 Notes outstanding as of June 30, 2020.
Subsequent to the end of the second quarter, we exchanged $315.5 million of the existing 2021 Notes for new 9.00% convertible secured notes due July 2025 (the “2025 Notes”). The 2025 Notes pay interest at the rate of 9.00%, of which 6.25% will be payable in cash and 2.75% will be payable in cash or additional notes, at the Company’s option. The 2025 Notes are secured by a first lien on substantially all of the Company’s assets, except for Credit Facility collateral, which secures the 2025 Notes on a second lien basis. A portion of the 2025 Notes equal to $150.0 million total principal amount is mandatorily convertible into common stock on a pro rata basis at a conversion price of $1.35 per share, subject, however, to the condition that the average of the daily trading prices for the common stock over the preceding 20-trading day period is at least $1.50 per share. Holders of the 2025 Notes also have optional conversion rights in the event that the Company elects to redeem the 2025 Notes in cash and at the final maturity of the new notes.
Prior to obtaining stockholder approval, the amount of 2025 Notes that may be converted into common stock is subject to a conversion cap. If the required stockholder approval of the issuance of additional shares of common stock and other related actions in connection with the exchange is not obtained in a timely manner, the convertibility of the 2025 Notes will be delayed until such approval is obtained. If such stockholder approval is not received by June 30, 2021, the failure to obtain such approval would result in an event of default under the 2025 Notes. Upon such default, the 2025 Notes will become immediately due and payable without any action by the 2025 Notes trustee or the holders of 2025 Notes. We plan to seek stockholder approval prior to June 30, 2021.
Concurrent with the completion of the 2021 Notes exchange, the Credit Facility was amended to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million; allow the holders of the 2025 Notes to have second liens on the accounts receivable and inventory assets backing the Credit Facility and a first lien on all other assets; increase the applicable margin for LIBOR and CDOR loansto 2.50% per annum and the applicable margin for base rate loans to 1.50% per annum; change the maturity date to March 2021, subject to extension to October 30, 2022 upon the occurrence of certain events; add a limit on the borrowing base so that the amount of eligible inventory included in the borrowing base is restricted to the lesser of 80% of the total borrowing base or $130 million; establish a limit on our cash balance if there are outstanding borrowings on the Credit Facility; add a cross-default to the 2025 Notes; and change the financial covenant testing clause to trigger if excess availability under the Credit Facility falls below the greater of 12.5% of the borrowing base and $31.25 million.
Following the 2021 Notes exchange, $12.7 million of 2021 Notes remain outstanding. If this remaining amount is repaid prior to March 2021, the maturity of the Credit Facility will extend to October 2022. We plan to retire the $12.7 million of 2021 Notes prior to March 2021.
We expect our available cash on-hand, cash generated by operations, including U.S. income tax refunds, and estimated availability under our Credit Facility to be adequate to fund current operations and debt maturities during the next 12 months. In addition, based on existing market conditions and our expected liquidity needs, among other
factors, we may use a portion of our cash flows from operations, proceeds from divestitures, securities offerings or borrowingsother eligible capital to reduce the principal amount of debt prior to scheduled maturities or to repay bank borrowings.outstanding.
At June 30,In 2019, we had cash and cash equivalents of $37.4 million, availability under our Credit Facility of $205.1 million and total debt of $479.2 million. Our 2019 capital expenditures consist of, among other items, investments in certain manufacturing facilities, replacing end of life machinery and equipment, and continuing the implementation of our enterprise resource planning solution globally. We believe that cash on hand, cash generated from operations and availability under our Credit Facility will be sufficient to fund operations, working capital needs, and capital expenditure requirements for the foreseeable future.
In 2018, we expanded and diversified our product portfolio with the acquisition ofcompleted two businessesdispositions for total consideration of $65.3$51.7 million. We did not have any acquisitions in the first half of 2019. For additional information, see Note 4 Acquisitions & Dispositions.Dispositions. We may pursue acquisitions in the future, which may be funded with cash and/or equity. Our ability to make significant additional acquisitions for cash may require us to pursue additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.
To the extent that access to the capital and other financial markets is adversely affected by the effects of COVID-19, our customers and other counterparties may become unable to make payments to us, on a timely basis or at all, which could adversely affect our business, cash flows, liquidity, financial condition and results of operations.
Our cash flows for the six months ended June 30, 20192020 and 20182019 are presented below (in millions):
| | | Six Months Ended June 30, | | Six Months Ended June 30, | |
| 2019 | | 2018 | | 2020 | | 2019 |
Net cash provided by (used in) operating activities | $ | 40.8 |
| | $ | (25.7 | ) | Net cash provided by (used in) operating activities | $ | (2.1) | | | $ | 40.8 | |
Net cash used in investing activities | (8.8 | ) | | (5.3 | ) | Net cash used in investing activities | (0.2) | | | (8.8) | |
Net cash used in financing activities | (42.1 | ) | | (43.9 | ) | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 54.4 | | | (42.1) | |
Effect of exchange rate changes on cash | 0.2 |
| | (1.2 | ) | Effect of exchange rate changes on cash | (0.3) | | | 0.2 | |
Net decrease in cash, cash equivalents and restricted cash | $ | (9.9 | ) | | $ | (76.1 | ) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 51.8 | | | $ | (9.9) | |
Net cash provided by (used in) operating activities
Net cash used in operating activities was $2.1 million for the six months ended June 30, 2020 compared to $40.8 million of cash provided by operating activities was $40.8for the six months ended June 30, 2019. This decline is primarily attributable to the decline in operating results. Net income adjusted for non-cash items provided $27.1 million of cash for the six months ended June 30, 2019 compared to $25.7$7.8 million of cash used in operating activities for the six months endedJune 30, 2018. This improvement2020. The remaining decline is primarily attributabledue to changes in working capital which provided cash of $13.7 million for the six months endedJune 30, 2019 compared to a $55.2$5.7 million use of cash for the same period in 2018.six months endedJune 30, 2020.
Net cash used in investing activities
Net cash used in investing activities was $8.8$0.2 million for the six months ended June 30, 20192020 compared to $5.3$8.8 millionused in investing activities for the same period in 2018.2019 primarily due to a $7.7 million reduction in capital expenditures for property an equipment.
Net cash provided by (used in) financing activities
Net cash provided by financing activities was $54.4 million for the six months ended June 30, 2020 compared to $42.1 million of net cash used in financing activities for the six months ended June 30, 2019. Net cash provided by financing activities for the six months ended June 30, 2020 includes $85.0 million of borrowings on the revolving Credit Facility partially offset by $27.6 million of cash used to repurchase 2021 Notes. Net cash used in investingfinancing activities for the six months ended June 30, 2019 primarily includes $9.3 million of capital expenditures for property and equipment. In comparison, net cash used in investing activities for the six months ended June 30, 2018 included $14.1 million of capital expenditures for property and equipment offset by $8.8 million of proceeds from the sale of business, property and equipment.
Net cash used in financing activities
Net cash used in financing activities was $42.1 million and $43.9 million for the six months ended June 30, 2019 and 2018, respectively. Net cash used in financing activities includes approximately $41.1 million of net repayments of debt for the six months ended June 30, 2019 compared to $41.7 million for the same period in 2018.debt.
Credit Facility
Senior Notes Due 2021
Our Senior Notes have $400.0 million principal amount outstanding which bear interest at a rate of 6.25% per annum, payable on April 1 and October 1 of each year, and mature on October 1, 2021. The Senior Notes are senior unsecured obligations guaranteed on a senior unsecured basis by our subsidiaries that guaranteeIn August 2020, we amended the Credit Facility and rank junior to, among other indebtedness, the Credit Facility to the extentas further discussed above. As of the value of the collateral securing the Credit Facility.
Credit Facility
On OctoberJune 30, 2017, we amended and restated2020, our Credit Facility to, among other things, increaseprovided revolving credit commitments from $140.0 million toof $300.0 million, including up to $30.0 million available to certain Canadian subsidiaries of the Company for loans in United States or Canadian dollars, $25.0$45.0 million available for letters of credit issued for the account of the Company and certain of its domestic subsidiaries and $3.0 million available for letters of credit issued for the account of Canadian subsidiaries of the Company. Availability under the Credit Facility is subject to a borrowing base calculated by reference to eligible accounts receivable in the United States, Canada and certain other jurisdictions (subject to a cap) and eligible inventory in the United States and Canada. Such eligible accounts receivable and eligible inventory serve as collateral for the Credit Facility. Our borrowing capacity under the Credit Facility could be reduced or eliminated, depending on future fluctuations in our receivables and inventory. The Credit Facility matures in July 2021, but if our outstanding Notes due October 2021 are refinanced or replaced with indebtedness maturing in or after February 2023, the final maturity of the Credit Facility will automatically extend to October 2022.
If excess availability under the Credit Facility falls below the greater of 10.0% of the borrowing base and $20.0 million, we will be required to maintain a fixed charge coverage ratio of at least 1.00:1.00 as of the end of each fiscal quarter until excess availability under the Credit Facility exceeds such thresholds for at least 60 consecutive days.
6.25%Notes Due 2021
As of June 30, 2020, our 2021 Notes had $328.1 million principal amount outstanding, which bear interest at a rate of 6.25% per annum, payable on April 1 and October 1 of each year, and mature on October 1, 2021. The 2021 Notes are unsecured obligations, and are guaranteed on a unsecured basis by our subsidiaries that guarantee the Credit Facility and rank junior to, among other indebtedness, the Credit Facility to the extent of the value of the collateral securing the Credit Facility. See further discussion above regarding the exchange of 2021 Notes completed subsequent to the end of the second quarter.
Supplemental Guarantor Financial Information
The Company’s 2021 Notes are guaranteed by our domestic subsidiaries which are 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional, joint and several, and on an unsecured basis.
We are presenting the following summarized financial information for the Company and the subsidiary guarantors (collectively referred to as the "Obligated Group”) pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Company and the subsidiary guarantors, presented on a combined basis, have been eliminated and information for the non-guarantor subsidiaries have been excluded. Amounts due to the non-guarantor subsidiaries and other related parties, as applicable, have been separately presented within the summarized financial information below.
Summarized financial information for the year-to-date interim period and the most recent annual period was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
Summarized Statements of Operations | | 2020 | | 2019 | | 2020 | | 2019 |
Revenue | | $ | 86,778 | | | $ | 205,953 | | | $ | 234,162 | | | $ | 442,759 | |
Cost of sales | | 81,443 | | 157,317 | | 214,638 | | 333,171 |
Operating income (loss) | | (34,903) | | 526 | | (85,975) | | 997 |
Net loss | | (5,494) | | (13,734) | | (42,638) | | (21,622) |
| | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Summarized Balance Sheet | | | | |
Current assets | | $ | 519,289 | | | $ | 530,111 | |
Noncurrent assets | | 371,954 | | 416,924 |
| | | | |
Current liabilities | | $ | 92,326 | | | $ | 122,354 | |
Payables to non-guarantor subsidiaries | | 122,604 | | 116,053 |
Noncurrent liabilities | | 447,862 | | 440,817 |
Off-balance sheet arrangements
As of June 30, 2019,2020, we had no off-balance sheet instruments or financial arrangements, other than letters of credit entered into in the ordinary course of business. Operating leases were excluded from our balance sheet as of December 31, 2018, but are included in the balance sheet as of June 30, 2019 following the January 1, 2019 adoption of ASC 842. For additional information, refer to Note 2 Recent Accounting Pronouncements and Note 8 Leases.
Contractual obligations
Except for net repayments underthe changes in the Credit Facility as of June 30, 2019,and 2021 Notes discussed above, there have been no other material changes in our contractual obligations and commitments disclosed in our 20182019 Annual Report on Form 10-K.
Critical accounting policies and estimates
There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2019.2020. For a detailed discussion of our critical accounting policies and estimates, refer to our 20182019 Annual Report on Form 10-K. For recent accounting pronouncements, refer to Note 2 Recent Accounting Pronouncements.
Item 3. Quantitative and qualitative disclosures about market risk
We are currently exposed to market risk from changes in foreign currency exchange rates and changes in interest rates. From time to time, we may enter into derivative financial instrument transactions to manage or reduce our market risk, but we do not enter into derivative transactions for speculative purposes.
There have been no significant changes to our market risk since December 31, 2018.2019. For a discussion of our exposure to market risk, refer to Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in our 20182019 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures have been designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of June 30, 2019.2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019.2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Information related to Item 1. Legal Proceedings is included in Note 12 Commitments and Contingencies, which is incorporated herein by reference.
Item 1A. Risk Factors
For additional information about our risk factors, see “Risk Factors” in Item 1A of our 2019 Annual Report on Form 10-K. Except for the updates below, there have been no material changes from the risk factors disclosed in our 2019 Annual Report on Form 10-K.
The convertibility of the 2025 Notes is subject to a conversion cap until stockholder approval is obtained and an event of default will occur if such approval is not obtained.
Subsequent to the end of the second quarter, we exchanged $315.5 million of our existing 6.25% senior unsecured notes due 2021 for new 9.00% convertible secured notes due July 2025 (the “2025 Notes”). The 2025 Notes pay interest at the rate of 9.00%, of which 6.25% will be payable in cash and 2.75% will be payable in cash or additional notes, at the Company’s option. The 2025 Notes are secured by a first lien on substantially all of the Company’s assets, except for Credit Facility collateral, which secures the 2025 Notes on a second lien basis. A portion of the 2025 Notes equal to $150.0 million total principal amount is mandatorily convertible into common stock on a pro rata basis at a conversion price of $1.35 per share, subject, however, to the condition that the average of the daily trading prices for the common stock over the preceding 20-trading day period is at least $1.50 per share. Holders of the 2025 Notes also have optional conversion rights in the event that the Company elects to redeem the 2025 Notes in cash and at the final maturity of the new notes.
Prior to obtaining stockholder approval, the amount of 2025 Notes that may be converted into common stock is subject to a conversion cap. If the required stockholder approval of the issuance of additional shares of common stock and other related actions in connection with the exchange is not obtained in a timely manner, the convertibility of the 2025 Notes will be delayed until such approval is obtained. If such stockholder approval is not received by
June 30, 2021, the failure to obtain such approval would result in an event of default under the 2025 Notes. Upon such default, the 2025 Notes will become immediately due and payable without any action by the 2025 Notes trustee or the holders of 2025 Notes, which would have a material adverse effect on our business, financial condition and results of operations.
The recent COVID-19 pandemic and related economic repercussions have had, and are expected to continue to have, a significant impact on our business, and depending on the duration of the pandemic and its effect on the oil and natural gas industry, could have a material adverse effect on our business, liquidity, consolidated results of operations and consolidated financial condition.
The COVID-19 pandemic and associated volatility in the oil and natural gas markets has caused us to incur additional risk.During the first half of 2020, the COVID-19 pandemic and associated actions taken around the world to mitigate the spread of COVID-19, including unprecedented governmental actions ordering citizens in the United States and countries around the world, including those in which we operate, to “shelter in place,” and issuing “stay at home orders,” caused a significant decline in economic activity and oil demand. At the same time, the OPEC+ oil producing nations increased production in an effort to grow market share, which further exacerbated the imbalance between supply and demand. The combination of these shocks in both supply and demand caused a significant decline in oil prices during the first quarter of 2020 and created an extremely challenging market for all sub-sectors of the oil and natural gas industry throughout the second quarter of 2020. In response to the low level of oil prices in the second quarter of 2020, the OPEC+ oil producing nations agreed to a significant cut in oil production and North American exploration and production companies significantly reduced supply by shutting in producing wells and significantly decreasing drilling and completion activities. Although oil demand and prices have increased from the lows reached at the beginning of the second quarter, they remain at levels that are uneconomic for many exploration and production companies. This has driven further declines in the global rig count and North America completions activities.
These events have directly affected our business and have compounded the impact from many of the risks described in our Form 10-K for the year ended December 31, 2018.2019, including those relating to our customers’ capital spending and trends in oil and natural gas prices. Demand for our products and services has declined and is expected to further decline as our customers continue to revise their capital budgets downwards and swiftly adjust their operations in response to lower commodity prices. In addition, we are facing, and expect to continue to face, logistical challenges including border closures, travel restrictions and an inability to commute to certain facilities and job sites, as we provide services and products to our customers. We are also experiencing inefficiencies surrounding stay-at-home orders andremote work arrangements, which we expect will continue for the foreseeable future.
Given the nature and significance of the events described above, we are not able to enumerate all potential risks to our business; however, we believe that in addition to the impacts described above, other current and potential impacts of these recent events include, but are not limited to: •disruption to our supply chain for raw materials essential to our business, including restrictions on importing and exporting products;
•notices from customers, suppliers and other third parties arguing that their non-performance under our contracts with them is permitted as a result of force majeure or other reasons;
•customers may also seek to delay payments, may default on payment obligations and/or seek bankruptcy protection that could delay or prevent collections of certain accounts receivable;
•liquidity challenges, including impacts related to delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies;
•a credit rating downgrade of our corporate debt and higher borrowing costs in the future;
•cybersecurity issues, as digital technologies may become more vulnerable and experience a higher rate of and increased sophistication in cyberattacks in the current environment of remote connectivity, which could disrupt our operations or result in the loss or exposure of confidential or sensitive customer, employee or company information and adversely affect our business, financial condition and results of operations;
•litigation risk and possible loss contingencies related to COVID-19 and its impact, including with respect to commercial contracts, employee matters and insurance arrangements;
•reduction of our global workforce to adjust to market conditions, including severance payments, retention issues, and an inability to hire employees when market conditions improve;
•costs associated with rationalization of our portfolio of real estate facilities, including possible exit of leases and facility closures to align with expected activity and workforce capacity;
•additional asset impairments, including an impairment of the carrying value of our intangible assets, property and equipment, along with other accounting charges as demand for our services and products decreases;
•infections and quarantining of our employees and the personnel of our customers, suppliers and other third parties in areas in which we operate;
•changes in the regulation of the production of hydrocarbons, such as the imposition of limitations on the production of oil and natural gas by states or other jurisdictions, that may result in additional limits on demand for our products and services;
•actions undertaken by national, regional and local governments and health officials to contain the virus or treat its effects; and
•a structural shift in the global economy and its demand for oil and natural gas as a result of changes in the way people work, travel and interact, or in connection with a global recession or depression.
Given the dynamic nature of these events, we cannot reasonably estimate the period of time that the COVID-19 pandemic and related market conditions will persist, the full extent of the impact they will have on our business, financial condition, results of operations or cash flows or the pace or extent of any subsequent recovery. This year has been, and we anticipate that it will continue to be, a challenging year for us, as our customers continue to reduce their capital budgets. Therefore, we expect a continued substantial decline in activity from levels we experienced in the first half of 2020, coupled with downward pressure on the price of our products and services, and corresponding reductions in revenue and operating margins.
The confluence of events described above have had, and are expected to continue to have, a significant impact on our business, and depending on the duration of the pandemic and its effect on the oil and natural gas industry, could have, a material adverse effect on our business, liquidity, consolidated results of operations and consolidated financial condition. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Conditions.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Following is a summary of our repurchases of our common stock during the three months ended June 30, 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plan or programs | | Maximum value of shares that may yet be purchased under the plan or program (in thousands) |
April 1, 2020 - April 30, 2020 | | — | | | $ | — | | | — | | | $ | — | |
May 1, 2020 - May 31, 2020 | | — | | | $ | — | | | — | | | $ | — | |
June 1, 2020 - June 30, 2020 | | — | | | $ | — | | | — | | | $ | — | |
Total | | — | | | $ | — | | | — | | | |
|
| | | | | | | | | | | | | | |
Period | | Total number of shares purchased (a) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plan or programs (b) | | Maximum value of shares that may yet be purchased under the plan or program (in thousands) (b) |
April 1, 2019 - April 30, 2019 | | — |
| | $ | — |
| | — |
| | $ | 49,752 |
|
May 1, 2019 - May 31, 2019 | | — |
| | $ | — |
| | — |
| | $ | 49,752 |
|
June 1, 2019 - June 30, 2019 | | — |
| | $ | — |
| | — |
| | $ | 49,752 |
|
Total | | — |
| | $ | — |
| | — |
| | |
(a) No shares were purchased during the three months ended June 30, 2019.
(b) In October 2014, our board of directors approved a program for the repurchase of outstanding shares of our common stock with an aggregate purchase amount of up to $150 million. From the inception of this program through June 30, 2019, we have repurchased approximately 4.5 million shares of our common stock for aggregate consideration of approximately $100.2 million. Remaining authorization under this program is $49.8 million.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
We are hereby correcting a typographical error that appeared in our proxy statement, dated April 2, 2019, concerning the deadline, under our bylaws, for stockholders to give timely notice of business and director nominations to be brought before our 2020 annual meeting of stockholders. The error appeared in the section of our proxy statement titled “Additional Information - Stockholder Proposals for the 2020 Annual Meeting,” and the corrected deadline is as follows:None
For notice to be timely, it must be delivered to our Secretary at our principal executive offices no later than close of business on the 90th day prior to the anniversary of the prior year’s annual meeting date but not earlier than the 120th day prior to such anniversary. Accordingly, for the 2020 Annual Meeting of stockholders, notice will have to be delivered to our Secretary at our principal offices no earlier than January 15, 2020 or later than February 14, 2020.
Item 6. Exhibits
| | | | | | | | |
Exhibit | | |
Number | | DESCRIPTION |
| | |
Exhibit4.1* | — | Rights Agreement dated as of April 29, 2020 between Forum Energy Technologies, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 the Company’s Current Report on Form 8-K, filed on April 30, 2020. |
Number | | DESCRIPTION |
10.1*# | — | Forum Energy Technologies, Inc. Second Amended and Restated 2016 Stock and Incentive Plan (incorporated by reference to Appendix B to the Company’s Proxy Statement on Schedule 14A filed on April 2, 2020). |
| | |
| — | Subsidiary guarantors of the Company's Unsecured Notes due 2021 |
| | |
| — | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| — | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| — | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| — | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
101.INS** | — | Inline XBRL Instance Document |
| | |
101.SCH** | — | Inline XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL** | — | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.LAB** | — | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
101.PRE** | — | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
101.DEF** | — | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
104** | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Previously filed.
**Filed herewith.
**Furnished herewith.
#Identifies management contracts and compensatory plans or arrangements.
SIGNATURES
As required by Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has authorized this report to be signed on its behalf by the undersigned authorized individuals.
| | | | | | | | | | | | | | |
| | | | |
| | | | |
| | FORUM ENERGY TECHNOLOGIES, INC. | | |
Date: | July 31, 2019August 7, 2020 | By: | /s/ Pablo G. MercadoD. Lyle Williams, Jr. | |
| | | Pablo G. MercadoD. Lyle Williams, Jr. | |
| | | SeniorExecutive Vice President and Chief Financial Officer and Treasurer | |
| | | (As Duly Authorized Officer and Principal Financial Officer) | |
| | | | |
| | By: | /s/ Tylar K. SchmittJohn McElroy | |
| | | Tylar K. SchmittJohn McElroy | |
| | | Vice President and Chief Accounting OfficerCorporate Controller | |
| | | (As Duly Authorized Officer and Principal Accounting Officer) | |