UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the Quarterly Period Ended September 30, 2020
OR
| ☐ | 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)
| Delaware | 61-1488595 | ||||||||||
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | ||||||||||
| incorporation or organization) | |||||||||||
| 10344 Sam Houston Park Drive | Suite 300 | Houston | Texas | 77064 | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
| (281) | 949-2500 | ||||
(Registrant’s telephone number, including area code)
| ______________________________________________ | ||||||||
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act
| 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.
| 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 November 3, 2020 there were 111,519,107 common shares outstanding.
1
Table of Contents
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands, except per share information) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Revenue | $ | 103,606 | $ | 239,266 | $ | 399,513 | $ | 756,756 | |||||||||||||||
| Cost of sales | 90,496 | 176,632 | 351,411 | 560,836 | |||||||||||||||||||
| Gross profit | 13,110 | 62,634 | 48,102 | 195,920 | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | 45,989 | 63,471 | 154,512 | 195,320 | |||||||||||||||||||
| Transaction expenses | 665 | 254 | 852 | 972 | |||||||||||||||||||
| Impairments of goodwill, intangible assets, property and equipment | 2,962 | 532,336 | 20,394 | 532,336 | |||||||||||||||||||
| Contingent consideration benefit | 0 | 0 | 0 | (4,629) | |||||||||||||||||||
| Loss (gain) on disposal of assets and other | 541 | (107) | (180) | (71) | |||||||||||||||||||
| Total operating expenses | 50,157 | 595,954 | 175,578 | 723,928 | |||||||||||||||||||
| Loss from equity investment | 0 | (39) | 0 | (318) | |||||||||||||||||||
| Operating loss | (37,047) | (533,359) | (127,476) | (528,326) | |||||||||||||||||||
| Other expense (income) | |||||||||||||||||||||||
| Interest expense | 8,473 | 7,766 | 21,617 | 24,170 | |||||||||||||||||||
| Foreign exchange and other losses (gains), net | 3,445 | (3,200) | (931) | (3,069) | |||||||||||||||||||
| Gain realized on previously held equity investment | 0 | (1,567) | 0 | (1,567) | |||||||||||||||||||
| Gain on extinguishment of debt | (28,734) | 0 | (72,478) | 0 | |||||||||||||||||||
| Deferred loan costs written off | 303 | 0 | 2,262 | 0 | |||||||||||||||||||
| Total other expense (income), net | (16,513) | 2,999 | (49,530) | 19,534 | |||||||||||||||||||
| Loss before income taxes | (20,534) | (536,358) | (77,946) | (547,860) | |||||||||||||||||||
| Income tax expense (benefit) | 1,017 | (3,371) | (13,757) | 6,749 | |||||||||||||||||||
| Net loss | (21,551) | (532,987) | (64,189) | (554,609) | |||||||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Basic | 111,607 | 110,295 | 111,459 | 109,977 | |||||||||||||||||||
| Diluted | 111,607 | 110,295 | 111,459 | 109,977 | |||||||||||||||||||
| Loss per share | |||||||||||||||||||||||
| Basic | $ | (0.19) | $ | (4.83) | $ | (0.58) | $ | (5.04) | |||||||||||||||
| Diluted | (0.19) | (4.83) | (0.58) | (5.04) | |||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Net loss | (21,551) | (532,987) | (64,189) | (554,609) | |||||||||||||||||||
| Change in foreign currency translation, net of tax of $0 | 5,942 | (6,260) | (1,004) | (2,833) | |||||||||||||||||||
| Loss on pension liability | (55) | (17) | (56) | (21) | |||||||||||||||||||
| Comprehensive loss | $ | (15,664) | $ | (539,264) | $ | (65,249) | $ | (557,463) | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
| (in thousands, except share information) | September 30, 2020 | December 31, 2019 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 20,020 | $ | 57,911 | |||||||
| Accounts receivable—trade, net of allowances of $9,819 and $9,048 | 79,811 | 154,182 | |||||||||
| Inventories, net | 364,655 | 414,640 | |||||||||
| Prepaid expenses and other current assets | 33,031 | 33,820 | |||||||||
| Accrued revenue | 1,617 | 1,260 | |||||||||
| Costs and estimated profits in excess of billings | 6,340 | 4,104 | |||||||||
| Total current assets | 505,474 | 665,917 | |||||||||
| Property and equipment, net of accumulated depreciation | 120,266 | 154,836 | |||||||||
| Operating lease assets | 33,907 | 48,682 | |||||||||
| Deferred financing costs, net | 374 | 1,243 | |||||||||
| Intangible assets, net | 247,298 | 272,300 | |||||||||
| Deferred income taxes, net | 157 | 654 | |||||||||
| Other long-term assets | 16,545 | 16,365 | |||||||||
| Total assets | $ | 924,021 | $ | 1,159,997 | |||||||
| Liabilities and equity | |||||||||||
| Current liabilities | |||||||||||
| Current portion of long-term debt | $ | 1,295 | $ | 717 | |||||||
| Accounts payable—trade | 60,057 | 98,720 | |||||||||
| Accrued liabilities | 70,143 | 86,625 | |||||||||
| Deferred revenue | 5,495 | 4,877 | |||||||||
| Billings in excess of costs and profits recognized | 169 | 5,911 | |||||||||
| Total current liabilities | 137,159 | 196,850 | |||||||||
| Long-term debt, net of current portion | 290,019 | 398,862 | |||||||||
| Deferred income taxes, net | 2,153 | 2,465 | |||||||||
| Operating lease liabilities | 46,299 | 49,938 | |||||||||
| Other long-term liabilities | 21,109 | 25,843 | |||||||||
| Total liabilities | 496,739 | 673,958 | |||||||||
| Commitments and contingencies | |||||||||||
| Equity | |||||||||||
| Common stock, $0.01 par value, 296,000,000 shares authorized, 119,614,808 and 118,840,611 shares issued | 1,196 | 1,189 | |||||||||
| Additional paid-in capital | 1,239,539 | 1,231,650 | |||||||||
| Treasury stock at cost, 8,217,553 and 8,211,919 shares | (134,499) | (134,493) | |||||||||
| Retained deficit | (568,956) | (503,369) | |||||||||
| Accumulated other comprehensive loss | (109,998) | (108,938) | |||||||||
| Total equity | 427,282 | 486,039 | |||||||||
| Total liabilities and equity | $ | 924,021 | $ | 1,159,997 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2020 | 2019 | |||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | (64,189) | $ | (554,609) | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation expense | 19,149 | 22,873 | |||||||||
| Amortization of intangible assets | 19,934 | 25,621 | |||||||||
| Impairments of goodwill, intangible assets, property and equipment | 20,394 | 532,336 | |||||||||
| Impairments of operating lease assets | 14,096 | 2,187 | |||||||||
| Inventory write down | 19,691 | 5,775 | |||||||||
| Stock-based compensation expense | 7,726 | 11,923 | |||||||||
| Loss from unconsolidated subsidiary | 0 | 317 | |||||||||
| Contingent consideration benefit | 0 | (4,629) | |||||||||
| Gain on extinguishment of debt | (72,478) | 0 | |||||||||
| Gain realized on previously held equity investment | 0 | (1,567) | |||||||||
| Deferred loan costs written off | 2,262 | 0 | |||||||||
| Deferred income taxes | 87 | (1,438) | |||||||||
| Noncash losses and other, net | 3,417 | 3,751 | |||||||||
| Changes in operating assets and liabilities | |||||||||||
| Accounts receivable—trade | 70,175 | 20,515 | |||||||||
| Inventories | 29,572 | 28,200 | |||||||||
| Prepaid expenses and other assets | 651 | 237 | |||||||||
| Cost and estimated profit in excess of billings | (2,471) | 4,190 | |||||||||
| Accounts payable, deferred revenue and other accrued liabilities | (60,767) | (21,328) | |||||||||
| Billings in excess of costs and estimated profits earned | (5,548) | 1,297 | |||||||||
| Net cash provided by operating activities | $ | 1,701 | $ | 75,651 | |||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures for property and equipment | (2,168) | (12,607) | |||||||||
| Proceeds from sale of business, property and equipment | 4,187 | 39,805 | |||||||||
| Net cash provided by investing activities | $ | 2,019 | $ | 27,198 | |||||||
| Cash flows from financing activities | |||||||||||
| Borrowings of debt | 85,000 | 97,000 | |||||||||
| Repayments of debt | (113,441) | (217,333) | |||||||||
| Bond exchange early participation payment | (3,500) | 0 | |||||||||
| Repurchases of stock | (182) | (1,050) | |||||||||
| Deferred financing costs | (9,358) | 0 | |||||||||
| Net cash used in financing activities | $ | (41,481) | $ | (121,383) | |||||||
| Effect of exchange rate changes on cash | (130) | 190 | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (37,891) | (18,344) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 57,911 | 47,241 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 20,020 | $ | 28,897 | |||||||
| Noncash activities | |||||||||||
| Operating lease right of use assets obtained in exchange for lease obligations | 4,382 | 9,603 | |||||||||
| Finance lease right of use assets obtained in exchange for lease obligations | 1,401 | 1,478 | |||||||||
| Note receivable related to equity method investment transaction | 0 | 4,725 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Forum Energy Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| Nine Months Ended September 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 | 0 | (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 | ||||||||||||||||||||||||||
| Stock-based compensation expense | $ | — | $ | 1,966 | $ | — | $ | — | $ | — | $ | 1,966 | ||||||||||||||||||||||||||
| Restricted stock issuance, net of forfeitures | $ | 0 | $ | (1) | $ | — | $ | — | $ | — | $ | (1) | ||||||||||||||||||||||||||
| Currency translation adjustment | $ | — | $ | — | $ | — | $ | — | $ | 5,942 | $ | 5,942 | ||||||||||||||||||||||||||
| Change in pension liability | $ | — | $ | — | $ | — | $ | — | $ | (55) | $ | (55) | ||||||||||||||||||||||||||
| Net loss | $ | — | $ | — | $ | — | $ | (21,551) | $ | — | $ | (21,551) | ||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | 1,196 | $ | 1,239,539 | $ | (134,499) | $ | (568,956) | $ | (109,998) | $ | 427,282 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Forum Energy Technologies, Inc. and subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||
| (in thousands) | Common stock | Additional paid-in capital | Treasury stock | Retained earnings (deficit) | 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 | 0 | (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 | ||||||||||||||||||||||||||
| Stock-based compensation expense | $ | — | $ | 3,661 | $ | — | $ | — | $ | — | $ | 3,661 | ||||||||||||||||||||||||||
| Restricted stock issuance, net of forfeitures | $ | 0 | $ | (8) | $ | — | $ | — | $ | — | $ | (8) | ||||||||||||||||||||||||||
| Shares issued in employee stock purchase plan | $ | 3 | $ | 864 | $ | — | $ | — | $ | — | $ | 867 | ||||||||||||||||||||||||||
| Treasury stock | $ | — | $ | — | $ | (5) | $ | — | $ | — | $ | (5) | ||||||||||||||||||||||||||
| Currency translation adjustment | $ | — | $ | — | $ | — | $ | — | $ | (6,260) | $ | (6,260) | ||||||||||||||||||||||||||
| Change in pension liability | $ | — | $ | — | $ | — | $ | — | $ | (17) | $ | (17) | ||||||||||||||||||||||||||
| Net loss | — | — | — | (532,987) | — | (532,987) | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | $ | 1,186 | $ | 1,227,768 | $ | (134,487) | $ | (490,921) | $ | (118,084) | $ | 485,462 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of 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 and production sectors of the oil and natural gas industry. 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. Forum is headquartered in Houston, TX with manufacturing and distribution facilities strategically located around the 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.
Prior to the sale of our aggregate 40% interest in the third quarter of 2019, our investment in Ashtead Technology (”Ashtead”) was accounted for using the equity method of accounting as 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 “Loss from equity investment” in the condensed consolidated statements of comprehensive loss and the investment was included in “Investment in unconsolidated subsidiary” in the condensed consolidated balance sheets. Our share of equity earnings were reported within operating loss, as the investee’s operations were 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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 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, 2019, which are included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on February 25, 2020.
COVID-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 response to these declarations and the continued spread of COVID-19, federal, state and local governments imposed varying degrees of restrictions on business and social activities, including quarantine and “stay-at-home” orders. As a result of the imposition of these government orders, there was an adverse impact on the level of oil and natural gas demand and many companies have sought protection under Chapter 11 of the U.S. Bankruptcy Code. The full impacts of the COVID-19 outbreak will ultimately depend on future developments, including the consequences of governmental and other measures designed to prevent the spread of the virus, the establishment of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which economic and operating conditions resume. We have experienced resulting disruptions to our business operations, as these restrictions have significantly impacted many sectors of the economy, with businesses curtailing or ceasing normal operations. While we cannot estimate with any degree of certainty the full impact of the COVID-19 outbreak on our liquidity, financial condition and future results of operations, the adverse impacts on our financial results from COVID-19 will continue in 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.
8
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Accounting Standards Adopted in 2020
Financial Instruments—Credit Losses. In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326), which introduced an expected credit loss methodology for the impairment 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, 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 scope that have the contractual right to receive cash. We adopted this new standard as of January 1, 2020. The adoption of this standard resulted in a noncash cumulative effect adjustment to increase our allowance for doubtful accounts and increase our retained deficit by $1.4 million. The new standard did not materially affect our unaudited Condensed Consolidated Statement of Comprehensive Loss for the nine months ended September 30, 2020.
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. We adopted this new standard as of January 1, 2020. The adoption of this new standard did not have a material impact 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. We adopted this new standard as of January 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 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 December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740) - Disclosure Framework - Simplifying the Accounting for Income Taxes, which simplified the accounting for income taxes by removing certain exceptions to the general principles of Topic 740 and clarifying and 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, 2020. We are currently evaluating the impact of this new guidance. However, we currently expect that the adoption of this guidance will not have a material impact on our consolidated financial statements.
Convertible Debt. In August 2020, the FASB issued ASU No. 2020-06 Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This update reduces the number of accounting models for convertible debt instruments resulting in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in-capital. In addition, this update also makes targeted changes to the disclosures for convertible instruments and earnings-per-
9
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
share guidance. This guidance may be adopted through either a modified retrospective or fully retrospective method of transition and will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and must be adopted as of the beginning of the Company's fiscal year. We are currently evaluating the impact of this new guidance. However, we currently expect that the adoption of this guidance will not have a material impact on our consolidated financial statements.
3. Revenue
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 receive in exchange for those goods or services. For a detailed discussion of our revenue recognition policies, refer to the Company’s 2019 Annual Report on Form 10-K.
Disaggregated Revenue
Refer to Note 11 Business Segments for disaggregated revenue by product line and geography.
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 nine months ended September 30, 2020 (in thousands):
| September 30, 2020 | December 31, 2019 | Increase / (Decrease) | |||||||||||||||||||||
| $ | % | ||||||||||||||||||||||
| Accrued revenue | $ | 1,617 | $ | 1,260 | |||||||||||||||||||
| Costs and estimated profits in excess of billings | 6,340 | 4,104 | |||||||||||||||||||||
| Contract assets | $ | 7,957 | $ | 5,364 | $ | 2,593 | 48 | % | |||||||||||||||
| Deferred revenue | $ | 5,495 | $ | 4,877 | |||||||||||||||||||
| Billings in excess of costs and profits recognized | 169 | 5,911 | |||||||||||||||||||||
| Contract liabilities | $ | 5,664 | $ | 10,788 | $ | (5,124) | (47) | % | |||||||||||||||
During the nine months ended September 30, 2020, our contract assets increased by $2.6 million and our contract liabilities decreased by $5.1 million due to the timing of billings for significant projects within our Subsea product line.
During the nine months ended September 30, 2020, we recognized revenue of $9.5 million that was included in the contract liability balance at the beginning of the period.
As all of our contracts are less than one year in 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. Dispositions
2019 Disposition of Cooper Alloy®
On December 4, 2019, we sold certain assets of our Cooper Alloy® brand of valve products for total consideration of $4.0 million and recognized a gain on disposition totaling $2.3 million. Pro forma results of operations for this disposition have not been presented because the effects were not material to the unaudited condensed consolidated financial statements.
10
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2019 Disposition of Equity Interest in Ashtead Technology
On September 3, 2019, we sold our aggregate 40% interest in Ashtead to the majority owners of Ashtead. Total consideration for Forum’s 40% interest and the settlement of a £3.0 million British Pounds note receivable from Ashtead was $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 third quarter of 2019, we recognized a gain of $1.6 million as a result of 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.
5. Inventories
Our significant components of inventory at September 30, 2020 and December 31, 2019 were as follows (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| Raw materials and parts | $ | 166,817 | $ | 172,082 | |||||||
| Work in process | 15,838 | 29,972 | |||||||||
| Finished goods | 252,346 | 278,661 | |||||||||
| Gross inventories | 435,001 | 480,715 | |||||||||
| Inventory reserve | (70,346) | (66,075) | |||||||||
| Inventories | $ | 364,655 | $ | 414,640 | |||||||
6. Intangible Assets
Intangible assets consisted of the following as of September 30, 2020 and December 31, 2019, respectively (in thousands):
| September 30, 2020 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Intangibles | Amortization Period (In Years) | ||||||||||||||||||||
| Customer relationships | $ | 270,005 | $ | (115,283) | $ | 154,722 | 10 - 15 | ||||||||||||||||
| Patents and technology | 90,868 | (24,424) | 66,444 | 5 - 19 | |||||||||||||||||||
| Non-compete agreements | 190 | (127) | 63 | 2 - 6 | |||||||||||||||||||
| Trade names | 42,433 | (21,930) | 20,503 | 7 - 19 | |||||||||||||||||||
| Distributor relationships | 14,120 | (12,625) | 1,495 | 15 - 22 | |||||||||||||||||||
| Trademarks | 5,089 | (1,018) | 4,071 | 15 | |||||||||||||||||||
| Intangible Assets Total | $ | 422,705 | $ | (175,407) | $ | 247,298 | |||||||||||||||||
| 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 | |||||||||||||||||
11
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
7. Impairments of Goodwill and Long-Lived Assets
During the third quarter of 2019, there was a significant decline in the quoted market prices of our common stock and a continued decline in U.S. onshore drilling and completions activity, which led us to evaluate all of our reporting units for a triggering event as of September 30, 2019. Upon evaluation, we considered these developments to be a triggering event that required us to update our goodwill impairment evaluation and review long-lived assets for all reporting units as of September 30, 2019.
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. The amount of the impairment charges were measured as the difference between the carrying value and the estimated fair value of the assets. In addition, we determined that the remaining carrying value of our goodwill was fully impaired in the third quarter of 2019. The fair values used in each goodwill impairment analysis were determined using the net present value of the expected future cash flows for each reporting unit (classified within level 3 of the fair value hierarchy). We determined the fair value of each reporting unit using a combination of discounted cash flow and guideline public company methodologies, which required significant assumptions and estimates about the future operations of each reporting unit. The assumptions about future cash flows and growth rates were based on our strategic plans and management’s estimates for future activity levels. Forecasted cash flows in future periods were estimated using a terminal value calculation, which considered long-term earnings growth rates.
During the nine months ended September 30, 2020, the COVID-19 pandemic and associated preventative actions taken around the world to mitigate its spread caused oil demand to deteriorate and 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, have driven sharp declines in global economic activity.
As a result, during the nine months ended September 30, 2020, we determined that certain long-lived assets were impaired as their carrying values exceeded their fair values. The amount of the impairment charges 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 a third party's sales price estimate (classified within level 3 of the fair value hierarchy).
Following is a summary of impairment charges recognized (in thousands) in our Drilling & Downhole (“D&D”), Completions (“C”), Production (“P”), and Corporate (“Corp”) segments:
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairments of: | D&D | C | P | Corp | Total | D&D | C | P | Total | ||||||||||||||||||||||||||||||||||||||||||||
Goodwill (1) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 191,485 | $ | 260,238 | $ | 19,287 | $ | 471,010 | |||||||||||||||||||||||||||||||||||
Intangible assets (1) | 5,257 | 0 | 0 | 0 | 5,257 | 0 | 48,241 | 5,230 | 53,471 | ||||||||||||||||||||||||||||||||||||||||||||
Property and equipment (1) | 1,069 | 9,608 | 4,460 | 0 | 15,137 | 5,200 | 2,655 | 0 | 7,855 | ||||||||||||||||||||||||||||||||||||||||||||
Operating lease right of use assets (2) | 4,544 | 6,140 | 1,914 | 1,498 | 14,096 | 1,450 | 582 | 155 | 2,187 | ||||||||||||||||||||||||||||||||||||||||||||
| Total impairments | $ | 10,870 | $ | 15,748 | $ | 6,374 | $ | 1,498 | $ | 34,490 | $ | 198,135 | $ | 311,716 | $ | 24,672 | $ | 534,523 | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairments of: | D&D | C | P | Corp | Total | D&D | C | P | Total | ||||||||||||||||||||||||||||||||||||||||||||
Goodwill (1) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 191,485 | $ | 260,238 | $ | 19,287 | $ | 471,010 | |||||||||||||||||||||||||||||||||||
Intangible assets (1) | 0 | 0 | 0 | 0 | 0 | 0 | 48,241 | 5,230 | 53,471 | ||||||||||||||||||||||||||||||||||||||||||||
Property and equipment (1) | 0 | 0 | 2,962 | 0 | 2,962 | 5,200 | 2,655 | 0 | 7,855 | ||||||||||||||||||||||||||||||||||||||||||||
Operating lease right of use assets (2) | 3,259 | 0 | 0 | 1,498 | 4,757 | 165 | 0 | 0 | 165 | ||||||||||||||||||||||||||||||||||||||||||||
| Total impairments | $ | 3,259 | $ | 0 | $ | 2,962 | $ | 1,498 | $ | 7,719 | $ | 196,850 | $ | 311,134 | $ | 24,517 | $ | 532,501 | |||||||||||||||||||||||||||||||||||
(1) These charges are included in Impairments of goodwill, intangible assets, property and equipment in the condensed consolidated statements of comprehensive loss.
12
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(2) For the nine months ended September 30, 2020 and 2019, $10.4 million and $1.3 million, respectively, of these charges are included in Cost of sales, while $3.7 million and $0.9 million, respectively, are included in Selling, general and administrative expenses in the condensed consolidated statements of comprehensive loss. For the three months ended September 30, 2020 and 2019, $1.8 million and 0, respectively, of these charges are included in Cost of sales, while $2.9 million and $0.2 million, respectively, are included in Selling, general and administrative expenses in the condensed consolidated statements of comprehensive loss.
8. Debt
Notes payable and lines of credit as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| 2021 Notes | $ | 12,655 | $ | 400,000 | |||||||
| 2025 Notes | 315,489 | 0 | |||||||||
| Unamortized debt premium (discount) | (31,856) | 770 | |||||||||
| Debt issuance cost | (7,588) | (3,232) | |||||||||
| Senior secured revolving credit facility | 0 | 0 | |||||||||
| Other debt | 2,614 | 2,041 | |||||||||
| Total debt | 291,314 | 399,579 | |||||||||
| Less: current maturities | (1,295) | (717) | |||||||||
| Long-term debt | $ | 290,019 | $ | 398,862 | |||||||
2021 Notes
In October 2013, we issued $300.0 million of 6.25% 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 “2021 Notes”). The 2021 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 2021 Notes are unsecured obligations, and are guaranteed on an unsecured basis by our U.S. subsidiaries that guarantee our senior secured revolving credit facility ("Credit Facility").
During the first half of 2020, we repurchased an aggregate $71.9 million principal amount of our 2021 Notes for $27.7 million and recognized a net gain of $43.8 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 the third quarter of 2020, we exchanged $315.5 million principal amount of the remaining 2021 Notes for new 2025 Notes as discussed further below. Following these transactions, $12.7 million principal amount of 2021 Notes remained outstanding as of September 30, 2020. In October 2020, we provided notice of redemption relating to the $12.7 million principal amount of 2021 Notes outstanding and intend to redeem such notes in full in November 2020 at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to the redemption date (the “Redemption”). This information does not constitute a notice of redemption with respect to the 2021 Notes, nor does it constitute an offer to tender for, or purchase any, 2021 Notes or any other security.
2025 Notes
In August 2020, we exchanged $315.5 million principal amount of the 2021 Notes for new 9.00% convertible secured notes due August 2025 (the “2025 Notes”). This transaction was accounted for as an extinguishment of the 2021 Notes with the new 2025 Notes recorded at fair value on the transaction date. We estimated the fair value of the 2025 Notes to be $282.6 million at the issuance date, resulting in a $32.9 million discount (“Debt Discount”) at issuance. As a result, we recognized a $28.7 million gain on extinguishment of debt that reflects the difference in the $314.8 million net carrying value of the 2021 Notes exchanged, including debt issuance costs and unamortized debt premium, less the $282.6 million estimated fair value of 2025 Notes and a $3.5 million early participation fee paid to
13
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
bondholders that participated in the exchange. The Debt Discount is being amortized as non-cash interest expense over the term of the 2025 Notes using the effective interest method.
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 priority collateral, which secures the 2025 Notes on a second lien basis. A portion of the 2025 Notes, initially equal to $150.0 million total principal amount, is mandatorily convertible into shares of our common stock at a conversion rate of 740.7407 shares per $1,000 principal amount of 2025 Notes converted, equivalent to 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. Any interest that the Company elects to pay in additional notes are also subject to the mandatory and optional conversion rights.
Credit Facility
In connection with the issuance of the 2025 Notes, we amended our Credit Facility. Following such amendment, our Credit Facility provides revolving credit commitments of $250.0 million (with a sublimit of up to $45.0 million available for the issuance of letters of credit for the account of the Company and certain of its domestic subsidiaries) (the “U.S. Line”), of which up to $25.0 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”).
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 priority collateral for the Credit Facility, which is also secured on a second lien basis by substantially all of the Company's other assets. The amount of eligible inventory included in the borrowing base is restricted to the lesser of $130.0 million (subject to a quarterly reduction of $0.5 million that started on October 1, 2020) and 80.0% of the total borrowing base. Our borrowing capacity under the Credit Facility could be reduced or eliminated, depending on future fluctuations in our receivables and inventory. As of September 30, 2020, our total borrowing base was $140.5 million, of which 0 was drawn and $31.9 million was used for security of outstanding letters of credit, resulting in remaining availability of $108.6 million.
Borrowings under the U.S. line bear interest at a rate equal to, at our option, either (a) the LIBOR rate, subject to a floor of 0.75%, plus a margin of 2.50% or (b) a base rate plus a margin of 1.50%. The U.S. line base rate is determined by reference to the greatest of (i) the federal funds rate plus 0.50% per annum, (ii) the one-month adjusted LIBOR plus 1.00% per annum, and (iii) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its prime rate, subject to a floor of 0.75%.
Borrowings under the Canadian Line bear interest at a rate equal to, at Forum Canada’s option, either (a) the CDOR rate, subject to a floor of 0.75%, plus a margin of 2.50% or (b) a base rate plus a margin of 1.50%. The Canadian line base rate is determined by reference to the greater of (i) the one-month CDOR rate plus 1.00% and (ii) the prime rate for Canadian dollar commercial loans made in Canada as reported by Thomson Reuters, subject to a floor of 0.75%.
The weighted average interest rate under the Credit Facility was approximately 2.40% for the nine months ended September 30, 2020.
The Credit Facility also provides for a commitment fee in the amount of (a) 0.375% on the unused portion of commitments if average usage of the Credit Facility is greater than 50% and (b) 0.500% on the unused portion of commitments if average usage of the Credit Facility is less than or equal to 50%.
The Credit Facility is currently scheduled to mature on July 1, 2021, subject to extension to October 30, 2022 if, on or before July 1, 2021, the 2021 Notes are repaid or refinanced in their entirety with indebtedness maturing on or after January 31, 2023. Upon completion of the Redemption in the fourth quarter 2020, the maturity of our Credit Facility will be October 30, 2022. If excess availability under the Credit Facility falls below the greater of 12.5% of the borrowing base and $31.25 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
14
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
thresholds for at least 60 consecutive days. Furthermore, the Credit Facility includes an obligation to prepay outstanding loans with cash on hand in excess of certain thresholds and includes a cross-default to the 2025 Notes.
Deferred Loan Costs
We have incurred loan costs that have been deferred and are amortized to interest expense over the term of the 2025 Notes, 2021 Notes and the Credit Facility. During the nine months ended September 30, 2020, we capitalized a total of $9.7 million of deferred loan costs related to the exchange of the 2021 Notes. In the first quarter of 2020, we wrote-off $2.0 million of deferred loan costs for the termination of previous discussions related to a potential exchange offer for our 2021 Notes. In the third quarter of 2020, we wrote off $0.3 million of deferred loan costs related to amending our Credit Facility to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million.
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 $31.9 million and $24.5 million in total outstanding letters of credit as of September 30, 2020 and December 31, 2019, respectively.
9. Income Taxes
For interim periods, our income tax expense or benefit is computed based on our estimated annual effective tax rate and any discrete items that impact the interim periods. For the three and nine months ended September 30, 2020, we recorded a tax expense of $1.0 million and tax benefit of $13.8 million, respectively, compared to a tax benefit of $3.4 million and tax expense of $6.7 million for the three and nine months ended September 30, 2019, 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 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 nine months ended September 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 enabled the company to realize these losses and the related valuation allowance was released.
The estimated annual effective tax rates for the nine months ended September 30, 2020 and 2019 were also impacted by losses in jurisdictions where the recording of a tax benefit is not available. For the nine months ended September 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. 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.
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, tax-planning and recent operating results. As of September 30, 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 China. As a result, we have certain valuation allowances against our deferred tax assets as of September 30, 2020.
15
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
10. Fair Value Measurements
The Company had 0 borrowings outstanding under the Credit Facility at both September 30, 2020 and December 31, 2019. 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 2021 Notes is estimated using Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At September 30, 2020, the fair value and the carrying value of our 2021 Notes approximated $11.8 million and $12.7 million, respectively. At December 31, 2019, the fair value and the carrying value of our 2021 Notes approximated $354.0 million and $397.5 million, respectively.
The fair value of our 2025 Notes is estimated using Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At September 30, 2020, the fair value and the carrying value of our 2025 Notes approximated $255.5 million and $276.1 million, respectively.
There were 0 other outstanding financial assets as of September 30, 2020 and December 31, 2019 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 nine months ended September 30, 2020.
11. Business Segments
The Company reports results of operations in the following three reporting segments: Drilling & Downhole, Completions and Production. 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Drilling & Downhole | $ | 43,164 | $ | 88,294 | 166,990 | 256,586 | |||||||||||||||||
| Completions | 19,632 | 70,637 | 88,038 | 246,816 | |||||||||||||||||||
| Production | 40,836 | 81,022 | 145,038 | 256,272 | |||||||||||||||||||
| Eliminations | (26) | (687) | (553) | (2,918) | |||||||||||||||||||
| Total revenue | $ | 103,606 | $ | 239,266 | $ | 399,513 | $ | 756,756 | |||||||||||||||
| Operating loss | |||||||||||||||||||||||
| Drilling & Downhole | $ | (13,207) | $ | 4,342 | $ | (26,751) | $ | 3,185 | |||||||||||||||
| Completions | (11,896) | (109) | (47,027) | 9,583 | |||||||||||||||||||
| Production | (70) | 2,301 | (9,306) | 10,225 | |||||||||||||||||||
| Corporate | (7,706) | (7,410) | (23,326) | (22,711) | |||||||||||||||||||
| Segment operating income (loss) | (32,879) | (876) | (106,410) | 282 | |||||||||||||||||||
| Transaction expenses | 665 | 254 | 852 | 972 | |||||||||||||||||||
| Impairments of goodwill, intangible assets, property and equipment | 2,962 | 532,336 | 20,394 | 532,336 | |||||||||||||||||||
| Contingent consideration benefit | 0 | 0 | 0 | (4,629) | |||||||||||||||||||
| Loss (gain) on disposal of assets and other | 541 | (107) | (180) | (71) | |||||||||||||||||||
| Operating loss | $ | (37,047) | $ | (533,359) | $ | (127,476) | $ | (528,326) | |||||||||||||||
16
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
A summary of consolidated assets by reportable segment is as follows (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| Drilling & Downhole | $ | 345,980 | $ | 407,779 | |||||||
| Completions | 406,325 | 496,714 | |||||||||
| Production | 142,841 | 186,786 | |||||||||
| Corporate | 28,875 | 68,718 | |||||||||
| Total assets | $ | 924,021 | $ | 1,159,997 | |||||||
Corporate assets primarily include cash, certain prepaid assets and deferred loan costs.
The following table presents our revenues disaggregated by product line (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Drilling Technologies | $ | 17,467 | $ | 43,192 | $ | 74,076 | $ | 122,429 | |||||||||||||||
| Downhole Technologies | 13,376 | 29,031 | 51,000 | 88,241 | |||||||||||||||||||
| Subsea Technologies | 12,321 | 16,071 | 41,914 | 45,916 | |||||||||||||||||||
| Stimulation and Intervention | 9,375 | 36,396 | 42,371 | 134,605 | |||||||||||||||||||
| Coiled Tubing | 10,257 | 34,241 | 45,667 | 112,211 | |||||||||||||||||||
| Production Equipment | 15,498 | 29,143 | 53,677 | 98,720 | |||||||||||||||||||
| Valve Solutions | 25,338 | 51,879 | 91,361 | 157,552 | |||||||||||||||||||
| Eliminations | (26) | (687) | (553) | (2,918) | |||||||||||||||||||
| Total revenue | $ | 103,606 | $ | 239,266 | $ | 399,513 | $ | 756,756 | |||||||||||||||
The following table presents our revenues disaggregated by geography (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| United States | $ | 62,311 | $ | 159,407 | $ | 256,497 | $ | 540,074 | |||||||||||||||
| Canada | 5,574 | 19,256 | 25,125 | 49,473 | |||||||||||||||||||
| Europe & Africa | 6,153 | 13,837 | 25,757 | 49,249 | |||||||||||||||||||
| Middle East | 11,156 | 16,561 | 34,303 | 48,306 | |||||||||||||||||||
| Asia-Pacific | 11,337 | 21,662 | 34,160 | 47,880 | |||||||||||||||||||
| Latin America | 7,075 | 8,543 | 23,671 | 21,774 | |||||||||||||||||||
| Total Revenue | $ | 103,606 | $ | 239,266 | $ | 399,513 | $ | 756,756 | |||||||||||||||
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 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 September 30, 2020 and December 31, 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.
17
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
13. Loss 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net loss | $ | (21,551) | $ | (532,987) | (64,189) | (554,609) | |||||||||||||||||
| Basic - weighted average shares outstanding | 111,607 | 110,295 | 111,459 | 109,977 | |||||||||||||||||||
| Dilutive effect of stock options and restricted stock | 0 | 0 | 0 | 0 | |||||||||||||||||||
| Dilutive effect of convertible notes due 2025 | — | — | — | — | |||||||||||||||||||
| Diluted - weighted average shares outstanding | 111,607 | 110,295 | 111,459 | 109,977 | |||||||||||||||||||
| Loss per share | |||||||||||||||||||||||
| Basic | $ | (0.19) | $ | (4.83) | $ | (0.58) | $ | (5.04) | |||||||||||||||
| Diluted | $ | (0.19) | $ | (4.83) | $ | (0.58) | $ | (5.04) | |||||||||||||||
For all periods presented, we excluded all potentially dilutive stock options and restricted stock and the assumed conversion of the 2025 Notes in calculating diluted earnings per share as the effect was anti-dilutive due to the net losses incurred for these periods.
14. Stockholders' Equity
Stock-based compensation
During the nine months ended September 30, 2020, the Company granted 2,250,360 shares of restricted stock units that vest ratably over three years. The Company also granted 3,265,000 shares of contingent restricted stock units that vest ratably over three years dependent upon achieving a minimum stock price of $0.71 for 20 trading days in each performance period. In addition, the Company granted 489,750 shares of restricted stock units that cliff vest at the end of three years dependent upon achieving a minimum stock price of $1.50 for 20 consecutive trading days during the performance period.
During the nine months ended September 30, 2020, the Company granted performance awards with a market condition that are payable in either cash or shares of the Company's common stock. The performance awards granted may settle for between 0 and 3 times the award's cash target amount. The award amount issued pursuant to the performance 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 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.
Reverse stock split
In October 2020, our Board of Directors approved a 1-for-20 reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of common stock, par value $0.01 per share, accompanied by a corresponding decrease in the Company’s authorized shares of common stock, such that, following the consummation of the Reverse Stock Split, the number of authorized shares of common stock will be reduced from 296,000,000 to 14,800,000. The Company’s stockholders previously approved the Reverse Stock Split at the annual meeting of stockholders on May 12, 2020.
The Company anticipates that the effective time of the Reverse Stock Split will be after market close on November 9, 2020, with the common stock trading on a post-split basis under the Company’s existing trading symbol, “FET,” at the market open on November 10, 2020. The Reverse Stock Split will increase the market price per share of the
18
Forum Energy Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Company’s common stock, and is expected to bring the Company into compliance with the listing requirements of the New York Stock Exchange.
15. Related Party Transactions
The Company has sold and purchased equipment 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.
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.
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 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. These 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 drilling rig equipment for new rigs, upgrades and refurbishment projects, subsea construction and development projects, pressure pumping equipment, the placement of production equipment on new producing wells, and downstream capital projects. For the nine months ended September 30, 2020, approximately 82% 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.
19
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, 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.
•Production. 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, 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.
In March and April of 2020, the COVID-19 pandemic and associated actions taken around the world to mitigate the spread of COVID-19 caused a significant decline in economic activity and oil demand. At the same time, the OPEC+ oil producing nations ("OPEC+") 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. In response, in the second quarter of 2020, 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. Since that time, WTI prices have partially rebounded and stabilized around a price of approximately $40 per barrel.
The extreme volatility and lower price environment have created an extremely challenging market for all sub-sectors of the oil and natural gas industry in 2020. Although oil demand and prices have increased from the lows reached at the beginning of the second quarter, global rig count continued to decline through the third quarter of 2020.
Due to the poor market conditions, exploration and production companies in North America are under pressure to continue reducing 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. In addition, recently there has been an increase in bankruptcies and consolidation of exploration and production and service companies. A continuation of this trend going forward may lead to a further reduction in the demand for our products.
Activity levels in international regions, as well as global offshore and subsea activity, have also been impacted by COVID-19 related activity disruptions. However, international revenue for our drilling and subsea capital equipment offerings have not declined as sharply due to longer project timelines for international drilling customers and the 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 lower oil demand and oversupply of relatively new or recently upgraded equipment.
20
Demand for products in our Valve Solutions product line is driven by capital projects and maintenance spending in the upstream, midstream and downstream markets. As such, revenue for our Valve Solutions product line has also been negatively affected by lower energy prices and the impacts of COVID-19 on the global economy. In addition, revenue for our Valve Solutions product line has been under pressure due to our distribution customers’ increased focus on decreasing the quantity of valves in their inventories in order to generate positive free cash flow.
Although we have experienced some operational inefficiencies as a result of COVID-19, our manufacturing facilities and business operations have not experienced work stoppages due to COVID-19 or resulting government regulations. However, in response to the decline in demand for our products and decreases in revenue, we have implemented significant cost reduction actions, including exiting facilities, lowering headcount, lowering salaries, 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 | ||||||||||||||||||||
| September 30, | June 30, | September 30, | ||||||||||||||||||
| 2020 | 2020 | 2019 | ||||||||||||||||||
| Average global oil, $/bbl | ||||||||||||||||||||
| West Texas Intermediate | $ | 40.89 | $ | 27.96 | $ | 56.34 | ||||||||||||||
| United Kingdom Brent | $ | 42.91 | $ | 29.70 | $ | 61.95 | ||||||||||||||
| Average North American Natural Gas, $/Mcf | ||||||||||||||||||||
| Henry Hub | $ | 2.00 | $ | 1.70 | $ | 2.38 | ||||||||||||||
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 $40.05 and $40.30 per barrel, respectively, as of September 30, 2020. We expect oil prices to remain below prior year levels due to lower demand, the impact of COVID-19 and supply surpluses. Natural gas prices increased in the third quarter 2020 with average price levels approximately 18% higher compared to the second quarter 2020.
21
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 | ||||||||||||||||||||
| September 30, | June 30, | September 30, | ||||||||||||||||||
| 2020 | 2020 | 2019 | ||||||||||||||||||
| Active Rigs by Location | ||||||||||||||||||||
| United States | 254 | 392 | 920 | |||||||||||||||||
| Canada | 47 | 25 | 132 | |||||||||||||||||
| International | 731 | 834 | 1,144 | |||||||||||||||||
| Global Active Rigs | 1,032 | 1,251 | 2,196 | |||||||||||||||||
| Land vs. Offshore Rigs | ||||||||||||||||||||
| Land | 836 | 1,029 | 1,921 | |||||||||||||||||
| Offshore | 196 | 222 | 275 | |||||||||||||||||
| Global Active Rigs | 1,032 | 1,251 | 2,196 | |||||||||||||||||
| U.S. Commodity Target | ||||||||||||||||||||
| Oil/Gas | 180 | 308 | 756 | |||||||||||||||||
| Gas | 72 | 82 | 163 | |||||||||||||||||
| Unclassified | 2 | 2 | 1 | |||||||||||||||||
| Total U.S. Active Rigs | 254 | 392 | 920 | |||||||||||||||||
| U.S. Well Path | ||||||||||||||||||||
| Horizontal | 218 | 353 | 801 | |||||||||||||||||
| Vertical | 15 | 14 | 53 | |||||||||||||||||
| Directional | 21 | 25 | 66 | |||||||||||||||||
| Total U.S. Active Rigs | 254 | 392 | 920 | |||||||||||||||||
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 third quarter 2020 was 35% and 72% lower compared to the second quarter of 2020 and the third quarter of 2019, respectively. The U.S. rig count was 805 at the beginning of 2020. Since then, the number of working rigs fell 70% to a low of 244 rigs in August 2020. Active rig levels for the remainder of 2020 are projected to remain significantly below prior year levels.
Tariffs imposed in 2018 by the U.S. government on imports of selected products, including those sourced from China, have caused our raw material costs to remain at an increased level, primarily in our Coiled Tubing and Valve Solutions product lines. In response, we are taking actions to mitigate the impact, including through diversification of our supply chain and applying for tariff exemptions.
The table below shows the amount of total inbound orders by segment:
| (in millions of dollars) | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
| September 30, | June 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||
| 2020 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Drilling & Downhole | $ | 38.7 | $ | 42.3 | $ | 80.0 | $ | 151.0 | $ | 240.3 | |||||||||||||||||||
| Completions | 18.4 | 14.2 | 64.5 | 82.5 | 215.5 | ||||||||||||||||||||||||
| Production | 35.2 | 29.1 | 55.2 | 115.0 | 210.7 | ||||||||||||||||||||||||
| Total Orders | $ | 92.3 | $ | 85.6 | $ | 199.7 | $ | 348.5 | $ | 666.5 | |||||||||||||||||||
22
Results of operations
Three months ended September 30, 2020 compared with three months ended September 30, 2019
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands of dollars, except per share information) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Drilling & Downhole | $ | 43,164 | $ | 88,294 | $ | (45,130) | (51.1) | % | |||||||||||||||
| Completions | 19,632 | 70,637 | (51,005) | (72.2) | % | ||||||||||||||||||
| Production | 40,836 | 81,022 | (40,186) | (49.6) | % | ||||||||||||||||||
| Eliminations | (26) | (687) | 661 | * | |||||||||||||||||||
| Total revenue | 103,606 | 239,266 | (135,660) | (56.7) | % | ||||||||||||||||||
| Operating loss: | |||||||||||||||||||||||
| Drilling & Downhole | $ | (13,207) | $ | 4,342 | $ | (17,549) | (404.2) | % | |||||||||||||||
| Operating margin % | (30.6) | % | 4.9 | % | |||||||||||||||||||
| Completions | (11,896) | (109) | (11,787) | (10,813.8) | % | ||||||||||||||||||
| Operating margin % | (60.6) | % | (0.2) | % | |||||||||||||||||||
| Production | (70) | 2,301 | (2,371) | (103.0) | % | ||||||||||||||||||
| Operating margin % | (0.2) | % | 2.8 | % | |||||||||||||||||||
| Corporate | (7,706) | (7,410) | (296) | (4.0) | % | ||||||||||||||||||
| Total segment operating loss | (32,879) | (876) | (32,003) | (3,653.3) | % | ||||||||||||||||||
| Operating margin % | (31.7) | % | (0.4) | % | |||||||||||||||||||
| Transaction expenses | 665 | 254 | 411 | * | |||||||||||||||||||
| Impairments of goodwill, intangible assets, property and equipment | 2,962 | 532,336 | (529,374) | * | |||||||||||||||||||
| Loss (gain) on disposal of assets and other | 541 | (107) | 648 | * | |||||||||||||||||||
| Operating loss | (37,047) | (533,359) | 496,312 | 93.1 | % | ||||||||||||||||||
| Interest expense | 8,473 | 7,766 | 707 | 9.1 | % | ||||||||||||||||||
| Foreign exchange losses (gains) and other, net | 3,445 | (3,200) | 6,645 | * | |||||||||||||||||||
| Gain on extinguishment of debt | (28,734) | — | (28,734) | * | |||||||||||||||||||
| Deferred loan costs written off | 303 | — | 303 | * | |||||||||||||||||||
| Gain realized on previously held equity investment | — | (1,567) | 1,567 | * | |||||||||||||||||||
| Total other (income) expense, net | (16,513) | 2,999 | (19,512) | (650.6) | % | ||||||||||||||||||
| Loss before income taxes | (20,534) | (536,358) | 515,824 | 96.2 | % | ||||||||||||||||||
| Income tax expense (benefit) | 1,017 | (3,371) | 4,388 | 130.2 | % | ||||||||||||||||||
| Net loss | $ | (21,551) | $ | (532,987) | $ | 511,436 | 96.0 | % | |||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Basic | 111,607 | 110,295 | |||||||||||||||||||||
| Diluted | 111,607 | 110,295 | |||||||||||||||||||||
| Loss per share | |||||||||||||||||||||||
| Basic | $ | (0.19) | $ | (4.83) | |||||||||||||||||||
| Diluted | $ | (0.19) | $ | (4.83) | |||||||||||||||||||
| * not meaningful | |||||||||||||||||||||||
We sold our equity interest in Ashtead in the third quarter of 2019. Therefore, our results of operations for the third quarter of 2020 may not be comparable to the results of operations for the third quarter of 2019. Refer to Note 4 Dispositions for additional information.
23
Revenue
Our revenue for the three months ended September 30, 2020 was $103.6 million, a decrease of $135.7 million, or 56.7%, compared to the three months ended September 30, 2019. For the three months ended September 30, 2020, our Drilling & Downhole, Completions, and Production segments comprised 41.7%, 18.9%, and 39.4% of our total revenue, respectively, which compared to 36.9%, 29.2%, and 33.9% of our total revenue, respectively, for the three months ended September 30, 2019. The overall decline in revenue is primarily related to lower sales volumes due to the significant decrease in drilling and completions activity levels. The changes in revenue by operating segment consisted of the following:
Drilling & Downhole segment — Revenue was $43.2 million for the three months ended September 30, 2020, a decrease of $45.1 million, or 51.1%, compared to the three months ended September 30, 2019. This decrease was driven by a $25.7 million, or 59.6%, decline in revenue for our Drilling Technologies product line due to lower sales volumes of consumable products and capital equipment as a result of the 72% decline in U.S. rig activity year-over-year. Revenue for our Downhole Technologies product line decreased by $15.7 million due to lower sales volumes of artificial lift products and well construction equipment due to the significant decline in drilling activity and well completions in 2020. The $3.8 million decline in revenue for our Subsea Technologies product line was relatively less than other product lines in the segment due to the diversification of sales of capital equipment to customers outside the oil and natural gas industry.
Completions segment — Revenue was $19.6 million for the three months ended September 30, 2020, a decrease of $51.0 million, or 72.2%, compared to the three months ended September 30, 2019. This decrease includes a $27.0 million decrease 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. and the cannibalization of existing excess equipment. The remaining decline was driven by a $24.0 million decrease in sales volumes for our Coiled Tubing product line primarily attributable to lower U.S. completions activity.
Production segment — Revenue was $40.8 million for the three months ended September 30, 2020, a decrease of $40.2 million, or 49.6%, compared to the three months ended September 30, 2019. This decrease was driven by a $26.5 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 $13.6 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 decline in well completions activity in 2020.
Segment operating loss and segment operating margin percentage
Segment operating loss for the three months ended September 30, 2020 was $32.9 million, a decline of $32.0 million compared to a loss of $0.9 million for the three months ended September 30, 2019. For the three months ended September 30, 2020, segment operating margin percentage was (31.7)% compared to (0.4)% for the three months ended September 30, 2019. Segment operating margin percentage is calculated by dividing segment operating loss by revenue for the period. The change in operating loss for each segment is explained as follows:
Drilling & Downhole segment — Segment operating loss was $13.2 million, or (30.6)%, for the three months ended September 30, 2020 compared to segment operating income of $4.3 million, or 4.9%, for the three months ended September 30, 2019. The $17.5 million decline in segment operating results is primarily attributable to lower gross profit from the 51.1% decline in segment revenues as well as employee severance and facility closure costs incurred in 2020. These declines in segment operating results were partially offset by lower employee and facilities related expenses due to headcount, salary and other cost reductions implemented in 2020.
Completions segment — Segment operating loss was $11.9 million, or (60.6)%, for the three months ended September 30, 2020 compared to a segment operating loss of $0.1 million, or (0.2)%, for the three months ended September 30, 2019. The $11.8 million decline in segment operating results is due to the reduction in gross profit from the 72.2% decline in revenues, partially offset by lower employee and facilities related expenses due to headcount, salary and other cost reductions implemented in 2020.
Production segment — Segment operating loss was $0.1 million, or (0.2)%, for the three months ended September 30, 2020 compared to segment operating income of $2.3 million, or 2.8%, for the three months ended September 30, 2019. The decline in segment operating results is due to lower gross profit from the 49.6% decline in revenue, partially offset by lower employee and facilities related expenses due to headcount, salary and other cost reductions implemented in 2020.
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Corporate — Selling, general and administrative expenses for Corporate were $7.7 million for the three months ended September 30, 2020, a $0.3 million increase compared to the three months ended September 30, 2019. Reductions in employee related costs from headcount, salary and other cost reductions were more than offset by a $1.5 million lease impairment and higher legal fees incurred in the three months ended September 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 loss
Several items are not included in segment operating loss, but are included in total operating loss. These items include transaction expenses, impairments of goodwill, intangible assets, property and equipment, 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). For further information related to impairments of goodwill, intangible assets, property and equipment, refer to Note 7 Impairments of Goodwill and Long-Lived Assets.
Other income and expense
Other income and expense includes interest expense, foreign exchange losses (gains) and other, gain on extinguishment of debt, deferred loan costs written off and gain realized on previously held equity investment. We incurred $8.5 million of interest expense during the three months ended September 30, 2020, an increase of $0.7 million compared to the three months ended September 30, 2019 primarily due to an increase in non-cash interest expense for amortization of discount on the new 2025 Notes.
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.
In the third quarter of 2020, we exchanged $315.5 million principal amount of 2021 Notes for new 2025 Notes. This transaction was accounted for as an extinguishment of the 2021 Notes with the new 2025 Notes recorded at fair value resulting in a $28.7 million gain on extinguishment of debt. See Note 8 Debt for further information.
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, resulting in a write-off of $0.3 million of deferred loan costs.
In the third quarter of 2019, we sold our aggregate 40% interest in Ashtead and recognized a gain of $1.6 million as a result of such sale. See Note 4 Dispositions for further information.
Taxes
We recorded a tax expense of $1.0 million for the three months ended September 30, 2020, compared to a tax benefit of $3.4 million for the three months ended September 30, 2019. The tax benefit for the three months ended September 30, 2019 includes a $3.8 million benefit related to the impairments of goodwill. In addition, the estimated annual effective tax rate for the three months ended September 30, 2020 is different than the comparable period in 2019 primarily due to the impairment of non-deductible goodwill in 2019 and 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.
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Nine months ended September 30, 2020 compared with nine months ended September 30, 2019
| Nine Months Ended September 30, | Favorable / (Unfavorable) | ||||||||||||||||||||||
| 2020 | 2019 | $ | % | ||||||||||||||||||||
| (in thousands of dollars, except per share information) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Drilling & Downhole | $ | 166,990 | $ | 256,586 | $ | (89,596) | (34.9) | % | |||||||||||||||
| Completions | 88,038 | 246,816 | (158,778) | (64.3) | % | ||||||||||||||||||
| Production | 145,038 | 256,272 | (111,234) | (43.4) | % | ||||||||||||||||||
| Eliminations | (553) | (2,918) | 2,365 | * | |||||||||||||||||||
| Total revenue | 399,513 | 756,756 | (357,243) | (47.2) | % | ||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| Drilling & Downhole | (26,751) | 3,185 | (29,936) | (939.9) | % | ||||||||||||||||||
| Operating margin % | (16.0) | % | 1.2 | % | |||||||||||||||||||
| Completions | (47,027) | 9,583 | (56,610) | (590.7) | % | ||||||||||||||||||
| Operating margin % | (53.4) | % | 3.9 | % | |||||||||||||||||||
| Production | (9,306) | 10,225 | (19,531) | (191.0) | % | ||||||||||||||||||
| Operating margin % | (6.4) | % | 4.0 | % | |||||||||||||||||||
| Corporate | (23,326) | (22,711) | (615) | (2.7) | % | ||||||||||||||||||
| Total segment operating income (loss) | (106,410) | 282 | (106,692) | (37,834.0) | % | ||||||||||||||||||
| Operating margin % | (26.6) | % | — | % | |||||||||||||||||||
| Transaction expenses | 852 | 972 | (120) | (12.3) | % | ||||||||||||||||||
| Impairments of goodwill, intangible assets, property and equipment | 20,394 | 532,336 | (511,942) | * | |||||||||||||||||||
| Contingent consideration benefit | — | (4,629) | 4,629 | * | |||||||||||||||||||
| Gain on disposal of assets and other | (180) | (71) | (109) | * | |||||||||||||||||||
| Operating loss | (127,476) | (528,326) | 400,850 | 75.9 | % | ||||||||||||||||||
| Interest expense | 21,617 | 24,170 | (2,553) | (10.6) | % | ||||||||||||||||||
| Foreign exchange gains and other, net | (931) | (3,069) | 2,138 | 69.7 | % | ||||||||||||||||||
| Gain on extinguishment of debt | (72,478) | — | (72,478) | * | |||||||||||||||||||
| Deferred loan costs written off | 2,262 | — | 2,262 | * | |||||||||||||||||||
| Gain realized on previously held equity investment | — | (1,567) | 1,567 | * | |||||||||||||||||||
| Total other (income) expense | (49,530) | 19,534 | (69,064) | * | |||||||||||||||||||
| Loss before income taxes | (77,946) | (547,860) | 469,914 | 85.8 | % | ||||||||||||||||||
| Income tax expense (benefit) | (13,757) | 6,749 | (20,506) | (303.8) | % | ||||||||||||||||||
| Net loss | $ | (64,189) | $ | (554,609) | $ | 490,420 | 88.4 | % | |||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Basic | 111,459 | 109,977 | |||||||||||||||||||||
| Diluted | 111,459 | 109,977 | |||||||||||||||||||||
| Loss per share | |||||||||||||||||||||||
| Basic | $ | (0.58) | $ | (5.04) | |||||||||||||||||||
| Diluted | $ | (0.58) | $ | (5.04) | |||||||||||||||||||
| * not meaningful | |||||||||||||||||||||||
We sold our equity interest in Ashtead in the third quarter of 2019. Therefore, our results of operations for the nine months ended September 30, 2020 may not be comparable to historical results of operations for the nine months ended September 30, 2019. Refer to Note 4 Dispositions for additional information.
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Revenue
Our revenue for the nine months ended September 30, 2020 was $399.5 million, a decrease of $357.2 million, or 47.2%, compared to the nine months ended September 30, 2019. For the nine months ended September 30, 2020, our Drilling & Downhole, Completions, and Production segments comprised 41.8%, 21.9%, and 36.3% of our total revenue, respectively, which compared to 33.9%, 32.2%, and 33.9% of our total revenue, respectively, for the nine months ended September 30, 2019. The overall decline in revenue is primarily related to lower sales volumes due to the significant decrease in drilling and completions activity levels. The changes in revenue by operating segment consisted of the following:
Drilling & Downhole segment — Revenue was $167.0 million for the nine months ended September 30, 2020, a decrease of $89.6 million, or 34.9%, compared to the nine months ended September 30, 2019. This decrease includes a $48.4 million, or 39.5%, 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 52% decline in U.S. rig activity year-over-year. Revenue for our Downhole Technologies product line decreased by $37.2 million primarily 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 first nine months of 2020. The $4.0 million decline in revenue for our Subsea Technologies product line was relatively less than other product lines in the segment due to the diversification of sales of capital equipment to customers outside the oil and natural gas industry.
Completions segment — Revenue was $88.0 million for the nine months ended September 30, 2020, a decrease of $158.8 million, or 64.3%, compared to the nine months ended September 30, 2019. This decline includes a $92.2 million, or 68.5%, decrease in sales volumes 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 $66.5 million decrease in sales volumes for our Coiled Tubing product line primarily attributable to lower U.S. completions activity.
Production segment — Revenue was $145.0 million for the nine months ended September 30, 2020, a decrease of $111.2 million, or 43.4%, compared to the nine months ended September 30, 2019. This decrease includes a $66.2 million, or 42.0%, decline in sales volumes of our valve products, particularly sales into the North America upstream and midstream oil and natural gas market, and a $45.0 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 U.S. well completions in the nine months ended September 30, 2020.
Segment operating income (loss) and segment operating margin percentage
Segment operating loss for the nine months ended September 30, 2020 was $106.4 million, a decline of $106.7 million compared to the nine months ended September 30, 2019. For the nine months ended September 30, 2020, segment operating margin percentage was (26.6)% compared to break-even for the nine months ended September 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 $26.8 million, or (16.0)%, for the nine months ended September 30, 2020 compared to income of $3.2 million, or 1.2% for the nine months ended September 30, 2019. The $29.9 million decline in segment operating results is primarily attributable to lower gross profit from the 34.9% decline in segment revenues. In addition, segment operating loss for the first nine months of 2020 includes approximately $8.0 million of inventory write-downs, $4.5 million of impairments of operating lease right of use assets, and $3.1 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 in 2020.
Completions segment — Segment operating loss was $47.0 million, or (53.4)%, for the nine months ended September 30, 2020 compared to income of $9.6 million, or 3.9% for the nine months ended September 30, 2019. The $56.6 million decline in segment operating results is primarily attributable to lower gross profit from the 64.3% decline in segment revenues. In addition, segment operating loss for the first nine months of 2020 includes $8.5 million of inventory write-downs, $6.1 million of impairments of operating lease right of use assets, and $1.5 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 in 2020.
Production segment — Segment operating loss was $9.3 million, or (6.4)%, for the nine months ended September 30, 2020 compared to income of $10.2 million, or 4.0% for the nine months ended September 30, 2019. The $19.5 million decline in segment operating results is primarily attributable to lower gross profit from the 43.4% decline in segment revenues. In addition, segment operating loss for the first nine months of 2020 includes $3.3 million of
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inventory write-downs, $1.9 million of impairments of operating lease right of use assets, and $1.2 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 in 2020.
Corporate — Selling, general and administrative expenses for Corporate were $23.3 million for the nine months ended September 30, 2020, a $0.6 million increase compared to the nine months ended September 30, 2019. Reductions in employee related costs from headcount, salary and other cost reductions were more than offset by a $1.5 million lease impairment and higher legal fees in the first nine months 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 goodwill, intangible assets, property and equipment, contingent consideration benefit and gain on 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. For further information related to impairments of goodwill, intangible assets, property and equipment, refer to Note 7 Impairments of Goodwill and Long-Lived Assets.
The $4.6 million contingent consideration benefit recognized in the nine months ended September 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 gains and other, gain on extinguishment of debt and deferred loan costs written off. We incurred $21.6 million of interest expense during the nine months ended September 30, 2020, a decrease of $2.6 million from the nine months ended September 30, 2019 primarily due to lower average outstanding balances on our revolving Credit Facility in 2020 compared to 2019.
The foreign exchange 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.
During the nine months ended September 30, 2020, we recognized $72.5 million of gains on extinguishment of debt, including a $43.8 million gain from the repurchase of notes in the first half of 2020 and a $28.7 million gain from the exchange of notes in the third quarter of 2020. During the first half of 2020, we repurchased an aggregate $71.9 million of principal amount of our 2021 Notes for $27.7 million and recognized a net gain of $43.8 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 the third quarter of 2020, we exchanged $315.5 million principal amount of 2021 Notes for new 2025 Notes. This transaction was accounted for as an extinguishment of the 2021 Notes with the new 2025 Notes recorded at fair value on the transaction date, resulting in a $28.7 million gain on extinguishment of debt. See Note 8 Debt for further information.
During the nine months ended September 30, 2020, we wrote-off $2.3 million of deferred loan costs including $2.0 million for the termination of previous discussions related to a potential exchange offer for our 2021 Notes and $0.3 million related to amending our Credit Facility to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million.
In the third quarter of 2019, we sold our aggregate 40% interest in Ashtead and recognized a gain of $1.6 million as a result of such sale. See Note 4 Dispositions for further information.
Taxes
We recorded a tax benefit of $13.8 million for the nine months ended September 30, 2020, compared to a tax expense of $6.7 million for the nine months ended September 30, 2019. The tax expense for the nine months ended September 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, as discussed further below. The tax expense for the nine months ended September 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 and a tax benefit of $3.8 million related to the impairment of goodwill. In
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addition, the estimated annual effective tax rates for the nine months ended September 30, 2020 and 2019 were impacted by losses in jurisdictions where the recording of a tax benefit is not available.
On March 27, 2020, President Trump signed the 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 expense for the nine months ended September 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.
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, our Credit Facility and the 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 generate positive operating cash flow and access outside sources of capital.
During the first half of 2020, we repurchased an aggregate $71.9 million principal amount of our 2021 Notes for $27.7 million and recognized a net gain of $43.8 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 the third quarter of 2020, we exchanged $315.5 million principal amount of the remaining 2021 Notes for new 2025 Notes. Concurrent with 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. Following these transactions, we had $12.7 million principal amount of 2021 Notes, $315.5 million principal amount of 2025 Notes and no borrowings outstanding under our Credit Facility as of September 30, 2020. The Credit Facility is currently scheduled to mature on July 1, 2021, subject to extension to October 30, 2022 if, on or before July 1, 2021, the 2021 Notes are repaid or refinanced in their entirety with indebtedness maturing on or after January 31, 2023. In October 2020, we provided notice of redemption relating to the $12.7 million principal amount of 2021 Notes outstanding and intend to redeem such notes in full in November 2020 at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to the redemption date. This information does not constitute a notice of redemption with respect to the 2021 Notes, nor does it constitute an offer to tender for, or purchase any, 2021 Notes or any other security.
See Note 8 Debt for further details related to the terms for our 2021 Notes, 2025 Notes and Credit Facility.
As of September 30, 2020, we had cash and cash equivalents of $20.0 million and $108.6 million of availability under our Credit Facility, respectively. We anticipate that our future working capital requirements for our operations will fluctuate directionally with revenues. Furthermore, availability under our Credit Facility will fluctuate directionally based on the level of our eligible accounts receivable and inventory. In the third quarter of 2020, we received a $14.1 million cash refund for income taxes from filing a carryback claim for U.S. federal tax losses based on provisions in the CARES Act. 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.
We expect our available cash on-hand, cash generated by operations, 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 other eligible capital to reduce the principal amount of debt outstanding.
In 2019, we completed two dispositions for total consideration of $51.7 million. For additional information, see Note 4 Dispositions. We may pursue acquisitions in the future, which may be funded with cash and/or equity. Our ability to make significant 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.
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Our cash flows for the nine months ended September 30, 2020 and 2019 are presented below (in millions):
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net cash provided by operating activities | $ | 1.7 | $ | 75.7 | |||||||
| Net cash provided by investing activities | 2.0 | 27.2 | |||||||||
| Net cash used in financing activities | (41.5) | (121.4) | |||||||||
| Effect of exchange rate changes on cash | (0.1) | 0.2 | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (37.9) | $ | (18.3) | |||||||
Net cash provided by operating activities
Net cash provided by operating activities was $1.7 million for the nine months ended September 30, 2020 compared to $75.7 million of cash provided by operating activities for the nine months ended September 30, 2019. This decline is primarily attributable to the decline in operating results. Net income adjusted for non-cash items used $29.9 million of cash for the nine months ended September 30, 2020 compared to providing $42.5 million of cash for the nine months ended September 30, 2019. The remaining decline is due to changes in working capital which provided cash of $31.6 million for the nine months ended September 30, 2020 compared to $33.1 million for the nine months ended September 30, 2019.
Net cash provided by investing activities
Net cash provided by investing activities was $2.0 million for the nine months ended September 30, 2020 including $4.2 million of proceeds from the sale of property and equipment, partially offset by $2.2 million of capital expenditures. Net cash provided by investing activities was $27.2 million for the nine months ended September 30, 2019 including $39.3 million in cash proceeds from the sale of our aggregate 40% interest in Ashtead technology, partially offset by $12.6 million of capital expenditures for property and equipment.
Net cash used in financing activities
Net cash used in financing activities was $41.5 million for the nine months ended September 30, 2020 compared to $121.4 million used in financing activities for the nine months ended September 30, 2019. Net cash used in financing activities for the nine months ended September 30, 2020 includes $27.7 million of cash used to repurchase 2021 Notes, $9.4 million paid for deferred financing costs and a $3.5 million early participation payment for the bond exchange. Net cash used in financing activities for the nine months ended September 30, 2019 primarily includes $120.3 million of net repayments of debt.
Supplemental Guarantor Financial Information
The Company’s 2021 Notes and 2025 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.
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Summarized financial information for the year-to-date interim period and the most recent annual period was as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| Summarized Statements of Operations | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Revenue | $ | 79,676 | $ | 197,980 | $ | 313,838 | $ | 640,739 | ||||||||||||||||||
| Cost of sales | 69,856 | 149,130 | 284,494 | 482,301 | ||||||||||||||||||||||
| Operating loss | (40,311) | (542,533) | (126,286) | (541,536) | ||||||||||||||||||||||
| Net loss | (21,551) | (532,987) | (64,189) | (554,609) | ||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Summarized Balance Sheet | ||||||||||||||
| Current assets | $ | 398,158 | $ | 530,111 | ||||||||||
| Noncurrent assets | 352,346 | 416,924 | ||||||||||||
| Current liabilities | $ | 80,889 | $ | 122,354 | ||||||||||
| Payables to non-guarantor subsidiaries | 126,307 | 116,053 | ||||||||||||
| Noncurrent liabilities | 326,662 | 440,817 | ||||||||||||
Off-balance sheet arrangements
As of September 30, 2020, we had no off-balance sheet instruments or financial arrangements, other than letters of credit entered into in the ordinary course of business.
Contractual obligations
Except for the 2025 Notes and the changes in the Credit Facility and 2021 Notes discussed above, there have been no other material changes in our contractual obligations and commitments disclosed in our 2019 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 nine months ended September 30, 2020. For a detailed discussion of our critical accounting policies and estimates, refer to our 2019 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, 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 2019 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
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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 September 30, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 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. 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, 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 remain depressed 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 and remote work arrangements.
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;
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•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 our activity levels will continue to be substantially below previous year levels, 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 September 30, 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) | ||||||||||||||||||||||
| July 1, 2020 - July 31, 2020 | 916 | $ | 2.25 | — | $ | — | ||||||||||||||||||||
| August 1, 2020 - August 31, 2020 | — | $ | — | — | $ | — | ||||||||||||||||||||
| September 1, 2020 - September 30, 2020 | — | $ | — | — | $ | — | ||||||||||||||||||||
| Total | 916 | $ | — | — | ||||||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
None
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Item 6. Exhibits
| Exhibit | ||||||||
| Number | DESCRIPTION | |||||||
| 4.1* | — | |||||||
| 4.2* | — | |||||||
| 10.1* | — | |||||||
| 10.2* | — | |||||||
| 10.3* | — | |||||||
| 10.4**# | — | |||||||
| 10.5**# | — | |||||||
| 22.1** | — | |||||||
| 31.1** | — | |||||||
| 31.2** | — | |||||||
| 32.1** | — | |||||||
| 32.2** | — | |||||||
| 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.
#Identifies management contracts and compensatory plans or arrangements.
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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: | November 6, 2020 | By: | /s/ D. Lyle Williams, Jr. | |||||||||||
| D. Lyle Williams, Jr. | ||||||||||||||
| Executive Vice President and Chief Financial Officer | ||||||||||||||
| (As Duly Authorized Officer and Principal Financial Officer) | ||||||||||||||
| By: | /s/ John McElroy | |||||||||||||
| John McElroy | ||||||||||||||
| Corporate Controller and Principal Accounting Officer | ||||||||||||||
| (As Duly Authorized Officer and Principal Accounting Officer) | ||||||||||||||
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