Forum Energy Technologies(FET) - 2020 Q4 - Annual Report

PART I Business Forum Energy Technologies (FET) designs, manufactures, and distributes products for the energy industry's drilling, downhole, subsea, completions, and production sectors, with over 80% of 2020 revenue from consumables - The company operates through three reporting segments: Drilling & Downhole, Completions, and Production, structured to align with the key phases of the oil and gas well cycle[12] - In 2020, over 80% of revenue was derived from consumable products and activity-based equipment, with the remainder from capital products and services[11] Company Backlog and Bookings (2019-2020) | Metric | 2020 ($ millions) | 2019 ($ millions) | | :--- | :--- | :--- | | Backlog (at Dec 31) | ~$114 | ~$173 | | Bookings (Full Year) | ~$473 | ~$863 | - The company faces competition from large multinational corporations like National Oilwell Varco and Schlumberger (Cameron), as well as smaller regional players, with key competitive factors including product quality, price, availability, and technical expertise[55][56] Drilling & Downhole segment The Drilling & Downhole segment provides products for drilling, downhole, and subsea markets, including capital equipment, consumables, and subsea technologies - This segment provides products for drilling, downhole, and subsea markets, including drilling capital equipment (tubular handling tools, cranes), consumables (valves, pumps), downhole protection systems, casing/cementing tools, and subsea technologies like Remotely Operated Vehicles (ROVs)[14] - Demand is driven by global drilling activity, well completion complexity, offshore activity, and defense spending[15][17] Completions segment The Completions segment serves coiled tubing, stimulation, and intervention markets with products like hydraulic fracturing pumps and pressure control equipment - This segment serves the coiled tubing, stimulation, and intervention markets, with products including hydraulic fracturing pumps, flow iron, pressure control equipment, wireline cables, and coiled tubing strings[33] - Demand is primarily influenced by the level of hydraulic fracturing and well intervention activity in North American shale basins[34] Production segment The Production segment supplies well site production equipment and industrial valves for production and infrastructure markets - This segment supplies products for production and infrastructure markets, including well site production equipment (separators, process systems) and a broad range of industrial valves (ball, gate, globe, check, butterfly)[41][45] - Demand is driven by spending on new well production, midstream/downstream projects, and infrastructure maintenance across the oil and gas industry, as well as in power generation and mining[42] Governmental regulation The company's operations are subject to complex environmental, health, and safety regulations, including RCRA and CERCLA - Operations are subject to numerous complex laws and regulations concerning environmental protection, health, and safety, including rules under the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)[62][66][67] - The company's business is indirectly affected by regulations on hydraulic fracturing, as a significant portion of its customers' production relies on this process, with potential new restrictions possibly reducing demand for its products[68] Risk Factors The company faces significant business, legal, regulatory, international, and financial risks, including oil and gas market volatility, competition, and substantial indebtedness - Business success is highly dependent on oil and natural gas industry activity levels, which are influenced by volatile commodity prices, OPEC decisions, and global economic conditions[73][81] - The COVID-19 pandemic has adversely affected business by reducing demand for products, creating logistical challenges, and causing supply chain disruptions[73][87] - The company has a substantial amount of indebtedness, including $316.9 million of 9.00% convertible secured notes due 2025, which restricts operations and increases vulnerability to adverse economic conditions[94] - Potential legislation or regulations restricting hydraulic fracturing could significantly reduce demand for the company's products, as many customers operate in unconventional shale plays[74][115] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[130] Properties As of December 31, 2020, the company owns or leases global manufacturing, service, and distribution facilities supporting its three segments Key Company Facilities | Location | Type | Ownership | Segments Served | | :--- | :--- | :--- | :--- | | Houston, TX | Corporate/Manufacturing | Leased | Shared | | Kirkbymoorside, UK | Manufacturing | Owned | D&D | | Hamburg, Germany | Manufacturing | Leased | D&D | | Dammam, Saudi Arabia | Manufacturing/Distribution | Owned | Shared | | Edmonton, Canada | Service/Distribution | Leased | Shared | Legal Proceedings The company is involved in various legal proceedings, which management does not expect to materially affect its financial condition or operations - Information regarding legal proceedings is incorporated by reference from Note 13 Commitments and Contingencies[134] Mine Safety Disclosures This item is not applicable to the company - Not applicable[135] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "FET," with no dividends paid in 2020 or 2019 and no current plans for future dividends - Common stock trades on the NYSE under the symbol "FET"[141] - No dividends were paid in 2020 or 2019, and none are currently planned[141] - There were no repurchases of common stock in the three months ended December 31, 2020[142] Selected Financial Data This section is not required as the company qualifies as a "smaller reporting company" under Regulation S-K - Not required under Regulation S-K for "smaller reporting companies"[143] Management's Discussion and Analysis of Financial Condition and Results of Operations The company's 2020 financial performance was severely impacted by the COVID-19 pandemic, resulting in a 46.4% revenue decrease and a net loss, despite cost-cutting and strategic dispositions Year-Over-Year Financial Performance (2019 vs. 2020) | Metric | 2020 ($ millions) | 2019 ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $512.5 | $956.5 | (46.4)% | | Gross Profit (Loss) | ($11.0) | $244.9 | (104.5)% | | Operating Loss | ($231.6) | ($536.1) | 56.8% | | Net Loss | ($96.9) | ($567.1) | 82.9% | | Loss Per Share (Basic) | ($17.37) | ($103.01) | 83.1% | - The significant decrease in revenue was driven by lower sales volumes across all segments due to reduced drilling and completions activity, with the Completions segment experiencing the largest decline of 61.1%[156] - In response to market conditions, the company implemented significant cost reduction actions, including exiting facilities, lowering headcount, reducing salaries, and suspending retirement plan matching contributions[148] - The company improved its liquidity position through the sale of its ABZ and Quadrant valve brands for $104.6 million and a $14.1 million tax refund under the CARES Act[165] Market Conditions The COVID-19 pandemic caused unprecedented declines in economic activity and energy demand in 2020, leading to extreme volatility and a lower price environment for oil and natural gas Average Commodity Prices (2019 vs. 2020) | Commodity | 2020 ($/unit) | 2019 ($/unit) | | :--- | :--- | :--- | | WTI Crude Oil ($/bbl) | $39.16 | $56.98 | | Brent Crude Oil ($/bbl) | $41.96 | $64.30 | | Henry Hub Natural Gas ($/Mcf) | $2.03 | $2.56 | Average Active Drilling Rigs (2019 vs. 2020) | Region | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | United States | 435 | 943 | (54)% | | Canada | 89 | 134 | (34)% | | International | 821 | 1,098 | (25)% | Results of operations The company experienced a significant decline in revenue and a net loss in 2020, driven by reduced activity across all segments and substantial inventory write-downs Segment Revenue Performance (2020 vs. 2019) | Segment | 2020 Revenue ($ millions) | 2019 Revenue ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | | Drilling & Downhole | $216.8 | $334.8 | (35.2)% | | Completions | $118.7 | $305.1 | (61.1)% | | Production | $177.5 | $321.0 | (44.7)% | - The company recorded significant inventory write-downs of $100.8 million in 2020, compared to $10.3 million in 2019, contributing to a gross loss[180] - A gain on extinguishment of debt of $72.5 million was recognized in 2020 from repurchasing and exchanging its 2021 Notes, and a gain on disposition of business of $88.4 million was recognized from the sale of the ABZ and Quadrant valve brands[161] Liquidity and capital resources Liquidity is maintained through cash on hand, operating cash flow, and a $250 million revolving credit facility, with a debt maturity extension in 2020 - Primary sources of liquidity are cash on hand, cash from operations, and a $250 million senior secured revolving credit facility, with $128.6 million in cash and $110.5 million available under its credit facility as of December 31, 2020[165] Cash Flow Summary (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Operating Activities | $3,883 | $104,144 | | Investing Activities | $108,250 | $28,135 | | Financing Activities | ($41,765) | ($122,191) | - In 2020, the company exchanged $315.5 million of its 6.25% unsecured notes due 2021 for new 9.00% convertible secured notes due 2025, extending its debt maturity profile[165][277] Critical accounting policies and estimates Critical accounting policies involve significant judgments and estimates for revenue recognition, inventory valuation, asset impairment, income taxes, and contingencies - Key critical accounting policies involve significant judgments and estimates, including revenue recognition (especially for long-term contracts), inventory valuation (assessing obsolete and slow-moving stock), impairment of long-lived assets, income taxes (realizability of deferred tax assets), and provisions for contingencies[175] Quantitative and Qualitative Disclosures About Market Risk This section is not required as the company qualifies as a "smaller reporting company" under Regulation S-K - Not required under Regulation S-K for "smaller reporting companies"[197] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2020 and 2019, including notes and the auditor's report highlighting critical audit matters - The report of the independent registered public accounting firm, Deloitte & Touche LLP, expresses an opinion that the financial statements are presented fairly in all material respects[199] - Critical Audit Matters identified by the auditor were the valuation of Inventory (due to significant judgments in determining net realizable value) and the impairment assessment of Long-lived assets (due to significant estimates in forecasting future cash flows)[203][204][208] Consolidated statements of comprehensive loss This statement details the company's revenues, gross profit, operating loss, net loss, and comprehensive loss for 2020 and 2019 Consolidated Statement of Comprehensive Loss (in thousands) | Line Item | 2020 | 2019 | | :--- | :--- | :--- | | Revenues | $512,476 | $956,533 | | Gross Profit (Loss) | ($11,021) | $244,852 | | Operating Loss | ($231,623) | ($536,146) | | Net Loss | ($96,889) | ($567,057) | | Comprehensive Loss | ($88,340) | ($560,765) | Consolidated balance sheets This statement provides a snapshot of the company's assets, liabilities, and equity as of December 31, 2020, and 2019 Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $490,191 | $665,917 | | Total Assets | $889,926 | $1,159,997 | | Total Current Liabilities | $124,934 | $196,850 | | Total Liabilities | $483,690 | $673,958 | | Total Equity | $406,236 | $486,039 | Consolidated statements of cash flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities for 2020 and 2019 Consolidated Statement of Cash Flows (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,883 | $104,144 | | Net cash provided by investing activities | $108,250 | $28,135 | | Net cash used in financing activities | ($41,765) | ($122,191) | | Net increase in cash | $70,706 | $10,670 | Notes to consolidated financial statements These notes provide detailed explanations and disclosures supporting the consolidated financial statements, including information on dispositions, impairments, and debt - Note 4 (Dispositions): In 2020, the company sold its ABZ and Quadrant valve brands for $104.6 million, recognizing a gain of $88.4 million[261] - Note 8 (Impairments): The company recognized total impairment charges of $35.8 million in 2020 and $534.7 million in 2019, with the 2019 charge including a full impairment of goodwill ($471.0 million)[272] - Note 9 (Debt): As of December 31, 2020, total debt was $294.7 million, primarily consisting of $316.9 million principal of 9.00% convertible secured notes due 2025 and $13.1 million drawn on the revolving credit facility[274] - Note 15 (Reverse Stock Split): The company effected a 1-for-20 reverse stock split on November 9, 2020, to comply with NYSE listing requirements, with all share and per-share data retroactively adjusted[309][310] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[335] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[336] - Management concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO 2013 framework[337] Other Information The company reports no other information for this item - None[339] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference to the Proxy Statement for the 2021 Annual Meeting of Stockholders[339] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement for the 2021 Annual Meeting of Stockholders - Information is incorporated by reference to the Proxy Statement for the 2021 Annual Meeting of Stockholders[342] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference from the company's Proxy Statement for the 2021 Annual Meeting of Stockholders - Information is incorporated by reference to the Proxy Statement for the 2021 Annual Meeting of Stockholders[342] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's Proxy Statement for the 2021 Annual Meeting of Stockholders - Information is incorporated by reference to the Proxy Statement for the 2021 Annual Meeting of Stockholders[342] Principal Accounting Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement for the 2021 Annual Meeting of Stockholders - Information is incorporated by reference to the Proxy Statement for the 2021 Annual Meeting of Stockholders[343] PART IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including the index to financial statements and exhibits, with schedules omitted - The report includes the Consolidated Financial Statements and Notes to Consolidated Financial Statements[344] - All financial statement schedules have been omitted because the required information is not applicable or is included elsewhere in the report[344] Form 10-K Summary The company has not provided a summary for Form 10-K - None[357]