Q2 2020 Forum Energy Technologies Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the farm Energy Technologies second quarter 2020 earnings Conference call. My name is short seller and I'll be your coordinator for today's call. At this time all participants on the listen only mode and all lines have been placed on mute to prevent any background noise. As a reminder, this conference call.
It is being recorded for replay purposes I wouldn't have tend to caught that's almost a lousy against Chief Financial Officer. Please proceed sir.
Thank you should until.
Good morning, everyone and welcome to form Energy technologies second quarter 2020 earnings Conference call.
With me today are Cris Gaut, Forum's, Chairman and Chief Executive Officer, and Neil Loves our executive Vice President of operations.
We issued our earnings release after market closed yesterday and it is available on our website.
The statements made during this conference call, including the answers to your questions May include forward looking statements. These statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.
Those risks include among other things matters that we have described in our earnings release in our filings with the Securities and Exchange Commission.
We do not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward looking statements to reflect future events information or circumstances that arise after this call.
In addition, this conference call contains time sensitive information that reflects managements best judgment only as the date of the life Paul.
Management's statements May include non-GAAP financial measures.
For a reconciliation of these measures refer to our earnings release. This call is being reported a replay of the call will be available on our website for two weeks following the call.
I'm now pleased to turn the call over to Cris Gaut, our Chief Executive Officer.
Thanks, Lyle and good morning.
I will not well the economic devastation that occurred in the second quarter, you have all heard more than enough about that by now.
For for I'm, specifically, a primary piece of our business is selling short cycle products to service companies to sustain replacing and upgrading their drilling and completion operations.
Our customers have sharply reduced their spending in these areas as their equipment equipment utilization evaporated.
Eventually much of this equipment will go back to work, which will drive demand for our products and services.
But the timing is uncertain.
That is why forms recently announced debt exchange that extended our debt maturity to October 2025 was so important.
This gives us the extended runway, we need to exploit the inevitable upturn in drilling and completion activity.
After buying back $72 million of our bonds at about 40 cents on the dollar in the first half of 2020.
Under our exchange 350 million of the $328 million of our debt was due in 2021 was rolled into a new security.
This new debt has the cash coupon of six in the quarter percent the same as the old debt plus another two or three quarter percent that is payable at the company's option in cash or income side additional knows.
In addition, there is a clear path for the company to de lever.
As the new notes are partially convertible into form equity.
$150 million principal about of the new nodes are convertible at a conversion price of $1.35 per share.
And our automatically and mandatorily convertible once for him stock price traits through $1.50 420 business days.
The conversion of $150 million of new debt at a conversion price that is more than two and a half times the current stock price.
Would represent about 50% dilution to current shareholders, while ensuring a strong and sustainable capital structure for the company.
This debt exchange provide a number of benefits.
The time necessary for a business recovery.
A clear path to de lever the balance sheet.
It does not burdened the company with a higher required cash cost of financing or restrictive financial maintenance covenants.
And it aligns the interests of our debt holders and our legacy stockholders around the long term success of forum.
The second quarter 2020 was exceptionally difficult and while it will review our results in a minute.
But it did provide the catalysts to resolve forums capital structure issues.
And to significantly restructure our cost for long term success in a world of lower demand for oilfield equipment.
Compared to the year ago quarter, our second quarter cash costs, excluding our purchase materials costs.
Our down about $150 million or 39%.
Most of that savings happening in the most recent quarter.
So we now have a very competitive cost structure for the current market environment.
As I look ahead I believe we have seen the bottom in our orders and our EBITDA.
For the third quarter, we expect revenues will be comparable to the second quarter as we rebuild the order book with an increase in domestic completions and international well construction activity.
We're already seeing some positive signs in this regard.
We also expect a modest improvement in EBITDA driven by cost reductions.
Looking further ahead for him is positioned for renewed success with our new cost and capital structures.
Dedicated employees.
And our portfolio of winning products.
Well.
Thank you Chris.
I'm pleased to represent the forum team with Chris and Neil at this exciting inflection point for the company.
The decrease in activity in spending by our customers, resulting from the cobot 19 pandemic and the dramatic reduction in drilling and completion activity due to low oil prices had a significant impact on our second quarter financial results.
Our total revenue for the quarter was $113 million down 38% from the first quarter.
Our book to Bill ratio was 76% as orders for our consumable products, which are typically booked and shipped in the same period, where most severely impacted.
In response to the forecasted declines in our revenue.
We initiated a significant cost reduction plan in March and completed many of our identified cost reduction actions early in the second quarter.
We focused our plans on cash costs included in ESG today and cost of goods sold except from the purchase materials and total we reduce these costs by $24 million compared to the first quarter at 30% production.
These cost reductions, which have all occurred since march amount to approximately $100 million in total savings on an annualized basis.
Our cost reduction actions included significant headcount reductions, especially at senior levels of the organization.
Facility closures, including production and distribution facilities located in the U.S.
Salary reductions across the company suspension.
And for Us and Canadian retirement plans and other reductions in variable costs.
As a direct result of these cost savings sequential decremental EBITDA margins were limited to 23%, resulting in adjusted EBITDA of negative $11 million for the second quarter.
We're particularly pleased with this result, given the weak pricing environment and the cobot related under absorption of fixed costs that had a direct impact on our gross margins.
For clarity adjusted EBITDA results exclude roughly $3 million of noncash stock compensation expense for the second quarter. This treatment as a change for forum, which now aligns with the presentation of our peers and we'll apply this change to the comparable periods in our earnings release.
Our free cash flow after net capital expenditures in the second quarter was negative $3.5 million as the impact of lower earnings was mostly offset by reductions in working capital from strong collections of receivables and inventory management.
Included in this result, or approximately $5 million of cash severance and other restructuring costs paid in the quarter, but for these restructuring costs for almost free cash flow positive in the quarter and has generated positive free cash flow for the past seven quarters.
Over this period forum generated $109 million free cash flow.
In the quarter, we decreased our net inventory position by $15 million and expect the monetization of excess inventory to continue in 2020 and beyond.
Net loss for the quarter was $5 million or five cents per diluted share.
Excluding a $39 million gain on extinguishment of debt and $9 million of special items. Adjusted net loss was 29 cents per diluted share.
Special items for the quarter on a pre tax basis included $4 million of severance and other restructuring costs.
$4 million of inventory and other working capital impairments and $1 million of foreign cash foreign exchange loss.
We provided a reconciliation table of these special items in our earnings release for your reference.
I will now I'll summarize our segment results on a sequential basis.
And our drilling and downhole segment orders were $42 million at 40% decrease from the first quarter, resulting from significant declines in drilling and well construction activity in North America.
This decrease was mitigated by our international exposure in the segment.
To put that in context, despite the low commodity price environment in the second quarter. Our drilling product line was awarded a multiyear contract to supply rig handling tools and related equipment for a 24 rig Newbuild program in the Asia market.
Orders for the second quarter includes $14 million for this award with additional orders under the award anticipated in the second half of the year.
Segment revenue was $47 million, a $29 million or 38% sequential decrease.
As book and ship activity across the segment was impacted by lower activity levels and Lockdowns due to the coven 19 pandemic.
Adjusted EBITDA for the segment was negative $3 million in the second quarter, a sequential decrease of 10 million.
And our completion segment orders decreased 72% to $14 million segment revenue was $18 million, a sequential decrease of $33 million or 65% due to the virtual standstill and well completion activity in the quarter.
The segment was also impacted by shipping delays from one of our international customers due to the impacts of Coven 19.
Adjusted EBITDA for the segment was negative $6 million, a $10 million sequential decrease.
Despite the significant cost reductions mentioned earlier as well as additional furloughs in several facilities within the segment the magnitude of the decline in revenue and resulting loss of operating leverage from from Unabsorbed fixed costs had outsized impact on our completions segment EBITDA.
Production segment orders were $29 billion, a sequential decrease of 43% primarily due to a significant decline and customer bookings activity for our valves product line.
Customer activity ground to a halt do the pandemic.
Due to pandemic related lockdowns and significant distributor destocking.
Segment revenue was $49 million, a 13% decrease due to lower sales of valves. This decrease was partially offset by a slight increase in shipments of surface production equipment for our customers focused on natural gas production in the northeastern United States.
Adjusted EBITDA for the segment was $2 million up 2 million sequentially due to lower overhead expenses from cost reductions.
I will now discuss some additional details about our results and financial position at the forefront level.
Our capital expenditures in the second quarter were less than $1 million, we are a capital light business and we expect our total capital expenditures for 2020 to be less than $5 million.
In the second quarter, we reduced net debt by $32 million, primarily due to the repurchase of $72 million principal amount of senior notes at a discount.
We ended June with $110 million of cash on the balance sheet and availability under our revolving credit facility of $84 million, resulting in total liquidity of $194 million.
Our debt at the end of June, including 85 million outstanding on our revolving credit facility and $328 million of unsecured notes due 2021.
Following the debt exchange completed earlier. This week, we now have $315 million of new secured notes due in 2025 and $13 million remaining on the old unsecured notes.
In connection with the debt exchange, we also amended our revolving credit facility.
The changes include a reduction in the size of commitments from $300 million to $250 million an increase in the interest rate margin.
Ill limit on the amount of availability derived from our inventory collateral and certain other administrative changes.
The majority of the revolving credit facility will be October 2022, with the resin with the resolution of the small remaining style the whole boats.
Pro forma for the credit facility Amendment, our liquidity at the end of the second quarter would've been $126 million.
Interest expense was $6 million in the second quarter, while we do expect higher interest expense following our debt exchange the six in the quarter percent of cash interest on the new convertible notes is consistent with cash interest on the previous those.
And the second quarter, depreciation and amortization and stock based compensation were 12 million and $3 million respectively.
We expect these expenses to remain at similar levels in the third quarter.
Adjusted corporate expenses were $6 million in the second quarter, and we expect them to be similar in the third quarter as well.
We will continue to have some tax expense. Despite an overall net loss as we are not recognizing tax benefits and loss, making jurisdictions, but we continue to recognize tech expense for some international jurisdictions with income.
Once we turn profitable in the loss, making jurisdictions, we expect to have a relatively low tax rate as we begin to use our net operating losses.
For more information about our financial results. Please review the earnings release on our website.
Now, let me turn the call over to Neil to discuss some of our key operating initiatives.
Thank you while good morning, everyone.
First off I want to thank our employees for the remarkable resilience during these incredibly difficult times.
Together, we made sacrifices to dramatically reduce cost and position for them for the future.
The market will recover and went into our employees will be key differentiator in our success.
As Chris and while had mentioned the unprecedented decline in drilling and completions activity due to covert 19 significantly reduced demand for many of our products.
And our spot we upsized our businesses to produce positive EBITDA with only a modest market rebound.
We remain committed to controlling costs, while generating cash flow from inventory.
The second quarter presented the most challenging market conditions in a generation.
Our ability to execute will increase as the market improves.
Forms customers rely on our products to increase the productivity and reduced the cost.
For example, within our for multi list solutions product portfolio.
We provide same management tools and cable plants that extend the life of electric submersible pumps or ASP.
These products witness an increase in Mclean demand.
After bottoming out in May.
And we expect demand for these products to continue.
As we as more wells have brought back online.
Another example of forms winning products with a large multi year rig handling tool award lyall referenced earlier.
In an industry, where capital is limited and tight.
Our customer selected the premium product of our handling tools.
And we're very excited to play a key role in this rig new build program.
Let me provide one more example.
In the net of last quarter's meltdown.
One service company customer was proud to post a picture of social media with one of their frac fleets working.
Among the key component in that picture.
Seven were supplied by four.
Sat.
Our 3000 horsepower costs.
Our jumbotron radiators.
Our PBM single line manifold.
Our high pressure flow iron.
Our AMC wireline pressure control equipment.
Our hydraulic latch assembly.
And our newest product from quality wireline enviroflight cables.
In addition, after the Frac work was completed.
Our Derek coil coil tubing from global community.
Was used for drilling up the plus.
And our fourth Sandguard with candid clamps was used with the artificial lift installation.
This picture reinforced to me at four and has the product the people and the desire to be the leading solution provider and our state.
These are just a few examples.
And I can a many more from our valve solutions production equipment and subsea product lines.
The market rebound may take many months to occur.
But when it does we are positioned to whit.
I'll now turn the call back over to credit for his closing remarks.
Thanks Neil.
The second quarter presented an extremely challenging market environment.
But I am proud of the way our team has navigated through the significant cost reductions.
I'm also pleased with the outcome of our debt exchange, which leaves us well positioned for future growth.
We now have the cost structure and the balance sheet to prosper lower for longer environment.
Forum has excellent earnings power potential with our stable of well positioned completion products artificial lift accessories, and well construction products to name a few.
With our new much more look more efficient cost structure, we can realize this earnings potential at a much lower level of drilling and completions activity that in the past.
Thank you for your interest in form and at this point, we will open the line for questions.
Shut tiller, let's take the first question.
Okay and your first question comes from the line of Bank of England, typically energy partners.
Good morning, guys couple of questions.
Yes, Chris I mean, the exchange offer here definitely extend runway which is critical.
Given you've got runway now kind of from a strategic perspective can you talk a little bit about.
Al you, how you claw back out of the whole that were in from an industry perspective, and do we look for do we look for divestitures that you look for acquisitions do we look for status quo and me what's the how do we how do we play off its from here given the balance now in better shape.
Yes.
We're very pleased that were getting off defense and playing offense again, Dan and that offense will be in a number forms the organic side will be as Neil and I've talked about.
Emphasizing our strong.
Products that have good market position.
Good share.
Solutions capability for our customers and where we can see that near term earnings power potential.
And we're putting the resources most behind those.
We have been fitting out our operations at our facilities and our product offering here.
So we can emphasize those that have the greatest that potential in the near and medium term.
One of the benefits from the debt exchange and the new debt structure is.
We do have the liquidity and we do have the flexibility.
To once again look at acquisitions.
With the.
Condition that we're not looking to lever up the company for sure, but we do have that flexibility.
And that.
Getting back I think to.
Historic strength.
Of the company.
So our focus will be on products that have really good earnings power potential.
In the new market environment.
Rounding out that portfolio.
But taking advantage of the much lower cost structures. So we can be successful.
At a lower level, where rig activity lower level of completions activity is still delivered good returns for our shareholders and taking advantage of.
Our runway and the path to deleveraging that we were talking about.
Hello.
Thank you and.
A follow up there just on the numbers.
Well you talked about revenues flattish for the third quarter EBITDA improved I just want to test some math with you to make sure I understand kind of dynamic here.
Adjusted EBITDA for the quarter 11.6 million negative.
You talked about I think realizing about 100 million at cost savings, but expecting 150, which implies sort of another 50 million of cost savings to calm, which should be about $12 million quarter I mean.
That math would say, we get EBITDA back close to breakeven in.
The third quarter, just from cost savings alone am I missing any things on my math and the right ballpark, Yes, let me clarify that that's not entirely.
Correct actually.
What would what we've said was that a year over year second quarter 2019 to second quarter of 2020, it's 150 of savings annualized.
Sequentially from Q1 to Q2, it's 100 million.
But we did.
Implement some of those cost savings.
During the course of Q2, so Q3 will have more benefit from the cost savings and that will and we have ongoing.
Your plans as well and so we do.
Expect to third quarter cost to be lower which will drive the improvement in EBITDA on the revenue side.
Obviously, there was deterioration during the course of Q2.
From April to May.
To June as activity came down.
We're already seeing some improvement look at the Frac fleets going back to work for example, so we expect the reverse to a core occurred during the third quarter and to be coming out of the third quarter at.
At a better run rate from a revenue standpoint, so although were flat quarter to quarter.
We'll be coming out of Q3, with a better run rate and the lower cost structure.
Got it thank you.
I'll, let others ask questions I've got a couple more acute backend. Thank you.
Okay. Thank you.
So until that can you remind what the.
That we're focused the the Q in for that.
For questions. Okay. That's going on to your question. Please press star one I guess telephone keypad again that is still 1001 question, we'll pause for just a moment second topic candy roster.
And you'd have a question from the line of Aaron Nike.
Hi, good morning from a shareholder just had a question about getting back into compliance with the New York stock exchange.
Minimum of $1 per share.
If we get any extension to that six months, where do we have a drop off drop dead date for that.
Yes, so we do have shareholder approval to.
Do a reverse split ticket.
Backing in compliance with that we have been waiting on that until we.
Had this success of the debt exchange, which has now occurred.
We still have some time on that but yes, we.
Do expect to move ahead with the shareholder approved.
Reverse split that will put our stock.
Back in compliance and as you know a stock split or reverse stock split is just arithmetic and it is a 10% move in the stock is still a 10% move in the stock it shouldn't be.
Transparent and.
No impact on shareholders and.
Just a matter of the math and so you should expect that that will occur.
This year.
Okay. Thank you.
Thank you do have a follow up question from the line, then determine particularly energy partners.
[noise] like a bad thing you can't get rid of mill.
So you got a lot of working capital in the second quarter Im just curious around.
Hi, I assume inventories become this kind of primary source of working capital improvement.
Can you talk about how you think about targeting inventories is there a dollar number is it out.
Terms are pretty low right now, but how do we think about that that inventory monetization and is it.
How do we measure.
Yes, so given the level of activity, we have now we have excess inventory.
And we're looking to move that.
Aggressively and turned out to cash so that is.
Our liquidity Bank. If you will that's that's in addition to what we talk about when we talk about our liquidity from our bank facility or cash on hand.
And so.
We are aggressively moving in that direction, maybe deal you can.
Give some examples of areas, where we think we can.
Focus on inventory movement sure.
Hey, Dan So I.
I think with our product portfolio and our wide reach we're able to go to is to many markets across the world. As an example, our simulation product line has historically been focused on the United States.
As we look utilizing our sales network across other product lines. We've we've begun to to move a lot of that inventory into other markets in Asia and in in.
In the Middle East. So we drove a lot of a lot of options to do that and continue to move forward to that.
Yep.
Good from a.
Thank you and then.
Obviously orders on the completion side were quite low hot what should we be watching.
Tend to kind of find the bottom here do we watch crack counts.
Or are they still cannibalizing equipment, how what do you think the lag time is between your.
I mean activity improvement and you guys seem orders and revenues.
Sure Hey, Dan a nail again.
We we are starting to get inbound and don't call and.
Customer, they're looking for Frac readiness and there is a month there is a lot of equipment out there.
I guess I would compare it to having a race car sitting on the shelf for six months expecting it to run the Indy 500.
20 days in a row, it's a challenge to do that and I think we're going to see.
Customers realize they do need newer equipment or at least a significant service have adequate and so we are seeing those types of call.
And in some initial orders from that I think the rig count bottoming.
I think good indicator for our completions our completion segment.
Yes, I mean operators are are very picky. These days today was that equipment to be working and the stages to be done than they have no patients for downtime. So.
It's hard for service companies too.
Take risk.
[music].
You know equipment that they are not confident in.
And then of course, we sell other products that are associated with that.
Pickup in completions, whether it's cool wireline cable or coiled tubing strings, which don't store real well. So there are number here areas and this short cycle space on completions that.
We're beginning to see.
Some positive side.
Yes.
And I gave you the valves valve.
Val slowdown as more coded related or is it more energy downturn related in other words do we think that devout picked back up at.
And didn't stop eases off.
Yes, Dan.
Good question, our valves business as you know spread not only upstream, but also through midstream downstream and even into industrial applications. So well the upstream portion of our slowdown.
And upstream represents a smaller piece of our valves business was really energy related the downstream portions in industrial work cobot lockdown related so.
Many facilities, where those be refineries or chemical plants were locked down to a essential personnel only basis and they really moved to only doing emergency.
There's to minimize the chance of any kind of cobot impact so.
Definitely a big piece in Dallas is tied to that that locked down of activity for Kuroda virus and as you see the economy starts open back up we would expect those things to rebound as well.
Okay.
Last question when when you think about all of the adjustments that you've had to make to the business to sustain.
This level of profitability and I commend you I know it's been hard.
What do you think that what's happened to revenue generating capacity, when we think about things getting better.
In revenues.
Do you have to start adding cost back when revenues go up 10% to we doubled revenues without changing the cost structure, what's our kind of what's on capacity at this point in time with the structure gotten place right now.
Yes, I think there we put that in two buckets probably say.
The overhead cost the SGN today, we have a lot of.
Capacity for growth.
Although our SGN a costs are significantly lower than they were.
On the cost of goods sold side, how many folks we have working in our facilities, we would need to hire that folks back but that cost of course goes directly into.
Inventory and product cost to be sold so it's directly related to two our volume. So we would be needing to add some cost but that is that the cost of goods sold if you look.
But I think that the benefit is that our fixed cost in terms of facilities in our fixed cost and SJ is significantly lower than it is and so.
Brings down our cost structure and brings up our earnings potential.
For.
Any improvement and completion drilling activity from here.
I'd say it one more guys sorry, so it feels like your what you're essentially telling us without giving for formal guidance is we've now kind of hit the bottom in terms of revenue and profitability rig count probably in going much lower total, it's probably not getting much worse.
<unk>.
Cost cutting et cetera. So when you when you guys look at the second half year here.
In a flattish revenue environment, maybe then it's a little bit better.
Then generating free cash a lot of that coming off balance sheet, but it sounds like you should generate free cash in the second half of the year, even at these wrapping levels.
Assuming no incremental downturn.
Yes, yes, Dan a thing I think from a guidance perspective, that's exactly right and spot on with respect to the free cash flow.
Generations the business that's been a major focus for us as mentioned the remarks seven quarters.
Free cash flow and we do expect to be free cash flow positive in the back half of the year as we're able to bring down inventories and the balance sheet even further.
Well done guys. Thank you.
Thank you Dan.
We will wrap up the call at this point Shentel or thank you very much and we'll talk to all of our good friends and shareholders.
Next quarter. Thank you very much.
Thank you everyone. This does conclude today's conference call you may now disconnect.
[music].
[music].
[music].
Good morning, ladies and gentlemen, and welcome to the farm Energy Technologies second quarter 2020, <unk> earnings Conference call. My name is short seller and I will be a coordinator for today's call. At this time operative that's on a listen only mode and all lines have been placed on mute to prevent any background noise.
As a reminder, this conference call. This man recorded for replay purposes, I will now turn the call. That's oh its allow when it gets chief Financial Officer. Please proceed sir.
Thank you show itself.
Good morning, everyone and welcome to form Energy technologies second quarter 2020 earnings Conference call.
With me today are Cris Gaut, Forum's, Chairman and Chief Executive Officer, and Neil locks, our executive Vice President of operations.
We issued our earnings release after market closed yesterday and it is available on our website.
The statements made during this conference call, including the answers to your questions May include forward looking statements.
These statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.
These risks include among other things matters that we have described in our earnings release, and our filings with the Securities and Exchange Commission.
We do not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward looking statements to reflect future events information or circumstances that arise after this call.
Additionally, this conference call contain time sensitive information reflects managements best judgment only at the date of the life Paul.
Management's statements May include non-GAAP financial measures.
A reconciliation of these measures refer to our earnings release.
This call is being recorded a replay of the call will be available on our website for two weeks following the call.
I'm now pleased to turn the call over to Cris Gaut, our Chief Executive Officer.
Thanks, while and good morning.
I will not well the economic devastation that occurred in the second quarter, you have all heard more than enough about that by now.
Before I was specifically a primary piece of our business is selling short cycle products to service companies to sustain replacement and upgrade their drilling and completion operations.
Our customers have sharply reduced their spending in these areas as their equipment equipment utilization evaporated.
Eventually much of this equipment will go back to work, which will drive demand for our products and services, but the timing is uncertain.
That is why Forbes recently announced that exchange that extended our debt maturity to October 2025, we are so important.
This gives us the extended runway, we need to exploit the inevitable upturn in drilling and completion activity.
After buying back $72 million of our bonds at about 40 cents on the dollar in the first half of 2020.
Under our exchange 350 million of the $328 million of our debt was due in 2021 was rolled into a new security.
This new debt has the cash coupon of six in the quarter percent the same as the old debt plus another two or three quarter percent that is payable at the company's option in cash or income side additional notes.
In addition, there is a clear path for the company to de lever as the new notes are partially convertible into form equity.
$150 million principal about of the new knows our convertible at a conversion price of $1.35 per share ads are automatically and mandatorily convertible once form stock price trades through a $1.50 420 business.
Dave.
The conversion of $150 million of new debt at a conversion price that is more than two and a half times the current stock price.
Would represent about 50% dilution to current shareholders, while ensuring a strong and sustainable capital structure for the company.
This debt exchange provide a number of benefits.
The time necessary for our business recovery.
A clear path to de lever the balance sheet.
It does not burdened the company with a higher required cash cost of financing or restrictive financial maintenance covenants.
And it aligns the interests of our debt holders and our legacy stockholders around the long term success of forum.
The second quarter 2020 was exceptionally difficult and while it will review our results in a minute.
But it did provide the catalysts to resolve forums capital structure issues.
To significantly restructure our cost for long term success in a world of lower demand for oilfield equipment.
Compared to the year ago quarter, our second quarter cash costs, excluding our purchase materials costs.
Our down about $150 million or 39% with most of that savings happening in the most recent quarter.
So we now have a very competitive cost structure for the current market environment.
As I look ahead I believe we have seen the bottom in our orders and our EBITDA.
For the third quarter, we expect revenues will be comparable to the second quarter as we rebuild the order book with an increase in domestic completions as international well construction activity.
We're already seeing some positive signs in this regard.
We also expect a modest improvement in EBITDA driven by cost reductions.
Looking further ahead form is positioned for renewed success with our new cost and capital structures.
Dedicated employees.
And our portfolio of winning products.
Well.
Thank you Chris.
I'm pleased to represent the forum team with Chris Amneal at this exciting inflection point for the company.
The decrease in activity and spending by our customers, resulting from the coven 19 pandemic.
And the dramatic reduction in drilling and completion activity due to low oil prices had a significant impact on our second quarter financial results.
Our total revenue for the quarter was $113 million down 38% from the first quarter.
Our book to Bill ratio was 76% as orders for our consumable products.
Sure typically book and ship in the same period or most severely impacted.
In response to the forecast and declines in our revenue.
We initiated a significant cost reduction plan in March and completed many of our identified cost reduction actions early in the second quarter.
We focus our plans on cash costs included in ESG today and cost of goods sold except from the purchase materials and total we've reduced these costs by $24 million compared to the first quarter, 30% production.
These cost reductions, which have all occurred since march amount to approximately $100 million and total savings on an annualized basis.
Our cost reduction actions included significant headcount reductions, especially at senior levels of the organization.
Facility closures, including production and distribution facility located in the us.
Salary reductions across the company suspension.
For our us and Canadian retirement plans and other reductions in variable costs.
As a direct result of these cost savings sequential decremental EBITDA margins were limited to 23%, resulting in adjusted EBITDA of negative $11 million for the second quarter.
We're particularly pleased with this result, given the weak pricing environment and the cobot related under absorption of fixed costs that had a direct impact on our gross margins.
For clarity adjusted EBITDA results exclude roughly $3 million of noncash stock compensation expense for the second quarter.
This treatment of the change for forum, which now aligns with the presentation of our peers and we applied this change to the comparable periods at our earnings release.
Our free cash flow after net capital expenditures in the second quarter was negative $3.5 million as the impact of lower earnings was mostly offset by reductions in working capital from strong collections of receivables and inventory management.
Included in this result, or approximately $5 million of cash severance and other restructuring costs paid in the quarter.
But for these restructuring costs for almost free cash flow positive in the quarter and has generated positive free cash flow for the past seven quarters.
Over this period forum generated $109 million free cash flow.
In the quarter, we decreased our net inventory position by $15 million and expect the monetization of excess inventory to continue in 2020 and beyond.
Net loss for the quarter was $5 million or five cents per diluted share.
Excluding a $39 million gain on extinguishment of debt and $9 million of special items. Adjusted net loss was 29 cents per diluted share.
Special items for the quarter on a pre tax basis included $4 million of severance and other restructuring costs.
$4 million of inventory and other working capital impairments at $1 billion of foreign cash foreign exchange loss.
We provided a reconciliation table of these special items in our earnings release for your reference.
I will summarize our segment results on a sequential basis.
And our drilling and downhole segment orders were $42 million, a 40% decrease from the first quarter, resulting from significant declines in drilling and well construction activity in North America.
This decrease was mitigated by our international exposure in the segment.
To put that in context, despite the low commodity price environment in the second quarter. Our drilling product line was awarded a multiyear contract to supply Rick handling tools and related equipment for a 24 rig Newbuilding program in the Asia market.
Orders for the second quarter includes $14 million for this award with additional orders under the award anticipated in the second half a year.
Segment revenue was $47 million, a 29 million dollar or 38% sequential decrease.
As book and ship activity across the segment was impacted by lower activity levels and locked down due to the coven 19 pandemic.
Adjusted EBITDA for the segment was negative $3 million in the second quarter, a sequential decrease of 10 million.
And our completions segment orders decreased 72% to $14 million segment revenue was $18 million, a sequential decrease of $33 million or 65% due to the virtual standstill and well completion activity in the quarter.
The segment was also impacted by shipping delays from one of our international customers due to the impacts of Copel 19.
Adjusted EBITDA for the segment was negative $6 million and $10 million sequential decrease.
Despite the significant cost reductions mentioned earlier as well as additional furloughs and several facilities within the segment.
The magnitude of the decline in revenue and resulting loss of operating leverage front upfront unabsorbed fixed costs had an outsized impact on our completion segment EBITDA.
Production segment orders were $29 million, a sequential decrease of 43% primarily due to a significant decline and customer bookings activity for our valves product line as customer activity ground to a halt due to the pandemic.
Due to pandemic related lockdowns and significant distributor destocking.
Segment revenue was $49 million, a 13% decrease due to lower sales of valves. This decrease was partially offset by a slight increase in shipments of surface production equipment for our customers focused on natural gas production in the northeastern United States.
Adjusted EBITDA for the segment was $2 million up 2 million sequentially due to lower overhead expenses from cost reductions.
I will now discuss some additional details about our results and financial position at the foreign level.
Our capital expenditures in the second quarter were less than $1 million, we are a capital light business and we expect our total capital expenditures for 2020 to be less than $5 million.
In the second quarter, we reduced net debt by $32 million, primarily due to the repurchase of $72 million principal amount of senior notes at a discount.
We ended June with $110 million of cash on the balance sheet and availability under our revolving credit facility of $84 million, resulting in total liquidity of $194 million.
Our debt at the end of June, including 85 million outstanding on our revolving credit facility and $328 million of unsecured notes due 2021.
Following the debt exchange completed earlier. This week, we now have $315 million of new secured notes due in 2025 and $13 million remaining on the old unsecured notes.
In connection with the debt exchange, we also amended our revolving credit facility.
The changes include a reduction in the size of commitments from 300 $250 million an increase in the interest rate margin.
11 on the amount of availability derived from our inventory collateral and certain other administrative changes.
The majority of the revolving credit facility will be October 2022.
With the resin with the resolution of a small remaining stub of all boats.
Pro forma for the credit facility Amendment, our liquidity at the end of the second quarter would've been $126 million.
Interest expense was $6 million in the second quarter, while we do expect higher interest expense following our debt exchange the six in the quarter percent of cash interest on the new convertible notes is consistent with cash here theres on the previous those.
In the second quarter, depreciation and amortization and stock based compensation were 12 million at $3 million respectively.
We expect these expenses to remain at similar levels in the third quarter.
Adjusted corporate expenses were $6 million and the second quarter, and we expect them to be similar in the third quarter as well.
We will continue to have some tax expense. Despite an overall net loss as we are not recognizing tax benefits and loss, making jurisdictions, but we continue to recognize tax expense for some international jurisdictions with income.
Once we turn profitable in the loss, making jurisdictions, we expect to have a relatively low tax rate as we begin to use our net operating losses.
For more information about our financial results. Please review the earnings release on our website.
Now, let me turn the call over to Neil to discuss some of our key operating initiatives.
Thank you while good morning, everyone.
First off I want to thank our employees for their remarkable resilience during these incredibly difficult times.
Together.
We made sacrifices to dramatically reduce costs and position forum for the future.
The market will recover and went into our employees will be the key differentiator in our success.
As Chris and Lyle had mentioned the unprecedented decline in drilling and completions activity due to covert 19 significantly reduced demand for many of our products.
And our spot we emphasized our businesses.
It is positive EBITDA with only a modest market rebound.
We remain committed to controlling costs, while generating cash flow from inventory.
The second quarter presented the most challenging market conditions and the generation.
Our ability to execute will increase as the market improves.
Forms customers rely on our products to increase the productivity and reduce the cost.
For example, within our for multi listed solutions product portfolio.
We provide fan management tools and cable class that extend the life of electric submersible pumps or ASP.
These products witness an increase in Mclean demand.
After bottoming out in May.
And we expect demand for these products to continue.
As we as more wells that brought back online.
Another example of forms wedding products with a large multi year rig hailing tool award lyall referenced earlier.
In an industry, where capital is limited and tight.
Our customer selected the premium product of our handling tools.
And we're very excited to play a key role in this rig Newbuilding program.
Let me provide one more example.
In the net of last quarter's meltdown.
One service company customer was proud deposits and picture a social media with one of the Frac fleets working.
Among the key component in that picture.
Seven were supplied by Florida.
Said.
Our 3000 horsepower pumps.
Our jumbo Tron radiators.
Our high CBF single line manifold.
Our high pressure flow iron.
Our AMC wireline pressure control equipment.
All right drawing last assembly.
And our newest product from quality wireline and wireless cables.
In addition asset a frac work was completed.
Our Derek oil coil tubing from global today.
Was used for drilling out the clubs and our fourth Sandguard with candid clamps was used with the artificial lift installation.
This picture reinforced to name at Florida has the products the people and the desire to be the leading solution provider in our space.
These are just a few examples.
And I can a many more from our valves solutions production equipment and subsea product lines.
The market rebound may take many months to occur.
But when and.
We are positioned to win.
I'll now turn the call back over to credit for his closing remarks.
Thanks Neil.
The second quarter presented an extremely challenging market environment.
But I am proud of the way our team has navigated through this significant cost reductions.
I'm also pleased with the outcome of our debt exchange, which leaves us well position for future growth.
We now have the cost structure and the balance sheet to prosper lower for longer environment.
Form has excellent earnings power potential with our stable of well positioned completion products artificial lift accessories, and well construction products to name a few.
With our new much more and more efficient cost structure. We can realize this earnings potential at a much lower level of drilling and completions activity that in the past.
Thank you for your interest in form and at this point, we will open the line for questions.
Schettler, let's take the first question.
Okay and your first question comes from the line of Dan Peter when with Picoway Energy partners.
Good morning, guys couple of questions.
Yes, Chris I mean, the exchange offer here definitely extend and runway which is critical.
Given you've got runway now kind of from a strategic perspective can you talk a little bit about.
How you.
How you claw back out of the whole that were in from an industry perspective, and do we look for do we look forward divestitures to the look for acquisitions do we look for status quo I mean, what's the how do we how do we play off is from here given the balance now in better shape.
Yes.
We're very pleased that were getting off the fence and playing offense again, Dan and that offense will be in a number forms the organic side will be as.
Ill and I've talked about.
Emphasizing our strong.
Products that have good market position.
Good share.
Solutions capability for our customers and where we can see that near term earnings power potential.
Yes, we're putting the resources.
Most behind those.
We have been fitting out our operations at our facilities and our product offering here.
So we can emphasize those that have the greatest potential in the near and medium term.
One of the benefits from the debt exchange and the new debt structure is.
We do have the liquidity and we do have the flexibility.
To once again look at acquisitions.
With the.
Condition that we're not looking to lever up the company for sure, but we do have that flexibility.
And that's getting back I think too.
The historic strength.
Of the company.
So our focus will be on products that have really good earnings power potential.
In the new market environment.
Rounding out that portfolio.
But taking advantage of the much lower cost structure. So we can be successful.
At a lower level, a rig activity lower level of completions activity is still delivered good returns for our shareholders and taking advantage of.
Our runway.
And the path to deleveraging that we were talking about.
Thank you and.
Follow up there just on the numbers.
Well you talked about revenues flattish for the third quarter EBITDA improved I just want to test some math with you to make sure I understand kind of dynamic here.
Adjusted EBITDA for the quarter 11.6 million negative.
You talked about I think realizing about 100 million at cost savings, but expecting 150, which implies sort of another 50 million of cost savings to calm, which should be about $12 million a quarter I mean.
That math would say, we get EBITDA back close to breakeven in.
The third quarter, just from cost savings alone am I missing any things on my math and the right ballpark, Yes, let me clarify that that's not entirely.
Correct actually.
What we what we've said was that a year over year second quarter 2019 to second quarter of 2020, it's 150 of savings annualized.
Sequentially from Q1, Q2, it's 100 million.
But we did.
Implement some of those cost savings.
During the course of Q2, so Q3 will have more benefit from the cost savings and that will and we have ongoing.
Good plans as well and so we do.
Expects to third quarter cost to be lower which will drive the improvement in EBITDA on the revenue side.
Obviously, there was deterioration during the course of Q2.
From April to May.
To June as activity came down.
We're already seeing some improvement look at the Frac fleets going back to work for example, so we expect the reversed to a court occurred during the third quarter as the becoming out in the third quarter at.
At a better run rate from the revenue standpoint, or so although were flat quarter to quarter.
I will be coming out of Q3, with a better run rate and the lower cost structure.
Got it thank you.
I'll, let others ask questions I'm going to couple more acute backend. Thank you.
Okay. Thank you.
So until we can you remind what the.
That were folks the the Q in for that.
For questions. Okay. Good audio question. Please press star one I guess telephone keypad again that is going to ask my question, we'll pause to does the momentum from Takeda roster.
And you'd have a question from the line of Aaron Mackie.
Hi, good morning.
Shareholder just had a question about getting back into compliance with the New York stock exchange.
Minimum of $1 per share.
If we get any extension to that six months, where do we have a drop off drop dead date for that.
Yes, so we do have shareholder approval to do.
Do a reverse split ticket.
Back in compliance with that we have been waiting on that until we.
I had the success of the debt exchange, which has now occurred.
We still have some time that but yes, we.
I do expect to move ahead with the shareholder approved.
Reverse split that will put our stock.
Back in compliance and as you know a stock split or reverse stock split is just arithmetic and it.
10% move in the stock is still a 10% move in the stock it shouldnt be.
Transparent and.
No impact on shareholders and.
Just a matter of the math and so you should expect that that will occur.
Yes this year.
Okay. Thank you.
Thank you do have a follow up question from the line of bad Tinkering with typically energy partners.
Like a bad 14 can't get rid of mill.
So you got a lot of working capital in the second quarter Im just curious around.
I assume inventory become that's kind of primary source of working capital improvement.
Can you talk about how you think about targeting inventories is there a dollar number is it out.
Those are pretty low right now, but but how do we think about that that inventory monetization and is.
How do we measure.
Yes, so given the level of activity, we have now we have excess inventory.
And we're looking to move that.
Aggressively and turned that to cash so that is.
Our liquidity bank. If you will have its that's in addition to what we talk about when we talk about our.
Would it be from our bank facility or cash on hand.
And so.
We are aggressively moving in that direction, maybe deal you can.
To give some examples of areas, where we think we can.
Focus on inventory movement share.
Hey, Dan so.
I think with our product portfolio and our wide range, we're able to go to into many markets across the world. As an example, our simulation product line has historically been focused on the United State.
We are utilizing our sales network across other product lines. We've we've begun to to move a lot of that inventory into other markets in Asia and.
In the Middle East. So we drove a lot of a lot of options to do that we continue to move forward to that.
Yep.
Good from a.
Thank you and then.
Obviously orders on the completion side were quite low.
So what should we be watching.
Since tenants spine the bottom here do we watch Frac counts.
Or they still cannibalizing equipment, how what do you think the lag time is between your.
But between activity improvement and you guys seem orders and revenues.
Sure and Dan a nail again.
We are starting to get inbound and alcohol and.
Customer, they're looking for Frac readiness and there is a month there is a lot of equipment out there.
I guess I would compare it to having a race car sitting on the shelf for six months expect dance around the Indy 500.
2800, well, it's a challenge to do that and I think we're going to see.
Customers realize they do need newer equipment or at least significant service on that equipment. So we are seeing those types of calls.
Adding some initial orders from that I think that rig count bottoming.
Hey, good indicator for our completions our completion segment.
Yes, I mean operators are very picky. These days today was that equipment to be working and the stages to be done than they have no patients for downtime. So.
It's hard for service companies too.
Take risk.
[music].
Equipment that they are not confident had.
And then of course, we sell other products that are associated with that.
Pickup and completions, whether it's cool wireline cable on our coiled tubing strings, which don't store real well. So there are number here areas in this short cycle space on completions that.
We're beginning to see.
Some positive side.
Good.
And I gave you the Val.
Val slowdown as more coded related or is it more energy downturn related in other words do we think thats about pick back up.
Endemic stuff eases off.
Yes, Dan.
Good question, our valves business as you know spread not only upstream, but also through midstream downstream and even into industrial applications. So the upstream portion of our slowdown.
And the upstream represents a smaller piece of our valves business was really energy related the downstream portions and industrial Workover lockdown related so.
Many facilities, where those new refineries or chemical plants for locked down to a essential personnel only basis and they really moved to only doing emergency.
There has to minimize the chance of any kind of cobot impact so.
Definitely a big piece in dialysis tied to that.
Download activity for Kuroda virus and as you see the economy starts open back up we would expect those things to rebound as well.
Okay.
Last question when when you think about all of the adjustments that you've had to make to the business to sustain.
This level of profitability and I commend you I know it's been hard.
What do you think that what's happened to revenue generating capacity, when we think about things getting better.
In revenues.
Do you have to start adding cost back when revenues go up 10%, we doubled revenues without changing the cost structure, what's our kind of what's on capacity at this point in time.
Structuring gotten quite striking.
Yes, I think there we have put that in two buckets probably say.
The overhead costs the SGN today, we have a lot of.
Capacity for growth.
Although our SGN a costs are significantly lower than they were.
On the cost of goods sold side, how many folks we have working at our facilities.
We would need to hire that folks back but that cost of course goes directly into.
Inventory and product cost to be sold so it's directly related to two our volume. So we would be needing to add some cost but that is the cost of goods sold if you look.
But I think that the benefit is that our fixed cost in terms of facilities in our fixed cost and SJ is significantly lower than it is and so.
Brings down our cost structure and brings up our earnings potential.
For.
Any improvement and completion drilling activity from here.
Yes, I said, one more guys science so.
Feels like year, what you're essentially telling us without giving for formal guidance is we've now kind of hit the bottom in terms of revenue and profitability rig count probably in going much lower total, it's probably not getting much worse.
Cost cutting et cetera. So when you when you guys look at the second half year here.
In a flattish revenue environment, maybe then it's a little bit better.
Then generating free cash a lot of that coming off balance sheet, but it sounds like you should generate free cash in the second half of the year, even at these ratable levels.
Assuming no incremental downturn.
Yes, Dan I think from a guidance perspective, that's exactly right.
And spot on with respect to the free cash flow.
Generations of business, that's been a major focus for us as mentioned the remarks seven quarters of free cash flow and we do expect to be free cash flow positive in the back half a year as we're able to bring down inventories and the balance sheet even further.
Well done guys. Thank you.
Thank you Dan.
We will wrap up the call at this point.
Color. Thank you very much and we'll talk to all of our good friends and shareholders.
Next quarter. Thank you very much.
Thank you everyone. This does conclude today's conference call you may now disconnect.