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Text: In addition, this conference call contains time-sensitive information that reflects management's best judgment only as the date of the live call.
Management's statements may include non-GAAP financial measures.
I will not dwell on the economic devastation that occurred in the second quarter.
You have all heard more than enough about that by now.
For Forum specifically, a primary piece of our business is selling short-cycle products to service companies to sustain, replace and upgrade their drilling and completion operations.
Our customers have sharply reduced their spending in these areas as their 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 Forum's 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 $0.40 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 a cash coupon of 6.25%, the same as the old debt, plus another 2.75% that is payable at the company's option in cash or in kind additional notes.
In addition, there is a clear path for the company to delever as the new notes are partially convertible into for equity.
$150 million principal amount of the new notes are convertible at a conversion price of $1.35 per share and are automatically and mandatorily convertible once form stock price trades through $1.50 for 20 business days.
The conversion of $150 million of new debt at a conversion price that is more than 2.5 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 provides a number of benefits, the time necessary for a business recovery, a clear path to delever the balance sheet.
It does not burden the company with a higher required cash cost of financing or restrictive financial maintenance covenants.
And it aligns the interest of our debt holders and our legacy stockholders around the long-term success of Forum.
The second quarter of 2020 was exceptionally difficult, and Lyle will review our results in a minute.
But it did provide the catalysts to resolve Forum's capital structure issues and to significantly restructure our costs 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 purchased materials costs, are 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 and international well construction activity.
We are already seeing some positive signs in this regard.
We also expect a modest improvement in EBITDA driven by cost reductions.
Looking further ahead, Forum is positioned for renewed success with our new cost and capital structures, dedicated employees and our portfolio of winning products.
I am pleased to represent the Forum team with Cris and Neal at this exciting inflection point for the company.
The decrease in activity and spending by our customers resulting from the COVID-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, were 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 SG&A and cost of goods sold, except from the purchased materials.
In total, we reduced these costs by $24 million compared to the first quarter, a 30% reduction.
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 head count 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 for our U.S. 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 are particularly pleased with this result given the weak pricing environment and the COVID-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.
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 were approximately $5 million of cash severance and other restructuring costs paid in the quarter.
But for these restructuring costs, Forum was 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 of 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 $0.05 per diluted share.
Excluding a $39 million gain on extinguishment of debt and $9 million of special items, adjusted net loss was $0.29 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 exchange loss.
I will now summarize our segment results on a sequential basis.
In our Drilling & 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 this 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 new build program in the Asia market.
Orders for the second quarter include $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 COVID-19 pandemic.
Adjusted EBITDA for the segment was negative $3 million in the second quarter, a sequential decrease of $10 million.
In 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 COVID-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 unabsorbed fixed costs had an outsized impact on our Completions segment EBITDA.
Production segment orders were $29 million, a sequential decrease of 43%, primarily due to a significant decline in 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 Forum 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 included $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, a limit on the amount of availability derived from our inventory collateral and certain other administrative changes.
The maturity of the revolving credit facility will be October 2022 with the resolution of the small remaining stub of all notes.
Pro forma for the credit facility amendment, our liquidity at the end of the second quarter would have been $126 million.
Interest expense was $6 million in the second quarter.
While we do expect higher interest expense following our debt exchange, the 6.25% of cash interest on the new convertible notes is consistent with cash interest on the previous notes.
In 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 in 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.
Together, we made sacrifices to dramatically reduce costs and position Forum for the future.
The market will recover, and when it does, our employees will be the key differentiator in our success.
As Cris and Lyle have mentioned, the unprecedented decline in drilling and completions activity due to COVID-19 significantly reduced demand for many of our products.
In response, we have sized 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.
Forum's customers rely on our products to increase their productivity and reduce their cost.
For example, within our Forum Multilift solutions product portfolio, we provide sand management tools and cable plants that extend the life of electric submersible pumps, or ESPs.
These products witnessed an increase in monthly demand after bottoming out in May, and we expect demand for these products to continue as we as more wells are brought back online.
Another example of Forum's winning products was the large multiyear rig handling tool award Lyle referenced earlier.
In an industry where capital is limited and tight, our customer selected the premium product of our handling tools, and we are very excited to play a key role in this rig new build program.
Let me provide one more example.
In the midst 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 components in that picture, seven were supplied by Forum, 7: our 3,000-horsepower pumps, our JumboTron radiators, our ICBM single-line manifold, our high-pressure flow wire, our AMT wireline pressure control equipment, our Hydraulic Latch Assemblies and our newest product from quality wireline and wireline cables.
In addition, after the frac work was completed, our DURACOIL coiled tubing from Global Tubing was used for drilling out the plugs and our Forum SandGuard with Cannon clamps was used with the artificial lift installation.
This picture reinforced to me that Forum has the products, the people and the desire to be the leading solutions provider in our space.
These are just a few examples, and I can name 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 win.
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 am 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 in a lower-for-longer environment.
Forum has excellent earnings power potential with our stable of well-positioned completions products, artificial lift accessories and well construction products, to name a few.
With our new much more efficient cost structure, we can realize this earnings potential at a much lower level of drilling and completions activity than in the past.
Shanteller, let's take the first question.

user
compname reports q2 loss per share $0.05.
q2 loss per share $0.05.
q2 revenue $113 million.
q2 adjusted loss per share $0.29 excluding items.
customer spending has been 'exceptionally' weak, impacting demand for many of forum's products.

assistant