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Forum Energy Technologies Inc (NYSE:FET)
Q3 2019 Earnings Call
Oct 25, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Third Quarter 2019 Earnings Conference Call. My name is Michelle and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode and all lines have been placed on mute, to prevent any background noise. We will be facilitating a question-and-answer session after the speakers' remarks. As a reminder, this conference call is being recorded for replay purposes. After the speakers' remarks today, I will instruct you on the procedures for asking questions.

I will now turn the conference over to Mark Conlon, Director of Investor Relations. Please proceed, sir.

Mark Conlon -- Director of Investor Relations

Thank you, Michelle. Good morning and welcome to Forum Energy Technologies third quarter 2019 earnings conference call. With us today to present formal remarks are Cris Gaut, Forum's Chairman and Chief Executive Officer as well as Pablo Mercado, our Chief Financial Officer and Lyle Williams, Senior Vice President of Operations.

We issued our earnings release last night 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 and 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 management's best judgment only as of the date of the live call. Management statements may include non-GAAP financial measures. For 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. Chris?

C. Christopher Gaut -- Chief Executive Officer

Thanks, Mark, and good morning everyone.

I believe Forum performed well in the third quarter despite a difficult market. We have a dedicated team that is working very hard and achieving good results around our three strategic objectives, which are generating strong free cash flow to reduce net debt ,operating and cost efficiency, emphasizing our winning products to improve on our market position. I would like to report on our progress in each of these areas.

On the first objective, I am pleased to report that we made significant strides in Q3 by reducing our net debt position by $70 million. This was achieved through a combination of free cash flow and the previously announced divestiture. Our free cash flow in the third quarter was $32 million, that's up $14 million from the second quarter and was generated from operating cash flow and monetization of excess inventory. This was our fourth consecutive quarter of strong free cash flow, during which time we have generated $86 million, representing a best in class free cash flow yield of well north of 50%.

We also closed on our previously announced divestiture of our joint venture interest in Ashtead, which we sold for $39 million in cash and an $8.5 million seller note. These efforts allowed us to fully pay down our revolving credit facility by the end of the third quarter. I expect further net debt reduction in the fourth quarter as we generate strong free cash flow for the fifth consecutive quarter. Year-to-date, we have reduced our net debt by $100 million and we ended the quarter with $308 million of liquidity.

Regarding the second objective, operating efficiency, we increased our adjusted EBITDA by $4 million sequentially to $22 million, despite a difficult market and lower revenue. This improvement was due to increased international sales, cost efficiencies and tariff mitigation. Lyle will talk more about our efficiency initiatives.

Finally, the third pillar of our 2019 strategy that we laid out at the beginning of the year was to drive growth with our winning products. We have seen continued success in growing these products despite a challenging market. Some examples include our DURACOIL coiled tubing string, which has gained significant traction in the market, our coiled line pipe product, where we are seeing increased quoting activity, onshore for gas injection lines and offshore for tiebacks, our EDGE desalter, where we are seeing multiple opportunities in the refining space, and lastly, our pipe handling equipment for the next-generation of drilling rigs for the Middle East market.

I would like to highlight some commonalities in each of these products. They all have significant international or offshore opportunities in addition to US presence. They provide critical value to our customers and remain in high demand even in an environment where spending remains constrained and there are barriers to entry for all these products, including protected intellectual property. As we look at the market today, drilling and completion activity is being depressed by cash spending constraints of operators and lackluster oil and gas prices. There is clearly budget exhaustion taking effect for the remainder of 2019 and as a result, the service companies have further reduced their spending on replacement capital items and consumable products.

We expect fourth quarter US land activity to be especially soft, more so than last year, with extended frac holidays for example. Also, our service company customers will want to demonstrate their discipline in Q4 by showing more cash flow, less capital spending and lower inventories. All of this will have a direct impact on Forum that we are seeing through reduced orders and lower expected revenue for the fourth quarter.

A way to think about Forum's fourth quarter operating results is that we will have roughly the equivalent of about two months of revenue in many of our US land businesses against three months of fixed costs. As a result, we are now expecting our fourth quarter revenue to be down significantly, with EBITDA in the low double digits.

We strongly believe that the underspending on maintenance and replacement equipment is unsustainable and that our customers will need to resume spending on the types of products Forum provides. Also, we believe the announcements you are seeing from service companies about scrapping a portion of their fleets is an admission of the cannibalization that has already taken place. During this period of low demand, our focus will be on cash flow generation and developing and growing market share with our winning products.

Now, let me ask Pablo to take you through our results and financial position. Pablo?

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

Thank you, Chris. Good morning. Our third quarter revenue was $239 million, down $6 million sequentially due to the continued slowdown in US drilling and completions activity, partially offset by higher deliveries of drilling equipment for international markets. Our adjusted EBITDA for the third quarter was $22 million or 9% of revenue, up $4 million from the second quarter. The improvement in profitability in the third quarter was primarily due to a more profitable sales mix and our continued cost reduction efforts.

I would note that our adjusted EBITDA does not add back the $4 million of non-cash equity-based compensation, but we do subtract out the $3 million of foreign exchange gains. Net loss for the quarter was $533 million or $4.83 per diluted share. The recent collapse in our stock price caused a large divergence between the book carrying value of our assets compared to the market value reflected in our stock price. As a result, we paid all of our goodwill and some intangible and other assets and we recorded a pre-tax non-cash charge of $535 million.

In addition, we had other special items of $3 million for restructuring and other charges and $3 million of foreign exchange gains. We provided a reconciliation table of these special items in our earnings release for your reference. Adjusted net income for the third quarter was $0.02 per diluted share, excluding special items. I will now summarize our segment results on a sequential basis.

In our Drilling & Downhole segment, orders were $80 million, a 2% increase. The book-to-bill ratio for the segment was 91%. Segment revenue was $88 million, an increase of $6 million or 7% due to higher deliveries of capital equipment for international markets. It is noteworthy that two-thirds of our drilling product lines' third quarter revenue was from markets outside of the US. Adjusted EBITDA for the segment was $11.8 million or 13% of revenue. This was an improvement of over 430 basis points, driven by better sales mix, cost efficiencies and operating leverage. I would note that our segment EBITDA included the equity earnings of the Ashtead joint venture for only the two months that we owned the business in the quarter.

In our Completion segment, orders decreased 9% to $65 million. Segment revenue was $71 million, a decrease of $11 million due to lower demand for our stimulation products as pressure pumping service companies continue to cannibalize their idle fleets and destock their consumables. In contrast, our coiled tubing and intervention product sales were resilient as we continue to penetrate the market with new products and benefited from international sales. Adjusted EBITDA for the segment was $10.7 million, a $1 million decrease from the second quarter. A higher mix of high margin coiled tubing and intervention products and cost containment and mitigation actions helped us hold EBITDA margins approximately flat.

Production segment orders were $55 million, a sequential decrease of 27%. Orders for both well site production equipment and valves were lower as E&P operators slowed their completions activity and valve distribution customers continued their destocking strategy. However, we have already received some good orders and letter of intent, totaling almost $20 million of process equipment in the fourth quarter. Segment revenue was $81 million, a 3% decrease due to lower sales of surface production equipment. Adjusted EBITDA margins were 7% for the segment, essentially flat from the second quarter.

I will now discuss some additional details about our results and financial position at the Forum level. Our free cash flow after net capital expenditures in the second quarter was $32 million, an improvement of $14 million from the second quarter. Our program to reduce excess inventory yielded meaningful results as we decreased our net inventory position by $26 million in the quarter.

We expect this inventory reduction to continue in the fourth quarter and beyond. Also in the third quarter, we closed our previously announced divestiture, which generated an additional $39 million of cash proceeds. As a result, any combination with our free cash flow, we reduced net debt by $70 million and ended the quarter with cash on the balance sheet at $300 million undrawn revolver and just our $400 million in unsecured notes during the fourth quarter of 2021. Our primary use of free cash flow will continue to be to reduce net debt and improve liquidity.

Our net capital expenditures in the third quarter were $3 million [Phonetic]. We expect our total capital expenditures for 2019 to be under $17 million. Our reported diluted share count for the third quarter was 110 million shares. Interest expense in the third quarter was $8 million and we expect it to be slightly lower in the fourth quarter with a lower debt level. Depreciation and amortization was $16 million in the third quarter and we expect it to decrease by approximately $1 million in the fourth quarter as a result of the asset impairment.

Corporate expenses were $6.5 million in the third quarter and will remain at a similar level in the fourth quarter. Our corporate expenses are down about 15% in the first three quarters of 2019, compared to the prior year. 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 continue to recognize tax expense for some international jurisdictions with income. Once we turn profitable in the loss-making jurisdictions, we will 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 Lyle to discuss some key operating initiatives.

D. Lyle Williams -- Senior Vice President of Operations

Thank you, Pablo. Hello everyone.

Forum's employees continue to make good progress toward achieving our strategic objectives. In light of the challenging market which Cris described, our teams are executing on the things we control. We were pleased with the $26 million inventory reduction this quarter. Inventory came down in almost every product line, as our reduction initiatives gained traction.

In particular, our Drilling & Downhole segment has made significant strides in reducing work-in-progress inventory in the past two quarters through further implementation of lean pull systems between the front office and the shop floor in each of our plants. Despite the softness of the current market, we expect further reductions in inventory in the fourth quarter as we continue to increase efficiency in this area.

In this quarter, we also saw our third consecutive sequential reduction in our adjusted SG&A costs. We continue to drive cost efficiency in every aspect of our operations. As of this point, our SG&A reductions total nearly $25 million on an annualized basis when compared with the fourth quarter of 2018. Based on actions already taken, we expect SG&A to decline again in the fourth quarter. In addition to SG&A reductions, we are managing our direct and indirect costs in our manufacturing facilities. For the fourth quarter, we have announced a number of facility closures during holiday weeks to better align our costs with temporarily lower activity levels.

On the revenue growth front, we are also taking advantage of improving conditions in international and offshore markets. Our subsea product line recently won an order to sell a remotely operated vehicle to an Asian customer for non-oil and gas use. Prior orders for offshore defense and renewable market applications are keeping our subsea operations busy and increasing profitability. Our Completion segment is also seeing opportunity in Asia. Specifically, our intervention products saw strong revenue in the third quarter with shipments of our intervention BOPs for an order received earlier this year. Opportunities continue to grow as this market demands western technology for unconventional operations. The Middle East market remains strong with increased inquiries for consumable products and capital equipment. We are seeing steady demand for coiled tubing products for the Middle East, which currently represents 15% of the product lines revenues. On the drilling products front, a number of contractors are tendering to build new rigs in the region and our offerings of handling tools and rig capital equipment are well suited to the applications.

We have also leveraged our Saudi Arabian operation to capture increased revenue opportunities. Recently, our downhole product line received Aramco approval for our well regarded packer stage collar product. Our valves assembly operation received approval from Aramco, and we are establishing service and consumable sales capabilities in the Kingdom for our intervention and drilling product lines.

Also on the international front, we are completing a significant order for offshore coiled line pipe, which we expect to ship near the end of this year for the North Sea. Overall sales outside of North America represent around 25% of our total revenue. We expect our share gaining initiatives and a strengthening international market to benefit our results in 2020.

Now, let me turn the call back over to Cris for closing remarks.

C. Christopher Gaut -- Chief Executive Officer

Thanks, Lyle.

We are pleased with our third quarter results, but expect the fourth quarter to be particularly challenging. We continue to believe that the underinvestment, deferred maintenance and cannibalization of equipment by our customers is not sustainable, but it is still difficult to determine how long this behavior can continue. Having said that, Forum's balanced portfolio in the international and offshore markets as well as our exposure to non-upstream markets will partially offset the current destocking weakness in the US land market.

Our operating efficiency and cost reductions are setting the Company up for long-term success. We will continue to focus on the things we can control to improve our cash flow, which are working capital management and managing our costs at both the cost of goods sold and SG&A levels.

We will also continue to focus on our winning products which we can grow even in challenging markets. Our international revenue as a percent of total revenue currently stands at about 25% compared to only 15% in the prior period. We expect this contribution to increase in the coming quarters as we see a greater percentage of future incremental growth coming from the international and offshore arenas versus the US onshore market.

Thank you for your interest. And at this point, we will open the line for questions. Michelle, please take the first question.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Sean Meakim of JPMorgan. Your line is open.

Sean Meakim -- JPMorgan -- Analyst

Hey, good morning.

C. Christopher Gaut -- Chief Executive Officer

Hi, Sean.

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

Hi, Sean.

Sean Meakim -- JPMorgan -- Analyst

So maybe just to start on that -- the international opportunity set, we think international spending might decelerate next year from a growth perspective, but you're relatively underpenetrated in most of your product lines. So I think you should be able to outkick whatever the market offers. Can you give us a sense of how you think about topline growth next year? And I think importantly, does the mix shift toward international versus North America impact gross margins or how you think about, how that could impact your initiative to streamline G&A?

C. Christopher Gaut -- Chief Executive Officer

Yeah. So some of the drivers of the international growth or our artificial lift portfolio as well as the drilling and downhole products that Lyle mentioned, also some of our completions products particularly in the coiled tubing and coiled line pipe arena. Some of those are, from a mix standpoint, quite favorable, including the completion products and the downhole products and so accretive from a margin standpoint. We feel like we have the infrastructure. We preserve the infrastructure to address these international markets. We are shifting some resources around to put more focus on the larger Middle East area for instance, but Sean, no, I don't think that will cause us to have to invest in SG&A nor in inventory. One thing we're also doing is leveraging our presence in Saudi Arabia across multiple product lines where initially it had more of a focus in just one product line, the valve space.

So, we think the Middle East market will be one of the stronger growth areas next year. In general, when you look across where opportunities are for revenue growth and I think we're putting more chips on that marker.

Sean Meakim -- JPMorgan -- Analyst

Thanks for that feedback, Cris. That was very helpful. I was hoping we can also dig in a little more into the acceleration in inventory reductions. It sounds like from -- while the lean initiatives are getting traction in Drilling & Downhole, I'm not sure if Completions are still more of a drag. So maybe -- a little bit more about kind within segment how things are going in. Does the pivot to more international opportunities have an impact on how you manage working capital need? So is there any impact on how DSOs could shift over time? Any select inventory builds that could mitigate some of the progress you're making elsewhere?

D. Lyle Williams -- Senior Vice President of Operations

Sure, Sean. This is Lyle. The team is making really good progress overall in inventory reduction. we mentioned that each one of our product line -- almost each one of our product lines saw a reduction this quarter in their inventories and our initiatives are really across the board as far as making reduction. I highlighted to Drilling & Downhole group as they've made a specific emphasis in the recent quarter on leaning out operations in some of their shops and made some really nice progress on work-in-progress reduction, but don't take that to mean that the other product lines are also seeing big reductions.

I think when we look to the international mix similar to Cris, we're already well positioned to take advantage of the opportunity there and don't see a significant change in any kind of working capital requirement, probably, to the contrary, the ability to continue leveraging the inventory we already have into those markets will be favorable.

C. Christopher Gaut -- Chief Executive Officer

And to the extent we have large ticket capital equipment for international market, for example in our EDGE desalters and refinery business or a large project in the subsea space where we will be building up work in process. We try to match that with cash payments. So that from a cash standpoint, although inventory will be going up -- we're protected and not cash out of pocket on those big projects.

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

And then in terms of inventory, since it's a work in process, it's a percent [Phonetic] of completion type of revenue recognition for those big projects, we do recognize that revenue over time.

Sean Meakim -- JPMorgan -- Analyst

Got it. That feedback was very helpful. Thanks a lot.

C. Christopher Gaut -- Chief Executive Officer

Thanks.

Operator

Our next question comes from James West of Evercore ISI. Your line is open.

James West -- Evercore ISI -- Analyst

Hey, good morning guys.

C. Christopher Gaut -- Chief Executive Officer

Hi, James.

James West -- Evercore ISI -- Analyst

And congratulations on another quarter of strong free cash flow and more debt reduction here. I guess, the first thing for me interesting comments from Lyle around the subsea side of the business, recognizing it's a smaller part of your mix, but are we starting to turn the corner here. I mean the subsea equipment and hardware manufacturers are showing good growth in orders. Rigs are getting contracting and going back to work. Do you think we're at a turning point here for your part of the subsea business?

C. Christopher Gaut -- Chief Executive Officer

We are seeing more bidding activity that has not yet turned into backlog for us. The increased bidding activity is for a combination of different projects. Lyle, James, and -- some of it for oil and gas and some of it non-oil and gas. There are still quite a few ROVs available out there.

James West -- Evercore ISI -- Analyst

Right.

C. Christopher Gaut -- Chief Executive Officer

But what we are seeing is for new long-term projects, operators would prefer to have new equipment for a five-year project rather than taking on equipment that is already five or seven years old and would be 12 years old at the end of their project. So that is a factor in their mind.

James West -- Evercore ISI -- Analyst

Okay. Okay, that's helpful. And then, Cris, on the -- this cannibalization issue, certainly 4Q, I understand the market is going to be pretty, pretty tough, but some of the contract drillers, some of the completions-oriented companies have suggested a budget reset and some movement higher in activity as we pivot into 2020. Are we at a point where their inventory destock is going to cause a quicker snapback in orders as we go into the early part of the year so they can get back to work, if indeed, there is some type of least short-term bounce back.

C. Christopher Gaut -- Chief Executive Officer

Historically, that is what we have seen. And if we just take pressure pumping as an example, just -- in the past eight years, we've seen three ups and three downs. And when it snaps back from a destocking, it's a very high percentage increase in revenue in the subsequent quarters. We are not yet seeing that light in the tunnel, but our experience is that when it happens, it happens in a significant way.

James West -- Evercore ISI -- Analyst

Right.

C. Christopher Gaut -- Chief Executive Officer

And as I said in the prepared remarks, we think the retirement announcements that we're seeing are an admission that this equipment has been cannibalized isn't competitive and is not economic to put back to work. And so, that I think will bode well for this transition point when it comes.

James West -- Evercore ISI -- Analyst

Got you, but definitely agree. Thanks, Cris.

C. Christopher Gaut -- Chief Executive Officer

Thanks.

Operator

Our next question comes from George O'Leary of Tudor, Pickering, Holt & Company. Your line is open.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Good morning, Cris. Good morning, guys.

C. Christopher Gaut -- Chief Executive Officer

Good morning.

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

Hey, George.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

On the artificial lift side of the equation and multi-lift portfolio, obviously, a lot of opportunity here in North America to continue gaining share, but can you talk a little bit about the strategy for that business on the international front and maybe where your attention is focused from a geomarkets perspective as we sit here today?

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

Yeah. Hey George, it's Pablo. Yeah, that acquisition or kind of combination of businesses with a focus on artificial lift has been really good for us. As you pointed out, it has been a story about market penetration. So, even in a down market, we have continued to add customers on the US side and are really benefiting from offering a full package of solutions to E&P operators.

Now, as you pointed out, we do still have room to go in the US. The next leg of growth we think can come from international growth, particularly in the Middle East, it's an area of focus for us. As we mentioned, we're leveraging our footprint there that we have for other product lines such as Davis-Lynch, such as the local processor in Saudi, to drive sales of these new products, and we think that there will definitely be a solution that works for that market.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Okay, great that's helpful color, Pablo. And then the international revenue as a percentage of the mix jumping to 25% quarter on quarter obviously, impressive thing to see. I think we've seen plenty of green shoots for the international and offshore markets in recent quarters as you kind of guide your crystal ball or just think strategically, Cris and Pablo and Lyle, how big do you think that international business could get through time over the next five years? Could that be 50% of revenue? Is that a good goal? How do you guys think about that just strategically longer term?

C. Christopher Gaut -- Chief Executive Officer

Yeah. I don't know that it would get to 50% just given the size of the of the US market, but a third in the near term and potentially a bit above that, but the US market is just so big and works the equipment so hard that in a normal environment where [Indecipherable] destocking, that's just is going to continue to be, I think, a very big part of our business, driven by consumable products.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Great, that's very helpful. If i may, I'll sneak one more in. On the -- as you guys have historically been fairly acquisitive, clearly the focus now is really on delevering and continuing to generate free cash flow, cut costs and pay down debt, but you have sold a business recently. There are incremental levers you have to pull on the asset or business sale side of the equation, and then kind of what is that broader A&D market look like today.

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

Yeah, George. It's Pablo again. I think that subsea rentals joint venture divestiture was a bit of a unique situation where we had a partner that really wanted to buy us out and we have just divergent interest in terms of how we want to manage the business. Given that our entire focus is on free cash flow generation and reducing net debt and wanted to run things for cash flow. So in this kind of market, what we are focused on doing is driving the winning products, investing in those and really de-emphasizing the other products, working down the inventory, shifting the SG&A resources, sales folks, engineering folks to those winning products and winning regions and monetizing the other products by turning the inventory into cash over time.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Great. Thanks for the color, Pablo and Cris.

C. Christopher Gaut -- Chief Executive Officer

Good, thanks.

Operator

Our next question comes from J.B. Lowe of Citi. Your line is open.

J.B. Lowe -- Citi -- Analyst

Hey, good morning guys.

C. Christopher Gaut -- Chief Executive Officer

Hey.

J.B. Lowe -- Citi -- Analyst

So you guys have done a great job of -- you hit your annualized $100 million free cash flow target this quarter, you pay down your revolver, continue to liquidate inventory and the stock price is still almost at a $1. I guess the next step is debt repayment. Are there any restrictions on buying your 2021 notes at a discount that are down here [Indecipherable].

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

Yes, there are some restrictions, but there is some basket available for that. And, of course, it's one of the options we're considering, but really in the context of dealing with the whole maturity.

J.B. Lowe -- Citi -- Analyst

Okay, fair enough. My other question was on, you guys are about a year into your -- after the acquisition of GHT. Has there been any progress there on expanding that sales in that business outside of just the pressure pumping market into other industries maybe?

C. Christopher Gaut -- Chief Executive Officer

Yeah, they do serve the non-oil and gas market, but still oil and gas has been the bigger part of their business. It is more capital equipment-oriented. It has a very large market share, but obviously there's very little in the way of capital equipment being ordered. I think that does give us great leverage to when there needs to be a reinvestment in equipment again. Regardless of the type of prime mover type of engine that's put on the new pressure pumping equipment, you want to make sure that those prime movers whether turbines or diesel engines of whatever type are well protected and the Jumbotron GHT product is the best way to do that. So, we've got a good product there, but it's kind of on the bench at the moment here, ready to come into the game.

J.B. Lowe -- Citi -- Analyst

Understood. Last one from me is, Lyle, I think you mentioned that you guys received approval from Saudi on the valve facility out there. Just wondering if you can update on the potential customers out there.

D. Lyle Williams -- Senior Vice President of Operations

Sure. We did in the quarter receive our approval as a manufacturing facility in Saudi from Saudi Aramco, which is a long-awaited approval that sets us up well, not only to be able to make sales directly to Aramco, but also as an approved supplier, expect to see more pull through whether that's through SABIC which is in the region and some of the smaller fabricators that build product for Aramco and for SABIC.

So the activity level is there and strong and our facilities ready. In addition to our Aramco approval, we also had passed our API 6D audit in the quarter. So we'll be an API approved facility here in the near term. And so, between those two approvals, we feel really good about the position of our facility there and the opportunity to take advantage of the market.

J.B. Lowe -- Citi -- Analyst

Great, thanks. That's all from me.

D. Lyle Williams -- Senior Vice President of Operations

Thanks.

Operator

Our next question comes from John Watson of Simmons Energy. Your line is open.

John Watson -- Simmons Energy -- Analyst

Thank you. Good morning.

C. Christopher Gaut -- Chief Executive Officer

Hey, John.

John Watson -- Simmons Energy -- Analyst

Hey. On the free cash flow front for 4Q, I'm thinking through the puts and takes versus 2Q EBITDA will be lower, capex will be lower and you're making good progress on inventories. Is it fair to think that 4Q free cash flow could be similar to what we saw in 2Q.

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

So let me give you some of the other puts and takes. I think you have those right. There is also the interest payment.

John Watson -- Simmons Energy -- Analyst

Right.

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

It's a semi-annual interest payment on the bonds that goes out right at the beginning of the quarter. So right at the beginning of October, it went out. So that is a difference, but on the working capital front, we -- the $26 million inventory reduction in the third quarter, I think, will help us see that turning into cash in the fourth quarter.

John Watson -- Simmons Energy -- Analyst

Okay. Okay, great. So, little better than 2Q. That's helpful. Thank you, Pablo. And then, just as a follow-up to one of J.B.'s questions, you're generating great free cash flow. Your maturity date is still two years away. Can you give us any further color on what types of conversations you're having regarding that maturity just conceptually, I know, we're a long way away.

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

Yeah, so clearly we're very focused on debt maturity. The good news is the bonds don't mature until October 21, which is in about two years. And we're also fortunate that our capital structure has a lot of flexibility built into it. As I mentioned before with an undrawn revolver, we have a lot of liquidity and also with the bonds being unsecured, we've got a lot of secured debt capacity as well. So we are evaluating all the financing options, but the main point is we've got a little bit of time and options and importantly we will continue to generate cash and therefore won't -- it's unlikely that we'll need to refinance the full amount.

John Watson -- Simmons Energy -- Analyst

Okay. Thank you, Pablo. Lastly, on the Production business front, orders were down significantly quarter-over-quarter, but like Lyle said, you've got some LOIs early in the quarter. I was wondering if you could help us put those two to think about Q4 revenues for that business, just a general trajectory.

D. Lyle Williams -- Senior Vice President of Operations

Sure, John. I could definitely do that. First off, the orders were driven by really two things. First was a delay in our surface production equipment orders. E&P operators have exhausted their 2019 budgets and are working to firm up their 2020 plan. And so, given the uncertainty in the commodity prices deck, many have yet to firm up their plans for next year.

What we saw early here in the fourth quarter was a decent amount of orders for the US market for that. And as you recall, our orders in the production equipment space are pretty large and lumpy. And so, really a timing factor of when those orders came in, but coming into the fourth quarter. So a lot of that big slug of orders is really for 2020 revenue. So, our fourth quarter was set based on orders received in prior quarters and we feel pretty good about that. The other part of the orders slow down was in the valves business. And we've seen some level of destocking of inventory by our distribution customers and we saw that in a much more pronounced way in the third quarter. The underlying activity in the businesses, primarily midstream and downstream is stable and steady. And so, we think that's a matter of time before the destocking there and inventory reductions run its course. And we see order levels pop back to a more order -- more consistent with underlying activity.

John Watson -- Simmons Energy -- Analyst

Okay, great. That's helpful, Lyle. Thanks guys, I'll turn it back.

Operator

Our next question comes from Daniel Pickering of Pickering Energy Partners. Your line is open.

Daniel Pickering -- Pickering Energy Partners -- Analyst

Good morning, guys. Thanks for taking the question. Pablo, you talked about an expectation that you wouldn't have to refinance your entire debt maturity. Trying to think about the next two years, the free cash generation don't want to get -- don't want to make you predict too specifically in the short term, but that's a $400 million issue now. You've kind of got cash to offset a decent piece of it already. I mean, is your expectation that'll be $200 million number to refi in 2021, a $150 million -- I'm just thinking about the next two years of cash flow. What do you think the model looks like?

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

Dan, that's not too far off from our thinking. However, we wouldn't wait quite that long to address it. But yeah, we've hit that $100 million run rate here in the back half of 2019, as was our objective and we think we can continue to generate strong free cash flow.

Daniel Pickering -- Pickering Energy Partners -- Analyst

So, I guess, what you're saying is you think the inventory reductions, the cash generation from operations, et cetera, that can continue. So, it's a $100 million a year on an ongoing basis. So 2020 ought to be another $100 million, given that you're at that run right now?

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

The working capital lever is still significant for us. We are trying to get to 2.5 or 3 inventory turns here over time. So a lot of the inventory is things that we've built up for a recovery that didn't happen in 2018. So, it's just a matter of moving that over time.

Daniel Pickering -- Pickering Energy Partners -- Analyst

Sure. And I'll count that. First one is one question and Cris, you talked about three up and down cycles in the last eight years and each time when the business snaps back, it snaps back notably. What would be the longest -- in those three time periods, on the downside, what would be the longest period of cannibalization and destocking and kind of where are we relative to that historically longest period?

C. Christopher Gaut -- Chief Executive Officer

Yeah, we're getting -- we're at the long end of that now, Dan.

Daniel Pickering -- Pickering Energy Partners -- Analyst

Okay.

C. Christopher Gaut -- Chief Executive Officer

[Speech Overlap] longer than the others have been, yes.

Daniel Pickering -- Pickering Energy Partners -- Analyst

Yeah. So it sounds like it's not Q4, but first half is not a unreasonable expectation or hope.

C. Christopher Gaut -- Chief Executive Officer

That's right. That is right.

Daniel Pickering -- Pickering Energy Partners -- Analyst

Okay. Great, thank you guys.

C. Christopher Gaut -- Chief Executive Officer

Thanks.

Operator

Our next question comes from Matt Dushkin of Bank of America. Your line is open.

Matt Dushkin -- Bank of America -- Analyst

Hey guys, good morning.

C. Christopher Gaut -- Chief Executive Officer

Morning, Matt.

Matt Dushkin -- Bank of America -- Analyst

Just given the capital discipline you're seeing from your OFS customers, are they passing any pricing pressures down on to you? And if so, can you talk to how much pressure you may be seeing and how you manage that in a likely soft 2020 US market?

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

Yeah. I wouldn't say pricing is the biggest issue here. They're buying it when they need it, or when they need it, they need it, right. So, no, I don't think that we're expecting a huge amount of additional pricing pressure. There probably are some specific products across our offering that are seeing more pressure than others, but no, it's more of a yes or no thing, I would say, in terms of buying decisions. Yes -- yeah, we need to be competitive, we need to be in the market, but no, we're not calling for huge pricing pressure to impact our results.

Matt Dushkin -- Bank of America -- Analyst

That's simple enough. And I guess, just shifting gears, looking at the Drilling & Downhole margin outperformance this quarter, are you be able to break out how much of that improvement was product mix versus maybe just cost improvements and better absorption?

C. Christopher Gaut -- Chief Executive Officer

Our Drilling & Downhole team has been working and restructuring for a while. And so, significant amount of cost realignment has been done there by the team. I'd say really, Matt, over the last year. So, we've definitely seen uptick in margin from an operating perspective, both from the volumes, but also from that cost restructuring. So, probably pretty good combination for both of them.

Matt Dushkin -- Bank of America -- Analyst

Okay, thanks guys. And I'll leave it there.

C. Christopher Gaut -- Chief Executive Officer

Okay. Well thank you all very much. We appreciate the good questions and we'll sign off at this point. Michelle?

Operator

[Operator Closing Remarks].

Duration: 48 minutes

Call participants:

Mark Conlon -- Director of Investor Relations

C. Christopher Gaut -- Chief Executive Officer

Pablo G. Mercado -- Senior Vice President & Chief Financial Officer

D. Lyle Williams -- Senior Vice President of Operations

Sean Meakim -- JPMorgan -- Analyst

James West -- Evercore ISI -- Analyst

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

J.B. Lowe -- Citi -- Analyst

John Watson -- Simmons Energy -- Analyst

Daniel Pickering -- Pickering Energy Partners -- Analyst

Matt Dushkin -- Bank of America -- Analyst

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