Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements based on our current expectations, estimates and projections about our operations and the industry in which we operate. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in “Risk Factors” and “Cautionary note regarding forward-looking statements” and elsewhere in this Annual Report on Form 10-K. We assume no obligation to update any of these forward-looking statements.
Overview
We are a global products company, serving the drilling, downhole, subsea, completions and production sectors of the energy industry. We design, manufacture and distribute products and engage in aftermarket parts supply and services that complement our product offering. The Company's products include highly engineered capital equipment as well as products that are consumed in the drilling, well construction, production and transportation of oil and natural gas. These consumable products are used in drilling, well construction and completions activities, within the supporting infrastructure, and at processing centers and refineries. Our engineered capital products are directed at drilling rig equipment for new rigs, upgrades and refurbishment projects; subsea construction and development projects; pressure pumping equipment; the placement of production equipment on new producing wells; and downstream capital projects. In 2020, over 80% of our revenue was derived from consumable products and activity-based equipment, while the balance was primarily derived from capital products with a small amount from rental and other services.
We seek to design, manufacture and supply high quality reliable products that create value for our diverse customer base, which includes, among others, oil and natural gas operators, land and offshore drilling contractors, oilfield service companies, subsea construction and service companies, and pipeline and refinery operators.
A summary of the products and services offered by each segment is as follows:
• Drilling & Downhole . This segment designs and manufactures products and provides related services to the drilling, well construction, artificial lift and subsea energy construction and services markets as well as other sectors such as alternative energy, defense and communications. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable drilling products consumed in the drilling process; (ii) well construction casing and cementing equipment and protection products for artificial lift equipment and cables; and (iii) subsea remotely operated vehicles and trenchers, specialty components and tooling, and complementary subsea technical services.
• Completions. This segment designs, manufactures and supplies products and provides related services to the coiled tubing, well stimulation and intervention markets. The products and related services consist primarily of: (i) capital and consumable products sold to the pressure pumping, hydraulic fracturing and flowback services markets, including hydraulic fracturing pumps, cooling systems and flow iron as well as wireline cable and pressure control equipment used in the well completion and intervention service markets; and (ii) coiled tubing strings and coiled line pipe and related services.
• Production . This segment designs, manufactures and supplies products and provides related equipment and services for production and infrastructure markets. The products and related services consist primarily of: (i) engineered process systems, production equipment, as well as specialty separation equipment; and (ii) a wide range of industrial valves focused on serving upstream, midstream, and downstream oil and natural gas customers as well as power generation and other general industries.
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Market Conditions
The level of demand for our products is directly related to the activity levels and the capital and operating budgets of our customers, which in turn are heavily influenced by energy prices and expectations as to future price trends. In addition, the availability of existing capital equipment adequate to serve exploration and production requirements, or lack thereof, drives demand for our capital equipment products.
In early 2020, the COVID-19 pandemic and associated actions taken around the world to mitigate the spread of COVID-19 caused unprecedented declines in economic activity, energy demand and oil and natural gas prices. In response, in the second quarter of 2020, OPEC+ agreed to a significant cut in oil production and North American exploration and production companies significantly reduced supply by shutting in producing wells and aggressively decreasing drilling and completion activities.
The extreme volatility and lower price environment through the year created a very challenging market for all sub-sectors of the oil and natural gas industry. Recently, oil demand and prices have partially rebounded as supply and demand have rebalanced at a lower level. However, overall activity and the North America rig count remain at historically low levels.
Due to the challenging market conditions, exploration and production companies in North America are under pressure to generate positive cash flows and minimize capital and maintenance expenditures. As a result, we have experienced a material reduction in demand for many of our products and consequently, our revenue. In addition, bankruptcies and consolidation of exploration and production and service companies continued through 2020. If this trend continues going forward, it may lead to a further reduction in the demand for our products.
Activity levels in international regions, as well as global offshore and subsea activity, have also been impacted by COVID-19 related activity disruptions. However, international revenue for our drilling and subsea capital equipment offerings have not declined as sharply due to longer project timelines for international drilling customers and the diversification of our subsea product line revenue outside of the oil and natural gas industry.
Demand for products in our Valve Solutions product line is driven by capital projects and maintenance spending in the upstream, midstream and downstream markets. As such, revenue for our Valve Solutions product line has also been negatively affected by lower energy prices and the impacts of COVID-19 on the global economy. In addition, revenue for our Valve Solutions product line has been under pressure due to our distribution customers’ increased focus on decreasing their valve inventories in order to generate positive free cash flow.
On December 31, 2020, we sold assets pertaining to our ABZ and Quadrant valve brands for total consideration of $104.6 million and recognized a gain on disposition of $88.4 million. The disposition of these brands will reduce our Valve Solutions product line’s future revenue.
Although we have experienced some operational inefficiencies, our manufacturing facilities and business operations have not experienced work stoppages due to COVID-19 or associated government regulations. However, in response to the decline in demand for our products and decreases in revenue, we have implemented significant cost reduction actions, including exiting facilities, lowering headcount, reducing salaries, suspending the Company’s matching contribution to the U.S. and Canada defined contribution retirement plans, and furloughing select employee groups. These efforts continued in the fourth quarter of 2020 with the discontinuation of certain products and other changes in sourcing and manufacturing strategies. These restructuring efforts are expected to be completed during the first half of 2021.
The table below shows average crude oil and natural gas prices for West Texas Intermediate crude oil (WTI), United Kingdom Brent crude oil (Brent), and Henry Hub natural gas:
2020 2019
Average global oil, $/bbl
West Texas Intermediate $ 39.16 $ 56.98
United Kingdom Brent $ 41.96 $ 64.30
Average North American Natural Gas, $/Mcf
Henry Hub $ 2.03 $ 2.56
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Average WTI and Brent oil prices were 31% and 35% lower, respectively, for the year ended December 31, 2020 compared to 2019. The price of oil varied dramatically during 2020 with spot prices for WTI and Brent falling from $61.14 and $67.77, respectively, as of December 31, 2019 to lows of below $15.00 per barrel in April 2020 followed by a partial recovery to $48.35 and $51.22, respectively, as of December 31, 2020. Average natural gas prices were 21% lower in 2020 than 2019.
The table below shows the average number of active drilling rigs operating by geographic area and drilling for different purposes based on the weekly rig count information published by Baker Hughes Company.
2020 2019
Active Rigs by Location
United States 433 943
Canada 89 134
International 825 1,098
Global Active Rigs 1,347 2,175
Land vs. Offshore Rigs
Land 1,133 1,903
Offshore 214 272
Global Active Rigs 1,347 2,175
U.S. Commodity Target, Land
Oil/Gas 345 773
Gas 85 169
Unclassified 3 1
Total U.S. Land Rigs 433 943
U.S. Well Path, Land
Horizontal 384 826
Vertical 21 54
Directional 28 63
Total U.S. Active Land Rigs 433 943
A substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed. The average U.S. and Canadian rig counts in 2020 decreased 54% and 34%, respectively, as compared to 2019, while the international rig count decreased 25% compared to 2019. The number of working rigs in the U.S. started 2020 at 805 and fell over 70% to a low of 244 rigs in August 2020. Since then, active rig levels have rebounded slightly to 351 working rigs as of December 31, 2020. Despite improvement in early 2021, the U.S. rig count in 2021 is projected to remain below levels achieved in recent years.
The table below shows the amount of total inbound orders by segment for the years ended December 31, 2020 and 2019:
(in millions of dollars) 2020 2019
Orders:
Drilling & Downhole $ 208.5 $ 314.2
Completions 112.8 273.8
Production 151.3 275.4
Total Orders $ 472.6 $ 863.4
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Results of operations
Year ended December 31, Change
(in thousands of dollars, except per share information) 2020 2019 $ %
Revenue:
Drilling & Downhole $ 216,836 $ 334,829 $ (117,993) (35.2) %
Completions 118,685 305,089 (186,404) (61.1) %
Production 177,510 320,996 (143,486) (44.7) %
Eliminations (555) (4,381) 3,826 *
Total revenue $ 512,476 $ 956,533 (444,057) (46.4) %
Cost of sales:
Drilling & Downhole $ 192,640 $ 240,175 $ (47,535) (19.8) %
Completions 165,098 226,713 (61,615) (27.2) %
Production 166,314 249,174 (82,860) (33.3) %
Eliminations (555) (4,381) 3,826 *
Total cost of sales $ 523,497 $ 711,681 $ (188,184) (26.4) %
Gross profit:
Drilling & Downhole $ 24,196 $ 94,654 $ (70,458) (74.4) %
Completions (46,413) 78,376 (124,789) (159.2) %
Production 11,196 71,822 (60,626) (84.4) %
Total gross profit $ (11,021) $ 244,852 $ (255,873) (104.5) %
Selling, general and administrative expenses:
Drilling & Downhole $ 72,160 $ 86,993 $ (14,833) (17.1) %
Completions 50,891 71,795 (20,904) (29.1) %
Production 44,614 64,020 (19,406) (30.3) %
Corporate 30,012 28,928 1,084 3.7 %
Total selling, general and administrative expenses $ 197,677 $ 251,736 $ (54,059) (21.5) %
Segment operating income (loss):
Drilling & Downhole $ (47,964) $ 7,343 $ (55,307) (753.2) %
Operating margin % (22.1) % 2.2 %
Completions (97,304) 6,581 (103,885) (1,578.6) %
Operating margin % (82.0) % 2.2 %
Production (33,418) 7,802 (41,220) (528.3) %
Operating margin % (18.8) % 2.4 %
Corporate (30,012) (28,928) (1,084) (3.7) %
Total segment operating loss $ (208,698) $ (7,202) $ (201,496) (2,797.8) %
Operating margin % (40.7) % (0.8) %
Transaction expenses 3,128 1,159 1,969 *
Impairments of goodwill, intangible assets, property and equipment 20,394 532,336 (511,942) *
Contingent consideration benefit — (4,629) 4,629 *
Loss (gain) on disposal of assets and other (597) 78 (675) *
Operating loss (231,623) (536,146) 304,523 56.8 %
Interest expense 30,268 31,618 (1,350) (4.3) %
Gain on extinguishment of debt (72,478) — (72,478) *
Deferred loan costs written off 2,262 — 2,262 *
Foreign exchange losses and other, net 6,470 5,022 1,448 *
Gain realized on previously held equity investment — (1,567) 1,567 *
Gain on disposition of business (88,375) (2,348) (86,027) *
Total other (income) expense, net (121,853) 32,725 (154,578) *
Loss before income taxes (109,770) (568,871) 459,101 80.7 %
Income tax benefit (12,881) (1,814) (11,067) *
Net loss (96,889) (567,057) 470,168 82.9 %
Weighted average shares outstanding
Basic 5,577 5,505
Diluted 5,577 5,505
Loss per share
Basic $ (17.37) $ (103.01)
Diluted $ (17.37) $ (103.01)
* not meaningful
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Revenue
Our revenue for the year ended December 31, 2020 was $512.5 million, a decrease of $444.1 million, or 46.4%, compared to the year ended December 31, 2019. For the year ended December 31, 2020, our Drilling & Downhole segment, Completions segment, and Production segment comprised 42.3%, 23.1% and 34.6% of our total revenue, respectively, compared to 35.0%, 31.4% and 33.6%, respectively, for the year ended December 31, 2019. The overall decrease in revenue is due to lower sales volumes due to the significant decrease in drilling and completions activity levels as a result of lower spending by exploration and production companies. The changes in revenue by operating segment consisted of the following:
Drilling & Downhole segment — Revenue was $216.8 million for the year ended December 31, 2020, a decrease of $118.0 million, or 35.2%, compared to the year ended December 31, 2019. This decrease includes a $60.4 million, or 38.3%, decline in revenue for our Drilling Technologies product line due to lower sales volumes of consumable products and capital equipment as a result of a 38% decline in global rig count year-over-year. Revenue for our Downhole Technologies product line decreased by $52.0 million, or 44.8%, primarily due to lower sales volumes of artificial lift products and well construction equipment due to the significant decrease in drilling activity and the number of wells completed in 2020. The $5.6 million, or 9.1%, decline in revenue for our Subsea Technologies product line was relatively less than other product lines in the segment due to the diversification of sales of capital equipment to customers outside the oil and natural gas industry.
Completions segment — Revenue was $118.7 million for the year ended December 31, 2020, a decrease of $186.4 million, or 61.1%, compared to the year ended December 31, 2019. This decline includes a $105.6 million, or 65.2%, decrease in sales volumes for our Stimulation and Intervention product line primarily attributable to lower spending by our pressure pumping service customers due to the significant decline in hydraulic fracturing activity levels in the U.S. The remaining decline was driven by an $80.8 million, or 57%, decrease in sales volumes for our Coiled Tubing product line primarily attributable to lower U.S. completions activity.
Production segment — Revenue was $177.5 million for the year ended December 31, 2020, a decrease of $143.5 million, or 44.7%, compared to the year ended December 31, 2019. This decrease includes an $86.6 million, or 43.7%, decline in sales volumes of our valve products, particularly sales into the North America upstream and midstream oil and natural gas market, and a $56.9 million, or 46.4%, decrease in revenue for our Production Equipment product line as a result of lower sales volumes of our surface production equipment due to the significant decline in the number of U.S. well completions in 2020.
Segment operating loss and segment operating margin percentage
Segment operating loss for the year ended December 31, 2020 was $208.7 million compared to a loss of $7.2 million for the year ended December 31, 2019. For the year ended December 31, 2020, segment operating margin percentage was (40.7)% compared to (0.8)% for the year ended December 31, 2019. Segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue for the period. The change in operating loss and segment operating margin percentage for each segment is explained as follows:
Drilling & Downhole segment — Segment operating loss was $48.0 million, or (22.1)%, for the year ended December 31, 2020 compared to income of $7.3 million, or 2.2% for the year ended December 31, 2019. The $55.3 million decline in segment operating results is primarily attributable to lower gross profit from the 35.2% decline in segment revenues. In addition, segment operating loss for 2020 includes $24.9 million of inventory write-downs, $5.4 million of impairments of operating lease right of use assets, and $4.4 million of employee severance costs. These declines in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented in 2020.
Completions segment — Segment operating loss was $97.3 million, or (82.0)%, for the year ended December 31, 2020 compared to income of $6.6 million, or 2.2% for the year ended December 31, 2019. The $103.9 million decline in segment operating results is primarily attributable to lower gross profit from the 61.1% decline in segment revenues. In addition, segment operating loss for 2020 includes $53.5 million of inventory write-downs, $6.1 million of impairments of operating lease right of use assets, and $1.8 million of employee severance costs. These declines in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented in 2020.
Production segment — Segment operating loss was $33.4 million, or (18.8)%, for the year ended December 31, 2020 compared to income of $7.8 million, or 2.4% for the year ended December 31, 2019. The $41.2 million decline in segment operating results is primarily attributable to lower gross profit from the (44.7)% decline in segment revenues. In addition, segment operating loss for 2020 includes $22.4 million of inventory write-downs, $2.4 million of impairments of operating lease right of use assets, and $1.3 million of employee severance costs. These declines
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in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented in 2020.
Corporate — Selling, general and administrative expenses for Corporate were $30.0 million for the year ended December 31, 2020, a $1.1 million increase compared to the year ended December 31, 2019. Reductions in employee related costs from headcount, salary and other cost reductions were more than offset by a $1.5 million lease impairment and higher legal fees related to litigation. Corporate costs include, among other items, payroll related costs for management, administration, finance, legal, and human resources personnel; professional fees for legal, accounting and related services; and marketing costs.
Other items not included in segment operating income (loss)
Several items are not included in segment operating loss, but are included in the total operating loss. These items include transaction expenses, impairments of goodwill, intangible assets, property and equipment, contingent consideration benefit and losses (gains) on the disposal of assets and other. Transaction expenses relate to legal and other advisory costs incurred in acquiring or disposing of businesses and are not considered to be part of segment operating loss. For further information related to impairments of goodwill, intangible assets, property and equipment, see Note 8 Impairments of Goodwill and Long Lived Assets .
The contingent consideration benefit in 2019 relates to a gain of $4.6 million recognized in the first quarter of 2019 due to reducing the estimated fair value of the contingent cash liability associated with the fourth quarter 2018 acquisition of Global Heat Transfer LLC.
Other income and expense
Other income and expense includes interest expense, gain on extinguishment of debt, deferred loan costs written off, foreign exchange losses and other, net, gain realized on previously held equity investment, and gain on disposition of business.
We incurred $30.3 million of interest expense during the year ended December 31, 2020, a decrease of $1.4 million compared to the year ended December 31, 2019 due to lower average outstanding balances on our Credit Facility in 2020 compared to 2019 partially offset by higher non-cash amortization of debt discount and debt issuance costs associated with our 9.0% convertible secured notes due August 2025 (the “2025 Notes”).
The foreign exchange losses are primarily the result of movements in the British pound, the Euro, and the Canadian Dollar relative to the U.S. dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S. dollar denominated cash, trade account receivables and net intercompany receivable balances for our foreign entities using a functional currency other than the U.S. dollar.
During the year ended December 31, 2020, we recognized $72.5 million of gains on extinguishment of debt, including a $43.8 million gain from the repurchase of notes in the first half of 2020 and a $28.7 million gain from the exchange of notes in the third quarter of 2020. During the first half of 2020, we repurchased an aggregate $71.9 million of principal amount of our 6.25% unsecured notes due 2021 (the “2021 Notes”) for $27.7 million and recognized a net gain of $43.8 million reflecting the difference in the amount paid and the net carrying value of the extinguished debt, including debt issuance costs and unamortized debt premium. In the third quarter of 2020, we exchanged $315.5 million principal amount of 2021 Notes for new 2025 Notes. This transaction was accounted for as an extinguishment of the 2021 Notes with the new 2025 Notes recorded at fair value on the transaction date, resulting in a $28.7 million gain on extinguishment of debt. See Note 9 Debt for further information.
During the year ended December 31, 2020, we wrote-off $2.3 million of deferred loan costs including $2.0 million for the termination of previous discussions related to a potential exchange offer for our 2021 Notes and $0.3 million related to amending our Credit Facility to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million.
In the fourth quarter of 2020, we sold certain assets of our ABZ and Quadrant valve brands and recognized a gain on disposition totaling $88.4 million. In the fourth quarter of 2019, we sold certain assets of our Cooper Alloy brand of valve products and recognized a gain on disposition totaling $2.3 million. In the third quarter of 2019, we sold our aggregate 40% interest in Ashtead and recognized a gain of $1.6 million as a result of such sale. See Note 4 Dispositions for further information related to these transactions.
Taxes
We recorded a tax benefit of $12.9 million for the year ended December 31, 2020 compared to $1.8 million for the year ended December 31, 2019. On March 27, 2020, the U.S. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which provided relief to corporate taxpayers by permitting a five-year carryback of 2018-2020 NOLs, increased the 30% limitation on interest expense deductibility to 50% of adjusted taxable
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income for 2019 and 2020, and accelerated refunds for minimum tax credit carryforwards, among other provisions. The tax effects of changes in tax laws are recognized in the period in which the law is enacted. As such, the tax benefit for the year ended December 31, 2020 includes a $16.0 million benefit related to a carryback claim for U.S. federal tax losses based on provisions in the CARES Act.
The tax benefit for the year ended December 31, 2019 includes an increase in our valuation allowance of $98.9 million to write down our deferred tax assets in the U.S., U.K., Germany, Singapore and Saudi Arabia primarily due to operating losses incurred where the recording of a tax benefit is not available and $27.2 million of tax expense related to the impairment of non-tax deductible goodwill.
See Note 11 Income Taxes for additional information.
Liquidity and capital resources
Sources and uses of liquidity
Our internal sources of liquidity are cash on hand and cash flows from operations, while our primary external sources include trade credit, our Credit Facility and 2025 Notes described below. Our primary uses of capital have been for inventories, sales on credit to our customers and maintenance and growth capital expenditures. We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue generating positive operating cash flow and access outside sources of capital.
During the first half of 2020, we repurchased an aggregate $71.9 million principal amount of our 2021 Notes for $27.7 million and recognized a net gain of $43.8 million reflecting the difference in the amount paid and the net carrying value of the extinguished debt, including debt issuance costs and unamortized debt premium. In the third quarter of 2020, we exchanged $315.5 million principal amount of the remaining 2021 Notes for new 2025 Notes. Concurrent with the 2021 Notes exchange, the Credit Facility was amended to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million. In the fourth quarter of 2020, we redeemed the remaining $12.6 million principal amount of 2021 Notes at par and therefore, no 2021 Notes remained outstanding at December 31, 2020.
As of December 31, 2020, we had $316.9 million principal amount of 2025 Notes and $13.1 million of borrowings outstanding under our Credit Facility. The Credit Facility is scheduled to mature on October 30, 2022 and the 2025 notes are scheduled to mature in August 2025.
See 9 Debt for further details related to the terms for our 2021 Notes, 2025 Notes and Credit Facility.
As of December 31, 2020, we had cash and cash equivalents of $128.6 million and $110.5 million of availability under our Credit Facility. In the fourth quarter of 2020, we sold certain assets of our ABZ and Quadrant brands of valve products for cash consideration of $104.6 million. In the third quarter of 2020, we received a $14.1 million cash refund for income taxes from filing a carryback claim for U.S. federal tax losses based on provisions in the CARES Act.
We anticipate that our future working capital requirements for our operations will fluctuate directionally with revenues. Furthermore, availability under our Credit Facility will fluctuate directionally based on the level of our eligible accounts receivable and inventory. In addition, we expect total 2021 capital expenditures to be less than $10.0 million, consisting of, among other items, replacing end of life machinery and equipment.
We expect our available cash on-hand, cash generated by operations, and estimated availability under our Credit Facility to be adequate to fund current operations and debt maturities during the next 12 months. In addition, based on existing market conditions and our expected liquidity needs, among other factors, we may use a portion of our cash flows from operations, proceeds from divestitures, securities offerings or other eligible capital to reduce the principal amount of our 2025 Notes or other debt outstanding.
In 2020, we completed one disposition for total consideration of $104.6 million and in 2019, we completed two dispositions for total consideration of $51.7 million. For additional information, see Note 4 Dispositions . We may pursue acquisitions in the future, which may be funded with cash and/or equity. Our ability to make significant acquisitions for cash may require us to pursue additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.
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Our cash flows for the years ended December 31, 2020 and 2019 are presented below (in thousands):
Year ended December 31,
2020 2019
Net cash provided by operating activities $ 3,883 $ 104,144
Net cash provided by investing activities 108,250 28,135
Net cash used in financing activities (41,765) (122,191)
Effect of exchange rate changes on cash 338 582
Net increase in cash, cash equivalents and restricted cash $ 70,706 $ 10,670
Net cash provided by operating activities
Net cash provided by operating activities was $3.9 million for the year ended December 31, 2020 compared to $104.1 million for the year ended December 31, 2019. The decrease is primarily attributable to the decline in operating results. Net income adjusted for non-cash items used $53.5 million of cash for the year ended December 31, 2020 compared to providing $40.7 million of cash for the year ended December 31, 2019. The remaining decline is due to changes in working capital which provided cash of $57.3 million for the year ended December 31, 2020 compared to $63.5 million for the year ended December 31, 2019.
Our operating cash flows are sensitive to a number of variables, the most significant of which is the level of drilling and production activity for oil and natural gas reserves. These activity levels are in turn impacted by the volatility of oil and natural gas prices, regional and worldwide economic activity, weather, infrastructure capacity to reach markets and other various factors. These factors are beyond our control and are difficult to predict.
Net cash provided by investing activities
Net cash provided by investing activities was $108.3 million for the year ended December 31, 2020 including $104.6 million from the sale of certain assets of our ABZ and Quadrant brands of valve products and $5.3 million of proceeds from the sale of property and equipment, partially offset by $2.2 million of capital expenditures. Net cash provided by investing activities was $28.1 million for the year ended December 31, 2019 including $39.3 million in cash proceeds from the sale of our aggregate 40% interest in Ashtead technology and $3.4 million in cash proceeds from the sale of certain assets of our Cooper Alloy brand of valve products, partially offset by $15.1 million of capital expenditures for property and equipment.
Net cash used in financing activities
Net cash used in financing activities was $41.8 million for the year ended December 31, 2020 compared to $122.2 million used in financing activities for the year ended December 31, 2019. Net cash used in financing activities for the year ended December 31, 2020 includes $40.3 million of cash used to repurchase 2021 Notes, $9.7 million paid for deferred financing costs and a $3.5 million early participation payment for the bond exchange. These cash outflows were partially offset by $13.1 million of net borrowings on our Credit Facility in 2020. Net cash used in financing activities for the year ended December 31, 2019 primarily includes $119.9 million of net repayments of debt.
Off-balance sheet arrangements
As of December 31, 2020, we had no off-balance sheet instruments or financial arrangements, other than letters of credit entered into in the ordinary course of business. For additional information, refer to Note 13 Commitments and Contingencies.
Supplemental Guarantor Financial Information
The Company’s 2025 Notes are guaranteed by our domestic subsidiaries which are 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional, joint and several.
The guarantees of the 2025 Notes are (i) pari passu in right of payment with all existing and future senior indebtedness of such guarantor, including all obligations under our Credit Facility; (ii) secured by certain collateral of such guarantor, subject to permitted liens under the indenture governing the 2025 Notes; (iii) effectively senior to all unsecured indebtedness of that guarantor, to the extent of the value of the collateral securing the 2025 Notes (after giving effect to the liens securing our Credit Facility and any other senior liens on the collateral); and (v) senior in right of payment to any future subordinated indebtedness of that guarantor.
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In the event of a bankruptcy, liquidation or reorganization of any of the non-guarantor subsidiaries of the 2025 Notes, the non-guarantor subsidiaries of such notes will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Company or to any guarantors.
The 2025 Notes guarantees shall each be released upon (i) any sale or other disposition of all or substantially all of the assets of such guarantor (by merger, consolidation or otherwise) to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary, if the sale or other disposition does not violate the applicable provisions of the indenture governing such notes; (ii) any sale, exchange or transfer (by merger, consolidation or otherwise) of the equity interests of such guarantor after which the applicable guarantor is no longer a subsidiary, which sale, exchange or transfer does not violate the applicable provisions of the indenture governing such notes; (iii) legal or covenant defeasance or satisfaction and discharge of the indenture governing such notes; or (iv) dissolution of such guarantor, provided no default or event of default has occurred that is continuing.
The obligations of each guarantor of the 2025 Notes under its guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such guarantor (including, without limitation, any guarantees under the Credit Facility) and any collections from or payments made by or on behalf of any other guarantor in respect of the obligations of such other guarantor under its guarantee or pursuant to its contribution obligations under the applicable indenture, result in the obligations of such guarantor under its guarantee not constituting a fraudulent conveyance, fraudulent preference or fraudulent transfer or otherwise reviewable transaction under applicable law. Nonetheless, in the event of the bankruptcy, insolvency or financial difficulty of a guarantor, such guarantor’s obligations under its guarantee may be subject to review and avoidance under applicable fraudulent conveyance, fraudulent preference, fraudulent transfer and insolvency laws.
We are presenting the following summarized financial information for the Company and the subsidiary guarantors (collectively referred to as the "Obligated Group") pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Company and the subsidiary guarantors, presented on a combined basis, have been eliminated and information for the non-guarantor subsidiaries have been excluded. Amounts due to the non-guarantor subsidiaries and other related parties, as applicable, have been separately presented within the summarized financial information below.
Summarized financial information was as follows (in thousands):
Year ended December 31,
(in thousands, except per share information) 2020 2019
Revenues $ 393,704 $ 811,566
Cost of sales 431,670 614,429
Operating loss (238,608) (550,091)
Net loss (96,889) (567,057)
Year ended December 31,
(in thousands, except per share information) 2020 2019
Current assets $ 385,364 $ 530,111
Noncurrent assets 332,486 416,924
Current liabilities 105,393 122,354
Payables to non-guarantor subsidiaries 102,885 116,053
Noncurrent liabilities 324,954 440,817
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Critical accounting policies and estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our consolidated financial statements, we make judgments, estimates and assumptions affecting the amounts reported. We base our estimates on factors including historical experience and various assumptions that we believe are reasonable under the circumstances. These factors form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements.
In order to provide a better understanding of how we make judgments, and develop estimates and assumptions about future events, we have described our most critical accounting policies below. We believe that these accounting policies reflect our more significant estimates and assumptions used in preparation of our consolidated financial statements.
Revenue recognition
Revenue is recognized in accordance with Accounting Standards Codification Topic 606 (“ASC 606”), when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Contract Identification . We account for a contract when it is approved, both parties are committed, the rights of the parties are identified, payment terms are defined, the contract has commercial substance and collection of consideration is probable.
Performance Obligations . A performance obligation is a promise in a contract to transfer a distinct good or service to the customer under ASC 606. The majority of our contracts with customers contain a single performance obligation to provide agreed-upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. In accordance with ASC 606, we do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. We have elected to apply the practical expedient to account for shipping and handling costs associated with outbound freight after control of a product has transferred to a customer as a fulfillment cost which is included in Cost of Sales. Furthermore, since our customer payment terms are short-term in nature, we have also elected to apply the practical expedient which allows an entity to not adjust for the effects of a significant financing component if it expects that the customer’s payment period will be less than one year in duration.
Contract Value . Revenue is measured based on the amount of consideration specified in the contracts with our customers and excludes any amounts collected on behalf of third parties. We have elected the practical expedient to exclude amounts collected from customers for all sales (and other similar) taxes.
The estimation of total revenue from a customer contract is subject to elements of variable consideration. Certain customers may receive rebates or discounts which are accounted for as variable consideration. We estimate variable consideration as the most likely amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is resolved. Our estimate of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historic, current, forecast) that is reasonably available to us.
Timing of Recognition . We recognize revenue when we satisfy a performance obligation by transferring control of a product or service to a customer. Our performance obligations are satisfied at a point in time or over time as work progresses.
Revenue from goods transferred to customers at a point in time accounted for 93% of revenues for the year ended December 31, 2020. The majority of this revenue is product sales, which are generally recognized when items are shipped from our facilities and title passes to the customer. The amount of revenue recognized for products is adjusted for expected returns, which are estimated based on historical data.
Revenue from goods transferred to customers over time accounted for 7% of revenues for the year ended December 31, 2020, which is related to certain contracts in our Subsea and Production Equipment product lines. Recognition over time for these contracts is supported by our assessment of the products supplied as having no
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alternative use to us and by clauses in the contracts that provide us with an enforceable right to payment for performance completed to date. We use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of assets to the customer which occurs as costs are incurred on the contract. The amount of revenue recognized is calculated based on the ratio of costs incurred to-date compared to total estimated costs which requires management to calculate reasonably dependable estimates of total contract costs. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period. We recognize revenue and cost of sales each period based upon the advancement of the work-in-progress unless the stage of completion is insufficient to enable a reasonably certain forecast of profit to be established. In such cases, no profit is recognized during the period.
Accounting estimates during the course of projects may change, primarily related to our remotely operated vehicles (“ROVs”) which may take longer to manufacture. The effect of such a change, which can be upward as well as downward, is accounted for in the period of change, and the cumulative income recognized to date is adjusted to reflect the latest estimates. These revisions to estimates are accounted for on a prospective basis.
Contracts are sometimes modified to account for changes in product specifications or requirements. Most of our contract modifications are for goods and services that are not distinct from the existing contract. As such, these modifications are accounted for as if they were part of the existing contract, and therefore, the effect of the modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue on a cumulative catch-up basis. No adjustment to any one contract was material to our consolidated financial statements for the years ended December 31, 2020, 2019 and 2018.
We sell our products through a number of channels including a direct sales force, marketing representatives, and distributors. We have elected to expense sales commissions when incurred as the amortization period would be less than one year. These costs are recorded within cost of sales.
Portfolio Approach . We have elected to apply ASC 606 to a portfolio of contracts with similar characteristics as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio.
Disaggregated Revenue . Refer to Note 18 Business Segments for disaggregated revenue by product line and geography.
Contract Balances . Contract balances are determined on a contract by contract basis. Contract assets represent revenue recognized for goods and services provided to our customers when payment is conditioned on something other than the passage of time. Similarly, when we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record a contract liability. Such contract liabilities typically result from billings in excess of costs incurred and advance payments received on product sales.
Stock based compensation
We account for awards of stock based compensation at fair value on the date granted to employees and recognize the compensation expense in our consolidated financial statements over the requisite service period. The fair value of stock based compensation is measured using the fair value of the common stock for restricted stock and restricted stock units, the Black-Scholes model for options, and a Monte Carlo Simulation model for performance share units and stock appreciation rights. These models require assumptions and estimates for inputs, especially the estimate of the volatility in the value of the underlying share price, that affect the resultant values and hence the amount of compensation expense recognized.
Inventories
Inventory, consisting of finished goods and materials and supplies held for resale, is carried at the lower of cost or net realizable value. We evaluate our inventories, based on an analysis of stocking levels, historical sales levels and future sales forecasts, to determine obsolete, slow-moving and excess inventory. While we have policies for calculating and recording reserves against inventory carrying values, we exercise judgment in establishing and applying these policies.
For the years ended December 31, 2020 and 2019, we recognized inventory write downs totaling $100.8 million and $10.3 million, respectively. These charges are all included in “ Cost of sales ” in the consolidated statements of comprehensive loss. See Note 5 Inventories for further information related to these charges.
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Property and equipment and intangible assets (“Long-lived assets”)
Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of assets, generally 3 to 30 years. We have established standard useful lives for certain classes of assets. Intangible assets are stated at cost less accumulated amortization. Amortization is computed using the straight-line method based on the estimated useful lives of assets.
We review long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the estimated fair value of the asset. The fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows based on expected utilization. The impairment loss recognized represents the excess of an assets’ carrying value as compared to its estimated fair value.
For the years ended December 31, 2020 and 2019, we recognized property and equipment impairment charges totaling $15.1 million and $7.9 million, respectively. For the years ended December 31, 2020 and 2019, we recognized intangible asset impairment charges totaling $5.3 million and $53.5 million, respectively. These charges are all included in “Impairments of goodwill, intangible assets, property and equipment” in the consolidated statements of comprehensive loss. See Note 8 Impairments of Goodwill and Long Lived Assets for further information related to these charges.
Income taxes
We follow the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon temporary differences between the carrying amounts and tax bases of our assets and liabilities at the balance sheet date, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, including the effect of U.S. tax reform, tax-planning and recent operating results. Any changes in our judgment as to the realizability of our deferred tax assets are recorded as an adjustment to the deferred tax asset valuation allowance in the period the change occurs.
The accounting guidance for income taxes requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. If a tax position meets the “more likely than not” recognition criteria, the accounting guidance requires the tax position be measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement. If management determines that likelihood of sustaining the realization of the tax benefit is less than or equal to 50%, then the tax benefit is not recognized in the consolidated financial statements.
We have operations in countries other than the U.S. Consequently, we are subject to the jurisdiction of a number of taxing authorities. The final determination of tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction. Changes in the operating environment, including changes in tax law or interpretation of tax law and currency repatriation controls, could impact the determination of our tax liabilities for a given tax year.
The CARES Act was signed into law in March 2020 in response to the COVID-19 pandemic. The tax effects of changes in tax laws are recognized in the period in which the law is enacted. As such, the tax benefit for the year ended December 31, 2020 includes a $16.0 million benefit related to a carryback claim for U.S. federal tax losses based on new provisions in the CARES Act.
For the year ended December 31, 2019, we recognized tax expense for valuation allowances totaling $98.9 million. See Note 11 Income Taxes for further information related to these charges.
Recognition of provisions for contingencies
In the ordinary course of business, we are subject to various claims, suits and complaints. We, in consultation with internal and external legal advisors, will provide for a contingent loss in the consolidated financial statements if, at the date of the consolidated financial statements, it is probable that a liability has been incurred and the amount can be reasonably estimated. If it is determined that the reasonable estimate of the loss is a range and that there is no best estimate within that range, a provision will be made for the lower amount of the range. Legal costs are expensed as incurred.
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An assessment is made of the areas where potential claims may arise under contract warranty clauses. Where a specific risk is identified, and the potential for a claim is assessed as probable and can be reasonably estimated, an appropriate warranty provision is recorded. Warranty provisions are eliminated at the end of the warranty period except where warranty claims are still outstanding. The liability for product warranty is included in accrued liabilities in the consolidated balance sheets.
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which we adopt as of the specified effective date. Refer to Note 2 Summary of Significant Accounting Policies for information related to recent accounting pronouncements.
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Cautionary note regarding forward-looking statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. All statements, other than statements of historical fact, included in this Annual Report on Form 10-K regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Annual Report on Form 10-K, the words “will,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Annual Report on Form 10-K are reasonable, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause actual results to differ materially from our plans, intentions or expectations. This may be the result of various factors, including, but not limited to, those factors discussed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K.