FORUM ENERGY TECHNOLOGIES, INC. 10-Q

Item 2. Management’s discussion and analysis of financial condition and results of operations CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 2, 2021, and elsewhere in this Quarterly Report on Form 10-Q. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. Overview We are a global company serving the oil, natural gas, industrial and renewable energy industries. FET provides value added solutions that increase the safety and efficiency of energy exploration and production. We are an environmentally and socially responsible company headquartered in Houston, Texas with manufacturing, distribution and service facilities strategically located throughout the world. Our products include highly engineered capital equipment as well as consumable products. 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, downstream capital projects and capital equipment for renewable energy projects. Our products are aimed at improving the safety, efficiency, and environmental and social impact of our customers' operations. For the six months ended June 30, 2021, approximately 80% of our revenue was derived from 17 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 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. In addition, we offer some of our products to renewable energy and new energy companies. A summary of the products and services offered by each segment is as follows: • Drilling & Downhole . This segment designs, manufactures and supplies 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 renewable energy, defense and communications. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable 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, submarine rescue vehicles, 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, high-pressure flexible hoses 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 industries. 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 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, OPEC+ implemented significant reductions in oil production and North American exploration and production companies aggressively reduced drilling and completion activities. The extreme volatility and lower price environment in 2020 created a very challenging market for all sub-sectors of the oil and natural gas industry, including those in which the Company competes. During the first half of 2021, distribution of vaccines resulted in reopening of certain economies and increasing demand for oil and natural gas. In addition, oil supply has been impacted by ongoing constraints by OPEC+ and capital discipline by North American exploration and production companies. As a result of these supply and demand factors, commodity prices have increased substantially in the first half of 2021. However, ongoing COVID-19 outbreaks and new variants of the virus continue to cause disruptions in global supply chains which have led to inflationary pressures for certain goods and services. Our revenues are highly correlated to the U.S. drilling rig count which has increased to 470 rigs as of the end of the second quarter of 2021 from a low of 244 rigs in August 2020. Furthermore, the level of active hydraulic fracturing fleets also increased substantially in the first half of 2021 in order to meet increasing oil demand. Due to market conditions, publicly owned exploration and production companies in North America remain under pressure to generate positive cash flows and constrain capital and maintenance expenditures. In contrast, privately owned exploration and production companies in North America have increased their drilling and completions activity levels 18 in response to the higher oil and natural gas price environment. In addition, consolidation of exploration and production and service companies has continued in 2021. While activity levels in international regions, as well as global offshore and subsea activity, were also impacted by COVID-19 related activity disruptions, international revenue for our drilling and subsea capital equipment offerings have recently increased due to an improved outlook for our 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. 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 resulted in a substantial decrease in our Valve Solutions product line’s revenue compared to the prior year. Although we 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 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. Certain facility closures and headcount reduction efforts continued in 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: Three Months Ended June 30, March 31, June 30, 2021 2021 2020 Average global oil, $/bbl West Texas Intermediate $ 66.19 $ 58.09 $ 27.96 United Kingdom Brent $ 68.98 $ 61.04 $ 29.70 Average North American Natural Gas, $/Mcf Henry Hub $ 2.95 $ 3.50 $ 1.70 The price of oil varied dramatically in 2020 with the spot prices for WTI and Brent falling from $61.14 and $67.77 per barrel, respectively, as of December 31, 2019 to lows below $15.00 per barrel in April 2020. Since that time, oil prices have rebounded to an average of $66.19 and $68.98 for WTI and Brent, respectively, in the second quarter 2021. In addition, natural gas prices remained above prior year levels with average prices approximately 74% higher compared to the second quarter 2020. 19 The table below shows the average number of active drilling rigs, based on the weekly Baker Hughes Incorporated rig count, operating by geographic area and drilling for different purposes. Three Months Ended June 30, March 31, June 30, 2021 2021 2020 Active Rigs by Location United States 450 393 392 Canada 72 145 25 International 734 698 834 Global Active Rigs 1,256 1,236 1,251 Land vs. Offshore Rigs Land 1,065 1,052 1,029 Offshore 191 184 222 Global Active Rigs 1,256 1,236 1,251 U.S. Commodity Target Oil/Gas 352 302 308 Gas 97 90 82 Unclassified 1 1 2 Total U.S. Active Rigs 450 393 392 U.S. Well Path Horizontal 408 353 353 Vertical 18 22 14 Directional 24 18 25 Total U.S. Active Rigs 450 393 392 A substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed. The average U.S. rig count for the second quarter 2021 was 15% higher compared to the first quarter of 2021 and second quarter of 2020. The U.S. rig count started 2020 at 805 working rigs and fell 70% to a low of 244 rigs in August 2020. Since that time, the number of active rigs has partially recovered, ending the second quarter 2021 at 470. The table below shows the amount of total inbound orders by segment: (in millions of dollars) Three Months Ended Six Months Ended June 30, March 31, June 30, June 30, June 30, 2021 2021 2020 2021 2020 Drilling & Downhole $ 80.5 $ 57.9 $ 42.3 $ 138.4 $ 112.3 Completions 47.4 47.2 14.2 94.6 64.1 Production 30.9 32.9 29.1 63.8 79.8 Total Orders $ 158.8 $ 138.0 $ 85.6 $ 296.8 $ 256.2 20 Results of operations Three months ended June 30, 2021 compared with three months ended June 30, 2020 Three Months Ended June 30, Change (in thousands of dollars, except per share information) 2021 2020 $ % Revenue: Drilling & Downhole $ 61,570 $ 47,183 $ 14,387 30.5 % Completions 46,516 17,583 28,933 164.6 % Production 29,337 48,597 (19,260) (39.6) % Eliminations (3) (88) 85 * Total revenue 137,420 113,275 24,145 21.3 % Operating income (loss): Drilling & Downhole $ 2,701 $ (9,399) $ 12,100 128.7 % Operating margin % 4.4 % (19.9) % Completions (370) (17,813) 17,443 97.9 % Operating margin % (0.8) % (101.3) % Production (4,041) (1,057) (2,984) (282.3) % Operating margin % (13.8) % (2.2) % Corporate (8,270) (7,191) (1,079) (15.0) % Total segment operating loss (9,980) (35,460) 25,480 71.9 % Operating margin % (7.3) % (31.3) % Impairments of intangible assets, property and equipment — 112 (112) * Gain on disposal of assets and other (360) (550) 190 * Operating loss (9,620) (35,022) 25,402 72.5 % Interest expense 7,775 6,420 1,355 21.1 % Foreign exchange losses (gains) and other, net (939) 631 (1,570) * Loss (gain) on extinguishment of debt 4,161 (36,285) 40,446 * Deferred loan costs written off — 130 (130) * Total other (income) expense, net 10,997 (29,104) 40,101 137.8 % Loss before income taxes (20,617) (5,918) (14,699) (248.4) % Income tax expense (benefit) 1,189 (424) 1,613 380.4 % Net loss $ (21,806) $ (5,494) $ (16,312) (296.9) % Weighted average shares outstanding Basic 5,638 5,580 Diluted 5,638 5,580 Loss per share Basic $ (3.87) $ (0.98) Diluted $ (3.87) $ (0.98) * not meaningful We sold certain assets of our ABZ and Quadrant valve brands on December 31, 2020. Therefore, our results of operations for the second quarter of 2021 may not be comparable to the results of operations for the second quarter of 2020. Refer to Note 4 Dispositions for additional information. 21 Revenue Our revenue for the three months ended June 30, 2021 was $137.4 million, an increase of $24.1 million, or 21.3%, compared to the three months ended June 30, 2020. For the three months ended June 30, 2021, our Drilling & Downhole, Completions, and Production segments comprised 44.8%, 33.9%, and 21.3% of our total revenue, respectively, which compared to 41.7%, 15.4%, and 42.9% of our total revenue, respectively, for the three months ended June 30, 2020. The overall increase in revenue is primarily related to higher sales volumes due to improving market conditions in the second quarter 2021 compared to the second quarter 2020 which was negatively impacted by the onset of the COVID 19 pandemic. The changes in revenue by operating segment consisted of the following: Drilling & Downhole segment — Revenue was $61.6 million for the three months ended June 30, 2021, an increase of $14.4 million, or 30.5%, compared to the three months ended June 30, 2020. This increase was driven by a $7.7 million, or 38.3%, increase in revenue for our Drilling Technologies product line due to higher sales volumes of handling tools into international markets and higher sales of consumable products as a result of the improving U.S. activity levels in the second quarter 2021. Revenue for our Downhole Technologies product line increased by $3.9 million, primarily due to higher sales volumes of artificial lift products due to the increase in the number of well completions and workover activity in the second quarter 2021 compared to 2020. Revenue for our Subsea Technologies product line increased by $2.8 million primarily due to higher replacement part sales in the second quarter 2021 compared to the second quarter 2020, which was negatively impacted by the onset of the COVID 19 pandemic. Completions segment — Revenue was $46.5 million for the three months ended June 30, 2021, an increase of $28.9 million, or 164.6%, compared to the three months ended June 30, 2020. This significant improvement includes revenue increases of $15.8 million and $13.1 million for our Stimulation & Intervention and Coiled Tubing product lines, respectively. These higher revenue levels were driven by increasing U.S. hydraulic fracturing and well intervention service activity levels in the second quarter 2021 compared to a rapidly declining market in the second quarter 2020 when service companies were idling equipment in response to historically low levels of oil demand at the onset of the COVID 19 pandemic. Production segment — Revenue was $29.3 million for the three months ended June 30, 2021, a decrease of $19.3 million, or 39.6%, compared to the three months ended June 30, 2020. This decrease includes a $9.7 million decline from the fourth quarter 2020 divestiture of our ABZ and Quadrant valve brands. The remaining decline was driven by a $7.5 million decline in sales volumes of our other valve brands, primarily due to lower sales into the North America downstream and midstream markets, and a $2.0 million decrease in revenue for our Production Equipment product line from lower sales volumes of our surface production equipment. Segment operating income (loss) and segment operating margin percentage Segment operating loss for the three months ended June 30, 2021 was $10.0 million, a $25.5 million improvement compared to a loss of $35.5 million for the three months ended June 30, 2020. For the three months ended June 30, 2021, segment operating margin percentage was (7.3)% compared to (31.3)% for the three months ended June 30, 2020. Segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue for the period. The change in operating income (loss) for each segment is explained as follows: Drilling & Downhole segment — Segment operating income was $2.7 million, or 4.4%, for the three months ended June 30, 2021 compared to a loss of $9.4 million, or (19.9)%, for the three months ended June 30, 2020. The $12.1 million improvement in segment operating results is primarily attributable to higher gross profit from the 30.5% increase in segment revenues. In addition, segment operating income increased due to lower severance and restructuring costs as well as lower employee and facility related costs due to headcount, salary and other cost reductions implemented in 2020. Completions segment — Segment operating loss was $0.4 million, or (0.8)%, for the three months ended June 30, 2021 compared to a segment operating loss of $17.8 million, or (101.3)%, for the three months ended June 30, 2020. The $17.4 million improvement in segment operating results is primarily attributable to higher gross profit from the 164.6% increase in revenues discussed above and a $2.3 million reduction in inventory write-downs compared to three months ended June 30, 2020. Production segment — Segment operating loss was $4.0 million, or (13.8)%, for the three months ended June 30, 2021 compared to a loss of $1.1 million, or (2.2)%, for the three months ended June 30, 2020. Segment operating results were negatively impacted by the reduction in gross profit from the 39.6% decline in revenue discussed above, including the fourth quarter 2020 disposition of our ABZ and Quadrant valve brands. However, this decline in gross profit was mostly offset by reductions in employee and facility related costs due to headcount, salary and other cost reductions implemented in 2020. 22 Corporate — Selling, general and administrative expenses for Corporate were $8.3 million for the three months ended June 30, 2021, a $1.1 million increase compared to the three months ended June 30, 2020. This increase was primarily related to higher costs associated with variable compensation plans for the three months ended June 30, 2021. 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 loss Several items are not included in segment operating loss, but are included in total operating loss. These items include impairments of intangible assets, property and equipment, and gain on the disposal of assets and other. For further information related to impairments of intangible assets, property and equipment, refer to Note 7 Impairments of Long-Lived Assets. Other income and expense Other income and expense includes interest expense, foreign exchange losses (gains) and other, loss (gain) on extinguishment of debt, and deferred loan costs written off. We incurred $7.8 million of interest expense during the three months ended June 30, 2021, an increase of $1.4 million compared to the three months ended June 30, 2020 due to higher non-cash amortization of debt discount and debt issuance costs associated with our 9.00% convertible secured notes due August 2025 ("2025 Notes") and a higher interest rate on our 2025 Notes compared to our previous notes outstanding. The foreign exchange losses (gains) are primarily the result of movements in the British pound, Euro and 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 entities using a functional currency other than the U.S. dollar. During the three months ended June 30, 2021, we repurchased an aggregate $41.5 million of principal amount of our 2025 Notes for $41.2 million. The net carrying value of the extinguished debt, including unamortized debt discount and debt issuance costs, was $37.0 million, resulting in a $4.2 million loss on extinguishment of debt. During the three months ended June 30, 2020, we repurchased an aggregate $61.0 million of principal amount of our previous 6.25% unsecured notes due 2021 (“2021 Notes”) for $24.3 million. The net carrying value of the extinguished debt, including unamortized debt premium and debt issuance costs, was $60.6 million, resulting in a $36.3 million gain on extinguishment of debt. Taxes We recorded tax expense of $1.2 million for the three months ended June 30, 2021, compared to a tax benefit of $0.4 million for the three months ended June 30, 2020. The estimated annual effective tax rates for the three months ended June 30, 2021 and 2020 were impacted by losses in jurisdictions where the recording of a tax benefit is not available. Furthermore, the tax expense or benefit recorded can vary from period to period depending on the Company’s relative mix of earnings and losses by jurisdiction. 23 Six months ended June 30, 2021 compared with six months ended June 30, 2020 Six Months Ended June 30, Favorable / (Unfavorable) 2021 2020 $ % (in thousands of dollars, except per share information) Revenue: Drilling & Downhole $ 110,226 $ 123,826 $ (13,600) (11.0) % Completions 84,359 68,406 15,953 23.3 % Production 57,368 104,202 (46,834) (44.9) % Eliminations (16) (527) 511 * Total revenue 251,937 295,907 (43,970) (14.9) % Operating loss: Drilling & Downhole (1,805) (13,544) 11,739 86.7 % Operating margin % (1.6) % (10.9) % Completions (302) (35,131) 34,829 99.1 % Operating margin % (0.4) % (51.4) % Production (7,882) (9,236) 1,354 14.7 % Operating margin % (13.7) % (8.9) % Corporate (15,280) (15,620) 340 2.2 % Total segment operating loss (25,269) (73,531) 48,262 65.6 % Operating margin % (10.0) % (24.8) % Impairments of intangible assets, property and equipment — 17,432 (17,432) * Gain on disposal of assets and other (1,269) (534) (735) * Operating loss (24,000) (90,429) 66,429 73.5 % Interest expense 16,937 13,144 3,793 28.9 % Foreign exchange losses (gains) and other, net 2,531 (4,376) 6,907 157.8 % Loss (gain) on extinguishment of debt 5,094 (43,744) 48,838 * Deferred loan costs written off — 1,959 (1,959) * Total other (income) expense 24,562 (33,017) 57,579 * Loss before income taxes (48,562) (57,412) 8,850 15.4 % Income tax expense (benefit) 2,907 (14,774) 17,681 119.7 % Net loss $ (51,469) $ (42,638) $ (8,831) (20.7) % Weighted average shares outstanding Basic 5,625 5,569 Diluted 5,625 5,569 Loss per share Basic $ (9.15) $ (7.66) Diluted $ (9.15) $ (7.66) * not meaningful We sold certain assets of our ABZ and Quadrant valve brands on December 31, 2020. Therefore, our results of operations for the six months ended June 30, 2021 may not be comparable to the results of operations for the six months ended June 30, 2020. Refer to Note 4 Dispositions for additional information. 24 Revenue Our revenue for the six months ended June 30, 2021 was $251.9 million, a decrease of $44.0 million, or 14.9%, compared to the six months ended June 30, 2020. For the six months ended June 30, 2021, our Drilling & Downhole, Completions, and Production segments comprised 43.8%, 33.4%, and 22.8% of our total revenue, respectively, which compared to 41.8%, 23.0%, and 35.2% of our total revenue, respectively, for the six months ended June 30, 2020. The overall decline in revenue is primarily related to a decrease in sales volumes due to lower drilling and completions activity levels in the first half of 2021 compared to the first half of 2020. The changes in revenue by operating segment consisted of the following: Drilling & Downhole segment — Revenue was $110.2 million for the six months ended June 30, 2021, a decrease of $13.6 million, or 11.0%, compared to the six months ended June 30, 2020. This decrease includes a $10.5 million, or 18.5%, 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 28% decline in U.S. rig activity year-over-year. Revenue for our Downhole Technologies product line decreased by $5.9 million primarily due to lower sales volumes of artificial lift products due to the significant decrease in the number of wells completed in the first half of 2021 compared to the first half of 2020. These declines were partially offset by a $2.8 million increase in revenue for our Subsea Technologies product line primarily due to higher replacement part sales in the first half of 2021 compared to the first half of 2020, which was negatively impacted by the onset of the COVID 19 pandemic. Completions segment — Revenue was $84.4 million for the six months ended June 30, 2021, an increase of $16.0 million, or 23.3%, compared to the six months ended June 30, 2020. This increase includes a $10.1 million, or 30.5%, increase in sales volumes for our Stimulation and Intervention product line and a $5.9 million, or 16.6%, increase in sales volumes for our Coiled Tubing product line. These higher revenue levels were driven by increasing U.S. hydraulic fracturing and well intervention service activity levels in the first half of 2021 compared to a rapidly declining market in the first half of 2020 when service companies were idling equipment in response to historically low levels of oil demand at the onset of the COVID 19 pandemic. Production segment — Revenue was $57.4 million for the six months ended June 30, 2021, a decrease of $46.8 million, or 44.9%, compared to the six months ended June 30, 2020. This decrease includes a $22.5 million decline from the fourth quarter 2020 divestiture of our ABZ and Quadrant valve brands. The remaining decline was driven by a $17.9 million decline in sales volumes of our other valve brands, primarily due to lower sales into the North America downstream and midstream markets, and a $6.4 million decrease in revenue for our Production Equipment product line from lower sales volumes of our surface production equipment, partially offset by higher sales volumes for our process oil treatment equipment due to increased project activity with international downstream customers. Segment operating loss and segment operating margin percentage Segment operating loss for the six months ended June 30, 2021 was $25.3 million, an improvement of $48.3 million compared to the six months ended June 30, 2020. For the six months ended June 30, 2021, segment operating margin percentage was (10.0)% compared to (24.8)% for the six months ended June 30, 2020. Segment operating margin percentage is calculated by dividing segment operating loss by revenue for the period. The change in operating loss for each segment is explained as follows: Drilling & Downhole segment — Segment operating loss was $1.8 million, or (1.6)%, for the six months ended June 30, 2021, an improvement of $11.7 million or 86.7% compared to the six months ended June 30, 2020. The $11.7 million improvement in segment operating results is primarily attributable to an $8.3 million decrease in employee related costs due to headcount, salary and other cost reductions implemented in 2020. In addition, segment operating results also improved due to a $2.0 million reduction in inventory write downs and lower severance and other costs related to restructuring activities implemented in the first half of 2020 in response to the onset of the COVID-19 pandemic. Completions segment — Segment operating loss was $0.3 million, or (0.4)%, for the six months ended June 30, 2021, an improvement of $34.8 million or 99.1% compared to the six months ended June 30, 2020. The $34.8 million improvement in segment operating results is primarily attributable to a $9.8 million decrease in inventory write downs, a $6.1 million decrease in impairments of operating lease right of use assets and a $6.5 million reduction in employee related costs due to headcount, salary and other cost reductions implemented in 2020. The remaining increase in segment operating results is due to higher gross profits from the 23.3% increase in segment revenues and various other cost reductions. 25 Production segment — Segment operating loss was $7.9 million, or (13.7)%, for the six months ended June 30, 2021 compared to a loss of $9.2 million, or (8.9)% for the six months ended June 30, 2020. The $1.4 million improvement in segment operating results is primarily attributable to an $8.1 million reduction in employee related costs due to headcount, salary and other cost reductions implemented in 2020 as well as a $2.0 million decrease in inventory write downs and a $1.9 million decrease in lease impairments. However, these cost decreases were mostly offset by the reduction in gross profit from the 44.9% decline in revenue discussed above, including the fourth quarter 2020 disposition of our ABZ and Quadrant valve brands. Corporate — Selling, general and administrative expenses for Corporate were $15.3 million for the six months ended June 30, 2021, a $0.3 million decline compared to the six months ended June 30, 2020. Cost reductions from lower legal and other professional fees were mostly offset by higher costs associated with variable compensation plans. 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 loss Several items are not included in segment operating loss, but are included in total operating loss. These items include impairments of intangible assets, property and equipment and gain on disposal of assets and other. For further information related to impairments of goodwill, intangible assets, property and equipment, refer to Note 7 Impairments of Long-Lived Assets. Other expense Other expense includes interest expense, foreign exchange losses (gains) and other, loss (gain) on extinguishment of debt and deferred loan costs written off. We incurred $16.9 million of interest expense during the six months ended June 30, 2021, an increase of $3.8 million from the six months ended June 30, 2020 due to higher non-cash amortization of debt discount and debt issuance costs associated with our 2025 Notes and a higher interest rate on our 2025 Notes compared to our previous notes outstanding. The foreign exchange losses (gains) are primarily the result of movements in the British pound, Euro and 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 entities using a functional currency other than the U.S. dollar. During the six months ended June 30, 2021, we repurchased an aggregate $58.0 million of principal amount of our 2025 Notes for $56.7 million. The net carrying value of the extinguished debt, including unamortized debt discount and debt issuance costs, was $51.6 million, resulting in a $5.1 million loss on extinguishment of debt. During the first half of 2020, we repurchased an aggregate $71.9 million of principal amount of our 2021 Notes for $27.6 million. The net carrying value of the extinguished debt, including unamortized debt premium and debt issuance costs, was $71.3 million, resulting in $43.7 million gain on extinguishment of debt. In addition, we wrote off $2.0 million of deferred loan costs due to the termination of previous discussions related to a potential exchange offer for our 2021 Notes. Taxes We recorded tax expense of $2.9 million for the six months ended June 30, 2021, compared to a tax benefit of $14.8 million for the six months ended June 30, 2020. The estimated annual effective tax rates for the six months ended June 30, 2021 and 2020 were impacted by losses in jurisdictions where the recording of a tax benefit is not available. Furthermore, the tax expense or benefit recorded can vary from period to period depending on the Company’s relative mix of earnings and losses by jurisdiction. The tax benefit for the six months ended June 30, 2020 includes a $16.6 million benefit related to a carryback claim for U.S. federal tax losses based on provisions in the U.S. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was signed into law on March 27, 2020. The CARES Act 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 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. 26 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 the 2025 Notes. Our primary uses of capital have been for inventories, sales on credit to our customers and maintenance and growth capital expenditures and debt repayments. 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 generate positive operating cash flow and access outside sources of capital. As of December 31, 2020, we had $316.9 million principal amount of 2025 Notes outstanding and $13.1 million outstanding on our revolving Credit Facility. During the six months ended June 30, 2021, we repurchased an aggregate $58.0 million principal amount of our 2025 Notes for $56.7 million. In addition, we repaid the $13.1 million outstanding on our revolving Credit Facility. Following these transactions, we had $258.8 million principal amount of 2025 Notes and no borrowings outstanding under our Credit Facility as of June 30, 2021. The Credit Facility is scheduled to mature in October 2022 and the 2025 notes are scheduled to mature in August 2025. See Note 8 Debt for further details related to the terms for our 2025 Notes and Credit Facility. As of June 30, 2021, we had cash and cash equivalents of $60.4 million and $125.8 million of availability under our Credit Facility. 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 subject to applicable sublimits. 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 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 $103.4 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. Our cash flows for the six months ended June 30, 2021 and 2020 are presented below (in millions): Six Months Ended June 30, 2021 2020 Net cash provided by (used in) operating activities $ 2.4 $ (2.1) Net cash provided by (used in) investing activities 0.1 (0.2) Net cash provided by (used in) financing activities (70.8) 54.4 Effect of exchange rate changes on cash — (0.3) Net increase (decrease) in cash, cash equivalents and restricted cash $ (68.3) $ 51.8 Net cash provided by (used in) operating activities Net cash provided by operating activities was $2.4 million for the six months ended June 30, 2021 compared to $2.1 million of cash used in operating activities for the six months ended June 30, 2020. This improvement is primarily attributable to changes in working capital which provided cash of $16.8 million for the six months ended June 30, 2021 compared to providing $5.7 million of cash for the six months ended June 30, 2020. This improvement in operating cash flows was partially offset by a decline in net income adjusted for non-cash items which used $14.5 million of cash for the six months ended June 30, 2021 compared to using $7.8 million for the six months ended June 30, 2020. 27 Net cash provided by (used in) investing activities Net cash provided by investing activities was $0.1 million for the six months ended June 30, 2021 including $2.1 million of proceeds from the sale of property and equipment, partially offset by $1.3 million of cash paid for the net working capital settlement related to the disposition of our ABZ and QVA valve brands and $0.7 million of capital expenditures. Net cash used in investing activities was $0.2 million for the six months ended June 30, 2020, primarily related to $1.5 million of capital expenditures for property and equipment partially offset by $1.3 million of proceeds from the sale of property and equipment. Net cash provided by (used in) financing activities Net cash used in financing activities was $70.8 million for the six months ended June 30, 2021 including $56.7 million of cash used to repurchase 2025 Notes and $13.1 million of repayments on the revolving Credit Facility. Net cash provided by financing activities was $54.4 million for the six months ended June 30, 2020, primarily related to $85.0 million of borrowings on the revolving Credit Facility, partially offset by $27.6 million of cash used to repurchase 2021 Notes. 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. 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. 28 Summarized financial information for the year-to-date interim period and the most recent annual period was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, Summarized Statements of Operations 2021 2020 2021 2020 Revenue $ 97,040 $ 86,778 $ 179,237 $ 234,162 Cost of sales 76,607 81,443 142,648 214,638 Operating loss (9,160) (34,903) (27,894) (85,975) Net loss (21,806) (5,494) (51,469) (42,638) June 30, 2021 December 31, 2020 Summarized Balance Sheet Current assets $ 310,086 $ 385,364 Non-current assets 314,307 332,486 Current liabilities $ 117,865 $ 105,393 Payables to non-guarantor subsidiaries 108,313 102,885 Non-current liabilities 260,544 324,954 Off-balance sheet arrangements As of June 30, 2021, we had no off-balance sheet instruments or financial arrangements, other than letters of credit entered into in the ordinary course of business. Critical accounting policies and estimates There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2021. For a detailed discussion of our critical accounting policies and estimates, refer to our 2020 Annual Report on Form 10-K. For recent accounting pronouncements, refer to Note 2 Recent Accounting Pronouncements . Item 3. Quantitative and qualitative disclosures about market risk Not required under Regulation S-K for “smaller reporting companies.”