What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 155 added, 145 removed, 233 unchanged (56% of the section changed)

17 unchanged sentences

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

For the nine months ended September 30, 2021, approximately 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.

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In addition, we offer some of our products to renewable energy and new energy companies.

We believe that the world's long-term energy demand will continue to rise.

We also expect hydrocarbons to continue to play a vital role in meeting the world's long-term energy demands while sources of renewable energy continue to develop.

As such, we remain focused on serving our customers in both oil and natural gas as well as renewable energy applications.

We are also continuing to develop products to help oil and gas operators lower their current emissions while also deploying our existing product technologies in renewable energy applications.

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.

This segment designs, manufactures and supplies products and provides related services to the drilling, well construction, artificial lift and subsea energy construction markets, including applications in oil and natural gas, renewable energy, defense, and communications.

The products and related services consist primarily of:

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(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.

and (ii) a wide range of industrial valves focused on serving oil and natural gas customers as well as power generation, renewable energy and other general industrial applications.

Market Conditions

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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.

Although we have experienced operational inefficiencies and supply chain delays, we have not had any work stoppages at our manufacturing facilities due to COVID-19 or associated government regulations.

However, in response to the decline in demand for our products during the pandemic, 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 nine months of 2021.

During the first nine months of 2021, distribution of vaccines and reopening of certain economies has resulted in increasing demand for oil and natural gas.

At the same time, the supply of oil and natural gas has been impacted by ongoing constraints by OPEC+ and North American exploration and production companies.

As a result of these

supply and demand factors, commodity prices have increased substantially in the first nine months of 2021.

In addition, ongoing COVID-19 outbreaks and worldwide labor constraints 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

in response to the higher oil and natural gas price environment.

drilling rig count which has increased to 521 rigs as of the end of the third 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 nine months of 2021 in order to meet increasing oil demand.

Publicly owned exploration and production companies in North America remain under pressure to generate positive cash flows and constrain capital expenditures.

In contrast, privately owned exploration and production companies in North America have increased their drilling and completions activity 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.

Outside of the North America market, activity levels have also increased as well as in global offshore and subsea activity.

As a result, during the first nine months of 2021, we have experienced increased demand for our drilling and subsea capital equipment offerings due to an improved outlook for our international drilling customers and the diversification of our subsea product line outside of the oil and natural gas industry.

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,

September 30, June 30, September 30,

2021 2021 2020

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Henry Hub $ 4.35 $ 2.95 $ 2.00

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.

The price of oil has varied dramatically over the last two years.

The spot prices for WTI and Brent fell 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 $70.54 and $73.51 for WTI and Brent, respectively, in the third quarter 2021.

In addition, natural gas prices have more than doubled when comparing the third quarter 2021 to the third quarter 2020.

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,

September 30, June 30, September 30,

2021 2021 2020

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Oil/Gas 394 352 180

Gas 101 97 72

Unclassified 1 1 2

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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.

rig count for the third quarter 2021 was 10% and 95% higher compared to the second quarter of 2021 and third quarter of 2020, respectively.

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.

Since that time, the number of active rigs has partially recovered, ending the third quarter 2021 at 521.

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,

(in millions of dollars) Three Months Ended Nine Months Ended

September 30, June 30, September 30, September 30, September 30,

2021 2021 2020 2021 2020

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Results of operations

Three months ended June 30, 2021 compared with three months ended June 30, 2020

Three Months Ended June 30, Change

Three months ended September 30, 2021 compared with three months ended September 30, 2020

Three Months Ended September 30, Change

(in thousands of dollars, except per share information) 2021 2020 $ %

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Operating margin % (5.3) % (31.7) %

Impairments of intangible assets, property and equipment — 112 (112) *

Gain on disposal of assets and other (360) (550) 190 *

Impairments of property and equipment — 2,962 (2,962) *

Loss (gain) on disposal of assets and other (93) 1,206 (1,299) *

Operating loss (7,376) (37,047) 29,671 80.1 %

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Loss before income taxes (10,738) (20,534) 9,796 47.7 %

Income tax expense (benefit) 1,189 (424) 1,613 380.4 %

Income tax expense 849 1,017 (168) (16.5) %

Net loss $ (11,587) $ (21,551) $ 9,964 46.2 %

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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.

Therefore, our results of operations for the third quarter of 2021 may not be comparable to the results of operations for the third quarter of 2020.

Refer to Note 4 Dispositions for additional information.

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.

Our revenue for the three months ended September 30, 2021 was $141.0 million, an increase of $37.4 million, or 36.1%, compared to the three months ended September 30, 2020.

For the three months ended September 30, 2021, our Drilling & Downhole, Completions, and Production segments comprised 44.8%, 35.0%, and 20.2% of our total revenue, respectively, which compared to 41.7%, 18.9%, and 39.4% of our total revenue, respectively, for the three months ended September 30, 2020.

The overall increase in revenue is primarily related to higher sales volumes due to improving market conditions in the third quarter 2021 compared to the third quarter 2020 which was negatively impacted by the COVID 19 pandemic, partially offset by the divestiture of our ABZ and Quadrant valve brands in the fourth quarter 2020.

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.

Drilling & Downhole segment — Revenue was $63.2 million for the three months ended September 30, 2021, an increase of $20.0 million, or 46.4%, compared to the three months ended September 30, 2020.

This increase was driven by a $10.0 million, or 81.4%, increase in revenue for our Subsea Technologies product line due to higher sales of Work Class ROVs into international markets.

Revenue for our Drilling Technologies product line increased by $5.7 million, or 32.9%, primarily due to higher sales of consumable products and capital equipment into the U.S.

market from the 95% year-over-year increase in the U.S.

Revenue for our Downhole Technologies product line increased by $4.2 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 third quarter 2021 compared to 2020.

Completions segment — Revenue was $49.7 million for the three months ended September 30, 2021, an increase of $30.1 million, or 153.1%, compared to the three months ended September 30, 2020.

This significant improvement includes revenue increases of $16.2 million and $13.9 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.

These higher sales volumes were driven by increasing U.S.

hydraulic fracturing and well intervention service activity levels in the third quarter 2021 compared to the third quarter 2020 when service companies were idling equipment in response to historically low levels of oil demand during the COVID 19 pandemic.

Production segment — Revenue was $28.5 million for the three months ended September 30, 2021, a decrease of $12.4 million, or 30.3%, compared to the three months ended September 30, 2020.

This decrease includes a $10.0 million decline related to the divestiture of our ABZ and Quadrant valve brands in the fourth quarter 2020.

The remaining $2.4 million decrease was driven by a $1.2 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 $1.2 million decrease in revenue for our Production Equipment product line, primarily from lower project revenue recognized for our process oil treatment 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 loss for the three months ended September 30, 2021 was $7.5 million, a $25.4 million improvement compared to a loss of $32.9 million for the three months ended September 30, 2020.

For the three months ended September 30, 2021, segment operating margin percentage was (5.3)% compared to (31.7)% for the three months ended September 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.

Drilling & Downhole segment — Segment operating income was $4.0 million, or 6.4%, for the three months ended September 30, 2021 compared to a loss of $13.2 million, or (30.6)%, for the three months ended September 30, 2020.

The $17.2 million improvement in segment operating results is primarily attributable to higher gross profit from the 46.4% 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.

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.

In addition, segment operating income increased due to a $3.2 million reduction in lease impairments and a $1.8 million reduction in inventory write-downs.

Completions segment — Segment operating income was $0.3 million, or 0.5%, for the three months ended September 30, 2021 compared to a segment operating loss of $11.9 million, or (60.6)%, for the three months ended September 30, 2020.

The $12.1 million improvement in segment operating results is primarily attributable to the 153.1% increase in revenues discussed above, partially offset by higher freight, manufacturing and employee related costs associated with the increased activity levels.

Production segment — Segment operating loss was $3.4 million, or (11.9)%, for the three months ended September 30, 2021 compared to a loss of $0.1 million, or (0.2)%, for the three months ended September 30, 2020.

The $3.3 million decline in segment operating results is primarily attributable to the disposition of our ABZ and Quadrant valve brands in the fourth quarter 2020.

The decline in gross profit from lower revenues discussed above was mostly offset by reductions in employee and facility related costs due to headcount, salary and other cost reductions implemented in 2020.

Corporate — Selling, general and administrative expenses for Corporate were $8.4 million for the three months ended September 30, 2021, a $0.7 million increase compared to the three months ended September 30, 2020.

This increase was primarily related to higher variable compensation costs and professional fees, partially offset by a $1.5 million decrease in lease impairments.

Corporate costs include, among other items, payroll related costs for management, administration, finance, legal, and human resources personnel;

3 unchanged sentences

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.

These items include impairments of property and equipment, and loss (gain) on the disposal of assets and other.

For further information related to impairments of 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.

We incurred $7.1 million of interest expense during the three months ended September 30, 2021, a decrease of $1.3 million compared to the three months ended September 30, 2020 due to lower debt balances outstanding in the three months ended September 30, 2021 compared to the three months outstanding September 30, 2020.

The foreign exchange losses (gains) are primarily the result of movements in the British pound, Euro and Canadian dollar relative to the U.S.

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dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than the U.S.

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.

During the three months ended September 30, 2021, we repurchased an aggregate $1.9 million of principal amount of our 9.00% convertible secured notes due August 2025 (“2025 Notes”) at approximately par value.

The net carrying value of the extinguished debt, including unamortized debt discount and debt issuance costs, was $1.7 million, resulting in a $0.2 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.

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.

In the third quarter of 2020, we exchanged $315.5 million principal amount of our previous 6.25% unsecured notes due 2021 (“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 8 Debt for further information.

Concurrent with the completion of the 2021 Notes exchange, the Credit Facility was also amended resulting in a write-off of $0.3 million of deferred loan costs.

We recorded tax expense of $0.8 million for the three months ended September 30, 2021, compared to tax expense of $1.0 million for the three months ended September 30, 2020.

The estimated annual effective tax rates for the three months ended September 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.

Six months ended June 30, 2021 compared with six months ended June 30, 2020

Six Months Ended June 30, Favorable / (Unfavorable)

Nine months ended September 30, 2021 compared with nine months ended September 30, 2020

Nine Months Ended September 30, Change

2021 2020 $ %

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Total revenue 392,921 399,513 (6,592) (1.7) %

Operating loss:

Operating income (loss):

Drilling & Downhole 2,237 (26,751) 28,988 108.4 %

8 unchanged sentences

Impairments of intangible assets, property and equipment — 20,394 (20,394) *

Gain on disposal of assets and other (1,269) (534) (735) *

Loss (gain) on disposal of assets and other (1,362) 672 (2,034) *

Operating loss (31,376) (127,476) 96,100 75.4 %

Interest expense 24,065 21,617 2,448 11.3 %

Foreign exchange losses (gains) and other, net 2,531 (4,376) 6,907 157.8 %

Foreign exchange gains and other, net (1,431) (931) (500) (53.7) %

Loss (gain) on extinguishment of debt 5,290 (72,478) 77,768 *

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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.

Therefore, our results of operations for the nine months ended September 30, 2021 may not be comparable to the results of operations for the nine months ended September 30, 2020.

Refer to Note 4 Dispositions for additional information.

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.

Our revenue for the nine months ended September 30, 2021 was $392.9 million, a decrease of $6.6 million, or 1.7%, compared to the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, our Drilling & Downhole, Completions, and Production segments comprised 44.1%, 34.1%, and 21.8% of our total revenue, respectively, which compared to 41.8%, 21.9%, and 36.3% of our total revenue, respectively, for the nine months ended September 30, 2020.

The overall decline in revenue is primarily related to a $32.5 million decrease from the divestiture of our ABZ and Quadrant valve brands in the fourth quarter 2020.

This decline was mostly offset by higher sales volumes in the Drilling and Downhole and Completions segments due to improving market conditions in the first nine months of 2021 compared to the first nine months of 2020 which was negatively impacted by the COVID 19 pandemic.

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.

Drilling & Downhole segment — Revenue was $173.4 million for the nine months ended September 30, 2021, an increase of $6.4 million, or 3.8%, compared to the nine months ended September 30, 2020.

This increase includes a $12.8 million, or 30.6%, increase in revenue for our Subsea Technologies product line primarily due to higher sales of Work Class ROVs into international markets.

This increase was partially offset by a $4.7 million, or 6.4%, revenue decline for our Drilling Technologies product line primarily due to lower service revenue.

Revenue for our Downhole Technologies product line decreased by $1.7 million, or 3.3%, primarily due to higher sales of artificial lift products in the first quarter 2020 prior to the onset of the COVID 19 pandemic.

Completions segment — Revenue was $134.1 million for the nine months ended September 30, 2021, an increase of $46.0 million, or 52.3%, compared to the nine months ended September 30, 2020.

This increase includes a $26.2 million, or 61.9%, increase in sales volumes for our Stimulation and Intervention product line and a $19.8 million, or 43.3%, 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.

hydraulic fracturing and well intervention service activity levels in the first nine months of 2021 compared to a rapidly declining market in the first nine months of 2020 when service companies were idling equipment in response to historically low levels of oil demand as a result of the COVID 19 pandemic.

Production segment — Revenue was $85.8 million for the nine months ended September 30, 2021, a decrease of $59.2 million, or 40.8%, compared to the nine months ended September 30, 2020.

This decrease includes a $32.5 million decline from the divestiture of our ABZ and Quadrant valve brands in the fourth quarter 2020.

The remaining decline was driven by a $19.2 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 $7.6 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.

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.

Segment operating income (loss) and segment operating margin percentage

Segment operating loss for the nine months ended September 30, 2021 was $32.7 million, a $73.7 million improvement compared to a loss of $106.4 million for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, segment operating margin percentage was (8.3)% compared to (26.6)% for the nine months ended September 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 $2.2 million, or 1.3%, for the nine months ended September 30, 2021 compared to a loss of $26.8 million, or (16.0)%, for the nine months ended September 30, 2020.

The $29.0 million improvement in segment operating results is primarily attributable to a 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 $4.4 million decrease in impairments of operating lease right of use assets, a $3.8 million reduction in inventory write downs and lower severance and other costs related to restructuring activities in the first nine months of 2020.

Completions segment — Segment operating loss was $0.1 million for the nine months ended September 30, 2021 compared to a loss of $47.0 million, or (53.4)%, for the nine months ended September 30, 2020.

The $47.0 million improvement in segment operating results is primarily attributable to higher gross profit from the 52.3% increase in revenues discussed above.

In addition, operating results improved due to a $12.3 million decrease in inventory write downs, a $6.1 million decrease in impairments of operating lease right of use assets and reductions in employee related costs due to headcount, salary and other cost reductions implemented in 2020.

Production segment — Segment operating loss was $11.3 million, or (13.1)%, for the nine months ended September 30, 2021 compared to a loss of $9.3 million, or (6.4)%, for the nine months ended September 30, 2020.

The $2.0 million decline in segment operating results is primarily attributable to the disposition of our ABZ and Quadrant valve brands in the fourth quarter 2020.

In addition, gross profit declined as a result of the lower sales volumes discussed above.

These declines were mostly offset by reductions in employee related costs due to headcount, salary and other cost reductions implemented in 2020 as well as a $1.9 million decrease in impairments of operating lease right of use assets and a $1.7 million decrease in inventory write downs.

Corporate — Selling, general and administrative expenses for Corporate were $23.7 million for the nine months ended September 30, 2021, a $0.3 million increase compared to the nine months ended September 30, 2020.

This increase was primarily related to higher variable compensation costs and professional fees, partially offset by a $1.5 million decrease in lease impairments.

Corporate costs include, among other items, payroll related costs for management, administration, finance, legal, and human resources personnel;

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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.

These items include impairments of intangible assets, property and equipment and loss (gain) on 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 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.

Other expense includes interest expense, foreign exchange gains and other, loss (gain) on extinguishment of debt and deferred loan costs written off.

We incurred $24.1 million of interest expense during the nine months ended September 30, 2021, an increase of $2.4 million from the nine months ended September 30, 2020 due to higher non-cash amortization of debt discount and debt issuance costs associated with our 2025 Notes.

The foreign exchange gains are primarily the result of movements in the British pound, Euro and Canadian dollar relative to the U.S.

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.

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.

During the nine months ended September 30, 2021, we repurchased an aggregate $59.9 million of principal amount of our 2025 Notes for $58.6 million.

The net carrying value of the extinguished debt, including unamortized debt discount and debt issuance costs, was $53.3 million, resulting in a $5.3 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.

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.

During the nine months ended September 30, 2020, we recognized $72.5 million of gains on extinguishment of debt, including a $43.8 million gain from the repurchase of notes and a $28.7 million gain from the exchange of notes in the third quarter of 2020 as further described below.

During the first nine months 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 $71.4 million, resulting in the $43.8 million gain on extinguishment of debt.

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 the $28.7 million gain on extinguishment of debt.

During the nine months ended September 30, 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.

We recorded tax expense of $3.8 million for the nine months ended September 30, 2021, compared to a tax benefit of $13.8 million for the nine months ended September 30, 2020.

The estimated annual effective tax rates for the nine months ended September 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.

The tax benefit for the nine months ended September 30, 2020 included 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.

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.

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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 internal sources of liquidity are cash on hand and cash flows from operations, while our primary external sources include trade credit, the Credit Facility and the 2025 Notes.

Our primary uses of capital have been for inventory, sales on credit to our customers, maintenance and growth capital expenditures, and debt repayments.

We continually monitor other 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.

As of December 31, 2020, we had $316.9 million principal amount of 2025 Notes outstanding and $13.1 million outstanding under our revolving Credit Facility.

During the nine months ended September 30, 2021, we repurchased $59.9 million principal amount of our 2025 Notes and repaid the $13.1 million outstanding under our revolving Credit Facility.

Following these transactions, we had $257.0 million principal amount of 2025 Notes and no borrowings outstanding under our Credit Facility as of September 30, 2021.

In September 2021, we amended our Credit Facility to, among other things, extend the maturity date to September 2026, reduce the aggregate amount of the commitment under the Credit Facility to $179.0 million, and change the interest rate applicable to outstanding loans.

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.

As of September 30, 2021, we had cash and cash equivalents of $50.0 million and $130.8 million of availability under the 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.

Furthermore, availability under the 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 $5.0 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.

We expect our available cash on-hand, cash generated by operations, and estimated availability under the Credit Facility to be adequate to fund current operations during the next 12 months.

In 2020, we completed one disposition for total consideration of $103.4 million.

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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,

Our cash flows for the nine months ended September 30, 2021 and 2020 are presented below (in millions):

Nine Months Ended September 30,

Net cash provided by (used in) operating activities $ (8.1) $ 1.7

Net cash provided by (used in) investing activities 0.1 (0.2)

Net cash provided by (used in) financing activities (70.8) 54.4

Net cash provided by investing activities 4.5 2.0

Net cash used in financing activities (74.6) (41.5)

Effect of exchange rate changes on cash (0.4) (0.1)

Net increase (decrease) in cash, cash equivalents and restricted cash $ (68.3) $ 51.8

Net decrease in cash, cash equivalents and restricted cash $ (78.6) $ (37.9)

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.

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.

Net cash used in operating activities was $8.1 million for the nine months ended September 30, 2021 compared to $1.7 million of cash provided by operating activities for the nine months ended September 30, 2020.

This decline in operating cash flows is primarily attributable to changes in working capital which provided cash of $2.8 million for the nine months ended September 30, 2021 compared to providing $31.6 million of cash for the nine months ended September 30, 2020.

This decline was partially offset by an improvement in net income adjusted for non-cash items which used $10.9 million of cash for the nine months ended September 30, 2021 compared to using $29.9 million for the nine months ended September 30, 2020.

Net cash provided by investing activities

Net cash provided by investing activities was $4.5 million for the nine months ended September 30, 2021 including $6.8 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 $1.0 million of capital expenditures.

Net cash provided by investing activities was $2.0 million for the nine months ended September 30, 2020 including $3.6 million of proceeds from the sale of property and equipment, partially offset by $2.2 million of capital expenditures for property and equipment.

Net cash used in financing activities

Net cash used in financing activities was $74.6 million for the nine months ended September 30, 2021 including $58.6 million of cash used to repurchase 2025 Notes and $13.1 million of repayments on the revolving Credit Facility.

Net cash used in financing activities was $41.5 million for the nine months ended September 30, 2020 including $27.6 million of cash used to repurchase 2021 Notes $9.4 million paid for deferred financing costs and a $3.5 million early participation payment for the bond exchange.

Supplemental Guarantor Financial Information

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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,

Three Months Ended September 30, Nine Months Ended September 30,

Summarized Statements of Operations 2021 2020 2021 2020

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Net loss (11,587) (21,551) (63,056) (64,189)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Summarized Balance Sheet

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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.

As of September 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.

There have been no material changes in our critical accounting policies and procedures during the nine months ended September 30, 2021.

For a detailed discussion of our critical accounting policies and estimates, refer to our 2020 Annual Report on Form 10-K.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis