Item 2. Management’s Discussion and Analysis
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 nine months ended September 30, 2021, approximately 80% of our revenue was derived from
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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.
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 markets, including applications in oil and natural gas, 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 oil and natural gas customers as well as power generation, renewable energy and other general industrial applications.
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. 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
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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 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.
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.
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
September 30, June 30, September 30,
2021 2021 2020
Average global oil, $/bbl
West Texas Intermediate $ 70.54 $ 66.19 $ 40.89
United Kingdom Brent $ 73.51 $ 68.98 $ 42.91
Average North American Natural Gas, $/Mcf
Henry Hub $ 4.35 $ 2.95 $ 2.00
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.
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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
September 30, June 30, September 30,
2021 2021 2020
Active Rigs by Location
United States 496 450 254
Canada 151 72 47
International 772 734 731
Global Active Rigs 1,419 1,256 1,032
Land vs. Offshore Rigs
Land 1,222 1,065 836
Offshore 197 191 196
Global Active Rigs 1,419 1,256 1,032
U.S. Commodity Target
Oil/Gas 394 352 180
Gas 101 97 72
Unclassified 1 1 2
Total U.S. Active Rigs 496 450 254
U.S. Well Path
Horizontal 451 408 218
Vertical 20 18 15
Directional 25 24 21
Total U.S. Active Rigs 496 450 254
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 third quarter 2021 was 10% and 95% higher compared to the second quarter of 2021 and third quarter of 2020, respectively. 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 third quarter 2021 at 521.
The table below shows the amount of total inbound orders by segment:
(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
Drilling & Downhole $ 83.4 $ 80.5 $ 38.7 $ 221.8 $ 151.0
Completions 59.6 47.4 18.4 154.2 82.5
Production 32.8 30.9 35.2 96.6 115.0
Total Orders $ 175.8 $ 158.8 $ 92.3 $ 472.6 $ 348.5
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Results of operations
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 $ %
Revenue:
Drilling & Downhole $ 63,180 $ 43,164 $ 20,016 46.4 %
Completions 49,692 19,632 30,060 153.1 %
Production 28,457 40,836 (12,379) (30.3) %
Eliminations (345) (26) (319) *
Total revenue 140,984 103,606 37,378 36.1 %
Operating income (loss):
Drilling & Downhole $ 4,042 $ (13,207) $ 17,249 130.6 %
Operating margin % 6.4 % (30.6) %
Completions 250 (11,896) 12,146 102.1 %
Operating margin % 0.5 % (60.6) %
Production (3,374) (70) (3,304) (4,720.0) %
Operating margin % (11.9) % (0.2) %
Corporate (8,387) (7,706) (681) (8.8) %
Total segment operating loss (7,469) (32,879) 25,410 77.3 %
Operating margin % (5.3) % (31.7) %
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 %
Interest expense 7,128 8,473 (1,345) (15.9) %
Foreign exchange losses (gains) and other, net (3,962) 3,445 (7,407) *
Loss (gain) on extinguishment of debt 196 (28,734) 28,930 *
Deferred loan costs written off — 303 (303) *
Total other (income) expense, net 3,362 (16,513) 19,875 120.4 %
Loss before income taxes (10,738) (20,534) 9,796 47.7 %
Income tax expense 849 1,017 (168) (16.5) %
Net loss $ (11,587) $ (21,551) $ 9,964 46.2 %
Weighted average shares outstanding
Basic 5,661 5,580
Diluted 5,661 5,580
Loss per share
Basic $ (2.05) $ (3.86)
Diluted $ (2.05) $ (3.86)
* not meaningful
We sold certain assets of our ABZ and Quadrant valve brands on December 31, 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.
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Revenue
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 $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. rig count. 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 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 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 $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 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.
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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; 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 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 $7.1 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. 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 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.
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.
Taxes
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.
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Nine months ended September 30, 2021 compared with nine months ended September 30, 2020
Nine Months Ended September 30, Change
2021 2020 $ %
(in thousands of dollars, except per share information)
Revenue:
Drilling & Downhole $ 173,406 $ 166,990 $ 6,416 3.8 %
Completions 134,051 88,038 46,013 52.3 %
Production 85,825 145,038 (59,213) (40.8) %
Eliminations (361) (553) 192 *
Total revenue 392,921 399,513 (6,592) (1.7) %
Operating income (loss):
Drilling & Downhole 2,237 (26,751) 28,988 108.4 %
Operating margin % 1.3 % (16.0) %
Completions (52) (47,027) 46,975 99.9 %
Operating margin % — % (53.4) %
Production (11,256) (9,306) (1,950) (21.0) %
Operating margin % (13.1) % (6.4) %
Corporate (23,667) (23,326) (341) (1.5) %
Total segment operating loss (32,738) (106,410) 73,672 69.2 %
Operating margin % (8.3) % (26.6) %
Impairments of intangible assets, property and equipment — 20,394 (20,394) *
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 gains and other, net (1,431) (931) (500) (53.7) %
Loss (gain) on extinguishment of debt 5,290 (72,478) 77,768 *
Deferred loan costs written off — 2,262 (2,262) *
Total other (income) expense 27,924 (49,530) 77,454 *
Loss before income taxes (59,300) (77,946) 18,646 23.9 %
Income tax expense (benefit) 3,756 (13,757) 17,513 127.3 %
Net loss $ (63,056) $ (64,189) $ 1,133 1.8 %
Weighted average shares outstanding
Basic 5,637 5,573
Diluted 5,637 5,573
Loss per share
Basic $ (11.19) $ (11.52)
Diluted $ (11.19) $ (11.52)
* not meaningful
We sold certain assets of our ABZ and Quadrant valve brands on December 31, 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.
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Revenue
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 $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 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 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.
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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; 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 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 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. 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 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 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.
Taxes
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 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
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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.
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, 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 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 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 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 the 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 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.
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Our cash flows for the nine months ended September 30, 2021 and 2020 are presented below (in millions):
Nine Months Ended September 30,
2021 2020
Net cash provided by (used in) operating activities $ (8.1) $ 1.7
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 decrease in cash, cash equivalents and restricted cash $ (78.6) $ (37.9)
Net cash provided by (used in) operating activities
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
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.
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The obligations of each guarantor of the 2025 Notes under its guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such guarantor (including, without limitation, any guarantees under the Credit Facility) and any collections from or payments made by or on behalf of any other guarantor in respect of the obligations of such other guarantor under its guarantee or pursuant to its contribution obligations under the applicable indenture, result in the obligations of such guarantor under its guarantee not constituting a fraudulent conveyance, fraudulent preference or fraudulent transfer or otherwise reviewable transaction under applicable law. Nonetheless, in the event of the bankruptcy, insolvency or financial difficulty of a guarantor, such guarantor’s obligations under its guarantee may be subject to review and avoidance under applicable fraudulent conveyance, fraudulent preference, fraudulent transfer and insolvency laws.
We are presenting the following summarized financial information for the Company and the subsidiary guarantors (collectively referred to as the "Obligated Group") pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Company and the subsidiary guarantors, presented on a combined basis, have been eliminated and information for the non-guarantor subsidiaries have been excluded. Amounts due to the non-guarantor subsidiaries and other related parties, as applicable, have been separately presented within the summarized financial information below.
Summarized financial information for the year-to-date interim period and the most recent annual period was as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
Summarized Statements of Operations 2021 2020 2021 2020
Revenue $ 108,099 $ 79,676 $ 287,336 $ 313,838
Cost of sales 86,495 69,856 229,143 284,494
Operating loss (3,998) (40,311) (31,892) (126,286)
Net loss (11,587) (21,551) (63,056) (64,189)
September 30, 2021 December 31, 2020
Summarized Balance Sheet
Current assets $ 323,397 $ 385,364
Non-current assets 301,761 332,486
Current liabilities $ 135,483 $ 105,393
Payables to non-guarantor subsidiaries 112,950 102,885
Non-current liabilities 258,977 324,954
Off-balance sheet arrangements
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 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. 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.”
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.