What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-04 compared with 2021-03-02 · 140 added, 207 removed, 228 unchanged (60% of the section changed)

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We assume no obligation to update any of these forward-looking statements.

We are a global products company, serving the drilling, downhole, subsea, completions and production sectors of the energy industry.

We design, manufacture and distribute products and engage in aftermarket parts supply and services that complement our product offering.

The Company's products include highly engineered capital equipment as well as products that are consumed in the drilling, well construction, production and transportation of oil and natural gas.

We are a global company serving the oil, natural gas, industrial and renewable energy industries.

FET provides value added solutions aimed at improving the safety, efficiency, and environmental impact of our customers' operations.

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;

and downstream capital projects.

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.

In 2021, over 78% of our revenue was derived from consumable products and activity-based equipment, while the balance was primarily derived from capital products with a small amount from rental and other services.

We seek to design, manufacture and supply high quality reliable products that create value for our diverse customer base, which includes, among others, oil and natural gas operators, land and offshore drilling contractors, oilfield service companies, subsea construction and service companies, and pipeline and refinery operators.

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

We also expect hydrocarbons will continue to play a vital role in meeting the world's long-term energy needs while renewable energy sources 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 and seeking to develop innovative equipment.

A summary of the products and services offered by each segment is as follows:

• Drilling & Downhole .

This segment designs and manufactures products and provides related services to the drilling, well construction, artificial lift and subsea energy construction and services markets as well as other sectors such as alternative energy, defense and communications.

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 drilling products consumed in the drilling process;

(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, specialty components and tooling, and complementary subsea technical services.

and (iii) subsea remotely operated vehicles and trenchers, submarine rescue vehicles, specialty components and tooling, and complementary subsea technical services.

• Completions.

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The products and related services consist primarily of:

(i) capital and consumable products sold to the pressure pumping, hydraulic fracturing and flowback services markets, including hydraulic fracturing pumps, cooling systems and flow iron as well as wireline cable and pressure control equipment used in the well completion and intervention service markets;

(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.

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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 general 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 addition, the availability of existing capital equipment adequate to serve exploration and production requirements, or lack thereof, drives demand for our capital equipment products.

In early 2020, the COVID-19 pandemic and associated actions taken around the world to mitigate the spread of COVID-19 caused unprecedented declines in economic activity, energy demand and oil and natural gas prices.

In response, in the second quarter of 2020, OPEC+ agreed to a significant cut in oil production and North American exploration and production companies significantly reduced supply by shutting in producing wells and aggressively decreasing drilling and completion activities.

The extreme volatility and lower price environment through the year created a very challenging market for all sub-sectors of the oil and natural gas industry.

Recently, oil demand and prices have partially rebounded as supply and demand have rebalanced at a lower level.

However, overall activity and the North America rig count remain at historically low levels.

Due to the challenging market conditions, exploration and production companies in North America are under pressure to generate positive cash flows and minimize capital and maintenance expenditures.

As a result, we have experienced a material reduction in demand for many of our products and consequently, our revenue.

In addition, bankruptcies and consolidation of exploration and production and service companies continued through 2020.

If this trend continues going forward, it may lead to a further reduction in the demand for our products.

Activity levels in international regions, as well as global offshore and subsea activity, have also been impacted by COVID-19 related activity disruptions.

However, international revenue for our drilling and subsea capital equipment offerings have not declined as sharply due to longer project timelines for international drilling customers and the diversification of our subsea product line revenue outside of the oil and natural gas industry.

Demand for products in our Valve Solutions product line is driven by capital projects and maintenance spending in the upstream, midstream and downstream markets.

As such, revenue for our Valve Solutions product line has also been negatively affected by lower energy prices and the impacts of COVID-19 on the global economy.

In addition, revenue for our Valve Solutions product line has been under pressure due to our distribution customers’ increased focus on decreasing their valve inventories in order to generate positive free cash flow.

On December 31, 2020, we sold assets pertaining to our ABZ and Quadrant valve brands for total consideration of $104.6 million and recognized a gain on disposition of $88.4 million.

The disposition of these brands will reduce our Valve Solutions product line’s future revenue.

Although we have experienced some operational inefficiencies, our manufacturing facilities and business operations have not experienced work stoppages due to COVID-19 or associated government regulations.

However, in response to the decline in demand for our products and decreases in revenue, we have implemented significant cost reduction actions, including exiting facilities, lowering headcount, reducing salaries, suspending the Company’s matching contribution to the U.S.

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.

In response to the decline in demand for our products in 2020, we implemented significant cost reduction actions, including exiting facilities, lowering headcount, reducing salaries, temporarily suspending the Company’s matching contribution to the U.S.

and Canada defined contribution retirement plans, and furloughing select employee groups.

These efforts continued in the fourth quarter of 2020 with the discontinuation of certain products and other changes in sourcing and manufacturing strategies.

These restructuring efforts are expected to be completed during the first half of 2021.

Certain facility closures and headcount reduction efforts continued into 2021.

During 2021, distribution of vaccines and reopening of certain economies 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 increased substantially in 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 586 rigs as of the end of 2021 from a low of 244 rigs in August 2020.

The level of active hydraulic fracturing fleets also increased substantially in 2021 in order to meet increasing oil demand.

Despite these improvements, drilling and completions activity remains significantly below pre-pandemic levels.

In addition, 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.

Furthermore, consolidation of exploration and production and service companies continued in 2021.

Activity levels have also increased in international markets, as well as in global offshore and subsea activity.

As a result, demand for our drilling and subsea capital equipment offerings increased during 2021 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:

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Henry Hub $ 3.89 $ 2.03

Average WTI and Brent oil prices were 31% and 35% lower, respectively, for the year ended December 31, 2020 compared to 2019.

The price of oil varied dramatically during 2020 with spot prices for WTI and Brent falling from $61.14 and $67.77, respectively, as of December 31, 2019 to lows of below $15.00 per barrel in April 2020 followed by a partial recovery to $48.35 and $51.22, respectively, as of December 31, 2020.

Average natural gas prices were 21% lower in 2020 than 2019.

The 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 $68.13 and $70.86 for WTI and Brent, respectively, as of December 31, 2021.

In addition, average natural gas prices were 91.6% higher in 2021 compared to 2020.

The table below shows the average number of active drilling rigs operating by geographic area and drilling for different purposes based on the weekly rig count information published by Baker Hughes Company.

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Global Active Rigs 1,365 1,347

Commodity Target, Land

Commodity Target

Oil/Gas 379 345

Unclassified 1 3

Land Rigs 433 943

Well Path, Land

Horizontal 431 384

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Directional 25 28

Active Land Rigs 433 943

Active Rigs 478 433

A substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed.

The average U.S.

and Canadian rig counts in 2020 decreased 54% and 34%, respectively, as compared to 2019, while the international rig count decreased 25% compared to 2019.

The number of working rigs in the U.S.

started 2020 at 805 and fell over 70% to a low of 244 rigs in August 2020.

Since then, active rig levels have rebounded slightly to 351 working rigs as of December 31, 2020.

Despite improvement in early 2021, the U.S.

rig count in 2021 is projected to remain below levels achieved in recent years.

rig count for 2021 increased 10% as compared to 2020, while the international rig count decreased 8% compared to 2020.

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 with 586 rigs as of December 31, 2021.

Despite this improvement, the U.S.

drilling rig count remains significantly below pre-pandemic levels.

The table below shows the amount of total inbound orders by segment for the years ended December 31, 2021 and 2020:

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Operating margin % (8.4) % (40.7) %

Transaction expenses 3,128 1,159 1,969 *

Impairments of goodwill, intangible assets, property and equipment 20,394 532,336 (511,942) *

Contingent consideration benefit — (4,629) 4,629 *

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

Loss (gain) on disposal of assets and other (1,052) 2,531 (3,583) *

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Interest expense 32,009 30,268 1,741 5.8 %

Gain on extinguishment of debt (72,478) — (72,478) *

Deferred loan costs written off 2,262 — 2,262 *

Foreign exchange losses and other, net 217 6,470 (6,253) *

Gain realized on previously held equity investment — (1,567) 1,567 *

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

Deferred loan costs written off — 2,262 (2,262) *

Gain on disposition of business — (88,375) 88,375 *

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Loss before income taxes (82,009) (109,770) 27,761 25.3 %

Income tax benefit (12,881) (1,814) (11,067) *

Income tax expense (benefit) 642 (12,881) 13,523 *

Net loss (82,651) (96,889) 14,238 14.7 %

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Our revenue for the year ended December 31, 2020 was $512.5 million, a decrease of $444.1 million, or 46.4%, compared to the year ended December 31, 2019.

Our revenue for the year ended December 31, 2021 was $541.1 million, an increase of $28.6 million, or 5.6%, compared to the year ended December 31, 2020.

For the year ended December 31, 2021, our Drilling & Downhole segment, Completions segment, and Production segment comprised 44.3%, 34.1% and 21.6% of our total revenue, respectively, compared to 42.3%, 23.1% and 34.6%, respectively, for the year ended December 31, 2020.

The overall decrease in revenue is due to lower sales volumes due to the significant decrease in drilling and completions activity levels as a result of lower spending by exploration and production companies.

The overall increase in revenue is primarily related to higher sales volumes in the Drilling and Downhole and Completions segments due to improving market conditions in 2021 compared to 2020, which was negatively impacted by the COVID 19 pandemic.

Offsetting the overall increase is a $41.1 million decrease from the fourth quarter 2020 divestiture of our ABZ and Quadrant valve brands within our Production segment.

The changes in revenue by operating segment consisted of the following:

Drilling & Downhole segment — Revenue was $216.8 million for the year ended December 31, 2020, a decrease of $118.0 million, or 35.2%, compared to the year ended December 31, 2019.

This decrease includes a $60.4 million, or 38.3%, decline in revenue for our Drilling Technologies product line due to lower sales volumes of consumable products and capital equipment as a result of a 38% decline in global rig count year-over-year.

Revenue for our Downhole Technologies product line decreased by $52.0 million, or 44.8%, primarily due to lower sales volumes of artificial lift products and well construction equipment due to the significant decrease in drilling activity and the number of wells completed in 2020.

The $5.6 million, or 9.1%, decline in revenue for our Subsea Technologies product line was relatively less than other product lines in the segment due to the diversification of sales of capital equipment to customers outside the oil and natural gas industry.

Completions segment — Revenue was $118.7 million for the year ended December 31, 2020, a decrease of $186.4 million, or 61.1%, compared to the year ended December 31, 2019.

This decline includes a $105.6 million, or 65.2%, decrease in sales volumes for our Stimulation and Intervention product line primarily attributable to lower spending by our pressure pumping service customers due to the significant decline in hydraulic fracturing activity levels in the U.S.

The remaining decline was driven by an $80.8 million, or 57%, decrease in sales volumes for our Coiled Tubing product line primarily attributable to lower U.S.

completions activity.

Drilling & Downhole segment — Revenue was $239.9 million for the year ended December 31, 2021, an increase of $23.1 million, or 10.6%, compared to the year ended December 31, 2020.

This increase includes an $18.5 million, or 33.3%, increase in revenue for our Subsea Technologies product line primarily due to higher sales of Work Class ROVs into international markets.

Revenue for our Downhole Technologies product line increased by $5.1 million, or 8.0%, primarily due to higher sales volumes of casing and cementing tools as the number of wells drilled in 2021 recovered from the historically low activity levels in 2020 during the COVID 19 pandemic.

Revenue for our Drilling Technologies product line was comparable year-over-year as higher sales volumes of consumable products were offset by lower repair and service revenues.

Completions segment — Revenue was $185.0 million for the year ended December 31, 2021, an increase of $66.3 million, or 55.9%, compared to the year ended December 31, 2020.

This increase includes a $40.3 million, or 71.3%, increase in sales volumes for our Stimulation and Intervention product line and a $26.1 million, or 42%, 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 2021 compared to a rapidly declining market in 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 $116.7 million for the year ended December 31, 2021, a decrease of $60.8 million, or 34.3%, compared to the year ended December 31, 2020.

This decrease includes an $86.6 million, or 43.7%, decline in sales volumes of our valve products, particularly sales into the North America upstream and midstream oil and natural gas market, and a $56.9 million, or 46.4%, decrease in revenue for our Production Equipment product line as a result of lower sales volumes of our surface production equipment due to the significant decline in the number of U.S.

well completions in 2020.

Segment operating loss and segment operating margin percentage

This decrease includes a $41.1 million decline from the divestiture of our ABZ and Quadrant valve brands in the fourth quarter 2020.

The remaining decrease was driven by a $15.0 million decline in sales volumes of our valve products, particularly sales into the North America downstream and midstream markets, and a $4.8 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 year ended December 31, 2021 was $45.5 million compared to a loss of $208.7 million for the year ended December 31, 2020.

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The change in operating loss and segment operating margin percentage for each segment is explained as follows:

Drilling & Downhole segment — Segment operating loss was $48.0 million, or (22.1)%, for the year ended December 31, 2020 compared to income of $7.3 million, or 2.2% for the year ended December 31, 2019.

The $55.3 million decline in segment operating results is primarily attributable to lower gross profit from the 35.2% decline in segment revenues.

In addition, segment operating loss for 2020 includes $24.9 million of inventory write-downs, $5.4 million of impairments of operating lease right of use assets, and $4.4 million of employee severance costs.

These declines in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented in 2020.

Completions segment — Segment operating loss was $97.3 million, or (82.0)%, for the year ended December 31, 2020 compared to income of $6.6 million, or 2.2% for the year ended December 31, 2019.

The $103.9 million decline in segment operating results is primarily attributable to lower gross profit from the 61.1% decline in segment revenues.

In addition, segment operating loss for 2020 includes $53.5 million of inventory write-downs, $6.1 million of impairments of operating lease right of use assets, and $1.8 million of employee severance costs.

These declines in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented in 2020.

Production segment — Segment operating loss was $33.4 million, or (18.8)%, for the year ended December 31, 2020 compared to income of $7.8 million, or 2.4% for the year ended December 31, 2019.

The $41.2 million decline in segment operating results is primarily attributable to lower gross profit from the (44.7)% decline in segment revenues.

In addition, segment operating loss for 2020 includes $22.4 million of inventory write-downs, $2.4 million of impairments of operating lease right of use assets, and $1.3 million of employee severance costs.

These declines

in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented in 2020.

Drilling & Downhole segment — Segment operating income was $4.7 million, or 2.0%, for the year ended December 31, 2021 compared to a loss of $48.0 million, or (22.1)%, for the year ended December 31, 2020.

The $52.7 million improvement in segment operating results includes higher gross profit from the 10.6% increase in revenues discussed above.

In addition, operating results improved due to a $20.4 million decrease in inventory write downs, a $5.3 million decrease in impairments of operating lease right of use assets and reductions in restructuring and employee related costs due to headcount, salary and other cost reductions implemented in 2020.

Completions segment — Segment operating loss was $4.5 million, or (2.4)%, for the year ended December 31, 2021 compared to a loss of $97.3 million, or (82.0)% for the year ended December 31, 2020.

The $92.8 million improvement in segment operating results includes higher gross profit from the 55.9% increase in revenues discussed above.

In addition, operating results improved due to a $51.4 million decrease in inventory write downs, a $6.1 million decrease in impairments of operating lease right of use assets and reductions in restructuring and employee related costs due to headcount, salary and other cost reductions implemented in 2020.

Production segment — Segment operating loss was $14.4 million, or (12.3)%, for the year ended December 31, 2021 compared to a loss of $33.4 million, or (18.8)% for the year ended December 31, 2020.

The $19.1 million improvement in segment operating results is primarily attributable to a $20.9 million decrease in inventory write downs, a $2.2 million decrease in impairments of operating lease right of use assets and reductions in restructuring and employee related costs due to headcount, salary and other cost reductions implemented in 2020.

improvements in operating results were partially offset by the reduction in operating income from the fourth quarter 2020 disposition of our ABZ and Quadrant valve brands.

Corporate — Selling, general and administrative expenses for Corporate were $31.4 million for the year ended December 31, 2021, a $1.4 million increase compared to the year ended December 31, 2020.

Reductions in employee related costs from headcount, salary and other cost reductions were more than offset by a $1.5 million lease impairment and higher legal fees related to litigation.

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

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

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and marketing costs.

Other items not included in segment operating income (loss)

Other items not included in segment operating loss

Several items are not included in segment operating loss, but are included in the total operating loss.

These items include transaction expenses, impairments of goodwill, intangible assets, property and equipment, contingent consideration benefit and losses (gains) on the disposal of assets and other.

Transaction expenses relate to legal and other advisory costs incurred in acquiring or disposing of businesses and are not considered to be part of segment operating loss.

For further information related to impairments of goodwill, intangible assets, property and equipment, see Note 8 Impairments of Goodwill and Long Lived Assets .

The contingent consideration benefit in 2019 relates to a gain of $4.6 million recognized in the first quarter of 2019 due to reducing the estimated fair value of the contingent cash liability associated with the fourth quarter 2018 acquisition of Global Heat Transfer LLC.

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, see Note 8 Impairments of Long-Lived Assets .

Other income and expense

Other income and expense includes interest expense, gain on extinguishment of debt, deferred loan costs written off, foreign exchange losses and other, net, gain realized on previously held equity investment, and gain on disposition of business.

We incurred $30.3 million of interest expense during the year ended December 31, 2020, a decrease of $1.4 million compared to the year ended December 31, 2019 due to lower average outstanding balances on our Credit Facility in 2020 compared to 2019 partially offset by higher non-cash amortization of debt discount and debt issuance costs associated with our 9.0% convertible secured notes due August 2025 (the “2025 Notes”).

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

Other income and expense includes interest expense, loss (gain) on extinguishment of debt, deferred loan costs written off, foreign exchange losses and other, net, and gain on disposition of business.

We incurred $32.0 million of interest expense during the year ended December 31, 2021, an increase of $1.7 million compared to the year ended December 31, 2020 due to higher non-cash amortization of debt discount and debt issuance costs associated with our 2025 Notes as well as a higher interest rate on our 2025 Notes compared to our previous 2021 Notes.

These increases were partially offset by lower average debt balances outstanding in 2021 compared to 2020.

The foreign exchange losses 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 foreign entities using a functional currency other than the 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 year ended December 31, 2021, we recognized a $5.3 million loss on extinguishment of debt from the repurchase of 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.

During the year ended December 31, 2020, we recognized $72.5 million of gains on extinguishment of debt, including a $43.8 million gain from the repurchase of notes in the first half of 2020 and a $28.7 million gain from the exchange of notes in the third quarter of 2020.

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See Note 9 Debt for further information.

During the year ended December 31, 2020, we wrote-off $2.3 million of deferred loan costs including $2.0 million for the termination of previous discussions related to a potential exchange offer for our 2021 Notes and $0.3 million related to amending our Credit Facility to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million.

In the fourth quarter of 2020, we sold certain assets of our ABZ and Quadrant valve brands and recognized a gain on disposition totaling $88.4 million.

In the fourth quarter of 2019, we sold certain assets of our Cooper Alloy brand of valve products and recognized a gain on disposition totaling $2.3 million.

In the third quarter of 2019, we sold our aggregate 40% interest in Ashtead and recognized a gain of $1.6 million as a result of such sale.

See Note 4 Dispositions for further information related to these transactions.

We recorded a tax benefit of $12.9 million for the year ended December 31, 2020 compared to $1.8 million for the year ended December 31, 2019.

On March 27, 2020, the U.S.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which provided relief to corporate taxpayers by permitting a five-year carryback of 2018-2020 NOLs, increased the 30% limitation on interest expense deductibility to 50% of adjusted taxable

income for 2019 and 2020, and accelerated refunds for minimum tax credit carryforwards, among other provisions.

See Note 4 Acquisitions & Dispositions for further information related to this transaction.

We recorded tax expense of $0.6 million for the year ended December 31, 2021 compared to a tax benefit of $12.9 million for the year ended December 31, 2020.

The estimated annual effective tax rates for the years ended December 31, 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 year ended December 31, 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.

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.

As such, the tax benefit for the year ended December 31, 2020 includes a $16.0 million benefit related to a carryback claim for U.S.

federal tax losses based on provisions in the CARES Act.

The tax benefit for the year ended December 31, 2019 includes an increase in our valuation allowance of $98.9 million to write down our deferred tax assets in the U.S., U.K., Germany, Singapore and Saudi Arabia primarily due to operating losses incurred where the recording of a tax benefit is not available and $27.2 million of tax expense related to the impairment of non-tax deductible goodwill.

See Note 11 Income Taxes for additional information.

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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 2025 Notes described below.

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

We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements.

Our future success and growth will be highly dependent on our ability to continue generating positive operating cash flow and access outside sources of capital.

During the first half of 2020, we repurchased an aggregate $71.9 million principal amount of our 2021 Notes for $27.7 million and recognized a net gain of $43.8 million reflecting the difference in the amount paid and the net carrying value of the extinguished debt, including debt issuance costs and unamortized debt premium.

In the third quarter of 2020, we exchanged $315.5 million principal amount of the remaining 2021 Notes for new 2025 Notes.

Concurrent with the 2021 Notes exchange, the Credit Facility was amended to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million.

In the fourth quarter of 2020, we redeemed the remaining $12.6 million principal amount of 2021 Notes at par and therefore, no 2021 Notes remained outstanding at December 31, 2020.

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

The Credit Facility is scheduled to mature on October 30, 2022 and the 2025 notes are scheduled to mature in August 2025.

See 9 Debt for further details related to the terms for our 2021 Notes, 2025 Notes and Credit Facility.

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 year ended December 31, 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 December 31, 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 9 Debt for further details related to the terms for our 2025 Notes and Credit Facility.

As of December 31, 2021, we had cash and cash equivalents of $46.9 million and $127.4 million of availability under our Credit Facility.

In the fourth quarter of 2020, we sold certain assets of our ABZ and Quadrant brands of valve products for cash consideration of $104.6 million.

In the third quarter of 2020, we received a $14.1 million cash refund for income taxes from filing a carryback claim for U.S.

federal tax losses based on provisions in the CARES Act.

We anticipate that our future working capital requirements for our operations will fluctuate directionally with revenues.

Furthermore, availability under our Credit Facility will fluctuate directionally based on the level of our eligible accounts receivable and inventory.

Furthermore, availability under our Credit Facility will fluctuate directionally based on the level of our eligible accounts receivable and inventory subject to applicable sublimits.

In addition, we expect total 2022 capital expenditures to be less than $10.0 million, consisting of, among other items, replacing end of life machinery and equipment.

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

In addition, based on existing market conditions and our expected liquidity needs, among other factors, we may use a portion of our cash flows from operations, proceeds from divestitures, securities offerings or other eligible capital to reduce the principal amount of our 2025 Notes or other debt outstanding.

In 2020, we completed one disposition for total consideration of $104.6 million and in 2019, we completed two dispositions for total consideration of $51.7 million.

For additional information, see Note 4 Dispositions .

We 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 November 2021, our board of directors approved a program for the repurchase of outstanding shares of our common stock with an aggregate purchase amount of up to $10.0 million.

Shares may be repurchased under the program from time to time, in amounts and at prices that the company deems appropriate, subject to market and business conditions, applicable legal requirements and other considerations.

In the fourth quarter of 2021, we repurchased approximately 56,000 shares of our common stock for aggregate consideration of approximately $1.1 million.

Remaining authorization under this program is $8.9 million.

In the fourth quarter of 2021, we completed the acquisition of Hawker Equipment Solutions, LLC (“Hawker”) for total cash consideration of $5.1 million, of which, $3.4 million was paid in the fourth quarter of 2021 with the balance expected to be paid over the next five years.

In 2020, we completed the disposition of our ABZ and Quadrant valve brands for total cash consideration of $103.4 million.

For additional information, see Note 4 Acquisitions & Dispositions.

We may pursue acquisitions in the future, which may be funded with cash and/or equity.

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Year ended December 31,

Net cash provided by operating activities $ 3,883 $ 104,144

Net cash provided by (used in) operating activities $ (15,775) $ 3,883

Net cash provided by investing activities 10,698 108,250

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Effect of exchange rate changes on cash (439) 338

Net increase in cash, cash equivalents and restricted cash $ 70,706 $ 10,670

Net cash provided by operating activities

Net cash provided by operating activities was $3.9 million for the year ended December 31, 2020 compared to $104.1 million for the year ended December 31, 2019.

The decrease is primarily attributable to the decline in operating results.

Net income adjusted for non-cash items used $53.5 million of cash for the year ended December 31, 2020 compared to providing $40.7 million of cash for the year ended December 31, 2019.

The remaining decline is due to changes in working capital which provided cash of $57.3 million for the year ended December 31, 2020 compared to $63.5 million for the year ended December 31, 2019.

Our operating cash flows are sensitive to a number of variables, the most significant of which is the level of drilling and production activity for oil and natural gas reserves.

These activity levels are in turn impacted by the volatility of oil and natural gas prices, regional and worldwide economic activity, weather, infrastructure capacity to reach markets and other various factors.

These factors are beyond our control and are difficult to predict.

Net increase (decrease) in cash, cash equivalents and restricted cash $ (81,759) $ 70,706

Net cash provided by (used in) operating activities

Net cash used in operating activities was $15.8 million for the year ended December 31, 2021 compared to $3.9 million of cash provided by operating activities for the year ended December 31, 2020.

The decline in operating cash flows is primarily attributable to changes in working capital which provided cash of $6.7 million for the year ended December 31, 2021 compared to providing $57.3 million for the year ended December 31, 2020.

This decline was partially offset by an improvement in net income adjusted for non-cash items which used $9.1 million of cash for the year ended December 31, 2021 compared to using $53.5 million of cash for the year ended December 31, 2020.

Net cash provided by investing activities

Net cash provided by investing activities was $10.7 million for the year ended December 31, 2021 including $10.8 million of cash received to settle a note receivable from the 2019 sale of our equity interest in Ashtead Technology and $7.0 million of proceeds from the sale of property and equipment.

These cash inflows were partially offset by $3.4 million of cash paid for the acquisition of Hawker and $2.4 million of capital expenditures.

Net cash provided by investing activities was $108.3 million for the year ended December 31, 2020 including $104.6 million from the sale of certain assets of our ABZ and Quadrant brands of valve products and $5.3 million of proceeds from the sale of property and equipment, partially offset by $2.2 million of capital expenditures.

Net cash provided by investing activities was $28.1 million for the year ended December 31, 2019 including $39.3 million in cash proceeds from the sale of our aggregate 40% interest in Ashtead technology and $3.4 million in cash proceeds from the sale of certain assets of our Cooper Alloy brand of valve products, partially offset by $15.1 million of capital expenditures for property and equipment.

Net cash used in financing activities

Net cash used in financing activities was $41.8 million for the year ended December 31, 2020 compared to $122.2 million used in financing activities for the year ended December 31, 2019.

Net cash used in financing activities for the year ended December 31, 2020 includes $40.3 million of cash used to repurchase 2021 Notes, $9.7 million paid for deferred financing costs and a $3.5 million early participation payment for the bond exchange.

Net cash used in financing activities was $76.2 million for the year ended December 31, 2021 including $58.6 million of cash used to repurchase 2025 Notes and $13.1 of repayments on the revolving Credit Facility.

Net cash used in financing activities was $41.8 million for the year ended December 31, 2020 including $40.3 million of cash used to repurchase 2021 Notes, $9.7 million paid for deferred financing costs and a $3.5 million early participation payment for the bond exchange.

These cash outflows were partially offset by $13.1 million of net borrowings on our Credit Facility in 2020.

Net cash used in financing activities for the year ended December 31, 2019 primarily includes $119.9 million of net repayments of debt.

Off-balance sheet arrangements

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In the event of a bankruptcy, liquidation or reorganization of any of the non-guarantor subsidiaries of the 2025 Notes, the non-guarantor subsidiaries of such notes will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Company or to any guarantors.

The 2025 Notes guarantees shall each be released upon (i) any sale or other disposition of all or substantially all of the assets of such guarantor (by merger, consolidation or otherwise) to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary, if the sale or other disposition does not violate the applicable provisions of the indenture governing such notes;

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;

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Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements.

In order to provide a better understanding of how we make judgments, and develop estimates and assumptions about future events, we have described our most critical accounting policies below.

We believe that these accounting policies reflect our more significant estimates and assumptions used in preparation of our consolidated financial statements.

In order to provide a better understanding of how we make judgments, and develop estimates and assumptions about future events, we have described our most critical accounting policies and estimates used in preparation of our consolidated financial statements below.

Revenue recognition

Revenue is recognized in accordance with Accounting Standards Codification Topic 606 (“ASC 606”), when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Contract Identification .

We account for a contract when it is approved, both parties are committed, the rights of the parties are identified, payment terms are defined, the contract has commercial substance and collection of consideration is probable.

Performance Obligations .

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer under ASC 606.

The majority of our contracts with customers contain a single performance obligation to provide agreed-upon products or services.

For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price.

In accordance with ASC 606, we do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.

We have elected to apply the practical expedient to account for shipping and handling costs associated with outbound freight after control of a product has transferred to a customer as a fulfillment cost which is included in Cost of Sales.

Furthermore, since our customer payment terms are short-term in nature, we have also elected to apply the practical expedient which allows an entity to not adjust for the effects of a significant financing component if it expects that the customer’s payment period will be less than one year in duration.

Contract Value .

Revenue is measured based on the amount of consideration specified in the contracts with our customers and excludes any amounts collected on behalf of third parties.

We have elected the practical expedient to exclude amounts collected from customers for all sales (and other similar) taxes.

The estimation of total revenue from a customer contract is subject to elements of variable consideration.

Certain customers may receive rebates or discounts which are accounted for as variable consideration.

We estimate variable consideration as the most likely amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is resolved.

Our estimate of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historic, current, forecast) that is reasonably available to us.

Timing of Recognition .

We recognize revenue when we satisfy a performance obligation by transferring control of a product or service to a customer.

Our performance obligations are satisfied at a point in time or over time as work progresses.

Revenue from goods transferred to customers at a point in time accounted for 93% of revenues for the year ended December 31, 2020.

The majority of this revenue is product sales, which are generally recognized when items are shipped from our facilities and title passes to the customer.

The amount of revenue recognized for products is adjusted for expected returns, which are estimated based on historical data.

Revenue from goods transferred to customers over time accounted for 7% of revenues for the year ended December 31, 2020, which is related to certain contracts in our Subsea and Production Equipment product lines.

Recognition over time for these contracts is supported by our assessment of the products supplied as having no

alternative use to us and by clauses in the contracts that provide us with an enforceable right to payment for performance completed to date.

For the year ended December 31, 2021, approximately 91% of our revenue was recognized from goods transferred to customers at a point in time while 9% of our revenue was recognized from goods transferred to customers over time.

Although terms of our contracts may vary considerably, the 9% of revenues recognized over time relate to certain contracts in our Subsea and Production Equipment product lines which are typically based on a fixed amount for the entire contract.

Recognition over time for these contracts is supported by our assessment of the products supplied as having no alternative use to us and by clauses in the contracts that provide us with an enforceable right to payment for performance completed to date.

We use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of assets to the customer which occurs as costs are incurred on the contract.

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In such cases, no profit is recognized during the period.

Accounting estimates during the course of projects may change, primarily related to our remotely operated vehicles (“ROVs”) which may take longer to manufacture.

Accounting estimates during the course of projects may change.

The effect of such a change, which can be upward as well as downward, is accounted for in the period of change, and the cumulative income recognized to date is adjusted to reflect the latest estimates.

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As such, these modifications are accounted for as if they were part of the existing contract, and therefore, the effect of the modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue on a cumulative catch-up basis.

No adjustment to any one contract was material to our consolidated financial statements for the years ended December 31, 2020, 2019 and 2018.

We sell our products through a number of channels including a direct sales force, marketing representatives, and distributors.

We have elected to expense sales commissions when incurred as the amortization period would be less than one year.

These costs are recorded within cost of sales.

Portfolio Approach .

We have elected to apply ASC 606 to a portfolio of contracts with similar characteristics as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio.

Disaggregated Revenue .

Refer to Note 18 Business Segments for disaggregated revenue by product line and geography.

Contract Balances .

Contract balances are determined on a contract by contract basis.

Contract assets represent revenue recognized for goods and services provided to our customers when payment is conditioned on something other than the passage of time.

Similarly, when we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record a contract liability.

Such contract liabilities typically result from billings in excess of costs incurred and advance payments received on product sales.

Stock based compensation

We account for awards of stock based compensation at fair value on the date granted to employees and recognize the compensation expense in our consolidated financial statements over the requisite service period.

The fair value of stock based compensation is measured using the fair value of the common stock for restricted stock and restricted stock units, the Black-Scholes model for options, and a Monte Carlo Simulation model for performance share units and stock appreciation rights.

These models require assumptions and estimates for inputs, especially the estimate of the volatility in the value of the underlying share price, that affect the resultant values and hence the amount of compensation expense recognized.

Inventory, consisting of finished goods and materials and supplies held for resale, is carried at the lower of cost or net realizable value.

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While we have policies for calculating and recording reserves against inventory carrying values, we exercise judgment in establishing and applying these policies.

As of December 31, 2021 and 2020, our inventory reserve balances were $62.9 million and $144.9 million, respectively.

For the years ended December 31, 2021 and 2020, we recognized inventory write downs totaling $8.1 million and $100.8 million, respectively.

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See Note 5 Inventories for further information related to these charges.

Property and equipment and intangible assets (“Long-lived assets”)

Property and equipment is stated at cost less accumulated depreciation.

Depreciation is computed using the straight-line method based on the estimated useful lives of assets, generally 3 to 30 years.

We have established standard useful lives for certain classes of assets.

Intangible assets are stated at cost less accumulated amortization.

Amortization is computed using the straight-line method based on the estimated useful lives of assets.

Long-lived assets

As of December 31, 2021, our long-lived assets included property and equipment, definite lived intangibles, and operating lease right of use assets with balances of $94.0 million, $217.4 million and $25.4 million, respectively.

Key estimates related to long-lived assets include useful lives and recoverability of carrying values and changes in such estimates could have a significant impact on financial results.

We review long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.

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The impairment loss recognized represents the excess of an assets’ carrying value as compared to its estimated fair value.

For the years ended December 31, 2020 and 2019, we recognized property and equipment impairment charges totaling $15.1 million and $7.9 million, respectively.

For the years ended December 31, 2020 and 2019, we recognized intangible asset impairment charges totaling $5.3 million and $53.5 million, respectively.

These charges are all included in “Impairments of goodwill, intangible assets, property and equipment” in the consolidated statements of comprehensive loss.

See Note 8 Impairments of Goodwill and Long Lived Assets for further information related to these charges.

For the year ended December 31, 2021, we did not recognize any impairment charges.

For the year ended December 31, 2020, we recognized impairment charges for property and equipment, intangible assets and operating lease right of use assets totaling $15.1 million, $5.3 million and $15.4 million, respectively.

See Note 8 Impairments of Long-Lived Assets for further information related to these charges.

We follow the liability method of accounting for income taxes.

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We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized.

In making such a determination, we consider all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, including the effect of U.S.

tax reform, tax-planning and recent operating results.

Any changes in our judgment as to the realizability of our deferred tax assets are recorded as an adjustment to the deferred tax asset valuation allowance in the period the change occurs.

For the year ended December 31, 2020, we recognized tax expense for valuation allowances totaling $25.3 million.

See Note 11 Income Taxes for further information related to these charges.

The accounting guidance for income taxes requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.

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Changes in the operating environment, including changes in tax law or interpretation of tax law and currency repatriation controls, could impact the determination of our tax liabilities for a given tax year.

The CARES Act was signed into law in March 2020 in response to the COVID-19 pandemic.

The tax effects of changes in tax laws are recognized in the period in which the law is enacted.

As such, the tax benefit for the year ended December 31, 2020 includes a $16.0 million benefit related to a carryback claim for U.S.

federal tax losses based on new provisions in the CARES Act.

For the year ended December 31, 2019, we recognized tax expense for valuation allowances totaling $98.9 million.

See Note 11 Income Taxes for further information related to these charges.

Recognition of provisions for contingencies

In the ordinary course of business, we are subject to various claims, suits and complaints.

We, in consultation with internal and external legal advisors, will provide for a contingent loss in the consolidated financial statements if, at the date of the consolidated financial statements, it is probable that a liability has been incurred and the amount can be reasonably estimated.

If it is determined that the reasonable estimate of the loss is a range and that there is no best estimate within that range, a provision will be made for the lower amount of the range.

Legal costs are expensed as incurred.

An assessment is made of the areas where potential claims may arise under contract warranty clauses.

Where a specific risk is identified, and the potential for a claim is assessed as probable and can be reasonably estimated, an appropriate warranty provision is recorded.

Warranty provisions are eliminated at the end of the warranty period except where warranty claims are still outstanding.

The liability for product warranty is included in accrued liabilities in the consolidated balance sheets.

Recent accounting pronouncements

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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-K

Item 7. Management’s Discussion and Analysis