What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-05 · 94 added, 215 removed, 173 unchanged (64% of the section changed)

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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.

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.

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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.

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 SEC on March 4, 2022, 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.

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.

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.

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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

consumable products and activity-based equipment, while the balance was primarily derived from capital products with a small amount from rental and other services.

For the three months ended March 31, 2022, approximately 76% 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 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.

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.

We are also continuing to develop products to help oil and natural 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:

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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, 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;

(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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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

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.

In 2021, distribution of vaccines and reopening of certain economies led to an increase in demand for oil and natural gas following the unprecedented decline in demand that resulted from the COVID-19 pandemic.

At the same time, the supply of oil and natural gas was impacted by ongoing capacity 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.

During the first quarter of 2022, the supply of oil and natural gas was further impacted by political and social responses to the Russia and Ukraine war resulting in further increases in energy prices, especially in Europe.

In addition, ongoing COVID-19 related shutdowns in China 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.

drilling rig count, which has increased to 670 rigs as of the end of the first quarter 2022 from a low of 244 rigs in August 2020.

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

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

In addition, publicly owned exploration and production companies in North America remain under pressure by investors 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.

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 equipment offerings has increased due to an improved outlook for our international drilling and subsea customers.

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,

March 31, December 31, March 31,

2022 2021 2021

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Henry Hub $ 4.67 $ 4.75 $ 3.50

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

The price of oil has varied dramatically over the last several 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.

Since that time, oil prices have rebounded to an average of $95.18 and $100.87 for WTI and Brent, respectively, in the first quarter of 2022.

In addition, natural gas prices have increased more than 30% comparing the first quarter 2022 to the first quarter 2021.

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,

March 31, December 31, March 31,

2022 2021 2021

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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.

rig count for the first quarter 2022 was 13% and 61% higher compared to the fourth quarter of 2021 and first quarter of 2021, respectively.

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

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

Since that time, the number of active rigs has partially recovered, ending the first quarter 2022 at 670 rigs.

Despite this improvement, the U.S.

drilling rig count remains below pre-pandemic levels.

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,

(in millions of dollars) Three Months Ended

March 31, December 31, March 31,

2022 2021 2021

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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

Three months ended March 31, 2022 compared with three months ended March 31, 2021

Three Months Ended March 31, Change

(in thousands of dollars, except per share information) 2022 2021 $ %

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Operating margin % (3.7) % (13.4) %

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

Loss (gain) on disposal of assets and other 22 (909) 931 *

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Foreign exchange losses (gains) and other, net (5,986) 3,470 (9,456) *

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 on extinguishment of debt — 933 (933) *

Total other expense 1,638 13,565 (11,927) (87.9) %

Loss before income taxes (7,346) (27,945) 20,599 73.7 %

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* 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.

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.

Our revenue for the three months ended March 31, 2022 was $155.2 million, an increase of $40.7 million, or 35.5%, compared to the three months ended March 31, 2021.

For the three months ended March 31, 2022, our Drilling & Downhole, Completions, and Production segments comprised 45.9%, 33.8%, and 20.3% of our total revenue, respectively, which compared to 42.5%, 33.0%, and 24.5% of our total revenue, respectively, for the three months ended March 31, 2021.

The overall increase in revenue is primarily related to higher sales volumes due to higher drilling and completions activity levels in the first quarter 2022 compared to the first quarter 2021.

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.

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.

Drilling & Downhole segment — Revenue was $71.3 million for the three months ended March 31, 2022, an increase of $22.6 million, or 46.5%, compared to the three months ended March 31, 2021.

This increase was led by a $10.7 million, or 57.9%, increase in revenue for our Drilling Technologies product line due to higher sales volumes of consumable products and capital equipment from the 34% year-over-year increase in global rig count.

Revenue for our Subsea Technologies product line increased by $7.4 million, or 49.3%, due to higher sales of ROVs and related support systems into international markets.

Revenue for our Downhole Technologies product line increased by $4.5 million, or 29.6%, 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 first quarter 2022 compared to the first quarter 2021.

Completions segment — Revenue was $52.5 million for the three months ended March 31, 2022, an increase of $14.7 million, or 38.8%, compared to the three months ended March 31, 2021.

This significant improvement includes a revenue increase of $11.5 million, or 61.3%, for our Stimulation & Intervention product line primarily due to higher capital equipment sales to pressure pumping customers to support increasing demand for hydraulic fracturing services.

Revenue for our Coiled Tubing product line increased by $3.2 million, or 16.9%, driven by increasing U.S.

hydraulic fracturing activity levels in the first quarter 2022 compared to the first quarter 2021.

Production segment — Revenue was $31.5 million for the three months ended March 31, 2022, an increase of $3.5 million, or 12.4%, compared to the three months ended March 31, 2021.

This increase includes a $2.7 million, or 19.8%, increase in sales of our valve products, primarily due to higher sales volumes into the North America downstream market, and a $0.8 million, or 5.4%, increase in revenue for our Production Equipment product line from higher sales volumes of surface production equipment for new producing wells.

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 loss for the three months ended March 31, 2022 was $5.7 million, a $9.6 million improvement compared to a loss of $15.3 million for the three months ended March 31, 2021.

For the three months ended March 31, 2022, segment operating margin percentage was (3.7)% compared to (13.4)% for the three months ended March 31, 2021.

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.

Drilling & Downhole segment — Segment operating income was $6.0 million, or 8.4%, for the three months ended March 31, 2022 compared to a loss of $4.5 million, or (9.3)%, for the three months ended March 31, 2021.

The $10.5 million improvement in segment operating results is primarily attributable to higher gross profit from the 46.5% 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.

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.

In addition, segment operating income increased due to a $2.8 reduction in inventory write-downs.

Completions segment — Segment operating loss was $0.7 million, or (1.4)%, for the three months ended March 31, 2022 compared to segment operating income of $0.1 million, or 0.2%, for the three months ended March 31, 2021.

Results were flat year-over-year as higher gross profit from the 38.8% increase in revenues discussed above was offset by increases in raw material, freight, and employee related costs.

Production segment — Segment operating loss was $1.8 million, or (5.6)%, for the three months ended March 31, 2022 compared to a loss of $3.8 million, or (13.7)%, for the three months ended March 31, 2021.

The $2.1 million improvement in segment operating results was driven by the 12.4% increase in revenues discussed above as well as lower compensation, depreciation and other facility costs in connection with cost reductions implemented in 2021.

These improvements were partially offset by higher freight and material costs as a result of inflationary pressures from global supply chains.

Corporate — Selling, general and administrative expenses for Corporate were $9.2 million for the three months ended March 31, 2022, a $2.2 million increase compared to the three months ended March 31, 2021.

This increase was primarily related to a $2.7 million charge recognized in the three months ended March 31, 2022 related to a modification of long-term incentive awards associated with the recent executive leadership transition.

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

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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.

Loss (gain) on the disposal of assets and other is not included in segment operating loss, but is included in total operating loss.

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.

Other income and expense includes interest expense, foreign exchange losses (gains) and other, and loss (gain) on extinguishment of debt.

We incurred $7.6 million of interest expense during the three months ended March 31, 2022, a decrease of $1.5 million compared to the three months ended March 31, 2021 due to lower debt balances outstanding in the three months ended March 31, 2022 compared to the three months outstanding March 31, 2021.

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

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

During the three months ended 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.

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.

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)

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.

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.

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.

These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location’s functional currency, primarily U.S.

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

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

During the three months ended March 31, 2021, we repurchased an aggregate $16.5 million of principal amount of our 2025 Notes for $15.6 million.

The net carrying value of the extinguished debt, including unamortized debt discount and debt issuance costs, was $14.7 million, resulting in a $0.9 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.

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.

We recorded tax expense of $1.9 million and $1.7 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

The estimated annual effective tax rates for the three months ended March 31, 2022 and 2021 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

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

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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.

As of March 31, 2022, we had $257.0 million principal amount of 2025 Notes outstanding and no borrowings outstanding under our revolving Credit Facility.

The 2025 Notes mature in August 2025 and the Credit Facility matures in September 2026.

See Note 7 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.

As of March 31, 2022, we had cash and cash equivalents of $20.6 million and $141.2 million of availability under the Credit Facility.

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

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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.

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.

To date, we have 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 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.

For additional information, see Note 4 Acquisitions.

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

Our ability to make significant acquisitions for cash may require us to pursue additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.

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

Nine Months Ended September 30,

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

Net cash provided by investing activities 4.5 2.0

Our cash flows for the three months ended March 31, 2022 and 2021 are presented below (in millions):

Three Months Ended March 31,

Net cash used in operating activities $ (24.9) $ (1.3)

Net cash provided by (used in) investing activities (0.7) 1.1

Net cash used in financing activities (0.6) (27.5)

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Net decrease in cash, cash equivalents and restricted cash $ (26.3) $ (27.8)

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 operating activities

Net cash used in operating activities was $24.9 million and $1.3 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

This decline in operating cash flows is primarily attributable to net increases in working capital, primarily inventory and accounts receivable, which used cash of $29.7 million for the three months ended March 31, 2022 compared to providing cash of $10.4 million for the three months ended March 31, 2021.

This decline was partially offset by an improvement in net income adjusted for non-cash items which provided $4.8 million of cash for the three months ended March 31, 2022 compared to using $11.8 million for the three months ended March 31, 2021.

Net cash provided by (used in) investing activities

Net cash used in investing activities was $0.7 million for the three months ended March 31, 2022 including $0.9 million of capital expenditures, partially offset by $0.1 million of proceeds from the sale of property and equipment.

Net cash provided by investing activities was $1.1 million for the three months ended March 31, 2021 including $1.5 million of proceeds from the sale of property and equipment, partially offset by $0.4 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.

Net cash used in financing activities was $0.6 million and $27.5 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

The decrease in net cash used in financing activities primarily resulted from $13.7 million of cash used to repurchase 2025 Notes and $13.1 million of repayments on the revolving Credit Facility during the three months ended March 31, 2021.

Supplemental Guarantor Financial Information

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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.

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,

Three Months Ended March 31,

Summarized Statements of Operations 2022 2021

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Net loss (9,199) (29,663)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Summarized Balance Sheet

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Non-current liabilities 257,315 259,622

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.

There have been no material changes in our critical accounting policies and procedures during the three months ended March 31, 2022.

For a detailed discussion of our critical accounting policies and estimates, refer to our 2021 Annual Report on Form 10-K.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis