What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-06 · 167 added, 85 removed, 182 unchanged (58% 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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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.

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.

For the six months ended June 30, 2022, approximately 77% 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.

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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 natural gas operators lower their current emissions while also deploying our existing product technologies in renewable energy applications and seeking to develop innovative equipment.

We are also continuing to develop products to help oil and natural gas operators lower their 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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(ii) well construction casing and cementing equipment and protection products for artificial lift equipment and cables;

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

and (iii) subsea remotely operated vehicles ("ROVs") 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, 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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Market Conditions

The level of demand for our products is directly related to the activity levels and the capital and operating budgets of our customers, which in turn are heavily influenced by energy prices and expectations as to future price trends.

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

In 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.

Demand for our products and services is directly related to the capital and operating budgets of our customers.

These budgets are heavily influenced by current and expected energy prices.

In addition, demand for our capital products is driven by the utilization of service company equipment.

Utilization is a function of equipment capacity and durability in demanding environments.

In 2021, distribution of vaccines and reopening of certain economies led to an increase in demand for oil and natural gas following an unprecedented decline 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.

During the first half 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, COVID-19 related shutdowns in China and worldwide labor constraints continue to cause disruptions in global supply chains, which have led to inflationary pressures.

In response, the Federal Reserve raised interest rates significantly in 2022 and further rate increases may occur.

These macroeconomic conditions could lead to a global or regional recession, which could lower demand for commodities, such as oil and natural gas, and have a direct impact on commodity prices.

Our revenues are highly correlated to the U.S.

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.

drilling rig count, which has increased to 753 rigs as of the end of the second 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 and natural gas demand.

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

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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.

It is expected that public and private exploration and production companies will continue to make investments in a similar fashion for the foreseeable future.

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

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Three Months Ended

March 31, December 31, March 31,

June 30, March 31, June 30,

2022 2022 2021

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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 $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.

Since that time, oil prices have rebounded to an average of $108.83 and $113.84 for WTI and Brent, respectively, in the second quarter 2022.

In addition, natural gas prices have increased by 154% comparing the second quarter 2022 to the second 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

March 31, December 31, March 31,

June 30, March 31, June 30,

2022 2022 2021

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The average U.S.

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 for the second quarter 2022 was 13% and 58% higher compared to the first quarter 2022 and second quarter 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 first quarter 2022 at 670 rigs.

Since that time, the number of active rigs has partially recovered, ending the second quarter 2022 at 753 rigs.

Despite this improvement, the U.S.

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The table below shows the amount of total inbound orders by segment:

(in millions of dollars) Three Months Ended

March 31, December 31, March 31,

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

June 30, March 31, June 30, June 30, June 30,

2022 2022 2021 2022 2021

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Results of operations

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

Three Months Ended March 31, Change

Three months ended June 30, 2022 compared with three months ended June 30, 2021

Three Months Ended June 30, Change

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

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Corporate (6,885) (8,270) 1,385 16.7 %

Total segment operating income (loss) 5,076 (9,980) 15,056 150.9 %

Operating margin % 2.9 % (7.3) %

Gain on disposal of assets and other (908) (360) (548) *

Operating income (loss) 5,984 (9,620) 15,604 162.2 %

Interest expense 7,842 7,775 67 0.9 %

Foreign exchange gains and other, net (12,838) (939) (11,899) *

Loss on extinguishment of debt — 4,161 (4,161) *

Total other (income) expense, net (4,996) 10,997 (15,993) (145.4) %

Income (loss) before income taxes 10,980 (20,617) 31,597 153.3 %

Income tax expense 1,716 1,189 527 44.3 %

Net income (loss) $ 9,264 $ (21,806) $ 31,070 142.5 %

Weighted average shares outstanding

Basic 5,747 5,638

Diluted 10,481 5,638

Earnings (loss) per share

Basic $ 1.61 $ (3.87)

Diluted $ 1.15 $ (3.87)

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Our revenue for the three months ended June 30, 2022 was $172.2 million, an increase of $34.8 million, or 25.3%, compared to the three months ended June 30, 2021.

For the three months ended June 30, 2022, our Drilling & Downhole, Completions, and Production segments comprised 44.4%, 38.3%, and 17.3% of our total revenue, respectively, which compared to 44.8%, 33.9%, and 21.3% of our total revenue, respectively, for the three months ended June 30, 2021.

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

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

Drilling & Downhole segment — Revenue was $76.5 million for the three months ended June 30, 2022, an increase of $14.9 million, or 24.2%, compared to the three months ended June 30, 2021.

This increase was led by a $5.9 million, or 21.4%, increase in revenue for our Drilling Technologies product line due to higher sales volumes of consumable products from the 31% year-over-year increase in global rig count.

Revenue for our Downhole Technologies product line increased by $4.8 million, or 28.9%, primarily due to higher sales volumes of artificial lift products due to the increase in the number of well completions and workover activity in the second quarter 2022 compared to the second quarter 2021.

Revenue for our Subsea Technologies product line increased by $4.2 million, or 24.2%, due to higher sales of ROVs and cable management systems into domestic and international markets.

Completions segment — Revenue was $66.1 million for the three months ended June 30, 2022, an increase of $19.6 million, or 42.1%, compared to the three months ended June 30, 2021.

This significant improvement includes a revenue increase of $13.0 million, or 53.3%, 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 $6.6 million, or 29.7%, driven by increasing U.S.

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

Production segment — Revenue was $29.9 million for the three months ended June 30, 2022, an increase of $0.5 million, or 1.8%, compared to the three months ended June 30, 2021.

This increase was driven by a $1.5 million, or 12.7%, increase in sales of our valve products, primarily due to higher sales volumes into the North America downstream market, partially offset by a $1.0 million, or (5.6)%, decrease in revenue for our Production Equipment product line from lower project revenue for our process oil treatment equipment.

Segment operating income (loss) and segment operating margin percentage

Segment operating income for the three months ended June 30, 2022 was $5.1 million, a $15.1 million improvement compared to a loss of $10.0 million for the three months ended June 30, 2021.

For the three months ended June 30, 2022, segment operating margin percentage was 2.9% compared to (7.3)% for the three months ended June 30, 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 $8.5 million, or 11.1%, for the three months ended June 30, 2022 compared to operating income of $2.7 million, or 4.4%, for the three months ended June 30, 2021.

The $5.8 million improvement in segment operating results is primarily attributable to higher gross profit from the 24.2% increase in segment revenues, partially offset by higher freight and employee related costs.

Completions segment — Segment operating income was $3.6 million, or 5.4%, for the three months ended June 30, 2022 compared to segment operating loss of $0.4 million, or (0.8)%, for the three months ended June 30, 2021.

The $4.0 million improvement in segment operating results was primarily due to higher gross profit from the 42.1% increase in revenues discussed above, partially offset by higher freight and employee related costs.

Production segment — Segment operating loss was $0.2 million, or (0.5)%, for the three months ended June 30, 2022 compared to a loss of $4.0 million, or (13.8)%, for the three months ended June 30, 2021.

The $3.9 million improvement in segment operating results was driven by the 1.8% increase in revenues discussed above as well as lower 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 $6.9 million for the three months ended June 30, 2022, a $1.4 million increase compared to the three months ended June 30, 2021.

This increase was primarily related to higher variable compensation costs and professional fees.

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 income (loss)

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

Other income and expense

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

We incurred $7.8 million of interest expense during the three months ended June 30, 2022, which was flat compared to the three months ended June 30, 2021.

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 three months ended June 30, 2021, we repurchased an aggregate $41.5 million principal amount of our 2025 Notes for $41.2 million.

The net carrying value of the extinguished debt, including unamortized debt discount and debt issuance costs, was $37.0 million, resulting in a $4.2 million loss on extinguishment of debt.

We recorded tax expense of $1.7 million and $1.2 million for the three months ended June 30, 2022 and June 30, 2021, respectively.

The estimated annual effective tax rates for the three months ended June 30, 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.

Six months ended June 30, 2022 compared with six months ended June 30, 2021

Six Months Ended June 30, Change

2022 2021 $ %

(in thousands of dollars, except per share information)

Drilling & Downhole $ 147,753 $ 110,226 $ 37,527 34.0 %

Completions 118,621 84,359 34,262 40.6 %

Production 61,384 57,368 4,016 7.0 %

Eliminations (338) (16) (322) *

Total revenue 327,420 251,937 75,483 30.0 %

Operating income (loss):

Drilling & Downhole 14,514 (1,805) 16,319 904.1 %

Operating margin % 9.8 % (1.6) %

Completions 2,872 (302) 3,174 1,051.0 %

Operating margin % 2.4 % (0.4) %

Production (1,906) (7,882) 5,976 75.8 %

Operating margin % (3.1) % (13.7) %

Corporate (16,090) (15,280) (810) (5.3) %

Total segment operating loss (610) (25,269) 24,659 97.6 %

Operating margin % (0.2) % (10.0) %

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

Gain on disposal of assets and other (886) (1,269) 383 *

Operating loss 276 (24,000) 24,276 101.2 %

Interest expense 15,466 16,937 (1,471) (8.7) %

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

Foreign exchange (gains) losses and other, net (18,824) 2,531 (21,355) (843.7) %

Loss on extinguishment of debt — 5,094 (5,094) *

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

Total other (income) expense (3,358) 24,562 (27,920) *

Loss before income taxes 3,634 (48,562) 52,196 107.5 %

Income tax expense 1,853 1,718 135 7.9 %

Income tax expense (benefit) 3,569 2,907 662 22.8 %

Net loss $ 65 $ (51,469) $ 51,534 100.1 %

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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.

Our revenue for the six months ended June 30, 2022 was $327.4 million, an increase of $75.5 million, or 30.0%, compared to the six months ended June 30, 2021.

For the six months ended June 30, 2022, our Drilling & Downhole, Completions, and Production segments comprised 45.1%, 36.2%, and 18.7% of our total revenue, respectively, which compared to 43.8%, 33.4%, and 22.8% of our total revenue, respectively, for the six months ended June 30, 2021.

The overall increase in revenue is related to higher sales volumes due to improving market conditions in the first half of 2022 compared to the first half of 2021 as a result of higher drilling and completions activity levels to support increasing global energy demand.

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

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.

Drilling & Downhole segment — Revenue was $147.8 million for the six months ended June 30, 2022, an increase of $37.5 million, or 34.0%, compared to the six months ended June 30, 2021.

This increase was led by revenue growth of $16.6 million, or 36.0%, in our Drilling Technologies product line from higher sales of capital equipment and consumable products from the 36% year-over-year increase in global rig count.

Revenue for our Subsea Technologies product line increased by $11.6 million, or 35.9%, primarily due to higher sales of Work Class ROVs and cable management systems into domestic and international markets.

Revenue for our Downhole Technologies product line increased by $9.3 million, or 29.3%, primarily due to higher sales of artificial lift products as a result of higher well completions activity levels.

Completions segment — Revenue was $118.6 million for the six months ended June 30, 2022, an increase of $34.3 million, or 40.6%, compared to the six months ended June 30, 2021.

This increase includes a $24.4 million, or 56.8%, increase in sales volumes for our Stimulation and Intervention product line and a $9.8 million, or 23.8%, increase in sales volumes for our Coiled Tubing product line.

These higher revenue levels were driven by increasing U.S.

hydraulic fracturing and well intervention service activity levels in the first half of 2022 compared to the first half of 2021 in response to higher energy demand.

Production segment — Revenue was $61.4 million for the six months ended June 30, 2022, an increase of $4.0 million, or 7.0%, compared to the six months ended June 30, 2021.

This increase is primarily driven by higher sales volumes of valves, primarily in the North America downstream market, as demand continues to recover from the COVID 19 pandemic.

Partially offsetting this increase is a decline in revenue of $0.2 million for our Production Equipment product line from lower project revenue for our process oil treatment equipment.

Segment operating income (loss) and segment operating margin percentage

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 loss for the six months ended June 30, 2022 was $0.6 million, a $24.7 million improvement compared to a loss of $25.3 million for the six months ended June 30, 2021.

For the six months ended June 30, 2022, segment operating margin percentage was (0.2)% compared to (10.0)% for the six months ended June 30, 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 $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 $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.

Drilling & Downhole segment — Segment operating income was $14.5 million, or 9.8%, for the six months ended June 30, 2022 compared to a loss of $1.8 million, or (1.6)%, for the six months ended June 30, 2021.

The $16.3 million improvement in segment operating results is primarily attributable to higher gross profit from the 34.0% increase in revenue discussed above.

In addition, segment operating results also improved due to a $3.1 million reduction in inventory write downs and lower restructuring related costs in connection with cost reductions executed in early 2021.

Completions segment — Segment operating income was $2.9 million for the six months ended June 30, 2022 compared to a loss of $0.3 million, or (0.4)%, for the six months ended June 30, 2021.

The $3.2 million improvement in segment operating results is primarily attributable to higher gross profit from the 40.6% increase in revenues discussed above, partially offset by higher freight and employee related costs.

Production segment — Segment operating loss was $1.9 million, or (3.1)%, for the six months ended June 30, 2022 compared to a loss of $7.9 million, or (13.7)%, for the six months ended June 30, 2021.

The $6.0 million improvement is primarily attributable to higher gross margin from the 7.0% revenue growth discussed above as well as lower 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 — Selling, general and administrative expenses for Corporate were $16.1 million for the six months ended June 30, 2022, a $0.8 million increase compared to the six months ended June 30, 2021.

This increase was primarily related to higher professional fees.

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

1 unchanged sentence

and marketing costs.

Other items not included in segment operating loss

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, 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.

Other items not included in segment operating income (loss)

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

Other expense

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

We incurred $15.5 million of interest expense during the six months ended June 30, 2022, a decrease of $1.5 million from the six months ended June 30, 2021 due to the lower average outstanding balance on our 2025 Notes.

The foreign exchange (gains) losses are primarily the result of movements in the British pound, Euro and Canadian dollar relative to 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 three months ended March 31, 2021, we repurchased an aggregate $16.5 million of principal amount of our 2025 Notes for $15.6 million.

During the six months ended June 30, 2021, we repurchased an aggregate $58.0 million of principal amount of our 2025 Notes for $56.7 million.

The net carrying value of the extinguished debt, including unamortized debt discount and debt issuance costs, was $51.6 million, resulting in a $5.1 million loss on extinguishment of debt.

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.

We recorded a tax expense of $3.6 million and $2.9 million for the six months ended June 30, 2022 June 30, 2021, respectively.

The estimated annual effective tax rates for the six months ended June 30, 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.

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

As of June 30, 2022, we had $257.0 million principal amount of 2025 Notes outstanding and $33.6 million of 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 March 31, 2022, we had cash and cash equivalents of $20.6 million and $141.2 million of availability under the Credit Facility.

As of June 30, 2022, we had cash and cash equivalents of $26.9 million and $114.3 million of availability under the Credit Facility.

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

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

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

In addition, we continue to 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 the Credit Facility to be adequate to fund current operations during the next 12 months.

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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.

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

Our cash flows for the 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)

Our cash flows for the six months ended June 30, 2022 and 2021 are presented below (in millions):

Six Months Ended June 30,

Net cash provided by (used in) operating activities $ (50.6) $ 2.4

Net cash provided by (used in) investing activities (1.4) 0.1

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

Net cash provided by (used in) financing activities 32.6 (70.8)

Effect of exchange rate changes on cash (0.6) —

Net decrease in cash, cash equivalents and restricted cash $ (20.0) $ (68.3)

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) operating activities

Net cash used in operating activities was $50.6 million for the six months ended June 30, 2022 compared to $2.4 million of cash provided by operating activities for the six months ended June 30, 2021.

This decline in operating cash flows is primarily attributable to net increases in working capital, primarily inventory and accounts receivable, which used cash of $75.2 million for the six months ended June 30, 2022 compared to providing cash of $16.8 million for the six months ended June 30, 2021.

This decline was partially offset by an improvement in net income adjusted for non-cash items which provided $24.6 million of cash for the six months ended June 30, 2022 compared to using $14.5 million for the six months ended June 30, 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 $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.

Net cash used in investing activities was $1.4 million for the six months ended June 30, 2022 including $3.6 million of capital expenditures, partially offset by $2.6 million of proceeds from the sale of property and equipment.

Net cash provided by investing activities was $0.1 million for the six months ended June 30, 2021 including $2.1 million of proceeds from the sale of property and equipment, partially offset by $1.3 million of cash paid for the net working capital settlement related to the disposition of our ABZ and QVA valve brands and $0.7 million of capital expenditures.

Net cash provided by (used in) financing activities

Net cash provided by financing activities was $32.6 million for the six months ended June 30, 2022 compared to $70.8 million of cash used in financing activities for the six months ended June 30, 2021, respectively.

The change in net cash provided by (used in) financing activities primarily resulted from $33.6 million of net borrowings on the revolving Credit Facility for the six months ended June 30, 2022 compared to a net $56.7 million of cash used to repurchase 2025 Notes and $13.1 million of repayments on the revolving Credit Facility during the six months ended June 30, 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 March 31,

Three Months Ended June 30, Six Months Ended June 30,

Summarized Statements of Operations 2022 2021 2022 2021

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Cost of sales 101,014 76,607 191,539 142,648

Operating loss (2,643) (18,734)

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

March 31, 2022 December 31, 2021

Operating income (loss) 22,726 (9,160) 20,083 (27,894)

Net income (loss) 9,264 (21,806) 65 (51,469)

June 30, 2022 December 31, 2021

Summarized Balance Sheet

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Critical accounting policies and estimates

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

There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 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