OIL STATES INTERNATIONAL, INC 10-K

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements and related notes appearing in "Part II Item 8 Financial Statements and Supplementary Data." This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in "Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 . This discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are based on our current expectations, estimates and projections about our business operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of numerous factors, including the known material factors set forth in "Part I, Item 1A. Risk Factors." You should read the following discussion and analysis together with our Consolidated Financial Statements and the notes to those statements included elsewhere in this Annual Report on Form 10‑K in order to understand factors, such as business combinations, charges and credit and financing transactions, which may impact comparability from period to period. We provide a broad range of products and services to our customers through our three business segments. Demand for our products and services is cyclical and substantially dependent upon activity levels in the oil and gas industry, particularly our customers' willingness to invest capital in the exploration for and development of crude oil and natural gas reserves. Our customers' capital spending programs are generally based on their cash flows and their outlook for near-term and long-term commodity prices, economic growth, commodity demand and estimates of resource production. As a result, demand for our products and services is largely sensitive to future expectations with respect to crude oil and natural gas prices. Recent Developments Disruptions caused by the COVID-19 pandemic and measures taken to prevent its spread or mitigate its effects both domestically and international have impacted our results of operations. In March of 2020, the spot price of WTI crude oil declined over 50% in response to actual and forecasted reductions in global demand for crude oil due to the COVID-19 pandemic coupled with announcements by Saudi Arabia and Russia of plans to increase crude oil production in an effort to protect market share. OPEC, its members, and other state-controlled oil companies ultimately agreed to reduce production following the crude oil price collapse and many operators shut-in production in the United States in an effort to address rapidly collapsing demand. While crude oil prices have recovered some of their losses since reaching record low levels in April of 2020, the spot price of Brent and WTI crude oil averaged $42 and $39 per barrel during 2020 – down 35% and 31%, respectively, from their comparable 2019 averages. The ultimate magnitude and duration of the COVID-19 pandemic, the timing and extent of governmental restrictions placing limitations on the mobility and ability to work of the worldwide population, and the related impact on crude oil prices, the global economy and capital markets remains uncertain. While it is difficult to assess or predict with precision the broad future effect of this pandemic on the global economy, the energy industry or us, we expect that the COVID-19 pandemic will continue to adversely affect demand for our products and services in 2021. Demand for most of our products and services depends substantially on the level of capital expenditures invested in the oil and natural gas industry, which reached 15-year lows in 2020. The decline in crude oil prices, coupled with higher crude oil inventory levels in 2020, caused rapid reductions in most of our customers' drilling, completion and production activities and their related spending on products and services, particularly those supporting activities in the U.S. shale play regions. These conditions have and may continue to result in a material adverse impact on certain customers' liquidity and financial position, leading to further spending reductions, delays in the collection of amounts owed and, in certain instances, non-payments of amounts owed. Additionally, future actions among OPEC members and other oil producing nations as to production levels and prices could result in further declines in crude oil prices, which would prove detrimental, particularly given the weak demand environment for crude oil and associated products caused by the ongoing COVID-19 pandemic. Following the unprecedented events commencing in March 2020, we immediately began aggressive implementation of cost reduction initiatives in an effort to reduce our expenditures to protect the financial health of our company, including the following: • reduced headcount by 32% between December 31, 2019 and December 31, 2020; • reduced capital expenditures in 2020 by 77% compared to 2019; • reduced annual short-term and long-term incentive awards; and • consolidated and closed certain facilities. -35- Given the COVID-19 induced economic destruction, we assessed the carrying value of goodwill and other assets based on the industry outlook regarding overall demand for and pricing of our products and services. As a result of these events, actions and assessments, we recorded the following charges during 2020: • non-cash goodwill impairment charges of $406.1 million to reduce the carrying value of our reporting units to their estimated fair value; • non-cash impairment charges of $31.2 million to reduce the carrying value of inventory to its estimated realizable value; • non-cash impairment charges of $12.4 million to decrease the carrying value of our fixed assets and leases to their estimated realizable value; and • employee severance and restructuring charges of $9.1 million. As discussed in more detail under "– Liquidity, Capital Resources and Other Matters – Financing Activities – Revolving Credit Facility," we amended our existing Revolving Credit Facility during the second quarter of 2020. In connection with this amendment, the Revolving Credit Facility size was reduced from $350 million to $200 million, with advances subject to a monthly borrowing base calculation, in exchange for suspension of the existing financial covenants from July 1, 2020 through March 30, 2021. On February 10, 2021, as discussed in more detail under "– Liquidity, Capital Resources and Other Matters – Financing Activities – Asset-based Revolving Credit Facility," we entered into the Asset-based Revolving Credit Facility in order to extend maturity, which provides for a $125.0 million asset-based revolving credit facility under which credit availability is subject to a monthly borrowing base calculation. The Asset-based Revolving Credit Facility matures in February 2025. Concurrent with entering into the Asset-based Revolving Credit Facility, the existing Amended Credit Agreement was terminated. In addition, as discussed in more detail under "– Liquidity, Capital Resources and Other Matters – Financing Activities – 1.50% Convertible Senior Notes due February 2023," we opportunistically purchased a total of $34.9 million principal amount of the Notes for $20.1 million in cash and recognized non-cash gains totaling $10.7 million during 2020. See Note 3, "Asset Impairments and Other Charges," Note 4, "Details of Selected Balance Sheet Accounts," Note 6, "Goodwill and Other Intangible Assets," Note 7, "Long-term Debt," and Note 8, "Operating Leases," to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion. The crude oil and natural gas industry is highly cyclical which may result in declines in the demand for, and prices of, our products and services, the inability or failure of our customers to meet their obligations to us or a sustained decline in our market capitalization. These and other potentially adverse market conditions could require us to incur additional asset impairment charges, record additional deferred tax valuation allowances and/or further write down the value of our goodwill and other intangible assets, and may otherwise adversely impact our results of operations, our cash flows and our financial position. Overview Current and expected future pricing for WTI crude oil, along with a belief that regulatory access will be allowed, are factors that will continue to influence our customers' willingness to invest in U.S. shale play developments as they allocate capital and strive for financial discipline and spending levels that are within their capital budgets and cash flows. Expectations for the longer-term price for Brent crude oil will continue to influence our customers' spending related to global offshore drilling and development and, thus, a significant portion of the activity of our Offshore/Manufactured Products segment. Crude oil prices are likely to remain highly volatile due to numerous factors, including global uncertainties related to the COVID-19 pandemic, higher global inventory levels, increasing domestic or international crude oil production, changes in governmental regulations, trade tensions with China, sanctions on Iranian production and tensions with Iran, civil unrest in Libya and Venezuela, use of alternative fuels, improved vehicle fuel efficiency, a more sustained movement to electric vehicles and/or the potential for ongoing supply/demand imbalances. Capital investment by our customers is at a 15-year low. This underinvestment coupled with potential instability in foreign producing nations could lead to a sustained recovery in WTI and Brent crude oil prices as demand recovers following the pandemic. In any event, crude oil price improvements will depend upon the balance of global supply and demand, with a corresponding continued reduction in global inventories. Customer spending in the natural gas shale plays has been limited due to significant technological advancements that have led to significant amounts of natural gas being produced from prolific basins in the Northeastern United States and from associated gas produced from the drilling and completion of unconventional oil wells in North America. -36- Recent WTI crude oil, Brent crude oil and natural gas pricing trends are as follows: Average price (1) for quarter ended Average price (1) for year ended December 31 Year March 31 June 30 September 30 December 31 WTI Crude (per bbl) 2020 $ 45.34 $ 27.96 $ 40.89 $ 42.52 $ 39.16 2019 54.82 59.88 56.34 56.82 56.98 2018 62.91 68.07 69.70 59.97 65.25 Brent Crude (per bbl) 2020 $ 50.27 $ 29.70 $ 42.91 $ 44.32 $ 41.96 2019 63.10 69.01 61.95 63.17 64.26 2018 66.86 74.53 75.08 68.76 71.32 Henry Hub Natural Gas (per MMBtu) 2020 $ 1.91 $ 1.70 $ 2.00 $ 2.52 $ 2.03 2019 2.92 2.57 2.38 2.40 2.56 2018 3.08 2.85 2.93 3.77 3.15 ____________________ (1) Source: U.S. Energy Information Administration. As of February 12, 2021, WTI crude oil, Brent crude oil and natural gas traded at $59.50 per barrel, $62.47 per barrel and $6.12 per MMBtu, respectively. U.S. drilling and completion activity and, in turn, our financial results, are sensitive to near-term fluctuations in commodity prices, particularly WTI crude oil prices, given the short-term, call-out nature of our U.S. operations. We primarily supply equipment and service personnel utilized in the completion and initial production of new and recompleted wells. Our U.S. activity is dependent primarily upon the level and complexity of drilling, completion, and workover activity in our areas of operations. Well intensity and complexity has increased with the continuing transition to multi-well pads, the drilling of longer lateral wells and increased downhole pressures, along with the increased number of frac stages completed in horizontal wells. Our Downhole Technologies segment, comprised of the GEODynamics business we acquired in January 2018, provides oil and gas perforation systems, downhole tools and services in support of completion, intervention, wireline and well abandonment operations. This segment designs, manufactures and markets its consumable engineered products to oilfield service as well as exploration and production companies. Product and service offerings for this segment include innovations in perforation technology through patented and proprietary systems combined with advanced modeling and analysis tools. This expertise has led to the optimization of perforation hole size, depth, and quality of tunnels, which are key factors for maximizing the effectiveness of hydraulic fracturing. Additional offerings include proprietary toe valve and frac plug products, which are focused on zonal isolation for hydraulic fracturing of horizontal wells, and a broad range of consumable products, such as setting tools and bridge plugs, that are used in completion, intervention and decommissioning applications. Demand drivers for the Downhole Technologies segment include continued trends toward longer lateral lengths, increased frac stages and more perforation clusters to target increased unconventional well productivity, which requires ongoing technological and product developments. Demand for our completion products and services within each of our segments is highly correlated to changes in the total number of wells drilled in the United States, total footage drilled, the number of drilled wells that are completed and changes in the drilling rig count. The following table sets forth a summary of the average U.S. drilling rig count, as measured by Baker Hughes, for the periods indicated. As of February 12, 2021 Average Rig Count for Year Ended December 31, 2020 2019 2018 Land – Oil 288 329 753 826 Land – Natural gas and other 91 87 165 185 Offshore 18 17 25 21 Total 397 433 943 1,032 The U.S. energy industry is primarily focused on crude oil and liquids-rich exploration and development activities in U.S. shale plays utilizing horizontal drilling and completion techniques. As of December 31, 2020, oil-directed drilling accounted for 76% of the total U.S. rig count – with the balance largely natural gas related. Due to the unprecedented decline in crude oil prices in March and April of 2020, drilling and completion activity in the United States collapsed – with the active drilling rig count declining 52% from March 31, 2020 to 351 rigs working as of December 31, 2020. As a result, the average U.S. rig count in 2020 decreased by 510 rigs, or 54%, from the 2019 average. -37- Our Offshore/Manufactured Products segment provides technology-driven, highly-engineered products and services for offshore oil and natural gas production systems and facilities, as well as certain products and services to the offshore and land-based drilling and completion markets. This segment is particularly influenced by global spending on deepwater drilling and production, which is primarily driven by our customers' longer-term commodity demand forecasts and outlook for crude oil and natural gas prices. Approximately 49% of Offshore/Manufactured Products sales in 2020 were driven by our customers' capital spending for products used in exploratory and developmental drilling, greenfield offshore production infrastructure, and subsea pipeline tie-in and repair system applications, along with upgraded equipment for existing offshore drilling rigs and other vessels (referred to herein as "project-driven products"). Deepwater oil and gas development projects typically involve significant capital investments and multi-year development plans. Such projects are generally undertaken by larger exploration, field development and production companies (primarily international oil companies ("IOCs") and state-run national oil companies ("NOCs")) using relatively conservative crude oil and natural gas pricing assumptions. Given the long lead times associated with field development, we believe some of these deepwater projects, once approved for development, are generally less susceptible to short-term fluctuations in the price of crude oil and natural gas. Customers have focused on improving the economics of major deepwater projects at lower commodity breakeven prices by re-bidding projects, identifying advancements in technology, and reducing overall project costs through equipment standardization. Bidding and quoting activity, along with orders from customers, for deepwater projects improved in 2019 from 2018 levels. However, with reduced market visibility given the significant decline in crude oil prices, which began in March of 2020, and associated reductions in customer spending, the segment's 2020 bookings were lower than the levels achieved in 2019. Backlog reported by our Offshore/Manufactured Products segment decreased from $280 million as of December 31, 2019 to $219 million as of December 31, 2020. The following table sets forth backlog reported by our Offshore/Manufactured Products segment as of the dates indicated (in millions). Backlog as of Year March 31 June 30 September 30 December 31 2020 $ 267 $ 235 $ 227 $ 219 2019 234 283 293 280 2018 157 165 175 179 Reduced demand for our products and services, coupled with a reduction in the prices we are able to charge our customers for our products and services, has adversely affected our results of operations, cash flows and financial position. While the current pricing environment for crude oil has improved from the levels experienced in 2020, if prices were to decline, our customers may be required to further reduce their capital expenditures, causing additional declines in the demand for, and prices of, our products and services, which would adversely affect our results of operations, cash flows and financial position. We use a variety of domestically produced and imported raw materials and component products, including steel, in manufacturing our products. The United States has imposed tariffs on a variety of imported products, including steel and aluminum. In response to the U.S. tariffs on steel and aluminum, the European Union and several other countries, including Canada and China, have threatened and/or imposed retaliatory tariffs. The effect of these tariffs and the application and interpretation of existing trade agreements and customs, anti-dumping and countervailing duty regulations continue to evolve, and we continue to monitor these matters. If we encounter difficulty in procuring these raw materials and component products, or if the prices we have to pay for these products increase as a result of customs, anti-dumping and countervailing duty regulations or otherwise, and we are unable to pass corresponding cost increases on to our customers, our financial position and results of operations could be adversely affected. Furthermore, uncertainty with respect to potential costs in the drilling and completion of oil and gas wells could cause our customers to delay or cancel planned projects which, if this occurred, would adversely affect our financial position, cash flows and results of operations. See Note 14, "Commitments and Contingencies," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for further discussion. Other factors that can affect our business and financial results include but are not limited to the general global economic environment, competitive pricing pressures, public health crises, climate-related and other regulatory changes, and changes in tax laws in the United States and international markets. We continue to monitor the global economy, the demand for and prices of crude oil and natural gas, and the resultant impact on the capital spending plans and operations of our customers in order to plan and manage our business. -38- Consolidated Results of Operations We manage and measure our business performance in three operating segments: Well Site Services, Downhole Technologies and Offshore/Manufactured Products. Selected financial information by business segment for the years ended December 31, 2020 and 2019 follows (in thousands): Year Ended December 31, 2020 2019 Variance 2020 vs. 2019 Revenues Well Site Services - Completion Services $ 191,529 $ 390,748 $ (199,219) Drilling Services (1) 8,310 41,346 (33,036) Total Well Site Services 199,839 432,094 (232,255) Downhole Technologies 97,936 182,314 (84,378) Offshore/Manufactured Products - Project-driven products 165,497 159,205 6,292 Short-cycle products 48,142 123,222 (75,080) Other products and services 126,661 120,519 6,142 Total Offshore/Manufactured Products 340,300 402,946 (62,646) Total $ 638,075 $ 1,017,354 $ (379,279) Operating income (loss) Well Site Services - Completion Services (2) $ (187,869) $ (11,621) $ (176,248) Drilling Services (1) (5,519) (43,419) 37,900 Total Well Site Services (193,388) (55,040) (138,348) Downhole Technologies (3) (224,414) (164,008) (60,406) Offshore/Manufactured Products (4) (80,794) 36,022 (116,816) Corporate (35,744) (45,154) 9,410 Total (5) $ (534,340) $ (228,180) $ (306,160) ____________________ (1) In late 2019, we reduced the scope of our Drilling Services business due to weakness in customer demand for vertical drilling rigs in the U.S., resulting in a non-cash fixed asset impairment charge of $33.7 million in 2019. Operating loss included a non-cash fixed asset impairment charge of $5.2 million in 2020. (2) Operating loss in 2020 included a non-cash inventory impairment charge of $9.0 million, a non-cash goodwill impairment charge of $127.1 million and a non-cash fixed asset impairment charge of $3.6 million. (3) Operating loss in 2020 and 2019 included non-cash goodwill impairment charges of $192.5 million and $165.0 million, respectively. Operating loss in 2020 also included a non-cash inventory impairment charge of $5.9 million and other non-cash asset impairment charges of $3.6 million. (4) Operating loss in 2020 included a non-cash inventory impairment charge of $16.2 million and a non-cash goodwill impairment charge of $86.5 million. (5) Operating loss included non-cash asset impairment charges totaling $449.7 million and $198.7 million in 2020 and 2019, respectively. See Note 3, "Asset Impairments and Other Charges," Note 4, "Details of Selected Balance Sheet Accounts," Note 6, "Goodwill and Other Intangible Assets," and Note 8, "Operating Leases," to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion of these and other charges recognized in 2020 and 2019. -39- YEAR ENDED DECEMBER 31, 2020 COMPARED TO YEAR ENDED DECEMBER 31, 2019 We reported a net loss for the year ended December 31, 2020 of $468.4 million, or $7.83 per share. The reported loss included non-cash impairment charges totaling $449.7 million ($421.5 million after tax, or $7.04 per share) related to write downs of goodwill, inventories, fixed assets and leases; $9.1 million ($7.2 million after-tax, or $0.12 per share) of severance and restructuring charges; non-cash gains of $10.7 million ($8.5 million after-tax, or $0.14 per share) associated with convertible debt extinguishment; and discrete tax benefits of $16.4 million, or $0.27 per share, associated with the carryback of tax losses allowed under the CARES Act. These results compare to a net loss for the year ended December 31, 2019 of $231.8 million, or $3.90 per share, which included non-cash goodwill and fixed asset impairment charges totaling $198.7 million ($191.6 million after-tax, or $3.23 per share), and $3.5 million ($2.8 million after-tax, or $0.05 per share) of severance and restructuring charges. Our reported results of operations for 2020 reflect the negative impact of the unprecedented decline in crude oil prices starting in March and April of 2020 stemming from the global response to the COVID-19 pandemic and ongoing uncertainties related to future crude oil demand. The spot price of WTI crude oil averaged $39 per barrel in 2020, down 31% from the prior-year average. The decline in crude oil prices, coupled with high crude oil inventory levels, had a negative impact on customer drilling, completion and production activity beginning in March of 2020. Additionally, our operations were negatively impacted by government-imposed business closures and mandates outside of the United States enacted in an effort to control the COVID-19 pandemic, which limited wellsite operations and required us and a number of our suppliers to temporarily cease certain operations. We expect customer-driven activity to improve off of 2020's low levels but remain tempered in 2021 given continued high crude oil inventory levels and uncertainty around demand recovery due to the continued severity of the COVID-19 pandemic. If the current pricing environment for crude oil does not continue to improve, or declines, our customers may be required to further reduce their planned capital expenditures, causing additional declines in the demand for, and prices of, our products and services. Revenues. Consolidated total revenues in 2020 decreased $379.3 million, or 37%, from 2019. Consolidated product revenues in 2020 decreased $152.1 million, or 31%, from 2019 driven primarily by lower U.S. land-based customer activity as well as the associated impact of competitive pricing pressures for products in our Downhole Technologies segment, partially offset by higher project-driven sales in our Offshore/Manufactured Products segment. Consolidated service revenues for 2020 decreased $227.2 million, or 43%, from 2019 due primarily to reduced customer spending in the U.S. shale play regions. As can be derived from the following table, 54% of our consolidated revenues in 2020 were related to our short-cycle product and service offerings, which compared to 73% in 2019, reflecting the negative impact of the COVID-19 pandemic on our U.S. operations. The following table provides supplemental disaggregated revenue information by operating segment for the years ended December 31, 2020 and 2019 (in thousands): Well Site Services Downhole Technologies Offshore/ Manufactured Products Total 2020 2019 2020 2019 2020 2019 2020 2019 Major revenue categories - Project-driven products $ — $ — $ — $ — $ 165,497 $ 159,205 $ 165,497 $ 159,205 Short-cycle: Completion products and services 191,529 390,748 97,936 182,314 26,148 95,806 315,613 668,868 Drilling services 8,310 41,346 — — — — 8,310 41,346 Other products — — — — 21,994 27,416 21,994 27,416 Total short-cycle 199,839 432,094 97,936 182,314 48,142 123,222 345,917 737,630 Other products and services — — — — 126,661 120,519 126,661 120,519 $ 199,839 $ 432,094 $ 97,936 $ 182,314 $ 340,300 $ 402,946 $ 638,075 $ 1,017,354 Percentage of total revenue by type - Products — % — % 93 % 97 % 71 % 76 % 52 % 48 % Services 100 % 100 % 7 % 3 % 29 % 24 % 48 % 52 % -40- Cost of Revenues (exclusive of Depreciation and Amortization Expense). Our consolidated total cost of revenues (exclusive of depreciation and amortization expense) decreased $240.8 million, or 30%, in 2020 compared to 2019. Cost of revenues in 2020 included non-cash inventory impairment provisions totaling $31.2 million – driven by the unprecedented market downturn which began in March of 2020. Excluding these 2020 provisions, consolidated cost of revenues decreased $271.9 million, or 34%, from 2019. Consolidated product costs in 2020, which included non-cash inventory impairment provisions of $17.9 million, decreased $81.6 million, or 22%, from 2019. Excluding these charges, consolidated product costs decreased $99.5 million, or 27%, from the prior-year period. Consolidated service costs for 2020, which included non-cash inventory impairment provisions of $13.3 million, decreased $159.2 million, or 37%, from 2019. Excluding these inventory impairment provisions, consolidated service costs declined $172.5 million, or 40%, due primarily to significantly lower activity levels in the U.S. shale play regions. Selling, General and Administrative Expense. Selling, general and administrative expense decreased $28.8 million, or 23%, in 2020 from 2019 due primarily to reductions in short- and long-term compensation costs, personnel levels, travel expense and other implemented cost-saving initiatives. Depreciation and Amortization Expense. Depreciation and amortization expense decreased $24.8 million, or 20%, in 2020 compared to the prior-year period, driven primarily by our decision to exit drilling operations in West Texas in the third quarter of 2019 along with reduced capital investments made in our Completion Services business in recent years. See Note 15, "Segments and Related Information," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for expense by segment. Impairments of Goodwill. During the first quarter of 2020, our Completion Services, Downhole Technologies and Offshore/Manufactured Products operations recognized non-cash goodwill impairment charges of $127.1 million, $192.5 million and $86.5 million, respectively, arising from, among other factors, the significant decline in our stock price (and that of most of our peers) and reduced growth rate expectations given weak energy market conditions resulting from the demand destruction caused by the global response to the COVID-19 pandemic. In addition, the estimated returns required by market participants increased materially in our March 31, 2020 assessment from our assessment as of December 1, 2019, resulting in higher discount rates used in the discounted cash flow analysis. During the fourth quarter of 2019, our Downhole Technologies segment recognized a non-cash goodwill impairment charge of $165.0 million. See Note 6, "Goodwill and Other Intangible Assets," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for further discussion. Impairments of Fixed and Lease Assets. During 2020, our Drilling Services, Completion Services and Downhole Technologies businesses recognized non-cash fixed asset and lease impairment charges of $5.2 million, $3.6 million and $3.6 million, respectively, following the significant decline in crude oil prices beginning in March of 2020 and our decisions to consolidate and exit certain facilities. During the third quarter of 2019, we made the strategic decision to reduce the scope of our Drilling Services business due to ongoing weakness in customer demand for vertical drilling rigs in the U.S. land market. As a result of this decision, our Drilling Services business recorded a non-cash impairment charge of $33.7 million. See Note 4, "Details of Selected Balance Sheet Accounts," and Note 8, "Operating Leases," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for further discussion. Operating Loss. Our consolidated operating loss was $534.3 million in 2020, which included $418.5 million in non-cash goodwill, inventory, fixed asset and lease impairment charges and $9.1 million of severance and restructuring charges. This compares to a consolidated operating loss of $228.2 million in 2019, which included $198.7 million in non-cash goodwill and fixed asset impairment charges and $3.5 million of severance and restructuring charges. Interest Expense, Net. Net interest expense totaled $13.9 million in 2020, a decrease of $3.8 million from 2019 due to reductions in the level of debt outstanding. Interest expense, which included amortization of debt discount and deferred financing costs, as a percentage of total average debt outstanding was approximately 6% in both 2020 and 2019. Our contractual cash interest expense as a percentage of total debt outstanding was substantially lower – averaging approximately 2% in 2020 and 3% in 2019. In connection with our adoption of the recent revision to accounting guidance for convertible instruments on January 1, 2021, interest expense associated with the Notes in 2021 will decrease to approximately 2% of the outstanding principal balance, which compares to the contractual interest rate of 1.50%. Additionally, we expect to recognize a non-cash expense of approximately $0.6 million for previously deferred financing costs associated with our Amended Revolving Credit Facility that will be written off in the first quarter of 2021. Other Income, Net. Other income, net in 2020 included non-cash gains of $10.7 million recognized in connection with purchases of $34.9 million principal amount of the Notes for $20.1 million in cash, with the balance consisting primarily of gains recognized on the sale of property and equipment. -41- Income Tax. Our income tax benefit for 2020 totaled $65.9 million on a pre-tax loss of $534.3 million, which included non-cash goodwill impairment charges (approximately $313.1 million) and other expenses that are not deductible for tax purposes. The impact of these non-deductible expenses was partially offset by $16.4 million in discrete tax benefits related to the carryback of U.S. federal net operating losses under the CARES Act. This compares to an income tax benefit for 2019 of $8.9 million on a pre-tax loss of $240.7 million, which included a non-cash goodwill impairment charge of $165.0 million and other expenses that are not deductible for tax purposes. Other Comprehensive Income (Loss). Reported comprehensive loss is the sum of the reported net income (loss) and other comprehensive income (loss). Other comprehensive loss was $3.6 million in 2020 compared to other comprehensive income of $3.7 million in 2019 due to fluctuations in foreign currency exchange rates compared to the U.S. dollar for certain of the international operations of our reportable segments. For 2020 and 2019, currency translation adjustments recognized as a component of other comprehensive income (loss) were primarily attributable to the United Kingdom and Brazil. During both 2020 and 2019, the exchange rate for the British pound strengthened compared to the U.S. dollar, while the Brazilian real weakened compared to the U.S. dollar. Segment Operating Results Well Site Services Revenues. Our Well Site Services segment revenues decreased $232.3 million, or 54%, in 2020 compared to 2019. Completion Services revenue decreased $199.2 million, or 51%, driven by the decline in U.S. land-based customer completion and production activity in response to lower commodity prices. Our Drilling Services revenues decreased $33.0 million, or 80%, year-over-year due primarily to our exit of drilling operations in the West Texas region in the fourth quarter of 2019. Operating Loss. During 2020 and 2019, our Well Site Services segment recorded non-cash impairment charges totaling $144.9 million and $33.7 million, respectively. Excluding these impairment charges, our Well Site Services segment operating loss increased $27.2 million in 2020 from 2019. Our Completion Services operating loss in 2020, after excluding non-cash impairment charges, was $48.2 million, compared to an operating loss of $11.6 million in the prior-year period, given a 51% decrease in revenues and $4.1 million of severance and restructuring charges partially offset by a $15.5 million reduction in depreciation expense. After excluding non-cash fixed asset impairment charges, our Drilling Services operating loss in 2020 was $0.3 million, compared to an operating loss of $9.7 million in the prior-year period. Downhole Technologies Revenues. Our Downhole Technologies segment revenues decreased $84.4 million, or 46%, in 2020 compared to 2019 due primarily to a decline in U.S. land-based customer completion activity and competitive pricing pressures. Operating Income (Loss). During 2020, our Downhole Technologies segment recorded a non-cash goodwill impairment charge of $192.5 million, a non-cash inventory impairment charge of $5.9 million, non-cash fixed asset and lease impairment charges of $3.6 million and severance and restructuring charges of $2.0 million. During 2019, the segment recognized a non-cash goodwill impairment charge of $165.0 million. Excluding the impairment charges, operating income declined $23.4 million in 2020 from 2019 due primarily to a 46% decline in revenues, partially offset by the benefit of cost reduction measures in 2020. Offshore/Manufactured Products Revenues. Given backlog entering the year, our Offshore/Manufactured Products segment revenues were more resilient and only declined $62.6 million, or 16%, in 2020 compared to 2019 with a significant reduction in sales of our short-cycle products (elastomer and valve products), partially offset by an increase in project-driven product sales. Operating Income (Loss). During 2020, our Offshore/Manufactured Products segment recorded non-cash impairment charges of $86.5 million related to goodwill and $16.2 million related to inventory. Excluding these charges, our Offshore/Manufactured Products segment operating income decreased $14.1 million, or 39%, in 2020 compared to 2019. Backlog. Backlog in our Offshore/Manufactured Products totaled $219 million as of December 31, 2020, a decrease of 22% from December 31, 2019. Orders totaled $286 million in 2020, yielding in a book-to-bill ratio of 0.8x. Corporate Corporate expenses decreased $9.4 million, or 21%, in 2020 from 2019 due primarily to personnel reductions as well as reductions in short- and long-term compensation and other implemented cost reduction measures. -42- Liquidity, Capital Resources and Other Matters Our primary liquidity needs are to fund operating and capital expenditures, new product development and general working capital needs. In addition, capital has been used to fund strategic business acquisitions, repay debt and fund share repurchases. Our primary sources of funds are cash flow from operations, proceeds from borrowings under our credit facilities and, less frequently, capital market transactions. Operating Activities Cash flows from operations totaling $132.8 million were generated during the year ended December 31, 2020 compared to $137.4 million provided by operations during 2019. During 2020, $69.7 million was provided from net working capital decreases, primarily due to collections of accounts receivable and an increase in deferred revenue, partially offset by decreases in accounts payable and accrued liabilities. Additionally, we filed carryback claims regarding U.S. net operating losses generated in 2018 and 2019 in accordance with the rules and provisions of the CARES Act and received cash of $41.3 million, which benefited our cash flow from operations. During 2019, $39.3 million was provided from net working capital decreases, with a reduction in accounts receivable partially offset by an increase in inventories. Investing Activities Net cash of $3.7 million was used in investing activities during the year ended December 31, 2020, compared to $52.0 million used during 2019. Capital expenditures totaled $12.7 million and $56.1 million during the years ended December 31, 2020 and 2019, respectively, while proceeds from the sale of property and equipment totaled $9.6 million and $6.0 million, respectively. We expect to spend approximately $15 million in total capital expenditures during 2021. Whether planned expenditures will actually be made in 2021 depends on industry conditions, project approvals and schedules, vendor delivery timing, free cash flow generation and careful monitoring of our levels of liquidity. We plan to fund these capital expenditures with available cash, internally generated funds and, if necessary, borrowings under our Asset-based Revolving Credit Facility (as discussed below). Financing Activities Net cash of $65.0 million was used in financing activities during the year ended December 31, 2020, primarily associated with a $32.9 million reduction in bank debt and our purchases of $34.9 million principal amount of the Notes for cash totaling $20.1 million. Net cash of $95.9 million was used in financing activities during the year ended December 31, 2019, primarily associated with the repayment of $84.2 million, net in borrowings under our Revolving Credit Facility and the repurchase at a discount of $7.8 million principal amount of the Notes for cash totaling $6.7 million. As of December 31, 2020, we had cash on-hand of $72.0 million, compared to $8.5 million as of December 31, 2019. As of December 31, 2020, we had $19.0 million outstanding under our Amended Revolving Credit Facility and $157.4 million principal amount of the Notes outstanding. Our reported interest expense, which included non-cash amortization of debt discount and deferred financing costs of $7.7 million, is substantially above our contractual cash interest expense. For 2020, our contractual interest expense was $6.2 million, or approximately 2% of the average principal balance of debt outstanding. We believe that cash on-hand, cash flow from operations and borrowing capacity available under our Asset-based Revolving Credit Facility will be sufficient to meet our liquidity needs in the coming twelve months. If our plans or assumptions change, or are inaccurate, we may need to raise additional capital. Our ability to obtain capital for additional projects to implement our growth strategy over the longer term will depend upon our future operating performance, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global financial markets, stakeholder scrutiny of environmental, social and governance matters and other factors, many of which are beyond our control. In this regard, the effect of the COVID-19 pandemic has resulted in significant disruption of global financial markets. For companies like ours that support the energy industry, this disruption has been exacerbated by the global crude oil supply and demand imbalance and resulting decline in crude oil prices, which has negatively impacted the value of our common stock; has and may continue to reduce our ability to -43- access capital in the bank and capital markets; and has and may continue to result in such capital being available on less favorable terms, which could in the future negatively affect our liquidity. Asset-based Revolving Credit Facility. On February 10, 2021, we entered into a senior secured credit facility with certain lenders, which provides for a $125.0 million asset-based revolving credit facility (the "Asset-based Revolving Credit Facility") under which credit availability is subject to a borrowing base calculation. Concurrent with entering into the Asset-based Revolving Credit Facility, the Amended Credit Agreement was terminated. The Asset-based Revolving Credit Facility is governed by a credit agreement with Wells Fargo Bank, National Association, as administrative agent and the lenders and other financial institutions from time to time party thereto (the "Asset-based Credit Agreement"). The Asset-based Credit Agreement matures on February 10, 2025 with a springing maturity 91 days prior to the maturity of any outstanding indebtedness with a principal amount in excess of $17.5 million (excluding the unsecured promissory note to the seller of GEODynamics ). The Asset-based Credit Agreement provides funding based on a borrowing base calculation that includes eligible U.S. customer accounts receivable and inventory and provides for a $50.0 million sub-limit for the issuance of letters of credit. Borrowings under the Asset-based Credit Agreement are secured by a pledge of substantially all of our domestic assets and the stock of certain foreign subsidiaries. Borrowings under the Asset-based Credit Agreement bear interest at a rate equal to the London Interbank Offered Rate ("LIBOR") plus a margin of 2.75% to 3.25% and subject to a LIBOR floor rate of 0.50%, or at a base rate plus a margin of 1.75% to 2.25%, in each case based on average borrowing availability. We must also quarterly pay a commitment fee of 0.375% to 0.50% per annum, based on unused commitments under the Asset-based Credit Agreement. The Asset-based Credit Agreement places restrictions on our ability to incur additional indebtedness, grant liens on assets, pay dividends or make distributions on equity interests, dispose of assets, make investments, repay other indebtedness (including the Notes), engage in mergers, and other matters, in each case, subject to certain exceptions. The Asset-based Credit Agreement contains customary default provisions, which, if triggered, could result in acceleration of all amounts then outstanding. The Asset-based Credit Agreement also requires us to satisfy and maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 for specified periods of time in the event that availability under the Asset-based Credit Agreement is less than the greater of 15% of the borrowing base and $14.1 million or if an event of default has occurred and is continuing. See Note 7, "Long-term Debt," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for further information regarding the terms of the Asset-based Credit Agreement. As of February 10, 2021, we had $12.1 million of borrowings outstanding under the Asset-based Revolving Credit Facility and $29.0 million of outstanding letters of credit. The total amount available to be drawn as of February 10, 2021 was approximately $29 million, calculated based on an initial borrowing base less outstanding borrowings and letters of credit. Revolving Credit Facility. Until its termination on February 10, 2021, our former senior secured revolving credit facility (the "Revolving Credit Facility") was governed by an amended and restated credit agreement by and among the Company, Wells Fargo Bank, N.A., as administrative agent for the lenders party thereto and the lenders and other financial institutions from time to time party thereto, dated as of January 30, 2018 (the "Credit Agreement"), which was scheduled to mature on January 30, 2022. Prior to June 17, 2020, our Revolving Credit Facility provided for up to $350 million in lender commitments, including $50 million for the issuance of letters of credit. On June 17, 2020, we entered into an omnibus amendment to the Credit Agreement (as amended, the "Amended Credit Agreement"). Lender commitments under the Amended Credit Agreement were reduced to $200 million in exchange for the suspension of the financial covenants from July 1, 2020 through March 30, 2021. During the financial covenant suspension period, borrowing availability under the Revolving Credit Facility (as amended, the "Amended Revolving Credit Facility") was limited to 85% of the lesser of (i) $200 million or (ii) a borrowing base, calculated monthly, equal to the sum of 70% of the consolidated net book value of eligible receivables and 20% of the consolidated net book value of eligible inventory (the "Borrowing Base"). We expensed approximately $0.5 million of previously deferred financing costs in 2020, which is included in interest expense, net as a result of the amendment of the Credit Agreement. See Note 7, "Long-term Debt," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for further information regarding the terms of the Credit Agreement and the amendment thereto. -44- As of December 31, 2020, we had $19.0 million of borrowings outstanding under the Amended Revolving Credit Facility and $29.2 million of outstanding letters of credit. The total amount available to be drawn as of January 1, 2021 was $69.3 million, calculated based on 85% of the Borrowing Base less outstanding borrowings and letters of credit. 1.50% Convertible Senior Notes due February 2023. On January 30, 2018, we issued $200.0 million aggregate principal amount of the Notes pursuant to an indenture, dated as of January 30, 2018 (the "Indenture"), between us and Wells Fargo Bank, N.A., as trustee. The Indenture contains certain events of default, including certain defaults by us with respect to other indebtedness of at least $40.0 million. During 2020, we opportunistically purchased $34.9 million principal amount of the outstanding Notes for $20.1 million in cash, which was $10.7 million below the net carrying amount of the related liability, resulting in the recognition of non-cash gains. During 2019, we repurchased $7.8 million principal amount of the outstanding Notes for $6.7 million, which approximated the carrying amount of the related liability. The initial carrying amount of the Notes recorded in the consolidated balance sheet as of January 30, 2018 was less than the $200.0 million in principal amount of the Notes, reflective of the estimated fair value of a similar debt instrument that does not have a conversion feature. We recorded the value of the conversion feature as a debt discount at the date of issuance, to be amortized as interest expense over the term of the Notes, with a similar amount allocated to additional paid-in capital. As a result of this amortization of debt discount, interest expense recognized on the Notes for accounting purposes, reflecting an effective interest rate of approximately 6%, is greater than the cash interest payments we are obligated to pay on the Notes. Interest expense associated with the Notes for 2020 and 2019 was $9.3 million and $10.2 million, respectively, while the related cash interest expense was $2.6 million and $3.0 million, respectively. As of December 31, 2020, none of the conditions allowing holders of the Notes to convert, or requiring us to repurchase the Notes, had been met. See Note 7, "Long-term Debt," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for further information regarding the Notes. See Note 2, "Summary of Significant Accounting Policies," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for discussion of the recent revision to accounting guidance for convertible instruments, which changed our method of accounting for the Notes upon our adoption of the standard effective January 1, 2021. Promissory Note. In connection with the GEODynamics Acquisition, we issued a $25.0 million promissory note that bears interest at 2.5% per annum and was scheduled to mature on July 12, 2019. We believe that payments due under the promissory note are subject to set-off, in full or in part, against certain claims related to matters occurring prior to the GEODynamics Acquisition. We have provided notice to and asserted indemnification claims against the seller of GEODynamics (the "Seller"), and the Seller has filed a breach of contract suit against us and one of our wholly-owned subsidiaries alleging that payments due under the promissory note are required to be, but have not been, repaid in accordance with the terms of the note. We have incurred settlement costs and expenses of $7.9 million related to such indemnification claims and we believe that the maturity date of the note is extended until these claims are resolved. Accordingly, we have reduced the carrying amount of such note in our consolidated balance sheet to $17.1 million as of December 31, 2020, which is our current best estimate of what is owed after set-off for indemnification matters. See Note 14, "Commitments and Contingencies," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K. Our total debt represented 20% of our combined total debt and stockholders' equity as of December 31, 2020 compared to 17% as of December 31, 2019. Stock Repurchase Program. We historically maintained a share repurchase program, which was allowed to expire on July 29, 2020. During 2020, we did not repurchase any shares of our common stock under the program. During 2019, we repurchased approximately 51 thousand shares of our common stock under the program at a total cost of $0.8 million. -45- Contractual Obligations. The following summarizes our contractual obligations as of December 31, 2020, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years (in thousands): Payments due by period Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years Contractual obligations Revolving Credit Facility (1) $ 19,000 $ — $ 19,000 $ — $ — 1.50% convertible senior notes due February 2023 (2) 163,270 2,361 160,910 — — Promissory note (3) 18,422 18,422 — — — Other debt and finance lease obligations 4,792 683 1,220 997 1,892 Operating lease liabilities (4) 43,841 9,293 11,738 9,023 13,787 Purchase obligations (5) 50,694 49,975 719 — — Total contractual cash obligations $ 300,019 $ 80,734 $ 193,587 $ 10,020 $ 15,679 ____________________ (1) Excludes interest on the variable-rate debt, which was scheduled to mature in January 2022. Since we cannot predict with any certainty the amount of interest due on our revolving debt due to the expected variability of interest rates and principal amounts outstanding, we do not include this in our obligations. If we assume interest payment amounts are calculated using the outstanding principal balances and interest rates as of December 31, 2020 and include applicable commitment fees, estimated interest payments on our variable-rate debt would be $0.7 million "due in less than one year" and $0.1 million "due in one to three years." As discussed above, we entered into a new Asset-based Revolving Credit Facility on February 10, 2021, which matures in February 2025. Concurrent with entering into the Asset-based Revolving Credit Facility, borrowings under the Amended Revolving Credit Facility were repaid and the related agreement was terminated. See Note 7, "Long-term Debt," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for additional information. (2) Amount represents the full principal amount of the Notes together with cash interest payments due semi-annually. (3) Amount represents the net principal amount of the $25 million promissory note together with accrued and unpaid interest as of February 22, 2021. The $25 million promissory note (together with accrued and unpaid interest) issued in connection with the GEODynamics Acquisition was scheduled to mature on July 12, 2019. We believe that payments due under the promissory note are subject to set-off, in full or in part, against certain claims related to matters occurring prior to the GEODynamics Acquisition. As more fully described in Note 14, "Commitments and Contingencies," to the Consolidated Financial Statements, we have provided notice to and asserted indemnification claims against the Seller, and the Seller has filed a breach of contract suit against us alleging that payments due under the promissory note are required to be, but have not been, repaid in accordance with the terms of the note. As a result, we believe that the maturity date of the note is extended until the resolution of the claims and we expect that the amount ultimately paid in respect of such note will be reduced as a result of these indemnification claims. Accordingly, we have reduced the carrying amount of such note in our consolidated balance sheet to $17.1 million as of December 31, 2020, which is our current best estimate of what is owed after set-off for indemnification matters. (4) Amount represents the payment obligations (including implied interest) for operating leases with an initial term of greater than 12 months. Operating lease obligations are recorded in the consolidated balance sheet as operating lease liabilities while the right-of-use assets are included within operating lease assets. (5) Our purchase obligations primarily relate to open purchase orders in our Offshore/Manufactured Products and Completion Services operations. Contingencies and Other Obligations. We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters, including occasional claims by individuals alleging exposure to hazardous materials as a result of our products or operations. Some of these claims relate to matters occurring prior to the acquisition of businesses, and some relate to businesses we have sold. In certain cases, we are entitled to indemnification from the sellers of businesses and, in other cases, we have indemnified the buyers of businesses. In addition, the Seller in the GEODynamics Acquisition filed a breach of contract suit against us in federal court in August 2020, in which the Seller alleged, among other contractual breaches, that it was entitled to approximately $19 million in U.S. federal income tax carryback claims we received under the provisions of the CARES Act legislation. On February 15, 2021, the Seller dismissed the federal lawsuit without prejudice and refiled in state court. Although we can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by indemnity or insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. See Note 14, "Commitments and Contingencies," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for further discussion. -46- Effects of Inflation Our revenues and results of operations have not been materially impacted by inflation in the past three fiscal years. Off-Balance Sheet Arrangements As of December 31, 2020, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S‑K. Tariffs We use a variety of domestically produced and imported raw materials and component products, including steel, in the manufacture of our products. In 2018, the United States imposed tariffs on a variety of imported products, including steel and aluminum. In response to the U.S. tariffs on steel and aluminum, the European Union and several other countries, including Canada and China, have threatened and/or imposed retaliatory tariffs. The effect of these tariffs and the application and interpretation of existing trade agreements and customs, anti-dumping and countervailing duty regulations continues to evolve, and we continue to monitor these matters. If we encounter difficulty in procuring these raw materials and component products, or if the prices we have to pay for these products increase further as a result of customs, anti-dumping and countervailing duty regulations or otherwise and we are unable to pass corresponding cost increases on to our customers, our financial position and results of operations could be adversely affected. Furthermore, uncertainty with respect to potential costs in the drilling and completion of oil and gas wells could cause customers to delay or cancel planned projects which, if this occurred, would adversely affect our financial position and results of operations. See Note 14, "Commitments and Contingencies," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for additional discussion. Tax Matters See Note 2, "Summary of Significant Accounting Policies," and Note 9, "Income Taxes," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K for additional information with respect to tax matters. Critical Accounting Policies Our Consolidated Financial Statements included in this Annual Report on Form 10‑K have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), which require that we make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, thus impacting our reported results of operations and financial position. The critical accounting policies and estimates described in this section are those that are most important to the depiction of our financial condition and results of operations and the application of which requires our most subjective judgments in making estimates about the effect of matters that are inherently uncertain. We describe our significant accounting policies more fully in Note 2, "Summary of Significant Accounting Policies," to the Consolidated Financial Statements included in this Annual Report on Form 10‑K. Goodwill and Long-Lived Tangible and Intangible Assets Our goodwill totaled $76.5 million, representing 7% of our total assets as of December 31, 2020. Our long-lived tangible assets totaled $416.7 million, representing 36% of our total assets as of December 31, 2020, and our long-lived intangible assets totaled $205.7 million, representing 18% of our total assets. The remainder of our assets largely consisted of cash, accounts receivable and inventories. Goodwill Goodwill represents the excess after impairments, if applicable, of the purchase price for acquired businesses over the allocated fair value of related net assets. In accordance with current accounting guidance, we do not amortize goodwill, but rather assess goodwill for impairment annually and when an event occurs or circumstances change that indicate the carrying amounts may not be recoverable. In the evaluation of goodwill, each reporting unit with goodwill on its balance sheet is assessed separately using relevant events and circumstances. We estimate the fair value of each reporting unit and compare that fair value to its recorded carrying value. We utilize, depending on circumstances, a combination of valuation methodologies including a market approach and an income approach, as well as guideline public company comparables. Projected cash flows are discounted using a long-term weighted average cost of capital for each reporting unit based on estimates of investment returns that would be required by a market participant. As part of the process of assessing goodwill for potential impairment, our total market capitalization is compared to the sum of the fair values of all reporting units to assess the reasonableness of aggregated fair values. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired and an impairment loss is recorded. -47- December 2019 Impairment During the fourth quarter of 2019, U.S. land-based completion activity declined significantly from levels experienced over the previous three quarters. Additionally, a number of other market indicators declined to levels not experienced in recent years. Consistent with most other oilfield service industry peers, our stock price declined and our market capitalization was below the carrying value of stockholders' equity. Given these market conditions, we reduced our near-term demand outlook for our short-cycle products and services in the U.S. shale play regions. This refined outlook was incorporated in the December 1, 2019 annual impairment assessment. Based on this quantitative assessment, we concluded that the goodwill amount recorded in our Downhole Technologies reporting unit was partially impaired and recognized a non-cash goodwill impairment charge of $165.0 million in the fourth quarter of 2019. The discount rates used to value the our reporting units as of December 1, 2019 ranged between 12.5% and 13.0%. Holding all other assumptions and inputs used in each of the respective discounted cash flow analysis constant, a 50 basis point increase in the discount rate assumption would have increased the goodwill impairment charge by approximately $28 million. March 2020 Impairments In March 2020, the spot price of WTI crude oil declined over 50% in response to current and expected material reductions in global demand stemming from the global response to the COVID-19 pandemic, coupled with announcements by Saudi Arabia and Russia of plans to increase crude oil production. Following this unprecedented collapse in crude oil prices, the spot price of Brent and WTI crude oil closed at $15 and $21 per barrel, respectively, on March 31, 2020. Consistent with oilfield service industry peers, our stock price also declined dramatically during the first quarter of 2020, with our market capitalization falling substantially below the carrying value of stockholders' equity. Given the significance of these March 2020 events, we performed a quantitative assessment of goodwill for further impairment as of March 31, 2020. This interim assessment indicated that the fair value of each of the reporting units was less than their respective carrying amounts due to, among other factors, the significant decline in the our stock price and that of our peers and reduced growth rate expectations given weak energy market conditions resulting from the demand destruction caused by the global response to the COVID-19 pandemic. In addition, the estimated returns required by market participants increased materially in our March 31, 2020 assessment from the assessment performed as of December 1, 2019, resulting in higher discount rates used in the discounted cash flow analysis. Significant assumptions and estimates used in the income approach include, among others, estimated future net annual cash flows and discount rates for each reporting unit, current and anticipated market conditions, estimated growth rates and historical data. These estimates relied upon significant management judgment, particularly given the uncertainties regarding the COVID-19 pandemic and its impact on activity levels and commodity prices as well as future global economic growth. Based on this quantitative assessment as of March 31, 2020, we concluded that goodwill recorded in the Completion Services and Downhole Technologies businesses was fully impaired while goodwill recorded in the Offshore/Manufactured Products business was partially impaired. We therefore recognized non-cash goodwill impairment charges totaling $406.1 million in the first quarter of 2020. The discount rates used to value our reporting units as of March 31, 2020 ranged between 16.8% and 18.5%. Holding all other assumptions and inputs used in the discounted cash flow analysis constant, a 50 basis point increase in the discount rate assumption for the Offshore/Manufactured Products reporting unit would have increased the goodwill impairment charge by approximately $10 million. December 2020 Assessment As of December 1, 2020, we had only one reporting unit – Offshore/Manufactured Products – with a goodwill balance of $76 million. We performed our annual quantitative assessment of goodwill for impairment, which indicated that the fair value of the Offshore/Manufactured Products reporting unit was greater than its carrying amount and no additional provision for impairment was required. The valuation techniques used in the December 1, 2020 assessment were consistent with those used during the March 31, 2020 assessment. The discount rate used to value the Offshore/Manufactured Products reporting unit as of December 1, 2020 was approximately 15%. The estimated returns required by market participants decreased in our December 1, 2020 assessment from our assessment as of March 31, 2020, resulting in lower discount rate used in the discounted cash flow analysis. Holding -48- all other assumptions and inputs used in the discounted cash flow analysis constant, a 100 basis point increase in the discount rate assumption for the Offshore/Manufactured Products reporting unit would not result in a goodwill impairment. As of December 31, 2020, our market capitalization was $306 million, or $452 million below our equity carrying value. The March 2020 and December 2019 goodwill impairment charges did not impact our liquidity position, debt covenants or cash flows. We continue to monitor commodity prices and other significant assumptions used in our forecasts. If we experience a prolonged decline in long-term demand for crude oil and natural gas or significant and sustained increases in commodity supplies, which serve to lower commodity prices over the long term, we will be required to update our discounted cash flow analysis and potentially be required to record a goodwill impairment in the future. Long-Lived Tangible and Intangible Assets An assessment for impairment of long-lived tangible and intangible assets is conducted whenever changes in facts and circumstances indicate a loss in value may have occurred. Indicators of impairment might include persistent negative economic trends affecting the markets we serve, recurring losses or lowered expectations of future cash flows to be generated by our assets. When necessary, the determination of the amount of impairment is based on quoted market prices, if available, or on our judgment as to the future operating cash flows to be generated from these assets throughout their estimated useful lives. During 2020 and 2019, we recognized non-cash asset impairment charges totaling $12.4 million and $33.7 million, respectively, to reduce the carrying value of certain equipment and facilities (owned and leased) to their estimated realizable value. Based on our impairment assessment in 2020, the carrying values of our other long-lived tangible and intangible assets are recoverable and no impairment losses were recorded. However, industry cyclicality and downturns may result in future changes to our estimates of projected operating cash flows, or their timing, and could potentially cause future impairment to the values of our long-lived assets, including finite-lived intangible assets. Revenue and Cost Recognition Our revenue contracts may include one or more promises to transfer a distinct good or service to the customer, which is referred to as a "performance obligation," and to which revenue is allocated. We recognize revenue and the related cost when, or as, the performance obligations are satisfied. The majority of our significant contracts for custom engineered products have a single performance obligation as no individual good or service is separately identifiable from other performance obligations in the contracts. For contracts with multiple distinct performance obligations, we allocate revenue to the identified performance obligations in the contract. Our product sales terms do not include significant post-performance obligations. Our performance obligations may be satisfied at a point in time or over time as work progresses. Revenues from goods and services transferred to customers at a point in time accounted for approximately 38%, 34% and 29% of consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively. The majority of our revenue recognized at a point in time is derived from short-term contracts for standard products offered by us. Revenue on these contracts is recognized when control over the product has transferred to the customer. Indicators we consider in determining when transfer of control to the customer occurs include: right to payment for the product, transfer of legal title to the customer, transfer of physical possession of the product, transfer of risk and customer acceptance of the product. Revenues from products and services transferred to customers over time accounted for approximately 62%, 66% and 71% of consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively. The majority of our revenue recognized over time is for services provided under short-term contracts, with revenue recognized as the customer receives and consumes the services provided by our segments. In addition, we manufacture certain products to individual customer specifications under short-term contracts for which control passes to the customer as the performance obligations are fulfilled and for which revenue is recognized over time. For significant project-related contracts involving custom engineered products within the Offshore/Manufactured Products segment (also referred to as "project-driven products"), revenues are typically recognized over time using an input measure such as the percentage of costs incurred to date relative to total estimated costs at completion for each contract (cost-to-cost method). Contract costs include labor, material and overhead. We believe this method is the most appropriate measure of progress on large contracts. Billings on such contracts in excess of costs incurred and estimated profits are classified as a -49- contract liability (deferred revenue). Costs incurred and estimated profits in excess of billings on these contracts are recognized as a contract asset (a component of accounts receivable). Contract estimates for project-related contracts involving custom engineered products are based on various assumptions to project the outcome of future events that may span several years. Changes in assumptions that may affect future project costs and margins include production efficiencies, the complexity of the work to be performed and the availability and costs of labor, materials and subcomponents. As a significant change in one or more of these estimates could affect the profitability of our contracts, contract-related estimates are reviewed regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss will be incurred on the contract, the loss is recognized in the period it is identified. Cost of goods sold includes all direct material and labor costs and those costs related to contract performance, such as indirect labor, supplies, tools and repairs. As presented on our consolidated statements of operations, costs of goods sold excludes depreciation and amortization expense. Selling, general and administrative costs are charged to expense as incurred. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that we collect from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of products. Proceeds from customers for the cost of oilfield rental equipment that is damaged or lost downhole are reflected as gains or losses on the disposition of assets after considering the write-off of the remaining net book value of the equipment. Accounting for Contingencies We have contingent liabilities and future claims for which we have made estimates of the amount of the eventual cost to liquidate such liabilities or claims. These liabilities and claims sometimes involve threatened or actual litigation where damages have been quantified and we have made an assessment of our exposure and recorded in an amount estimated to cover the expected loss. Other claims or liabilities have been estimated based on their fair value or our experience in such matters and, when appropriate, the advice of outside counsel or other outside experts. Upon the ultimate resolution of these uncertainties, our future reported financial results will be impacted by the difference between our estimates and the actual amounts paid to settle a liability. Examples of areas where we have made important estimates of future liabilities include duties, income taxes, litigation, insurance claims and contractual claims and obligations. Estimation of Useful Lives The selection of the useful lives of many of our assets requires the judgments of our operating personnel. Our judgment in this area is influenced by our historical experience in operating our assets, technological developments and expectations of future demand for the assets. Should our estimates be too long or short, we might eventually report a disproportionate number of losses or gains upon disposition or retirement of our long-lived assets. We believe our estimates of useful lives are appropriate. Income Taxes We follow the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded based upon the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled. On March 27, 2020, the CARES Act was signed into law, which allowed the carryback of U.S. federal net operating losses. Prior to the enactment of the CARES Act, such tax losses could only be carried forward. On December 22, 2017, Tax Reform Legislation was signed into law which enacted significant changes to U.S. tax and related laws, including certain key U.S. federal income tax provisions applicable to oilfield service and manufacturing companies such as ours. In accordance with the SEC's Staff Accounting Bulletin No. 118, we recorded provisional estimates to reflect the effect of the Tax Reform Legislation on our income tax assets and liabilities as of December 31, 2017. During 2018, we adjusted these provisional estimates based on additional guidance issued by the Internal Revenue Service. -50- As of December 31, 2020, our total investment, including earnings and profits, in foreign subsidiaries is considered to be permanently reinvested. We record a valuation allowance in the reporting period when we believe that it is more likely than not that any deferred tax asset will not be realized. This assessment requires analysis of changes in tax laws, available positive and negative evidence, including consideration of losses in recent years, reversals of temporary differences, forecasts of future income, assessment of future business and tax planning strategies. During 2020, 2019 and 2018, we recorded valuation allowances primarily with respect to foreign and U.S. state net operating loss carryforwards. The calculation of our tax liabilities involves assessing uncertainties regarding the application of complex tax regulations. We recognize liabilities for tax expenses based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be. Recent Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the "FASB"), which are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption. In August 2020, the FASB issued updated guidance to simplify the accounting for convertible instruments and contracts in an entity's own equity. This new guidance eliminates the requirement that the carrying value of convertible debt instruments, such as the Notes, be allocated between the debt and equity components. As permitted under the standard, we adopted the new guidance on January 1, 2021 using the modified retrospective transition method. Adoption of the standard resulted in a $12.2 million increase in the net carrying value of the Notes, a $3.7 million decrease in deferred income taxes and an $8.5 million net decrease in stockholders' equity. The effective interest rate associated with the Notes after adoption of this guidance decreased from approximately 6% to approximately 2%, which compares to the contractual interest rate of 1.50%. In June 2016, the FASB issued guidance on credit impairment for short-term receivables which, as amended, introduced the recognition of management's current estimate of credit losses that are expected to occur over the remaining life of a financial asset. We adopted this guidance on January 1, 2020, using the optional transition method of recognizing any cumulative effect of adopting this guidance as an adjustment to the opening balance of retained earnings. The cumulative impact of the adoption of the new standard was not material to our consolidated financial statements. Prior periods were not retrospectively adjusted.