OIL STATES INTERNATIONAL, INC 10-Q

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and notes to those statements included in our 2020 Annual Report on Form 10-K in order to understand factors, such as business combinations, charges and credits and financing transactions, which may impact comparability from period to period. We provide a broad range of products and services to the oil and gas industry through our Offshore/Manufactured Products, Downhole Technologies and Well Site Services 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 sensitive to future expectations with respect to crude oil and natural gas prices. Recent Developments In March of 2020, the spot price of West Texas Intermediate ("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. Demand for most of our products and services depends substantially on the level of capital expenditures by the oil and natural gas industry, and these conditions caused rapid reductions to 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. While the prices of and demand for crude oil have increased significantly since reaching record low levels in April 2020, with crude oil inventory levels moderating, uncertainty remains regarding the timing of demand recovery to pre-COVID-19 levels. Following the unprecedented events 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, stabilize our cash flows and protect liquidity. In addition, as discussed in more detail below and under "– ABL Facility," "– 2023 Notes," and "– 2026 Notes," we completed two significant financing transactions during the first quarter of 2021, which served to extend the maturity profile of our debt and provide greater access to liquidity. On February 10, 2021, we entered into a new $125.0 million asset-based revolving credit facility (the "ABL Facility") under which credit availability is subject to a borrowing base calculation that includes eligible U.S. customer accounts receivable and inventory. The ABL Facility matures in February 2025. Concurrent with entering into the ABL Facility, our former senior secured revolving credit facility was terminated. On March 16, 2021, we secured an amendment that permitted us to incur the indebtedness represented by the 2026 Notes discussed below. On March 19, 2021, we issued $135.0 million aggregate principal amount of our 4.75% convertible senior notes due 2026 (the "2026 Notes"). Net proceeds from the 2026 Notes offering, after deducting issuance costs, totaled $130.6 million. The 2026 Notes will mature on April 1, 2026 and bear interest at an annual rate of 4.75%, which is payable semi-annually on April 1 and October 1. We used $120.0 million of the cash proceeds to purchase $125.0 million principal amount of our outstanding 1.50% convertible senior notes due 2023 (the "2023 Notes") at a discount, with the balance added to cash on-hand. Additionally, as discussed in more detail under "– 2023 Notes," during the second quarter of 2021, we purchased $6.4 million principal amount of our 2023 Notes for $6.0 million in cash. 24 Brent and WTI crude oil and natural gas pricing trends were 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 Brent Crude (per bbl) 2021 $ 61.04 $ 68.98 2020 $ 50.27 $ 29.70 $ 42.91 $ 44.32 $ 41.96 WTI Crude (per bbl) 2021 $ 58.09 $ 66.19 2020 $ 45.34 $ 27.96 $ 40.89 $ 42.52 $ 39.16 Henry Hub Natural Gas (per MMBtu) 2021 $ 3.50 $ 2.95 2020 $ 1.91 $ 1.70 $ 2.00 $ 2.52 $ 2.03 ________________ (1) Source: U.S. Energy Information Administration (spot prices). On July 23, 2021, Brent crude oil, WTI crude oil and natural gas spot prices closed at $72.24 per barrel, $74.86 per barrel and $4.11 per MMBtu, respectively. Additionally, as presented in more detail below, the U.S. drilling rig count reported on July 23, 2021 was 491 rigs, 9% above the second quarter 2021 average. Overview 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 39% of Offshore/Manufactured Products segment sales in the first six months of 2021 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. Backlog reported by our Offshore/Manufactured Products segment totaled $214 million as of June 30, 2021, with quarterly bookings totaling $65 million, yielding a quarterly book-to-bill ratio of 0.9x and a year-to-date ratio of 1.0x. The following table sets forth backlog as of the dates indicated (in millions). Backlog as of Year March 31 June 30 September 30 December 31 2021 $ 226 $ 214 2020 $ 267 $ 235 $ 227 $ 219 2019 $ 234 $ 283 $ 293 $ 280 Our Downhole Technologies segment, comprised of the GEODynamics, Inc. ("GEODynamics") business we acquired in 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. 25 Our Well Site Services segment provides completion services and, to a much lesser extent land drilling services, in the United States (including the Gulf of Mexico) and the rest of the world. U.S. drilling and completion activity and, in turn, our Well Site Services results, are sensitive to near-term fluctuations in commodity prices, particularly WTI crude oil prices, given the short-term, call-out nature of its 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. 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. and international drilling rig count, as measured by Baker Hughes Company, for the periods indicated. Average for the As of July 23, 2021 Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 United States: Land – Oil 370 339 293 314 472 Land – Natural gas and other 104 97 84 94 98 Offshore 17 14 15 15 18 491 450 392 423 588 International: Land 630 651 649 837 Offshore 178 207 173 227 808 858 822 1,064 1,258 1,250 1,245 1,652 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 June 30, 2021, oil-directed drilling accounted for 79% 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 from 790 rigs as of February 29, 2020 to a trough of 244 rigs as of August 14, 2020. Since August 14, 2020, the U.S. rig count has increased 93% to 470 rigs as of June 30, 2021. As can be derived from the table above, the average U.S. rig count for the three months ended June 30, 2021 increased by 58 rigs, or 15%, compared to the average for the three months ended June 30, 2020. Reduced demand for our products and services, coupled with a reduction in the prices we charge our customers for our products and services, has adversely affected our results of operations, cash flows and financial position. If the current pricing environment for crude oil declines from current levels, our customers may be required to further reduce their capital expenditures, causing 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 the manufacture of 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 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 13, "Commitments and Contingencies." 26 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 prices of and demand for 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. Human Capital For more information on our health and safety, diversity and other workforce policies, please see "Part I, Item 1. Business – Human Capital" in our Annual Report on Form 10-K for the year ended December 31, 2020. Selected Financial Data This selected financial data should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related notes included in "Part I, Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes included in "Part II, Item 8. Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended December 31, 2020 in order to understand factors, such as charges and credits, financing transactions and changes in tax regulations, which may impact the comparability of the selected financial data. 27 Unaudited Consolidated Results of Operations Data The following summarizes our unaudited consolidated results of operations for the three and six months ended June 30, 2021 and 2020 (in thousands, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 Variance 2021 2020 Variance Revenues: Products $ 78,038 $ 82,643 $ (4,605) $ 139,483 $ 185,623 $ (46,140) Services 67,686 63,602 4,084 131,830 180,316 (48,486) 145,724 146,245 (521) 271,313 365,939 (94,626) Costs and expenses: Product costs 63,926 68,088 (4,162) 113,389 157,834 (44,445) Service costs 53,706 59,995 (6,289) 106,553 167,851 (61,298) Cost of revenues (exclusive of depreciation and amortization expense presented below) (1) 117,632 128,083 (10,451) 219,942 325,685 (105,743) Selling, general and administrative expenses 22,092 23,992 (1,900) 43,317 50,116 (6,799) Depreciation and amortization expense 20,909 24,646 (3,737) 42,429 51,055 (8,626) Impairments of goodwill (2) — — — — 406,056 (406,056) Impairments of fixed and lease assets (3) 2,794 2,992 (198) 3,444 8,190 (4,746) Other operating income, net (85) (134) 49 (439) (27) (412) 163,342 179,579 (16,237) 308,693 841,075 (532,382) Operating loss (17,618) (33,334) 15,716 (37,380) (475,136) 437,756 Interest expense, net (2,699) (4,179) 1,480 (5,024) (7,683) 2,659 Other income (4) 1,820 5,994 (4,174) 5,780 6,768 (988) Loss before income taxes (18,497) (31,519) 13,022 (36,624) (476,051) 439,427 Income tax benefit (5) 3,226 6,893 (3,667) 5,543 46,384 (40,841) Net loss $ (15,271) $ (24,626) $ 9,355 $ (31,081) $ (429,667) $ 398,586 Net loss per share: Basic $ (0.25) $ (0.41) $ (0.52) $ (7.19) Diluted (0.25) (0.41) (0.52) (7.19) Weighted average number of common shares outstanding: Basic 60,317 59,839 60,207 59,747 Diluted 60,317 59,839 60,207 59,747 ________________ (1) Cost of revenues (exclusive of depreciation and amortization expense) included non-cash inventory impairment charges of $25.2 million ($12.0 million in product costs and $13.2 million in service costs) recognized in the first quarter of 2020. (2) During the first quarter of 2020, we recognized non-cash goodwill impairment charges totaling $406.1 million to reduce the carrying value of our reporting units to their estimated fair value. (3) During the first quarter of 2021 and 2020, our Well Site Services segment recognized non-cash impairment charges of $0.7 million and $5.2 million, respectively, to reduce the carrying value of the segment's fixed assets to their estimated realizable value. During the second quarter of 2021, our Well Site Services segment recognized non-cash impairment charges of $2.8 million to reduce the carrying value of certain of the segment's operating lease assets to their estimated realizable value. During the second quarter of 2020, our Well Site Services segment recognized a non-cash impairment charge of $3.0 million to reduce the carrying value of the segment's fixed assets to their estimated realizable value. (4) During the first quarter of 2021, we recognized non-cash gains of $3.6 million in connection with our purchases of $125.0 million principal amount of our 2023 Notes. During the second quarter of 2021, we recognized non-cash gains of $0.4 million in connection with our purchases of $6.4 million principal amount of our 2023 Notes. During the second quarter of 2020, we recognized non-cash gains of $4.8 million in connection with our purchases of $12.0 million principal amount of our 2023 Notes. (5) During the first quarter of 2020, we recognized a discrete tax benefit of $14.8 million related to U.S. net operating loss carrybacks under provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). See Note 3, "Asset Impairments and Other Restructuring Items," Note 4, "Details of Selected Balance Sheet Accounts," Note 6, "Long-term Debt," and Note 11, "Income Taxes," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further discussion of these and other charges and benefits recognized in the first six months of 2021 and 2020. 28 Unaudited Operating Segment Financial Data We manage and measure our business performance in three distinct operating segments: Offshore/Manufactured Products, Downhole Technologies and Well Site Services. Supplemental unaudited financial information by operating segment for the three and six months ended June 30, 2021 and 2020 is summarized below (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 Variance 2021 2020 Variance Revenues Offshore/Manufactured Products $ 76,908 $ 94,936 $ (18,028) $ 137,517 $ 186,108 $ (48,591) Downhole Technologies 26,760 14,965 11,795 52,190 56,030 (3,840) Well Site Services 42,056 36,344 5,712 81,606 123,801 (42,195) Total $ 145,724 $ 146,245 $ (521) $ 271,313 $ 365,939 $ (94,626) Operating income (loss) Offshore/Manufactured Products (1) $ 4,810 $ 9,419 $ (4,609) $ 5,881 $ (86,077) $ 91,958 Downhole Technologies (2) (2,295) (11,110) 8,815 (3,910) (203,801) 199,891 Well Site Services (3) (11,590) (22,920) 11,330 (21,443) (167,874) 146,431 Corporate (8,543) (8,723) 180 (17,908) (17,384) (524) Total $ (17,618) $ (33,334) $ 15,716 $ (37,380) $ (475,136) $ 437,756 ________________ (1) Operating loss in the first quarter of 2020 included non-cash goodwill and inventory impairment charges of $86.5 million and $16.2 million, respectively. (2) Operating loss in the first quarter of 2020 included a non-cash goodwill impairment charge of $192.5 million. (3) Operating loss in the first quarter of 2021 included non-cash fixed asset impairment charges of $0.7 million. Operating loss in the second quarter of 2021 included non-cash operating lease asset impairment charges of $2.8 million. Operating loss in the first quarter of 2020 included non-cash goodwill, inventory and fixed asset impairment charges of $127.1 million, $9.0 million and $5.2 million, respectively. Operating loss in the second quarter of 2020 included a non-cash fixed asset impairment charge of $3.0 million. See Note 3, "Asset Impairments and Other Restructuring Items," and Note 4, "Details of Selected Balance Sheet Accounts," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further discussion of these and other charges and benefits recognized in the first six months of 2021 and 2020. 29 Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 Consolidated Operating Results We reported a net loss for the three months ended June 30, 2021 of $15.3 million, or $0.25 per share. The second quarter 2021 loss included non-cash operating lease asset impairment charges of $2.8 million ($2.2 million after-tax, or $0.04 per share), restructuring charges of $2.6 million ($2.0 million after-tax, or $0.03 per share) and non-cash gains on extinguishment of 2023 Notes of $0.4 million ($0.3 million after-tax, or $0.01 per share). These results compare to a net loss for the three months ended June 30, 2020 of $24.6 million, or $0.41 per share. The reported second quarter 2020 loss included: $5.4 million ($4.3 million after-tax, or $0.07 per share) of severance and restructuring costs; non-cash fixed asset impairment charges of $3.0 million ($2.4 million after-tax, or $0.04 per share); $2.2 million ($1.7 million after-tax, or $0.03 per share) in bad debt provisions related to customer bankruptcies; and non-cash gains of $4.8 million ($3.8 million after-tax, or $0.06 per share) associated with debt extinguishment. Our reported results of operations reflect the negative impact of the global response to the COVID-19 pandemic and ongoing uncertainties related to future crude oil demand and supply. Customer-driven activity has improved off of 2020's low levels but could remain tempered over the balance of 2021 given uncertainty around the timing of demand recovery to pre-COVID-19 levels due to the ongoing nature of the COVID-19 pandemic. If the pricing environment for crude oil declines from current levels, our customers may be required to moderate or reduce their planned capital expenditures, leading to declines in the demand for and prices of our products and services. During the second quarter of 2021, we recognized an aggregate $2.8 million reduction of payroll tax expense (within cost of revenues and selling, general and administrative expense) as part of the CARES Act employee retention credit program. We continue to evaluate additional benefits potentially available to us under the CARES Act. Revenues. Consolidated total revenues in the second quarter of 2021 were relatively consistent with the level reported in the second quarter of 2020, but were up 16% sequentially. Consolidated product revenues in the second quarter of 2021 decreased $4.6 million, or 6%, from the second quarter of 2020, driven by reduced project-driven customer demand for connector products, partially offset by an increase in U.S. land-based customer activity. Consolidated service revenues in the second quarter of 2021 increased $4.1 million, or 6%, from the second quarter of 2020 due primarily to higher customer spending in the U.S. shale play regions as activity recovers from the 2020 COVID-19 induced lows. As can be derived from the following table, 58% of our consolidated revenues in the second quarter of 2021 were derived from sales of our short-cycle product and service offerings, which compares to 43% in the same period last year. The following table provides supplemental disaggregated revenue from contracts with customers by operating segment for the three months ended June 30, 2021 and 2020 (in thousands): Offshore/ Manufactured Products Downhole Technologies Well Site Services Total Three months ended June 30 2021 2020 2021 2020 2021 2020 2021 2020 Major revenue categories - Project-driven products $ 31,826 $ 51,365 $ — $ — $ — $ — $ 31,826 $ 51,365 Short-cycle: Completion products and services 10,447 4,739 26,760 14,965 39,083 36,175 76,290 55,879 Drilling services — — — — 2,973 169 2,973 169 Other products 5,583 6,634 — — — — 5,583 6,634 Total short-cycle 16,030 11,373 26,760 14,965 42,056 36,344 84,846 62,682 Other products and services 29,052 32,198 — — — — 29,052 32,198 $ 76,908 $ 94,936 $ 26,760 $ 14,965 $ 42,056 $ 36,344 $ 145,724 $ 146,245 Percentage of total revenue by type - Products 72 % 73 % 85 % 90 % — % — % 54 % 57 % Services 28 % 27 % 15 % 10 % 100 % 100 % 46 % 43 % 30 Cost of Revenues (exclusive of Depreciation and Amortization Expense). Our consolidated total cost of revenues (exclusive of depreciation and amortization expense) decreased $10.5 million, or 8%, in the second quarter of 2021 compared to the second quarter of 2020. Consolidated product costs in the second quarter of 2021, decreased $4.2 million, or 6%, from the second quarter of 2020. Consolidated service costs in the second quarter of 2021, decreased $6.3 million, or 10%, from the second quarter of 2020 due to implemented cost saving measures. Selling, General and Administrative Expense. Selling, general and administrative expense decreased $1.9 million, or 8%, in the second quarter of 2021 from the second quarter of 2020 due primarily to reductions in personnel, compensation levels and bad debt expense along with other implemented cost reduction measures, partially offset by $2.1 million in restructuring charges recognized during the current quarter. Depreciation and Amortization Expense. Depreciation and amortization expense decreased $3.7 million, or 15%, in the second quarter of 2021 compared to the prior-year quarter, driven primarily by reduced capital investments made in our Well Site Services segment in recent years. Note 12, "Segments and Related Information," presents depreciation and amortization expense by segment. Impairments of Fixed and Lease Assets. During the second quarters of 2021 and 2020, our Well Site Services segment recorded non-cash impairment charges of $2.8 million and $3.0 million, respectively, to reduce the carrying value of certain of the segment's fixed and lease assets to their estimated realizable value. Operating Income (Loss). Our consolidated operating loss was $17.6 million in the second quarter of 2021, which included $2.8 million of non-cash operating lease asset impairment charges and $2.6 million of restructuring charges. This compares to a consolidated operating loss of $33.3 million recognized in the second quarter of 2020, which included $5.4 million of severance and restructuring charges and $3.0 million of non-cash fixed asset impairment charges. Interest Expense, Net. Net interest expense was $2.7 million in the second quarter of 2021, which compares to $4.2 million in the same period of 2020. Interest expense, which included amortization of deferred financing costs in 2021 and amortization of debt discount and deferred financing costs in 2020, as a percentage of total debt outstanding was approximately 6% in the second quarter of 2021 and 2020. Other Income, Net. Net other income for second quarter of 2021 included non-cash gains of $0.4 million recognized in connection with our purchases of $6.4 million principal amount of our 2023 Notes for $6.0 million in cash. Net other income for second quarter of 2020 included non-cash gains of $4.8 million recognized in connection with our purchases of $12.0 million principal amount of our 2023 Notes for $5.9 million in cash. Income Tax. For the three months ended June 30, 2021, our income tax benefit was $3.2 million, or 17% of the pre-tax loss of $18.5 million, which included certain non-deductible expenses. This compares to an income tax benefit of $6.9 million, or 22% of the pre-tax loss of $31.5 million for the three months ended June 30, 2020, which also included certain expenses that are not deductible for income tax purposes. Other Comprehensive Income (Loss). Reported comprehensive loss is the sum of reported net loss and other comprehensive income (loss). Other comprehensive income was $3.2 million in the second quarter of 2021 compared to loss of $1.2 million in the second quarter of 2020 due to fluctuations in foreign currency exchange rates compared to the U.S. dollar for certain of the international operations of our operating segments. For the three months ended June 30, 2021 and 2020, currency translation adjustments recognized as a component of other comprehensive income (loss) were primarily attributable to Brazil. During the second quarter of 2021, the exchange rate for the Brazilian real strengthened compared to the U.S. dollar. This compares to the second quarter of 2020, when the exchange rate for the Brazilian real weakened compared to the U.S. dollar. 31 Segment Operating Results Offshore/Manufactured Products Revenues. Our Offshore/Manufactured Products segment revenues decreased $18.0 million, or 19%, in the second quarter of 2021 compared to the second quarter of 2020 due primarily to a reduction in sales of its connector products. Operating Income. Our Offshore/Manufactured Products segment reported operating income of $4.8 million in the second quarter of 2021, compared to operating income of $9.4 million in the second quarter of 2020, with the impact of the year-over-year decrease in revenues partially offset by implemented cost reduction measures. Backlog. Backlog in our Offshore/Manufactured Products segment totaled $214 million as of June 30, 2021, with second quarter 2021 bookings of $65 million and a quarterly book-to-bill ratio of 0.9x. Downhole Technologies Revenues. Our Downhole Technologies segment revenues increased $11.8 million, or 79%, in the second quarter of 2021 from the prior-year period due primarily to an increase in U.S. land-based customer completion activity. Operating Loss. Our Downhole Technologies segment reported an operating loss of $2.3 million in the second quarter of 2021 compared to an operating loss of $11.1 million in the prior-year period, driven by the significant increase in revenues and implemented cost reduction measures. The second quarter 2020 results included a $1.5 million bad debt provision on a receivable from a customer claiming bankruptcy protection and $1.3 million in severance and restructuring costs. Well Site Services Revenues. Our Well Site Services segment revenues increased $5.7 million, or 16%, in the second quarter of 2021 compared to the prior-year quarter, driven by higher customer drilling, completion and production activity. Operating Loss. Our Well Site Services segment reported an operating loss of $11.6 million in the second quarter of 2021, which included $2.4 million in restructuring charges and $2.8 million of non-cash operating lease asset impairment charges. The segment reported an operating loss of $22.9 million in the second quarter of 2020, which included $3.5 million in severance and restructuring costs and $3.0 million of non-cash fixed asset impairment charges. Excluding these charges, our Well Site Services operating loss decreased $10.0 million from the prior-year period due to the increase in revenues and implemented cost reduction measures. Corporate Corporate expenses decreased $0.2 million, or 2%, in the second quarter of 2021 from the prior-year period. 32 Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020 Consolidated Operating Results We reported a net loss for the six months ended June 30, 2021 of $31.1 million, or $0.52 per share. The reported first half of 2021 loss included non-cash impairment charges of $3.4 million ($2.7 million after-tax, or $0.05 per share) associated with write-downs of fixed and lease assets, $6.0 million ($4.7 million after-tax, or $0.08 per share) of severance and restructuring costs and non-cash gains of $4.0 million ($3.2 million after-tax, or $0.05 per share) associated with debt extinguishment. These results compare to a net loss for the six months ended June 30, 2020 of $429.7 million, or $7.19 per share, which included: non-cash impairment charges totaling $439.5 million ($413.4 million after-tax, or $6.92 per share) related to write-downs of goodwill, inventories and fixed assets; $6.1 million ($4.8 million after-tax, or $0.08 per share) of severance and restructuring costs; $2.2 million ($1.7 million after-tax, or $0.03 per share) in bad debt provisions related to customer bankruptcies; non-cash gains of $4.8 million ($3.8 million after-tax, or $0.06 per share) associated with debt extinguishment; and a discrete tax benefit of $14.8 million, or $0.25 per share, associated with the carryback of tax losses allowed under the CARES Act. Our reported results of operations 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 and supply. Customer-driven activity has improved off of 2020's low levels but could remain tempered over the balance of 2021 given uncertainty around the timing of demand recovery to pre-COVID-19 levels. If the pricing environment for crude oil declines from current levels, our customers may be required to moderate or reduce their planned capital expenditures, leading to declines in the demand for and prices of our products and services. During the first half of 2021, we recognized an aggregate $7.6 million reduction of payroll tax expense (recognized within cost of revenues and selling, general and administrative expense) as part of the CARES Act employee retention credit program. During the first half of 2020, we also recognized a discrete income tax benefit of $14.8 million related to U.S. net operating loss carrybacks under provisions of the CARES Act. We continue to evaluate additional benefits potentially available to us under the CARES Act. Revenues. Consolidated total revenues in the first six months of 2021 decreased $94.6 million, or 26%, from the first six months of 2020. Consolidated product revenues in the first six months of 2021 decreased $46.1 million, or 25%, from the first six months of 2020, driven by the significant decline in U.S. land-based customer activity beginning in March 2020 and reduced project-driven customer demand for connector products. Consolidated service revenues in the first six months of 2021 decreased $48.5 million, or 27%, from the first six months of 2020 due primarily to higher customer spending in the U.S. shale play regions in the first quarter of 2020, prior to the significant impact of the COVID-19 pandemic on our operating results. As can be derived from the following table, 60% of our consolidated revenues in the first six months of 2021 were derived from sales of our short-cycle product and service offerings, which compares to 58% in the same period last year. The following table provides supplemental disaggregated revenue from contracts with customers by operating segment for the six months ended June 30, 2021 and 2020 (in thousands): Offshore/ Manufactured Products Downhole Technologies Well Site Services Total Six months ended June 30 2021 2020 2021 2020 2021 2020 2021 2020 Major revenue categories - Project-driven products $ 53,200 $ 88,153 $ — $ — $ — $ — $ 53,200 $ 88,153 Short-cycle: Completion products and services 18,561 18,416 52,190 56,030 77,882 119,101 148,633 193,547 Drilling services — — — — 3,724 4,700 3,724 4,700 Other products 9,719 15,054 — — — — 9,719 15,054 Total short-cycle 28,280 33,470 52,190 56,030 81,606 123,801 162,076 213,301 Other products and services 56,037 64,485 — — — — 56,037 64,485 $ 137,517 $ 186,108 $ 52,190 $ 56,030 $ 81,606 $ 123,801 $ 271,313 $ 365,939 Percentage of total revenue by type - Products 69 % 72 % 85 % 91 % — % — % 51 % 51 % Services 31 % 28 % 15 % 9 % 100 % 100 % 49 % 49 % 33 Cost of Revenues (exclusive of Depreciation and Amortization Expense). Our consolidated total cost of revenues (exclusive of depreciation and amortization expense) decreased $105.7 million, or 32%, in the first six months of 2021 compared to the first six months of 2020. Cost of revenues in the first six months of 2020 included provisions totaling $25.2 million for excess and obsolete inventory – driven by the unprecedented market downturn beginning in March of 2020. Excluding these provisions, consolidated cost of revenues decreased $80.5 million, or 27%, from the prior-year period. Consolidated product costs in the first six months of 2021, decreased $44.4 million, or 28%, from the first six months of 2020, which included a provision of $12.0 million for excess and obsolete inventory. Excluding this charge, consolidated product costs decreased $32.5 million, or 22%, from the prior-year period. Consolidated service costs in the first six months of 2021, decreased $61.3 million, or 37%, from the first six months of 2020, which included provisions for excess and obsolete inventory of $13.2 million. Excluding these charges, consolidated service costs decreased $48.0 million, or 31%, from the prior-year period. Selling, General and Administrative Expense. Selling, general and administrative expense decreased $6.8 million, or 14%, in the first six months of 2021 from the first six months of 2020 due primarily to reductions in personnel, compensation levels, travel and bad debt expenses along with other implemented cost reduction measures, partially offset by $3.7 million in severance and restructuring costs recognized in the first half of 2021. Depreciation and Amortization Expense. Depreciation and amortization expense decreased $8.6 million, or 17%, in the first six months of 2021 compared to the prior-year period, driven primarily by reduced capital investments made in our Well Site Services segment in recent years. Note 12, "Segments and Related Information," presents depreciation and amortization expense by segment. Impairments of Goodwill. During the first quarter of 2020, our Offshore/Manufactured Products, Downhole Technologies and Well Site Services operations recognized non-cash goodwill impairment charges of $86.5 million, $192.5 million and $127.1 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. Impairments of Fixed and Lease Assets. During the first six months of 2021 and 2020, our Well Site Services segment recorded non-cash impairment charges of $3.4 million and $8.2 million, respectively, to reduce the carrying value of certain of the segment's fixed and lease assets to their estimated realizable value. Operating Income (Loss). Our consolidated operating loss was $37.4 million in the first six months of 2021, which included $3.4 million of non-cash asset impairment charges and $6.0 million of severance and restructuring costs. This compares to a consolidated operating loss of $475.1 million recognized in the first six months of 2020, which included the impact of $439.5 million non-cash asset impairment charges and $6.1 million in severance and restructuring costs. Interest Expense, Net. Net interest expense was $5.0 million in the first six months of 2021, which compares to $7.7 million in the same period of 2020. Interest expense, which included amortization of deferred financing costs in 2021 and amortization of debt discount and deferred financing costs in 2020, as a percentage of total debt outstanding was approximately 5% in the first six months of 2021 and 6% in the first six months of 2020. Other Income, Net. Net other income for the first six months of 2021 included non-cash gains of $4.0 million recognized in connection with our purchases of $131.4 million principal amount of our 2023 Notes for $126.0 million in cash. In the first six months of 2020, we recognized non-cash gains of $4.8 million recognized in connection with our purchases of $17.7 million principal amount of our 2023 Notes for $10.6 million in cash. Income Tax. For the six months ended June 30, 2021, our income tax benefit was $5.5 million, or 15% of the pre-tax loss of $36.6 million, which included certain non-deductible expenses and discrete tax items. This compares to an income tax benefit of $46.4 million, or 10% of the pre-tax loss of $476.1 million for the six months ended June 30, 2020, which included non-cash goodwill charges (approximately $313.1 million) and other expenses that are not deductible for income tax purposes. In the first six months of 2020, the impact of these non-deductible expenses was partially offset by a $14.8 million discrete tax benefit related to the carryback of U.S. net operating losses under the CARES Act. 34 Other Comprehensive Income (Loss). Reported comprehensive loss is the sum of reported net loss and other comprehensive income (loss). Other comprehensive income was $1.6 million in the first six months of 2021 compared to loss of $16.0 million in the first six months of 2020 due to fluctuations in foreign currency exchange rates compared to the U.S. dollar for certain of the international operations of our operating segments. For the six months ended June 30, 2021 and 2020, currency translation adjustments recognized as a component of other comprehensive income (loss) were primarily attributable to the United Kingdom and Brazil. During the first six months of 2021, the exchange rate for the British pound and the Brazilian real strengthened compared to the U.S. dollar. This compares to the first six months of 2020, when the exchange rate for both the British pound and Brazilian real weakened compared to the U.S. dollar. Segment Operating Results Offshore/Manufactured Products Revenues. Our Offshore/Manufactured Products segment revenues declined $48.6 million, or 26%, in the first six months of 2021 compared to the first six months of 2020 due primarily to a reduction in sales of its connector and short-cycle products and service activities. Operating Income (Loss). Our Offshore/Manufactured Products segment reported operating income of $5.9 million in the first six months of 2021, which included $0.3 million of severance and restructuring charges. The segment reported an operating loss of $86.1 million in the first six months of 2020, which included severance and restructuring costs of $0.4 million and 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 $10.8 million in the first six months of 2021 compared to the first six months of 2020, with the impact of the year-over-year decrease in revenues partially offset by implemented cost reduction measures. Backlog. Backlog in our Offshore/Manufactured Products segment totaled $214 million as of June 30, 2021, a decrease of 2% from December 31, 2020. Bookings during first six months 2021 totaled $135 million, yielding a year-to-date book-to-bill ratio of 1.0x. Downhole Technologies Revenues. Our Downhole Technologies segment revenues decreased $3.8 million, or 7%, in the first six months of 2021 from the prior-year period due primarily to higher U.S. land-based customer completion activity during the first quarter of 2020, prior to the significant impact of the COVID-19 pandemic on our operating results. Operating Loss. Our Downhole Technologies segment reported an operating loss of $3.9 million in the first six months of 2021, which included $0.5 million of severance and restructuring charges. The segment reported an operating loss of $203.8 million in the prior-year period, which included severance and restructuring costs of $1.3 million and a non-cash goodwill impairment charge of $192.5 million. Excluding these charges, operating loss declined $6.6 million in the first six months of 2021 from the prior-year period due to implemented cost reduction measures. Well Site Services Revenues. Our Well Site Services segment revenues decreased $42.2 million, or 34%, in the first six months of 2021 compared to the prior-year period, driven by higher customer completion and production activity during the first quarter of 2020, prior to the significant impact of the COVID-19 pandemic on our operating results. Operating Loss. Our Well Site Services segment reported an operating loss of $21.4 million in the first six months of 2021, which included $3.7 million in severance and restructuring costs and non-cash fixed and lease asset impairment charges of $3.4 million. The segment reported an operating loss of $167.9 million in the first six months of 2020, which included severance and restructuring costs of $4.1 million and non-cash impairment charges of $127.1 million related to goodwill, $9.0 million related to inventory and $8.2 million related to fixed assets. Excluding these charges, our Well Site Services operating loss decreased $5.2 million from the prior-year period due to implemented cost reduction measures. Corporate Corporate expenses increased $0.5 million, or 3%, in the first six months of 2021 from the prior-year period, with $1.6 million of severance costs incurred in the first six months of 2021 substantially offset by implemented cost reduction measures. 35 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 markets transactions. Operating Activities Cash flows from operations totaling $13.9 million were generated during the first half of 2021, compared to $44.1 million generated by operations during the same period of 2020. During the first half of 2021, $5.2 million was provided by net working capital decreases, primarily due to an increase in accounts payable, partially offset by increases in accounts receivable and inventories. During the first half of 2020, $27.8 million was provided by net working capital decreases, primarily due to a reduction in accounts receivable, partially offset by decreases in accounts payable and accrued liabilities. Investing Activities Cash used in investing activities during the first half of 2021 totaled $4.2 million, compared to $3.8 million used in investing activities during the first half of 2020. Capital expenditures totaled $7.3 million and $8.9 million during the first half of 2021 and 2020, respectively. These investments were partially offset by proceeds from the sale of property and equipment of $3.4 million and $5.4 million during the six months ended June 30, 2021 and 2020, respectively. We expect to spend approximately $15 million in 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 ABL Facility. Financing Activities During the six months ended June 30, 2021, net cash of $19.1 million was used in financing activities including our purchases of $131.4 million principal amount of our 2023 Notes for cash totaling $126.0 million and $19.0 million of net repayments under our ABL Facility. Partially offsetting these uses was our issuance of $135.0 million principal amount of our 2026 Notes yielding net cash proceeds of $130.6 million. This compares to $5.0 million of cash provided by financing activities during the six months ended June 30, 2020, primarily as a result of $19.1 million in net borrowings under our former revolving credit facility, partially offset by our purchases of $17.7 million principal amount of our 2023 Notes for $10.6 million. As of June 30, 2021, we had cash and cash equivalents totaling $62.7 million, which compared to $72.0 million as of December 31, 2020. As of June 30, 2021, we had no borrowings outstanding under our ABL Facility (discussed below), $135.0 million principal amount of our 2026 Notes outstanding, $26.0 million principal amount of our 2023 Notes outstanding and other debt of $22.0 million. Our reported interest expense, which appropriately included amortization of deferred financing costs of $1.4 million during the first six months of 2021, was above our contractual cash interest expense. For the first six months of 2021, our contractual cash interest expense was $3.7 million, or approximately 4% of the average principal balance of debt outstanding. We believe that cash on-hand, cash flow from operations and borrowing capacity available under our ABL 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 during 2020, which has negatively impacted the value of our common stock; has and may continue to reduce our ability to 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. 36 ABL Facility. On February 10, 2021, we entered into the ABL Facility under which credit availability is subject to a borrowing base calculation. Concurrent with entering into the ABL Facility, we terminated our former revolving credit facility. On March 16, 2021, we entered into an amendment to the ABL Facility that permitted us to incur the indebtedness represented by the 2026 Notes. The ABL 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 "ABL Agreement"). The ABL 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 ABL 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 ABL Agreement are secured by a pledge of substantially all of our domestic assets (other than real property) and the stock of certain foreign subsidiaries. Borrowings under the ABL 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 pay a quarterly commitment fee of 0.375% to 0.50% per annum, based on unused commitments under the ABL Agreement. The ABL 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 2023 Notes and 2026 Notes), engage in mergers, and other matters, in each case, subject to certain exceptions. The ABL Agreement contains customary default provisions, which, if triggered, could result in acceleration of all amounts then outstanding. The ABL 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 ABL 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. As of June 30, 2021, we had no borrowings outstanding under the ABL Facility and $17.3 million of outstanding letters of credit. The total amount available to be drawn as of June 30, 2021 was $50.3 million, calculated based on the current borrowing base less outstanding letters of credit. Former Revolving Credit Facility. See Note 6, "Long-term Debt," for further information regarding our former revolving credit facility. 2026 Notes. On March 16, 2021, we issued $135 million aggregate principal amount of the 2026 Notes pursuant to an indenture, dated as of March 16, 2021 (the "2026 Indenture"), between the Company and Wells Fargo Bank, National Association, as trustee. Net proceeds from the 2026 Notes offering, after deducting issuance costs, totaled $130.6 million. We used $120.0 million of the cash proceeds to purchase $125.0 million principal amount of the outstanding 2023 Notes, with the balance added to cash on-hand. The 2026 Indenture contains certain events of default, including certain defaults by the Company with respect to other indebtedness of at least $40.0 million. See Note 6, "Long-term Debt," for further information regarding the 2026 Notes. As of June 30, 2021, none of the conditions allowing holders of the 2026 Notes to convert, or requiring us to repurchase the 2026 Notes, had been met. 2023 Notes. On January 30, 2018, we issued $200 million aggregate principal amount of the 2023 Notes pursuant to an indenture, dated as of January 30, 2018 (the "2023 Indenture"), between the Company and Wells Fargo Bank, National Association, as trustee. The 2023 Indenture contains certain events of default, including certain defaults by the Company with respect to other indebtedness of at least $40.0 million. During the first six months of 2021, we purchased $131.4 million principal amount of the outstanding 2023 Notes for $126.0 million in cash. Since September 2019, we have purchased a cumulative $174.0 million principal amount of the 2023 Notes for $152.8 million in cash. See Note 6, "Long-term Debt," for further information regarding the 2023 Notes. As of June 30, 2021, none of the conditions allowing holders of the 2023 Notes to convert, or requiring us to repurchase the 2023 Notes, had been met. 37 Promissory Note. In connection with the 2018 acquisition of GEODynamics (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. Payments due under the promissory note are subject to set-off, in full or in part, against certain indemnification claims related to matters occurring prior to our acquisition of GEODynamics. 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 such note. We have incurred settlement costs and expenses of $7.5 million related to such indemnification claims and believe that the maturity date of such note is extended until the resolution of such indemnity claims and that we are permitted to set-off the principal amount owed by the amount of such costs and expenses. Accordingly, we have reduced the carrying amount of such note in our consolidated balance sheet to $17.5 million as of June 30, 2021, which is our current best estimate of what is owed after set-off for indemnification matters. See Note 13, "Commitments and Contingencies," to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. Our total debt represented 20% of our combined total debt and stockholders' equity as of June 30, 2021 and December 31, 2020. 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 product 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 the 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 its lawsuit 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 13, "Commitments and Contingencies," to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. Off-Balance Sheet Arrangements As of June 30, 2021, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Availability and Cost of Products We use a variety of domestically produced and imported raw materials and component products, including steel, in the manufacture of 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 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 13, "Commitments and Contingencies," to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. 38 Critical Accounting Policies For a discussion of the critical accounting policies and estimates that we use in the preparation of our condensed consolidated financial statements, see "Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K. These estimates require significant judgments, assumptions and estimates. We have discussed the development, selection, and disclosure of these critical accounting policies and estimates with the audit committee of our Board of Directors. There have been no material changes to the judgments, assumptions and estimates upon which our critical accounting estimates are based. 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, management believes 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 (referred to as "ASU 2020-06"). This guidance eliminated the requirement that the carrying value of convertible debt instruments, such as our 2023 Notes, be allocated between the debt and equity components. As permitted under the standard, we adopted the 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 2023 Notes, a $2.7 million decrease in deferred income taxes and an $9.5 million net decrease in stockholders' equity. The effective interest rate associated with the 2023 Notes after adoption of the standard decreased from approximately 6% to approximately 2%, which compares to the contractual cash interest rate of 1.50%. As further discussed in Note 6, "Long-term Debt," we issued $135 million principal amount of our 2026 Notes on March 19, 2021, which have been accounted for in accordance with the provisions of ASU 2020-06.