What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 121 added, 127 removed, 271 unchanged (48% of the section changed)

4 unchanged sentences

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those described in more detail under the heading “ Risk Factors ” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.

See also “ Cautionary Statement Regarding Forward-Looking Statements ” below.

See also “ Cautionary Note Regarding Forward-Looking Statements ” below.

Cautionary Note Regarding Forward-Looking Statements.

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Additionally, t here are a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements.

Such risks include those disclosed under the heading “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 and in Part II, Item 1A of this Quarterly Report on Form 10-Q, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the United States Securities and Exchange Commission, as well as, risks related to:

• our ability to continue as a going concern;

• our ability to generate sufficient cash from operations, access our 2022 ABL Credit Facility, or maintain our compliance with our 2022 ABL Credit Agreement and A&R Term Loan Credit Agreement covenants;

Such risks include those disclosed under the heading “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q, as such risk factors may be amended, supplemented, or superseded from time to time by other reports we file with the United States Securities and Exchange Commission, as well as risks related to:

• our ability to generate sufficient cash from operations, access our 2022 ABL Credit Facility or amounts available under our Delayed Draw Term Loan, or maintain our compliance with covenants under our debt arrangements including our 2022 ABL Credit Agreement and A&R Term Loan Credit Agreement;

• our ability to manage inflationary pressures in our operating costs;

• the impact to our business, financial condition, results of operations and cash flows due to negative market conditions, including from the lingering impact of widespread public health crises, epidemics and pandemics, threats of domestic and global economic recession and future economic uncertainties, particularly in industries in which we are heavily dependent;

• negative market conditions, including threats of domestic and global economic recession, future economic uncertainties, and impacts from epidemics and pandemics;

particularly in industries in which we are heavily dependent;

• delays in the commencement of major projects;

• our business may be affected by seasonal and other variation, such as severe weather conditions (including conditions influenced by climate change) and the nature of our client s’ industry;

• seasonal and other variation, such as severe weather conditions (including conditions influenced by climate change) and the nature of our client s’ industry;

• our ability to expand into new markets (including low carbon energy transition) and attract clients in new industries may be limited due to our competition’s breadth of service offerings and intellectual property;

• we have significant debt and high leverage which could have a negative impact on our financing options, liquidity position and ability to manage increases in interest rates;

• the timing of new client contracts and termination of existing contracts may result in unpredictable fluctuations in our cash flows and financial results;

• our significant debt and high leverage which could have a negative impact on our financing options, liquidity position and ability to manage increases in interest rates;

• our ability to access capital and liquidity provided by the financial and capital markets;

• the timing of new client contracts and termination of existing contracts resulting in unpredictable fluctuations in our cash flows and financial results;

• risk of non-payment and/or delays in payment of receivables from our clients;

• we may not be able to continue to meet the New York Stock Exchange’s (“NYSE”) continued listing requirements and rules, and the NYSE may delist our common stock, which could negatively affect our company, the price of our common stock and our shareholders’ ability to sell our common stock;

• our financial forecasts are based upon estimates and assumptions that may materially differ from actual results;

• we may incur liabilities and suffer negative financial or reputational impacts relating to occupational health and safety matters;

• our ability to continue to meet the New York Stock Exchange’s (“NYSE”) continued listing requirements and rules, and the risk that NYSE may delist our common stock, which could negatively affect our company, the price of our common stock and our shareholders’ ability to sell our common stock in the event we are unable to list our common stock on another exchange;

• our financial forecasts being based upon estimates and assumptions that may materially differ from actual results;

• our incurrence of liabilities and suffering of negative financial or reputational impacts relating to occupational health and safety matters;

• our ability to continue as a going concern;

• changes in laws or regulations in the local jurisdictions that we conduct our business;

• the inherently uncertain outcome of current and future litigation;

• if we fail to maintain effective internal controls, we may not be able to report our financial results accurately or timely or prevent or detect fraud, which could have a material adverse effect on our business;

• our failure to maintain effective internal controls, and the resulting inability to report our financial results accurately or timely or prevent or detect fraud;

• acts of terrorism, war or political or civil unrest in the U.S.

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We market our services to companies in a diverse array of heavy industries which include:

• Energy (refining, power, renewables, nuclear and liquefied natural gas);

• Energy (refining, power, renewables, nuclear, offshore oil and gas, and liquefied natural gas);

• Manufacturing and Process (chemical, petrochemical, pulp and paper industries, automotive and mining);

• Midstream and Others (valves, terminals and storage, pipeline and offshore oil and gas);

• Midstream and Others (valves, terminals and storage, and pipeline);

• Public Infrastructure (amusement parks, bridges, ports, construction and building, roads, dams, and railways);

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Market Conditions Update.

The lingering impact of widespread public health crises, epidemics and pandemics had less effect on our workforce and operations during the first and second quarters of 2023, as well as the operations of our clients, suppliers and contractors.

However, the global economy, including the financial and credit markets, has recently experienced significant volatility and disruptions, including increases in inflation rates, rising interest rates, disruption to global supply chains, declines in economic growth, volatility in foreign currency exchange rates, and uncertainty about economic stability.

The global economy, including the financial and credit markets, has recently experienced significant volatility and disruptions, including increases in inflation rates, rising interest rates, disruption to global supply chains, commodity price volatility, uncertainty about economic stability and geopolitical conflicts.

The severity and duration of the impact of these conditions on our business cannot be predicted.

See Item 1A of our Annual Report on Form 10-K “Risk Factors” for additional information.

Recent Refinancing Transaction.

On June 16, 2023, we entered into the A&R Term Loan Credit Agreement and ABL Amendment No.

Refer to Note 1 - Description of Business and Basis of Presentation and Note 11 - Debt to the unaudited condensed consolidated financial statements for additional details.

Listing Notice from NYSE.

During 2022, the Company’s share price and total market capitalization and Shareholders equity had fallen below NYSE listing standard thresholds and therefore the Company received notices of non-compliance from the NYSE.

On May 25, 2023, we were notified by the NYSE that we had regained compliance with the NYSE’s quantitative continued listing standards.

Although we have regained compliance with the NYSE’s quantitative continued listing within the cure period, there is no assurance that we will remain in compliance with such requirement or other NYSE continued listing standards in the future.

Results of Operations

The following is a comparison of our results of operations for the three and six months ended June 30, 2023 to the three and six months ended June 30, 2022.

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The following table sets forth the components of revenue and operating loss from our operations for the three month period ended June 30, 2023 and 2022 (in thousands):

Three Months Ended June 30, Increase

The following is a comparison of our results of operations for the three and nine months ended September 30, 2023 to the three and nine months ended September 30, 2022.

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The following table sets forth the components of revenue and operating loss from our operations for the three-month period ended September 30, 2023 and 2022 (in thousands):

Three Months Ended September 30, Increase

2023 2022 $ %

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Corporate and shared support services (14,152) (16,774) 2,622 15.6 %

Total operating income (loss) $ 4,596 $ (10,794) $ 15,390 142.6 %

Total operating loss $ (1,258) $ (1,729) $ 471 27.2 %

Interest expense, net $ (10,067) $ (26,653) $ 16,586 62.2 %

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NM = Not meaningful

Total revenues increased $18.0 million or 8.1% from the prior year quarter and were negatively impacted by $1.8 million from adverse foreign exchange movement.

IHT revenues increased by $2.6 million or 2.3% and benefited from a $4.6 million or 5% increase in IHT U.S.

revenue due to higher callout and turnaround activity, and a $1.1 million increase in IHT international revenue, partially offset by a $3.1 million decrease in Canada revenue due to lower turnaround activity.

MS revenue increased by $15.3 million or 14.3%, attributable to a $4.8 million or 8.9% increase in U.S.

revenue due to higher callout activity in leak repair, turnaround activity, hot tapping services, and a $10.0 million revenue increase in international regions and Canada.

Total revenues decreased $11.6 million or 5.3% from the prior year quarter and were positively impacted by $1.2 million from foreign exchange movement.

IHT revenues decreased by $6.4 million or 5.9% primarily due to a $4.9 million decrease in IHT U.S.

operations revenue and a $2.8 million decrease in IHT Canada operations revenue due to lower activity in nested and turnaround services.

This was partially offset by a $0.7 million increase in international regions revenue and $0.6 million increase in aerospace related revenue.

MS revenue decreased by $5.2 million or 4.8%, which was attributable to a $5.6 million or 8.4% decrease in MS U.S.

operations revenue primarily due to lower activity in repairs and maintenance work, and a $3.3 million decrease in MS Canada operations due to less project work.

This was partially offset by a $3.7 million increase in international regions revenue.

Operating income (loss).

Overall operating income was $4.6 million in the current year quarter, a $15.4 million improvement compared to an operating loss of $10.8 million in the prior year quarter.

IHT operating income increased by $1.0 million or 18.8% due to higher activity and higher margins in all regions, partially offset by higher labor related costs in U.S.

MS operating income increased by $5.7 million or 82.1% as compared to the prior year quarter, driven by higher revenue and margins from the Company’s U.S., Canada and international operations.

Operating income from U.S.

and international operations increased by $3.4 million and $2.8 million, respectively, and Canada increased by $0.9 million, partially offset by a decrease in operating income from our domestic valve business.

Corporate operating loss decreased by $8.6 million due to lower professional fees and lower severance cost in the current quarter compared to the prior year quarter and lower overall costs due to the Company’s ongoing cost reduction efforts.

In spite of our cost reduction efforts, we continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the three months ended June 30, 2023 and 2022, operating loss includes net expenses totaling $3.1 million and $6.9 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Three Months Ended June 30,

Overall operating loss was $1.3 million in the current year quarter, a $0.5 million improvement compared to prior year quarter.

IHT operating income decreased by $1.0 million or 13.2% due to lower activity in several regions, partially offset by higher direct margins in U.S.

and cost reduction actions in Canada operations.

MS operating income decreased by $1.1 million or 15.3% as compared to the prior year quarter, driven by our Canada operations and domestic valve business, partially offset by higher operating income from our U.S.

and international operations and savings in our overhead costs.

Corporate operating loss decreased by $2.6 million due to lower legal cost in the current quarter compared to the prior year quarter and lower overall costs due to the Company’s continuous cost reduction efforts.

We continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the three months ended September 30, 2023 and 2022, operating loss includes net expenses totaling $2.8 million and $2.8 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Three Months Ended September 30,

Operating income (loss) $ (1,258) $ (1,729)

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Total non-core expenses 2,757 2,752

Operating income (loss), excluding non-core expenses $ 7,660 $ (3,893)

Excluding the impact of these identified non-core items in both periods, operating income increased by $11.6 million from a loss of $3.9 million to income of $7.7 million.

Operating income, excluding non-core expenses $ 1,499 $ 1,023

Excluding the impact of these identified non-core items in both periods, operating income increased by $0.5 million from income of $1.0 million in the three months ended September 30, 2022 to $1.5 million in the three months ended September 30, 2023.

See our non-GAAP reconciliation for additional details of our non-core expenses.

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Interest expense decreased by $16.6 million compared to the prior year quarter.

The decrease was primarily attributable to lower outstanding debt during the second quarter of 2023 due to the $225.0 million pay down of our term debt in November 2022.

These effects were partially offset by the increase in PIK interest on the subordinated term loan, a year over year increase in cash interest rates and the acceleration of the amortization of debt related deferred costs until June 16, 2023 to reflect the revised Trigger Date impact on the maturity date.

Cash interest paid during the quarter ended June 30, 2023 and 2022 was $4.7 million and $3.3 million, respectively.

Loss on Debt Extinguishment.

On June 16, 2023, we used the proceeds from the ME/RE Loans and borrowings under the 2022 ABL Credit Facility to repay the total outstanding Term Loan balance of $35.5 million plus the applicable prepayment premium of $1.4 million and related accrued interest, resulting in a loss on debt extinguishment of $1.6 million.

Other income (expense), net.

Other income (expense), net decreased by $3.2 million primarily due to foreign currency fluctuations and lower gains on asset disposals in the second quarter of 2023 as compared to the 2022 period, and insurance proceeds received from a natural disaster claim in the 2022 period.

The decrease was primarily attributable to lower outstanding debt during the current quarter compared to the prior year quarter due to the paydown of $225 million in November 2022 and full payoff of the remaining balance of our APSC term loan in June 2023.

These effects were partially offset by a year over year increase in cash interest on the 2022 ABL Credit Facility and the increase in PIK interest on the Uptiered Loan / Subordinated Term Loan.

Cash interest paid during the quarter ended September 30, 2023 and 2022 was $5.0 million and $7.7 million, respectively.

Other income, net.

Other income, net decreased by $3.0 million primarily due to the larger impact of foreign currency fluctuations and asset disposals in the third quarter of 2022 as compared to 2023.

The provision for income tax was $1.1 million on the pre-tax loss from continuing operations of $11.1 million in the current year quarter, compared to a $1.5 million income tax provision on a pre-tax loss of $25.2 million in the prior year quarter.

The effective tax rate, inclusive of discrete items, was a provision of 15.3% for the three months ended June 30, 2023, compared to a provision of 8.5% for the three months ended June 30, 2022.

The effective tax rate change from the prior year quarter compared to the current year quarter is due to changes in the valuation allowance.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The following is a comparison of our results of operations for the six months ended June 30, 2023 to the six months ended June 30, 2022.

The effective tax rate, inclusive of discrete items, was a provision of 9.7% for the three months ended September 30, 2023, compared to a provision of 5.8% for the three months ended September 30, 2022.

The effective tax rate differs from the prior year quarter compared to the current year quarter and from the statutory rate due to changes in the valuation allowance.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The following is a comparison of our results of operations for the nine months ended September 30, 2023 to the nine months ended September 30, 2022.

The components of revenue and operating income (loss) from our continuing operations consisted of the following (in thousands):

Six Months Ended June 30, Increase

Nine Months Ended September 30, Increase

2023 2022 $ %

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Loss on debt extinguishment (1,585) — (1,585) NM

Other income (expense), net 648 6,438 (5,790) (89.9) %

Other income, net 914 9,664 (8,750) (90.5) %

Loss before income taxes $ (48,578) $ (88,973) $ 40,395 45.4 %

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IHT revenues increased by $2.4 million or 0.7% and MS revenue increased by $17.2 million or 5.6%.

Revenues were negatively impacted by adverse foreign exchange movements of $4.9 million during the six month period ended June 30, 2023.

Revenues were negatively impacted by $3.8 million from adverse foreign exchange movements during the nine-month period ended September 30, 2023.

IHT segment year to date revenue increased 0.7%, compared to the prior year period, which was primarily driven by an increase of $8.3 million in U.S.

revenue due to higher callout and turnaround activity and an increase of $2.2 million increase in international revenue, partially offset by lower activity in Canada revenue.

MS segment revenue increased 11.1% compared to the prior year period, due to a $8.8 million increase in the U.S.

market, primarily attributable to higher activity in callout, hot taping and leak repair services, a $9.3 million increase in international operations primarily attributable to higher turnaround activity, leak repair services and product sales, and a $3.5 million increase in Canada.

revenue due to higher callout and turnaround activity, an increase of $3.0 million in other international regions’ revenue and an increase of $1.1 million in aerospace activity, offset by a $10.0 million decrease in Canada revenue due to turnaround/project work in 2022 that did not repeat in 2023.

MS segment revenue increased 5.6% compared to the prior year period, due to a $4.0 million increase in U.S.

operations, primarily attributable to higher activity in callout, hot tapping and leak repair services, a $0.2 million increase in Canada operations and a $13.0 million increase in other international operations primarily attributable to higher turnaround activity, leak repair services and product sales.

Operating income (loss).

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IHT operating income increased by $4.6 million or 35.6%, driven by higher activity and improved margins in the U.S.

and cost reductions in Canada.

and indirect and SG&A cost reductions in the U.S.

MS operating income increased by $7.2 million as compared to the prior year period.

Operating income from the U.S., international and Canada operations increased by $4.2 million, $2.1 million and $2.1 million, respectively, driven by higher activity and improved margins.

Corporate operating loss decreased by $16.0 million due to lower professional fees and lower severance cost in the current year period as compared to the prior year period and lower overall costs due to the Company’s ongoing cost reduction efforts.

In spite of our cost reduction efforts, we continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the six months ended June 30, 2023 and 2022, operating loss includes net expenses totaling $5.1 million and $14.1 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Six Months Ended June 30,

Operating income from the U.S., Canada, and other international operations increased by $3.7 million, $1.2 million, and $2.3 million, respectively, driven by higher activity and improved margins.

Corporate operating loss decreased by $18.6 million due to lower professional fees, lower legal and severance cost in the current year period as compared to the prior year period and lower overall costs due to the Company’s continuous cost reduction efforts.

We continue to experience cost inflation in several areas across all segments, such as raw materials, transportation, and labor costs.

For the nine months ended September 30, 2023 and 2022, operating loss includes net expenses totaling $7.8 million and $16.9 million, respectively, that we do not believe are indicative of our core operating activities, as detailed in the table below (in thousands):

Nine Months Ended September 30,

Operating loss $ (4,408) $ (34,929)

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Interest expense, net decreased $20.2 million from the prior year period.

The decrease was primarily attributable to lower outstanding debt during the 2023 period, due to the $ 225.0 million pay down of our term debt in November 2022 and the 2022 period write off of deferred financing costs related to our Citi ABL facility that was refinanced in February 2022.

These effects were partially offset by a year over year increase in cash interest rates and the acceleration of the amortization of debt related deferred costs until June 16, 2023 to reflect the revised Trigger Date impact on the maturity date.

Cash interest paid for six months ended June 30, 2023 and 2022 was $9.1 million and $9.4 million, respectively.

The decrease was primarily attributable to lower outstanding debt during the 2023 period, due to a $ 225.0 million payment on the APSC term loan in November 2022 and subsequent pay off of the APSC term loan in June 2023.

These decreases were partially offset by a year over year increase in cash interest on the 2022 ABL Credit Facility and the increase in PIK interest on the subordinated term loan.

Cash interest paid for nine months ended September 30, 2023 and 2022 was $14.5 million and $17.2 million, respectively.

Loss on Debt Extinguishment.

On June 16, 2023, we used the proceeds from the ME/RE Loans and borrowings under the 2022 ABL Credit Facility to repay the total outstanding Term Loan balance of $35.5 million under the Term Loan Credit Agreement with APSC plus the applicable prepayment premium of $1.4 million and related accrued interest, resulting in a loss on debt extinguishment of $1.6 million.

Other income (expense), net .

Other income (expense) improved by $5.8 million from the prior year period primarily due to foreign currency fluctuations, lower gains on disposal of assets in 2023 compared to the 2022 period, and insurance proceeds received from a natural disaster claim in 2022.

T he provision for income tax was $2.9 million on the pre-tax loss from continuing operations of $37.5 million in the current year-to-date compared to income tax expense o f $2.7 million o n the pre-tax loss of $63.8 million in the prior year-to-date period.

The effective tax rate was a provision of 7.7% for the six months ended June 30, 2023, compared to a provision of 4.2% for the six months ended June 30, 2022.

The effective tax rate change from the prior year quarter compared to the current year quarter is due to an increase in the valuation allowance.

On June 16, 2023, we used the proceeds from the ME/RE Loans and borrowings under the 2022 ABL Credit Facility to repay the total outstanding balance of $ 35.5 million under the Term Loan Credit Agreement with APSC plus the applicable prepayment premium, resulting in a loss on debt extinguishment of $ 1.6 million.

Other income, net .

Other income decreased by $8.8 million from the prior year period primarily due to larger foreign currency fluctuations, gains on disposal of assets, and insurance proceeds received from a natural disaster claim in the 2022 period.

T he provision for income tax was $4.0 million on the pre-tax loss from continuing operations of $48.6 million in the current year-to-date period compared to income tax expense o f $4.2 million o n the pre-tax loss of $89.0 million in the prior year-to-date period.

The effective tax rate was a provision of 8.3% for the nine months ended September 30, 2023, compared to a provision of 4.7% for the nine months ended September 30, 2022.

The effective tax rate differs from the statutory rate and from the prior year period due to a change in the valuation allowance.

Non-GAAP Financial Measures and Reconciliations

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(unaudited, in thousands)

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

3 unchanged sentences

1,452 539 5,820 10,576

Write-off of software cost

Legal costs 2

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1,452 539 5,820 10,576

Write-off of software cost

Legal costs 2

2 unchanged sentences

655 670 1,177 3,028

Foreign currency (gain) loss 143 (1,029) (34) (1,691)

Foreign currency gain (742) (2,264) (776) (3,955)

Pension credit 5

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Free Cash Flow:

Cash used in operating activities $ (5,854) $ (511) $ (23,617) $ (56,486)

Cash provided by (used in) operating activities $ 1,548 $ 5,913 $ (22,069) $ (50,573)

Capital expenditures (2,360) (5,883) (7,433) (17,299)

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____________________________________

1 For the three and six months ended June 30, 2023, includes $1.6 million and $3.2 million, respectively related to debt financing and $0.7 million and $0.8 million, respectively, related to lease extinguishment charges.

For the three and six months ended June 30, 2022, includes $4.7 million and $10.0 million, respectively, related to costs associated with the debt financing and corporate support.

1 For the three and nine months ended September 30, 2023, includes $1.5 million and $4.7 million, respectively related to debt financing, and $0 and $1.1 million, respectively, related to lease extinguishment charges and other project costs.

For the three and nine months ended September 30, 2022, includes $0.5 million and $10.5 million, respectively, related to costs associated with the debt financing and corporate support costs.

2 Primarily relates to accrued legal matters and legal fees.

3 For the three and six months ended June 30, 2023, primarily related to costs associated with staff reductions.

For the three months ended June 30, 2022, includes $1.0 million primarily related to customary severance costs associated with staff reductions.

For the six months ended June 30, 2022, includes $1.3 million related to customary severance costs associated with executive departures and $1.1 million associated with severance across multiple corporate departments.

3 For the three and nine months ended September 30, 2023, primarily related to customary severance costs associated with staff reductions across multiple departments.

For the three months ended September 30, 2022, primarily related to customary severance costs associated with staff reductions across multiple corporate departments.

For the nine months ended September 30, 2022 includes $1.3 million related to customary severance costs associated with executive departures and $1.7 million associated with severance across multiple corporate departments.

4 Represents the tax effect of the adjustments.

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(unaudited, in thousands)

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Severance charges, net 1

287 35 595 89

Professional fees and other 3

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Provision for income taxes 1,072 1,465 4,020 4,182

Gain on equipment sale 7 (1,172) (296) (3,485)

Loss (gain) on equipment sale 10 (786) (286) (4,269)

Interest expense, net 10,067 26,653 43,499 63,708

4 unchanged sentences

1,452 539 4,925 10,576

Write-off of software cost 629 — 629 —

Legal costs 4

9 unchanged sentences

___________________

1 For the three and six months ended June 30, 2023, primarily related to costs associated with staff reductions.

For the three months ended June 30, 2022, includes $1.0 million primarily related to customary severance costs associated with staff reductions.

1 For the three and nine months ended September 30, 2023, primarily related to customary severance costs associated with staff reductions across multiple departments.

For the three months ended September 30, 2022, primarily related to customary severance costs associated with staff reductions across multiple corporate departments.

2 Represents pension credits for the U.K.

2 unchanged sentences

Accruals for future benefits ceased in connection with a plan curtailment in 2013.

3 For the three and six months ended June 30, 2023, includes $1.6 million and $3.2 million, respectively related to debt financing and $0.7 million and $0.8 million, respectively, related to lease extinguishment charges.

For the three and six months ended June 30, 2022, includes $4.7 million and $10.0 million, respectively, related to costs associated with the debt financing and corporate support.

3 For the three and nine months ended September 30, 2023, includes $1.5 million and $4.7 million, respectively related to debt financing, and $0 and $1.1 million, respectively, related to lease extinguishment charges and other project costs.

For the three and nine months ended September 30, 2022, includes $0.5 million and $10.5 million, respectively, related to costs associated with the debt financing and corporate support costs.

4 Primarily relates to accrued legal matters and legal fees.

Liquidity, Capital Resources and Going Concern

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP and assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the issue date of these condensed consolidated financial statements.

As discussed in Note 1 - Description of Business and Basis of Presentation , the Company successfully negotiated amendments to existing debt instruments (including to the financial covenants contained therein) and / or entered into new agreements with our lenders.

These actions removed the substantial doubt about our ability to continue as a going concern that previously existed and had been disclosed in prior periods.

In addition, as of June 30, 2023, we are in compliance with our debt covenants.

Based on the Company’s forecast and the amendments/new agreements entered in June 2023, we believe that our current working capital including cash on hand, our capital expenditure financing and the remaining borrowing availability under our various debt agreements is sufficient to fund our operations, maintain compliance with our debt covenants (as amended), and satisfy the Company’s obligations as they come due within one year after the date of issuance of these unaudited condensed consolidated financial statements.

Our ability to maintain compliance with the financial covenants contained in the various debt agreements is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties.

While our lenders agreed to amend the financial covenants contained therein and, in the case of the ABL Credit Agreement, to extend the maturity, there can be no assurance that our lenders will provide additional waivers or amendments in the event of future non-compliance with our debt covenants, or other possible events of default that could happen.

Financing for our operations consists primarily of our 2022 ABL Credit Agreement (which includes the Revolving Credit Loans, the Delayed Draw Term Loan, and the ME/RE Loans), the A&R Term Loan Credit Agreement (which includes the Uptiered Loan and the Incremental Term Loan), and cash flows attributable to our operations.

As of June 30, 2023, excluding availability dedicated to repayment of the Notes and drawn on July 31, 2023, we had approximately $36.8 million of pro forma borrowing capacity consisting of $21.8 million available under the amended 2022 ABL Credit Agreement, and $15.0 million available under the A&R Term Loan Agreement.

Our principal uses of cash are for working capital needs and operations.

We have entered into recent refinancing transactions as further described in Note 11 – Debt and certain amendments to address our near-term liquidity needs, and we have taken definitive actions to reduce costs, improve operations, profitability, and liquidity, and position the Company for future growth;

however, we have suffered recurring operating losses and subsequent to year-end, we had reduced borrowing capacity to fund our increasing working capital needs.

Our cash and cash equivalents as of June 30, 2023 totaled $30.4 million, consisting of $25.0 million of unrestricted cash on hand, and $5.4 million restricted.

As of December 31, 2022, our cash and cash equivalents were $58.1 million, including $51.1 million of unrestricted cash on hand, and $7.0 million restricted.

Our gross debt and finance obligations were $310.9 million, of which $4.5 million was classified as current at June 30, 2023, compared to gross debt of $285.9 million at December 31, 2022.

On July 31, 2023, $42.5 million of the $57.5 million availability under the A&R Term Loan Credit Agreement was drawn down and the proceeds were used to repay the Notes that matured on August 1, 2023.

As of August 8, 2023, we had consolidated cash and cash equivalents of $21.3 million, excluding $5.3 million of restricted cash, and approximately $33.4 million of undrawn availability under our various credit facilities, resulting in total liquidity of $54.7 million.

Liquidity and Capital Resources

Financing for operations consists primarily of our 2022 ABL Credit Agreement (which includes the Revolving Credit Loans and, the Delayed Draw Term Loan), ME/RE Loans, the A&R Term Loan Credit Agreement (which includes the Uptiered Loan and the Incremental Term Loan), and cash flows from our operations.

As of September 30, 2023, we had approximately $19.9 million of borrowing capacity consisting of $4.9 million available under the 2022 ABL Credit Agreement, and $15.0 million available under the A&R Term Loan Agreement.

Our principal uses of cash are for working capital, capital expenditures, and operations.

Our cash and cash equivalents as of September 30, 2023 totaled $21.5 million, consisting of $16.5 million of unrestricted cash on hand, and $5.0 million of restricted cash.

As of December 31, 2022, our cash and cash equivalents were $58.1 million, including $51.1 million of unrestricted cash on hand, and $7.0 million of restricted cash.

Our total debt and finance obligations were $301.1 million, of which $5.3 million was classified as current at September 30, 2023, compared to total debt of $285.9 million at December 31, 2022.

As of November 7, 2023, we had consolidated cash and cash equivalents of $25.5 million, excluding $5.0 million of restricted cash.

In addition, we had $10.0 million available under the A&R Term Loan Agreement and approximately $4.0 million of undrawn availability under our other various credit facilities, resulting in total liquidity of $39.5 million.

As of September 30, 2023, we were in compliance with all debt provisions and covenants under our various debt agreements.

Refer to Note 11 - Debt for information on our debt instruments.

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Our capital budgets are based upon our estimate of internally generated sources of cash including from asset sales, as well as cash on hand and the available borrowing capacity under our ABL and other Credit Facilities.

We expect to finance our 2023 capital budget with cash flows from operations, cash on hand, proceeds from asset sales, and our credit facility.

We expect to finance our 2023 capital budget with cash flows from operations, cash on hand, proceeds from asset sales, and amounts available under our debt arrangements.

Actual capital expenditure levels may vary significantly due to many factors, including industry conditions;

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the extent to which non-strategic assets are sold and our liquidity outlook.

We continuously monitor our liquidity needs, coordinate our capital expenditure program with our expected cash flows

and projected debt-repayment schedule, and evaluate our available alternative sources of liquidity, including accessing debt and

equity capital markets in light of current and expected economic conditions.

Although we cannot provide any assurance, we believe that our liquidity position and our improving ability to generate cash flows from our operations due to the success of our ongoing cost reduction efforts should be adequate to meet our cash requirements inclusive of, but not limited to, our normal operating needs, debt service obligations and commitments of at least the next twelve months.

The following table summarizes cash flows from Operating, Investing and Financing activities (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows provided by (used in):

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Cash flows attributable to our operating activities.

For the six months ended June 30, 2023, net cash used in operating activities was $23.6 million.

Our net cash used in operating activities was driven by our net loss for the period, which totaled $40.5 million and negative working capital of $26.4 million, partially offset by amortization of debt issuance costs and debt discount of $16.2 million, depreciation and amortization of $19.1 million, and PIK Interest of $7.1 million.

For the six months ended June 30, 2022, net cash used in operating activities was $53.4 million.

For the nine months ended September 30, 2023, net cash used in operating activities was $22.1 million, an improvement of $24.3 million over the 2022 period.

Our net cash used in operating activities was driven by our net loss for the period, which totaled $52.6 million and negative working capital of $26.2 million, partially offset by amortization of debt issuance costs of $16.9 million, depreciation and amortization of $28.5 million, and PIK interest of $10.9 million.

For the nine months ended September 30, 2022, net cash used in operating activities was $46.4 million.

Our net cash used in operating activities generally reflects the cash effects of transactions and other events used in the determination of net loss, which totaled $76.9 million.

The decline in cash generated from operations was driven by the net loss during the period, decline in working capital of $38.0 million, a gain on disposal of assets of $3.5 million, and movement in deferred income taxes of $0.4 million.

These were partially offset by amortization of debt issuance costs and debt discount, write off of deferred loan costs of $14.8 million, depreciation and amortization of $19.6 million, and paid-in-kind interest of $10.0 million, resulting in negative operating cash flows for the period.

The decline in cash generated from operations was driven by the net loss during the period,

negative working capital impacts of $35.3 million, a gain on disposal of assets of $4.3 million, and movement in deferred income taxes of $0.4 million.

These were partially offset by amortization of debt issuance costs and debt discount, and write off of deferred loan costs of $28.4 million, depreciation and amortization of $28.6 million, and PIK interest of $15.5 million.

Cash flows attributable to our investing activities.

For the six months ended June 30, 2023, net cash used in investing activities was $4.7 million, consisting primarily of capital expenditures (mainly related to the Company’s new aerospace inspection facility in Cincinnati), partially offset by $0.3 million of cash proceeds from asset sales.

For the six months ended June 30, 2022, net cash used in investing activities was $8.9 million, consisting primarily of $14.0 million of capital expenditures, partially offset by $5.1 million of cash proceeds from asset sales.

For the nine months ended September 30, 2023, net cash used in investing activities was $7.0 million, consisting primarily of capital expenditures of $7.4 million, partially offset by $0.4 million of cash proceeds from asset sales.

For the nine months ended September 30, 2022, net cash used in investing activities was $13.8 million, consisting primarily of $21.0 million of capital expenditures, partially offset by $7.2 million of cash proceeds from asset sales.

Cash flows attributable to our financing activities.

For the six months ended June 30, 2023, net cash provided by financing activities was $0.5 million consisting primarily of net borrowings under our 2022 ABL Credit Facility of $16.0 million and borrowings under ME/RE loans of $27.4 million offset by the payoff of APSC Term Loan of $37.1 million and payment of deferred financing cost of $5.3 million.

For the six months ended June 30, 2022, net cash provided by financing activities was $64.8 million consisting primarily of net borrowings under our 2022 ABL Credit Facility of $66.1 million and issuance of common stock amounting to $9.7 million partially offset by $10.6 million in payments for debt issuance costs.

For the nine months ended September 30, 2023, net cash used in financing activities was $7.4 million consisting primarily of net borrowings under our 2022 ABL Credit Facility of $11.0 million, borrowings under ME/RE loans of $27.4 million and borrowings under the Incremental Term Loan of $42.5 million, offset by the payoff of APSC Term Loan of $37.1 million, payoff of the Notes of $41.2 million and payment of debt issuance cost of $8.4 million.

For the nine months ended September 30, 2022, net cash provided by financing activities was $63.3 million consisting primarily of net borrowings under our ABL Credit Facility of $67.8 million and $9.7 million cash proceeds from the equity issuances, partially offset by $13.6 million in payments for debt issuance costs.

Effect of exchange rate changes on cash and cash equivalents.

For the six months ended June 30, 2023 and 2022, the effect of foreign exchange rate changes on cash was $0.2 million and $0.4 million, respectively.

For the nine months ended September 30, 2023 and 2022, the effect of foreign exchange rate changes on cash was $0.1 million and $1.4 million, respectively.

The impact of exchange rates on cash and cash equivalents is primarily attributable to fluctuations in U.S.

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We have various contractual obligations in the normal course of our operations.

For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2022.

There have been no material changes to the contractual obligation disclosure since year-end 2022, see Note 11 - Debt for additional details regarding amendments to our debt agreements that were executed during the first and second quarters of 2023.

For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations” in our Annual Report on Form 10-K.

See Note 11 - Debt for additional details regarding new financing transactions and amendments to our debt agreements that were executed during the year.

Off-Balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations.

As of June 30, 2023, the material off-balance sheet arrangements and transactions that we have entered into include $10.1 million in outstanding letters of credit under the 2022 ABL Credit Facility.

See Note 11 - Debt for additional details.

See Note 11 - Debt for additional details on our off-balance sheet arrangements.

Critical Accounting Policies and Estimates

A discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2022.

There were no material changes to our critical accounting policies during the six months ended June 30, 2023.

A discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K.

There were no material changes to our critical accounting policies during the nine months ended September 30, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis