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11: R1 Cover Page HTML 74K
12: R2 Unaudited Consolidated Statements of Operations HTML 98K
13: R3 Unaudited Consolidated Statements of Comprehensive HTML 41K
Loss
14: R4 Consolidated Balance Sheets HTML 127K
15: R5 Consolidated Balance Sheets (Parentheticals) HTML 28K
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Equity
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29: R19 Segments and Related Information HTML 170K
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Schedule of Asset Impairments (Details)
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(Exact name of registrant as specified in its charter)
iDelaware
i76-0476605
(State
or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
iThree Allen Center, 333 Clay Street
iSuite
4620
i77002
iHouston,
iTexas
(Zip
Code)
(Address of principal executive offices)
(i713) i652-0582
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon stock, par value $0.01 per share
iOIS
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
☐
iAccelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
i☒
As
of October 21, 2022, the number of shares of common stock outstanding was i63,902,143.
The accompanying unaudited condensed consolidated financial statements of Oil States International, Inc. and its subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. Certain information in footnote disclosures normally included with financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair statement
of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the full year.
As further discussed in Note 12, "Commitments and Contingencies," the impact of the Coronavirus Disease 2019 ("COVID-19") pandemic and the related economic, business and market disruptions continue to evolve and their future effects remain uncertain. The actual impact of these developments on the Company will depend on numerous factors, many of which are beyond management's control and knowledge. It is therefore difficult for management to assess or predict with precision the broad future effect of this
health crisis on the global economy, the energy industry or the Company. During 2020 and 2021, the Company recorded asset impairments, severance and restructuring charges in response to these developments as further discussed in Note 3, "Asset Impairments and Other Charges and Benefits." As additional information becomes available, events or circumstances change and strategic operational decisions are made by management, further adjustments may be required which could have a material adverse impact on the Company's consolidated financial position, results of operations and cash flows.
The preparation of condensed consolidated financial statements in conformity
with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Examples of such estimates include, but are not limited to, goodwill and long-lived asset impairments, revenue and income recognized over time, valuation allowances recorded on deferred tax assets, reserves on inventory, allowances for doubtful accounts, settlement of litigation and potential future adjustments related to contractual indemnification and other agreements. Actual results could materially differ from those estimates.
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, which are adopted by the
Company as of the specified effective date. Management believes that recently issued standards, which are not yet effective, will not have a material impact on the Company's consolidated financial statements upon adoption.
The financial statements included in this report should be read in conjunction with the Company's audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2021.
2. iAcquisition
On
April 14, 2022, the Company acquired E-Flow Control Holdings Limited ("E-Flow"), a U.K.-based global provider of fully integrated handling, control, monitoring and instrumentation solutions. The purchase price of $i8.1 million (net of cash acquired) was funded with cash-on-hand and is subject to customary post-closing adjustments. Under the terms of the purchase agreement, the
Company may be entitled to indemnification for certain matters occurring prior to the acquisition.
The E-Flow transaction was accounted for using the acquisition method of accounting, based on the Company's preliminary estimates of the fair value of assets acquired (primarily long-lived intangible assets and goodwill) and liabilities assumed in the acquisition. E-Flow's results of operations have been included in the Company's consolidated financial statements and have been reported within the Offshore/Manufactured Products segment subsequent to the closing of the acquisition.
3. iAsset Impairments and Other Charges and Benefits
In March of 2020, the spot price of West Texas Intermediate
("WTI") crude oil declined over i50% 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. As demand for most of the Company's products and services depends substantially on the level of capital expenditures by the oil and natural gas industry, these conditions caused rapid reductions to most of the
Company's customers' drilling, completion and production activities and their related spending on the Company's products and services, particularly those supporting activities in the U.S. shale play regions, until the supply/demand imbalances eased. Following these March 2020 events, the Company immediately implemented significant cost reduction initiatives, which continued into 2021.
i
In this regard,
during the first nine months of 2021, the Company continued its restructuring efforts, closed additional facilities in the United States and continued to assess the carrying value of its assets based on management actions and the industry outlook regarding demand for and pricing of its products and services, and recorded the following charges (in thousands):
Offshore/
Manufactured Products
Well Site Services
Downhole Technologies
Corporate
Pre-tax Total
Tax
After-tax Total
First quarter 2021
Impairments
of fixed assets (Note 4)
$
i—
$
i650
$
i—
$
i—
$
i650
$
i137
$
i513
Severance
and restructuring costs
i282
i1,306
i275
i1,555
i3,418
i717
i2,701
Second
quarter 2021
Impairments of operating lease assets (Note 4)
$
i—
$
i2,794
$
i—
$
i—
$
i2,794
$
i587
$
i2,207
Severance
and restructuring costs
i—
i2,351
i203
i—
i2,554
i536
i2,018
Third
quarter 2021
Impairment of inventories (Note 4)
$
i—
$
i—
$
i2,113
$
i—
$
i2,113
$
i444
$
i1,669
Severance
and restructuring costs
i256
i352
i129
i—
i737
i154
i583
/
Additionally,
during the three and nine months ended September 30, 2021, the Company recognized $i1.2 million and $i8.8 million,
respectively, in aggregate reductions to payroll tax expense (within cost of revenues and selling, general and administrative expense) as part of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") employee retention credit program.
In August 2022, the Offshore/Manufactured Products segment settled outstanding litigation against certain service providers in exchange for cash totaling $i6.9 million. In connection with this settlement, the
Company recognized a gain of $i6.1 million (net of legal and other related costs) in the third quarter of 2022, which is included in other operating income, net.
Should, among other events and circumstances, the ongoing war between Russia and Ukraine escalate or spread, global economic and industry conditions deteriorate, the COVID-19 pandemic-induced business, supply chain and market disruptions worsen, the outlook for future operating results and cash flow for any of the
Company's segments decline, income tax rates increase or regulations change, climate and environmental regulations or rules change, costs of equity or debt capital increase, valuation for comparable public companies or comparable acquisition valuations decrease, or management implements strategic decisions based on industry conditions, the Company may need to recognize additional impairment losses and/or incur other costs in future periods.
As
of September 30, 2022, accounts receivable, net in the United States and the United Kingdom represented i75% and i12%, respectively, of the total. No other country or single customer
accounted for more than 10% of the Company's total accounts receivable as of September 30, 2022.
For the nine months ended September 30, 2022, the $i3.0 million net decrease in contract assets
was attributable to $i30.4 million transferred to accounts receivable, which was partially offset by $i27.6 million
in revenue recognized during the period. Deferred revenue (contract liabilities) increased by $i7.5 million in the first nine months of 2022, reflecting $i22.7 million
in new customer billings which were not recognized as revenue during the period, partially offset by the recognition of $i14.8 million of revenue that was deferred at the beginning of the period.
i
The
following provides a summary of activity in the allowance for doubtful accounts for the nine months ended September 30, 2022 and 2021 (in thousands):
The
Company recorded an impairment charge of $i2.1 million in the third quarter of 2021 to reduce the carrying value of inventories within the Downhole Technologies segment to their estimated net realizable value based primarily on management's decision to exit a product offering.
For
the three months ended September 30, 2022 and 2021, depreciation expense was $i11.3 million and $i14.7 million, respectively. Depreciation
expense was $i35.9 million and $i46.7 million, respectively, for the nine months ended September 30, 2022 and 2021.
During
the first and second quarters of 2021, the Well Site Services segment recognized non-cash fixed and operating lease asset impairment charges of $i0.7 million and $i2.8 million,
respectively, associated with the closure of additional facilities coupled with other management actions. During the second quarter of 2021, the segment also recorded an additional $i1.9 million charge associated with the exit of a leased facility.
For
the three months ended September 30, 2022 and 2021, amortization expense was $i5.1 million and $i4.9 million,
respectively. Amortization expense was $i15.5 million and $i15.4 million for the nine months ended September 30,
2022 and 2021, respectively.
(1)Unamortized
deferred financing costs of $i2.1 million and $i2.7 million as of September 30, 2022 and December 31,
2021, respectively, are presented in other noncurrent assets.
(3)The outstanding principal amount of the 2023 Notes was $i19.5 million and $i26.0 million
as of September 30, 2022 and December 31, 2021, respectively.
/
Revolving Credit Facility
On February 10, 2021, the Company entered into a senior secured credit facility with certain lenders, which provides for a $i125.0 million
asset-based revolving credit facility (the "ABL Facility") under which credit availability is subject to a borrowing base calculation. On March 16, 2021, the Company entered into an amendment to the ABL Facility that permitted the Company to incur the indebtedness represented by the 2026 Notes discussed below.
The ABL Facility is governed by a credit agreement, as amended, 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 i91
days prior to the maturity of any outstanding indebtedness with a principal amount in excess of $i17.5 million.
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 $i50.0 million
sub-limit for the issuance of letters of credit. Borrowings under the ABL Agreement are secured by a pledge of substantially all of the Company's 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 i2.75%
to i3.25% and subject to a LIBOR floor rate of i0.50%, or at a base rate plus a margin of i1.75%
to i2.25%, in each case based on average borrowing availability. Quarterly, the Company must also pay a commitment fee of i0.375%
to i0.50% per annum, based on unused commitments under the ABL Agreement.
The
ABL Agreement places restrictions on the Company's 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 the 2026 Notes discussed below), 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 repayment of all amounts then outstanding. The ABL Agreement also requires the Company to satisfy and maintain a fixed charge coverage ratio of not less than i1.0
to 1.0 (i) in the event that availability under the ABL Agreement is less than the greater of (a) i15% of the borrowing base and (b) $i14.1 million;
(ii) to complete certain specified transactions; or (iii) if an event of default has occurred and is continuing.
As of September 30, 2022, the Company had $i17.6 million of outstanding letters of credit, but ino
borrowings outstanding under the ABL Agreement. The total amount available to be drawn as of September 30, 2022 was $i79.9 million, calculated based on the current borrowing base less outstanding borrowings, if any, and letters of credit. As of September 30, 2022, the Company was in compliance with its debt covenants under the ABL Agreement.
2026
Notes
On March 19, 2021, the Company issued $i135.0 million aggregate principal amount of its i4.75%
convertible senior notes due 2026 (the "2026 Notes") pursuant to an indenture, dated as of March 19, 2021 (the "2026 Indenture"), between the Company and Wells Fargo Bank, National Association, as trustee. Computershare Trust Company, National Association, assumed the role of trustee as of March 1, 2022. Net proceeds from the 2026 Notes offering, after deducting issuance costs, totaled $i130.6 million.
The Company used $i120.0 million of the cash proceeds to purchase $i125.0 million
principal amount of the outstanding 2023 Notes at a discount, with the balance added to cash on-hand.
The 2026 Notes bear interest at a rate of i4.75% per year and will mature on April 1, 2026, unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears on April 1 and October 1 of each year. Additional interest and special interest may accrue on the 2026 Notes under certain circumstances as described in the 2026 Indenture.
The initial conversion rate is 95.3516 shares of the Company's common stock per $1,000 principal amount of the 2026 Notes (equivalent to an initial conversion price of $i10.49 per share of common stock). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the 2026 Indenture. The
Company's intent is to repay the principal amount of the 2026 Notes in cash and settle the conversion feature in shares of the Company's common stock. As of September 30, 2022, 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, the Company issued $i200.0 million
aggregate principal amount of its i1.50% convertible senior notes due 2023 (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.
Computershare Trust Company, National Association, assumed the role of trustee as of March 1, 2022. As of September 30, 2022, $i19.5 million principal amount of the 2023 Notes remained outstanding. The 2023 Notes bear interest at a rate of i1.50%
per year and will mature on February 15, 2023, unless earlier repurchased, redeemed or converted. The initial conversion rate is 22.2748 shares of the Company's common stock per $1,000 principal amount of the 2023 Notes (equivalent to an initial conversion price of $i44.89 per share of common stock). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the 2023 Indenture.
The Company's intent is to repay the principal amount of the 2023 Notes in cash. As of September 30, 2022, none of the conditions allowing holders of the 2023 Notes to convert, or requiring us to repurchase the 2023 Notes, had been met.
The following table provides a summary of the Company's purchases of outstanding 2023 Notes during the nine months ended September 30, 2022 and 2021, with non-cash gains reported within other income, net (in thousands):
In connection with the 2018 acquisition of GEODynamics, Inc. ("GEODynamics" and the "GEODynamics Acquisition"), the Company issued a $i25.0 million
promissory note (the "GEO Note") that bore interest at i2.50% per annum (subject to adjustment) and was scheduled to mature on July 12, 2019. Payments due under the GEO Note were subject to set-off, in full or in part, against certain indemnification claims related to matters occurring prior to the GEODynamics Acquisition. The Company asserted indemnification claims against the seller of GEODynamics (the "GEO Seller"), and the
GEO Seller filed a breach of contract suit against the Company and one of its wholly-owned subsidiaries alleging that payments due under the GEO Note were required to be repaid in accordance with the terms of such note. The Company incurred settlement costs and expenses of $i7.5 million
related to such indemnification claims, and as of June 28, 2022 had reduced the carrying amount of such note in the consolidated balance sheet to $i17.5 million, which was its then-current best estimate of what was owed after set-off for such indemnification matters. As further discussed in Note 12, "Commitments and Contingencies," on June 28, 2022, the Company settled its disputes with the GEO Seller, including the
full and final settlement of all amounts due under the GEO Note. Pursuant to the settlement agreement, on July 1, 2022, the Company paid the GEO Seller $i10.0 million in cash, issued approximately i1.9 million
shares of its common stock (having a market value of $i10.3 million) and extinguished the $i17.5 million carrying value of the GEO Note along with accrued interest of $i2.2 million.
6. iFair
Value Measurements
The Company's financial instruments consist of cash and cash equivalents, investments, receivables, payables and debt instruments. The Company believes that the carrying values of these instruments, other than the 2023 Notes and 2026 Notes, on the accompanying consolidated balance sheets approximate their fair values. The estimated fair value of the 2023 Notes as of September 30, 2022 was $i19.1 million
based on quoted market prices (a Level 2 fair value measurement), which compares to the principal amount of $i19.5 million. The estimated fair value of the 2026 Notes as of September 30, 2022 was $i110.4 million
based on quoted market prices (a Level 2 fair value measurement), which compares to the principal amount of $i135.0 million.
7. iStockholders'
Equity
Common and Preferred Stock
i
The following table provides details with respect to the changes to the number of shares of common stock, $i0.01
par value, outstanding during the first nine months of 2022 (in thousands):
Accumulated other comprehensive loss, reported as a component of stockholders' equity, primarily relates to fluctuations in currency exchange rates against the U.S. dollar as used to translate certain of the international operations of the Company's operating segments. Accumulated other comprehensive loss increased from $i66.0 million at
December 31, 2021 to $i89.8 million at September 30, 2022. For the nine months ended September 30, 2022 and 2021, currency translation adjustments recognized as a component of other comprehensive loss were primarily attributable to the United Kingdom and Brazil.
During the nine months ended September 30,
2022, the exchange rate for the British pound weakened by i18% compared to the U.S. dollar while the Brazilian real strengthened by i3% compared to the U.S. dollar, contributing to other comprehensive loss of $i23.8 million.
During the nine months ended September 30, 2021, the exchange rate for the British pound and the Brazilian real weakened by i1% and i5%, respectively, compared
to the U.S. dollar, contributing to other comprehensive loss of $i4.2 million.
For the three months ended September 30, 2022, the
Company's income tax expense was $i0.8 million on a pre-tax income of $i2.9 million.
This compares to an income tax benefit of $i3.5 million on a pre-tax loss of $i16.6 million,
which included certain non-deductible expenses, for the three months ended September 30, 2021.
For the nine months ended September 30, 2022, the Company's income tax expense was $i6.0 million on a pre-tax loss of $i6.4 million.
Income tax expense in the first nine months of 2022 was negatively impacted by valuation allowances recorded against U.S. tax assets as well as certain non-deductible expenses and discrete tax items. This compares to an income tax benefit of $i9.1 million on a pre-tax loss of $i53.2 million,
which included certain non-deductible expenses and discrete tax items, for the nine months ended September 30, 2021.
9. iNet Income (Loss) Per Share
i
The
table below provides a reconciliation of the numerators and denominators of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share amounts):
Less:
Income attributable to unvested restricted stock awards
(i41)
i—
i—
i—
Numerator
for basic net income (loss) per share
i2,102
(i13,042)
(i12,425)
(i44,123)
Effect
of dilutive securities:
Unvested restricted stock awards
i3
i—
i—
i—
Numerator
for diluted net income (loss) per share
$
i2,105
$
(i13,042)
$
(i12,425)
$
(i44,123)
Denominators:
Weighted
average number of common shares outstanding
i63,896
i61,378
i62,490
i61,294
Less:
Weighted average number of unvested restricted stock awards outstanding
(i1,222)
(i1,001)
(i1,198)
(i1,030)
Denominator
for basic net income (loss) per share
i62,674
i60,377
i61,292
i60,264
Effect
of dilutive securities:
Unvested restricted stock awards
i2
i—
i—
i—
Denominator
for diluted net income (loss) per share
i62,676
i60,377
i61,292
i60,264
Net
income (loss) per share:
Basic
$
i0.03
$
(i0.22)
$
(i0.20)
$
(i0.73)
Diluted
i0.03
(i0.22)
(i0.20)
(i0.73)
/
The
calculation of diluted net income (loss) per share for the three and nine months ended September 30, 2022 excluded i249 thousand shares and i287 thousand
shares, respectively, issuable pursuant to outstanding stock options, due to their antidilutive effect. The calculation of diluted net loss per share for the three and nine months ended September 30, 2021 excluded i394 thousand shares and i444 thousand
shares, respectively, issuable pursuant to outstanding stock options, due to their antidilutive effect. Additionally, shares issuable upon conversion of both the 2023 Notes and the 2026 Notes were excluded from the calculation of diluted net income (loss) per share for the three and nine months ended September 30, 2022 and 2021 due to, among other factors, the Company's share price.
The
following table presents a summary of activity for stock options, service-based restricted stock and stock unit awards, and performance-based stock unit awards for the nine months ended September 30, 2022 (in thousands):
Weighted
average grant date fair value (2022 awards)
i
$
i6.50
$
i6.51
/
The
restricted stock program consists of a combination of service-based restricted stock and stock units, as well as performance-based stock units. Service-based restricted stock awards generally vest on a straight-line basis over a term of ithree years. Service-based stock unit awards (i39
thousand units as of September 30, 2022) vest at the end of a ione-year period, however the underlying shares are not issued until a specified future date. Performance-based stock unit awards generally vest at the end of a ithree-year
period, with the number of shares ultimately issued under the program dependent upon achievement of predefined specific performance objectives. The performance objective for performance-based awards granted in 2022 and 2021 is the Company's cumulative EBITDA over a ithree-year period. The performance objective for outstanding awards granted in 2020 is the Company's EBITDA
growth rate over a ithree-year period.
In the event the predefined targets are exceeded for any performance-based award, additional shares up to a maximum of i200%
of the target award may be granted. Conversely, if actual performance falls below the predefined target, the number of shares vested is reduced. If the actual performance falls below the threshold performance level, no restricted shares will vest.
During the first quarters of 2022 and 2021, the Company issued conditional long-term cash incentive awards ("Cash Awards") of $i1.5 million
and $i1.5 million, respectively, with the ultimate dollar amount to be awarded ranging from iizero/
to a maximum of $ii3.1/ million
for both the 2022 and 2021 Cash Awards. The performance measure for these Cash Awards is relative total stockholder return compared to a peer group of companies measured over a ithree-year period. The ultimate dollar amount to be awarded for the 2022 and 2021 Cash Awards is limited to their targeted award value ($ii1.5/ million)
if the Company's total stockholder return were to be negative over the performance period. The obligations, if any, related to the Cash Awards are classified as liabilities and recognized over the vesting period.
Stock-based compensation expense recognized during the three and nine months ended September 30, 2022 totaled $i1.7 million and $i5.2 million,
respectively. Stock-based compensation expense recognized during the three and nine months ended September 30, 2021 totaled $i1.5 million and $i6.3 million,
respectively. As of September 30, 2022, there was $i8.5 million of pre-tax compensation costs related to service-based and performance-based stock awards, which will be recognized in future periods as vesting conditions are satisfied.
The Company operates through ithree
operating segments: Offshore/Manufactured Products, Well Site Services and Downhole Technologies. iFinancial information by operating segment for the three and nine months ended September 30, 2022 and 2021 is summarized in the following tables (in thousands).
(1)Operating
income included a $i6.1 million gain on settlement of outstanding litigation against certain service providers.
(2)Operating loss included non-cash fixed and lease asset impairment charges of $i3.4 million.
(3)Operating
loss included a non-cash inventory impairment charge of $i2.1 million.
See Note 3, "Asset Impairments and Other Charges and Benefits," and Note 4, "Details of Selected Balance Sheet Accounts," for further discussion of these and other charges and benefits recognized in first nine months of 2022 and 2021.
The following tables provide supplemental disaggregated revenue from contracts with customers by operating segment for the three and nine months ended September 30, 2022 and 2021 (in thousands):
Offshore/Manufactured
Products
Well Site Services
Downhole Technologies
Total
2022
2021
2022
2021
2022
2021
2022
2021
Three
Months Ended September 30
Major revenue categories -
Project-driven
products
$
i38,911
$
i25,294
$
i—
$
i—
$
i—
$
i—
$
i38,911
$
i25,294
Short-cycle:
Completion
products and services
i15,036
i11,544
i53,928
i42,714
i32,848
i25,527
i101,812
i79,785
Drilling
services
i—
i—
i6,581
i3,284
i—
i—
i6,581
i3,284
Other
products
i8,674
i7,138
i—
i—
i—
i—
i8,674
i7,138
Total
short-cycle
i23,710
i18,682
i60,509
i45,998
i32,848
i25,527
i117,067
i90,207
Other
products and services
i33,416
i25,027
i—
i—
i—
i—
i33,416
i25,027
$
i96,037
$
i69,003
$
i60,509
$
i45,998
$
i32,848
$
i25,527
$
i189,394
$
i140,528
Offshore/Manufactured
Products
Well Site Services
Downhole Technologies
Total
2022
2021
2022
2021
2022
2021
2022
2021
Nine
Months Ended September 30
Major revenue categories -
Project-driven
products
$
i113,853
$
i78,494
$
i—
$
i—
$
i—
$
i—
$
i113,853
$
i78,494
Short-cycle:
Completion
products and services
i43,893
i30,105
i149,845
i120,596
i95,156
i77,717
i288,894
i228,418
Drilling
services
i—
i—
i13,655
i7,008
i—
i—
i13,655
i7,008
Other
products
i24,052
i16,857
i—
i—
i—
i—
i24,052
i16,857
Total
short-cycle
i67,945
i46,962
i163,500
i127,604
i95,156
i77,717
i326,601
i252,283
Other
products and services
i94,818
i81,064
i—
i—
i—
i—
i94,818
i81,064
$
i276,616
$
i206,520
$
i163,500
$
i127,604
$
i95,156
$
i77,717
$
i535,272
$
i411,841
/
Revenues
from products and services transferred to customers over time accounted for approximately i63% and i63% of consolidated revenues for the nine months ended
September 30, 2022 and 2021, respectively. The balance of revenues for the respective periods relates to products and services transferred to customers at a point in time. As of September 30, 2022, the Company had $i168.1 million of remaining backlog related to contracts
with an original expected duration of greater than ione year. Approximately i15% of this remaining backlog
is expected to be recognized as revenue over the remaining three months of 2022, with an additional i50% recognized in 2023 and the balance thereafter.
12. iCommitments
and Contingencies
During 2021 and the first nine months of 2022, the distribution of COVID-19 vaccines progressed and many government-imposed restrictions were relaxed or rescinded. However, the effects of the COVID-19 pandemic and related economic, business and market disruptions continue and the macro outlook remains uncertain. The most direct impacts that the Company continues to experience are decreased pricing for its products and services due to the timing and rate of activity increases, market pressures driving increased capital discipline by its customers, supply chain disruptions, labor market constraints and inflation in wages, materials, parts, equipment and other costs. While the prices of and demand for crude oil have recovered from the lows seen in the initial stages of the pandemic, further outbreaks or the emergence
of new strains of the COVID-19 virus could result in the reimposition of domestic and international regulations directing individuals to stay at home, limiting travel, requiring facility closures and imposing quarantines. Widespread implementation of these or similar restrictions could result in commodity price volatility, reduced demand for the Company's products and services, as well as delays in or inability of the Company to fulfill its contractual obligations to customers, logistic constraints, increases in the Company's costs and workforce and raw material shortages. The Company continues to monitor the effect of the COVID-19
pandemic on its employees, customers, critical suppliers and other stakeholders. The ultimate duration of the COVID-19 pandemic, along with resulting governmental restrictions and related impacts on the prices of and demand for crude oil, the global economy and capital markets remains uncertain.
The Company is a party to various pending or threatened claims,
lawsuits and administrative proceedings seeking damages or other remedies concerning its commercial operations, products, employees and other matters, including occasional claims by individuals alleging exposure to hazardous materials as a result of the Company's products or operations. Some of these claims relate to matters occurring prior to the acquisition of businesses, and some relate to businesses the Company has sold. In certain cases, the Company is entitled to indemnification from the sellers of businesses and, in other cases, the Company has indemnified the buyers of businesses. Although the
Company can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on the Company, management believes 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 the Company's consolidated financial position, results of operations or liquidity.
Following the GEODynamics Acquisition in January 2018, the Company determined that certain steel products historically imported by GEODynamics from China for use in its manufacturing process were potentially subject to anti-dumping
and countervailing duties. Following an internal review, the Company voluntarily disclosed this matter to U.S. Customs and Border Protection ("CBP") and, in December 2020, reached an agreement with CBP to settle this matter for $i7.3 million. The Company asserted indemnification claims for such settlement amount and related costs of $i7.5 million
against the GEO Seller and pursed its right to set-off such amounts against payments due under the GEO Note. As of June 28, 2022, the Company had reduced the carrying amount of such note in its consolidated balance sheet to $i17.5 million, which was the Company's then-current best estimate of what was owed after set-off for such indemnification matters prior to the settlement of the counterclaim
described below.
In August 2020, the GEO Seller filed a breach of contract suit against the Company and one of its wholly-owned subsidiaries in federal court alleging that payments due under GEO Note were not repaid in accordance with the terms of such note. Additionally, the GEO Seller alleged that it was entitled to approximately $i19.0 million
in U.S. federal income tax carryback claims received by the Company under the provisions of the CARES Act. On February 15, 2021, following the federal magistrate's report and recommendation that the federal district court dismiss the GEO Seller's lawsuit for lack of federal jurisdiction, the GEO Seller dismissed the federal lawsuit without prejudice and refiled its lawsuit in state court. On September 20, 2021, the state court denied the GEO Seller's motion for partial summary judgement. In December 2021, the Company filed a counterclaim against the GEO Seller alleging material misrepresentations and breaches of warranties by the GEO Seller with respect to GEODynamics' liability for anti-dumping and
countervailing duties.
On June 28, 2022, the Company entered into a settlement agreement (the "Settlement Agreement") with the GEO Seller, related to the matters discussed above (the "Settlement"), including the full and final settlement of all amounts due pursuant to the GEO Note ($i17.5 million in principal amount and accrued interest of $i2.2 million
outstanding as of June 28, 2022). Pursuant to the Settlement Agreement, the Company and the GEO Seller agreed to the resolution of such disputes through, among other matters: (i) the payment by the Company of $i10.0 million in cash and (ii) the issuance by the Company
of i1,909,722 shares of its common stock (having a market value of $i10.3 million on the date of issuance). The payment and issuance of common
stock were made on July 1, 2022. In connection with the execution of the Settlement Agreement, the Company recognized a non-cash settlement charge of $i0.6 million in the second quarter of 2022.
In August 2022, the Offshore/Manufactured Products segment settled outstanding litigation against certain service providers in exchange for cash totaling $i6.9 million.
In connection with this settlement, the Company recognized a gain of $i6.1 million (net of legal and other related costs) in the third quarter of 2022, which is included in other operating income, net.
This Quarterly Report on Form 10-Q and other statements we make contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors, including incorrect or changed assumptions. For a discussion of known material factors that could affect our results, please refer to "Part I, Item 1. Business,""Part I, Item 1A. Risk Factors,""Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk" included in our 2021 Annual Report on Form 10-K filed with the Securities and
Exchange Commission (the "SEC") on February 22, 2022, as well as to "Part II, Item 1A. Risk Factors" included in this Quarterly Report on Form 10-Q.
You can typically identify "forward-looking statements" by the use of forward-looking words such as "may,""will,""could,""project,""believe,""anticipate,""expect,""estimate,""potential,""plan,""forecast,""proposed,""should,""seek," and other similar words. Such statements may relate to our future financial position, budgets, capital expenditures, projected costs, plans and objectives of management for future operations and possible future strategic transactions. Actual results frequently differ from assumed facts and such differences can be material, depending upon the circumstances.
While
we believe we are providing forward-looking statements expressed in good faith and on a reasonable basis, there can be no assurance that actual results will not differ from such forward-looking statements. The following are important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, us:
•the ongoing impact of the Coronavirus Disease 2019 ("COVID-19") pandemic;
•the impact of the ongoing military action between Russia and Ukraine, that began in February 2022, including, but not limited to, energy market disruptions, supply chain disruptions and increased costs, government sanctions, and delays or potential cancellation of planned customer projects;
•the ability and willingness
of the Organization of Petroleum Exporting Countries ("OPEC") and other producing nations to set and maintain oil production levels and pricing;
•the level of supply of and demand for oil and natural gas;
•fluctuations in the current and future prices of oil and natural gas;
•the level of exploration, drilling and completion activity;
•the cyclical nature of the oil and natural gas industry;
•the level of offshore oil and natural gas developmental activities;
•the financial health of our customers;
•the
impact of environmental matters, including executive actions and regulatory or legislative efforts to adopt environmental or climate change regulations that may result in increased operating costs or reduced oil and natural gas production or demand globally;
•proposed new rules by the SEC relating to the disclosure of a range of climate-related information and risks;
•political, economic and litigation efforts to restrict or eliminate certain oil and natural gas exploration, development and production activities due to concerns over the threat of climate change;
•the availability of and access to attractive oil and natural gas field prospects, which may be affected by governmental actions or actions of other parties restricting drilling and completion activities;
•general
global economic conditions;
•global weather conditions and natural disasters;
•changes in tax laws and regulations;
•supply chain disruptions;
•the impact of tariffs and duties on imported materials and exported finished goods;
•our ability to timely obtain and maintain critical permits for operating facilities;
•our ability to attract and retain skilled personnel;
•negative outcome of litigation, threatened litigation or government proceedings;
•our
ability to develop new competitive technologies and products;
•inflation, including our ability to increase prices to our customers as our costs increase;
•fluctuations in currency exchange rates;
•physical, digital, cyber, internal and external security breaches and other incidents affecting information security and data privacy;
21
•the cost of capital in the bank and capital markets and our ability to access them;
•our ability to protect and enforce our intellectual property rights;
•our
ability to complete the integration of acquired businesses and achieve the expected accretion in earnings; and
•the other factors identified in "Part I, Item 1A. Risk Factors" in our 2021 Annual Report on Form 10-K, as well as in "Part II, Item 1A. Risk Factors" included in this Quarterly Report on Form 10-Q.
Should one or more of these risks or uncertainties materialize, or should the assumptions on which our forward-looking statements are based prove incorrect or change, actual results may differ materially from those expected, estimated or projected. In addition, the factors identified above may not necessarily be all of the important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by us, or on our behalf. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. We undertake no responsibility to publicly release the result of any revision of our forward-looking statements after the date they are made.
In addition, in certain places in this Quarterly Report on Form 10-Q, we refer to information and reports published by third parties that purport to describe trends or developments in the energy industry. We do so for the convenience of our stockholders and in an effort to provide information available in the market that will assist our investors in better understanding the market environment in which we operate. However, we specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.
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 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 2021 Annual Report on Form 10-K in order to understand factors, such as charges and credits, financing transactions and changes in tax regulations, which may impact comparability from period to period.
We provide a broad range of manufactured products and services to customers in the energy, industrial and military sectors through our Offshore/Manufactured Products, Well Site Services and Downhole Technologies 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, making demand for our products and services sensitive to expectations regarding future crude oil and natural gas prices, as well as economic growth, commodity demand and estimates of resource production and regulatory pressures related to environmental, social and governance ("ESG") considerations.
Recent Developments
The spot price of Brent crude oil averaged $101 per barrel during the third quarter of
2022, an increase of 37% from the third quarter 2021 average. The higher commodity price environment was driven by declines in crude oil supplies, concerns over sanctions resulting from the Russian invasion of Ukraine on February 24, 2022, increased demand as the global effects of the COVID-19 pandemic moderated and slower crude oil production growth due to reduced investments by operators globally in recent years. However, crude oil prices decreased toward the end of the third quarter of 2022 from the highs reported in the second quarter of 2022 in response to, among other things, the growing risk of a global recession, which raises concerns over future demand destruction.
Brent and West Texas Intermediate ("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)
2022
$
100.87
$
113.84
$
100.71
$
—
$
105.00
2021
61.04
68.98
73.51
79.61
70.86
WTI
Crude (per bbl)
2022
$
95.18
$
108.83
$
93.06
$
—
$
98.96
2021
58.09
66.19
70.58
77.33
68.14
Henry
Hub Natural Gas (per MMBtu)
2022
$
4.67
$
7.50
$
8.03
$
—
$
6.74
2021
3.50
2.95
4.35
4.75
3.90
________________
(1)Source:
U.S. Energy Information Administration (spot prices).
22
On October 21, 2022, Brent crude oil, WTI crude oil and natural gas spot prices closed at $91.82 per barrel, $85.47 per barrel and $4.45 per MMBtu, respectively. Additionally, as presented in more detail below, the U.S. drilling rig count reported on October 21, 2022 was 771 rigs – slightly above the third quarter 2022 average.
In January of 2022, we completed the exit of certain non-performing service offerings within our Well Site Services segment. These service offerings generated revenues of $15.0 million in the first nine months of 2021.
During
the first quarter of 2022, we recorded bad debt expense of $0.8 million related to receivables from Russia-based customers of the Offshore/Manufactured Products segment. As of September 30, 2022, we had no remaining material balance sheet exposure related to Russia.
In April of 2022, our Offshore/Manufactured Products segment acquired E-Flow Control Holdings Limited ("E-Flow"), a U.K.-based global provider of fully integrated handling, control, monitoring and instrumentation solutions. E-Flow, founded in 1988, provides a broad range of engineering, design, manufacturing, installation and commissioning services to its customers in the energy industry. The purchase price of $8.1 million (net of cash acquired) was funded with cash on-hand.
As further discussed in Note 12, "Commitments and Contingencies," on June 28,
2022, we fully settled our disputes with the seller (the "GEO Seller") of GEODynamics, Inc. ("GEODynamics"), which we acquired in 2018, including the full and final settlement of all amounts due under the GEO Note (as defined below). Pursuant to the settlement agreement, on July 1, 2022, we paid the GEO Seller $10.0 million in cash and issued approximately 1.9 million shares of our common stock (having a market value of $10.3 million).
In August of 2022, our Offshore/Manufactured Products segment settled outstanding litigation against certain service providers in exchange for cash totaling $6.9 million. In connection with this settlement, the Company recognized a gain of $6.1 million in the third quarter of 2022.
Overview
Current
and expected future pricing for WTI crude oil, along with expectations regarding the regulatory environment in the regions that we operate in, are factors that will continue to influence our customers' willingness to invest capital in their businesses. Expectations for the longer-term price for Brent crude oil will continue to influence our customers' spending related to global offshore drilling and development and, thus, a significant portion of the activity of our Offshore/Manufactured Products segment.
Crude oil prices and levels of demand for crude oil are likely to remain highly volatile due to numerous factors, including geopolitical conflicts (such as the direction and outcome of Russia's invasion of Ukraine), social unrest and tensions; sanctions; the perceived risk of a global economic recession; global uncertainties related to the COVID-19 pandemic; domestic or international crude oil production; changes in governmental
rules and regulations; the willingness of operators to invest capital in the exploration for and development of resources; use of alternative fuels; improved vehicle fuel efficiency; a more sustained movement to electric vehicles; and the potential for ongoing supply/demand imbalances. Capital investment by our customers recently reached a 15-year low due to these factors and the desire to generate sustainable cash flows.
Customer spending in the natural gas shale plays has been limited due to technological advancements that have led to significant amounts of natural gas being produced from prolific basins in the Northeastern United States and from associated gas produced from the drilling and completion of unconventional oil wells in the United States.
U.S. drilling, completion and production activity and, in turn, our financial results, are sensitive to near-term fluctuations in
commodity prices, particularly WTI crude oil prices, given the short-term, call-out nature of our U.S. operations.
Our Offshore/Manufactured Products segment provides technology-driven, highly-engineered products and services for offshore oil and natural gas production systems and facilities globally, as well as certain products and services to the offshore and land-based drilling and completion markets. This segment also produces a variety of products for use in industrial, military and other applications outside the traditional energy industry. 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 41% of Offshore/Manufactured Products segment sales in the first nine months of 2022 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
23
international oil companies and state-run national oil companies) 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 change based on short-term fluctuations in the price of crude oil and natural gas.
Backlog reported by our Offshore/Manufactured Products segment increased to $258 million as of September 30, 2022 from $249 million as of September 30, 2021. Bookings totaled $283 million in the first nine months of 2022, yielding a book-to-bill 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
2022
$
265
$
241
$
258
$
—
2021
226
214
249
260
2020
267
235
227
219
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 of and initial production from new and recompleted wells in our U.S. operations, which are dependent primarily upon the level and complexity of drilling, completion and workover activity in our areas of operations. Well intensity and complexity have increased with the continuing transition to multi-well pads, the drilling of longer lateral wells and increased downhole pressures, along with the increased number of frac stages completed in horizontal wells.
Our
Downhole Technologies segment 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 frac plug and toe valve products, which are focused on zonal isolation for hydraulic fracturing of horizontal wells, and a broad range of consumable products, such as setting tools and bridge plugs, that are used in completion, intervention
and decommissioning applications. Demand drivers for the Downhole Technologies segment include continued trends toward longer lateral lengths, increased frac stages and more perforation clusters to target increased unconventional well productivity, which requires ongoing technological and product developments.
Demand for our completion-related 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 U.S. and international drilling rig count, as measured by Baker Hughes Company, as of and for the periods indicated.
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 September 30, 2022, 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
24
count declining from 790 rigs as of February 29, 2020 to a trough of 244 rigs as of August 14, 2020. From this trough, the
U.S. rig count has increased to 765 rigs as of September 30, 2022. As can be derived from the table above, the average U.S. rig count for the first nine months of 2022 increased by 258 rigs, or 58%, compared to the average for the first nine months of 2021.
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. In addition, in response to Russia’s invasion of Ukraine, governments in the European Union, the United States, the United Kingdom, Switzerland and other countries have enacted sanctions against Russia
and Russian interests. The effect of these sanctions and 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, cash flows 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.
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; natural disasters; labor market constraints; supply chain disruptions; inflation in wages, materials, parts, equipment and other costs; climate-related and other regulatory changes; geopolitical tensions; 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, 2021.
25
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, 2021 in order to understand factors, such as charges, credits and financing transactions, which may impact comparability of the selected financial data.
Unaudited Consolidated Results of Operations
The following summarizes our
consolidated results of operations for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share amounts):
Cost of revenues (exclusive of depreciation and amortization expense presented below)(1)
151,299
117,207
34,092
420,059
337,149
82,910
Selling,
general and administrative expenses
23,374
20,078
3,296
70,964
63,395
7,569
Depreciation and amortization expense
16,413
19,657
(3,244)
51,469
62,086
(10,617)
Impairments
of fixed and lease assets(2)
—
—
—
—
3,444
(3,444)
Other operating income, net(3)
(6,750)
(275)
(6,475)
(6,852)
(714)
(6,138)
184,336
156,667
27,669
535,640
465,360
70,280
Operating
income (loss)
5,058
(16,139)
21,197
(368)
(53,519)
53,151
Interest
expense, net
(2,637)
(2,569)
(68)
(7,947)
(7,593)
(354)
Other income, net(4)
491
2,137
(1,646)
1,892
7,917
(6,025)
Income
(loss) before income taxes
2,912
(16,571)
19,483
(6,423)
(53,195)
46,772
Income tax (provision) benefit
(769)
3,529
(4,298)
(6,002)
9,072
(15,074)
Net
income (loss)
$
2,143
$
(13,042)
$
15,185
$
(12,425)
$
(44,123)
$
31,698
Net
income (loss) per share:
Basic
$
0.03
$
(0.22)
$
(0.20)
$
(0.73)
Diluted
0.03
(0.22)
(0.20)
(0.73)
Weighted
average number of common shares outstanding:
Basic
62,674
60,377
61,292
60,264
Diluted
62,676
60,377
61,292
60,264
________________
(1)Cost
of revenues (exclusive of depreciation and amortization expense) included a non-cash inventory impairment charge of $2.1 million (in product costs) recognized in the three and nine month ended September 30, 2021.
(2)During the first nine months of 2021, we recognized non-cash impairment charges of $3.4 million to reduce the carrying value of certain fixed and operating lease assets to their estimated realizable value.
(3)In the three and nine months ended September 30, 2022, we recognized a gain of $6.1 million associated with the settlement of outstanding litigation against certain service providers.
(4)During the first nine months of 2021, we recognized non-cash gains
of $4.0 million in connection with our purchases of $131.4 million principal amount of our 2023 Notes.
26
See Note 3, "Asset Impairments and Other Charges and Benefits," Note 4, "Details of Selected Balance Sheet Accounts" and Note 5, "Long-term Debt," 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 nine months of 2022 and 2021.
Unaudited Segment Results of Operations
We manage and measure our business
performance in three distinct operating segments: Offshore/Manufactured Products, Well Site Services and Downhole Technologies. Supplemental financial information by operating segment for the three and nine months ended September 30, 2022 and 2021 is summarized below (in thousands):
(1)Operating
income in the three and nine months ended September 30, 2022 included a gain of $6.1 million recognized in connection with the settlement of outstanding litigation against certain service providers.
(2)Operating loss in the first nine months of 2021 included non-cash fixed and operating lease asset impairment charges of $3.4 million.
(3)Operating loss in the three and nine months ended September 30 2021 included a non-cash inventory impairment charge of $2.1 million.
See Note 3, "Asset Impairments and Other Charges and Benefits," 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 nine months of 2022 and 2021.
We reported net income for the three months ended September 30, 2022 of $2.1 million, or $0.03 per share, which included a gain of $6.1 million ($4.6 million after-tax, or $0.07 per share) recognized in connection with the favorable settlement of a litigation matter. These results compare to a net loss for the three months ended September 30, 2021 of $13.0 million,
or $0.22 per share. Reported third quarter 2021 results reflected the impact of Hurricane Ida, which negatively affected operations in southeast Louisiana and the Gulf of Mexico. The third quarter 2021 loss also included a non-cash inventory impairment charge of $2.1 million ($1.7 million after-tax, or $0.03 per share) and severance and restructuring costs of $0.7 million ($0.6 million after-tax, or $0.01 per share).
Our reported results of operations reflect the negative impact of the global response to the COVID-19 pandemic, ongoing uncertainties related to future crude oil demand and supply and, to a lesser extent, supply chain disruptions. Customer-driven activity has continued to improve since the low levels of 2020, but uncertainty remains around the willingness of operators (our customers) to invest in U.S. land-based drilling, completion and production activities given regulatory pressures and ESG considerations.
During
the third quarter of 2021, we recognized an aggregate $1.2 million reduction of payroll tax expense (within cost of revenues and selling, general and administrative expense) as part of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") employee retention credit program.
Revenues. Consolidated total revenues in the third quarter of 2022 increased $48.9 million, or 35%, from the third quarter of 2021.
Consolidated product revenues in the third quarter of 2022 increased $29.3 million, or 42%, from the third quarter of 2021, driven primarily by higher demand for project-related connector products and increased U.S. land-based customer activity. Consolidated service revenues in the third quarter of 2022 increased $19.5 million, or 28%, from the third quarter of 2021 due primarily to higher customer spending in the United States, partially
offset by the exit of certain non-performing service offerings in January 2022 (which generated revenues of $5.5 million in the third quarter of 2021). As can be derived from the following table, 62% of our consolidated revenues in the third quarter of 2022 were derived from sales of our short-cycle product and service offerings, which compares to 64% 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 September 30, 2022 and 2021 (in thousands):
Offshore/
Manufactured Products
Well Site Services
Downhole Technologies
Total
Three Months Ended September 30
2022
2021
2022
2021
2022
2021
2022
2021
Major
revenue categories -
Project-driven products
$
38,911
$
25,294
$
—
$
—
$
—
$
—
$
38,911
$
25,294
Short-cycle:
Completion
products and services
15,036
11,544
53,928
42,714
32,848
25,527
101,812
79,785
Drilling services
—
—
6,581
3,284
—
—
6,581
3,284
Other
products
8,674
7,138
—
—
—
—
8,674
7,138
Total short-cycle
23,710
18,682
60,509
45,998
32,848
25,527
117,067
90,207
Other
products and services
33,416
25,027
—
—
—
—
33,416
25,027
$
96,037
$
69,003
$
60,509
$
45,998
$
32,848
$
25,527
$
189,394
$
140,528
Percentage
of total revenue by type -
Products
76
%
70
%
—
%
—
%
83
%
86
%
53
%
50
%
Services
24
%
30
%
100
%
100
%
17
%
14
%
47
%
50
%
Cost
of Revenues (exclusive of Depreciation and Amortization Expense). Our consolidated total cost of revenues (exclusive of depreciation and amortization expense) increased $34.1 million, or 29%, in the third quarter of 2022 compared to the third quarter of 2021. Cost of revenues in the third quarter of 2021 included charges totaling $2.1 million for non-cash inventory impairments. Excluding these charges, consolidated cost of revenues increased $36.2 million, or 31%, from the prior-year period.
Consolidated product costs were $81.6 million in the third quarter of 2022. This compares to consolidated product costs of $60.3 million in the third quarter of 2021, which included $2.1 million in non-cash inventory impairment charges. Excluding these charges, consolidated product costs increased $23.4 million, or 40%, from the third quarter of 2021, reflective of the reported revenue growth as well as higher material,
transportation, labor and other costs. Consolidated service costs in the third
28
quarter of 2022 increased $12.8 million, or 23%, from the third quarter of 2021, with the impact of higher customer activity levels and increased labor and other costs partially offset by the impact of the January 2022 exit of certain non-performing service offerings.
Selling, General and Administrative Expense. Selling, general and administrative expense increased $3.3 million, or 16%, in the third quarter of 2022 from the third quarter of 2021 due primarily to higher performance-based incentive compensation expenses.
Depreciation and Amortization Expense. Depreciation
and amortization expense decreased $3.2 million, or 17%, in the third quarter of 2022 compared to the prior-year quarter, driven primarily by reduced capital investments made in our Well Site Services segment in recent years. Note 11, "Segments and Related Information," to our Unaudited Condensed Consolidated Financial Statements presents depreciation and amortization expense by segment.
Other Operating Income, Net. Net other operating income for the third quarter of 2022 included a gain of $6.1 million recognized in connection with the settlement of outstanding litigation against certain service providers within our Offshore/Manufactured Products segment.
Operating Income (Loss). Our consolidated operating income was $5.1 million in the third quarter of 2022, which included the $6.1 million gain reported as other operating income,
net. This compares to a consolidated operating loss of $16.1 million recognized in the third quarter of 2021, which included a $2.1 million non-cash inventory impairment charge and $0.7 million of severance and restructuring charges.
Interest Expense, Net. Net interest expense totaled $2.6 million in the third quarter of 2022, which compares to $2.6 million in the same period of 2021. Interest expense as a percentage of total debt outstanding was approximately 6% in the third quarter of 2022 and 2021.
Income Tax. For the three months ended September 30, 2022, our income tax provision was $0.8 million on pre-tax income of $2.9 million. This compares to an income tax benefit of $3.5 million on a pre-tax loss of $16.6 million for the three months ended September 30,
2021, which included certain non-deductible expenses.
Other ComprehensiveLoss. Reported comprehensive loss is the sum of reported net income (loss) and other comprehensive loss. Other comprehensive loss was $11.9 million in the third quarter of 2022 compared to comprehensive loss of $5.8 million in the third quarter of 2021 due to fluctuations in currency exchange rates compared to the U.S. dollar which are used to translate certain of the international operations of our operating segments. For the three months ended September 30, 2022 and 2021, currency translation adjustments recognized as a component of other comprehensive loss were primarily attributable to the United Kingdom and Brazil. During the third quarters of 2022 and 2021, the exchange rates
for both the British pound and the Brazilian real weakened compared to the U.S. dollar.
Segment Operating Results
Offshore/Manufactured Products
Revenues. Our Offshore/Manufactured Products segment revenues increased $27.0 million, or 39%, in the third quarter of 2022 compared to the third quarter of 2021 due primarily to increased demand for project-related connector equipment and short-cycle and military products. In addition, Hurricane Ida tempered third quarter 2021 revenues and operating income.
Operating Income. Our Offshore/Manufactured Products segment reported operating income of $13.4 million in the third quarter of 2022, compared to operating income of $1.8 million in the third quarter of 2021. This year-over-year increase was due primarily
to the segment's reported revenue growth and the third quarter 2022 recognition of a $6.1 million gain in connection with the settlement of certain outstanding litigation, partially offset by the impact of higher material, transportation, labor and other costs.
Backlog. Backlog in our Offshore/Manufactured Products segment totaled $258 million as of September 30, 2022, with third quarter 2022 bookings of $115 million and a quarterly book-to-bill ratio of 1.2x.
29
Well Site Services
Revenues. Our Well Site Services segment revenues increased $14.5 million, or 32%, in the third quarter of 2022
compared to the prior-year quarter, driven by increased customer activity levels across all geographic regions, partially offset by the exit of U.S. thru-tubing service offerings in January 2022 (which generated revenues of $5.5 million in the third quarter of 2021) and the prior-year impact of Hurricane Ida, which tempered third quarter 2021 revenues and operating income.
Operating Income (Loss). Our Well Site Services segment reported operating income of $2.4 million in the third quarter of 2022, compared to an operating loss of $5.3 million in the third quarter of 2021, which included $0.4 million in severance and restructuring charges. Excluding these 2021 charges, the segment's operating income (loss) improved $7.3 million from the prior-year quarter due primarily to the segment's reported revenue growth and a $2.8 million reduction in depreciation and amortization expense, partially offset by increased
labor, material and other costs.
Downhole Technologies
Revenues. Our Downhole Technologies segment revenues increased $7.3 million, or 29%, in the third quarter of 2022 from the prior-year period due primarily to higher customer demand for perforating and completion products in the United States.
Operating Loss. Our Downhole Technologies segment reported an operating loss of $0.3 million in the third quarter of 2022, compared to an operating loss of $5.0 million in the prior-year period, which included a $2.1 million non-cash inventory impairment charge. Excluding this charge, our Downhole Technologies operating loss decreased $2.6 million from the prior-year period due to the reported increase in revenues, partially offset by higher material, transportation, labor and other costs.
Corporate
Corporate
expenses increased $2.7 million, or 36%, in the third quarter of 2022 from the prior-year period, due primarily to higher personnel costs and performance-based incentive compensation.
We reported a net loss for the nine months ended September 30, 2022 of $12.4 million, or $0.20 per share, which included a gain of $6.1 million ($4.6 million after-tax, or $0.07 per share) recognized in connection with the settlement of a litigation matter. These results compare to a net loss for the nine months
ended September 30, 2021 of $44.1 million, or $0.73 per share, which included non-cash impairment charges of $5.6 million ($4.4 million after-tax, or $0.08 per share) associated with write-downs of fixed and lease assets, $6.7 million ($5.3 million after-tax, or $0.09 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 extinguishment of a portion of our 2023 Notes.
Our reported results of operations reflect the negative impact of the global response to the COVID-19 pandemic, ongoing uncertainties related to future crude oil demand and supply and, to a lesser extent, supply chain disruptions. Customer-driven activity has continued to improve since the low levels of 2020, but uncertainty remains around the willingness of operators (our customers) to invest in U.S. land-based drilling,
completion and production activities given regulatory pressures and ESG considerations.
During the first nine months of 2021, we recognized an aggregate $8.8 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.
Revenues. Consolidated total revenues in the first nine months of 2022 increased $123.4 million, or 30%, from the first nine months of 2021.
Consolidated product revenues in the first nine months of 2022 increased $74.6 million, or 36%, from the first nine months of 2021, driven primarily by increased U.S. land-based customer activity and higher demand for project-related connector product and fixed platform and deck equipment. Consolidated service revenues in the first nine
months of 2022 increased $48.8 million, or 24%, from the first nine months of 2021 due primarily to higher customer spending in the United States, partially offset by the exit of certain non-performing service offerings in January 2022 (which generated revenues of $15.0 million in the first nine months of 2021). As can be derived from the following table, 61% of our consolidated revenues in the first nine months of 2022 were derived from sales of our short-cycle product and service offerings, which compares to 61% in the same period last year.
The following table provides supplemental disaggregated revenue from contracts with customers by operating segment for the three and nine months ended September 30, 2022 and 2021 (in thousands):
Offshore/
Manufactured Products
Well Site Services
Downhole Technologies
Total
Nine Months Ended September 30
2022
2021
2022
2021
2022
2021
2022
2021
Major
revenue categories -
Project-driven products
$
113,853
$
78,494
$
—
$
—
$
—
$
—
$
113,853
$
78,494
Short-cycle:
Completion
products and services
43,893
30,105
149,845
120,596
95,156
77,717
288,894
228,418
Drilling services
—
—
13,655
7,008
—
—
13,655
7,008
Other
products
24,052
16,857
—
—
—
—
24,052
16,857
Total short-cycle
67,945
46,962
163,500
127,604
95,156
77,717
326,601
252,283
Other
products and services
94,818
81,064
—
—
—
—
94,818
81,064
$
276,616
$
206,520
$
163,500
$
127,604
$
95,156
$
77,717
$
535,272
$
411,841
Percentage
of total revenue by type -
Products
74
%
69
%
—
%
—
%
84
%
86
%
53
%
51
%
Services
26
%
31
%
100
%
100
%
16
%
14
%
47
%
49
%
Cost
of Revenues (exclusive of Depreciation and Amortization Expense). Our consolidated total cost of revenues (exclusive of depreciation and amortization expense) increased $82.9 million, or 25%, in the first nine months of 2022 compared to the first nine months of 2021. Cost of revenues in the first nine months of 2021 included $2.1 million of non-cash inventory impairment charges. Excluding these charges, consolidated cost of revenues increased $85.0 million, or 25%, from the prior-year period.
31
Consolidated product costs in the first nine months of 2022 increased $52.1 million, or 30%, compared to the first nine months of 2021, which included $2.1 million in non-cash inventory impairment charges. Excluding these charges, consolidated product costs
increased $54.2 million, or 32%, from the prior-year period due to the reported revenue growth and higher material, transportation, labor and other costs. Consolidated service costs in the first nine months of 2022 increased $30.8 million, or 19%, compared to the first nine months of 2021 with the impact of higher customer activity levels and increased labor and other costs, partially offset by the impact of the January 2022 exit of certain non-performing service offerings.
Selling, General and Administrative Expense. Selling, general and administrative expense increased $7.6 million, or 12%, in the first nine months of 2022 from the first nine months of 2021 due primarily to higher performance-based incentive compensation, professional service, bad debt and trade show expenses, partially offset by $3.7 million in severance and restructuring charges recognized in the prior-year period.
Depreciation
and Amortization Expense. Depreciation and amortization expense decreased $10.6 million, or 17%, in the first nine months of 2022 compared to the prior-year period, driven primarily by reduced capital investments made in our Well Site Services segment in recent years. Note 11, "Segments and Related Information," to our Unaudited Condensed Consolidated Financial Statements presents depreciation and amortization expense by segment.
Impairments of Fixed and Lease Assets. During the first nine months of 2021, our Well Site Services segment recorded non-cash impairment charges of $3.4 million to reduce the carrying value of certain of the segment's fixed and operating lease assets to their estimated realizable value.
Other Operating Income, Net. Net other operating income for the first nine months of 2022 included
a gain of $6.1 million recognized in connection with the settlement of outstanding litigation against certain service providers within our Offshore/Manufactured Products segment.
Operating Loss. Our consolidated operating loss was $0.4 million in the first nine months of 2022, which included the $6.1 million gain reported as other operating income, net. This compares to a consolidated operating loss of $53.5 million recognized in the first nine months of 2021, which included $5.6 million of non-cash fixed and operating lease asset impairment charges and $6.7 million of severance and restructuring costs.
Interest Expense, Net. Net interest expense totaled $7.9 million in the first nine months of 2022, which compares to $7.6 million in the first nine months of 2021. Interest expense as a percentage of total debt outstanding was approximately
6% in the first nine months of 2022 and 5% in the first nine months of 2021.
Other Income, Net. Net other income for the first nine months of 2022 included a non-cash charge of $0.6 million recognized in connection with the settlement of disputes with the GEO Seller. Net other income for the first nine months of 2022 and 2021 included non-cash gains of $0.2 million and $4.0 million, respectively, recognized in connection with our purchases of our 2023 Notes.
Income Tax. For the first nine months of 2022, our income tax provision was $6.0 million on a pre-tax loss of $6.4 million. Income tax expense in the first nine months of 2022 was negatively impacted by valuation allowances recorded against U.S. deferred tax assets as well as certain non-deductible expenses and discrete tax items. This compares to an income tax benefit of $9.1 million
on a pre-tax loss of $53.2 million for the first nine months of 2021, which included certain non-deductible expenses and discrete tax items.
Other ComprehensiveLoss. Reported comprehensive loss is the sum of reported net income (loss) and other comprehensive loss. Other comprehensive loss was $23.8 million in the first nine months of 2022 compared to comprehensive loss of $4.2 million in the first nine months of 2021 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 first nine months of 2022 and 2021, currency translation adjustments recognized as a component of other comprehensive loss were primarily attributable to the United Kingdom and Brazil. During the first nine months of 2022, the exchange rate for the British pound weakened compared to
the U.S. dollar, while the Brazilian real strengthened compared to the U.S. dollar. During the first nine months of 2021, the exchange rate for the British pound and the Brazilian real weakened compared to the U.S. dollar.
32
Segment Operating Results
Offshore/Manufactured Products
Revenues. Our Offshore/Manufactured Products segment revenues increased $70.1 million, or 34%, in the first nine months of 2022 compared to the first nine months of 2021 due to increased demand for all of the segment's product and service offerings, particularly project-related connector and short-cycle products.
Operating Income.
Our Offshore/Manufactured Products segment reported operating income of $33.0 million in the first nine months of 2022, which included a $6.1 million gain in connection with the settlement of certain outstanding litigation. The segment reported operating income of $7.6 million in the first nine months of 2021, which included severance and restructuring costs of $0.5 million. This year-over-year increase was due primarily to the reported revenue growth and the recognition of a $6.1 million gain in connection with the settlement of litigation, partially offset by the impact of higher material, transportation, labor and other costs.
Backlog. Backlog in our Offshore/Manufactured Products segment totaled $258 million as of September 30, 2022 compared to $260 million as of December 31, 2021. Bookings during the
first nine months of 2022 totaled $283 million, yielding a book-to-bill ratio of 1.0x.
Well Site Services
Revenues. Our Well Site Services segment revenues increased $35.9 million, or 28%, in the first nine months of 2022 compared to the same prior-year period, driven by increased U.S. customer activity levels partially offset by the exit of U.S. thru-tubing service offerings in January 2022 (which generated revenues of $15.0 million in the first nine months of 2021).
Operating Loss. Our Well Site Services segment reported an operating loss of $0.4 million in the first nine months of 2022. The segment reported an operating loss of $26.7 million in the first nine months of 2021, which included $4.0 million in severance and restructuring costs and non-cash fixed and lease asset impairment charges
of $3.4 million. Excluding these 2021 charges, the segment's operating loss decreased $18.8 million compared to the same prior-year period due primarily to the segment's reported revenue growth coupled with a $6.1 million decrease in depreciation and amortization expense, partially offset by increased labor, material and other costs.
Downhole Technologies
Revenues. Our Downhole Technologies segment revenues increased $17.4 million, or 22%, in the first nine months of 2022 from the same prior-year period due primarily to increased customer demand for perforating and completion products in the United States.
Operating Loss. Our Downhole Technologies segment reported an operating loss of $3.3 million in the first nine months of 2022. The segment reported an operating loss of $8.9 million in the
first nine months of 2021, which included a non-cash inventory impairment charge of $2.1 million and $0.6 million of severance and restructuring charges. Excluding these 2021 charges, operating loss decreased $2.9 million in the first nine months of 2022 from the prior-year period due to the reported increase in revenues, partially offset by higher material, transportation, labor and other costs.
Corporate
Operating Loss. Corporate expenses in the first nine months of 2022 increased $4.1 million, or 16%, from the first nine months of 2021 due primarily to higher personnel costs, performance-based incentive compensation and professional fees, partially offset by $1.6 million of severance costs recognized in the prior-year period.
33
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 totaled $19.0 million during the nine months ended September 30, 2022, compared to $20.6 million generated by operations during the first nine months of 2021.
During the first nine months of 2022, $27.5 million was used to fund net working capital increases,
primarily due to increases in accounts receivable and inventories driven by higher activity levels. During the first nine months of 2021, $6.6 million was provided by net working capital decreases, primarily due to an increase in accounts payable and accrued liabilities, partially offset by an increase in inventories.
Investing Activities
Cash used in investing activities during the first nine months of 2022 totaled $19.3 million, compared to $5.3 million used in investing activities during the first nine months of 2021.
As discussed under "Recent Developments," we acquired E-Flow on April 14, 2022 for net cash consideration of $8.1 million.
Capital expenditures totaled $13.3 million and $11.0 million during the first nine months of 2022
and 2021, respectively. These investments were partially offset by proceeds from the sale of property and equipment of $2.2 million and $6.2 million during the first nine months of 2022 and 2021, respectively.
We expect to spend approximately $20 million in capital expenditures during 2022. We plan to fund these capital expenditures with available cash, internally generated funds and, if necessary, borrowings under our ABL Facility discussed below.
Financing Activities
During the nine months ended September 30, 2022, net cash of $17.9 million was used in financing activities, including a cash payment of $10.0 million related to the GEO Note settlement (discussed below) and the purchase of $6.5 million principal amount of our outstanding 2023 Notes. This compares to $19.4 million of cash
used in financing activities during the nine months ended September 30, 2021, 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 in the first nine months of 2021 was our issuance of $135.0 million principal amount of our 4.75% convertible senior notes due 2026 (the "2026 Notes") yielding net cash proceeds of $130.6 million.
On June 28, 2022, we entered into a settlement agreement with the GEO Seller, which provided for the full and final settlement of all amounts due under the GEO Note. Pursuant to the settlement agreement, on July 1, 2022, we paid the GEO Seller $10.0 million in cash and issued approximately 1.9 million
shares of our common stock.
As of September 30, 2022, we had cash and cash equivalents totaling $33.1 million, which compared to $52.9 million as of December 31, 2021. Cash was used during the period to settle the GEO Note, fund the E-Flow acquisition, fund capital expenditures and purchase a portion of our 2023 Notes.
As of September 30, 2022, we had no borrowings outstanding under our ABL Facility, $19.5 million principal amount of our 2023 Notes outstanding, $135.0 million principal amount of our 2026 Notes outstanding and other debt of $3.6 million. Our reported interest expense included amortization of deferred financing costs of $1.4 million during the first nine months of 2022. For the first nine months of 2022, our contractual
cash interest expense was $6.5 million, or approximately 5% 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
34
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 ESG matters and other factors, many of which are beyond our control. In this regard, the effect of the COVID-19 pandemic resulted in a significant disruption of global financial markets. For companies like ours that support the energy industry, this disruption negatively impacted the value of our common stock and may reduce our ability to access capital in the bank and capital markets or result in such capital being available on less favorable terms, which could in the future negatively affect our liquidity.
On March 21, 2022, the SEC proposed new rules relating to the disclosure of a range of climate-related information and risks. We are currently assessing these rules, but at this time we cannot predict the costs of implementation or any potential adverse impacts resulting from these rules. To the extent these
rules are finalized as proposed, we or our customers could incur increased costs related to the assessment and disclosure of climate-related risks. We may also face increased litigation risks related to disclosures made pursuant to the rule if finalized as proposed. In addition, enhanced climate disclosure requirements could accelerate the trend of certain stakeholders and lenders in restricting or seeking more stringent conditions with respect to their investments in our customers in the energy industry and companies like ours that support the energy industry. For more information on our risks related to climate change, see the risk factor in "Part I, Item 1A. Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2021 titled, "Our and our customers' operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating
costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide." Also see the risk factor in "Part II, Item 1A. Risk Factors" included in this Quarterly Report on Form 10-Q titled, "The Inflation Reduction Act of 2021 could accelerate the transition to a low carbon economy and could impose new costs on our customers' operations."
Revolving Credit Facility. On February 10, 2021, we entered into a senior secured credit facility with certain lenders, which provides for a $125.0 million asset-based revolving credit facility (the "ABL Facility") under which credit availability is subject to a borrowing base calculation. 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, as amended, 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 GEO Note defined below).
See Note 5, "Long-term Debt," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding the ABL Agreement. As of September 30, 2022, we had $17.6 million of outstanding letters of credit,
but no borrowings outstanding under the ABL Agreement. The total amount available to be drawn as of September 30, 2022 was $79.9 million, calculated based on the current borrowing base less outstanding letters of credit.
2026 Notes. On March 16, 2021, we issued $135.0 million aggregate principal amount of the 2026 Notes pursuant to an indenture, dated as of March 16, 2021 (the "2026 Indenture"), between us and Wells Fargo Bank, National Association, as trustee. Computershare Trust Company, National Association, assumed the role of trustee as of March 1,
2022. 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 us with respect to other indebtedness of at least $40.0 million.
See Note 5, "Long-term Debt," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding the 2026 Notes. As of September 30, 2022, 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 $200.0 million aggregate principal amount of the 2023 Notes pursuant to an indenture, dated as of January 30, 2018 (the "2023 Indenture"), between us and Wells Fargo Bank, National Association, as trustee. Computershare Trust Company, National Association, assumed the role of trustee as of March 1, 2022. Since September 2019, we have purchased a cumulative $180.5 million principal amount of the 2023 Notes for $159.0 million in cash, with $19.5 million principal amount outstanding as of September 30,
2022.
The 2023 Indenture contains certain events of default, including certain defaults by us with respect to other indebtedness of at least $40.0 million.
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See Note 5, "Long-term Debt," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding the 2023 Notes. As of September 30, 2022, none of the conditions allowing holders of the 2023 Notes to convert, or requiring us to repurchase the 2023 Notes, had been met.
Promissory Note. In
connection with the 2018 acquisition of GEODynamics (such acquisition, the "GEODynamics Acquisition"), we issued a $25.0 million promissory note (the "GEO Note") that was scheduled to mature on July 12, 2019. Payments due under the GEO Note were subject to set-off, in full or in part, against certain indemnification claims related to matters occurring prior to the GEODynamics Acquisition. We asserted indemnification claims against the GEO Seller, and the GEO Seller filed a breach of contract suit against us and one of our wholly-owned subsidiaries alleging that payments due under the GEO Note were required to be repaid in accordance with the terms of such note. We incurred settlement costs and expenses of $7.5 million related
to such indemnification claims and as of June 28, 2022, had reduced the carrying amount of such note in our consolidated balance sheet to $17.5 million, which was our then-current best estimate of what was owed after set-off for indemnification matters. On June 28, 2022, we entered into a settlement agreement with the GEO Seller, including the full and final settlement of all amounts due pursuant to the GEO Note. Pursuant to the settlement agreement, on July 1, 2022, we paid the GEO Seller $10.0 million in cash and issued approximately 1.9 million shares of our common stock (having a market value of $10.3 million). See Note 12, "Commitments and Contingencies," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion.
Our
total debt represented 19% and 20% of our combined total debt and stockholders' equity as of September 30, 2022 and December 31, 2021, respectively.
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 GEO Seller filed a breach of contract suit against us in federal court in August 2020, in which the GEO 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 GEO Seller dismissed the federal lawsuit without prejudice and refiled its lawsuit in state court. On September 20, 2021, a motion by the GEO Seller for partial summary judgement was denied by the state court. On June 28, 2022, we entered into a settlement agreement with the GEO Seller, including the full and final settlement of all amounts due under the GEO Note. Pursuant to the settlement agreement,
on July 1, 2022, we paid the GEO Seller $10.0 million in cash and issued approximately 1.9 million shares of our common stock (having a market value of $10.3 million).
In August of 2022, our Offshore/Manufactured Products segment settled outstanding litigation against certain service providers in exchange for the receipt of cash totaling $6.9 million. In connection with this settlement, we recognized a gain of $6.1 million in the third quarter of 2022.
See Note 12, "Commitments and Contingencies," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion.
Off-Balance Sheet Arrangements. As of September 30, 2022, we had no off-balance sheet
arrangements.
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 2021 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, which are adopted by us as of the specified effective date. 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.
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Item 3.Quantitative and Qualitative Disclosures about Market Risk
Market risk refers to the potential losses arising from changes in interest rates,
foreign currency fluctuations and exchange rates, equity prices, and commodity prices, including the correlation among these factors and their volatility.
Our principal market risks are our exposure to changes in interest rates and foreign currency exchange rates. We enter into derivative instruments only to the extent considered necessary to meet risk management objectives and do not use derivative contracts for speculative purposes.
Interest Rate Risk. We have a revolving credit facility that is subject to the risk of higher interest charges associated with increases in interest rates. As of September 30, 2022, we had no floating-rate obligations outstanding under our ABL Facility. Use of floating-rate obligations would
expose us to the risk of increased interest expense in the event of increases in short-term interest rates.
Foreign Currency Exchange Rate Risk. Our operations are conducted in various countries around the world and we receive revenue from these operations in a number of different currencies. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in (i) currencies other than the U.S. dollar, which is our functional currency, or (ii) the functional currency of our subsidiaries, which is not necessarily the U.S. dollar. In order to mitigate the effects of foreign currency exchange rate risks in areas outside of the United States (primarily in our Offshore/Manufactured Products segment), we generally pay a portion of our expenses in local currencies and
a substantial portion of our contracts provide for collections from customers in U.S. dollars. During the nine months ended September 30, 2022, our reported foreign currency exchange gains were $0.3 million and are included in "Other operating expense, net" in the consolidated statements of operations.
Accumulated other comprehensive loss, reported as a component of stockholders' equity, primarily relates to fluctuations in currency exchange rates against the U.S. dollar as used to translate certain of the international operations of our operating segments. Our accumulated other comprehensive loss increased $23.8 million from $66.0 million as of December 31, 2021 to $89.8 million as of September 30,
2022, due to changes in currency exchange rates. During the nine months ended September 30, 2022, the exchange rate for the British pound weakened by 18% compared to the U.S. dollar while the Brazilian real strengthened by 3% compared to the U.S. dollar.
ITEM 4.Controls and Procedures
(i) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022 at the reasonable assurance level.
(ii) Changes in Internal ControlOverFinancial Reporting
There have been no changes in the Company's internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM
1.Legal Proceedings
The information with respect to this Item 1 is set forth under Note 12, "Commitments and Contingencies."
ITEM 1A.Risk Factors
"Part I, Item 1A. Risk Factors" of our 2021 Annual Report on Form 10-K includes a detailed discussion of our risk factors. The risks described in such report are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may materially adversely affect our business, financial conditions or future results. Except as described below, there have been no material changes to our risk factors as set
forth in our 2021 Annual Report on Form 10-K.
The ongoing military action between Russia and Ukraine could adversely affect our business, financial condition and results of operations.
In February of 2022, Russian military forces invaded Ukraine and fighting between the two countries continues. While we have no operations, personnel or material assets in either country as of September 30, 2022, the outcome of this ongoing military conflict is highly unpredictable and could lead to further market and other disruptions that could adversely affect us, such as: volatility in crude oil and natural gas prices, which can adversely affect demand for our products and services; further supply chain constraints and disruptions, or increased prices for certain raw materials and component parts, such as steel and forgings, that are used in products
we manufacture and other products needed by our customers in connection with their ongoing operations; instability in financial markets; higher inflation; delays or cancellations of planned projects by our customers due to rising costs; changes in currency rates; and increases in cyberattacks and espionage. As a result of this conflict, governments in the European Union, the United States, the United Kingdom, Switzerland and other countries have enacted sanctions against Russia and Russian interests. Such sanctions, and other measures, as well as existing and potential further responses from Russia or other countries to such sanctions, could exacerbate the foregoing risks. Any of these developments could adversely affect our business, financial condition and results of operations.
The Inflation Reduction Act of 2021 could accelerate the transition to a low carbon economy and could impose new costs on our customers' operations.
In
August 2022, President Biden signed the Inflation Reduction Act of 2021 ("IRA 2022") into law. The IRA 2022 contains hundreds of billions of dollars in incentives for the development of renewable energy, clean hydrogen, clean fuels, electric vehicles and supporting infrastructure and carbon capture and sequestration, amongst other provisions. These incentives could further accelerate the transition of the economy away from the use of fossil fuels towards lower- or zero-carbon emissions alternatives, which could decrease demand for oil and gas and consequently adversely affect the business of our customers, thereby reducing demand for our services. In addition, the IRA 2022 imposes the first ever federal fee on the emission of greenhouse gases through a methane emissions charge. The IRA 2022 amends the federal Clean Air Act to impose a fee on the emission of methane from sources required to report their GHG emissions to the U.S. Environmental Protection Agency
("EPA"), including those sources in the offshore and onshore petroleum and natural gas production and gathering and boosting source categories. The methane emissions charge would start in calendar year 2024 at $900 per ton of methane, increase to $1,200 in 2025, and be set at $1,500 for 2026 and each year after. Calculation of the fee is based on certain thresholds established in the IRA 2022. The methane emissions charge could increase our customers' operating costs and adversely affect their businesses, thereby reducing demand for our products and services.
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ITEM 2.Unregistered Sales of Equity Securities
and Use of Proceeds
(a) None.
(b) None.
(c)
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Period
Total
Number of Shares Purchased(1)
Average Price Paid per Share(1)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans orPrograms
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
