The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements based on our current expectations, estimates and projections about our operations and the industry in which we operate. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in "Risk Factors" and "Cautionary note regarding forward-looking statements" and elsewhere in this Annual Report on Form 10-K. We assume no obligation to update any of these forward-looking statements.
We are a global company serving the oil, natural gas, industrial and renewable energy industries. FET provides value added solutions aimed at improving the safety, efficiency, and environmental impact of our customers' operations. We are an environmentally and socially responsible company headquartered in
Houston, Texaswith manufacturing, distribution and service facilities strategically located throughout the world. Our products include highly engineered capital equipment as well as consumable products. These consumable products are used in drilling, well construction and completions activities, within the supporting infrastructure, and at processing centers and refineries. Our engineered capital products are directed at drilling rig equipment for new rigs, upgrades and refurbishment projects, subsea construction and development projects, pressure pumping equipment, the placement of production equipment on new producing wells, downstream capital projects and capital equipment for renewable energy projects. In 2021, over 78% of our revenue was derived from consumable products and activity-based equipment, while the balance was primarily derived from capital products with a small amount from rental and other services. We design, manufacture and supply high quality reliable products that create value for our diverse customer base, which includes, among others, oil and natural gas operators, land and offshore drilling contractors, oilfield service companies, subsea construction and service companies, and pipeline and refinery operators. In addition, we offer some of our products to renewable energy and new energy companies. We expect that the world's long-term energy demand will continue to rise. We also expect hydrocarbons will continue to play a vital role in meeting the world's long-term energy needs while renewable energy sources continue to develop. As such, we remain focused on serving our customers in both oil and natural gas as well as renewable energy applications. We are also continuing to develop products to help oil and gas operators lower their current emissions while also deploying our existing product technologies in renewable energy applications and seeking to develop innovative equipment.
Here is a summary of the products and services offered by each segment:
•Drilling & Downhole. This segment designs, manufactures and supplies products and provides related services to the drilling, well construction, artificial lift and subsea energy construction markets, including applications in oil and natural gas, renewable energy, defense, and communications. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable products consumed in the drilling process; (ii) well construction casing and cementing equipment and protection products for artificial lift equipment and cables; and (iii) subsea remotely operated vehicles and trenchers, submarine rescue vehicles, specialty components and tooling, and complementary subsea technical services. •Completions. This segment designs, manufactures and supplies products and provides related services to the coiled tubing, well stimulation and intervention markets. The products and related services consist primarily of: (i) capital and consumable products sold to the pressure pumping, hydraulic fracturing and flowback services markets, including hydraulic fracturing pumps, cooling systems, high-pressure flexible hoses and flow iron as well as wireline cable and pressure control equipment used in the well completion and intervention service markets; and (ii) coiled tubing strings and coiled line pipe and related services. •Production. This segment designs, manufactures and supplies products and provides related equipment and services for production and infrastructure markets. The products and related services consist primarily of: (i) engineered process systems, production equipment, as well as specialty separation equipment; and (ii) a wide range of industrial valves focused on serving oil and natural gas customers as well as power generation, renewable energy and other general industrial applications. 32
The level of demand for our products is directly related to the activity levels and the capital and operating budgets of our customers, which in turn are heavily influenced by energy prices and expectations as to future price trends. In addition, the availability of existing capital equipment adequate to serve exploration and production requirements, or lack thereof, drives demand for our capital equipment products. In 2020, the COVID-19 pandemic and associated actions taken around the world to mitigate the spread of COVID-19 caused unprecedented declines in economic activity, energy demand and oil and natural gas prices. In response, OPEC+ implemented significant reductions in oil production and North American exploration and production companies aggressively reduced drilling and completion activities. In response to the decline in demand for our products in 2020, we implemented significant cost reduction actions, including exiting facilities, lowering headcount, reducing salaries, temporarily suspending the Company's matching contribution to the
U.S.and Canadadefined contribution retirement plans, and furloughing select employee groups. Certain facility closures and headcount reduction efforts continued into 2021. During 2021, distribution of vaccines and reopening of certain economies resulted in increasing demand for oil and natural gas. At the same time, the supply of oil and natural gas has been impacted by ongoing constraints by OPEC+ and North American exploration and production companies. As a result of these supply and demand factors, commodity prices increased substantially in 2021. In addition, ongoing COVID-19 outbreaks and worldwide labor constraints continue to cause disruptions in global supply chains, which have led to inflationary pressures for certain goods and services. Our revenues are highly correlated to the U.S.drilling rig count, which has increased to 586 rigs as of the end of 2021 from a low of 244 rigs in August 2020. The level of active hydraulic fracturing fleets also increased substantially in 2021 in order to meet increasing oil demand. Despite these improvements, drilling and completions activity remains significantly below pre-pandemic levels. In addition, publicly owned exploration and production companies in North Americaremain under pressure to generate positive cash flows and constrain capital expenditures. In contrast, privately owned exploration and production companies in North Americahave increased their drilling and completions activity in response to the higher oil and natural gas price environment. Furthermore, consolidation of exploration and production and service companies continued in 2021. Activity levels have also increased in international markets, as well as in global offshore and subsea activity. As a result, demand for our drilling and subsea capital equipment offerings increased during 2021 due to an improved outlook for our international drilling customers and the diversification of our subsea product line outside of the oil and natural gas industry. On December 31, 2020, we sold assets pertaining to our ABZ and Quadrant valve brands for total consideration of $104.6 million, and recognized a gain on disposition of $88.4 million. The disposition of these brands resulted in a substantial decrease in our Valve Solutions product line's revenue compared to the prior year. The table below shows average crude oil and natural gas prices for West TexasIntermediate crude oil (WTI), United Kingdom Brent crude oil (Brent), and Henry Hubnatural gas: 2021 2020 Average global oil, $/bbl West Texas Intermediate $ 68.13 $ 39.16United Kingdom Brent $ 70.86 $ 41.96 Average North American Natural Gas, $/Mcf Henry Hub $ 3.89 $ 2.03The price of oil has varied dramatically over the last two years. The spot prices for WTI and Brent fell from $61.14and $67.77per barrel, respectively, as of December 31, 2019to lows below $15.00per barrel in April 2020. Since that time, oil prices have rebounded to an average of $68.13and $70.86for WTI and Brent, respectively, as of December 31, 2021. In addition, average natural gas prices were 91.6% higher in 2021 compared to 2020. 33
The table below shows the average number of active rigs operating by geographic area and drilling for different purposes based on weekly rig count information published by Baker Hughes Company.
2021 2020 Active Rigs by Location United States 478 433 Canada 132 89 International 755 825 Global Active Rigs 1,365 1,347 Land vs. Offshore Rigs Land 1,172 1,133 Offshore 193 214 Global Active Rigs 1,365 1,347 U.S. Commodity Target Oil/Gas 379 345 Gas 98 85 Unclassified 1 3 Total U.S. Rigs 478 433 U.S. Well Path Horizontal 431 384 Vertical 22 21 Directional 25 28 Total U.S. Active Rigs 478 433 A substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed. The average
U.S.rig count for 2021 increased 10% as compared to 2020, while the international rig count decreased 8% compared to 2020. The U.S.rig count started 2020 at 805 working rigs and fell 70% to a low of 244 rigs in August 2020. Since that time, the number of active rigs has partially recovered, ending with 586 rigs as of December 31, 2021. Despite this improvement, the U.S.drilling rig count remains significantly below pre-pandemic levels.
The table below shows the total amount of incoming orders by segment for the years ended
(in millions of dollars) 2021 2020 Orders: Drilling & Downhole
$ 282.6 $ 208.5Completions 207.0 112.8 Production 142.7 151.3 Total Orders $ 632.3 $ 472.634
Table of Contents Results of operations Year ended December 31, Change (in thousands of dollars, except per share information) 2021 2020 $ % Revenue: Drilling & Downhole
$ 239,895 $ 216,836 $ 23,05910.6 % Completions 185,018 118,685 66,333 55.9 % Production 116,710 177,510 (60,800) (34.3) % Eliminations (555) (555) - * Total revenue $ 541,068 $ 512,47628,592 5.6 % Cost of sales: Drilling & Downhole $ 170,610 $ 192,640 $ (22,030)(11.4) % Completions 146,240 165,098 (18,858) (11.4) % Production 101,432 166,314 (64,882) (39.0) % Eliminations (555) (555) - * Total cost of sales $ 417,727 $ 523,497 $ (105,770)(20.2) % Gross profit: Drilling & Downhole $ 69,285 $ 24,196 $ 45,089186.3 % Completions 38,778 (46,413) 85,191 183.5 % Production 15,278 11,196 4,082 36.5 % Total gross profit $ 123,341 $ (11,021) $ 134,3621,219.1 % Selling, general and administrative expenses: Drilling & Downhole $ 64,536 $ 72,160 $ (7,624)(10.6) % Completions 43,310 50,891 (7,581) (14.9) % Production 29,632 44,614 (14,982) (33.6) % Corporate 31,408 30,012 1,396 4.7 %
Total selling, general and administrative expenses
(14.6) % Segment operating income (loss): Drilling & Downhole
$ 4,749 $ (47,964) $ 52,713109.9 % Operating margin % 2.0 % (22.1) % Completions (4,532) (97,304) 92,772 95.3 % Operating margin % (2.4) % (82.0) % Production (14,354) (33,418) 19,064 57.0 % Operating margin % (12.3) % (18.8) % Corporate (31,408) (30,012) (1,396) (4.7) % Total segment operating loss $ (45,545) $ (208,698) $ 163,15378.2 % Operating margin % (8.4) % (40.7) % Impairments of intangible assets, property and equipment - 20,394 (20,394) * Loss (gain) on disposal of assets and other (1,052) 2,531 (3,583) * Operating loss (44,493) (231,623) 187,130 80.8 % Interest expense 32,009 30,268 1,741 5.8 % Foreign exchange losses and other, net 217 6,470 (6,253) * Loss (gain) on extinguishment of debt 5,290 (72,478) 77,768 * Deferred loan costs written off - 2,262 (2,262) * Gain on disposition of business - (88,375) 88,375 * Total other (income) expense, net 37,516 (121,853) 159,369 * Loss before income taxes (82,009) (109,770) 27,761 25.3 % Income tax expense (benefit) 642 (12,881) 13,523 * Net loss (82,651) (96,889) 14,238 14.7 % Weighted average shares outstanding Basic 5,643 5,577 Diluted 5,643 5,577 Loss per share Basic $ (14.65) $ (17.37)Diluted $ (14.65) $ (17.37)* not meaningful 35
Our revenue for the year ended
December 31, 2021was $541.1 million, an increase of $28.6 million, or 5.6%, compared to the year ended December 31, 2020. For the year ended December 31, 2021, our Drilling & Downhole segment, Completions segment, and Production segment comprised 44.3%, 34.1% and 21.6% of our total revenue, respectively, compared to 42.3%, 23.1% and 34.6%, respectively, for the year ended December 31, 2020. The overall increase in revenue is primarily related to higher sales volumes in the Drilling and Downhole and Completions segments due to improving market conditions in 2021 compared to 2020, which was negatively impacted by the COVID 19 pandemic. Offsetting the overall increase is a $41.1 milliondecrease from the fourth quarter 2020 divestiture of our ABZ and Quadrant valve brands within our Production segment. The changes in revenue by operating segment consisted of the following: Drilling & Downhole segment - Revenue was $239.9 millionfor the year ended December 31, 2021, an increase of $23.1 million, or 10.6%, compared to the year ended December 31, 2020. This increase includes an $18.5 million, or 33.3%, increase in revenue for our Subsea Technologiesproduct line primarily due to higher sales of Work Class ROVs into international markets. Revenue for our Downhole Technologies product line increased by $5.1 million, or 8.0%, primarily due to higher sales volumes of casing and cementing tools as the number of wells drilled in 2021 recovered from the historically low activity levels in 2020 during the COVID 19 pandemic. Revenue for our Drilling Technologies product line was comparable year-over-year as higher sales volumes of consumable products were offset by lower repair and service revenues. Completions segment - Revenue was $185.0 millionfor the year ended December 31, 2021, an increase of $66.3 million, or 55.9%, compared to the year ended December 31, 2020. This increase includes a $40.3 million, or 71.3%, increase in sales volumes for our Stimulation and Intervention product line and a $26.1 million, or 42%, increase in sales volumes for our Coiled Tubing product line. These higher revenue levels were driven by increasing U.S.hydraulic fracturing and well intervention service activity levels in 2021 compared to a rapidly declining market in 2020 when service companies were idling equipment in response to historically low levels of oil demand as a result of the COVID 19 pandemic. Production segment - Revenue was $116.7 millionfor the year ended December 31, 2021, a decrease of $60.8 million, or 34.3%, compared to the year ended December 31, 2020. This decrease includes a $41.1 milliondecline from the divestiture of our ABZ and Quadrant valve brands in the fourth quarter 2020. The remaining decrease was driven by a $15.0 milliondecline in sales volumes of our valve products, particularly sales into the North Americadownstream and midstream markets, and a $4.8 milliondecrease in revenue for our Production Equipment product line from lower sales volumes of our surface production equipment, partially offset by higher sales volumes for our process oil treatment equipment due to increased project activity with international downstream customers.
Segment operating profit (loss) and segment operating margin percentage
Segment operating loss for the year ended
December 31, 2021was $45.5 millioncompared to a loss of $208.7 millionfor the year ended December 31, 2020. For the year ended December 31, 2021, segment operating margin percentage was (8.4)% compared to (40.7)% for the year ended December 31, 2020. Segment operating margin percentage is calculated by dividing segment operating income (loss) by revenue for the period. The change in operating loss and segment operating margin percentage for each segment is explained as follows: Drilling & Downhole segment - Segment operating income was $4.7 million, or 2.0%, for the year ended December 31, 2021compared to a loss of $48.0 million, or (22.1)%, for the year ended December 31, 2020. The $52.7 millionimprovement in segment operating results includes higher gross profit from the 10.6% increase in revenues discussed above. In addition, operating results improved due to a $20.4 milliondecrease in inventory write downs, a $5.3 milliondecrease in impairments of operating lease right of use assets and reductions in restructuring and employee related costs due to headcount, salary and other cost reductions implemented in 2020. Completions segment - Segment operating loss was $4.5 million, or (2.4)%, for the year ended December 31, 2021compared to a loss of $97.3 million, or (82.0)% for the year ended December 31, 2020. The $92.8 millionimprovement in segment operating results includes higher gross profit from the 55.9% increase in revenues discussed above. In addition, operating results improved due to a $51.4 milliondecrease in inventory write downs, a $6.1 milliondecrease in impairments of operating lease right of use assets and reductions in restructuring and employee related costs due to headcount, salary and other cost reductions implemented in 2020. Production segment - Segment operating loss was $14.4 million, or (12.3)%, for the year ended December 31, 2021compared to a loss of $33.4 million, or (18.8)% for the year ended December 31, 2020. The $19.1 millionimprovement in segment operating results is primarily attributable to a $20.9 milliondecrease in inventory write downs, a $2.2 milliondecrease in impairments of operating lease right of use assets and reductions in restructuring and employee related costs due to headcount, salary and other cost reductions implemented in 2020. These 36
improvements in operating results were partially offset by reduced operating profit resulting from the fourth quarter 2020 divestiture of our ABZ and Quadrant valve brands.
Corporate - Selling, general and administrative expenses for Corporate were
$31.4 millionfor the year ended December 31, 2021, a $1.4 millionincrease compared to the year ended December 31, 2020. This increase was primarily related to higher variable compensation costs, partially offset by a $1.5 milliondecrease in impairments of operating lease right of use assets and a decrease in professional fees. Corporate costs include, among other items, payroll related costs for management, administration, finance, legal, and human resources personnel; professional fees for legal, accounting and related services; and marketing costs.
Other items not included in segment operating loss
Several items are not included in segment operating loss, but are included in the total operating loss. These items include impairments of intangible assets, property and equipment, and loss (gain) on disposal of assets and other. For further information related to impairments of intangible assets, property and equipment, see Note 8 Impairments of Long-Lived Assets.
Other income and expenses
Other income and expense includes interest expense, loss (gain) on extinguishment of debt, deferred borrowing costs written off, foreign exchange and other losses, net, and gain on disposal of ‘business.
$32.0 millionof interest expense during the year ended December 31, 2021, an increase of $1.7 millioncompared to the year ended December 31, 2020due to higher non-cash amortization of debt discount and debt issuance costs associated with our 2025 Notes as well as a higher interest rate on our 2025 Notes compared to our previous 2021 Notes. These increases were partially offset by lower average debt balances outstanding in 2021 compared to 2020. The foreign exchange losses are primarily the result of movements in the British pound, Euro and Canadian dollar relative to the U.S.dollar. These movements in exchange rates create foreign exchange gains or losses when applied to monetary assets or liabilities denominated in currencies other than the location's functional currency, primarily U.S.dollar denominated cash, trade account receivables and net intercompany receivable balances for our entities using a functional currency other than the U.S.dollar. During the year ended December 31, 2021, we recognized a $5.3 millionloss on extinguishment of debt from the repurchase of an aggregate $59.9 millionof principal amount of our 2025 Notes for $58.6 million. The net carrying value of the extinguished debt, including unamortized debt discount and debt issuance costs, was $53.3 million. During the year ended December 31, 2020, we recognized $72.5 millionof gains on extinguishment of debt, including a $43.8 milliongain from the repurchase of notes in the first half of 2020 and a $28.7 milliongain from the exchange of notes in the third quarter of 2020. During the first half of 2020, we repurchased an aggregate $71.9 millionof principal amount of our 6.25% unsecured notes due 2021 (the "2021 Notes") for $27.7 millionand recognized a net gain of $43.8 millionreflecting the difference in the amount paid and the net carrying value of the extinguished debt, including debt issuance costs and unamortized debt premium. In the third quarter of 2020, we exchanged $315.5 millionprincipal amount of 2021 Notes for new 2025 Notes. This transaction was accounted for as an extinguishment of the 2021 Notes with the new 2025 Notes recorded at fair value on the transaction date, resulting in a $28.7 milliongain on extinguishment of debt. See Note 9 Debt for further information. During the year ended December 31, 2020, we wrote-off $2.3 millionof deferred loan costs including $2.0 millionfor the termination of previous discussions related to a potential exchange offer for our 2021 Notes and $0.3 millionrelated to amending our Credit Facility. In the fourth quarter of 2020, we sold certain assets of our ABZ and Quadrant valve brands and recognized a gain on disposition totaling $88.4 million. See Note 4 Acquisitions & Dispositions for further information related to this transaction.
We recorded tax expense of
$0.6 millionfor the year ended December 31, 2021compared to a tax benefit of $12.9 millionfor the year ended December 31, 2020. The estimated annual effective tax rates for the years ended December 31, 2021and 2020 were impacted by losses in jurisdictions where the recording of a tax benefit is not available. Furthermore, the tax expense or benefit recorded can vary from period to period depending on the Company's relative mix of earnings and losses by jurisdiction. The tax benefit for the year ended December 31, 2020included a $16.6 millionbenefit related to a carryback claim for U.S.federal tax losses based on provisions in the U.S.Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which was signed into law on March 27, 2020. The CARES Act provided relief to corporate taxpayers by permitting a five-year carryback of 2018-2020 NOLs, increased the 30% limitation on interest expense 37
50% deductibility of adjusted taxable income for 2019 and 2020 and accelerated refunds for minimum tax credit carryovers, among other provisions. The tax effects of changes in tax laws are recognized in the period in which the law is enacted. See note 11 Income taxes for more information.
Cash and capital resources
Sources and uses of liquidity
Our internal sources of liquidity are cash on hand and cash flows from operations, while our primary external sources include trade credit, the Credit Facility and the 2025 Notes. Our primary uses of capital have been for inventory, sales on credit to our customers, maintenance and growth capital expenditures, and debt repayments. We continually monitor other potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to generate positive operating cash flow and access outside sources of capital. As of
December 31, 2020, we had $316.9 millionprincipal amount of 2025 Notes outstanding and $13.1 millionoutstanding under our revolving Credit Facility. During the year ended December 31, 2021we repurchased $59.9 millionprincipal amount of our 2025 Notes and repaid the $13.1 millionoutstanding under our revolving Credit Facility. Following these transactions, we had $257.0 millionprincipal amount of 2025 Notes and no borrowings outstanding under our Credit Facility as of December 31, 2021. In September 2021, we amended our Credit Facility to, among other things, extend the maturity date to September 2026, reduce the aggregate amount of the commitment under the Credit Facility to $179.0 million, and change the interest rate applicable to outstanding loans.
See Note 9 Debt for more details on the terms of our 2025 Notes and our Credit Facility.
December 31, 2021, we had cash and cash equivalents of $46.9 millionand $127.4 millionof availability under our Credit Facility. We anticipate that our future working capital requirements for our operations will fluctuate directionally with revenues. Furthermore, availability under our Credit Facility will fluctuate directionally based on the level of our eligible accounts receivable and inventory subject to applicable sublimits. In addition, we expect total 2022 capital expenditures to be less than $10.0 million, consisting of, among other items, replacing end of life machinery and equipment. We expect our available cash on-hand, cash generated by operations, and estimated availability under our Credit Facility to be adequate to fund current operations during the next 12 months. In addition, based on existing market conditions and our expected liquidity needs, among other factors, we may use a portion of our cash flows from operations, proceeds from divestitures, securities offerings or other eligible capital to reduce the principal amount of our 2025 Notes outstanding. In November 2021, our board of directors approved a program for the repurchase of outstanding shares of our common stock with an aggregate purchase amount of up to $10.0 million. Shares may be repurchased under the program from time to time, in amounts and at prices that the company deems appropriate, subject to market and business conditions, applicable legal requirements and other considerations. In the fourth quarter of 2021, we repurchased approximately 56,000 shares of our common stock for aggregate consideration of approximately $1.1 million. Remaining authorization under this program is $8.9 million. In the fourth quarter of 2021, we completed the acquisition of Hawker Equipment Solutions, LLC("Hawker") for total cash consideration of $5.1 million, of which, $3.4 millionwas paid in the fourth quarter of 2021 with the balance expected to be paid over the next five years. In 2020, we completed the disposition of our ABZ and Quadrant valve brands for total cash consideration of $103.4 million. For additional information, see Note 4 Acquisitions & Dispositions. We may pursue acquisitions in the future, which may be funded with cash and/or equity. Our ability to make significant acquisitions for cash may require us to pursue additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all. 38
Our cash flows for the years ended
December 31, 2021and 2020 are presented below (in thousands): Year ended December 31, 2021 2020 Net cash provided by (used in) operating activities $ (15,775) $ 3,883Net cash provided by investing activities 10,698 108,250 Net cash used in financing activities (76,243) (41,765) Effect of exchange rate changes on cash (439) 338
Net increase (decrease) in cash, cash equivalents and restricted cash
$ (81,759) $ 70,706
Net cash provided by (used in) operating activities
Net cash used in operating activities was
$15.8 millionfor the year ended December 31, 2021compared to $3.9 millionof cash provided by operating activities for the year ended December 31, 2020. The decline in operating cash flows is primarily attributable to changes in working capital which provided cash of $6.7 millionfor the year ended December 31, 2021compared to providing $57.3 millionfor the year ended December 31, 2020. This decline was partially offset by an improvement in net income adjusted for non-cash items which used $9.1 millionof cash for the year ended December 31, 2021compared to using $53.5 millionof cash for the year ended December 31, 2020.
Net cash provided by investing activities
Net cash provided by investing activities was
$10.7 millionfor the year ended December 31, 2021including $10.8 millionof cash received to settle a note receivable from the 2019 sale of our equity interest in Ashtead Technology and $7.0 millionof proceeds from the sale of property and equipment. These cash inflows were partially offset by $3.4 millionof cash paid for the acquisition of Hawker and $2.4 millionof capital expenditures. Net cash provided by investing activities was $108.3 millionfor the year ended December 31, 2020including $104.6 millionfrom the sale of certain assets of our ABZ and Quadrant brands of valve products and $5.3 millionof proceeds from the sale of property and equipment, partially offset by $2.2 millionof capital expenditures.
Net cash used in financing activities
Net cash used in financing activities was
$76.2 millionfor the year ended December 31, 2021including $58.6 millionof cash used to repurchase 2025 Notes and $13.1of repayments on the revolving Credit Facility. Net cash used in financing activities was $41.8 millionfor the year ended December 31, 2020including $40.3 millionof cash used to repurchase 2021 Notes, $9.7 millionpaid for deferred financing costs and a $3.5 millionearly participation payment for the bond exchange. These cash outflows were partially offset by $13.1 millionof net borrowings on our Credit Facility in 2020.
Off-balance sheet arrangements
December 31, 2021, we had no off-balance sheet instruments or financial arrangements, other than letters of credit entered into in the ordinary course of business. For additional information, refer to Note 13 Commitments and Contingencies.
Additional financial information about the guarantor
The Company's 2025 Notes are guaranteed by our domestic subsidiaries which are 100% owned, directly or indirectly, by the Company. The guarantees are full and unconditional, joint and several. The guarantees of the 2025 Notes are (i) pari passu in right of payment with all existing and future senior indebtedness of such guarantor, including all obligations under our Credit Facility; (ii) secured by certain collateral of such guarantor, subject to permitted liens under the indenture governing the 2025 Notes; (iii) effectively senior to all unsecured indebtedness of that guarantor, to the extent of the value of the collateral securing the 2025 Notes (after giving effect to the liens securing our Credit Facility and any other senior liens on the collateral); and (v) senior in right of payment to any future subordinated indebtedness of that guarantor. In the event of a bankruptcy, liquidation or reorganization of any of the non-guarantor subsidiaries of the 2025 Notes, the non-guarantor subsidiaries of such notes will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Company or to any guarantors. The 2025 Notes guarantees shall each be released upon (i) any sale or other disposition of all or substantially all of the assets of such guarantor (by merger, consolidation or otherwise) to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary, if the sale or other disposition does not violate the 39
applicable provisions of the indenture governing such notes; (ii) any sale, exchange or transfer (by merger, consolidation or otherwise) of the equity interests of such guarantor after which the applicable guarantor is no longer a subsidiary, which sale, exchange or transfer does not violate the applicable provisions of the indenture governing such notes; (iii) legal or covenant defeasance or satisfaction and discharge of the indenture governing such notes; or (iv) dissolution of such guarantor, provided no default or event of default has occurred that is continuing. The obligations of each guarantor of the 2025 Notes under its guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such guarantor (including, without limitation, any guarantees under the Credit Facility) and any collections from or payments made by or on behalf of any other guarantor in respect of the obligations of such other guarantor under its guarantee or pursuant to its contribution obligations under the applicable indenture, result in the obligations of such guarantor under its guarantee not constituting a fraudulent conveyance, fraudulent preference or fraudulent transfer or otherwise reviewable transaction under applicable law. Nonetheless, in the event of the bankruptcy, insolvency or financial difficulty of a guarantor, such guarantor's obligations under its guarantee may be subject to review and avoidance under applicable fraudulent conveyance, fraudulent preference, fraudulent transfer and insolvency laws. We are presenting the following summarized financial information for the Company and the subsidiary guarantors (collectively referred to as the "
Obligated Group") pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Company and the subsidiary guarantors, presented on a combined basis, have been eliminated and information for the non-guarantor subsidiaries have been excluded. Amounts due to the non-guarantor subsidiaries and other related parties, as applicable, have been separately presented within the summarized financial information below.
The summarized financial information was as follows (in thousands):
Year ended December
(in thousands, except per share information) 2021 2020 Revenues
$ 401,876 $ 393,704Cost of sales 323,914 431,670 Operating loss (46,827) (238,608) Net loss (82,651) (96,889) Year ended December 31, (in thousands, except per share information) 2021 2020 Current assets $ 327,281 $ 385,364Noncurrent assets 298,172 332,486 Current liabilities 144,487 105,393 Payables to non-guarantor subsidiaries 125,281 102,885 Noncurrent liabilities 259,622 324,954
Significant Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States of America. In preparing our consolidated financial statements, we make judgments, estimates and assumptions affecting the amounts reported. We base our estimates on factors including historical experience and various assumptions that we believe are reasonable under the circumstances. These factors form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements.
In order to provide a better understanding of how we make judgments and develop estimates and assumptions about future events, we have described below our most critical accounting policies and estimates used in the preparation of our consolidated financial statements. .
Revenue is recognized in accordance with Accounting Standards Codification Topic 606 ("ASC 606"), when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For the year ended
December 31, 2021, approximately 91% of our revenue was recognized from goods transferred to customers at a point in time while 9% of our revenue was recognized from goods transferred to customers over time. Although terms of our contracts may vary considerably, the 9% of revenues recognized over time relate to certain contracts in our Subseaand Production Equipment product lines which are typically based on a fixed amount for the entire contract. Recognition over time for these contracts is supported by our assessment of the products supplied as having no alternative use to us and by clauses in the contracts that provide us with an enforceable right to payment for performance completed to date. We use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of assets to the customer which occurs as costs are incurred on the contract. The amount of revenue recognized is calculated based on the ratio of costs incurred to date compared to total estimated costs which requires management to calculate reasonably dependable estimates of total contract costs. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period. We recognize revenue and cost of sales each period based upon the advancement of the work-in-progress unless the stage of completion is insufficient to enable a reasonably certain forecast of profit to be established. In such cases, no profit is recognized during the period. Accounting estimates during the course of projects may change. The effect of such a change, which can be upward as well as downward, is accounted for in the period of change, and the cumulative income recognized to date is adjusted to reflect the latest estimates. These revisions to estimates are accounted for on a prospective basis. Contracts are sometimes modified to account for changes in product specifications or requirements. Most of our contract modifications are for goods and services that are not distinct from the existing contract. As such, these modifications are accounted for as if they were part of the existing contract, and therefore, the effect of the modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue on a cumulative catch-up basis.
Inventory, consisting of finished goods and materials and supplies held for resale, is carried at the lower of cost or net realizable value. We evaluate our inventories based on an analysis of stocking levels, historical sales levels and future sales forecasts, to determine obsolete, slow-moving and excess inventory. While we have policies for calculating and recording reserves against inventory carrying values, we exercise judgment in establishing and applying these policies. As of
December 31, 2021and 2020, our inventory reserve balances were $62.9 millionand $144.9 million, respectively. For the years ended December 31, 2021and 2020, we recognized inventory write downs totaling $8.1 millionand $100.8 million, respectively. These charges are all included in "Cost of sales" in the consolidated statements of comprehensive loss. See Note 5 Inventories for further information related to these charges.
December 31, 2021, our long-lived assets included property and equipment, definite lived intangibles, and operating lease right of use assets with balances of $94.0 million, $217.4 millionand $25.4 million, respectively. Key estimates related to long-lived assets include useful lives and recoverability of carrying values and changes in such estimates could have a significant impact on financial results. We review long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the asset may be impaired. The amount of the impairment is measured as the difference between the carrying value and the estimated fair value of the asset. The fair value is determined either through the use of an external valuation, or by means of an analysis of discounted future cash flows based on expected utilization. The impairment loss recognized represents the excess of an assets' carrying value as compared to its estimated fair value. For the year ended December 31, 2021, we did not recognize any impairment charges. For the year ended December 31, 2020, we recognized impairment charges for property and equipment, intangible assets and operating lease right of use assets totaling $15.1 million, $5.3 millionand $15.4 million, respectively. See Note 8 Impairments of Long-Lived Assets for further information related to these charges. 41
We follow the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon temporary differences between the carrying amounts and tax bases of our assets and liabilities at the balance sheet date, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, tax-planning and recent operating results. Any changes in our judgment as to the realizability of our deferred tax assets are recorded as an adjustment to the deferred tax asset valuation allowance in the period the change occurs. For the year ended
December 31, 2020, we recognized tax expense for valuation allowances totaling $25.3 million. See Note 11 Income Taxes for further information related to these charges. The accounting guidance for income taxes requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. If a tax position meets the "more likely than not" recognition criteria, the accounting guidance requires the tax position be measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement. If management determines that likelihood of sustaining the realization of the tax benefit is less than or equal to 50%, then the tax benefit is not recognized in the consolidated financial statements. We have operations in countries other than the U.S.Consequently, we are subject to the jurisdiction of a number of taxing authorities. The final determination of tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction. Changes in the operating environment, including changes in tax law or interpretation of tax law and currency repatriation controls, could impact the determination of our tax liabilities for a given tax year.
Recent accounting statements
From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board("FASB"), which we adopt as of the specified effective date. Refer to Note 2 Summary of Significant Accounting Policies for information related to recent accounting pronouncements.
Caution Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control. All statements, other than statements of historical fact, included in this Annual Report on Form 10-K regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Annual Report on Form 10-K, the words "will," "could," "believe," "anticipate," "intend," "estimate," "expect," "may," "continue," "predict," "potential," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Annual Report on Form 10-K are reasonable, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause actual results to differ materially from our plans, intentions or expectations. This may be the result of various factors, including, but not limited to, those factors discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K.
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