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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Overview

We are a global products company, serving the drilling, downhole, subsea, completions and production sectors of the energy industry. We design, manufacture and distribute products and engage in aftermarket parts supply and services that complement our product offering. The Company's products include highly engineered capital equipment as well as products that are consumed in the drilling, well construction, production and transportation of oil and natural gas. 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; and downstream capital projects. In 2020, over 80% 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 seek to 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.

A summary of the products and services offered by each segment is as follows:

•Drilling & Downhole. This segment designs and manufactures products and provides related services to the drilling, well construction, artificial lift and subsea energy construction and services markets as well as other sectors such as alternative energy, defense and communications. The products and related services consist primarily of: (i) capital equipment and a broad line of expendable drilling 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, 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 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 upstream, midstream, and downstream oil and natural gas customers as well as power generation and other general industries.

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Market Conditions

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 early 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, in the second quarter of 2020, OPEC+ agreed to a significant cut in oil production and North American exploration and production companies significantly reduced supply by shutting in producing wells and aggressively decreasing drilling and completion activities.

The extreme volatility and lower price environment through the year created a very challenging market for all sub-sectors of the oil and natural gas industry. Recently, oil demand and prices have partially rebounded as supply and demand have rebalanced at a lower level. However, overall activity and the North America rig count remain at historically low levels.

Due to the challenging market conditions, exploration and production companies in North America are under pressure to generate positive cash flows and minimize capital and maintenance expenditures. As a result, we have experienced a material reduction in demand for many of our products and consequently, our revenue. In addition, bankruptcies and consolidation of exploration and production and service companies continued through 2020. If this trend continues going forward, it may lead to a further reduction in the demand for our products.

Activity levels in international regions, as well as global offshore and subsea activity, have also been impacted by COVID-19 related activity disruptions. However, international revenue for our drilling and subsea capital equipment offerings have not declined as sharply due to longer project timelines for international drilling customers and the diversification of our subsea product line revenue outside of the oil and natural gas industry.

Demand for products in our Valve Solutions product line is driven by capital projects and maintenance spending in the upstream, midstream and downstream markets. As such, revenue for our Valve Solutions product line has also been negatively affected by lower energy prices and the impacts of COVID-19 on the global economy. In addition, revenue for our Valve Solutions product line has been under pressure due to our distribution customers’ increased focus on decreasing their valve inventories in order to generate positive free cash flow.

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 will reduce our Valve Solutions product line’s future revenue.

Although we have experienced some operational inefficiencies, our manufacturing facilities and business operations have not experienced work stoppages due to COVID-19 or associated government regulations. However, in response to the decline in demand for our products and decreases in revenue, we have implemented significant cost reduction actions, including exiting facilities, lowering headcount, reducing salaries, suspending the Company’s matching contribution to the U.S. and Canada defined contribution retirement plans, and furloughing select employee groups. These efforts continued in the fourth quarter of 2020 with the discontinuation of certain products and other changes in sourcing and manufacturing strategies. These restructuring efforts are expected to be completed during the first half of 2021.

The table below shows average crude oil and natural gas prices for West Texas Intermediate crude oil (WTI), United Kingdom Brent crude oil (Brent), and Henry Hub natural gas:

Average global oil, $/bbl

Average North American Natural Gas, $/Mcf

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Average WTI and Brent oil prices were 31% and 35% lower, respectively, for the year ended December 31, 2020 compared to 2019. The price of oil varied dramatically during 2020 with spot prices for WTI and Brent falling from $61.14 and $67.77, respectively, as of December 31, 2019 to lows of below $15.00 per barrel in April 2020 followed by a partial recovery to $48.35 and $51.22, respectively, as of December 31, 2020. Average natural gas prices were 21% lower in 2020 than 2019.

The table below shows the average number of active drilling rigs operating by geographic area and drilling for different purposes based on the weekly rig count information published by Baker Hughes Company.

Active Rigs by Location

Land vs. Offshore Rigs

U.S. Commodity Target, Land

Unclassified 3 1

U.S. Well Path, Land

Total U.S. Active Land Rigs 433 943

A substantial portion of our revenue is impacted by the level of rig activity and the number of wells completed. The average U.S. and Canadian rig counts in 2020 decreased 54% and 34%, respectively, as compared to 2019, while the international rig count decreased 25% compared to 2019. The number of working rigs in the U.S. started 2020 at 805 and fell over 70% to a low of 244 rigs in August 2020. Since then, active rig levels have rebounded slightly to 351 working rigs as of December 31, 2020. Despite improvement in early 2021, the U.S. rig count in 2021 is projected to remain below levels achieved in recent years.

The table below shows the amount of total inbound orders by segment for the years ended December 31, 2020 and 2019:

Orders:

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Results of operations

Year ended December 31, Change

(in thousands of dollars, except per share information) 2020 2019 $ %

Revenue:

Cost of sales:

Gross profit:

Selling, general and administrative expenses:

Segment operating income (loss):

Operating margin % (22.1) % 2.2 %

Operating margin % (82.0) % 2.2 %

Operating margin % (18.8) % 2.4 %

Operating margin % (40.7) % (0.8) %

Contingent consideration benefit — (4,629) 4,629 *

Loss (gain) on disposal of assets and other (597) 78 (675) *

Gain on extinguishment of debt (72,478) — (72,478) *

Deferred loan costs written off 2,262 — 2,262 *

Gain realized on previously held equity investment — (1,567) 1,567 *

Weighted average shares outstanding

Loss per share

* not meaningful

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Revenue

Our revenue for the year ended December 31, 2020 was $512.5 million, a decrease of $444.1 million, or 46.4%, compared to the year ended December 31, 2019. For the year endedDecember 31, 2020, our Drilling & Downhole segment, Completions segment, and Production segment comprised 42.3%, 23.1% and 34.6% of our total revenue, respectively, compared to 35.0%, 31.4% and 33.6%, respectively, for the year ended December 31, 2019. The overall decrease in revenue is due to lower sales volumes due to the significant decrease in drilling and completions activity levels as a result of lower spending by exploration and production companies. The changes in revenue by operating segment consisted of the following:

Drilling & Downhole segment — Revenue was $216.8 million for the year ended December 31, 2020, a decrease of $118.0 million, or 35.2%, compared to the year ended December 31, 2019. This decrease includes a $60.4 million, or 38.3%, decline in revenue for our Drilling Technologies product line due to lower sales volumes of consumable products and capital equipment as a result of a 38% decline in global rig count year-over-year. Revenue for our Downhole Technologies product line decreased by $52.0 million, or 44.8%, primarily due to lower sales volumes of artificial lift products and well construction equipment due to the significant decrease in drilling activity and the number of wells completed in 2020. The $5.6 million, or 9.1%, decline in revenue for our Subsea Technologies product line was relatively less than other product lines in the segment due to the diversification of sales of capital equipment to customers outside the oil and natural gas industry.

Completions segment — Revenue was $118.7 million for the year ended December 31, 2020, a decrease of $186.4 million, or 61.1%, compared to the year ended December 31, 2019. This decline includes a $105.6 million, or 65.2%, decrease in sales volumes for our Stimulation and Intervention product line primarily attributable to lower spending by our pressure pumping service customers due to the significant decline in hydraulic fracturing activity levels in the U.S. The remaining decline was driven by an $80.8 million, or 57%, decrease in sales volumes for our Coiled Tubing product line primarily attributable to lower U.S. completions activity.

Production segment — Revenue was $177.5 million for the year ended December 31, 2020, a decrease of $143.5 million, or 44.7%, compared to the year ended December 31, 2019. This decrease includes an $86.6 million, or 43.7%, decline in sales volumes of our valve products, particularly sales into the North America upstream and midstream oil and natural gas market, and a $56.9 million, or 46.4%, decrease in revenue for our Production Equipment product line as a result of lower sales volumes of our surface production equipment due to the significant decline in the number of U.S. well completions in 2020.

Segment operating loss and segment operating margin percentage

Segment operating loss for the year ended December 31, 2020 was $208.7 million compared to a loss of $7.2 million for the year ended December 31, 2019. For the year ended December 31, 2020, segment operating margin percentage was (40.7)% compared to (0.8)% for the year ended December 31, 2019. 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 loss was $48.0 million, or (22.1)%, for the year ended December 31, 2020 compared to income of $7.3 million, or 2.2% for the year ended December 31, 2019. The $55.3 million decline in segment operating results is primarily attributable to lower gross profit from the 35.2% decline in segment revenues. In addition, segment operating loss for 2020 includes $24.9 million of inventory write-downs, $5.4 million of impairments of operating lease right of use assets, and $4.4 million of employee severance costs. These declines in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented in 2020.

Completions segment — Segment operating loss was $97.3 million, or (82.0)%, for the year ended December 31, 2020 compared to income of $6.6 million, or 2.2% for the year ended December 31, 2019. The $103.9 million decline in segment operating results is primarily attributable to lower gross profit from the 61.1% decline in segment revenues. In addition, segment operating loss for 2020 includes $53.5 million of inventory write-downs, $6.1 million of impairments of operating lease right of use assets, and $1.8 million of employee severance costs. These declines in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented in 2020.

Production segment — Segment operating loss was $33.4 million, or (18.8)%, for the year ended December 31, 2020 compared to income of $7.8 million, or 2.4% for the year ended December 31, 2019. The $41.2 million decline in segment operating results is primarily attributable to lower gross profit from the (44.7)% decline in segment revenues. In addition, segment operating loss for 2020 includes $22.4 million of inventory write-downs, $2.4 million of impairments of operating lease right of use assets, and $1.3 million of employee severance costs. These declines

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in segment operating results were partially offset by lower employee related costs due to headcount, salary and other cost reductions implemented in 2020.

Corporate — Selling, general and administrative expenses for Corporate were $30.0 million for the year ended December 31, 2020, a $1.1 million increase compared to the year ended December 31, 2019. Reductions in employee related costs from headcount, salary and other cost reductions were more than offset by a $1.5 million lease impairment and higher legal fees related to litigation. 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 income (loss)

Several items are not included in segment operating loss, but are included in the total operating loss. These items include transaction expenses, impairments of goodwill, intangible assets, property and equipment, contingent consideration benefit and losses (gains) on the disposal of assets and other. Transaction expenses relate to legal and other advisory costs incurred in acquiring or disposing of businesses and are not considered to be part of segment operating loss. For further information related to impairments of goodwill, intangible assets, property and equipment, see Note 8 Impairments of Goodwill and Long Lived Assets.

The contingent consideration benefit in 2019 relates to a gain of $4.6 million recognized in the first quarter of 2019 due to reducing the estimated fair value of the contingent cash liability associated with the fourth quarter 2018 acquisition of Global Heat Transfer LLC.

Other income and expense

Other income and expense includes interest expense, gain on extinguishment of debt, deferred loan costs written off, foreign exchange losses and other, net, gain realized on previously held equity investment, and gain on disposition of business.

We incurred $30.3 million of interest expense during the year ended December 31, 2020, a decrease of $1.4 million compared to the year ended December 31, 2019 due to lower average outstanding balances on our Credit Facility in 2020 compared to 2019 partially offset by higher non-cash amortization of debt discount and debt issuance costs associated with our 9.0% convertible secured notes due August 2025 (the “2025 Notes”).

The foreign exchange losses are primarily the result of movements in the British pound, the Euro, and the 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 foreign entities using a functional currency other than the U.S. dollar.

During the year ended December 31, 2020, we recognized $72.5 million of gains on extinguishment of debt, including a $43.8 million gain from the repurchase of notes in the first half of 2020 and a $28.7 million gain from the exchange of notes in the third quarter of 2020. During the first half of 2020, we repurchased an aggregate $71.9 million of principal amount of our 6.25% unsecured notes due 2021 (the “2021 Notes”) for $27.7 million and recognized a net gain of $43.8 million reflecting 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 million principal 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 million gain on extinguishment of debt. See Note 9 Debt for further information.

During the year ended December 31, 2020, we wrote-off $2.3 million of deferred loan costs including $2.0 million for the termination of previous discussions related to a potential exchange offer for our 2021 Notes and $0.3 million related to amending our Credit Facility to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million.

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. In the fourth quarter of 2019, we sold certain assets of our Cooper Alloy brand of valve products and recognized a gain on disposition totaling $2.3 million. In the third quarter of 2019, we sold our aggregate 40% interest in Ashtead and recognized a gain of $1.6 million as a result of such sale. See Note 4 Dispositions for further information related to these transactions.

Taxes

We recorded a tax benefit of $12.9 million for the year ended December 31, 2020 compared to $1.8 million for the year ended December 31, 2019. On March 27, 2020, the U.S. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which provided relief to corporate taxpayers by permitting a five-year carryback of 2018-2020 NOLs, increased the 30% limitation on interest expense deductibility to 50% of adjusted taxable

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income for 2019 and 2020, and accelerated refunds for minimum tax credit carryforwards, among other provisions. The tax effects of changes in tax laws are recognized in the period in which the law is enacted. As such, the tax benefit for the year ended December 31, 2020 includes a $16.0 million benefit related to a carryback claim for U.S. federal tax losses based on provisions in the CARES Act.

The tax benefit for the year ended December 31, 2019 includes an increase in our valuation allowance of $98.9 million to write down our deferred tax assets in the U.S., U.K., Germany, Singapore and Saudi Arabia primarily due to operating losses incurred where the recording of a tax benefit is not available and $27.2 million of tax expense related to the impairment of non-tax deductible goodwill.

See Note 11 Income Taxes for additional information.

Liquidity 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, our Credit Facility and 2025 Notes described below. Our primary uses of capital have been for inventories, sales on credit to our customers and maintenance and growth capital expenditures. We continually monitor 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 continue generating positive operating cash flow and access outside sources of capital.

During the first half of 2020, we repurchased an aggregate $71.9 million principal amount of our 2021 Notes for $27.7 million and recognized a net gain of $43.8 million reflecting 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 million principal amount of the remaining 2021 Notes for new 2025 Notes. Concurrent with the 2021 Notes exchange, the Credit Facility was amended to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million. In the fourth quarter of 2020, we redeemed the remaining $12.6 million principal amount of 2021 Notes at par and therefore, no 2021 Notes remained outstanding at December 31, 2020.

As of December 31, 2020, we had $316.9 million principal amount of 2025 Notes and $13.1 million of borrowings outstanding under our Credit Facility. The Credit Facility is scheduled to mature on October 30, 2022 and the 2025 notes are scheduled to mature in August 2025.

See 9 Debt for further details related to the terms for our 2021 Notes, 2025 Notes and Credit Facility.

As of December 31, 2020, we had cash and cash equivalents of $128.6 million and $110.5 million of availability under our Credit Facility. In the fourth quarter of 2020, we sold certain assets of our ABZ and Quadrant brands of valve products for cash consideration of $104.6 million. In the third quarter of 2020, we received a $14.1 million cash refund for income taxes from filing a carryback claim for U.S. federal tax losses based on provisions in the CARES Act.

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. In addition, we expect total 2021 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 and debt maturities 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 or other debt outstanding.

In 2020, we completed one disposition for total consideration of $104.6 million and in 2019, we completed two dispositions for total consideration of $51.7 million. For additional information, see Note 4 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.

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Our cash flows for the years ended December 31, 2020 and 2019 are presented below (in thousands):

Year ended December 31,

Net cash provided by operating activities $ 3,883 $ 104,144

Net cash provided by investing activities 108,250 28,135

Net cash used in financing activities (41,765) (122,191)

Effect of exchange rate changes on cash 338 582

Net increase in cash, cash equivalents and restricted cash $ 70,706 $ 10,670

Net cash provided by operating activities

Net cash provided by operating activities was $3.9 million for the year ended December 31, 2020 compared to $104.1 million for the year ended December 31, 2019. The decrease is primarily attributable to the decline in operating results. Net income adjusted for non-cash items used $53.5 million of cash for the year ended December 31, 2020 compared to providing $40.7 million of cash for the year ended December 31, 2019. The remaining decline is due to changes in working capital which provided cash of $57.3 million for the year ended December 31, 2020 compared to $63.5 million for the year ended December 31, 2019.

Our operating cash flows are sensitive to a number of variables, the most significant of which is the level of drilling and production activity for oil and natural gas reserves. These activity levels are in turn impacted by the volatility of oil and natural gas prices, regional and worldwide economic activity, weather, infrastructure capacity to reach markets and other various factors. These factors are beyond our control and are difficult to predict.

Net cash provided by investing activities

Net cash provided by investing activities was $108.3 million for the year ended December 31, 2020 including $104.6 million from the sale of certain assets of our ABZ and Quadrant brands of valve products and $5.3 million of proceeds from the sale of property and equipment, partially offset by $2.2 million of capital expenditures. Net cash provided by investing activities was $28.1 million for the year ended December 31, 2019 including $39.3 million in cash proceeds from the sale of our aggregate 40% interest in Ashtead technology and $3.4 million in cash proceeds from the sale of certain assets of our Cooper Alloy brand of valve products, partially offset by $15.1 million of capital expenditures for property and equipment.

Net cash used in financing activities

Net cash used in financing activities was $41.8 million for the year ended December 31, 2020 compared to $122.2 million used in financing activities for the year ended December 31, 2019. Net cash used in financing activities for the year ended December 31, 2020 includes $40.3 million of cash used to repurchase 2021 Notes, $9.7 million paid for deferred financing costs and a $3.5 million early participation payment for the bond exchange. These cash outflows were partially offset by $13.1 million of net borrowings on our Credit Facility in 2020. Net cash used in financing activities for the year ended December 31, 2019 primarily includes $119.9 million of net repayments of debt.

Off-balance sheet arrangements

As of December 31, 2020, 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.

Supplemental Guarantor Financial Information

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.

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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 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.

Summarized financial information was as follows (in thousands):

Year ended December 31,

(in thousands, except per share information) 2020 2019

Year ended December 31,

(in thousands, except per share information) 2020 2019

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Critical 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 our most critical accounting policies below. We believe that these accounting policies reflect our more significant estimates and assumptions used in preparation of our consolidated financial statements.

Revenue recognition

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.

Contract Identification. We account for a contract when it is approved, both parties are committed, the rights of the parties are identified, payment terms are defined, the contract has commercial substance and collection of consideration is probable.

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer under ASC 606. The majority of our contracts with customers contain a single performance obligation to provide agreed-upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. In accordance with ASC 606, we do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. We have elected to apply the practical expedient to account for shipping and handling costs associated with outbound freight after control of a product has transferred to a customer as a fulfillment cost which is included in Cost of Sales. Furthermore, since our customer payment terms are short-term in nature, we have also elected to apply the practical expedient which allows an entity to not adjust for the effects of a significant financing component if it expects that the customer’s payment period will be less than one year in duration.

Contract Value. Revenue is measured based on the amount of consideration specified in the contracts with our customers and excludes any amounts collected on behalf of third parties. We have elected the practical expedient to exclude amounts collected from customers for all sales (and other similar) taxes.

The estimation of total revenue from a customer contract is subject to elements of variable consideration. Certain customers may receive rebates or discounts which are accounted for as variable consideration. We estimate variable consideration as the most likely amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is resolved. Our estimate of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historic, current, forecast) that is reasonably available to us.

Timing of Recognition. We recognize revenue when we satisfy a performance obligation by transferring control of a product or service to a customer. Our performance obligations are satisfied at a point in time or over time as work progresses.

Revenue from goods transferred to customers at a point in time accounted for 93% of revenues for the year ended December 31, 2020. The majority of this revenue is product sales, which are generally recognized when items are shipped from our facilities and title passes to the customer. The amount of revenue recognized for products is adjusted for expected returns, which are estimated based on historical data.

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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, primarily related to our remotely operated vehicles (“ROVs”) which may take longer to manufacture. 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. No adjustment to any one contract was material to our consolidated financial statements for the years ended December 31, 2020, 2019 and 2018.

We sell our products through a number of channels including a direct sales force, marketing representatives, and distributors. We have elected to expense sales commissions when incurred as the amortization period would be less than one year. These costs are recorded within cost of sales.

Portfolio Approach. We have elected to apply ASC 606 to a portfolio of contracts with similar characteristics as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio.

Disaggregated Revenue. Refer to Note 18 Business Segments for disaggregated revenue by product line and geography.

Contract Balances. Contract balances are determined on a contract by contract basis. Contract assets represent revenue recognized for goods and services provided to our customers when payment is conditioned on something other than the passage of time. Similarly, when we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record a contract liability. Such contract liabilities typically result from billings in excess of costs incurred and advance payments received on product sales.

Stock based compensation

We account for awards of stock based compensation at fair value on the date granted to employees and recognize the compensation expense in our consolidated financial statements over the requisite service period. The fair value of stock based compensation is measured using the fair value of the common stock for restricted stock and restricted stock units, the Black-Scholes model for options, and a Monte Carlo Simulation model for performance share units and stock appreciation rights. These models require assumptions and estimates for inputs, especially the estimate of the volatility in the value of the underlying share price, that affect the resultant values and hence the amount of compensation expense recognized.

Inventories

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.

For the years ended December 31, 2020 and 2019, we recognized inventory write downs totaling $100.8 million and $10.3 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.

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Property and equipment and intangible assets (“Long-lived assets”)

Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of assets, generally 3 to 30 years. We have established standard useful lives for certain classes of assets. Intangible assets are stated at cost less accumulated amortization. Amortization is computed using the straight-line method based on the estimated useful lives of assets.

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 years ended December 31, 2020 and 2019, we recognized property and equipment impairment charges totaling $15.1 million and $7.9 million, respectively. For the years ended December 31, 2020 and 2019, we recognized intangible asset impairment charges totaling $5.3 million and$53.5 million, respectively. These charges are all included in “Impairments of goodwill, intangible assets, property and equipment” in the consolidated statements of comprehensive loss. See Note 8 Impairments of Goodwill and Long Lived Assets for further information related to these charges.

Income taxes

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, including the effect of U.S. tax reform, 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.

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.

The CARES Act was signed into law in March 2020 in response to the COVID-19 pandemic. The tax effects of changes in tax laws are recognized in the period in which the law is enacted. As such, the tax benefit for the year ended December 31, 2020 includes a $16.0 million benefit related to a carryback claim for U.S. federal tax losses based on new provisions in the CARES Act.

For the year ended December 31, 2019, we recognized tax expense for valuation allowances totaling $98.9 million. See Note 11 Income Taxes for further information related to these charges.

Recognition of provisions for contingencies

In the ordinary course of business, we are subject to various claims, suits and complaints. We, in consultation with internal and external legal advisors, will provide for a contingent loss in the consolidated financial statements if, at the date of the consolidated financial statements, it is probable that a liability has been incurred and the amount can be reasonably estimated. If it is determined that the reasonable estimate of the loss is a range and that there is no best estimate within that range, a provision will be made for the lower amount of the range. Legal costs are expensed as incurred.

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An assessment is made of the areas where potential claims may arise under contract warranty clauses. Where a specific risk is identified, and the potential for a claim is assessed as probable and can be reasonably estimated, an appropriate warranty provision is recorded. Warranty provisions are eliminated at the end of the warranty period except where warranty claims are still outstanding. The liability for product warranty is included in accrued liabilities in the consolidated balance sheets.

Recent accounting pronouncements

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.

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Cautionary note 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 ourplans, 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.

Item 7A. Quantitative and qualitative disclosures about market risk

Not required under Regulation S-K for “smaller reporting companies.”

Item 8. Consolidated Financial Statements and Supplementary Data

Page

Consolidated balance sheets as of December 31, 2020 and 2019 51

Notes to consolidated financial statements 54

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Forum Energy Technologies, Incorporated

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Forum Energy Technologies, Incorporated and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of comprehensive loss, changes in stockholders' equity, and cash flows, for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Inventory — Refer to Notes 2 and 5 to the financial statements

Critical Audit Matter Description

Inventory consists of finished goods and materials and supplies which are carried at the lower of cost or net realizable value. The Company evaluates the net realizable values of inventories based on analysis of inventory levels including excess, obsolete and slow-moving items, historical sales experience and future sales forecasts. The Company’s evaluation of net realizable value is performed at each location and is based on information and assumptions specific to that location. Changes in these assumptions could have a significant impact on the recorded inventory amounts or the amount of inventory write-downs. The inventory, net balance at December 31, 2020 was $251.7 million and the amount of inventory reserve was $144.9 million.

Given the significant judgments and assumptions made by management in applying the methodology used to determine net realizable value, future sales forecasts, and the reports utilized to determine inventory levels and historical sales experiences, performing audit procedures required a high degree of auditor judgment and increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the net realizable value of inventory included the following, among others:

•We made inquiries of business unit managers as well as executives, sales, and operations personnel about the expected product lifecycles and product development plans and historical usage by product.

•We have tested the forecasted demand by comparing internal and external information (e.g. historical usage, contracts, communications with customers, product development plans, and macroeconomic conditions) with the Company’s forecasted demand.

•We evaluated management’s forecasted demand by comparing actual results to historical forecasts.

•We considered the existence of contradictory evidence based on reading of internal communications to management and the board of directors, Company press releases, and analysts' reports, as well as our observations and inquiries as to changes within the business.

Long-lived assets —Refer to Notes 2, 6, 7 and 8 to the financial statements

Critical Audit Matter Description

The Company reviews 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. If the undiscounted future cash flows are less than the carrying amount of the assets, there is an indication that the assets 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. In performing the review for impairment, management makes significant estimates and assumptions related to forecasts of future cash flows including forecasts of future revenue and useful lives of the assets. The net balances of property and equipment, definite lived intangibles, and right of use asset balances were $113.7 million, $240.4 million and $31.5 million, respectively, as of December 31, 2020.

Given the significant estimates and assumptions made by management to estimate future sales forecasts and useful lives of the assets, performing audit procedures required a high degree of auditor judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the forecasts of future sales and useful lives included the following, among others:

•We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts.

•We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical and current year results, (2) internal communications to management and the Board of Directors (3) forecasted information included in industry reports of the Company and certain of its peer companies, and (4) third-party and independently researched market data.

•We compared the remaining useful life of the primary assets to the Company’s underlying asset registers

/s/ Deloitte & Touche LLP

Houston, Texas

March 2, 2021

We have served as the Company’s auditor since 2019.

Forum Energy Technologies, Inc. and subsidiaries

Consolidated statements of comprehensive loss

Year ended December 31,

(in thousands, except per share information) 2020 2019

Operating expenses

Contingent consideration benefit — (4,629)

Loss (gain) on disposal of assets and other (597) 78

Loss from equity investments — (318)

Other expense (income)

Gain on extinguishment of debt (72,478) —

Deferred loan costs written off 2,262 —

Foreign exchange losses and other, net 6,470 5,022

Gain realized on previously held equity investment — (1,567)

Gain on disposition of business (88,375) (2,348)

Weighted average shares outstanding

Loss per share

Other comprehensive income (loss), net of tax:

Change in foreign currency translation, net of tax of $0 9,249 7,958

Loss on pension liability (700) (1,666)

The accompanying notes are an integral part of these consolidated financial statements.

Forum Energy Technologies, Inc. and subsidiaries

Consolidated balance sheets

(in thousands, except share information) December 31,2020 December 31,2019

Assets

Current assets

Prepaid expenses and other current assets 19,018 33,820

Costs and estimated profits in excess of billings 8,516 4,104

Property and equipment, net of accumulated depreciation 113,668 154,836

Deferred financing costs, net 249 1,243

Deferred income taxes, net 102 654

Liabilities and equity

Current liabilities

Current portion of long-term debt $ 1,322 $ 717

Billings in excess of costs and profits recognized 1,817 5,911

Commitments and contingencies

Equity

The accompanying notes are an integral part of these consolidated financial statements.

Forum Energy Technologies, Inc. and subsidiaries

Consolidated statements of cash flows

Year ended December 31,

(in thousands, except share information) 2020 2019

Cash flows from operating activities

Impairments of operating lease assets 15,370 2,364

Provision for doubtful accounts 1,127 3,152

Contingent consideration benefit — (4,629)

Gain on disposition of business (88,375) (2,348)

Gain on extinguishment of debt (72,478) —

Deferred loan costs written off 2,262 —

Gain realized on previously held equity investment — (1,567)

Loss from equity investments, net of distributions — 318

Changes in operating assets and liabilities

Prepaid expenses and other current assets 17,794 621

Cost and estimated profits in excess of billings (4,317) 4,632

Billings in excess of costs and estimated profits earned (3,900) 2,279

Net cash provided by operating activities $ 3,883 $ 104,144

Cash flows from investing activities

Capital expenditures for property and equipment (2,246) (15,102)

Proceeds from the sale of equity investment and business 105,204 42,754

Proceeds from the sale of property and equipment 5,292 483

Net cash provided by investing activities $ 108,250 $ 28,135

Cash flows from financing activities

Bond exchange early participation payment (3,500) —

Payment of capital lease obligations (1,179) (1,197)

Deferred financing costs (9,747) —

Net cash used in financing activities $ (41,765) $ (122,191)

Effect of exchange rate changes on cash 338 582

Net increase in cash, cash equivalents and restricted cash 70,706 10,670

Cash, cash equivalents and restricted cash at beginning of period 57,911 47,241

Cash, cash equivalents and restricted cash at end of period $ 128,617 $ 57,911

Supplemental cash flow disclosures

Cash paid (refunded) for income taxes (13,941) 3,917

Noncash investing and financing activities

Note receivable related to equity method investment transaction — 4,725

Accrued purchases of property and equipment — 91

The accompanying notes are an integral part of these consolidated financial statements.

Forum Energy Technologies, Inc. and subsidiaries

Consolidated statements of changes in stockholders’ equity

Restricted stock issuance, net of forfeitures 9 (1,044) — — — (1,035)

Stock-based compensation expense — 15,846 — — — 15,846

Shares issued in employee stock purchase plan 5 1,546 — — — 1,551

Contingent shares issued for acquisition of Cooper 1 374 — — — 375

Treasury stock — — (59) — — (59)

Change in pension liability — — — — (1,666) (1,666)

Currency translation adjustment — — — — 7,958 7,958

Restricted stock issuance, net of forfeitures 7 (196) — — — (189)

Stock-based compensation expense — 9,784 — — — 9,784

Shares issued in employee stock purchase plan 2 344 — — — 346

Treasury stock — — (6) — — (6)

Change in pension liability — — — — (700) (700)

Currency translation adjustment — — — — 9,249 9,249

The accompanying notes are an integral part of these consolidated financial statements.

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Forum Energy Technologies, Inc. and subsidiaries

Notes to consolidated financial statements

1. Nature of Operations

Forum Energy Technologies, Inc. (the “Company”), a Delaware corporation, is a global products company, serving the drilling, downhole, subsea, completions and production sectors of the energy industry. The Company designs, manufactures and distributes products, and engages in aftermarket parts supply and services that complement the Company’s product offering.

2. Summary of Significant Accounting Policies

Basis of presentation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

COVID-19 Impacts

The outbreak of COVID-19 in 2020 caused significant disruptions in the U.S. and world economies. In response to the continued spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities, including quarantine and “stay-at-home” orders. As a result of the imposition of these government orders, there was an adverse impact on the level of oil and natural gas demand and many companies have sought protection under Chapter 11 of the U.S. Bankruptcy Code. The full impacts of the COVID-19 outbreak are continuing to evolve and will ultimately depend on future developments, including the rate of distribution for approved vaccines, actions taken by governmental authorities, customers, suppliers and other third parties to prevent further spread of the virus, workforce availability, and the timing and extent to which economic and operating conditions resume. We have experienced resulting disruptions to our business operations, as restrictions have significantly impacted many sectors of the economy, with businesses curtailing or ceasing normal operations. While we cannot estimate with any degree of certainty the full impact of the COVID-19 outbreak on our liquidity, financial condition and future results of operations, we expect the adverse impacts on our financial results from COVID-19 will continue in future quarters.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries after elimination of intercompany balances and transactions.

We previously held an investment in Ashtead, an operating entity where we had the ability to exert significant influence, but did not control operating and financial policies. This investment was accounted for using the equity method of accounting with our share of the net income reported in “Loss from equity investments” in the consolidated statements of comprehensive loss and the investment reported in “Investment in unconsolidated subsidiary” in the consolidated balance sheets. On September 3, 2019, we sold our aggregate 40% interest in Ashtead to the majority owners of Ashtead. As of December 31, 2020, we have no investments in unconsolidated subsidiaries. Refer to Note 4 Dispositions for further discussion.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

In the preparation of these consolidated financial statements, estimates and assumptions have been made by management including, among others, an assessment of percentage of completion of projects based on costs to complete contracts, the selection of useful lives of tangible and intangible assets, expected future cash flows from long lived assets to support impairment tests, provisions necessary for trade receivables, amounts of deferred taxes and income tax contingencies. Actual results could differ from these estimates.

The financial reporting of contracts depends on estimates, which are assessed continually during the term of those contracts. The amounts of revenues and income recognized are subject to revisions as the contract progresses to completion and changes in estimates are reflected in the period in which the facts that give rise to the revisions become known. Additional information that enhances and refines the estimating process that is obtained after the

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Forum Energy Technologies, Inc. and subsidiaries

Notes to consolidated financial statements (continued)

balance sheet date, but before issuance of the consolidated financial statements, is reflected in the consolidated financial statements.

Cash and cash equivalents

Cash and cash equivalents consist of cash on deposit and high quality, short term money market instruments with an original maturity of three months or less. Cash equivalents are based on quoted market prices, a Level 1 fair value measure.

Accounts receivable-trade

Trade accounts receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus receivables do not bear interest, although a finance charge may be applied to amounts past due. We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. Such allowances are based upon several factors including, but not limited to, credit approval practices, industry and customer historical experience as well as the current and projected financial condition of the specific customer. Accounts receivable outstanding longer than contractual terms are considered past due. We write off accounts receivable to the allowance for doubtful accounts when they become uncollectible. Any payments subsequently received on receivables previously written off are credited to bad debt expense.

The change in amounts of the allowance for doubtful accounts during the two year period ended December 31, 2020 is as follows (in thousands):

Inventories

Inventory consisting of finished goods and materials and supplies held for resale is carried at the lower of cost or net realizable value. For certain operations, cost, which includes the cost of raw materials and labor for finished goods, is determined using standard cost which approximates a first-in first-out basis. For other operations, this cost is determined on an average cost, first-in first-out or specific identification basis. Net realizable value means estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. We continuously evaluate inventories based on an analysis of inventory levels, historical sales experience and future sales forecasts, to determine obsolete, slow-moving and excess inventory.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Capital leases of property and equipment are stated at the present value of future minimum lease payments. Expenditures for property and equipment and for items which substantially increase the useful lives of existing assets are capitalized at cost and depreciated over their estimated useful life utilizing the straight-line method. Routine expenditures for repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method based on the estimated useful lives of assets, generally 3 to 30 years. Property and equipment held under capital leases are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. Gains or losses resulting from the disposition of assets are recognized in income with the related asset cost and accumulated depreciation removed from the balance sheet. Assets acquired in connection with business combinations are recorded at fair value.

Rental equipment consists of equipment rented to customers under short-term rental agreements. Rental equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of three to ten years.

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Forum Energy Technologies, Inc. and subsidiaries

Notes to consolidated financial statements (continued)

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.

For the years ended December 31, 2020 and 2019, we recognized property and equipment impairment charges totaling $15.1 million and $7.9 million, respectively, which are included in “Impairments of goodwill, intangible assets, property and equipment” in the consolidated statements of comprehensive loss. See Note 8 Impairments of Goodwill and Long Lived Assets for further information related to these charges.

We record the fair value of asset retirement obligations as a liability in the period in which the associated legal obligation is incurred. The fair value of the obligation is recorded as a liability and capitalized as part of the related asset. Over time, the liability is accreted to its future value and the capitalized cost is depreciated over the estimated useful life of the related asset. The current portion of the liability is included in other accrued liabilities and the non-current portion is included in other long-term liabilities in the consolidated balance sheets.

Lease Obligations

We determine if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded in our consolidated balance sheets. Leases with an initial term greater than 12 months are recognized in our consolidated balance sheets based on lease classification as either operating or financing. Operating leases are included in operating lease assets, accrued liabilities and operating lease liabilities. Finance leases are included in property and equipment, current portion of long-term debt, and long-term debt. Some of our lease agreements include lease and non-lease components for which we have elected to not separate for all classes of underlying assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We sublease certain real estate to third parties when we have no future use for the property.

Our lease portfolio primarily consists of operating leases for certain manufacturing facilities, warehouses, service facilities, office spaces, equipment and vehicles. Operating lease Right of Use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Our leases have remaining terms of 1 year to 13 years and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. The operating lease ROU assets also include any upfront lease payments made and exclude lease incentives and initial direct costs incurred. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

We review lease ROU 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 by means of an analysis of discounted future cash flows based on expected utilization.

For the years ended December 31, 2020 and 2019, we recognized impairments of operating lease assets totaling $15.4 million and $2.4 million, respectively, which are included in “Cost of Sales” and “Selling, general and administrative expenses” in the consolidated statements of comprehensive loss. See Note 8 Impairments of Goodwill and Long Lived Assets for further information related to these charges.

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Forum Energy Technologies, Inc. and subsidiaries

Notes to consolidated financial statements (continued)

Goodwill and intangible assets

For goodwill and intangible assets with indefinite lives, an assessment for impairment is performed annually or when there is an indication an impairment may have occurred. We use an assessment date of October 1 for our annual impairment test for goodwill and other indefinite-lived intangible assets. Goodwill is reviewed for impairment by comparing the carrying value of each of our seven reporting units’ net assets, including allocated goodwill, to the estimated fair value of the reporting unit. We determine the fair value of our reporting units using a discounted cash flow approach. We selected this valuation approach because we believe it, combined with our best judgment regarding underlying assumptions and estimates, provides the best estimate of fair value for each of our reporting units. Determining the fair value of a reporting unit requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, future operating margins, the weighted average cost of capital, a terminal growth value, and future market conditions, among others. We believe that the estimates and assumptions used in our impairment assessments are reasonable. If the reporting unit’s carrying value is greater than its calculated fair value, we recognize a goodwill impairment charge for the amount by which the carrying value of goodwill exceeds its fair value.

For the year ended December 31, 2019, we recognized goodwill impairment charges totaling $471.0 million which is included in “Impairments of goodwill, intangible assets, property and equipment” in the consolidated statements of comprehensive loss. See Note 8 Impairments of Goodwill and Long Lived Assets for further information related to these charges. Following the goodwill impairment charges recognized in the third quarter of 2019, there is no remaining goodwill balance for any of our reporting units.

Intangible assets with definite lives are comprised of customer and distributor relationships, patents and technology, trade names, trademarks and non-compete agreements which are amortized on a straight-line basis over the life of the intangible asset, generally two to twenty-two years. These assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In performing the review for impairment, future cash flows expected to result from the use of the asset 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. The impairment loss recognized represents the excess of an assets’ carrying value as compared to its estimated fair value.

For the years ended December 31, 2020 and2019, we recognized intangible asset impairment charges totaling $5.3 million and$53.5 million, respectively, which are included in “Impairments of goodwill, intangible assets, property and equipment” in the consolidated statements of comprehensive loss. See Note 8 Impairments of Goodwill and Long Lived Assets for further information related to these charges.

Recognition of provisions for contingencies

An assessment is made of the areas where potential claims may arise under contract warranty clauses. Where a specific risk is identified, and the potential for a claim is assessed as probable and can be reasonably estimated, an appropriate warranty provision is recorded. Warranty provisions are eliminated at the end of the warranty period except where warranty claims are still outstanding. The liability for product warranty is included in other accrued liabilities in the consolidated balance sheets.

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Notes to consolidated financial statements (continued)

Revenue recognition and deferred revenue

Revenue from goods transferred to customers over time accounted for 7% of revenues for the year ended December 31, 2020, which is related to certain contracts in our Subsea and Production Equipment product lines. 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.

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Notes to consolidated financial statements (continued)

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.

Disaggregated Revenue. Refer to Note 18 Business Segments for disaggregated revenue by product line and geography.

Concentration of credit risk

Trade accounts receivable are financial instruments which potentially subject the Company to credit risk. Trade accounts receivable consist of uncollateralized receivables from domestic and international customers. For the years ended December 31, 2020 and 2019, no one customer accounted for 10% or more of the total revenue or 10% or more of the total accounts receivable balance at the end of the respective period.

Stock based compensation

We measure all stock based compensation awards at fair value on the date they are granted to employees and directors, and recognize compensation cost over the requisite service period for awards with only a service condition, and over a graded vesting period for awards with service and performance or market conditions.

The fair value of stock based compensation awards with market conditions is measured using a Monte Carlo Simulation model and, in accordance with Accounting Standards Codification Topic 718, is not adjusted based on actual achievement of the performance goals. The Black-Scholes option pricing model is used to measure the fair value of options. Forfeitures are accounted for as they occur.

Income taxes

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. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period in which the change occurs. We record a valuation allowance in each reporting period when management believes that it is more likely than not that any deferred tax asset created will not be realized. See Note 11 Income Taxes for more information on valuation allowances recognized.

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, accounting guidance requires the tax position be measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement.

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Notes to consolidated financial statements (continued)

Non-U.S. local currency translation

We have global operations and the majority of our non-U.S. operations have designated the local currency as the functional currency. Realized and unrealized gains and losses resulting from re-measurements of monetary assets and liabilities denominated in a currency other than the local entity’s functional currency are included in the consolidated statements of comprehensive loss as incurred.

Financial statements of our foreign operations where the functional currency is not the U.S. dollar are translated into U.S. dollars using the current rate method whereby assets and liabilities are translated at the balance sheet rate and income and expenses are translated at the average exchange rates in effect during the period. The resultant translation adjustments are reported as a component of accumulated other comprehensive loss within stockholders’ equity in our consolidated balance sheets.

Fair value

The carrying amounts for financial instruments classified as current assets and current liabilities approximate fair value, due to the short maturity of such instruments. The book values of other financial instruments, such as our debt related to the Credit Facility, approximates fair value because interest rates charged are similar to other financial instruments with similar terms and maturities and the rates vary in accordance with a market index.

For the financial assets and liabilities disclosed at fair value, fair value is determined as the exit price, or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The established fair value hierarchy divides fair value measurement into three broad levels:

•Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

•Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

•Level 3 - inputs are unobservable for the asset or liability, which reflect the best judgment of management.

The financial assets and liabilities that are disclosed at fair value for disclosure purposes are categorized in one of the above three levels based on the lowest level input that is significant to the fair value measurement in its entirety. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.

Recent accounting pronouncements

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. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

Accounting Standards Adopted in 2020

Financial Instruments—Credit Losses. In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326), which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. It requires an entity to estimate credit losses expected over the life of an exposure based on historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. We adopted this new standard as of January 1, 2020. The adoption of this standard resulted in a noncash cumulative effect adjustment to increase our allowance for doubtful accounts and increase our retained deficit by $1.4 million. The new standard did not materially affect our consolidated statements of comprehensive loss for the year ended December 31, 2020.

Accounting for Implementation Costs Related to a Cloud Computing Arrangement. In August 2018, the FASB issued ASU No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This new guidance aligns the requirements for capitalizing implementation costs incurred by an entity related to a cloud computing arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, this guidance requires an entity to capitalize certain implementation costs incurred and then amortize them over the term of the cloud hosting

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Notes to consolidated financial statements (continued)

arrangement. Furthermore, this guidance also requires an entity to present the expense, cash flows, and capitalized implementation costs in the same financial statement line items as the associated hosting service. We adopted this new standard as of January 1, 2020. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.

Fair Value Measurement Disclosure. In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement. This new guidance eliminated, modified and added certain disclosure requirements related to fair value measurements. We adopted this new standard as of January 1, 2020. This new standard did not have a material impact on our condensed consolidated financial statements.

Subsidiary Guarantees. In March 2020, the SEC adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees, in Rule 3-10 of Regulation S-X. The amended rule focuses on providing material, relevant and decision-useful information regarding guarantees and other credit enhancements, while eliminating certain prescriptive requirements. We adopted these amendments in 2020. Accordingly, combined summarized financial information has been presented only for the issuers and guarantors of our registered securities. In addition, the previous disclosures have been removed from the Notes to Condensed Consolidated Financial Statements and the new required disclosures are included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Accounting Standards Issued But Not Yet Adopted

Income Tax. In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740) - Disclosure Framework - Simplifying the Accounting for Income Taxes, which simplified the accounting for income taxes by removing certain exceptions to the general principles of Topic 740 and clarifying and amending existing guidance. This guidance will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We are currently evaluating the impact of this new guidance. However, we currently expect that the adoption of this guidance will not have a material impact on our consolidated financial statements.

Convertible Debt. In August 2020, the FASB issued ASU No. 2020-06 Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This update reduces the number of accounting models for convertible debt instruments resulting in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in-capital. In addition, this update also makes targeted changes to the disclosures for convertible instruments and earnings-per-share guidance. This guidance may be adopted through either a modified retrospective or fully retrospective method of transition and will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and must be adopted as of the beginning of the Company's fiscal year. We are currently evaluating the impact of this new guidance. However, we currently expect that the adoption of this guidance will not have a material impact on our consolidated financial statements.

3. Revenues

Disaggregated Revenue

Refer to Note 18 Business Segments for disaggregated revenue by product line and geography.

Contract Balances

The following table reflects the changes in our contract assets and contract liabilities balances for the year ended December 31, 2020:

$ %

Costs and estimated profits in excess of billings 8,516 4,104

Billings in excess of costs and profits recognized 1,817 5,911

During the year ended December 31, 2020, our contract assets increased by $4.8 million and our contract liabilities decreased by $1.1 million primarily due to the timing of billings on large projects in our Subsea Technologies product line.

During the year ended December 31, 2020, we recognized revenue of $9.3 million that was included in the contract liability balance at the beginning of the period.

Substantially all of our contracts are less than one year in duration. As such, we have elected to apply the practical expedient which allows an entity to exclude disclosures about its remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

4. Dispositions

2020 Disposition of ABZ and Quadrant Valves

On December 31, 2020, we sold certain assets of our ABZ and Quadrant valve brands for cash consideration of $104.6 million. This transaction was accounted for as a disposition of a business. We recognized a gain on disposition of $88.4 million based on the difference in cash received less $15.0 million of net book value of assets sold and a $1.2 million accrued liability for an estimated working capital settlement. Pro forma results of operations for this disposition have not been presented because the effects were not material to the consolidated financial statements.

2019 Disposition of Cooper Alloy®

On December 4, 2019, we sold certain assets of our Cooper Alloy® brand of valve products for total consideration of $4.0 million and recognized a gain on disposition totaling $2.3 million. Pro forma results of operations for this disposition have not been presented because the effects were not material to the consolidated financial statements.

2019 Disposition of Equity Interest in Ashtead Technology

On September 3, 2019, we sold our aggregate 40% interest in Ashtead to the majority owners of Ashtead. Total consideration for Forum’s 40% interest and the settlement of a £3.0 million British Pounds note receivable from Ashtead was $47.7 million. Forum received $39.3 million in cash proceeds and a new £6.9 million British Pounds note receivable with a three year maturity. In the third quarter of 2019, we recognized a gain of $1.6 million as a result of this transaction, which is classified as Gain realized on previously held equity investment in the consolidated statements of comprehensive loss. Pro forma results of operations for this transaction have not been presented because the effects were not material to the consolidated financial statements.

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Notes to consolidated financial statements (continued)

5. Inventories

The Company’s significant components of inventory at December 31, 2020 and 2019 were as follows (in thousands):

The change in the amounts of the inventory reserve during the two year period ended December 31, 2020 is as follows (in thousands):

The $100.8 million charged to expense during the year ended December 31, 2020 includes significant write downs of inventory related to the Company’s decision to discontinue certain products and other changes to sourcing and manufacturing strategies.

6. Property and Equipment

Property and equipment consists of the following (in thousands):

Estimated useful lives December 31,

Right of use assets - finance leases 2-6 3,823 2,528

Less: accumulated depreciation (3,517) (3,354)

Depreciation expense was $24.5 million and $30.6 million for the years ended December 31, 2020 and 2019, respectively.

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Notes to consolidated financial statements (continued)

7. Intangible Assets

At December 31, 2020and 2019, intangible assets consisted of the following, respectively (in thousands):

Intangible assets with definite lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. For the years ended December 31, 2020 and2019, we recognized intangible asset impairment charges totaling $5.3 million and$53.5 million, respectively, which are included in “Impairments of goodwill, intangible assets, property and equipment” in the consolidated statements of comprehensive loss. See Note 8 Impairments of Goodwill and Long Lived Assets for further information related to these charges.

Amortization expense was $26.5 million and $32.6 million for the years ended December 31, 2020 and 2019, respectively. The estimated future amortization expense for the next five years is as follows (in thousands):

Year ending December 31, Amount

8. Impairments of Goodwill and Long Lived Assets

During the third quarter of 2019, there was a significant decline in the quoted market prices of our common stock and a continued decline in U.S. onshore drilling and completions activity, which led us to evaluate all of our reporting units for a triggering event as of September 30, 2019. Upon evaluation, we considered these developments to be a triggering event that required us to update our goodwill impairment evaluation and review long-lived assets for all reporting units as of September 30, 2019.

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As a result, and in connection with the preparation of our financial statements, we determined that certain long-lived assets were impaired as their carrying values exceeded their fair values. The amount of the impairment charges were measured as the difference between the carrying value and the estimated fair value of the assets. In addition, we determined that the remaining carrying value of our goodwill was fully impaired in the third quarter of 2019. The fair values used in each goodwill impairment analysis were determined using the net present value of the expected future cash flows for each reporting unit (classified within level 3 of the fair value hierarchy). We determined the fair value of each reporting unit using a combination of discounted cash flow and guideline public company methodologies, which required significant assumptions and estimates about the future operations of each reporting unit. The assumptions about future cash flows and growth rates were based on our strategic plans and management’s estimates for future activity levels. Forecasted cash flows in future periods were estimated using a terminal value calculation, which considered long-term earnings growth rates.

During the year ended December 31, 2020, the COVID-19 pandemic and associated preventative actions taken around the world to mitigate its spread caused oil demand to deteriorate and economic activity to decrease. As a result, oil prices declined significantly during the period and created an extremely challenging market for all sub-sectors of the oil and natural gas industry. In addition, responses to the spread of COVID-19, including significant government restrictions on movement, have driven sharp declines in global economic activity.

As a result, we determined that certain long-lived assets were impaired as their carrying values exceeded their fair values. The amount of the impairment charges were measured as the difference between the carrying value and the estimated fair value of the assets. The fair value was determined either through analysis of discounted future cash flows or, for certain real estate, based on a third party's sales price estimate (classified within level 3 of the fair value hierarchy).

Following is a summary of impairment charges recognized (in thousands) in our Drilling & Downhole (“D&D”), Completions (“C”), Production (“P”), and Corporate (“Corp”) segments:

Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019

Impairments of: D&D C P Corp Total D&D C P Total

(1) These charges are included in Impairments of goodwill, intangible assets, property and equipment in the condensed consolidated statements of comprehensive loss.

(2) For the years ended December 31, 2020 and 2019, $10.8 million and $1.3 million, respectively, of these charges are included in Cost of sales, while $4.5 million and $1.1 million, respectively, are included in Selling, general and administrative expenses in the condensed consolidated statements of comprehensive loss.

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Notes to consolidated financial statements (continued)

9. Debt

Notes payable and lines of credit as of December 31, 2020 and 2019 consisted of the following (in thousands):

Unamortized debt premium (discount) (30,248) 770

Senior secured revolving credit facility 13,126 —

Less: current maturities (1,322) (717)

2021 Notes

As of December 31, 2020, no 2021 Notes remained outstanding.

In October 2013, we issued $300.0 million of 6.25% unsecured notes due 2021 at par, and in November 2013, we issued an additional $100.0 million aggregate principal amount of the notes at a price of 103.25% of par (the “2021 Notes”). The 2021 Notes bear interest at a rate of 6.25% per annum, payable on April 1 and October 1 of each year, and mature on October 1, 2021. The 2021 Notes are unsecured obligations, and are guaranteed on an unsecured basis by our U.S. subsidiaries that guarantee our senior secured revolving credit facility ("Credit Facility").

During the first half of 2020, we repurchased an aggregate $71.9 million principal amount of our 2021 Notes for $27.7 million and recognized a net gain of $43.8 million, reflecting 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 million principal amount of the remaining 2021 Notes for new 2025 Notes as discussed further below. In the fourth quarter of 2020, we redeemed the remaining $12.6 million principal amount of 2021 Notes at par.

2025 Notes

In August 2020, we exchanged $315.5 million principal amount of the 2021 Notes for new 9.00% convertible secured notes due August 2025 (the “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. We estimated the fair value of the 2025 Notes to be $282.6 million at the issuance date, resulting in a $32.9 million discount (“Debt Discount”) at issuance. As a result, we recognized a $28.7 million gain on extinguishment of debt that reflects the difference in the $314.8 million net carrying value of the 2021 Notes exchanged, including debt issuance costs and unamortized debt premium, less the $282.6 million estimated fair value of 2025 Notes and a $3.5 million early participation fee paid to bondholders that participated in the exchange. The Debt Discount is being amortized as non-cash interest expense over the term of the 2025 Notes using the effective interest method.

The 2025 Notes pay interest at the rate of 9.00%, of which 6.25% will be payable in cash and 2.75% will be payable in cash or additional notes, at the Company’s option. In the fourth quarter 2020, we elected to pay $1.4 million of accrued interest as additional notes. The 2025 Notes are secured by a first lien on substantially all of the Company’s assets, except for Credit Facility priority collateral, which secures the 2025 Notes on a second lien basis. A portion of the 2025 Notes, initially equal to $150.0 million total principal amount, is mandatorily convertible into shares of our common stock at a conversion rate of 37.0370 shares per $1,000 principal amount of 2025 Notes converted, equivalent to a conversion price of $27.00 per share, subject, however, to the condition that the average of the daily trading prices for the common stock over the preceding 20-trading day period is at least $30.00 per share. Holders of the 2025 Notes also have optional conversion rights in the event that the Company elects to redeem the 2025 Notes in cash and at the final maturity of the new notes. Any interest that the Company elects to pay in additional notes are also subject to the mandatory and optional conversion rights.

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Notes to consolidated financial statements (continued)

Credit Facility

In connection with the issuance of the 2025 Notes, we amended our Credit Facility. Following such amendment, our Credit Facility provides revolving credit commitments of $250.0 million (with a sublimit of up to $45.0 million available for the issuance of letters of credit for the account of the Company and certain of its domestic subsidiaries) (the “U.S. Line”), of which up to $25.0 million is available to certain of our Canadian subsidiaries for loans in U.S. or Canadian dollars (with a sublimit of up to $3.0 million available for the issuance of letters of credit for the account of our Canadian subsidiaries) (the “Canadian Line”).

Availability under the Credit Facility is subject to a borrowing base calculated by reference to eligible accounts receivable in the U.S., Canada and certain other jurisdictions (subject to a cap) and eligible inventory in the U.S. and Canada. Such eligible accounts receivable and eligible inventory serve as priority collateral for the Credit Facility, which is also secured on a second lien basis by substantially all of the Company's other assets. The amount of eligible inventory included in the borrowing base is restricted to the lesser of $130.0 million (subject to a quarterly reduction of $0.5 million that started on October 1, 2020) and 80.00% of the total borrowing base. Our borrowing capacity under the Credit Facility could be reduced or eliminated, depending on future fluctuations in our receivables and inventory. As of December 31, 2020, our total borrowing base was $139.2 million, of which $13.1 million was drawn and $15.6 million was used for security of outstanding letters of credit, resulting in remaining availability of $110.5 million.

Borrowings under the U.S. line bear interest at a rate equal to, at our option, either (a) the LIBOR rate, subject to a floor of 0.75%, plus a margin of 2.50% or (b) a base rate plus a margin of 1.50%. The U.S. line base rate is determined by reference to the greatest of (i) the federal funds rate plus 0.50% per annum, (ii) the one-month adjusted LIBOR plus 1.00% per annum, and (iii) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its prime rate, subject to a floor of 0.75%.

Borrowings under the Canadian Line bear interest at a rate equal to, at Forum Canada’s option, either (a) the CDOR rate, subject to a floor of 0.75%, plus a margin of 2.50% or (b) a base rate plus a margin of 1.50%. The Canadian line base rate is determined by reference to the greater of (i) the one-month CDOR rate plus 1.00% and (ii) the prime rate for Canadian dollar commercial loans made in Canada as reported by Thomson Reuters, subject to a floor of 0.75%.

The weighted average interest rate under the Credit Facility was approximately 2.65% for the year ended December 31, 2020.

The Credit Facility also provides for a commitment fee in the amount of (a) 0.375% on the unused portion of commitments if average usage of the Credit Facility is greater than 50% and (b) 0.500% on the unused portion of commitments if average usage of the Credit Facility is less than or equal to 50%.

The Credit Facility is currently scheduled to mature on October 30, 2022. If excess availability under the Credit Facility falls below the greater of 12.5% of the borrowing base and $31.3 million, we will be required to maintain a fixed charge coverage ratio of at least 1.00:1.00 as of the end of each fiscal quarter until excess availability under the Credit Facility exceeds such thresholds for at least 60 consecutive days. Furthermore, the Credit Facility includes an obligation to prepay outstanding loans with cash on hand in excess of certain thresholds and includes a cross-default to the 2025 Notes.

Other debt

Other debt consists primarily of various finance leases of equipment.

Deferred loan costs

The Company has incurred loan costs that have been deferred and are amortized to interest expense over the term of the 2025 Notes and the Credit Facility. During the year ended December 31, 2020, we capitalized a total of $9.7 million of deferred loan costs related to the exchange of the 2021 Notes. In the first quarter of 2020, we wrote-off $2.0 million of deferred loan costs for the termination of previous discussions related to a potential exchange offer for our 2021 Notes. In the third quarter of 2020, we wrote off $0.3 million of deferred loan costs related to amending our Credit Facility to, among other things, reduce the size of the commitments from $300.0 million to $250.0 million. Approximately $1.8 million and $1.9 million of deferred loan costs were amortized to interest expense for the years ended December 31, 2020 and 2019, respectively.

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Notes to consolidated financial statements (continued)

Future principal payments under long-term debt for each of the years ending December 31 are as follows (in thousands):

Thereafter —

Add: Unamortized debt premium (30,248)

Less: Debt issuance cost (7,318)

Less: present value discount on finance leases $ (64)

10. Leases

Our lease portfolio primarily consists of operating leases for certain manufacturing facilities, warehouses, service facilities, office spaces, equipment and vehicles. The following table summarizes the supplemental balance sheet information related to leases as of December 31, 2020 and 2019 (in thousands):

As of

Assets

Operating lease assets Operating lease assets $ 31,520 $ 48,682

Liabilities

Current

Finance Current portion of long-term debt 1,322 717

Noncurrent

Operating Operating lease liabilities $ 44,536 49,938

Finance Long-term debt, net of current portion 950 $ 1,324

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Notes to consolidated financial statements (continued)

The following table summarizes the components of lease expenses for the twelve months ended December 31, 2020 (in thousands):

Twelve Months EndedDecember 31,

Finance lease cost

Interest on lease liabilities Interest expense 155 81

The maturities of lease liabilities as of December 31, 2020 are as follows (in thousands):

Operating Leases Finance Leases Total

The following table summarizes the weighted-average remaining lease term and weighted average discount rates related to leases as of December 31, 2020:

Lease Term and Discount Rate December 31, 2020 December 31, 2019

Weighted-average remaining lease term (years)

Operating leases 6.6 years 6.8 years

Financing leases 1.8 years 2.8 years

Weighted-average discount rate

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Notes to consolidated financial statements (continued)

The following table summarizes the supplemental cash flow information related to leases as of December 31, 2020:

Twelve Months EndedDecember 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 11,038 $ 12,679

Operating cash flows from finance leases 80 81

Financing cash flows from finance leases $ 1,179 $ 1,197

Noncash activities from adoption of ASC 842 as of January 1, 2019

Prepaid expenses and other current assets n/a $ (884)

Operating lease assets n/a 54,069

Operating lease liabilities n/a 64,506

Accrued liabilities n/a (11,321)

11. Income Taxes

The components of loss before income taxes for the years ended December 31, 2020 and 2019 are as follows (in thousands):

The components of income tax benefit for the years ended December 31, 2020 and 2019 are as follows (in thousands):

Current

Deferred

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The reconciliation between the actual provision for income taxes and that computed by applying the U.S. statutory rate to loss before income taxes are outlined below (in thousands):

State taxes, net of federal tax benefit (4,190) (3.8) % (5,846) (1.0) %

Prior year federal, non-U.S. and state tax (1,827) (1.7) % 257 — %

Goodwill impairment — — % 27,244 4.8 %

Our effective tax rate was (11.7)% and (0.3)% for the years ended December 31, 2020 and 2019, respectively.

For the year ended December 31, 2020, we recognized a $16.0 million benefit 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 deductibility to 50% of adjusted taxable income for 2019 and 2020, and accelerated refunds for minimum tax credit carryforwards, among other provisions. The tax effects of changes in tax laws are recognized in the period in which the law is enacted.

The tax benefit for the year ended December 31, 2020 includes an increase in our valuation allowance of $25.3 million consisting of a full valuation allowance against our deferred tax assets in the U.S., U.K., Germany, Singapore, China and Saudi Arabia as further described below under the primary components of deferred taxes.

Table of Contents

FET US Equity

FET · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and qualitative disclosures about market risk

Item 8. Consolidated Financial Statements and Supplementary Data

FET US Equity☆

FET · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and qualitative disclosures about market risk

Item 8. Consolidated Financial Statements and Supplementary Data

FET US Equity