Asset Impairments and Other Charges

9 Months Ended

Sep. 30, 2020

Restructuring and Related Activities [Abstract]

In March of 2020, the spot price of West Texas Intermediate ("WTI") crude oil declined over 50% in response to current and expected material reductions in global demand stemming from the global response to the COVID-19 pandemic, coupled with announcements by Saudi Arabia and Russia of plans to increase crude oil production. Following this unprecedented collapse in crude oil prices, the spot price of Brent and WTI crude oil closed at $15 and $21 per barrel, respectively, on March 31, 2020. Crude oil prices further declined in April of 2020 to record low levels, and while the spot price of Brent and WTI crude oil increased to an average of $43 and $41 per barrel, respectively, in the third quarter of 2020, these average prices continue to be depressed versus historical price levels.

Demand for most of the Company's products and services depends substantially on the level of capital expenditures by the oil and natural gas industry. The decline in oil prices has, and is expected to continue to, result in further near-term reductions to most of the Company's customers' drilling, completion and production activities and their related spending on products and services, particularly in the U.S. shale play regions. These conditions may also result in a material adverse impact on certain customers' liquidity and financial position, leading to further spending reductions, delays in the collection of amounts owed and in certain instances, non-payment of amounts owed.

Consistent with oilfield service industry peers, the Company's stock price declined dramatically during the first quarter of 2020, with its market capitalization falling substantially below the carrying value of stockholders' equity.

Following these March 2020 events, the Company immediately implemented significant cost reduction initiatives. The Company also assessed the carrying value of goodwill, long-lived and other assets based on the industry outlook regarding overall demand for and pricing of its products and services, other market considerations and the financial condition of the Company's customers. As a result of these events, actions and assessments, the Company recorded the following charges during the first quarter of 2020 (in thousands):


	Completion Services		Drilling Services		Downhole Technologies		Offshore/ Manufactured Products		Pre-tax Total		Tax		After-tax Total
Impairments of goodwill	$	127,054	$	—	$	192,502	$	86,500	$	406,056	$	19,600	$	386,456
Impairments of fixed assets	—		5,198		—		—		5,198		1,092		4,106
Impairments of inventories (Note 4)	8,981		—		—		16,249		25,230		4,736		20,494
Severance and facility closure costs	331		217		—		112		660		139		521

During the second and third quarters of 2020, the Company further reduced its workforce and closed additional facilities in the United States and continued to assess the carrying value of its assets based on the industry outlook regarding demand for and pricing of its products and services, and recorded the following charges (in thousands):


	Completion Services		Downhole Technologies		Offshore/ Manufactured Products		Corporate		Pre-tax Total		Tax		After-tax Total
Second quarter 2020
Impairments of fixed assets	$	2,992	$	—	$	—	$	—	$	2,992	$	628	$	2,364
Severance and facility closure costs	3,544		1,315		322		216		5,397		1,133		4,264

Third quarter 2020
Impairments of inventories (Note 4)	$	—	$	5,921	$	—	$	—	$	5,921	$	1,243	$	4,678
Severance and facility closure costs	—		—		288		—		288		60		228

Goodwill

The Company has three reporting units – Completion Services, Downhole Technologies and Offshore/Manufactured Products – with goodwill balances totaling $482.3 million as of December 31, 2019. Goodwill is allocated to each reporting unit from acquisitions made by the Company. In accordance with current accounting guidance, the Company does not amortize goodwill, but rather assesses goodwill for impairment annually and when an event occurs or circumstances change that indicate the carrying amounts may not be recoverable. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired and an impairment loss is recorded. Given the significance of the March 2020 events described above, the Company performed a quantitative assessment of goodwill for impairment as of March 31, 2020. This interim assessment indicated that the fair value of each of the reporting units was less than their respective carrying amounts.

Management utilizes, depending on circumstances, a combination of valuation methodologies including a market approach and an income approach, as well as guideline public company comparables. The valuation techniques used in the March 31, 2020 assessment were consistent with those used during the December 1, 2019 assessment, except for the Completion Services reporting unit where the income approach was used to estimate its fair value – with the market approach used only to validate the results in 2020. The fair values of each of the Company's reporting units were determined using significant unobservable inputs (Level 3 fair value measurements). This approach estimates fair value by discounting the Company's forecasts of future cash flows by a discount rate (expected return) that a market participant is expected to require.

Significant assumptions and estimates used in the income approach include, among others, estimated future net annual cash flows and discount rates for each reporting unit, current and anticipated market conditions, estimated growth rates and historical data. These estimates rely upon significant management judgment, particularly given the continued uncertainties regarding the COVID-19 pandemic and its impact on activity levels and commodity prices as well as future global economic growth.

Based on this quantitative assessment as of March 31, 2020, the Company concluded that goodwill recorded in the Completion Services and Downhole Technologies businesses was fully impaired while goodwill recorded in the Offshore/Manufactured Products business was partially impaired. The Company therefore recognized non-cash goodwill impairment charges totaling $406.1 million in the first quarter of 2020. These impairment charges did not impact the Company's liquidity position, debt covenants or cash flows.

The discount rates used to value the Company's reporting units as of March 31, 2020 ranged between 16.8% and 18.5%. Holding all other assumptions and inputs used in the discounted cash flow analysis constant, a 50 basis point increase in the discount rate assumption for the Offshore/Manufactured Products reporting unit would have increased the goodwill impairment charge by approximately $10 million.

A summary of changes in the carrying values of goodwill by reporting unit in the first nine months of 2020 is presented in Note 4, "Details of Selected Balance Sheet Accounts."

Long-lived Assets

The Company also assesses the carrying value of long-lived assets, including property, plant and equipment, operating lease assets and other intangible assets held by each of its four reporting units. As a result of the March 2020 assessment, the Company concluded that property and equipment held by the Drilling Services reporting unit was further impaired and recognized a non-cash fixed asset impairment charge of $5.2 million in the first quarter of 2020. During the second quarter of 2020, the Company concluded that certain facilities held for sale by the Completion Services reporting unit were impaired and recognized a non-cash fixed asset impairment charge of $3.0 million to reduce the carrying value of the facilities to their estimated realizable value based on the current market environment.

The Company performed a qualitative assessment of goodwill and long-lived assets as of September 30, 2020 and concluded that no further impairment evaluation was required. As a result, no material impairments of goodwill or long-lived assets were recorded in the third quarter of 2020.

Should, among other events and circumstances, global economic and industry conditions further deteriorate, the COVID-19 pandemic business and market disruptions worsen, the outlook for future operating results and cash flow for any of the Company's reporting units decline, income tax rates increase or regulations change, costs of equity or debt capital increase, valuations for comparable public companies or comparable acquisition valuations decrease, or management implement strategic decisions based on industry conditions, the Company may need to recognize additional impairment losses in future periods.