The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q and the audited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report.
This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in any forward-looking statement because of various factors, including those described in the sections titled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" of this Form 10-Q.
Overview of Business
We are a global provider of highly engineered tubular services, tubular fabrication and specialty well construction and well intervention solutions to the oil and gas industry and have been in business for over 80 years. We provide our services and products to leading exploration and production companies in both offshore and onshore environments, with a focus on complex and technically demanding wells.
We conduct our business through three operating segments:
•Tubular Running Services. The Tubular Running Services ("TRS") segment provides tubular running services globally. Internationally, the TRS segment operates in the majority of the offshore oil and gas markets and also in several onshore regions with operations in approximately 50 countries on six continents. In theU.S. , the TRS segment provides services in the active onshore oil and gas drilling regions, including thePermian Basin ,Eagle Ford Shale ,Haynesville Shale ,Marcellus Shale andUtica Shale , as well as in theU.S. Gulf of Mexico . Our customers in these markets are primarily large exploration and production companies, including international oil and gas companies, national oil and gas companies, major independents and other oilfield service companies. •Tubulars. The Tubulars segment designs, manufactures and distributes connectors and casing attachments for large outside diameter ("OD") heavy wall pipe. Additionally, the Tubulars segment sells large OD pipe originally manufactured by various pipe mills, as plain end or fully fabricated with proprietary welded or thread-direct connector solutions and provides specialized fabrication and welding services in support of offshore deepwater projects, including drilling and production risers, flowlines and pipeline end terminations, as well as long-length tubular assemblies up to 400 feet in length. The Tubulars segment also specializes in the development, manufacture and supply of proprietary drilling tool solutions that focus on improving drilling productivity through eliminating or mitigating traditional drilling operational risks. •Cementing Equipment. The Cementing Equipment ("CE") segment provides specialty equipment to enhance the safety and efficiency of rig operations. It provides specialized equipment, services and products utilized in the construction of the wellbore in both onshore and offshore environments. The product portfolio includes casing accessories that serve to improve the installation of casing, centralization and wellbore zonal isolation, as well as enhance cementing operations through advance wiper plug and float equipment technology. The CE segment also provides services and products utilized in the construction, completion or abandonment of the wellbore. These solutions are primarily used to isolate portions of the wellbore through the setting of barriers downhole to allow for rig evacuation in case of inclement weather, maintenance work on other rig equipment, squeeze cementing, pressure testing within the wellbore, hydraulic fracturing and temporary and permanent abandonments. These offerings improve operational efficiencies and limit non-productive time if unscheduled events are encountered at the wellsite. 29 --------------------------------------------------------------------------------
Outlook
Two significant events that began during the first quarter are continuing to create headwinds across the oil and gas markets. First, there was a breakdown in theOrganization of Petroleum Exporting Countries ("OPEC") andRussia production cut agreements and during the period of dispute, meaningful downward pressure on commodity prices occurred. There was an ultimate agreement made amongst these parties inApril 2020 which took effect beginning inMay 2020 . Despite this agreement, there continues to be excess inventory of oil. This is due to the second event, the global Covid-19 pandemic which created an energy demand decline and has given rise to logistical challenges in furthering certain existing drilling programs. Both of these events have caused our customers to reduce capital spending, with theU.S. onshore market seeing a large reduction from initial 2020 guidance. International customer spending has also been reduced although at a lower rate than theU.S. onshore markets. InAfrica , travel restrictions have led to significant activity disruptions. We continue to believe that the effects of Covid-19 will depress the oil and gas markets in the short to intermediate term. We expect commodity over-supply issues to have a long-term effect over the next 24 months, requiring time for the market supply and demand curve to return to balance. As ofJune 30, 2020 , the full impact of the Covid-19 outbreak and the reduction in oil sector activity continues to evolve daily. It is uncertain how long either event will last. With the significant decline in oil prices as well as the general economic decline caused by the impacts of Covid-19, we expect the lower demand for our products and services to continue due to much lower capital expenditure budgets throughout the industry. Although Covid-19 has contributed to a decline in demand for our offerings, the direct impact of the outbreak on our ability to conduct operations has been minor. We have implemented a work-from-home directive for office personnel across the globe, split-shift rotation protocols for our manufacturing and operations facilities, social distancing guidelines in manufacturing and operations facilities, and quarantine protocols for employees at risk of exposure to Covid-19. In addition, we have experienced local disruptions of activity in response to outbreaks of Covid-19 at certain offshore drilling locations, and disruptions due to travel restrictions and local governmental orders. However, in the majority of locations, our products and services have been deemed essential economic activity and have continued during local restrictions on business activity. In this challenging and uncertain environment, we are continuing and building upon our profitability improvement project to further reduce our cost base. We are implementing workforce reductions, in conjunction with changes to our compensation and benefits programs and concurrent with the pursuit of several government-sponsored relief support programs globally that will capture additional labor savings. We are also working to reduce our non-labor spend, engaging in active discussions with our vendors and scrutinizing research and development spending. We are also working to optimize working capital, with workstreams under way in the areas of collections, capital expenditures, inventory management and disbursements. We also continue to monitor potential goodwill impairments as a result of Covid-19. For further information, see Note 6-Goodwill and Intangible Assets in our Notes to Unaudited Condensed Consolidated Financial Statements. While management anticipates that the industry and economic impact of Covid-19 andOPEC's actions will have a negative effect on our results of operations in 2020 and perhaps beyond, the degree to which these factors will impact our business remains uncertain. Please read Item 1A, Risk Factors, in this Quarterly Report.
How We Evaluate Our Operations
We use a number of financial and operational measures to routinely analyze and evaluate the performance of our business, including revenue, Adjusted EBITDA, Adjusted EBITDA margin and safety performance.
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Revenue
We analyze our revenue growth by comparing actual monthly revenue to our internal projections for each month to assess our performance. We also assess incremental changes in our monthly revenue across our operating segments to identify potential areas for improvement.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income (loss) before interest income, net, depreciation and amortization, income tax benefit or expense, asset impairments, gain or loss on disposal of assets, foreign currency gain or loss, equity-based compensation, unrealized and realized gains or losses, the effects of the tax receivable agreement ("TRA"), other non-cash adjustments and other charges or credits. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenue. We review Adjusted EBITDA and Adjusted EBITDA margin on both a consolidated basis and on a segment basis. We use Adjusted EBITDA and Adjusted EBITDA margin to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), income tax, foreign currency exchange rates and other charges and credits. Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles in theU.S. ("GAAP").
The following table presents a reconciliation of net loss to Adjusted EBITDA and Adjusted EBITDA margin for each of the periods presented (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net loss$ (34,245) $ (15,160) $ (120,223) $ (43,447) Goodwill impairment - - 57,146 - Severance and other charges, net 5,162 815 25,887 1,270 Interest income, net (178) (426) (711) (1,194) Depreciation and amortization 17,252 23,913 36,970 49,155 Income tax expense (benefit) 8,986 3,300 (6,577) 13,073 (Gain) loss on disposal of assets (650) 154 (590) 381 Foreign currency (gain) loss (1,693) 661 8,199 178 TRA related adjustments - (220) - (220) Charges and credits (1) 3,674 4,126 5,266 7,625 Adjusted EBITDA$ (1,692) $ 17,163 $ 5,367 $ 26,821 Adjusted EBITDA margin (2.0) % 11.0 % 2.6 % 8.9 % (1) Comprised of Equity-based compensation expense (for the three months endedJune 30, 2020 and 2019:$3,515 and$3,017 , respectively, and for the six months endedJune 30, 2020 and 2019:$5,661 and$5,591 , respectively), Unrealized and realized (gains) losses (for the three months endedJune 30, 2020 and 2019:$111 and$(383) , respectively, and for the six months endedJune 30, 2020 and 2019:$(1,593) and$(691) , respectively), and Investigation-related matters (for the three months endedJune 30, 2020 and 2019:$48 and$1,492 , respectively, and for the six months endedJune 30, 2020 and 2019:$1,198 and$2,725 , respectively). For a reconciliation of our Adjusted EBITDA on a segment basis to the most comparable measure calculated in accordance with GAAP, see "Operating Segment Results." 31
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Safety and Quality Performance
Safety is one of our primary core values. Maintaining a strong safety record is a critical component of our operational success. Many of our customers have safety standards we must satisfy before we can perform services. As a result, we continually monitor our safety performance through the evaluation of safety observations, job and customer surveys, and safety data. The primary measure for our safety performance is the tracking of the Total Recordable Incident Rate which is reviewed on both a monthly and rolling twelve-month basis.
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