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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ |
Accelerated filer |
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Non-accelerated filer |
☐ |
Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No
As of July 25, 2022, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was
TABLE OF CONTENTS
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Page |
PART I |
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Item 1. |
3 |
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3 |
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4 |
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5 |
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6 |
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7 |
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8 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
17 |
Item 3. |
28 |
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Item 4. |
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PART II |
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Item 1. |
30 |
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Item 1A. |
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Item 2. |
30 |
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Item 6. |
31 |
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32 |
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
DRIL-QUIP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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June 30, |
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December 31, |
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(In thousands, except per share data) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Trade receivables, net |
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Unbilled receivables |
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Inventories, net |
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Prepaids and other current assets |
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Assets held for sale |
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Total current assets |
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Operating lease right of use assets |
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Property, plant and equipment, net |
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Deferred income taxes |
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Intangible assets |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued income taxes |
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Contract liabilities |
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Accrued compensation |
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Operating lease liabilities |
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Other accrued liabilities |
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Total current liabilities |
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Deferred income taxes |
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Income tax payable |
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Operating lease liabilities, long-term |
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Other long-term liabilities |
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Total liabilities |
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Stockholders' equity: |
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Preferred stock: |
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Common stock: |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive losses |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DRIL-QUIP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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(In thousands, except per share data) |
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Revenues: |
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Products |
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$ |
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$ |
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$ |
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$ |
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Services |
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Leasing |
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Total revenues |
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Cost and expenses: |
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Cost of sales: |
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Products |
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Services |
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Leasing |
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Total cost of sales |
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Selling, general and administrative |
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Engineering and product development |
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Restructuring and other charges |
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(Gain) loss on sale of property, plant and equipment |
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Foreign currency transaction (gains) and losses |
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Total costs and expenses |
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Operating loss |
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Interest income |
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Interest expense |
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( |
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( |
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Loss before income taxes |
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( |
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( |
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( |
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Income tax provision |
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Net loss |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Loss per common share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Weighted average common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DRIL-QUIP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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(In thousands) |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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( |
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( |
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Total comprehensive loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DRIL-QUIP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six months ended |
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June 30, |
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2022 |
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2021 |
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(In thousands) |
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Operating activities |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Stock-based compensation expense |
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Restructuring and other charges |
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Gain on sale of property, plant and equipment |
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( |
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( |
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Deferred income taxes |
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( |
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Changes in operating assets and liabilities: |
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Trade receivables, net |
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Unbilled receivables |
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( |
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( |
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Inventories, net |
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( |
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Prepaids and other assets |
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( |
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Accounts payable and accrued expenses |
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( |
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Other, net |
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( |
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Net cash provided by (used in) operating activities |
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( |
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Investing activities |
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Purchase of property, plant and equipment |
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( |
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Proceeds from sale of property, plant and equipment |
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Net cash provided by (used in) investing activities |
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( |
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Financing activities |
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Repurchase of common shares |
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( |
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Other |
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( |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of exchange rate changes on cash activities |
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( |
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( |
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Increase (decrease) in cash and cash equivalents |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
DRIL-QUIP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
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Common Stock |
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Additional Paid-In Capital |
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Retained Earnings |
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Accumulated Other Comprehensive Losses |
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Total |
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(In thousands, except shares) |
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Balance at April 1, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Foreign currency translation adjustment |
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- |
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- |
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- |
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( |
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( |
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Net loss |
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- |
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- |
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( |
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- |
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( |
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Comprehensive loss |
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( |
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Repurchase of common shares ( |
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( |
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- |
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( |
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- |
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( |
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Stock-based compensation expense |
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- |
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- |
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- |
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Other |
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- |
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( |
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( |
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- |
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( |
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Balance at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Balance at January 1, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Foreign currency translation adjustment |
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- |
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- |
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- |
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( |
) |
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( |
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Net loss |
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- |
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- |
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( |
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- |
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( |
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Comprehensive loss |
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- |
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- |
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- |
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- |
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( |
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Repurchase of common shares ( |
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( |
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- |
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( |
) |
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( |
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Stock-based compensation expense |
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- |
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- |
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- |
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Other |
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- |
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( |
) |
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( |
) |
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- |
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( |
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Balance at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Additional Paid-In Capital |
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Retained Earnings |
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Accumulated Other Comprehensive Losses |
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Total |
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(In thousands, except shares) |
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Balance at April 1, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Foreign currency translation adjustment |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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( |
) |
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( |
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Comprehensive loss |
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( |
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Stock option expense |
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- |
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- |
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- |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Balance at January 1, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Foreign currency translation adjustment |
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- |
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- |
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Net loss |
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- |
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- |
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( |
) |
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( |
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Comprehensive loss |
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( |
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Stock option expense |
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- |
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- |
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- |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
7
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Basis of Presentation
Dril-Quip, Inc., a Delaware corporation (the “Company” or “Dril-Quip”), designs, manufactures, sells and services highly engineered drilling and production equipment that is well suited primarily for use in deepwater, harsh environment and severe service applications. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors, diverters and safety valves. Dril-Quip’s products are used by major integrated, large independent and foreign national oil and gas companies and drilling contractors throughout the world. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip’s customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products.
The Company’s operations are organized into
The condensed consolidated financial statements included herein are unaudited. The balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements as of that date. In the opinion of management, the unaudited condensed consolidated interim financial statements include all normal recurring adjustments necessary for a fair statement of the financial position as of June 30, 2022 and the results of operations and comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021 and cash flows for the six months ended June 30, 2022 and 2021. Certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations and comprehensive income (loss) for the three and six months ended June 30, 2022 and cash flows for the six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
2. Significant Accounting Policies
Principles of Consolidation
Use of Estimates
8
Revenue Recognition
The Company generates revenues through the sale of products, the sale of services and the leasing of running tools. The Company normally negotiates contracts for products, including those accounted for under the over-time method, rental tools and services separately. Modifications to the scope and price of sales contracts may occur in the form of variations and change orders. For all product sales, it is the customer’s decision as to the timing of the product installation, as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory assistance services. The customer may instead choose to use a third party or its own personnel.
Leasing revenues
The Company earns leasing revenues from the rental of running tools. Revenues from rental of running tools are recognized on a day rate basis over the lease term, which is generally between one to three months.
On April 30, 2021, as a result of lower activity stemming from the COVID-19 pandemic, AFGlobal Corporation provided a 90-day written notice of termination of the lease agreement between the Company and AFGlobal in relation to the Company’s forge facility and equipment at its Houston Eldridge campus. As a result of the lease termination, the Company had approximately $
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, receivables and payables. The carrying values of these financial instruments approximate their respective fair values as they are short-term in nature.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate our property and equipment and definite-lived intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by comparing the carrying value to the estimated fair value. We assess recoverability based on undiscounted future net cash flows. Estimating future net cash flows requires us to make judgements regarding long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about our revenue growth, operating margins, capital expenditures, future market conditions and technological developments. If changes in these assumptions occur, our expectations regarding future net cash flows may change such that a material impairment could result.
Restructuring and Other Charges
During the second quarter of 2022, the Company incurred $
Repurchase of Equity Securities
On February 22, 2022, the Board of Directors authorized an incremental $
For the three months ended June 30, 2022, the Company purchased
For the three and six months ended June 30, 2021, the Company purchased
9
Earnings Per Share
Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed considering the dilutive effect of stock awards using the treasury stock method.
In each relevant period, the net income used in the basic and dilutive earnings per share calculations is the same.
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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(In thousands) |
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Weighted average common shares outstanding – basic |
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Dilutive effect of common stock awards |
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Weighted average common shares outstanding – diluted |
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For the three and six months ended June 30, 2022 and 2021, the Company has excluded the following common stock options and awards because their impact on the income/(loss) per share is anti-dilutive (in thousands on a weighted average basis):
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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(In thousands) |
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Director stock awards |
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Stock options |
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Performance share units |
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Restricted stock awards |
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3. Revenue Recognition
Revenues from contracts with customers (excludes leasing) consisted of the following:
|
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Three months ended June 30, |
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Western |
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Eastern |
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Asia- |
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Total |
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||||||||||||||||
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2022 |
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2021 |
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2022 |
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2021 |
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2022 |
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2021 |
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2022 |
|
2021 |
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||||||||
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(In thousands) |
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|||||||||||||||||||||||
Product Revenues |
|
$ |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
$ |
|
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$ |
|
$ |
|
||||||||
Service Revenues |
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||||||||
Total |
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$ |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
$ |
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||||||||
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||||||||
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Six months ended June 30, |
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Western |
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Eastern |
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Asia- |
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Total |
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||||||||||||||||
|
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2022 |
|
2021 |
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2022 |
|
2021 |
|
|
2022 |
|
2021 |
|
|
2022 |
|
2021 |
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||||||||
|
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(In thousands) |
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|
|||||||||||||||||||||||
Product Revenues |
|
$ |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
$ |
|
||||||||
Service Revenues |
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||||||||
Total |
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$ |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
$ |
|
||||||||
10
Contract Balances
Balances related to contracts with customers consisted of the following:
Contract Assets (amounts shown in thousands)
Contract Assets at December 31, 2021 |
|
$ |
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Additions |
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Transfers to Trade Receivables, Net |
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( |
) |
Contract Assets at June 30, 2022 |
|
$ |
|
Contract Liabilities (amounts shown in thousands)
Contract Liabilities at December 31, 2021 |
|
$ |
|
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Additions |
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Revenue Recognized |
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( |
) |
Contract Liabilities at June 30, 2022 |
|
$ |
|
Contract assets include unbilled accounts receivable associated with contracts accounted for under the over-time accounting method which were approximately $
Obligations for returns and refunds were considered immaterial as of June 30, 2022.
Remaining Performance Obligations
The aggregate amount of the transaction price allocated to remaining performance obligations from our over-time product lines was $
The Company applies the practical expedient available under the revenue standard and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
4. Stock-Based Compensation and Stock Awards
During the three and six months ended June 30, 2022, the Company recognized approximately $
5. Inventories, net
Inventories consist of the following:
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June 30, |
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December 31, |
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||
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2022 |
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2021 |
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(In thousands) |
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|||||
Raw materials and supplies |
|
$ |
|
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$ |
|
||
Work in progress |
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Finished goods |
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Less: allowance for slow moving and excess inventory |
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( |
) |
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|
( |
) |
Total inventory |
|
$ |
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$ |
|
||
11
6. Assets Held for Sale
In the second quarter of 2022, the Company actively marketed for sale its corporate administrative building, forge facilities and aftermarket facilities in connection with the consolidation of its operations into a smaller footprint at its campus in Houston, Texas. The Company expects the sales to be completed within a year in three separate transactions.
In accordance with the applicable accounting guidance, FASB ASC 360-10-45-9, the Company reclassified the buildings' net carrying amount from Property, plant and equipment, net, to Assets held for sale on the Condensed Consolidated Balance Sheets at June 30, 2022. Of the $
7. Impairment, Restructuring and Other Charges
Restructuring and Other Charges
During the three and six months ended June 30, 2022, the Company incurred additional costs of approximately $
During the three and six months ended June 30, 2021, the Company incurred additional costs under the former 2018 global strategic plan to realign manufacturing facilities globally. These charges were primarily related to the restructuring of our downhole tools business where we exited certain underperforming countries and markets and shifted from manufacturing in-house to a vendor sourcing model.
The following table summarizes the components of charges included in "Restructuring and other charges" in our condensed consolidated statements of income (loss) for the three and six months ended June 30, 2022 and 2021 (in thousands):
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
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||||||||||
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2022 |
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2021 |
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2022 |
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2021 |
|
||||
Inventory write-down |
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$ |
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$ |
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$ |
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$ |
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||||
Severance |
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Long-lived asset write-down |
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Other |
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||||
|
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$ |
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$ |
|
|
$ |
|
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$ |
|
||||
The following table summarizes the changes to our accrued liability balance related to restructuring and other charges as of June 30, 2022 (in thousands):
|
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Total |
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Beginning balance at January 1, 2022 |
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$ |
|
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Additions for costs expensed |
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Reductions for payments |
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( |
) |
Other |
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Ending balance at June 30, 2022 |
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$ |
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|
12
8. Intangible Assets
Intangible assets, the majority of which were acquired in the acquisition of TIW and OPT, consist of the following:
|
|
|
|
June 30, 2022 |
|
|||||||||||||
|
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Estimated |
|
Gross |
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Accumulated |
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Foreign |
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Net Book |
|
||||
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(In thousands) |
|
|||||||||||||
Trademarks |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||
Patents |
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|
( |
) |
|
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( |
) |
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|
|||
Customer relationships |
|
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( |
) |
|
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( |
) |
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|
|||
Organizational costs |
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|
( |
) |
|
|
( |
) |
|
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|
|||
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
|
|
|
|
December 31, 2021 |
|
|||||||||||||
|
|
Estimated |
|
Gross |
|
|
Accumulated |
|
|
Foreign |
|
|
Net Book |
|
||||
|
|
|
|
(In thousands) |
|
|||||||||||||
Trademarks |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||
Patents |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|||
Customer relationships |
|
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|
|
( |
) |
|
|
( |
) |
|
|
|
|||
Organizational costs |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|||
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
9. Asset Backed Loan (ABL) Credit Facility
The Company's ABL Credit Facility, dated February 23, 2018, as amended, was terminated effective February 22, 2022. In addition, we opened a new cash collateral account with JPMorgan Chase Bank, N.A., in which cash was transferred to facilitate our existing letters of credit. We had transferred approximately $
10. Geographic Areas
The Company’s operations are organized into
Eliminations of operating profits are related to intercompany inventory transfers that are deferred until shipment is made to third party customers.
13
|
|
Three months ended June 30, |
|
|||||||||||||||||||||||||||||||||||||
|
|
Western Hemisphere |
|
|
Eastern Hemisphere |
|
|
Asia-Pacific |
|
|
DQ Corporate |
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|
Total |
|
|||||||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
(In thousands) |
|
|||||||||||||||||||||||||||||||||||||
Revenues |
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|
|
|
|
|
|
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|
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|
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|
|
|
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|
||||||||||
Products |
|
|
|
|
|
|
|
|
|
|
|
|
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||||||||||
Point in Time |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
||||||||
Over-Time |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
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|
||||||||
Total Products |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
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|
||||||||
Services |
|
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|
|
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|
|
|
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||||||||||
Technical Advisory |
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|
|
|
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|
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- |
|
|
|
- |
|
|
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|
||||||||
Reconditioning |
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|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
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|
||||||||
Total Services |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
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|
||||||||
Leasing |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||||||||
Total Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
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|
||||||||
Intercompany |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
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|
|||||||||
Eliminations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total Revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||||||
Depreciation and amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||
Income (loss) before income taxes |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
||||
During the three months ended June 30, 2022, the Company incurred additional costs under the 2021 global strategic plan. These charges were primarily related to a $
|
|
Six months ended June 30, |
|
|||||||||||||||||||||||||||||||||||||
|
|
Western Hemisphere |
|
|
Eastern Hemisphere |
|
|
Asia-Pacific |
|
|
DQ Corporate |
|
|
Total |
|
|||||||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
(In thousands) |
|
|||||||||||||||||||||||||||||||||||||
Revenues |
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||||||||||
Products |
|
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|
|
|
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|
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|
||||||||||
Point in Time |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
||||||||
Over-Time |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||||||||
Total Products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||||||||
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Technical Advisory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||||||||
Reconditioning |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||||||||
Total Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||||||||
Leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||||||||
Total Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||||||||
Intercompany |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||||||||
Eliminations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||||||
Depreciation and amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||
Income (loss) before income taxes |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
||||
During the six months ended June 30, 2022, the Company incurred additional costs under the 2021 global strategic plan. These charges were primarily related to a $
14
|
|
June 30, |
|
|
December 31, |
|
||
|
|
(In thousands) |
|
|||||
Total long-lived assets: |
|
|
|
|
|
|
||
Western Hemisphere |
|
$ |
|
|
$ |
|
||
Eastern Hemisphere |
|
|
|
|
|
|
||
Asia-Pacific |
|
|
|
|
|
|
||
Eliminations |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Total assets: |
|
|
|
|
|
|
||
Western Hemisphere |
|
$ |
|
|
$ |
|
||
Eastern Hemisphere |
|
|
|
|
|
|
||
Asia-Pacific |
|
|
|
|
|
|
||
Eliminations |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
As of June 30, 2022, the Company had recorded a $
11. Income Tax
The effective tax rate for the three and six months ended June 30, 2022 was (
We have historically considered the majority of undistributed earnings of our foreign subsidiaries and equity investees to be indefinitely reinvested, and, accordingly, no deferred taxes had been provided on the indefinitely reinvested earnings. As of June 30, 2020, the Company reversed its indefinite reinvestment assertion. As a result, we recorded a deferred foreign tax liability, which had a balance of $
The Company is subject to ongoing tax authority examinations in various jurisdictions in which it operates. The Company reviews its accrual for uncertain tax positions at each reporting period and updates positions based on available information. It is reasonably possible that the Company's existing liabilities for unrecognized tax benefits could significantly change within the next 12 months, primarily due to the progression of any audits and the expiration of statutes of limitation.
12. Contingencies
FMC Technologies Lawsuit
On October 5, 2020, FMC Technologies, Inc. (“FMC”) sued the Company alleging misappropriation of trade secrets and sought money damages and injunctive relief in the 127th District Court of Harris County in an action styled FMC Technologies, Inc. v. Richard Murphy and Dril-Quip, Inc., Cause No. 2020-63081. FMC alleged that its former employee communicated FMC trade secrets to the Company and the Company used those trade secrets in its VXTe subsea tree systems. On April 29, 2021, the jury returned a verdict in favor of the Company. FMC filed a notice of appeal on August 20, 2021. The Company intends to continue its vigorous defense of this matter on appeal.
15
General
The Company operates its business and markets its products and services in most of the significant oil and gas producing areas in the world and is, therefore, subject to the risks customarily attendant to international operations and is dependent on the condition of the oil and gas industry. Additionally, certain of the Company’s products are used in potentially hazardous drilling, completion, and production applications that can cause personal injury, property damage and environmental claims. Although exposure to such risks have not resulted in any significant problems for the Company in the past, ongoing exposure to these risks and future developments could adversely impact the Company in the future.
The Company is also involved in a number of legal actions arising in the ordinary course of business. Although no assurance can be given with respect to the ultimate outcome of such legal action, in the opinion of management, the ultimate liability with respect thereto will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in all parts of this document that are not historical facts are forward-looking statements that involve risks and uncertainties that are beyond the control of Dril-Quip, Inc. (the “Company” or “Dril-Quip”). You can identify the Company’s forward-looking statements by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions, or by the Company’s discussion of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct. These forward-looking statements include the following types of information and statements as they relate to the Company:
These statements are based on assumptions and analysis in light of the Company’s experience and perception of historical trends, current conditions, expected future developments and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk Factors” in Part II of this report, and “Item 1A. Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Investors should note that Dril-Quip announces financial information in SEC filings, press releases and public conference calls. Dril-Quip may use the Investors section of its website (www.dril-quip.com) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on Dril-Quip’s website is not part of this Form 10-Q.
17
The following is management’s discussion and analysis of certain significant factors that have affected aspects of the Company’s financial position, results of operations, comprehensive income (loss) and cash flows during the periods included in the accompanying unaudited condensed consolidated financial statements. This discussion should be read in conjunction with the Company's unaudited condensed consolidated financial statements and notes thereto presented elsewhere herein as well as the discussion under Part II – Item 1A, “Risk Factors,” included herein and “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Overview
Dril-Quip, Inc., a Delaware corporation (the “Company” or “Dril-Quip”), designs, manufactures, sells and services highly engineered drilling and production equipment that is well suited primarily for use in deepwater, harsh environment and severe service applications. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors, diverters and safety valves. Dril-Quip’s products are used by major integrated, large independent and foreign national oil and gas companies and drilling contractors throughout the world. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip’s customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products.
Business Environment
During the first quarter of 2022, Dril-Quip entered into a collaboration agreement with Aker Solutions ASA (Aker Solutions) to offer subsea injection systems for carbon capture, utilization and storage (CCUS) projects. Under the agreement, Dril-Quip will provide Aker Solutions with CO2 injection Xmas trees and wellheads that will be fully integrated into a larger subsea injection system to provide customers with market-leading technology purposely designed for the injection and storage of CO2. The arrangement will leverage on Aker Solution’s position as an integrated supplier of CCUS systems along with its control systems and electrification components. We believe this collaboration agreement focuses on the strengths of both organizations, will deliver an optimum solution for carbon capture and storage, and is in line with each party's strategic goals of collaboration and partnerships to unlock value for customers.
In February 2022, Russia invaded Ukraine, resulting in wide-ranging sanctions imposed on Russia by certain members of the European Union, the United Kingdom and the United States, among others, higher oil prices and increased uncertainty in global markets. As Russia's invasion of Ukraine continues, there can be no certainty regarding whether such governments or other governments will impose additional sanctions, export-controls or other economic or military measures against Russia. Although we have minimal operational exposure in Russia and we do not intend to commit further capital towards projects in Russia, the full impact of the invasion of Ukraine, including economic sanctions and export controls or additional war or military conflict, as well as potential responses to them by Russia, is currently unknown and could adversely affect oil and gas companies, many of which are our customers, as well as the global supply chain. For more information on the risks associated with the invasion of Ukraine, see "Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine." under "Item 1A. Risk Factors" in Part II of our Quarterly Report on Form 10-Q for the period ending March 31, 2022.
Crude oil prices increased in 2022, mainly driven by the Russian invasion of Ukraine and loosening of pandemic-related restrictions and the Company has seen an increase in drilling activity in the offshore market as a result of these continued price increases. Further, a growing global economy resulted in global petroleum demand rising faster than petroleum supply.
During the second quarter of 2021, Dril-Quip entered into a collaboration and supply agreement in which the Company will serve as a supplier of subsea wellheads, tubular goods, liner hangers and other related tools and services to a peer provider of subsea equipment and services. The arrangement provides a framework for bundling several of our products and services into an integrated engineering, procurement and construction offering by our peer for the subsea production system market. We believe this collaboration and supply agreement will lead to opportunities to participate in more subsea projects and bids as a subcontractor for this industry peer that we previously may not have had access to independently.
The Company has been operating under a hybrid work environment with employees expected to work partially remote and partially from the office. We do not believe that remote work arrangements have adversely affected our ability to maintain financial reporting systems, internal controls over financial reporting and disclosure controls and procedures. The Company has taken steps and adjusted its workforce to be in line with the current situation as we continue to monitor ongoing market conditions. The extent to which our future results are affected by these externalities will depend on various factors and circumstances beyond our control, such as the duration and scope of the pandemic, additional actions by businesses and governments in response to the pandemic, the speed and effectiveness of containing the virus and developments in the global oil markets. Similarly, we expect that the uncertainty in the sustainability of current oil prices will continue to have a negative impact on oil and gas activities. Further, Russia’s military incursion
18
into Ukraine has led to, and could continue to, give rise to regional instability and result in heightened economic sanctions by certain members of the European Union, the United Kingdom, the United States, and certain other members of the international community that, in turn, could increase uncertainty with respect to global financial markets and production output from OPEC+ and other crude oil producing nations. In addition to this, continued outbreaks of new COVID-19 variants could also aggravate the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and updated by our Quarterly Report on Form 10-Q for the period ending March 31, 2022 including leading to further material impairment charges.
The Company took advantage of the Payroll Tax Deferral provided by the CARES Act in 2020. The Payroll Tax Deferral allows the Company to defer the payment of the Company’s share of FICA taxes of 6.2%. As such, the Company was able to defer its share of FICA taxes for the period beginning March 27, 2020 and ending December 31, 2020. This resulted in approximately $2.9 million in FICA cash tax payments being deferred to 2021 and 2022. The CARES Act provided for the five-year carryback of Net Operating Losses (“NOLs”) generated in the 2018, 2019 and 2020 taxable years. The Company filed returns to carryback its NOLs to generate a refund of $46.0 million.
During 2021, the Company took advantage of job support schemes in Singapore, Australia, the U.K. and Denmark under which the governments introduced a plan to help businesses co-fund wages of workers to encourage employers to retain their workers. These benefits did not continue in 2022 and as such the Company did not record any significant benefits through June 30, 2022.
Oil and Gas Prices
The market for drilling and production equipment and services and the Company’s business are substantially dependent on the condition of the oil and gas industry and, in particular, the willingness of oil and gas companies to make capital expenditures on exploration, drilling and production operations. Oil and gas prices and the level of drilling and production activity have historically been characterized by significant volatility.
According to the Energy Information Administration (EIA) of the U.S. Department of Energy, Brent Crude oil prices per barrel are listed below for the periods covered by this report:
|
|
Three months ended |
|
|
Six months ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
Brent Crude Oil Price per Barrel |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Low |
|
$ |
97.92 |
|
|
$ |
61.47 |
|
|
$ |
78.25 |
|
|
$ |
50.37 |
|
High |
|
|
129.20 |
|
|
|
76.94 |
|
|
|
133.18 |
|
|
|
76.94 |
|
Average |
|
|
113.84 |
|
|
|
68.98 |
|
|
|
107.20 |
|
|
|
64.95 |
|
Closing |
|
|
119.78 |
|
|
|
76.94 |
|
|
|
119.78 |
|
|
|
76.94 |
|
According to the July 2022 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average approximately $104.05 per barrel in 2022 and $93.75 per barrel in 2023, compared with an average of $70.89 per barrel in 2021. In its July 2022 Oil Market Report, the International Energy Agency projected global oil demand to grow to 99.2 million barrels per day in 2022 as compared to 97.5 million barrels per day in 2021.
Although crude oil prices rebounded sharply in 2022, we have only recently seen an increase in activity from our customers as any recovery in the subsea market generally lags relative to the overall recovery in crude oil prices. If the Company experiences significant contract terminations, suspensions or scope adjustments to its contracts, then its financial condition, results of operations and cash flows may be adversely impacted.
Offshore Rig Count
Detailed below is the average contracted offshore rig count (rigs currently drilling as well as rigs committed, but not yet drilling) for the Company’s geographic regions for the six months ended June 30, 2022 and 2021. The rig count data includes floating rigs (semi-submersibles and drillships) and jack-up rigs. The Company has included only these types of rigs as they are the primary assets used to deploy the Company’s products.
|
|
Six months ended June 30, |
|
|||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
Floating |
|
|
Jack-up |
|
|
Floating |
|
|
Jack-up |
|
||||
Western Hemisphere |
|
|
58 |
|
|
|
42 |
|
|
|
55 |
|
|
|
46 |
|
Eastern Hemisphere |
|
|
48 |
|
|
|
61 |
|
|
|
41 |
|
|
|
54 |
|
Asia-Pacific |
|
|
28 |
|
|
|
260 |
|
|
|
31 |
|
|
|
253 |
|
Total |
|
|
134 |
|
|
|
363 |
|
|
|
127 |
|
|
|
353 |
|
19
Source: IHS—Petrodata RigBase – June 30, 2022 and 2021
According to IHS-Petrodata RigBase, as of June 30, 2022, there were 510 contracted rigs for the Company’s geographic regions (136 floating rigs and 374 jack-up rigs), an increase of 6.5% from the rig count of 479 rigs (125 floating rigs and 354 jack-up rigs) as of June 30, 2021.
Regulation
The demand for the Company’s products and services is also affected by laws and regulations relating to the oil and gas industry in general, including those specifically directed to offshore operations. The adoption of new laws and regulations, or changes to existing laws or regulations that curtail exploration and development drilling for oil and gas for economic or other policy reasons, could adversely affect the Company’s operations by limiting demand for its products.
In March 2018, the President of the United States issued a proclamation imposing a 25 percent global tariff on imports of certain steel products, effective March 23, 2018. The President subsequently proposed an additional 25 percent tariff on approximately $50 billion worth of imports from China, and the government of China responded with a proposal of an additional 25 percent tariff on U.S. goods with a value of $50 billion. The initial U.S. tariffs were implemented on July 6, 2018, covering $34 billion worth of Chinese goods, with another $16 billion of goods facing tariffs beginning on August 23, 2018.
In September 2018, the President directed the U.S. Trade Representative (USTR) to place additional tariffs on approximately $200 billion worth of additional imports from China. These tariffs, which took effect on September 24, 2018, were initially set at a level of 10 percent until the end of the year, at which point the tariffs were to rise to 25 percent. However, on December 19, 2018, USTR postponed the date on which the rate of the additional duties would increase to 25 percent until March 2, 2019. On May 9, 2019, USTR announced that the United States increased the level of tariffs from 10 percent to 25 percent on approximately $200 billion worth of Chinese imports. The President also ordered USTR to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion. On August 13, 2019 and August 23, 2019, USTR announced the imposition of an additional tariff of 15 percent on approximately $300 billion worth of Chinese imports, effective September 1, 2019 (or December 15, 2019 for certain articles). Following the conclusion of a phase one trade deal with China, USTR suspended the implementation of the 15 percent additional duty on approximately $160 billion worth of Chinese imports and reduced the applicable duty from 15 percent to 7.5 percent for $120 billion worth of Chinese imports. Negotiations for a phase two trade deal with China had begun prior to the outbreak of the global COVID-19 pandemic and if continued could lead to additional changes to the tariff rates described above. However, President Biden has indicated that these tariffs will likely remain in place while the new administration assesses the United States’ current posture, including a review of the phase one trade deal with China.
The imposition of any additional tariffs or initiation of trade restrictions by or against the United States could cause our cost of raw materials to increase or affect the markets for our products. However, given the uncertainty regarding the scope and duration of these trade actions by the United States and other countries, their ultimate impact on our business and operations remains uncertain.
On June 23, 2016 the United Kingdom (U.K.) held a referendum in which a majority of British voters voted to exit the E.U., commonly known as “Brexit”, with the U.K. officially withdrawing from the E.U. on January 31, 2020. A transition period (during which the trading relationship between the E.U. and the U.K. remained substantially the same as prior to Brexit) followed, and this transition period expired on December 31, 2020. Shortly prior to expiration of the transition period, in December 2020, the U.K. and the E.U. reached an accord on a trade and cooperation agreement (TCA). Brexit and the terms of the TCA brought to an end the U.K.’s automatic access to the E.U. single market, resulting in the U.K. no longer benefitting from the free movement of goods and services between the E.U. and the U.K. The rights of people to freely move between the E.U. and the U.K. have also been restricted. The TCA entered into force on January 1, 2021 and, following formal ratification by the E.U. on April 28, 2021, entered fully into force on May 1, 2021. For more information on the risks associated with Brexit and the TCA, see “Our international operations require us to comply with a number of U.S. and foreign regulations governing the international trade of goods, services and technology, which expose us to compliance risks" under “Item 1A. Risk Factors” in Part II of this report and “Item 1A. Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
20
The Company believes that its backlog should help mitigate the impact of negative market conditions; however, slow recovery in commodity prices or an extended downturn in the global economy or future restrictions on, or declines in, oil and gas exploration and production could have a negative impact on the Company and its backlog. The Company’s product backlog at June 30, 2022 was approximately $208.6 million, compared to approximately $220.9 million at March 31, 2022, and $220.9 million at December 31, 2021.
The following table represents the change in backlog for the three months ended June 30, 2022, March 31, 2022, and December 31, 2021.
|
|
Three months ended |
|
|||||||||
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|||
|
|
(In thousands) |
|
|
|
|
||||||
Beginning Backlog |
|
$ |
220,934 |
|
|
$ |
210,119 |
|
|
$ |
179,012 |
|
Bookings: |
|
|
|
|
|
|
|
|
|
|||
Product (1) |
|
|
56,780 |
|
|
|
63,155 |
|
|
|
83,105 |
|
Service |
|
|
19,596 |
|
|
|
22,578 |
|
|
|
19,380 |
|
Leasing |
|
|
12,403 |
|
|
|
9,996 |
|
|
|
9,837 |
|
Cancellation/Revision adjustments |
|
|
(7,879 |
) |
|
|
(2,011 |
) |
|
|
(3,336 |
) |
Translation adjustments |
|
|
730 |
|
|
|
234 |
|
|
|
33 |
|
Total Bookings |
|
|
81,630 |
|
|
|
93,952 |
|
|
|
109,019 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|||
Product |
|
|
61,979 |
|
|
|
55,642 |
|
|
|
48,695 |
|
Service |
|
|
19,596 |
|
|
|
17,499 |
|
|
|
19,380 |
|
Leasing |
|
|
12,403 |
|
|
|
9,996 |
|
|
|
9,837 |
|
Total Revenue |
|
|
93,978 |
|
|
|
83,137 |
|
|
|
77,912 |
|
Ending Backlog |
|
$ |
208,586 |
|
|
$ |
220,934 |
|
|
$ |
210,119 |
|
(1) The backlog data shown above includes all bookings as of June 30, 2022, including contract awards and signed purchase orders for which the contracts would not be considered enforceable or qualify for the practical expedient under ASC 606. As a result, this table will not agree to the disclosed performance obligations of $65.2 million as of June 30, 2022 within “Revenue Recognition”, Note 3 to the Notes to Condensed Consolidated Financial Statements.
Revenues. Dril-Quip’s revenues are generated from three sources: products, services and leasing. Product revenues are derived from the sale of drilling and production equipment. Service revenues are earned when the Company provides technical advisory assistance and rework and reconditioning services. Leasing revenues are derived from rental tools used during installation and retrieval of the Company’s products. For the three months ended June 30, 2022 and 2021, the Company derived 66.0% and 69.1%, respectively, of its revenues from the sale of its products, 20.8% and 21.7%, respectively, of its revenue from services, and 13.2% and 9.2%, respectively, of its revenues from leasing. For the six months ended June 30, 2022 and 2021, the Company derived 66.4% and 68.8% , respectively, of its revenues from the sale of its products, 20.9% and 21.7%, respectively, of its revenue from services, and 12.7% and 9.5%, respectively, of its revenues from leasing. Service and leasing revenues generally correlate to revenues from product sales because increased product sales typically generate increased demand for technical advisory assistance services and rental of running tools during installation. The Company has substantial international operations, with approximately 62.4% and 67.2% of its revenues derived from foreign sales for the six months ended June 30, 2022 and 2021, respectively. The majority of the Company’s domestic revenue relates to operations in the U.S. Gulf of Mexico. Domestic revenue approximated 37.6% and 32.8% of the Company’s total revenues for the six months ended June 30, 2022 and 2021, respectively.
Product contracts are generally negotiated and sold separately from service contracts. In addition, service contracts are not typically included in the product contracts or related sales orders and are not offered to the customer as a condition of the sale of the Company’s products. The demand for products and services is generally based on worldwide economic conditions in the oil and gas industry and is not based on a specific relationship between the two types of contracts. Substantially all of the Company’s sales are made on a purchase order basis. Purchase orders are subject to change and/or termination at the option of the customer. In case of a change or termination, the customer is required to pay the Company for work performed and other costs necessarily incurred due to the change or termination.
Generally, the Company attempts to raise its prices as its costs increase. However, the actual pricing of the Company’s products and services is impacted by a number of factors, including global oil prices, competitive pricing pressure, the level of utilized capacity in the oil service sector, preservation of market share, the introduction of new products and overall market conditions.
21
The Company accounts for more complex, customer specific projects that have relatively longer manufacturing time frames on an over-time basis. For the three months ended June 30, 2022, there were 50 projects representing approximately 36.7% of the Company's total revenues and approximately 55.6% of its product revenues that were accounted for using over-time accounting, compared to 39 projects for the three months ended June 30, 2021, which represented approximately 21.1% of the Company's total revenues and approximately 30.6% of its product revenues. For the six months ended June 30, 2022, there were 56 projects representing approximately 33.3% of the Company's total revenues and approximately 50.1% of its product revenues that were accounted for using over-time accounting, compared to 45 projects for the six months ended June 30, 2021, which represented approximately 19.1% of the Company's total revenues and approximately 27.8% of its product revenues. These percentages may fluctuate in the future. Revenues accounted for in this manner are generally recognized based upon a calculation of the percentage complete, which is used to determine the revenue earned and the appropriate portion of total estimated cost of sales to be recognized. Accordingly, price and cost estimates are reviewed periodically as the work progresses, and adjustments proportionate to the percentage complete are reflected in the period when such estimates are revised. Losses, if any, are recorded in full in the period they become known. Amounts received from customers in excess of revenues recognized are classified as a current liability.
Cost of Sales. The principal elements of cost of sales are labor, raw materials, manufacturing overhead, and application engineering expenses related to customized products. Cost of sales as a percentage of revenues is influenced by the product mix sold in any particular period, costs from projects accounted for under the over-time method, over/under manufacturing overhead absorption, pricing and market conditions. The Company’s costs related to its foreign operations do not significantly differ from its domestic costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses include the costs associated with sales and marketing, general corporate overhead, business development expenses, compensation expense, stock-based compensation expense, legal expenses and other related administrative functions.
Engineering and Product Development Expenses. Engineering and product development expenses consist of new product development and testing.
Impairments. We evaluate our property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and we could incur additional impairment charges related to the carrying value of our long-lived assets. There were no impairment charges recorded for the three months ended June 30, 2022.
Restructuring and Other Charges. During the three and six months ended June 30, 2022, the Company incurred additional costs of approximately $5.8 million under the 2021 global strategic plan. These charges were primarily related to the write-downs of long-lived assets and other charges of approximately $5.1 million and $0.7 million, respectively. Other charges consisted of consulting and legal fees, office moves, cleanup and preparation costs, and brokerage fees.
(Gain) Loss on Sale of Property, Plant and Equipment. Gain or loss on sale of property, plant and equipment consists of sales of certain property, plant and equipment.
Foreign Currency Transaction (Gains) and Losses. Foreign currency transaction (gains) and losses result from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated.
Income Tax Provision (Benefit). The Company’s effective income tax rate fluctuates from the U.S. statutory tax rate based on, among other factors, changes in earnings mix by geography and tax jurisdiction, impact of valuation allowances, changes in tax legislation, and other permanent differences related to the recognition of income and expense between U.S. GAAP and applicable tax rules.
22
Results of Operations
The following table sets forth, for the periods indicated, certain condensed consolidated statements of income (loss) data expressed as a percentage of revenues:
|
|
Three months ended |
|
|
Six months ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
|
65.9 |
% |
|
|
69.1 |
% |
|
|
66.5 |
% |
|
|
68.8 |
% |
Services |
|
|
20.9 |
|
|
|
21.7 |
|
|
|
20.9 |
|
|
|
21.7 |
|
Leasing |
|
|
13.2 |
|
|
|
9.2 |
|
|
|
12.6 |
|
|
|
9.5 |
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
|
57.7 |
|
|
|
54.4 |
|
|
|
57.7 |
|
|
|
52.5 |
|
Services |
|
|
8.4 |
|
|
|
10.3 |
|
|
|
9.4 |
|
|
|
10.9 |
|
Leasing |
|
|
8.1 |
|
|
|
11.5 |
|
|
|
8.3 |
|
|
|
9.6 |
|
Total cost of sales |
|
|
74.2 |
|
|
|
76.2 |
|
|
|
75.4 |
|
|
|
73.0 |
|
Selling, general and administrative |
|
|
23.9 |
|
|
|
36.6 |
|
|
|
25.3 |
|
|
|
36.5 |
|
Engineering and product development |
|
|
2.9 |
|
|
|
4.6 |
|
|
|
3.6 |
|
|
|
4.8 |
|
Restructuring and other charges |
|
|
6.1 |
|
|
|
1.2 |
|
|
|
3.3 |
|
|
|
16.1 |
|
(Gain) loss on sale of property, plant and equipment |
|
|
(0.4 |
) |
|
|
0.1 |
|
|
|
(0.3 |
) |
|
|
(2.4 |
) |
Foreign currency transaction (gains) and losses |
|
|
(2.6 |
) |
|
|
(0.6 |
) |
|
|
(2.1 |
) |
|
|
0.6 |
|
Operating loss |
|
|
(4.1 |
) |
|
|
(18.1 |
) |
|
|
(5.2 |
) |
|
|
(28.6 |
) |
Interest income |
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.1 |
|
Interest expense |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.3 |
) |
Loss before income taxes |
|
|
(3.6 |
) |
|
|
(18.1 |
) |
|
|
(4.9 |
) |
|
|
(28.8 |
) |
Income tax provision |
|
|
2.3 |
|
|
|
5.5 |
|
|
|
3.2 |
|
|
|
4.2 |
|
Net loss |
|
|
(5.9 |
)% |
|
|
(23.6 |
)% |
|
|
(8.1 |
)% |
|
|
(33.0 |
)% |
The following table sets forth, for the periods indicated, a breakdown of our products and service revenues:
|
|
Three months ended |
|
|
Six months ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
(In millions) |
|
|
|
|
|
|
|
|||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Subsea equipment |
|
$ |
49.5 |
|
|
$ |
45.6 |
|
|
$ |
95.7 |
|
|
$ |
88.4 |
|
Downhole tools |
|
|
12.5 |
|
|
|
10.3 |
|
|
|
21.9 |
|
|
|
23.0 |
|
Total products |
|
|
62.0 |
|
|
|
55.9 |
|
|
|
117.6 |
|
|
|
111.4 |
|
Services: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Subsea equipment |
|
|
14.8 |
|
|
|
14.0 |
|
|
|
27.9 |
|
|
|
27.9 |
|
Downhole tools |
|
|
4.8 |
|
|
|
3.5 |
|
|
|
9.2 |
|
|
|
7.3 |
|
Total services |
|
|
19.6 |
|
|
|
17.5 |
|
|
|
37.1 |
|
|
|
35.2 |
|
Leasing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Subsea equipment |
|
|
10.5 |
|
|
|
5.6 |
|
|
|
19.1 |
|
|
|
12.6 |
|
Downhole tools |
|
|
1.9 |
|
|
|
1.8 |
|
|
|
3.3 |
|
|
|
2.8 |
|
Total leasing |
|
|
12.4 |
|
|
|
7.4 |
|
|
|
22.4 |
|
|
|
15.4 |
|
Total revenues |
|
$ |
94.0 |
|
|
$ |
80.8 |
|
|
$ |
177.1 |
|
|
$ |
162.0 |
|
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Revenues. Revenues increased by $13.2 million, or approximately 16.3%, to $94.0 million for the three months ended June 30, 2022 from $80.8 million for the three months ended June 30, 2021. Within product revenues, subsea equipment increased by $3.9 million, and downhole tools revenue increased by $2.2 million. Product revenues in the Western Hemisphere and the Eastern
23
Hemisphere increased by $6.6 million and $3.6 million, respectively, partially offset by decreased product revenues of $4.1 million in the Asia-Pacific region. As crude oil prices have continued to rise, the Company has seen an increase in drilling activity in the offshore market. Further, our revenues were favorably impacted by an increase in global demand and increased activity from customer drilling schedules. In any given time period, the revenues recognized between the various product lines and geographic areas will vary depending upon the timing of shipments to customers, our product mix and completion status of the projects accounted for under the over-time accounting method, market conditions and customer demand.
Service revenues increased by approximately $2.1 million resulting mainly from an increase in the Western Hemisphere and the Eastern Hemisphere of $2.6 million and $0.7 million, respectively, partially offset by a decrease in the Asia-Pacific region of $1.2 million. Increase in service revenues in the Western Hemisphere and the Eastern Hemisphere is mainly due to customer specific increases in technical advisory services and maintenance requests tied to drilling schedules. Lower service revenues in the Asia-Pacific region is primarily due to standby rates that the customers paid as a result of travel restrictions and increase in rig mobilization activities in 2021 as companies resumed their well completion activities.
Leasing revenues increased by approximately $5.0 million resulting mainly from increased leasing revenues in the Western Hemisphere, the Eastern Hemisphere and the Asia-Pacific region of $4.2 million, $0.6 million and $0.2 million, respectively. The majority of the increases in all the regions are related to increased subsea rental tool utilization due to timing of customer drilling activity.
Cost of Sales. Cost of sales increased by $8.1 million, or approximately 13.2%, to $69.7 million for the three months ended June 30, 2022 from $61.5 million for the same period in 2021. Cost of sales as a percentage of revenue decreased to 74.1% from 76.2% for the three months ended June 30, 2022 and 2021, respectively, primarily due to favorable product mix.
Selling, General and Administrative Expenses. For the three months ended June 30, 2022, selling, general and administrative expenses decreased by $7.1 million, or 24.0% to $22.5 million from $29.6 million for the same period in 2021. This decrease was attributable mainly to lower legal expenses in the current period related to costs incurred in the second quarter of 2021 in connection with the FMC Technologies, Inc. lawsuit.
Engineering and Product Development Expenses. For the three months ended June 30, 2022, engineering and product development expenses decreased by approximately $1.0 million, or 26.9%, to $2.7 million from $3.7 million for the same period in 2021. This decrease was attributable mainly to lower spend on research and development activities as we completed certain strategic projects. We are in the process of reprioritizing new research and development initiatives.
Restructuring and Other Charges. For the three months ended June 30, 2022, the Company incurred additional costs of approximately $5.8 million under the 2021 global strategic plan. These charges were primarily related to the write-downs of long-lived assets and other charges of approximately $5.1 million and $0.7 million, respectively. Other charges consisted of consulting and legal fees, office moves, cleanup and preparation costs, and brokerage fees. During the three months ended June 30, 2021, the Company incurred additional costs under the 2018 global strategic plan primarily related to consulting fees of $1.0 million.
Gain on Sale of Property, Plant and Equipment. For the three months ended June 30, 2022, the gain on sale of property, plant and equipment was $0.4 million. For the three months ended June 30, 2021, loss on sale of property, plant and equipment was approximately $0.1 million.
Foreign Currency Transaction (Gains) and Losses. Foreign exchange gain for the three months ended June 30, 2022, was $2.4 million as compared to a gain of $0.5 million for the same period in 2021.
Income Tax Provision. Income tax provision for the three months ended June 30, 2022 was $2.2 million on a loss before taxes of $3.4 million, resulting in an effective tax rate of (64.1)%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to change in projected earnings mix by geography and tax jurisdiction, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries. Income tax provision for the three months ended June 30, 2021 was $4.4 million on a loss before taxes of $14.7 million, resulting in an effective income tax rate of approximately (30.1)%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to changes in pre-tax income or loss in foreign jurisdictions, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries.
Net Loss. Net loss was approximately $5.6 million for the three months ended June 30, 2022 as compared to net loss $19.1 million for the same period in 2021 for the reasons set forth above.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Revenues. Revenues increased by $15.1 million, or approximately 9.3% to $177.1 million for the six months ended June 30, 2022 from $162.0 million for the six months ended June 30, 2021. Within product revenues, subsea equipment increased by $7.3 million, partially offset by decreased downhole tools revenues of $1.1 million. Product revenues in the Eastern Hemisphere and the Western Hemisphere increased by $8.7 million and $5.3 million, respectively, partially offset by decreased product revenues of $7.8 million in the Asia-Pacific region. As crude oil prices have continued to rise, the Company has seen an increase in drilling activity in
24
the offshore market. Further, our revenues were favorably impacted by an increase in global demand and increased activity from customer drilling schedules. In any given time period, the revenues recognized between the various product lines and geographic areas will vary depending upon the timing of shipments to customers, our product mix and completion status of the projects accounted for under the over-time accounting method, market conditions and customer demand.
Service revenues increased by approximately $1.9 million resulting mainly from an increase in the Western Hemisphere and the Eastern Hemisphere of $3.7 million and $1.3 million, respectively, partially offset by a decrease in the Asia-Pacific region of $3.1 million. Increase in service revenues in the Western Hemisphere and the Eastern Hemisphere is mainly due to customer specific increases in technical advisory services and maintenance requests tied to drilling schedules. Lower service revenues in the Asia-Pacific region resulted primarily due to standby rates that the customers paid as a result of travel restrictions and increase in rig mobilization activities in 2021 as companies resumed their well completion activities.
Leasing revenues increased by approximately $7.0 million resulting from increased leasing revenues in the Western Hemisphere, the Eastern Hemisphere and the Asia-Pacific region of $4.9 million, $1.4 million and $0.7 million, respectively. The majority of the increases in all the regions are related to increased subsea rental tool utilization due to timing of customer drilling activity.
Cost of Sales. Cost of sales increased by $15.3 million, or approximately 13.0%, to $133.7 million for the six months ended June 30, 2022 from $118.3 million for the same period in 2021. Cost of sales as a percentage of revenue increased to 75.5% from 73.0% for the six months ended June 30, 2022 and 2021, respectively, primarily due to unfavorable product mix and inflationary pressures resulting in an increase in the cost of raw materials.
Selling, General and Administrative Expenses. For the six months ended June 30, 2022, selling, general and administrative expenses decreased by $14.3 million, or 24.1% to $44.9 million from $59.2 million for the same period in 2021. This decrease was attributable mainly to lower legal expenses in the current period related to costs incurred in the first quarter of 2021 in connection with the FMC Technologies, Inc. lawsuit and administrative costs associated with the importation tax settlement under the Brazilian tax amnesty program.
Engineering and Product Development Expenses. For the six months ended June 30, 2022, engineering and product development expenses decreased by approximately $1.4 million, or 17.6%, to $6.4 million from $7.8 million for the same period in 2021. This decrease was attributable mainly to lower spend on research and development activities as we completed certain strategic projects. We are in the process of reprioritizing new research and development initiatives.
Restructuring and Other Charges. For the six months ended June 30, 2022, the Company incurred additional costs of approximately $5.8 million under the 2021 global strategic plan. These charges were primarily related to the write-downs of long-lived assets and other charges of approximately $5.1 million and $0.7 million, respectively. Other charges consisted of consulting and legal fees, office moves, cleanup and preparation costs, and brokerage fees. During the six months ended June 30, 2021, the Company incurred additional costs under the 2018 global strategic plan to realign manufacturing facilities globally. These charges were primarily related to the restructuring of our downhole tools business where we exited certain underperforming countries and markets and shifted from manufacturing in-house to a vendor sourcing model which resulted in non-cash inventory write downs of $19.3 million, severance charges of $2.7 million and other charges of $4.0 million, consisting of facilities-related market exit costs and consulting fees.
Gain on Sale of Property, Plant and Equipment. For the six months ended June 30, 2022, the gain on sale of property, plant and equipment was approximately $0.5 million. For the six months ended June 30, 2021, gain on sale of assets was approximately $3.9 million, primarily related to the sale of two of our buildings in Singapore.
Foreign Currency Transaction (Gains) and Losses. Foreign exchange gain for the six months ended June 30, 2022, was $3.7 million as compared to a loss of $0.9 million for the same period in 2021.
Income Tax Provision. Income tax provision for the six months ended June 30, 2022 was $5.7 million on a loss before taxes of $8.8 million, resulting in an effective tax rate of (64.2)% Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to change in projected earnings mix by geography and tax jurisdiction, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries. Income tax provision for the six months ended June 30, 2021 was $6.8 million on a loss before taxes of $46.6 million, resulting in an effective income tax rate of approximately (14.6)% Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to changes in pre-tax income or loss in foreign jurisdictions, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries.
Net Loss. Net loss was approximately $14.5 million for the six months ended June 30, 2022 as compared to $53.4 million for the same period in 2021 for the reasons set forth above.
25
Non-GAAP Financial Measures
We have performed a detailed analysis of the non-GAAP measures that are relevant to our business and its operations and determined that the appropriate unit of measure to analyze our performance is Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, as well as other significant non-cash items and other adjustments for certain charges and credits). The Company believes that the exclusion of these charges and credits from these financial measures enables it to evaluate more effectively the Company's operations period over period and to identify operating trends that could otherwise be masked by excluded items. It is our determination that Adjusted EBITDA is a more relevant measure of how the Company reviews its ability to meet commitments and pursue capital projects.
Adjusted EBITDA
We calculate Adjusted EBITDA as one of the indicators to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure. This measurement is used in concert with net income and cash flows from operations, which measures actual cash generated in the period. In addition, we believe that Adjusted EBITDA is a supplemental measurement tool used by analysts and investors to help evaluate overall operating performance, ability to pursue and service possible debt opportunities and analyze possible future capital expenditures. Adjusted EBITDA does not represent funds available for our discretionary use and is not intended to represent or to be used as a substitute for net income, as measured under U.S. generally accepted accounting principles. The items excluded from Adjusted EBITDA, but included in the calculation of reported net income, are significant components of the condensed consolidated statements of income (loss) and must be considered in performing a comprehensive assessment of overall financial performance. Our calculation of Adjusted EBITDA may not be consistent with calculations of Adjusted EBITDA used by other companies.
The following table reconciles our reported net income to Adjusted EBITDA for each of the respective periods:
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
(In thousands) |
|
|
|
|
|
|
|
|||||||
Net loss |
|
$ |
(5,570 |
) |
|
$ |
(19,067 |
) |
|
$ |
(14,508 |
) |
|
$ |
(53,425 |
) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest (income) expense, net |
|
|
(474 |
) |
|
|
(4 |
) |
|
|
(623 |
) |
|
|
386 |
|
Income tax provision |
|
|
2,175 |
|
|
|
4,407 |
|
|
|
5,671 |
|
|
|
6,793 |
|
Depreciation and amortization expense |
|
|
7,670 |
|
|
|
7,343 |
|
|
|
15,229 |
|
|
|
14,759 |
|
Restructuring and other charges (2) |
|
|
5,765 |
|
|
|
7,250 |
|
|
|
5,797 |
|
|
|
30,820 |
|
(Gain) loss on sale of property, plant and equipment |
|
|
(380 |
) |
|
|
82 |
|
|
|
(494 |
) |
|
|
(3,873 |
) |
Foreign currency transaction (gains) and losses |
|
|
(2,419 |
) |
|
|
(475 |
) |
|
|
(3,673 |
) |
|
|
899 |
|
Stock compensation expense |
|
|
2,573 |
|
|
|
3,079 |
|
|
|
5,100 |
|
|
|
6,265 |
|
Brazilian amnesty settlement |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,787 |
|
Adjusted EBITDA (1) |
|
$ |
9,340 |
|
|
$ |
2,615 |
|
|
$ |
12,499 |
|
|
$ |
4,411 |
|
(1) Adjusted EBITDA does not measure financial performance under GAAP and, accordingly, should not be considered as an alternative to net income as an indicator of operating performance.
(2) Restructuring and other charges include legal expenses related to the FMC Technologies, Inc. lawsuit. These legal expenses are included in "Selling, general and administrative" in our condensed consolidated statements of income (loss) for the six months ended June 30, 2021 (in thousands).
26
Liquidity and Capital Resources
Cash Flows
Cash flows provided by (used in) type of activity were as follows:
|
|
Six months ended June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(In thousands) |
|
|||||
Operating activities |
|
$ |
(20,209 |
) |
|
$ |
24,415 |
|
Investing activities |
|
|
(2,847 |
) |
|
|
325 |
|
Financing activities |
|
|
(9,740 |
) |
|
|
(77 |
) |
|
|
|
(32,796 |
) |
|
|
24,663 |
|
Effect of exchange rate changes on cash activities |
|
|
(1,871 |
) |
|
|
(137 |
) |
Increase (decrease) in cash and cash equivalents |
|
$ |
(34,667 |
) |
|
$ |
24,526 |
|
Statements of cash flows for entities with international operations that are local currency functional exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are non-cash changes. As a result, changes reflected in certain accounts on the condensed consolidated statements of cash flows may not reflect the changes in corresponding accounts on the condensed consolidated balance sheets.
The primary liquidity needs of the Company are (i) to fund capital expenditures to improve and expand facilities and manufacture additional running tools and (ii) to fund working capital. The Company’s principal source of funds is cash flows from operations.
We believe our business model, our current cash reserves and the recent downhole tools business restructuring and facility realignment will strengthen our balance sheet and leave us well-positioned to manage our business. We continue to review potential scenarios in connection with the potential impact of any new COVID-19 variant outbreaks on the global economy and the oil and gas industry. Based on our analysis, we believe our existing balances of cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.
Net cash used in operating activities for the six months ended June 30, 2022 was $20.2 million as compared to net cash provided by operating activities of $24.4 million for the six months ended June 30, 2021. The $44.6 million net change is primarily due to decreased cash flow resulting from changes in operating assets and liabilities of $70.5 million and $13.0 million of non-cash movements which includes decreases in items such as restructuring and other charges and stock-based compensation. This was partially offset by a decrease in net loss of $38.9 million.
The change in operating assets and liabilities for the six months ended June 30, 2022 resulted in a $70.5 million decrease in cash as compared to the change in operating assets and liabilities for the six months ended June 30, 2021. The $25.8 million decrease in cash due to changes in prepaids and other assets was primarily due to an increase in advances to vendors related to projects accounted for on an over-time basis and receipt of tax receivables in 2021. The decrease due to changes in accounts payable and accrued expenses of $25.7 million was mainly related to the payout of our short-term incentive bonuses, payment of our agent fees in the Middle East and the payment of certain property taxes. The $23.3 million decrease in cash due to changes in unbilled receivables was mainly due to the timing of completion of some of our major projects that are accounted for on an over-time basis. Increase in trade receivables by $13.1 million was primarily due to increase in billing activity related to our ongoing projects. These decreases in cash were partially offset by a decrease in inventory of $17.4 million mainly related to our continued focus on inventory management and consumption during the year.
The change in investing cash flows for the six months ended June 30, 2022 resulted in a $2.8 million decrease in cash primarily due to a $3.4 million capital expenditure spend by the Company, partially offset by the proceeds from the sale of property, plant and equipment totaling $0.6 million. Capital expenditures by the Company were $3.4 million and $5.6 million for the six months ended June 30, 2022 and 2021, respectively. Capital expenditures for the six months ended June 30, 2022 were $1.8 million for rental tools to support our developed products, $1.2 million for machinery and equipment related to our global strategic program which includes consolidation of our manufacturing facilities from the Eastern Hemisphere to the Western Hemisphere and $0.4 million for other capital expenditures. Capital expenditures for the six months ended June 30, 2021 were $2.1 million for rental tools to support our developed products, $2.6 million for machinery and equipment related to our global strategic program which includes consolidation of our manufacturing facilities from the Eastern Hemisphere to the Western Hemisphere and $0.9 million for other capital expenditures. We constantly review capital expenditure needs to ensure these are justified expenditures.
27
Asset Backed Loan (ABL) Credit Facility
The Company's ABL Credit Facility, dated February 23, 2018, as amended, was terminated effective February 22, 2022. In addition, we opened a new cash collateral account with JPMorgan Chase Bank, N.A., in which cash was transferred to facilitate our existing letters of credit. We had transferred approximately $7.1 million of letters of credit prior to the termination of our ABL Credit Facility to JPMorgan Chase, N.A. Since then we have issued an additional $1.8 million of letters of credit to JP Morgan Chase, N.A. The Company is required to maintain a balance equal to the outstanding letters of credit plus 5% at all times which is considered as restricted cash and is included in "Cash and cash equivalents" in our condensed consolidated balance sheets as at June 30, 2022 and December 31, 2021. Withdrawals from this cash collateral account are only allowed at such point a given letter of credit has expired or has been cancelled.
Repurchase of Equity Securities
On February 22, 2022, the Board of Directors authorized an incremental $100.0 million share repurchase plan. The repurchase plans have no set expiration date and any repurchased shares are expected to be cancelled. The manner, timing and amount of any purchase will be determined by management based on an evaluation of market conditions, stock price, liquidity and other factors. The program does not obligate the Company to acquire any amount of common stock and may be modified or superseded at any time at the Company’s discretion.
For the three months ended June 30, 2022, the Company purchased 157,101 shares under the share repurchase plans at an average price of approximately $24.49 per share totaling approximately $3.8 million and has retired such shares. For the six months ended June 30, 2022, the Company purchased 430,730 shares under the share repurchase plans at an average price of approximately $22.40 per share totaling approximately $9.6 million and has retired such shares.
For the three and six months ended June 30, 2021, the Company purchased no shares under the share repurchase plans.
The Company currently has no derivative instruments and no off-balance sheet hedging or financing arrangements, contracts or operations.
Other Matters
From time to time, the Company enters into discussions or negotiations to acquire other businesses or enter into joint ventures. The timing, size or success of any such efforts and the associated potential capital commitments are unpredictable and dependent on market conditions and opportunities existing at the time. The Company may seek to fund all or part of any such efforts with proceeds from debt or equity issuances. Debt or equity financing may not, however, be available at that time due to a variety of circumstances, including, among others, the Company’s credit ratings, industry conditions, general economic conditions and market conditions.
Critical Accounting Judgments
During the six months ended June 30, 2022, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies. Refer to our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our critical accounting policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is currently exposed to certain market risks related to interest rate changes on its short-term investments and fluctuations in foreign exchange rates. The Company does not engage in any material hedging transactions, forward contracts or currency trading which could mitigate the market risks inherent in such transactions. There have been no material changes in market risks for the Company since December 31, 2021.
Foreign Exchange Rate Risk
The Company has operations in various countries around the world and conducts business in a number of different currencies. Our significant foreign subsidiaries may also have monetary assets and liabilities not denominated in their functional currency. These monetary assets and liabilities are exposed to changes in currency exchange rates which may result in non-cash gains and losses primarily due to fluctuations between the U.S. dollar and each subsidiary's functional currency.
The Company experienced a foreign currency pre-tax gain of approximately $2.4 million and a pre-tax gain $3.7 million, during the three and six months ended June 30, 2022, respectively. The Company experienced a foreign currency pre-tax gain of approximately $0.5 million and a pre-tax loss of approximately $0.9 million during the three and six months ended June 30, 2021, respectively.
28
The Company does not engage in any material hedging transactions, forward contracts or currency trading which could mitigate the effects and risks inherent in such transactions. Additionally, there is no assurance that the Company will be able to protect itself against currency fluctuations in the future.
Item 4. Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022 to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
29
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
For a description of the Company’s legal proceedings, see “Contingencies,” Note 12 to the Notes to Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 and updated in our Quarterly Report on Form 10-Q for the period ending March 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the repurchase and cancellation of our common stock during the six months ended months ended June 30, 2022.
|
|
Six months ended |
|
|||||||||||||
|
|
June 30, 2022 |
|
|||||||||||||
|
|
Total |
|
|
Average |
|
|
Total Number |
|
|
Maximum |
|
||||
January 1 - 31, 2022 |
|
|
273,629 |
|
|
$ |
21.20 |
|
|
|
273,629 |
|
|
$ |
18.5 |
|
February 1 - 28, 2022 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
118.5 |
|
March 1 - 31, 2022 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
118.5 |
|
April 1 - 30, 2022 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
118.5 |
|
May 1 - 31, 2022 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
118.5 |
|
June 1 - 30, 2022 |
|
|
157,101 |
|
|
|
24.49 |
|
|
|
157,101 |
|
|
|
114.6 |
|
|
|
|
430,730 |
|
|
$ |
22.40 |
|
|
|
430,730 |
|
|
$ |
114.6 |
|
30
Item 6.
(a) Exhibits
The following Exhibits are filed herewith:
|
||
|
|
|
Exhibit No. |
|
Description |
*3.1 |
— |
|
|
|
|
*3.2 |
— |
|
|
|
|
*4.1 |
— |
|
|
|
|
31.1 |
— |
|
|
|
|
31.2 |
— |
|
|
|
|
32.1 |
— |
|
|
|
|
32.2 |
— |
|
|
|
|
101.INS |
— |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
101.SCH |
— |
Inline XBRL Taxonomy Extension Schema Document. |
|
|
|
101.CAL |
— |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
101.DEF |
— |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
|
101.LAB |
— |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
|
|
101.PRE |
— |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
104 |
— |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Incorporated herein by reference as indicated.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
DRIL-QUIP, INC. |
||
|
|
|
|
Date: July 28, 2022 |
BY: |
|
/s/ Kyle F. McClure |
|
|
|
Kyle F. McClure, |
|
|
|
Vice President – Chief Financial Officer |
|
|
|
(Principal Financial Officer and |
|
|
|
Duly Authorized Signatory) |
32