Innovex International, Inc. 10-Q

Item 1. Financial Statements DRIL-QUIP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, 2021 December 31, 2020 (In thousands, except per share data) ASSETS Current assets: Cash and cash equivalents $ 362,213 $ 345,955 Trade receivables, net 103,803 116,202 Unbilled receivables 139,516 140,318 Inventories, net 194,911 212,536 Prepaids and other current assets 44,278 48,182 Total current assets 844,721 863,193 Operating lease right of use assets 5,646 6,962 Property, plant and equipment, net 231,385 234,823 Deferred income taxes 6,109 5,768 Intangible assets 28,743 29,434 Other assets 10,227 10,992 Total assets $ 1,126,831 $ 1,151,172 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 38,495 $ 37,424 Accrued income taxes 5,207 4,343 Contract liabilities 13,858 11,339 Accrued compensation 7,012 5,015 Operating lease liabilities 788 1,110 Other accrued liabilities 29,947 26,281 Total current liabilities 95,307 85,512 Deferred income taxes 6,934 6,779 Income tax payable 9,423 9,383 Operating lease liabilities, long-term 4,916 5,845 Other long-term liabilities 1,985 2,125 Total liabilities 118,565 109,644 Contingencies (Note 12) Stockholders' equity: Preferred stock: 10,000,000 shares authorized at $ 0.01 par value ( no ne issued) - - Common stock: 100,000,000 shares authorized at $ 0.01 par value, 35,428,778 and 35,417,712 shares issued and outstanding at March 31, 2021 and December 31, 2020 363 363 Additional paid-in capital 68,799 65,613 Retained earnings 1,090,905 1,125,263 Accumulated other comprehensive losses ( 151,801 ) ( 149,711 ) Total stockholders' equity 1,008,266 1,041,528 Total liabilities and stockholders' equity $ 1,126,831 $ 1,151,172 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents DRIL-QUIP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) Three months ended March 31, 2021 2020 (In thousands, except per share data) Revenues: Products $ 55,583 $ 67,558 Services 17,667 18,814 Leasing 7,989 9,626 Total revenues 81,239 95,998 Cost and expenses: Cost of sales: Products 41,204 53,645 Services 9,350 9,688 Leasing 6,233 8,081 Total cost of sales 56,787 71,414 Selling, general and administrative 29,558 24,658 Engineering and product development 4,037 5,525 Impairments - 7,719 Restructuring and other charges 25,020 32,713 Gain on sale of assets ( 3,955 ) ( 467 ) Foreign currency transaction (gains) and losses 1,374 ( 3,242 ) Total costs and expenses 112,821 138,320 Operating loss ( 31,582 ) ( 42,322 ) Interest income 49 1,206 Interest expense ( 439 ) ( 191 ) Loss before income taxes ( 31,972 ) ( 41,307 ) Income tax provision (benefit) 2,386 ( 21,609 ) Net loss $ ( 34,358 ) $ ( 19,698 ) Loss per common share: Basic $ ( 0.97 ) $ ( 0.55 ) Diluted $ ( 0.97 ) $ ( 0.55 ) Weighted average common shares outstanding: Basic 35,385 35,695 Diluted 35,385 35,695 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents DRIL-QUIP, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three months ended March 31, 2021 2020 (In thousands) Net loss $ ( 34,358 ) $ ( 19,698 ) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ( 2,090 ) ( 24,979 ) Total comprehensive loss $ ( 36,448 ) $ ( 44,677 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents DRIL-QUIP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended March 31, 2021 2020 (In thousands) Operating activities Net loss $ ( 34,358 ) $ ( 19,698 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 7,416 8,873 Stock-based compensation expense 3,186 3,176 Impairments - 7,719 Restructuring and other charges 25,020 32,713 Gain on sale of assets ( 3,955 ) ( 467 ) Deferred income taxes ( 433 ) ( 10,862 ) Changes in operating assets and liabilities: Trade receivables, net 11,024 ( 19,444 ) Unbilled receivables 802 11,224 Inventories, net ( 5,794 ) ( 15,537 ) Prepaids and other assets 4,962 ( 11,723 ) Accounts payable and accrued expenses 5,202 ( 7,211 ) Net cash provided by (used in) operating activities 13,072 ( 21,237 ) Investing activities Purchase of property, plant and equipment ( 2,513 ) ( 4,187 ) Proceeds from sale of equipment 5,944 687 Net cash provided by (used in) investing activities 3,431 ( 3,500 ) Financing activities Repurchase of common shares - ( 25,000 ) Other ( 40 ) ( 85 ) Net cash used in financing activities ( 40 ) ( 25,085 ) Effect of exchange rate changes on cash activities ( 205 ) ( 5,652 ) Increase (decrease) in cash and cash equivalents 16,258 ( 55,474 ) Cash and cash equivalents at beginning of period 345,955 398,946 Cash and cash equivalents at end of period $ 362,213 $ 343,472 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents DRIL-QUIP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Losses Total (In thousands, except shares) Balance at January 1, 2021 $ 363 $ 65,613 $ 1,125,263 $ ( 149,711 ) $ 1,041,528 Foreign currency translation adjustment - - - ( 2,090 ) ( 2,090 ) Net loss - - ( 34,358 ) - ( 34,358 ) Comprehensive loss ( 36,448 ) Stock option expense - 3,186 - - 3,186 Balance at March 31, 2021 $ 363 $ 68,799 $ 1,090,905 $ ( 151,801 ) $ 1,008,266 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Losses Total (In thousands, except shares) Balance at January 1, 2020 $ 371 $ 52,870 $ 1,181,023 $ ( 143,563 ) $ 1,090,701 Foreign currency translation adjustment - - - ( 24,979 ) ( 24,979 ) Net loss - - ( 19,698 ) - ( 19,698 ) Comprehensive loss ( 44,677 ) Repurchase of common stock ( 808,389 shares) ( 8 ) - ( 25,000 ) - ( 25,008 ) Stock option expense - 3,176 - - 3,176 Other - ( 1 ) 10 - 9 Balance at March 31, 2020 $ 363 $ 56,045 $ 1,136,335 $ ( 168,542 ) $ 1,024,201 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents 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 three geographic segments — Western Hemisphere (including North and South America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe and Africa; headquartered in Aberdeen, Scotland) and Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East; headquartered in Singapore). Each of these segments sells similar products and services, and the Company has manufacturing facilities in all three of its regional headquarter locations, as well as in Macae, Brazil. The Company’s major subsidiaries are Dril-Quip (Europe) Limited, located in Aberdeen with branches in Azerbaijan, Denmark, Norway and Holland; Dril-Quip Asia-Pacific PTE Ltd., located in Singapore; and Dril-Quip do Brasil LTDA, located in Macae, Brazil. Other operating subsidiaries include TIW Corporation (TIW) and Honing, Inc., both located in Houston, Texas; DQ Holdings Pty. Ltd., located in Perth, Australia; Dril-Quip Cross (Ghana) Ltd., located in Takoradi, Ghana; PT DQ Oilfield Services Indonesia, located in Jakarta, Indonesia; Dril-Quip Egypt for Petroleum Services S.A.E., located in Alexandria, Egypt; Dril-Quip TIW Saudi Arabia Limited, located in Dammam, Kingdom of Saudi Arabia; Dril-Quip Oilfield Services (Tianjin) Co. Ltd., located in Tianjin, China, with branches in Shenzhen and Beijing, China; Dril-Quip Qatar LLC, located in Doha, Qatar; Dril-Quip TIW Mexico S. de R.L.C.V., located in Villahermosa, Mexico; Dril-Quip Venezuela S.C.A., located in Anaco, Venezuela and with a registered branch located in Ecuador; TIW (UK) Limited, located in Aberdeen, Scotland; and TIW International LLC, with a registered branch located in Singapore. The condensed consolidated financial statements included herein are unaudited. The balance sheet at December 31, 2020 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 March 31, 2021 and the results of operations and comprehensive income (loss) for the three months ended March 31, 2021 and 2020 and cash flows for the three months ended March 31, 2021 and 2020. 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 months ended March 31, 2021 and cash flows for the three months ended March 31, 2021 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, 2020. In February 2021, a severe winter storm resulted in widespread power outages across Texas. This unprecedented event caused our Houston manufacturing facilities to be shut down for a week resulting in additional costs. In addition to these weather-related impacts, we are continuing to experience effects resulting from the COVID-19 pandemic, although to a lesser degree as compared to 2020. The introduction of the COVID-19 vaccine during the first quarter of 2021 and the recent availability of the vaccine to the general population has resulted in the rate of new infections trend downwards. Although the downward trend is encouraging, the effect of the pandemic and the actions and changes in consumer behavior resulting from the pandemic continue to impact our business and have significantly reduced global economic activity and caused global demand for oil and gas to decrease at an unprecedented rate. This demand reduction was further exacerbated by disputes over oil production between the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC nations. We continue to experience demand deterioration in 2021 as the market continues to be volatile and challenging. The extent of the impact of the pandemic, including economic impacts that may persist following the widespread deployment of vaccines, and the decline in oil prices on our operational and financial performance will depend on future developments, which are uncertain and cannot be predicted. An extended period of economic disruption could have a material adverse impact on our business, results of operations, access to sources of liquidity and overall financial condition. 8 Table of Contents 2. Significant Accounting Policies Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition, impairment of our goodwill and asset recoverability tests and inventories. 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 and rental of its forging facility. Revenues from rental of running tools are recognized within leasing revenues on a day rate basis over the lease term, which is generally between one to three months. Rental revenue from the forging facility is recognized on a straight-line basis over the expected life of the lease. Leasing revenues from rental of running tools for the three months ended March 31, 2021 were $ 7.5 million and leasing revenues from rental of facilities were $ 0.5 million for the same period. 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 first quarter of 2021, the Company incurred additional costs under our existing 2018 global strategic plan to realign manufacturing facilities globally. These charges were primarily related to the restructuring of our downhole tools business where we are exiting certain underperforming countries and markets and shifting 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 $ 3.0 million, consisting of facilities-related restructuring charges and professional fees. We incurred restructuring and other charges of $ 32.7 million related to non-cash inventory write-downs, long-lived asset write-downs, severance and other charges of approximately $ 17.3 million, $ 6.9 million, $ 8.4 million and $ 0.1 million, respectively, for the three months ended March 31, 2020. These charges are reflected as "Restructuring and other charges" in our condensed consolidated statements of income (loss). 9 Table of Contents Repurchase of Equity Securities On February 26, 2019, the Board of Directors authorized a share repurchase plan under which the Company can repurchase up to $ 100 million of its common stock. The repurchase plan has no set expiration date, and any repurchased shares are expected to be cancelled. For the three months ended March 31, 2021, the Company purchased no shares under the share repurchase plan. For the three months ended March 31, 2020 , the Company purchased 808,389 shares under the share repurchase plan at an average price of approximately $ 30.91 per share totaling approximately $ 25.0 million and has retired such shares . 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. The following table reconciles the weighted average basic number of common shares outstanding and the weighted average diluted number of common shares outstanding for the purpose of calculating basic and diluted earnings per share: Three months ended March 31, 2021 2020 (In thousands) Weighted average common shares outstanding – basic 35,385 35,695 Dilutive effect of common stock awards - - Weighted average common shares outstanding – diluted 35,385 35,695 For the three months ended March 31, 2021 and 2020, 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): Three months ended March 31, 2021 2020 (In thousands) Director stock awards 56 40 Stock options 58 132 Performance share units 331 277 Restricted stock awards 480 336 Reclassifications We reclassified approximately $ 3.2 million of foreign currency transaction gains for the three months ended March 31, 2020, from selling, general and administrative to foreign currency transaction (gains) and losses. These reclassifications did not have an impact on our condensed consolidated statements of income (loss), condensed consolidated balance sheets, condensed consolidated statements of comprehensive income (loss), condensed consolidated statements of stockholders’ equity and condensed consolidated statements of cash flows . 3. New Accounting Standards In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740).” Topic 740 is effective for fiscal years and interim periods beginning after December 15, 2020. This update simplifies the accounting for income taxes by removing certain exceptions such as the exception to the incremental approach for intraperiod tax allocation, the exception to the requirement to recognize a deferred tax liability for equity method investments, the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary and the exception to the general methodology for calculating income taxes in an interim period. The adoption of ASU 2019-12 did not have a material impact on our financial position, results of operations or cash flows. 10 Table of Contents 4. Revenue Recognition Revenues from contracts with customers (excludes leasing) consisted of the following: Three months ended March 31, Western Hemisphere Eastern Hemisphere Asia- Pacific Total 2021 2020 2021 2020 2021 2020 2021 2020 (In thousands) Product Revenues $ 37,916 $ 41,472 $ 6,722 $ 18,179 $ 10,945 $ 7,907 $ 55,583 $ 67,558 Service Revenues 10,504 10,956 2,719 4,338 4,444 3,520 17,667 18,814 Total $ 48,420 $ 52,428 $ 9,441 $ 22,517 $ 15,389 $ 11,427 $ 73,250 $ 86,372 Contract Balances Balances related to contracts with customers consisted of the following: Contract Assets (amounts shown in thousands) Contract Assets at December 31, 2020 $ 135,973 Additions 25,307 Transfers to Trade Receivables, Net ( 26,121 ) Contract Assets at March 31, 2021 $ 135,159 Contract Liabilities (amounts shown in thousands) Contract Liabilities at December 31, 2020 $ 10,815 Additions 6,546 Revenue Recognized ( 3,650 ) Contract Liabilities at March 31, 2021 $ 13,711 Contract assets include unbilled accounts receivable associated with contracts accounted for under the over time accounting method which were approximately $ 92.5 million and $ 98.2 million at March 31, 2021 and December 31, 2020, respectively. Unbilled contract assets are transferred to trade receivables, net, when the rights become unconditional. The contract liabilities primarily relate to advance payments from customers. Obligations for returns and refunds were considered immaterial as of March 31, 2021. Remaining Performance Obligations The aggregate amount of the transaction price allocated to remaining performance obligations from our over time product lines was $ 69.4 million as of March 31, 2021. The Company expects to recognize revenue on approximately 49.5 % of the remaining performance obligations over the next 12 months and the remaining 50.5 % thereafter. 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. 5. Stock-Based Compensation and Stock Awards During the three months ended March 31, 2021, the Company recognized approximately $ 3.2 million of stock-based compensation expense. Stock-based compensation is included in "Selling, general and administrative" in our accompanying condensed consolidated statements of income (loss) and "Additional paid-in capital" in our accompanying condensed consolidated balance sheets. During the three months ended March 31, 2020, the Company recognized approximately $ 3.2 million of stock-based compensation expense. 11 Table of Contents 6. Inventories, net Inventories consist of the following: March 31, December 31, 2021 2020 (In thousands) Raw materials and supplies $ 30,991 $ 32,833 Work in progress $ 42,593 44,924 Finished goods $ 221,588 216,928 295,172 294,685 Less: allowance for slow moving and excess inventory ( 100,261 ) ( 82,149 ) Total inventory $ 194,911 $ 212,536 7. Impairment, Restructuring and Other Charges Restructuring and Other Charges During the first quarter of 2021, the Company incurred additional costs under our existing 2018 global strategic plan to realign manufacturing facilities globally. These charges were primarily related to the restructuring of our downhole tools business where we are exiting certain underperforming countries and markets and shifting 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 $ 3.0 million, consisting of facilities-related restructuring charges and professional fees. We incurred restructuring and other charges associated with the global strategic plan of $ 32.7 million during the three months ended March 31, 2020. Of these charges, inventory write-downs, severance charges, long-lived assets write-downs and other charges were $ 17.3 million, $ 8.4 million, $ 6.9 million and $ 0.1 million respectively, during the three months ended March 31, 2020. These charges are reflected as "Restructuring and other charges" in our condensed consolidated statements of income (loss). 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 months ended March 31, 2021 and 2020 (in thousands): Three months ended March 31, 2021 2020 Inventory write-down $ 19,251 $ 17,272 Severance 2,746 8,399 Long-lived asset write-down - 6,912 Other 3,023 130 $ 25,020 $ 32,713 The following table summarizes the changes to our accrued liability balance related to restructuring and other charges as of March 31, 2021 (in thousands): Total Beginning balance at January 1, 2021 $ 1,146 Additions for costs expensed 5,769 Reductions for payments ( 768 ) Other ( 5 ) Ending balance at March 31, 2021 $ 6,142 Goodwill Impairment 12 Table of Contents For the three months ended March 31, 2020, as a result of our updated assessment of market conditions and restructuring efforts, impairment losses consisted of a full impairment of our Goodwill balance of $ 7.7 million, all of which was in the Eastern Hemisphere reporting unit. These charges are reflected as "Impairments" in our condensed consolidated statements of income (loss). 8. Intangible Assets Intangible assets, the majority of which were acquired in the acquisition of TIW and OPT, consist of the following: March 31, 2021 Estimated Useful Lives Gross Book Value Accumulated Amortization Foreign Currency Translation Net Book Value (In thousands) Trademarks 15 years $ 8,262 $ ( 1,162 ) $ ( 16 ) $ 7,084 Patents 15 - 30 years 6,059 ( 2,871 ) ( 2 ) 3,186 Customer relationships 5 - 15 years 26,082 ( 7,784 ) 4 18,302 Non-compete agreements 3 years 171 ( 171 ) - - Organizational costs 3 years 185 ( 15 ) 1 171 $ 40,759 $ ( 12,003 ) $ ( 13 ) $ 28,743 December 31, 2020 Estimated Useful Lives Gross Book Value Accumulated Amortization Foreign Currency Translation Net Book Value (In thousands) Trademarks 15 years $ 8,238 $ ( 1,033 ) $ ( 5 ) $ 7,200 Patents 15 - 30 years 6,054 ( 2,715 ) ( 2 ) 3,337 Customer relationships 5 - 15 years 25,966 ( 7,304 ) 65 18,727 Non-compete agreements 3 years 171 ( 171 ) - - Organizational costs 3 years 179 ( 15 ) 6 170 $ 40,608 $ ( 11,238 ) $ 64 $ 29,434 9. Asset Backed Loan (ABL) Credit Facility On February 23, 2018, the Company, as borrower, and the Company’s subsidiaries TIW and Honing, Inc., as guarantors, entered into a five-year senior secured revolving credit facility (the “ABL Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and other financial institutions, as lenders with total commitments of $ 100.0 million, including up to $ 10.0 million available for letters of credit. The maximum amount that the Company may borrow under the ABL Credit Facility is subject to the borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments. All obligations under the ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by the Company, TIW, Honing, Inc., and future significant domestic subsidiaries, subject to customary exceptions. Borrowings under the ABL Credit Facility are secured by liens on substantially all of the Company’s personal property, and bear interest at the Company’s option at either (i) the CB Floating Rate (as defined therein), calculated as the rate of interest publicly announced by JPMorgan Chase Bank, N.A., as its “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, with such CB Floating Rate not being less than Adjusted One Month LIBOR (as defined therein) or (ii) the Adjusted LIBOR (as defined therein), plus, in each case, an applicable margin. The applicable margin ranges from 1.00 % to 1.50 % per annum for CBFR loans and 2.00 % to 2.50 % per annum for Eurodollar loans and, in each case, is based on the Company’s leverage ratio. The unused portion of the ABL Credit Facility is subject to a commitment fee that varies from 0.250 % to 0.375 % per annum, according to the average unused commitments under the ABL Credit Facility. Interest on Eurodollar loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on CB Floating Rate loans is payable monthly in arrears. 13 Table of Contents The ABL Credit Facility contains various covenants and restrictive provisions that limit the Company’s ability to, among other things, (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions; and (5) engage in transactions with affiliates. The ABL Credit Facility also requires the Company to maintain a fixed charge coverage ratio of 1.1 to 1.0, based on the ratio of EBITDA (as defined therein) to Fixed Charges (as defined therein) during certain periods, including when availability under the ABL Credit Facility is under certain levels. If the Company fails to perform its obligations under the agreement that results in an event of default, the commitments under the ABL Credit Facility could be terminated and any outstanding borrowings under the ABL Credit Facility may be declared immediately due and payable. The ABL Credit Facility also contains cross default provisions that apply to the Company’s other indebtedness. The Company is in compliance with the related covenants as of March 31, 2021. As of March 31, 2021, the availability under the ABL Credit Facility was $ 35.4 million, after taking into account the outstanding letters of credit of approximately $ 1.0 million issued under the facility. 10. Geographic Areas The Company’s operations are organized into three geographic segments - Western Hemisphere (including North and South America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe and Africa; headquartered in Aberdeen, Scotland) and Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East; headquartered in Singapore). Each of these segments sells similar products and services and the Company has manufacturing facilities in all three of its regional headquarter locations as well as in Macae, Brazil. Eliminations of operating profits are related to intercompany inventory transfers that are deferred until shipment is made to third party customers. Three months ended March 31, Western Hemisphere Eastern Hemisphere Asia-Pacific DQ Corporate Total 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 (In thousands) Revenues Products Point in Time $ 28,286 $ 22,964 $ 4,853 $ 8,962 $ 8,576 $ 5,447 $ - $ - $ 41,715 $ 37,373 Over Time 9,629 18,508 1,869 9,217 2,369 2,460 - - 13,867 30,185 Total Products 37,915 41,472 6,722 18,179 10,945 7,907 - - 55,582 67,558 Services Technical Advisory 8,321 7,396 1,893 3,496 4,187 3,289 - - 14,401 14,181 Reconditioning 2,183 3,560 826 842 257 231 - - 3,266 4,633 Total Services (excluding rental tools) 10,504 10,956 2,719 4,338 4,444 3,520 - - 17,667 18,814 Leasing 4,438 4,761 1,128 2,748 2,424 2,117 - - 7,990 9,626 Total Services (including rental tools) 14,942 15,717 3,847 7,086 6,868 5,637 - - 25,657 28,440 Intercompany 2,224 3,314 141 331 2,074 2,256 - 4,439 5,901 Eliminations - - - - - - ( 4,439 ) ( 5,901 ) ( 4,439 ) ( 5,901 ) Total Revenues $ 55,081 $ 60,503 $ 10,710 $ 25,596 $ 19,887 $ 15,800 $ ( 4,439 ) $ ( 5,901 ) $ 81,239 $ 95,998 Depreciation and amortization $ 4,304 $ 5,622 $ 990 $ 974 $ 1,203 $ 1,340 $ 919 $ 937 $ 7,416 $ 8,873 Income (loss) before income taxes $ ( 19,379 ) $ 8,153 $ ( 2,863 ) $ ( 28,321 ) $ 10,738 $ 1,569 $ ( 20,468 ) $ ( 22,708 ) $ ( 31,972 ) $ ( 41,307 ) 14 Table of Contents March 31, 2021 December 31, 2020 (In thousands) Total long-lived assets: Western Hemisphere $ 348,212 $ 350,577 Eastern Hemisphere 222,763 222,741 Asia-Pacific 65,073 68,600 Eliminations ( 353,938 ) ( 353,939 ) Total $ 282,110 $ 287,979 Total assets: Western Hemisphere $ 770,279 $ 769,649 Eastern Hemisphere 800,621 779,147 Asia-Pacific 200,152 186,808 Eliminations ( 644,221 ) ( 584,432 ) Total $ 1,126,831 $ 1,151,172 During the first quarter of 2021 , there were approximately $ 19.1 million of non-cash inventory write downs in the Western Hemisphere and $ 0.2 million in the Eastern Hemisphere as we proceeded to shift from the manufacturing of our downhole tools products business to a vendor outsourcing model . During 2020, we wrote down $ 25.5 million related to inventory and long-lived assets balances, with $ 22.3 million recorded in the Eastern Hemisphere and $ 3.2 million in the Western Hemisphere. We also recorded a full impairment of our goodwill balance of $ 7.7 million during the first quarter of 2020, all of which was in the Eastern Hemisphere. 11. Income Tax The effective tax rate for the three months ended March 31, 2021 was ( 7.5 )%, compared to 52.3 % for the same period in 2020. The change in the effective tax rate between the periods resulted primarily from discretely recognized tax benefits of Net Operating Losses (“NOLs”) in 2020 due to the Coronavirus, Aid, Relief and Economic Security Act (“CARES Act”), changes in income or loss earned in foreign jurisdictions, changes in valuation allowances in the United States, changes in nondeductible compensation and the mix of earnings in jurisdictions with differing tax rates. 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 $ 3.6 million as of March 31, 2021, and is primarily related to estimated foreign withholding tax associated with repatriating all non-U.S. earnings back to the United States. 12. Contingencies Brazilian Tax Issue From 2002 to 2007, the Company’s Brazilian subsidiary imported goods through, and paid taxes on such imports to, the State of Espirito Santo in Brazil. Upon the final sale of these goods, the Company’s Brazilian subsidiary collected taxes from customers and remitted them to the State of Rio de Janeiro net of the taxes paid on importation of those goods to the State of Espirito Santo in accordance with the Company’s understanding of Brazilian tax laws. In December 2010 and January 2011, the Company’s Brazilian subsidiary was served with two assessments totaling approximately $ 13.0 million from the State of Rio de Janeiro to cancel the credits associated with the tax payments to the State of Espirito Santo on the importation of goods from July 2005 to October 2007. The Company objected to these assessments on the grounds that they would represent double taxation on the importation of the same goods and that the Company is entitled to the credits under applicable Brazilian law. The Company’s Brazilian subsidiary filed appeals with a State of Rio de Janeiro judicial court to annul both of these tax assessments and deposited with the court approximately $ 8.8 million (approximately $ 5.9 million at current exchange rates) in December 2014 and December 2016 as the full amount of the assessments with penalties and interest. The first level judicial court has ruled against the Company in each of these cases and the Company has appealed both of those rulings. The Company believes that these credits are valid and that success in the judicial court process is probable despite the unfavorable rulings at the lower court level. Based upon this analysis, the Company has not accrued any liability in conjunction with this matter. 15 Table of Contents The relevant governmental agencies of the State of Rio de Janeiro recently authorized an amnesty program with interest discounts and reduced fines that allows the Company’s Brazilian subsidiary to settle and pay off both of these tax assessments for approximately $ 2.1 million . T he Company’s Brazilian subsidiary has elected to participate in this amnesty program and as such recorded the settlement amount as of March 31, 2021. After settling and paying off the tax assessment with the relevant governmental agencies , the security amounts deposited with the court totaling approximately $ 6 million at current exchange rates will be returned to our Brazilian subsidiary in due course . 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 alleges that its former employee communicated FMC trade secrets to the Company and that the Company used those trade secrets in its VXTe subsea tree systems. The Company denies these allegations and intends to vigorously defend against this lawsuit. The trial began on April 6, 2021 and the jury started deliberations on April 27, 2021 but has not reached a verdict yet. 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 in the past, there can be no assurance that ongoing and future developments will not adversely impact the Company. 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 Table of Contents