What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 150 added, 99 removed, 253 unchanged (50% of the section changed)

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future operations, financial results, business plans and cash needs;

the overall timing and level of transition of the global energy sector from fossil-based systems of energy production and consumption to more renewable energy sources.

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.

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The information on Dril-Quip’s website is not part of this Form 10-Q.

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.

Results of Operations” and the financial statements included in the Company’s Annual Report on Form 10-K for t he year ended December 31, 2020 .

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 t he year ended December 31, 2020 .

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.

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Business Environment

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.

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 COVID-19 pandemic continues to have an impact globally.

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.

Increased availability of the COVID-19 vaccine to the general population during the second quarter of 2021 has resulted in the rate of new infections, hospitalizations and deaths trending downwards, especially in the United States.

Although the downward trend is encouraging, emergence and spread of the COVID-19 Delta variant adds uncertainty to the economic recovery.

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 global demand for oil and gas.

This demand reduction was further exacerbated by disputes over oil production between the OPEC and non-OPEC nations.

We continue to experience demand deterioration in 2021 as the market continues to be volatile and challenging.

As a result of these disruptions and the related downturn in customer activity, overall production output decreased in the current quarter by approximately 14% as compared to the first quarter of 2020.

We actively review our global production plans with our supply chain and manufacturing groups and adopt contingency plans where possible to minimize the impact of these COVID-19 related disruptions.

We continue to experience delayed recovery in 2021 as the market continues to be volatile and challenging.

We actively review our global production plans with our supply chain and manufacturing groups and adopt contingency plans where possible to minimize the impact of these COVID-19 related disruptions, however the emergence and spread of the COVID-19 Delta variant adds uncertainty to future economic recovery.

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.

The proactive safety measures we had previously implemented in response to the COVID-19 pandemic to protect the health and safety of our employees, customers and suppliers globally will continue to remain in place until we have determined that the COVID-19 pandemic has been adequately contained.

We enacted rigorous safety measures in all of our sites, including implementing social distancing protocols, requiring remote work arrangements where possible, staggering shifts, suspending travel, extensively and frequently disinfecting our workspaces and providing masks to those employees who must be physically present at work.

Additionally, as Covid-19 vaccines have become available, the Company organized the administration of the vaccines on site to our employees and their families in the US.

As a larger proportion of the population gets vaccinated from increased availability of the COVID-19 vaccines, some jurisdictions in which the Company operates have eased safety protocols such as face mask and social distancing requirements.

The Company will continue to implement safety measures as recommended by government health agencies until we have determined that the COVID-19 pandemic has been adequately contained.

We continue to enact safety measures, including implementing social distancing protocols, requiring remote work arrangements where possible, staggering shifts, suspending travel, and extensively and frequently disinfecting our workspaces.

Additionally, as COVID-19 vaccines became available in the first quarter of 2021, the Company organized administration of the vaccines on site to our employees and their families in the US.

Furthermore, we have also utilized government employee support packages where available, in an effort to retain employees during this uncertain period.

During 2020, the Company took advantage of the Payroll Tax Deferral provided by the CARES Act.

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 to 2021 its share of FICA taxes for the period beginning March 27, 2020 and ending December 31, 2020.

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 back to previous tax years to generate a refund of $31.0 million and expects to file a NOL carryback claim for the 2020 tax year in the second quarter of 2021.

During 2020 and the first quarter of 2021 the Company also took advantage of job support schemes in Singapore, Australia, the U.K.

In the prior year, the Company filed returns to carryback its NOLs to previous tax years to generate a refund of $31.0 million.

In the second quarter of 2021 the Company filed returns for the 2019 tax year to carryback the NOL for the 2020 tax year for an additional refund of approximately $15.0 million.

During 2020 and the first half of 2021 , the Company also 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 .

The Company has recorded an estimated benefit of $0.4 million through March 31, 2021.

We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained.

In compliance with the orders issued by certain local jurisdictions in which the Company operates, the Company has continued the practice of requiring all employees to wear a face mask or covering while working at all sites.

We may take further safety precautions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

All our facilities currently remain operational with staggered shifts which ha s impacted production output .

The Company has recorded an estimated benefit of $ 0.

7 million through June 3 0 , 202 1 .

All our facilities currently remain operational with staggered shifts which has impacted production output.

We expect the constraints and limits imposed on our operations to slow or diminish our research and development activities and qualification activities with our customers.

We do not believe that remote work arrangements have adversely affected our ability to maintain financial reporting systems, internal control over financial reporting and disclosure controls and procedures.

The C ompany has taken steps and adjust ed its workforce to be in line with the current situation as we continue to monitor ong o ing market conditions.

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.

We believe the COVID-19 pandemic will continue to negatively impact oilfield activity for the majority of 2021 and possibly linger into 2022.

Similarly, we expect that the oil price decline, and continued uncertainty regarding its duration, will continue to have a negative impact on oil and gas activities.

Similarly, we expect that any declines in oil prices, and continued uncertainty regarding its duration, will continue to have a negative impact on oil and gas activities.

In addition to this, COVID-19 and the associated depressed global economic conditions could also aggravate the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, including leading to further material impairment charges.

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Brent Crude Oil Price per Barrel

According to the April 2021 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average approximately $62 per barrel in 2021 and $60 per barrel in 2022, compared with an average of $41.96 per barrel in 2020.

In its April 2021 Oil Market Report, the International Energy Agency projected global oil demand to grow by 5.7 million barrels per day to reach 96.7 million barrels per day in 2021, after contracting by 8.7 million barrels per day in 2020.

Lower crude oil and natural gas prices have resulted in a trend of customers seeking to renegotiate contract terms with the Company, including reductions in the prices of its products and services, extensions of delivery terms and, in some instances, contract revisions.

An extended period of reduced crude oil and natural gas prices may accelerate these trends.

According to the July 2021 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average approximately $69 per barrel in 2021 and $67 per barrel in 2022, compared with an average of $41.69 per barrel in 2020.

In its July 2021 Oil Market Report, the International Energy Agency projected global oil demand to grow by 5.4 million barrels per day in 2021 and 3.0 million barrels per day in 2022, after contracting by 8.7 million barrels per day in 2020.

Although crude oil prices have started to recover in 2021, we have yet to see 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 three months ended March 31, 2021 and 2020 .

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.

Three months ended March 31,

Six months ended June 30,

Western Hemisphere

Eastern Hemisphere

IHS—Petrodata RigBase – March 31, 2021 and 2020

According to IHS-Petrodata RigBase, as of March 31, 2021, there were 475 contracted rigs for the Company’s geographic regions (126 floating rigs and 349 jack-up rigs), which represents an 11.4% decrease from the rig count of 536 rigs (152 floating rigs and 384 jack-up rigs) as of March 31, 2020 .

IHS—Petrodata RigBase – June 30, 2021 and 2020

According to IHS-Petrodata RigBase, as of June 30, 2021, there were 479 contracted rigs for the Company’s geographic regions (125 floating rigs and 354 jack-up rigs), which represents a 3.6% decrease from the rig count of 497 rigs (138 floating rigs and 359 jack-up rigs) as of June 30, 2020 .

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.

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have also been restricted.

The TCA is provisionally applicable from January 1, 2021, having been ratified by the UK Parliament on December 30, 2020 and it is currently awaiting formal approval of the European Parliament (expected on or around April 26, 2021).

For more information on the risks associate with Brexit and the TCA, see “Our international operations require us to comply with a number of U.S.

regulations governing the international trade of goods, services and technology, which expose us to compliance risks" under “Item 1A.

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, 2020.

In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021.

The U.K.’s Financial Conduct Authority, which regulates LIBOR, intends to phase out LIBOR as a benchmark by the end of 2021.

At the present time, the ABL Credit Facility has a term that extends beyond 2021, and borrowings under the ABL Credit Facility (as defined herein) 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.

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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 March 31, 2021 was approximately $196.7 million, compared to approximately $195.7 million at December 31, 2020, and $261.1 million at March 31, 2020.

The following table represents the change in backlog for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020:

The Company’s product backlog at June 30, 2021 was approximately $191.2 million, compared to approximately $196.7 million at March 31, 2021, and $195.7 million at December 31, 2020.

The following table represents the change in backlog for the three months ended June 30, 2021, March 31, 2021, and December 31, 2020:

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Ending Backlog

The backlog data shown above includes all bookings as of March 31, 2021, 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 $69.4 million as of March 31, 2021 within “Revenue Recognition”, Note 4 to the Notes to Condensed Consolidated Financial Statements.

As a result of worldwide reductions in workforce and natural attrition, the total number of employees as of March 31, 2021 were reduced to 1,400, of which 727 were located in the United States.

The backlog data shown above includes all bookings as of June 30, 2021, 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 $57.6 million as of June 30, 2021 within “Revenue Recognition”, Note 4 to the Notes to Condensed Consolidated Financial Statements.

As a result of worldwide reductions in workforce and natural attrition, the total number of employees as of June 30, 2021 were reduced to 1,357, of which 677 were located in the United States.

The total number of the Company’s employees as of December 31, 2020 were 1,424, of which 729 were located in the United States.

As of March 31, 2020, the total number of the Company's employees were 1,831, of which 914 were located in the United States.

As of June 30, 2020, the total number of the Company's employees were 1,572, of which 757 were located in the United States.

Dril-Quip’s revenues are generated from three sources:

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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 and from lease of our forging facility.

For the three months ended March 31, 2021 and 2020, the Company derived 68.4% and 70.4%, respectively, of its revenues from the sale of its products, 21.8% and 19.6%, respectively, of its revenue from services, and 9.8% and 10.0%, 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 o perations, with approximately 68.5% and 63.1% of its revenues derived from foreign sales for the three months ended March 31, 2021 and 20 20 , respectively.

Leasing revenues are derived from rental tools used during installation and retrieval of the Company’s products.

For the three months ended June 30, 2021 and 2020, the Company derived 69.1% and 69.8%, respectively, of its revenues from the sale of its products, 21.7% and 22.9%, respectively, of its revenue from services, and 9.2% and 7.3%, respectively, of its revenues from leasing.

For the six months ended June 30, 2021 and 2020, the Company derived 68.8% and 70.1%, respectively, of its revenues from the sale of its products, 21.7% and 21.2%, respectively, of its revenue from services, and 9.5% and 8.7%, 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 o perations, with approximately 67.2% and 64.0% of its revenues derived from foreign sales for the six months ended June 30, 2021 and 20 20 , respectively.

The majority of the Company’s domestic revenue relates to operations in the U.S.

Gulf of Mexico.

Domestic revenue approximated 31.5% an d 36.9% of the Compan y’s total revenues for the three months ended March 31, 2021 and 20 20 , respectively.

Domestic revenue approximated 32.8% an d 36.0% of the Compan y’s total revenues for the six months ended June 30, 2021 and 20 20 , respectively.

Product contracts are generally negotiated and sold separately from service contracts.

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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 March 31, 2021, there were 41 projects representing approximately 17.1% of the Company's total revenues and approximately 24.9% of its product revenues that were accounted for using over time accounting, compared to 42 projects for the three months ended March 31, 2020, which represented approximately 31.4% of the Company's total revenues and approximately 44.7% of its product revenues.

For the three months ended June 30, 2021, there were 39 projects representing approximately 21.1% of the Company's total revenues and approximately 30.6% of its product revenues that were accounted for using over time accounting, compared to 43 projects for the three months ended June 30, 2020, which represented approximately 37.7% of the Company's total revenues and approximately 54.1% of its product revenues.

For the six months ended June 30, 2021, there were 45 projects representing approximately 19.1% of the Company's total revenues and approximately 27.8% of its product revenues that were accounted for using over time accounting, compared to 46 projects for the six months ended June 30, 2020, which represented approximately 34.5% of the Company's total revenues and approximately 49.2% of its product revenues.

These percentages may fluctuate in the future.

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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 March 31, 2021.

There were no impairment charges recorded for the three months ended June 30, 2021.

Restructuring and Other Charges .

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This plan continued in 2020 as a result of the COVID-19 pandemic and the developments in global oil markets.

During the first quarter of 2021, we continued to incur restructuring charges under the global strategic plan as we exited from certain underperforming countries and markets and shifted from manufacturing in-house to a vendor outsourcing model.

During 2021, we continued to incur restructuring charges under the global strategic plan as we exited from certain underperforming countries and markets and shifted from manufacturing in-house to a vendor outsourcing model.

(Gain) Loss on Sale of Assets.

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The Company’s effective income tax rate fluctuates from the U.S.

statutory tax rate based on, among other factors, changes in pretax income in jurisdictions with varying statutory tax rates, impact of valuation allowances, changes in tax legislation, and other permanent differences related to the recognition of income and expense between U.S.

statutory tax rate based on, among other factors, changes in pretax income in jurisdictions with varying statutory tax rates, 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.

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Total revenues

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Restructuring and other charges

Gain on sale of assets

(Gain) loss on sale of assets

Foreign currency transaction (gains) and losses

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(In millions)

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Total revenues

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Revenues decreased by $14.8 million, or approximately 15.4%, to $81.2 million for the three months ended March 31, 2021 from $96.0 million for the three months ended March 31, 2020.

Product revenues decreased by approximately $12.0 million for the three months ended March 31, 2021 as compared to the same period in 2020 as a result of decreased revenues in subsea equipment of $13.8 million, $0.9 million in offshore rig equipment and $0.5 million in surface equipment, partially offset by increased downhole tools revenue of $3.2 million.

Product revenues in the Eastern Hemisphere and Western Hemisphere decreased by $11.5 million and $3.5 million, respectively, partially offset by increased product revenues of $3.0 million in the Asia-Pacific region.

revenues continue to be negatively impacted by lower pro duction output primarily due to reduced global demand a nd customer request s to exten d their deliveries into future periods as a result of drilling schedule delays .

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Revenues decreased by $9.6 million, or approximately 10.7%, to $80.8 million for the three months ended June 30, 2021 from $90.4 million for the three months ended June 30, 2020.

Product revenues decreased by approximately $7.2 million for the

three months ended June 30, 2021 as com pared to the same period in 20 20 as a res ult of decreased revenues in subsea equipment of $7.4 million and $1.3 million in surface equipment , partially offset by increased downhole tools revenue of $1.3 million and $0.2 million in offshore rig equipment .

P roduct revenues in the Eastern Hemisphere and the Asia-Pacific region decreased by $5.6 million and $2.1 million , respectively, partially offset by increased product revenues of $0.5 million in the Western Hemisphere .

O u r revenues continue to be negatively impacted by reduced global demand a nd customer drilling schedule delays .

T hese negative impacts were attributable to both the COVID-19 pandemic and developments in the global oil markets.

The effects of the winter storm on our Houston manufacturing facilities were partially mitigated through extended production shifts.

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, completion status of the projects accounted for under the over time accounting method, market conditions and customer demand.

Service revenues decreased by approximately $1.2 million resulting mainly from decreased service revenues in the Eastern Hemisphere of $1.6 million, in the Western Hemisphere of $0.5 million, partially offset by increased service revenues of $0.9 million in the Asia-Pacific region.

Service revenues decreased by approximately $3.2 million resulting mainly from decreased service revenues in the Western Hemisphere of $2.7 million, in the Eastern Hemisphere of $1.0 million, partially offset by increased service revenues of $0.5 million in the Asia-Pacific region.

Lower service revenues in the Eastern Hemisphere and Western Hemisphere resulted primarily from developments in the global oil markets.

Global travel restrictions resulting from the COVID-19 pandemic also impacted service revenue, especially in the Eastern Hemisphere.

Increase in service revenues in Asia-Pacific is mainly due to customer specific increases in technical advisory services and maintenance requests.

Leasing revenues increased by approximately $0.8 million resulting mainly from increased leasing revenues in the Western Hemisphere of $0.5 million, in the Asia-Pacific region of $0.2 million and in the Eastern Hemisphere of $0.1 million.

The majority of the increases are related to increased subsea rental tool utilization due to timing of customer drilling activity.

Cost of Sales.

Cost of sales decreased by $5.4 million, or approximately 8.1%, to $61.5 million for the three months ended June 30, 2021 from $66.9 million for the same period in 2020.

The decrease in costs of sales were mainly in line with the decrease in revenue for the three months ended June 30, 2021.

Cost of sales as a percentage of revenue increased to 76.2% and excluding a one-time expense related to the termination of our forge facility lease agreement with AFGlobal, decreased to 73.3% from 74.0% for the three months ended June 30, 2021 and 2020, respectively, as a result of savings from our business transformation activities.

Selling, General and Administrative Expenses.

For the three months ended June 30, 2021, selling, general and administrative expenses increased by $6.3 million, or 26.8% to $29.6 million from $23.3 million for the same period in 2020.

This increase was attributable mainly to higher legal expenses in the current period related to costs incurred in connection with the FMC Technologies, Inc.

Engineering and Product Development Expenses.

For the three months ended June 30, 2021, engineering and product development expenses decreased by approximately $1.7 million, or 30.6%, to $3.7 million from $5.4 million for the same period in 2020.

This decrease was attributable mainly to lower spend on research and development activities as we completed certain strategic projects.

Restructuring and Other Charges.

For the three months ended June 30, 2021, the Company incurred additional costs under our existing 2018 global strategic plan primarily related to consulting fees of $1.0 million.

We recorded restructuring and other charges of $1.6 million primarily related to the write-down of long-lived assets and consulting fees for the three months ended June 30, 2020.

(Gain) Loss on Sale of Assets.

For the three months ended June 30, 2021, loss on sale of assets was approximately $0.1 million.

For the three months ended June 30, 2020, gain on sale of assets was $0.1 million.

Foreign Currency Transaction (Gains) and Losses.

Foreign exchange gain for the three months ended June 30, 2021, was $0.5 million as compared to a loss of $0.8 million for the same period in 2020.

Income Tax Provision .

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 tax rate of (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.

Income tax provision for the three months ended June 30, 2020 was $7.1 million on a loss before taxes of $7.1 million, resulting in an effective income tax rate of approximately (100.3)%.

Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to tax benefits of the CARES Act, changes in the valuation allowances in the United States and in various foreign countries.

The change in the effective tax rate between the periods was primarily a result of discretely recognized benefits of the CARES Act in 2020, changes in valuation allowances, and a mix of earnings in jurisdictions with differing tax rates.

Net loss was approximately $19.1 million for the three months ended June 30, 2021 as compared to a net loss of $14.1 million for the same period in 20120 for the reasons set forth above.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Revenues decreased by $24.4 million, or approximately 13.1%, to $162.0 million for the six months ended June 30, 2021 from $186.4 million for the six months ended June 30, 2020.

Product revenues decreased by approximately $19.3 million for the six months ended June 30, 2021 as compared to the same period in 2020 as a result of decreased revenues in subsea equipment of $21.2 million, in surface equipment of $1.9 million and in offshore rig equipment of $0.7 million, partially offset by increased

downhole tools revenue of $4.5 million .

Product revenues in the Eastern Hemisphere and Western Hemisphere decreased by $17.1 million and $3.1 million , respectively, partially offset by an increase of $0.9 million in the Asia-Pacific region .

Our revenues continue to be negatively impacted by reduced global demand and customer drilling schedule delays.

These negative impacts were attributable to both the COVID-19 pandemic and developments in the global oil markets .

Service revenues decreased by approximately $4.3 million resulting mainly from decreased service revenues in the Western Hemisphere of $3.2 million and in the Eastern Hemisphere of $2.6 million, partially offset by an increase in the Asia-Pacific region of $1.5 million.

Lower service revenues in the Eastern Hemisphere and Western Hemisphere resulted primarily from COVID-19 disruptions and developments in the global oil markets.

Global travel restrictions also impacted service revenue, especially in the Eastern Hemisphere.

Increase in service revenues in Asia-Pacific is mainly due to customer specific increases in technical advisory services and maintenance requests in Malaysia.

Leasing revenues decreased by approximately $1.6 million resulting mainly from decreased leasing revenues in the Eastern Hemisphere of $1.6 million and in the Western Hemisphere of $0.3 million, partially offset by increased leasing revenue in Asia-Pacific region of $0.3 million.

Increase in service revenues in Asia-Pacific is mainly due to customer specific increases in technical advisory services and maintenance requests.

Leasing revenues decreased by approximately $0.8 million resulting mainly from decreased leasing revenues in the Eastern Hemisphere of $1.5 million, partially offset by increased leasing revenues in the Asia-Pacific region of $0.5 million and in the Western Hemisphere of $0.2 million.

The majority of the decrease in the Eastern Hemisphere is related to decreased subsea rental tool utilization due to timing of customer drilling activity and COVID-19 related travel restrictions.

Increase in leasing revenues in the Western Hemisphere and the Asia-Pacific region were due to customer specific increases in rental tool utilization.

Cost of Sales.

Cost of sales decreased by $14.6 million, or approximately 20.5%, to $56.8 million for the three months ended March 31, 2021 from $71.4 million for the same period in 2020.

The decrease in costs of sales were mainly in line with the decrease in revenue for the three months ended March 31, 2021.

Savings resulting from our business transformation activities were partially offset by higher costs related to the COVID-19 pandemic comprising staggered shifts, extensive cleaning and sanitization of workstations, and incremental production costs related to the winter storm shut down of our Houston manufacturing facility.

Overall, savings from our business transformation activities resulted in a decrease in cost of sales as a percentage of revenue to 69.9% from 74.4% for the three months ended March 31, 2021 and 2020, respectively.

Cost of sales decreased by $20.1 million, or approximately 14.5%, to $118.3 million for the six months ended June 30, 2021 from $138.4 million for the same period in 2020.

The decrease in cost of sales were mainly in line with the decrease in revenue for the six months ended June 30, 2021.

Cost of sales as a percentage of revenue was 73.0% and excluding a one-time expense related to the termination of our forge facility lease agreement with AFGlobal, decreased to 71.6% from 74.2% for the six months ended June 30, 2021 and 2020, respectively, as a result of savings from our business transformation activities.

Selling, General and Administrative Expenses.

For the three months ended March 31, 2021, selling, general and administrative expenses increased by $4.9 million, or 19.9% to $29.6 million from $24.7 million for the same period in 2020.

This increase was attributable mainly to higher legal expenses in the current period related to an ongoing legal matter and an importation tax settlement under a recently introduced Brazilian tax amnesty program.

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.

For the six months ended June 30, 2021, selling, general and administrative expenses increased by $11.2 million, or approximately 23.3% to $59.2 million from $48.0 million for the same period in 2020.

This increase was attributable mainly to higher legal expenses in the current period related to costs incurred in connection with the FMC Technologies, Inc.

lawsuit and an importation tax settlement under a Brazilian tax amnesty program introduced in the first quarter of 2021.

Engineering and Product Development Expenses.

For the three months ended March 31, 2021, engineering and product development expenses decreased by approximately $1.5 million, or 26.9%, to $4.0 million from $5.5 million for the same period in 2020.

The decrease was attributable to lower spend on research and development activities for completed strategic projects.

(Gain) Loss on Sale of Assets.

During the three months ended March 31, 2021, gain on sale of assets was approximately $4.0 million primarily related to the sale of two of our buildings in Singapore.

During the three months ended March 31, 2020, gain on sale of assets was $0.5 million, which consisted primarily of the sale of our TIW Oklahoma facility.

For the six months ended June 30, 2021, engineering and product development expenses decreased by approximately $3.1 million, or 28.7%, to $7.8 million from $10.9 million for the same period in 2020.

This decrease was attributable mainly to lower spend on research and development activities as we completed certain strategic projects.

Restructuring and Other Charges.

For the six months ended June 30, 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 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.

As a result of unfavorable market conditions primarily due to the COVID-19 pandemic and developments in the global oil markets, we recorded inventory write-downs, severance charges, long-lived asset write-downs and other charges of $34.3 million during the six months ended June 30, 2020.

Gain on Sale of Assets.

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.

For the six months ended June 30, 2020, gain on sale of assets was $0.6 million, which consisted primarily of the sale of our TIW Oklahoma facility.

Foreign Currency Transaction (Gains) and Losses.

Foreign exchange loss for the three months ended March 31, 2021, was $1.4 million as compared to a gain of $3.2 million for the same period in 2020.

Foreign exchange loss for the six months ended June 30, 2021, was $0.9 million as compared to a gain of $2.4 million for the same period in 2020.

Income Tax Provision (Benefit) .

Income tax provision for the three months ended March 31, 2021 was $2.4 million on a loss before taxes of $32.0 million, resulting in an effective tax rate of (7.5)%.

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 tax rate of (14.6)% .

Income tax benefit for the three months ended March 31, 2020 was $21.6 million on a loss before taxes of $41.3 million, resulting in an effective income tax rate of approximately 52.3%.

Income tax benefit for the six months ended June 30, 2020 was $14.5 million on a loss before taxes of $48.4 million, resulting in an effective income tax rate of approximately 30.0%.

The change in the effective tax rate between the periods was primarily a result of discretely recognized benefits of the CARES Act in 2020, changes in valuation allowances and a mix of earnings in jurisdictions with differing tax rates.

Net loss was approximately $34.4 million for the three months ended March 31, 2021 as compared to a net loss of $19.7 million for the same period in 20120 for the reasons set forth above.

Net loss was approximately $53.4 million for the six months ended June 30, 2021 as compared to a net loss of $33.8 million for the same period in 2020 for the reasons set forth above.

Non-GAAP Financial Measures

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The following table reconciles our reported net income to Adjusted EBITDA for each of the respective periods:

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

(In thousands)

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Restructuring and other charges (2)

Gain on sale of assets

(Gain) loss on sale of assets

Foreign currency transaction (gains) and losses

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(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 a non-recurring legal matter.

(2) Restructuring and other charges include legal expenses related to the FMC Technologies, Inc.

These legal expenses are included in "Sellling, general and administrative" in our condensed consolidated statements of income (loss) for the three and six months ended June 30, 2021 and 2020 (in thousands).

Liquidity and Capital Resources

Cash flows provided by (used in) type of activity were as follows:

Three months ended March 31,

Six months ended June 30,

(In thousands)

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The Company’s principal source of funds is cash flows from operations.

As of March 31, 2021, the Company had approximately $362.2 million of cash and cash equivalents on hand and an availability of $35.4 million under the ABL Credit Facility.

As of June 30, 2021, the Company had approximately $370.5 million of cash and cash equivalents on hand and an availability of $25.1 million under the ABL Credit Facility.

Although there still remains uncertainty related to the impact of the COVID-19 pandemic on our future results, we continue to monitor our spend and reduce non-essential spending.

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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 provided by operating activities for the three months ended March 31, 2021 was $13.1 million as compared to net cash used in operating activities of $21.2 million for the three months ended March 31, 2020.

Net cash provided by operating activities for the six months ended June 30, 2021 was $24.4 million as compared to net cash used in operating activities of $18.2 million for the six months ended June 30, 2020.

The $42.6 million net change is primarily due to increased cash flow resulting from changes in operating assets and liabilities of $84.8 million.

This was partially offset by $22.6 million of non-cash movements which included decreases in items such as impairments, restructuring and other charges, and an increase in net loss of $19.6 million.

The change in operating assets and liabilities for the three months ended March 31, 2021 resulted in a $58.9 million increase in cash as compared to the change in operating assets and liabilities for the three months ended March 31, 2020.

Trade receivables decreased by $30.5 million during the first quarter of 2021, primarily due to our continued focus on global cash collections.

The change in operating assets and liabilities for the six months ended June 30, 2021 resulted in a $84.8 million increase in cash as compared to the change in operating assets and liabilities for the six months ended June 30, 2020.

The $37.8 million decrease in prepaids and other assets was primarily due to receipt of tax receivables.

The increase in accounts payable and accrued expenses of $12.4 million was mainly related to proactive discussions with most of our vendors on extending payment terms to be in line with the current market conditions.

Trade receivables decreased by $26.5 million primarily due to our continued focus on global cash collections by improving our invoicing cycle time and increasing collection efforts across all business units.

The decrease in inventory of $21.2 million was mainly related to our focus on inventory management and consumption during the year.

These were partially offset by increase in unbilled receivables by $10.4 million mainly due to the timing difference on our milestone billing and progress on the projects that are accounted for on an over time basis.

The change in investing cash flows for the three months ended March 31, 2021 resulted in a $3.4 million increase in cash primarily due to the sale of two of our buildings in Singapore.

Capital expenditures by the Company were $2.5 million and $4.2 million for the three months ended March 31, 2021 and 2020, respectively.

Capital expenditures for the three months ended March 31, 2021 were $1.2 million for rental tools to support our current and recently developed products, $0.6 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 $0.7 million for other capital expenditures.

The increase in accounts payable and accrued expenses of $3.9 million was mainly related to the reinstatement of our short-term incentive plan in 2021.

These were partially offset by an increase in unbilled receivables by $4.6 million mainly due to the timing difference on our milestone billing and progress on the projects that are accounted for on an over time basis.

The change in investing cash flows for the six months ended June 30, 2021 resulted in a $0.3 million increase in cash primarily due to the sale of two of our buildings in Singapore for $5.9 million, partially offset by capital expenditure spend by the Company.

Capital expenditures by the Company were $5.6 million and $8.3 million for the six months ended June 30, 2021 and 2020, respectively.

Capital expenditures for the six months ended June 30, 2021 were $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, $2.1 million for rental tools to support our current and recently developed products and $0.9 million for other capital expenditures.

Capital expenditures for the six months ended June 30, 2020 were $2.5 million for machinery and equipment, $3.6 million for rental tools, and $2.2 million for other capital expenditures.

We constantly review capital expenditure needs to ensure these are justified expenditures.

Capital expenditures for the three months ended March 31, 2020 were $0.7 million for machinery and equipment, $1.9 million for rental tools, and $1.6 million for other capital expenditures.

Repurchase of Equity Securities

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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 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 .

For the three and six months ended June 30, 2021, the Company purchased no shares under the share repurchase plan.

For the six months ended June 30, 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 .

Asset Backed Loan (ABL) Credit Facility

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.

As of June 30, 2021, the availability under the ABL Credit Facility was $25.1 million, after taking into account the outstanding letters of credit of approximately $7.4 million issued under the facility.

For additional information on the ABL Credit Facility, see "Asset Backed Loan (ABL) Credit Facility", Note 9 to the Notes to Condensed Consolidated Financial Statements.

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Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our critical accounting policies.

During the three months ended March 31, 2021, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies.

During the six months ended June 30, 2021, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis