Item 1. Financial Statements
Item 1. Financial Statements
DRIL-QUIP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30,
2021
December 31,
2020
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
$
370,481
$
345,955
Trade receivables, net
90,417
116,202
Unbilled receivables
145,400
140,318
Inventories, net
202,382
212,536
Prepaids and other current assets
40,606
48,182
Total current assets
849,286
863,193
Operating lease right of use assets
5,542
6,962
Property, plant and equipment, net
229,247
234,823
Deferred income taxes
6,403
5,768
Intangible assets
27,979
29,434
Other assets
6,252
10,992
Total assets
$
1,124,709
$
1,151,172
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
47,610
$
37,424
Accrued income taxes
1,960
4,343
Contract liabilities
13,448
11,339
Accrued compensation
8,549
5,015
Operating lease liabilities
928
1,110
Other accrued liabilities
34,040
26,281
Total current liabilities
106,535
85,512
Deferred income taxes
6,694
6,779
Income tax payable
9,524
9,383
Operating lease liabilities, long-term
4,636
5,845
Other long-term liabilities
1,996
2,125
Total liabilities
129,385
109,644
Contingencies (Note 12)
Stockholders' equity:
Preferred stock: 10,000,000 shares authorized at $ 0.01 par value ( none issued)
-
-
Common stock:
100,000,000 shares authorized at $ 0.01 par value, 35,431,110 and 35,417,712
shares issued and outstanding at June 30, 2021 and December 31, 2020
363
363
Additional paid-in capital
71,878
65,613
Retained earnings
1,071,838
1,125,263
Accumulated other comprehensive losses
( 148,755
)
( 149,711
)
Total stockholders' equity
995,324
1,041,528
Total liabilities and stockholders' equity
$
1,124,709
$
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
Six months ended
June 30,
June 30,
2021
2020
2021
2020
(In thousands, except per share data)
Revenues:
Products
$
55,860
$
63,133
$
111,443
$
130,691
Services
17,536
20,750
35,203
39,564
Leasing
7,401
6,563
15,390
16,189
Total revenues
80,797
90,446
162,036
186,444
Cost and expenses:
Cost of sales:
Products
43,920
49,741
85,124
103,386
Services
8,317
9,222
17,667
18,910
Leasing
9,302
7,974
15,535
16,055
Total cost of sales
61,539
66,937
118,326
138,351
Selling, general and administrative
29,593
23,331
59,151
47,989
Engineering and product development
3,722
5,364
7,759
10,889
Impairments
-
-
-
7,719
Restructuring and other charges
1,000
1,587
26,020
34,300
(Gain) loss on sale of assets
82
( 85
)
( 3,873
)
( 552
)
Foreign currency transaction (gains) and losses
( 475
)
817
899
( 2,425
)
Total costs and expenses
95,461
97,951
208,282
236,271
Operating loss
( 14,664
)
( 7,505
)
( 46,246
)
( 49,827
)
Interest income
63
653
112
1,859
Interest expense
( 59
)
( 209
)
( 498
)
( 400
)
Loss before income taxes
( 14,660
)
( 7,061
)
( 46,632
)
( 48,368
)
Income tax provision (benefit)
4,407
7,081
6,793
( 14,528
)
Net loss
$
( 19,067
)
$
( 14,142
)
$
( 53,425
)
$
( 33,840
)
Loss per common share:
Basic
$
( 0.54
)
$
( 0.40
)
$
( 1.51
)
$
( 0.96
)
Diluted
$
( 0.54
)
$
( 0.40
)
$
( 1.51
)
$
( 0.96
)
Weighted average common shares outstanding:
Basic
35,387
35,023
35,386
35,359
Diluted
35,387
35,023
35,386
35,359
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
Six months ended
June 30,
June 30,
2021
2020
2021
2020
(In thousands)
Net loss
$
( 19,067
)
$
( 14,142
)
$
( 53,425
)
$
( 33,840
)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
3,046
2,048
956
( 22,931
)
Total comprehensive loss
$
( 16,021
)
$
( 12,094
)
$
( 52,469
)
$
( 56,771
)
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)
Six months ended
June 30,
2021
2020
(In thousands)
Operating activities
Net loss
$
( 53,425
)
$
( 33,840
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
14,759
16,813
Stock-based compensation expense
6,265
6,458
Impairments
-
7,719
Restructuring and other charges
23,218
34,300
Gain on sale of assets
( 3,873
)
( 552
)
Deferred income taxes
( 695
)
( 2,421
)
Changes in operating assets and liabilities:
Trade receivables, net
26,450
( 104
)
Unbilled receivables
( 5,082
)
( 467
)
Inventories, net
( 12,700
)
( 33,869
)
Prepaids and other assets
14,375
( 23,452
)
Accounts payable and accrued expenses
15,123
11,224
Net cash provided by (used in) operating activities
24,415
( 18,191
)
Investing activities
Purchase of property, plant and equipment
( 5,625
)
( 8,318
)
Proceeds from sale of equipment
5,950
3,138
Net cash provided by (used in) investing activities
325
( 5,180
)
Financing activities
Repurchase of common shares
-
( 25,000
)
Other
( 77
)
( 129
)
Net cash used in financing activities
( 77
)
( 25,129
)
Effect of exchange rate changes on cash activities
( 137
)
( 4,638
)
Increase (decrease) in cash and cash equivalents
24,526
( 53,138
)
Cash and cash equivalents at beginning of period
345,955
398,946
Cash and cash equivalents at end of period
$
370,481
$
345,808
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 April 1, 2021
$
363
$
68,799
$
1,090,905
$
( 151,801
)
$
1,008,266
Foreign currency translation adjustment
-
-
-
3,046
3,046
Net loss
-
-
( 19,067
)
-
( 19,067
)
Comprehensive loss
( 16,021
)
Stock option expense
-
3,079
-
-
3,079
Balance at June 30, 2021
$
363
$
71,878
$
1,071,838
$
( 148,755
)
$
995,324
Balance at January 1, 2021
$
363
$
65,613
$
1,125,263
$
( 149,711
)
$
1,041,528
Foreign currency translation adjustment
-
-
-
956
956
Net loss
-
-
( 53,425
)
-
( 53,425
)
Comprehensive loss
-
-
-
-
( 52,469
)
Stock option expense
-
6,265
-
-
6,265
Balance at June 30, 2021
$
363
$
71,878
$
1,071,838
$
( 148,755
)
$
995,324
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Losses
Total
(In thousands, except shares)
Balance at April 1, 2020
$
363
$
56,045
$
1,136,335
$
( 168,542
)
$
1,024,201
Foreign currency translation adjustment
-
-
-
2,048
2,048
Net loss
-
-
( 14,142
)
-
( 14,142
)
Comprehensive loss
( 12,094
)
Stock option expense
-
3,282
-
-
3,282
Other
-
-
( 2
)
-
( 2
)
Balance at June 30, 2020
$
363
$
59,327
$
1,122,191
$
( 166,494
)
$
1,015,387
Balance at January 1, 2020
$
371
$
52,870
$
1,181,023
$
( 143,563
)
$
1,090,701
Foreign currency translation adjustment
-
-
( 22,931
)
( 22,931
)
Net loss
-
-
( 33,840
)
-
( 33,840
)
Comprehensive loss
( 56,771
)
Repurchase of common stock ( 808,389 shares)
( 8
)
-
( 24,992
)
-
( 25,000
)
Stock option expense
-
6,458
-
-
6,458
Other
-
( 1
)
-
-
( 1
)
Balance at June 30, 2020
$
363
$
59,327
$
1,122,191
$
( 166,494
)
$
1,015,387
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 June 30, 2021 and the results of operations and comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020 and cash flows for the six months ended June 30, 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 and six months ended June 30, 2021 and cash flows for the six months ended June 30, 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.
We are continuing to experience effects resulting from the COVID-19 pandemic, albeit to a lesser degree as compared to 2020. Increased availability of the COVID-19 vaccine to the general population in the second quarter of 2021 has resulted in a lower rate of new infections, hospitalizations and deaths as compared to 2020. Although the downward trend is encouraging, emergence and spread of the COVID-19 Delta variant adds uncertainty for a potential 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 Organization of Petroleum Exporting Countries (OPEC) and non-OPEC nations. We continue to experience delayed recovery 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 global 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. Revenues from rental of running tools are recognized on a day rate basis over the lease term, which is generally between one to three months.
On April 30, 2021, as a result of lower activity stemming from the COVID-19 pandemic, AFGlobal Corporation provided a 90-day written notice of termination of the lease agreement between the Company and AFGlobal in relation to the Company’s forge facility and equipment at its Houston Eldridge campus.
Based on the initial 5 -year term of the lease agreement, the Company had straight-lined the total anticipated lease revenue for that initial term into equal monthly lease revenue. As a result of the lease termination, the Company has approximately $ 2.3 million in unbilled revenue that was expensed as of June 30, 2021. Leasing revenue from renting this facility that was not recognized due to the termination of the lease agreement was approximately $ 0.5 million for the three and six months ended June 30, 2021. The Company has numerous other forging suppliers and does not expect any disruptions in forging supply as a result of the lease termination.
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 half 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 exited certain underperforming countries and markets and shifted from manufacturing in-house to a vendor sourcing model. During the first half of 2020, the overall offshore market conditions declined as a result of the COVID-19 pandemic and developments in global oil markets. As such, we incurred additional costs under our existing 2018 global strategic plan to realign our manufacturing facilities globally. 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. The manner, timing and amount of any purchase will be determined by management based on an evaluation of market conditions, stock price, liquidity and other factors. The program does not obligate the Company to acquire any amount of common stock and may be modified or superseded at any time at the Company’s discretion.
For the three 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. For the three months ended June 30, 2020 , the Company purchased no shares under the share repurchase plan.
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
Six months ended
June 30,
June 30,
2021
2020
2021
2020
(In thousands)
Weighted average common shares outstanding – basic
35,387
35,023
35,386
35,359
Dilutive effect of common stock awards
-
-
-
-
Weighted average common shares outstanding – diluted
35,387
35,023
35,386
35,359
For the three and six months ended June 30, 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
Six months ended
June 30,
June 30,
2021
2020
2021
2020
(In thousands)
Director stock awards
60
45
58
42
Stock options
58
122
58
124
Performance share units
329
279
330
278
Restricted stock awards
479
333
480
333
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 June 30,
Western
Hemisphere
Eastern
Hemisphere
Asia-
Pacific
Total
2021
2020
2021
2020
2021
2020
2021
2020
(In thousands)
Product Revenues
$
37,259
$
36,797
$
8,565
$
14,216
$
10,036
$
12,120
$
55,860
$
63,133
Service Revenues
10,438
13,164
2,571
3,593
4,527
3,993
17,536
20,750
Total
$
47,697
$
49,961
$
11,136
$
17,809
$
14,563
$
16,113
$
73,396
$
83,883
Six months ended June 30,
Western
Hemisphere
Eastern
Hemisphere
Asia-
Pacific
Total
2021
2020
2021
2020
2021
2020
2021
2020
(In thousands)
Product Revenues
$
75,175
$
78,269
$
15,287
$
32,395
$
20,981
$
20,027
$
111,443
$
130,691
Service Revenues
20,942
24,120
5,290
7,931
8,971
7,513
35,203
39,564
Total
$
96,117
$
102,389
$
20,577
$
40,326
$
29,952
$
27,540
$
146,646
$
170,255
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
46,990
Transfers to Trade Receivables, Net
( 41,930
)
Contract Assets at June 30, 2021
$
141,033
Contract Liabilities (amounts shown in thousands)
Contract Liabilities at December 31, 2020
$
10,815
Additions
21,618
Revenue Recognized
( 19,058
)
Contract Liabilities at June 30, 2021
$
13,375
Contract assets include unbilled accounts receivable associated with contracts accounted for under the over time accounting method which were approximately $ 83.4 million and $ 98.2 million at June 30, 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 June 30, 2021.
Remaining Performance Obligations
The aggregate amount of the transaction price allocated to remaining performance obligations from our over time product lines was $ 57.6 million as of June 30, 2021. The Company expects to recognize revenue on approximately 87.0 % of the remaining performance obligations over the next 12 months and the remaining 13.0 % 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.
11
Table of Contents
5. Stock-Based Compensation and Stock Awards
During the three and six months ended June 30, 2021, the Company recognized approximately $ 3.1 million and $ 6.3 million, respectively, 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 and six months ended June 30, 2020, the Company recognized approximately $ 3.3 million and $ 6.5 million, respectively of stock-based compensation expense.
6. Inventories, net
Inventories consist of the following:
June 30,
December 31,
2021
2020
(In thousands)
Raw materials and supplies
$
30,346
$
32,833
Work in progress
43,169
44,924
Finished goods
226,438
216,928
299,953
294,685
Less: allowance for slow moving and excess inventory
( 97,571
)
( 82,149
)
Total inventory
$
202,382
$
212,536
7. Impairment, Restructuring and Other Charges
Restructuring and Other Charges
During the three and 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.
As a result of unfavorable market conditions primarily due to the COVID-19 pandemic and developments in global oil markets, which triggered historically low crude oil prices and decreases in our customers’ capital budgets, we incurred additional costs under our 2018 global strategic plan primarily focused on workforce reductions and the reorganization of certain facilities during the three and six months ended June 30, 2020.
The following table summarizes the components of charges included in "Restructuring and other charges" in our condensed consolidated statements of income (loss) for the three and six months ended June 30, 2021 and 2020 (in thousands):
Three months ended June 30,
Six months ended June 30,
2021
2020
2021
2020
Inventory write-down
$
-
$
-
$
19,251
$
17,272
Severance
-
-
2,745
8,399
Long-lived asset write-down
-
942
-
7,854
Other
1,000
645
4,024
775
$
1,000
$
1,587
$
26,020
$
34,300
The following table summarizes the changes to our accrued liability balance related to restructuring and other charges as of June 30, 2021 (in thousands):
Total
Beginning balance at January 1, 2021
$
1,146
Additions for costs expensed
5,768
Reductions for payments
( 1,802
)
Other
2
Ending balance at June 30, 2021
$
5,114
12
Table of Contents
Goodwill Impairment
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:
June 30, 2021
Estimated
Useful Lives
Gross
Book Value
Accumulated
Amortization
Foreign
Currency
Translation
Net Book
Value
(In thousands)
Trademarks
15 years
$
8,262
$
( 1,298
)
$
( 16
)
$
6,948
Patents
15 - 30 years
6,060
( 3,034
)
( 2
)
3,024
Customer relationships
5 - 15 years
26,095
( 8,233
)
5
17,867
Organizational costs
3 years
185
( 47
)
2
140
$
40,602
$
( 12,612
)
$
( 11
)
$
27,979
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
Organizational costs
3 years
179
( 15
)
6
170
$
40,437
$
( 11,067
)
$
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 June 30, 2021.
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.
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 June 30,
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
$
25,948
$
14,873
$
5,956
$
6,839
$
6,890
$
7,293
$
-
$
-
$
38,794
$
29,005
Over Time
11,311
21,924
2,609
7,377
3,146
4,827
-
-
17,066
34,128
Total Products
37,259
36,797
8,565
14,216
10,036
12,120
-
-
55,860
63,133
Services
Technical Advisory
7,781
10,456
2,127
1,937
3,787
2,938
-
-
13,695
15,331
Reconditioning
2,657
2,708
444
1,656
740
1,055
-
-
3,841
5,419
Total Services
(excluding rental tools)
10,438
13,164
2,571
3,593
4,527
3,993
-
-
17,536
20,750
Leasing
4,233
3,674
1,944
1,826
1,224
1,063
-
-
7,401
6,563
Total Services
(including rental tools)
14,671
16,838
4,515
5,419
5,751
5,056
-
-
24,937
27,313
Intercompany
2,553
2,317
496
689
6,223
3,413
-
9,272
6,419
Eliminations
-
-
-
-
-
-
( 9,272
)
( 6,419
)
( 9,272
)
( 6,419
)
Total Revenues
$
54,483
$
55,952
$
13,576
$
20,324
$
22,010
$
20,589
$
( 9,272
)
$
( 6,419
)
$
80,797
$
90,446
Depreciation and amortization
$
4,250
$
4,801
$
986
$
952
$
1,180
$
1,254
$
927
$
933
$
7,343
$
7,940
Income (loss) before income taxes
$
( 2,175
)
$
5,024
$
3,553
$
( 2,349
)
$
4,800
$
5,615
$
( 20,838
)
$
( 15,351
)
$
( 14,660
)
$
( 7,061
)
During the three months ended June 30, 2021, we recorded restructuring and other charges of $ 1.0 million, consisting primarily of consulting fees in DQ Corporate. During the three months ended June 30, 2020, we recorded restructuring and other charges of $ 1.6 million, consisting primarily of a $ 0.9 million in write-down of long-lived assets in the Western Hemisphere and $ 0.7 million for consulting fees in DQ Corporate.
14
Table of Contents
Six months ended June 30,
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
$
54,235
$
37,837
$
10,809
$
15,801
$
15,467
$
12,740
$
-
$
-
$
80,511
$
66,378
Over Time
20,940
40,432
4,478
16,594
5,514
7,287
-
-
30,932
64,313
Total Products
75,175
78,269
15,287
32,395
20,981
20,027
-
-
111,443
130,691
Services
Technical Advisory
16,102
17,852
4,020
5,433
7,974
6,227
-
-
28,096
29,512
Reconditioning
4,840
6,268
1,270
2,498
997
1,286
-
-
7,107
10,052
Total Services
(excluding rental tools)
20,942
24,120
5,290
7,931
8,971
7,513
-
-
35,203
39,564
Leasing
8,671
8,435
3,072
4,574
3,647
3,180
-
-
15,390
16,189
Total Services
(including rental tools)
29,613
32,555
8,362
12,505
12,618
10,693
-
-
50,593
55,753
Intercompany
4,777
5,631
637
1,020
8,297
5,669
-
-
13,711
12,320
Eliminations
-
-
-
-
-
-
( 13,711
)
( 12,320
)
( 13,711
)
( 12,320
)
Total
$
109,565
$
116,455
$
24,286
$
45,920
$
41,896
$
36,389
$
( 13,711
)
$
( 12,320
)
$
162,036
$
186,444
Depreciation and amortization
$
8,555
$
10,423
$
1,977
$
1,926
$
2,383
$
2,594
$
1,844
$
1,870
$
14,759
$
16,813
Income (loss) before income taxes
$
( 21,551
)
$
13,177
$
690
$
( 30,670
)
$
15,538
$
7,184
$
( 41,309
)
$
( 38,059
)
$
( 46,632
)
$
( 48,368
)
During the six months ended June 30, 2021, we recorded $ 26.0 million of restructuring and other charges. These charges were related to non-cash inventory write downs, severance charges and other charges, primarily consisting of facilities restructuring exit costs and consulting fees. Of these charges, $ 21.0 million was recorded in the Western Hemisphere, $ 1.6 million in the Eastern Hemisphere and $ 3.4 million in DQ Corporate. During the six months ended June 30, 2020, we recorded impairments, restructuring and other charges of $ 42.0 million. Of these charges, $ 32.1 million was recorded in the Eastern Hemisphere, $ 2.8 million in the Western Hemisphere, $ 6.9 million in DQ Corporate and $ 0.2 million in Asia-Pacific.
June 30,
2021
December 31,
2020
(In thousands)
Total long-lived assets:
Western Hemisphere
$
342,705
$
350,577
Eastern Hemisphere
222,582
222,741
Asia-Pacific
64,070
68,600
Eliminations
( 353,934
)
( 353,939
)
Total
$
275,423
$
287,979
Total assets:
Western Hemisphere
$
764,757
$
769,649
Eastern Hemisphere
796,853
779,147
Asia-Pacific
202,601
186,808
Eliminations
( 639,502
)
( 584,432
)
Total
$
1,124,709
$
1,151,172
As of June 30, 2021, we wrote down $ 19.1 million of non-cash inventory write downs in the Western Hemisphere and $ 0.2 million in the Eastern Hemisphere as we shifted 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.
15
Table of Contents
11. Income Tax
The effective tax rate for the three and six months ended June 30, 2021 was ( 30.1 )% and ( 14.6 )%, respectively, compared to ( 100.3 )% and 30.0 %, respectively, 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 $ 3.5 million as of June 30, 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.
In the first quarter of 2021, the relevant governmental agencies of the State of Rio de Janeiro authorized an amnesty program with interest discounts and reduced fines. The Company’s Brazilian subsidiary elected to participate in this amnesty program and recorded the settlement amount of approximately $ 2.1 million as of March 31, 2021. As a result of settling these tax assessments with the relevant governmental agencies pursuant to the amnesty program, the security amounts previously deposited with the court totaling approximately $ 6 million at current exchange rates are being returned to our Brazilian subsidiary, with approximately $ 4 million already received during the second quarter of 2021.
FMC Technologies Lawsuit
On October 5, 2020, FMC Technologies, Inc. (“FMC”) sued the Company alleging misappropriation of trade secrets and sought money damages and injunctive relief in the 127th District Court of Harris County in an action styled FMC Technologies, Inc. v. Richard Murphy and Dril-Quip, Inc. , Cause No. 2020-63081. FMC alleged that its former employee communicated FMC trade secrets to the Company and the Company used those trade secrets in its VXTe subsea tree systems. On April 29, 2021, the jury returned a verdict in favor of the Company. If FMC appeals, the Company intends to continue its vigorous defense of this matter.
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
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.