Innovex International, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in all parts of this document that are not historical facts are forward-looking statements that involve risks and uncertainties that are beyond the control of Dril-Quip, Inc. (the “Company” or “Dril-Quip”). You can identify the Company’s forward-looking statements by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions, or by the Company’s discussion of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct. These forward-looking statements include the following types of information and statements as they relate to the Company: • the impact of the ongoing COVID-19 pandemic and the effects thereof; • the impact of actions taken by OPEC and non-OPEC nations in response to their dispute over production levels and the effects thereof; • future operating results and cash flow; • scheduled, budgeted and other future capital expenditures; • planned or estimated cost savings; • working capital requirements; • the need for and the availability of expected sources of liquidity; • the introduction into the market of the Company’s future products; • the Company’s ability to deliver its backlog in a timely fashion; • the market for the Company’s existing and future products; • the Company’s ability to develop new applications for its technologies; • the exploration, development and production activities of the Company’s customers; • compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures, remedial actions and proceedings; • effects of pending legal proceedings; • changes in customers’ future product and service requirements that may not be cost effective or within the Company’s capabilities; • future operations, financial results, business plans and cash needs; and • 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. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk Factors” in Part II of this report, “Item 1A. Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Investors should note that Dril-Quip announces financial information in SEC filings, press releases and public conference calls. Dril-Quip may use the Investors section of its website ( www.dril-quip.com ) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on Dril-Quip’s website is not part of this Form 10-Q. 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 17 Table of Contents 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 . Overview Dril-Quip, Inc., a Delaware corporation (the “Company” or “Dril-Quip”), designs, manufactures, sells and services highly engineered drilling and production equipment that is well suited primarily for use in deepwater, harsh environment and severe service applications. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors, diverters and safety valves. Dril-Quip’s products are used by major integrated, large independent and foreign national oil and gas companies and drilling contractors throughout the world. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip’s customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products. Business Environment During the 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. 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 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. 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. The Company took advantage of the Payroll Tax Deferral provided by the CARES Act in 2020. The Payroll Tax Deferral allows the Company to defer the payment of the Company’s share of FICA taxes of 6.2%. As such, the Company was able to defer its share of FICA taxes for the period beginning March 27, 2020 and ending December 31, 2020. This resulted in approximately $2.9 million in FICA cash tax payments being deferred to 2021 and 2022. The CARES Act provided for the five-year carryback of Net Operating Losses (“NOLs”) generated in the 2018, 2019 and 2020 taxable years. 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. 18 Table of Contents 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. 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 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 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. Oil and Gas Prices The market for drilling and production equipment and services and the Company’s business are substantially dependent on the condition of the oil and gas industry and, in particular, the willingness of oil and gas companies to make capital expenditures on exploration, drilling and production operations. Oil and gas prices and the level of drilling and production activity have historically been characterized by significant volatility. According to the Energy Information Administration (EIA) of the U.S. Department of Energy, Brent Crude oil prices per barrel are listed below for the periods covered by this report: Three months ended Six months ended June 30, June 30, Brent Crude Oil Price per Barrel 2021 2020 2021 2020 Low $ 61.47 $ 9.12 $ 50.37 $ 9.12 High 76.94 43.20 76.94 70.25 Average 68.98 29.70 64.95 40.23 Closing 76.94 41.64 76.94 41.64 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 six months ended June 30, 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. 19 Table of Contents Six months ended June 30, 2021 2020 Floating Rigs Jack-up Rigs Floating Rigs Jack-up Rigs Western Hemisphere 55 46 58 47 Eastern Hemisphere 41 54 53 68 Asia-Pacific 31 253 38 263 Total 127 353 149 378 Source: 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 . Regulation The demand for the Company’s products and services is also affected by laws and regulations relating to the oil and gas industry in general, including those specifically directed to offshore operations. The adoption of new laws and regulations, or changes to existing laws or regulations that curtail exploration and development drilling for oil and gas for economic or other policy reasons, could adversely affect the Company’s operations by limiting demand for its products. In March 2018, the President of the United States issued a proclamation imposing a 25 percent global tariff on imports of certain steel products, effective March 23, 2018. The President subsequently proposed an additional 25 percent tariff on approximately $50 billion worth of imports from China, and the government of China responded with a proposal of an additional 25 percent tariff on U.S. goods with a value of $50 billion. The initial U.S. tariffs were implemented on July 6, 2018, covering $34 billion worth of Chinese goods, with another $16 billion of goods facing tariffs beginning on August 23, 2018. In September 2018, the President directed the U.S. Trade Representative (USTR) to place additional tariffs on approximately $200 billion worth of additional imports from China. These tariffs, which took effect on September 24, 2018, were initially set at a level of 10 percent until the end of the year, at which point the tariffs were to rise to 25 percent. However, on December 19, 2018, USTR postponed the date on which the rate of the additional duties would increase to 25 percent until March 2, 2019. On May 9, 2019, USTR announced that the United States increased the level of tariffs from 10 percent to 25 percent on approximately $200 billion worth of Chinese imports. The President also ordered USTR to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion. On August 13, 2019 and August 23, 2019, USTR announced the imposition of an additional tariff of 15 percent on approximately $300 billion worth of Chinese imports, effective September 1, 2019 (or December 15, 2019 for certain articles). Following the conclusion of a phase one trade deal with China, USTR suspended the implementation of the 15 percent additional duty on approximately $160 billion worth of Chinese imports and reduced the applicable duty from 15 percent to 7.5 percent for $120 billion worth of Chinese imports. Negotiations for a phase two trade deal with China had begun prior to the outbreak of the global COVID-19 pandemic and if continued could lead to additional changes to the tariff rates described above. However, President Biden has indicated that these tariffs will likely remain in place while the new administration assesses the United States’ current posture, including a review of the phase one trade deal with China. In November 2018, the United States, Mexico and Canada signed the United States-Mexico-Canada Agreement (USMCA), the successor agreement to the North American Free Trade Agreement. The three countries have all ratified the new agreement, and on July 1, 2020, the USMCA became effective. The imposition of any additional tariffs or initiation of trade restrictions by or against the United States could cause our cost of raw materials to increase or affect the markets for our products. However, given the uncertainty regarding the scope and duration of these trade actions by the United States and other countries, their ultimate impact on our business and operations remains uncertain. On June 23, 2016 the United Kingdom (U.K.) held a referendum in which a majority of British voters voted to exit the E.U., commonly known as “Brexit”, with the U.K. officially withdrawing from the E.U. on January 31, 2020. A transition period (during which the trading relationship between the E.U. and the U.K. remained substantially the same as prior to Brexit) followed, and this transition period expired on December 31, 2020. Shortly prior to expiration of the transition period, in December 2020, the U.K. and the E.U. reached an accord on a trade and cooperation agreement (TCA). Brexit and the terms of the TCA brought to an end the U.K.’s automatic access to the E.U. single market, resulting in the U.K. no longer benefitting from the free movement of goods and services between the E.U. and the U.K. The rights of people to freely move between the E.U. and the U.K. have also been restricted. The TCA entered into force on January 1, 2021 and, following formal ratification by the E.U. on April 28, 2021, entered fully into force on May 1, 2021. For more information on the risks associated with Brexit and the TCA, see “Our international operations require us to comply with a number of U.S. and foreign regulations governing the international trade of goods, services and 20 Table of Contents 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. 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. We have not yet pursued any technical amendment or other contractual alternative to address this matter. We are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate. The Company believes that its backlog should help mitigate the impact of negative market conditions; however, slow recovery in commodity prices or an extended downturn in the global economy or future restrictions on, or declines in, oil and gas exploration and production could have a negative impact on the Company and its backlog. The Company’s product backlog at June 30, 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: Three months ended June 30, 2021 March 30, 2021 December 31, 2020 (In thousands) Beginning Backlog $ 196,661 $ 195,650 $ 221,566 Bookings: Product (1) 52,788 58,639 37,259 Service 17,536 17,667 18,235 Leasing 7,401 7,989 7,307 Cancellation/Revision adjustments (3,427 ) (1,048 ) (2,014 ) Translation adjustments 1,028 (997 ) 531 Total Bookings 75,326 82,250 61,318 Revenues: Product 55,860 55,583 61,692 Service 17,536 17,667 18,235 Leasing 7,401 7,989 7,307 Total Revenue 80,797 81,239 87,234 Ending Backlog $ 191,190 $ 196,661 $ 195,650 (1) 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. Employees 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 June 30, 2020, the total number of the Company's employees were 1,572, of which 757 were located in the United States. Revenues . Dril-Quip’s revenues are generated from three sources: products, services and leasing. Product revenues are derived from the sale of drilling and production equipment. Service revenues are earned when the Company provides technical advisory assistance and rework and reconditioning services. Leasing revenues are derived from rental tools used during installation and retrieval of the Company’s products. For the three months ended June 30, 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 21 Table of Contents 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 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. In addition, service contracts are not typically included in the product contracts or related sales orders and are not offered to the customer as a condition of the sale of the Company’s products. The demand for products and services is generally based on worldwide economic conditions in the oil and gas industry and is not based on a specific relationship between the two types of contracts. Substantially all of the Company’s sales are made on a purchase order basis. Purchase orders are subject to change and/or termination at the option of the customer. In case of a change or termination, the customer is required to pay the Company for work performed and other costs necessarily incurred due to the change or termination. Generally, the Company attempts to raise its prices as its costs increase. However, the actual pricing of the Company’s products and services is impacted by a number of factors, including global oil prices, competitive pricing pressure, the level of utilized capacity in the oil service sector, preservation of market share, the introduction of new products and overall market conditions. The Company accounts for more complex, customer specific projects that have relatively longer manufacturing time frames on an over time basis. For the three months ended June 30, 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. Revenues accounted for in this manner are generally recognized based upon a calculation of the percentage complete, which is used to determine the revenue earned and the appropriate portion of total estimated cost of sales to be recognized. Accordingly, price and cost estimates are reviewed periodically as the work progresses, and adjustments proportionate to the percentage complete are reflected in the period when such estimates are revised. Losses, if any, are recorded in full in the period they become known. Amounts received from customers in excess of revenues recognized are classified as a current liability. Cost of Sales . The principal elements of cost of sales are labor, raw materials, manufacturing overhead, and application engineering expenses related to customized products. Cost of sales as a percentage of revenues is influenced by the product mix sold in any particular period, costs from projects accounted for under the over time method, over/under manufacturing overhead absorption, pricing and market conditions. The Company’s costs related to its foreign operations do not significantly differ from its domestic costs. Selling, General and Administrative Expenses . Selling, general and administrative expenses include the costs associated with sales and marketing, general corporate overhead, business development expenses, compensation expense, stock-based compensation expense, legal expenses and other related administrative functions. Engineering and Product Development Expenses . Engineering and product development expenses consist of new product development and testing. Impairments. We evaluate our property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and we could incur additional impairment charges related to the carrying value of our long-lived assets. There were no impairment charges recorded for the three months ended June 30, 2021. Restructuring and Other Charges . Restructuring and other charges consist of costs associated with our global strategic plan that was initiated in 2018 to better align our operations with market conditions. This plan continued in 2020 as a result of the COVID-19 pandemic and the developments in global oil markets. 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. Gain or loss on sale of assets consists of sales of certain property, plant and equipment. Foreign Currency Transaction (Gains) and Losses. Foreign currency transaction (gains) and losses result from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated. Income Tax Provision (Benefit) . The Company’s effective income tax rate fluctuates from the U.S. statutory tax rate based on, among other factors, changes in pretax income in jurisdictions with varying statutory tax rates, impact of valuation allowances, 22 Table of Contents changes in tax legislation, and other permanent differences related to the recognition of income and expense between U.S. GAAP and applicable tax rules. Results of Operations The following table sets forth, for the periods indicated, certain condensed consolidated statements of income (loss) data expressed as a percentage of revenues: Three months ended Six months ended June 30, June 30, 2021 2020 2021 2020 Revenues: Products 69.1 % 69.8 % 68.8 % 70.1 % Services 21.7 22.9 21.7 21.2 Leasing 9.2 7.3 9.5 8.7 Total revenues 100.0 100.0 100.0 100.0 Cost of sales: Products 54.4 55.0 52.5 55.5 Services 10.3 10.2 10.9 10.1 Leasing 11.5 8.8 9.6 8.6 Total cost of sales 76.2 74.0 73.0 74.2 Selling, general and administrative 36.6 25.8 36.5 25.7 Engineering and product development 4.6 5.9 4.8 5.8 Impairments - - - 4.1 Restructuring and other charges 1.2 1.8 16.1 18.4 (Gain) loss on sale of assets 0.1 (0.1 ) (2.4 ) (0.3 ) Foreign currency transaction (gains) and losses (0.6 ) 0.9 0.6 (1.3 ) Operating loss (18.1 ) (8.3 ) (28.6 ) (26.6 ) Interest income 0.1 0.7 0.1 1.0 Interest expense (0.1 ) (0.2 ) (0.3 ) (0.2 ) Loss before income taxes (18.1 ) (7.8 ) (28.8 ) (25.8 ) Income tax provision (benefit) 5.5 7.8 4.2 (7.8 ) Net loss (23.6 )% (15.6 )% (33.0 )% (18.0 )% The following table sets forth, for the periods indicated, a breakdown of our products and service revenues: Three months ended Six months ended June 30, June 30, 2021 2020 2021 2020 (In millions) Revenues: Products: Subsea equipment $ 40.1 $ 47.5 $ 78.2 $ 99.4 Surface equipment 2.5 3.8 5.8 7.7 Downhole tools 9.7 8.4 21.6 17.1 Offshore rig equipment 3.6 3.4 5.8 6.5 Total products 55.9 63.1 111.4 130.7 Services 17.5 20.7 35.2 39.5 Leasing 7.4 6.6 15.4 16.2 Total revenues $ 80.8 $ 90.4 $ 162.0 $ 186.4 Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 Revenues. 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 23 Table of Contents 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. 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 $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. lawsuit. 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. 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. 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 24 Table of Contents 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 . 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 $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. 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 $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 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 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 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 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 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 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%. 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. 25 Table of Contents Net Loss. 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 We have performed a detailed analysis of the non-GAAP measures that are relevant to our business and its operations and determined that the appropriate unit of measure to analyze our performance is Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, as well as other significant non-cash items and other adjustments for certain charges and credits). The Company believes that the exclusion of these charges and credits from these financial measures enables it to evaluate more effectively the Company's operations period over period and to identify operating trends that could otherwise be masked by excluded items. It is our determination that Adjusted EBITDA is a more relevant measure of how the Company reviews its ability to meet commitments and pursue capital projects. Adjusted EBITDA We calculate Adjusted EBITDA as one of the indicators to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure. This measurement is used in concert with net income and cash flows from operations, which measures actual cash generated in the period. In addition, we believe that Adjusted EBITDA is a supplemental measurement tool used by analysts and investors to help evaluate overall operating performance, ability to pursue and service possible debt opportunities and analyze possible future capital expenditures. Adjusted EBITDA does not represent funds available for our discretionary use and is not intended to represent or to be used as a substitute for net income, as measured under U.S. generally accepted accounting principles. The items excluded from Adjusted EBITDA, but included in the calculation of reported net income, are significant components of the condensed consolidated statements of income (loss) and must be considered in performing a comprehensive assessment of overall financial performance. Our calculation of Adjusted EBITDA may not be consistent with calculations of Adjusted EBITDA used by other companies. The following table reconciles our reported net income to Adjusted EBITDA for each of the respective periods: Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 (In thousands) Net loss $ (19,067 ) $ (14,142 ) $ (53,425 ) $ (33,840 ) Add: Interest (income) expense, net (4 ) (444 ) 386 (1,459 ) Income tax provision (benefit) 4,407 7,081 6,793 (14,528 ) Depreciation and amortization expense 7,343 7,940 14,759 16,813 Impairments - - - 7,719 Restructuring and other charges (2) 7,250 1,587 30,820 34,300 (Gain) loss on sale of assets 82 (85 ) (3,873 ) (552 ) Foreign currency transaction (gains) and losses (475 ) 817 899 (2,425 ) Stock compensation expense 3,079 3,282 6,265 6,458 Brazilian amnesty settlement - - 1,787 - Adjusted EBITDA (1) $ 2,615 $ 6,036 $ 4,411 $ 12,486 (1) Adjusted EBITDA does not measure financial performance under GAAP and, accordingly, should not be considered as an alternative to net income as an indicator of operating performance. (2) Restructuring and other charges include legal expenses related to the FMC Technologies, Inc. lawsuit. These legal expenses are included in "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). 26 Table of Contents Liquidity and Capital Resources Cash Flows Cash flows provided by (used in) type of activity were as follows: Six months ended June 30, 2021 2020 (In thousands) Operating activities $ 24,415 $ (18,191 ) Investing activities 325 (5,180 ) Financing activities (77 ) (25,129 ) 24,663 (48,500 ) Effect of exchange rate changes on cash activities (137 ) (4,638 ) Increase (decrease) in cash and cash equivalents $ 24,526 $ (53,138 ) Statements of cash flows for entities with international operations that are local currency functional exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are non-cash changes. As a result, changes reflected in certain accounts on the condensed consolidated statements of cash flows may not reflect the changes in corresponding accounts on the condensed consolidated balance sheets. The primary liquidity needs of the Company are (i) to fund capital expenditures to improve and expand facilities and manufacture additional running tools and (ii) to fund working capital. The Company’s principal source of funds is cash flows from operations. 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. Further, the Company adjusted the workforce to be in line with the current situation as we continue to monitor the ongoing market conditions. We believe our business model, our current cash reserves and the recent downhole tools business restructuring and facility realignment will strengthen our balance sheet and leave us well-positioned to manage our business through this crisis as it continues to unfold. We continue to review potential scenarios in connection with the impact of COVID-19 on the global economy and the oil and gas industry. Based on our analysis, we believe our existing balances of cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months. Net cash 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 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. 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. 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. 27 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 . Asset Backed Loan (ABL) Credit 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. Off-Balance Sheet Arrangements The Company currently has no derivative instruments and no off-balance sheet hedging or financing arrangements, contracts or operations. Other Matters From time to time, the Company enters into discussions or negotiations to acquire other businesses or enter into joint ventures. The timing, size or success of any such efforts and the associated potential capital commitments are unpredictable and dependent on market conditions and opportunities existing at the time. The Company may seek to fund all or part of any such efforts with proceeds from debt or equity issuances. Debt or equity financing may not, however, be available at that time due to a variety of circumstances, including, among others, the Company’s credit ratings, industry conditions, general economic conditions and market conditions. Critical Accounting Policies 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 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.