Dril-Quip(DRQ) - 2019 Q4 - Annual Report

PART I Business Dril-Quip, Inc. designs, manufactures, and services highly engineered drilling and production equipment for deepwater and harsh environments, with revenue primarily from product sales and significant international operations - The company's principal products include subsea and surface wellheads, production trees, control systems, and riser systems, serving major integrated, independent, and national oil and gas companies worldwide[13] Revenue Breakdown by Source (2017-2019) | Revenue Source | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Products | 73.1% | 68.9% | 77.1% | | Services | 17.4% | 18.8% | 13.6% | | Leasing | 9.5% | 12.3% | 9.3% | - International operations are significant, with foreign sales accounting for approximately 65.0% of revenues in 2019, an increase from 61.0% in 2018 and 55.0% in 2017[13][16] Brent Crude Oil Prices per Barrel (2017-2019) | Year | High | Low | Average | | :--- | :--- | :--- | :--- | | 2019 | $74.94 | $53.23 | $64.28 | | 2018 | $86.07 | $50.57 | $71.34 | | 2017 | $66.80 | $43.98 | $54.15 | - Product backlog was approximately $272.5 million at the end of 2019, a slight increase from $270.0 million at the end of 2018. The 2019 backlog was negatively impacted by $61.0 million in cancellations, including the termination of the Ca Rong Do Project in Vietnam[28][31] - The company's customer base is concentrated, with the top 15 customers representing 52% of total revenues in 2019. BP and its affiliates were the largest customer, accounting for approximately 10% of total revenues[27] - As of December 31, 2019, the company had 1,814 employees, a 6% reduction from 1,926 employees at the end of 2018, resulting from worldwide workforce reductions and attrition[38] Risk Factors The company faces significant risks tied to the oil and gas industry's cyclical nature, including dependency on customer capital expenditures, volatile commodity prices, intense competition, international operations, and potential backlog cancellations - The business is highly dependent on the capital expenditures of oil and gas companies, which are influenced by volatile oil and gas prices and broader economic conditions. The recent COVID-19 outbreak is noted as a risk that could negatively impact demand[47][59] - Competition is a major risk, as several primary competitors are larger, more diversified multinational companies with greater capital resources and longer operating histories[50] - The company's backlog is subject to unexpected adjustments and cancellations, as exemplified by the termination of the Ca Rong Do Project in Vietnam during the third quarter of 2019[54] - International operations, which accounted for 65% of 2019 revenue, expose the company to risks such as political instability, currency fluctuations, changes in tax laws, and trade policies. The uncertainty surrounding Brexit is specifically highlighted as a risk to the company's U.K. operations[56][59] - The company is subject to extensive governmental regulations, including environmental, health, and safety laws. Changes in these regulations, particularly those curtailing offshore drilling, could increase costs and limit demand for its products[68][71] Unresolved Staff Comments The company reports that there are no unresolved staff comments from the Securities and Exchange Commission - None[79] Properties Dril-Quip owns and leases numerous properties globally for its manufacturing, sales, service, and reconditioning activities, with major manufacturing facilities in Houston, Aberdeen, Singapore, and Macae Major Manufacturing Facilities | Location | Approx. Size (sq. ft.) | Acreage | Ownership | | :--- | :--- | :--- | :--- | | Houston, TX (N. Eldridge) | 1,731,000 | 218 | Owned | | Aberdeen, Scotland | 222,800 | 24.1 | Owned | | Singapore | 293,200 | 14.4 | Leased | | Macae, Brazil | 169,600 | 10.6 | Owned | - The company also operates numerous smaller sales, service, and reconditioning facilities in key energy markets across North and South America, Europe, Africa, and Asia-Pacific[86] Legal Proceedings The company is involved in a tax dispute in Brazil, with assessments of approximately $13.0 million related to tax credits, which the company has appealed and expects to win - The company's Brazilian subsidiary was served with two tax assessments totaling approximately $13.0 million by the State of Rio de Janeiro related to the cancellation of tax credits from July 2005 to October 2007[87] - The company has appealed the assessments in a judicial court and deposited approximately $8.8 million with the court. Management believes the credits are valid and has not accrued any liability for this matter[87] Mine Safety Disclosure This item is not applicable to the company's operations - Not applicable[89] PART II Market for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Dril-Quip's common stock trades on the New York Stock Exchange under "DRQ," with no current dividends, and the company repurchased approximately $26.6 million of its common stock during 2019 - The company's common stock is traded on the New York Stock Exchange under the symbol "DRQ"[92] - The company has not paid dividends and does not anticipate paying any in the foreseeable future, intending to reinvest earnings into the business[92] - On February 26, 2019, a new $100.0 million stock repurchase plan was authorized. During 2019, the company repurchased 615,940 shares for approximately $26.6 million at an average price of $43.12 per share[94] Selected Financial Data This section provides a five-year summary of key financial data, with 2019 total revenues of $414.8 million and net income of $1.7 million, a significant improvement from prior losses Selected Financial Data (2017-2019, in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Revenues | $414,806 | $384,626 | $455,469 | | Operating Income (Loss) | $2,803 | $(122,738) | $(69,136) | | Net Income (Loss) | $1,720 | $(95,695) | $(100,639) | | Diluted EPS | $0.05 | $(2.58) | $(2.69) | | Net Cash from Ops | $14,678 | $45,503 | $107,993 | | Total Assets | $1,206,565 | $1,192,510 | $1,399,805 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 2019 financial results, highlighting a 7.8% revenue increase to $414.8 million and a return to $1.7 million net income, covering key operational and financial aspects - Revenues for 2019 increased by $30.2 million (7.8%) to $414.8 million, primarily due to a $38.3 million increase in product revenues, reflecting improved market conditions for exploration and production equipment[120] - Net income was $1.7 million in 2019, a significant turnaround from a net loss of $95.7 million in 2018. The 2018 loss was heavily impacted by $98.6 million in impairment, restructuring, and other charges[120][115] - Cost of sales as a percentage of revenue decreased to 71.1% in 2019 from 76.3% in 2018, attributed to lower unabsorbed manufacturing costs and savings from transformation initiatives[120] - Net cash provided by operating activities decreased to $14.7 million in 2019 from $45.5 million in 2018, primarily due to changes in operating assets and liabilities, including an increase in inventory and unbilled receivables[126] Backlog Reconciliation (2018-2019, in thousands) | Description | 2019 | 2018 | | :--- | :--- | :--- | | Beginning Backlog | $269,968 | $207,303 | | Total Bookings | $417,375 | $447,291 | | Total Revenue | ($414,806) | ($384,626) | | Ending Backlog | $272,537 | $269,968 | Reconciliation to Adjusted EBITDA (2017-2019, in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net income (loss) | $1,720 | $(95,695) | $(100,639) | | Adjustments | $52,079 | $113,125 | $161,177 | | Adjusted EBITDA | $53,799 | $17,430 | $60,538 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are related to interest rate changes on investments and foreign currency exchange rate fluctuations, with a 10% adverse movement potentially decreasing 2019 revenues by approximately $13.8 million - The company is exposed to market risks from interest rate changes and foreign currency exchange rate fluctuations[149] - A sensitivity analysis showed that a 10% adverse movement in foreign currency exchange rates against the U.S. dollar would have resulted in a decrease in revenues of approximately $13.8 million and a decrease in net income of approximately $3.2 million for 2019[150] Financial Statements and Supplementary Data This section includes the company's consolidated financial statements for 2019 and PricewaterhouseCoopers LLP's unqualified auditor's report, highlighting the allowance for slow-moving and excess inventory as a critical audit matter - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019[155] - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[160] - The auditor identified the 'Allowance for Slow Moving and Excess Inventory' as a Critical Audit Matter due to the significant management judgment and auditor subjectivity required to evaluate assumptions about future demand and sales[168][169] Consolidated Income Statement Highlights (2019, in thousands) | Line Item | Amount | | :--- | :--- | | Total Revenues | $414,806 | | Gross Profit | $119,799 | | Operating Income | $2,803 | | Net Income | $1,720 | Consolidated Balance Sheet Highlights (As of Dec 31, 2019, in thousands) | Line Item | Amount | | :--- | :--- | | Cash and cash equivalents | $398,946 | | Total Current Assets | $880,489 | | Total Assets | $1,206,565 | | Total Liabilities | $115,864 | | Total Stockholders' Equity | $1,090,701 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[286] Controls and Procedures Based on an evaluation as of December 31, 2019, the company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, with no material changes to internal controls over financial reporting during the fourth quarter of 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[287] - No material changes in internal controls over financial reporting occurred during the fourth quarter of 2019[287] Other Information The company reports no other information for this item - None[288] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's 2020 Proxy Statement[291] Executive Compensation Information regarding director and executive compensation is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's 2020 Proxy Statement[292] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's 2020 Proxy Statement[293] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's 2020 Proxy Statement[294] Principal Accountant Fees and Services Information regarding fees paid to the principal accountant and the audit committee's pre-approval policies is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's 2020 Proxy Statement[295] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K, including Schedule II—Valuation and Qualifying Accounts - This item lists all financial statements, schedules, and exhibits filed with the report[298] Schedule II—Valuation and Qualifying Accounts (Year ended Dec 31, 2019, in thousands) | Description | Beginning Balance | Charges to Costs | Write-offs | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | Allowance for doubtful trade receivables | $5,666 | $617 | $(4,069) | $2,214 | | Allowance for slow moving/excess inventory | $108,567 | $1,032 | $(38,579) | $71,020 | Form 10-K Summary This item is not applicable - Not applicable[315]