Dril-Quip(DRQ) - 2020 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This part details Dril-Quip's financial performance, condition, and operational results, including statements and management analysis Item 1. Condensed Consolidated Financial Statements Presents Dril-Quip's unaudited condensed consolidated financial statements, including balance sheets, income statements, and detailed notes Balance Sheets Provides a snapshot of Dril-Quip's financial position, detailing assets, liabilities, and stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--------------------------- | :------------ | :---------------- | | Total Assets | $1,147,691 | $1,206,565 | | Cash and Cash Equivalents | $345,808 | $398,946 | | Goodwill | $- | $7,947 | | Total Liabilities | $132,304 | $115,864 | | Total Stockholders' Equity | $1,015,387 | $1,090,701 | Statements of Income (Loss) Presents Dril-Quip's revenues, expenses, and net income or loss over specific reporting periods Condensed Consolidated Statements of Income (Loss) Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Revenues | $90,446 | $103,808 | $186,444 | $198,125 | | Operating Income (Loss) | $(7,505) | $2,120 | $(49,827) | $(3,482) | | Net Income (Loss) | $(14,142) | $1,681 | $(33,840) | $(4,369) | | Basic Income (Loss) per Common Share | $(0.40) | $0.05 | $(0.96) | $(0.12) | Statements of Comprehensive Income (Loss) Details Dril-Quip's net income or loss and other comprehensive income components, such as foreign currency adjustments Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (Loss) | $(14,142) | $1,681 | $(33,840) | $(4,369) | | Foreign Currency Translation Adjustments | $2,048 | $(2,317) | $(22,931) | $(690) | | Total Comprehensive Loss | $(12,094) | $(636) | $(56,771) | $(5,059) | Statements of Cash Flows Outlines Dril-Quip's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Activity | 2020 | 2019 | | :------------------------------------------ | :--------- | :--------- | | Net Cash Provided by (Used in) Operating Activities | $(18,191) | $10,650 | | Net Cash Used in Investing Activities | $(5,180) | $(3,033) | | Net Cash Used in Financing Activities | $(25,129) | $(1,996) | | Increase (Decrease) in Cash and Cash Equivalents | $(53,138) | $5,026 | | Cash and Cash Equivalents at End of Period | $345,808 | $423,126 | Statements of Stockholders' Equity Shows changes in Dril-Quip's equity accounts, including net loss, stock repurchases, and translation adjustments Condensed Consolidated Statements of Stockholders' Equity Highlights (Six Months Ended June 30, in thousands) | Metric | January 1, 2020 | June 30, 2020 | | :---------------------------------- | :-------------- | :------------ | | Balance at Beginning of Period | $1,090,701 | $1,090,701 | | Foreign Currency Translation Adjustment | $(22,931) | $(22,931) | | Net Loss | $(33,840) | $(33,840) | | Repurchase of Common Stock | $(25,000) | $(25,000) | | Stock Option Expense | $6,458 | $6,458 | | Balance at End of Period | $1,015,387 | $1,015,387 | Notes to Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. Organization and Basis of Presentation Describes Dril-Quip's business, geographic segments, and the significant impact of the COVID-19 pandemic - Dril-Quip designs, manufactures, sells, and services highly engineered drilling and production equipment for deepwater, harsh environment, and severe service applications[32] - The company's operations are organized into three geographic segments: Western Hemisphere, Eastern Hemisphere, and Asia-Pacific[32] - The COVID-19 pandemic and disputes over oil production have significantly reduced global economic activity and caused declines in crude oil prices, creating a challenging industry environment with potential material adverse impacts on the company's performance[32] Note 2. Significant Accounting Policies Details Dril-Quip's key accounting policies, including goodwill impairment, restructuring charges, and share repurchases - A $7.7 million goodwill impairment loss was recorded in the first quarter of 2020, entirely within the Eastern Hemisphere reporting unit, due to declining offshore market conditions, lower commodity prices, and reduced customer capital budgets[39] - Restructuring and other charges for the six months ended June 30, 2020, totaled $34.3 million, including $17.3 million in inventory write-downs, $8.4 million in severance, and $7.8 million in long-lived asset write-downs, driven by market conditions and a global strategic plan[42][56] - The company repurchased 808,389 shares of common stock for approximately $25.0 million during the six months ended June 30, 2020, under its share repurchase plan[43] Note 3. New Accounting Standards Discusses Dril-Quip's assessment of recently issued accounting standards and their potential financial impact - The company is assessing the impact of ASU 2020-04 'Reference Rate Reform (Topic 848)' and ASU 2019-12 'Income Taxes (Topic 740)' on its financial position, results of operations, or cash flows[48] Note 4. Revenue Recognition Explains Dril-Quip's revenue recognition policies and provides a breakdown of revenues by type Revenue by Type (in thousands) | Revenue Type | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :----------------------------- | | Product Revenues | $63,133 | $130,691 | | Service Revenues | $20,750 | $39,564 | | Total | $83,883 | $170,255 | - The aggregate amount of the transaction price allocated to remaining performance obligations from over time product lines was $92.7 million as of June 30, 2020, with approximately 62.3% expected to be recognized over the next 12 months[52] Note 5. Stock-Based Compensation and Stock Awards Presents Dril-Quip's stock-based compensation expenses for various reporting periods Stock-Based Compensation Expense (in thousands) | Period | June 30, 2020 | June 30, 2019 | | :------------- | :------------ | :------------ | | Three Months | $3,300 | $3,200 | | Six Months | $6,500 | $8,100 | Note 6. Inventories, net Details Dril-Quip's inventory components, including raw materials, work in progress, and finished goods Inventories, net (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :------------------------------------------ | :------------ | :---------------- | | Raw materials and supplies | $40,100 | $46,282 | | Work in progress | $49,863 | $54,171 | | Finished goods | $204,402 | $175,629 | | Less: allowance for slow moving and excess inventory | $(81,953) | $(71,020) | | Total Inventory | $212,412 | $205,062 | Note 7. Impairment, Restructuring and Other Charges Outlines Dril-Quip's goodwill impairment and restructuring charges, including inventory write-downs and severance - Goodwill impairment of $7.7 million was recorded in the first quarter of 2020, all in the Eastern Hemisphere, due to market conditions[59] Components of Restructuring and Other Charges (Six Months Ended June 30, 2020, in thousands) | Component | Amount | | :-------------------------- | :------- | | Inventory write-down | $17,272 | | Severance | $8,399 | | Long-lived asset write-down | $7,854 | | Other | $775 | | Total | $34,300 | - The accrued liability balance related to restructuring and other charges was $7,055 thousand at June 30, 2020[58] Note 8. Intangible Assets Provides a breakdown of Dril-Quip's net intangible assets, including trademarks, patents, and customer relationships Net Intangible Assets (in thousands) | Asset Type | June 30, 2020 | December 31, 2019 | | :------------------- | :------------ | :---------------- | | Trademarks | $7,390 | $7,694 | | Patents | $3,540 | $3,416 | | Customer relationships | $19,376 | $20,955 | | Non-compete agreements | $- | $1 | | Organizational costs | $167 | $179 | | Total Net Book Value | $30,473 | $32,245 | Note 9. Asset Backed Loan (ABL) Credit Facility Describes Dril-Quip's senior secured revolving ABL Credit Facility and its available capacity - The company has a five-year senior secured revolving ABL Credit Facility with total commitments of $100.0 million[61] - As of June 30, 2020, the availability under the ABL Credit Facility was $38.0 million, and the company was in compliance with all related covenants[63] Note 10. Geographic Areas Presents Dril-Quip's total revenues and impairment charges broken down by geographic segment Total Revenues by Geographic Segment (in thousands) | Segment | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :----------------- | :------------------------------- | :----------------------------- | | Western Hemisphere | $55,952 | $116,455 | | Eastern Hemisphere | $20,324 | $45,920 | | Asia-Pacific | $20,589 | $36,389 | | Eliminations | $(6,419) | $(12,320) | | Total Revenues | $90,446 | $186,444 | - During the six months ended June 30, 2020, impairments, restructuring, and other charges totaled $42.0 million, with $32.1 million 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[66] Note 11. Income Tax Details Dril-Quip's effective tax rates and the impact of the CARES Act and foreign tax liabilities Effective Tax Rate | Period | June 30, 2020 | June 30, 2019 | | :------------- | :------------ | :------------ | | Three Months | (100.3)% | 65.0% | | Six Months | 30.0% | 503.5% | - The CARES Act discretely impacted and increased the effective tax rate by 69.1% in the current period due to provisions relating to net operating loss carryback periods[68] - The company reversed its indefinite reinvestment assertion for foreign earnings, recording a deferred foreign tax liability of $3.4 million related to estimated foreign withholding tax[71] Note 12. Contingencies Discusses Dril-Quip's involvement in a Brazilian tax dispute and management's assessment of legal liabilities - The company is involved in a Brazilian tax dispute with two assessments totaling approximately $13.0 million, which it is appealing, believing success in the judicial court process is probable[72] - Management believes that the ultimate liability from ongoing legal actions will not have a material adverse effect on the company's results of operations, financial position, or cash flows[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on Dril-Quip's financial performance, condition, and cash flows, impacted by market volatility Overview Describes Dril-Quip's core business of designing and manufacturing drilling and production equipment for severe applications - Dril-Quip designs, manufactures, sells, and services highly engineered drilling and production equipment primarily for deepwater, harsh environment, and severe service applications[76] - The company's principal products include subsea and surface wellheads, production trees, control systems, riser systems, and various tools, used by major oil and gas companies globally[76] Business Environment Analyzes the impact of the COVID-19 pandemic, oil market disputes, and other factors on Dril-Quip's operations - The COVID-19 pandemic and global oil market disputes have caused significant economic disruption, reduced oil and gas demand, supply chain disruptions, and delays in product shipments and production[77] - The company deferred approximately $3.1 million in FICA cash tax payments to 2021 under the CARES Act and expects a $24.0 million NOL carryback refund in 2020[77][79] Brent Crude Oil Price per Barrel (Average) | Period | June 30, 2020 | June 30, 2019 | | :------------------------- | :------------ | :------------ | | Three Months Ended | $29.70 | $69.04 | | Six Months Ended | $40.23 | $66.07 | Average Contracted Offshore Rig Count | Rig Type | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------- | :----------------------------- | :----------------------------- | | Floating Rigs | 149 | 154 | | Jack-up Rigs | 378 | 357 | | Total | 527 | 511 | - Rigs under construction decreased by approximately 21.5% from 93 rigs at June 30, 2019, to 73 rigs at June 30, 2020, potentially limiting future product supply[88] Backlog (in thousands) | Period | June 30, 2020 | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------ | :------------- | :---------------- | | Beginning Backlog | $261,132 | $272,537 | $250,673 | | Total Bookings | $67,181 | $84,593 | $130,318 | | Total Revenue | $90,446 | $95,998 | $108,454 | | Ending Backlog | $237,867 | $261,132 | $272,537 | - The total number of employees decreased by 7% from December 2019 to 1,572 as of June 30, 2020, due to worldwide workforce reductions and natural attrition[93] - Brexit continues to pose uncertainties regarding trade and customs requirements, and potential volatility in the British pound sterling[96] Results of Operations Compares Dril-Quip's financial performance across different periods, highlighting revenue, costs, and profitability changes Revenue Composition as a Percentage of Total Revenues | Revenue Type | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :------------- | :------------------------------- | :----------------------------- | | Products | 69.8% | 70.1% | | Services | 22.9% | 21.2% | | Leasing | 7.3% | 8.7% | - Total revenues decreased by 12.9% to $90.4 million for the three months ended June 30, 2020, and by 5.9% to $186.4 million for the six months ended June 30, 2020, primarily due to decreased product revenues[102][106] - Cost of sales as a percentage of revenues increased to 74.0% for the three months and 74.2% for the six months ended June 30, 2020, due to COVID-19 disruptions and dilutive revenue mix[104][106] - Engineering and product development expenses increased by 24.1% to $10.9 million for the six months ended June 30, 2020, driven by strategic growth initiatives and R&D efforts[106] - Net loss for the six months ended June 30, 2020, was $33.8 million, significantly higher than the $4.4 million net loss in the prior year, primarily due to lower revenues, increased impairment, and restructuring charges[108] Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 Compares Dril-Quip's financial results for the three months ended June 30, 2020, against the prior year - Revenues decreased by $13.4 million (12.9%) to $90.4 million, primarily due to a $14.1 million decrease in product revenues, partially offset by a $4.1 million increase in service revenues[102][104] - Leasing revenues decreased by $3.4 million, mainly due to reduced subsea rental tool utilization and COVID-19 related travel restrictions[104] - Net loss was $14.1 million, compared to a net income of $1.7 million in the prior year, driven by lower revenues, increased restructuring charges ($1.6 million vs. $1.0 million), and a foreign exchange loss[104][105] Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Compares Dril-Quip's financial results for the six months ended June 30, 2020, against the prior year - Revenues decreased by $11.7 million (5.9%) to $186.4 million, with product revenues down $12.0 million, while service revenues increased by $4.5 million[106] - The company recorded a $7.7 million goodwill impairment loss in the Eastern Hemisphere and $34.3 million in restructuring and other charges, significantly impacting profitability[106] - Net loss was $33.8 million, compared to a net loss of $4.4 million in the prior year, primarily due to the aforementioned factors and a higher effective tax rate[108] Non-GAAP Financial Measures Presents Dril-Quip's Adjusted EBITDA as a non-GAAP measure to evaluate operational performance - Adjusted EBITDA is used as a non-GAAP measure to evaluate operational performance by removing the effect of capital structure and certain non-cash items[110] Adjusted EBITDA (in thousands) | Period | June 30, 2020 | June 30, 2019 | | :------------- | :------------ | :------------ | | Three Months | $6,036 | $13,432 | | Six Months | $12,486 | $22,727 | Liquidity and Capital Resources Discusses Dril-Quip's cash position, operating cash flows, financing activities, and available credit facilities - Cash and cash equivalents decreased to $345.8 million at June 30, 2020, from $398.9 million at December 31, 2019[8][113] - Net cash used in operating activities for the six months ended June 30, 2020, was $18.2 million, a significant shift from $10.7 million provided in the prior year, primarily due to changes in operating assets and liabilities and increased net loss[115] - The company used $25.1 million in financing activities, mainly for repurchasing 808,389 common shares for approximately $25.0 million during the six months ended June 30, 2020[115][116] - As of June 30, 2020, the company had $38.0 million available under its ABL Credit Facility[117] - Management believes existing cash reserves and anticipated operating cash flows will be sufficient to meet cash needs for the next twelve months[113] Critical Accounting Policies Confirms no material changes to Dril-Quip's critical accounting policies during the reporting period - There were no material changes in the company's critical accounting policies or associated judgments and assumptions during the six months ended June 30, 2020[121] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details Dril-Quip's exposure to interest rate and foreign exchange risks, noting no material hedging activities - The company is exposed to market risks related to interest rate changes on short-term investments and fluctuations in foreign exchange rates[122] - The company does not engage in any material hedging transactions, forward contracts, or currency trading[123] Foreign Currency Pre-tax (Loss)/Gain (in millions) | Period | June 30, 2020 | June 30, 2019 | | :------------- | :------------ | :------------ | | Three Months | $(0.8) | $0.2 | | Six Months | $2.4 | $0.9 | Item 4. Controls and Procedures States the effectiveness of Dril-Quip's disclosure controls and procedures, with no material changes in internal control - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[124] - There were no material changes in the company's internal control over financial reporting during the three months ended June 30, 2020[124] PART II—OTHER INFORMATION This part includes information on legal proceedings, risk factors, and equity security sales Item 1. Legal Proceedings Refers to Note 12, 'Contingencies,' for a description of Dril-Quip's legal proceedings - For a description of the company's legal proceedings, refer to Note 12, 'Contingencies,' in the Notes to Condensed Consolidated Financial Statements[127] Item 1A. Risk Factors States no material changes to the risk factors previously disclosed in Dril-Quip's prior annual and quarterly reports - No material changes from the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, and the Quarterly Report on Form 10-Q for the period ended March 31, 2020[128] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details Dril-Quip's common stock repurchases and cancellations under its authorized share repurchase plan Common Stock Repurchase and Cancellation (Six Months Ended June 30, 2020) | Metric | Value | | :------------------------------------------ | :-------------------- | | Total Number of Shares Purchased | 808,389 | | Average Price Paid per Share | $30.91 | | Total Value of Shares Purchased | ~$25.0 million | | Maximum Value Remaining Under Plan | $48.5 million | - The share repurchase plan, authorized on February 26, 2019, allows for repurchases of up to $100.0 million of common stock with no set expiration date[130] FORWARD LOOKING STATEMENTS Identifies forward-looking statements and outlines the substantial risks and uncertainties that could affect future results Forward-Looking Statements Disclosure Identifies forward-looking statements and outlines the substantial risks and uncertainties that could affect future results - Forward-looking statements are identified by words such as 'anticipate,' 'estimate,' 'expect,' 'may,' 'project,' and 'believe,' and involve substantial risks and uncertainties[133] - Key risks include the impact of the COVID-19 pandemic, actions by OPEC and non-OPEC nations, oil and natural gas price volatility, economic uncertainties, political tensions, regulatory actions, operating interruptions, project terminations, and fluctuations in foreign currency[133][135] - The company cautions against undue reliance on forward-looking statements and undertakes no obligation to publicly update or revise any such statement, as actual future results could differ materially[135] Item 6. Exhibits This part lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents and certifications Exhibits List Lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents and certifications - The exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, Form of Certificate representing Common Stock, Rule 13a-14(a)/15d-14(a) Certifications (CEO and CFO), Section 1350 Certifications (CEO and CFO), and various Inline XBRL documents[137] SIGNATURE This part contains the official signature for the Quarterly Report on Form 10-Q Report Signature Confirms the signing of the Quarterly Report on Form 10-Q by Dril-Quip, Inc.'s Chief Financial Officer - The report is signed by Raj Kumar, Vice President – Chief Financial Officer, on behalf of Dril-Quip, Inc[142] - The signing date of the report is July 30, 2020[142]