Dril-Quip(DRQ) - 2022 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents the company's unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | ASSETS | | | | Total current assets | $717,376 | $745,549 | | Total assets | $978,110 | $1,010,426 | | LIABILITIES | | | | Total current liabilities | $70,321 | $93,663 | | Total liabilities | $90,335 | $113,318 | | EQUITY | | | | Total stockholders' equity | $887,775 | $897,108 | Condensed Consolidated Statements of Income (Loss) Condensed Consolidated Statements of Income (Loss) | Metric (in thousands, except per share data) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $83,137 | $81,239 | | Total cost of sales | $63,995 | $56,787 | | Selling, general and administrative | $22,393 | $29,558 | | Engineering and product development | $3,676 | $4,037 | | Restructuring and other charges | $32 | $25,020 | | Operating loss | $(5,591) | $(31,582) | | Loss before income taxes | $(5,442) | $(31,972) | | Income tax provision (benefit) | $3,496 | $2,386 | | Net loss | $(8,938) | $(34,358) | | Basic loss per common share | $(0.26) | $(0.97) | | Diluted loss per common share | $(0.26) | $(0.97) | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $(8,938) | $(34,358) | | Foreign currency translation adjustments | $2,886 | $(2,090) | | Total comprehensive income (loss) | $(6,052) | $(36,448) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :-------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $(10,928) | $13,072 | | Net cash provided by (used in) investing activities | $(1,858) | $3,431 | | Net cash used in financing activities | $(5,859) | $(40) | | Effect of exchange rate changes on cash activities | $1,202 | $(205) | | Increase (decrease) in cash and cash equivalents | $(17,443) | $16,258 | | Cash and cash equivalents at end of period | $338,008 | $362,213 | Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity | Metric (in thousands, except shares) | Balance at January 1, 2022 | Balance at March 31, 2022 | | :----------------------------------- | :------------------------- | :------------------------ | | Common Stock | $352 | $349 | | Additional Paid-In Capital | $80,254 | $82,781 | | Retained Earnings | $973,087 | $958,344 | | Accumulated Other Comprehensive Losses | $(156,585) | $(153,699) | | Total Stockholders' Equity | $897,108 | $887,775 | | Repurchase of common shares | - | $(5,808) | | Stock-based compensation expense | - | $2,527 | Notes to Condensed Consolidated Financial Statements 1. Organization and Basis of Presentation The company designs and manufactures engineered drilling equipment for severe service applications across three geographic segments - Dril-Quip's core business involves highly engineered drilling and production equipment for deepwater, harsh environment, and severe service applications[29] - Operations are organized into three geographic segments: Western Hemisphere, Eastern Hemisphere, and Asia-Pacific, with manufacturing facilities in each regional headquarters[29] 2. Significant Accounting Policies This note outlines key accounting policies, including revenue recognition, and details a new share repurchase plan - The Board of Directors authorized an incremental $100 million share repurchase plan on February 22, 2022, bringing the cumulative authorized amount to approximately $118 million[36] - For the three months ended March 31, 2022, the Company repurchased 273,629 shares at an average price of approximately $21.20 per share, totaling approximately $5.8 million[36] - Revenues are generated from the sale of products, services, and the leasing of running tools, with recognition based on contract terms[32][33] 3. Revenue Recognition This section details revenue by segment and type, contract balances, and remaining performance obligations Revenue by Geographic Segment and Type (Q1 2022) | Revenue Type (in thousands) | Western Hemisphere 2022 | Eastern Hemisphere 2022 | Asia-Pacific 2022 | Total 2022 | | :-------------------------- | :---------------------- | :---------------------- | :---------------- | :--------- | | Product Revenues | $36,661 | $11,783 | $7,198 | $55,642 | | Service Revenues | $11,585 | $3,262 | $2,652 | $17,499 | | Total | $48,246 | $15,045 | $9,850 | $73,141 | Contract Balances | Contract Balances (in thousands) | December 31, 2021 | March 31, 2022 | | :------------------------------- | :---------------- | :------------- | | Contract Assets | $97,716 | $104,101 | | Contract Liabilities | $9,222 | $5,028 | - The aggregate amount of the transaction price allocated to remaining performance obligations from over-time product lines was $86.5 million as of March 31, 2022, with approximately 93.4% expected to be recognized over the next 12 months[44] 4. Stock-Based Compensation and Stock Awards This note reports the stock-based compensation expense for the first quarters of 2022 and 2021 Stock-Based Compensation Expense | Metric (in millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Stock-based compensation expense | $2.5 | $3.2 | 5. Inventories, net This note provides a detailed breakdown of the company's inventory components and related allowances Inventory Components | Inventory Component (in thousands) | March 31, 2022 | December 31, 2021 | | :--------------------------------- | :------------- | :---------------- | | Raw materials and supplies | $28,609 | $27,398 | | Work in progress | $27,096 | $28,361 | | Finished goods | $211,226 | $218,946 | | Total inventory (gross) | $266,931 | $274,705 | | Less: allowance for slow moving and excess inventory | $(125,642) | $(128,981) | | Total inventory (net) | $141,289 | $145,724 | 6. Impairment, Restructuring and Other Charges This note details a significant reduction in restructuring charges in Q1 2022 compared to Q1 2021 - No significant restructuring costs were incurred under the 2021 global strategic plan during the three months ended March 31, 2022[48] Restructuring and Other Charges | Charge Type (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------- | :-------------------------------- | :-------------------------------- | | Inventory write-down | $- | $19,300 | | Severance | $32 | $2,700 | | Other | $- | $3,000 | | Total | $32 | $25,000 | 7. Intangible Assets This note provides a breakdown of intangible assets, including trademarks, patents, and customer relationships Net Book Value of Intangible Assets | Intangible Asset (in thousands) | Net Book Value (March 31, 2022) | Net Book Value (December 31, 2021) | | :------------------------------ | :------------------------------ | :--------------------------------- | | Trademarks | $6,512 | $6,655 | | Patents | $2,669 | $2,772 | | Customer relationships | $16,414 | $16,912 | | Organizational costs | $89 | $107 | | Total | $25,684 | $26,446 | 8. Asset Backed Loan (ABL) Credit Facility The company terminated its ABL Credit Facility and established a new restricted cash collateral account - The ABL Credit Facility was terminated effective February 22, 2022[52] - A new cash collateral account was established with JPMorgan Chase Bank, N.A., with approximately $7.1 million transferred to cover existing letters of credit, which is now considered restricted cash[52] 9. Geographic Areas This note provides a breakdown of financial performance by the company's three geographic segments Financial Performance by Geographic Segment (Q1 2022) | Metric (in thousands) | Western Hemisphere 2022 | Eastern Hemisphere 2022 | Asia-Pacific 2022 | Total 2022 | | :-------------------- | :---------------------- | :---------------------- | :---------------- | :--------- | | Total Revenues | $57,356 | $17,562 | $14,151 | $83,137 | | Income (loss) before income taxes | $8,553 | $75 | $340 | $(5,442) | Total Assets | Asset Category (in thousands) | March 31, 2022 | December 31, 2021 | | :---------------------------- | :------------- | :---------------- | | Total long-lived assets | $260,734 | $264,877 | | Total assets | $978,110 | $1,010,426 | - During Q1 2022, there were no asset write-downs, unlike Q1 2021 which saw $19.3 million in non-cash inventory write-downs due to a shift to vendor outsourcing[56] 10. Income Tax This note discusses the significant change in the effective tax rate and the company's foreign earnings reinvestment policy Effective Tax Rate | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--------------- | :-------------------------------- | :-------------------------------- | | Effective tax rate | (64.2)% | (7.5)% | - The change in effective tax rate was primarily due to changes in income in foreign jurisdictions, valuation allowances in the U.S., foreign inclusions, and nondeductible compensation[57] - The company reversed its indefinite reinvestment assertion for foreign earnings, resulting in a deferred foreign tax liability of $3.3 million as of March 31, 2022[57] 11. Contingencies This note addresses the status of the FMC Technologies, Inc. lawsuit regarding trade secret misappropriation - In the FMC Technologies, Inc. lawsuit, the jury returned a verdict in favor of Dril-Quip on April 29, 2021; FMC filed an appeal which the company intends to vigorously defend[58] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, cash flows, and key business trends Forward-Looking Statements - The report contains forward-looking statements regarding future results, expenditures, market conditions, and the impact of external factors like COVID-19 and the energy transition[62] - These statements are based on assumptions and involve substantial risks, with actual future results potentially differing materially from expectations[62] Overview - Dril-Quip designs, manufactures, and services highly engineered drilling and production equipment for severe service applications, serving major oil and gas companies globally[65] Business Environment - Dril-Quip entered a collaboration agreement with Aker Solutions ASA in Q1 2022 to offer subsea injection systems for carbon capture, utilization, and storage (CCUS) projects[66] - The Russia-Ukraine invasion in February 2022 led to sanctions and increased uncertainty, potentially affecting the global supply chain despite Dril-Quip's minimal operational exposure in Russia[66][68] - Crude oil prices rebounded sharply in Q1 2022, but recovery in the subsea market generally lags[66][68] Oil and Gas Prices - The company's business is substantially dependent on the condition of the oil and gas industry and capital expenditures by oil and gas companies[68] Brent Crude Oil Price per Barrel | Brent Crude Oil Price per Barrel | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Low | $78.25 | $50.37 | | High | $133.18 | $69.95 | | Average | $100.87 | $61.04 | | Closing | $107.29 | $63.52 | Offshore Rig Count - As of March 31, 2022, the total contracted offshore rig count for the company's geographic regions was 491, an increase of 3.4% from 475 rigs as of March 31, 2021[71] Contracted Offshore Rig Count | Rig Type / Region | 2022 Floating Rigs | 2022 Jack-up Rigs | 2021 Floating Rigs | 2021 Jack-up Rigs | | :---------------- | :----------------- | :---------------- | :----------------- | :---------------- | | Western Hemisphere | 56 | 41 | 55 | 43 | | Eastern Hemisphere | 50 | 61 | 41 | 52 | | Asia-Pacific | 29 | 255 | 33 | 249 | | Total | 135 | 357 | 129 | 344 | Regulation - Demand for the company's products is affected by industry regulations, including tariffs on steel imports and the implications of Brexit[72] - The imposition of additional tariffs or trade restrictions could increase raw material costs or affect product markets, with the ultimate impact remaining uncertain[72] Backlog and Revenues - Product backlog increased to $220.9 million at March 31, 2022, from $210.1 million at December 31, 2021[74] - For Q1 2022, 66.9% of revenues came from products, 21.0% from services, and 12.0% from leasing, with international sales accounting for approximately 62.8% of total revenues[75] Backlog and Bookings | Metric (in thousands) | March 31, 2022 | December 31, 2021 | March 30, 2021 | | :-------------------- | :------------- | :---------------- | :------------- | | Beginning Backlog | $210,119 | $179,012 | $195,650 | | Total Bookings | $93,952 | $109,019 | $82,250 | | Total Revenue | $83,137 | $77,912 | $81,239 | | Ending Backlog | $220,934 | $210,119 | $196,661 | Results of Operations - Total revenues increased by $1.9 million (2.3%) to $83.1 million in Q1 2022, driven by increased subsea equipment and leasing revenues[80][81][82] - Cost of sales increased by $7.2 million (12.7%) to $64.0 million in Q1 2022, primarily due to unfavorable product mix and increased transportation costs[82] - Selling, general and administrative expenses decreased by $7.2 million (24.2%) to $22.4 million in Q1 2022, mainly due to lower legal and consulting fees[82] - Net loss significantly reduced to $8.9 million in Q1 2022 from $34.4 million in Q1 2021, primarily due to lower restructuring charges and SG&A expenses[82] Key Metrics as a Percentage of Revenues | Metric (as % of revenues) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Products | 66.9% | 68.4% | | Services | 21.1% | 21.8% | | Leasing | 12.0% | 9.8% | | Total cost of sales | 77.0% | 69.9% | | Selling, general and administrative | 26.9% | 36.4% | | Engineering and product development | 4.4% | 5.0% | | Restructuring and other charges | 0.0% | 30.8% | | Operating loss | (6.7)% | (38.9)% | | Net income (loss) | (10.8)% | 42.2% | Non-GAAP Financial Measures - Adjusted EBITDA - Adjusted EBITDA is used to evaluate and compare operating results by removing the effect of capital structure and certain non-cash items[84][85] Adjusted EBITDA Reconciliation | Metric (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(8,938) | $(34,358) | | Adjusted EBITDA | $3,159 | $8,046 | Liquidity and Capital Resources - Net cash used in operating activities was $10.9 million in Q1 2022, a $24.0 million decrease from Q1 2021, primarily due to changes in operating assets and liabilities[88] - Capital expenditures were $2.1 million in Q1 2022, mainly for rental tools and machinery[88] - The ABL Credit Facility was terminated, and a new cash collateral account was opened holding approximately $7.1 million as restricted cash[89] - The Board authorized an incremental $100 million share repurchase plan, and the company repurchased 273,629 shares for $5.8 million in Q1 2022[90] Summary of Cash Flow Activities | Cash Flow Activity (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Operating activities | $(10,928) | $13,072 | | Investing activities | $(1,858) | $3,431 | | Financing activities | $(5,859) | $(40) | | Increase (decrease) in cash | $(17,443) | $16,258 | Other Matters - The company may engage in discussions for acquisitions or joint ventures, with timing and funding being unpredictable[93] Critical Accounting Judgments - There were no material changes in critical accounting judgments and assumptions during the three months ended March 31, 2022[94] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily from interest rate and foreign exchange rate fluctuations Foreign Exchange Rate Risk - The company is exposed to foreign exchange rate risk due to international operations and does not engage in material hedging transactions[96] Foreign Currency Pre-tax (Gain)/Loss | Metric (in millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Foreign currency pre-tax (gain)/loss | $1.3 (gain) | $(1.4) (loss) | Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and reports no material changes in internal control - The company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of March 31, 2022[97] - There were no material changes in the company's internal control over financial reporting during the three months ended March 31, 2022[97] PART II—OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 12 (Contingencies) for a description of the company'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[100] Item 1A. Risk Factors This section updates risk factors disclosed in the Annual Report, specifically addressing risks from the Russia-Ukraine conflict Risks Related to Business, Operations and Industry - The Russia-Ukraine invasion has led to sanctions which could adversely affect oil and gas customers and the global supply chain, increasing market instability[102] - The company does not intend to commit further capital towards projects in Russia, and the full impact of the conflict remains unknown[102] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section summarizes the repurchase of common stock during the first quarter of 2022 Issuer Purchases of Equity Securities | Period | Total Number of Shares Purchased | Average Price paid per Share | Maximum Dollar Value of Shares that May Yet be Purchased (in millions) | | :-------------------- | :------------------------------- | :--------------------------- | :--------------------------------------------------------------------- | | January 1 - 31, 2022 | 273,629 | $21.20 | $18.5 | | February 1 - 28, 2022 | - | - | $118.5 | | March 1 - 31, 2022 | - | - | $118.5 | | Total | 273,629 | $21.20 | $118.5 | Item 6. Index to Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL interactive data files - The report includes exhibits such as the Restated Certificate of Incorporation, Bylaws, Certifications, and various Inline XBRL documents[108][109][110][111][112][113][114] Signatures This section contains the authorized signature for the Form 10-Q report - The report was signed by Kyle F. McClure, Vice President – Chief Financial Officer, on April 28, 2022, as the duly authorized signatory[120]