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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the Quarterly Period Ended March 31, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

Commission file number 001-13439

 

DRIL-QUIP, INC.

(Exact name of registrant as specified in its charter)

 

 

delaware

 

74-2162088

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

6401 N. ELDRIDGE PARKWAY

HOUSTON, texas

77041

(Address of principal executive offices) (Zip Code)

(713) 939-7711

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

DRQ

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes       No  

As of May 4, 2020, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 35,060,690.

 

 


TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

PART I

Item 1.

Condensed Consolidated Financial Statements

3

 

Balance Sheets

3

 

Statements of Income (Loss)

4

 

Statements of Comprehensive Income (Loss)

5

 

Statements of Cash Flows

6

 

Statements of Stockholders' Equity

7

 

Notes to Financial Statements

8

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

Index to Exhibits

33

 

Signatures

34

 

 

 


Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1.        Financial Statements

DRIL-QUIP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(In thousands, except per share data)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

343,472

 

 

$

398,946

 

Trade receivables, net

 

 

118,640

 

 

 

107,626

 

Unbilled receivables

 

 

129,310

 

 

 

140,534

 

Inventories, net

 

 

197,035

 

 

 

205,062

 

Prepaids and other current assets

 

 

37,834

 

 

 

28,321

 

Total current assets

 

 

826,291

 

 

 

880,489

 

Operating lease right of use assets

 

 

5,047

 

 

 

5,144

 

Property, plant and equipment, net

 

 

244,495

 

 

 

258,497

 

Deferred income taxes

 

 

17,879

 

 

 

8,936

 

Goodwill

 

 

-

 

 

 

7,947

 

Intangible assets

 

 

31,204

 

 

 

32,245

 

Other assets

 

 

11,194

 

 

 

13,307

 

Total assets

 

$

1,136,110

 

 

$

1,206,565

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

49,817

 

 

$

46,324

 

Accrued income taxes

 

 

6,943

 

 

 

4,561

 

Contract liabilities

 

 

6,431

 

 

 

6,901

 

Accrued compensation

 

 

6,916

 

 

 

13,599

 

Operating lease liabilities

 

 

1,213

 

 

 

1,314

 

Other accrued liabilities

 

 

22,126

 

 

 

24,241

 

Total current liabilities

 

 

93,446

 

 

 

96,940

 

Deferred income taxes

 

 

3,495

 

 

 

4,150

 

Income tax payable

 

 

8,988

 

 

 

8,868

 

Operating lease liabilities, long-term

 

 

3,809

 

 

 

3,801

 

Other long-term liabilities

 

 

2,171

 

 

 

2,105

 

Total liabilities

 

 

111,909

 

 

 

115,864

 

Contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock: 10,000,000 shares authorized at $0.01 par value (none issued)

 

 

-

 

 

 

-

 

Common stock:

 

 

 

 

 

 

 

 

100,000,000 shares authorized at $0.01 par value, 35,060,690 and 35,859,540

shares issued and outstanding at March 31, 2020 and December 31, 2019

 

 

363

 

 

 

371

 

Additional paid-in capital

 

 

56,045

 

 

 

52,870

 

Retained earnings

 

 

1,136,335

 

 

 

1,181,023

 

Accumulated other comprehensive losses

 

 

(168,542

)

 

 

(143,563

)

Total stockholders' equity

 

 

1,024,201

 

 

 

1,090,701

 

Total liabilities and stockholders' equity

 

$

1,136,110

 

 

$

1,206,565

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands, except per share data)

 

Revenues:

 

 

 

 

 

 

 

 

Products

 

$

67,558

 

 

$

65,434

 

Services

 

 

18,814

 

 

 

18,476

 

Leasing

 

 

9,626

 

 

 

10,407

 

Total revenues

 

 

95,998

 

 

 

94,317

 

Cost and expenses:

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

Products

 

 

53,645

 

 

 

51,544

 

Services

 

 

9,688

 

 

 

9,237

 

Leasing

 

 

8,081

 

 

 

8,595

 

Total cost of sales

 

 

71,414

 

 

 

69,376

 

Selling, general and administrative

 

 

21,416

 

 

 

24,544

 

Engineering and product development

 

 

5,525

 

 

 

3,617

 

Impairments

 

 

7,719

 

 

 

-

 

Restructuring and other charges

 

 

32,713

 

 

 

2,396

 

Gain on sale of assets

 

 

(467

)

 

 

(13

)

Total costs and expenses

 

 

138,320

 

 

 

99,920

 

Operating loss

 

 

(42,322

)

 

 

(5,603

)

Interest income

 

 

1,206

 

 

 

2,006

 

Interest expense

 

 

(191

)

 

 

(121

)

Loss before income taxes

 

 

(41,307

)

 

 

(3,718

)

Income tax provision (benefit)

 

 

(21,609

)

 

 

2,333

 

Net loss

 

 

(19,698

)

 

 

(6,051

)

Loss per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.55

)

 

$

(0.17

)

Diluted

 

$

(0.55

)

 

$

(0.17

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

35,695

 

 

 

35,559

 

Diluted

 

 

35,695

 

 

 

35,559

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Net loss

 

$

(19,698

)

 

$

(6,051

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(24,979

)

 

 

1,627

 

Total comprehensive loss

 

$

(44,677

)

 

$

(4,424

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(19,698

)

 

$

(6,051

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,873

 

 

 

8,356

 

Stock-based compensation expense

 

 

3,176

 

 

 

4,862

 

Impairments

 

 

7,719

 

 

 

-

 

Restructuring and other charges

 

 

32,713

 

 

 

1,271

 

Gain on sale of assets

 

 

(467

)

 

 

(13

)

Deferred income taxes

 

 

(10,862

)

 

 

(73

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables, net

 

 

(19,444

)

 

 

15,768

 

Unbilled receivables

 

 

11,224

 

 

 

(21,365

)

Inventories, net

 

 

(15,537

)

 

 

(2,700

)

Prepaids and other assets

 

 

(11,723

)

 

 

15,960

 

Accounts payable and accrued expenses

 

 

(7,212

)

 

 

(14,478

)

     Other, net

 

 

1

 

 

 

(699

)

Net cash provided by (used in) operating activities

 

 

(21,237

)

 

 

838

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(4,187

)

 

 

(3,527

)

Proceeds from sale of equipment

 

 

687

 

 

 

341

 

Net cash used in investing activities

 

 

(3,500

)

 

 

(3,186

)

Financing activities

 

 

 

 

 

 

 

 

Repurchase of common shares

 

 

(25,000

)

 

 

(1,116

)

Other

 

 

(85

)

 

 

-

 

Net cash used in financing activities

 

 

(25,085

)

 

 

(1,116

)

Effect of exchange rate changes on cash activities

 

 

(5,652

)

 

 

172

 

Decrease in cash and cash equivalents

 

 

(55,474

)

 

 

(3,292

)

Cash and cash equivalents at beginning of period

 

 

398,946

 

 

 

418,100

 

Cash and cash equivalents at end of period

 

$

343,472

 

 

$

414,808

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

Common Stock

 

 

Additional Paid-In Capital

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Losses

 

 

Total

 

 

 

 

 

 

 

(In thousands, except shares)

 

 

 

 

 

Balance at January 1, 2020

 

$

371

 

 

$

52,870

 

 

$

1,181,023

 

 

$

(143,563

)

 

$

1,090,701

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(24,979

)

 

 

(24,979

)

Net loss

 

 

-

 

 

 

-

 

 

 

(19,698

)

 

 

-

 

 

 

(19,698

)

Comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(44,677

)

Repurchase of common stock (808,389 shares)

 

 

(8

)

 

 

-

 

 

 

(25,000

)

 

 

-

 

 

 

(25,008

)

Stock option expense

 

 

-

 

 

 

3,176

 

 

 

-

 

 

 

-

 

 

 

3,176

 

Other

 

 

-

 

 

 

(1

)

 

 

10

 

 

 

-

 

 

 

9

 

Balance at March 31, 2020

 

$

363

 

 

$

56,045

 

 

$

1,136,335

 

 

$

(168,542

)

 

$

1,024,201

 

 

 

Balance at January 1, 2019

 

$

376

 

 

$

34,953

 

 

$

1,205,946

 

 

$

(145,113

)

 

$

1,096,162

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,627

 

 

 

1,627

 

Net loss

 

 

-

 

 

 

-

 

 

 

(6,051

)

 

 

-

 

 

 

(6,051

)

Comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,424

)

Repurchase of common stock (28,078 shares)

 

 

-

 

 

 

-

 

 

 

(1,116

)

 

 

-

 

 

 

(1,116

)

Stock option expense

 

 

-

 

 

 

4,862

 

 

 

-

 

 

 

-

 

 

 

4,862

 

Other

 

 

-

 

 

 

-

 

 

 

(79

)

 

 

-

 

 

 

(79

)

Balance at March 31, 2019

 

$

376

 

 

$

39,815

 

 

$

1,198,700

 

 

$

(143,486

)

 

$

1,095,405

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DRIL-QUIP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Basis of Presentation

Dril-Quip, Inc., a Delaware corporation (the “Company” or “Dril-Quip”), designs, manufactures, sells and services highly engineered drilling and production equipment that is well suited primarily for use in deepwater, harsh environment and severe service applications. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors, diverters and safety valves. Dril-Quip’s products are used by major integrated, large independent and foreign national oil and gas companies and drilling contractors throughout the world. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip’s customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products.

The Company’s operations are organized into three geographic segments — Western Hemisphere (including North and South America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe and Africa; headquartered in Aberdeen, Scotland) and Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East; headquartered in Singapore). Each of these segments sells similar products and services, and the Company has major manufacturing facilities in all three of its regional headquarter locations as well as in Macae, Brazil. The Company’s major subsidiaries are Dril-Quip (Europe) Limited, located in Aberdeen with branches in Azerbaijan, Denmark, Norway and Holland; Dril-Quip Asia-Pacific PTE Ltd., located in Singapore; and Dril-Quip do Brasil LTDA, located in Macae, Brazil. Other operating subsidiaries include TIW Corporation (TIW) and Honing, Inc., both located in Houston, Texas; DQ Holdings Pty. Ltd., located in Perth, Australia; Dril-Quip Cross (Ghana) Ltd., located in Takoradi, Ghana; PT DQ Oilfield Services Indonesia, located in Jakarta, Indonesia; Dril-Quip (Nigeria) Ltd., located in Port Harcourt, Nigeria; Dril-Quip Egypt for Petroleum Services S.A.E., located in Alexandria, Egypt; Dril-Quip TIW Saudi Arabia Limited, located in Dammam, Kingdom of Saudi Arabia; Dril-Quip Oilfield Services (Tianjin) Co. Ltd., located in Tianjin, China, with branches in Shenzhen and Beijing, China; Dril-Quip Qatar LLC, located in Doha, Qatar; Dril-Quip TIW Mexico S. de R.L.C.V., located in Villahermosa, Mexico; TIW de Venezuela S.A., located in Anaco, Venezuela and with a registered branch located in Ecuador; TIW (UK) Limited, located in Aberdeen, Scotland; TIW Hungary LLC, located in Szolnok, Hungary; and TIW International LLC, with a registered branch located in Singapore.

The condensed consolidated financial statements included herein are unaudited. The balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date. In the opinion of management, the unaudited condensed consolidated interim financial statements include all normal recurring adjustments necessary for a fair statement of the financial position as of March 31, 2020 and the results of operations and comprehensive income (loss) and cash flows for the three months ended March 31, 2020 and 2019. Certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Management believes the unaudited interim related disclosures in these condensed consolidated financial statements are adequate. The results of operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”).

The recent outbreak of COVID-19 and its development into a pandemic has resulted in significant economic disruption globally. Actions taken by various governmental authorities, individuals and companies around the world to prevent the spread of COVID-19 through social distancing have restricted travel, curtailed business operations, prohibited public gatherings and restricted the overall level of individual movement and in-person interaction across the globe. This has significantly reduced global economic activity and caused global demand for oil and gas to decrease at an unprecedented rate. This demand reduction was further exacerbated by disputes over oil production by Organization of Petroleum Exporting Countries (OPEC) and non-OPEC nations. The subsequent actions taken by such countries as a result thereof, including Saudi Arabia discounting its crude oil export prices, have led to significant declines in crude oil prices, resulting in a challenging industry environment. The extent of the impact of the pandemic 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 financial condition.

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2. Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition, impairment of our goodwill and asset recoverability tests and inventories.

Revenue Recognition

The Company generates revenues through the sale of products, the sale of services and the leasing of installation tools. The Company normally negotiates contracts for products, including those accounted for under the over time method, rental tools and services separately. Modifications to the scope and price of sales contracts may occur in the form of variations and change orders. For all product sales, it is the customer’s decision as to the timing of the product installation as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory assistance services. The customer may instead choose to use a third party or its own personnel.

Product and Service Revenues

Product and service revenues are recognized as the Company satisfies the performance obligation by transferring control of the promised good or service to the customer. Revenues are measured based on consideration specified in a contract with a customer and exclude sales incentives and amounts collected on behalf of third parties. In addition, some customers may impose contractually negotiated penalties for late delivery that are excluded from the transaction price.

Management has elected to utilize certain practical expedients allowed under Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606). Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer are excluded from the measurement of the transaction price. Shipping and handling activities that are performed after a customer obtains control of the good are accounted for as activities to fulfill the promise to transfer the good and thus are excluded from the transaction price.

Product revenues

The Company recognizes product revenues from two methods:

 

product revenues are recognized over time as control is transferred to the customer; and

 

product revenues from the sale of products that do not qualify for the over time method are recognized as point in time.

Revenues recognized under the over time method

The Company uses the over time method on long-term project contracts that have the following characteristics:

 

the contracts call for products which are designed to customer specifications;

 

the structural designs are unique and require significant engineering and manufacturing efforts generally requiring more than six months in duration;

 

product requirements cannot be filled directly from the Company’s standard inventory; and

 

The Company has an enforceable right to payment for any work completed to date and the enforceable payment includes a reasonable profit margin.

For each project, the Company prepares a detailed analysis of estimated costs, profit margin, completion date and risk factors which include availability of material, production efficiencies and other factors that may impact the project. On a quarterly basis, management reviews the progress of each project, which may result in revisions of previous estimates, including revenue recognition. The Company calculates the percentage complete and applies the percentage to determine the revenues earned and the appropriate portion of total estimated costs to be recognized. Losses, if any, are recorded in full in the period they become known. Historically, the Company’s estimates of total costs and costs to complete have approximated actual costs incurred to complete the project.

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Table of Contents

 

Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in customer prepayments as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported in unbilled receivables. Unbilled revenues are expected to be billed and collected within one year. At March 31, 2020 and December 31, 2019, unbilled receivables included $87.4 million and $83.2 million of unbilled receivables related to products accounted for using the over time method of accounting, respectively. For the three months ended March 31, 2020, there were 42 projects representing approximately 31.4% of the Company's total revenues and approximately 44.7% of its product revenues that were accounted for using over time accounting, compared to 21 projects for the three months ended March 31, 2019, which represented approximately 18.0% of the Company's total revenues and approximately 26.0% of its product revenues.

Revenues recognized under the point in time method

Revenues from the sale of standard inventory products, not accounted for under the over time method, are recorded at the point in time that the customer obtains control of the promised asset and the Company satisfies its performance obligation. This point in time recognition aligns with the time of shipment, which is when the Company typically has a present right to payment, title transfers to the customer, the customer or its carrier has physical possession and the customer has significant risks and rewards of ownership. The Company may provide product storage to some customers. Revenues for these products are recognized at the point in time that control of the product transfers to the customer, the reason for storage is requested by the customer, the product is separately identified, the product is ready for physical transfer to the customer and the Company does not have the ability to use or direct the use of the product. This point in time typically occurs when the products are moved to storage. We receive payment after control of the products has transferred to the customer.

Service revenues

The Company recognizes service revenues from two sources:

 

technical advisory assistance; and

 

rework and reconditioning of customer-owned Dril-Quip products.

The Company generally does not install products for its customers, but it does provide technical advisory assistance.

The Company normally negotiates contracts for products, including those accounted for under the over time method, and services separately. For all product sales, it is the customer’s decision as to the timing of the product installation as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory assistance services. The customer may use a third party or their own personnel. The contracts for these services are typically considered day-to-day.

Rework and reconditioning service revenues are recorded using the over time method based on the remaining steps that need to be completed as the refurbishment process is performed. The measurement of progress considers, among other things, the time necessary for completion of each step in the reconditioning plan, the materials to be purchased, labor and ordering procedures. We receive payment after the services have been performed by billing customers periodically (typically monthly).

Lease revenues

The Company earns lease revenues from the rental of running tools and rental of its forging facility. Rental revenues are recognized within leasing revenues on a day rate basis over the lease term, which is generally between one to three months. Rental revenue from the forging facility is recognized on a straight-line basis over the expected life of the lease. Lease revenues from rental of running tools for the three months ended March 31, 2020 were $9.1 million and lease revenues from rental of facilities were $0.5 million for the same period.

Practical Expedients

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, receivables and payables. The carrying values of these financial instruments approximate their respective fair values as they are short-term in nature.

Goodwill and indefinite-lived intangible assets

For goodwill and intangible assets with indefinite lives, an assessment for impairment is performed annually or when there is an indication an impairment may have occurred. We complete our annual impairment test for goodwill and other indefinite-lived

10


Table of Contents

 

intangibles using an assessment date of October 1. Goodwill is reviewed for impairment by comparing the carrying value of each of our reporting unit’s net assets, including allocated goodwill, to the estimated fair value of the reporting unit. We determine the fair value of our reporting units using a discounted cash flow approach. We selected this valuation approach because we believe it, combined with our best judgment regarding underlying assumptions and estimates, provides the best estimate of fair value for each of our reporting units. Determining the fair value of a reporting unit requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, future operating margins, the weighted average cost of capital ("discount rates"), a terminal growth value, and future market conditions, among others. We believe that the estimates and assumptions used in our impairment assessments are reasonable. If the reporting unit’s carrying value is greater than its calculated fair value, we recognize a goodwill impairment charge for the amount by which the carrying value of goodwill exceeds its fair value. In March 2020, the overall offshore market conditions declined primarily due to the COVID-19 pandemic and the developments in the global oil markets. This decline was evidenced by lower commodity prices, decline in expected offshore rig counts, decrease in our customers’ capital budgets and potential delays of contracts. As such, an interim goodwill impairment analysis was performed in connection with the preparation and review of financial statements for the three months ended March 31, 2020. Based on this analysis, we recorded an impairment loss of $7.7 million for our Eastern Hemisphere reporting unit for the three months ended March 31, 2020.

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate our property and equipment and definite-lived intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by comparing the carrying value to the estimated fair value. We assess recoverability based on undiscounted future net cash flows. Estimating future net cash flows requires us to make judgements regarding long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about our revenue growth, operating margins, capital expenditures, future market conditions and technological developments. If changes in these assumptions occur, our expectations regarding future net cash flows may change such that a material impairment could result. There was no impairment of property and equipment and definite-lived intangible assets during the three months ended March 31, 2020 or 2019.

Restructuring and Other Charges

In March 2020, the overall offshore market conditions declined primarily due to the COVID-19 pandemic and the developments in the global oil markets. As such, we amended our 2018 global strategic plan to realign our manufacturing facilities globally. We recorded non-cash inventory and long-lived asset write-downs of approximately $17.3 million and $6.9 million, respectively, as a result of expected changes in our business structure and where specific products are manufactured. Additionally, we incurred severance and other charges of $8.4 million and $0.1 million respectively, during the three months ended March 31, 2020. These charges are reflected as "Restructuring and other charges" in our consolidated statement of operations.

In the third quarter of 2018, we initiated a global strategic plan to better align our operations with market conditions. We incurred restructuring charges consisting primarily of consulting fees of approximately $2.4 million during the three months ended March 31, 2019.  

Treasury Shares

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. For the three months ended March 31, 2020, the Company purchased 808,389 shares under the share repurchase plan at an average price of approximately 30.91 per share totaling approximately $25.0 million and has retired such shares. For the three-month period ended March 31, 2019, the Company purchased 28,078 shares under the share repurchase plan at an average price of approximately $39.74 per share totaling approximately $1.1 million and has retired such shares.

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Earnings Per Share

Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed considering the dilutive effect of stock awards using the treasury stock method.

In each relevant period, the net income used in the basic and dilutive earnings per share calculations is the same. The following table reconciles the weighted average basic number of common shares outstanding and the weighted average diluted number of common shares outstanding for the purpose of calculating basic and diluted earnings per share:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Weighted average common shares outstanding - basic

 

 

35,695

 

 

 

35,559

 

Dilutive effect of common stock awards

 

 

-

 

 

 

-

 

Weighted average common shares outstanding – diluted

 

 

35,695

 

 

 

35,559

 

 

 

For the three months ended March 31, 2020 and 2019, the Company has excluded the following common stock options and awards because their impact on the income/(loss) per share is anti-dilutive (in thousands on a weighted average basis):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Director stock awards

 

 

40

 

 

 

4

 

Stock options

 

 

132

 

 

 

-

 

Performance share units

 

 

277

 

 

 

92

 

Restricted stock awards

 

 

336

 

 

 

44

 

 

3. New Accounting Standards

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04 “Reference Rate Reform (Topic 848).” Topic 848 is effective for fiscal years and interim periods beginning as of March 12, 2020 through December 31, 2022. This update provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. It is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We are currently in the process of assessing the impact of this guidance on our financial position, results of operations or cash flows.

In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740).” Topic 740 is effective for fiscal years and interim periods beginning after December 15, 2020. This update simplifies the accounting for income taxes by removing certain exceptions such as the exception to the incremental approach for intraperiod tax allocation, the exception to the requirement to recognize a deferred tax liability for equity method investments, the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary and the exception to the general methodology for calculating income taxes in an interim period. We are currently in the process of assessing the impact of this guidance on our financial position, results of operations or cash flows.

 

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4. Revenue Recognition

Revenues from contracts with customers (excludes leasing) consisted of the following:

 

 

 

Three months ended

 

 

 

March 31, 2020

 

 

 

Western

Hemisphere

 

 

Eastern

Hemisphere

 

 

Asia-

Pacific

 

 

Total

 

 

 

(In thousands)

 

Product Revenues

 

$

41,472

 

 

$

18,179

 

 

$

7,907

 

 

$

67,558

 

Service Revenues

 

 

10,956

 

 

 

4,338

 

 

 

3,520

 

 

 

18,814

 

Total

 

$

52,428

 

 

$

22,517

 

 

$

11,427

 

 

$

86,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

 

Western

Hemisphere

 

 

Eastern

Hemisphere

 

 

Asia-

Pacific

 

 

Total

 

 

 

(In thousands)

 

Product Revenues

 

$

36,376

 

 

$

18,618

 

 

$

10,440

 

 

$

65,434

 

Service Revenues

 

 

9,845

 

 

 

5,005

 

 

 

3,626

 

 

 

18,476

 

Total

 

$

46,221

 

 

$

23,623

 

 

$

14,066

 

 

$

83,910

 

 

 

 

Contract Balances  

Balances related to contracts with customers consisted of the following:

Contract Assets (amounts shown in thousands)

 

Contract Assets at December 31, 2019

 

$

136,332

 

Additions

 

 

31,460

 

Transfers to Trade Receivables, Net

 

 

(43,727

)

Contract Assets at March 31, 2020

 

$

124,065

 

 

Contract Liabilities (amounts shown in thousands)

 

Contract Liabilities at December 31, 2019

 

$

6,901

 

Additions

 

 

2,988

 

Revenue Recognized

 

 

(3,458

)

Contract Liabilities at March 31, 2020

 

$

6,431

 

 

Contract assets include unbilled accounts receivable associated with contracts accounted for under the over time accounting method which were approximately $87.4 million and $83.2 million at March 31, 2020 and December 31, 2019, respectively. Unbilled contract assets are transferred to the trade receivables, net, when the billing milestones are met. The contract liabilities primarily relate to advance payments from customers.

Obligations for returns and refunds were considered immaterial as of March 31, 2020.

Remaining Performance Obligations

The aggregate amount of the transaction price allocated to remaining performance obligations from our over time product lines was $116.5 million as of March 31, 2020. The Company expects to recognize revenue on approximately 73.9% of the remaining performance obligations over the next 12 months and the remaining 26.1% thereafter.  

The Company applies the practical expedient available under the revenue standard and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

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5. Stock-Based Compensation and Stock Awards

During the three months ended March 31, 2020, the Company recognized approximately $3.2 million of stock-based compensation expense. Stock-based compensation is included in "Selling, general and administrative" in our accompanying condensed consolidated statements of income (loss) and "Additional paid-in capital" in our accompanying condensed consolidated balance sheets. Stock-based compensation expense was $4.9 million which included approximately $1.8 million related to accelerated vesting of restricted stock awards of our former Chief Operating Officer recognized for the three months ended March 31, 2019. No stock-based compensation expense was capitalized during the three months ended March 31, 2020 or 2019.

6. Inventories, net

Inventories consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Raw materials and supplies

 

$

41,137

 

 

$

46,282

 

Work in progress

 

 

51,897

 

 

 

54,171

 

Finished goods

 

 

186,897

 

 

 

175,629

 

 

 

 

279,931

 

 

 

276,082

 

Less: allowance for slow moving and excess inventory

 

 

(82,896

)

 

 

(71,020

)

Total inventory

 

$

197,035

 

 

$

205,062

 

 

7. Impairment, Restructuring and Other Charges

Restructuring and Other Charges

 

As a result of unfavorable market conditions primarily due to the COVID-19 pandemic and developments in the global oil markets, which triggered historically low crude oil prices and decreases in our customers’ capital budgets, we announced a cost reduction plan primarily focused on workforce reductions and the reorganization of certain facilities in the first quarter of 2020. We incurred restructuring and other charges associated with the cost reduction plan of $32.7 million during the three months ended March 31, 2020. We expect to incur cost through out the year under this plan. Of these charges, inventory write-downs, severance charges, long-lived assets write-downs and other charges were $17.3 million, $8.4 million, $6.9 million and $0.1 million respectively, during the three months ended March 31, 2020. These charges are reflected as "Restructuring and other charges" in our consolidated statement of operations. During the three months ended March 31, 2019, we incurred restructuring and other charges of approximately $2.4 million related to consulting fees, and an approximate $1.1 million payout to our former Chief Operating Officer, pursuant to a separation agreement entered into with him during the first quarter of 2019.

 

The following table summarizes the components of charges included in "Restructuring and other charges" in our consolidated statement of operations for the three months ended March 31, 2020 (in thousands):

 

 

 

Three months ended March 31, 2020

 

Inventory write-down

 

$

17,272

 

Severance

 

 

8,399

 

Long-lived asset write-down

 

 

6,912

 

Other

 

 

130

 

 

 

$

32,713

 

 

The following table summarizes the changes to our accrued liability balance related to restructuring and other charges for the three months ended March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Balance at January 1, 2020

 

$

-

 

Additions for costs expensed

 

 

8,000

 

Reductions for payments

 

 

-

 

Ending balance at March 31, 2020

 

$

8,000

 

 

Goodwill Impairment

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In connection with our preparation and review of financial statements for the three months ended March 31, 2020, we recorded an impairment loss of $7.7 million for the first quarter of 2020 as a result of our updated assessment of current market conditions and restructuring efforts. These charges are reflected as "Impairments" in our consolidated statement of operations. No goodwill impairment losses were recorded for the three months ended March 31, 2019.

 

8. Intangible Assets

Intangible assets consist of the following:

 

 

 

 

 

March 31, 2020

 

 

 

Estimated

Useful Lives

 

Gross

Book Value

 

 

Accumulated

Amortization

 

 

Foreign

Currency

Translation

 

 

Net Book

Value

 

 

 

 

 

(In thousands)

 

Trademarks

 

15 years

 

$

8,206

 

 

$

(638

)

 

$

(49

)

 

$

7,519

 

Patents

 

15 - 30 years

 

 

5,951

 

 

 

(2,371

)

 

 

111

 

 

 

3,691

 

Customer relationships

 

5 - 15 years

 

 

25,939

 

 

 

(5,833

)

 

 

(281

)

 

 

19,825

 

Non-compete agreements

 

3 years

 

 

171

 

 

 

(171

)

 

 

-

 

 

 

-

 

Organizational costs

 

indefinite

 

 

179

 

 

 

-

 

 

 

(10

)

 

 

169

 

 

 

 

 

$

40,446

 

 

$

(9,013

)

 

$

(229

)

 

$

31,204

 

 

 

 

 

 

December 31, 2019

 

 

 

Estimated

Useful Lives

 

Gross

Book Value

 

 

Accumulated

Amortization

 

 

Foreign

Currency

Translation

 

 

Net Book

Value

 

 

 

 

 

(In thousands)

 

Trademarks

 

15 years

 

$

8,159

 

 

 

(512

)

 

$

47

 

 

$

7,694

 

Patents

 

15 - 30 years

 

 

5,945

 

 

 

(2,529

)

 

 

-

 

 

 

3,416

 

Customer relationships

 

5 - 15 years

 

 

25,787

 

 

 

(4,954

)

 

 

122

 

 

 

20,955

 

Non-compete agreements

 

3 years

 

 

171

 

 

 

(170

)

 

 

-

 

 

 

1

 

Organizational costs

 

indefinite

 

 

172

 

 

 

-

 

 

 

7

 

 

 

179

 

 

 

 

 

$

40,234

 

 

$

(8,165

)

 

$

176

 

 

$

32,245

 

 

9. Asset Backed Loan (ABL) Credit Facility

On February 23, 2018, the Company, as borrower, and the Company’s subsidiaries TIW and Honing, Inc., as guarantors, entered into a five -year senior secured revolving credit facility (the “ABL Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and other financial institutions as lenders with total commitments of $100.0 million, including up to $10.0 million available for letters of credit. The maximum amount that the Company may borrow under the ABL Credit Facility is subject to the borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments.

All obligations under the ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by the Company, TIW, Honing, Inc., and future significant domestic subsidiaries, subject to customary exceptions. Borrowings under the ABL Credit Facility are secured by liens on substantially all of the Company’s personal property, and bear interest at the Company’s option at either (i) the CB Floating Rate (as defined therein), calculated as the rate of interest publicly announced by JPMorgan Chase Bank, N.A., as its “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, with such CB Floating Rate not being less than Adjusted One Month LIBOR (as defined therein) or (ii) the Adjusted LIBOR (as defined therein), plus, in each case, an applicable margin. The applicable margin ranges from 1.00% to 1.50% per annum for CBFR loans and 2.00% to 2.50% per annum for Eurodollar loans and, in each case, is based on the Company’s leverage ratio. The unused portion of the ABL Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to average unused commitments under the ABL Credit Facility. Interest on Eurodollar loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on CB Floating Rate loans is payable monthly in arrears.

The ABL Credit Facility contains various covenants and restrictive provisions that limit the Company’s ability to, among other things, (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain

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dividends or make other distributions; and (5) engage in transactions with affiliates. The ABL Credit Facility also requires the Company to maintain a fixed charge coverage ratio of 1.1 to 1.0, based on the ratio of EBITDA (as defined therein) to Fixed Charges (as defined therein) during certain periods, including when availability under the ABL Credit Facility is under certain levels. If the Company fails to perform its obligations under the agreement that results in an event of default, the commitments under the ABL Credit Facility could be terminated and any outstanding borrowings under the ABL Credit Facility may be declared immediately due and payable. The ABL Credit Facility also contains cross default provisions that apply to the Company’s other indebtedness. The Company is in compliance with the related covenants as of March 31, 2020.

As of March 31, 2020, the availability under the ABL Credit Facility was $44.5 million, after taking into account the outstanding letters of credit of approximately $0.9 million issued under the facility.

10. Geographic Areas

 

 

 

Three months ended March 31,

 

 

 

Western Hemisphere

 

 

Eastern Hemisphere

 

 

Asia-Pacific

 

 

DQ Corporate

 

 

Total

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point in Time

 

$

22,964

 

 

$

23,767

 

 

$

8,962

 

 

$

14,118

 

 

$

5,447

 

 

$

10,440

 

 

$

-

 

 

$

-

 

 

$

37,373

 

 

$

48,325

 

Over Time

 

 

18,508

 

 

 

12,609

 

 

 

9,217

 

 

 

4,500

 

 

 

2,460

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

30,185

 

 

 

17,109

 

Total Products

 

 

41,472

 

 

 

36,376

 

 

 

18,179

 

 

 

18,618

 

 

 

7,907

 

 

 

10,440

 

 

 

-

 

 

 

-

 

 

 

67,558

 

 

 

65,434

 

Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technical Advisory

 

 

7,396

 

 

 

7,022

 

 

 

3,496

 

 

 

4,082

 

 

 

3,289

 

 

 

3,195

 

 

 

-

 

 

 

-

 

 

 

14,181

 

 

 

14,299

 

Reconditioning

 

 

3,560

 

 

 

2,823

 

 

 

842

 

 

 

923

 

 

 

231

 

 

 

431

 

 

 

-

 

 

 

-

 

 

 

4,633

 

 

 

4,177

 

Total Services

(excluding rental tools)

 

 

10,956

 

 

 

9,845

 

 

 

4,338

 

 

 

5,005

 

 

 

3,520

 

 

 

3,626

 

 

 

-

 

 

 

-

 

 

 

18,814

 

 

 

18,476

 

Leasing

 

 

4,761

 

 

 

6,321

 

 

 

2,748

 

 

 

2,647

 

 

 

2,117

 

 

 

1,439

 

 

 

-

 

 

 

-

 

 

 

9,626

 

 

 

10,407

 

Total Services

(including rental tools)

 

 

15,717

 

 

 

16,166

 

 

 

7,086

 

 

 

7,652

 

 

 

5,637

 

 

 

5,065

 

 

 

-

 

 

 

-

 

 

 

28,440

 

 

 

28,883

 

Intercompany

 

 

3,314

 

 

 

4,091

 

 

 

331

 

 

 

144

 

 

 

2,256

 

 

 

740

 

 

 

 

 

 

 

-

 

 

 

5,901

 

 

 

4,975

 

Eliminations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,901

)

 

 

(4,975

)

 

 

(5,901

)

 

 

(4,975

)

Total Revenues

 

$

60,503

 

 

$

56,633

 

 

$

25,596

 

 

$

26,414

 

 

$

15,800

 

 

$

16,245

 

 

$

(5,901

)

 

$

(4,975

)

 

$

95,998

 

 

$

94,317

 

Depreciation and amortization

 

$

5,622

 

 

$

5,419

 

 

$

974

 

 

$

1,053

 

 

$

1,340

 

 

$

1,198

 

 

$

937

 

 

$

686

 

 

$

8,873

 

 

$

8,356

 

Income (loss) before income taxes

 

$

8,153

 

 

$

1,579

 

 

$

(28,321

)

 

$

6,581

 

 

$

1,569

 

 

$

5,196

 

 

$

(22,708

)

 

$

(17,074

)

 

$

(41,307

)

 

$

(3,718

)

 

During the three months ended March 31, 2020, we recorded impairments, restructuring and other charges of $40.4 million. Of these charges, $32.1 million were recorded in the Eastern Hemisphere, $1.9 million in the Western Hemisphere and $6.2 million in DQ Corporate and $0.2 million in Asia-Pacific.

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(In thousands)

 

Total long-lived assets:

 

 

 

 

 

 

 

 

Western Hemisphere

 

$

375,729

 

 

$

379,776

 

Eastern Hemisphere

 

 

235,939

 

 

 

246,854

 

Asia-Pacific

 

 

70,088

 

 

 

71,384

 

Eliminations

 

 

(371,937

)

 

 

(371,938

)

Total

 

$

309,819

 

 

$

326,076

 

 

 

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

 

 

 

Western Hemisphere

 

$

777,321

 

 

$

732,716

 

Eastern Hemisphere

 

 

786,238

 

 

 

818,803

 

Asia-Pacific

 

 

179,839

 

 

 

181,188

 

Eliminations

 

 

(607,288

)

 

 

(526,142

)

Total

 

$

1,136,110

 

 

$

1,206,565

 

 

During the three months ended March 31, 2020, we wrote-down some of our inventory and long-lived assets balances in the amount of $24.2 million, of which $22.3 million was recorded in the Eastern Hemisphere and $1.9 million in the Western Hemisphere. We also recorded a $7.7 million impairment of our Goodwill balance all of which was in the Eastern Hemisphere.

 

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The Company’s operations are organized into three geographic segments - Western Hemisphere (including North and South America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe and Africa; headquartered in Aberdeen, Scotland) and Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East; headquartered in Singapore). Each of these segments sells similar products and services and the Company has major manufacturing facilities in all three of its regional headquarter locations as well as in Macae, Brazil.

Eliminations of operating profits are related to intercompany inventory transfers that are deferred until shipment is made to third party customers.

11. Income Tax

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 and includes favorable changes to tax law and incentives for businesses impacted by COVID-19. The CARES Act includes provisions relating to net operating loss carryback periods which have discretely impacted and increased the effective tax rate by 79.8% in the current period.

The effective tax rate for the three months ended March 31, 2020 was 52.3%, compared to (62.7)% for the same period in 2019. The change in the effective tax rate between the periods was primarily a result of discretely recognized tax benefits of net operating losses, impairment losses, changes in valuation allowances in the United States and in various foreign countries and a mix of earnings in jurisdictions with differing tax rates.

12. Contingencies

Brazilian Tax Issue

From 2002 to 2007, the Company’s Brazilian subsidiary imported goods through, and paid taxes on such imports to, the State of Espirito Santo in Brazil. Upon the final sale of these goods, the Company’s Brazilian subsidiary collected taxes from customers and remitted them to the State of Rio de Janeiro net of the taxes paid on importation of those goods to the State of Espirito Santo in accordance with the Company’s understanding of Brazilian tax laws.

In December 2010 and January 2011, the Company’s Brazilian subsidiary was served with two assessments totaling approximately $13.0 million from the State of Rio de Janeiro to cancel the credits associated with the tax payments to the State of Espirito Santo on the importation of goods from July 2005 to October 2007. The Company objected to these assessments on the grounds that they would represent double taxation on the importation of the same goods and that the Company is entitled to the credits under applicable Brazilian law. The Company’s Brazilian subsidiary filed appeals with a State of Rio de Janeiro judicial court to annul both of these tax assessments and deposited with the court approximately $8.8 million in December 2014 and December 2016 as the full amount of the assessments with penalties and interest. The Company believes that these credits are valid and that success in the judicial court process is probable. Based upon this analysis, the Company has not accrued any liability in conjunction with this matter.

General

The Company operates its business and markets its products and services in most of the significant oil and gas producing areas in the world and is, therefore, subject to the risks customarily attendant to international operations and dependency on the condition of the oil and gas industry. Additionally, certain of the Company’s products are used in potentially hazardous drilling, completion, and production applications that can cause personal injury, property damage and environmental claims. Although exposure to such risk has not resulted in any significant problems in the past, there can be no assurance that ongoing and future developments will not adversely impact the Company.

The Company is also involved in a number of legal actions arising in the ordinary course of business. Although no assurance can be given with respect to the ultimate outcome of such legal action, in the opinion of management, the ultimate liability with respect thereto will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.

 

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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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 the year ended December 31, 2019.

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, subsea control systems and manifolds, 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

The recent outbreak of COVID-19 and its development into a pandemic has resulted in significant economic disruption globally. Actions taken by various governmental authorities, individuals and companies around the world to prevent the spread of COVID-19 through social distancing have restricted travel, curtailed business operations, prohibited public gatherings and restricted the overall level of individual movement and in-person interaction across the globe. This has significantly reduced global economic activity and caused global demand for oil and gas to decrease at an unprecedented rate. This demand reduction was further exacerbated by disputes over oil production by Organization of Petroleum Exporting Countries (OPEC) and non-OPEC nations. The subsequent actions taken by such countries as a result thereof, including Saudi Arabia discounting its crude oil export prices, have led to significant declines in crude oil prices, resulting in a challenging industry environment.

The pandemic has also caused disruption to our suppliers and their sub-contractors. Our suppliers and their sub-contractors’ operations were disrupted by worker absenteeism, quarantine, travel and health-related restrictions as a result of COVID-19. In addition to this, increased costs associated with ensuring the safety and health of their personnel were incurred. Consequently, our supply chain was disrupted, our product shipments were delayed, and our productivity suffered.

In response to the COVID-19 pandemic, we have taken proactive, aggressive action to protect the health and safety of our employees, customers, partners and suppliers globally. We enacted rigorous safety measures in all of our sites, including implementing social distancing protocols, requiring remote work arrangements where possible, staggering shifts, suspending travel, extensively and frequently disinfecting our workspaces and providing masks to those employees who must be physically present at work. We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained. We may take further safety precautions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

All our facilities currently remain operational with staggered shifts which has reduced productivity. 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.

COVID-19 and the developments in the global oil markets have negatively impacted the Company’s results during the first quarter as there were supply chain disruptions, staggered shifts, delivery extensions requested by customers and governmental quarantine requirements. 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. In addition to this, COVID-19 and the volatile regional and 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, 2019, including leading to further material impairment charges.

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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

 

 

 

March 31,

 

Brent Crude Oil Price per Barrel

 

2020

 

 

2019

 

Low

 

$

14.85

 

 

$

53.23

 

High

 

 

70.25

 

 

 

68.35

 

Average

 

 

50.27

 

 

 

63.10

 

Closing

 

 

14.85

 

 

 

67.93

 

 

According to the April 2020 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average approximately $33 per barrel in 2020 and $46 per barrel in 2021, compared with an average of $64 per barrel in 2019. In its April 2020 Oil Market Report, the International Energy Agency projected the 2020 global oil demand will decrease 9.3 million barrels per day compared to 2019. This decrease in demand coupled with an overabundance of supply due to the production disputes between the OPEC and non-OPEC nations has resulted in the Brent Crude Oil price per barrel to decrease to $20.40 as of May 4, 2020.

 

Lower crude oil and natural gas prices have resulted in a trend of customers seeking to renegotiate contract terms with the Company, including reductions in the prices of its products and services, extensions of delivery terms and, in some instances, contract revisions. In some cases, a customer may already hold an inventory of the Company’s equipment, which may delay the placement of new orders. In addition, some of the Company’s customers could experience liquidity or solvency issues or could otherwise be unable or unwilling to perform under a contract, which could ultimately lead a customer to enter bankruptcy or otherwise encourage a customer to seek to repudiate, cancel or renegotiate a contract. An extended period of reduced crude oil and natural gas prices may accelerate these trends. 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 three months ended March 31, 2020 and 2019. 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.

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

 

 

Floating

Rigs

 

 

Jack-up

Rigs

 

 

Floating

Rigs

 

 

Jack-up

Rigs

 

Western Hemisphere

 

 

57

 

 

 

48

 

 

 

51

 

 

 

38

 

Eastern Hemisphere

 

 

56

 

 

 

76

 

 

 

62

 

 

 

71

 

Asia-Pacific

 

 

42

 

 

 

268

 

 

 

40

 

 

 

242

 

Total

 

 

155

 

 

 

392

 

 

 

153

 

 

 

351

 

 

Source: IHS—Petrodata RigBase – March 31, 2020 and 2019

According to IHS-Petrodata RigBase, as of March 31, 2020, there were 536 contracted rigs for the Company’s geographic regions (152 floating rigs and 384 jack-up rigs), which represents a 6.3% increase from the rig count of 504 rigs (153 floating rigs and 351 jack-up rigs) as of March 31, 2019. However, since March 31, 2020 the industry has seen an increase in contract cancellations, and we expect this trend to continue due to the current market conditions as evidenced by the contracted rig count as of May 5, 2020 which has decreased to 526 (147 floating rigs and 379 jack-up rigs).

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The Company believes that the number of rigs (semi-submersibles, drillships and jack-up rigs) under construction impacts its backlog and resulting revenues because in certain cases, its customers order some of the Company’s products during the construction of such rigs. As a result, an increase in rig construction activity tends to favorably impact the Company’s backlog while a decrease in rig construction activity tends to negatively impact the Company’s backlog. According to IHS-Petrodata RigBase, as of March 31, 2020 and 2019, there were 74 and 103 rigs, respectively, under construction, which represents an approximate 28.2% decrease in rigs under construction. The expected delivery dates for the rigs under construction at March 31, 2020 are as follows:

 

 

 

Floating

 

 

Jack-Up

 

 

 

 

 

 

 

Rigs

 

 

Rigs

 

 

Total

 

2020

 

 

11

 

 

 

26

 

 

 

37

 

2021

 

 

13

 

 

 

17

 

 

 

30

 

2022

 

 

2

 

 

 

5

 

 

 

7

 

2023

 

 

-

 

 

 

-

 

 

 

-

 

After 2023 or unspecified delivery date

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

 

26

 

 

 

48

 

 

 

74

 

 

However, given the developments in the current global oil markets and oversupply of offshore drilling rigs, the Company believes it is possible that delivery of some rigs under construction could be postponed or cancelled, limiting the opportunity for supply of the Company’s products.

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). The President also instructed USTR to begin the process of increasing the 25 percent tariff on approximately $250 billion worth of Chinese imports to 30 percent. 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.

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 (NAFTA). The three countries have all ratified the new agreement, but the USMCA still requires each country to meet certain additional obligations before the agreement can enter into force.

The imposition of any additional tariffs or initiation of trade restrictions by or against the United States or the failure by Canada to ratify the USMCA 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.

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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 March 31, 2020 was approximately $261.1 million, compared to approximately $272.5 million at December 31, 2019, and $303.7 million at March 31, 2019.

The following table represents the change in backlog for the three months ended March 31, 2020, December 31, 2019, and March 31, 2019:

 

 

 

Three months ended

 

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

March 31,

2019

 

 

 

 

(In thousands)

Beginning Backlog

 

$

272,537

 

 

$

250,673

 

 

$

269,968

 

 

Bookings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product (1)

 

 

60,137

 

 

 

95,589

 

 

 

104,350

 

 

Service

 

 

18,814

 

 

 

19,082

 

 

 

18,476

 

 

Leasing

 

 

9,626

 

 

 

10,610

 

 

 

10,407

 

 

Cancellation/Revision adjustments

 

 

(2,266

)

 

 

5,022

 

 

 

(5,324

)

 

Translation adjustments

 

 

(1,718

)

 

 

15

 

 

 

143

 

 

Total Bookings

 

 

84,593

 

 

 

130,318

 

 

 

128,052

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

67,558

 

 

 

78,762

 

 

 

65,434

 

 

Service

 

 

18,814

 

 

 

19,082

 

 

 

18,476

 

 

Leasing

 

 

9,626

 

 

 

10,610

 

 

 

10,407

 

 

Total Revenue

 

 

95,998

 

 

 

108,454

 

 

 

94,317

 

 

Ending Backlog

 

$

261,132

 

 

$

272,537

 

 

$

303,703

 

 

 

 

(1)

The backlog data shown above includes all bookings as of March 31, 2020, 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 $116.5 million as of March 31, 2020 within “Revenue Recognition”, Note 4 to the Notes to Condensed Consolidated Financial Statements.

During the first quarter of 2018, Dril-Quip Asia-Pacific Pte Ltd. was awarded a contract to supply top-tensioned riser (TTR) systems and related services for the development of the Ca Rong Do Project (CRD Project) located offshore Vietnam operated by Repsol with the participation of Mubadala, PVEP and PetroVietnam for approximately $82 million. The CRD Project was terminated in the third quarter of 2019 and is not included within the backlog balance as of March 31, 2020 and December 31, 2019.

As of March 31, 2019, the total number of the Company's employees was 1,850 of which 823 were located in the United States. The total number of the Company’s employees as of December 31, 2019 was 1,814, of which 906 were located in the United States. The total number of employees as of March 31, 2020 was 1,831, of which 914 were located in the United States.

As of January 31, 2020 (“exit day”), the U.K. has formally left the E.U. Under the terms of the withdrawal agreement, a post-Brexit transition period started on exit day and will end on December 31, 2020 unless extended (the end of the “transition period”). During the transition period all E.U. law, across all policy areas, is still applicable to, and in, the U.K., with the exception of provisions of those treaties and acts that were not binding upon, and in, the U.K. before the withdrawal agreement entered into force. In particular, the U.K. remains in the E.U. Customs Union and in the Single Market with all four freedoms (of movement of goods, capital, persons and services) and all EU policies applying. The transition period, however, can be extended "for up to one or two years" in a one-off decision made pursuant to the withdrawal agreement by the joint U.K. and E.U. committee before July 1, 2020. However, it is not clear at this time whether or not there will be an extension. Significant change is expected at the end of the transition period, even if a comprehensive future U.K. and E.U. relationship is concluded within the transition period. Further, even if a comprehensive future U.K. and E.U. relationship is concluded, negotiations regarding the future U.K. and E.U. relationship may continue in the future and may be expected to result in continued volatility in the value of the British pound sterling. A weaker British pound sterling compared to the U.S. dollar during a reporting period would cause local currency results of the Company's U.K. operations to be translated into fewer U.S. dollars. In addition, the Company continues to monitor potential changes to trade and customs requirements as a result of Brexit. Continued adverse consequences such as deterioration in economic conditions and volatility in currency exchange rates could have a negative impact on the Company's financial position and results of operations.

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In early March 2020, full face-to-face negotiations between the E.U. and the U.K. were suspended after just one round as officials focused on the COVID-19 pandemic sweeping Europe. However, on April 20, 2020, E.U. and U.K. officials resumed Brexit trade talks by videoconference. As of the second quarter of 2020, the post-Brexit process between the E.U. and the U.K. is continuing despite COVID-19 and as noted above, unless an extension is agreed, the transition period will end on December 31, 2020. See “Our international operations expose us to instability and changes in economic and political conditions and other risks inherent to international business, which could have a material adverse effect on our results of operations, financial position or cash flows" under "Item 1A. Risk Factors" in Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it 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.

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 and from lease of our forging facility. For the three months ended March 31, 2020 and 2019, the Company derived 70.4% and 69.4%, respectively, of its revenues from the sale of its products, 19.6% and 19.6%, respectively, of its revenue from services, and 10.0% and 11.0%, respectively, of its revenues from leasing. Service and leasing revenues generally correlate to revenues from product 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 operations, with approximately 63.1% and 62.1% of its revenues derived from foreign sales for the three months ended March 31, 2020 and 2019, respectively. The majority of the Company’s domestic revenue relates to operations in the U.S. Gulf of Mexico. Domestic revenue approximated 36.9% and 37.9% of the Company’s total revenues for the three months ended March 31, 2020 and 2019, 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 March 31, 2020, there were 42 projects representing approximately 31.4% of the Company’s total revenues and approximately 44.7% of its product revenues that were accounted for using over time accounting, compared to 21 projects for the three months ended March 31, 2019, which represented approximately 18.0% of the Company’s total revenues and approximately 26.0% 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, foreign currency transaction gains and losses and other related administrative functions.

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Table of Contents

 

Engineering and Product Development Expenses. Engineering and product development expenses consist of new product development and testing.

Impairments. Impairment losses consist of Goodwill impairment of $7.7 million, which occurred in connection with our preparation and review of financial statements for the three months ended March 31, 2020.

Restructuring and Other Charges. Restructuring and other charges consist of inventory write-downs, severance charges, long-lived assets write-downs and other charges of $17.3 million, $8.4 million, $6.9 million and $0.1 million respectively, which occurred in connection with our preparation and review of financial statements for the three months ended March 31, 2020.

Gain on sale of assets. Gain on sale of assets consists of sales of certain property, plant and equipment. Gain on sale of assets during the three months ended March 31, 2020 and 2019 was $0.5 million and nil, respectively. This gain consisted primarily of the sale of our TIW Oklahoma facility.

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, and other 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 consolidated statement of income data expressed as a percentage of revenues:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Products

 

 

70.4

%

 

 

69.4

%

Services

 

 

19.6

 

 

 

19.6

 

Leasing

 

 

10.0

 

 

 

11.0

 

Total revenues

 

 

100.0

 

 

 

100.0

 

Cost of sales:

 

 

 

 

 

 

 

 

Products

 

 

55.9

 

 

 

54.6

 

Services

 

 

10.1

 

 

 

9.8

 

Leasing

 

 

8.4

 

 

 

9.1

 

Total cost of sales

 

 

74.4

 

 

 

73.5

 

Selling, general and administrative

 

 

22.3

 

 

 

26.0

 

Engineering and product development

 

 

5.8

 

 

 

3.8

 

Impairments

 

 

8.0

 

 

 

-

 

Restructuring and other charges

 

 

34.1

 

 

 

2.5

 

Gain on sale of assets

 

 

(0.5

)

 

 

(0.0

)

Operating loss

 

 

(44.1

)

 

 

(5.8

)

Interest income

 

 

1.3

 

 

 

2.1

 

Interest expense

 

 

(0.2

)

 

 

(0.1

)

Loss before income taxes

 

 

(43.0

)

 

 

(3.8

)

Income tax provision (benefit)

 

 

(22.5

)

 

 

2.5

 

Net loss

 

 

(20.5

)%

 

 

(6.3

)%

 

 

The following table sets forth, for the periods indicated, a breakdown of our products and service revenues:

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Table of Contents

 

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In millions)

 

Revenues:

 

 

 

 

 

 

 

 

Products:

 

 

 

 

 

 

 

 

Subsea equipment

 

$

51.9

 

 

$

52.2

 

Surface equipment

 

 

3.9

 

 

 

3.0

 

Downhole tools

 

 

8.7

 

 

 

8.4

 

Offshore rig equipment

 

 

3.1

 

 

 

1.8

 

Total products

 

 

67.6

 

 

 

65.4

 

Services

 

 

18.8

 

 

 

18.5

 

Leasing

 

 

9.6

 

 

 

10.4

 

Total revenues

 

$

96.0

 

 

$

94.3

 

 

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Revenues.   Revenues increased by $1.7 million, or approximately 1.8%, to $96.0 million for the three months ended March 31, 2020 from $94.3 million for the three months ended March 31, 2019. Product revenues increased by approximately $2.1 million for the three months ended March 31, 2020 as compared to the same period in 2019 as a result of increased revenues of $1.3 million in offshore rig equipment, and $0.8 million in surface equipment. Product revenues in the Western Hemisphere increased by $5.1 million, partially offset by decreased revenues in Asia-Pacific of $2.5 million and in the Eastern Hemisphere of $0.5 million. Although revenues for the three months ended March 31, 2020 were marginally higher as compared to the three months ended March 31, 2019, our revenues were negatively impacted by reduced productivity, customers requesting extension of their deliveries and supply chain disruptions attributable to both COVID-19 and the developments in the global oil markets. Although all regions were impacted to differing degrees broadly in line with the spread of the pandemic and the developments in the global oil markets, the impact was most felt in Asia-Pacific. This stemmed from their governments requiring two weeks of quarantine of any person returning from China after the Lunar New Year holidays. Further, as a result of supply chain interruptions to our wellhead business in Europe we shifted our focus to pipe fabrication which invariably has lower gross margins. 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 increased by approximately $0.3 million resulting mainly from increased service revenues in the Western Hemisphere of $1.1 million, partially offset by decreased service revenues of $0.7 million in the Eastern Hemisphere. The increase of service revenues in the Western Hemisphere is due largely to increased demand for downhole tool technical advisory assistance within Latin America. Lower service revenues in the Eastern Hemisphere and Asia-Pacific are attributable primarily to COVID-19 disruptions and the developments in the global oil markets. Service revenues were also negatively impacted due to travel restrictions around the globe.

Leasing revenues decreased by approximately $0.8 million resulting mainly from decreased leasing revenues in the Western Hemisphere of $1.6 million, partially offset by increased leasing revenues of $0.7 million in Asia-Pacific. The majority of the decrease in leasing revenues is related to decreased subsea rental tool utilization in the Western Hemisphere due to timing of customer exploration activity and COVID-19 related travel restrictions and the developments in the global oil markets.

Cost of Sales.  Cost of sales increased by $2.0 million, or approximately 2.9%, to $71.4 million for the three months ended March 31, 2020 from $69.4 million for the same period in 2019. In the Eastern Hemisphere and Asia-Pacific this was primarily driven by lower productivity resulting from staggered shifts, additional freight costs, quarantine of our employees in the Asia-Pacific region upon their return from China after the Lunar New Year and more extensive cleaning and sanitization of workstations. These factors more than offset the gains achieved from the business transformation executed over 2019. Although we were impacted by COVID-19 in the Western Hemisphere, our cost of sales as a percentage of revenue decreased primarily due to savings from leasing of our forge facility.

Selling, General and Administrative Expenses.  For the three months ended March 31, 2020, selling, general and administrative expenses decreased by approximately $3.1 million, or 12.7%, to $21.4 million from $24.5 million for the same period in 2019. Foreign exchange gain for the three months ended March 31, 2020 was $3.2 million as compared to a gain of $0.7 million for the same period in 2019. Excluding the impact of foreign exchange gain, selling, general and administrative expense was $24.6 million and $25.2 million for the three months ended March 31, 2020 and 2019, respectively. The decrease of $0.6 million is primarily due to a decrease in stock-based compensation expense, bonuses and annual merit increases, partially offset by an increase in professional fees.

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Impairments.  In March 2020, the overall offshore market conditions declined primarily due to the COVID-19 pandemic and the developments in the global oil markets. This decline was evidenced by lower commodity prices, decline in expected offshore rig counts, decrease in our customers’ capital budgets and potential delays or cancellations of contracts. As a result, an interim goodwill impairment analysis was performed in connection with the preparation and review of financial statements for the three months ended March 31, 2020. Based on this analysis, we recorded an impairment loss of $7.7 million for our Eastern Hemisphere reporting unit for the three months ended March 31, 2020. No Goodwill impairment losses were recorded for the three months ended March 31, 2019.

Restructuring and Other Charges. As a result of unfavorable market conditions primarily due to the COVID-19 pandemic and developments in the global oil markets, which triggered historically low crude oil prices and decreases in our customers’ capital budgets, we announced a cost reduction plan primarily focused on workforce reductions and the reorganization of certain facilities in the first quarter of 2020. We recorded inventory write-downs, severance charges, long-lived assets write-downs and other charges of $32.7 million during the three months ended March 31, 2020.

In the third quarter of 2018, we initiated a global strategic plan to better align our operations with market conditions. As a result of this plan, we incurred restructuring charges consisting primarily of consulting fees of approximately $2.4 million during the three months ended March, 2019.  

Engineering and Product Development Expenses.  For the three months ended March 31, 2020, engineering and product development expenses increased by approximately $1.9 million, or 52.8%, to $5.5 million from $3.6 million for the same period in 2019 due to increased activity required to support strategic growth initiatives tied to committed customer orders and our continued research and development efforts within the Subsea Productions Systems product line which resulted in Offshore Technology Conference award for VXTe product.

Gain on Sale of Assets.  During the three months ended March 31, 2020, gain on sale of assets was $0.5 million, which consisted primarily of the sale of our TIW Oklahoma facility.

Income Tax Provision (Benefit).   Income tax benefit for the three months ended March 31, 2020 was $21.6 million on loss before taxes of $41.3 million, resulting in an effective tax rate of 52.3%. Income tax expense for the three months ended March 31, 2019 was $2.3 million on a loss before taxes of $3.7 million, resulting in an effective income tax rate of approximately (62.7)%. The change in the effective tax rate between the periods was primarily a result of discretely recognized tax benefits of net operating losses, impairment losses, changes in valuation allowances in the United States and in various foreign countries and a mix of earnings in jurisdictions with differing tax rates.

Net Loss. Net loss was approximately $19.7 million for the three months ended March 31, 2020, compared to a net loss of $6.1 million for the same period in 2019 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 consolidated statements of income 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. 

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The following table reconciles our reported net income to Adjusted EBITDA for each of the respective periods:

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Net loss

 

$

(19,698

)

 

$

(6,051

)

Add:

 

 

 

 

 

 

 

 

Interest income, net

 

 

(1,015

)

 

 

(1,885

)

Income tax provision (benefit)

 

 

(21,609

)

 

 

2,333

 

Depreciation and amortization expense

 

 

8,873

 

 

 

8,356

 

Impairments

 

 

7,719

 

 

 

-

 

Restructuring and other charges

 

 

32,713

 

 

 

2,396

 

Gain on sale of assets

 

 

(467

)

 

 

(13

)

Foreign currency gain

 

 

(3,242

)

 

 

(704

)

Stock compensation expense

 

 

3,176

 

 

 

4,862

 

Adjusted EBITDA

 

$

6,450

 

 

$

9,294

 

 

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.

Liquidity and Capital Resources

Cash Flows

Cash flows provided by (used in) type of activity were as follows:

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Operating activities

 

$

(21,237

)

 

$

838

 

Investing activities

 

 

(3,500

)

 

 

(3,186

)

Financing activities

 

 

(25,085

)

 

 

(1,116

)

 

 

 

(49,822

)

 

 

(3,464

)

Effect of exchange rate changes on cash activities

 

 

(5,652

)

 

 

172

 

Decrease in cash and cash equivalents

 

$

(55,474

)

 

$

(3,292

)

 

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 March 31, 2020, the Company had approximately of $343.5 million of cash and cash equivalents on hand and an availability of $44.5 million under the ABL Credit Facility.

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our business model, our current cash reserves and the recent 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 have reviewed numerous 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 used in operating activities for the three months ended March 31, 2020 was $21.2 million as compared to $0.8 million of net cash provided by operating activities for the three months ended March 31, 2019. The net change is primarily due to decreased cash flow resulting from changes in operating assets and liabilities of $35.2 million, a decrease due to increase in net loss of $13.6 million, offset by $26.8 million of non-cash movements which included an increase in impairment, restructuring and other charges of

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$39.2 million, of which $24.2 million is related to write-down of inventory and long-lived assets and $7.7 million is related to impairment of Goodwill.

The change in operating assets and liabilities for the three months ended March 31, 2020 resulted in a $42.7 million decrease in cash. The increase in trade receivables resulted in decreased cash flow of $19.5 million primarily due to lower global collections as customers started to focus on cash conservation due to the unprecedented downturn in the global oil markets coupled with remote working arrangements in response to the COVID-19 pandemic that caused some initial disruptions to collection efforts. Change in inventory resulted in decreased cash flow of $15.5 million primarily due to delay in shipments as a result of COVID-19 related productivity disruptions and to a lesser degree the stocking program activity related to our downhole tools business. The $11.7 million increase in prepaids and other assets resulted in decreased cash flow and was primarily due to the CARES Act tax benefit. The decrease in accrued liabilities was primarily due to the release of seasonal compensation accruals and tax payments, partially offset by an increase in trade accounts payable, which resulted in a net decrease in cash flow of $7.2 million. This was partially offset by $11.2 million decrease in unbilled receivables primarily due to increased invoicing of work performed on projects that are accounted on an over time basis.

The change in investing cash flows for the three months ended March 31, 2020 resulted in a $3.5 million decrease to cash. Capital expenditures by the Company were $4.2 million and $3.5 million for the three months ended March 31, 2020 and 2019, respectively. The capital expenditures for the three months ended March 31, 2020 were $0.7 million for machinery and equipment, $1.9 million for rental tools, and $1.6 million for other capital expenditures. The capital expenditures for the three months ended March 31, 2019 were $0.8 million for buildings, $1.2 million for rental tools, $1.1 million for machinery and equipment and $0.4 million for other capital expenditures.

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 particular amount of common stock and may be modified or superseded at any time at the Company’s discretion.

During the three-month period ended March 31, 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

On February 23, 2018, the Company, as borrower, and the Company’s subsidiaries TIW Corporation and Honing, Inc., as guarantors, entered into a five-year senior secured revolving credit facility (the “ABL Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and other financial institutions as lenders with total commitments of $100.0 million, including up to $10.0 million available for letters of credit. The maximum amount that the Company may borrow under the ABL Credit Facility is subject to the borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments.

As of March 31, 2020, the availability under the ABL Credit Facility was $44.5 million, after taking into account the outstanding letters of credit of approximately $0.9 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, 2019 for a discussion of our critical accounting policies. During the three months ended March 31, 2020, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies.

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Item 3.        Quantitative and Qualitative Disclosures About Market Risk

The Company is currently exposed to certain market risks related to interest rate changes on its short-term investments and fluctuations in foreign exchange rates. The Company does not engage in any material hedging transactions, forward contracts or currency trading which could mitigate the market risks inherent in such transactions. There have been no material changes in market risks for the Company since December 31, 2019.

Foreign Exchange Rate Risk

The Company has operations in various countries around the world and conducts business in a number of different currencies. Our significant foreign subsidiaries may also have monetary assets and liabilities not denominated in their functional currency. These monetary assets and liabilities are exposed to changes in currency exchange rates which may result in non-cash gains and losses primarily due to fluctuations between the U.S. dollar and each subsidiary's functional currency.

The Company experienced a foreign currency pre-tax gain of approximately $3.2 million and $0.7 million, respectively, during the three months ended March 31, 2020 and 2019, respectively.

The Company does not engage in any material hedging transactions, forward contracts or currency trading which could mitigate the effects and risks inherent in such transactions. Additionally, there is no assurance that the Company will be able to protect itself against currency fluctuations in the future.

Item 4.        Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2020 to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

For a description of the Company’s legal proceedings, see “Contingencies,” Note 12 to the Notes to Condensed Consolidated Financial Statements.

Item 1A.      Risk Factors

This section augments and updates certain risk factors disclosed under “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019. The following risk factors supplement the corresponding risks described in the Annual Report and should be read together with the other risk factors disclosed in the Annual Report.

The outbreak of COVID-19 and developments in the global oil markets have had, and may continue to have, material adverse consequences for general economic, financial and business conditions, and could materially and adversely affect our business, financial condition, results of operations and liquidity and those of our customers, suppliers and other counterparties.

The recent outbreak of COVID-19 and the responses of governmental authorities, companies and individuals across the world to stem the spread of the virus have significantly reduced global economic activity, as there has been a dramatic decrease in the number of businesses open for operation and substantially less people across the world have been traveling to work or leaving their home to purchase goods and services. As a result, there has been an unprecedented decline in the demand for, and thus also the market prices of, crude oil.  Additionally, the lack of sufficient storage capacity for the large increase in crude oil inventories and recent actions taken by OPEC and non-OPEC nations related to crude oil supply have exacerbated the negative impact on the market prices for crude oil.  

Any prolonged period of economic slowdown or recession resulting from the negative effects of COVID-19 on economic and business prospects across the world may negatively impact crude oil prices and the demand for our products, and could have significant adverse consequences to our financial condition and the financial condition of our customers, suppliers and other counterparties.

The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition, results of operation and liquidity will depend largely on future developments, including the duration and spread of the outbreak, and the related impact on overall economic activity, all of which are uncertain and cannot be predicted with certainty at this time.

To the extent the COVID-19 pandemic or the developments in the global oil markets adversely affects our business, financial condition, results of operation and liquidity, these events may also have the effect of heightening many of the other risks described in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 2019, as those risk factors are amended or supplemented by subsequent Quarterly Reports on Form 10-Q and other reports and documents we file with the SEC.

We depend on third-party suppliers for timely deliveries of raw materials, and our results of operations could be adversely affected if we are unable to obtain adequate supplies in a timely manner.

Our manufacturing operations depend upon obtaining adequate supplies of raw materials from third parties. The ability of these third parties to deliver raw materials may be affected by events beyond our control, such as the COVID-19 pandemic. Restrictions or disruptions of transportation related to the pandemic, including reduced availability of air transport, port closures and increased border controls or closures, have resulted in higher costs and delays, both on obtaining raw materials and shipping finished goods to customers. Any interruption or increased costs in the supply of raw materials needed to manufacture our products could adversely affect our business, results of operations and reputation with our customers.

 

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Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the repurchase and cancellation of our common stock during the three months ended March 31, 2020.

 

 

 

Three months ended

 

 

 

March 31, 2020

 

 

 

Total

Number of

Shares

Purchased

 

 

Average

Price

paid per

Share

 

 

Total Number

of Shares

Purchased

as Part of

Publicly

Announced

Plans or

Programs (1)

 

 

Maximum

Dollar Value

(in millions)

of Shares that

May Yet be

Purchased

Under the Plans

or Programs

 

January 1 - 31, 2020

 

 

-

 

 

$

-

 

 

 

-

 

 

$

73.4

 

February 1 - 29, 2020

 

 

-

 

 

 

-

 

 

 

-

 

 

 

73.4

 

March 1 - 31, 2020

 

 

808,389

 

 

 

30.91

 

 

 

808,389

 

 

 

48.5

 

 

 

 

808,389

 

 

$

30.91

 

 

 

808,389

 

 

$

48.5

 

 

 

(1)

On February 26, 2019, the Company announced that its Board of Directors authorized a stock repurchase plan under which the Company is authorized to repurchase up to $100.0 million of its common stock. The repurchase plan has no set expiration date and any repurchased shares are expected to be cancelled.

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Table of Contents

 

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:

 

the impact of the 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 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; and

 

future operations, financial results, business plans and cash needs.

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, 2019 and the following:

 

the impact of the ongoing COVID-19 pandemic;

 

the impact of the recent significant decline in oil and natural gas prices and the general volatility of oil and natural gas prices;

 

the impact of actions taken by OPEC and non-OPEC nations in response to their dispute over production levels;

 

the cyclical nature of the oil and gas industry;

 

uncertainties associated with the United States and worldwide economies;

 

uncertainties regarding political tensions in the Middle East, South America, Africa and elsewhere;

 

current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries;

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uncertainties regarding future oil and gas exploration and production activities, including new regulations, customs requirements and product testing requirements;

 

operating interruptions (including explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks);

 

project terminations, suspensions or scope adjustments to contracts reflected in the Company’s backlog;

 

the Company’s reliance on product development;

 

technological developments;

 

the Company’s reliance on third-party technologies;

 

acquisition and merger activities involving the Company or its competitors;

 

the Company’s dependence on key employees and skilled machinists, fabricators and technical personnel;

 

the Company’s reliance on sources of raw materials, including any increase in steel costs or decreases in steel supply as a result of global tariffs on certain imported steel mill products;

 

impact of environmental matters, including future environmental regulations;

 

competitive products and pricing pressures;

 

fluctuations in foreign currency, including those attributable to the Brexit;

 

the ability of the OPEC to set and maintain production levels and pricing;

 

oil and natural gas production levels by non-OPEC countries;

 

the Company’s reliance on significant customers;

 

creditworthiness of the Company’s customers;

 

fixed-price contracts;

 

changes in general economic, market or business conditions;

 

access to capital markets;

 

negative outcome of litigation, threatened litigation or government proceedings;

 

terrorist threats or acts, war and civil disturbances; and

 

changes to, and differing interpretations of, tax laws with respect to our operations and subsidiaries.

Many of such factors are beyond the Company’s ability to control or predict. Any of the factors, or a combination of these factors, could materially affect the Company’s future results of operations and the ultimate accuracy of the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular statement, and the Company undertakes no obligation to publicly update or revise any forward-looking statement.

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.

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Table of Contents

 

Item 6.

(a) Exhibits

The following Exhibits are filed herewith:

 

 

 

 

 

Exhibit No.

 

Description

*3.1

Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017).

 

 

 

*3.2

Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 20, 2014).

 

 

 

*4.1

Form of Certificate representing Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, File No. 001-13439).

 

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of Blake T. DeBerry.

 

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification of Jeffrey J. Bird.

 

 

 

32.1

Section 1350 Certification of Blake T. DeBerry.

 

 

 

32.2

Section 1350 Certification of Jeffrey J. Bird.

 

 

 

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.  

 

 

 

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*

Incorporated herein by reference as indicated.

+

Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-Q.

33


Table of Contents

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

DRIL-QUIP, INC.

 

 

 

 

Date: May 06, 2020

BY:

 

/s/ Jeffrey J. Bird

 

 

 

Jeffrey J. Bird,

 

 

 

Senior Vice President – Production Operations and Chief Financial Officer

 

 

 

(Principal Financial Officer and

 

 

 

Duly Authorized Signatory)

 

34

drq-ex311_240.htm

Exhibit 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Blake T. DeBerry, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 06, 2020

 

 

 

 

/s/ Blake T. DeBerry

 

 

Blake T. DeBerry

 

 

President and Chief Executive Officer

 

drq-ex312_241.htm

Exhibit 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Jeffrey J. Bird, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 06, 2020

 

 

 

 

/s/ Jeffrey J. Bird

 

 

Jeffrey J. Bird

 

 

Senior Vice President – Production Operations and Chief Financial Officer (Principal Financial Officer and Duly Authorized Signatory)

 

drq-ex321_242.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dril-Quip, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2020 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Blake T. DeBerry, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 06, 2020

 

 

/s/ Blake T. DeBerry

 

Blake T. DeBerry

 

President and Chief Executive Officer

 

drq-ex322_243.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dril-Quip, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2020 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Jeffrey J. Bird, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 06, 2020

 

 

/s/ Jeffrey J. Bird

 

Jeffrey J. Bird

 

Senior Vice President - Production Operations and Chief Financial Officer (Principal Financial Officer and Duly
Authorized Signatory)

 

v3.20.1
Income Tax
3 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
Income Tax

11. Income Tax

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 and includes favorable changes to tax law and incentives for businesses impacted by COVID-19. The CARES Act includes provisions relating to net operating loss carryback periods which have discretely impacted and increased the effective tax rate by 79.8% in the current period.

The effective tax rate for the three months ended March 31, 2020 was 52.3%, compared to (62.7)% for the same period in 2019. The change in the effective tax rate between the periods was primarily a result of discretely recognized tax benefits of net operating losses, impairment losses, changes in valuation allowances in the United States and in various foreign countries and a mix of earnings in jurisdictions with differing tax rates.

v3.20.1
Impairment, Restructuring and Other Charges
3 Months Ended
Mar. 31, 2020
Restructuring And Related Activities [Abstract]  
Impairment, Restructuring and Other Charges

7. Impairment, Restructuring and Other Charges

Restructuring and Other Charges

 

As a result of unfavorable market conditions primarily due to the COVID-19 pandemic and developments in the global oil markets, which triggered historically low crude oil prices and decreases in our customers’ capital budgets, we announced a cost reduction plan primarily focused on workforce reductions and the reorganization of certain facilities in the first quarter of 2020. We incurred restructuring and other charges associated with the cost reduction plan of $32.7 million during the three months ended March 31, 2020. We expect to incur cost through out the year under this plan. Of these charges, inventory write-downs, severance charges, long-lived assets write-downs and other charges were $17.3 million, $8.4 million, $6.9 million and $0.1 million respectively, during the three months ended March 31, 2020. These charges are reflected as "Restructuring and other charges" in our consolidated statement of operations. During the three months ended March 31, 2019, we incurred restructuring and other charges of approximately $2.4 million related to consulting fees, and an approximate $1.1 million payout to our former Chief Operating Officer, pursuant to a separation agreement entered into with him during the first quarter of 2019.

 

The following table summarizes the components of charges included in "Restructuring and other charges" in our consolidated statement of operations for the three months ended March 31, 2020 (in thousands):

 

 

 

Three months ended March 31, 2020

 

Inventory write-down

 

$

17,272

 

Severance

 

 

8,399

 

Long-lived asset write-down

 

 

6,912

 

Other

 

 

130

 

 

 

$

32,713

 

 

The following table summarizes the changes to our accrued liability balance related to restructuring and other charges for the three months ended March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Balance at January 1, 2020

 

$

-

 

Additions for costs expensed

 

 

8,000

 

Reductions for payments

 

 

-

 

Ending balance at March 31, 2020

 

$

8,000

 

 

Goodwill Impairment

 

In connection with our preparation and review of financial statements for the three months ended March 31, 2020, we recorded an impairment loss of $7.7 million for the first quarter of 2020 as a result of our updated assessment of current market conditions and restructuring efforts. These charges are reflected as "Impairments" in our consolidated statement of operations. No goodwill impairment losses were recorded for the three months ended March 31, 2019.

 

v3.20.1
New Accounting Standards
3 Months Ended
Mar. 31, 2020
Accounting Changes And Error Corrections [Abstract]  
New Accounting Standards

3. New Accounting Standards

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04 “Reference Rate Reform (Topic 848).” Topic 848 is effective for fiscal years and interim periods beginning as of March 12, 2020 through December 31, 2022. This update provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. It is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We are currently in the process of assessing the impact of this guidance on our financial position, results of operations or cash flows.

In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740).” Topic 740 is effective for fiscal years and interim periods beginning after December 15, 2020. This update simplifies the accounting for income taxes by removing certain exceptions such as the exception to the incremental approach for intraperiod tax allocation, the exception to the requirement to recognize a deferred tax liability for equity method investments, the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary and the exception to the general methodology for calculating income taxes in an interim period. We are currently in the process of assessing the impact of this guidance on our financial position, results of operations or cash flows.

 

v3.20.1
Revenue Recognition - Revenues From Contracts With Customers (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Disaggregation Of Revenue [Line Items]    
Revenues $ 86,372 $ 83,910
Western Hemisphere | Operating Segments    
Disaggregation Of Revenue [Line Items]    
Revenues 52,428 46,221
Eastern Hemisphere | Operating Segments    
Disaggregation Of Revenue [Line Items]    
Revenues 22,517 23,623
Asia Pacific | Operating Segments    
Disaggregation Of Revenue [Line Items]    
Revenues 11,427 14,066
Products    
Disaggregation Of Revenue [Line Items]    
Revenues 67,558 65,434
Products | Western Hemisphere | Operating Segments    
Disaggregation Of Revenue [Line Items]    
Revenues 41,472 36,376
Products | Eastern Hemisphere | Operating Segments    
Disaggregation Of Revenue [Line Items]    
Revenues 18,179 18,618
Products | Asia Pacific | Operating Segments    
Disaggregation Of Revenue [Line Items]    
Revenues 7,907 10,440
Services    
Disaggregation Of Revenue [Line Items]    
Revenues 18,814 18,476
Services | Western Hemisphere | Operating Segments    
Disaggregation Of Revenue [Line Items]    
Revenues 10,956 9,845
Services | Eastern Hemisphere | Operating Segments    
Disaggregation Of Revenue [Line Items]    
Revenues 4,338 5,005
Services | Asia Pacific | Operating Segments    
Disaggregation Of Revenue [Line Items]    
Revenues $ 3,520 $ 3,626
v3.20.1
Stock-Based Compensation and Stock Awards - Additional Information (Detail) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Capitalized expense $ 0 $ 0
Former Chief Operating Officer | Restricted Stock Awards    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Allocated share-based compensation expense   1,800,000
Selling, General and Administrative Expenses    
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Allocated share-based compensation expense $ 3,200,000 $ 4,900,000
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement Of Income And Comprehensive Income [Abstract]    
Net loss $ (19,698) $ (6,051)
Other comprehensive income (loss), net of tax:    
Foreign currency translation adjustments (24,979) 1,627
Total comprehensive loss $ (44,677) $ (4,424)
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
May 04, 2020
Cover [Abstract]    
Entity Registrant Name DRIL-QUIP, INC.  
Entity Central Index Key 0001042893  
Trading Symbol DRQ  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Period End Date Mar. 31, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Entity Common Stock Shares Outstanding   35,060,690
Entity Emerging Growth Company false  
Entity Small Business false  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Shell Company false  
Entity File Number 001-13439  
Entity Tax Identification Number 74-2162088  
Entity Address, Address Line One 6401 N. ELDRIDGE PARKWAY  
Entity Address, City or Town HOUSTON  
Entity Address, State or Province TX  
Entity Address, Country US  
Entity Address, Postal Zip Code 77041  
City Area Code 713  
Local Phone Number 939-7711  
Entity Incorporation, State or Country Code DE  
Document Quarterly Report true  
Document Transition Report false  
Title of each class Common Stock, $0.01 par value per share  
Security Exchange Name NYSE  
v3.20.1
Organization and Basis of Presentation
3 Months Ended
Mar. 31, 2020
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Organization and Basis of Presentation

1. Organization and Basis of Presentation

Dril-Quip, Inc., a Delaware corporation (the “Company” or “Dril-Quip”), designs, manufactures, sells and services highly engineered drilling and production equipment that is well suited primarily for use in deepwater, harsh environment and severe service applications. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors, diverters and safety valves. Dril-Quip’s products are used by major integrated, large independent and foreign national oil and gas companies and drilling contractors throughout the world. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip’s customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products.

The Company’s operations are organized into three geographic segments — Western Hemisphere (including North and South America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe and Africa; headquartered in Aberdeen, Scotland) and Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East; headquartered in Singapore). Each of these segments sells similar products and services, and the Company has major manufacturing facilities in all three of its regional headquarter locations as well as in Macae, Brazil. The Company’s major subsidiaries are Dril-Quip (Europe) Limited, located in Aberdeen with branches in Azerbaijan, Denmark, Norway and Holland; Dril-Quip Asia-Pacific PTE Ltd., located in Singapore; and Dril-Quip do Brasil LTDA, located in Macae, Brazil. Other operating subsidiaries include TIW Corporation (TIW) and Honing, Inc., both located in Houston, Texas; DQ Holdings Pty. Ltd., located in Perth, Australia; Dril-Quip Cross (Ghana) Ltd., located in Takoradi, Ghana; PT DQ Oilfield Services Indonesia, located in Jakarta, Indonesia; Dril-Quip (Nigeria) Ltd., located in Port Harcourt, Nigeria; Dril-Quip Egypt for Petroleum Services S.A.E., located in Alexandria, Egypt; Dril-Quip TIW Saudi Arabia Limited, located in Dammam, Kingdom of Saudi Arabia; Dril-Quip Oilfield Services (Tianjin) Co. Ltd., located in Tianjin, China, with branches in Shenzhen and Beijing, China; Dril-Quip Qatar LLC, located in Doha, Qatar; Dril-Quip TIW Mexico S. de R.L.C.V., located in Villahermosa, Mexico; TIW de Venezuela S.A., located in Anaco, Venezuela and with a registered branch located in Ecuador; TIW (UK) Limited, located in Aberdeen, Scotland; TIW Hungary LLC, located in Szolnok, Hungary; and TIW International LLC, with a registered branch located in Singapore.

The condensed consolidated financial statements included herein are unaudited. The balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date. In the opinion of management, the unaudited condensed consolidated interim financial statements include all normal recurring adjustments necessary for a fair statement of the financial position as of March 31, 2020 and the results of operations and comprehensive income (loss) and cash flows for the three months ended March 31, 2020 and 2019. Certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Management believes the unaudited interim related disclosures in these condensed consolidated financial statements are adequate. The results of operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”).

The recent outbreak of COVID-19 and its development into a pandemic has resulted in significant economic disruption globally. Actions taken by various governmental authorities, individuals and companies around the world to prevent the spread of COVID-19 through social distancing have restricted travel, curtailed business operations, prohibited public gatherings and restricted the overall level of individual movement and in-person interaction across the globe. This has significantly reduced global economic activity and caused global demand for oil and gas to decrease at an unprecedented rate. This demand reduction was further exacerbated by disputes over oil production by Organization of Petroleum Exporting Countries (OPEC) and non-OPEC nations. The subsequent actions taken by such countries as a result thereof, including Saudi Arabia discounting its crude oil export prices, have led to significant declines in crude oil prices, resulting in a challenging industry environment. The extent of the impact of the pandemic 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 financial condition.

v3.20.1
Asset Backed Loan (ABL) Credit Facility (Details) - ABL Credit Facility - Revolving Credit Facility
3 Months Ended
Feb. 23, 2018
USD ($)
Mar. 31, 2020
USD ($)
Debt Instrument [Line Items]    
Debt instrument, term 5 years  
Total commitments $ 100,000,000.0  
Amount available for letters of credit (up to) $ 10,000,000.0  
Fixed charges ratio   1.1
Available borrowing capacity   $ 44,500,000
Letters of credit outstanding   $ 900,000
Minimum    
Debt Instrument [Line Items]    
Commitment fee percentage 0.25%  
Maximum    
Debt Instrument [Line Items]    
Commitment fee percentage 0.375%  
CB Floating Rate | Minimum    
Debt Instrument [Line Items]    
Basis spread on variable rate 1.00%  
CB Floating Rate | Maximum    
Debt Instrument [Line Items]    
Basis spread on variable rate 1.50%  
Eurodollar | Minimum    
Debt Instrument [Line Items]    
Basis spread on variable rate 2.00%  
Eurodollar | Maximum    
Debt Instrument [Line Items]    
Basis spread on variable rate 2.50%  
v3.20.1
Commitments and Contingencies (Details) - Brazil
$ in Millions
2 Months Ended
Jan. 31, 2011
USD ($)
assessment
Dec. 31, 2016
USD ($)
Dec. 31, 2014
USD ($)
Commitments And Contingencies [Line Items]      
Number of tax assessments | assessment 2    
Value of assessments served on Brazilian subsidiary $ 13.0    
Court deposit   $ 8.8 $ 8.8
v3.20.1
Geographic Areas (Tables)
3 Months Ended
Mar. 31, 2020
Segment Reporting [Abstract]  
Schedule of Segment Reporting

 

 

 

Three months ended March 31,

 

 

 

Western Hemisphere

 

 

Eastern Hemisphere

 

 

Asia-Pacific

 

 

DQ Corporate

 

 

Total

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point in Time

 

$

22,964

 

 

$

23,767

 

 

$

8,962

 

 

$

14,118

 

 

$

5,447

 

 

$

10,440

 

 

$

-

 

 

$

-

 

 

$

37,373

 

 

$

48,325

 

Over Time

 

 

18,508

 

 

 

12,609

 

 

 

9,217

 

 

 

4,500

 

 

 

2,460

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

30,185

 

 

 

17,109

 

Total Products

 

 

41,472

 

 

 

36,376

 

 

 

18,179

 

 

 

18,618

 

 

 

7,907

 

 

 

10,440

 

 

 

-

 

 

 

-

 

 

 

67,558

 

 

 

65,434

 

Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technical Advisory

 

 

7,396

 

 

 

7,022

 

 

 

3,496

 

 

 

4,082

 

 

 

3,289

 

 

 

3,195

 

 

 

-

 

 

 

-

 

 

 

14,181

 

 

 

14,299

 

Reconditioning

 

 

3,560

 

 

 

2,823

 

 

 

842

 

 

 

923

 

 

 

231

 

 

 

431

 

 

 

-

 

 

 

-

 

 

 

4,633

 

 

 

4,177

 

Total Services

(excluding rental tools)

 

 

10,956

 

 

 

9,845

 

 

 

4,338

 

 

 

5,005

 

 

 

3,520

 

 

 

3,626

 

 

 

-

 

 

 

-

 

 

 

18,814

 

 

 

18,476

 

Leasing

 

 

4,761

 

 

 

6,321

 

 

 

2,748

 

 

 

2,647

 

 

 

2,117

 

 

 

1,439

 

 

 

-

 

 

 

-

 

 

 

9,626

 

 

 

10,407

 

Total Services

(including rental tools)

 

 

15,717

 

 

 

16,166

 

 

 

7,086

 

 

 

7,652

 

 

 

5,637

 

 

 

5,065

 

 

 

-

 

 

 

-

 

 

 

28,440

 

 

 

28,883

 

Intercompany

 

 

3,314

 

 

 

4,091

 

 

 

331

 

 

 

144

 

 

 

2,256

 

 

 

740

 

 

 

 

 

 

 

-

 

 

 

5,901

 

 

 

4,975

 

Eliminations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,901

)

 

 

(4,975

)

 

 

(5,901

)

 

 

(4,975

)

Total Revenues

 

$

60,503

 

 

$

56,633

 

 

$

25,596

 

 

$

26,414

 

 

$

15,800

 

 

$

16,245

 

 

$

(5,901

)

 

$

(4,975

)

 

$

95,998

 

 

$

94,317

 

Depreciation and amortization

 

$

5,622

 

 

$

5,419

 

 

$

974

 

 

$

1,053

 

 

$

1,340

 

 

$

1,198

 

 

$

937

 

 

$

686

 

 

$

8,873

 

 

$

8,356

 

Income (loss) before income taxes

 

$

8,153

 

 

$

1,579

 

 

$

(28,321

)

 

$

6,581

 

 

$

1,569

 

 

$

5,196

 

 

$

(22,708

)

 

$

(17,074

)

 

$

(41,307

)

 

$

(3,718

)

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(In thousands)

 

Total long-lived assets:

 

 

 

 

 

 

 

 

Western Hemisphere

 

$

375,729

 

 

$

379,776

 

Eastern Hemisphere

 

 

235,939

 

 

 

246,854

 

Asia-Pacific

 

 

70,088

 

 

 

71,384

 

Eliminations

 

 

(371,937

)

 

 

(371,938

)

Total

 

$

309,819

 

 

$

326,076

 

 

 

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

 

 

 

Western Hemisphere

 

$

777,321

 

 

$

732,716

 

Eastern Hemisphere

 

 

786,238

 

 

 

818,803

 

Asia-Pacific

 

 

179,839

 

 

 

181,188

 

Eliminations

 

 

(607,288

)

 

 

(526,142

)

Total

 

$

1,136,110

 

 

$

1,206,565

 

 

v3.20.1
Revenue Recognition (Tables)
3 Months Ended
Mar. 31, 2020
Revenue From Contract With Customer [Abstract]  
Schedule of Revenue from Contract with Customer Excludes Leasing

Revenues from contracts with customers (excludes leasing) consisted of the following:

 

 

 

Three months ended

 

 

 

March 31, 2020

 

 

 

Western

Hemisphere

 

 

Eastern

Hemisphere

 

 

Asia-

Pacific

 

 

Total

 

 

 

(In thousands)

 

Product Revenues

 

$

41,472

 

 

$

18,179

 

 

$

7,907

 

 

$

67,558

 

Service Revenues

 

 

10,956

 

 

 

4,338

 

 

 

3,520

 

 

 

18,814

 

Total

 

$

52,428

 

 

$

22,517

 

 

$

11,427

 

 

$

86,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

 

Western

Hemisphere

 

 

Eastern

Hemisphere

 

 

Asia-

Pacific

 

 

Total

 

 

 

(In thousands)

 

Product Revenues

 

$

36,376

 

 

$

18,618

 

 

$

10,440

 

 

$

65,434

 

Service Revenues

 

 

9,845

 

 

 

5,005

 

 

 

3,626

 

 

 

18,476

 

Total

 

$

46,221

 

 

$

23,623

 

 

$

14,066

 

 

$

83,910

 

 

 

Schedule of Contract Asset and Liability

Balances related to contracts with customers consisted of the following:

Contract Assets (amounts shown in thousands)

 

Contract Assets at December 31, 2019

 

$

136,332

 

Additions

 

 

31,460

 

Transfers to Trade Receivables, Net

 

 

(43,727

)

Contract Assets at March 31, 2020

 

$

124,065

 

 

Contract Liabilities (amounts shown in thousands)

 

Contract Liabilities at December 31, 2019

 

$

6,901

 

Additions

 

 

2,988

 

Revenue Recognized

 

 

(3,458

)

Contract Liabilities at March 31, 2020

 

$

6,431

 

 

v3.20.1
Geographic Areas - Schedule of Segment Reporting (Detail) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Dec. 31, 2019
Segment Reporting Information [Line Items]      
Revenues $ 95,998 $ 94,317  
Depreciation and amortization 8,873 8,356  
Income (loss) before income taxes (41,307) (3,718)  
Total long-lived assets 309,819   $ 326,076
Total assets 1,136,110   1,206,565
Transferred at Point in Time      
Segment Reporting Information [Line Items]      
Revenues 37,373 48,325  
Transferred Over Time      
Segment Reporting Information [Line Items]      
Revenues 30,185 17,109  
Intercompany      
Segment Reporting Information [Line Items]      
Revenues 5,901 4,975  
Eliminations      
Segment Reporting Information [Line Items]      
Revenues (5,901) (4,975)  
Total long-lived assets (371,937)   (371,938)
Total assets (607,288)   (526,142)
Western Hemisphere      
Segment Reporting Information [Line Items]      
Revenues 60,503 56,633  
Western Hemisphere | Transferred at Point in Time      
Segment Reporting Information [Line Items]      
Revenues 22,964 23,767  
Western Hemisphere | Transferred Over Time      
Segment Reporting Information [Line Items]      
Revenues 18,508 12,609  
Western Hemisphere | Operating Segments      
Segment Reporting Information [Line Items]      
Depreciation and amortization 5,622 5,419  
Income (loss) before income taxes 8,153 1,579  
Total long-lived assets 375,729   379,776
Total assets 777,321   732,716
Western Hemisphere | Intercompany      
Segment Reporting Information [Line Items]      
Revenues 3,314 4,091  
Eastern Hemisphere [Member]      
Segment Reporting Information [Line Items]      
Revenues 25,596 26,414  
Eastern Hemisphere [Member] | Transferred at Point in Time      
Segment Reporting Information [Line Items]      
Revenues 8,962 14,118  
Eastern Hemisphere [Member] | Transferred Over Time      
Segment Reporting Information [Line Items]      
Revenues 9,217 4,500  
Eastern Hemisphere [Member] | Operating Segments      
Segment Reporting Information [Line Items]      
Depreciation and amortization 974 1,053  
Income (loss) before income taxes (28,321) 6,581  
Total long-lived assets 235,939   246,854
Total assets 786,238   818,803
Eastern Hemisphere [Member] | Intercompany      
Segment Reporting Information [Line Items]      
Revenues 331 144  
Asia Pacific      
Segment Reporting Information [Line Items]      
Revenues 15,800 16,245  
Asia Pacific | Transferred at Point in Time      
Segment Reporting Information [Line Items]      
Revenues 5,447 10,440  
Asia Pacific | Transferred Over Time      
Segment Reporting Information [Line Items]      
Revenues 2,460    
Asia Pacific | Operating Segments      
Segment Reporting Information [Line Items]      
Depreciation and amortization 1,340 1,198  
Income (loss) before income taxes 1,569 5,196  
Total long-lived assets 70,088   71,384
Total assets 179,839   $ 181,188
Asia Pacific | Intercompany      
Segment Reporting Information [Line Items]      
Revenues 2,256 740  
Corporate, Non-Segment      
Segment Reporting Information [Line Items]      
Revenues (5,901) (4,975)  
Depreciation and amortization 937 686  
Income (loss) before income taxes (22,708) (17,074)  
Corporate, Non-Segment | Eliminations      
Segment Reporting Information [Line Items]      
Revenues (5,901) (4,975)  
Products | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 67,558 65,434  
Products | Western Hemisphere | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 41,472 36,376  
Products | Eastern Hemisphere [Member] | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 18,179 18,618  
Products | Asia Pacific | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 7,907 10,440  
Technical Advisory | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 14,181 14,299  
Technical Advisory | Western Hemisphere | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 7,396 7,022  
Technical Advisory | Eastern Hemisphere [Member] | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 3,496 4,082  
Technical Advisory | Asia Pacific | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 3,289 3,195  
Reconditioning | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 4,633 4,177  
Reconditioning | Western Hemisphere | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 3,560 2,823  
Reconditioning | Eastern Hemisphere [Member] | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 842 923  
Reconditioning | Asia Pacific | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 231 431  
Total Services (excluding rental tools) | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 18,814 18,476  
Total Services (excluding rental tools) | Western Hemisphere | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 10,956 9,845  
Total Services (excluding rental tools) | Eastern Hemisphere [Member] | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 4,338 5,005  
Total Services (excluding rental tools) | Asia Pacific | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 3,520 3,626  
Leasing | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 9,626 10,407  
Leasing | Western Hemisphere | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 4,761 6,321  
Leasing | Eastern Hemisphere [Member] | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 2,748 2,647  
Leasing | Asia Pacific | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 2,117 1,439  
Total Services (including rental tools) | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 28,440 28,883  
Total Services (including rental tools) | Western Hemisphere | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 15,717 16,166  
Total Services (including rental tools) | Eastern Hemisphere [Member] | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues 7,086 7,652  
Total Services (including rental tools) | Asia Pacific | Operating Segments      
Segment Reporting Information [Line Items]      
Revenues $ 5,637 $ 5,065  
v3.20.1
Intangible Assets (Tables)
3 Months Ended
Mar. 31, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Schedule of Finite-Lived and Indefinite-Lived Intangible Assets

Intangible assets consist of the following:

 

 

 

 

 

March 31, 2020

 

 

 

Estimated

Useful Lives

 

Gross

Book Value

 

 

Accumulated

Amortization

 

 

Foreign

Currency

Translation

 

 

Net Book

Value

 

 

 

 

 

(In thousands)

 

Trademarks

 

15 years

 

$

8,206

 

 

$

(638

)

 

$

(49

)

 

$

7,519

 

Patents

 

15 - 30 years

 

 

5,951

 

 

 

(2,371

)

 

 

111

 

 

 

3,691

 

Customer relationships

 

5 - 15 years

 

 

25,939

 

 

 

(5,833

)

 

 

(281

)

 

 

19,825

 

Non-compete agreements

 

3 years

 

 

171

 

 

 

(171

)

 

 

-

 

 

 

-

 

Organizational costs

 

indefinite

 

 

179

 

 

 

-

 

 

 

(10

)

 

 

169

 

 

 

 

 

$

40,446

 

 

$

(9,013

)

 

$

(229

)

 

$

31,204

 

 

 

 

 

 

December 31, 2019

 

 

 

Estimated

Useful Lives

 

Gross

Book Value

 

 

Accumulated

Amortization

 

 

Foreign

Currency

Translation

 

 

Net Book

Value

 

 

 

 

 

(In thousands)

 

Trademarks

 

15 years

 

$

8,159

 

 

 

(512

)

 

$

47

 

 

$

7,694

 

Patents

 

15 - 30 years

 

 

5,945

 

 

 

(2,529

)

 

 

-

 

 

 

3,416

 

Customer relationships

 

5 - 15 years

 

 

25,787

 

 

 

(4,954

)

 

 

122

 

 

 

20,955

 

Non-compete agreements

 

3 years

 

 

171

 

 

 

(170

)

 

 

-

 

 

 

1

 

Organizational costs

 

indefinite

 

 

172

 

 

 

-

 

 

 

7

 

 

 

179

 

 

 

 

 

$

40,234

 

 

$

(8,165

)

 

$

176

 

 

$

32,245

 

v3.20.1
Significant Accounting Policies (Tables)
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Schedule of Earnings Per Share The following table reconciles the weighted average basic number of common shares outstanding and the weighted average diluted number of common shares outstanding for the purpose of calculating basic and diluted earnings per share:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Weighted average common shares outstanding - basic

 

 

35,695

 

 

 

35,559

 

Dilutive effect of common stock awards

 

 

-

 

 

 

-

 

Weighted average common shares outstanding – diluted

 

 

35,695

 

 

 

35,559

 

 

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

For the three months ended March 31, 2020 and 2019, the Company has excluded the following common stock options and awards because their impact on the income/(loss) per share is anti-dilutive (in thousands on a weighted average basis):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Director stock awards

 

 

40

 

 

 

4

 

Stock options

 

 

132

 

 

 

-

 

Performance share units

 

 

277

 

 

 

92

 

Restricted stock awards

 

 

336

 

 

 

44

 

v3.20.1
Inventories, net
3 Months Ended
Mar. 31, 2020
Inventory Disclosure [Abstract]  
Inventories, net

6. Inventories, net

Inventories consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Raw materials and supplies

 

$

41,137

 

 

$

46,282

 

Work in progress

 

 

51,897

 

 

 

54,171

 

Finished goods

 

 

186,897

 

 

 

175,629

 

 

 

 

279,931

 

 

 

276,082

 

Less: allowance for slow moving and excess inventory

 

 

(82,896

)

 

 

(71,020

)

Total inventory

 

$

197,035

 

 

$

205,062

 

 

v3.20.1
Significant Accounting Policies
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Significant Accounting Policies

2. Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition, impairment of our goodwill and asset recoverability tests and inventories.

Revenue Recognition

The Company generates revenues through the sale of products, the sale of services and the leasing of installation tools. The Company normally negotiates contracts for products, including those accounted for under the over time method, rental tools and services separately. Modifications to the scope and price of sales contracts may occur in the form of variations and change orders. For all product sales, it is the customer’s decision as to the timing of the product installation as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory assistance services. The customer may instead choose to use a third party or its own personnel.

Product and Service Revenues

Product and service revenues are recognized as the Company satisfies the performance obligation by transferring control of the promised good or service to the customer. Revenues are measured based on consideration specified in a contract with a customer and exclude sales incentives and amounts collected on behalf of third parties. In addition, some customers may impose contractually negotiated penalties for late delivery that are excluded from the transaction price.

Management has elected to utilize certain practical expedients allowed under Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606). Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer are excluded from the measurement of the transaction price. Shipping and handling activities that are performed after a customer obtains control of the good are accounted for as activities to fulfill the promise to transfer the good and thus are excluded from the transaction price.

Product revenues

The Company recognizes product revenues from two methods:

 

product revenues are recognized over time as control is transferred to the customer; and

 

product revenues from the sale of products that do not qualify for the over time method are recognized as point in time.

Revenues recognized under the over time method

The Company uses the over time method on long-term project contracts that have the following characteristics:

 

the contracts call for products which are designed to customer specifications;

 

the structural designs are unique and require significant engineering and manufacturing efforts generally requiring more than six months in duration;

 

product requirements cannot be filled directly from the Company’s standard inventory; and

 

The Company has an enforceable right to payment for any work completed to date and the enforceable payment includes a reasonable profit margin.

For each project, the Company prepares a detailed analysis of estimated costs, profit margin, completion date and risk factors which include availability of material, production efficiencies and other factors that may impact the project. On a quarterly basis, management reviews the progress of each project, which may result in revisions of previous estimates, including revenue recognition. The Company calculates the percentage complete and applies the percentage to determine the revenues earned and the appropriate portion of total estimated costs to be recognized. Losses, if any, are recorded in full in the period they become known. Historically, the Company’s estimates of total costs and costs to complete have approximated actual costs incurred to complete the project.

Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in customer prepayments as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported in unbilled receivables. Unbilled revenues are expected to be billed and collected within one year. At March 31, 2020 and December 31, 2019, unbilled receivables included $87.4 million and $83.2 million of unbilled receivables related to products accounted for using the over time method of accounting, respectively. For the three months ended March 31, 2020, there were 42 projects representing approximately 31.4% of the Company's total revenues and approximately 44.7% of its product revenues that were accounted for using over time accounting, compared to 21 projects for the three months ended March 31, 2019, which represented approximately 18.0% of the Company's total revenues and approximately 26.0% of its product revenues.

Revenues recognized under the point in time method

Revenues from the sale of standard inventory products, not accounted for under the over time method, are recorded at the point in time that the customer obtains control of the promised asset and the Company satisfies its performance obligation. This point in time recognition aligns with the time of shipment, which is when the Company typically has a present right to payment, title transfers to the customer, the customer or its carrier has physical possession and the customer has significant risks and rewards of ownership. The Company may provide product storage to some customers. Revenues for these products are recognized at the point in time that control of the product transfers to the customer, the reason for storage is requested by the customer, the product is separately identified, the product is ready for physical transfer to the customer and the Company does not have the ability to use or direct the use of the product. This point in time typically occurs when the products are moved to storage. We receive payment after control of the products has transferred to the customer.

Service revenues

The Company recognizes service revenues from two sources:

 

technical advisory assistance; and

 

rework and reconditioning of customer-owned Dril-Quip products.

The Company generally does not install products for its customers, but it does provide technical advisory assistance.

The Company normally negotiates contracts for products, including those accounted for under the over time method, and services separately. For all product sales, it is the customer’s decision as to the timing of the product installation as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory assistance services. The customer may use a third party or their own personnel. The contracts for these services are typically considered day-to-day.

Rework and reconditioning service revenues are recorded using the over time method based on the remaining steps that need to be completed as the refurbishment process is performed. The measurement of progress considers, among other things, the time necessary for completion of each step in the reconditioning plan, the materials to be purchased, labor and ordering procedures. We receive payment after the services have been performed by billing customers periodically (typically monthly).

Lease revenues

The Company earns lease revenues from the rental of running tools and rental of its forging facility. Rental revenues are recognized within leasing revenues on a day rate basis over the lease term, which is generally between one to three months. Rental revenue from the forging facility is recognized on a straight-line basis over the expected life of the lease. Lease revenues from rental of running tools for the three months ended March 31, 2020 were $9.1 million and lease revenues from rental of facilities were $0.5 million for the same period.

Practical Expedients

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, receivables and payables. The carrying values of these financial instruments approximate their respective fair values as they are short-term in nature.

Goodwill and indefinite-lived intangible assets

For goodwill and intangible assets with indefinite lives, an assessment for impairment is performed annually or when there is an indication an impairment may have occurred. We complete our annual impairment test for goodwill and other indefinite-lived

intangibles using an assessment date of October 1. Goodwill is reviewed for impairment by comparing the carrying value of each of our reporting unit’s net assets, including allocated goodwill, to the estimated fair value of the reporting unit. We determine the fair value of our reporting units using a discounted cash flow approach. We selected this valuation approach because we believe it, combined with our best judgment regarding underlying assumptions and estimates, provides the best estimate of fair value for each of our reporting units. Determining the fair value of a reporting unit requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, future operating margins, the weighted average cost of capital ("discount rates"), a terminal growth value, and future market conditions, among others. We believe that the estimates and assumptions used in our impairment assessments are reasonable. If the reporting unit’s carrying value is greater than its calculated fair value, we recognize a goodwill impairment charge for the amount by which the carrying value of goodwill exceeds its fair value. In March 2020, the overall offshore market conditions declined primarily due to the COVID-19 pandemic and the developments in the global oil markets. This decline was evidenced by lower commodity prices, decline in expected offshore rig counts, decrease in our customers’ capital budgets and potential delays of contracts. As such, an interim goodwill impairment analysis was performed in connection with the preparation and review of financial statements for the three months ended March 31, 2020. Based on this analysis, we recorded an impairment loss of $7.7 million for our Eastern Hemisphere reporting unit for the three months ended March 31, 2020.

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate our property and equipment and definite-lived intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by comparing the carrying value to the estimated fair value. We assess recoverability based on undiscounted future net cash flows. Estimating future net cash flows requires us to make judgements regarding long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about our revenue growth, operating margins, capital expenditures, future market conditions and technological developments. If changes in these assumptions occur, our expectations regarding future net cash flows may change such that a material impairment could result. There was no impairment of property and equipment and definite-lived intangible assets during the three months ended March 31, 2020 or 2019.

Restructuring and Other Charges

In March 2020, the overall offshore market conditions declined primarily due to the COVID-19 pandemic and the developments in the global oil markets. As such, we amended our 2018 global strategic plan to realign our manufacturing facilities globally. We recorded non-cash inventory and long-lived asset write-downs of approximately $17.3 million and $6.9 million, respectively, as a result of expected changes in our business structure and where specific products are manufactured. Additionally, we incurred severance and other charges of $8.4 million and $0.1 million respectively, during the three months ended March 31, 2020. These charges are reflected as "Restructuring and other charges" in our consolidated statement of operations.

In the third quarter of 2018, we initiated a global strategic plan to better align our operations with market conditions. We incurred restructuring charges consisting primarily of consulting fees of approximately $2.4 million during the three months ended March 31, 2019.  

Treasury Shares

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. For the three months ended March 31, 2020, the Company purchased 808,389 shares under the share repurchase plan at an average price of approximately 30.91 per share totaling approximately $25.0 million and has retired such shares. For the three-month period ended March 31, 2019, the Company purchased 28,078 shares under the share repurchase plan at an average price of approximately $39.74 per share totaling approximately $1.1 million and has retired such shares.

Earnings Per Share

Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed considering the dilutive effect of stock awards using the treasury stock method.

In each relevant period, the net income used in the basic and dilutive earnings per share calculations is the same. The following table reconciles the weighted average basic number of common shares outstanding and the weighted average diluted number of common shares outstanding for the purpose of calculating basic and diluted earnings per share:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Weighted average common shares outstanding - basic

 

 

35,695

 

 

 

35,559

 

Dilutive effect of common stock awards

 

 

-

 

 

 

-

 

Weighted average common shares outstanding – diluted

 

 

35,695

 

 

 

35,559

 

 

 

For the three months ended March 31, 2020 and 2019, the Company has excluded the following common stock options and awards because their impact on the income/(loss) per share is anti-dilutive (in thousands on a weighted average basis):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Director stock awards

 

 

40

 

 

 

4

 

Stock options

 

 

132

 

 

 

-

 

Performance share units

 

 

277

 

 

 

92

 

Restricted stock awards

 

 

336

 

 

 

44

 

v3.20.1
Geographic Areas
3 Months Ended
Mar. 31, 2020
Segment Reporting [Abstract]  
Geographic Areas

10. Geographic Areas

 

 

 

Three months ended March 31,

 

 

 

Western Hemisphere

 

 

Eastern Hemisphere

 

 

Asia-Pacific

 

 

DQ Corporate

 

 

Total

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point in Time

 

$

22,964

 

 

$

23,767

 

 

$

8,962

 

 

$

14,118

 

 

$

5,447

 

 

$

10,440

 

 

$

-

 

 

$

-

 

 

$

37,373

 

 

$

48,325

 

Over Time

 

 

18,508

 

 

 

12,609

 

 

 

9,217

 

 

 

4,500

 

 

 

2,460

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

30,185

 

 

 

17,109

 

Total Products

 

 

41,472

 

 

 

36,376

 

 

 

18,179

 

 

 

18,618

 

 

 

7,907

 

 

 

10,440

 

 

 

-

 

 

 

-

 

 

 

67,558

 

 

 

65,434

 

Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technical Advisory

 

 

7,396

 

 

 

7,022

 

 

 

3,496

 

 

 

4,082

 

 

 

3,289

 

 

 

3,195

 

 

 

-

 

 

 

-

 

 

 

14,181

 

 

 

14,299

 

Reconditioning

 

 

3,560

 

 

 

2,823

 

 

 

842

 

 

 

923

 

 

 

231

 

 

 

431

 

 

 

-

 

 

 

-

 

 

 

4,633

 

 

 

4,177

 

Total Services

(excluding rental tools)

 

 

10,956

 

 

 

9,845

 

 

 

4,338

 

 

 

5,005

 

 

 

3,520

 

 

 

3,626

 

 

 

-

 

 

 

-

 

 

 

18,814

 

 

 

18,476

 

Leasing

 

 

4,761

 

 

 

6,321

 

 

 

2,748

 

 

 

2,647

 

 

 

2,117

 

 

 

1,439

 

 

 

-

 

 

 

-

 

 

 

9,626

 

 

 

10,407

 

Total Services

(including rental tools)

 

 

15,717

 

 

 

16,166

 

 

 

7,086

 

 

 

7,652

 

 

 

5,637

 

 

 

5,065

 

 

 

-

 

 

 

-

 

 

 

28,440

 

 

 

28,883

 

Intercompany

 

 

3,314

 

 

 

4,091

 

 

 

331

 

 

 

144

 

 

 

2,256

 

 

 

740

 

 

 

 

 

 

 

-

 

 

 

5,901

 

 

 

4,975

 

Eliminations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,901

)

 

 

(4,975

)

 

 

(5,901

)

 

 

(4,975

)

Total Revenues

 

$

60,503

 

 

$

56,633

 

 

$

25,596

 

 

$

26,414

 

 

$

15,800

 

 

$

16,245

 

 

$

(5,901

)

 

$

(4,975

)

 

$

95,998

 

 

$

94,317

 

Depreciation and amortization

 

$

5,622

 

 

$

5,419

 

 

$

974

 

 

$

1,053

 

 

$

1,340

 

 

$

1,198

 

 

$

937

 

 

$

686

 

 

$

8,873

 

 

$

8,356

 

Income (loss) before income taxes

 

$

8,153

 

 

$

1,579

 

 

$

(28,321

)

 

$

6,581

 

 

$

1,569

 

 

$

5,196

 

 

$

(22,708

)

 

$

(17,074

)

 

$

(41,307

)

 

$

(3,718

)

 

During the three months ended March 31, 2020, we recorded impairments, restructuring and other charges of $40.4 million. Of these charges, $32.1 million were recorded in the Eastern Hemisphere, $1.9 million in the Western Hemisphere and $6.2 million in DQ Corporate and $0.2 million in Asia-Pacific.

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(In thousands)

 

Total long-lived assets:

 

 

 

 

 

 

 

 

Western Hemisphere

 

$

375,729

 

 

$

379,776

 

Eastern Hemisphere

 

 

235,939

 

 

 

246,854

 

Asia-Pacific

 

 

70,088

 

 

 

71,384

 

Eliminations

 

 

(371,937

)

 

 

(371,938

)

Total

 

$

309,819

 

 

$

326,076

 

 

 

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

 

 

 

Western Hemisphere

 

$

777,321

 

 

$

732,716

 

Eastern Hemisphere

 

 

786,238

 

 

 

818,803

 

Asia-Pacific

 

 

179,839

 

 

 

181,188

 

Eliminations

 

 

(607,288

)

 

 

(526,142

)

Total

 

$

1,136,110

 

 

$

1,206,565

 

 

During the three months ended March 31, 2020, we wrote-down some of our inventory and long-lived assets balances in the amount of $24.2 million, of which $22.3 million was recorded in the Eastern Hemisphere and $1.9 million in the Western Hemisphere. We also recorded a $7.7 million impairment of our Goodwill balance all of which was in the Eastern Hemisphere.

 

The Company’s operations are organized into three geographic segments - Western Hemisphere (including North and South America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe and Africa; headquartered in Aberdeen, Scotland) and Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East; headquartered in Singapore). Each of these segments sells similar products and services and the Company has major manufacturing facilities in all three of its regional headquarter locations as well as in Macae, Brazil.

Eliminations of operating profits are related to intercompany inventory transfers that are deferred until shipment is made to third party customers.

v3.20.1
Revenue Recognition - Contract Asset and Liability (Details)
$ in Thousands
3 Months Ended
Mar. 31, 2020
USD ($)
Contract Assets  
Contract Assets at December 31, 2019 $ 136,332
Additions 31,460
Transfers to Trade Receivables, Net (43,727)
Contract Assets at March 31, 2020 124,065
Contract Liabilities  
Contract Liabilities at December 31, 2019 6,901
Contract Liabilities at March 31, 2020 6,431
Other Current Liabilities  
Contract Liabilities  
Contract Liabilities at December 31, 2019 6,901
Additions 2,988
Revenue Recognized (3,458)
Contract Liabilities at March 31, 2020 $ 6,431
v3.20.1
Inventories, net (Detail) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Inventory Disclosure [Abstract]    
Raw materials and supplies $ 41,137 $ 46,282
Work in progress 51,897 54,171
Finished goods 186,897 175,629
Inventory, gross, Total 279,931 276,082
Less: allowance for slow moving and excess inventory (82,896) (71,020)
Total inventory $ 197,035 $ 205,062
v3.20.1
CONDENSED CONSOLIDATED STATEMENTSOF STOCKHOLDERS' EQUITY (UNAUDITED) (Parenthetical) - shares
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement Of Stockholders Equity [Abstract]    
Treasury stock shares (in shares) 808,389 28,078
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Revenues:    
Revenues from products and services $ 86,372 $ 83,910
Leasing 9,626 10,407
Total revenues 95,998 94,317
Cost of sales:    
Total cost of sales 71,414 69,376
Selling, general and administrative 21,416 24,544
Engineering and product development 5,525 3,617
Impairments 7,719  
Restructuring and other charges 32,713 2,396
Gain on sale of assets (467) (13)
Total costs and expenses 138,320 99,920
Operating loss (42,322) (5,603)
Interest income 1,206 2,006
Interest expense (191) (121)
Loss before income taxes (41,307) (3,718)
Income tax provision (benefit) (21,609) 2,333
Net loss $ (19,698) $ (6,051)
Loss per common share:    
Basic (in dollars per share) $ (0.55) $ (0.17)
Diluted (in dollars per share) $ (0.55) $ (0.17)
Weighted average common shares outstanding:    
Basic (in shares) 35,695 35,559
Diluted (in shares) 35,695 35,559
Products    
Revenues:    
Revenues from products and services $ 67,558 $ 65,434
Cost of sales:    
Total cost of sales 53,645 51,544
Services    
Revenues:    
Revenues from products and services 18,814 18,476
Cost of sales:    
Total cost of sales 9,688 9,237
Leasing    
Cost of sales:    
Total cost of sales $ 8,081 $ 8,595
v3.20.1
Intangible Assets - Schedule of Intangible Assets (Details) - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Schedule of Finite and Indefinite-Lived Intangible Assets [Line Items]    
Accumulated Amortization $ (9,013) $ (8,165)
Finite-Lived, Foreign Currency Translation (229) 176
Indefinite-lived, Gross Book Value 179 172
Indefinite-lived Intangible Assets, Foreign Currency Translation (10) 7
Indefinite-lived Intangible, Net Book Value 169 179
Indefinite and Finite-Lived, Gross Book Value 40,446 40,234
Indefinite and Finite-Lived, Net Book Value $ 31,204 $ 32,245
Trademarks    
Schedule of Finite and Indefinite-Lived Intangible Assets [Line Items]    
Estimated Useful Lives 15 years 15 years
Finite-Lived, Gross Book Value $ 8,206 $ 8,159
Accumulated Amortization (638) (512)
Finite-Lived, Foreign Currency Translation (49) 47
Finite-Lived, Net Book Value 7,519 7,694
Patents    
Schedule of Finite and Indefinite-Lived Intangible Assets [Line Items]    
Finite-Lived, Gross Book Value 5,951 5,945
Accumulated Amortization (2,371) (2,529)
Finite-Lived, Foreign Currency Translation 111  
Finite-Lived, Net Book Value $ 3,691 $ 3,416
Patents | Minimum    
Schedule of Finite and Indefinite-Lived Intangible Assets [Line Items]    
Estimated Useful Lives 15 years 15 years
Patents | Maximum    
Schedule of Finite and Indefinite-Lived Intangible Assets [Line Items]    
Estimated Useful Lives 30 years 30 years
Customer relationships    
Schedule of Finite and Indefinite-Lived Intangible Assets [Line Items]    
Finite-Lived, Gross Book Value $ 25,939 $ 25,787
Accumulated Amortization (5,833) (4,954)
Finite-Lived, Foreign Currency Translation (281) 122
Finite-Lived, Net Book Value $ 19,825 $ 20,955
Customer relationships | Minimum    
Schedule of Finite and Indefinite-Lived Intangible Assets [Line Items]    
Estimated Useful Lives 5 years 5 years
Customer relationships | Maximum    
Schedule of Finite and Indefinite-Lived Intangible Assets [Line Items]    
Estimated Useful Lives 15 years 15 years
Non-compete agreements    
Schedule of Finite and Indefinite-Lived Intangible Assets [Line Items]    
Estimated Useful Lives 3 years 3 years
Finite-Lived, Gross Book Value $ 171 $ 171
Accumulated Amortization $ (171) (170)
Finite-Lived, Net Book Value   $ 1
v3.20.1
Income Tax - Additional Information (Detail)
1 Months Ended 3 Months Ended
Mar. 27, 2020
Mar. 31, 2020
Mar. 31, 2019
Unusual Risk Or Uncertainty [Line Items]      
Effective tax rate, percent   52.30% (62.70%)
Covid 19      
Unusual Risk Or Uncertainty [Line Items]      
Effective tax rate, percent 79.80%    
v3.20.1
Organization and Basis of Presentation (Details)
3 Months Ended
Mar. 31, 2020
Segment
Location
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Number of geographic segments | Segment 3
Number of headquarter locations | Location 3
v3.20.1
Inventories, net (Tables)
3 Months Ended
Mar. 31, 2020
Inventory Disclosure [Abstract]  
Schedule of Inventories

Inventories consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Raw materials and supplies

 

$

41,137

 

 

$

46,282

 

Work in progress

 

 

51,897

 

 

 

54,171

 

Finished goods

 

 

186,897

 

 

 

175,629

 

 

 

 

279,931

 

 

 

276,082

 

Less: allowance for slow moving and excess inventory

 

 

(82,896

)

 

 

(71,020

)

Total inventory

 

$

197,035

 

 

$

205,062

 

v3.20.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2020
Commitments And Contingencies Disclosure [Abstract]  
Commitments and Contingencies

12. Contingencies

Brazilian Tax Issue

From 2002 to 2007, the Company’s Brazilian subsidiary imported goods through, and paid taxes on such imports to, the State of Espirito Santo in Brazil. Upon the final sale of these goods, the Company’s Brazilian subsidiary collected taxes from customers and remitted them to the State of Rio de Janeiro net of the taxes paid on importation of those goods to the State of Espirito Santo in accordance with the Company’s understanding of Brazilian tax laws.

In December 2010 and January 2011, the Company’s Brazilian subsidiary was served with two assessments totaling approximately $13.0 million from the State of Rio de Janeiro to cancel the credits associated with the tax payments to the State of Espirito Santo on the importation of goods from July 2005 to October 2007. The Company objected to these assessments on the grounds that they would represent double taxation on the importation of the same goods and that the Company is entitled to the credits under applicable Brazilian law. The Company’s Brazilian subsidiary filed appeals with a State of Rio de Janeiro judicial court to annul both of these tax assessments and deposited with the court approximately $8.8 million in December 2014 and December 2016 as the full amount of the assessments with penalties and interest. The Company believes that these credits are valid and that success in the judicial court process is probable. Based upon this analysis, the Company has not accrued any liability in conjunction with this matter.

General

The Company operates its business and markets its products and services in most of the significant oil and gas producing areas in the world and is, therefore, subject to the risks customarily attendant to international operations and dependency on the condition of the oil and gas industry. Additionally, certain of the Company’s products are used in potentially hazardous drilling, completion, and production applications that can cause personal injury, property damage and environmental claims. Although exposure to such risk has not resulted in any significant problems in the past, there can be no assurance that ongoing and future developments will not adversely impact the Company.

The Company is also involved in a number of legal actions arising in the ordinary course of business. Although no assurance can be given with respect to the ultimate outcome of such legal action, in the opinion of management, the ultimate liability with respect thereto will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.

v3.20.1
Significant Accounting Policies - Schedule of Antidilutive Securities (Details) - shares
shares in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Director stock awards    
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]    
Antidilutive securities (in shares) 40 4
Stock options    
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]    
Antidilutive securities (in shares) 132 0
Performance share units    
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]    
Antidilutive securities (in shares) 277 92
Restricted stock awards    
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]    
Antidilutive securities (in shares) 336 44
v3.20.1
Revenue Recognition - Narrative (Details1)
Mar. 31, 2020
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2020-04-01  
Revenue Remaining Performance Obligation Expected Timing Of Satisfaction [Line Items]  
Remaining performance obligation percentage 73.90%
Expected timing of satisfaction period 12 months
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2021-04-01  
Revenue Remaining Performance Obligation Expected Timing Of Satisfaction [Line Items]  
Remaining performance obligation percentage 26.10%
Expected timing of satisfaction period 0 years
v3.20.1
Impairment, Restructuring and Other Charges - Schedule of Impairment, Restructuring and Other Charges (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Restructuring And Related Activities [Abstract]    
Inventory write-down $ 17,272  
Severance 8,399  
Long-lived asset impairment 6,912  
Other restructuring charges 130 $ 2,400
Total impairment, restructuring and other charges $ 32,713  
v3.20.1
Intangible Assets
3 Months Ended
Mar. 31, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Intangible Assets

8. Intangible Assets

Intangible assets consist of the following:

 

 

 

 

 

March 31, 2020

 

 

 

Estimated

Useful Lives

 

Gross

Book Value

 

 

Accumulated

Amortization

 

 

Foreign

Currency

Translation

 

 

Net Book

Value

 

 

 

 

 

(In thousands)

 

Trademarks

 

15 years

 

$

8,206

 

 

$

(638

)

 

$

(49

)

 

$

7,519

 

Patents

 

15 - 30 years

 

 

5,951

 

 

 

(2,371

)

 

 

111

 

 

 

3,691

 

Customer relationships

 

5 - 15 years

 

 

25,939

 

 

 

(5,833

)

 

 

(281

)

 

 

19,825

 

Non-compete agreements

 

3 years

 

 

171

 

 

 

(171

)

 

 

-

 

 

 

-

 

Organizational costs

 

indefinite

 

 

179

 

 

 

-

 

 

 

(10

)

 

 

169

 

 

 

 

 

$

40,446

 

 

$

(9,013

)

 

$

(229

)

 

$

31,204

 

 

 

 

 

 

December 31, 2019

 

 

 

Estimated

Useful Lives

 

Gross

Book Value

 

 

Accumulated

Amortization

 

 

Foreign

Currency

Translation

 

 

Net Book

Value

 

 

 

 

 

(In thousands)

 

Trademarks

 

15 years

 

$

8,159

 

 

 

(512

)

 

$

47

 

 

$

7,694

 

Patents

 

15 - 30 years

 

 

5,945

 

 

 

(2,529

)

 

 

-

 

 

 

3,416

 

Customer relationships

 

5 - 15 years

 

 

25,787

 

 

 

(4,954

)

 

 

122

 

 

 

20,955

 

Non-compete agreements

 

3 years

 

 

171

 

 

 

(170

)

 

 

-

 

 

 

1

 

Organizational costs

 

indefinite

 

 

172

 

 

 

-

 

 

 

7

 

 

 

179

 

 

 

 

 

$

40,234

 

 

$

(8,165

)

 

$

176

 

 

$

32,245

 

 

v3.20.1
Revenue Recognition
3 Months Ended
Mar. 31, 2020
Revenue From Contract With Customer [Abstract]  
Revenue Recognition

4. Revenue Recognition

Revenues from contracts with customers (excludes leasing) consisted of the following:

 

 

 

Three months ended

 

 

 

March 31, 2020

 

 

 

Western

Hemisphere

 

 

Eastern

Hemisphere

 

 

Asia-

Pacific

 

 

Total

 

 

 

(In thousands)

 

Product Revenues

 

$

41,472

 

 

$

18,179

 

 

$

7,907

 

 

$

67,558

 

Service Revenues

 

 

10,956

 

 

 

4,338

 

 

 

3,520

 

 

 

18,814

 

Total

 

$

52,428

 

 

$

22,517

 

 

$

11,427

 

 

$

86,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

 

Western

Hemisphere

 

 

Eastern

Hemisphere

 

 

Asia-

Pacific

 

 

Total

 

 

 

(In thousands)

 

Product Revenues

 

$

36,376

 

 

$

18,618

 

 

$

10,440

 

 

$

65,434

 

Service Revenues

 

 

9,845

 

 

 

5,005

 

 

 

3,626

 

 

 

18,476

 

Total

 

$

46,221

 

 

$

23,623

 

 

$

14,066

 

 

$

83,910

 

 

 

 

Contract Balances  

Balances related to contracts with customers consisted of the following:

Contract Assets (amounts shown in thousands)

 

Contract Assets at December 31, 2019

 

$

136,332

 

Additions

 

 

31,460

 

Transfers to Trade Receivables, Net

 

 

(43,727

)

Contract Assets at March 31, 2020

 

$

124,065

 

 

Contract Liabilities (amounts shown in thousands)

 

Contract Liabilities at December 31, 2019

 

$

6,901

 

Additions

 

 

2,988

 

Revenue Recognized

 

 

(3,458

)

Contract Liabilities at March 31, 2020

 

$

6,431

 

 

Contract assets include unbilled accounts receivable associated with contracts accounted for under the over time accounting method which were approximately $87.4 million and $83.2 million at March 31, 2020 and December 31, 2019, respectively. Unbilled contract assets are transferred to the trade receivables, net, when the billing milestones are met. The contract liabilities primarily relate to advance payments from customers.

Obligations for returns and refunds were considered immaterial as of March 31, 2020.

Remaining Performance Obligations

The aggregate amount of the transaction price allocated to remaining performance obligations from our over time product lines was $116.5 million as of March 31, 2020. The Company expects to recognize revenue on approximately 73.9% of the remaining performance obligations over the next 12 months and the remaining 26.1% thereafter.  

The Company applies the practical expedient available under the revenue standard and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Operating activities    
Net loss $ (19,698) $ (6,051)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation and amortization 8,873 8,356
Stock-based compensation expense 3,176 4,862
Impairments 7,719  
Restructuring and other charges 32,713 1,271
Gain on sale of assets (467) (13)
Deferred income taxes (10,862) (73)
Changes in operating assets and liabilities:    
Trade receivables, net (19,444) 15,768
Unbilled receivables 11,224 (21,365)
Inventories, net (15,537) (2,700)
Prepaids and other assets (11,723) 15,960
Accounts payable and accrued expenses (7,212) (14,478)
Other, net 1 (699)
Net cash provided by (used in) operating activities (21,237) 838
Investing activities    
Purchase of property, plant and equipment (4,187) (3,527)
Proceeds from sale of equipment 687 341
Net cash used in investing activities (3,500) (3,186)
Financing activities    
Repurchase of common shares (25,000) (1,116)
Other (85)  
Net cash used in financing activities (25,085) (1,116)
Effect of exchange rate changes on cash activities (5,652) 172
Decrease in cash and cash equivalents (55,474) (3,292)
Cash and cash equivalents at beginning of period 398,946 418,100
Cash and cash equivalents at end of period $ 343,472 $ 414,808
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 343,472 $ 398,946
Trade receivables, net 118,640 107,626
Unbilled receivables 129,310 140,534
Inventories, net 197,035 205,062
Prepaids and other current assets 37,834 28,321
Total current assets 826,291 880,489
Operating lease right of use assets 5,047 5,144
Property, plant and equipment, net 244,495 258,497
Deferred income taxes 17,879 8,936
Goodwill   7,947
Intangible assets 31,204 32,245
Other assets 11,194 13,307
Total assets 1,136,110 1,206,565
Current liabilities:    
Accounts payable 49,817 46,324
Accrued income taxes 6,943 4,561
Contract liabilities 6,431 6,901
Accrued compensation 6,916 13,599
Operating lease liabilities 1,213 1,314
Other accrued liabilities 22,126 24,241
Total current liabilities 93,446 96,940
Deferred income taxes 3,495 4,150
Income tax payable 8,988 8,868
Operating lease liabilities, long-term 3,809 3,801
Other long-term liabilities 2,171 2,105
Total liabilities 111,909 115,864
Contingencies (Note 12)
Stockholders' equity:    
Preferred stock: 10,000,000 shares authorized at $0.01 par value (none issued)
Common stock:    
100,000,000 shares authorized at $0.01 par value, 35,060,690 and 35,859,540 shares issued and outstanding at March 31, 2020 and December 31, 2019 363 371
Additional paid-in capital 56,045 52,870
Retained earnings 1,136,335 1,181,023
Accumulated other comprehensive losses (168,542) (143,563)
Total stockholders' equity 1,024,201 1,090,701
Total liabilities and stockholders' equity $ 1,136,110 $ 1,206,565
v3.20.1
Impairment, Restructuring and Other Charges - Narrative (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Restructuring Cost And Reserve [Line Items]    
Restructuring and other charges $ 32,713  
Severance costs 8,399  
Inventory write-down 17,272  
Long-lived asset impairment 6,912  
Other restructuring charges 130 $ 2,400
Goodwill impairment loss $ 7,700 0
Former Chief Operating Officer    
Restructuring Cost And Reserve [Line Items]    
Severance costs   $ 1,100
v3.20.1
Significant Accounting Policies - Schedule of Earnings Per Share (Details) - shares
shares in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Accounting Policies [Abstract]    
Weighted average common shares outstanding basic (in shares) 35,695 35,559
Dilutive effect of common stock awards (in shares) 0 0
Weighted average common shares outstanding diluted (in shares) 35,695 35,559
v3.20.1
Revenue Recognition - Narrative (Details) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Revenue Remaining Performance Obligation Expected Timing Of Satisfaction [Line Items]    
Unbilled receivables $ 129,310 $ 140,534
Performance obligation 116,500  
Receivables (Included in Trade Receivables)    
Revenue Remaining Performance Obligation Expected Timing Of Satisfaction [Line Items]    
Unbilled receivables $ 87,400 $ 83,200
v3.20.1
Asset Backed Loan (ABL) Credit Facility
3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
Asset Backed Loan (ABL) Credit Facility

9. Asset Backed Loan (ABL) Credit Facility

On February 23, 2018, the Company, as borrower, and the Company’s subsidiaries TIW and Honing, Inc., as guarantors, entered into a five -year senior secured revolving credit facility (the “ABL Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and other financial institutions as lenders with total commitments of $100.0 million, including up to $10.0 million available for letters of credit. The maximum amount that the Company may borrow under the ABL Credit Facility is subject to the borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments.

All obligations under the ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by the Company, TIW, Honing, Inc., and future significant domestic subsidiaries, subject to customary exceptions. Borrowings under the ABL Credit Facility are secured by liens on substantially all of the Company’s personal property, and bear interest at the Company’s option at either (i) the CB Floating Rate (as defined therein), calculated as the rate of interest publicly announced by JPMorgan Chase Bank, N.A., as its “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, with such CB Floating Rate not being less than Adjusted One Month LIBOR (as defined therein) or (ii) the Adjusted LIBOR (as defined therein), plus, in each case, an applicable margin. The applicable margin ranges from 1.00% to 1.50% per annum for CBFR loans and 2.00% to 2.50% per annum for Eurodollar loans and, in each case, is based on the Company’s leverage ratio. The unused portion of the ABL Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to average unused commitments under the ABL Credit Facility. Interest on Eurodollar loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on CB Floating Rate loans is payable monthly in arrears.

The ABL Credit Facility contains various covenants and restrictive provisions that limit the Company’s ability to, among other things, (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain

dividends or make other distributions; and (5) engage in transactions with affiliates. The ABL Credit Facility also requires the Company to maintain a fixed charge coverage ratio of 1.1 to 1.0, based on the ratio of EBITDA (as defined therein) to Fixed Charges (as defined therein) during certain periods, including when availability under the ABL Credit Facility is under certain levels. If the Company fails to perform its obligations under the agreement that results in an event of default, the commitments under the ABL Credit Facility could be terminated and any outstanding borrowings under the ABL Credit Facility may be declared immediately due and payable. The ABL Credit Facility also contains cross default provisions that apply to the Company’s other indebtedness. The Company is in compliance with the related covenants as of March 31, 2020.

As of March 31, 2020, the availability under the ABL Credit Facility was $44.5 million, after taking into account the outstanding letters of credit of approximately $0.9 million issued under the facility.

v3.20.1
Stock-Based Compensation and Stock Awards
3 Months Ended
Mar. 31, 2020
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Stock-Based Compensation and Stock Awards

5. Stock-Based Compensation and Stock Awards

During the three months ended March 31, 2020, the Company recognized approximately $3.2 million of stock-based compensation expense. Stock-based compensation is included in "Selling, general and administrative" in our accompanying condensed consolidated statements of income (loss) and "Additional paid-in capital" in our accompanying condensed consolidated balance sheets. Stock-based compensation expense was $4.9 million which included approximately $1.8 million related to accelerated vesting of restricted stock awards of our former Chief Operating Officer recognized for the three months ended March 31, 2019. No stock-based compensation expense was capitalized during the three months ended March 31, 2020 or 2019.

v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Losses
Beginning Balance at Dec. 31, 2018 $ 1,096,162 $ 376 $ 34,953 $ 1,205,946 $ (145,113)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Foreign currency translation adjustment 1,627       1,627
Net loss (6,051)     (6,051)  
Comprehensive loss (4,424)        
Repurchase of common stock (1,116)     (1,116)  
Stock option expense 4,862   4,862    
Other (79)     (79)  
Ending Balance at Mar. 31, 2019 1,095,405 376 39,815 1,198,700 (143,486)
Beginning Balance at Dec. 31, 2019 1,090,701 371 52,870 1,181,023 (143,563)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Foreign currency translation adjustment (24,979)       (24,979)
Net loss (19,698)     (19,698)  
Comprehensive loss (44,677)        
Repurchase of common stock (25,008) (8)   (25,000)  
Stock option expense 3,176   3,176    
Other 9   (1) 10  
Ending Balance at Mar. 31, 2020 $ 1,024,201 $ 363 $ 56,045 $ 1,136,335 $ (168,542)
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - $ / shares
Mar. 31, 2020
Dec. 31, 2019
Statement Of Financial Position [Abstract]    
Preferred stock, shares authorized (in shares) 10,000,000 10,000,000
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, shares issued (in shares) 0 0
Common stock, shares authorized (in shares) 100,000,000 100,000,000
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares issued (in shares) 35,060,690 35,859,540
Common stock, shares outstanding (in shares) 35,060,690 35,859,540
v3.20.1
Impairment, Restructuring and Other Charges - Schedule of Accrued Liabilities Related to Restructuring and Others Charges (Details)
$ in Thousands
3 Months Ended
Mar. 31, 2020
USD ($)
Restructuring And Related Activities [Abstract]  
Beginning balance $ 0
Additions for costs expensed 8,000
Reductions for payments 0
Ending balance $ 8,000
v3.20.1
Geographic Areas - Additional Information (Detail)
$ in Millions
3 Months Ended
Mar. 31, 2020
USD ($)
Segment
Location
Mar. 31, 2019
USD ($)
Concentration Risk [Line Items]    
Impairment, restructuring and other charges $ 40.4  
Impairment of inventory and long-lived assets 24.2  
Goodwill impairment loss $ 7.7 $ 0.0
Number of geographic segments | Segment 3  
Number of headquarter locations | Location 3  
Eastern Hemisphere [Member]    
Concentration Risk [Line Items]    
Impairment, restructuring and other charges $ 32.1  
Impairment of inventory and long-lived assets 22.3  
Goodwill impairment loss 7.7  
Western Hemisphere    
Concentration Risk [Line Items]    
Impairment, restructuring and other charges 1.9  
Impairment of inventory and long-lived assets 1.9  
Corporate, Non-Segment    
Concentration Risk [Line Items]    
Impairment, restructuring and other charges 6.2  
Asia Pacific    
Concentration Risk [Line Items]    
Impairment, restructuring and other charges $ 0.2  
v3.20.1
Impairment, Restructuring and Other Charges (Tables)
3 Months Ended
Mar. 31, 2020
Restructuring And Related Activities [Abstract]  
Schedule of Impairment, Restructuring and Other Charges

The following table summarizes the components of charges included in "Restructuring and other charges" in our consolidated statement of operations for the three months ended March 31, 2020 (in thousands):

 

 

 

Three months ended March 31, 2020

 

Inventory write-down

 

$

17,272

 

Severance

 

 

8,399

 

Long-lived asset write-down

 

 

6,912

 

Other

 

 

130

 

 

 

$

32,713

 

Schedule of Accrued Liabilities Related to Restructuring and Others Charges

The following table summarizes the changes to our accrued liability balance related to restructuring and other charges for the three months ended March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Balance at January 1, 2020

 

$

-

 

Additions for costs expensed

 

 

8,000

 

Reductions for payments

 

 

-

 

Ending balance at March 31, 2020

 

$

8,000

 

v3.20.1
Significant Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition, impairment of our goodwill and asset recoverability tests and inventories.

Revenue Recognition

Revenue Recognition

The Company generates revenues through the sale of products, the sale of services and the leasing of installation tools. The Company normally negotiates contracts for products, including those accounted for under the over time method, rental tools and services separately. Modifications to the scope and price of sales contracts may occur in the form of variations and change orders. For all product sales, it is the customer’s decision as to the timing of the product installation as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory assistance services. The customer may instead choose to use a third party or its own personnel.

Product and Service Revenues

Product and service revenues are recognized as the Company satisfies the performance obligation by transferring control of the promised good or service to the customer. Revenues are measured based on consideration specified in a contract with a customer and exclude sales incentives and amounts collected on behalf of third parties. In addition, some customers may impose contractually negotiated penalties for late delivery that are excluded from the transaction price.

Management has elected to utilize certain practical expedients allowed under Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606). Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer are excluded from the measurement of the transaction price. Shipping and handling activities that are performed after a customer obtains control of the good are accounted for as activities to fulfill the promise to transfer the good and thus are excluded from the transaction price.

Product revenues

The Company recognizes product revenues from two methods:

 

product revenues are recognized over time as control is transferred to the customer; and

 

product revenues from the sale of products that do not qualify for the over time method are recognized as point in time.

Revenues recognized under the over time method

The Company uses the over time method on long-term project contracts that have the following characteristics:

 

the contracts call for products which are designed to customer specifications;

 

the structural designs are unique and require significant engineering and manufacturing efforts generally requiring more than six months in duration;

 

product requirements cannot be filled directly from the Company’s standard inventory; and

 

The Company has an enforceable right to payment for any work completed to date and the enforceable payment includes a reasonable profit margin.

For each project, the Company prepares a detailed analysis of estimated costs, profit margin, completion date and risk factors which include availability of material, production efficiencies and other factors that may impact the project. On a quarterly basis, management reviews the progress of each project, which may result in revisions of previous estimates, including revenue recognition. The Company calculates the percentage complete and applies the percentage to determine the revenues earned and the appropriate portion of total estimated costs to be recognized. Losses, if any, are recorded in full in the period they become known. Historically, the Company’s estimates of total costs and costs to complete have approximated actual costs incurred to complete the project.

Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in customer prepayments as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported in unbilled receivables. Unbilled revenues are expected to be billed and collected within one year. At March 31, 2020 and December 31, 2019, unbilled receivables included $87.4 million and $83.2 million of unbilled receivables related to products accounted for using the over time method of accounting, respectively. For the three months ended March 31, 2020, there were 42 projects representing approximately 31.4% of the Company's total revenues and approximately 44.7% of its product revenues that were accounted for using over time accounting, compared to 21 projects for the three months ended March 31, 2019, which represented approximately 18.0% of the Company's total revenues and approximately 26.0% of its product revenues.

Revenues recognized under the point in time method

Revenues from the sale of standard inventory products, not accounted for under the over time method, are recorded at the point in time that the customer obtains control of the promised asset and the Company satisfies its performance obligation. This point in time recognition aligns with the time of shipment, which is when the Company typically has a present right to payment, title transfers to the customer, the customer or its carrier has physical possession and the customer has significant risks and rewards of ownership. The Company may provide product storage to some customers. Revenues for these products are recognized at the point in time that control of the product transfers to the customer, the reason for storage is requested by the customer, the product is separately identified, the product is ready for physical transfer to the customer and the Company does not have the ability to use or direct the use of the product. This point in time typically occurs when the products are moved to storage. We receive payment after control of the products has transferred to the customer.

Service revenues

The Company recognizes service revenues from two sources:

 

technical advisory assistance; and

 

rework and reconditioning of customer-owned Dril-Quip products.

The Company generally does not install products for its customers, but it does provide technical advisory assistance.

The Company normally negotiates contracts for products, including those accounted for under the over time method, and services separately. For all product sales, it is the customer’s decision as to the timing of the product installation as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory assistance services. The customer may use a third party or their own personnel. The contracts for these services are typically considered day-to-day.

Rework and reconditioning service revenues are recorded using the over time method based on the remaining steps that need to be completed as the refurbishment process is performed. The measurement of progress considers, among other things, the time necessary for completion of each step in the reconditioning plan, the materials to be purchased, labor and ordering procedures. We receive payment after the services have been performed by billing customers periodically (typically monthly).

Lease revenues

The Company earns lease revenues from the rental of running tools and rental of its forging facility. Rental revenues are recognized within leasing revenues on a day rate basis over the lease term, which is generally between one to three months. Rental revenue from the forging facility is recognized on a straight-line basis over the expected life of the lease. Lease revenues from rental of running tools for the three months ended March 31, 2020 were $9.1 million and lease revenues from rental of facilities were $0.5 million for the same period.

Practical Expedients

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, receivables and payables. The carrying values of these financial instruments approximate their respective fair values as they are short-term in nature.

Goodwill and intangible assets

Goodwill and indefinite-lived intangible assets

For goodwill and intangible assets with indefinite lives, an assessment for impairment is performed annually or when there is an indication an impairment may have occurred. We complete our annual impairment test for goodwill and other indefinite-lived

intangibles using an assessment date of October 1. Goodwill is reviewed for impairment by comparing the carrying value of each of our reporting unit’s net assets, including allocated goodwill, to the estimated fair value of the reporting unit. We determine the fair value of our reporting units using a discounted cash flow approach. We selected this valuation approach because we believe it, combined with our best judgment regarding underlying assumptions and estimates, provides the best estimate of fair value for each of our reporting units. Determining the fair value of a reporting unit requires the use of estimates and assumptions. Such estimates and assumptions include revenue growth rates, future operating margins, the weighted average cost of capital ("discount rates"), a terminal growth value, and future market conditions, among others. We believe that the estimates and assumptions used in our impairment assessments are reasonable. If the reporting unit’s carrying value is greater than its calculated fair value, we recognize a goodwill impairment charge for the amount by which the carrying value of goodwill exceeds its fair value. In March 2020, the overall offshore market conditions declined primarily due to the COVID-19 pandemic and the developments in the global oil markets. This decline was evidenced by lower commodity prices, decline in expected offshore rig counts, decrease in our customers’ capital budgets and potential delays of contracts. As such, an interim goodwill impairment analysis was performed in connection with the preparation and review of financial statements for the three months ended March 31, 2020. Based on this analysis, we recorded an impairment loss of $7.7 million for our Eastern Hemisphere reporting unit for the three months ended March 31, 2020.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate our property and equipment and definite-lived intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by comparing the carrying value to the estimated fair value. We assess recoverability based on undiscounted future net cash flows. Estimating future net cash flows requires us to make judgements regarding long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about our revenue growth, operating margins, capital expenditures, future market conditions and technological developments. If changes in these assumptions occur, our expectations regarding future net cash flows may change such that a material impairment could result. There was no impairment of property and equipment and definite-lived intangible assets during the three months ended March 31, 2020 or 2019.

Restructuring and Other Charges

Restructuring and Other Charges

In March 2020, the overall offshore market conditions declined primarily due to the COVID-19 pandemic and the developments in the global oil markets. As such, we amended our 2018 global strategic plan to realign our manufacturing facilities globally. We recorded non-cash inventory and long-lived asset write-downs of approximately $17.3 million and $6.9 million, respectively, as a result of expected changes in our business structure and where specific products are manufactured. Additionally, we incurred severance and other charges of $8.4 million and $0.1 million respectively, during the three months ended March 31, 2020. These charges are reflected as "Restructuring and other charges" in our consolidated statement of operations.

In the third quarter of 2018, we initiated a global strategic plan to better align our operations with market conditions. We incurred restructuring charges consisting primarily of consulting fees of approximately $2.4 million during the three months ended March 31, 2019.  

Treasury Shares

Treasury Shares

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. For the three months ended March 31, 2020, the Company purchased 808,389 shares under the share repurchase plan at an average price of approximately 30.91 per share totaling approximately $25.0 million and has retired such shares. For the three-month period ended March 31, 2019, the Company purchased 28,078 shares under the share repurchase plan at an average price of approximately $39.74 per share totaling approximately $1.1 million and has retired such shares.

Earnings Per Share

Earnings Per Share

Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed considering the dilutive effect of stock awards using the treasury stock method.

In each relevant period, the net income used in the basic and dilutive earnings per share calculations is the same. The following table reconciles the weighted average basic number of common shares outstanding and the weighted average diluted number of common shares outstanding for the purpose of calculating basic and diluted earnings per share:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Weighted average common shares outstanding - basic

 

 

35,695

 

 

 

35,559

 

Dilutive effect of common stock awards

 

 

-

 

 

 

-

 

Weighted average common shares outstanding – diluted

 

 

35,695

 

 

 

35,559

 

 

 

For the three months ended March 31, 2020 and 2019, the Company has excluded the following common stock options and awards because their impact on the income/(loss) per share is anti-dilutive (in thousands on a weighted average basis):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Director stock awards

 

 

40

 

 

 

4

 

Stock options

 

 

132

 

 

 

-

 

Performance share units

 

 

277

 

 

 

92

 

Restricted stock awards

 

 

336

 

 

 

44

 

v3.20.1
Significant Accounting Policies - Additional Information (Details)
3 Months Ended
Mar. 31, 2020
USD ($)
Project
Method
Source
$ / shares
shares
Mar. 31, 2019
USD ($)
Project
$ / shares
shares
Dec. 31, 2019
USD ($)
Feb. 26, 2019
USD ($)
Accounting Policies [Line Items]        
Number of product revenue sources | Method 2      
Unbilled receivables $ 129,310,000   $ 140,534,000  
Number of projects | Project 42 21    
Percentage of total revenues 31.40% 18.00%    
Percentage of product revenues 44.70% 26.00%    
Number of service revenue sources | Source 2      
Lease revenues $ 9,626,000 $ 10,407,000    
Goodwill impairment loss 7,700,000 0    
Impairment of property and equipment 0 0    
Impairment of intangible assets 0 0    
Inventory write-down 17,272,000      
Long-lived asset impairment 6,912,000      
Severance costs 8,399,000      
Restructuring costs 100,000      
Other restructuring charges $ 130,000 $ 2,400,000    
Shares authorized to be purchased (up to) (in shares)       $ 100,000,000
Treasury stock shares (in shares) | shares 808,389 28,078    
Average price of shares (in dollars per share) | $ / shares $ 30.91 $ 39.74    
Treasury stock, value of acquired shares $ 25,000,000.0 $ 1,100,000    
Eastern Hemisphere [Member]        
Accounting Policies [Line Items]        
Goodwill impairment loss 7,700,000      
Running Tools [Member]        
Accounting Policies [Line Items]        
Lease revenues 9,100,000      
Rental Facilities [Member]        
Accounting Policies [Line Items]        
Lease revenues 500,000      
Over Time Method        
Accounting Policies [Line Items]        
Unbilled receivables $ 87,400,000   $ 83,200,000