DRIL-QUIP INC [DRQ] Filings

10-Q 1 drq-20220331.htm 10-Q 10-Q

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, 2022


☐	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 April 25, 2022, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 34,518,858.

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	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Index to Exhibits	28
	Signatures	29

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

DRIL-QUIP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	March 31, 2022			December 31, 2021
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	338,008		$	355,451
Trade receivables, net		86,375			100,987
Unbilled receivables		109,548			102,597
Inventories, net		141,289			145,724
Prepaids and other current assets		42,156			40,790
Total current assets		717,376			745,549
Operating lease right of use assets		4,900			5,258
Property, plant and equipment, net		212,944			216,200
Deferred income taxes		11,021			11,381
Intangible assets		25,684			26,446
Other assets		6,185			5,592
Total assets	$	978,110		$	1,010,426
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	36,599		$	35,232
Accrued income taxes		3,583			4,102
Contract liabilities		6,504			9,746
Accrued compensation		7,399			6,291
Operating lease liabilities		919			1,046
Other accrued liabilities		15,317			37,246
Total current liabilities		70,321			93,663
Deferred income taxes		4,335			3,925
Income tax payable		9,725			9,627
Operating lease liabilities, long-term		3,965			4,170
Other long-term liabilities		1,989			1,933
Total liabilities		90,335			113,318
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, 34,518,858 and 34,774,156 shares issued and outstanding at March 31, 2022 and December 31, 2021		349			352
Additional paid-in capital		82,781			80,254
Retained earnings		958,344			973,087
Accumulated other comprehensive losses		(153,699	)		(156,585	)
Total stockholders' equity		887,775			897,108
Total liabilities and stockholders' equity	$	978,110		$	1,010,426

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,
	2022			2021
	(In thousands, except per share data)
Revenues:
Products	$	55,642		$	55,583
Services		17,499			17,667
Leasing		9,996			7,989
Total revenues		83,137			81,239
Cost and expenses:
Cost of sales:
Products		48,038			41,204
Services		8,784			9,350
Leasing		7,173			6,233
Total cost of sales		63,995			56,787
Selling, general and administrative		22,393			29,558
Engineering and product development		3,676			4,037
Restructuring and other charges		32			25,020
Gain on sale of property, plant and equipment		(114	)		(3,955	)
Foreign currency transaction (gains) and losses		(1,254	)		1,374
Total costs and expenses		88,728			112,821
Operating loss		(5,591	)		(31,582	)
Interest income		203			49
Interest expense		(54	)		(439	)
Loss before income taxes		(5,442	)		(31,972	)
Income tax provision (benefit)		3,496			2,386
Net loss	$	(8,938	)	$	(34,358	)
Loss per common share:
Basic	$	(0.26	)	$	(0.97	)
Diluted	$	(0.26	)	$	(0.97	)
Weighted average common shares outstanding:
Basic		34,494			35,385
Diluted		34,494			35,385

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,
	2022			2021
	(In thousands)
Net income (loss)	$	(8,938	)	$	(34,358	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		2,886			(2,090	)
Total comprehensive income (loss)	$	(6,052	)	$	(36,448	)

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,
	2022			2021
	(In thousands)
Operating activities
Net loss	$	(8,938	)	$	(34,358	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		7,559			7,416
Stock-based compensation expense		2,527			3,186
Restructuring and other charges		32			25,020
Gain on sale of property, plant and equipment		(114	)		(3,955	)
Deferred income taxes		1,327			(433	)
Changes in operating assets and liabilities:
Trade receivables, net		14,849			11,024
Unbilled receivables		(6,951	)		802
Inventories, net		5,658			(5,794	)
Prepaids and other assets		(1,768	)		4,962
Accounts payable and accrued expenses		(25,109	)		5,202
Net cash provided by (used in) operating activities		(10,928	)		13,072
Investing activities
Purchase of property, plant and equipment		(2,066	)		(2,513	)
Proceeds from sale of property, plant and equipment		208			5,944
Net cash provided by (used in) investing activities		(1,858	)		3,431
Financing activities
Repurchase of common shares		(5,808	)		-
Other		(51	)		(40	)
Net cash used in financing activities		(5,859	)		(40	)
Effect of exchange rate changes on cash activities		1,202			(205	)
Increase (decrease) in cash and cash equivalents		(17,443	)		16,258
Cash and cash equivalents at beginning of period		355,451			345,955
Cash and cash equivalents at end of period	$	338,008		$	362,213

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, 2022	$	352		$	80,254	$	973,087		$	(156,585	)	$	897,108
Foreign currency translation adjustment		-			-		-			2,886			2,886
Net loss		-			-		(8,938	)		-			(8,938	)
Comprehensive loss													(6,052	)
Repurchase of common shares (273,629 shares)		(3	)		-		(5,805	)		-			(5,808	)
Stock-based compensation expense		-			2,527		-			-			2,527
Balance at March 31, 2022	$	349		$	82,781	$	958,344		$	(153,699	)	$	887,775

Balance at January 1, 2021	$	363		$	65,613	$	1,125,263		$	(149,711	)	$	1,041,528
Foreign currency translation adjustment		-			-		-			(2,090	)		(2,090	)
Net loss		-			-		(34,358	)		-			(34,358	)
Comprehensive loss		-			-		-			-			(36,448	)
Stock-based compensation expense		-			3,186		-			-			3,186
Balance at March 31, 2021	$	363		$	68,799	$	1,090,905		$	(151,801	)	$	1,008,266

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, 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 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 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; Dril-Quip Venezuela S.C.A., located in Anaco, Venezuela and with a registered branch located in Ecuador.

The condensed consolidated financial statements included herein are unaudited. The balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements as of 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, 2022 and the results of operations and comprehensive income (loss) for the three months ended March 31, 2022 and 2021 and cash flows for the three months ended March 31, 2022 and 2021. 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. The results of operations and comprehensive income (loss) for the three months ended March 31, 2022 and cash flows for the three months ended March 31, 2022 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, 2021.

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 materially from those estimates. Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition and asset recoverability tests and inventories.

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Revenue Recognition

The Company generates revenues through the sale of products, the sale of services and the leasing of running 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.

Leasing revenues

The Company earns leasing revenues from the rental of running tools. Revenues from rental of running tools are recognized on a day rate basis over the lease term, which is generally between one to three months.

On April 30, 2021, as a result of lower activity stemming from the COVID-19 pandemic, AFGlobal Corporation provided a 90-day written notice of termination of the lease agreement between the Company and AFGlobal in relation to the Company’s forge facility and equipment at its Houston Eldridge campus. As a result of the lease termination, the Company had approximately $2.3 million in unbilled revenue that was expensed in second quarter of 2021. The Company has numerous other forging suppliers and does not expect any disruptions in forging supply as a result of the lease termination.

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.

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.

Restructuring and Other Charges

During the first quarter of 2022, the Company did not incur any significant costs under the 2021 global strategic plan. During the first quarter of 2021, the Company incurred costs under the former 2018 global strategic plan as the Company exited from certain underperforming countries and markets and shifted from manufacturing in-house to a vendor outsourcing model which resulted in inventory write-downs, severance charges and other charges consisting of facilities-related restructuring charges and professional fees. These charges are reflected as "Restructuring and other charges" in our condensed consolidated statements of income (loss).

Repurchase of Equity Securities

On February 22, 2022, the Board of Directors authorized an incremental $100 million share repurchase plan. This results in a cumulative authorized amount of approximately $118 million currently available for share repurchases based on the $18 million remaining under our share repurchase plan authorized by the Board of Directors in 2019.

The repurchase plans have no set expiration date and any repurchased shares are expected to be cancelled. The manner, timing and amount of any purchase will be determined by management based on an evaluation of market conditions, stock price, liquidity and other factors. The program does not obligate the Company to acquire any amount of common stock and may be modified or superseded at any time at the Company’s discretion.

For the three months ended March 31, 2022, the Company purchased 273,629 shares under the share repurchase plans at an average price of approximately $21.20 per share totaling approximately $5.8 million and has retired such shares.

For the three months ended March 31, 2021, the Company purchased no shares under the share repurchase plans.

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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,
	2022		2021
	(In thousands)
Weighted average common shares outstanding – basic		34,494		35,385
Dilutive effect of common stock awards		-		-
Weighted average common shares outstanding – diluted		34,494		35,385

For the three months ended March 31, 2022 and 2021, 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,
	2022		2021
	(In thousands)
Director stock awards		58		56
Stock options		-		58
Performance share units		260		331
Restricted stock awards		516		480

3. Revenue Recognition

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


	Three months ended March 31,
	Western Hemisphere				Eastern Hemisphere				Asia- Pacific				Total
	2022		2021		2022		2021		2022		2021		2022		2021
	(In thousands)
Product Revenues	$	36,661	$	37,916	$	11,783	$	6,722	$	7,198	$	10,945	$	55,642	$	55,583
Service Revenues		11,585		10,504		3,262		2,719		2,652		4,444		17,499		17,667
Total	$	48,246	$	48,420	$	15,045	$	9,441	$	9,850	$	15,389	$	73,141	$	73,250

Contract Balances

Balances related to contracts with customers consisted of the following:

Contract Assets (amounts shown in thousands)


Contract Assets at December 31, 2021	$	97,716
Additions		37,070
Transfers to Trade Receivables, Net		(30,685	)
Contract Assets at March 31, 2022	$	104,101

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Contract Liabilities (amounts shown in thousands)


Contract Liabilities at December 31, 2021	$	9,222
Additions		629
Revenue Recognized		(4,823	)
Contract Liabilities at March 31, 2022	$	5,028

Contract assets include unbilled accounts receivable associated with contracts accounted for under the over-time accounting method which were approximately $64.0 million and $58.7 million at March 31, 2022 and December 31, 2021, respectively. Unbilled contract assets are transferred to trade receivables, net, when the rights become unconditional. The contract liabilities primarily relate to advance payments from customers.

Obligations for returns and refunds were considered immaterial as of March 31, 2022.

Remaining Performance Obligations

The aggregate amount of the transaction price allocated to remaining performance obligations from our over-time product lines was $86.5 million as of March 31, 2022. The Company expects to recognize revenue on approximately 93.4% of the remaining performance obligations over the next 12 months and the remaining 6.6% 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.

4. Stock-Based Compensation and Stock Awards

During the three months ended March 31, 2022, the Company recognized approximately $2.5 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. During the three months ended March 31, 2021, the Company recognized approximately $3.2 million of stock-based compensation expense.

5. Inventories, net

Inventories consist of the following:


	March 31,			December 31,
	2022			2021
	(In thousands)
Raw materials and supplies	$	28,609		$	27,398
Work in progress		27,096			28,361
Finished goods		211,226			218,946
		266,931			274,705
Less: allowance for slow moving and excess inventory		(125,642	)		(128,981	)
Total inventory	$	141,289		$	145,724

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6. Impairment, Restructuring and Other Charges

Restructuring and Other Charges

During the three months ended March 31, 2022, the Company did not incur any significant costs under the 2021 global strategic plan.

During the three months ended March 31, 2021, the Company incurred costs under our former 2018 global strategic plan to realign manufacturing facilities globally. These charges were primarily related to the restructuring of our downhole tools business where we exited certain underperforming countries and markets and shifted from manufacturing in-house to a vendor sourcing model which resulted in non-cash inventory write downs of $19.3 million, severance charges of $2.7 million and other charges of $3.0 million, consisting of facilities-related restructuring charges and professional fees. The Company completed its 2018 global strategic plan in the third quarter of 2021.

The following table summarizes the components of charges included in "Restructuring and other charges" in our condensed consolidated statements of income (loss) for the three months ended March 31, 2022 and 2021 (in thousands):


	Three months ended March 31,
	2022		2021
Inventory write-down	$	-	$	19,251
Severance		32		2,746
Long-lived asset write-down		-