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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

 

 

 

 


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.

3


Table of Contents

 

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