Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 as they relate to the Company:
•the impact of actions taken by the Organization of Petroleum Exporting Countries and the expanded alliance (OPEC+) in response to their dispute over production levels and the effects thereof;
•the impact of the ongoing COVID-19 pandemic 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 Company’s ability to deliver its backlog in a timely fashion;
•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;
•future operations, financial results, business plans and cash needs; and
•the overall timing and level of transition of the global energy sector from fossil-based systems of energy production and consumption to more renewable energy sources.
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, and “Item 1A. Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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
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, 2021.
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, 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
During the first quarter of 2022, Dril-Quip entered into a collaboration agreement with Aker Solutions ASA (Aker Solutions) to offer subsea injection systems for carbon capture, utilization and storage (CCUS) projects. Under the agreement, Dril-Quip will provide Aker Solutions with CO2 injection Xmas trees and wellheads that will be fully integrated into a larger subsea injection system to provide customers with market-leading technology purposely designed for the injection and storage of CO2. The arrangement will leverage on Aker Solution’s position as an integrated supplier of CCUS systems along with its control systems and electrification components. We believe this collaboration agreement focuses on the strengths of both organizations, will deliver an optimum solution for carbon capture and storage, and is in line with each parties' strategic goals of collaboration and partnerships to unlock value for customers.
In February 2022, Russia invaded Ukraine, resulting in wide-ranging sanctions imposed on Russia by certain members of the European Union, the United Kingdom and the United States, among others, higher oil prices and increased uncertainty in global markets. As Russia's invasion of Ukraine continues, there can be no certainty regarding whether such governments or other governments will impose additional sanctions, export-controls or other economic or military measures against Russia. Although we have minimal operational exposure in Russia and we do not intend to commit further capital towards projects in Russia, the impact of the invasion of Ukraine, including economic sanctions and export controls or additional war or military conflict, as well as potential responses to them by Russia, is currently unknown and they could adversely affect oil and gas companies, including many of which are our customers, as well as the global supply chain. For more information on the risks associated with the invasion of Ukraine, see "Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia's invasion of Ukraine." under "Item 1A. Risk Factors" in Part II of this report.
Although crude oil prices have rebounded sharply during the first quarter 2022, we have just started to see an increase in activity from our customers as any recovery in the subsea market generally lags relative to the overall recovery in crude oil prices. Crude oil prices increased in 2022, mainly driven by the Russian invasion of Ukraine and loosening of pandemic-related restrictions. Further, a growing global economy resulted in global petroleum demand rising faster than petroleum supply. Surges in COVID-19 variants could cause restrictions and disruptions to return as we saw in the case of the Omicron variant. This could lead to decreased demand and an oversupply resulting in an imbalance causing a decrease in crude oil prices.
During the second quarter of 2021, Dril-Quip entered into a collaboration and supply agreement in which the Company will serve as a supplier of subsea wellheads, tubular goods, liner hangers and other related tools and services to a peer provider of subsea equipment and services. The arrangement provides a framework for bundling several of our products and services into an integrated engineering, procurement and construction offering by our peer for the subsea production system market. We believe this collaboration and supply agreement will lead to opportunities to participate in more subsea projects and bids as a subcontractor for this industry peer that we previously may not have had access to independently.
The Company has been operating under a hybrid work environment with employees expected to work partially remote and partially from the office. We do not believe that remote work arrangements have adversely affected our ability to maintain financial reporting systems, internal controls over financial reporting and disclosure controls and procedures. The Company has taken steps and adjusted its workforce to be in line with the current situation as we continue to monitor ongoing market conditions. The extent to which our future results are affected by these externalities will depend on various factors and circumstances beyond our control, such
16
Table of Contents
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. Similarly, we expect that the uncertainty in the sustainability of current oil prices will continue to have a negative impact on oil and gas activities. Further, Russia’s military incursion into Ukraine has led to, and could continue to, give rise to regional instability and result in heightened economic sanctions by certain members of the European Union, the United Kingdom, the United States, and certain other members of the international community that, in turn, could increase uncertainty with respect to global financial markets and production output from OPEC+ and other crude oil producing nations. In addition to this, continued outbreaks of new COVID-19 variants could also aggravate the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, including leading to further material impairment charges.
The Company took advantage of the Payroll Tax Deferral provided by the CARES Act in 2020. The Payroll Tax Deferral allows the Company to defer the payment of the Company’s share of FICA taxes of 6.2%. As such, the Company was able to defer its share of FICA taxes for the period beginning March 27, 2020 and ending December 31, 2020. This resulted in approximately $2.9 million in FICA cash tax payments being deferred to 2021 and 2022. The CARES Act provided for the five-year carryback of Net Operating Losses (“NOLs”) generated in the 2018, 2019 and 2020 taxable years. The Company filed returns to carryback its NOLs to generate a refund of $46.0 million.
During 2021, the Company took advantage of job support schemes in Singapore, Australia, the U.K. and Denmark under which the governments introduced a plan to help businesses co-fund wages of workers to encourage employers to retain their workers. These benefits did not continue in 2022 and as such the Company did not record any significant benefits through March 31, 2022.
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 |
|
2022 |
|
|
2021 |
|
Low |
|
$ |
78.25 |
|
|
$ |
50.37 |
|
High |
|
|
133.18 |
|
|
|
69.95 |
|
Average |
|
|
100.87 |
|
|
|
61.04 |
|
Closing |
|
|
107.29 |
|
|
|
63.52 |
|
According to the April 2022 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average approximately $105.22 per barrel in 2022 and $88.98 per barrel in 2023, compared with an average of $70.89 per barrel in 2021.In its April 2022 Oil Market Report, the International Energy Agency projected global oil demand to grow to 99.4 million barrels per day in 2022 as compared to 97.5 million barrels per day in 2021.
Although crude oil prices rebounded sharply in 2022, we have just started to see an increase in activity from our customers as any recovery in the subsea market generally lags relative to the overall recovery in crude oil prices. 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, 2022 and 2021. 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.
17
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
Floating Rigs |
|
|
Jack-up Rigs |
|
|
Floating Rigs |
|
|
Jack-up Rigs |
|
Western Hemisphere |
|
|
56 |
|
|
|
41 |
|
|
|
55 |
|
|
|
43 |
|
Eastern Hemisphere |
|
|
50 |
|
|
|
61 |
|
|
|
41 |
|
|
|
52 |
|
Asia-Pacific |
|
|
29 |
|
|
|
255 |
|
|
|
33 |
|
|
|
249 |
|
Total |
|
|
135 |
|
|
|
357 |
|
|
|
129 |
|
|
|
344 |
|
Source: IHS—Petrodata RigBase – March 31, 2022 and 2021
According to IHS-Petrodata RigBase, as of March 31, 2022, there were 491 contracted rigs for the Company’s geographic regions (132 floating rigs and 359 jack-up rigs), an increase of 3.4% from the rig count of 475 rigs (126 floating rigs and 349 jack-up rigs) as of March 31, 2021.
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). 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. However, President Biden has indicated that these tariffs will likely remain in place while the new administration assesses the United States’ current posture, including a review of the phase one trade deal with China.
The imposition of any additional tariffs or initiation of trade restrictions by or against the United States 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.
On June 23, 2016 the United Kingdom (U.K.) held a referendum in which a majority of British voters voted to exit the E.U., commonly known as “Brexit”, with the U.K. officially withdrawing from the E.U. on January 31, 2020. A transition period (during which the trading relationship between the E.U. and the U.K. remained substantially the same as prior to Brexit) followed, and this transition period expired on December 31, 2020. Shortly prior to expiration of the transition period, in December 2020, the U.K. and the E.U. reached an accord on a trade and cooperation agreement (TCA). Brexit and the terms of the TCA brought to an end the U.K.’s automatic access to the E.U. single market, resulting in the U.K. no longer benefitting from the free movement of goods and services between the E.U. and the U.K. The rights of people to freely move between the E.U. and the U.K. have also been restricted. The TCA entered into force on January 1, 2021 and, following formal ratification by the E.U. on April 28, 2021, entered fully into force on May 1, 2021. For more information on the risks associated with Brexit and the TCA, see “Our international operations require us to comply with a number of U.S. and foreign regulations governing the international trade of goods, services and technology, which expose us to compliance risks" under “Item 1A. Risk Factors” in Part II of this report and “Item 1A. Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
18
Table of Contents
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, 2022 was approximately $220.9 million, compared to approximately $210.1 million at December 31, 2021, and $196.7 million at March 30, 2021.
The following table represents the change in backlog for the three months ended March 31, 2022, December 31, 2021 and March 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
March 30, 2021 |
|
|
|
(In thousands) |
|
Beginning Backlog |
|
$ |
210,119 |
|
|
$ |
179,012 |
|
|
$ |
195,650 |
|
Bookings: |
|
|
|
|
|
|
|
|
|
Product (1) |
|
|
63,155 |
|
|
|
83,105 |
|
|
|
58,639 |
|
Service |
|
|
22,578 |
|
|
|
19,380 |
|
|
|
17,667 |
|
Leasing |
|
|
9,996 |
|
|
|
9,837 |
|
|
|
7,989 |
|
Cancellation/Revision adjustments |
|
|
(2,011 |
) |
|
|
(3,336 |
) |
|
|
(1,048 |
) |
Translation adjustments |
|
|
234 |
|
|
|
33 |
|
|
|
(997 |
) |
Total Bookings |
|
|
93,952 |
|
|
|
109,019 |
|
|
|
82,250 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Product |
|
|
55,642 |
|
|
|
48,695 |
|
|
|
55,583 |
|
Service |
|
|
17,499 |
|
|
|
19,380 |
|
|
|
17,667 |
|
Leasing |
|
|
9,996 |
|
|
|
9,837 |
|
|
|
7,989 |
|
Total Revenue |
|
|
83,137 |
|
|
|
77,912 |
|
|
|
81,239 |
|
Ending Backlog |
|
$ |
220,934 |
|
|
$ |
210,119 |
|
|
$ |
196,661 |
|
(1) The backlog data shown above includes all bookings as of March 31, 2022, 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 86.5 million as of March 31, 2022 within “Revenue Recognition”, Note 4 to the Notes to Condensed Consolidated Financial Statements.
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. For the three months ended March 31, 2022 and 2021, the Company derived 66.9% and 68.4%, respectively, of its revenues from the sale of its products, 21.0% and 21.8%, respectively, of its revenue from services, and 12.0% and 9.8%, 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 62.8% and 68.5% of its revenues derived from foreign sales for the three months ended March 31, 2022 and 2021, respectively. The majority of the Company’s domestic revenue relates to operations in the U.S. Gulf of Mexico. Domestic revenue approximated 37.2% and 31.5% of the Company’s total revenues for the three months ended March 31, 2022 and 2021, 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.
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Table of Contents
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, 2022, there were 46 projects representing approximately 29.4% of the Company's total revenues and approximately 43.9% of its product revenues that were accounted for using over-time accounting, compared to 41 projects for the three months ended March 31, 2021, which represented approximately 17.1% of the Company's total revenues and approximately 24.9% 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 and other related administrative functions.
Engineering and Product Development Expenses. Engineering and product development expenses consist of new product development and testing.
Impairments. We evaluate our property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and we could incur additional impairment charges related to the carrying value of our long-lived assets. There were no impairment charges recorded for the three months ended March 31, 2022.
Restructuring and Other Charges. During the three months ended March 31, 2022, we did not incur any significant restructuring costs under the 2021 global strategic plan.
(Gain) Loss on Sale of Property, Plant and Equipment. Gain or loss on sale of property, plant and equipment consists of sales of certain property, plant and equipment.
Foreign Currency Transaction (Gains) and Losses. Foreign currency transaction (gains) and losses result from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated.
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, changes in tax legislation, and other permanent differences related to the recognition of income and expense between U.S. GAAP and applicable tax rules.
20
Table of Contents
Results of Operations
The following table sets forth, for the periods indicated, certain condensed consolidated statements of income (loss) data expressed as a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
Revenues: |
|
|
|
|
|
|
Products |
|
|
66.9 |
% |
|
|
68.4 |
% |
Services |
|
|
21.1 |
|
|
|
21.8 |
|
Leasing |
|
|
12.0 |
|
|
|
9.8 |
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales: |
|
|
|
|
|
|
Products |
|
|
57.8 |
|
|
|
50.7 |
|
Services |
|
|
10.6 |
|
|
|
11.5 |
|
Leasing |
|
|
8.6 |
|
|
|
7.7 |
|
Total cost of sales |
|
|
77.0 |
|
|
|
69.9 |
|
Selling, general and administrative |
|
|
26.9 |
|
|
|
36.4 |
|
Engineering and product development |
|
|
4.4 |
|
|
|
5.0 |
|
Restructuring and other charges |
|
|
0.0 |
|
|
|
30.8 |
|
Gain on sale of property, plant and equipment |
|
|
(0.1 |
) |
|
|
(4.9 |
) |
Foreign currency transaction (gains) and losses |
|
|
(1.5 |
) |
|
|
1.7 |
|
Operating loss |
|
|
(6.7 |
) |
|
|
(38.9 |
) |
Interest income |
|
|
0.2 |
|
|
|
0.1 |
|
Interest expense |
|
|
(0.1 |
) |
|
|
(0.5 |
) |
Loss before income taxes |
|
|
(6.6 |
) |
|
|
(39.3 |
) |
Income tax provision (benefit) |
|
|
4.2 |
|
|
|
2.9 |
|
Net income (loss) |
|
|
(10.8 |
)% |
|
|
42.2 |
% |
The following table sets forth, for the periods indicated, a breakdown of our products and service revenues:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In millions) |
|
Revenues: |
|
|
|
|
|
|
Products: |
|
|
|
|
|
|
Subsea equipment |
|
$ |
46.3 |
|
|
$ |
42.9 |
|
Downhole tools |
|
|
9.3 |
|
|
|
12.7 |
|
Total products |
|
|
55.6 |
|
|
|
55.6 |
|
Services: |
|
|
|
|
|
|
Subsea equipment |
|
|
13.2 |
|
|
|
13.8 |
|
Downhole tools |
|
|
4.3 |
|
|
|
3.8 |
|
Total services |
|
|
17.5 |
|
|
|
17.6 |
|
Leasing |
|
|
|
|
|
|
Subsea equipment |
|
|
8.6 |
|
|
|
7.0 |
|
Downhole tools |
|
|
1.4 |
|
|
|
1.0 |
|
Total leasing |
|
|
10.0 |
|
|
|
8.0 |
|
Total revenues |
|
$ |
83.1 |
|
|
$ |
81.2 |
|
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Revenues. Revenues increased by $1.9 million, or approximately 2.3%, to $83.1 million for the three months ended March 31, 2022 from $81.2 million for the three months ended March 31, 2021. Product revenues remained relatively unchanged for the three months ended March 31, 2022 as compared to the same period in 2021. Within product revenues, subsea equipment increased by $3.4 million, offset by decreased revenues of $3.4 million in downhole tools. Product revenues in the Eastern Hemisphere increased by $5.0 million, offset by decreased product revenues of $3.7 million and $1.3 million in the Asia-Pacific region and Western
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Hemisphere, respectively. Although crude oil prices rebounded sharply during the first quarter of 2022, there is generally a delay in recovery of drilling activity in the offshore market. Further, our revenues continue to be impacted by reduced global demand and customer drilling schedule delays. 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, our product mix and completion status of the projects accounted for under the over-time accounting method, market conditions and customer demand.
Service revenues decreased by approximately $0.1 million resulting mainly from a decrease in the Asia-Pacific region of $1.8 million, partially offset by an increase in the Western Hemisphere of $1.1 million, and of $0.6 million in the Eastern Hemisphere. Lower service revenues in the Asia-Pacific region resulted primarily from developments in the global oil markets and global travel restrictions resulting from the COVID-19 pandemic. Increase in service revenues in the Western Hemisphere and the Eastern Hemisphere is mainly due to customer specific increases in technical advisory services and maintenance requests tied to drilling schedules.
Leasing revenues increased by approximately $2.0 million resulting mainly from increased leasing revenues in the Asia-Pacific region of $0.4 million, in the Western Hemisphere of $0.8 million, and in the Eastern Hemisphere of $0.8 million. The majority of the increases in all the regions are related to increased subsea rental tool utilization due to timing of customer drilling activity.
Cost of Sales. Cost of sales increased by $7.2 million, or approximately 12.7%, to $64.0 million for the three months ended March 31, 2022 from $56.8 million for the same period in 2021. Cost of sales as a percentage of revenue increased to 77.0% from 69.9% for the three months ended March 31, 2022 and 2021, respectively, primarily due to unfavorable product mix and increased transportation costs resulting in an increase in the cost of raw materials.
Selling, General and Administrative Expenses. For the three months ended March 31, 2022, selling, general and administrative expenses decreased by $7.2 million, or 24.2% to $22.4 million from $29.6 million for the same period in 2021. This decrease was attributable mainly to lower legal expenses in the current period related to costs incurred in the first quarter of 2021 in connection with the FMC Technologies, Inc. lawsuit, consulting fees associated with our ongoing global strategic plan and administrative costs associated with the importation tax settlement under the Brazilian tax amnesty program.
Engineering and Product Development Expenses. For the three months ended March 31, 2022, engineering and product development expenses decreased by approximately $0.4 million, or 8.9%, to $3.7 million from $4.0 million for the same period in 2020. This decrease was attributable mainly to lower spend on research and development activities as we completed certain strategic projects.
Restructuring and Other Charges. For 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 the 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.
Gain on Sale of Property, Plant and Equipment. For the three months ended March 31, 2022, the gain on sale of property, plant and equipment was deemed immaterial. During the three months ended March 31, 2021, gain on sale of property, plant and equipment was approximately $4.0 million primarily related to the sale of two of our buildings in Singapore.
Foreign Currency Transaction (Gains) and Losses. Foreign exchange gain for the three months ended March 31, 2022, was $1.3 million as compared to a loss of $1.4 million for the same period in 2021.
Income Tax Provision (Benefit). Income tax provision for the three months ended March 31, 2022 was $3.5 million on a loss before taxes of $5.4 million, resulting in an effective tax rate of (64.2)%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to changes in pre-tax income or loss in foreign jurisdictions, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries. Income tax provision for the three months ended March 31, 2021 was $2.4 million on a loss before taxes of $32.0 million, resulting in an effective income tax rate of approximately (7.5)%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to changes in pre-tax income or loss in foreign jurisdictions, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries.
Net Loss. Net loss was approximately $8.9 million for the three months ended March 31, 2022 as compared to $34.4 million for the same period in 2021 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,
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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 condensed consolidated statements of income (loss) 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.
The following table reconciles our reported net income to Adjusted EBITDA for each of the respective periods:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Net loss |
|
$ |
(8,938 |
) |
|
$ |
(34,358 |
) |
Add: |
|
|
|
|
|
|
Interest (income) expense, net |
|
|
(149 |
) |
|
|
390 |
|
Income tax provision |
|
|
3,496 |
|
|
|
2,386 |
|
Depreciation and amortization expense |
|
|
7,559 |
|
|
|
7,416 |
|
Restructuring and other charges (2) |
|
|
32 |
|
|
|
29,820 |
|
Gain on sale of property, plant and equipment |
|
|
(114 |
) |
|
|
(3,955 |
) |
Foreign currency transaction (gains) and losses |
|
|
(1,254 |
) |
|
|
1,374 |
|
Stock compensation expense |
|
|
2,527 |
|
|
|
3,186 |
|
Brazilian amnesty settlement |
|
|
- |
|
|
|
1,787 |
|
Adjusted EBITDA (1) |
|
$ |
3,159 |
|
|
$ |
8,046 |
|
(1) 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.
(2) Restructuring and other charges include legal expenses related to the FMC Technologies, Inc. lawsuit. These legal expenses are included in "Selling, general and administrative" in our condensed consolidated statements of income (loss) for the three months ended March 31, 2022 and 2021 (in thousands).
Liquidity and Capital Resources
Cash Flows
Cash flows provided by (used in) type of activity were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Operating activities |
|
$ |
(10,928 |
) |
|
$ |
13,072 |
|
Investing activities |
|
|
(1,858 |
) |
|
|
3,431 |
|
Financing activities |
|
|
(5,859 |
) |
|
|
(40 |
) |
|
|
|
(18,645 |
) |
|
|
16,463 |
|
Effect of exchange rate changes on cash activities |
|
|
1,202 |
|
|
|
(205 |
) |
Increase (decrease) in cash and cash equivalents |
|
$ |
(17,443 |
) |
|
$ |
16,258 |
|
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.
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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. In addition, we opened a new cash collateral account with JPMorgan Chase Bank, N.A., to facilitate our existing and future letters of credit. We transferred approximately $7.1 million of letters of credit upon termination of our ABL Credit Facility to JPMorgan Chase, N.A. and this is considered as restricted cash as of March 31, 2022.
We believe our business model, our current cash reserves and the recent downhole tools business restructuring and facility realignment will strengthen our balance sheet and leave us well-positioned to manage our business. We continue to review potential scenarios in connection with the potential impact of any new COVID-19 variant outbreaks 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, 2022 was $10.9 million as compared to net cash provided by operating activities of $13.1 million for the three months ended March 31, 2021. The $24.0 million net change is primarily due to decreased cash flow resulting from changes in operating assets and liabilities of $29.5 million and $19.9 million of non-cash movements which includes decreases in items such as stock-based compensation expense and restructuring and other charges. This was partially offset by a decrease in net loss of $25.4 million.
The change in operating assets and liabilities for the three months ended March 31, 2022 resulted in a $29.5 million decrease in cash as compared to the change in operating assets and liabilities for the three months ended March 31, 2021. The decrease due to changes in accounts payable and accrued expenses of $30.3 million was mainly related to the payout of our short-term incentive bonuses, payment of our agent fees in the Middle East and the payment of certain property taxes. The $7.8 million decrease in cash due to changes in unbilled receivables was mainly due to the timing of completion of some of our major projects that are accounted for on an over-time basis. The $6.7 million decrease in cash due to changes in prepaids and other assets was primarily due to an increase in advances to vendors related to projects accounted for on an over-time basis. These decreases in cash were partially offset by a decrease in inventory of $11.5 million mainly related to our continued focus on inventory management and consumption during the year and a decrease in trade receivables by $3.8 million primarily due to increase in billing activity related to our ongoing projects.
The change in investing cash flows for the three months ended March 31, 2022 resulted in a $1.9 million decrease in cash primarily due to a $2.1 million capital expenditure spend by the Company, partially offset by the proceeds from the sale of property, plant and equipment totaling $0.2 million. Capital expenditures by the Company were $2.1 million and $2.5 million for the three months ended March 31, 2022 and 2021, respectively. Capital expenditures for the three months ended March 31, 2022 were $1.5 million for rental tools to support our developed products, $0.4 million for machinery and equipment related to our global strategic program which includes consolidation of our manufacturing facilities from the Eastern Hemisphere to the Western Hemisphere and $0.2 million for other capital expenditures. Capital expenditures for the three months ended March 31, 2021 were $1.2 million for rental tools to support our developed products, $0.6 million for machinery and equipment related to our global strategic program which includes consolidation of our manufacturing facilities from the Eastern Hemisphere to the Western Hemisphere and $0.7 million for other capital expenditures. We constantly review capital expenditure needs to ensure these are justified expenditures.
Asset Backed Loan (ABL) Credit Facility
The Company's ABL Credit Facility, dated February 23, 2018, as amended, was terminated effective February 22, 2022. In addition, we opened a new cash collateral account with JPMorgan Chase Bank, N.A., in which cash was transferred to facilitate our existing letters of credit. We transferred approximately $7.1 million of letters of credit prior to the termination of our ABL Credit Facility to JPMorgan Chase, N.A. and this is considered as restricted cash as of March 31, 2022. The Company is required to maintain a balance equal to the outstanding letters of credit plus 5% at all times. Withdrawals from this cash collateral account are only allowed at such point a given letter of credit has expired or has been cancelled.
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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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 Judgments
During the three months ended March 31, 2022, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies. Refer to our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our critical accounting policies.