Dril-Quip
Transformed
2019 Annual Report
Dril-Quip, Inc. manufactures onshore and offshore
drilling and production equipment, which is particularly
well-suited for use in deepwater, harsh environments
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 for use by oil
and gas companies throughout the world. Dril-Quip
also provides installation and reconditioning services
and rents running tools for use in connection with
installation and retrieval of its products.
The worldwide corporate headquarters are located in
Houston, Texas. The Company was founded in 1981,
went public in 1997 and is publicly traded on the NYSE
under the symbol “DRQ.”
Forward-Looking Statements
Statements contained in this Annual Report relating to future
operations, financial results and business plans are forward-looking
statements that are based upon certain assumptions and analysis
made by the management of the Company in light of its experience
and perception of historical trends, current conditions, expected
developments and other factors. These statements are subject to
risks beyond the Company’s control, including the factors detailed
in the Company’s Annual Report on Form 10-K enclosed herewith.
Investors are cautioned that any such statements are not guarantees
of future performance, and actual outcomes may vary materially
from those indicated. Forward-looking statements speak only as of
the date they are made, and the Company assumes no obligation to
update such information.
Our Global
Transformation
In 2018, we began the implementation of a full business
transformation centered around a structured approach to improve
cost performance across our entire Company. The sustainable cost-
saving initiatives we implemented in 2018 and 2019 focused on
optimizing and improving our infrastructure across manufacturing,
supply chain, SG&A, engineering and research and development. This
reorganization will allow us to maintain our global presence in key
markets, while supporting an integrated supply chain model which
will create more flexibility in meeting the needs of our customers.
The original goal was to achieve annualized savings of $40 to $50
million in place by year-end 2019. At the end of the fourth quarter of
2019, we completed the initial phase of our cost saving initiatives and
attained $52 million in annualized savings.
We achieved these goals through the combined efforts of our
dedicated global workforce and strong management team who
worked together tirelessly to develop the assertive actions necessary
to assure the continued growth and sustainability of Dril-Quip.
We invite you to learn more about the results we achieved in 2019
and our path forward in the coming pages.
$52MM
11%
19%
Engineering & R&D
Supply Chain
21%
SG&A
49%
Manufacturing
Operational Transformation &
LEAN Implementation
Footprint rationalization
Broad workforce engagement
Integrated supply chain
LEAN as a way of doing business
Leads to EBITDA improvement
$40–$50MM
Target
Achieved
1
To my fellow shareholders,
I am particularly
proud of the many
achievements we
made in 2019 that
will help us in an
uncertain offshore
energy environment.
We transformed our operating model, which allowed us to drive efficiencies,
improve operational execution and generate free cash flow. While we reduced
costs and rationalized our global footprint as part of our highly successful
transformation, our commitment to our customers remained unchanged. Our
employees and management team continued to provide the highest level of
service and support to our expanding customer base, while providing new
products which deliver permanent cost savings to our customers.
Blake T. DeBerry
President and Chief Executive Officer
2
REPLACE???
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I am very pleased that through the efforts of our global
workforce, we were able to deliver annualized savings of $52
million, above the high end of our expectations.
Our operational focus and execution
Many of the financial and operational
our Company-wide initiatives to
led to a $30 million, or 8%, year over
gains we achieved were directly
reduce operating costs and improve
year growth in revenue to $415 million.
attributable to our ability to deliver
efficiencies. I am very pleased that
We saw revenue growth throughout
on our ambitious sales transformation
through the efforts of our global
2019, with revenue at $94 million in
and cost saving initiatives. As we
workforce, we were able to deliver
the first quarter of 2019 and ending
previously announced, in 2018 we
annualized savings of $52 million,
at $109 million for the fourth quarter.
began implementation of a full business
above the high end of our expectations.
Looking at product bookings, the
transformation centered around a
We maintained a footprint in key
fourth quarter of 2019 was the first
structured approach to sales and cost
markets, while leveraging an integrated
time in 22 quarters that we achieved
performance. We saw the results of
supply chain model which will create
non-project product bookings above
these efforts in our 2019 operating
more flexibility in addressing our
$100 million. We saw our full year
performance. Our retooled commercial
customers’ needs. The sustainable
bookings increase year over year by
teams delivered increases in product
cost-saving initiatives we accomplished
$144 million, or 59%, to $388 million.
bookings and created an organization
are optimizing and improving our
Our innovative and award-winning
to specifically target new customers and
infrastructure across manufacturing,
research and development (R&D)
expand the sales of new products and
supply chain, SG&A, engineering and
remains a key component to future
solutions to our existing client base. The
R&D and have certainly contributed to
growth and continued commercial
changes we made are systemic and are
the strong growth in Adjusted EBITDA
excellence. New technology product
now part of our DNA moving forward.
we generated in 2019. As you can see,
bookings grew in 2019 to about 13% of
total product bookings, or $51 million,
more than tripling the $15 million we
achieved in 2018. In 2019, we received
orders for our new BigBore-IIeTM
wellhead system specifying the DXeTM
profile as well as for high strength, high
fatigue BadgerTM connectors. We also
received another “Spotlight on New
Technology Award” from the Offshore
Technology Conference for the XPak
De™ Liner Hanger System which is the
industry’s first double expansion system
and is particularly well suited for large
diameter casing strings used when
drilling wells in deep water.
We initially announced a target
of $40 million to $50 million of
total annualized cost savings from
we worked hard in 2019 executing on
our business and sales transformations
and remained focused on achieving
Revenue
Millions
Revenue
Millions
Bookings
Millions
Bookings
Millions
$455.5
$455.5
$384.6
$414.8
$384.6
$414.8
$388
$388
$241
$244
$241
$244
500
500
400
400
300
300
200
200
100
100
0
0
400
350
300
250
200
150
100
50
0
400
350
300
250
200
150
100
50
0
2
2017
2018
2017
2019
2018
2019
2017
2018
2017
2019
2018
2019
3
our strategic goals while operating
We will no longer manufacture
efficiently and generating free cash
everything in every location, but
flow through this downturn. As we
instead we will find the cost-effective
look to 2020 and beyond, we will focus
manufacturing solutions that leverage
on productivity improvements and
our newly created supply chain
further leveraging our supply chain and
capability and ensure our customers
procurement capability.
get quality products while maximizing
In February of 2019, our Board
authorized an additional $100 million
share repurchase program. This was
in addition to the $100 million share
returns for the Company. We will
continue to make strides in fine-tuning
our supply chain to ensure we capture
long term, sustainable improvements.
repurchase program that we completed
In closing, I want to thank my
in 2018. In 2019, we repurchased
management team and all of our
approximately 615,000 common shares
employees for their continued hard
for a total of $26.6 million under our
work and dedication and our Board
current program. We believe this is
for their guidance and support. We
a good use of the cash that we have
have an experienced, results-driven
accumulated on our strong balance
organization delivering first-class service
sheet and a way to return cash to
and a strong, clean balance sheet with
our stockholders. As you can see, we
nearly $400 million in cash on hand. Our
still have availability remaining to
proactive approach in 2019 to focus on
opportunistically buy back more shares.
our bottoms up strategic plan with a
vision toward the long-term viability and
sustainability of Dril-Quip has made us
a stronger Company with the flexibility
to adapt to changing markets. We will
build on our long history of generating
free cash flow and believe we have
positioned Dril-Quip to be successful in
2020 and beyond.
Blake T. DeBerry
President and
Chief Executive Officer
March 23, 2020
With a debt-free balance sheet and
$399 million in cash at year-end 2019,
we have significant dry powder for
future repurchases as well as investing
in possible funding needed for key
projects, supporting an upturn and
pursuing strategic acquisitions.
The energy industry is currently
experiencing pressure on both
supply and demand. The Coronavirus
pandemic has limited worldwide
demand, and the actions taken by
Russia and Saudi Arabia have flooded
the supply market. We spent the past
18 months re-evaluating our overall
business and product lines and believe
that we realigned and reorganized
our entire Company to operate more
efficiently in any macro environment.
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5
Sustainability and
Corporate Responsibility
At Dril-Quip, we manage our business
with a focus on health and safety, the
environment, ethical behavior, quality
and being a good corporate citizen in
all countries in which we operate.
Health, Safety and Environmental (HSE)
All of our major manufacturing
facilities are compliant with OHSAS
18001 for occupational health
and safety management systems
and are compliant with ISO 14001
for environmental management
systems. We have full management
commitment to Health, Safety and the
Environment. We regularly track our
health and safety performance against
industry standards and report the
results through the organization and
to our board of directors.
Our senior management teams perform
safety walk-throughs of our facilities
on a quarterly basis. We empower our
employees with stop-work authority
and a reporting card system to identify
any safety concerns or potential
improvements. We have dedicated HSE
employees in all regions, and all of
our operations hold weekly safety
meetings and regularly perform
Environmental Site Assessments of
our operational practices as part of our
environmental systems.
Ethics Compliance and Anti-Corruption
Our Code of Business Conduct and
Ethical Practices applies to all our
directors, officers and employees.
Concerns regarding ethics, accounting
or any violation of applicable laws may
be reported confidentially through
our website. We also provide periodic
compliance training to our employees.
Dril-Quip maintains a Conflict Minerals
Policy to govern its actions with respect
to conflict minerals covered by U.S. law.
We also maintain an Anti-Corruption
Policy that governs our compliance
with the U. S. Foreign Corrupt Practices
Act, the U.K. Bribery Act and other
applicable laws against corruption.
This policy also applies to our agents,
distributors and joint venture partners.
Non-Discrimination and Employment Practices
We are committed to providing
equal opportunity in all aspects of
employment, and we maintain policies
that prohibit any discrimination or
harassment. We also maintain an
Affirmative Action Plan in the U.S. and
have implemented a program to ensure
compliance with the U.K. Modern
Slavery Act as well as a program to
ensure compliance with the U.K. Gender
Pay Gap requirements.
Dril-Quip has an Employee Assistance
Fund that was established to provide
assistance to employees affected by
catastrophic events.
Sustainability
We seek to conserve energy in all of
our facilities. Dril-Quip Houston, our
largest facility, participated in an air
conditioning tune-up program to
reduce electrical load, and we use LED
lighting in our Houston facilities.
The Company participates in recycling
programs throughout its worldwide
operations. All our manufacturing
facilities are certified to ISO 9001:2015
quality standard. We use LEAN and
Advanced Product Quality Planning
principles to reduce waste in all of our
operations. Our current R&D efforts are
focused on developing equipment that
structurally changes the way customers
drill wells that make permanent cost
savings. This design process generally
eliminates operational risks for our
customers and reduces the amount of
manual labor that is needed to deploy
the equipment.
5
4
Financial Highlights
(In thousands, except per share data)
Statement of Operations Data
2019
2018
2017
Years ended December 31
Revenues
Operating income (loss)
Net income (loss)
Diluted earnings (loss) per share
Weighted average diluted shares outstanding
Other Data
Depreciation and amortization
Free Cash Flow:
Net cash provided by operating activities
Less: Capital expenditures
Free Cash Flow
Year-end Financial Position
Working capital
Total assets
Total debt
$
414,806
$
384,626
$
$455,469
2,803
1,720
0.05
36,152
34,020
14,678
(11,501)
3,177
783,549
1,206,565
-
$
$
$
$
(122,738)
(95,695)
(2.58)
37,075
35,312
45,503
(32,061)
13,442
770,723
1,192,510
-
(69,136)
(100,639)
(2.69)
37,457
Years ended December 31
$
$
$
$
40,974
107,993
(27,622)
80,371
As of December 31
908,638
1,399,805
-
$
$
$
$
Total stockholders' equity
1,090,701
1,096,162
1,294,461
2019 financial results were negatively impacted by restructuring and severance charges of $4.4 million. 2018 financial results were negatively impacted by impairment charges of $85.5 million and restructuring and severance charges of $13.1
million. 2017 financial results were negatively impacted by impairment, restructuring and severance charges of $66 million and one-time tax provisions of $67 million, largely as a result of the US Tax Reform.
Net Income (Loss)
Millions
Operational Cash Flow
Millions
Free Cash Flow
Millions
$108
$80.4
$45.5
$14.7
$13.4
2017
2018
$1.7
2019
2017
2018
2019
2017
2018
$3.2
2019
-$95.7
-$100.6
6
500
400
300
200
100
0
20
0
-20
-40
-60
-80
-100
-120
100
80
60
40
20
0
120
100
80
60
40
20
0
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
.
Commission file number 001-13439
DRIL-QUIP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
74-2162088
(IRS Employer
Identification No.)
6401 N. Eldridge Parkway
Houston, Texas
(Address of principal executive offices)
77041
(Zip code)
Registrant’s telephone number, including area code: (713) 939-7711
Title of Each Class
Common Stock, $.01 par value per share
Securities registered pursuant to Section 12(b) of the Act:
Trading symbol(s)
DRQ
Securities registered pursuant to Section 12(g) of the Act: None
Name of Each Exchange On Which Registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 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
Non-Accelerated filer
☒
☐
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 Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At June 28, 2019, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately
1,715,500,000 based on the closing price of such stock on such date of $ 48.00.
At February 26, 2020, the number of shares outstanding of registrant’s Common Stock was 35,869,079.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2019 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are
incorporated by reference in Part III of this Form 10-K.
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PART I
TABLE OF CONTENTS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosure
PART II
Item 5.
Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
PART IV
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
2
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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:
•
•
•
future operating results and cash flow;
scheduled, budgeted and other future capital expenditures;
planned or estimated cost savings;
• working capital requirements;
•
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•
•
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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; and
future operations, financial results, business plans and cash needs.
These statements are based on assumptions and analysis in light of the Company’s experience and perception of historical
trends, current conditions, expected future developments and other factors the Company believes were appropriate in the
circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties
that could significantly impact expected results, and actual future results could differ materially from those described in such
statements. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the
factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk
Factors” in this report and the following:
•
•
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•
•
•
•
•
•
•
the volatility of oil and natural gas prices;
the cyclical nature of the oil and gas industry;
uncertainties associated with the United States and worldwide economies;
uncertainties regarding political tensions in the Middle East, South America, Africa and elsewhere;
current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in
other countries;
uncertainties regarding future oil and gas exploration and production activities, including new regulations, customs
requirements and product testing requirements;
operating interruptions (including explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime,
labor difficulties, transportation interruptions, spills and releases and other environmental risks);
project terminations, suspensions or scope adjustments to contracts reflected in the Company’s backlog;
the Company’s reliance on product development;
technological developments;
3
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the Company’s reliance on third-party technologies;
acquisition and merger activities involving the Company or its competitors;
the Company’s dependence on key employees and skilled machinists, fabricators and technical personnel;
the Company’s reliance on sources of raw materials, including any increase in steel costs or decreases in steel supply as a
result of global tariffs on certain imported steel mill products;
impact of environmental matters, including future environmental regulations;
competitive products and pricing pressures;
fluctuations in foreign currency, including those attributable to the Brexit;
the ability of the Organization of Petroleum Exporting Countries (OPEC) to set and maintain production levels and pricing;
oil and natural gas production levels by non-OPEC countries;
the Company’s reliance on significant customers;
creditworthiness of the Company’s customers;
fixed-price contracts;
changes in general economic, market or business conditions;
access to capital markets;
negative outcome of litigation, threatened litigation or government proceedings;
the impact of global health epidemics and concerns;
terrorist threats or acts, war and civil disturbances; and
changes to, and differing interpretations of, tax laws with respect to our operations and subsidiaries.
Many of such factors are beyond the Company’s ability to control or predict. Any of the factors, or a combination of these
factors, could materially affect the Company’s future results of operations and the ultimate accuracy of the forward-looking
statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based
on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular
statement, and the Company undertakes no obligation to publicly update or revise any forward-looking statement.
4
Item 1.
Business
General
PART I
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. Dril-Quip’s products are used by major integrated, large independent and foreign national oil and gas companies and
drilling contractors throughout the world. 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 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.
Dril-Quip has developed its broad line of subsea equipment, surface equipment and offshore rig equipment primarily through its
internal product research and development efforts. The Company believes that it has achieved significant market share and brand
name recognition with respect to its established products due to the technological capabilities, reliability, cost effectiveness and
operational timesaving features of these 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.A. de C.V., located in
Villahermosa, Mexico; TIW de Venezuela S.A., located in Anaco, Venezuela and with a registered branch located in Shushufindi,
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.
Dril-Quip markets its products through its offices and sales representatives located in the major international energy markets
throughout the world. In 2019 the Company generated approximately 65.0% of its revenues from foreign sales compared to 61.0% and
55.0% in 2018 and 2017, respectively.
The Company makes available, free of charge on its website, its Annual Report on Form 10-K and quarterly reports on Form 10-
Q (in both HTML and XBRL formats), current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practical after it electronically files such reports with, or furnishes
them to, the Securities and Exchange Commission (SEC). The Company’s website address is www.dril-quip.com. Documents and
information on the Company’s website, or on any other website, are not incorporated by reference into this Form 10-K. The SEC
maintains a website (www.sec.gov) that contains reports the Company has filed with the SEC.
The Company also makes available free of charge on its website (www.dril-quip.com/govern.html) its:
•
•
Corporate Governance Guidelines,
Code of Business Conduct and Ethical Practices,
• Audit Committee Charter,
• Nominating and Governance Committee Charter, and
•
Compensation Committee Charter.
Any stockholder, who so requests, may obtain a printed copy of any of these documents from the Company. Changes in or
waivers to the Company's Code of Business Conduct and Ethical Practices involving directors and executive officers of the Company
will be posted on its website.
5
Overview and Industry Outlook
Both 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. The level of capital expenditures has generally been dependent upon the prevailing
view of future oil and gas prices, which are influenced by numerous factors affecting the supply and demand for oil and gas, including
worldwide economic activity, interest rates and the cost of capital, environmental regulation, tax policies and the ability and/or desire
of OPEC and other producing nations to set and maintain production levels and prices. The Brent crude oil price began a slow
recovery in 2017 after a sharp drop during 2015 and 2016, with an average price of $54.15. During 2018, crude oil prices fluctuated
significantly, with a high of $86.07 per barrel and ending the year at a low of $50.57 per barrel. This trend continued in 2019, as Brent
crude oil prices fluctuated from a high of $74.94 per barrel and ending the year at a low of $53.23 per barrel. According to the January
2020 release of the Short-Term Energy Outlook published by the Energy Information Administration (EIA) of the U.S. Department of
Energy, Brent crude oil prices averaged approximately $64.36 per barrel in 2019, and the price is forecasted to average $64.83 per
barrel in 2020 and $67.53 per barrel in 2021.
Capital expenditures are also dependent on the cost of exploring for and producing oil and gas, the availability, expiration date
and price of leases, the discovery rate of new oil and gas reserves, technological advances and alternative opportunities to invest in
onshore exploration and production operations. Oil and gas prices and the level of drilling and production activity have historically
been characterized by significant volatility. Future declines in oil and gas prices may further adversely affect the willingness of some
oil and gas companies to make capital expenditures on exploration, drilling and production operations, which could have an adverse
impact on the Company’s results of operations, financial position and cash flows. In its January 2020 Short-Term Energy Outlook, the
EIA reported United States crude oil production averaged an estimated 12.2 million barrels per day in 2019 and is forecasted to
average 13.3 million barrels per day in 2020.
Brent crude oil prices per barrel for the three-year period ended December 31, 2019 are summarized below:
High
Low
Average
Closing, December 31,
Brent Crude Oil Prices
2018
2017
2019
$
$
$
$
74.94
53.23
64.28
67.77
$
$
$
$
86.07
50.57
71.34
50.57
$
$
$
$
66.80
43.98
54.15
66.73
The volatility in Brent crude oil prices over the past three years continues to have a significant effect on major integrated, large
independent and foreign national oil and gas companies’ capital expenditure budgets. The Company expects continued pressure in
both crude oil and natural gas prices, as well as in the level of drilling and production related activities, particularly as they relate to
offshore activities. Even during periods of high prices for oil and natural gas, companies exploring for oil and gas may cancel or
curtail programs, seek to renegotiate contract terms, including the price of products and services, or reduce their levels of capital
expenditures for exploration and production for a variety of reasons. Slow drilling and production activity, which had a negative
impact on the Company’s results for the year ended December 31, 2019 is expected to improve slightly in 2020. A prolonged delay in
the recovery of commodity prices could also lead to further material impairment charges to tangible or intangible assets or otherwise
result in a material adverse effect on the Company's results of operations. See “Item 1A. Risk Factors—A material or extended decline
in expenditures by the oil and gas industry could significantly reduce our revenue and income.”
Products and Services
Dril-Quip’s revenues are generated from two sources: products and services. Product revenues are derived from the sale of
drilling and production equipment. Service revenues are earned when the Company provides technical advisory assistance and rental
tools during installation and retrieval of the Company’s products. Additionally, the Company earns service revenues when rework and
reconditioning services are provided. In 2019, the Company derived 73.1% of its revenues from the sale of its products, 17.4% of its
revenues from services and 9.5% of its revenues from leasing rental tools, compared to 68.9%, 18.8% and 12.3% for products,
services and leasing rental tools in 2018, respectively, and 77.1%, 13.6% and 9.3% for products, services and leasing rental tools in
2017, respectively. Service and leasing revenues generally correlate to revenues from product sales because increased product sales
typically generate increased demand for technical advisory assistance services during installation and rental of running tools.
However, existing customer equipment can be used in certain circumstances, which creates demand for services with no correlating
product sales. The Company has substantial international operations, with approximately 65.0% of its revenues derived from foreign
sales in 2019, 61.0% in 2018 and 55.0% in 2017. Substantially all of the Company’s domestic revenue relates to operations in the U.
S. Gulf of Mexico. Domestic revenue approximated 35.0% of the Company’s total revenues in 2019, 39.0% in 2018 and 45.0% in
2017.
6
Product contracts are typically 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 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 as a result of 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, maintenance of market share, the introduction of new products and general market conditions.
Products
Dril-Quip designs, manufactures, fabricates, inspects, assembles, tests and markets subsea equipment, downhole tools, surface
equipment and offshore rig equipment. The Company’s products are used primarily for exploration and production of oil and gas from
offshore drilling rigs, such as floating rigs and jack-up rigs, and for drilling and production of oil and gas wells on offshore platforms,
tension leg platforms (TLPs), Spars and moored vessels such as floating production, storage and offloading monohull moored vessels
(FPSOs). TLPs are floating production platforms that are connected to the ocean floor via vertical mooring tethers. A Spar is a floating
cylindrical structure approximately six or seven times longer than its diameter and is anchored in place. The TIW products are used in
the drilling and production for oil and gas both onshore and offshore.
Subsea Equipment - Subsea equipment is used in the drilling and production of offshore oil and gas wells around the world.
Included in the subsea equipment product line are subsea wellheads, mudline hanger systems, specialty connectors and associated
pipe, production riser systems, subsea production trees, liner hangers, subsea control systems and subsea manifolds.
Subsea wellheads are pressure-containing vessels that are sometimes referred to as a “wellhead housing” and are made from
forged and machined steel. A casing hanger, also made of steel, lands inside the wellhead housing and suspends casing (pipe)
downhole. As drilling depth increases, successively smaller diameter casing strings are installed, each suspended by an independent
casing hanger. Subsea wellheads are utilized when drilling from floating drilling rigs, either semi-submersible or drillship types, or
TLPs and Spars. The Company’s flagship subsea wellhead, called the SS-15® Subsea Wellhead System, is rated for 15,000 psi
internal pressure and is offered to the industry in a variety of configurations. The Company’s newest wellhead product, the SS-20
BigBore II-e Subsea Wellhead System, is designed to contain higher pressures (20,000 pounds per square inch (psi)) and provides the
ability to reduce the number of casing strings in the well design by increasing load carrying and pressure capacities of casing hangers
and associated installation tools.
Mudline hanger systems are used in jack-up drilling operations to support the weight of the various casing strings at the ocean
floor while drilling a well. They also provide a method to disconnect the casing strings in an orderly manner at the ocean floor after
the well has been drilled, and subsequently reconnect to enable production of the well by either tying it back vertically to a
subsequently installed platform or by installing a shallow water subsea tree.
Large diameter weld-on specialty connectors (threaded or stab type) are used primarily in offshore wells drilled from floating
drilling rigs, jack-up rigs, fixed platforms, TLPs and Spars. Specialty connectors join lengths of conductor or large diameter (16-inch
or greater) casing. Specialty connectors provide a more rapid connection than other methods of connecting lengths of pipe. Connectors
may be sold individually or as an assembly after being welded to sections of Company or customer supplied pipe. Dril-Quip’s weld-on
specialty connectors are designed to prevent cross threading and provide a quick, convenient method of joining casing joints with
structural integrity compatible with casing strength.
Production riser systems are generally designed and manufactured to customer specifications. Production risers provide a
vertical conduit from the subsea wellhead up to a TLP, Spar or FPSO floating at the surface.
A subsea production tree is an assembly composed of valves, a wellhead connector, control equipment and various other
components installed on a subsea wellhead or a mudline hanger system and used to control the flow of oil and gas from a producing
well. Subsea trees may be used as stand alone satellite wells or multiple well template mounted and cluster arrangements. These types
typically produce via a subsea gathering system of manifolds and flowlines to a central control point located on a platform, TLP, Spar
or FPSO. The use of subsea production trees has become an increasingly important method for producing wells located in hard-to-
reach deepwater areas or economically marginal fields located in shallower waters. The Company is an established manufacturer of
complicated dual-bore production trees. In addition, Dril-Quip manufactures a single bore subsea completion system. This system
eliminates the need for an expensive multibore installation and workover riser, thereby saving both cost and installation time. The
horizontal bore subsea production completion system accommodates numerous completion configuration possibilities and features
large vertical access drill-through for passage of drill-bits, submersible pumps, coil tubing strings and Dril-Quip's slimline casing
hanger system. The concentric monobore vertical bore subsea production system accommodates numerous completion configuration
possibilities including in tubing head and in the subsea wellhead. Dril-Quip’s subsea production trees are used in ultra-deepwater
applications. These trees feature remote flowline and control connections, utilizing remotely operated intervention tools. The
Company’s subsea production trees are generally custom designed and manufactured to customer specifications.
7
A subsea control system provides control of subsea trees, manifolds, ocean floor process equipment and pipeline protection
equipment. Dril-Quip has developed a variety of subsea control systems, including fiber optic based multiplex control systems that
provide real time access to tree functions and tree equipment status. The control system can be packaged for shallow water or
deepwater applications. Dril-Quip also manufactures control systems used in the installation, retrieval and workover of production
equipment.
A subsea manifold is a structure located on the ocean floor consisting of valves, flowline connections and a control module used
to collect and control the flow of oil and gas from subsea wells for delivery to a floating production unit or terminal.
Downhole Tools - Downhole tools are primarily comprised of liner hangers, production packers, safety valves and specialty
downhole tools. A liner hanger is used to hang-off and seal casing into a previously installed casing string in the well bore, and can
provide a means of tying back the liner for production to surface. Dril-Quip has developed a state-of-the-art liner hanger system and
has installed its liner hangers in a number of difficult well applications, resulting in improved industry recognition and market
opportunities. In addition to liner hanger systems that are well suited for onshore use, TIW offers expandable liner hanger systems that
are typically utilized in challenging environments such as deepwater or High Pressure, High Temperature (HPHT) applications.
Surface Equipment - Surface equipment is principally used for flow control on offshore production platforms, TLPs and Spars.
Included in the Company’s surface equipment product line are platform wellheads, platform production trees and riser tensioners.
Dril-Quip’s development of platform wellheads and platform production trees was facilitated by adaptation of its existing subsea
wellhead and tree technology to surface wellheads and trees.
Platform wellheads are pressure-containing forged and machined metal housings in which casing hangers are landed and sealed
at the platform deck to suspend casings. The Company emphasizes the use of metal-to-metal sealing wellhead systems with
operational time-saving features which can be used in high pressure, high temperature and corrosive drilling and production
applications.
After installation of a wellhead, a platform production tree , consisting of gate valves, a surface wellhead connector, controls,
tree cap and associated equipment, is installed on the wellhead to control and regulate oil or gas production. Platform production trees
are similar to subsea production trees but utilize less complex equipment and more manual, rather than hydraulically actuated, valves
and connectors. Platform wellheads and platform production trees and associated equipment are designed and manufactured in
accordance with customer specifications.
Riser tensioners are used on a floating drilling/production vessel to provide a continuous and reliable upward force on a riser
string that is independent of the movement of the floating vessel.
Rig Equipment - Rig equipment includes drilling riser systems, wellhead connectors, diverters, safety valves and cement
manifolds. The drilling riser system consists of (i) lengths of riser pipe and associated riser connectors that secure one to another;
(ii) the telescopic joint, which connects the entire drilling riser system to the diverter at top of the riser at the rig and provides a means
to compensate for vertical motion of the rig relative to the ocean floor; and (iii) the wellhead connector , which provides a means for
remote connection and disconnection of the blowout preventer stack to or from the wellhead. Diverters are used to provide protection
from shallow gas blowouts and to divert gases off of the rig during the drilling operation. A safety valve is used to provide a quick,
sure shutoff in the drill string at the drill floor and prevent flow up the drill pipe. The TIW Kelly Valve is located in the drill string
below the kelly, the uppermost component of the drill string, and is designed to be closed under pressure to remove the kelly. Cement
manifolds are used to control the flow of cement and other fluids during the cementing operations of the well installation.
Wellhead connectors are used on production riser systems and drilling riser systems. They are also used on both TLPs and
Spars, which are installed in deepwater applications. The principal markets for offshore rig equipment are new rigs, rig upgrades,
TLPs and Spars. Drilling risers, wellhead connectors and diverters are generally designed and manufactured to customer
specifications.
Certain of the Company's products are used in potentially hazardous drilling, completion and production applications that can
cause personal injury, product liability and environmental claims. See “Item 1A. Risk Factors—Our business involves numerous
operating hazards that may not be covered by insurance. The occurrence of an event not fully covered by insurance could have a
material adverse effect on our results of operations, financial position and cash flows.”
Services
The Company provides services to customers, including technical advisory assistance as well as rework and reconditioning
services on its customer-owned products. These services are provided from the Company’s worldwide locations and represented
approximately 17.4% of revenues in 2019 compared to 18.8% in 2018 and 13.6% in 2017.
Technical Advisory Assistance. Dril-Quip generally does not install products for its customers, but it does provide technical
advisory assistance to the customer, if requested, in the installation of its products. The customer is not obligated to utilize these
services and may use its own personnel or a third party to perform these services. Technical advisory assistance services performed by
the Company are negotiated and sold separately from the Company’s products. These services are not a prerequisite to the sale of the
Company’s products as its products are fully functional on a stand alone basis. The Company’s technicians provide assistance in the
onsite installation of the Company’s products and are available on a 24-hour call out from the Company’s facilities located in
8
Houston, Texas; Midland, Texas; Baku, Azerbaijan; Villahermosa, Mexico; Anaco, Venezuela; Shushufindi, Ecuador; Macae, Brazil;
Aberdeen, Scotland; Szolnok, Hungary; Stavanger, Norway; Esbjerg, Denmark; Port Harcourt, Nigeria; Alexandria, Egypt; Takoradi,
Ghana; Tianjin, China; Doha, Qatar; Singapore; and Perth, Australia.
Reconditioning. The Company provides reconditioning of its customer-owned products at its facilities in Houston, Texas;
Macae, Brazil; Aberdeen, Scotland; Stavanger, Norway; Esbjerg, Denmark; Baku, Azerbaijan; Port Harcourt, Nigeria; Alexandria,
Egypt; Takoradi, Ghana; Tianjin, China; Doha, Qatar; Singapore; and Perth, Australia. The Company does not typically service, repair
or recondition its competitors’ products.
Leasing
The Company rents running and installation tools for use in installing its products. These tools are required to install and retrieve
the Company’s products that are purchased by customers. Rental or purchase of running tools is not a condition of the sale of the
Company’s products and is contracted for separately from product sales and other services offered by the Company. Running tools are
available from Dril-Quip’s locations in Houston, Texas; Midland, Texas; Villahermosa, Mexico; Anaco, Venezuela; Shushufindi,
Ecuador; Macae, Brazil; Aberdeen, Scotland; Szolnok, Hungary; Stavanger, Norway; Esbjerg, Denmark; Singapore; and Perth,
Australia. These rentals are provided from the Company's worldwide locations and represented approximately 9.5% of revenues in
2019 compared to 12.3% in 2018 and 9.3% in 2017. During the later part of 2019, we leased our forge facilities and equipment to
AFGlobal Corporation.
Manufacturing
Dril-Quip has major manufacturing facilities in Houston, Texas; Aberdeen, Scotland; Singapore; and Macae, Brazil. See “Item
2. Properties—Manufacturing Facilities.” Dril-Quip maintains its high standards of product quality through the implementation of
Advanced Product Quality Planning (APQP) methodologies, as well as through the use of quality control specialists.
The Company’s Houston, Aberdeen, Singapore and Macae manufacturing plants are ISO 14001, OHSAS 18001 and ISO 9001
certified. The Houston, Aberdeen, Singapore and Macae plants are also licensed to applicable American Petroleum Institute (API)
product specifications and are API Q1, 9 th edition and APIQ2 compliant. Dril-Quip works to maintain its high standards of product
quality through the use of precision measuring equipment such as MRP gages, Faro Arms, Coordinate Measuring Machine and the
application of APQP. APQP entails concurrent engineering principles to identify and address potential quality concerns early in the
product development process. The Company has the capability to manufacture its products globally and continues to have local
capability in key critical markets. The Company’s primary raw material is forged steel products which it procures from qualified
forging suppliers located globally as well as domestically through AFGlobal Corporation.
Dril-Quip’s manufacturing facilities utilize state-of-the-art computer numerically controlled (CNC) machine tools and
equipment, which contribute to the Company’s product quality and timely delivery. The Company has also developed a cost effective,
in-house machine tool rebuild and refurbishment capability, which produces machine upgrades with customized features to enhance
the economic manufacturing of its specialized products. This strategy provides the added advantage of in-house expertise for repairs
and maintenance of these machines.
Customers
The Company’s principal customers are major integrated, large independent and foreign national oil and gas companies. Drilling
contractors and engineering and construction companies also represent a portion of the Company’s customer base. The Company’s
customers are generally oil and gas companies that are well-known participants in exploration and production.
The Company is not dependent on any one customer or group of customers. In 2019, the Company’s top 15 customers
represented approximately 52% of total revenues, and BP and its affiliated companies accounted for approximately 10% of total
revenues. In 2018, the Company’s top 15 customers represented approximately 56% of total revenues, and BP and its affiliated
companies accounted for approximately 13% of total revenues. In 2017, the Company’s top 15 customers represented approximately
49% of total revenues and Chevron and its affiliated companies accounted for approximately 14% of total revenues. No other
customer accounted for more than 10% of total revenues in 2019, 2018 or 2017. The number and variety of the Company’s products
required in a given year by any one customer depends upon the amount of that customer’s capital expenditure budget devoted to
exploration and production and on the results of competitive bids for major projects. Consequently, a customer that accounts for a
significant portion of revenues in one fiscal year may represent an immaterial portion of revenues in subsequent years. While the
Company is not dependent on any one customer or group of customers, the loss of one or more of its significant customers could, at
least on a short-term basis, have an adverse effect on the Company’s results of operations.
Backlog
Backlog consists of firm customer orders of Dril-Quip products for which a purchase order, signed contract or letter of award
has been received, satisfactory credit or financing arrangements exist and delivery is scheduled. Historically, the Company’s revenues
for a specific period have not been directly related to its backlog as stated at a particular point in time. The Company’s product
backlog was approximately $272.5 million and $270.0 million at December 31, 2019 and 2018, respectively. The backlog at the end
of 2019 represents an increase of approximately $2.5 million, or 1.0%, from the end of 2018. The Company’s backlog balance during
9
2019 was negatively impacted by translation adjustments of approximately $0.5 million, due primarily to the weakening of the
Brazilian Real against the U.S. dollar, and approximately $61.0 million in cancellations.
During the first quarter of 2018, Dril-Quip Asia-Pacific Pte Ltd. was awarded a contract to supply top-tensioned riser (TTR)
systems and related services for the development of the Ca Rong Do Project (CRD Project) located offshore Vietnam operated by
Repsol with the participation of Mubadala, PVEP and PetroVietnam. The CRD Project was terminated in the third quarter of 2019 and
is no longer included within the backlog balance as of December 31, 2019.
The Company expects to fill approximately 70% to 80% of the December 31, 2019 product backlog by December 31, 2020. The
remaining backlog at December 31, 2019 consists of longer-term projects which are being designed and manufactured to customer
specifications requiring longer lead times.
In August 2012, the Company’s Brazilian subsidiary, Dril-Quip do Brasil LTDA, was awarded a four-year contract by
Petrobras, Brazil’s national oil company. As part of an amendment to extend the term of the contract for an additional four years,
Petrobras agreed to issue purchase orders totaling a minimum of approximately $24.4 million (based on current exchange rates) before
2019. As of December 31, 2019, Petrobras has issued purchase orders totaling that minimum required amount. See “Item 1A. Risk
Factors—Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future
revenues and earnings.”
Marketing and Sales
Dril-Quip markets its products and services throughout the world directly through its sales personnel in multiple domestic and
international locations. In addition, in certain foreign markets the Company utilizes independent sales agents or representatives to
enhance its marketing and sales efforts.
Some of the locations in which Dril-Quip has sales agents or representatives are Trinidad, Indonesia, Malaysia, Saudi Arabia
and United Arab Emirates. Although they do not have authority to contractually bind the Company, these representatives market the
Company’s products in their respective territories in return for sales commissions. The Company advertises its products and services
in trade and technical publications targeted to its customer base. The Company also participates in industry conferences and trade
shows to enhance industry awareness of its products.
The Company’s customers generally order products on a purchase order basis. Orders, other than those considered to be long-
term projects, are typically filled within twelve months after receipt, depending on the type of product and whether it is sold out of
inventory or requires some customization. Contracts for certain of the Company’s larger, more complex products, such as subsea
production trees, drilling risers and equipment for TLPs and Spars, can take a year or more to complete.
The primary factors influencing a customer’s decision to purchase the Company’s products are the quality, reliability and
reputation of the product, price, technology, service and timely delivery. For large drilling and production system orders, project
management teams coordinate customer needs with the Company’s engineering, manufacturing and service organizations, as well as
with subcontractors and vendors.
A portion of the Company’s business consists of designing, manufacturing and selling equipment, as well as offering technical
advisory assistance during installation of the equipment, for major projects pursuant to competitive bids. The number of such projects
in any year may fluctuate. The Company’s profitability on such projects is critically dependent on making accurate and cost effective
bids and performing efficiently in accordance with bid specifications. Various factors, including availability of raw materials, changes
in customer requirements and governmental regulations, can adversely affect the Company’s performance on individual projects, with
potential material adverse effects on project profitability.
Product Development and Engineering
The technological demands of the oil and gas industry continue to increase as exploration and drilling expand into more hostile
environments. Conditions encountered in these environments include water depths in excess of 10,000 feet, well pressures exceeding
15,000 psi, well flowing temperatures beyond 350 degrees Fahrenheit and mixed flows of oil, gas and water that may also be highly
corrosive and impact material properties.
Since its founding in 1981, Dril-Quip has actively engaged in continuing development efforts to generate new products and
improve existing products. When developing new products, the Company typically seeks to design the most technologically advanced
version for a particular application to establish its reputation and qualification in that product. Thereafter, the Company leverages its
expertise in the more technologically advanced product to produce less costly and complex versions of the product for less demanding
applications. The Company also focuses its activities on reducing the overall cost to the customer, which includes not only the initial
capital cost but also operating, installation and maintenance costs associated with its products.
10
In the 1980s, the Company introduced its first product, specialty connectors, as well as mudline suspension systems, template
systems and subsea wellheads. In the 1990s, the Company introduced a series of new products, including diverters, wellhead
connectors, SingleBore™ subsea trees, improved severe service dual bore subsea trees, subsea and platform valves, platform
wellheads, platform trees, subsea tree workover riser systems, drilling riser systems and TLP and Spar production riser systems. Since
2000, Dril-Quip has introduced multiple new products, including liner hangers, subsea control systems, subsea manifolds, riser
tensioners, and enhanced versions of subsea wellhead connectors and Dril-Quip’s industry leading subsea wellhead system(s). Recent
product development efforts focus on the evolution and enhancement of Dril-Quip’s subsea tree portfolio to align with projected
market needs, ability to meet a wider array of customer applications, and offer customers overall project cost savings through
technological advantages.
Historically, Dril-Quip’s product development work is primarily conducted at its facilities in Houston, Texas; however, such
activities have gradually increased in other regions, such as Aberdeen, Scotland, Singapore and Brazil. In addition to the work of its
product development staff, the Company’s application engineering staff provides technical services to customers in connection with
the design and sales of its products. The Company’s ability to develop new products and maintain technological advantages is
important to its future success. See “Item 1A. Risk Factors-Our business could be adversely affected if we do not develop new
products and secure and retain patents related to our products.”
The Company believes that the success of its business depends more on the technical competence, creativity and marketing
abilities of its employees than on any individual patent, trademark or copyright. Nevertheless, as part of its ongoing product
development and manufacturing activities, Dril-Quip’s policy has been to seek patents when appropriate on inventions concerning
new products and product improvements. All patent rights for products developed by employees are assigned to the Company and
almost all of the Company’s products have components that are covered by patents.
In 2019, major production milestones were met for several key global projects. In the North Sea, the additional subsea
completion trees for a subsea field development project were successfully installed. Dril-Quip performed an extensive front-end
engineering and design contract for a subsea production system project located off the coast of South America. Additional subsea trees
were delivered and installed for field development projects off the coasts of Gabon and the UK Continental Shelf; the latter of which
included a novel protective structure for shallow water applications within the region. The completion of a subsea completion field
development and associated start-up activities for an offshore project within Indonesia included the subsea and topside control system
architecture, reinforcing Dril-Quip’s ability to support larger scopes within the subsea production system market. Also, off the coast of
Mexico, multiple deepwater subsea wellhead systems were installed with the support of a new service facility in Villahermosa,
expanding Dril-Quip's aftermarket support presence in the region in support of international oil and gas operators entry in the Mexican
Gulf of Mexico. Dril-Quip continued to support the tieback of multiple wells for projects in the Gulf of Mexico and offshore Brazil.
Engineering, manufacturing, assembly and test work continued on additional subsea completion projects for upcoming installations
off the coasts of India and the UK, and contribute to the Company’s subsea production system backlog that has increased year-to-year.
The requirements of the equipment in these projects represent significant technological challenges, the development of which is
serving to enhance the Company's overall engineering capabilities and has resulted in product bookings for several new products
throughout the year.
Dril-Quip’s continued efforts in developing technologically advanced products enable Dril-Quip to offer products for the
harshest environments. The latest subsea wellhead system has been ordered by a major oil company for its high pressure, high
temperature applications, further strengthening Dril-Quip’s position in the subsea market.
In an ongoing test program, the Company continued the utilization of its recently constructed high-load horizontal test machine
and fatigue test machine for rigorous validation testing of its existing specialty connector product line. Active engineering programs
have been initiated in-house to continue development in specialty connector product enhancements as well as new product
development. This high-load horizontal test machine has been instrumental in the development and qualification of our 20,000 psi
wellhead system, riser connector that utilizes Dril-Quip proprietary locking, sealing profiles, and 20,000 psi flange. Engineering
development efforts are on-going in subsea production systems.
In early 2016, the Company announced that it is establishing a research and development facility in Singapore that focuses on
materials and products suitable for HPHT applications. The new facility serves as an additional hub for research and development
activities for the Company.
Dril-Quip has numerous U.S. registered trademarks, including Dril-Quip®, Quik-Thread®, Quik-Stab®, Multi-Thread®, MS-
15®, SS-15®, SS-10®, SU-90®, DX® and TIW®. The Company has registered its trademarks in the countries where such
registration is deemed material.
Although in the aggregate, the Company’s patents and trademarks are of considerable importance to the manufacturing and
marketing of many of its products, the Company does not consider any single patent or trademark or group of patents or trademarks to
be material to its business as a whole, except the Dril-Quip® trademark. The Company also relies on trade secret protection for its
confidential and proprietary information. The Company routinely enters into confidentiality agreements with its employees and
suppliers. There can be no assurance, however, that others will not independently obtain similar information or otherwise gain access
to the Company’s trade secrets.
11
Competition
Dril-Quip faces significant competition from other manufacturers and suppliers of exploration and production equipment.
Several of its primary competitors are diversified multinational companies with substantially larger operating staffs and greater capital
resources than those of the Company and which, in many instances, have been engaged in the manufacturing business for a much
longer period of time than the Company. The Company competes principally with the petroleum production equipment segments of
Baker Hughes; Schlumberger, Ltd.; TechnipFMC plc; and Aker Solutions.
Because of their relative size and diversity of products, several of the Company’s competitors have the ability to provide
“turnkey” services for drilling and production applications, which enables them to use their own products to the exclusion of Dril-
Quip’s products. See “Item 1A. Risk Factors—We may be unable to successfully compete with other manufacturers of drilling and
production equipment.” The Company also competes to a lesser extent with a number of other companies in various products. The
principal competitive factors in the petroleum drilling and production equipment markets are quality, reliability and reputation of the
product, price, technology, service and timely delivery.
Employees
The total number of the Company's employees as of December 31, 2018 was 1,926. Of those 1,926 employees, 946 were located
in the United States. As a result of worldwide reductions in workforce and natural attrition, the total number of the Company's
employees as of December 31, 2019 was 1,814, a 6% reduction from December 31, 2018. Of those 1,814 employees, 906 were located
in the United States. Substantially all of the Company's employees are not covered by collective bargaining agreements, and the
Company considers its employee relations to be good.
The Company’s operations depend in part on its ability to attract quality employees. While the Company believes that its wage
and salary rates are competitive and that its relationship with its labor force is good, a significant increase in the wages and salaries
paid by competing employers could result in a reduction of the Company’s labor force, increases in the wage and salary rates paid by
the Company or both. If either of these events were to occur, in the near-term, the profits realized by the Company from work in
progress would be reduced and, in the long-term, the production capacity and profitability of the Company could be diminished and
the growth potential of the Company could be impaired. See “Item 1A. Risk Factors—Loss of our key management or other personnel
could adversely impact our business.”
Governmental Regulations
Many aspects of the Company’s operations are affected by political developments and are subject to both domestic and foreign
governmental regulations, including those relating to oilfield operations, the discharge of materials into the environment from our
manufacturing or other facilities, health and worker safety aspects of our operations, or otherwise relating to human health and
environmental protection. In addition, the Company depends on the demand for its services from the oil and gas industry and,
therefore, is affected by changing taxes, price controls and other laws and regulations relating to the oil and gas industry in general,
including those specifically directed to onshore and offshore operations. The adoption of laws and regulations curtailing 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 the Company’s products. See “Item 1A. Risk Factors—Our operations and our customers’ operations are subject
to a variety of governmental laws and regulations that may increase our costs, limit the demand for our products and services or
restrict our operations.”
In recent years, increased concern has been raised over the protection of the environment. Legislation to regulate emissions of
greenhouse gases has been introduced, but not enacted, in the U.S. Congress, and there has been a wide-ranging policy debate, both
nationally and internationally, regarding the impact of these gases and possible means for their regulation. In addition, efforts have
been made and continue to be made in the international community toward the adoption of international treaties or protocols that
would address global climate change issues, such as the annual United Nations Climate Change Conferences. In November 2015, the
United Nations Climate Change Conference (COP21) was held in Paris with the objective to achieve a legally binding and universal
agreement on climate, with the aim of keeping global warming below 2 C (Celsius), from all nations, regardless of size. The Paris
Agreement, signed by the U.S. on April 22, 2016, requires countries to review and “represent a progression” in their nationally
determined contributions, which set greenhouse gas emission reduction goals, every five years. However, in November 2019, the
United States initiated the process of withdrawing from the Paris Agreement. The earliest possible effective withdrawal date from the
Paris Agreement is November 2020. Also, the U.S. Environmental Protection Agency (EPA) has undertaken efforts to collect
information regarding greenhouse gas emissions and their effects. Following a finding by the EPA that certain greenhouse gases
represent a danger to human health, the EPA expanded its regulations relating to those emissions and adopted rules imposing
permitting and reporting obligations. The results of the permitting and reporting requirements could lead to further regulation of these
greenhouse gases by the EPA. Moreover, specific design and operational standards apply to U.S. outer continental shelf vessels, rigs,
platforms, vehicles, structures and equipment.
The U.S. Bureau of Safety and Environmental Enforcement (BSEE) regulates the design and operation of well control and other
equipment at offshore production sites, among other requirements. BSEE has adopted stricter requirements for subsea drilling
production equipment. In April 2016, BSEE published a final blowout preventer systems and well control rule, which focuses on
blowout preventer requirements and includes reforms in well design, well control, casing, cementing, real-time monitoring and subsea
containment, among other things. BSEE also finalized a rule in September 2016 concerning production safety systems for oil and
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natural gas operations on the Outer Continental Shelf. However, in December 2017, BSEE published a proposed rule that would revise
a number of the requirements in the September 2016 rule. The final rule implementing these revisions was published in September
2018. Subsequently, on May 2, 2019, BSEE issued the 2019 Well Control Rule, the revised well control and blowout preventer rule
governing Outer Continental Shelf (OCS) activities. The new rule revised the then existing regulations impacting offshore oil and gas
drilling, completions, workovers, and decommissioning activities. Specifically, the 2019 Well Control Rule addresses six areas of
offshore operations: well design, well control, casing, cementing, real-time monitoring , and subsea containment. The revisions were
targeted to ensure safety and environmental protection while correcting errors in the 2016 rule and reducing unnecessary regulatory
burden. In addition, drilling in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. For
example, in December 2016, the Obama administration banned offshore drilling in portions of the Arctic and Atlantic oceans.
Although the Trump administration announced a proposal in January 2018 to open most U.S. coastal waters to offshore drilling,
several coastal states have taken steps to prohibit offshore drilling. For example, California passed laws in September 2018 barring the
construction of new oil drilling-related infrastructure in state waters. Similarly, in November 2018, voters in Florida approved an
amendment to the state constitution that would ban oil and gas drilling in offshore state waters. Further, in December 2018,
environmental groups challenged incidental harassment authorizations issued by the National Marine Fisheries Service that allow
companies to conduct air gun seismic surveys for oil and gas exploration off the Atlantic coast. The attorneys general for nine coastal
states also sought to intervene as plaintiffs. To the extent that new laws or other governmental actions prohibit or restrict drilling or
impose additional environmental protection requirements that result in increased costs to the oil and gas industry in general and the
drilling industry in particular, the business of the Company could be adversely affected. Similarly, restrictions on authorizations
needed to conduct seismic surveys could impact our customers' ability to identify oil and gas reserves, thereby reducing demand for
our products. The Company cannot determine to what extent its future operations and earnings may be affected by new legislation,
new regulations or changes in existing regulations. See “Item 1A. Risk Factors—Our business and our customers’ businesses are
subject to environmental laws and regulations that may increase our costs, limit the demand for our products and services or restrict
our operations.”
Our operations are also governed by laws and regulations related to workplace safety and worker health, such as the
Occupational Safety and Health Act and regulations promulgated thereunder.
Based on the Company’s experience to date, the Company does not currently anticipate any material adverse effect on its
business or consolidated financial position as a result of future compliance with existing environmental, health and safety laws.
However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of
or by regulatory agencies, or stricter or different interpretations of existing laws and regulations, may require additional expenditures
by the Company, which may be material.
Executive Officers of the Registrant
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) to Form 10-K, the following
information is included in Part I of this Form 10-K:
The following table sets forth the names, ages (as of February 20, 2020 ) and positions of the Company’s executive officers:
Name
Blake T. DeBerry
Jeffrey J. Bird
James C. Webster
Raj Kumar
Age
60
53
50
47
Position
President, Chief Executive Officer and Director
Senior Vice President, Production Operations and
Chief Financial Officer
Vice President, General Counsel and Secretary
Vice President, Finance and Chief Accounting Officer
Blake T. DeBerry has been President and Chief Executive Officer and a member of the Board of Directors of the Company since
October 2011. Mr. DeBerry was Senior Vice President—Sales and Engineering from July 2011 until October 2011, and was Vice
President—Dril-Quip Asia Pacific (which covers the Pacific Rim, Asia, Australia, India and the Middle East) from March 2007 to
July 2011. He has been an employee of the Company since 1988 and has held a number of management and engineering positions in
the Company’s domestic and international offices. Mr. DeBerry holds a Bachelor of Science degree in mechanical engineering from
Texas Tech University.
Jeffrey J. Bird is Senior Vice President - Production Operations and Chief Financial Officer. He joined the Company in March
2017 as Vice President and Chief Financial officer and was promoted to his current position in February 2019. From December 2014
through February 2017, he was Executive Vice President and Chief Financial Officer of Frank's International, a provider of engineered
tubular services to the oil and gas industry. Prior to joining Frank's International, Mr. Bird was the Vice President of Finance and
Chief Financial Officer of Ascend Performance Materials, a provider of chemicals, fibers and plastics in Houston, Texas, from
September 2010. Prior to joining Ascend, Mr. Bird served in a variety of accounting and finance roles, primarily in the industrial
manufacturing sector including serving as a division Chief Financial Officer at Danaher Corporation. Mr. Bird holds a BA in
Accounting from Cedarville University in Ohio.
James C. Webster is Vice President, General Counsel and Secretary. He joined the Company in February 2011 as Vice President
and General Counsel and was elected to the additional position of Secretary in May 2011. From September 2005 until September
2010, he was Vice President, General Counsel and Secretary of M-I SWACO, at the time a joint venture between Smith International,
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Inc. and Schlumberger Ltd., and then was an area general counsel for Schlumberger from September 2010 to February 2011 following
Schlumberger’s acquisition of Smith International. From 1999 to September 2005, he was an associate with, and later a partner in, the
law firm of Gardere Wynne Sewell LLP (now part of Foley & Lardner LLP) in Houston. Mr. Webster holds an economics degree
from the University of Arizona and a joint Law/MBA from Loyola University.
Raj Kumar is Vice President - Finance and Chief Accounting Officer. He joined the Company in June 2017 as Vice President
and Treasurer and was promoted to his current position in February 2019. Prior to joining the Company, Mr. Kumar was the Vice
President of Integrated Supply Chain from October 2016 to May 2017 and the Vice President - Finance from March 2015 to October
2016 at Franks International. Prior to that, he served as Segment Controller – O&P Americas at LyondellBasell from December 2012
to December 2014. Prior to joining LyondellBasell, Mr. Kumar served in a variety of accounting, finance and strategic planning
roles with FMC Technologies, Inc. and Dell Inc. Mr. Kumar holds a BBA in accounting from Deakin University in Australia and an
MBA from Columbia University in New York.
Item 1A.
Risk Factors
In this Item 1A., the terms “we,” “our,” “us” and “Dril-Quip” used herein refer to Dril-Quip, Inc. and its subsidiaries unless
otherwise indicated or as the context so requires.
A material or extended decline in expenditures by the oil and gas industry could significantly reduce our revenue and
income.
Our business depends upon 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. The level of capital expenditures is generally
dependent on the prevailing view of future oil and gas prices, which are influenced by numerous factors affecting the supply and
demand for oil and gas, including:
• worldwide economic activity;
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the level of exploration and production activity;
interest rates and the cost of capital;
environmental regulation;
government initiatives to promote the use of renewable energy sources and public sentiment and consumer demand
regarding renewable energy and electric vehicles;
federal, state and foreign policies regarding exploration and development of oil and gas;
the ability and/or desire of OPEC and other major producers to set and maintain production levels and pricing;
governmental regulations regarding future oil and gas exploration and production;
the cost of exploring and producing oil and gas;
technological advances affecting energy consumption;
the cost of developing alternative energy sources;
the availability, expiration date and price of onshore and offshore leases;
the discovery rate of new oil and gas reserves in onshore and offshore areas;
the success of drilling for oil and gas in unconventional resource plays such as shale formations;
alternative opportunities to invest in onshore exploration and production opportunities;
technological advances and new techniques that render drilling more efficient or reduce demand for, and production of,
fossil fuels; and
• weather conditions and natural disasters.
Oil and gas prices and the level of drilling and production activity have been characterized by significant volatility in recent
years. Worldwide military, political and economic events have contributed to crude oil and natural gas price volatility and are likely to
continue to do so in the future. In addition, the effects of global health epidemics and concerns, such as the coronavirus (COVID-19),
could negatively impact demand for crude oil and natural gas in affected areas which could contribute to further price volatility.
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We expect continued pressure in both crude oil and natural gas prices, as well as in the level of drilling and production related
activities, particularly as they relate to offshore activities. Even during periods of high prices for oil and natural gas, companies
exploring for oil and gas may cancel or curtail programs, seek to renegotiate contract terms, including the price of our products and
services, or reduce their levels of capital expenditures for exploration and production for a variety of reasons. These risks are greater
during periods of low or declining commodity prices. The sustained lower crude oil and natural gas prices, along with lower drilling
and production activity, have had a negative impact on our results of operations.
We may not be able to satisfy technical requirements, testing requirements or other specifications under contracts and
contract tenders.
Our products are used primarily in deepwater, harsh environment and severe service applications. Our contracts with customers
and customer requests for bids typically set forth detailed specifications or technical requirements for our products and services, which
may also include extensive testing requirements. We anticipate that such testing requirements will become more common in our
contracts. In addition, scrutiny of the drilling industry has resulted in more stringent technical specifications for our products and more
comprehensive testing requirements for our products to ensure compliance with such specifications. We cannot assure you that our
products will be able to satisfy the specifications or that we will be able to perform the full-scale testing necessary to prove that the
product specifications are satisfied in future contract bids or under existing contracts, or that the costs of modifications to our products
to satisfy the specifications and testing will not adversely affect our results of operations. If our products are unable to satisfy such
requirements, or we are unable to perform any required full-scale testing, our customers may cancel their contracts and/or seek new
suppliers, and our business, results of operations, cash flows or financial position may be adversely affected.
We rely on technology provided by third parties and our business may be materially adversely affected if we are unable
to renew our licensing arrangements with them.
We have existing contracts and may enter into new contracts with customers that require us to use technology or to purchase
components from third parties, including some of our competitors. In the ordinary course of our business, we have entered into
licensing agreements with some of these third parties for the use of such technology, including a license from a competitor of a
technology important to our subsea wellheads. We may not be able to renew our existing licenses or to purchase these components on
terms acceptable to us, or at all. If we are unable to use a technology or purchase a component, we may not be able to meet existing
contractual commitments without increased costs or modifications or at all. In addition, we may need to stop selling products
incorporating that technology or component or to redesign our products, either of which could result in a material adverse effect on
our business and operations.
We may be unable to successfully compete with other manufacturers of drilling and production equipment.
Several of our primary competitors are diversified multinational companies with substantially larger operating staffs and greater
capital resources than ours and which have been engaged in the manufacturing business for a much longer time than us. If these
competitors substantially increase the resources they devote to developing and marketing competitive products and services, we may
not be able to compete effectively. Similarly, consolidation among our competitors could enhance their product and service offerings
and financial resources, further intensifying competition.
The loss of a significant customer could have an adverse impact on our financial results.
Our principal customers are major integrated oil and gas companies, large independent and foreign national oil and gas
companies throughout the world. Drilling contractors and engineering and construction companies also represent a portion of our
customer base. In 2019, our top 15 customers represented approximately 52% of total revenues, and BP and its affiliated companies
accounted for approximately 10% of total revenues. In 2018 and 2017, our top 15 customers represented approximately 56% and 49%
of total revenues, respectively, while BP and its affiliated companies accounted for approximately 13% of 2018 total revenues and
Chevron and its affiliated companies accounted for approximately 14% of 2017 total revenues. The loss of one or more of our
significant customers could have an adverse effect on our results of operations, financial position and cash flows.
Our customers’ industries are undergoing continuing consolidation that may impact our results of operations.
The oil and gas industry is rapidly consolidating and, as a result, some of our largest customers have consolidated and are using
their size and purchasing power to seek economies of scale and pricing concessions. This consolidation may result in reduced capital
spending by some of our customers or the acquisition of one or more of our primary customers, which may lead to decreased demand
for our products and services. We cannot assure you that we will be able to maintain our level of sales to a customer that has
consolidated or replace that revenue with increased business activity with other customers. As a result, the acquisition of one or more
of our primary customers may have a significant negative impact on our results of operations, financial position or cash flows. We are
unable to predict what effect consolidations in the industry may have on price, capital spending by our customers, our selling
strategies, our competitive position, our ability to retain customers or our ability to negotiate favorable agreements with our customers.
Increases in the cost of raw materials and energy used in our manufacturing processes could negatively impact our
profitability.
Any increases in commodity prices for items such as nickel, molybdenum and heavy metal scrap that are used to make the steel
alloys required for our products would result in an increase in our raw material costs. Similarly, any increase in energy costs would
15
increase our product costs. If we are not successful in raising our prices on products to compensate for any increased raw material or
energy costs, our margins will be negatively impacted.
We depend on third-party suppliers for timely deliveries of raw materials, and our results of operations could be
adversely affected if we are unable to obtain adequate supplies in a timely manner.
Our manufacturing operations depend upon obtaining adequate supplies of raw materials from third parties. The ability of these
third parties to deliver raw materials may be affected by events beyond our control. Any interruption in the supply of raw materials
needed to manufacture our products could adversely affect our business, results of operations and reputation with our customers.
Conditions in the global financial system may have impacts on our business and financial position that we currently
cannot predict.
Uncertainty in the credit markets may negatively impact the ability of our customers to finance purchases of our products and
services and could result in a decrease in, or cancellation of, orders included in our backlog or adversely affect the collectability of our
receivables. If the availability of credit to our customers is reduced, they may reduce their drilling and production expenditures,
thereby decreasing demand for our products and services, which could have a negative impact on our financial position. Additionally,
unsettled conditions could have an impact on our suppliers, causing them to be unable to meet their obligations to us. A prolonged
constriction on future lending by banks or investors could result in higher interest rates on future debt obligations or could restrict our
ability to obtain sufficient financing to meet our long-term operational and capital needs.
We are exposed to the credit risks of our customers, and a general increase in the nonpayment and nonperformance by
customers could have an adverse impact on our cash flows, results of operations and financial condition.
Our business is subject to risks of loss resulting from nonpayment or nonperformance by our customers. Certain of our
customers finance their activities through cash flow from operations, the incurrence of debt or the issuance of equity. In an economic
downturn, commodity prices typically decline, and the credit markets and availability of credit can be expected to be constrained.
Additionally, certain of our customers’ equity values could decline. The combination of lower cash flow due to commodity prices, a
reduction in borrowing bases under reserve-based credit facilities and the lack of available debt or equity financing may result in a
significant reduction in our customers’ liquidity and ability to pay or otherwise perform on their obligations to us. Furthermore, some
of our customers may be highly leveraged and subject to their own operating and regulatory risks, which increases the risk that they
may default on their obligations to us. Any increase in the nonpayment and nonperformance by our customers could have an adverse
impact on our operating results and could adversely affect our liquidity.
Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our
future revenues and earnings.
The revenues projected in our backlog may not be realized or, if realized, may not result in profits. All of the projects currently
included in our backlog are subject to change and/or termination at the option of the customer. In case of a change or termination, the
customer is generally required to pay us for work performed and other costs necessarily incurred as a result of the change or
termination.
We can give no assurance that our backlog will remain at current levels. Sales of our products are affected by prices for oil and
natural gas, which have fluctuated significantly and may continue to do so in the future. Contracts denominated in foreign currency are
also affected by changes in exchange rates, which may have a negative impact on our backlog. When drilling and production levels
are depressed, a customer may no longer need the equipment or services currently under contract or may be able to obtain comparable
equipment or services at lower prices. As a result, customers may delay projects, exercise their termination rights or attempt to
renegotiate contract terms.
For example, during the first quarter of 2018, Dril-Quip Asia-Pacific Pte Ltd. was awarded a contract to supply TTR systems
and related services for the development of the CRD Project located offshore Vietnam operated by Repsol with the participation of
Mubadala, PVEP and PetroVietnam. The CRD Project was terminated in the third quarter of 2019 and is no longer included within
the backlog balance as of December 31, 2019.
Continued declines in, or sustained low levels of, oil and natural gas prices could also reduce new customer orders, possibly
causing a decline in our future backlog. If we experience significant project terminations, suspensions or scope adjustments to
contracts reflected in our backlog, our financial condition, results of operations and cash flows may be adversely impacted.
Impairment in the carrying value of long-lived assets, inventory, intangible assets and goodwill could negatively affect
our operating results.
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.
As a result of continued unfavorable offshore market conditions and low commodity prices, the Company engaged in a strategic
review with a third-party firm in 2018. In conjunction with the strategic review, the Company adjusted its forecast for recovery to
reflect a more delayed recovery in the offshore industry, with pre-downturn demand not returning until after 2025. Additionally, the
Company pursued a global transformation, which included a reduction in workforce, realignment of facilities and restructuring of
operations. We expect this transformation to allow us to maintain our global footprint in key markets, while supporting an integrated
16
supply chain model that we expect to create more flexibility and allow us to continue serving our customers. The Company completed
the strategic restructuring in 2019. The full benefit of the restructuring is expected to be realized in 2020 and future years.
During the fourth quarter of 2018, we incurred inventory and long-lived asset write-downs of approximately $32.1 million and
$14.9 million, respectively, as a result of changes in our business structure and where specific products are manufactured. These
charges are reflected as Impairment, restructuring and other charges in our consolidated statement of operations. There were no
impairment charges recorded in the year ended December 31, 2019.
For goodwill, an assessment for impairment is performed annually or when there is an indication an impairment may have
occurred. We typically complete our annual impairment test for goodwill and other intangibles using an assessment date of October 1.
Goodwill is reviewed for impairment by comparing the carrying value of each of our three reporting units' 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, 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 calculated fair value.
In December 2018, the overall offshore market conditions declined. This decline was evidenced by lower commodity prices,
decline in expected offshore rig counts, decrease in our customers’ capital budgets and potential delays associated with certain of our
long term projects. Further, in December 2018 due to the decline in our stock price, our market capitalization dropped below the
carrying value of our assets. An interim goodwill impairment analysis was performed for the year ended December 31, 2018. Based
on this analysis, we recorded an impairment loss of $38.6 million for our Western Hemisphere reporting unit for the year ended
December 31, 2018. Following this impairment charge, the Western Hemisphere reporting unit has no remaining goodwill balance.
The remaining goodwill balance is associated with our Eastern Hemisphere reporting unit. Based on our interim goodwill impairment
analysis the fair value of the Eastern Hemisphere reporting unit exceeds its carry value by 71%. Further declines in the overall
offshore market, commodity prices, or sustained lower valuation for the Company’s common stock could indicate a reduction in the
estimate of the Eastern Hemisphere’s reporting unit fair value which, in turn, could lead to additional impairment charges associated
with goodwill. Goodwill is not amortized but rather tested for impairment annually on October 1 or when events occur or
circumstances change that would trigger such a review. The impairment test entails an assessment of qualitative factors to determine
whether it is more likely than not that an impairment exists. If it is more likely than not that an impairment exists, then a quantitative
impairment test is performed. Impairment exists when the carrying amount of a reporting unit exceeds its fair value. For the year
ended December 31, 2019, we performed an analysis of our goodwill and as a result of our qualitative assessment no impairment was
recorded.
During 2019, Brent crude oil prices fluctuated significantly, with a high of $74.94 per barrel, a low of $53.23 per barrel, and an
average of $64.28 per barrel. Continued weakness or volatility in market conditions may further deteriorate the financial performance
or future prospects of our operating segments from current levels, which may result in an impairment of long-lived assets, inventory or
goodwill and negatively impact our financial results in the period of impairment.
Our international operations expose us to instability and changes in economic and political conditions and other risks
inherent to international business, which could have a material adverse effect on our results of operations, financial position or
cash flows.
We have substantial international operations, with approximately 65.0% of our revenues derived from foreign sales in 2019,
61.0% in 2018 and 55.0% in 2017. We operate our business and market our products and services in many of the significant oil and
gas producing areas in the world and are, therefore, subject to the risks customarily attendant to international operations and
investments in foreign countries. Risks associated with our international operations include:
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volatility in general economic, social and political conditions;
terrorist threats or acts, war and civil disturbances;
expropriation or nationalization of assets;
renegotiation or nullification of existing contracts;
foreign taxation, including changes in laws or differing interpretations of existing laws;
assaults on property or personnel;
restrictive action by local governments;
foreign and domestic monetary policies;
limitations on repatriation of earnings;
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the occurrence of a trade war or other governmental action related to tariffs or trade agreements or policies;
travel limitations or operational problems caused by public health threats; and
changes in currency exchange rates.
Any of these risks could have an adverse effect on our ability to manufacture products abroad or the demand for our products
and services in some locations. To date, we have not experienced any significant problems in foreign countries arising from local
government actions or political instability, but there is no assurance that such problems will not arise in the future. Interruption of our
international operations could have a material adverse effect on our overall operations.
The recent outbreak of COVID-19 could adversely affect our business and results of operations.
The recent outbreak of a novel coronavirus (COVID-19) first identified in Wuhan, Hubei Province, China, could cause
disruption to our suppliers or their manufacturers located in China and elsewhere. Our suppliers and their manufacturers could be
disrupted by worker absenteeism, quarantines, or other travel or health-related restrictions as a result of COVID-19 outbreaks or
concern over COVID-19 or could incur increased costs associated with ensuring the safety and health of their personnel. If our
suppliers or their manufacturers are so affected, our supply chain could be disrupted, our product shipments could be delayed, our
costs could be increased and our business could be adversely affected.
Additionally, COVID-19 outbreaks or concern over COVID-19 could disrupt our operations by restricting employee travel and
increasing work absenteeism. Any such disruption in our operations could adversely affect our business.
The effects of global health epidemics and concerns, such as the coronavirus (COVID-19), could negatively impact demand and
prices for crude oil and natural gas.
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.
Doing business on a worldwide basis exposes us and our subsidiaries to risks inherent in complying with the laws and
regulations of a number of different nations, including various anti-bribery laws. We do business and have operations in a number of
developing countries that have relatively underdeveloped legal and regulatory systems compared to more developed countries. Several
of these countries are generally perceived as presenting a higher than normal risk of corruption, or as having a culture in which
requests for improper payments are not discouraged. As a result, we may be subject to risks under the U.S. Foreign Corrupt Practices
Act, the United Kingdom’s Bribery Act of 2010 and similar laws in other countries that generally prohibit companies and their
representatives from making, offering or authorizing improper payments to government officials for the purpose of obtaining or
retaining business. We have adopted policies and procedures, including our Code of Business Conduct and Ethical Practices, which
are designed to promote compliance with such laws. However, maintaining and administering an effective compliance program under
applicable anti-bribery laws in developing countries presents greater challenges than is the case in more developed countries.
In addition, the movement of goods, services and technology subjects us to complex legal regimes governing international trade.
Our import activities are governed by unique tariff and customs laws and regulations in each of the countries where we operate.
Further, many of the countries in which we do business maintain controls on the export or reexport of certain goods, services and
technology, as well as economic sanctions that prohibit or restrict business activities in, with or involving certain persons, entities or
countries. These laws and regulations concerning import and export activity, including their recordkeeping and reporting
requirements, are complex and frequently changing. Moreover, they may be adopted, enacted, amended, enforced or interpreted in a
manner that could materially impact our operations.
The precautions we take to prevent and detect misconduct, fraud or non-compliance with applicable laws and regulations
governing international trade, including anti-bribery laws, may not be able to prevent such occurrences, and we could face unknown
risks or losses. Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to criminal or civil
penalties, such as fines, imprisonment, sanctions, debarment from government contracts, seizure of shipments and loss of import and
export privileges. In addition, actual or alleged violations of such laws and regulations could be expensive and consume significant
time and attention of senior management to investigate and resolve, as well as damage our reputation and ability to do business, any of
which could have a material adverse effect on our business and our results of operations, financial position and cash flows. We are
also subject to the risks that our employees, agents and other representatives may act or fail to act in violation of such laws or
regulations or our compliance policies and procedures.
The results of the United Kingdom’s referendum on withdrawal from the European Union, including the subsequent exchange
rate fluctuations and political and economic uncertainties, may have a negative effect on global economic conditions, financial
markets and our business.
The June 23, 2016 referendum by British voters to exit the European Union (Brexit), and the uncertainty that has followed, has
adversely impacted global markets, including currencies, and resulted in a decline in the value of the British pound sterling, as
compared to the U.S. dollar and other currencies. Volatility in exchange rates could be expected to continue in the short to medium
term as the United Kingdom (U.K.) seeks U.K. Parliamentary approval for its terms of exit from the European Union, to the
uncertainty surrounding the date on which the U.K. will exit the European Union and the need for and terms of the U.K.’s new
international trade agreements. Exchange rate volatility could also be expected due to the risk that the U.K. might exit the European
Union (E.U.)without a withdrawal agreement in force. A weaker British pound sterling compared to the U.S. dollar during a reporting
period would cause local currency results of the Company's U.K. operations to be translated into fewer U.S. dollars. In addition, the
18
Company continues to monitor potential changes to trade and customs requirements as a result of Brexit. Continued adverse
consequences such as deterioration in economic conditions and volatility in currency exchange rates could have a negative impact on
the Company's financial position and results of operations.
On October 28, 2019, following the U.K.'s failure to exit the E.U. on the originally scheduled exit date of March 29, 2019, the
E.U. further extended the deadline for the U.K. to approve a negotiated withdrawal agreement to January 31, 2020. As of January 31,
2020 (“exit day”), the U.K. has formally left the E.U. Under the terms of the withdrawal agreement, a post-Brexit transition period
started on exit day and will end on December 31, 2020 unless extended (the end of the “transition period”). The transition period,
however, can be extended "for up to one or two years" in a one-off decision made by the joint U.K. and E.U. committee before June
30, 2020. Significant change is expected at the end of the transition period, even if a comprehensive future U.K. and E.U. relationship
is concluded within the transition period. Further, negotiations on the future U.K. and E.U. relationship are likely to continue after the
end of the transition period.
The consequences of Brexit and the negotiations that the U.K. is currently undertaking with other countries with a view to
replicating (where possible) the effects of the E.U.’s international trade agreements, which the U.K. will no longer benefit from,
together with the protracted negotiations around the terms of Brexit, could introduce significant uncertainties into global financial
markets and adversely impact the regions in which we and our clients operate. For example, importing and exporting activity from our
Aberdeen manufacturing facility could be subject to higher costs and delays, which could cause disruptions in our delivery schedules
to our customers. In the long term, Brexit could also create uncertainty with respect to the legal and regulatory requirements to which
we and our customers in the U.K. are subject and lead to divergent national laws and regulations as the U.K. government determines
which E.U. laws to modify or replace.
Continued adverse consequences, such as deterioration in economic conditions and volatility in currency exchange rates, and the
uncertainty surrounding Brexit could have a negative impact on the Company's financial position and results of operations.
We are subject to taxation in many jurisdictions and there are inherent uncertainties in the final determination of our
tax liabilities.
As a result of our international operations, we are subject to taxation in many jurisdictions. Accordingly, our effective income
tax rate and other tax obligations in the future could be adversely affected by a number of factors, including changes in the mix of
earnings in countries with differing statutory tax rates, the mix of business executed in deemed profit regimes compared to book
income regimes, changes in the valuation of deferred tax assets and liabilities, disagreements with taxing authorities with respect to
the interpretation of tax laws and regulations and changes in tax laws. In particular, foreign income tax returns of foreign subsidiaries
and related entities are routinely examined by foreign tax authorities, and these tax examinations may result in assessments of
additional taxes, interest or penalties. Refer to "Item 3. Legal Proceedings" regarding tax assessments in Brazil. We regularly assess all
of these matters to determine the adequacy of our tax provision, which is subject to discretion. If our assessments are incorrect, it
could have an adverse effect on our business and financial condition.
Moreover, the United States Congress, the Organization for Economic Co-operation and Development and other government
agencies in the other jurisdictions where we and our subsidiaries do business have had an extended focus on issues related to the
taxation of multinational corporations. One example is in the area of "base erosion and profit shifting," where payments are made
between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. As a result, the tax laws in the United
States and other countries in which we and our subsidiaries do business could change on a prospective or retroactive basis, and such
changes could adversely affect us.
Our excess cash is invested in various financial instruments which may subject us to potential losses.
We invest excess cash in various financial instruments including interest bearing accounts, money market mutual funds and
funds which invest in U.S. Treasury obligations and repurchase agreements backed by U.S. Treasury obligations. However, changes in
the financial markets, including interest rates, as well as the performance of the issuers, can affect the market value of our short-term
investments.
We may suffer losses as a result of foreign currency fluctuations and limitations on the ability to repatriate income or
capital to the United States.
We conduct a portion of our business in currencies other than the U. S. dollar, and our operations are subject to fluctuations in
foreign currency exchange rates. We cannot assure you that we will be able to protect the Company against such fluctuations in the
future. Further, we cannot assure you that the countries in which we currently operate will not adopt policies limiting repatriation of
earnings in the future.
Our foreign subsidiaries also hold significant amounts of cash that may be subject to both U.S. income taxes (subject to
adjustment for foreign tax credits) and withholding taxes of the applicable foreign country if we repatriate that cash to the United
States.
19
Our business involves numerous operating hazards that may not be covered by insurance. The occurrence of an event
not fully covered by insurance could have a material adverse effect on our results of operations, financial position and cash
flows.
Our products are used in potentially hazardous drilling, completion and production applications that can cause personal injury,
product liability and environmental claims. In addition, certain areas where our products are used, including in and near the U.S. Gulf
of Mexico, are close to high population areas and subject to hurricanes and other extreme weather conditions on a relatively frequent
basis. A catastrophic occurrence at a location where our equipment and/or services are used may expose us to substantial liability for
personal injury, wrongful death, product liability, environmental damage or commercial claims. Our general liability insurance
program includes an aggregate coverage limit of $200 million for claims with respect to property damage, injury or death and
pollution. However, our insurance policies may not cover fines, penalties or costs and expenses related to government-mandated
cleanup of pollution. In addition, our insurance does not provide coverage for all liabilities, and we cannot assure you that our
insurance coverage will be adequate to cover claims that may arise or that we will be able to maintain adequate insurance at rates we
consider reasonable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our results of
operations, financial position and cash flows.
We attempt to further limit our liability through contractual indemnification provisions with our customers. We generally seek to
enter into contracts for the provision of our products and services that provide for (1) the responsibility of each party to the contract
for personal injuries to, or the death of, its employees and damages to its property, (2) cross-indemnification with other contractors
providing products and/or services to the other party to the contract with respect to personal injury, death and property damage and
(3) the operator being responsible for claims brought by third parties for personal injury, death, property loss or damage relating to
pollution or other well control events. Due to competitive market pressures, we may not be able to successfully obtain favorable
contractual provisions, and a failure to do so may increase our risks and costs, which could materially impact our results of operations.
In addition, we cannot assure you that any party that is contractually obligated to indemnify us will be financially able to do so or that
a court will enforce all such indemnities.
We may lose money on fixed-price contracts.
A portion of our business consists of the designing, manufacturing and selling of our equipment for major projects pursuant to
competitive bids, and is performed on a fixed-price basis. Under these contracts, we are typically responsible for all cost overruns,
other than the amount of any cost overruns resulting from requested changes in order specifications. Our actual costs and any gross
profit realized on these fixed-price contracts may vary from the estimated amounts on which these contracts were originally based.
This may occur for various reasons, including:
•
•
•
errors in estimates or bidding;
changes in availability and cost of labor and materials;
variations in productivity from our original estimates; and
• material changes in foreign currency exchange rates.
These variations and the risks inherent in our projects may result in reduced profitability or losses on projects. Depending on the
size of a project, variations from estimated contract performance could have a material adverse impact on our operating results.
Our business could be adversely affected if we do not develop new products and secure and retain patents related to our
products.
Technology is an important component of our business and growth strategy, and our success as a company depends to a
significant extent on the development and implementation of new product designs and improvements. Whether we can continue to
develop systems and services and related technologies to meet evolving industry requirements and, if so, at prices acceptable to our
customers will be significant factors in determining our ability to compete in the industry in which we operate. Many of our
competitors are large multinational companies that may have significantly greater financial resources than we have, and they may be
able to devote greater resources to research and development of new systems, services and technologies than we are able to do.
Our ability to compete effectively will also depend on our ability to continue to obtain patents on our proprietary technology and
products. Although we do not consider any single patent to be material to our business as a whole, the inability to protect our future
innovations through patents could have a material adverse effect.
We may be required to recognize a charge against current earnings because of over time method of accounting.
Revenues and profits on long-term project contracts are recognized on an over time basis. We calculate the percent complete and
apply the percentage to determine revenues earned and the appropriate portion of total estimated costs. Accordingly, purchase order
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. To the extent that these adjustments result in a reduction or elimination of
previously reported profits, we would have to recognize a charge against current earnings, which could be significant depending on
the size of the project or the adjustment.
20
Loss of our key management or other personnel could adversely impact our business.
We depend on the continued services of our executive officers and other key members of management, particularly our
President and Chief Executive Officer. From time to time, there may be changes in our executive management team resulting from the
hiring or departure of executives. Such changes in our executive management team may be disruptive to our business. The loss of one
or more of our key employees or groups could have a material adverse effect on our results of operations, financial position and cash
flows.
Acquisitions, dispositions and investments may not result in anticipated benefits and may present risks not originally
contemplated, which could have a material adverse effect on our financial condition, results of operations and cash flows.
From time to time, we evaluate purchases and sales of assets, businesses or other investments. These transactions may not result
in the anticipated realization of savings, creation of efficiencies, offering of new products or services, generation of cash or income or
reduction of risk. In addition, acquisitions may be financed by borrowings, requiring us to incur debt, or by the issuance of our
common stock. These transactions involve numerous risks, and we cannot ensure that:
•
•
•
•
•
any acquisition would be successfully integrated into our operations and internal controls;
the due diligence conducted prior to an acquisition would uncover situations that could result in financial or legal exposure;
the use of cash for acquisitions would not adversely affect our cash available for capital expenditures and other uses;
any disposition, investment, acquisition or integration would not divert management resources from the operation of our
business; or
any disposition, investment, acquisition or integration would not have a material adverse effect on our financial condition,
results of operations or cash flows.
Restrictions in the agreement governing the Asset Backed Loan (ABL) Credit Facility could adversely affect our
business, financial condition and results of operations.
The operating and financial restrictions in the ABL Credit Facility and any future financing agreements could restrict our ability
to finance future operations, capital needs or to access to capital at a reasonable cost or otherwise pursue our business activities. For
example, ABL Credit Facility limits our and our subsidiaries’ ability to, among other things:
•
•
incur additional debt or issue guarantees;
incur or permit certain liens to exist;
• make certain investments, acquisitions or other restricted payments, including payments for the purchase of equity interests
in the Company;
dispose of assets;
engage in certain types of transactions with affiliates;
•
•
• merge, consolidate or transfer all or substantially all of our assets; and
•
prepay certain indebtedness.
Furthermore, the ABL Credit Facility contains a covenant requiring us to maintain a fixed charge coverage ratio of 1.1 to 1.0
based on the ratio of consolidated EBITDA to fixed charges when availability under the ABL Credit Facility falls below the greater of
$15 million and 20% of the lesser of the borrowing base and aggregate commitments.
In addition, any borrowings under the ABL Credit Facility may be at variable rates of interest that expose us to interest rate risk.
If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed
will remain the same, and our net income and cash flows will correspondingly decrease.
A failure to comply with the covenants in the agreement governing the ABL Credit Facility could result in an event of default,
which, if not cured or waived, would permit the exercise of remedies against us that could have a material adverse effect on our
business, results of operations and financial position. Remedies under the ABL Credit Facility include foreclosure on the collateral
securing the indebtedness and termination of the commitments under the ABL Credit Facility, and any outstanding borrowings under
the ABL Credit Facility may be declared immediately due and payable.
Our operations and our customers’ operations are subject to a variety of governmental laws and regulations that may
increase our costs, limit the demand for our products and services or restrict our operations.
Our business and our customers’ businesses may be significantly affected by:
•
•
federal, state, local and foreign laws and other regulations relating to the oilfield operations, worker safety and the
protection of the environment;
changes in these laws and regulations;
21
•
•
levels of enforcement of these laws and regulations; and
interpretation of existing laws and regulations.
In addition, we depend on the demand for our products and services from the oil and gas industry. This demand is affected by
changing taxes, price controls and other laws and regulations relating to the oil and gas industry in general, including those
specifically directed to offshore operations. For example, the adoption of laws and regulations curtailing exploration and development
drilling for oil and gas for economic or other policy reasons could adversely affect our operations by limiting demand for our products.
We cannot determine the extent to which our future operations and earnings may be affected by new legislation, new regulations or
changes in existing regulations and enforcement thereof.
Various new regulations intended to improve particularly offshore safety systems and environmental protection have been
issued since 2010 that have increased the complexity of the drilling permit process and may limit the opportunity for some operators
to continue deepwater drilling in the U.S. Gulf of Mexico, which could adversely affect the Company’s financial operations. Third-
party challenges to industry operations in the U.S. Gulf of Mexico may also serve to further delay or restrict activities. If the new
regulations, policies, operating procedures and possibility of increased legal liability are viewed by our current or future customers as
a significant impairment to expected profitability on projects, they could discontinue or curtail their operations, thereby adversely
affecting our financial operations by decreasing demand for our products.
Because of our foreign operations and sales, we are also subject to changes in foreign laws and regulations that may encourage
or require hiring of local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular
jurisdiction. If we fail to comply with any applicable law or regulation, our business, results of operations, financial position and cash
flows may be adversely affected.
Our businesses and our customers’ businesses are subject to environmental laws and regulations that may increase our
costs, limit the demand for our products and services or restrict our operations.
Our operations and the operations of our customers are also subject to federal, state, local and foreign laws and regulations
relating to the protection of human health and the environment. These environmental laws and regulations affect the products and
services we design, market and sell, as well as the facilities where we manufacture our products. For example, our operations are
subject to numerous and complex laws and regulations that, among other things, may regulate the management and disposal of
hazardous and non-hazardous wastes; require acquisition of environmental permits related to our operations; restrict the types,
quantities and concentrations of various materials that can be released into the environment; limit or prohibit operation activities in
certain ecologically sensitive and other protected areas; regulate specific health and safety criteria addressing worker protection;
require compliance with operational and equipment standards; impose testing, reporting and record-keeping requirements; and require
remedial measures to mitigate pollution from former and ongoing operations. We are required to invest financial and managerial
resources to comply with such environmental, health and safety laws and regulations and anticipate that we will continue to be
required to do so in the future. In addition, environmental laws and regulations could limit our customers’ exploration and production
activities. These laws and regulations change frequently, which makes it impossible for us to predict their cost or impact on our future
operations. For example, legislation to regulate emissions of greenhouse gases has been introduced, but not enacted, in the U.S.
Congress, and there has been a wide-ranging policy debate, both nationally and internationally, regarding the impact of these gases
and possible means for their regulation. In addition, efforts have been made and continue to be made in the international community
toward the adoption of international treaties or protocols that would address global climate change issues, such as the annual United
Nations Climate Change Conferences, including the United Nations Climate Change Conference in Paris (COP 21) in November
2015, which resulted in the creation of the Paris Agreement. The Paris Agreement, signed by the U.S. on April 22, 2016, requires
countries to review and “represent a progression” in their nationally determined contributions, which set greenhouse gas emission
reduction goals, every five years. However, in November 2019, the United States initiated the process of withdrawing from the Paris
Agreement. The earliest possible effective withdrawal date from the Paris Agreement is November 2020. Also, the EPA has
undertaken efforts to collect information regarding greenhouse gas emissions and their effects. Following a finding by the EPA that
certain greenhouse gases represent a danger to human health, the EPA expanded its regulations relating to those emissions and
adopted rules imposing permitting and reporting obligations. The results of the permitting and reporting requirements could lead to
further regulation of these greenhouse gases by the EPA. Subsequent to the Paris Agreement, there has been no significant legislative
progress in cap and trade proposals or greenhouse gas emission reductions. The adoption of legislation or regulatory programs to
reduce greenhouse gas emissions could also increase the cost of consuming, and thereby reduce demand for, the hydrocarbons that our
customers produce. Consequently, such legislation or regulatory programs could have an adverse effect on our financial condition and
results of operations. It is too early to determine whether, or in what form, further regulatory action regarding greenhouse gas
emissions will be adopted or what specific impact a new regulatory action might have on us or our customers. Generally, the
anticipated regulatory actions do not appear to affect us in any material respect that is different, or to any materially greater or lesser
extent, than other companies that are our competitors. However, our business and prospects could be adversely affected to the extent
laws are enacted or modified or other governmental action is taken that prohibits or restricts our customers’ exploration and
production activities or imposes environmental protection requirements that result in increased costs to us or our customers.
22
In addition to potential impacts on our business resulting from climate-change legislation or regulations, our business also could
be negatively affected by climate-change related physical changes or changes in weather patterns. An increase in severe weather
patterns could result in damages to or loss of our equipment, impact our ability to conduct our operations and/or result in a disruption
of our customers’ operations. There have also been efforts in recent years to influence the investment community, including
investment advisors and certain sovereign wealth, pension and endowment funds, promoting divestment of fossil fuel equities and
pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and
initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and
ability to access capital.
Environmental laws may provide for “strict liability” for damages to natural resources or threats to public health and safety,
rendering a party liable for environmental damage without regard to negligence or fault on the part of such party. Sanctions for
noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution.
Some environmental laws and regulations provide for joint and several strict liability for remediation of spills and releases of
hazardous substances. In addition, we may be subject to claims alleging personal injury or property damage as a result of alleged
exposure to hazardous substances, as well as damage to natural resources. These laws and regulations also may expose us to liability
for the conduct of or conditions caused by others, or for our acts that were in compliance with all applicable laws and regulations at
the time such acts were performed. Any of these laws and regulations could result in claims, fines or expenditures that could be
material to results of operations, financial position and cash flows.
Our business could be adversely affected by a failure or breach of our information technology systems.
Our business operations depend on our information technology (IT) systems. Despite our security and back-up measures, our IT
systems are vulnerable to cyber incidents or attacks, natural disasters and other disruptions or failures. Due to the nature of cyber-
attacks, breaches to our IT systems could go unnoticed for a prolonged period of time. The failure of our IT systems to perform as
anticipated for any reason or any significant breach of security could disrupt our business or the businesses of key customers or
suppliers and result in numerous adverse consequences, including reduced effectiveness and efficiency of our operations and those of
our customers or suppliers, the loss, theft, corruption or inappropriate disclosure of confidential information or critical data, including
sensitive employee and customer data, increased overhead costs, loss of revenue, legal liabilities and regulatory penalties, including
under data protection laws and regulations, loss of intellectual property and damage to our reputation, which could have a material
adverse effect on our business and results of operations. In addition, we may be required to incur significant costs to prevent or
respond to damage caused by these disruptions or security breaches in the future.
Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy and data
protection.
The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant
change. New laws and regulations governing data privacy and the unauthorized disclosure of confidential information, including the
European Union General Data Protection Regulation and recent California legislation, pose increasingly complex compliance
challenges and potentially elevate our costs. Any failure, or perceived failure, by us to comply with applicable data protection laws
could result in proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments
and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely
affect our business. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in
a violation of these laws. Additionally, if we acquire a company that has violated or is not in compliance with applicable data
protection laws, we may incur significant liabilities and penalties as a result.
The market price of our common stock may be volatile.
The trading price of our common stock and the price at which we may sell common stock in the future are subject to large
fluctuations in response to any of the following:
•
•
•
•
•
•
•
•
•
•
limited trading volume in our common stock;
quarterly variations in operating results;
general financial market conditions;
the prices of natural gas and oil;
announcements by us and our competitors;
our liquidity;
changes in government regulations;
our ability to raise additional funds;
our involvement in litigation; and
other events.
23
We do not anticipate paying dividends on our common stock in the near future.
We have not paid any dividends in the past and do not intend to pay cash dividends on our common stock in the foreseeable
future. Our Board of Directors reviews this policy on a regular basis in light of our earnings, financial position and market
opportunities. We currently intend to retain any earnings for the future operation and development of our business as well as potential
stock repurchases or acquisition opportunities.
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of the Company,
even if that change would be beneficial to our stockholders.
The existence of some provisions in our corporate documents and Delaware law could delay or prevent a change in control of
our company, even if that change would be beneficial to our stockholders. Our certificate of incorporation and bylaws contain
provisions that may make acquiring control of our company difficult, including:
•
•
•
•
provisions relating to the classification, nomination and removal of our directors;
provisions regulating the ability of our stockholders to bring matters for action at annual meetings of our stockholders;
provisions requiring the approval of the holders of at least 80% of our voting stock for a broad range of business
combination transactions with related persons; and
the authorization given to our Board of Directors to issue and set the terms of preferred stock.
In addition, the Delaware General Corporation Law imposes restrictions on mergers and other business combinations between
us and any holder of 15% or more of our outstanding common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Manufacturing Facilities
Location
Houston, Texas
—Hempstead Highway
—N. Eldridge Parkway
—S. Main Street
Aberdeen, Scotland
Singapore
Macae, Brazil
Building Size
(Approximate
Square Feet)
Land
(Approximate
Acreage)
Owned or
Leased
175,000
1,731,000
127,000
222,800
293,200
169,600
12.9
218
2.9
24.1
14.4
10.6
Owned
Owned
Owned
Owned
Leased
Owned
For additional information on our manufacturing facilities, see "Item 1. Business - General" and "Manufacturing".
24
Sales, Service and Reconditioning Facilities
Location*
Midland, Texas
Oklahoma City, Oklahoma*
Villahermosa, Mexico*
Anaco, Venezuela*
Quito, Ecuador
Shushufindi, Ecuador
Szolnok, Hungary
Beverwijk, Holland
Stavanger, Norway*
Esbjerg, Denmark
Takoradi, Ghana
Port Harcourt, Nigeria
Cairo, Egypt
Alexandria, Egypt
Doha, Qatar
Shekou, China
Perth and Welshpool, Australia
Mumbai, India
Jakarta, Indonesia
Kuala Lumpur, Malaysia
Beijing, China
Building Size
(Approximate
Square Feet)
10,000
6,000
12,400
3,000
2,600
135,800
4,300
32,000
42,000
19,100
2,500
6,600
2,200
5,200
8,900
11,100
28,000
130
150
400
120
Land
(Approximate
Acreage)
0.2
0.1
0.3
0.1
0.1
3.1
0.1
0.7
6.1
2.6
0.8
0.1
—
0.6
—
—
2.9
—
—
—
—
Activity
Sales/Service/Warehouse
Sales/Warehouse
Sales/Service/Warehouse
Sales/Service/Warehouse
Sales
Sales/Service/Warehouse
Sales/Service/Warehouse
Sales/Warehouse
Sales/Service/Reconditioning/Warehouse/Fabrication
Sales/Service/Reconditioning/Warehouse
Service/Reconditioning/Warehouse
Service/Reconditioning/Warehouse
Sales
Service/Reconditioning/Warehouse
Service/Reconditioning/Warehouse
Sales/Service/Warehouse
Sales/Service/Reconditioning/Warehouse
Sales
Sales
Sales
Sales
*These facilities are owned; all other facilities are leased.
The Company also performs sales, service and reconditioning activities at its facilities in Houston, Aberdeen, Singapore and
Macae. For additional information on our manufacturing facilities, see "Item 1. Business – General."
Item 3.
Legal Proceedings
Brazilian Tax Issue
From 2002 to 2007, the Company’s Brazilian subsidiary imported goods through the State of Espirito Santo in Brazil. Upon the
final sale of these goods, the Company’s Brazilian subsidiary collected taxes from customers and remitted them to the State of Rio de
Janeiro net of the taxes paid on importation of those goods to the State of Espirito Santo in accordance with the Company’s
understanding of Brazilian tax laws.
In December 2010 and January 2011, the Company’s Brazilian subsidiary was served with two assessments totaling
approximately $13.0 million from the State of Rio de Janeiro to cancel the credits associated with the tax payments to the State of
Espirito Santo (Santo Credits) on the importation of goods from July 2005 to October 2007. The Company has objected to these
assessments on the grounds that they would represent double taxation on the importation of the same goods and that the Company is
entitled to the credits under applicable Brazilian law. The Company’s Brazilian subsidiary filed appeals with a State of Rio de Janeiro
judicial court to annul both of these tax assessments following rulings against the Company by the tax administration’s highest
council. In connection with those appeals, the Company deposited with the court a total amount of approximately $8.8 million in
December 2014 and December 2016 as the full amount of the assessments with penalties and interest. The Company believes that
these credits are valid and that success in the judicial court process is probable. Based upon this analysis, the Company has not
accrued any liability in conjunction with this matter.
25
General
The Company operates its business and markets its products and services in most of the significant oil and gas producing areas
in the world and is, therefore, subject to the risks customarily attendant to international operations and dependency on the condition of
the oil and gas industry. Additionally, products of the Company are used in potentially hazardous drilling, completion, and production
applications that can cause personal injury, property damage and environmental claims. Although exposure to such risk has not
resulted in any significant problems in the past, there can be no assurance that ongoing and future developments will not adversely
impact the Company.
For a further description of the Company’s legal proceedings, see “Contingencies,” Note 15 of Notes to Consolidated Financial
Statements. The Company also is involved in a number of legal actions arising in the ordinary course of business. Although no
assurance can be given with respect to the ultimate outcome of such legal action, in the opinion of management, the ultimate liability
with respect thereto will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
Item 4.
Mine Safety Disclosure
Not applicable.
26
PART II
Item 5.
Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is publicly traded on the New York Stock Exchange under the symbol "DRQ."
There were approximately 306 stockholders of record of the Company’s common stock as of December 31, 2019. This number
includes the Company’s employees and directors that hold shares, but does not include the number of security holders for whom
shares are held in a “nominee” or “street” name.
The Company has not paid any dividends in the past and does not currently anticipate paying any dividends in the foreseeable
future. The Company intends to reinvest any retained earnings for the future operation and development of its business, or to use for
potential stock repurchases or acquisition opportunities. The Board of Directors will review this policy on a regular basis in light of
the Company’s earnings, financial position, market opportunities and restrictions under the ABL Credit Facility.
Information concerning securities authorized for issuance under equity compensation plans is included in "Stock-Based
Compensation and Stock Awards," Note 18 of Notes to Consolidated Financial Statements.
Repurchase of Equity Securities
The following table summarizes the repurchase and cancellation of our common stock during the year ended December 31, 2019
Twelve months ended December 31, 2019
Total Number of
Shares Purchased
Average Price
paid
per Share
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs (1)
Maximum Dollar
Value (in millions)
of Shares that
May
Yet be Purchased
Under the Plans
or Programs
-
-
28,078
-
21,173
900
-
26,842
48,895
292,888
197,164
-
615,940
$
$
-
-
39.74
-
39.87
39.98
-
44.66
44.34
42.81
43.91
-
43.12
-
-
28,078
-
21,173
900
-
26,842
48,895
292,888
197,164
-
615,940
$
$
100.0
100.0
98.9
-
98.0
98.0
-
96.8
94.6
82.1
73.4
-
73.4
January 1-31, 2019
February 1-28, 2019
March 1-31, 2019
April 1-30, 2019
May 1-31, 2019
June 1-30, 2019
July 1-31, 2019
August 1-31, 2019
September 1-30, 2019
October 1-31, 2019
November 1-30, 2019
December 1-31, 2019
(1) On February 26, 2019, the Company announced that its Board of Directors authorized a stock repurchase plan under which the Company is authorized to repurchase up to $100.0 million
of its common stock. The repurchase plan has no set expiration date and any repurchased shares are expected to be cancelled. During the year ended December 31, 2019, the Company
purchased 615,940 shares under the share repurchase plan at an average price of approximately $43.12 per share totaling approximately $26.6 million , pursuant to a 10b5-1 plan, which is
reflected in " Retained earnings" in the Consolidated Balance Sheet. All repurchased shares have been cancelled as of December 31, 2019.
Performance Graph
The following graph compares the cumulative total shareholder return on our common stock to the cumulative total shareholder
return on the Standard & Poor’s 500 Stock Index and the Philadelphia Oil Service Sector Index (“OSX”), an index of oil and natural
gas related companies that represents an industry composite of peers. This graph covers the period from December 31, 2014 through
December 31, 2019. This comparison assumes the investment of $100 on December 31, 2014 and the reinvestment of all dividends, if
any. The shareholder return set forth is not necessarily indicative of future performance.
27
COMPARISON OF 5 YEARS
CUMULATIVE TOTAL RETURN
Among Dril-Quip, Inc., the S&P 500 Index
and the Philadelphia Oil Service Index (OSX)
The performance graph above is furnished and not filed for purposes of Section 18 of the Exchange Act and will not be
incorporated by reference into any registration statement filed under the Securities Act of 1933, as amended (the “Securities Act”),
unless specifically identified therein as being incorporated therein by reference. The performance graph is not soliciting material
subject to Regulation 14A.
28
Item 6.
Selected Financial Data
The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included elsewhere in this report
on Form 10-K.
2019
Year Ended December 31,
2017
(In thousands, except per share amounts)
2018
2016
2015
Statement of Operations Data:
Revenues:
Products
Services
Leasing
Total revenues
Cost and expenses:
Cost of sales:
Products
Services
Leasing
Total cost of sales
Selling, general and administrative
Engineering and product development
Impairment, restructuring and other charges
Gain on Sale of Assets
Total costs and expenses
Operating income (loss)
Interest income
Interest expense
Income (loss) before income taxes
Income tax (benefit) provision
Net income (loss)
Earnings (loss) per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Statement of Cash Flows Data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Other Data:
Depreciation and amortization
Capital expenditures
Balance Sheet Data:
Working capital
Total assets
Total stockholders' equity
$
303,279
72,018
39,509
414,806
$
265,052
72,414
47,160
384,626
$
351,132
61,945
42,392
455,469
$
433,012
64,094
41,625
538,731
$
685,364
96,297
62,649
844,310
223,502
36,550
34,955
295,007
96,782
17,329
4,396
(1,511)
412,003
2,803
7,940
(314)
10,429
8,709
1,720
0.05
0.05
35,839
36,152
$
$
$
222,568
37,196
33,809
293,573
101,090
20,297
98,602
(6,198)
507,364
(122,738)
8,040
(291)
(114,989)
(19,294)
(95,695) $ (100,639) $
270,854
32,733
26,656
330,243
113,588
19,974
60,968
(168)
524,605
(69,136)
3,564
(72)
(65,644)
34,995
296,696
32,784
27,215
356,695
50,361
18,919
-
(103)
425,872
112,859
3,037
(28)
115,868
22,647
93,221
(2.58) $
(2.58) $
(2.69) $
(2.69) $
2.48
2.47
37,075
37,075
37,457
37,457
37,537
37,667
$
$
$
422,468
45,401
30,960
498,829
85,392
11,254
-
-
595,475
248,835
948
(12)
249,771
57,763
192,008
5.00
4.98
38,364
38,531
$
14,678
(8,471)
(24,572) $
$
45,503
(15,173)
(99,199) $
107,993
(44,892)
560
34,020
11,501
$
$
35,312
32,061
$
$
40,974
27,622
$
$
$
$
$
246,522
(157,849)
(21,893) $
190,155
(26,655)
(73,565)
31,857
25,763
$
$
30,477
27,079
$
$
$
$
$
$
$
2019
2018
As of December 31,
2017
(In thousands)
2016
2015
$
783,549
$ 1,206,565
$ 1,090,701
$
771,442
$ 1,192,510
$ 1,096,162
$
908,638
$ 1,399,805
$ 1,294,461
$
955,231
$ 1,461,404
$ 1,356,424
$ 1,023,483
$ 1,428,250
$ 1,324,458
29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of certain significant factors that have affected aspects of the
Company’s financial position, results of operations, comprehensive income and cash flows during the periods included in the
accompanying consolidated financial statements. This discussion should be read in conjunction with the Company’s consolidated
financial statements and notes thereto presented elsewhere in this report.
Overview
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. Dril-Quip's products are used by major integrated,
large independent and foreign national oil and gas companies and drilling contractors throughout the world. 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 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.
Oil and Gas Prices
Both 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. See “Item 1A. Risk Factors—A material or extended decline in expenditures by the oil and
gas industry could significantly reduce our revenue and income.”
During 2019, Brent crude oil prices fluctuated significantly, with a high of $74.94 per barrel, a low of $53.23 per barrel, and an
average of $64.28 per barrel compared to an average of $71.34 per barrel in 2018 and $54.15 per barrel in 2017. According to the
January 2020 release of the Short-Term Energy Outlook published by the EIA, Brent crude oil prices are projected to average $64.83
per barrel in 2020 and $67.53 per barrel in 2021. The International Energy Agency projected the global oil demand to grow by
approximately 1.2 million barrels per day to a total of 101.5 million barrels per day in 2020 based on its December 2019 Oil Market
Report.
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 years ended December 31, 2019, 2018 and 2017. 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.
Western Hemisphere
Eastern Hemisphere
Asia Pacific
Total
2019
2018
2017
Floating Rigs
52
63
39
154
Jack-up Rigs
43
74
252
369
Floating Rigs
56
57
34
147
Jack-up Rigs
37
63
231
331
Floating Rigs
58
56
34
148
Jack-up Rigs
41
60
222
323
Source: IHS—Petrodata RigBase— December 31, 2019, 2018 and 2017
According to IHS-Petrodata RigBase, as of December 31, 2019, there were 540 rigs contracted for the Company’s geographic
regions (156 floating rigs and 384 jack-up rigs), which represents a 10.9% increase from the rig count of 487 rigs (146 floating rigs
and 341 jack-up rigs) as of December 31, 2018. The December 31, 2018 rig count represented a 3.4% increase from the rig count on
December 31, 2017 of 471 rigs (148 floating rigs and 323 jack-up rigs).
The Company believes that the number of rigs (semi-submersibles, drillships and jack-up rigs) under construction impacts its
backlog and resulting revenues because in certain cases, its customers order some of the Company’s products during the construction
of such rigs. As a result, an increase in rig construction activity tends to favorably impact the Company’s backlog while a decrease in
rig construction activity tends to negatively impact the Company’s backlog. According to IHS-Petrodata RigBase, at the end of 2019,
2018 and 2017, there were 72, 121, and 138 rigs, respectively, under construction.
The expected delivery dates for the rigs under construction on December 31, 2019 are as follows:
2020
2021
2022
Total
Floating Rigs
Jack-up Rigs
Total
16
8
2
26
30
36
7
3
46
52
15
5
72
However, given the sustained low level of oil and gas prices and oversupply of offshore drilling rigs, the Company believes it is
possible that delivery of some rigs under construction could be postponed or cancelled, limiting the opportunity for supply of the
Company's products.
Regulation
The demand for the Company’s products and services is also affected by laws and regulations relating to the oil and gas industry
in general, including those specifically directed to offshore operations. The adoption of new laws and regulations, or changes to
existing laws or regulations that curtail exploration and development drilling for oil and gas for economic or other policy reasons,
could adversely affect the Company’s operations by limiting demand for its products.
In March 2018, the President of the United States issued a proclamation imposing a 25 percent global tariff on imports of certain
steel products, effective March 23, 2018. The President subsequently proposed an additional 25 percent tariff on approximately $50
billion worth of imports from China, and the government of China responded with a proposal of an additional 25 percent tariff on U.S.
goods with a value of $50 billion. The initial U.S. tariffs were implemented on July 6, 2018, covering $34 billion worth of Chinese
goods, with another $16 billion of goods facing tariffs beginning on August 23, 2018.
In September 2018, the President directed the U.S. Trade Representative (USTR) to place additional tariffs on approximately
$200 billion worth of additional imports from China. These tariffs, which took effect on September 24, 2018, were initially set at a
level of 10 percent until the end of the year, at which point the tariffs were to rise to 25 percent. However, on December 19, 2018,
USTR postponed the date on which the rate of the additional duties would increase to 25 percent until March 2, 2019. On May 9,
2019, USTR announced that the United States increased the level of tariffs from 10 percent to 25 percent on approximately $200
billion worth of Chinese imports. The President also ordered USTR to begin the process of raising tariffs on essentially all remaining
imports from China, which are valued at approximately $300 billion. On August 13, 2019 and August 23, 2019, USTR announced the
imposition of an additional tariff of 15 percent on approximately $300 billion worth of Chinese imports, effective September 1, 2019
(or December 15, 2019 for certain articles). 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 are
currently underway and could lead to additional changes to the tariff rates described above.
In November 2018, the United States, Mexico and Canada signed the United States-Mexico-Canada Agreement (USMCA), the
successor agreement to the North American Free Trade Agreement (NAFTA). Mexico and the United States have ratified the new
agreement, but the USMCA still requires ratification by Canada before going into effect.
The imposition of any additional tariffs or initiation of trade restrictions by or against the United States or the failure by Canada
to ratify the USMCA could cause our cost of raw materials to increase or affect the markets for our products. However, given the
uncertainty regarding the scope and duration of these trade actions by the United States and other countries, their ultimate impact on
our business and operations remains uncertain.
Business Environment
Oil and gas prices and the level of drilling and production activity have been characterized by significant volatility in recent
years. Worldwide military, political, economic and other events have contributed to oil and natural gas price volatility and are likely to
continue to do so in the future. Lower crude oil and natural gas prices have resulted in a trend of customers seeking to renegotiate
contract terms with the Company, including reductions in the prices of its products and services, extensions of delivery terms and, in
some instances, contract cancellations or revisions. In some cases, a customer may already hold an inventory of the Company’s
equipment, which may delay the placement of new orders. In addition, some of the Company’s customers could experience liquidity
or solvency issues or could otherwise be unable or unwilling to perform under a contract, which could ultimately lead a customer to
enter bankruptcy or otherwise encourage a customer to seek to repudiate, cancel or renegotiate a contract. An extended period of
reduced crude oil and natural gas prices may accelerate these trends. If the Company experiences significant contract terminations,
suspensions or scope adjustments to its contracts, then its financial condition, results of operations and cash flows may be adversely
impacted.
The Company expects continued pressure in both crude oil and natural gas prices, as well as in the level of drilling and
production related activities. Even during periods of high prices for oil and natural gas, companies exploring for oil and gas may
cancel or curtail programs, seek to renegotiate contract terms, including the price of products and services, or reduce their levels of
capital expenditures for exploration and production for a variety of reasons. Lower drilling and production activity that had a negative
impact on the Company’s results for the year ended December 31, 2018 improved slightly in certain markets in 2019. A prolonged
delay in the recovery of commodity prices could also lead to further material impairment charges to tangible or intangible assets or
otherwise result in a material adverse effect on the Company's results of operations.
31
The Company operates its business and markets its products and services in most of the significant oil and gas producing areas
in the world and is, therefore, subject to the risks customarily attendant to international operations and investments in foreign
countries. These risks include nationalization, expropriation, war, acts of terrorism and civil disturbance, restrictive action by local
governments, limitation on repatriation of earnings, change in foreign tax laws and change in currency exchange rates, any of which
could have an adverse effect on either the Company’s ability to manufacture its products in its facilities abroad or the demand in
certain regions for the Company’s products or both. To date, the Company has not experienced any significant problems in foreign
countries arising from local government actions or political instability, but there is no assurance that such problems will not arise in
the future. Interruption of the Company’s international operations could have a material adverse effect on its overall operations.
Revenues . Dril-Quip’s revenues are generated from three sources: products, services and leasing rental tools. Product revenues
are derived from the sale of drilling and production equipment. Service revenues are earned when the Company provides technical
advisory assistance and rental tools during installation and retrieval of the Company’s products. Additionally, the Company earns
service revenues when rework and reconditioning services are provided. In 2019, the Company derived 73.1% of its revenues from the
sale of its products, 17.4% of its revenues from services and 9.5% of its revenues from leasing rental tools, compared to 68.9%, 18.8%
and 12.3% for products, services and leasing rental tools in 2018, respectively, and 77.1%, 13.6% and 9.3% for products, services and
leasing rental tools in 2017, respectively. During 2019, we leased our forge facilities and equipment to AFGlobal Corporation, which
also has an option to acquire those same assets. Service and leasing revenues generally correlate to revenues from product sales
because increased product sales typically generate increased demand for technical advisory assistance services during installation and
rental of running tools. However, customer stocking and destocking can affect the correlation between demand for services and
product sales. The Company has substantial international operations, with approximately 65.0% of its revenues derived from foreign
sales in 2019, 61.0% in 2018 and 55.0% in 2017. Substantially all of the Company’s domestic revenue relates to operations in the U.S.
Gulf of Mexico. Domestic revenue approximated 35.0% of the Company’s total revenues in 2019, 39.0% in 2018 and 45.0% in 2017.
Product contracts are typically 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 as a
result of 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, maintenance of market share, the introduction of new products and general market conditions.
The Company accounts for larger and more complex projects that have relatively longer manufacturing time frames on an over
time basis. During 2019, there were 36 projects that were accounted for using the over time method, which represented approximately
20.5% of the Company’s total revenues and 28.0% of the Company’s product revenues. During 2018, there were 22 projects that were
accounted for using the over time method, which represented approximately 16.0% of the Company’s total revenues and 23.0% of the
Company’s product revenues. During 2017, there were eight projects that were accounted for using the over time method, which
represented approximately 13.0% of the Company’s total revenues and 16.0% of the Company’s 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.
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. See “Item 1A.
Risk Factors—We may be required to recognize a charge against current earnings because of over time method of accounting.”
Cost of Sales. The principal elements of cost of sales are labor, raw materials and manufacturing overhead. 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 and market conditions. The Company’s costs related to its foreign
operations do not significantly differ from its domestic costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses include the costs associated with
sales and marketing, general corporate overhead, business development expenses, compensation expense, stock-based compensation
expense, legal expenses, foreign currency transaction gains and losses and other related administrative functions. The Company’s
U.K. subsidiary, whose functional currency is the British pound sterling, conducts a portion of its operations in U.S. dollars. As a
result, this subsidiary holds significant monetary assets denominated in U.S. dollars. These monetary assets are subject to changes in
exchange rates between the U.S. dollar and the British pound sterling, which has resulted in pre-tax non-cash foreign currency (gains)
loss during the years ended December 31, 2019, 2018 and 2017 totaling $(1.6) million, $(1.0) million and $8.3 million, respectively .
Engineering and Product Development Expenses. Engineering and product development expenses consist of new product
development and testing, as well as application engineering related to customized products.
Impairment, Restructuring and Other Charges. During 2019, we incurred approximately $4.4 million of expenses primarily
associated with professional fees related to our strategic restructuring and approximately $1.1 million in severance payout to our
former Chief Operating Officer, pursuant to a separation agreement entered into with him during the first quarter of 2019. No goodwill
impairment losses were recorded for the year ended December 31, 2019.
32
For the year ended December 31, 2018, we incurred impairment, restructuring and other charges consisting of certain goodwill,
inventory, long-lived assets and other restructuring costs of $38.6 million, $32.1 million, $14.9 million and $13.0 million,
respectively.
For the year ended December 31, 2017, the balance consisted of certain inventory and fixed asset write-downs of $27.4 million
and $33.6 million, respectively. For more detail, see "Impairment, Restructuring and Other Charges", Note 7 of Notes to Consolidated
Financial Statements and "Goodwill," Note 8 of Notes to Consolidated Financial Statements.
Income Tax Provision. Income tax expense for 2019 was $8.7 million on net income before taxes of $10.4 million, resulting in
an effective income tax rate of 83.5%. Income tax benefit for 2018 was $19.3 million on net loss before taxes of $115.0 million,
resulting in an effective income tax rate of 16.8%. Income tax expense in 2017 was $35.0 million on net loss before taxes of $65.6
million, resulting in an effective tax rate of approximately negative 53.3%. The change in the 2019 effective income tax rate was
primarily impacted by changes in valuation allowance positions against the net U.S. deferred tax assets as well as those in various
foreign countries, the mix of foreign income taxed at different statuory rates, non-taxable income, non-deductible expenses, foreign
income inclusions and foreign tax credits.
Results of Operations
The following table sets forth, for the periods indicated, certain consolidated statement of income data expressed as a percentage
of revenues:
Year Ended December 31,
2018
2017
2019
Revenues:
Products
Services
Leasing
Total revenues
Cost of sales:
Products
Services
Leasing
Total cost of sales
Selling, general and administrative
Engineering and product development
Impairment, restructuring and other charges
Gain on sale of assets
Total costs and expenses
Operating income (loss)
Interest income
Interest expense
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
73.1%
17.4
9.5
100.0
53.9
8.8
8.4
71.1
23.3
4.2
1.1
(0.4)
99.3
0.7
1.9
(0.1)
2.5
2.1
0.4%
68.9%
18.8
12.3
100.0
57.6
9.7
8.8
76.1
26.3
5.3
25.6
(1.6)
131.7
(31.7)
2.1
(0.1)
(29.7)
(5.0)
(24.7)%
77.1%
13.6
9.3
100.0
59.5
7.2
5.9
72.5
24.9
4.4
13.4
-
115.2
(15.2)
0.8
-
(14.4)
7.7
(22.1)%
The following table sets forth, for the periods indicated, a breakdown of our products and service revenues:
2019
Year Ended December 31,
2018
(In millions)
2017
Revenues:
Products:
Subsea equipment
Downhole tools
Surface equipment
Offshore rig equipment
Total products
Services
Leasing
Total revenues
$
$
245.3
28.5
19.4
10.1
303.3
72.0
39.5
414.8
$
$
209.1
32.2
19.6
4.1
265.0
72.4
47.2
384.6
$
$
291.2
33.4
14.5
12.1
351.2
61.9
42.4
455.5
33
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenues. Revenues increased by $30.2 million, or approximately 7.8%, to $414.8 million in 2019 from $384.6 million in 2018.
The overall increase in revenue was driven by increased product revenues of $38.3 million, partially offset by decreased service
revenues of $0.4 million and leasing revenues of $7.7 million. Product revenues increased by approximately $38.3 million for the year
ended December 31, 2019 compared to the same period in 2018 as a result of increased revenues of $36.2 million in subsea equipment
and $6.0 million in offshore rig equipment, partially offset by decreased revenues of $3.7 million and $0.2 million in downhole tools
and surface equipment sales, respectively. Product revenues increased in Asia Pacific by $32.1 million and $14.4 million in the
Eastern Hemisphere, partially offset by decreased revenues of $8.2 million in the Western Hemisphere. The overall increased revenues
were largely due to increases in the demand for exploration and production equipment, especially subsea equipment, as a result of
improving market conditions in 2019. In any given time period, the revenues recognized between the various product lines and
geographic areas will vary depending upon the timing of shipments to customers, completion status of the projects accounted for
under the over time method, market conditions and customer demand. Service revenues decreased by approximately $0.4 million,
resulting from decreased service revenues in the Eastern Hemisphere of $1.2 million and in Asia Pacific of $0.9 million, partially
offset by an increase in the Western Hemisphere of $1.7 million. The decreased service revenues were largely due to decreased
technical advisory assistance and reconditioning of customer-owned property. Leasing revenues decreased by approximately $7.7
million for the year ended December 31, 2019 compared to the same period in 2018 as a result of decreased rental tool leases of $3.3
million in Asia Pacific, $3.1 million in the Western Hemisphere and $1.3 million in the Eastern Hemisphere.
Cost of Sales. Cost of sales increased by $1.4 million, or 0.5%, to $295.0 million for 2019 from $293.6 million for 2018. As a
percentage of revenues, cost of sales was approximately 71.1% in 2019 and 76.3% in 2018. Cost of sales as a percentage of revenue
decreased in 2019, primarily as a result of lower unabsorbed manufacturing costs and savings from our transformation initiatives
including the leasing of our forge facilities, partially offset by product mix.
Selling, General and Administrative Expenses. For 2019, selling, general and administrative expenses decreased by
approximately $4.3 million, or 4.3%, to $96.8 million from $101.1 million in 2018. Foreign exchange gain for the twelve months
ended December 30, 2019 was $1.6 million as compared to a gain of $1.0 million for the same period in 2018. Excluding the impact
of foreign exchange gain, selling, general and administrative expense was $98.4 million and $102.1 million for the twelve months
ended December 31, 2019 and 2018, respectively. The decrease of $3.7 million is primarily due to continued progress in the
Company’s transformation efforts, partially offset by an increase in stock-based compensation expense, annual merit increases,
bonuses and partial restoration of prior salary rollbacks. Selling, general and administrative expenses as a percentage of revenues
decreased to 23.3% for the year ended December 31, 2019 from 26.3% for the same period of 2018.
Engineering and Product Development Expenses. For 2019, engineering and product development expenses decreased by
approximately $3.0 million, or 14.6%, to $17.3 million from $20.3 million in 2018. Engineering and product development expenses as
a percentage of revenues decreased to 4.2% in 2019 from 5.3% in 2018, largely as a result of our transformation activities.
Impairment, Restructuring and Other Charges. During 2019, we incurred approximately $4.4 million of expenses primarily
associated with professional fees related to our strategic restructuring and approximately $1.1 million in severance payout to our
former Chief Operating Officer, pursuant to a separation agreement entered into with him during the first quarter of 2019. In
December 2018, the overall offshore market conditions declined. This decline was evidenced by lower commodity prices, decline in
expected offshore rig counts, decrease in our customers’ capital budgets and potential delays associated with certain of our long term
projects. Further, in December 2018 due to the decline in our stock price, our market capitalization dropped below the carrying value
of our assets. As a result, an interim goodwill impairment analysis was performed as of December 31, 2018. Based on this analysis,
we recorded an impairment loss of $38.6 million for our Western Hemisphere reporting unit for the year ended December 31, 2018.
For further information, see "Goodwill," Note 8 of Notes to Consolidated Financial Statements.
Additionally, we incurred restructuring, long-lived asset impairments and other charges associated with the cost reduction plan
of $60.0 million during the year ended December 31, 2018.
Income Tax Provision (Benefit). Income tax expense for 2019 was $8.7 million on income before taxes of $10.4 million,
resulting in an effective income tax rate of 83.5%. Income tax benefit in 2018 was $19.3 million on a loss before taxes of $115.0
million, resulting in an effective tax rate of approximately 16.8%. The change in the effective income tax rate was primarily impacted
by the change in valuation allowance against the net U.S. deferred tax assets as well as those in various foreign countries, the mix of
foreign income taxed at different statuory rates, an increase in non-taxable income, non-deductible expenses, foreign income
inclusions and foreign tax credits.
Net Income (Loss). Net income was approximately $1.7 million in 2019, compared to a net loss of $95.7 million in 2018, for the
reasons set forth above.
34
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
For a discussion of our results of operations for the year ended December 31, 2018 compared to the year ended December 31,
2017, see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations"
in our Annual Report on Form 10-K for the year ended December 31, 2018.
Non-GAAP Financial Measures
We have performed a detailed analysis of the non-GAAP measures that are relevant to our business and its operations and
determined that the appropriate unit of measure to analyze our performance is Adjusted EBITDA (earnings before interest, taxes,
depreciation and amortization, as well as other significant non-cash items and other adjustments for certain charges and credits). The
Company believes that the exclusion of these charges and credits from these financial measures enables it to evaluate more effectively
the Company's operations period over period and to identify operating trends that could otherwise be masked by excluded items. It is
our determination that Adjusted EBITDA is a more relevant measure of how the Company reviews its ability to meet commitments
and pursue capital projects.
Adjusted EBITDA
We calculate Adjusted EBITDA as one of the indicators to evaluate and compare the results of our operations from period to
period by removing the effect of our capital structure from our operating structure and certain other items, including those that affect
the comparability of operating results. This measurement is used in concert with operating income, its most directly comparable
financial measure, and net cash from operating activities, which measures actual cash generated in the period. In addition, we believe
that Adjusted EBITDA is a supplemental measurement tool used by analysts and investors to help evaluate overall operating
performance, ability to pursue and service possible debt opportunities and analyze possible future capital expenditures. Adjusted
EBITDA does not represent funds available for our discretionary use and is not intended to represent or to be used as a substitute for
net income, as measured under U.S. generally accepted accounting principles. The items excluded from Adjusted EBITDA, but
included in the calculation of reported net income, are significant components of the consolidated statements of income and must be
considered in performing a comprehensive assessment of overall financial performance. Our calculation of Adjusted EBITDA may
not be consistent with calculations of Adjusted EBITDA used by other companies.
The following table reconciles our reported net income to Adjusted EBITDA for each of the respective periods:
Net income (loss)
Add:
Interest income
Income tax expense (benefit)
Depreciation and amortization expense
Restructuring costs, including severance
Long-lived asset, inventory and goodwill
impairments
Gain on sale of assets
Foreign currency loss (gain)
Stock compensation expense
Adjusted EBITDA (1)
$
$
2019
Year Ended December 31,
2018
(In thousands)
$
(95,695) $
1,720
(7,626)
8,709
34,020
4,396
-
(1,511)
(1,630)
15,721
53,799
$
(7,749)
(19,294)
35,312
13,071
85,531
(6,198)
(1,007)
13,459
17,430
$
2017
(100,639)
(3,492)
34,995
40,974
5,170
60,968
-
8,292
14,270
60,538
(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.
35
Liquidity and Capital Resources
Cash Flows
Cash flows provided by (used in) operations by type of activity were as follows:
2019
Year Ended December 31,
2018
(In thousands)
2017
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash activities
Increase (decrease) in cash and cash equivalents
$
$
$
14,678
(8,471)
(24,572)
(18,365)
(789)
(19,154) $
$
45,503
(15,173)
(99,199)
(68,869)
(6,211)
(75,080) $
107,993
(44,892)
560
63,661
6,022
69,683
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 year, as these are non-cash changes. As a result, changes
reflected in certain accounts on the Consolidated Statements of Cash Flows may not reflect the changes in corresponding accounts on
the Consolidated Balance Sheets.
The primary liquidity needs of the Company are (i) to fund capital expenditures to improve and expand facilities and
manufacture additional running tools, (ii) to fund working capital and (iii) to fund the repurchase of the Company's shares. The
Company’s principal source of funds is cash flows from operations. As of December 31, 2019, the Company had availability of $33.4
million under the ABL Credit Facility. The Company may use its liquidity for, among other things, the support of the Company's
research and development efforts, the funding of key projects and spending required by any upturn in the Company's business and the
pursuit of possible acquisitions.
Net cash provided by operating activities in 2019 decreased by approximately $30.8 million primarily due to decreases resulting
from the change in non-operating assets and liabilities of $90.0 million and operating assets and liabilities of $38.2 million, partially
offset by a decreased net loss of $97.4 million between 2019 and 2018. Decreases in the change in non-operating assets and liabilities
of $90.0 million primarily related to decreases in impairment, restructuring and other non-cash charges of $98.4 million, partially
offset by a lower gain on sale of equipment of $4.7 million and a change in deferred income taxes of $4.7 million. Decreases in the
change in operating assets and liabilities of $38.2 million related to change in inventory of $64.0 million and change in trade
receivables, net and unbilled receivables of $34.4 million, partially offset by change in accounts payable and accrued expenses of
$34.1 million and change in prepaid and other assets of $26.1 million.
The change in trade receivables in 2019 was driven by increased activity both for point in time and over time projects. Revenues
from over time projects increased by 40.0% in 2019. This higher activity also resulted in the Company having to build additional
inventory and invest in a strategic stocking program for its subsea production system and its downhole tools business. This led to a
growth in unbilled receivables of $57.0 million, partially offset by a decrease in trade receivables, net of approximately $11.0 million.
On the other hand, trade payables increased primarily as a result of continued negotiations with vendors on extending payment terms,
which led to an increase of $19.6 million in 2019.
Net income changed by $97.4 million to $1.7 million in 2019 from a net loss of $95.7 million in 2018. Net loss decreased by
$4.9 million to a net loss of $95.7 million in 2018 from net loss of $100.6 million in 2017. The reasons for the changes in net losses
are set forth in the “Results of Operations” section above.
The change in operating assets and liabilities of $71.3 million during 2018 was offset by a decreased net loss of $4.9 million
between 2018 and 2017 and increases in non-operating assets and liabilities of approximately $3.9 million. The decreases in the
change in operating assets and liabilities primarily related to decreases in the change in contract assets and trade receivables of $38.0
million as a result of increased settlements with customers during 2018, prepaid and other assets of $25.2 million and trade accounts
payable and accrued expenses of $20.5 million, offset by increases in inventory of $12.3 million as a result of reductions in customer
orders and efforts to utilize existing inventory and other costs of $0.3 million.
Net cash used in investing activities decreased by approximately $6.7 million due to decreased capital expenditures related to
facilities in the Western and Asia Pacific Hemispheres, partially offset by decreased proceeds related to sales of assets. Capital
expenditures by the Company were $11.5 million, $32.1 million and $27.6 million in 2019, 2018 and 2017, respectively. Capital
expenditures in 2019, 2018 and 2017 included expanding worldwide manufacturing facilities as well as increased expenditures on
machinery and equipment and running tools. Capital expenditures in 2019 included $3.0 million for facilities, machinery and
equipment, $2.4 million for rental tools, and other expenditures of $6.1 million. Capital expenditures in 2019 were primarily related to
the re-alignment of our facilities associated with the Company’s transformation initiatives. Capital expenditures in 2018 were
primarily $14.0 million for facilities, $2.9 million for machinery and equipment, $12.6 million for rental tools and other expenditures
of $2.6 million. Capital expenditures in 2017 were comprised of $15.7 million for facilities, $5.5 million for machinery and
equipment, $5.6 million for rental tools and other expenditures of $0.8 million.
36
The Company acquired The Technologies Alliance Inc. d/b/a OilPatch Technologies (OPT) for approximately $19.9 million, net
of cash and working capital adjustments, during the first quarter of 2017.
Repurchase of Equity Securities
On February 26, 2019, the Company announced that the Board of Directors had authorized a new stock repurchase program
under which the Company is authorized to repurchase up to $100 million of its common stock. The repurchase program has no set
expiration date. Repurchases under the program will be made through open market purchases, privately negotiated transactions or
plans, instructions or contracts established under Rule 10b5-1 under the Exchange Act. The manner, timing and amount of any
purchase will be determined by management based on an evaluation of market conditions, stock price, liquidity and other factors. The
program does not obligate the Company to acquire any particular amount of common stock and may be modified or superseded at any
time at the Company’s discretion. During the year ended December 31, 2019, the Company purchased 615,940 shares at an average
price of $43.12 per share totaling approximately $26.6 million. All repurchased shares have been cancelled as of December 31, 2019.
Refer to "Item 5 - Market for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities" for
further discussion.
On July 26, 2016, the Board of Directors authorized a stock repurchase plan under which the Company was authorized to
repurchase up to $100 million of its common stock. During the year ended December 31, 2018, the Company purchased, and
subsequently cancelled, 1,991,206 shares for $100.0 million . The repurchase plan was completed on October 19, 2018. All
repurchased shares have been cancelled as of December 31, 2018.
On February 26, 2015, the Company announced that the Board of Directors had authorized a stock repurchase plan under which
the Company was authorized to repurchase up to $100 million of its common stock. As part of the repurchase plan, the Company
repurchased 400,500 shares under this plan for a total of $24.2 million during 2017. All repurchased shares were subsequently
cancelled.
Contractual Obligations
The following table presents the long-term contractual obligations of the Company’s leases and the related payments in total and
by year as of December 31, 2019 :
Operating
Leases
Twelve months ended
December 31, 2019
Finance
Leases
(In thousands)
Total
2020
2021
2022
2023
2024
After 2024
Total lease payments
Less: interest
Present value of lease liabilities
$
$
1,486
711
461
361
329
3,513
6,861
1,797
5,064
$
$
244
142
53
25
20
-
484
31
453
$
$
1,730
853
514
386
349
3,513
7,345
1,828
5,517
In addition to the above, the Company has issued purchase orders in the ordinary course of business for the purchase of goods
and services. These purchase orders are enforceable and legally binding. However, none of the Company’s purchase obligations call
for deliveries of goods or services for time periods in excess of one year.
The Company believes that cash generated from operations plus cash on hand will be sufficient to fund operations, working
capital needs and anticipated capital expenditure requirements for the next twelve months at current activity levels. However, if work
activity increases, there could be a strain on working capital.
Asset Backed Loan (ABL) Credit Facility
On February 23, 2018, the Company, as borrower, and the Company’s subsidiaries TIW Corporation and Honing, Inc., as
guarantors, entered into a five-year senior secured revolving credit facility (the “ABL Credit Facility”) with JPMorgan Chase Bank,
N.A., as administrative agent, and other financial institutions as lenders with total commitments of $100.0 million, including up to
$10.0 million available for letters of credit. The maximum amount that the Company may borrow under the ABL Credit Facility is
subject to the borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to
reserves and other adjustments.
37
As of December 31, 2019, the availability under the ABL Credit Facility was $33.4 million, after taking into account the
outstanding letters of credit of approximately $0.4 million issued under the facility. For additional information on the ABL Credit
Facility, see "Asset Backed Loan (ABL) Credit Facility," Note 14 of Notes to Consolidated Financial Statements.
Backlog
Backlog typically consists of firm customer orders of Dril-Quip products for which a purchase order, signed contract or letter of
award has been received, satisfactory credit or financing arrangements exist and delivery is scheduled. Historically, the Company’s
revenues for a specific period have not been directly related to its backlog as stated at a particular point in time.
The Company believes that its backlog should help mitigate the impact of negative market conditions; however, slow recovery
in the 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 was
approximately $272.5 million at December 31, 2019 and $270.0 million at December 31, 2018. The backlog at the end of 2019
represents an increase of approximately $2.5 million, or 1.0% from the end of 2018. The Company’s backlog balance during 2019 was
negatively impacted by translation adjustments of approximately $0.5 million, due primarily to the weakening of the U.S. dollar and
by approximately $61.0 million in cancellations. The Company’s backlog balance during 2018 was negatively impacted by translation
adjustments of approximately $3.1 million, due primarily to the weakening of the U.S. dollar and by approximately $11.7 million in
cancellations.
The following table represent the change in backlog.
Beginning Backlog
Bookings:
Product (1) (2)
Service
Leasing
Cancellation/Revision adjustments
Translation adjustments
Total Bookings
Revenues:
Product
Service
Leasing
Total Revenue
Ending Backlog (1)
$
$
2019
Year Ended December 31,
2018
(In thousands)
2017
269,968
-
367,365
72,018
39,509
(61,015)
(502)
417,375
303,279
72,018
39,509
414,806
272,537
$
207,303
$
317,579
342,474
72,414
47,160
(11,675)
(3,082)
447,291
265,052
72,414
47,160
384,626
269,968
$
241,235
61,945
42,392
(3,105)
2,726
345,193
351,132
61,945
42,392
455,469
207,303
$
(1) The backlog data shown above includes all bookings as of December 31, 2019, 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 $109.8 million as of December 31, 2019,
within "Revenue Recognition,” Note 4 of Notes to Consolidated Financial Statements.
(2) As of December 31, 2019, approximately $3.8 million related to contract awards is included in our backlog.
During the first quarter of 2018, Dril-Quip Asia-Pacific Pte Ltd. was awarded a contract to supply top-tensioned riser (TTR)
systems and related services for the development of the CRD Project located offshore Vietnam operated by Repsol with the
participation of Mubadala, PVEP and PetroVietnam. The CRD Project was terminated in the third quarter of 2019 and is not included
within the backlog balance as of December 31, 2019.
The Company expects to fill approximately 70% to 80% of the December 31, 2019 product backlog by December 31, 2020. The
remaining backlog at December 31, 2019 consists of longer-term projects which are being designed and manufactured to customer
specifications requiring longer lead times.
In August 2012, the Company’s Brazilian subsidiary, Dril-Quip do Brasil LTDA, was awarded a four-year contract by
Petrobras, Brazil’s national oil company. As part of an amendment to extend the term of the contract for an additional four years,
Petrobras agreed to issue purchase orders totaling a minimum of approximately $24.4 million (based on current exchange rates) before
2019. As of December 31, 2019, Petrobras has issued purchase orders totaling that required minimum amount. See “Item 1A. Risk
Factors—Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future
revenues and earnings.”
38
Geographic Segments
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. Revenues for each of these segments are dependent upon the ultimate sale of
products and services to the Company’s customers. For information on revenues by geographic segment, see "Geographic Segments,"
Note 16 of Notes to Consolidated Financial Statements.
Currency Risk
The Company has operations in various countries around the world and conducts business in a number of different currencies
other than the U.S. dollar, principally the British pound sterling and the Brazilian real. Our significant foreign subsidiaries may also
have monetary assets and liabilities not denominated in their functional currency. These monetary assets and liabilities are exposed to
changes in currency exchange rates which may result in non-cash gains and losses primarily due to fluctuations between the U.S.
dollar and each subsidiary’s functional currency.
The Company generally attempts to minimize its currency exchange risk by seeking international contracts payable in local
currency in amounts equal to the Company’s estimated operating costs payable in local currency and in U.S. dollars for the balance of
the contracts. The Company had, net of income taxes, a transaction gain of $1.3 million in 2019, a transaction gain of $0.8 million in
2018 and a transaction loss of $12.7 million in 2017. There is no assurance that the Company will be able to protect itself against such
fluctuations in the future. The Company has put in place an active cash management process to convert excess foreign currency and
concentrate this cash in certain of our holding company bank accounts to minimize foreign currency risk and increase investment
income.
The Company conducts business in certain countries that limit repatriation of earnings. Further, there can be no assurance that
the countries in which the Company currently operates will not adopt policies limiting repatriation of earnings in the future. The
Company also has significant investments in countries other than the United States, principally its manufacturing operations in
Scotland, Singapore, Brazil and, to a lesser extent, Norway. The functional currency of these foreign operations is the local currency
except for Singapore, where the U.S. dollar is used. Financial statement assets and liabilities in the functional currency are translated
at the end of the period exchange rates. Resulting translation adjustments are reflected as a separate component of stockholders’ equity
and have no current effect on earnings or cash flow.
Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and results of operations are based on the Company’s
consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of the consolidated financial statements requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no
assurance that actual results will not differ from those estimates. The Company believes the following accounting policies affect its
more significant judgments and estimates used in preparation of its consolidated financial statements.
Revenue Recognition
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;
the contracts contain specific terms as to milestones, progress billings and delivery dates;
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.
39
For each project, the Company prepares a detailed analysis of estimated costs, profit margin, completion date and risk factors
which include availability of material, production efficiencies and other factors that may impact the project. On a quarterly basis,
management reviews the progress of each project, which may result in revisions of previous estimates, including revenue recognition.
The Company calculates the percentage complete and applies the percentage to determine the revenues earned and the appropriate
portion of total estimated costs to be recognized. Losses, if any, are recorded in full in the period they become known. Historically, the
Company’s estimates of total costs and costs to complete have approximated actual costs incurred to complete the project.
Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific
contract, billings may be in excess of the revenue recognized, in which case the amounts are included in customer prepayments as a
liability on the Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts
are reported in trade receivables, net. Unbilled revenues are expected to be billed and collected within one year. At December 31,
2019 and 2018, unbilled receivables included $83.2 million and $57.0 million of unbilled receivables related to products accounted for
using over time method of accounting, respectively. For the year ended December 31, 2019, there were 36 projects representing
approximately 20.5% of the Company’s total revenues and approximately 28.0% of its product revenues, and 22 projects during 2018
representing approximately 16.0% of the Company’s total revenues and approximately 23.0% of its product revenues, which were
accounted for using over time method of accounting.
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).
The Company earns lease revenues from the rental of running tools. Rental revenues are recognized within leasing revenues
over the lease term.
Inventories. Inventory costs are determined principally by the use of the first-in, first-out (FIFO) costing method and are stated
at the lower of cost or net realizable value. Company manufactured inventory is valued principally using standard costs, which are
calculated based upon direct costs incurred and overhead allocations and approximate actual costs. Inventory purchased from third-
party vendors is principally valued at the weighted average cost.
Inventory Reserves. Periodically, obsolescence reviews are performed on slow moving and excess inventories and reserves are
established based on current assessments about future demands and market conditions. The Company determines the reserve
percentages based on an analysis of stocking levels, historical sales levels and future sales forecasts anticipated for inventory items by
product type. The inventory values have been reduced by a reserve for slow moving and excess inventories of $71.0 million and
$108.6 million as of December 31, 2019 and 2018, respectively. If market conditions are less favorable than those projected by
management, additional inventory reserves may be required.
40
Goodwill. For goodwill an assessment for impairment is performed annually or when there is an indication an impairment may
have occurred. Goodwill is not amortized but rather tested for impairment annually on October 1 or when events occur or
circumstances change that would trigger such a review. The impairment test entails an assessment of qualitative factors to determine
whether it is more likely than not that an impairment exists. If it is more likely than not that an impairment exists, then a quantitative
impairment test is performed. Impairment exists when the carrying amount of a reporting unit exceeds its fair value. We complete our
annual impairment test for goodwill using an assessment date of October 1. In 2019, we performed an analysis of our goodwill and as
a result of our qualitative assessment no impairment was recorded. In 2018, goodwill was 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.
Contingent Liabilities . The Company establishes reserves for estimated loss contingencies when the Company believes a loss is
probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are reflected in net income in the
period in which different or additional facts or information become known or circumstances change that affect the Company’s
previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon the
Company’s assumptions and estimates regarding the probable outcome of the matter. Should the outcome differ from the Company’s
assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be required.
Off-Balance Sheet Arrangements
The Company has no derivative instruments and no off-balance sheet hedging or financing arrangements, contracts or
operations.
New Accounting Standards
The information set forth under Note 3 of Notes to Consolidated Financial Statements under the caption "New Accounting
Standards" is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is currently exposed to certain market risks related to interest rate changes on its short-term investments and
fluctuations in foreign currency exchange rates. The Company does not engage in any material hedging transactions, forward contracts
or currency trading which could mitigate the market risks inherent in such transactions. There have been no material changes in
market risks for the Company from December 31, 2018.
Foreign Currency Exchange Rate Risk
Through its subsidiaries, the Company conducts a portion of its business in currencies other than the United States dollar. There
is no assurance that the Company will be able to protect itself against currency fluctuations in the future. In periods where the dollar is
strong as compared to other currencies, it is possible that foreign sales may reflect a decline in profits due to translation. It does not
appear the Company’s sales have experienced significant profit declines. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Currency Risk” in Item 7 of this report.
The Company uses a sensitivity analysis model to measure the potential impact on revenue and net income of a 10% adverse
movement of foreign currency exchange rates against the U.S. dollar over the previous year. Based upon this model, a 10% decrease
would have resulted in a decrease in revenues of approximately $13.8 million and a decrease in net income of approximately $3.2
million for 2019. There can be no assurance that the exchange rate decrease projected above will materialize as fluctuations in
exchange rates are beyond the Company’s control.
41
Item 8.
Financial Statements and Supplementary Data
Management’s Annual Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income (Loss) for the Three Years in the Period Ended December 31, 2019
Consolidated Statements of Comprehensive Income (Loss) for the Three Years in the Period Ended December 31, 2019
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the Three Years in the Period Ended December 31, 2019
Consolidated Statements of Stockholders’ Equity for the Three Years in the Period Ended December 31, 2019
Notes to Consolidated Financial Statements
Page
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46
47
48
49
50
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42
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a
process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by
the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of the assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the financial statements.
Management has designed its internal control over financial reporting to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officers and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management has
concluded that our internal control over financial reporting was effective as of December 31, 2019.
PricewaterhouseCoopers LLP, the independent registered public accounting firm, who audited the consolidated financial
statements included in this Annual Report on Form 10-K, has also audited the effectiveness of our internal control over financial
reporting, as stated in their report which appears herein.
43
To the Board of Directors and Stockholders of Dril-Quip, Inc.
Report of Independent Registered Public Accounting Firm
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Dril-Quip, Inc. and its subsidiaries (the “Company”) as of
December 31, 2019 and 2018, and the related consolidated statements of income (loss), of comprehensive income (loss), of
stockholders' equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes
and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 appearing under
Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control
over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions
on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
44
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are
material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
Allowance for Slow Moving and Excess Inventory
As described in Notes 2 and 5 to the consolidated financial statements, management periodically performs obsolescence reviews on
slow-moving and excess inventories and reserves are established based on current assessments about future demands and market
conditions. Management determines the reserve percentages based on an analysis of stocking levels, historical sales levels and future
sales forecasts anticipated for inventory items by product type. The Company’s consolidated inventories, net balance was $205.1
million as of December 31, 2019, which is net of an allowance for slow moving and excess inventory of $71.0 million.
The principal considerations for our determination that performing procedures relating to the allowance for slow moving and excess
inventory is a critical audit matter are there was significant judgment by management when developing the reserve percentages, which
in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management’s significant
assumptions, including the assumption that the historical inventory movements are indicative of future sales.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion
on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s
inventory reserve assessment. These procedures also included, among others, evaluating the reasonableness of the significant
assumptions used by management in developing the reserve percentages by product type. Evaluating the reasonableness of the
assumption that the historical inventory movements are indicative of future sales involved considering the consumption and use of
inventory in previous periods, changes in market conditions, and current backlog levels and whether these were consistent with
evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 27, 2020
We have served as the Company’s auditor since 2014.
45
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
2019
Year Ended December 31,
2018
(In thousands, except per share data)
2017
Revenues:
Products
Services
Leasing
Total revenues
Cost and expenses:
Cost of sales:
Products
Services
Leasing
Total cost of sales
Selling, general and administrative
Engineering and product development
Impairment, restructuring and other charges
Gain on sale of assets
Total costs and expenses
Operating income (loss)
Interest income
Interest expense
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Income (loss) per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
$
$
$
303,279
72,018
39,509
414,806
$
265,052
72,414
47,160
384,626
351,132
61,945
42,392
455,469
223,502
36,550
34,955
295,007
96,782
17,329
4,396
(1,511)
412,003
2,803
7,940
(314)
10,429
8,709
1,720
0.05
0.05
35,839
36,152
$
$
$
222,568
37,196
33,809
293,573
101,090
20,297
98,602
(6,198)
507,364
(122,738)
8,040
(291)
(114,989)
(19,294)
(95,695) $
(2.58) $
(2.58) $
37,075
37,075
270,854
32,733
26,656
330,243
113,588
19,974
60,968
(168)
524,605
(69,136)
3,564
(72)
(65,644)
34,995
(100,639)
(2.69)
(2.69)
37,457
37,457
The accompanying notes are an integral part of these consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
DRIL-QUIP, INC.
Net income (loss)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
Total comprehensive income (loss)
$
$
2019
Year Ended December 31,
2018
(In thousands)
$
(95,695) $
1,720
2017
(100,639)
1,550
3,270
$
(18,823)
(114,518) $
24,117
(76,522)
The accompanying notes are an integral part of these consolidated financial statements.
47
Current assets:
Cash and cash equivalents
Trade receivables, net
Unbilled receivables
Inventories, net
Prepaids and other current assets
Total current assets
Operating lease right of use assets
Property, plant and equipment, net
Deferred income taxes
Goodwill
Intangible assets
Other assets
Total assets
Current liabilities:
Accounts payable
Accrued income taxes
Contract liabilities
Accrued compensation
Operating lease liabilities
Other accrued liabilities
Total current liabilities
Deferred income taxes
Income tax payable
Operating lease liabilities, long-term
Other long-term liabilities
Total liabilities
Contingencies (Note 15)
Stockholders' equity:
DRIL-QUIP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
2019
2018
(In thousands)
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY
$
$
$
398,946
107,626
140,534
205,062
28,321
880,489
5,144
258,497
8,936
7,947
32,245
13,307
1,206,565
46,324
4,561
6,901
13,599
1,314
24,241
96,940
4,150
8,868
3,801
2,105
115,864
418,100
118,663
83,502
191,194
41,522
852,981
-
274,123
7,995
7,714
34,974
14,723
1,192,510
26,693
3,138
9,648
10,537
-
31,523
81,539
2,466
9,623
-
2,720
96,348
-
-
371
52,870
1,181,023
(143,563)
1,090,701
1,206,565
$
376
34,953
1,205,946
(145,113)
1,096,162
1,192,510
$
$
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 at December 31, 2019 and 2018,
35,859,540 and 36,264,001 issued and outstanding at December 31, 2019 and 2018
Additional paid-in capital
Retained earnings
Accumulated other comprehensive losses
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
48
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2019
Year Ended December 31,
2018
(In thousands)
2017
$
1,720
$
(95,695)
$
(100,639)
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization
Release of contingent consideration
Stock-based compensation expense
Impairment, restructuring and other non-cash charges
Gain on sale of equipment
Deferred income taxes
Changes in operating assets and liabilities:
Trade receivables, net
Unbilled receivables
Inventories, net
Prepaids and other assets
Accounts payable and accrued expenses
Other, net
Net cash provided by operating activities
Investing activities
Purchase of property, plant and equipment
Proceeds from sale of equipment
Acquisition of business, net of cash acquired
Net cash used in investing activities
Financing activities
Proceeds from exercise of stock options
ABL Credit Facility issuance costs
Repurchase of common shares
Other
Net cash provided by (used) in financing activities
Effect of exchange rate changes on cash activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
34,020
(2,001)
15,721
174
(1,511)
598
10,783
(57,032)
(14,054)
10,980
15,343
(63)
14,678
(11,501)
3,030
-
(8,471)
2,181
-
(26,570)
(183)
(24,572)
(789)
(19,154)
418,100
398,946
35,312
-
13,459
98,602
(6,198)
(4,091)
17,988
(29,843)
49,926
(15,084)
(18,755)
(118)
45,503
(32,061)
16,888
-
(15,173)
1,616
(815)
(100,000)
-
(99,199)
(6,211)
(75,080)
493,180
418,100
$
$
40,974
-
14,270
60,968
(168)
17,231
6,200
19,912
37,642
10,107
1,765
(269)
107,993
(27,622)
3,170
(20,440)
(44,892)
560
-
-
-
560
6,022
69,683
423,497
493,180
The accompanying notes are an integral part of these consolidated financial statements.
49
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
DRIL-QUIP, INC.
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Losses
Total
Balance at December 31, 2016
$
Foreign currency translation adjustment
Net loss
Comprehensive loss
Options exercised and awards vested
(208,163 shares)
Stock option expense
Other
Balance at December 31, 2017
Foreign currency translation adjustment
Net loss
Comprehensive loss
Repurchase of common stock (1,991,206
shares)
Options exercised and awards vested
(261,055 shares)
Stock option expense
ASC 606 Implementation
Other
Balance at December 31, 2018
Foreign currency translation adjustment
Net income
Comprehensive loss
Repurchase of common stock (615,940
shares)
Options exercised and awards vested
(478,246 shares)
Stock option expense
Other
Balance at December 31, 2019
$
$
5,468
-
-
-
560
14,270
(215)
20,083
-
-
-
$
(In thousands)
1,500,988
$
-
(100,639)
-
-
-
(53)
1,400,296
-
(95,695)
-
(150,407) $
24,117
-
-
1,356,424
24,117
(100,639)
(76,522)
-
-
-
(126,290)
(18,823)
-
560
14,270
(271)
1,294,461
(18,823)
(95,695)
(114,518)
-
(99,980)
-
(100,000)
1,591
13,459
-
(180)
34,953
-
-
-
-
-
1,683
(358)
1,205,946
-
1,720
-
(26,564)
2,181
15,721
15
52,870
-
-
(79)
1,181,023
$
$
-
-
-
-
(145,113)
1,550
-
-
-
-
-
-
$
(143,563) $
1,616
13,459
1,683
(539)
1,096,162
1,550
1,720
3,270
(26,570)
2,181
15,721
(63)
1,090,701
375
-
-
-
-
-
(3)
372
-
-
-
(20)
25
-
-
(1)
376
-
-
-
(6)
-
-
1
371
The accompanying notes are an integral part of these consolidated financial statements.
50
DRIL-QUIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
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.A. de C.V., located in
Villahermosa, Mexico; TIW de Venezuela S.A., located in Anaco, Venezuela and with a registered branch located in Shushufindi,
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. For a listing of all of Dril-Quip's subsidiaries, please see Exhibit 21.1 to this
report.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current year presentation on the consolidated statements of
income (loss), consolidated balance sheets and the consolidated statements of cash flows.
Reclassifications. As a result of our global business transformation, certain prior period amounts have been reclassified to
conform to the current period presentation as it related to product engineering and quality assurance cost. We reclassified
approximately $19.1 million of engineering cost from our engineering and product development cost and approximately $2.9 million
of quality assurance cost from selling, general and administrative to product cost of sales during the twelve months ended December
31, 2018. We reclassified approximately $22.2 million of engineering cost from our engineering and product development cost and
approximately $2.7 million of quality assurance cost from selling, general and administrative to product cost of sales during the twelve
months ended December 31, 2017. These reclassifications did not have an impact on our Condensed Consolidated Statements of
Income (Loss), Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Comprehensive Income (Loss),
Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows.
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 and disclosure
of contingent assets 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 and slow moving and excess inventories.
51
Cash and Cash Equivalents
Short-term investments that have a maturity of three months or less from the date of purchase are classified as cash equivalents.
The Company invests excess cash in interest bearing accounts, money market mutual funds and funds which invest in U.S. Treasury
obligations and repurchase agreements backed by U.S. Treasury obligations. The Company’s investment objectives continue to be the
preservation of capital and the maintenance of liquidity.
Trade Receivables
The Company maintains an allowance for doubtful accounts on trade receivables equal to amounts estimated to be uncollectible.
This estimate is based upon historical collection experience combined with a specific review of each customer’s outstanding trade
receivable balance. The allowance estimate includes expected recoveries of amounts previously written off and expected to be written
off in the valuation account. Management believes that the allowance for doubtful accounts is adequate; however, actual write-offs
may exceed the recorded allowance.
Inventories
Inventory costs are determined principally by the use of the first-in, first-out (FIFO) costing method and are stated at the lower
of cost or net realizable value. Company manufactured inventory is valued principally using standard costs, which are calculated based
upon direct costs incurred and overhead allocations and approximate actual costs. Inventory purchased from third-party vendors is
principally valued at the weighted average cost.
Inventory Reserves
Periodically, obsolescence reviews are performed on slow moving and excess inventories and reserves are established based on
current assessments about future demands and market conditions. The Company determines the reserve percentages based on an
analysis of stocking levels, historical sales levels and future sales forecasts anticipated for inventory items by product type. The
inventory values have been reduced by a reserve for slow moving and excess inventories of $71.0 million and $108.6 million as of
December 31, 2019 and 2018, respectively. If market conditions are less favorable than those projected by management, additional
inventory reserves may be required.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, with depreciation provided on a straight-line basis over their estimated useful
lives. We capitalize costs incurred to enhance, improve and extend the useful lives of our property and equipment and expense costs
incurred to repair and maintain the existing condition of our assets.
Goodwill and intangible assets
For goodwill and intangible assets, an assessment for impairment is performed annually or when there is an indication an
impairment may have occurred. Goodwill is not amortized but rather tested for impairment annually on October 1 or when events
occur or circumstances change that would trigger such a review. The impairment test entails an assessment of qualitative factors to
determine whether it is more likely than not that an impairment exists. If it is more likely than not that an impairment exists, then a
quantitative impairment test is performed. Impairment exists when the carrying amount of a reporting unit exceeds its fair value. We
complete our annual impairment test for goodwill and other intangibles using an assessment date of October 1. In 2019, we performed
an analysis of our goodwill and as a result of our qualitative assessment no impairment was recorded. 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.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the
estimated undiscounted future cash flows expected to be generated by the asset, an impairment charge is recognized by reflecting the
asset at its fair value. We review the recoverability of the carrying value of our assets based upon estimated future cash flows while
taking into consideration assumptions and estimates, including the future use of the asset, remaining useful life of the asset and service
potential of the asset. Additionally, inventories are valued at the lower of cost or net realizable value.
52
Restructuring costs and other charges
As a result of unfavorable market conditions, combined with the impact of decreased capital expenditure budgets within the
industry driven by sustained low oil prices, we announced a cost reduction plan primarily focused on workforce reductions and the
reorganization of certain facilities in the second quarter of 2018. During 2019, we incurred approximately $4.4 million of expenses
primarily associated with professional fees related to our strategic restructuring and approximately $1.1 million in severance payout to
our former Chief Operating Officer, pursuant to a separation agreement entered into with him during the first quarter of 2019. We
incurred restructuring and other charges associated with the cost reduction plan of $60.0 million during the year ended December 31,
2018. There were no costs incurred for employee termination benefits during the year ended December 31, 2019 and approximately
$7.3 million of costs related to employee termination benefits were incurred during the year ended December 31, 2018. Additionally,
in 2018, we incurred non-cash inventory and long-lived asset write-downs of approximately $32.1 million and $14.9 million,
respectively, as a result of expected changes in our business structure and where specific products are manufactured. In 2018, there
were other charges incurred of approximately $5.7 million related to professional fees for consulting services for the strategic planning
and implementation efforts. These charges are reflected as "Impairment, restructuring and other charges" in our consolidated statement
of operations. We did not incur restructuring charges during the year ended December 31, 2017.
For the year ended December 31, 2018, we recorded an impairment charge of $38.6 million for the fourth quarter of 2018 as a
result of our updated assessment of current market conditions and restructuring efforts. For further information, see Note 8,
“Goodwill.”
Income Taxes
The Company accounts for income taxes using the asset and liability method. Current income taxes are provided on income
reported for financial statement purposes, adjusted for transactions that do not enter into the computation of income taxes payable in
the same year. Deferred tax assets and liabilities are measured using enacted tax rates for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of assets and liabilities. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred income tax assets to the amounts that are expected more likely than not to be realized in
the future. The Company classifies interest and penalties related to uncertain tax positions as income taxes in its financial statements.
Revenue Recognition
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 one year in duration;
the contracts contain specific terms as to milestones, progress billings and delivery dates;
product requirements cannot be filled directly from the Company’s standard inventory; and
The Company has an enforceable right to payment for any work completed to date and the enforceable payment includes a
reasonable profit margin.
For each project, the Company prepares a detailed analysis of estimated costs, profit margin, completion date and risk factors
which include availability of material, production efficiencies and other factors that may impact the project. On a quarterly basis,
management reviews the progress of each project, which may result in revisions of previous estimates, including revenue recognition.
The Company calculates the percentage complete and applies the percentage to determine the revenues earned and the appropriate
portion of total estimated costs to be recognized. Losses, if any, are recorded in full in the period they become known. Historically, the
Company’s estimates of total costs and costs to complete have approximated actual costs incurred to complete the project.
Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific
contract, billings may be in excess of the revenue recognized, in which case the amounts are included in customer prepayments as a
liability on the Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts
are reported in trade receivables. Unbilled revenues are expected to be billed and collected within one year. At December 31, 2019 and
2018, unbilled receivables included $83.2 million and $57.0 million of unbilled receivables related to products accounted for using
over time method of accounting, respectively. For the year ended December 31, 2019, there were 36 projects representing
approximately 20.5% of the Company’s total revenues and approximately 28.0% of its product revenues, and 22 projects during 2018
53
representing approximately 16.0% of the Company’s total revenues and approximately 23.0% of its product revenues, which were
accounted for using over time method of accounting.
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. Rental revenues are recognized within leasing revenues on a
over the lease term.
Practical Expedients
As permitted under Accounting Standards Update (ASU) 2016-02 “Leases (Topic 842),” we elected the package of practical
expedients permitted under the transition guidance which, among other things, allows companies to carry forward their historical lease
classification.
Foreign Currency
The financial statements of foreign subsidiaries are translated into U.S. dollars at period-end exchange rates except for revenues
and expenses, which are translated at average monthly rates. Translation adjustments are reflected as a separate component of
stockholders’ equity and have no effect on current earnings or cash flows.
Foreign currency exchange transactions are recorded using the exchange rate at the date of the settlement. The Company had,
net of income taxes, a transaction gain of $1.3 million in 2019, a transaction gain of $0.8 million in 2018 and a transaction loss of
$12.7 million in 2017. These amounts are included in selling, general and administrative costs in the Consolidated Statements of
Income on a pre-tax basis.
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.
Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit risk primarily include trade receivables. The
Company grants credit to its customers, which operate primarily in the oil and gas industry. The Company performs periodic credit
54
evaluations of its customers’ financial condition and generally does not require collateral. The Company maintains reserves for
potential losses, and actual losses have historically been within management’s expectations.
In addition, the Company invests excess cash in interest bearing accounts, money market mutual funds and funds which invest
in obligations of the U.S. Treasury and repurchase agreements backed by U.S. Treasury obligations. Changes in the financial markets
and interest rates could affect the interest earned on short-term investments.
Earnings Per Share
Basic earnings per common share is computed by dividing net income 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 options
and awards using the treasury stock method.
3. New Accounting Standards
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.
In November 2019, the FASB issued Accounting Standards Update (ASU) 2019-10 “Financial Instruments – Credit Losses
(Topic 326).” Topic 326 is effective for fiscal years and interim periods beginning after December 15, 2019. This update also amends
the mandatory effective date for the elimination of Step 2 from the goodwill impairment test (Accounting Standards Update No. 2017-
.04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. These amendments align the
mandatory effective dates for goodwill with those for Credit Losses. The adoption of ASU 2019-10 did not have a material impact on
our financial position, results of operations or cash flows.
In April 2019, the FASB issued ASU 2019-04 “Codification Improvements to Financial Instruments – Credit Losses (Topic
326).” The new standard clarifies certain aspects of accounting for credit losses, hedging activities and financial instruments
(addressed by ASUs 2016-13, 2017-12, and 2016-01, respectively). The standard is effective for fiscal periods beginning after
December 15, 2019, including interim periods within those fiscal years. We early adopted as of October 1, 2019, and the result of
adoption did not have a material impact on our financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease
assets (right of use) and lease obligations (lease liability) for leases previously classified as operating leases under generally accepted
accounting principles on the balance sheet for leases with terms in excess of 12 months. The standard is effective for fiscal periods
beginning after December 15, 2018, including interim periods within those fiscal years. Please see Note 10, “Leases and Lease
Commitments,” for a discussion of the impact related to the adoption of this standard
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” On January 1, 2018, we
adopted the new accounting standard ASC 606 and all the related amendments (the "new revenue standard”) for contracts that are not
completed at the date of initial application using the modified retrospective method.
We recognized the cumulative effect of the initial application of the new revenue standard as an increase to the opening balance
of retained earnings at January 1, 2018 for $1.7 million . Therefore, the comparative information for prior periods has not been
restated and continues to be reported under the accounting standards in effect for those periods.
A majority of the Company's revenues are not subject to the new revenue standard. The adoption of ASC 606 resulted in a
decrease of approximately $1.6 million in our results from operations for the year ended December 31, 2018 and did not have a
material impact on the Company's consolidated financial position, results of operations, equity or cash flows. A majority of our
product revenues continues to be recognized when products are shipped from our facilities.
55
4. Revenue Recognition
Revenues from contracts with customers (excludes leasing) consisted of the following:
Twelve Months Ended
December 31, 2019
Western
Hemisphere
Eastern
Hemisphere
Asia-
Pacific
Total
Product Revenues
Service Revenues
Total
Contract Balances
$
$
162,067
42,694
204,761
$
$
(In thousands)
86,057
18,509
104,566
$
$
55,155
10,815
65,970
$
$
303,279
72,018
375,297
Balances related to contracts with customers consisted of the following:
Contract Assets (amounts shown in thousands)
Contract Assets at December 31, 2018
Additions
Transfers to Accounts Receivable
Contract Assets at December 31, 2019
Contract Liabilities (amounts shown in thousands)
Contract Liabilities at December 31, 2018
Additions
Revenue Recognized
Contract Liabilities at December 31, 2019
$
$
$
$
83,188
88,144
(35,000)
136,332
9,648
109,249
(111,996)
6,901
Contract asset receivables were $136.3 million and $83.2 million for the years ended December 31, 2019 and 2018, respectively.
Contract assets include unbilled accounts receivable associated with contracts accounted for under the over time accounting method
which were approximately $83.2 million and $57.0 million at December 31, 2019 and 2018, respectively. Unbilled contract assets are
transferred to the trade receivables, net, when the rights become unconditional. The contract liabilities primarily relate to advance
payments from customers.
Obligations for returns and refunds were considered immaterial as of December 31, 2019.
Remaining Performance Obligations
The aggregate amount of the transaction price allocated to remaining performance obligations from our over time product lines
was $111.1 million as of December 31, 2019. The Company expects to recognize revenue on approximately 65.8% of the remaining
performance obligations over the next 12 months and the remaining 34.2% thereafter.
The Company applies the practical expedient available under the new revenue standard and does not disclose information about
remaining performance obligations that have original expected durations of one year or less.
5. Inventories, net
Inventories consist of the following:
December 31,
2019
2018
Raw materials and supplies
Work in progress
Finished goods
Less: allowance for slow moving and excess inventory
Total inventory
$
$
56
$
(In thousands)
46,282
54,171
175,629
276,082
(71,020)
205,062
55,878
51,251
192,632
299,761
(108,567)
191,194
$
6. Property, Plant and Equipment, net
Property, plant and equipment consists of:
Estimated Useful
Lives
December 31,
2019
2018
Land improvements
Buildings
Machinery, equipment and other
Less accumulated depreciation
Land
Construction work in process
Total property, plant and equipment
10-25 years
15-40 years
3-10 years
$
$
$
(In thousands)
7,790
213,705
382,837
604,332
(371,365)
232,967
12,550
12,980
258,497
7,774
212,501
375,240
595,515
(349,701)
245,814
12,524
15,785
274,123
$
Depreciation expense totaled $31.0 million, $32.8 million and $38.6 million for 2019, 2018 and 2017, respectively.
7. Impairment, Restructuring and Other Charges
Restructuring Charges
During 2019, we incurred approximately $4.4 million of expenses primarily associated with professional fees related to our
strategic restructuring and approximately $1.1 million in severance payout to our former Chief Operating Officer, pursuant to a
separation agreement entered into with him during the first quarter of 2019.
As a result of unfavorable market conditions, including lower commodity prices, the decline in expected offshore rig counts,
decreases in our customers’ capital budgets and potential delays associated with certain of our long term projects, as well as the
decline in our stock price in December 2018 which resulted in our market capitalization decreasing to below the carrying value of our
assets, we announced a cost reduction plan primarily focused on workforce reductions and the reorganization of certain facilities in the
second quarter of 2018. In conjunction with the strategic review, the Company adjusted its forecast for recovery to reflect a more
delayed recovery in the offshore industry, with pre-downturn demand not returning until after 2025. We incurred restructuring and
other charges associated with the cost reduction plan of $60.0 million during the year ended December 31, 2018. Costs incurred for
employee termination benefits during the year ended December 31, 2018 were $7.3 million. Additionally, we incurred non-cash
inventory and long-lived asset write-downs of approximately $32.1 million and $14.9 million, respectively, as a result of changes in
our business structure and where specific products are manufactured. Remaining costs incurred of approximately $5.7 million related
to professional fees for consulting services for the strategic planning and implementation efforts. These charges are reflected as
"Impairment, restructuring and other charges" in our consolidated statement of operations. We did not incur restructuring charges
during the year ended December 31, 2017.
2019 Impairment Charge
There were no impairment of goodwill, inventory or long-lived assets during the year ended December 31, 2019.
2018 Impairment Charge
For the year ended December 31, 2018, we recorded an impairment charge of $38.6 million for the fourth quarter of 2018 as a
result of our updated assessment of current market conditions and restructuring efforts. For further information, see Note 8,
“Goodwill.”
2017 Impairment of Inventory and Long-lived Assets
In connection with our preparation and review of financial statements for the year ended December 31, 2017, after considering
current Brent crude (Brent) consensus forecasts and expected rig counts for the foreseeable future, we determined the carrying amount
of certain of our long-lived assets in the Western Hemisphere exceeded the fair values of such assets due to projected declines in asset
utilization and that the cost of some of our worldwide inventory exceeded its market value. As a result, we recorded corresponding
impairments and other charges. Primarily as a result of the factors described above, we recorded charges of approximately $33.6
million related to inventory and $27.4 million related to fixed assets.
57
8. Goodwill
We recorded an impairment charge of $38.6 million for the fourth quarter of 2018, as discussed below. There was no
impairment of goodwill during the twelve months ended December 31, 2019. The changes in the carrying amount of goodwill by
reporting unit during the years ended December 31, 2019 and 2018 were as follows:
Carrying Value
January 1, 2019
Foreign Currency
Translation
Impairments
Carrying Value
December 31, 2019
Western Hemisphere
Eastern Hemisphere
Asia Pacific
Total
$
$
- $
7,714
-
7,714 $
(In thousands)
- $
233
-
233 $
- $
-
-
- $
-
7,947
-
7,947
Carrying Value
January 1, 2018
Foreign Currency
Translation
Impairments
Carrying Value
December 31, 2018
Western Hemisphere
Eastern Hemisphere
Asia Pacific
Total
$
$
39,158 $
8,466
-
47,624 $
(In thousands)
(599) $
(752)
-
(1,351) $
(38,559) $
-
-
(38,559) $
-
7,714
-
7,714
At October 1, 2019, the Company performed its annual impairment test on each of its reporting units. The impairment test
entailed an assessment of qualitative factors to determine whether it is more likely than not that an impairment exists. As a result of
our assessment no goodwill impairment losses were recorded for the year ended December 31, 2019.
At October 1, 2018, the Company performed its annual impairment test on each of its reporting units and concluded that there
had been no impairment because the estimated fair values of each of those reporting units exceeded its carrying value. Relevant events
and circumstances that could have a negative impact on goodwill include: macroeconomic conditions; industry and market conditions,
such as commodity prices; operating cost factors; overall financial performance; the impact of dispositions and acquisitions; and other
entity-specific events. Further declines in commodity prices or sustained lower valuation for the Company's common stock could
indicate a reduction in the estimate of reporting unit fair value which, in turn, could lead to an impairment of reporting unit goodwill.
The fair values were determined using the net present value of the expected future cash flows for each reporting unit. During the
Company’s goodwill impairment analysis, the Company determined the fair value of each of its reporting units as a whole using
discounted cash flow analysis, which requires significant assumptions and estimates about the future operations of each reporting unit.
The assumptions about future cash flows and growth rates are based on our revised strategic budget for 2019 and for future periods,
and management’s beliefs about future activity levels. The discount rates we used for future periods could change substantially if the
cost of debt or equity were to significantly increase or decrease, or if we were to choose different comparable companies in
determining the appropriate discount rates for our reporting units. Forecasted cash flows in future periods were estimated using a
terminal value calculation, which considered long-term earnings growth rates.
In December 2018, the overall offshore market conditions declined. This decline was evidenced by lower commodity prices,
decline in expected offshore rig counts, decrease in our customers’ capital budgets and potential delays associated with certain of our
long term projects. Further, in December 2018 due to the decline in our stock price, our market capitalization dropped below the
carrying value of our assets. An interim goodwill impairment analysis was performed for the year ended December 31, 2018. Based
on this analysis, we recorded an impairment loss of $38.6 million for our Western Hemisphere reporting unit for the year ended
December 31, 2018. Following this impairment charge, the Western Hemisphere reporting unit has no remaining goodwill balance.
The remaining goodwill balance is associated with our Eastern Hemisphere reporting unit. Based on our interim goodwill impairment
analysis the fair value of the Eastern Hemisphere reporting unit exceeds its carry value by 71% . Further declines in the overall
offshore market, commodity prices, or sustained lower valuation for the Company’s common stock could indicate a reduction in the
estimate of the Eastern Hemisphere’s reporting unit fair value which, in turn, could lead to additional impairment charges associated
with goodwill. No goodwill impairment losses were recorded for the year ended December 31, 2017.
58
9. Intangible Assets
Intangible assets, the majority of which were acquired in the acquisition of TIW and OPT, consist of the following:
Estimated
Useful Lives
Trademarks
Patents
Customer relationships
Non-compete agreements
Organizational Costs
15 years
15 - 30 years
5 - 15 years
3 years
indefinite
Estimated
Useful Lives
Trademarks
Patents
Customer relationships
Non-compete agreements
Organizational costs
indefinite
15 - 30 years
5 - 15 years
3 years
indefinite
Gross Book Value
$
$
8,159
5,945
25,787
171
172
40,234
Gross Book Value
$
$
8,236
6,026
25,703
171
172
40,308
$
$
$
2019
Foreign Currency
Translation
Net Book Value
47
-
122
-
7
176
$
$
7,694
3,416
20,955
1
179
32,245
Accumulated
Amortization
(In thousands)
$
(512) $
(2,529)
(4,954)
(170)
-
(8,165) $
2018
Accumulated
Amortization
Foreign Currency
Translation
Net Book Value
(In thousands)
$
-
(1,925)
(2,953)
(113)
-
(4,991) $
(72) $
(11)
(260)
-
-
(343) $
8,164
4,090
22,490
58
172
34,974
In December 2018, the overall offshore market conditions declined. This decline was evidenced by lower commodity prices,
decline in expected offshore rig counts, decrease in our customers’ capital budgets and potential delays associated with certain of our
long term projects. As a result, we determined that the trademark asset is no longer indefinite lived and determined a 15 -year useful
life to be appropriate based on our current market forecast.
Amortization expense was $2.9 million for each of the years 2019, 2018 and 2017. Based on the carrying value of intangible
assets at December 31, 2019, amortization expense for the subsequent five years is estimated to be as follows: 2020 — $3.0 million;
2021 — $2.9 million; 2022 — $2.9 million ; and 2023 — $2.8 million; 2024 — $2.6 million.
10. Leases and Lease Commitments
Effective January 1, 2019, we adopted ASU 2016-02, “Leases (Topic 842),” and elected the package of practical expedients that
does not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any
expired or existing leases and (3) initial direct costs for any expired or existing leases. We adopted the practical expedient that allows
lessees to treat the lease and non-lease components of a lease as a single lease component. The impact of the adoption of ASC 842, as
of January 1, 2019, was approximately $5.5 million to our assets, approximately $1.6 million to our current liability and
approximately $3.9 million to our long-term liability.
Under the transition method selected by the Company, leases expiring at, or entered into after, January 1, 2019 were required to
be recognized and measured. Prior period amounts have not been adjusted and continue to be reflected in accordance with the
Company's historical accounting under ASC 840. The adoption of this standard resulted in the recording of operating lease assets and
operating lease liabilities as of January 1, 2019, with no related impact on the Company’s Consolidated Statement of Stockholders’
Equity or Consolidated Statement of Income (Loss). Short-term leases have not been recorded on the balance sheet.
59
We lease facilities related to sales and service, manufacturing, reconditioning, certain office spaces, apartments and warehouse,
all of which we classify as operating leases. In addition, we also lease certain office equipment and vehicles, which we classify as
financing leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet; short-term lease expense for
the twelve months ended December 31, 2019 was approximately $2.1 million.
Most leases include one or more options to renew, with renewal terms that can extend the lease term on a monthly, annual or
longer basis. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include options to purchase
the leased property. The depreciable life of assets and leasehold improvements is limited by the expected lease term, unless there is a
transfer of title or purchase option that is reasonably certain of being exercised.
Certain lease agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any
material residual value guarantees or material restrictive covenants.
Assets
Operating
Finance
Total lease assets
Liabilities
Current
Operating
Finance
Noncurrent
Operating
Finance
Total lease liabilities
Classification
Operating lease right of use assets
Other assets
Operating lease liabilities
Other accrued liabilities
Operating lease liabilities, long-term
Other long-term liabilities
$
$
$
$
December 31, 2019
(In thousands)
5,144
437
5,581
1,314
228
3,801
224
5,567
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is based on our rate for the
ABL Credit Facility (as defined herein).
Our lease cost for the twelve months ended December 31, 2019 is as follows:
Twelve Months Ended
December 31, 2019
(In thousands)
Operating lease cost
Short-term lease costs
Amortization of leased assets
Interest on lease liabilities
Total lease cost
Classification
Selling, general and administrative
Selling, general and administrative
Selling, general and administrative
Net interest expense
$
$
1,713
2,104
361
25
4,203
60
The Company leases certain offices, shop and warehouse facilities, automobiles and equipment. Total lease expense incurred
was $3.8 million, $5.4 million, $6.0 million in 2019, 2018 and 2017, respectively. Under the current lease guidance, ASC 842, the
future annual minimum lease commitments at December 31, 2019 are as follows: 2020 — $1.7 million; 2021 — $0.9 million; 2022 —
$0.5 million; 2023 — $0.4 million; 2024 — $0.3 million; and thereafter— $3.5 million. The five year and beyond maturity of our
lease obligations is presented below:
2020
2021
2022
2023
2024
After 2024
Total lease payments
Less: interest
Present value of lease liabilities
Operating
Leases
$
$
1,486
711
461
361
329
3,513
6,861
1,797
5,064
Twelve months ended
December 31, 2019
Finance
Leases
(In thousands)
244
142
53
25
20
-
484
31
453
$
$
$
$
Total
1,730
853
514
386
349
3,513
7,345
1,828
5,517
Under the previous lease guidance, ASC 840, the future annual minimum lease commitments at December 31, 2018 were as
follows: 2019 - $2.0 million; 2020 - $1.5 million; 2021 - $0.8 million; 2022 - $0.5 million; 2023 - $0.4 million; and thereafter -
$4.2 million.
The lease term and discount rate for our operating and finance leases is as follows:
December 31, 2019
Weighted average remaining lease term (years)
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
12.6
2.5
4.8%
4.3%
We had no material non-cash financing leases entered into during the twelve months ended December 31, 2019.
Other information pertaining to our lease obligations is as follows:
Other Information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
December 31, 2019
(In thousands)
$
1,737
28
183
61
11. Income Taxes
Income (loss) before income taxes consisted of the following:
Domestic
Foreign
Total
$
$
(51,041) $
61,470
10,429
$
(120,784) $
5,795
(114,989) $
(84,278)
18,634
(65,644)
The income tax provision (benefit) consists of the following:
2019
Year Ended December 31,
2018
(In thousands)
2017
2019
Year Ended December 31,
2018
(In thousands)
2017
Current:
Federal
Foreign
Total current
Deferred:
Federal
Foreign
Total deferred
Total
$
$
(569) $
8,513
7,944
(24,366) $
9,163
(15,203)
-
765
765
8,709
$
-
(4,091)
(4,091)
(19,294) $
20,435
(2,671)
17,764
20,592
(3,361)
17,231
34,995
The difference between the effective income tax rate reflected in the provision for income taxes and the U.S. federal statutory
rate was as follows:
Federal income tax statutory rate
Foreign income tax rate differential
Foreign development tax incentive
Nondeductible goodwill impairment
Exempt income
Foreign taxes and inclusions (net of FTC)
Transition tax (net of FTC)
Nondeductible expenses
Foreign intellectual property tax benefit
Manufacturing benefit
Change in valuation allowance
Changes to PY Accruals
Deferred tax rate change
Change in Uncertain tax positions
Interest on net equity
General business credits
Branch income
Other
Effective tax rate
Year Ended December 31,
2018
2017
2019
21.00%
16.20
(0.91)
-
(24.02)
21.00
-
15.51
-
-
24.96
6.28
(0.36)
4.31
-
(11.14)
9.64
1.03
83.50%
21.00%
(0.94)
0.24
(5.21)
2.32
(1.83)
5.80
(1.03)
-
(1.18)
(1.99)
(1.17)
0.66
(0.78)
1.02
0.59
(0.66)
(0.06)
16.78%
35.00%
2.41
1.78
-
-
-
(28.62)
(1.75)
16.06
-
(35.61)
(4.01)
(20.66)
(25.59)
3.15
1.39
-
3.14
(53.31)%
62
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred
tax assets (liabilities) are as follows:
Deferred tax assets:
Foreign tax credit carryforward
Inventory
Net operating losses
Allowance for doubtful accounts
Reserve for accrued liabilities
Stock options
Unrealized gain/loss
Other
Total deferred tax assets
Valuation allowance
Deferred tax liabilities:
Property, plant and equipment
Goodwill & Intangibles
Deferred revenue
Other
Total deferred tax liability
Net deferred tax asset
As of December 31,
2019
2018
(In thousands)
$
$
4,817
17,777
18,991
358
2,732
2,782
1,862
867
50,186
(34,464)
(5,757)
(2,092)
(1,830)
(1,257)
(10,936)
4,786
$
$
2,918
28,181
4,899
1,729
3,357
3,908
-
1,003
45,995
(31,833)
(6,601)
(881)
-
(1,151)
(8,633)
5,529
Tax operating loss carryforwards totaled $88.9 million at December 31, 2019. These operating losses will expire as shown in the
table below.
Tax operating losses
(in thousands)
3,633
1,658
1,985
81,591
88,867
$
$
Expiration
2020-2025
2026-2032
2033-2038
Indefinite
In assessing the realizability of our deferred tax assets, the Company has assessed whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. In making this
determination, the Company considered taxable income in prior years, if carryback is permitted, the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies. The Company has a three-year cumulative loss at December 31,
2019 in the United States and certain foreign jurisdictions and has recorded a valuation allowance at December 31, 2019 of $34.5
million against deferred tax assets in those jurisdictions.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (US Tax Reform).
US Tax Reform eliminated the deferral of U.S. income tax on the historical unrepatriated earnings by imposing a transition tax, which
is a one-time mandatory deemed repatriation tax on undistributed earnings. Certain undistributed earnings of the Company’s foreign
subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for income taxes has been provided thereon.
The estimate of undistributed earnings of the Company’s foreign subsidiaries amounted to $535 million as of December 31, 2019.
Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both income taxes and
withholding taxes payable. Determination of the amount of the potential tax liability on repatriation is not practicable at this time
because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available
to reduce a portion of the U.S. tax liability.
US Tax Reform subjects a US shareholder to tax on Global Intangible Low-Taxed Income (GILTI). We have elected to account
for GILTI in the year that the tax is incurred as a period expense.
The Company evaluates uncertain tax positions for recognition and measurement in the consolidated financial statements. To
recognize a tax position, the Company determines whether it is more likely than not that the tax positions will be sustained upon
examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that
63
meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the consolidated financial
statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is
greater than 50 percent likely of being realized upon settlement. The Company had an uncertain tax position of $18.7 million at
December 31, 2019 due to uncertainty in tax positions taken in the U.S. and certain foreign tax jurisdictions. The tax years which
remain subject to examination by major tax jurisdictions are the years ended December 31, 2012 through December 31, 2019.
A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows:
Balance at beginning of year
Additions for tax positions related to the current year
Additions for tax positions related to the prior year
Settlements with tax authorities
Balance at end of year
2019
2018
(In thousands)
2017
$
$
18,648
-
17
-
18,665
$
$
18,323
-
325
-
18,648
$
$
5,151
16,800
-
(3,628)
18,323
The amounts above exclude accrued interest and penalties of $1.6 million, $1.1 million and $0.6 million at December 31, 2019,
2018 and 2017 respectively. The Company classifies interest and penalties relating to uncertain tax positions within Tax
expense(benefit) in the Consolidated Statement of Income (Loss).
It is reasonably possible that the Company's existing liabilities for unrecognized tax benefits may increase or decrease in the
year ending December 31, 2019, primarily due to the progression of any audits and the expiration of statutes of limitation. However,
the Company cannot reasonably estimate a range of potential changes in its existing liabilities for unrecognized tax benefits due to
various uncertainties, such as the unresolved nature of any possible audits. As of December 31, 2019, if recognized, $7.3 million of
the Company's unrecognized tax benefits would favorably impact the effective tax rate.
The Company received a net income tax refund of $10.9 million in 2019 and paid $3.8 million and $8.4 million in income taxes
in 2018 and 2017, respectively.
12. Other Accrued Liabilities
Current other accrued liabilities consist of the following:
December 31,
2019
2018
Accrued vendor costs
Property, sales and other taxes
Commissions payable
Payroll taxes
Accrued warranties
Severance
Other
Total
$
$
$
(In thousands)
10,289
7,243
2,426
2,159
-
-
2,124
24,241
$
3,495
7,898
5,248
6,227
1,868
5,498
1,289
31,523
13. Employee Benefit Plans
The Company sponsors a defined-contribution (cash balance) 401(k) plan covering domestic employees and a defined-
contribution pension plan covering certain foreign employees. The Company generally makes contributions to the plans equal to each
participant’s eligible contributions for the plan year up to a specified percentage of the participant’s annual compensation. The
Company’s contribution expense under these plans was $4.1 million, $4.1 million and $4.3 million in 2019, 2018 and 2017,
respectively.
14. 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
64
Facility are secured by liens on substantially all of the Company’s personal property, and bear interest at the Company’s option at
either (i) the CB Floating Rate (as defined therein), calculated as the rate of interest publicly announced by JPMorgan Chase Bank,
N.A., as its “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, with such
CB Floating Rate not being less than Adjusted One Month LIBOR (as defined therein) or (ii) the Adjusted LIBOR (as defined
therein), plus, in each case, an applicable margin. The applicable margin ranges from 1.00% to 1.50% per annum for CBFR loans and
2.00% to 2.50% per annum for Eurodollar loans and, in each case, is based on the Company’s leverage ratio. The unused portion of
the ABL Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to average unused
commitments under the ABL Credit Facility. Interest on Eurodollar loans is payable at the end of the selected interest period, but no
less frequently than quarterly. Interest on CB Floating Rate loans is payable monthly in arrears.
The ABL Credit Facility contains various covenants and restrictive provisions that limit the Company’s ability to, among other
things, (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain
dividends or make other distributions and (5) engage in transactions with affiliates. The ABL Credit Facility also requires the
Company to maintain a fixed charge coverage ratio of 1.1 to 1.0, based on the ratio of EBITDA (as defined therein) to Fixed Charges
(as defined therein) during certain periods, including when availability under the ABL Credit Facility is under certain levels. If the
Company fails to perform its obligations under the agreement that results in an event of default, the commitments under the ABL
Credit Facility could be terminated and any outstanding borrowings under the ABL Credit Facility may be declared immediately due
and payable. The ABL Credit Facility also contains cross default provisions that apply to the Company’s other indebtedness. The
Company is in compliance with the related covenants as of December 31, 2019.
As of December 31, 2019, the availability under the ABL Credit Facility was $33.4 million, after taking into account the
outstanding letters of credit of approximately $0.4 million issued under the facility.
15. Contingencies
Brazilian Tax Issue
From 2002 to 2007, the Company’s Brazilian subsidiary imported goods through the State of Espirito Santo in Brazil. Upon the
final sale of these goods, the Company’s Brazilian subsidiary collected taxes from customers and remitted them to the State of Rio de
Janeiro net of the taxes paid on importation of those goods to the State of Espirito Santo in accordance with the Company’s
understanding of Brazilian tax laws.
In December 2010 and January 2011, the Company’s Brazilian subsidiary was served with two assessments totaling
approximately $13.0 million from the State of Rio de Janeiro to cancel the credits associated with the tax payments to the State of
Espirito Santo (Santo Credits) on the importation of goods from July 2005 to October 2007. The Company has objected to these
assessments on the grounds that they would represent double taxation on the importation of the same goods and that the Company is
entitled to the credits under applicable Brazilian law. The Company’s Brazilian subsidiary filed appeals with a State of Rio de Janeiro
judicial court to annul both of these tax assessments following rulings against the Company by the tax administration’s highest
council. In connection with those appeals, the Company deposited with the court a total amount of approximately $8.8 million in
December 2014 and December 2016 as the full amount of the assessments with penalties and interest. The Company believes that
these credits are valid and that success in the judicial court process is probable. Based upon this analysis, the Company has not
accrued any liability in conjunction with this matter.
General
The Company operates its business and markets its products and services in most of the significant oil and gas producing areas
in the world and is, therefore, subject to the risks customarily attendant to international operations and dependency on the condition of
the oil and gas industry. Additionally, certain of the Company's products are used in potentially hazardous drilling, completion, and
production applications that can cause personal injury, product liability and environmental claims. Although exposure to such risk has
not resulted in any significant problems in the past, there can be no assurance that ongoing and future developments will not adversely
impact the Company.
The Company is also involved in a number of legal actions arising in the ordinary course of business. Although no assurance can
be given with respect to the ultimate outcome of such legal action, in the opinion of management, the ultimate liability with respect
thereto will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
65
16. Geographic Segments
Western Hemisphere
Revenues
Products
Point in Time
Over Time
Total Products
Services
Technical Advisory
Reconditioning
Total Services (excluding Leasing)
Leasing
Total Services (including Leasing)
Intercompany
Total
Depreciation and amortization
Income (loss) before taxes
Eastern Hemisphere
Revenues
Products
Point in Time
Over Time
Total Products
Services
Technical Advisory
Reconditioning
Total Services (excluding Leasing)
Leasing
Total Services (including Leasing)
Intercompany
Total
Depreciation and amortization
Income before taxes
$
$
$
$
$
$
$
$
2019
Year Ended December 31,
2018
(In thousands)
2017
108,006
54,061
162,067
31,962
10,733
42,695
22,202
64,897
12,856
239,820
21,737
19,882
65,416
20,641
86,057
15,100
3,409
18,509
12,351
30,860
1,267
118,184
4,163
28,045
$
$
$
$
$
$
$
$
$
135,687
34,595
170,282
29,973
10,985
40,958
25,302
66,260
13,343
$
249,885
$
23,314
(29,823) $
$
49,216
22,503
71,719
16,499
3,188
19,687
13,639
33,326
2,010
107,055
4,578
20,495
$
$
$
215,907
1,178
217,085
28,053
8,846
36,899
28,151
65,050
27,554
309,689
30,441
(18,099)
43,260
26,404
69,664
15,313
1,958
17,271
10,776
28,047
772
98,483
4,096
1,379
66
Asia Pacific Hemisphere
Revenues
Products
Point in Time
Over Time
Total Products
Services
Technical Advisory
Reconditioning
Total Services (excluding Leasing)
Leasing
Total Services (including Leasing)
Intercompany
Total
Depreciation and amortization
Income (loss) before taxes
Corporate
Depreciation and amortization
Loss before taxes
Consolidated
Revenues
Products
Point in Time
Over Time
Total Products
Services
Technical Advisory
Reconditioning
Total Services (excluding Leasing)
Leasing
Total Services (including Leasing)
Intercompany
Eliminations
Total
Depreciation and amortization
Income (loss) before taxes
2019
Year Ended December 31,
2018
(In thousands)
2017
44,908
10,247
55,155
9,369
1,445
10,814
4,956
15,770
5,792
76,717
5,038
27,302
$
$
$
$
$
19,569
3,482
23,051
10,143
1,626
11,769
8,219
19,988
2,058
$
45,097
4,785
$
(3,123) $
34,951
29,432
64,383
7,559
216
7,775
3,465
11,240
781
76,404
4,063
4,928
3,082
$
(64,800) $
$
2,635
(102,538) $
2,374
(53,852)
$
218,330
84,949
303,279
$
204,472
60,580
265,052
56,431
15,587
72,018
39,509
111,527
19,915
(19,915)
414,806
34,020
10,429
$
$
$
56,615
15,799
72,414
47,160
119,574
17,411
(17,411)
$
384,626
$
35,312
(114,989) $
294,118
57,014
351,132
50,925
11,020
61,945
42,392
104,337
29,107
(29,107)
455,469
40,974
(65,644)
$
$
$
$
$
$
$
$
$
$
67
Total long-lived assets:
Western Hemisphere
Eastern Hemisphere
Asia Pacific
Eliminations
Total
Total assets:
Western Hemisphere
Eastern Hemisphere
Asia Pacific
Eliminations
Total
December 31,
2019
2018
(In thousands)
$
$
$
$
379,776
246,854
71,384
(371,938)
326,076
732,716
818,803
181,188
(526,142)
1,206,565
$
$
$
$
412,624
256,899
65,944
(395,938)
339,529
708,723
788,171
154,298
(458,682)
1,192,510
In 2019, BP and its affiliated companies accounted for approximately 10% of the Company’s total revenues. In 2018, BP and its
affiliated companies accounted for approximately 13% of the Company’s total revenues. In 2017, Chevron and its affiliated
companies accounted for approximately 14% of the Company’s total revenues. No other customer accounted for more than 10% of the
Company’s total revenues in 2019, 2018 or 2017.
During the fourth quarter of 2017, the Company pursued a restructuring of its entities to prepare it for potential increased
activity in international markets. The main focus of the restructuring was to consolidate excess foreign cash held offshore and create
an internal financing capability. The excess foreign cash is now held in a treasury concentration center in the Eastern Hemisphere
where it is invested when not required to fund international operations. When required, these funds can be easily deployed to meet the
working capital requirements of foreign operations. This structure was put in place as the Company expects that when the market
rebounds, future work will come from international markets, especially Europe and Asia Pacific.
The Company’s operations are organized into three geographic segments—Western Hemisphere (including North and South
America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe and Africa; headquartered in Aberdeen, Scotland)
and Asia Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East; headquartered in Singapore). Each
of these segments sells similar products and services, and the Company has major manufacturing facilities in all three of its regional
headquarter locations as well as in Macae, Brazil.
Eliminations of operating profits are related to intercompany inventory transfers that are deferred until shipment is made to third
party customers.
17. Stock Repurchase Plan
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. During the year ended December 31, 2019, the Company purchased 615,940 shares at an average price of $43.12 under the
share repurchase plan for approximately $26.6 million. Refer to Item 5. Market for Registrant's Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities for further discussion.
On July 26, 2016, the Board of Directors authorized a stock repurchase plan under which the Company was authorized to
repurchase up to $100 million of its common stock. During the year ended December 31, 2018, the Company purchased 1,991,206
shares under the share repurchase plan for approximately $100 million. The repurchase plan was completed on October 19, 2018. All
repurchased shares have been cancelled as of December 31, 2018. Refer to Item 5. Market for Registrant's Common Stock, Related
Stockholder Matters and Issuer Purchases of Equity Securities for further discussion.
18. Stock-Based Compensation and Stock Awards
On May 13, 2004, the Company’s stockholders approved the 2004 Incentive Plan of Dril-Quip, Inc. (as amended in 2012 and
approved by the Company’s stockholders on May 10, 2012, the “2004 Plan”), which reserved up to 2,696,294 shares of common stock
for awards under the 2004 Plan. Persons eligible for awards under the 2004 Plan are employees holding positions of responsibility
with the Company or any of its subsidiaries and members of the Board of Directors.
68
On May 12, 2017, the Company’s stockholders approved the 2017 Omnibus Incentive Plan of Dril-Quip, Inc. (the “2017 Plan”),
which reserved up to 1,500,000 shares of common stock to be used for awards under the 2017 Plan. Persons eligible for awards under
the 2017 Plan are employees of the Company or any of its subsidiaries and members of the Board of Directors.
Stock Options
Options granted under the 2004 Plan have a term of ten years and become exercisable in cumulative annual increments of one-
fourth of the total number of shares of common stock subject thereto, beginning on the first anniversary of the date of the grant. No
stock options have been granted under the 2017 Plan.
The fair value of stock options granted was estimated on the grant date using the Black-Scholes option pricing model. The
expected life was based on the Company’s historical trends, and volatility is based on the historical volatility over the expected life of
the options. The risk-free interest rate is based on U.S. Treasury yield curve at the grant date. The Company does not pay dividends
and, therefore, there is no assumed dividend yield.
Option activity for the year ended December 31, 2019 was as follows:
Number of
Options
Weighted
Average
Price
224,087
(47,712)
(44,000)
132,375
132,375
$
$
$
63.57
48.77
66.74
67.85
67.85
Aggregate
Intrinsic
Value
(in millions)
Weighted
Average
Remaining
Contractual
Life
(in years)
-
-
1.4
1.4
Outstanding at December 31, 2018
Exercised
Forfeited
Outstanding at December 31, 2019
Exercisable at year-end
The total intrinsic value of stock options exercised in 2019, 2018 and 2017 was $0.2 million, $0.7 million and $0.4 million,
respectively. The income tax benefit realized from stock options exercised was $38,342, $157,442 and $153,759 for the years ended
December 31, 2019, 2018 and 2017, respectively. There were 184,692 anti-dilutive stock option shares on December 31, 2019.
Stock-based compensation is recognized as selling, general and administrative expense in the accompanying Consolidated
Statements of Income. For the years ended December 31, 2019, 2018 and 2017, there was no stock-based compensation expense for
stock option awards and no stock-based compensation expense was capitalized during 2019, 2018 and 2017.
Options granted to employees vest over four years and the Company recognizes compensation expense on a straight-line basis
over the vesting period of the options. At December 31, 2019, there was no unrecognized compensation expense related to non-vested
stock options as all outstanding options were fully vested.
Restricted Stock Awards
On October 28, 2019 and 2018, pursuant to the 2017 Plan and the 2004 Plan, the Company awarded officers, directors and key
employees restricted stock awards (RSAs), which is an award of common stock subject to time vesting. The awards issued under both
the 2017 Plan and the 2004 Plan are restricted as to transference, sale and other disposition. These RSAs vest ratably over a three -year
period. The RSAs may also vest in the event of a change of control. Upon termination, whether voluntary or involuntary, the RSAs
that have not vested will be returned to the Company resulting in stock forfeitures. The fair market value of the stock on the date of
grant is amortized and charged to selling, general and administrative expense over the stipulated time period over which the RSAs vest
on a straight-line basis, net of estimated forfeitures.
The Company’s RSA activity and related information is presented below:
Weighted-
average
Grant Date
Fair Value
43.18
$
44.35
44.22
43.08
43.16
$
Restricted
Stock
403,179
186,730
(218,180)
(23,039)
348,690
Unvested at December 31, 2018
Granted
Vested
Forfeited
Nonvested at December 31, 2019
69
RSA compensation expense for the years ended December 31, 2019, 2018 and 2017 totaled $8.6 million, $8.8 million and $8.4
million, respectively. For 2019, 2018 and 2017, the income tax benefit recognized in net income for RSAs was $2.0 million, $1.5
million and $1.9 million , respectively. As of December 31, 2019, there was $7.4 million of total unrecognized compensation cost
related to nonvested RSAs, which is expected to be recognized over a weighted average period of 2.9 years. There were 45,857 anti-
dilutive restricted shares on December 31, 2019.
Performance Unit Awards
On October 28, 2019 and 2018, pursuant to the 2017 Plan and the 2004 Plan, the Company awarded performance unit awards
(Performance Units) to officers and key employees. The Performance Units were valued on a per unit basis based on a Monte Carlo
simulation at $48.47 for the 2019 grants, $54.62 for the 2018 grants, and $54.64 for the 2017 grants, approximately 108.9%, 126.8%
and 131.7% , respectively, of the grant date share price. Under the terms of the Performance Units, participants may earn from 0% to
200% of their target award based upon the Company’s relative total share return (TSR) in comparison to the 15 component companies
of the Philadelphia Oil Service Index.
The TSR is calculated over a three -year period from October 1, 2019 and 2018 to September 30, 2022 and 2021, respectively,
and assumes reinvestment of dividends for companies within the index that pay dividends, which Dril-Quip does not.
Assumptions used in the Monte Carlo simulation are as follows:
Grant date
Performance period
Volatility
Risk-free interest rate
Grant date price
2019
October 28, 2019
October 1, 2019 to September
30, 2022
38.8%
1.7%
44.53
$
$
2018
October 28, 2018
October 1, 2018 to
September 30, 2021
32.6%
2.9%
43.09
The Company’s Performance Unit activity and related information is presented below:
Nonvested balance at December 31, 2018
Granted
Vested
Nonvested balance at December 31, 2019
Number of
Performance
Units
Weighted
Average
Grant Date
Fair Value
Per Unit
288,093
183,471
(203,014)
268,550
$
$
54.22
48.47
53.46
52.81
Performance Unit compensation expense was $9.6 million, $4.2 million and $5.4 million for the years ended December 31,
2019, 2018 and 2017, respectively. The income tax benefit recognized in net income for Performance Units was $1.9 million, $0.4
million and $0.8 million, for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, there was
$8.3 million of total unrecognized compensation expense related to nonvested Performance Units which is expected to be recognized
over a weighted average period of 2.1 years. There were 14,596 anti-dilutive Performance Units at December 31, 2019.
Director Stock Compensation Awards
In June 2014, the Board of Directors authorized a stock compensation program for the directors pursuant to the 2004 Plan. This
program continues under the 2017 Plan. Under this program, the Directors may elect to receive all or a portion of their fees in the form
of restricted stock awards (DSAs) in an amount equal to 125% of the fees in lieu of cash. The awards are made quarterly on the first
business day after the end of each calendar quarter and vest on January 1 of the second year after the grant date.
The Company's DSA activity for the year ended December 31, 2019 is presented below:
Weighted
Average
Grant Date
Fair Value
Per Share
DSA Number
of Shares
18,879
26,781
(9,340)
36,320
$
$
49.93
43.29
51.58
44.61
Nonvested balance at December 31, 2018
Granted
Vested
Nonvested balance at December 31, 2019
70
Director stock compensation awards expense for 2019 was $782,125 as compared to $460,884 for 2018 and $462,968 for 2017.
For 2019, 2018, and 2017, the income tax benefit recognized in net income for DSAs was $58,901, $81,879, and $115,002,
respectively. There was $885,558 of unrecognized compensation expense related to nonvested DSAs, which is expected to be
recognized over a weighted average period of one year. There were 6,514 anti-dilutive DSA shares on December 31, 2019.
Equity Compensation Plan Information
The following table summarizes information for equity compensation plans in effect as of December 31, 2019 :
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (1)
(a)
Weighted-
average
exercise
price of
outstanding
options,
warrants and
rights (2)
(b)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plan
(c)
400,925
$
-
400,925
$
67.85
-
67.85
597,780
-
597,780
Plan category
Equity compensation plans approved by
stockholders
Equity compensation plans not approved by
stockholders
Total
(1)
(2)
Excludes 385,010 shares of unvested RSAs and DSAs, which were granted pursuant to the 2017 Plan and the 2004 Plan. Includes 268,550 unvested Performance Units shown at
100% level of performance achievement.
The weighted average exercise price does not take into account 268,550 unvested Performance Units, which do not have an exercise price.
19. Earnings Per Share
The following is a reconciliation of the basic and diluted earnings per share computation.
2019
Year Ended December 31,
2018
(In thousands, except per
share amounts)
2017
Net income (loss)
Weighted average basic common shares outstanding
Effect of dilutive securities - stock options and awards
Total shares and dilutive securities
Basic income (loss) per common share
Diluted income (loss) per common share
$
$
$
1,720
35,839
313
36,152
0.05
0.05
$
$
$
(95,695) $
37,075
-
37,075
(2.58) $
(2.58) $
(100,639)
37,457
-
37,457
(2.69)
(2.69)
For the years ended December 31, 2019, 2018 and 2017, the Company has excluded the following common stock options and
awards because their impact on the loss per share is anti-dilutive (in thousands on a weighted average basis):
2019
2017
Year Ended December 31,
2018
(In thousands)
9
6
169
240
6
185
15
46
8
21
160
186
Director stock awards
Stock options
Performance share units
Restricted stock awards
71
20. Quarterly Results of Operations (Unaudited):
2019
Revenues
Cost of sales
Gross profit
Operating income (loss)
Net income (loss)
Earnings (loss) per share:
Basic (1)
Diluted (1)
2018
Revenues
Cost of sales
Gross profit
Operating loss
Net loss
Loss per share:
Basic (1)
Diluted (1)
March 31
Quarter Ended
June 30
September 30
(In thousands, except per share data)
Unaudited
December 31
$
$
$
$
$
$
$
94,317
69,376
24,941
(5,603)
(6,051)
(0.17) $
(0.17) $
$
99,173
73,485
25,688
(6,277)
(7,383)
(0.20) $
(0.20) $
$
$
$
$
103,808
73,867
29,941
2,120
1,681
0.05
0.05
94,861
75,537
19,324
(3,748)
(3,042)
(0.08) $
(0.08) $
$
108,227
76,023
32,204
222
(1,310)
(0.04) $
(0.04) $
$
93,257
71,113
22,144
(14,084)
(10,358)
(0.28) $
(0.28) $
108,454
75,741
32,713
6,064
7,400
0.21
0.21
97,335
73,438
23,897
(98,629)
(74,912)
(2.02)
(2.02)
(1)
The sum of the quarterly per share amounts may not equal the annual amount reported, as per share amounts are computed independently for each quarter and for the full year.
21. Subsequent Events
None.
72
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and
with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2019 to provide reasonable assurance that information required to be disclosed in the
Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and
communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding disclosure.
“Management’s Annual Report on Internal Control over Financial Reporting” appears on page 48 of this Annual Report on
Form 10-K.
There has been no change in the Company’s internal controls over financial reporting that occurred during the three months
ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls
over financial reporting.
Item 9B. Other Information
None.
73
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item is set forth under the captions “Election of Directors,” “Corporate Governance Matters”
and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement (the “2020 Proxy
Statement”) for its annual meeting of stockholders to be held on May 14, 2020, which sections are incorporated herein by reference.
Pursuant to Item 401(b) of Regulation S-K, the information required by this item with respect to executive officers of the
Company is set forth in Part I of this report.
Item 11.
Executive Compensation
The information required by this item is set forth in the sections entitled “Director Compensation,” “Executive Compensation”
and “Corporate Governance Matters” in the 2020 Proxy Statement, which sections are incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is set forth in the sections entitled “Security Ownership of Certain Beneficial Owners and
Management” and “Executive Compensation—Equity Compensation Plan Information” in the 2020 Proxy Statement, which sections
are incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is set forth in the section entitled “Corporate Governance Matters” in the 2020 Proxy
Statement, which section is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information required by this item is set forth in the sections entitled “Approval of Appointment of Independent Registered
Public Accounting Firm—Fees Paid to PwC” and “—Audit Committee Pre-Approval Policy for Audit and Non-Audit Services” in the
2020 Proxy Statement, which sections are incorporated herein by reference.
74
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
PART IV
All financial statements of the registrant are set forth under Item 8 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedule
Schedule II—Valuation and Qualifying Accounts
Description
Allowance for doubtful trade receivables
December 31, 2019
December 31, 2018
December 31, 2017
Allowance for slow moving and excess inventory
December 31, 2019
December 31, 2018
December 31, 2017
Balance at
beginning
of period
Charges to
costs and
expenses
Recoveries and
write offs
Balance at
end of
period
(In thousands)
$
$
$
$
$
$
5,666
4,519
5,570
108,567
83,566
45,648
$
$
$
$
$
$
617
3,794
1,709
1,032
34,155
32,204
$
$
$
$
$
$
(4,069) $
(2,647) $
(2,760) $
2,214
5,666
4,519
(38,579) $
(9,154) $
$
5,714
71,020
108,567
83,566
All other financial schedules are omitted because of the absence of conditions under which they are required or because the
required information is presented in the financial statements or notes thereto.
(a)(3) Exhibits
Dril-Quip will furnish any exhibit to a stockholder upon payment by the stockholder of the Company’s reasonable expenses to
furnish the exhibit.
Exhibit No.
Description
*2.1 —
Stock Purchase Agreement, dated as of October 14, 2016, by and between Pearce Industries, Inc. and the
Company (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed
on October 17, 2016, File No. 001-13439).
*3.1 —
Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2017, File No. 001-13439).
*3.2
Certificate of Elimination of Series A Junior Participating Preferred Stock of the Company (incorporated herein
by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31,
2017, File No. 001-13439).
*3.3 —
Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K filed on May 20, 2014, File No. 001-13439).
*4.1 —
Form of certificate representing Common Stock (incorporated herein by reference to Exhibit 4.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, File No. 001-13439).
*4.2 —
Description of securities
*+10.1 —
Employment Agreement, dated as of December 8, 2011, between the Company and Mr. DeBerry (incorporated
herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on December 12,
2011, File No. 001-13439).
75
*+10.2 —
Employment Agreement, dated as of December 8, 2011, between the Company and Mr. Gariepy (incorporated
herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on December 12,
2011, File No. 001-13439).
*+10.3 —
*+10.4 —
*+10.5 —
Separation Agreement and Release, dated as of March 5, 2019, between the Company and James A. Gariepy
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
March 8, 2019, File No. 001-13439).
Employment Agreement, dated as of December 8, 2011, between the Company and Mr. Webster (incorporated
herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K/A filed on December 12,
2011, File No. 001-13439).
Employment Agreement, dated as of March 7, 2017, between the Company and Mr. Bird (incorporated herein
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 9, 2017, File No.
001-13439).
*+10.6 —
Employment Agreement, dated as of May 16, 2019, between the Company and Mr. Kumar (incorporated
herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on May 20, 2019).
*+10.7 —
Amended and Restated 2004 Incentive Plan of Dril-Quip, Inc. (incorporated herein by reference to Exhibit A to
the Company’s Proxy Statement filed on April 6, 2012, File No. 001-13439).
*+10.8
—
*+10.9 —
*+10.10
*+10.11
*+10.12
*+10.13
*+10.14
*10.15
*10.16
—
—
—
—
—
—
—
2017 Omnibus Incentive Plan of Dril-Quip, Inc. (incorporated herein by reference to Exhibit A to the
Company’s Proxy Statement filed on March 31, 2017, File No. 001-13439).
Form of Standard Non-Qualified Stock Option Agreement under 2004 Incentive Plan of Dril-Quip, Inc.
(incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on
December 19, 2008, File No. 001-13439).
Form of Restricted Stock Award Agreement under 2017 Omnibus Incentive Plan of Dril-Quip, Inc.
(incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2017, File No. 001-13439).
Form of Restricted Stock Award Agreement under 2017 Omnibus Incentive Plan of Dril-Quip, Inc.
(incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed on
May 20, 2019, File No. 001-13439).
2017 Performance Unit Award Agreement under 2017 Omnibus Incentive Plan of Dril-Quip, Inc. (incorporated
herein by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2017, File No. 001-13439).
Stock Compensation Program for Directors under 2004 Incentive Plan of Dril-Quip, Inc. (incorporated herein
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2014, File No. 001-13439).
Form of Indemnification Agreement (incorporated herein by reference to the Company’s Current Report on
Form 8-K filed on October 17, 2005, File No. 001-13439).
Contract for Goods and Services dated August 20, 2012 between Petroleo Brasileiro S.A. and Dril-Quip do
Brasil LTDA (English translation) (incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, File No. 001-13439).
Amendment to Contract #4600368806 dated as of July 29, 2016, between Petroleo Brasileiro S.A., the
Company, and Dril-Quip do Brasil LTDA (English translation) (incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, File No. 001-
13439).
76
*10.17
*10.18
*10.19
*10.20
—
—
—
—
Extrajudicial Agreement, dated as of October 17, 2016, between Petróleo Brasileiro S.A., the Company and
Dril-Quip do Brazil LTDA (English translation) (incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, File No. 001-13439).
Credit Agreement, dated as of February 23, 2018, among the Company, as borrower, the guarantors party
thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, an issuing bank and
swingline lender (incorporated herein by reference to Exhibit 10.23 to the Company's Annual Report on Form
10-K for the year ended December 31, 2017, File No. 001-13439).
Pledge and Security Agreement, dated as of February 23, 2018, among the Company, TIW Corporation and
Honing, Inc., as grantors, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated herein by
reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31,
2017, File No. 001-13439).
Form of Director Restricted Stock Award Agreement under 2017 Omnibus Incentive Plan of Dril-Quip, Inc.
(incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2019, File No. 001-13439).
**21.1 —
Subsidiaries of the Registrant.
**23.1 —
Consent of PricewaterhouseCoopers LLP.
**31.1 —
Rule 13a-14(a)/15d-14(a) Certification of Blake T. DeBerry.
**31.2 —
Rule 13a-14(a)/15d-14(a) Certification of Jeffrey J. Bird.
**32.1 —
Section 1350 Certification of Blake T. DeBerry.
**32.2 —
Section 1350 Certification of Jeffrey J. Bird.
**101.INS
Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline XBRL document.
—
**101.SCH —
Inline XBRL Schema Document
**101.CAL —
Inline XBRL Calculation Document
**101.DEF —
Inline XBRL Definition Linkbase Document
**101.LAB —
Inline XBRL Label Linkbase Document
**101.PRE —
Inline XBRL Presentation Linkbase Document
104
The cover page from the Annual Report on Form 10-K for the year ended December 31, 2019 formatted in
Inline XBRL (included as exhibit 101).
—
*
**
+
Incorporated herein by reference as indicated.
Filed with this report.
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
77
Item 16.
Form 10-K Summary
Not applicable.
78
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized on February 27, 2020.
SIGNATURES
DRIL-QUIP, INC.
By:
/S/ BLAKE T. DEBERRY
Blake T. DeBerry
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Capacity
Date
/S/
JOHN V. LOVOI
JOHN V. LOVOI
/S/ BLAKE T. DEBERRY
BLAKE T. DEBERRY
/S/
JEFFREY J. BIRD
JEFFREY J. BIRD
/S/ RAJ KUMAR
RAJ KUMAR
/S/ A.P. SHUKIS
A.P. SHUKIS
/S/ TERENCE B. JUPP
TERENCE B. JUPP
/S/ STEVEN L. NEWMAN
STEVEN L. NEWMAN
/S/ AMY SCHWETZ
AMY SCHWETZ
Chairman of the Board
President, Chief Executive Officer and
Director (Principal Executive Officer)
February 27, 2020
February 27, 2020
Senior Vice President, Production Operations and Chief
Financial Officer (Principal Financial and Accounting Officer
and Duly Authorized Signatory)
February 27, 2020
Vice President, Finance and Chief Accounting Officer
February 27, 2020
Director
Director
Director
Director
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
79
Board of Directors
Executive Officers
John V. Lovoi
Chairman of the Board
Blake T. DeBerry
Director, President and
Chief Executive Officer
Terrence B. Jupp
Director
Blake T. DeBerry
Director, President and
Chief Executive Officer
Jeffrey J. Bird
Senior Vice President,
Production Operations and
Chief Financial Officer
Steven L. Newman
Director
Amy B. Schwetz
Director
A.P. Shukis
Director
James C. Webster
Vice President, General Counsel
and Secretary
Raj Kumar
Vice President, Finance and Chief
Accounting Officer
Corporate Address
Dril-Quip, Inc.
6401 N. Eldridge Pkwy.
Houston, TX 77041
+1 713-939-7711
Independent Registered Public
Accountants
PricewaterhouseCoopers LLP
Houston, TX
Transfer Agent
Computershare
P.O. Box 30170
College Station, TX 77842-3170
Analysts, portfolio managers,
representatives of the news media
and other interested parties seeking
financial information about the
Company should contact:
Dril-Quip, Inc.
Investor Relations
6401 N. Eldridge Pkwy.
Houston, TX 77041
+1 713-939-7711
www.dril-quip.com
Common Stock
Dril-Quip Inc.’s common stock is listed on
the New York Stock Exchange under the
symbol “DRQ.”
Annual Meeting
The annual meeting of stockholders will
be held on May 14, 2020 at 10 a.m. at the
Company’s world headquarters located
at 6401 N. Eldridge Pkwy. Houston, TX
77041. Information with respect to the
annual meeting is contained in the Proxy
Statement delivered to the holders of
Dril-Quip, Inc. common stock. This 2019
Annual Report is not to be considered a
part of the proxy soliciting materials.
6401 N. Eldridge Pkwy.
Houston, Texas 77041
+1 713-939-7711
dril-quip.com