DRIL-QUIP, INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements contained in all parts of this document that are not historical facts are forward-looking statements that involve risks and uncertainties that are beyond the control ofDril-Quip, Inc. (the "Company" or "Dril-Quip"). You can identify the Company's forward-looking statements by the words "anticipate," "estimate," "expect," "may," "project," "believe" and similar expressions, or by the Company's discussion of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct. These forward-looking statements include the following types of information and statements as they relate to the Company:
•
the impact of actions taken by theOrganization of Petroleum Exporting Countries and the expanded alliance (OPEC+) with respect to their production levels and the effects thereof;
•
the impact of the ongoing COVID-19 pandemic and the effects thereof;
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the impact of general economic conditions, including inflation, on economic activity and on our operations;
•
future operating results and cash flow;
•
scheduled, budgeted and other future capital expenditures;
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planned or estimated cost savings;
•
working capital requirements;
•
the need for and the availability of expected sources of liquidity;
•
the introduction into the market of the Company's future products;
•
the Company's ability to deliver its backlog in a timely fashion;
•
the market for the Company's existing and future products;
•
the Company's ability to develop new applications for its technologies;
•
the exploration, development and production activities of the Company's customers;
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compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures, remedial actions and proceedings;
•
effects of pending legal proceedings;
•
changes in customers' future product and service requirements that may not be cost effective or within the Company's capabilities;
•
future operations, financial results, business plans and cash needs; and
•
the overall timing and level of transition of the global energy sector from fossil-based systems of energy production and consumption to more renewable energy sources.
These statements are based on assumptions and analysis in light of the Company's experience and perception of historical trends, current conditions, expected future developments and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under "Item 1A. Risk Factors" in Part I of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 .
Investors should note that
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The following is management's discussion and analysis of certain significant factors that have affected aspects of the Company's financial position, results of operations, comprehensive income (loss) and cash flows during the periods included in the accompanying unaudited condensed consolidated financial statements. This discussion should be read in conjunction with the Company's unaudited condensed consolidated financial statements and notes thereto presented elsewhere herein as well as the discussion under "Risk Factors," included herein and "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 . OverviewDril-Quip, Inc. , aDelaware corporation (the "Company" or "Dril-Quip"), designs, manufactures, sells and services highly engineered drilling and production equipment that is well suited primarily for use in deepwater, harsh environment and severe service applications. The Company's principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors, diverters and safety valves.Dril-Quip's products are used by major integrated, large independent and foreign national oil and gas companies and drilling contractors throughout the world.Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-ownedDril-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 organizational structure is based on product and service lines. The Company operates in three business segments- Subsea Products,Subsea Services, andWell Construction . Our Subsea Products business manufactures highly engineered, field-proven products with a wide array of deepwater drilling equipment and technology that meets the requirements for harsh subsea environments. Our Subsea Services business provides high-level aftermarket support and technical services with field technicians that support the full installation and lifecycle management of regulatory and industry standards, as well as offering industry training programs. OurWell Construction business provides products and services utilized in the construction of the wellbore such as completions, casing hardware and liner hanger systems. These products and services are used on both land and offshore markets.
Business Environment
OnAugust 16, 2022 ,President Biden signed into law the Inflation Reduction Act of 2022 (the "Inflation Reduction Act"). The Inflation Reduction Act contains a number of revisions to the Internal Revenue Code, including a 15% book-income corporate alternative minimum tax on any corporation that, along with the other members of its controlled group, if any, has average adjusted financial statement income over$1.0 billion for any 3-tax-year period ending withJanuary 1, 2022 or later and a 1% excise tax on the fair market value of stock that is repurchased by publicly tradedU.S. corporations or their specified affiliates. The alternative minimum tax and the excise tax are effective in taxable years beginning afterDecember 31, 2022 . Currently, we are not subject to the corporate alternative minimum tax. The Company will evaluate any impact related to the excise tax on stock repurchases by the Company in future periods. During the first quarter of 2022,Dril-Quip entered into a collaboration agreement with Aker Solutions ASA (Aker Solutions) to offer subsea injection systems for carbon capture, utilization and storage (CCUS) projects. Under the agreement,Dril-Quip will provide Aker Solutions with CO2 injection Xmas trees and wellheads that will be fully integrated into a larger subsea injection system to provide customers with market-leading technology purposely designed for the injection and storage of CO2. The arrangement will leverage on Aker Solution's position as an integrated supplier of CCUS systems along with its control systems and electrification components. We believe this collaboration agreement focuses on the strengths of both organizations, will deliver an optimum solution for carbon capture and storage, and is in line with each party's strategic goals of collaboration and partnerships to unlock value for customers. InFebruary 2022 ,Russia invadedUkraine , resulting in wide-ranging sanctions imposed onRussia by certain members of theEuropean Union , theUnited Kingdom andthe United States , among others, higher oil prices and increased uncertainty in global markets. AsRussia's invasion ofUkraine continues, there can be no certainty regarding whether such governments or other governments will impose additional sanctions, export-controls or other economic or military measures againstRussia . Although we have minimal operational exposure inRussia and we do not intend to commit further capital towards projects inRussia , the full impact of the invasion ofUkraine , including economic sanctions and export controls or additional war or military conflict, as well as potential responses to them byRussia , is currently unknown and could adversely affect oil and gas companies, many of which are our customers, as well as the global supply chain. For more information on the risks associated with the invasion ofUkraine , see "Our business may also be affected by new sanctions and export controls targetingRussia and other responses toRussia's invasion ofUkraine discussed in our Annual Report Form 10-K "Item 1A. Risk Factors" for the fiscal year endedDecember 31, 2022 . 16
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We continue to monitor the impact of the COVID-19 pandemic, government actions and measures taken to prevent its spread, and the potential to affect our operations, particularly inChina . We are also monitoring the current global economic environment, specifically including inflationary pressures and the macroeconomic impact of the conflict inUkraine , and any resulting impacts on our financial position and results of operations. See our Annual Report Form 10-K "Item 1A. Risk Factors" for the fiscal year endedDecember 31, 2022 . 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. 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. Any future deterioration of commodity prices could lead to material impairment charges to tangible or intangible assets or otherwise result in a material adverse effect on the Company's results of operations. 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.
Oil and Gas Prices
The market for drilling and production equipment and services and the Company's business are substantially dependent on the condition of the oil and gas industry and, in particular, the willingness of oil and gas companies to make capital expenditures on exploration, drilling and production operations. Oil and gas prices and the level of drilling and production activity have historically been characterized by significant volatility. According to theEnergy Information Administration (EIA) of theU.S. Department of Energy , Brent Crude oil prices per barrel for the periods covered by this report were: Three months ended March 31, Brent Crude Oil Price per Barrel 2023 2022 Low$ 71.03 $ 78.25 High 87.54 133.18 Average 81.07 100.87 Closing 79.19 107.29 According to theApril 2023 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average approximately$85 per barrel in 2023 and$81 per barrel in 2024, compared with an average of$101 per barrel in 2022. In itsApril 2023 Oil Market Report, theInternational Energy Agency projected global oil demand will climb by two million barrels per day in 2023 to a record 101.9 million barrels per day. Although crude oil prices had rebounded sharply in 2022, we have seen a downward trend in the first quarter of 2023. 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. 17
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Offshore Rig Count
Detailed below is the average contracted Mobile Offshore Drilling Units
("MODU"). These are rigs currently drilling as well as rigs committed, but not
yet drilling, for the three months ended March 31, 2023 and 2022. The rig count
data includes floating rigs (semi-submersibles and drillships) and jack-up rigs.
The Company has included only these types of rigs as they are the primary assets
used to deploy the Company's products.
Three months ended March 31,
2023 2022
Floating Jack-up Floating Jack-up
Rigs Rigs Rigs Rigs
Mobile Offshore Drilling Units 146 391 135 357
Source: IHS-Petrodata RigBase -
According to IHS-Petrodata RigBase, as ofMarch 31, 2023 , there were 534 contracted rigs (145 floating rigs and 389 jack-up rigs), an increase of 8.8% from the rig count of 491 rigs (132 floating rigs and 359 jack-up rigs) as ofMarch 31, 2022 . 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. InMarch 2018 , the President ofthe United States issued a proclamation imposing a 25 percent global tariff on imports of certain steel products, effectiveMarch 23, 2018 . The President subsequently proposed an additional 25 percent tariff on approximately$50 billion worth of imports fromChina , and the government ofChina responded with a proposal of an additional 25 percent tariff onU.S. goods with a value of$50 billion . In the following months,the United States andChina placed additional, competing tariffs on imported goods until the two countries entered a phase one trade deal, which included an agreement to reduce certain tariffs. Negotiations for a phase two trade deal withChina had begun prior to the outbreak of the global COVID-19 pandemic and if continued could lead to additional changes to the tariff rates in the phase one trade deal.President Biden has indicated that these tariffs will likely remain in place while the administration assessesthe United States' current posture, including a review of the phase one trade deal withChina . The imposition of any additional tariffs or initiation of trade restrictions by or againstthe United States could cause our cost of raw materials to increase or affect the markets for our products. However, given the uncertainty regarding the scope and duration of these trade actions bythe United States and other countries, their ultimate impact on our business and operations remains uncertain. TheUnited Kingdom (U.K. ) officially withdrew from the E.U. onJanuary 31, 2020 ("Brexit"). Brexit and the terms of a subsequent trade and cooperation agreement (TCA) brought to an end theU.K.'s automatic access to the E.U. single market, resulting in theU.K. no longer benefitting from the free movement of goods and services between the E.U. and theU.K. The rights of people to freely move between the E.U. and theU.K. have also been restricted. For more information on the risks associated with Brexit and the TCA, see "Our international operations require us to comply with a number ofU.S. and foreign regulations governing the international trade of goods, services and technology, which expose us to compliance risks" under "Item 1A. Risk Factors" in Part I of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 . The Company believes that its backlog should help mitigate the impact of any negative market conditions; however, slow recovery in commodity prices or an extended downturn in the global economy or future restrictions on, or declines in, oil and gas exploration and production could have a negative impact on the Company and its backlog. The Company's product backlog atMarch 31, 2023 was approximately$235.1 million , compared to approximately$240.9 million atDecember 31, 2022 , and$220.9 million atMarch 31, 2022 . 18
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The following table represents the change in backlog for the three months ended
Three months ended
March 31, December 31, March 31,
2023 2022 2022
(In thousands)
Beginning Backlog $ 240,865 $ 211,767 $ 210,119
Bookings:
Product (1) 55,902 98,967 63,155
Service 21,281 21,657 22,578
Leasing 10,338 10,444 9,996
Cancellation/Revision adjustments (2,432 ) (5,007 ) (2,011 )
Translation adjustments 56 (149 ) 234
Total Bookings 85,145 125,912 93,952
Revenues:
Product 59,246 64,713 55,642
Service 21,281 21,657 17,499
Leasing 10,338 10,444 9,996
Total Revenue 90,865 96,814 83,137
Ending Backlog $ 235,145 $ 240,865 $ 220,934
(1) The backlog data shown above includes all bookings as of March 31, 2023 ,
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 $69.3 million as of March 31, 2023 within
"Revenue Recognition", Note 3 to the Notes to Condensed
Consolidated Financial Statements.
Revenues. Dril-Quip's revenues are generated from three sources: products,
services and leasing. Product revenues are derived from the sale of drilling and
production equipment. Service revenues are earned when the Company provides
technical advisory assistance and rework and reconditioning services. Leasing
revenues are derived from rental tools used during installation and retrieval of
the Company's products. For the three months ended March 31, 2023 and 2022, the
Company derived 65.2% and 66.9%, respectively, of its revenues from the sale of
its products, 23.4% and 21.0%, respectively, of its revenue from services, and
11.4% and 12.0%, respectively, of its revenues from leasing. Service and leasing
revenues generally correlate to revenues from product sales because increased
product sales typically generate increased demand for technical advisory
assistance services and rental of running tools during installation. The Company
has substantial international operations, with approximately 62.8% and 62.8% of
its revenues derived from foreign sales for the three months ended March 31,
2023 and 2022, respectively. The majority of the Company's domestic revenue
relates to operations in the U.S. Gulf of Mexico . Domestic revenue approximated
37.2% and 37.2% of the Company's total revenues for the three months ended March
31, 2023 and 2022, respectively.
Product contracts are generally negotiated and sold separately from service
contracts. In addition, service contracts are not typically included in the
product contracts or related sales orders and are not offered to the customer as
a condition of the sale of the Company's products. The demand for products and
services is generally based on worldwide economic conditions in the oil and gas
industry and is not based on a specific relationship between the two types of
contracts. Substantially all of the Company's sales are made on a purchase order
basis. Purchase orders are subject to change and/or termination at the option of
the customer. In case of a change or termination, the customer is required to
pay the Company for work performed and other costs necessarily incurred due to
the change or termination.
Generally, the Company attempts to raise its prices as its costs increase.
However, the actual pricing of the Company's products and services is impacted
by a number of factors, including global oil prices, competitive pricing
pressure, the level of utilized capacity in the oil service sector, preservation
of market share, the introduction of new products and overall market conditions.
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The Company accounts for more complex, customer specific projects that have relatively longer manufacturing time frames on an over-time basis. For the three months endedMarch 31, 2023 , there were 63 projects representing approximately 32.7% of the Company's total revenues and approximately 50.2% of its product revenues that were accounted for using over-time accounting, compared to 46 projects for the three months endedMarch 31, 2022 , which represented approximately 29.4% of the Company's total revenues and approximately 43.9% of its product revenues. These percentages may fluctuate in the future. Revenues accounted for in this manner are generally recognized based upon a calculation of the percentage complete, which is used to determine the revenue earned and the appropriate portion of total estimated cost of sales to be recognized. Accordingly, price and cost estimates are reviewed periodically as the work progresses, and adjustments proportionate to the percentage complete are reflected in the period when such estimates are revised. Losses, if any, are recorded in full in the period they become known. Amounts received from customers in excess of revenues recognized are classified as a current liability. Cost of Sales. The principal elements of cost of sales are labor, raw materials, manufacturing overhead, and application engineering expenses related to customized products. Cost of sales as a percentage of revenues is influenced by the product mix sold in any particular period, costs from projects accounted for under the over-time method, over/under manufacturing overhead absorption, pricing and market conditions. The Company's costs related to its foreign operations do not significantly differ from its domestic costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses include the costs associated with sales and marketing, general corporate overhead, business development expenses, compensation expense, stock-based compensation expense, legal expenses and other related administrative functions.
Engineering and Product Development Expenses. Engineering and product development expenses consist of new product development and testing.
Restructuring and Other Charges. During the three months endedMarch 31, 2023 , the Company incurred additional costs of approximately$1.7 million under the 2021 global strategic plan. These charges primarily consisted of office moves, site cleanup, preparation costs, consulting and legal fees.
Gain on Sale of Property, Plant and Equipment. Gain on sale of property, plant and equipment consists of sales of certain property, plant and equipment.
Foreign Currency Transaction (Gain) Loss. Foreign currency transaction (gains) and losses result from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated.
Income Tax Provision. The Company's effective income tax rate fluctuates from theU.S. statutory tax rate based on, among other factors, changes in earnings mix by geography and tax jurisdiction, impact of valuation allowances, changes in tax legislation, and other permanent differences related to the recognition of income and expense betweenU.S. GAAP and applicable tax rules. 20
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Results of Operations
The following table sets forth, for the periods indicated, certain condensed
consolidated statements of income (loss) data expressed as a percentage of
revenues:
Three months ended
March 31,
2023 2022
Revenues:
Products 65.2 % 66.9 %
Services 23.4 21.1
Leasing 11.4 12.0
Total revenues 100.0 100.0
Cost of sales:
Products 51.8 57.8
Services 13.2 10.6
Leasing 7.1 8.6
Total cost of sales 72.1 77.0
Selling, general and administrative 24.9 26.9
Engineering and product development 3.7 4.4
Restructuring and other charges 1.9 -
Gain on sale of property, plant and equipment (7.3 ) (0.1 ) Foreign currency transaction (gain) loss
1.2 (1.5 )
Operating income (loss) 3.5 (6.7 )
Interest income 3.1 0.2
Interest expense (0.1 ) (0.1 )
Income (loss) before income taxes 6.5 (6.6 )
Income tax provision 4.0 4.2
Net income (loss) 2.5 % (10.8 )%
The following table sets forth, for the periods indicated, a breakdown of our products, service and leasing revenues:
Three months ended
March 31,
2023 2022
(In millions)
Revenues:
Products:
Subsea products $ 46.1 $ 46.3
Well construction 13.2 9.3
Total products 59.3 55.6
Services:
Subsea services 16.5 13.2
Well construction services 4.8 4.3
Total services 21.3 17.5
Leasing
Subsea leasing 7.4 8.6
Well construction leasing 2.9 1.4
Total leasing 10.3 10.0
Total revenues $ 90.9 $ 83.1
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The following table sets forth, for the periods indicated, our revenues by
business segments:
Three months ended March 31,
2023 2022 2023 2022 2023 2022 2023 2022 2023 2022
Subsea Products Subsea Services Well Construction Corporate Total
(In millions)
Revenue $ 46.1 $ 46.3 $ 23.9 $ 21.8 $ 20.9 $ 15.0 $ - $ - $ 90.9 $ 83.1
Operating
income (loss) 1.5 (2.6 ) 9.4 0.4 0.6 2.6 (8.3 ) (6.0 ) 3.2 (5.6 )
Three Months Ended
Revenues. Revenues increased by$7.7 million , or approximately 9.3%, to$90.9 million for the three months endedMarch 31, 2023 from$83.1 million for the three months endedMarch 31, 2022 .
Well construction revenue increased by approximately
As crude oil prices have continued to rise, the Company has seen an increase in drilling activity in the offshore market. Further, our overall revenues were favorably impacted by an increase in global demand and increased activity from customer drilling schedules. In any given time period, the revenues recognized between the various product lines will vary depending upon the timing of shipments to customers, our product mix and completion status of the projects accounted for under the over-time accounting method, market conditions and customer demand. Cost of Sales. Cost of sales increased by$1.5 million , or approximately 2.4%, to$65.5 million for the three months endedMarch 31, 2023 from$64.0 million for the same period in 2022. Cost of sales as a percentage of revenue decreased to 72.1% from 77.0% for the three months endedMarch 31, 2023 and 2022, respectively, primarily due to favorable product mix and as a result of savings from our business transformation initiatives. Selling, General and Administrative Expenses. For the three months endedMarch 31, 2023 , selling, general and administrative expenses increased marginally by$0.2 million , or 0.9% to$22.6 million from$22.4 million for the same period in 2022. Engineering and Product Development Expenses. For the three months endedMarch 31, 2023 , engineering and product development expenses decreased by approximately$0.3 million , or 7.5%, to$3.4 million from$3.7 million for the same period in 2022. This decrease was attributable mainly to lower spend on research and development activities as we completed certain strategic projects. We are in the process of reprioritizing new research and development initiatives. Restructuring and Other Charges. For the three months endedMarch 31, 2023 , the Company incurred additional costs of approximately$1.7 million under the 2021 global strategic plan. These charges were primarily related to office moves, site cleanup, preparation costs, consulting and legal fees. During the three months endedMarch 31, 2022 , the Company did not incur any significant restructuring costs. Gain on Sale of Property, Plant and Equipment. For the three months endedMarch 31, 2023 , the gain on sale of property, plant and equipment was$6.7 million , primarily related to the sale of ourHouston aftermarket facility and theHouston forge facility buildings. For the three months endedMarch 31, 2022 , gain on sale of property, plant and equipment was not significant.
Foreign Currency Transaction (Gain) Loss. Foreign exchange loss for the three
months ended
Operating Income (Loss).Subsea product operating income was higher for the three months endedMarch 31, 2023 as compared to the same period in 2022, primarily due to a favorable product mix coupled with overall price increases during 2022 that were implemented in response to higher costs that were realized in the first half of 2022 such as increased transportation costs and an increase in the cost of raw materials.Subsea services operating income was higher for the three months endedMarch 31, 2023 as compared to the same period in 2022, primarily due to gain on sale of theHouston aftermarket facility recognized in the current period, overall increased utilization in the current period and rate increases during 2022 that were implemented in response to higher costs that were realized in the first half of 2022 such as increased transportation costs and an increase in the cost of raw materials. 22
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Well Construction operating income was lower for the three months endedMarch 31, 2023 as compared to the same period in 2022, primarily due to an unfavorable foreign exchange movements mainly impactingMexico and costs associated with preparation for anticipated growth and entry into new markets. Corporate operating loss increased for the three months endedMarch 31, 2023 as compared to the same period in 2022, primarily due to restructuring costs of$1.7 million . Income Tax Provision. Income tax provision for the three months endedMarch 31, 2023 was$3.6 million on an income before taxes of$5.9 million , resulting in an effective tax rate of 61.1%. Income tax expense was different than theU.S federal statutory income tax rate of 21% primarily due to projected earnings mix by geography and tax jurisdiction, foreign withholding taxes, nondeductible compensation and the change in valuation allowances inthe United States and in various foreign countries. Income tax provision for the three months endedMarch 31, 2022 was$3.5 million on a loss before taxes of$5.4 million , resulting in an effective income tax rate of approximately (64.2)%. Income tax expense was different than theU.S federal statutory income tax rate of 21% primarily due to pre-tax income or loss in foreign jurisdictions, nondeductible compensation and the change in valuation allowances inthe United States and in various foreign countries.
Net Income (Loss). Net income was approximately
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 relevant measure of how the Company reviews its operating performance.
Adjusted EBITDA
We calculate Adjusted EBITDA as one of the indicators to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure. This measurement is used in concert with net income and cash flows from operations, which measures actual cash generated in the period. In addition, we believe that Adjusted EBITDA is a supplemental measurement tool used by analysts and investors to help evaluate overall operating performance. 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 underU.S. generally accepted accounting principles. The items excluded from Adjusted EBITDA, but included in the calculation of reported net income, are significant components of the condensed consolidated statements of income (loss) and must be considered in performing a comprehensive assessment of overall financial performance. Our calculation of Adjusted EBITDA may not be consistent with calculations of Adjusted EBITDA used by other companies.
The following table reconciles our reported net income to Adjusted EBITDA for each of the respective periods:
Three months ended March 31,
2023 2022
(In thousands)
Net income (loss) $ 2,311 $ (8,938 )
Add:
Interest (income) expense, net (2,747 ) (149 )
Income tax provision 3,624 3,496
Depreciation and amortization expense 6,889
7,559
Restructuring and other charges 1,718
32
Gain on sale of property, plant and equipment (6,647 ) (114 ) Foreign currency transaction (gain) loss 1,120 (1,254 ) Stock compensation expense 2,577 2,527 Adjusted EBITDA (1)$ 8,845 $ 3,159
(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.
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Liquidity and Capital Resources
Cash Flows
Cash flows provided by (used in) type of activity were as follows:
Three months ended March 31,
2023 2022
(In thousands)
Operating activities $ (52,920 ) $ (10,928 )
Investing activities 23,347 (1,858 )
Financing activities (11 ) (5,859 )
(29,584 ) (18,645 )
Effect of exchange rate changes on cash activities 123 1,202
Decrease in cash and cash equivalents$ (29,461 ) $ (17,443 ) Statements of cash flows for entities with international operations that are local currency functional exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are non-cash changes. As a result, changes reflected in certain accounts on the condensed consolidated statements of cash flows may not reflect the changes in corresponding accounts on the condensed consolidated balance sheets. The primary liquidity needs of the Company are (i) to fund capital expenditures to improve and expand facilities and manufacture additional running tools and (ii) to fund working capital. The Company's principal source of funds is cash flows from operations. We believe our business model, our current cash and short-term investment reserves and the ongoing business restructuring and facility realignment will strengthen our balance sheet and leave us well-positioned to manage our business. Based on our analysis, we believe our existing balances of cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months. Net cash used in operating activities for the three months endedMarch 31, 2023 was$52.9 million as compared to$10.9 million for the three months endedMarch 31, 2022 . The$42.0 million increase in cash used is primarily due to cash outflows resulting from changes in operating assets and liabilities of$45.2 million and$8.0 million of non-cash movements which includes items such as restructuring and other charges, gain on sale of property, plant and equipment, stock-based compensation, deferred income taxes, depreciation and amortization. This was partially offset by a decrease in net loss of$11.2 million . The change in operating assets and liabilities for the three months endedMarch 31, 2023 resulted in a$45.2 million decrease in cash as compared to the change in operating assets and liabilities for the three months endedMarch 31, 2022 . The$54.4 million decrease in cash due to changes in trade receivables was mainly due to a significant increase in billings as the rights became unconditional on the contract assets and transferred to trade receivables. Decrease in cash due to changes in inventory levels was$10.4 million as we continually reassess our needs based on backlog trends. This was partially offset by an increase in cash due to the changes in accounts payable and accrued expenses of$15.9 million primarily due to the payment of our agent fees in theMiddle East and certain taxes inMexico in the prior period that did not occur in the current period. The$3.1 million increase in cash due to changes in prepaids and other assets was primarily due to a decrease in advances to vendors related to projects accounted for on an over-time basis. The$0.6 million increase in cash due to the decrease in unbilled receivables was mainly due to completion timelines of some of our projects. The change in investing cash flows for the three months endedMarch 31, 2023 resulted in a$23.3 million increase in cash primarily due to the sale of ourHouston aftermarket facility for approximately$15.4 million and a net change of$13.3 million in our short-term investments as some investments matured during the quarter and were reinvested in investments classified as cash equivalents as per our accounting policy. This was partially offset by$5.4 million of capital expenditure spend by the Company during the current quarter. Capital expenditures by the Company were$5.4 million and$2.1 million for the three months endedMarch 31, 2023 and 2022, respectively. Capital expenditures for the three months endedMarch 31, 2023 were$2.8 million for rental tools to support our developed products,$2.2 million for machinery and equipment related to our global strategic program which includes consolidation of our manufacturing facilities and$0.4 million for other capital expenditures. Capital expenditures for the three months endedMarch 31, 2022 were$1.5 million for rental tools to support our developed products,$0.4 million for machinery and equipment related to our global strategic program which included consolidation of our manufacturing facilities and$0.2 million for other capital expenditures. We constantly review capital expenditure needs to ensure these are justified expenditures. 24
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Table of Contents Credit Facility The Company's ABL Credit Facility, datedFebruary 23, 2018 , as amended, was terminated effectiveFebruary 22, 2022 . In addition, we opened a new cash collateral account withJPMorgan Chase Bank, N.A ., in which cash was transferred to facilitate our existing letters of credit. As ofMarch 31, 2023 , the cash balance in that account was approximately$5.4 million . The Company is required to maintain a balance equal to the outstanding letters of credit plus 5% at all times which is considered as restricted cash and is included in "Cash and cash equivalents" in our condensed consolidated balance sheets as atMarch 31, 2023 andDecember 31, 2022 . Withdrawals from this cash collateral account are only allowed at such point a given letter of credit has expired or has been cancelled.
Repurchase of
OnFebruary 22, 2022 , the Board of Directors authorized an incremental$100.0 million share repurchase plan. The repurchase plans have no set expiration date and any repurchased shares are expected to be cancelled. The manner, timing and amount of any purchase will be determined by management based on an evaluation of market conditions, stock price, liquidity and other factors. The program does not obligate the Company to acquire any amount of common stock and may be modified or superseded at any time at the Company's discretion.
For the three months ended
For the three months endedMarch 31, 2022 , the Company purchased 273,629 shares under the share repurchase plan at an average price of approximately$21.20 per share totaling approximately$5.8 million and had retired such shares.
The Company currently has no derivative instruments and no off-balance sheet hedging or financing arrangements, contracts or operations.
Other Matters
From time to time, the Company enters into discussions or negotiations to acquire other businesses or enter into joint ventures. The timing, size or success of any such efforts and the associated potential capital commitments are unpredictable and dependent on market conditions and opportunities existing at the time. The Company may seek to fund all or part of any such efforts with proceeds from debt or equity issuances. Debt or equity financing may not, however, be available at that time due to a variety of circumstances, including, among others, the Company's credit ratings, industry conditions, general economic conditions and market conditions.
Critical Accounting Estimates
During the three months endedMarch 31, 2023 , there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies. Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2022 for a discussion of our critical accounting policies.
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