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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2024

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission file number 001-13439

 

DRIL-QUIP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

74-2162088

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2050 West Sam Houston Parkway S., Suite 1100

Houston, texas

77042

(Address of principal executive offices) (Zip Code)

(713) 939-7711

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share

DRQ

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

As of April 29, 2024, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 34,420,419.

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I

Item 1.

Condensed Consolidated Financial Statements

3

Balance Sheets

3

Statements of Income (Loss)

4

Statements of Comprehensive Income (Loss)

5

Statements of Cash Flows

6

 

Statements of Stockholders’ Equity

7

Notes to Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 5.

Other Information

33

Item 6.

Index to Exhibits

34

Signatures

35

 

 


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

DRIL-QUIP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

March 31,
2024

 

 

December 31,
2023

 

 

 

(In thousands, except per share data)

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

198,197

 

 

$

187,323

 

Restricted cash

 

 

4,103

 

 

 

4,077

 

Short-term investments

 

 

4,016

 

 

 

25,908

 

Trade receivables, net

 

 

137,135

 

 

 

135,569

 

Unbilled receivables

 

 

139,610

 

 

 

148,429

 

Inventories

 

 

209,160

 

 

 

194,593

 

Prepaid expenses

 

 

13,126

 

 

 

14,119

 

Other current assets

 

 

8,285

 

 

 

9,699

 

Assets held for sale

 

 

1,513

 

 

 

-

 

Total current assets

 

 

715,145

 

 

 

719,717

 

Operating lease right of use assets

 

 

16,356

 

 

 

16,343

 

Property, plant and equipment, net

 

 

215,264

 

 

 

217,631

 

Deferred income taxes

 

 

9,663

 

 

 

8,989

 

Goodwill

 

 

16,288

 

 

 

16,654

 

Intangible assets

 

 

40,247

 

 

 

41,941

 

Other assets

 

 

8,064

 

 

 

6,906

 

Total assets

 

$

1,021,027

 

 

$

1,028,181

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

62,907

 

 

$

60,160

 

Accrued income taxes

 

 

7,064

 

 

 

5,942

 

Contract liabilities

 

 

6,839

 

 

 

7,583

 

Accrued compensation

 

 

14,026

 

 

 

14,035

 

Operating lease liabilities

 

 

2,300

 

 

 

2,118

 

Other accrued liabilities

 

 

40,420

 

 

 

27,865

 

Total current liabilities

 

 

133,556

 

 

 

117,703

 

Deferred income taxes

 

 

10,330

 

 

 

10,564

 

Income tax payable

 

 

385

 

 

 

346

 

Operating lease liabilities, long-term

 

 

14,541

 

 

 

14,554

 

Other long-term liabilities

 

 

4,852

 

 

 

3,754

 

Total liabilities

 

 

163,664

 

 

 

146,921

 

Contingencies (Note 14)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock: 10,000,000 shares authorized at $0.01 par value (none issued)

 

 

-

 

 

 

-

 

Common stock:

 

 

 

 

 

 

100,000,000 shares authorized at $0.01 par value, 34,419,768 and 34,386,577
shares issued and outstanding at March 31, 2024 and December 31, 2023

 

 

343

 

 

 

343

 

Additional paid-in capital

 

 

103,025

 

 

 

100,289

 

Retained earnings

 

 

930,789

 

 

 

950,719

 

Accumulated other comprehensive losses

 

 

(176,794

)

 

 

(170,091

)

Total stockholders’ equity

 

 

857,363

 

 

 

881,260

 

Total liabilities and stockholders’ equity

 

$

1,021,027

 

 

$

1,028,181

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

 

 

Three months ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

 

(In thousands, except per share data)

 

Revenues:

 

 

 

 

 

 

Products

 

$

64,562

 

 

$

59,246

 

Services

 

 

30,187

 

 

 

21,281

 

Leasing

 

 

15,548

 

 

 

10,338

 

Total revenues

 

 

110,297

 

 

 

90,865

 

Cost and expenses:

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

Products

 

 

48,300

 

 

 

47,044

 

Services

 

 

23,290

 

 

 

12,003

 

Leasing

 

 

6,829

 

 

 

6,455

 

Total cost of sales

 

 

78,419

 

 

 

65,502

 

Selling, general and administrative

 

 

29,991

 

 

 

22,585

 

Engineering and product development

 

 

3,738

 

 

 

3,399

 

Restructuring and other charges

 

 

-

 

 

 

1,718

 

Gain on sale of property, plant and equipment

 

 

(200

)

 

 

(6,647

)

Acquisition costs

 

 

19,046

 

 

 

-

 

Foreign currency transaction loss (gain)

 

 

(1,895

)

 

 

1,120

 

Total costs and expenses

 

 

129,099

 

 

 

87,677

 

Operating income (loss)

 

 

(18,802

)

 

 

3,188

 

Interest income, net

 

 

(2,196

)

 

 

(2,747

)

Income (loss) before income taxes

 

 

(16,606

)

 

 

5,935

 

Income tax provision (benefit)

 

 

3,378

 

 

 

3,624

 

Net income (loss)

 

$

(19,984

)

 

$

2,311

 

Net income (loss) per common share:

 

 

 

 

 

 

Basic

 

$

(0.58

)

 

$

0.07

 

Diluted

 

$

(0.58

)

 

$

0.07

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Basic

 

 

34,417

 

 

 

34,128

 

Diluted

 

 

34,417

 

 

 

34,489

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

 

(In thousands)

 

Net income (loss)

 

$

(19,984

)

 

$

2,311

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(6,649

)

 

 

574

 

Total comprehensive income (loss)

 

$

(26,633

)

 

$

2,885

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(19,984

)

 

$

2,311

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

8,432

 

 

 

6,889

 

Stock-based compensation expense

 

 

2,788

 

 

 

2,577

 

Restructuring and other charges

 

 

-

 

 

 

683

 

Gain on sale of property, plant and equipment

 

 

(200

)

 

 

(6,647

)

Acquisition costs

 

 

18,087

 

 

 

-

 

Deferred income taxes

 

 

(1,997

)

 

 

(211

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade receivables, net

 

 

(937

)

 

 

(39,531

)

Unbilled receivables

 

 

3,973

 

 

 

(6,376

)

Inventories

 

 

(13,152

)

 

 

(4,758

)

Prepaids and other assets

 

 

(1,186

)

 

 

1,335

 

Accounts payable and accrued expenses

 

 

124

 

 

 

(9,192

)

Other, net

 

 

(52

)

 

 

-

 

Net cash used in operating activities

 

 

(4,104

)

 

 

(52,920

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(4,757

)

 

 

(5,424

)

Proceeds from sale of property, plant and equipment

 

 

375

 

 

 

15,460

 

Purchase of short-term investments

 

 

-

 

 

 

(9,081

)

Maturities of short-term investments

 

 

21,892

 

 

 

22,392

 

Net cash provided by investing activities

 

 

17,510

 

 

 

23,347

 

Cash flows from financing activities:

 

 

 

 

 

 

Other

 

 

(297

)

 

 

(11

)

Net cash used in financing activities

 

 

(297

)

 

 

(11

)

Effect of exchange rate changes on cash activities

 

 

(2,209

)

 

 

123

 

Increase (decrease) in cash and cash equivalents

 

 

10,900

 

 

 

(29,461

)

Cash and cash equivalents at beginning of period

 

 

191,400

 

 

 

264,804

 

Cash and cash equivalents at end of period

 

$

202,300

 

 

$

235,343

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

Common Stock

 

 

Additional Paid-In Capital

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Losses

 

 

Total

 

 

 

(In thousands, except shares)

 

Balance at January 1, 2024

 

$

343

 

 

$

100,289

 

 

$

950,719

 

 

$

(170,091

)

 

$

881,260

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

54

 

 

 

(6,703

)

 

 

(6,649

)

Net loss

 

 

-

 

 

 

-

 

 

 

(19,984

)

 

 

-

 

 

 

(19,984

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,633

)

Payroll taxes for shares withheld

 

 

-

 

 

 

(52

)

 

 

-

 

 

 

-

 

 

 

(52

)

Stock-based compensation expense

 

 

-

 

 

 

2,788

 

 

 

-

 

 

 

-

 

 

 

2,788

 

Balance at March 31, 2024

 

$

343

 

 

$

103,025

 

 

$

930,789

 

 

$

(176,794

)

 

$

857,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid-In Capital

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Losses

 

 

Total

 

 

 

(In thousands, except shares)

 

Balance at January 1, 2023

 

 

343

 

 

 

90,450

 

 

 

950,168

 

 

 

(168,609

)

 

$

872,352

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

574

 

 

 

574

 

Net income

 

 

-

 

 

 

-

 

 

 

2,311

 

 

 

-

 

 

 

2,311

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,885

 

Stock-based compensation expense

 

 

-

 

 

 

2,577

 

 

 

-

 

 

 

-

 

 

 

2,577

 

Balance at March 31, 2023

 

$

343

 

 

$

93,027

 

 

$

952,479

 

 

$

(168,035

)

 

$

877,814

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


DRIL-QUIP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Basis of Presentation

Dril-Quip, Inc., a Delaware corporation (the “Company” or “Dril-Quip”), is a leading developer of innovative technologies for the energy industry, designing and manufacturing best-in-class products for traditional oil and gas, and certain energy transition applications. The Company designs, manufactures, sells and services highly engineered drilling and production equipment for both offshore and onshore applications. The Company’s principal products consist of subsea and surface wellheads, specialty connectors and associated pipes, subsea production systems, mudline hanger systems, production riser systems, dry tree systems, subsea manifolds, line hangers and expandable liner systems, multi-frac well connections, conventional wellhead, thermal wellhead, completion packers and safety and kelly 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 reportable business segments: Subsea Products, Subsea Services, and Well Construction. The Company’s 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. The Company’s 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. The Company’s Well Construction business provides products and services utilized in the construction of the wellbore such as completions, casing hardware and liner hanger systems. In 2023, the Company acquired Great North and includes its product, service and leasing solutions within the Well Construction segment. Great North offers pressure control and completion solutions, including customized and highly engineered wellhead products for use in heavy oil and thermal production locations, proprietary completion solutions such as the Multi-Well Frac Connector TM, as well as related installation and maintenance services. The Company’s products and services are used on both land and offshore markets. For information with respect to our segments, see “Business Segments,” Note 11 of Notes to the Consolidated Financial Statements.

The condensed consolidated financial statements included herein are unaudited. The balance sheet at December 31, 2023 has been derived from the audited consolidated financial statements as of that date. In the opinion of management, the unaudited condensed consolidated interim financial statements include all normal recurring adjustments necessary for a fair statement of the financial position as of March 31, 2024 and the results of operations and comprehensive income (loss) for the three months ended March 31, 2024 and 2023 and cash flows for the three months ended March 31, 2024 and 2023. Certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations and comprehensive income (loss) for the three months ended March 31, 2024 and cash flows for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

2. Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

Reclassifications

We reclassified approximately $5.5 million of accrued professional fees for the year ended December 31, 2023, from accounts payable to other accrued liabilities to conform to our current year presentation. These reclassifications to the prior period were made to conform to the current period presentation and did not have an impact on our consolidated statements of income (loss), consolidated balance sheets, consolidated statements of comprehensive income (loss), consolidated statements of stockholders’ equity and consolidated statements of cash flows.

8


Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition and asset recoverability tests and inventories.

Revenue Recognition

The Company generates revenues through the sale of products, the sale of services and the leasing of running tools. The Company normally negotiates contracts for products, including those accounted for under the over-time method, rental tools and services separately. Modifications to the scope and price of sales contracts may occur in the form of variations and change orders. For all product sales, it is the customer’s decision as to the timing of the product installation, as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory assistance services. The customer may instead choose to use a third party or its own personnel.

Leasing Revenues

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

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.

The Company’s ABL Credit Facility, dated February 23, 2018, as amended, was terminated effective February 22, 2022. We opened a new cash collateral account with JPMorgan Chase Bank, N.A., in which cash was transferred to facilitate our existing letters of credit. As of March 31, 2024, the cash balance in that account was approximately $4.1 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 at March 31, 2024 and December 31, 2023. Withdrawals from this cash collateral account are only allowed at such point a given letter of credit has expired or has been cancelled.

Short-term Investments

Short-term investments that have a maturity greater than three months and less than a year from the balance sheet date are comprised primarily of time deposits, certificates of deposit, commercial paper, bonds and notes, substantially all of which are denominated in U.S. dollars and are stated at cost plus accrued interest, which approximates fair value. The Company expects to hold all of its Short-term investments to maturity.

For purposes of the condensed consolidated financial statements, the Company does not consider Short-term investments to be cash equivalents.

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.

Fair Value Measurements

The Company applies the applicable accounting guidance for fair value measurements. This guidance provides the definition of fair value, describes the method used to appropriately measure fair value in accordance with generally accepted accounting principles, and outlines fair value disclosure requirements.

The fair value hierarchy established under this guidance prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

9


Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted prices, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate our property and equipment and definite-lived intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by comparing the carrying value to the estimated fair value. We assess recoverability based on undiscounted future net cash flows. Estimating future net cash flows requires us to make judgments regarding long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about our revenue growth, operating margins, capital expenditures, future market conditions and technological developments. If changes in these assumptions occur, our expectations regarding future net cash flows may change such that a material impairment could result.

Goodwill and Intangible Assets

For goodwill and indefinite-lived 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.

Restructuring and Other Charges

Restructuring and other charges consist of costs associated with our 2021 global strategic plan initiated in the fourth quarter of 2021, in an effort to realign our subsea product business with the market conditions. The 2021 global strategic plan concluded in the third quarter of 2023. As a result, the Company incurred no additional restructuring charges during the three months ended March 31, 2024. During the three months ended March 31, 2023, the Company incurred $1.7 million of additional costs under the 2021 global strategic plan. These charges were primarily related to consulting and legal fees, office moves and site cleanup, and preparation costs. These charges are reflected as “Restructuring and other charges” in our condensed consolidated statements of income (loss).

Repurchase of Equity Securities

On February 22, 2022, the Board of Directors authorized an incremental $100.0 million share repurchase plan. The repurchase plan has no set expiration date and any repurchased shares are expected to be cancelled. The manner, timing and amount of any purchase will be determined by management based on an evaluation of market conditions, stock price, liquidity and other factors. The program does not obligate the Company to acquire any amount of common stock and may be modified or superseded at any time at the Company’s discretion.

For the three months ended March 31, 2024 and 2023 the Company did not purchase any shares under the share repurchase plan.

10


Earnings Per Share

Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed considering the dilutive effect of stock awards using the treasury stock method.

In each relevant period, the net income (loss) used in the basic and dilutive earnings per share calculations is the same. The following table reconciles the weighted average basic number of common shares outstanding and the weighted average diluted number of common shares outstanding for the purpose of calculating basic and diluted earnings per share:

 

 

Three months ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

 

(In thousands)

 

Weighted average common shares outstanding – basic

 

 

34,417

 

 

 

34,128

 

Dilutive effect of common stock awards

 

 

-

 

 

 

361

 

Weighted average common shares outstanding – diluted

 

 

34,417

 

 

 

34,489

 

 

 

For the three months ended March 31, 2024 and 2023, the Company has excluded the following common stock awards because their impact on the income (loss) per share is anti-dilutive (in thousands on a weighted average basis):

 

 

Three months ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

 

(In thousands)

 

Director stock awards

 

 

67

 

 

 

-

 

Performance share units

 

 

397

 

 

 

-

 

Restricted stock awards

 

 

592

 

 

 

-

 

 

3. Business Acquisitions

On July 31, 2023, the Company acquired 100% of the issued and outstanding shares of 1185641 B.C. LTD (d/b/a Great North Wellhead and Frac, “Great North”) for a purchase price of $105 million CAD, approximately $79.8 million, which is subject to customary adjustments for cash and working capital. The acquisition of Great North allows Dril-Quip to service its clients with Great North’s products.

The following table summarizes the consideration transferred to acquire Great North:

Fair value of consideration transferred:

 

(In thousands)

 

 

 

 

 

Cash

 

$

84,097

 

Contingent consideration

 

 

3,571

 

Total

 

$

87,668

 

The acquisition of Great North includes a contingent consideration arrangement that requires additional consideration to be paid by Dril-Quip to the sellers of Great North based on the future revenues of Great North for the fiscal years 2024 and 2025. The range of the undiscounted amounts Dril-Quip could pay under the contingent consideration agreement is between zero and $30 million CAD, approximately $22.8 million. The fair value of the contingent consideration recognized on the acquisition date was $3.6 million. The Company is required to remeasure this liability to fair value quarterly with any changes in the fair value recorded in income until the final payment is made. As of March 31, 2024 the fair value of the contingent consideration was $1.2 million. For information with respect to our fair value measurements, see “Fair Value Measurements,” Note 4 of Notes to the Consolidated Financial Statements. The contingent consideration is included in other long-term liabilities as of March 31, 2024.

11


The following table sets forth the preliminary purchase price allocation, which was based on fair value of assets acquired and liabilities assumed at the acquisition date, July 31, 2023:

Preliminary amounts of identified assets acquired and liabilities assumed:

 

 

(In thousands)

 

Cash

 

$

1,810

 

Accounts receivable

 

 

16,499

 

Prepaid expenses and other current assets

 

 

609

 

Inventory

 

 

16,068

 

Property, plant and equipment

 

 

29,338

 

Right of use assets

 

 

11,115

 

Intangible assets (1)

 

 

22,263

 

Total assets acquired

 

$

97,702

 

 

 

 

 

Accounts payable

 

 

7,034

 

Accrued expenses

 

 

3,522

 

Deferred revenue

 

 

47

 

Lease liability, long-term

 

 

11,115

 

Deferred taxes

 

 

5,075

 

Total liabilities assumed

 

$

26,793

 

 

 

 

 

Net identifiable assets acquired

 

$

70,909

 

Goodwill

 

 

16,759

 

Net assets acquired

 

$

87,668

 

(1) Includes $4.0 million of trademarks with a weighted average useful life of 10 years, $3.6 million of patents with a weighted average useful life of 15 years, and $14.7 million of customer relationships with a weighted average useful life of 10 years. See “Goodwill and Intangible Assets,” Note 10 of Notes to the Condensed Consolidated Financial Statements for further information regarding intangible assets.

4. Fair Value Measurements

As of March 31, 2024, the Company’s Level 3 instruments consist of contingent purchase consideration liabilities related to the acquisition of Great North (Note 3). The fair value of such earn-out liabilities is generally determined using a Monte Carlo Simulation that includes significant inputs that are not observable. Significant inputs include management’s estimate of revenue and other market inputs, including expected revenue volatility (6.7%) and a revenue discount rate (8.4%). The fair value of certain earn-out liabilities is derived using the estimated probability of success of achieving the earn-out periods discounted to present value. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement, with the change in fair value recognized in “Change in fair value of earn-out liability” of the condensed consolidated statements of income.

12


The Company’s contingent consideration measured at fair value for the periods presented are as follows (in thousands):

 

 

March 31, 2024

 

 

December 31, 2023

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liability:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

1,182

 

 

 

-

 

 

 

-

 

 

$

1,182

 

 

$

1,208

 

 

 

-

 

 

 

-

 

 

$

1,208

 

Total liabilities

 

$

1,182

 

 

 

-

 

 

 

-

 

 

$

1,182

 

 

$

1,208

 

 

 

-

 

 

 

-

 

 

$

1,208

 

(1) As of March 31, 2024 and December 31, 2023, contingent consideration includes certain amounts in other long-term liabilities on the Company’s condensed consolidated balance sheets.

The following table provides a reconciliation of changes in the fair value of the Company’s earn-out liabilities associated with the Company’s acquisition measured at fair value for the three months ended March 31, 2024 and 2023 (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Beginning period balance

 

$

1,208

 

 

 

-

 

Additions to contingent consideration

 

 

-

 

 

 

-

 

Payments of contingent consideration

 

 

-

 

 

 

-

 

Fair value adjustment of earn-out liabilities

 

 

-

 

 

 

-

 

Currency translation adjustment

 

 

(26

)

 

 

-

 

Ending period balance

 

$

1,182

 

 

$

-

 

 

5. Revenue Recognition

Revenues from contracts with customers consisted of the following:

 

 

Three months ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

 

Products:

 

 

 

 

 

 

Subsea products

 

$

35,332

 

 

$

46,117

 

Well construction

 

 

29,230

 

 

 

13,129

 

Total products

 

$

64,562

 

 

$

59,246

 

Services:

 

 

 

 

 

 

Subsea services

 

$

16,723

 

 

$

16,487

 

Well construction services

 

 

13,464

 

 

 

4,794

 

Total services

 

$

30,187

 

 

$

21,281

 

Leasing:

 

 

 

 

 

 

Subsea leasing

 

$

7,856

 

 

$

7,409

 

Well Construction leasing

 

 

7,692

 

 

 

2,929

 

Total leasing

 

$

15,548

 

 

$

10,338

 

Total revenues

 

$

110,297

 

 

$

90,865

 

 

Contract Balances

Balances related to contracts with customers consisted of the following:

Contract Assets (amounts shown in thousands)

Contract assets at December 31, 2023

 

$

148,429

 

Additions

 

 

107,633

 

Transfers to Trade receivables, net

 

 

(116,452

)

Contract assets at March 31, 2024

 

$

139,610

 

 

13


Contract Liabilities (amounts shown in thousands)

Contract liabilities at December 31, 2023

 

$

7,583

 

Additions

 

 

1,920

 

Revenue recognized

 

 

(2,664

)

Contract liabilities at March 31, 2024

 

$

6,839

 

Contract assets include unbilled accounts receivable associated with contracts accounted for under the over-time accounting method which were approximately $92.2 million and $90.2 million at March 31, 2024 and December 31, 2023, respectively. Unbilled contract assets are transferred to trade receivables, net, when the right to bill becomes unconditional. Contract liabilities primarily relate to advance payments from customers.

Obligations for returns and refunds were considered immaterial as of March 31, 2024.

Remaining Performance Obligations

The aggregate amount of the transaction price allocated to remaining performance obligations from our over-time product lines was $56.0 million as of March 31, 2024. The Company expects to recognize revenue on approximately 92.2% of the remaining performance obligations over the next 12 months and the remaining 7.8% thereafter.

The Company applies the practical expedient available under the revenue standard and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

6. Stock-Based Compensation and Stock Awards

During the three months ended March 31, 2024, the Company recognized approximately $2.8 million of stock-based compensation expense. Stock-based compensation is included in “Selling, general and administrative” in our accompanying condensed consolidated statements of income (loss) and “Additional paid-in capital” in our accompanying condensed consolidated balance sheets. During the three months ended March 31, 2023, the Company recognized approximately $2.6 million of stock-based compensation expense.

7. Inventories

Inventories consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

 

 

(In thousands)

 

Raw materials and supplies

 

$

36,428

 

 

$

34,950

 

Work in progress

 

 

33,302

 

 

 

33,911

 

Finished goods

 

 

139,430

 

 

 

125,732

 

Total inventory

 

$

209,160

 

 

$

194,593

 

 

As of March 31, 2024, the inventory values of raw materials, work in progress and finished goods have been reduced by a reserve for slow moving, excess and obsolete inventories of $6.4 million, $3.5 million and $58.3 million, respectively. As of December 31, 2023 the inventory values of raw materials, work in progress and finished goods have been reduced by a reserve for slow moving, excess and obsolete inventories of $8.3 million, $2.7 million and $55.2 million, respectively.

8. Assets Held for Sale

In accordance with the applicable accounting guidance, FASB ASC 360-10-45-9, the Company identified $1.0 million of buildings and $0.5 million of land as held for sale in the first quarter of 2024. The assets’ net carrying amount were reclassified from Property, plant and equipment, net, to Assets held for sale on the condensed consolidated balance sheets at March 31, 2024. No long-lived asset write downs were recorded in the three months ended March 31, 2024.

14


9. Restructuring and Other Charges

The 2021 global strategic plan concluded in the third quarter of 2023. As a result, the Company did not incur any restructuring charges during the three months ended March 31, 2024.

During the three months ended March 31, 2023, the Company incurred costs of approximately $1.7 million under the 2021 global strategic plan. These charges primarily consist of office moves, site cleanup, preparation costs, and consulting and legal fees.

The following table summarizes the changes to our accrued liability balance related to restructuring and other charges as of March 31, 2024 (in thousands):

 

 

Total

 

Beginning balance at January 1, 2024

 

$

630

 

Additions for costs expensed

 

 

-

 

Reductions for payments

 

 

(600

)

Other

 

 

(30

)

Ending balance at March 31, 2024

 

$

0

 

 

10. Goodwill and Intangible Assets

Goodwill

The following table summarizes the change in goodwill, which was acquired in the acquisition of Great North in 2023 (in millions):

 

 

Total

 

Net balance as of December 31, 2023

 

$

16.7

 

Addition due to business combination

 

 

-

 

Impairments

 

 

-

 

Foreign currency translation

 

 

(0.4

)

Net balance as of March 31, 2024 (1)

 

$

16.3

 

(1) As of March 31, 2024, the Goodwill balance is included in long-lived assets in the Well Construction business segment.

Intangible Assets

Intangible assets, the majority of which were acquired in the acquisition of TIW Corporation in 2016, OilPatch Technologies in 2017, and Great North in 2023, consist of the following:

 

 

 

 

 

March 31, 2024

 

 

 

Estimated
Useful Lives

 

Gross
Book Value

 

 

Accumulated
Amortization

 

 

Foreign
Currency
Translation

 

 

Net Book
Value

 

 

 

 

 

(In thousands)

 

Trademarks

 

10 – 15 years

 

$

12,101

 

 

$

(3,048

)

 

$

(97

)

 

$

8,956

 

Patents

 

15 – 30 years

 

 

9,670

 

 

 

(4,369

)

 

 

(78

)

 

 

5,223

 

Customer relationships

 

5 – 15 years

 

 

40,370

 

 

 

(13,978

)

 

 

(324

)

 

 

26,068

 

Organizational costs

 

3 years

 

 

172

 

 

 

(169

)

 

 

(3

)

 

 

-

 

 

 

 

$

62,313

 

 

$

(21,564

)

 

$

(502

)

 

$

40,247

 

 

 

 

 

 

December 31, 2023

 

 

 

Estimated
Useful Lives

 

Gross
Book Value

 

 

Accumulated
Amortization

 

 

Foreign
Currency
Translation

 

 

Net Book
Value

 

 

 

 

 

(In thousands)

 

Trademarks

 

10 – 15 years

 

$

12,091

 

 

$

(2,811

)

 

$

4

 

 

$

9,284

 

Patents

 

15 30 years

 

 

9,686

 

 

 

(4,200

)

 

 

(22

)

 

 

5,464

 

Customer relationships

 

5 – 15 years

 

 

40,291

 

 

 

(13,095

)

 

 

(3

)

 

 

27,193

 

Organizational costs

 

3 years

 

 

163

 

 

 

(163

)

 

 

-

 

 

 

-

 

 

 

 

$

62,231

 

 

$

(20,269

)

 

$

(21

)

 

$

41,941

 

 

15


 

11. Business Segments

Operating segments are defined in FASB ASC Topic 280, Segment Reporting, as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company’s operations are organized into three reportable business segments: Subsea Products, Subsea Services, and Well Construction. The Company evaluates segment performance based on operating income. The accounting policies of the segments are the same as described in the summary of significant accounting policies.

Subsea Products. The Company’s Subsea Products segment designs, manufactures and sells a variety of products including subsea wellheads, connectors and surface equipment, and subsea production systems.

Subsea Services. The Company’s Subsea Services segment delivers a variety of technical services including subsea rental services, subsea rework services and subsea services shared support.

Well Construction. The Company’s Well Construction business provides products and services utilized in the construction of the wellbore such as completions, casing hardware and liner hanger systems. In 2023, the Company acquired Great North and includes its product, service and leasing solutions within the Well Construction segment. Great North offers pressure control and completion solutions, including customized and highly engineered wellhead products for use in heavy oil and thermal production locations, proprietary completion solutions such as the Multi-Well Frac Connector TM, as well as related installation and maintenance services.

During the three months ended March 31, 2024, the Company did not incur any costs under the 2021 global strategic plan. During the three months ended March 31, 2023, the Company incurred $1.7 million of additional costs under the 2021 global strategic plan, all of which is in Corporate.

The following tables presents selected financial data by business segment:

 

 

Three months ended March 31,

 

 

 

2024

 

 

2023

 

 

 

(In thousands)

 

Revenue

 

 

 

 

 

 

Subsea products

 

$

35,332

 

 

$

46,117

 

Subsea services

 

 

24,579

 

 

 

23,896

 

Well construction

 

 

50,386

 

 

 

20,852

 

Total revenue

 

$

110,297

 

 

$

90,865

 

Depreciation and amortization

 

 

 

 

 

 

Subsea products

 

$

1,569

 

 

$

1,599

 

Subsea services

 

 

2,247

 

 

 

2,754

 

Well construction

 

 

3,867

 

 

 

1,743

 

Segment depreciation and amortization

 

 

7,683

 

 

 

6,096

 

Corporate (1)

 

 

749

 

 

 

793

 

Total depreciation and amortization

 

$

8,432

 

 

$

6,889

 

Operating income (loss)

 

 

 

 

 

 

Subsea products

 

$

639

 

 

$

1,495

 

Subsea services

 

 

1,833

 

 

 

9,384

 

Well construction

 

 

5,632

 

 

 

562

 

Segment operating income

 

 

8,104

 

 

 

11,441

 

Corporate (1)

 

 

(26,906

)

 

 

(8,253

)

Total operating income (loss)

 

$

(18,802

)

 

$

3,188

 

 

(1) Corporate includes the expenses and assets of the Company’s corporate office functions, legal and other administrative expenses that are managed at a consolidated level.

The Company does not allocate assets to its reportable segments as they are not included in the review performed by the Chief Operating Decision Maker (CODM) for purposes of assessing segment performance and allocating resources. The balance sheet is reviewed on a consolidated basis and is not used in the context of segment reporting.

16


12. Income Tax

The effective tax rate for the three months ended March 31, 2024 was (20.3%) compared to 61.1% for the same period in 2023. The change in the effective tax rate between the periods resulted primarily due to the change in earnings mix by geography and tax jurisdiction as compared to the prior period, changes in valuation allowances in the United States, foreign withholding tax, and changes in nondeductible expenses. In the United States, significant transaction costs in connection with the proposed merger with Innovex Downhole Solutions Inc. were incurred which were partially deductible. As such, these costs had a larger impact to the earnings mix as compared to previous periods.

The Company had no outstanding NOL carryback claims as of December 31, 2023 including the estimated carryback claim relating to the 2020 tax