DRIL-QUIP INC [DRQ] Filings

10-Q 1 drq-20230930.htm 10-Q 10-Q

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 September 30, 2023


☐	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 regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

As of October 24, 2023, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 34,183,053.

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		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	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
PART II
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 5.	Other Information	35
Item 6.	Index to Exhibits	36
	Signatures	37

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

DRIL-QUIP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30, 2023			December 31, 2022
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	181,072		$	264,804
Short-term investments		8,911			32,232
Trade receivables, net		133,337			90,861
Unbilled receivables		154,305			144,428
Inventories, net		183,250			146,004
Prepaid expenses		19,237			19,874
Other current assets		18,100			32,438
Assets held for sale		10,828			19,383
Total current assets		709,040			750,024
Operating lease right of use assets		16,235			4,872
Property, plant and equipment, net		211,806			181,270
Deferred income taxes		5,839			4,488
Goodwill		16,237			-
Intangible assets		42,504			23,348
Other assets		5,907			5,949
Total assets	$	1,007,568		$	969,951
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	50,455		$	43,019
Accrued income taxes		6,604			4,868
Contract liabilities		8,098			8,020
Accrued compensation		14,141			11,296
Operating lease liabilities		2,057			1,054
Other accrued liabilities		25,380			19,298
Total current liabilities		106,735			87,555
Deferred income taxes		12,114			3,756
Income tax payable		451			823
Operating lease liabilities, long-term		14,381			3,807
Other long-term liabilities		3,425			1,658
Total liabilities		137,106			97,599
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, 34,177,472 and 34,157,057 shares issued and outstanding at September 30, 2023 and December 31, 2022		343			343
Additional paid-in capital		98,169			90,450
Retained earnings		948,928			950,168
Accumulated other comprehensive losses		(176,978	)		(168,609	)
Total stockholders’ equity		870,462			872,352
Total liabilities and stockholders’ equity	$	1,007,568		$	969,951

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

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DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)


	Three months ended						Nine months ended
	September 30,						September 30,
	2023			2022			2023			2022
	(In thousands, except per share data)
Revenues:
Products	$	77,603		$	58,508		$	192,677		$	176,129
Services		27,214			20,443			72,228			57,538
Leasing		12,427			9,190			32,811			31,589
Total revenues		117,244			88,141			297,716			265,256
Cost and expenses:
Cost of sales:
Products		60,640			49,714			152,849			151,932
Services		19,083			8,105			46,199			24,773
Leasing		5,880			7,891			17,768			22,663
Total cost of sales		85,603			65,710			216,816			199,368
Selling, general and administrative		26,993			22,431			71,692			67,322
Engineering and product development		3,061			2,645			9,662			9,041
Restructuring and other charges		2,267			4,101			3,375			9,898
Gain on sale of property, plant and equipment		(1,027	)		(17,276	)		(8,412	)		(17,770	)
Acquisition costs		5,358			-			6,492			-
Foreign currency transaction loss (gain)		1,060			(1,901	)		(2,632	)		(5,574	)
Total costs and expenses		123,315			75,710			296,993			262,285
Operating income (loss)		(6,071	)		12,431			723			2,971
Interest income, net		(2,312	)		(248	)		(7,038	)		(871	)
Income (loss) before income taxes		(3,759	)		12,679			7,761			3,842
Income tax provision (benefit)		3,275			(610	)		9,001			5,061
Net income (loss)	$	(7,034	)	$	13,289		$	(1,240	)	$	(1,219	)
Net income (loss) per common share:
Basic	$	(0.21	)	$	0.39		$	(0.04	)	$	(0.04	)
Diluted	$	(0.21	)	$	0.38		$	(0.04	)	$	(0.04	)
Weighted average common shares outstanding:
Basic		34,132			33,948			34,130			33,948
Diluted		34,132			34,232			34,130			33,948

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

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DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


	Three months ended						Nine months ended
	September 30,						September 30,
	2023			2022			2023			2022
	(In thousands)
Net income (loss)	$	(7,034	)	$	13,289		$	(1,240	)	$	(1,219	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(4,489	)		(10,487	)		(8,369	)		(19,829	)
Total comprehensive income (loss)	$	(11,523	)	$	2,802		$	(9,609	)	$	(21,048	)

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

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DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine months ended
	September 30,
	2023			2022
	(In thousands)
Cash flows from operating activities:
Net loss	$	(1,240	)	$	(1,219	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		21,837			22,352
Stock-based compensation expense		7,719			7,669
Restructuring and other charges		(1,148	)		6,119
Gain on sale of property, plant and equipment		(8,412	)		(17,770	)
Acquisition costs		4,585			-
Deferred income taxes		1,612			1,538
Changes in operating assets and liabilities:
Trade receivables, net		(22,461	)		16,980
Unbilled receivables		(12,440	)		(38,097	)
Inventories, net		(18,783	)		2,255
Prepaids and other assets		16,750			(8,854	)
Accounts payable and accrued expenses		(6,423	)		(10,124	)
Other, net		-			(16	)
Net cash used in operating activities		(18,404	)		(19,167	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(21,041	)		(13,712	)
Proceeds from sale of property, plant and equipment		17,291			18,535
Acquisition of Great North, net of cash acquired		(82,287	)		-
Purchase of short-term investments		(22,978	)		(25,287	)
Maturities of short-term investments		46,299			-
Net cash used in investing activities		(62,716	)		(20,464	)
Cash flows from financing activities:
Repurchase of common shares		-			(20,807	)
Other		(41	)		(74	)
Net cash used in financing activities		(41	)		(20,881	)
Effect of exchange rate changes on cash activities		(2,571	)		(4,660	)
Decrease in cash and cash equivalents		(83,732	)		(65,172	)
Cash and cash equivalents at beginning of period		264,804			355,451
Cash and cash equivalents at end of period	$	181,072		$	290,279

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

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DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Losses			Total
	(In thousands, except shares)
Balance at July 1, 2023	$	343		$	95,593		$	955,962		$	(172,489	)	$	879,409
Foreign currency translation adjustment		-			-			-			(4,489	)		(4,489	)
Net loss		-			-			(7,034	)		-			(7,034	)
Comprehensive loss														(11,523	)
Stock-based compensation expense		-			2,576			-			-			2,576
Balance at September 30, 2023	$	343		$	98,169		$	948,928		$	(176,978	)	$	870,462

Balance at January 1, 2023	$	343		$	90,450		$	950,168		$	(168,609	)	$	872,352
Foreign currency translation adjustment		-			-			-			(8,369	)		(8,369	)
Net loss		-			-			(1,240	)		-			(1,240	)
Comprehensive loss														(9,609	)
Stock-based compensation expense		-			7,719			-			-			7,719
Balance at September 30, 2023	$	343		$	98,169		$	948,928		$	(176,978	)	$	870,462

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Losses			Total
	(In thousands, except shares)
Balance at July 1, 2022	$	348		$	85,351		$	948,917		$	(165,927	)	$	868,689
Foreign currency translation adjustment		-			-			-			(10,487	)		(10,487	)
Net income		-			-			13,289			-			13,289
Comprehensive income														2,802
Repurchase of common shares (457,467 shares)		(5	)		-			(11,145	)		-			(11,150	)
Stock-based compensation expense		-			2,569			-			-			2,569
Other		-			(3	)		9			-			6
Balance at September 30, 2022	$	343		$	87,917		$	951,070		$	(176,414	)	$	862,916

Balance at January 1, 2022		352			80,254			973,087			(156,585	)	$	897,108
Foreign currency translation adjustment		-			-			-			(19,829	)		(19,829	)
Net loss		-			-			(1,219	)		-			(1,219	)
Comprehensive loss														(21,048	)
Repurchase of common shares (888,197 shares)		(9	)		-			(20,798	)		-			(20,807	)
Stock-based compensation expense		-			7,669			-			-			7,669
Other		-			(6	)		-			-			(6	)
Balance at September 30, 2022	$	343		$	87,917		$	951,070		$	(176,414	)	$	862,916

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

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DRIL-QUIP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Basis of Presentation

Dril-Quip, Inc., a Delaware corporation (the “Company” or “Dril-Quip”), designs, manufactures, sells and services highly engineered drilling and production equipment for both offshore and onshore applications. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors, diverters and safety valves. Dril-Quip’s products are used by major integrated, large independent and foreign national oil and gas companies and drilling contractors throughout the world. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip’s customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products.

During the quarter ended March 31, 2023, the Company reorganized its structure in order to streamline operations and leadership around more focused and integrated product and service lines to align with its business strategy. To reflect the Company’s new organizational structure, the Company changed presentation of its segments in 2023 into the following three reportable business segments: Subsea Products, Subsea Services, and Well Construction. Segment operating results for the prior year comparative period have been restated to reflect this change. Previously, the Company’s operations were organized into three geographic segments. 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. Our Well 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. Additionally, 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. For information with respect to our segments, see “Business Segments,” Note 12 of Notes to the Condensed Consolidated Financial Statements.

The condensed consolidated financial statements included herein are unaudited. The balance sheet at December 31, 2022 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 September 30, 2023 and the results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022 and cash flows for the nine months ended September 30, 2023 and 2022. 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 and nine months ended September 30, 2023 and cash flows for the nine months ended September 30, 2023 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, 2022.

Revision to Previously Reported Financial Information

In conjunction with our close process for the second quarter of 2023, we identified accounting errors related to an indemnification receivable and duplicate billing errors impacting prior periods. In the third quarter of 2022, due to the expiration of the statute of limitations of an Uncertain Tax Position (“UTP”), we released the liability for this UTP, but failed to write-off the related indemnification receivable previously obtained from the seller of an acquired business, resulting in an overstatement of operating income during the period. In addition, the Company identified billing errors in 2022 and 2021 that resulted in an overstatement of revenue and trade receivables.

We have assessed these errors, individually and in the aggregate, and concluded that they were not material to any prior annual or interim period. However, the aggregate amount of the prior period errors would have been material to our current interim condensed consolidated statements of income and to our anticipated full year results and therefore, we have revised our previously issued financial information. For more details, see “Revision to Previously Reported Financial Information,” Note 5 of Notes to the Condensed Consolidated Financial Statements.

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2. Significant Accounting Policies

Principles of Consolidation

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

Reclassifications

We reclassified approximately $5.5 million of accrued bonus related to our short-term incentive plan for the year ended December 31, 2022, from other accrued liabilities to accrued compensation to conform to our current year presentation. These reclassifications 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.

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 September 30, 2023, the cash balance in that account was approximately $4.2 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 September 30, 2023 and December 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.

Short-term Investments

Short-term investments that have a maturity greater than three months and less than a year from the date of purchase 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.

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