Dril-Quip(DRQ) - 2024 Q4 - Annual Report

Mergers and Acquisitions - The merger between Innovex Downhole Solutions, Inc. and Dril-Quip, Inc. was completed on September 6, 2024, resulting in Legacy Innovex becoming a wholly owned subsidiary of Dril-Quip, with shareholders receiving 32,183,966 shares of the new company stock at a conversion rate of 2.0125[22] - Innovex acquired 80% of Downhole Well Solutions, LLC for a total purchase price of $75.1 million in cash and 1,918,558 shares of Company Common Stock on November 29, 2024[23] Market Overview - The total addressable market (TAM) for Innovex's products was estimated at $4.5 billion in 2023, which increased to $8.3 billion in 2024 post-merger, with $3.6 billion in North America and $4.7 billion in International & Offshore markets[25] - In 2024, approximately 55% of Innovex's revenue came from the North American market, while the International and Offshore markets contributed 45%[26] - Innovex's revenue sources in 2024 included approximately 80% from product sales, 8% from rental tools, and 12% from services[35] - The company estimates its market share in the North American market at 13% and 12% in the International and Offshore markets for 2024, reflecting growth opportunities post-merger and acquisition[31] Product Development and Innovation - Innovex is focused on new product development, with an active pipeline aimed at expanding its addressable market and enhancing its product portfolio[46] - Innovex's engineering team is dedicated to R&D and product enhancements, ensuring responsiveness to customer needs and market opportunities[44] - As of December 31, 2024, Innovex held approximately 829 U.S. and international patents, supporting its proprietary technology and product innovations[51] - The company emphasizes a culture of innovation and aims to attract and retain top talent in the oil and natural gas industry[66] Customer and Revenue Insights - As of December 31, 2024, the company had 1,376 unique active customers, a decrease from 1,485 in 2023, with the top ten accounts contributing 35% of revenue[58] - The company’s top customers include major national and international oil companies, indicating a strong market position[58] Operational Strategy - The company maintains a disciplined acquisition strategy, viewing acquisitions as a core competency to drive growth and market share expansion[32] - The company operates manufacturing facilities in multiple locations, including Texas, Louisiana, Scotland, Singapore, Brazil, Canada, Vietnam, and Saudi Arabia, to support global operations[60] - The company maintains a flexible manufacturing and supply chain model to balance responsiveness with cost efficiency[60] - The company plans to increase spending with low-cost international vendors to improve margins and enhance competitiveness[61] - The company employs 2,683 individuals as of December 31, 2024, with a strong focus on employee health, safety, and well-being[67] Regulatory and Environmental Factors - The company is subject to various environmental regulations, which may impose substantial compliance costs and affect operational expenses[69] - The company is actively monitoring climate change regulations, with potential impacts on demand and pricing for fossil fuels due to international commitments[76] - The Infrastructure Investment and Jobs Act and the Inflation Reduction Act (IRA) contain billions in incentives for renewable energy and clean technologies, potentially impacting demand for oil and natural gas products[77] - The IRA imposes a methane emissions charge starting at $900 per ton in 2024, increasing to $1,500 per ton in 2026 and beyond, which could raise customers' operating costs[77] - The Bureau of Ocean Energy Management estimates that $6.9 billion in new supplemental financial assurance will be required from offshore leaseholders under new regulations[85] - Regulatory changes related to hydraulic fracturing and wastewater disposal could adversely affect demand for the company's products and services[81][84] - Almost half of U.S. states have implemented measures to reduce greenhouse gas emissions, which could impact customer operations and demand for products[78] - Environmental activism and divestment initiatives may limit the company's access to capital and affect business operations[80] - Increased regulation regarding induced seismicity could lead to greater opposition to oil and natural gas activities, impacting demand for the company's products[83] Financial Risks - The company is exposed to commodity price risk due to fluctuations in oil and natural gas prices, impacting customer activity levels[358] - As of December 31, 2024, the company had variable rate debt of $11.4 million under the Term Loan and $14.0 million under the Revolver, exposing it to interest rate risk[360] - The company does not engage in material hedging transactions, leaving it exposed to market risks inherent in its operations[359]