Dril-Quip(DRQ) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Presents Q2 2023 unaudited condensed consolidated financial statements, detailing financial position, performance, and cash flows, with accompanying notes - In Q1 2023, the company reorganized its structure, changing reportable business segments from geographic to three product and service lines: Subsea Products, Subsea Services, and Well Construction, with prior year data restated[28][70] - Accounting errors from prior periods, related to an indemnification receivable and duplicate billings, were corrected and revised in the current report to avoid material misstatement of interim results[30][31][50] - Post-period, on July 31, 2023, a Dril-Quip subsidiary acquired Great North Wellhead for CAD $105 million cash, with potential earnout payments up to CAD $30 million[83] Condensed Consolidated Balance Sheets As of June 30, 2023, total assets increased slightly to $979.7 million, total liabilities rose to $100.3 million, and stockholders' equity reached $879.4 million, while cash decreased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $755,156 | $750,024 | | Cash and cash equivalents | $236,490 | $264,804 | | Trade receivables, net | $135,504 | $90,861 | | Inventories, net | $164,523 | $146,004 | | Total Assets | $979,666 | $969,951 | | Total Current Liabilities | $88,124 | $87,555 | | Total Liabilities | $100,257 | $97,599 | | Total Stockholders' Equity | $879,409 | $872,352 | Condensed Consolidated Statements of Income (Loss) The company achieved a net income of $3.5 million in Q2 2023, a turnaround from a $5.6 million loss in Q2 2022, driven by lower charges and gains on asset sales Statement of Income (Loss) Highlights (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $89,607 | $93,978 | $180,472 | $177,115 | | Operating Income (Loss) | $3,606 | $(3,869) | $6,794 | $(9,460) | | Net Income (Loss) | $3,483 | $(5,570) | $5,794 | $(14,508) | | Diluted EPS | $0.10 | $(0.16) | $0.17 | $(0.42) | Condensed Consolidated Statements of Comprehensive Income (Loss) Q2 2023 saw a total comprehensive loss of $1.0 million, primarily due to a $4.5 million foreign currency translation loss offsetting net income Comprehensive Income (Loss) (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) | $3,483 | $(5,570) | $5,794 | $(14,508) | | Foreign currency translation adjustments | $(4,454) | $(12,228) | $(3,880) | $(9,342) | | Total Comprehensive Income (Loss) | $(971) | $(17,798) | $1,914 | $(23,850) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities increased to $41.6 million in H1 2023, while investing activities provided $14.1 million, leading to a $28.3 million decrease in cash Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(41,638) | $(20,209) | | Net cash provided by (used in) investing activities | $14,066 | $(2,847) | | Net cash used in financing activities | $(22) | $(9,740) | | Decrease in cash and cash equivalents | $(28,314) | $(34,667) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $879.4 million by June 30, 2023, driven by net income and stock-based compensation, partially offset by foreign currency adjustments - For the six months ended June 30, 2023, the company did not repurchase any common shares, compared to repurchasing 430,730 shares for $9.7 million in the same period of 2022[24][45][46] Notes to Condensed Consolidated Financial Statements Notes detail strategic reorganization, prior period error revisions, revenue recognition, restructuring charges, and significant subsequent events including an acquisition and tax refund - The aggregate transaction price for remaining performance obligations from over-time product lines was $55.4 million as of June 30, 2023, with 85.3% expected to be recognized within the next 12 months[57] - In Q2 2023, the company recorded a net credit of $0.6 million in restructuring charges, primarily due to a $2.3 million release of a restructuring liability related to its Well Construction business[64][66] - In July 2023, the company received a $16.8 million income tax refund, with an additional $5.4 million refund approved and being processed[85] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's return to profitability in Q2 and H1 2023, driven by product mix, cost savings, and asset sales, alongside increased backlog and liquidity - The company's product backlog increased to approximately $252.0 million at June 30, 2023, up from $240.9 million at December 31, 2022[111] Backlog and Bookings (in thousands) | Metric | Q2 2023 | Q1 2023 | | :--- | :--- | :--- | | Beginning Backlog | $235,145 | $240,865 | | Total Bookings | $106,443 | $85,145 | | Total Revenue | $89,607 | $90,865 | | Ending Backlog | $251,981 | $235,145 | Adjusted EBITDA Reconciliation (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $3,483 | $(5,570) | $5,794 | $(14,508) | | Adjusted EBITDA | $8,787 | $9,340 | $17,625 | $12,499 | - Net cash used in operating activities increased to $41.6 million in H1 2023 from $20.2 million in H1 2022, primarily due to changes in working capital, including a significant increase in trade receivables[168][169] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks involve interest rate changes on investments and foreign exchange rate fluctuations, with no material changes since year-end 2022 - The company is exposed to foreign exchange rate risk, which resulted in a pre-tax gain of $4.8 million in Q2 2023 and $3.7 million for the first six months of 2023[180][181] Item 4. Controls and Procedures As of June 30, 2023, the CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023[184] - No changes occurred in the company's internal control over financial reporting during Q2 2023 that materially affected, or are reasonably likely to materially affect, these controls[185] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is defending a favorable jury verdict on appeal in a trade secret lawsuit against FMC Technologies, with other legal actions deemed immaterial - In the FMC Technologies lawsuit, a jury found in favor of Dril-Quip, and the company intends to vigorously defend the verdict on appeal[80][188] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 Item 5. Other Information During Q2 2023, no director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, CEO/CFO certifications, and Inline XBRL documents