Dril-Quip(DRQ) - 2023 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents Dril-Quip's unaudited condensed consolidated financial statements, highlighting net loss and increased assets and liabilities due to the Great North acquisition Condensed Consolidated Balance Sheets This section provides a snapshot of Dril-Quip's financial position, detailing assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change | % Change | | :-------------------------- | :----------- | :----------- | :------- | :------- | | Total Assets | $1,007,568 | $969,951 | $37,617 | 3.9% | | Cash and cash equivalents | $181,072 | $264,804 | $(83,732) | -31.6% | | Goodwill | $16,237 | $- | $16,237 | N/A | | Intangible assets | $42,504 | $23,348 | $19,156 | 82.0% | | Total Liabilities | $137,106 | $97,599 | $39,507 | 40.5% | | Total Stockholders' Equity | $870,462 | $872,352 | $(1,890) | -0.2% | Condensed Consolidated Statements of Income (Loss) This section details Dril-Quip's financial performance over periods, showing revenues, expenses, and net income or loss Condensed Consolidated Statements of Income (Loss) Highlights (in thousands, except per share data) | Metric | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total Revenues | $117,244 | $88,141 | $297,716 | $265,256 | | Total Costs and Expenses | $123,315 | $75,710 | $296,993 | $262,285 | | Operating income (loss) | $(6,071) | $12,431 | $723 | $2,971 | | Net income (loss) | $(7,034) | $13,289 | $(1,240) | $(1,219) | | Basic EPS | $(0.21) | $0.39 | $(0.04) | $(0.04) | - Acquisition costs were $5,358 thousand for the three months and $6,492 thousand for the nine months ended September 30, 2023, significantly impacting expenses[13] - Gain on sale of property, plant and equipment decreased from $17,276 thousand in Q3 2022 to $1,027 thousand in Q3 2023[13] Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents Dril-Quip's total comprehensive income or loss, including net income and other comprehensive income items Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $(7,034) | $13,289 | $(1,240) | $(1,219) | | Foreign currency translation adjustments | $(4,489) | $(10,487) | $(8,369) | $(19,829) | | Total comprehensive income (loss) | $(11,523) | $2,802 | $(9,609) | $(21,048) | Condensed Consolidated Statements of Cash Flows This section outlines Dril-Quip's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (Nine months ended September 30, in thousands) | Activity | 2023 | 2022 | | :--------------- | :---------- | :---------- | | Operating activities | $(18,404) | $(19,167) | | Investing activities | $(62,716) | $(20,464) | | Financing activities | $(41) | $(20,881) | | Decrease in cash and cash equivalents | $(83,732) | $(65,172) | - Net cash used in investing activities significantly increased due to the $82,287 thousand acquisition of Great North, net of cash acquired[21] - Net cash used in financing activities decreased substantially as no common shares were repurchased in the nine months ended September 30, 2023, compared to $20,807 thousand in 2022[21] Condensed Consolidated Statements of Stockholders' Equity This section details changes in Dril-Quip's stockholders' equity, including retained earnings and comprehensive losses Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Metric | Sep 30, 2023 | Jan 1, 2023 | Sep 30, 2022 | | :-------------------------- | :----------- | :---------- | :----------- | | Total Stockholders' Equity | $870,462 | $872,352 | $862,916 | | Retained Earnings | $948,928 | $950,168 | $951,070 | | Accumulated Other Comprehensive Losses | $(176,978) | $(168,609) | $(176,414) | - Net loss for the nine months ended September 30, 2023, was $1,240 thousand, contributing to the decrease in retained earnings[24] - Foreign currency translation adjustments resulted in an $8,369 thousand loss for the nine months ended September 30, 2023[24] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Organization and Basis of Presentation This note outlines Dril-Quip's business segments and the basis for preparing its condensed consolidated financial statements - Dril-Quip reorganized its structure in Q1 2023 into three reportable business segments: Subsea Products, Subsea Services, and Well Construction[28] - Segment operating results for prior year comparative periods have been restated to reflect this change from previous geographic segments[28] 2. Significant Accounting Policies This note describes the key accounting principles and methods used in preparing Dril-Quip's financial statements - Reclassified approximately $5.5 million of accrued bonus from other accrued liabilities to accrued compensation for the year ended December 31, 2022, with no impact on consolidated financial statements[33] Restructuring and Other Charges (in thousands) | Period | 2023 | 2022 | | :------------------- | :--- | :--- | | Three months ended Sep 30 | $2,267 | $4,101 | | Nine months ended Sep 30 | $3,375 | $9,898 | - The company did not purchase any shares under its $100.0 million share repurchase plan for the three and nine months ended September 30, 2023[48] 3. Business Acquisitions This note details Dril-Quip's acquisition of Great North Wellhead and Frac, including purchase price and goodwill recognition - Acquired 100% of Great North Wellhead and Frac on July 31, 2023, for approximately $79.8 million (CAD $105 million)[52] - Great North contributed $15.5 million in revenues and $1.6 million in earnings to Dril-Quip from August 1 to September 30, 2023[53] - Goodwill of $16.8 million was recognized from the acquisition, attributable to expected synergies and intangible assets not qualifying for separate recognition[58] 4. Fair Value Measurements This note describes Dril-Quip's fair value measurements, particularly for contingent purchase consideration liabilities - Level 3 financial instruments primarily consist of contingent purchase consideration liabilities related to the Great North acquisition[60] - The fair value of contingent consideration recognized on the acquisition date was $3.6 million, estimated using a Monte-Carlo valuation model based on Level 3 inputs[55] Contingent Consideration Measured at Fair Value (in thousands) | Date | Total | Level 3 | | :------------------- | :---- | :------ | | September 30, 2023 | $3,460 | $3,460 | 5. Revision to Previously Reported Financial Information This note details accounting errors identified in Q2 2023 and their impact on previously reported financial statements - Identified accounting errors in Q2 2023 related to an indemnification receivable and duplicate billing errors impacting prior periods (2021, 2022)[63] Impact of Errors on Condensed Consolidated Statement of Income (Loss) for Three Months Ended September 30, 2022 (in thousands, except per share data) | Metric | As Reported | Adjustments | As Revised | | :-------------------------- | :---------- | :---------- | :--------- | | Restructuring and other charges | $2,180 | $1,921 | $4,101 | | Operating income (loss) | $14,352 | $(1,921) | $12,431 | | Net income (loss) | $15,210 | $(1,921) | $13,289 | | Basic EPS | $0.45 | $(0.06) | $0.39 | Impact of Errors on Condensed Consolidated Statement of Income (Loss) for Nine Months Ended September 30, 2022 (in thousands, except per share data) | Metric | As Reported | Adjustments | As Revised | | :-------------------------- | :---------- | :---------- | :--------- | | Restructuring and other charges | $7,977 | $1,921 | $9,898 | | Operating income (loss) | $4,892 | $(1,921) | $2,971 | | Net income (loss) | $702 | $(1,921) | $(1,219) | | Basic EPS | $0.02 | $(0.06) | $(0.04) | 6. Revenue Recognition This note outlines Dril-Quip's revenue recognition policies and disaggregates revenue by product and service categories Revenues from Contracts with Customers (in thousands) | Category | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total Products | $77,603 | $58,508 | $192,677 | $176,129 | | Total Services | $27,214 | $20,443 | $72,228 | $57,538 | - Remaining performance obligations from over-time product lines totaled $41.8 million as of September 30, 2023, with approximately 98.6% expected to be recognized within the next 12 months[72] 7. Stock-Based Compensation and Stock Awards This note details Dril-Quip's stock-based compensation expense and related stock award information Stock-Based Compensation Expense (in thousands) | Period | 2023 | 2022 | | :------------------- | :--- | :--- | | Three months ended Sep 30 | $2,600 (approx.) | $2,600 (approx.) | | Nine months ended Sep 30 | $7,700 (approx.) | $7,700 (approx.) | 8. Inventories, net This note provides a breakdown of Dril-Quip's inventory, including raw materials, work in progress, and finished goods Inventories, net (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :---------------------- | :----------- | :----------- | | Raw materials and supplies, net | $34,057 | $21,956 | | Work in progress, net | $34,056 | $38,263 | | Finished goods, net | $115,137 | $85,785 | | Total inventory, net | $183,250 | $146,004 | 9. Assets Held for Sale This note details Dril-Quip's assets classified as held for sale, including the sale of an aftermarket facility - Assets held for sale balance was $10.8 million as of September 30, 2023, down from $19.4 million at December 31, 2022[10][77] - Sold aftermarket facility in March 2023 for approximately $14.5 million, realizing a gain of approximately $5.9 million[76] - The remaining balance of $10.8 million comprises the corporate administrative building, which the Company expects to sell within a year[77] 10. Restructuring and Other Charges This note details Dril-Quip's restructuring and other charges, including severance and other related expenses Restructuring and Other Charges (in thousands) | Component | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Severance | $504 | $- | $504 | $32 | | Long-lived asset write-down | $- | $- | $- | $5,055 | | Other | $1,763 | $4,101 | $2,871 | $4,811 | | Total | $2,267 | $4,101 | $3,375 | $9,898 | - A $2.3 million restructuring liability related to the Well Construction business was released in Q2 2023, partially offsetting current year costs[78] - Accrued liability balance for restructuring and other charges decreased from $3,802 thousand at January 1, 2023, to $902 thousand at September 30, 2023[80] 11. Goodwill and Intangible Assets This note provides information on Dril-Quip's goodwill and intangible assets, primarily from the Great North acquisition - Goodwill balance increased to $16.2 million as of September 30, 2023, from $0 at December 31, 2022, due to the Great North acquisition[81] Net Intangible Assets (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :------------------ | :----------- | :----------- | | Trademarks | $9,391 | $6,036 | | Patents | $5,539 | $2,356 | | Customer relationships | $27,574 | $14,916 | | Organizational costs | $- | $40 | | Total Net Book Value | $42,504 | $23,348 | 12. Business Segments This note presents Dril-Quip's financial performance disaggregated by its Subsea Products, Subsea Services, and Well Construction segments - Company reorganized into Subsea Products, Subsea Services, and Well Construction segments in Q1 2023, with prior period results restated[85] Revenue by Business Segment (Three months ended September 30, in thousands) | Segment | 2023 | 2022 | Change | % Change | | :-------------- | :--- | :--- | :----- | :------- | | Subsea Products | $55,427 | $48,496 | $6,931 | 14.3% | | Subsea Services | $24,176 | $22,276 | $1,900 | 8.5% | | Well Construction | $37,641 | $17,369 | $20,272 | 116.7% | | Total Revenue | $117,244 | $88,141 | $29,103 | 33.0% | Operating Income (Loss) by Business Segment (Three months ended September 30, in thousands) | Segment | 2023 | 2022 | Change | % Change | | :-------------- | :--- | :--- | :----- | :------- | | Subsea Products | $954 | $18,007 | $(17,053) | -94.7% | | Subsea Services | $885 | $676 | $209 | 30.9% | | Well Construction | $6,353 | $2,066 | $4,287 | 207.5% | | Corporate | $(14,263) | $(8,318) | $(5,945) | 71.5% | | Total Operating Income (Loss) | $(6,071) | $12,431 | $(18,502) | -148.8% | 13. Income Tax This note details Dril-Quip's effective tax rate and significant income tax refunds received or expected Effective Tax Rate | Period | 2023 | 2022 | | :------------------- | :----- | :----- | | Three months ended Sep 30 | (87.1)% | (4.8)% | | Nine months ended Sep 30 | 116.0% | 131.7% | - Received $16.8 million in income tax refunds in Q3 2023, including interest, related to prior year tax returns[92] - An additional $5.4 million refund related to prior year returns has been approved and is expected in Q4 2023[176] 14. Contingencies This note describes Dril-Quip's legal proceedings, including the favorable outcome of the FMC Technologies lawsuit - FMC Technologies' lawsuit alleging misappropriation of trade secrets was affirmed in favor of Dril-Quip by the First District of Texas Court of Appeals on August 10, 2023[95] - FMC has until November 24, 2023, to file a petition for review with the Texas Supreme Court[95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Dril-Quip's financial condition, operational results, and business environment, including segment performance, non-GAAP measures, and liquidity Forward-Looking Statements This section highlights that statements not based on historical facts are forward-looking and subject to risks and uncertainties - Statements in the report that are not historical facts are forward-looking and involve substantial risks and uncertainties[99][100] - Key factors that could impact future results include OPEC+ actions, general economic conditions (inflation, interest rates), risks related to the Great North acquisition, and the global energy sector transition[100] Overview This section provides a general description of Dril-Quip's business, products, and operational segments - Dril-Quip designs, manufactures, sells, and services highly engineered drilling and production equipment for deepwater, harsh environment, and severe service applications[103] - The company operates in three business segments: Subsea Products, Subsea Services, and Well Construction[104] Recent Developments This section highlights Dril-Quip's recent acquisition of Great North Wellhead and Frac, including its terms - On July 31, 2023, Dril-Quip acquired Great North Wellhead and Frac for CAD $105 million, with potential earnout payments up to CAD $30 million based on future revenue growth targets for 2024 and 2025[105] Business Environment This section discusses the external factors influencing Dril-Quip's operations, including oil prices and rig counts Brent Crude Oil Price per Barrel (Average) | Period | 2023 | 2022 | | :------------------- | :----- | :----- | | Three months ended Sep 30 | $86.65 | $100.71 | | Nine months ended Sep 30 | $81.99 | $105.00 | - Offshore Rig Count (Mobile Offshore Drilling Units) increased by 4.8% to 544 contracted rigs (144 floating, 400 jack-up) as of September 30, 2023, from 519 rigs in 2022[119] - Product backlog at September 30, 2023, was approximately $211.1 million, compared to $240.9 million at December 31, 2022[124] Results of Operations This section analyzes Dril-Quip's financial performance, detailing revenue, cost of sales, and operating income by segment Revenue by Business Segment (Three months ended September 30, in millions) | Segment | 2023 | 2022 | Change | % Change | | :-------------- | :--- | :--- | :----- | :------- | | Subsea Products | $55.4 | $48.5 | $6.9 | 14.3% | | Subsea Services | $24.1 | $22.3 | $1.8 | 8.1% | | Well Construction | $37.7 | $17.3 | $20.4 | 117.9% | | Total Revenue | $117.2 | $88.1 | $29.1 | 33.0% | Operating Income (Loss) by Business Segment (Three months ended September 30, in millions) | Segment | 2023 | 2022 | Change | % Change | | :-------------- | :--- | :--- | :----- | :------- | | Subsea Products | $1.0 | $18.0 | $(17.0) | -94.4% | | Subsea Services | $0.9 | $0.7 | $0.2 | 28.6% | | Well Construction | $6.3 | $2.1 | $4.2 | 200.0% | | Corporate | $(14.3) | $(8.4) | $(5.9) | 70.2% | | Total Operating Income (Loss) | $(6.1) | $12.4 | $(18.5) | -149.2% | - Cost of sales as a percentage of revenue decreased to 73.0% from 74.6% for the three months ended September 30, 2023, primarily due to a favorable product mix and savings from business transformation initiatives[141] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, such as Adjusted EBITDA, used to evaluate performance - Adjusted EBITDA is used as a key non-GAAP financial measure to evaluate operating performance, excluding interest, taxes, depreciation, amortization, and other significant non-cash items[166][167] Adjusted EBITDA (in thousands) | Period | 2023 | 2022 | | :------------------- | :----- | :----- | | Three months ended Sep 30 | $12,371 | $7,047 | | Nine months ended Sep 30 | $29,996 | $19,546 | Liquidity and Capital Resources This section discusses Dril-Quip's cash flow, capital expenditures, and overall ability to meet its financial obligations Cash Flows by Activity (Nine months ended September 30, in thousands) | Activity | 2023 | 2022 | | :--------------- | :---------- | :---------- | | Operating activities | $(18,404) | $(19,167) | | Investing activities | $(62,716) | $(20,464) | | Financing activities | $(41) | $(20,881) | - Net cash used in investing activities increased primarily due to the $82.3 million acquisition of Great North[175] - Capital expenditures for the nine months ended September 30, 2023, were $21.0 million, including $7.7 million for machinery and equipment and $10.7 million for rental tools[175] - Received an income tax refund of approximately $16.8 million in July 2023, with an additional $5.4 million expected in Q4 2023[176] Critical Accounting Estimates This section confirms no material changes in Dril-Quip's critical accounting estimates during the reporting period - There were no material changes in critical accounting estimates during the nine months ended September 30, 2023[183] Item 3. Quantitative and Qualitative Disclosures About Market Risk Dril-Quip faces market risks from interest rate and foreign exchange fluctuations, reporting a foreign currency pre-tax loss in Q3 2023 - The Company is exposed to market risks related to interest rate changes on its short-term investments and fluctuations in foreign exchange rates[184] - The Company does not engage in any material hedging transactions, forward contracts, or currency trading[184][187] - Foreign currency pre-tax loss of approximately $1.1 million during the three months ended September 30, 2023, compared to a gain of $1.9 million in the same period of 2022[186] Item 4. Controls and Procedures Management concluded Dril-Quip's disclosure controls and procedures were effective, with no material changes in internal control - The Company's disclosure controls and procedures were effective as of September 30, 2023[189] - There has been no material change in the Company's internal control over financial reporting during the three months ended September 30, 2023[190] PART II—OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 14 for legal proceedings, highlighting the favorable outcome of the FMC Technologies lawsuit - For a description of the Company's legal proceedings, refer to 'Contingencies,' Note 14 to the Notes to Condensed Consolidated Financial Statements[193] - The FMC Technologies lawsuit alleging misappropriation of trade secrets was affirmed in favor of Dril-Quip by the First District of Texas Court of Appeals on August 10, 2023[95] Item 1A. Risk Factors No material changes occurred to the risk factors previously disclosed in Dril-Quip's Annual Report on Form 10-K for 2022 - There have been no material changes from the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[194] Item 5. Other Information Rule 10b5-1 trading plans were adopted by key executives and a director in Q3 2023 for common share sales in 2024 - Rule 10b5-1 trading plans were adopted in the third quarter of 2023 by Jeffrey J. Bird (President, CEO, and Director), Kyle F. McClure (VP and CFO), James C. Webster (VP, General Counsel and Secretary), and Terence B. Jupp (Director)[196] - These plans are for selling common shares, with durations from January 1, 2024, through April 5, 2024, subject to certain conditions[196] Item 6. Index to Exhibits This section indexes exhibits filed with the Form 10-Q, including corporate documents, acquisition agreements, and certifications - Includes the Restated Certificate of Incorporation and Amended and Restated Bylaws[199] - Lists the Share Purchase Agreement for Great North, dated July 31, 2023[199] - Contains certifications from Jeffrey J. Bird (CEO) and Kyle F. McClure (CFO) under Rule 13a-14(a)/15d-14(a) and Section 1350[199] Signatures The report was signed on November 1, 2023, by Kyle F. McClure, Vice President – Chief Financial Officer - The report was signed on November 1, 2023[203] - Signed by Kyle F. McClure, Vice President – Chief Financial Officer, as the Principal Financial Officer and Duly Authorized Signatory[203]