Business Acquisitions

9 Months Ended

Sep. 30, 2023

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 acquired business contributed revenues of $15.5 million and earnings of $1.6 million to Dril-Quip for the period from August 1, 2023 to September 30, 2023. The following unaudited pro forma summary presents consolidated information of Dril-Quip as if the business combination had occurred on January 1, 2022.


	Pro forma three months ended September 30,					Pro forma nine months ended September 30,
	2023			2022		2023		2022
	(In thousands)
	(unaudited)
Revenues	$	125,367		$	112,471	$	352,343	$	329,692
Net income	$	(1,611	)	$	15,810	$	10,387	$	(1,450	)

These pro forma amounts have been calculated after applying Dril-Quip’s accounting policies and adjusting the results of Great North to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment, and intangible assets had been applied from January 1, 2022, with the consequential tax effects.

Dril-Quip incurred $5.4 million and $6.5 million of acquisition-related costs for the three and nine months ended September 30, 2023, respectively. These expenses are included in “Acquisition costs” in the condensed consolidated statements of income (loss) for the respective periods and are reflected in the pro forma earnings for the nine months ended September 30, 2022, in the table above.

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 FY 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 current and noncurrent portion of contingent consideration is included in other accrued liabilities and other long-term liabilities, respectively. The fair value of the contingent consideration recognized on the acquisition date of $3.6 million was estimated by applying a Monte-Carlo valuation model based on Level 3 inputs. The Company will be 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.

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 11 of Notes to the Condensed Consolidated Financial Statements for further information regarding intangible assets.

Acquired assets and liabilities were recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair value of tangible and intangible identifiable net assets resulted in the recognition of goodwill of $16.8 million, all of which is included in long-lived assets in the Well Construction business segment and is attributable to expected synergies from combining operations as well as intangible assets which do not qualify for separate recognition. This goodwill is not tax deductible.

The goodwill was determined on the basis of the fair values of the tangible and intangible assets and liabilities as of the acquisition date. It may be adjusted if the provisional fair values change as a result of circumstances existing at the acquisition date. Such fair value adjustments may arise in respect to intangible assets, inventories and property, plant and equipment, upon completion of the necessary valuations and physical verifications of such assets. The amount of deferred taxes may also be adjusted during the measurement period.