News

Dril-Quip, Inc. DRQ fell 9.90% in yesterday’s trading session after announcing that certain previously issued financial statements should no longer be relied upon due to an error in the classification of inventory write-downs. The announcement followed comments from the Securities and Exchange Commission (“SEC”) regarding the company's Registration Statement on Form S-4 and its Annual Report on Form 10-K for the fiscal year that ended on Dec 31, 2023.

Details of the Error

On Jun 3, 2024, the SEC's Division of Corporation Finance issued comment letters to Dril-Quip, highlighting an error in the company's 2023 Form 10-K. The error pertains to the misclassification of approximately $67 million in inventory write-downs from 2021. These write-downs, which included $19.3 million related to the 2018 global strategic plan and $47.7 million from the 2021 global strategic plan, were incorrectly classified under "Restructuring and other charges" instead of "Cost of sales" as per ASC 420-10-S99-3 guidelines.

This misclassification resulted in an understatement of "Cost of sales" and an overstatement of "Restructuring and other charges" by $67 million for the fiscal year that ended on Dec 31, 2021. Importantly, this error did not affect its Income (loss) before income taxes, Net income (loss), or Adjusted EBITDA.

Audit Committee Conclusions

On Jul 8, 2024, Dril-Quip's Audit Committee, after consulting with management and its independent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”), determined that its consolidated financial statements for the affected period should no longer be relied upon. These include any related reports, press releases, earnings releases and investor presentations.

Additionally, the Audit Committee concluded that management's report on internal control over financial reporting as of Dec 31, 2023, and PwC's opinions on the consolidated financial statements and the effectiveness of internal control over financial reporting for the same period should no longer be relied upon. The company's disclosure controls and procedures as of Dec 31, 2023, were also deemed ineffective.

Next Steps

Dril-Quip plans to file restated consolidated financial statements for the affected period and amend its 2023 Form 10-K and Form 10-Q for the quarter ended on Mar 31, 2024.

The company will disclose a material weakness in its internal control over financial reporting in the amended reports. This weakness relates to the lack of effective controls over the financial statement classification of inventory write-downs associated with restructurings.

Dril-Quip's management and Audit Committee have discussed these issues with PwC and are committed to addressing and rectifying the identified weaknesses to ensure accurate financial reporting in the future.

Zacks Rank & Key Picks

Dril-Quip currently carries a Zack Rank #3 (Hold).

Investors interested in the energy sector may look at some better-ranked stocks like Hess Corporation HES, Sunoco LP SUN and SM Energy Company SM, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hess is a leading oil and natural gas exploration and production company that made several world-class oil discoveries in the Stabroek Block, located off the coast of Guyana. The company is currently in the process of being acquired by supermajor Chevron in an all-stock deal worth $53 billion. The merger will likely result in the creation of an energy behemoth with a massive portfolio of producing assets.

The Zacks Consensus Estimate for HES’ 2024 EPS is pegged at $10.28. The company has a Zacks Style Score of B for Growth. It has witnessed upward earnings estimate revisions for 2024 and 2025 in the past 30 days.

Sunoco is a leading wholesale motor fuel distributor in the United States, boasting a vast distribution network spanning 40 states. With long-term contracts servicing more than 10,000 convenience stores, it distributes over 10 fuel brands, ensuring a stable revenue stream. SUN currently has a Value Score of A.

The Zacks Consensus Estimate for 2024 and 2025 earnings per unit is pegged at $7.29 and $7.17, respectively. The partnership has witnessed upward earnings estimate revisions for 2024 and 2025 in the past 60 days.

SM Energy is set to expand its oil-centered operations in the coming years, with an increasing focus on crude oil, especially in the Permian Basin and Eagle Ford regions. The company’s attractive oil and gas investments should create long-term value for shareholders.

The Zacks Consensus Estimate for SM’s 2024 EPS is pegged at $6.95. The company has a Zacks Style Score of A for Value. It has witnessed upward earnings estimate revisions for 2025 in the past seven days.

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