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Mergers and Acquisitions | 9 Months Ended
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Sep. 30, 2024
Business Combinations [Abstract] |
Mergers and Acquisitions | NOTE 3. MERGERS AND ACQUISITIONS The Company's acquisition of business and equity method investments consisted of the following transactions during the nine months ended September 30, 2024 and the twelve months ended December 31, 2023. Acquisition costs within the Condensed Consolidated Statements of Operations and Comprehensive Income consist of legal, accounting, advisory fees, and other integration costs related to the Merger and the acquisition of equity interest in Downhole Well Solutions, LLC. Legacy Innovex and Dril-Quip Merger. As discussed in Note 1, on the Closing Date, the Merger was consummated. Following the Merger, Legacy Innovex became a wholly owned subsidiary of Dril-Quip, and the name “Dril-Quip, Inc.” was changed to “Innovex International, Inc.” As provided for in the Merger Agreement, Legacy Innovex paid a cash dividend of $75.0 million to the holders of the Legacy Innovex Common Stock on September 6, 2024. The Merger is accounted for as a reverse acquisition under ASC 805, Business Combinations (“ASC 805”), where Legacy Innovex, the legal acquiree, is determined to be the accounting acquirer of Dril-Quip based upon an evaluation of the following primary factors: • Although the pre-combination stockholders of Legacy Innovex held approximately 48% of the Combined Company, the largest pre-combination stockholder of Legacy Innovex, Amberjack Capital Partners, L.P. (“Amberjack”), held the largest minority voting interest of approximately 44% in the Company after Merger closed, whereas Dril-Quip’s pre-combination ownership was widely dispersed among stockholders. • Legacy Innovex surpassed Dril-Quip in size as measured in key performance metrics including Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA for the year ended December 31, 2023. • The Company’s board consists of nine directors, including: • four continuing directors of the pre-combination Dril-Quip board of directors; • four directors, each a member of the pre-combination Legacy Innovex board of directors; and • the Chief Executive Officer of Legacy Innovex as of immediately prior to the Closing Date. • Legacy Innovex’s pre-combination senior management team constitutes the majority of the senior management of the Company, including the Chief Executive Officer, Chief Financial Officer, and the President of North America. • Upon consummation of the Merger, the Company’s headquarters are located at Legacy Innovex’s headquarters, the Company’s name has been changed to Innovex International, Inc., and the ticker symbol of the Company has been changed to “INVX." Purchase Price Consideration The accounting acquiree Dril-Quip’s stock price was used to measure the consideration transferred in the reverse acquisition, as Dril-Quip’s stock price was more reliably measurable than the value of the equity interest of the accounting acquirer Legacy Innovex, which was a privately held entity. The following table summarizes the consideration for the Merger (in thousands, except stock price and shares):
Fair value of shares transferred to Dril-Quip shareholders (1) |  | $ |  | 530,909 |
Fair value of replacement Dril-Quip stock-based payment awards attributable to the purchase price |  |  |  | 6,364 |
Total purchase price consideration |  | $ |  | 537,273 |
(1) The fair value of shares transferred to Dril-Quip stockholders is based on 34,452,230 shares of Dril-Quip common stock outstanding and the closing stock price of Dril-Quip common stock of $15.41 on the Closing Date. Preliminary Purchase Price Allocation In accordance with ASC 805, identifiable assets acquired and liabilities assumed from Dril-Quip were recorded at their estimated fair values on the Closing Date. The allocation of the purchase price included in the current period balance sheet is based on the best estimate of management and is preliminary and subject to change. We will continue to obtain information to assist in determining the fair value of net assets acquired during the measurement period. The Company expects to finalize these amounts as soon as possible but no later than one year from the Closing Date. The Merger resulted in a gain on bargain purchase recognized on the Company’s condensed consolidated statements of operations and comprehensive income due to the estimated fair value of the identifiable net assets acquired exceeding the purchase consideration transferred. Upon completion of its preliminary assessment, the Company concluded that all of the assets acquired and liabilities assumed have been identified and recognized, including any additional assets and liabilities not previously identified or recognized in the acquisition accounting, and that recording a gain on bargain purchase was appropriate and required under U.S. GAAP. The bargain purchase gain was due to the decrease in the share price of legacy Dril-Quip stock from the date the Merger Agreement was signed to the Closing Date, while the agreed upon ratio of Innovex shareholder’s ownership of the Combined Company, as stipulated in the Merger Agreement, remained the same. The table below presents the preliminary allocation to the estimated fair value of identifiable assets acquired and liabilities assumed, and the resulting gain on bargain purchase as of the Closing Date (in thousands):
|  |  | Preliminary Purchase Price Allocation |
Cash and restricted cash |  | $ |  | 154,312 |
Trade receivables |  |  |  | 125,155 |
Contract assets |  |  |  | 8,675 |
Inventories |  |  |  | 148,958 |
Assets held for sale |  |  |  | 1,535 |
Prepaid expenses and other current assets |  |  |  | 20,023 |
Property and equipment, net |  |  |  | 133,690 |
Right of use assets – operating |  |  |  | 21,358 |
Deferred tax asset, net |  |  |  | 124,634 |
Other long-term assets |  |  |  | 5,461 |
Total assets |  |  |  | 743,801 |
Accounts payable |  |  |  | 48,887 |
Accrued expenses |  |  |  | 28,906 |
Contract liabilities |  |  |  | 14,332 |
Operating lease liabilities - current |  |  |  | 2,080 |
Current portion of long-term debt and finance lease obligations |  |  |  | 595 |
Other current liabilities |  |  |  | 213 |
Long-term debt and finance lease obligations |  |  |  | 1,645 |
Operating lease liabilities - noncurrent |  |  |  | 15,397 |
Other long-term liabilities |  |  |  | 1,814 |
Total liabilities |  |  |  | 113,869 |
Net assets acquired |  |  |  | 629,932 |
Gain on bargain purchase |  |  |  | (92,659 | )
Total purchase consideration |  | $ |  | 537,273 |
The Company incurred transaction costs in connection with the Merger in the amount of $20.3 million and $25.3 million for the three and nine months ended September 30, 2024, respectively. The costs have been expensed as incurred and recognized in acquisition costs in the Company’s Consolidated Statement of Operations. Revenue and Earnings For the period from September 7, 2024 to September 30, 2024, we have included $24.5 million of revenues contributed by the business acquired in the Merger. Due to the integration of operations since the Closing Date, it was impracticable to present stand-alone earnings since the date of the Merger. Unaudited Supplemental Pro Forma Financial Information The unaudited supplemental pro forma information presented below has been prepared for the Combined Company as if the Merger had occurred on January 1, 2023. The pro forma summary uses estimates and assumptions based on information available at the time. The Company believes the estimates and assumptions to be reasonable; however, the unaudited pro forma information is not necessarily indicative of what the Combined Company’s results would have been had the Merger been completed as of the beginning of the periods as indicated, nor does it purport to project the Company’s future results. The unaudited pro forma information does not reflect any synergy savings that might have been achieved from combining the operations. Amounts are presented in thousands:
| Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
| 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Revenues | $ | 231,203 |  |  | $ | 260,433 |  |  | $ | 727,626 |  |  | $ | 728,435 |
Net income | $ | 3,962 |  |  | $ | 6,279 |  |  | $ | 35,143 |  |  | $ | 92,904 |
Pro forma information includes, among others, (i) incremental depreciation and amortization resulting from the property and equipment and lease right-of-use assets acquired, (ii) accounting policy alignment, (iii) adjustments to reflect non-recurring acquisition related costs incurred directly in connection with the Merger as if it had occurred in the earliest period presented above, and (iv) the tax-related effects as though the Merger had occurred on January 1, 2023. Downhole Well Solutions, LLC (“DWS”) Acquisition. On May 1, 2023, Legacy Innovex acquired a 20% equity interest in DWS, via purchasing stock units of DWS, for the purchase price of $17.6 million in cash consideration. Transaction costs recognized in connection with the acquisition were $0.7 million and were capitalized as part of the equity investment. DWS sells drilling equipment and related technology which is complimentary to the Company’s existing product lines. Legacy Innovex obtained significant influence over DWS through a 20% ownership and one board seat out of three total board seats of representation on the board of directors of DWS. The acquisition was accounted for as an equity method investment under Accounting Standards Codification (“ASC”) 323, Investments- Equity Method and Joint Ventures. The cost of the investment is $15.0 million more than the acquired underlying equity in DWS net assets. The difference is attributable to intangible assets of $13.0 million and equity method goodwill of $2.0 million. The difference pertaining to intangible assets will be amortized to Equity method earnings over the remaining useful life of the related asset. For the three and nine months ended September 30, 2024, we recorded our proportionate share of DWS’s net income of $1.4 million, adjusted for $0.4 million amortization attributed to intangible assets, and $3.3 million, adjusted for $1.1 million amortization attributed to intangible assets, respectively. For the three and nine months ended September 30, 2024, DWS distributed $0.7 million and $2.3 million of dividends to the Company, respectively, which were recorded as a reduction of the carrying value of the equity investment. For the three and nine months ended September 30, 2023, we recorded our proportionate share of DWS’s net income of $1.4 million, adjusted for $0.6 million amortization attributed to intangible assets, and $2.1 million, adjusted for $0.6 million amortization attributed to intangible assets, respectively. For each of the three and nine months ended September 30, 2023, DWS distributed $0.4 million of dividends to the Company, which were recorded as a reduction of the carrying value of the equity investment. Legacy Innovex signed an option to acquire the remaining 80% interest in DWS dated April 24, 2024, exercisable any time prior to April 30, 2025. If we exercise the option, the purchase price will be based on a multiple of DWS EBITDA.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 805 -SubTopic 20 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147479907/805-20-50-5 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 805 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/805/tableOfContent + Details
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