Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition, inventories and contingent liabilities as discussed more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Revenue Recognition

Revenue Recognition

Product Revenue

The Company earns product revenues from two methods:

•

product revenues recognized under the percentage-of-completion method; and

•

product revenues from the sale of products that do not qualify for the percentage-of-completion method.

Revenues Recognized Under Percentage-of-Completion Method

Revenues recognized under the percentage-of-completion method

The Company uses the percentage-of-completion method on long-term project contracts that have the following characteristics:

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The contracts call for products which are designed to customer specifications;

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The structural designs are unique and require significant engineering and manufacturing efforts generally requiring more than one year in duration;

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The contracts contain specific terms as to milestones, progress billings and delivery dates; and

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Product requirements cannot be filled directly from the Company’s standard inventory.

For each project, the Company prepares a detailed analysis of estimated costs, profit margin, completion date and risk factors which include availability of material, production efficiencies and other factors that may impact the project. On a quarterly basis, management reviews the progress of each project, which may result in revisions of previous estimates, including revenue recognition. The Company calculates the percent complete and applies the percentage to determine the revenues earned and the appropriate portion of total estimated costs. Losses, if any, are recorded in full in the period they become known. Historically, the Company’s estimates of total costs and costs to complete have approximated actual costs incurred to complete the project.

Under the percentage-of-completion method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in customer prepayments as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported in trade receivables. Unbilled revenues are expected to be billed and collected within one year. As of June 30, 2014 and December 31, 2013, receivables included $43.9 million and $52.9 million of unbilled receivables, respectively. For the quarter ended June 30, 2014, there were 12 projects representing approximately 5% of the Company’s total revenue and approximately 6% of its product revenues that were accounted for using percentage-of-completion accounting, compared to 11 projects during the second quarter of 2013, which represented approximately 6% of the Company’s total revenues and approximately 7% of its product revenues. For the six months ended June 30, 2014, there were 16 projects representing approximately 8% of the Company’s total revenues and 10% of its product revenues, compared to 15 projects that represented approximately 12% of the Company’s total revenues and 14% of its product revenues for the six months ended June 30, 2013, all of which were accounted for using percentage-of-completion accounting.

Revenues Not Recognized Under Percentage-of-Completion Method

Revenues not recognized under the percentage-of-completion method

Revenues from the sale of inventory products, not accounted for under the percentage-of-completion method, are recorded at the time the manufacturing processes are complete and ownership is transferred to the customer.

Service Revenue

Service revenue

The Company earns service revenues from three sources:

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technical advisory assistance;

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rental of running tools; and

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rework and reconditioning of customer-owned Dril-Quip products.

The Company does not install products for its customers, but it does provide technical advisory assistance. At the time of delivery of the product, the customer is not obligated to buy or rent the Company’s running tools and the Company is not obligated to perform any subsequent services relating to installation. Technical advisory assistance service revenue is recorded at the time the service is rendered. Service revenues associated with the rental of running and installation tools are recorded as earned. Rework and reconditioning service revenues are recorded when the refurbishment process is complete.

The Company normally negotiates contracts for products, including those accounted for under the percentage-of-completion method, and services separately. For all product sales, it is the customer’s decision as to the timing of the product installation as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory services. The customer may use a third party or their own personnel.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, receivables and payables. The carrying values of these financial instruments approximate their respective fair values as they are short-term in nature.

Earnings Per Share

Earnings Per Share

Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed considering the dilutive effect of stock options and awards using the treasury stock method.

In each relevant period, the net income used in the basic and dilutive earnings per share calculations is the same. The following table reconciles the number of common shares outstanding at June 30 of each year to the weighted average number of common shares outstanding and the weighted average diluted number of common shares outstanding for the purpose of calculating basic and diluted earnings per share:


	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
	(In thousands)
Weighted average basic common shares outstanding—basic		40,327		40,636		40,501		40,583
Dilutive effect of common stock options and awards		235		185		222		184

Weighted average diluted common shares outstanding—diluted		40,562		40,821		40,723		40,767

- Definition

Disclosure of accounting policy regarding (1) the principles it follows in consolidating or combining the separate financial statements, including the principles followed in determining the inclusion or exclusion of subsidiaries or other entities in the consolidated or combined financial statements and (2) its treatment of interests (for example, common stock, a partnership interest or other means of exerting influence) in other entities, for example consolidation or use of the equity or cost methods of accounting. The accounting policy may also address the accounting treatment for intercompany accounts and transactions, noncontrolling interest, and the income statement treatment in consolidation for issuances of stock by a subsidiary.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Regulation S-X (SX)

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-Number 210

-Section 02

-Paragraph k

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+ Details

- Definition

Disclosure of accounting policy for computing basic and diluted earnings or loss per share for each class of common stock and participating security. Addresses all significant policy factors, including any antidilutive items that have been excluded from the computation and takes into account stock dividends, splits and reverse splits that occur after the balance sheet date of the latest reporting period but before the issuance of the financial statements.

+ References+ Details

- Definition

Disclosure of accounting policy for revenue recognition for long-term construction-type contracts accounted for using the percentage-of-completion method. The disclosure would generally be expected to include the method or methods of measuring extent of progress toward completion. If the entity departs from using the percentage-of-completion method for a single contract or a group of contracts for which reasonably dependable estimates cannot be made, such a departure from the basic policy is disclosed. The disclosure may also describe the accounting for significant changes in estimate.

+ References+ Details