Filing summary
Issuer discrepancy: The supplied filing is Dril-Quip, Inc.’s Form 10-Q for the quarter ended June 30, 2013, not an Innovex International, Inc. filing. Financial information below is for Dril-Quip. Amounts are in millions of U.S. dollars unless stated otherwise.
Business context and reporting period
Dril-Quip designs, manufactures, sells and services offshore drilling and production equipment, with operations in the Western Hemisphere, Eastern Hemisphere and Asia-Pacific. This unaudited filing reports second-quarter and six-month 2013 results, compared with the same periods in 2012.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $222.0 | $176.6 | $415.2 | $353.7 |
| Operating income | $56.2 | $41.3 | $108.4 | $81.4 |
| Net income | $42.9 | $29.8 | $82.8 | $58.6 |
| Diluted EPS | $1.05 | $0.74 | $2.03 | $1.45 |
| Operating margin | 25.3% | 23.5% | 26.1% | 23.0% |
| Net margin | 19.3% | 16.9% | 20.0% | 16.6% |
- Q2 revenue rose 25.7% year over year, led by subsea equipment; product revenue increased about $42.1 million and services about $3.3 million.
- For the first half, revenue increased 17.4%. Subsea equipment revenue grew $66.1 million, partly offset by lower surface and offshore rig equipment revenue.
- Cost of sales was 60.0% of revenue in Q2 versus 61.3% a year earlier, and 60.1% for the first half versus 60.9%. Management attributed the improvement mainly to product mix.
- Q2 SG&A rose 33.9% to $23.3 million, including higher personnel costs, increased stock compensation and a foreign-exchange transaction loss. First-half SG&A increased only 2.9%, helped by foreign-exchange gains.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $325.5 million at June 30, 2013, up from $257.2 million at December 31, 2012. Current assets were $987.2 million and current liabilities $148.2 million.
- The balance sheet reported no borrowings; the company said it had no commercial lending arrangement or line of credit.
- First-half operating cash flow was $86.1 million, compared with cash used of $32.5 million in the prior-year period. Capital expenditures were $23.1 million, and cash increased $68.4 million after investing, financing and currency effects.
- Inventory rose to $376.6 million from $362.2 million at year-end; customer prepayments fell to $53.4 million from $86.3 million.
- Management said cash on hand and expected operating cash flow should fund operations, working capital and anticipated capital expenditures for the next 12 months.
Material changes, outlook and risks
- Backlog was approximately $1.137 billion at June 30, 2013, versus $697 million a year earlier, $881 million at December 31, 2012 and $1.022 billion at March 31, 2013. Backlog is subject to customer change or termination and is not guaranteed revenue.
- A Petrobras contract awarded in 2012 was valued at up to $650 million net of Brazilian taxes if all equipment is ordered. Purchase orders received under it added $15 million in Q2; no shipments had been made under the contract during the first half.
- The filing gives no company-specific earnings or revenue guidance. Management noted exposure to volatile oil and gas prices, offshore activity, regulation and testing requirements, international operations, foreign exchange, customer credit and litigation. It cautioned that prolonged commodity-price declines or reduced offshore activity could adversely affect results, liquidity and backlog.
- Q2 included a $0.7 million pretax loss on ATP-related receivables and recognition of $3.7 million of previously deferred revenue for work prepaid by ATP. Remaining ATP-related receivables were approximately $0.4 million.
- Brazilian tax assessments involving approximately $13 million of disputed credits remained contested; management believed the credits valid and success probable, and recorded no liability. A separate Deepwater Horizon claim had been dismissed with prejudice, though a motion to remand one personal-injury lawsuit remained pending; no liability was accrued.
- Foreign-currency translation losses were $24.1 million for the first half, recorded in other comprehensive income. The company also reported a $4.7 million first-half pretax foreign-currency transaction gain.
Important facts for investors to verify
- Confirm issuer identity: this source is Dril-Quip, not Innovex International.
- Review the composition, delivery timing and cancellation exposure of the $1.137 billion backlog, including Petrobras purchase orders.
- Assess whether subsea-led revenue growth and margin improvement are sustainable as product mix and offshore activity change.
- Track inventory, working-capital conversion and cash generation against planned capital spending.
- Follow developments in the Brazilian tax dispute, the remaining Deepwater Horizon lawsuit and ATP collections.