Filing and reporting period
The supplied filing is Dril-Quip, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2012, filed August 3, 2012. This does not match the request metadata naming Innovex International, Inc.; verify the issuer before relying on this summary.
Dril-Quip designs, manufactures, sells, and services offshore drilling and production equipment. Results cover the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $176.6 | $137.0 | $353.7 | $274.7 |
| Operating income | $41.3 | $30.4 | $81.4 | $61.0 |
| Net income | $29.8 | $22.2 | $58.6 | $43.9 |
| Diluted EPS | $0.74 | $0.55 | $1.45 | $1.09 |
- Q2 revenue rose 28.9% year over year; six-month revenue rose 28.8%. Product and service revenue both increased. Subsea equipment was the largest product category.
- Operating margin was 23.5% in Q2 and 23.0% for the first half, versus 22.2% in each 2011 comparison. Net margin was 16.9% and 16.6%, respectively, versus 16.2% and 16.0%.
- Cost of sales grew faster than revenue: 32.1% in Q2 and 32.9% for the first half. Cost of sales was 61.3% of Q2 revenue and 60.9% of first-half revenue, compared with 59.9% and 59.0% in 2011. Management cited product mix and unabsorbed manufacturing overhead for the Q2 increase.
- Six-month operating cash flow was negative $32.5, versus positive $35.4 in 2011. Receivables used $40.8 and inventory used $63.2, primarily reflecting growth and production needs. Capital expenditures were $27.7, and investing cash flow was negative $26.6.
- Cash declined $50.4 in the first half to $248.1. At June 30, total current assets were $852.0 and current liabilities $149.8. There was no long-term debt, and the company reported no commercial credit line.
- Total assets were $1,149.9 and stockholders’ equity $990.6 at June 30. Inventory was $340.0, up from $277.8 at year-end 2011.
Material changes and operating trends
- Q2 product revenue increased $32.2 and service revenue $7.4 year over year. For the first half, product revenue increased $61.7 and service revenue $17.3.
- Regional revenue and pretax income varied. Q2 Western Hemisphere and Asia-Pacific product revenue increased, while Eastern Hemisphere product revenue declined. For the first half, product revenue increased in all three regions.
- Backlog was approximately $697 at June 30, 2012, down from $727 a year earlier and $716 at December 31, 2011, but up from $701 at March 31, 2012. Management cautioned that customer projects can change or be terminated.
- Average contracted rig counts rose to 645 in Q2 2012 from 582 in Q2 2011. Rigs under construction numbered 180 at June 2012, compared with 144 a year earlier.
- Foreign-currency translation reduced Q2 comprehensive income by $12.3; first-half translation loss was $3.7. A first-half foreign-currency transaction loss of approximately $1.9 was reported.
Outlook, risks, and contingencies
- The company provided no specific company revenue or earnings guidance. Management believed cash on hand and operating cash generation would fund operations, working capital, and anticipated capital spending for the next 12 months, while warning that commodity-price declines, catastrophic events, or regulatory changes could harm liquidity.
- Management expected continued volatility in oil and gas prices and offshore activity. It noted that prolonged lower hydrocarbon prices, economic weakness, or restrictions on offshore exploration could adversely affect results and backlog. The filing cited external EIA and IEA forecasts; these are not company guidance.
- Deepwater Horizon claims against Dril-Quip in the consolidated proceedings were dismissed with prejudice, with final judgment entered in April 2012. The company accrued no liability, but noted that further suits or investigations could arise and that insurance may not cover all claims or costs; insurers had issued a reservation-of-rights letter.
- A Brazilian tax assessment, including interest, penalties, and potential fees, was approximately BRL19.9 million (about $9.8 million) as of June 2012. The company is contesting it, recorded no liability, and said the ultimate outcome could not be determined.
- Other material risks include regulatory and product-testing changes following Deepwater Horizon, customer cancellations, international political and currency risks, competition, raw-material availability, and the cyclical offshore oil and gas market. Management reported no material change in the previously disclosed risk factors.
- The board authorized repurchases of up to $100 million of common stock, with no expiration date; no shares had been repurchased by June 30.
Investor verification points
- Confirm issuer identity: the filing is for Dril-Quip, Inc., not Innovex International, Inc.
- Review the drivers and sustainability of revenue growth, margin changes, and the rise in working-capital investment, especially inventory and receivables.
- Assess backlog quality, customer termination rights, and the conversion of backlog into revenue and cash.
- Check subsequent developments in the Brazilian tax dispute and any Deepwater Horizon-related claims or insurance coverage.
- Verify actual capital spending and any share repurchases after June 30, 2012; the filing reports authorization but no purchases by quarter-end.