Business context and reporting period
The supplied filing is Dril-Quip, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020—not an Innovex International, Inc. filing. Verify the issuer and filing before relying on this summary. Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for deepwater and challenging oil-and-gas applications.
Financial performance
Amounts are in millions of dollars, except per-share data. Comparisons are with the corresponding 2019 period.
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $91.3 | $108.2 | $277.7 | $306.4 |
| Gross profit | $24.1 | $32.2 | $72.2 | $87.1 |
| Gross margin | 26.3% | 29.7% | 26.0% | 28.4% |
| Operating income (loss) | $(2.1) | $0.2 | $(51.9) | $(3.3) |
| Net income (loss) | $14.3 | $(1.3) | $(19.5) | $(5.7) |
| Diluted EPS | $0.41 | $(0.04) | $(0.55) | $(0.16) |
| Adjusted EBITDA | $10.2 | $15.3 | $22.7 | $38.0 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(4.3) | $6.6 |
Q3 net income included a $16.4 million income-tax benefit despite a $2.1 million pretax loss; the 797.5% effective tax rate reflects tax items including CARES Act NOL benefits. Nine-month results included a $30.9 million tax benefit against a $50.4 million pretax loss. Accordingly, reported net income should be considered alongside operating results and tax effects.
Balance sheet and liquidity
At September 30, cash and cash equivalents were $359.2 million, total current assets $863.0 million, current liabilities $101.0 million, total assets $1,159.5 million and total liabilities $122.0 million. No borrowing balance is presented on the balance sheet; the filing reports $44.6 million of availability under its $100 million asset-based revolving credit facility, net of approximately $1.0 million of letters of credit. The company reported covenant compliance. Cash declined $39.8 million during the first nine months. Capital expenditures were $10.2 million, and share repurchases used $25.0 million.
Material changes versus prior period
- Q3 revenue declined 15.6%; nine-month revenue declined 9.4%. Product revenue fell 18.8% in Q3 and 12.2% year to date, principally reflecting lower subsea equipment sales. Services rose year to date, while leasing revenue fell.
- Gross margin contracted to 26.3% in Q3 from 29.7% and to 26.0% for nine months from 28.4%. Management cited lower production volumes, unfavorable mix, COVID-related operating and freight costs, and supply-chain disruption.
- Nine-month operating results included $7.7 million of goodwill impairment and $34.9 million of restructuring and other charges, versus $4.0 million of such charges in 2019. The 2020 charges included inventory write-downs, severance and long-lived asset write-downs.
- Nine-month operating cash flow shifted to a $4.3 million outflow from a $6.6 million inflow. Inventory increased, partly because shipment delays and strategic stocking tied up cash.
- Backlog declined to $221.6 million at September 30 from $237.9 million at June 30 and $272.5 million at December 31, 2019. Management cautions that the backlog measure includes some bookings that are not enforceable or recognized as remaining performance obligations.
Outlook, risks and unusual items
- Management said it expected COVID-19 to weigh on oilfield activity for most of 2020 and potentially into 2021, with oil-price uncertainty continuing to pressure customer activity. It gave no specific company revenue or earnings guidance.
- Management believed cash, cash equivalents and anticipated operating cash flows would meet ordinary-course cash needs for the next 12 months. This is a forward-looking assessment subject to pandemic, commodity-price and operating uncertainties.
- COVID-19 and supply-chain disruption delayed shipments and constrained production; output fell 8% versus the prior quarter. Offshore contracted rig count in the company’s regions was down 11% year over year at September 30.
- The company’s agreement with Proserv to manufacture and supply subsea control systems was intended to avoid $8–$10 million of annual operating and R&D costs.
- On October 5, 2020, FMC Technologies sued Dril-Quip alleging trade-secret misappropriation and seeking damages and injunctive relief. Dril-Quip denied the allegations, intended to defend the suit, and recorded no liability. A Brazilian tax dispute involved assessments of approximately $13.0 million; approximately $8.8 million had been deposited with the court, and no liability was accrued. Management believed success in the judicial process was probable despite adverse lower-court rulings.
- Other risks include oil-and-gas market cyclicality, contract cancellations or renegotiations, foreign-exchange exposure without material hedging, and possible further impairments. The company reported no material change in risk factors from its prior reports.
Important facts for investors to verify
- Confirm the issuer: the supplied text identifies Dril-Quip, Inc., while the request metadata names Innovex International, Inc.
- Assess the sustainability of earnings excluding the substantial tax benefit, and understand the CARES Act NOL carryback assumptions and foreign tax valuation allowances.
- Review cash conversion, inventory growth, shipment delays, backlog quality and the distinction between reported backlog and the $76.5 million of remaining performance obligations.
- Track liquidity and borrowing-base availability, facility covenants, and whether cash-flow assumptions remain adequate under prolonged market stress.
- Monitor the FMC lawsuit, Brazilian tax proceedings, restructuring costs and any additional asset or inventory impairments.