Filing summary
Entity mismatch: The request identifies Innovex International, Inc., but the supplied filing is Dril-Quip, Inc.’s Form 10-Q for the quarter ended September 30, 2018. The figures and discussion below summarize Dril-Quip, not Innovex.
Business context and reporting period
Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for deepwater and harsh-environment applications. This unaudited filing covers the three and nine months ended September 30, 2018, compared with the same 2017 periods.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $93.3m | $100.3m | $287.3m | $347.5m |
| Operating loss | $(14.1)m | $(62.0)m | $(23.9)m | $(64.0)m |
| Net loss | $(10.4)m | $(29.3)m | $(20.8)m | $(29.1)m |
| Adjusted EBITDA | $0.8m | $13.7m | $10.4m | $46.7m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $32.6m | $74.7m |
Q3 product revenue was $63.2m and services revenue was $30.0m. For the nine-month period, products contributed $199.0m and services $88.3m. Gross margin was approximately 29.6% in Q3 and 29.4% for the nine months, versus 37.2% and 33.0%, respectively, in 2017. Operating margins were approximately (15.1)% and (8.3)% for those 2018 periods.
At September 30, 2018, cash and cash equivalents were $424.1m, total current assets $897.5m, and current liabilities $68.3m. The company reported no borrowings balance in the supplied filing; it had $56.0m of availability under its $100m asset-backed revolving facility, net of letters of credit. Total liabilities were $101.5m. Nine-month investing cash outflow was $15.4m, financing cash outflow was $80.6m, and cash declined $69.1m to $424.1m. Capital expenditures were $26.7m.
Changes versus prior period
- Q3 revenue declined 7.1%; nine-month revenue declined 17.3%, mainly from lower product sales, particularly subsea equipment. Service revenue increased in both periods.
- Cost of sales rose to 70.4% of revenue in Q3 and 70.6% for nine months, compared with 62.8% and 67.0% in 2017. Management cited product mix, pricing concessions and unabsorbed manufacturing costs.
- Prior-year results included $61.0m of impairment and other charges; no impairments were recorded in 2018. 2018 nine-month results also included a $5.1m gain from selling Houston property and equipment.
- Cash from operations fell to $32.6m from $74.7m for nine months. The company spent $80.9m on share repurchases during the period; the remaining $19.1m of the authorization was repurchased in October 2018.
- Backlog was $249.0m at September 30, down from $260.9m at June 30, but up from $207.3m at December 31, 2017. Backlog includes about $84m of contract awards that may not meet ASC 606 enforceability criteria.
Outlook, risks and unusual items
- Management expected continued pressure on oil and gas prices and drilling activity, while noting that backlog may help mitigate market weakness. It expected restructuring-related cost savings to begin in early 2019; the strategic review was expected to conclude by mid-2019, with further charges anticipated after $3.7m incurred in Q3.
- In October 2018, a subsidiary entered into a FEED contract and frame agreement for the Sea Lion development. The estimated equipment scope is $207m, with vendor financing potentially covering up to 30%; a definitive award depends on contract agreement and Premier Oil’s final investment decision.
- Risks include commodity-price and offshore activity volatility, customer renegotiations or cancellations, rig construction delays, foreign exchange exposure, and tariffs that could raise steel and other raw-material costs. Management noted possible delay or cancellation of the Ca Rong Do project amid territorial discussions, and uncertainty over Petrobras orders and acceptance of completed equipment.
- A Brazilian tax dispute involves approximately $13.0m in assessments; $8.8m has been deposited with the court. Management believes success is probable and has not accrued a liability. The filing also describes ordinary-course legal matters that management does not expect to have a material adverse effect.
- The company reported compliance with ABL covenants, effective disclosure controls, and no material change in internal control over financial reporting. No material changes to the 2017 Form 10-K risk factors were reported.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is Dril-Quip, Inc., not Innovex International, Inc.
- Assess whether product demand, subsea sales and gross margins recover, given declining revenue and elevated manufacturing-cost absorption pressure.
- Review backlog quality, including the $84m of awards outside the disclosed ASC 606 remaining performance obligations, and project-specific cancellation or acceptance risks.
- Track the strategic review’s additional charges and expected savings, as well as cash use following substantial share repurchases.
- Monitor the Sea Lion definitive contract and final investment decision, including the potential vendor-financing exposure.