Filing summary
Issuer mismatch: The request identifies Innovex International, Inc., but the supplied Form 10-Q is for Dril-Quip, Inc. This summary covers Dril-Quip’s filing for the quarter ended September 30, 2021.
Business context and reporting period
Dril-Quip designs, manufactures, sells and services equipment used in drilling and production, primarily for deepwater and harsh-environment applications. It reports Western Hemisphere, Eastern Hemisphere and Asia-Pacific operations. The filing presents third-quarter and nine-month results through September 30, 2021, compared with the same 2020 periods.
Financial performance and liquidity
- Third-quarter revenue: $83.0 million, down 9.1% year over year. Product revenue fell to $53.6 million from $66.5 million; services rose to $19.6 million from $17.8 million; leasing rose to $9.8 million from $7.1 million.
- Third-quarter earnings: Gross profit was $20.2 million, a 24.3% gross margin, versus $24.1 million and 26.3% a year earlier. Operating loss was $6.9 million (8.4% operating margin), compared with a $2.1 million loss. Net loss was $11.1 million, or $0.31 per share, versus net income of $14.3 million, or $0.41 per share.
- Nine-month results: Revenue was $245.0 million, down 11.8%; net loss was $64.6 million, compared with a $19.5 million loss in 2020. Operating loss was $53.2 million. Gross margin was approximately 26.1%, versus approximately 26.0%.
- Adjusted EBITDA: $4.0 million for the quarter and $14.6 million for nine months, versus $10.2 million and $22.7 million, respectively, in 2020. This is a non-GAAP measure.
- Cash flow: Nine-month operating cash flow was $33.7 million, versus cash used of $4.3 million in 2020. Investing activities used $2.0 million and financing activities used $1.2 million. Cash increased $29.2 million to $375.2 million.
- Balance sheet and liquidity: Cash was $375.2 million; current assets were $827.3 million and current liabilities $91.8 million. Total liabilities were $114.0 million. The filing reports $31.1 million available under the $100 million ABL facility after letters of credit and borrowing-base limitations; it does not report outstanding borrowings. The company was in covenant compliance.
Material changes versus prior comparable periods
- Third-quarter revenue declined primarily because of lower subsea equipment sales, especially in Asia-Pacific and the Eastern Hemisphere. Increased service and leasing revenue partly offset the decline.
- Third-quarter cost of sales fell less than revenue, and the cost-of-sales ratio increased to 75.8% from 73.7%, with management citing manufacturing and freight costs. SG&A increased to $25.3 million from $20.8 million, mainly due to legal costs, restored employee incentives, consulting and tax-settlement costs.
- Nine-month product revenue decreased $32.0 million, driven principally by subsea equipment. SG&A increased $15.6 million year over year, while restructuring charges declined to $26.0 million from $34.9 million; 2020 also included $7.7 million of goodwill impairment.
- Cash flow improved substantially, helped by working-capital movements, including lower unbilled receivables and inventory, tax-receivable collections and return of Brazilian court deposits.
- Backlog was $179.0 million at September 30, down from $191.2 million at June 30, 2021 and $195.7 million at December 31, 2020.
Outlook, risks and unusual items
- Management described recovery as delayed and the market as volatile, citing COVID-19, customer drilling delays, oil-and-gas demand uncertainty, travel limits and supply-chain logistics costs. It expected pandemic-related activity weakness to continue through most of 2021 and potentially into 2022.
- Management said existing cash and anticipated operating cash flows should meet ordinary-course needs for the next 12 months. No quantified earnings or revenue guidance was provided.
- The company entered a subsea collaboration and supply agreement in the second quarter, intended to provide access to additional projects and bids.
- Restructuring charges included $19.3 million of non-cash inventory write-downs, $2.7 million of severance and other costs; the 2018 strategic plan was concluded in the third quarter. The company also expensed approximately $2.3 million of unbilled lease revenue after termination of its AFGlobal forge-facility lease.
- Dril-Quip settled Brazilian tax assessments through an amnesty program for approximately $2.1 million; about $6 million of court security deposits was returned during the second and third quarters.
- FMC Technologies sued over alleged trade-secret misappropriation. A jury found in Dril-Quip’s favor, but FMC appealed; Dril-Quip said it would continue its defense.
- Other risks include dependence on oil-and-gas capital spending, possible contract changes or cancellations, international and foreign-exchange exposure, tariffs and regulatory changes. The company reported no material hedging arrangements.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is Dril-Quip, not Innovex International.
- Review the causes and potential duration of declining subsea product revenue, and whether bookings and backlog stabilize.
- Assess cash-flow quality, particularly the role of working-capital releases, and monitor cash use as activity recovers or weakens.
- Check ABL borrowing-base availability, letters of credit, covenant requirements and any future borrowings.
- Track the FMC appeal, remaining restructuring or inventory exposure, and the impact of the forge-lease termination.
- Evaluate tax-rate variability and the sustainability of tax-related cash receipts and benefits.