Innovex International, Inc. quarterly report, Q2 FY2021

Filing and business context

Important identity discrepancy: The request identifies Innovex International, Inc., but the supplied Form 10-Q is for Dril-Quip, Inc. (NYSE: DRQ), for the quarter ended June 30, 2021. Verify that this is the intended filing before relying on this summary.

Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for deepwater and harsh-environment oil and gas operations. Its report covers the three and six months ended June 30, 2021; financial amounts below are in millions unless noted. The interim statements are unaudited.

Financial results and liquidity

MetricQ2 2021Q2 2020Six months 2021Six months 2020
Revenue$80.8$90.4$162.0$186.4
Operating loss$(14.7)$(7.5)$(46.2)$(49.8)
Net loss$(19.1)$(14.1)$(53.4)$(33.8)
Loss per share, diluted$(0.54)$(0.40)$(1.51)$(0.96)
Adjusted EBITDA (non-GAAP)$2.6$6.0$4.4$12.5
Operating cash flowNot separately presentedNot separately presented$24.4$(18.2)

Q2 gross margin was approximately 23.8% of revenue, versus 26.0% a year earlier; six-month gross margin was 27.0%, versus 25.8%. Operating margins were approximately (18.1)% and (8.3)% for Q2, and (28.6)% and (26.6)% for the respective six-month periods. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.

At June 30, cash and cash equivalents were $370.5 million, total current assets $849.3 million and current liabilities $106.5 million. Total liabilities were $129.4 million and stockholders’ equity $995.3 million. The balance sheet does not list borrowings; the company reported $25.1 million of availability under its asset-backed revolving facility, net of approximately $7.4 million of letters of credit. It was in compliance with facility covenants.

Material changes and notable items

  • Revenue declined 10.7% in Q2 and 13.1% for the first half year over year. Product revenue fell, especially subsea equipment; management attributed weakness to reduced market demand and customer drilling delays associated with COVID-19 and oil-market conditions.
  • Q2 net loss widened despite lower revenue. SG&A rose $6.3 million to $29.6 million, primarily due to legal costs related to the FMC Technologies lawsuit. The company’s Q2 restructuring charge was $1.0 million.
  • First-half restructuring and other charges were $26.0 million, mainly associated with exiting underperforming downhole-tool markets and moving to vendor sourcing. They included $19.3 million of non-cash inventory write-downs, $2.7 million of severance and $4.0 million of other costs. The prior-year period included $34.3 million of restructuring charges and a $7.7 million goodwill impairment.
  • First-half operating cash flow improved to $24.4 million from cash use of $18.2 million, helped by working-capital movements and collections. Investing cash flow was $0.3 million, including $5.9 million proceeds from the sale of two Singapore buildings; capital expenditures were $5.6 million. Cash increased $24.5 million during the half.
  • The company recorded a $3.9 million first-half gain on asset sales. It also recorded approximately $2.1 million for settlement under a Brazilian tax amnesty program; court-deposited funds were being returned, with approximately $4 million received in Q2.
  • On April 30, AFGlobal gave notice to terminate the lease for the Houston forge facility. Dril-Quip expensed approximately $2.3 million in unbilled revenue as of June 30 and reported about $0.5 million of forgone leasing revenue for the quarter and half year. Management said it had other forging suppliers and did not expect a supply disruption.

Outlook, risks and contingencies

Management provided no numerical earnings or revenue guidance. It said existing cash and anticipated operating cash flows should meet ordinary-course cash needs for the next 12 months. Management expected COVID-19 to continue weighing on oilfield activity through most of 2021 and potentially into 2022; the Delta variant, oil prices, customer activity and the pace of subsea-market recovery remained uncertain.

Product backlog was $191.2 million at June 30, down from $196.7 million at March 31, 2021. Separately, remaining performance obligations for over-time product lines were $57.6 million; the company expected to recognize about 87% within 12 months. Backlog includes certain awards and orders that do not qualify as enforceable performance obligations under the revenue standard.

During Q2, Dril-Quip entered a collaboration and supply agreement with a peer subsea equipment provider, which management said could expand access to subsea projects and bids. The company also noted foreign-exchange exposure without material hedging and was evaluating the eventual replacement of LIBOR in its credit facility.

In the FMC Technologies trade-secrets case, a jury returned a verdict in Dril-Quip’s favor on April 29, 2021; FMC could appeal. In the Brazilian tax matter, the company elected a settlement program after earlier adverse lower-court rulings. Management also cited the risks of international operations, hazardous applications, oil-and-gas market volatility, trade restrictions and extended economic disruption.

Important facts for investors to verify

  • Confirm that the supplied Dril-Quip filing, rather than an Innovex International filing, is the intended document.
  • Review the drivers and sustainability of operating cash flow, including working-capital changes and tax-receivable collections.
  • Assess the effect of restructuring, inventory write-downs, legal costs and the forge-lease termination on future costs and margins.
  • Track backlog conversion, cancellations and customer activity; distinguish reported backlog from the $57.6 million of remaining performance obligations.
  • Confirm the FMC litigation’s appeal status, the Brazilian tax settlement and recovery of deposited funds, and borrowing-base availability under the ABL facility.