Business context and reporting period
Filing identity: The supplied filing is Dril-Quip, Inc.’s Form 10-Q, not an Innovex International, Inc. filing. It covers the quarter and six months ended June 30, 2018; figures below summarize Dril-Quip’s filing.
Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for deepwater and harsh-environment oil and gas operations. It reports Western Hemisphere, Eastern Hemisphere and Asia-Pacific segments.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $94.9 million | $127.9 million | $194.0 million | $247.2 million |
| Gross profit and margin | $25.4 million; 26.8% | $40.4 million; 31.6% | $56.8 million; 29.3% | $77.2 million; 31.2% |
| Operating income (loss) | $(3.7) million | $(1.1) million | $(9.8) million | $(2.0) million |
| Net income (loss) | $(3.0) million | $15,000 | $(10.4) million | $110,000 |
| Adjusted EBITDA, non-GAAP | $1.6 million | $19.3 million | $9.6 million | $33.0 million |
Q2 product revenue fell about 37% to $64.7 million, while service revenue rose about 17% to $30.1 million. For the first half, product revenue declined about 30% and services increased about 9%. Cost of sales as a share of revenue rose to 73.2% in Q2 from 68.4%, reflecting product mix, pricing concessions and under-absorbed manufacturing costs.
First-half operating cash flow was $23.5 million, down from $38.7 million. Investing cash outflow was $9.1 million and financing cash outflow was $10.0 million; cash increased $0.2 million to $493.4 million. Capital expenditures were $19.6 million. At June 30, cash was $493.4 million, total current assets were $976.4 million and current liabilities were $80.5 million. The balance sheet reports no debt balance. The new five-year ABL facility has $100 million in commitments; reported availability was $63.0 million after letters of credit. The company stated it was in covenant compliance.
Material changes versus comparable periods
- Revenue contracted substantially, mainly from lower product demand, particularly subsea equipment; management cited low oil and gas prices and completed projects without replacement projects.
- Profitability weakened despite lower SG&A and engineering costs. Higher unit cost burden and pricing pressure reduced gross margin.
- Q2 included a $5.1 million gain on equipment sales tied to Houston headquarters reorganization and consolidation. Without this gain, operating results would have been weaker.
- Cash generation declined year over year. Working-capital reductions, including lower inventory, supported operating cash flow.
- Foreign-currency translation generated a $21.7 million other comprehensive loss in Q2; the first-half translation loss was $8.5 million.
- The company repurchased 219,102 shares for approximately $9.8 million in May; $90.2 million remained under the authorization.
Outlook, risks and unusual items
No specific company revenue or earnings guidance was provided. Management expected continued pressure on oil and gas prices and drilling activity, while noting that backlog could help mitigate adverse conditions. Brent crude averaged $74.53 per barrel in Q2; the EIA forecast cited in the filing projected averages of about $73 in 2018 and $69 in 2019.
Backlog was approximately $260.9 million at June 30, up from $234.9 million a year earlier and $207.3 million at December 31, 2017. It includes about $84 million of contract awards that may not be enforceable under the revenue standard; backlog therefore is not equivalent to remaining performance obligations, which were $25.4 million for specified obligations.
Risks include volatile commodity prices, customer contract cancellations or renegotiations, offshore project delays, pricing and steel-cost pressure from tariffs, foreign exchange exposure, and international political and regulatory risks. The Ca Rong Do project offshore Vietnam could be delayed or cancelled amid territorial discussions. Petrobras had not yet accepted certain completed equipment representing about $1.5 million of unrecognized revenue; approximately $18 million of a stated $25 million minimum purchase-order commitment had been issued by June 30.
A Brazilian tax dispute relating to assessments of approximately $13 million remained in litigation. The company had deposited about $8.8 million with the court and accrued no liability, stating it believed recovery was probable. A July 2018 letter of intent for the Sea Lion development offshore the Falkland Islands contemplated 23 subsea production systems, but formal award depended on a definitive contract and Premier’s final investment decision; vendor financing was contemplated for part of the contract.
ASC 606 was adopted January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $1.8 million. The company said adoption increased operating results by approximately $0.5 million in Q2 and $2.3 million for the first half, without material overall financial-statement impact. Income tax expense despite pretax losses reflected, in part, valuation allowances in the U.S. and Asia-Pacific regions; accounting for U.S. tax reform remained provisional.
Important facts for investors to verify
- Confirm issuer identity: the source is Dril-Quip, not Innovex International.
- Assess whether backlog converts to enforceable orders and revenue, particularly the $84 million of awards and the Vietnam and Petrobras exposures.
- Track product demand, gross margins, pricing concessions and manufacturing capacity utilization as oilfield activity changes.
- Verify cash-flow sustainability, capital spending, ABL availability and covenant compliance; the reported $63 million availability is subject to borrowing-base limits.
- Monitor outcomes of the Brazilian tax litigation, Petrobras acceptance of completed equipment, tariff effects and foreign-currency movements.
- Separate recurring operating performance from the $5.1 million asset-sale gain and consider the non-GAAP nature of Adjusted EBITDA.