Filing summary
Issuer mismatch: The supplied filing identifies the registrant as Dril-Quip, Inc., not Innovex International, Inc. This summary reflects the filing text provided. Reporting period: three months ended March 31, 2018; comparative period: three months ended March 31, 2017. Figures are unaudited and in U.S. dollars unless noted.
Business context and reporting period
Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for deepwater and harsh-environment applications. It reports operations across the Western Hemisphere, Eastern Hemisphere and Asia Pacific. Results are exposed to oil and gas industry activity, customer capital spending and commodity-price volatility.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $99.2 million | $119.2 million |
| Operating loss | $6.3 million | $0.9 million |
| Net income (loss) | $(7.4) million | $0.1 million |
| Diluted earnings (loss) per share | $(0.20) | $0.00 |
| Cash provided by operations | $11.4 million | $11.5 million |
| Capital expenditures | $10.6 million | $4.8 million |
| Adjusted EBITDA (non-GAAP) | $7.8 million | $13.6 million |
Revenue declined 16.8%, primarily due to lower product demand, especially for subsea equipment. Products generated $71.0 million of revenue, down from $91.6 million; services rose to $28.1 million from $27.6 million. Cost of sales was 68.3% of revenue versus 69.1%; operating margin was negative 6.3% versus negative 0.7%, and net margin was negative 7.4% versus positive 0.1%.
Cash and cash equivalents were $495.6 million at March 31, 2018, compared with $493.2 million at year-end 2017. Total liabilities were $92.8 million and stockholders’ equity was $1.305 billion. The company had no borrowings or letters of credit outstanding under its new $100 million asset-backed revolving facility and reported $64 million of availability. The filing reports no other debt balance.
Operating cash flow was nearly unchanged year over year. Inventory reductions provided $17.2 million of operating cash, while accounts payable and accrued expenses used cash. Investing outflow was $10.5 million, including $10.6 million of capital expenditures; cash increased $2.4 million during the quarter.
Material changes versus the prior comparable period
- Product revenue fell about $20.5 million, with decreases in subsea equipment, offshore rig equipment and downhole tools partly offset by higher surface-equipment revenue.
- Western Hemisphere revenue declined by about $29.5 million; Eastern Hemisphere revenue increased by about $10.0 million; Asia Pacific revenue decreased by about $3.1 million.
- SG&A increased to $28.3 million from $25.8 million, including a $1.3 million foreign-currency transaction loss versus a small gain a year earlier, and higher professional-service costs.
- Engineering and product development expense decreased to $9.4 million from $11.9 million.
- Backlog increased to $266.7 million from $207.3 million at December 31, 2017, but was below $295.5 million at March 31, 2017. The reported backlog includes approximately $84 million of contract awards that may not meet ASC 606 enforceability criteria.
Outlook, risks and unusual items
- The filing provides no company-specific earnings or revenue guidance. Management expects continued volatility in oil and gas prices and drilling activity and says sustained low hydrocarbon prices have adversely affected, and may continue to adversely affect, results.
- Management cited the backlog as a partial buffer, while warning that customer contract cancellations, suspensions, renegotiations and delivery delays could impair results. Offshore rigs under construction were down approximately 11.4% year over year, and some deliveries could be postponed or cancelled.
- A contract for riser systems on the Ca Rong Do project offshore Vietnam is in backlog but may be delayed or cancelled amid territorial discussions between China and Vietnam.
- Petrobras-related backlog included $28 million of purchase orders. Approximately $16 million of completed equipment had not been accepted for delivery; non-acceptance could adversely affect results. The company also said Petrobras had issued about $12 million of the approximately $29 million in minimum purchase orders contemplated under the contract amendment.
- A Brazilian tax dispute involves approximately $13 million of assessments; the company deposited about $8.8 million with the court and recorded no liability, believing success in the judicial process is probable.
- Adoption of ASC 606 on January 1, 2018 increased opening retained earnings by $1.8 million and increased Q1 operating results by approximately $1.2 million; comparative prior-period figures were not restated. Tax expense of $2.9 million on a pretax loss was affected by valuation allowances in the U.S. and Asia Pacific and provisional accounting for U.S. tax reform.
- Foreign-currency transaction losses, international political and regulatory risks, customer creditworthiness, pricing pressure, and potential steel tariffs are among the disclosed risks. The company reported no material change in risk factors from its 2017 Form 10-K.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-Q is for Dril-Quip, Inc., not Innovex International, Inc.
- Assess whether the backlog is likely to convert to revenue, particularly the Vietnam project and contract awards excluded from disclosed remaining performance obligations.
- Monitor Petrobras equipment acceptance and issuance of the remaining purchase orders.
- Review the causes and sustainability of product-revenue weakness, operating losses and the tax provision despite a pretax loss.
- Verify liquidity and covenant headroom under the borrowing-base facility; reported availability was $64 million and the company had no facility borrowings at quarter-end.