Filing summary
Registrant discrepancy: The supplied filing is for Dril-Quip, Inc., not Innovex International, Inc. It is an unaudited Form 10-Q for the quarter and six months ended June 30, 2017.
Business and financial performance
Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for deepwater and other demanding oil and gas applications.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $127.9m | $142.4m | $247.2m | $309.0m |
| Operating income (loss) | $(1.1)m | $45.2m | $(2.0)m | $94.6m |
| Net income | $0.015m | $36.1m | $0.110m | $72.9m |
| Operating margin | (0.9)% | 31.7% | (0.8)% | 30.6% |
| Adjusted EBITDA | $19.3m | $42.6m | $33.0m | $95.6m |
Q2 product revenue was $102.1m and service revenue $25.8m. For the six-month period, product revenue was $193.7m and service revenue $53.5m. Product mix, unabsorbed manufacturing costs and pricing concessions increased cost of sales to 68.4% of revenue in Q2 (from 56.1%) and 68.8% for the half year (from 56.0%).
At June 30, cash and equivalents were $437.0m; current assets were $1,024.9m and current liabilities $86.3m. Total liabilities were $88.6m, with no commercial lending arrangement or line of credit. Six-month operating cash flow was $38.7m (prior year $162.9m); investing cash outflow was $33.6m, including $21.3m for acquisitions, and cash increased $13.5m to $437.0m. Capital expenditures were $12.9m. Management said cash on hand and operating cash flow should fund operations, working capital and expected capital spending.
Changes, outlook and risks
- Revenue fell 10.2% in Q2 and 20.0% for the first half, mainly from weaker equipment demand, especially subsea products, amid low oil and gas prices. Six-month subsea revenue declined $59.5m year over year.
- SG&A rose to $31.2m in Q2 and $57.0m for the half, reflecting recurring TIW costs and foreign-exchange transaction losses; the prior-year periods included substantial FX gains. The 2017 half-year results also include TIW, acquired in November 2016. TIW contributed $25.7m of revenue and a $6.6m net loss in the first half of 2017. Dril-Quip acquired OilPatch Technologies in January 2017 for approximately $20m.
- Backlog declined to $234.9m at June 30 from $295.5m at March 31 and $317.6m at December 31, 2016. Management expected lower bookings and significantly reduced revenue in the second half of 2017 versus the first, with continued pressure on offshore activity and oil and gas prices; it expected these trends to persist through 2018. No specific earnings or revenue guidance was provided.
- Management cited risks from contract cancellations, renegotiations and delayed rig deliveries; rigs under contract were down 8.3% year over year and rigs under construction down about 21%. A prolonged downturn could lead to asset impairment charges. Petrobras purchase orders of $19m remained in backlog; approximately $3m of completed equipment awaited customer acceptance. The Petrobras contract was extended through July 2020, with a minimum of approximately $30m in orders before 2019, but further orders are not assured.
- Brazilian tax assessments totaling about $13.0m remain disputed. The company had deposited approximately $8.8m with the courts and recorded no liability, believing success was probable. Other ordinary-course litigation was not expected by management to have a material adverse effect. Workforce reductions lowered headcount 11.6% from year-end; six-month severance expense was $1.9m, and pay reductions were estimated to save approximately $10m annually.
- Foreign-exchange exposure remains unhedged; the company recorded a $3.7m Q2 transaction loss versus a $15.4m gain in the prior-year quarter. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended company: this filing identifies Dril-Quip, Inc., not Innovex International, Inc.
- Monitor backlog, orders, cancellations and the company’s forecast of materially weaker second-half revenue.
- Assess whether margins and cash generation can recover amid pricing concessions, low capacity utilization and elevated SG&A.
- Track Petrobras order commitments and acceptance of completed equipment, as well as the outcome of the Brazilian tax dispute.
- Review acquisition integration and TIW’s operating losses, and consider the effect of currency movements and potential asset impairments.