Filing summary
Important identity mismatch: The supplied filing is Dril-Quip, Inc.’s Form 10-Q for the quarter ended March 31, 2017; it is not identified as an Innovex International, Inc. filing. Verify the issuer before relying on this summary.
Business context and reporting period
Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for deepwater and other demanding oil and gas applications. The unaudited report covers the three months ended March 31, 2017, compared with the same quarter of 2016.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 or prior date |
|---|---|---|
| Revenue | $119.2 million | $166.6 million |
| Gross profit and margin | $36.8 million; 30.9% | $73.5 million; 44.1% |
| Operating income (loss) | $(0.9) million; (0.7)% margin | $49.3 million; 29.6% margin |
| Net income | $94,000; approximately $0.00 per share | $36.8 million; $0.97 per share |
| Operating cash flow | $11.5 million | $52.5 million |
| Capital expenditures | $4.8 million | $7.7 million |
| Cash and cash equivalents | $414.2 million | $423.5 million at December 31, 2016 |
| Total liabilities | $85.5 million | $105.0 million at December 31, 2016 |
| Backlog | $295.5 million | $317.6 million at December 31, 2016; $522 million at March 31, 2016 |
Cost of sales rose to 69.1% of revenue from 55.9%. The filing reports no commercial lending arrangement or lines of credit. Management said cash on hand and operating cash flow should fund operations, working capital and expected capital spending for the next 12 months. Operating cash flow fell sharply year over year, while investing cash outflow included $19.9 million for the OilPatch Technologies acquisition.
Material changes versus the prior period
- Revenue declined 28.4%, mainly from weaker product demand, including a $46.3 million decrease in subsea equipment revenue. Product revenue fell to $91.6 million from $135.2 million; service revenue declined to $27.6 million from $31.4 million.
- Operating results deteriorated to a small loss, driven by lower revenue and margins, pricing concessions and under-absorbed manufacturing costs. SG&A increased to $25.8 million from $13.2 million, partly reflecting TIW expenses and a much smaller foreign-exchange transaction gain than in Q1 2016.
- Net income was nearly breakeven. The company’s non-GAAP adjusted net income was $2.2 million, including adjustments for the TIW loss and severance; this measure is not a substitute for GAAP results.
- Operating cash flow decreased to $11.5 million from $52.5 million. Cash declined by $9.3 million during the quarter.
- The company acquired OilPatch Technologies for approximately $20 million in January 2017. TIW, acquired in November 2016, contributed $15.7 million in Q1 revenue and a $0.9 million net loss.
Outlook, commentary and risks
The filing provides no specific company revenue or earnings guidance. Management cited continued oil-price and activity volatility, customer pressure to reduce prices or renegotiate, contract cancellations or delays, and the possibility that offshore rig construction deliveries could be postponed or cancelled. Average contracted offshore rig counts were lower year over year, and rigs under construction declined approximately 22%. The company reported backlog of $295.5 million, but noted that purchase orders and customer contracts may change or be terminated.
The EIA’s April 2017 outlook, as quoted in the filing, projected Brent crude averaging about $54 per barrel in 2017 and $57 in 2018; these are third-party estimates, not company guidance. Dril-Quip reduced headcount 8.9% from December 2016 through Q1 2017, recorded $1.6 million in severance costs, and implemented pay reductions estimated to save approximately $10 million annually.
For the Petrobras contract, $28 million of purchase orders remained in backlog; approximately $8 million of completed equipment had not been accepted for delivery and related revenue had not been recognized. The filing also describes Brazilian tax assessments of approximately $13 million. The company had deposited about $8.8 million with the court, recorded no liability, and said it believed success in the court process was probable. Management warned that low hydrocarbon prices or significant regulatory or other adverse events could harm liquidity and results.
Key facts for investors to verify
- Confirm that Dril-Quip, rather than Innovex International, is the intended issuer and that the period is Q1 2017.
- Assess whether the lower backlog, rig activity and product demand indicate further revenue pressure, and whether backlog converts to orders and revenue as expected.
- Review the drivers of the sharp margin and earnings decline, including pricing, capacity utilization, acquisition-related costs and the ongoing TIW contribution.
- Monitor Petrobras acceptance and collection of completed equipment, remaining contract orders, and the outcome of the Brazilian tax litigation.
- Evaluate cash generation and spending needs against management’s 12-month liquidity assessment; the filing reports no credit lines and no debt balance is clearly identified.