Business context and reporting period
The supplied filing is Dril-Quip, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2016; this does not match the request metadata naming Innovex International, Inc. Dril-Quip designs, manufactures, sells and services offshore drilling and production equipment. Figures below compare the first quarter of 2016 with the first quarter of 2015 unless otherwise noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $166.6 million | $226.0 million; down 26.3% |
| Product revenue | $135.2 million | $187.5 million |
| Service revenue | $31.4 million | $38.5 million |
| Gross profit and margin | $73.5 million; 44.1% | Margin 44.6% |
| Operating income and margin | $49.3 million; 29.6% | $71.7 million; 31.7% |
| Net income and margin | $36.8 million; 22.1% | $53.7 million; 23.7% |
| Diluted EPS | $0.97 | $1.38 |
| Operating cash flow | $52.5 million | $87.1 million |
| Capital expenditures | $7.7 million | $6.2 million |
| Cash and cash equivalents | $423.4 million | $381.3 million at Dec. 31, 2015 |
| Total liabilities | $107.2 million | $103.8 million at Dec. 31, 2015 |
Cash increased by $42.0 million during the quarter. Dril-Quip reported no commercial lending arrangement or credit lines. It had $1.165 billion in current assets and $104.9 million in current liabilities at March 31, 2016. The filing reports no debt balance.
Material changes and operating trends
- Revenue fell $59.4 million, mainly from lower subsea equipment sales and weaker Western and Eastern Hemisphere activity; Asia-Pacific product revenue increased.
- Management attributed the downturn to low oil and gas prices and reduced customer demand. Brent averaged $33.84 per barrel in Q1 2016 versus $53.98 a year earlier. Offshore rigs under contract in the company’s regions declined 20.6% year over year.
- Cost of sales declined with revenue, but increased as a share of revenue to 55.9% from 55.4%, primarily due to pricing concessions. Selling, general and administrative costs fell 22.1%, reflecting lower headcount and related costs.
- Operating cash flow declined $34.5 million year over year, reflecting lower net income and less favorable changes in operating assets and liabilities. Receivables rose $8.9 million in the quarter, which management linked mainly to slower customer collections.
- Backlog was approximately $522 million at March 31, 2016, versus $685 million at year-end 2015 and $1.1 billion a year earlier. Cancellations and revisions reduced backlog by about $63 million, including cancellation of one wellhead-equipment contract worth approximately $52 million.
Outlook, risks and contingencies
The filing provides no company earnings or revenue guidance. Management said cash on hand and operating cash flow should fund operations, working capital and expected capital spending for the next 12 months, while warning that continued significant hydrocarbon-price declines or other adverse events could harm liquidity. Management cited EIA estimates that Brent would average about $34.73 per barrel in 2016 and $40.58 in 2017; these are external forecasts, not company guidance.
Management expects continued commodity-price and activity volatility. Risks include customer contract renegotiations, cancellations or delays; customers’ ability to perform; pricing pressure; lower offshore investment; foreign-exchange movements; and political, regulatory and international operating risks. The company noted that some rigs under construction could be delayed or cancelled.
For a Petrobras contract, $46 million of purchase orders remained in backlog; approximately $12 million of completed equipment had not been accepted for delivery. The company said it did not expect Petrobras to order all equipment available under the contract’s original terms. Non-acceptance could adversely affect results.
A Brazilian tax dispute involves approximately $13 million in assessments concerning tax credits. The company had deposited approximately $3.1 million with a court and recorded no liability, stating it believed the credits were valid and success in court was probable. Management said ordinary-course legal matters were not expected to have a material adverse effect. The company also reported a $7.3 million pretax foreign-currency transaction gain in Q1 2016 and said it does not materially hedge currency exposure.
Important facts for investors to verify
- Confirm the filing issuer: the supplied document identifies Dril-Quip, Inc., not Innovex International, Inc.
- Assess the pace of backlog erosion, cancellations and revisions, and whether delayed or unaccepted orders convert to revenue and cash.
- Monitor customer collections and working-capital needs given slower collections and lower operating cash flow.
- Track the Brazilian tax litigation, including the unaccrued assessment and court deposit, and Petrobras equipment acceptance.
- Review exposure to offshore activity, commodity prices, customer credit and foreign exchange; management cautions that interim results are not necessarily indicative of full-year results.