Filing summary
Entity note: The request identifies Innovex International, Inc., but the supplied Form 10-Q is for Dril-Quip, Inc. This summary reflects the filing provided. It covers the quarter and six months ended June 30, 2015; financial amounts are in U.S. dollars unless noted.
Business context and results
Dril-Quip designs, manufactures, sells and services offshore drilling and production equipment. Its three geographic segments are Western Hemisphere, Eastern Hemisphere and Asia-Pacific. Results are exposed to offshore activity, customer capital spending, commodity prices, project timing and foreign exchange.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $215.3 million | $230.3 million | $441.3 million | $434.4 million |
| Operating income | $52.6 million | $69.0 million | $124.3 million | $127.5 million |
| Net income | $39.2 million | $51.3 million | $92.9 million | $93.9 million |
| Diluted EPS | $1.01 | $1.27 | $2.39 | $2.31 |
| Operating margin | 24.4% | 30.0% | 28.2% | 29.3% |
| Net margin | 18.2% | 22.3% | 21.0% | 21.6% |
Financial position and cash flow
- At June 30, 2015, cash and cash equivalents were $382.7 million, up from $298.7 million at December 31, 2014. Current assets were $1.131 billion and current liabilities $126.7 million; the current ratio was approximately 8.9.
- Total liabilities were $131.0 million, including $4.3 million of deferred income taxes. The balance sheet lists no borrowings; management said the company had no commercial lending arrangement or credit lines.
- For the first six months, operating cash flow was $113.0 million, capital expenditures were $11.2 million, and cash increased by $84.0 million to $382.7 million. Operating cash flow benefited chiefly from collections and a $70.5 million decrease in trade receivables, partly offset by lower payables and accrued expenses.
- Stock repurchases used $19.9 million in the first half. The company had repurchased and cancelled 260,200 shares under its $100 million authorization by June 30, leaving $80.1 million available.
Changes and management commentary
- Q2 revenue fell 6.5% year over year, mainly from a $15.0 million decline in subsea equipment revenue, particularly in the U.S. Gulf of Mexico. Western Hemisphere product revenue declined; Eastern Hemisphere and Asia-Pacific product revenue increased.
- Q2 selling, general and administrative expense rose 31.8% to $33.6 million, primarily reflecting $11.8 million of foreign currency transaction losses versus $2.0 million a year earlier, largely due to the stronger British pound. This contributed to lower operating and net income.
- First-half revenue rose 1.6%, while operating income declined 2.5% and net income declined 1.1%. Services grew, but cost of sales and engineering and product development expenses increased.
- Backlog was approximately $1.0 billion at June 30, down from $1.2 billion at year-end 2014 and $1.3 billion a year earlier. Management said backlog may help cushion weaker market conditions.
- Management expected cash on hand and operating cash flow to fund operations, working capital and anticipated capital expenditures for the next 12 months. The filing gives no specific company revenue or earnings guidance.
Risks, contingencies and unusual items
- Management cited materially lower oil prices and reduced offshore rig activity: average crude prices for the first half were down approximately 47% year over year, while global offshore rigs under contract declined 8.91% from December 2014 to June 2015. Risks include customer contract renegotiations, cancellations, suspensions, scope changes and customer credit problems.
- A Petrobras contract awarded in 2012 was valued at $650 million at signing exchange rates if all equipment is ordered. Only purchase orders are included in backlog; about $69 million of purchase orders remained in backlog at June 30, 2015. Approximately $10 million of completed equipment had not yet been accepted for delivery, creating potential adverse effects if not accepted.
- In a Brazilian tax dispute, the company had deposited approximately $3.1 million with a court and faced additional assessments totaling about $13.0 million concerning tax credits. Management believed its position was valid and success probable, and had accrued no liability. Separately, tax authorities certified approximately $8.3 million in credits and granted $2.3 million of inflation-related credits in Q2; the latter reduced SG&A expense.
- The company recognized foreign currency pre-tax losses of $11.8 million in Q2 and $5.4 million for the first half; it reported no material hedging transactions. Other risks include international operations, offshore regulation, product liability and oil and gas industry volatility.
- The 2014 cash flow statement was revised to reclassify $6.7 million between working-capital categories. The company said the revision was not material and did not affect operating cash flow or other reported cash flow totals.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is Dril-Quip, Inc., not Innovex International, Inc.
- Track whether lower oil prices, offshore rig counts and the $1.0 billion backlog translate into weaker orders, cancellations or margin pressure.
- Assess the persistence and currency drivers of foreign exchange losses, especially the British pound exposure.
- Monitor Petrobras equipment acceptance and the Brazilian tax-credit litigation, including the unaccrued assessment exposure.
- Review the quality and sustainability of operating cash flow, including the contribution from receivables collections and the effect of customer prepayment changes.