Filing identity and reporting period
Important discrepancy: The supplied filing is Dril-Quip, Inc.’s Form 10-K, not Innovex International, Inc.’s. It reports the fiscal year ended December 31, 2014, and includes unaudited quarterly results for Q4 2014. The filing was signed February 27, 2015.
Business context
Dril-Quip designs, manufactures, sells and services offshore drilling and production equipment, with a focus on deepwater and harsh environments. It reports three geographic segments: Western Hemisphere, Eastern Hemisphere and Asia-Pacific. Products generated 83% of 2014 revenue; services generated 17%. Foreign sales were approximately 63% of revenue.
Financial performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $931.0 million | $872.4 million |
| Gross profit | $417.4 million | $358.5 million |
| Gross margin | 44.8% | 41.1% |
| Operating income / margin | $278.7 million / 29.9% | $223.5 million / 25.6% |
| Net income / margin | $208.7 million / 22.4% | $169.8 million / 19.5% |
| Diluted EPS | $5.19 | $4.16 |
| Operating cash flow | $149.3 million | $162.2 million |
| Capital expenditures | $42.5 million | $42.6 million |
| Cash and cash equivalents, year-end | $298.7 million | $384.4 million |
| Working capital, year-end | $928.5 million | $931.6 million |
| Total debt, year-end | None reported | None reported |
Q4 2014: Revenue was $254.8 million, operating income $78.2 million, net income $59.1 million and diluted EPS $1.50. In Q4 2013, the corresponding figures were $232.5 million, $63.2 million, $47.1 million and $1.15.
Changes versus prior periods
- Full-year revenue rose 6.7% year over year, led by subsea equipment and higher service revenue. Subsea revenue increased $37.9 million; service revenue increased $17.0 million.
- Gross margin improved to 44.8% from 41.1%. Management attributed the improvement primarily to pricing increases and product mix.
- Operating cash flow declined $12.9 million despite higher earnings, mainly because of working-capital use. Trade receivables rose $102.7 million and inventories rose $36.8 million.
- Cash declined $85.7 million during 2014. Financing cash outflow included $190.2 million of share repurchases; the company repurchased and cancelled approximately 2.0 million shares during the year.
- Backlog was approximately $1.2 billion at both year-end 2014 and 2013, versus $881 million at year-end 2012.
Outlook, risks and unusual items
- Management highlighted the sharp late-2014 decline in crude prices: Brent ended the year at $55.27 per barrel, versus $109.95 at year-end 2013. It expected continued price and activity volatility and warned that prolonged lower hydrocarbon prices could materially hurt results. The filing cites EIA forecasts for 2015 and 2016; these are third-party forecasts, not company earnings guidance.
- The company expected to deliver approximately 60%–65% of year-end 2014 product backlog during 2015. Backlog is subject to customer changes or termination and is not a certain predictor of revenue or profit.
- Approximately $9 million of completed Petrobras equipment had not been accepted for delivery, and related revenue had not been recognized. The filing says refusal to accept this or similar equipment could adversely affect results.
- A Brazilian tax dispute concerns assessments totaling approximately $13 million. Dril-Quip had deposited about $3.1 million with the court for one assessment, believed its tax-credit position was valid, and recorded no liability because management considered success probable.
- Other material risks include customer capital-spending cuts, fixed-price project overruns, technical/testing requirements, international and foreign-exchange exposure, raw-material supply and pricing, regulation, and operational, environmental and product-liability hazards. A 10% adverse move in the pound sterling and Brazilian real was estimated to reduce revenue by about $37 million and net income by about $14 million.
- Management said cash on hand and operating cash flow should fund operations and anticipated capital expenditures for the next 12 months, while noting that a significant industry downturn or other adverse events could affect liquidity.
Key facts investors should verify
- Confirm the issuer: the source filing is Dril-Quip, Inc., despite the request metadata naming Innovex International, Inc.
- Review the effect of the late-2014 oil-price decline on subsequent customer budgets, orders, backlog conversion and margins.
- Assess collection and conversion of higher receivables and inventory, including the $68.0 million of unbilled receivables at year-end.
- Track Petrobras delivery acceptance and the status and outcome of the Brazilian tax-credit litigation.
- Evaluate the sustainability of margin improvement and the impact of repurchases on cash, share count and per-share results.