Filing summary
Entity discrepancy: The request identifies Innovex International, Inc., but the filing text is Dril-Quip, Inc.’s Form 10-Q for the quarter ended September 30, 2012. The figures below summarize the filing as provided and should not be attributed to Innovex without verification. Dollar amounts are in millions unless noted.
Business and reporting period
Dril-Quip designs, manufactures, sells and services offshore drilling and production equipment, with operations in the Western Hemisphere, Eastern Hemisphere and Asia-Pacific. The filing reports the three and nine months ended September 30, 2012, compared with the same 2011 periods; balance-sheet comparisons are to December 31, 2011.
Financial performance and liquidity
- Third quarter: Revenue was $190.9 million, up 23.2% year over year; net income was $29.7 million versus $23.3 million; diluted EPS was $0.73 versus $0.58. Operating income was $38.7 million, with a 20.2% operating margin; net margin was 15.5%.
- First nine months: Revenue was $544.6 million, up 26.7%; net income was $88.3 million versus $67.1 million; diluted EPS was $2.18 versus $1.67. Operating income was $120.1 million, with a 22.0% operating margin; net margin was 16.2%.
- Revenue mix: Third-quarter product revenue was $159.5 million and service revenue $31.4 million. Subsea equipment was the principal product growth driver. Nine-month product and service revenue were $455.8 million and $88.7 million, respectively.
- Margins: Cost of sales was 63.8% of revenue in Q3 versus 62.2% a year earlier, and 61.9% for the nine months versus 60.2%. Management attributed the deterioration mainly to product mix and, in Q3, unabsorbed manufacturing overhead. Operating margin was 20.2% versus 20.4% in Q3 and 22.0% versus 21.5% for the nine months.
- Cash flow: Nine-month operating cash flow was negative $9.9 million, compared with positive $51.2 million in 2011, principally reflecting increases in receivables and inventory. Capital expenditures were $40.6 million. Cash declined $35.2 million to $263.4 million.
- Balance sheet: Current assets were $891.9 million and current liabilities $155.2 million at September 30. The company reported no long-term debt and no commercial lending arrangement or credit lines. Total assets were $1,196.2 million and stockholders’ equity $1,031.5 million.
Changes, outlook and management commentary
- For Q3, product revenue grew approximately $25.3 million and services grew $10.6 million year over year. For the first nine months, product revenue increased approximately $87.0 million and services $27.9 million.
- Backlog was approximately $747 million at September 30, up from $716 million at December 31, 2011 and $730 million a year earlier. Management said backlog may help buffer weaker market conditions, but customer orders and projects can be changed or terminated.
- A four-year Petrobras contract awarded in August 2012 was valued at approximately $650 million, net of Brazilian taxes, if all equipment is ordered. It was excluded from September 30 backlog; approximately $60 million in purchase orders had been received by November 7, 2012. The filing provides no full-year earnings or revenue guidance.
- Management expected available cash and internally generated funds to cover operations, working capital and anticipated capital expenditures for the next 12 months, while warning that a significant downturn, catastrophic event or regulatory change could harm liquidity.
- Management cited higher offshore rig activity and increasing U.S. Gulf of Mexico service revenue, but noted volatility in oil and gas prices, customer capital spending, regulation and product-testing requirements. The filing reported no material change in risk factors from the 2011 Form 10-K.
Risks, contingencies and unusual items
- Deepwater Horizon: Claims against the company in the consolidated proceedings were dismissed with prejudice, with final judgment entered in April 2012. The company recorded no liability, but noted potential future lawsuits or investigations and that insurance may not cover all claims, fines or cleanup costs; insurers had issued a reservation-of-rights letter.
- Brazilian tax assessment: The subsidiary contested approximately $13.0 million of assessments concerning tax credits. The company believed its position was valid and success probable, but recorded no liability because it could not reasonably estimate a loss or range of losses. Separately, earlier tax settlements included $7.8 million of expense; remaining amounts generated credits subject to certification.
- ATP bankruptcy: At September 30, the company had $1.4 million in ATP receivables and $4.3 million in customer prepayments.
- Foreign exchange: Foreign-currency transaction losses were approximately $2.4 million in Q3 and $4.3 million for the nine months, higher than in the comparable 2011 periods.
- Share repurchase: A plan authorized repurchases of up to $100 million, with no expiration date; no shares had been repurchased by September 30.
Important facts for investors to verify
- Confirm the issuer and filing: the supplied document is for Dril-Quip, Inc., not Innovex International, Inc.
- Review subsequent filings for conversion of the Petrobras award into purchase orders and the related backlog and revenue impact.
- Track whether working-capital growth, especially receivables and inventory, reverses and operating cash flow recovers.
- Monitor resolution of the Brazilian tax-credit dispute, ATP bankruptcy exposure, and any developments in Deepwater Horizon-related claims or insurance coverage.
- Assess whether cost-of-sales pressure, foreign-exchange losses and offshore market or regulatory changes affect margins and demand.