Business context and reporting period
This is Dril-Quip, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2012, comparing the first quarter of 2012 with the first quarter of 2011. The filing is for an offshore drilling and production equipment maker operating across the Western Hemisphere, Eastern Hemisphere, and Asia-Pacific. The request metadata names Innovex International, Inc., but the supplied filing identifies Dril-Quip, Inc.; confirm the intended company before relying on this summary.
Key financial results
Amounts are in millions of U.S. dollars, except per-share data. Balance-sheet comparisons are March 31, 2012 versus December 31, 2011.
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $177.1 | $137.7 |
| Operating income / margin | $40.0 / 22.6% | $30.6 / 22.1% |
| Net income / margin | $28.8 / 16.3% | $21.7 / 15.7% |
| Diluted EPS | $0.71 | $0.54 |
| Operating cash flow | $(1.5) | $40.6 |
| Capital expenditures | $13.9 | $19.8 |
| Cash and cash equivalents | $285.5 | $298.6 |
| Current assets / current liabilities | $829.3 / $151.5 | $799.3 / $151.0 |
| Total assets / stockholders’ equity | $1,125.7 / $964.7 | $1,085.9 / $925.2 |
| Debt | $0.046 current; no long-term debt | $0.057 current; no long-term debt |
Total revenue increased 28.6%. Product revenue rose to $149.7 million from $120.2 million; service revenue rose to $27.4 million from $17.5 million. Product mix shifted toward subsea equipment: subsea revenue increased $42.6 million, while offshore rig equipment revenue fell $17.9 million. Cost of sales rose to 60.4% of revenue from 58.2%, primarily due to product mix; gross margin therefore declined to 39.6% from 41.8%. Operating and net margins improved modestly.
Material changes, liquidity, and outlook
- Net income increased by $7.1 million year over year. Regional revenue growth was strongest in the Eastern Hemisphere, with increases also in Asia-Pacific; Western Hemisphere product revenue declined.
- Operating cash flow fell by $42.0 million to a $1.5 million use of cash. Working capital movements used $37.5 million, including a $25.3 million inventory increase to support anticipated higher production and an $8.2 million rise in receivables. Cash declined $13.1 million during the quarter.
- Management said cash on hand and cash generated from operations should fund operations, working capital, and anticipated capital expenditures for the next 12 months. It also said commercial borrowing should be available if unexpected cash needs arise. No formal company revenue or earnings guidance is provided.
- Backlog was approximately $701 million at March 31, 2012, versus $655 million a year earlier and $716 million at December 31, 2011. Customer orders may change or be terminated, so backlog is not assured revenue.
- Management cited volatile oil and gas prices, offshore activity, regulatory and permitting changes, product testing requirements, international and foreign-exchange exposure, and customer and project risks. It could not quantify the future revenue and earnings effects of U.S. Gulf of Mexico permitting delays. The company reported $2.3 million of foreign-currency transaction losses in each comparative quarter.
Contingencies and unusual items
- Deepwater Horizon: A January 2012 court order dismissed claims against the company in the consolidated proceedings, and a final judgment in its favor was entered April 9, 2012. The company said no liability was accrued. It noted that future lawsuits or investigations remain possible and that insurance coverage may not cover all claims, fines, or cleanup costs; insurers had issued a reservation-of-rights letter.
- Brazilian tax assessments: The subsidiary was contesting assessments. A January 2012 decision reduced one assessment; as of April 2012, total assessments including interest, penalties, and possible restatement fees were approximately BRL19.7 million (about $10.8 million). No liability was accrued because the outcome and potential loss could not be reasonably estimated. Management did not expect any resulting liability to materially adversely affect operations, financial position, or cash flows.
- The company adopted the updated comprehensive-income presentation standard in the quarter; it stated that the new offsetting-disclosure standard would not materially affect its financial statements when adopted.
Facts investors should verify
- Confirm the company and filing identity: the supplied 10-Q is for Dril-Quip, Inc., not Innovex International, Inc.
- Assess whether inventory and receivables growth converts to cash, and whether operating cash flow improves in subsequent quarters.
- Review the quality, timing, and cancellation exposure of the $701 million backlog, as well as the mix and margins of subsea versus offshore rig equipment.
- Monitor U.S. Gulf of Mexico permitting and regulatory developments, and any renewed Deepwater Horizon claims or insurance disputes.
- Track the Brazilian tax dispute and accumulated interest and penalties; the filing does not provide a clear estimate of possible loss.