Business context and reporting period
The supplied filing is Dril-Quip, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2011, not a filing for Innovex International, Inc. Dril-Quip designs, manufactures, sells and services offshore drilling and production equipment. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $137.7 million | $142.5 million; down 3.4% |
| Operating income / margin | $30.6 million / 22.2% | $34.6 million / 24.3% |
| Net income / margin | $21.7 million / 15.7% | $25.7 million / 18.0% |
| Basic and diluted EPS | $0.54 | $0.65 basic; $0.64 diluted |
| Operating cash flow | $40.6 million | $22.9 million |
| Capital expenditures | $19.8 million | $7.6 million |
| Cash and cash equivalents | $268.3 million at March 31 | $245.9 million at December 31, 2010 |
| Total debt | $0.2 million current; no long-term debt reported | $0.3 million current; no long-term debt reported |
| Backlog | Approximately $655 million | $550 million at March 31, 2010; $627 million at December 31, 2010 |
Gross margin was approximately 41.8%, versus 42.6% a year earlier. Cash increased by $22.4 million during the quarter. Operating cash flow less capital expenditures was approximately $20.8 million, compared with $15.3 million in Q1 2010. Current assets were $718.9 million and current liabilities $126.9 million at quarter-end. The remaining bank facility balance was repaid in April 2011. Management said cash on hand and operating cash flow should cover operations, working capital and expected capital spending for the next 12 months.
Material changes versus the prior comparable period
- Product revenue declined $1.6 million: lower subsea and surface equipment revenue was largely offset by higher offshore rig equipment sales. Service revenue fell $3.2 million, primarily reflecting lower running-tool rentals and reconditioning.
- U.S. Gulf of Mexico revenue declined to $51.6 million from $62.7 million. Subsea equipment revenue in the region fell to $23.0 million from $34.9 million, while offshore rig equipment revenue rose to $24.1 million from $17.5 million.
- SG&A increased to $18.3 million from $13.4 million, principally due to a $2.3 million foreign-currency transaction loss versus a $1.7 million gain in Q1 2010. Engineering and product development expense increased to $8.7 million from $6.8 million.
- Net income fell 15.7%; Q1 2010 included a $5.9 million special charge related to a Brazilian tax settlement, while Q1 2011 had no special item.
- Operating cash flow improved, helped by working-capital movements, including a $14.6 million increase in payables and accrued expenses, largely from customer prepayments. Inventory increased $7.2 million.
- Revenue mix shifted: Western Hemisphere revenue increased, while Eastern Hemisphere and Asia-Pacific revenue declined. Foreign sales accounted for approximately 63% of revenue, compared with 56% in Q1 2010.
Outlook, risks, contingencies and unusual items
- No formal earnings or revenue guidance is provided. Management noted that BOEM resumed issuing deepwater permits in Q1 2011 but could not quantify the future impact of the Deepwater Horizon moratorium and permitting delays. It expected potential adverse effects on Gulf of Mexico subsea and, to a lesser extent, surface equipment revenue and on regional service revenue; offshore rig equipment was expected to be less affected.
- Gulf of Mexico activity remains material: the region generated approximately 37% of worldwide Q1 2011 revenue. Backlog provides some support, but orders may be changed or terminated at customers’ option and are not assured revenue.
- Dril-Quip was named in multiple lawsuits related to the Deepwater Horizon incident and was involved in ongoing government investigations. The company denied responsibility, intended to defend the matters and recorded no liability. Potential outcomes and insurance coverage are uncertain; the filing describes a $100 million aggregate liability coverage limit in place at the time of the incident.
- The Brazilian subsidiary received tax assessments of approximately BRL 24.4 million, or about $15 million, concerning the treatment of import and export taxes. The company is contesting them, recorded no liability because the outcome and loss range could not be reasonably estimated, and did not expect a material adverse effect.
- Other disclosed risks include volatile oil and gas prices, further offshore regulation and product testing, customer concentration and project cancellations, fixed-price contract cost overruns, foreign exchange exposure, third-party technology and supplier dependence, and potential raw-material cost increases. A Japanese forging supplier had experienced some delivery delays after the March 2011 earthquake and tsunami.
- The 2010 Brazilian tax settlement also included approximately $6.3 million of prepaid tax credits intended to offset future import taxes; certification timing could affect their use. The filing reports no material impact from recently adopted accounting standards.
Key facts investors should verify
- Confirm the intended issuer: this source is a Dril-Quip, Inc. 10-Q, despite the request metadata naming Innovex International, Inc.
- Check subsequent developments in Deepwater Horizon litigation, investigations, indemnification and insurance coverage, and whether any liability was later recognized.
- Track Gulf of Mexico permitting, subsea revenue, service revenue and the degree to which backlog converts to recognized revenue.
- Verify the status and eventual resolution of the approximately $15 million Brazilian tax assessments and certification of the prepaid tax credits.
- Assess whether higher capital spending, inventory growth, foreign-exchange losses and supplier delays affect cash generation, margins or delivery commitments.