Business context and reporting period
The supplied filing is Dril-Quip, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017—not an Innovex International, Inc. filing. Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for offshore and other demanding oil-and-gas applications. The company reports three geographic segments.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | $100.3; down 18.9% from $123.6 | $347.5; down 19.7% from $432.6 |
| Gross profit and margin | $37.3; 37.2%, versus 37.2% | $114.5; 32.9%, versus 42.1% |
| Operating income (loss) | $(62.0), versus $22.9 | $(64.0), versus $117.5 |
| Net income (loss) | $(29.3), or $(0.78) per diluted share | $(29.1), or $(0.78) per diluted share |
| Adjusted EBITDA | $13.7, versus $28.2 | $46.7, versus $121.9 |
| Cash from operating activities | Not separately stated in the provided filing text | $74.7, versus $221.5 |
Nine-month cost of sales rose to 67.1% of revenue from 57.9%, reflecting unabsorbed manufacturing costs, product mix and pricing concessions. Third-quarter cost of sales remained 62.8% of revenue year over year.
At September 30, cash and cash equivalents were $473.0 million, up from $423.5 million at December 31, 2016. Current assets were $992.5 million and current liabilities $69.3 million. Total liabilities were $71.5 million; the company reported no commercial lending arrangement or lines of credit. Nine-month investing cash outflow was $39.7 million, including $19.6 million of capital expenditures and $21.3 million for an acquisition. Cash increased by $49.5 million over the period.
Material changes versus the prior comparable period
- Lower demand for exploration and production equipment drove the revenue decline, particularly in subsea equipment. Nine-month product revenue fell $82.9 million; service revenue declined $2.2 million.
- The company recorded $61.0 million of impairment and other charges in the third quarter: $33.6 million for inventory and $27.4 million for fixed assets. Management cited expected lower asset utilization and inventory market values in light of oil-price forecasts and rig-count expectations.
- Nine-month SG&A increased to $85.0 million from $31.5 million. Drivers included a $4.0 million foreign-currency loss versus a $28.1 million gain in 2016, $20.0 million of recurring TIW expenses and $3.0 million of severance costs.
- The 2017 results include TIW, acquired in November 2016, and the January 2017 acquisition of OilPatch Technologies for approximately $20 million. TIW contributed $36.3 million of revenue and a $13.9 million pretax operating loss for the first nine months of 2017.
- Product backlog fell to $216.6 million at September 30, from $318 million at December 31, 2016. Nine-month contracted offshore rig counts and rigs under construction also declined year over year.
Outlook, commentary, risks and contingencies
Management expected pressure on oil and gas prices and drilling activity, especially offshore, to persist through 2018. It cited the EIA’s September 2017 outlook for average Brent prices of approximately $51 per barrel in 2017 and $52 in 2018. Management said cash on hand and operating cash flow were expected to fund operations, working capital and anticipated capital expenditures.
The company reduced headcount by 12.2% from December 31, 2016, to 2,067 employees at September 30, 2017, and instituted global pay reductions estimated to save approximately $10 million annually. It reported $3.0 million of severance costs for the first nine months.
Key risks include prolonged low commodity prices, reduced offshore activity, customer contract renegotiations or cancellations, pricing pressure, possible postponement or cancellation of rigs under construction, foreign-exchange movements and international operating risks. Management warned that a prolonged downturn could lead to further impairments. Goodwill testing for the Western Hemisphere found no impairment at September 30, but results depend on forecasts and assumptions.
In a Brazilian tax dispute, the company had deposited approximately $8.8 million with the court and had not accrued a liability, believing success in the judicial process was probable. Separately, it disclosed $2.2 million of accrued tax exposure related to Saudi service revenue. The company recorded an $8.2 million tax benefit related to the U.K. patent box deduction and a $1.6 million Asia-Pacific deferred-tax valuation allowance. It reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm issuer identity: the supplied document names Dril-Quip, Inc., while the request names Innovex International, Inc.
- Assess the cause and potential recurrence of the $61.0 million impairment charge and the assumptions behind asset and inventory valuations.
- Track backlog, order cancellations, offshore activity and whether the stated expectation of pressure through 2018 changed in later filings.
- Review the sustainability of operating cash flow, cash levels and spending needs amid continued revenue contraction.
- Monitor TIW’s operating performance, the Brazilian tax litigation, customer acceptance of Petrobras equipment and the status of the company’s revenue-standard implementation.