Filing identity and reporting period
The supplied filing is Dril-Quip, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2011—not an Innovex International, Inc. filing. The summary below reflects the filing text provided. Dril-Quip designs, manufactures, sells, and services offshore drilling and production equipment.
Financial performance and position
Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in millions.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $155.0 | $140.1 | $429.7 | $424.7 |
| Operating income | $31.8 | $37.7 | $92.8 | $111.6 |
| Net income | $23.3 | $27.7 | $67.1 | $81.4 |
| Diluted EPS | $0.58 | $0.69 | $1.67 | $2.03 |
| Operating margin | 20.4% | 26.8% | 21.5% | 26.3% |
| Net margin | 15.0% | 19.7% | 15.6% | 19.2% |
- Quarterly revenue grew 10.6%, led by subsea equipment; nine-month revenue rose 1.2%. Products accounted for about 86% of nine-month sales.
- Gross margin was 37.8% in Q3 and 39.8% for nine months, versus 43.3% in both comparable 2010 periods. Management attributed the decline primarily to product mix and higher unabsorbed manufacturing overhead.
- Cash from operations was $51.2 million for nine months, down from $101.0 million. Capital expenditures were $45.1 million; investing cash outflow was $42.9 million. Cash increased $9.7 million to $255.6 million.
- At September 30, 2011, total assets were $1,032.5 million, current assets $750.0 million, and current liabilities $131.6 million. Debt was approximately $70,000 current, with no long-term debt; the European term facility was paid off in April 2011.
- Backlog was approximately $730 million, compared with $727 million at June 30, 2011 and $627 million at December 31, 2010. Customer contracts in backlog may be changed or terminated.
Material changes versus prior periods
- Q3 revenue increased, but operating income fell 15.7% and net income fell 15.9% year over year. For the first nine months, operating income declined 16.9% and net income 17.5%.
- Q3 product sales rose by about $13.7 million, mainly from a $24.1 million increase in subsea equipment, partly offset by lower offshore rig equipment sales. Nine-month subsea growth was largely offset by decreases in offshore rig and surface equipment.
- Nine-month SG&A increased 16.6% to $52.6 million, including $2.9 million of foreign-currency transaction losses versus a $0.3 million gain in 2010. Engineering and product development expense rose 21.2% to $25.7 million.
- Operating cash flow was pressured by working-capital investment, including increases of $28.1 million in receivables and $29.5 million in inventory, partly offset by a $21.6 million increase in payables and accrued expenses. Management cited slower collections and higher backlog-related inventory.
- U.S. Gulf of Mexico revenue represented 31% of worldwide Q3 revenue versus 39% in Q3 2010. Nine-month Gulf revenue was $129.8 million versus $177.3 million.
Outlook, risks, contingencies, and unusual items
- The filing gives no company-specific numerical revenue or earnings guidance. Management said operating cash, together with cash on hand, should fund operations, working capital, and anticipated capital spending for the next 12 months, while noting that adverse market or regulatory developments could affect liquidity.
- Deepwater Horizon-related permitting delays and regulation may constrain Gulf of Mexico activity. Management said subsea and, to a lesser extent, surface equipment sales and service revenue could be adversely affected into 2012; the full impact could not be quantified. Gulf of Mexico revenue was about 31% of worldwide Q3 sales.
- Dril-Quip was named in multiple lawsuits related to the incident and is defending claims and cross-claims. The company recorded no liability. Its insurance program had a $100 million aggregate limit, but coverage may not apply to all claims, fines, or cleanup costs; insurers issued a reservation-of-rights letter. A trial was scheduled to begin February 27, 2012.
- A Brazilian subsidiary is contesting state tax assessments. The total assessment, including accrued interest, penalties, and possible fees, was about BRL 25.7 million (approximately $14.6 million as of October 2011). No liability was accrued; management did not expect a material adverse effect, but the outcome was undetermined.
- After quarter-end, CEO and Chairman J. Mike Walker retired effective October 20, 2011. John V. Lovoi became Chairman and Blake T. DeBerry became President and CEO. The company expected to recognize $4.7 million of pretax Q4 expense for Walker’s severance and accelerated option vesting.
- Other risks include volatile oil and gas prices, customer capital-spending decisions, foreign-exchange exposure, product testing and regulatory changes, and project cost estimates under percentage-of-completion accounting. Management reported effective disclosure controls as of September 30, 2011.
Important facts for investors to verify
- Confirm the issuer: the provided filing is for Dril-Quip, Inc., despite the request metadata naming Innovex International, Inc.
- Track Gulf of Mexico permitting activity, subsea and service revenue, and the potential effect of additional offshore safety requirements.
- Assess whether receivable collections and inventory growth convert into operating cash flow, alongside planned capital expenditures.
- Monitor Deepwater Horizon litigation, insurance coverage and indemnification, and the Brazilian tax assessments; no liability was accrued for either contingency.
- Verify the Q4 severance and stock-option expense following the CEO transition, and the company’s ability to sustain margins as backlog is executed.