Dril-Quip, Inc. — Form 10-Q Summary
Company and period: The supplied filing is for Dril-Quip, Inc., not Innovex International, Inc. It reports the quarter and nine months ended September 30, 2015; filed October 28, 2015. Dril-Quip designs, manufactures, sells, and services offshore drilling and production equipment.
Financial performance
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2014 periods.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $201.4 | $241.8 | $642.7 | $676.1 |
| Operating income | $64.3 | $73.0 | $188.5 | $200.5 |
| Net income | $50.8 | $55.7 | $143.7 | $149.6 |
| Diluted EPS | $1.32 | $1.40 | $3.70 | $3.70 |
| Operating margin | 31.9% | 30.1% | 29.4% | 29.6% |
| Net margin | 25.2% | 23.0% | 22.4% | 22.1% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $158.7 | $102.6 |
- Q3 revenue fell 16.7%, primarily from a $41.0 million decrease in product sales; service revenue increased modestly. Nine-month revenue fell 4.9% as product sales declined $39.3 million while services rose $5.9 million.
- For the first nine months, cost of sales was $350.9 million (54.6% of revenue), versus $371.0 million (54.9%) in 2014. SG&A was $67.9 million and engineering and product development expense was $35.3 million.
- Cash and cash equivalents were $397.0 million at September 30, 2015, up from $298.7 million at year-end 2014. Current assets were $1,133.8 million and current liabilities $118.1 million. Total liabilities were $122.3 million; the filing reports no commercial lending arrangement or line of credit.
- Nine-month investing cash outflow was $16.6 million, including $16.7 million of capital expenditures. Financing cash outflow was $38.9 million, including $40.9 million of share repurchases. Cash increased $98.3 million over the period.
Material changes and operating context
- Revenue and earnings declined year over year amid a sharp downturn in oil prices and offshore activity. Average Brent crude was $50.44 per barrel in Q3 2015 versus $101.90 a year earlier; average contracted rig counts also fell across the reported regions.
- Q3 product revenue declined across subsea, surface, and offshore rig equipment. For the nine months, Western Hemisphere revenue decreased $47.8 million overall, while Eastern Hemisphere revenue increased $23.2 million and Asia-Pacific revenue declined $9.0 million.
- Backlog was $824 million at September 30, down from approximately $974 million at June 30, $1.2 billion at December 31, 2014, and $1.25 billion a year earlier. Management attributed about $42 million of the nine-month backlog reduction to order cancellations and revisions and about $36 million to currency translation.
- The company repurchased and cancelled 351,800 shares for $21.0 million in Q3 at an average $59.60 per share. The board’s authorization was up to $100 million; $59.1 million remained available at quarter-end.
Outlook, risks, contingencies, and unusual items
- Management said cash on hand and operating cash flow should fund operations, working capital, and expected capital expenditures for the next 12 months. This is management’s liquidity assessment, not formal earnings guidance. The filing gives no company revenue or earnings forecast.
- Management expected global headcount to decline from 2,720 at year-end 2014 to approximately 2,250 by year-end 2015, through attrition and workforce reductions. It cited lower oil prices and declining backlog.
- Management warned that continued low commodity prices, customer contract renegotiations or cancellations, reduced offshore spending, regulatory changes, foreign-exchange movements, and international or operational disruptions could adversely affect results, cash flow, backlog, or liquidity. Customers may change or terminate purchase orders, subject to payment for work performed and related costs.
- Petrobras contract: the original four-year award was valued at $650 million net of Brazilian taxes at exchange rates then prevailing, but management did not expect all equipment to be ordered. At September 30, backlog included $51 million of related purchase orders at the then-current exchange rate. Approximately $11 million of completed equipment had not been accepted for delivery; refusal of acceptance could adversely affect results.
- Brazilian tax dispute: the company disputed assessments of approximately $13.0 million relating to tax credits and said success in court was probable; it accrued no liability. Approximately $3.1 million had been deposited with the court for one assessment. Separately, a $2.3 million inflation-related tax credit recognized in Q2 reduced SG&A.
- Foreign-currency translation losses were $43.8 million for the first nine months and contributed to accumulated other comprehensive losses. The company also recorded foreign-currency transaction gains, including $6.5 million in Q3, primarily associated with the U.S. dollar and British pound. It did not materially hedge currency exposure.
- The filing revised the presentation of 2014 cash-flow working-capital items by reclassifying $6.7 million between categories; management said the revision was not material and did not change operating cash flow. New inventory and revenue-recognition standards were under evaluation.
Most important facts for investors to verify
- Confirm issuer identity: this document names Dril-Quip, Inc.; it is not an Innovex International filing.
- Track backlog conversion, cancellations, customer order revisions, and the pace of offshore activity as commodity prices and rig counts change.
- Monitor Petrobras equipment acceptance, remaining contract orders, and the disputed Brazilian tax assessments and credits.
- Assess whether strong operating cash flow is sustainable, given the period’s collection of receivables and reductions in customer prepayments and accrued liabilities.
- Review planned workforce reductions, share repurchases, capital spending, and the company’s exposure to unhedged foreign-exchange movements.