Filing and business context
Important identity discrepancy: The request identifies Innovex International, Inc., but the supplied Form 10-Q is for Dril-Quip, Inc. (NYSE: DRQ), for the quarter ended June 30, 2021. Verify that this is the intended filing before relying on this summary.
Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for deepwater and harsh-environment oil and gas operations. Its report covers the three and six months ended June 30, 2021; financial amounts below are in millions unless noted. The interim statements are unaudited.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $80.8 | $90.4 | $162.0 | $186.4 |
| Operating loss | $(14.7) | $(7.5) | $(46.2) | $(49.8) |
| Net loss | $(19.1) | $(14.1) | $(53.4) | $(33.8) |
| Loss per share, diluted | $(0.54) | $(0.40) | $(1.51) | $(0.96) |
| Adjusted EBITDA (non-GAAP) | $2.6 | $6.0 | $4.4 | $12.5 |
| Operating cash flow | Not separately presented | Not separately presented | $24.4 | $(18.2) |
Q2 gross margin was approximately 23.8% of revenue, versus 26.0% a year earlier; six-month gross margin was 27.0%, versus 25.8%. Operating margins were approximately (18.1)% and (8.3)% for Q2, and (28.6)% and (26.6)% for the respective six-month periods. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
At June 30, cash and cash equivalents were $370.5 million, total current assets $849.3 million and current liabilities $106.5 million. Total liabilities were $129.4 million and stockholders’ equity $995.3 million. The balance sheet does not list borrowings; the company reported $25.1 million of availability under its asset-backed revolving facility, net of approximately $7.4 million of letters of credit. It was in compliance with facility covenants.
Material changes and notable items
- Revenue declined 10.7% in Q2 and 13.1% for the first half year over year. Product revenue fell, especially subsea equipment; management attributed weakness to reduced market demand and customer drilling delays associated with COVID-19 and oil-market conditions.
- Q2 net loss widened despite lower revenue. SG&A rose $6.3 million to $29.6 million, primarily due to legal costs related to the FMC Technologies lawsuit. The company’s Q2 restructuring charge was $1.0 million.
- First-half restructuring and other charges were $26.0 million, mainly associated with exiting underperforming downhole-tool markets and moving to vendor sourcing. They included $19.3 million of non-cash inventory write-downs, $2.7 million of severance and $4.0 million of other costs. The prior-year period included $34.3 million of restructuring charges and a $7.7 million goodwill impairment.
- First-half operating cash flow improved to $24.4 million from cash use of $18.2 million, helped by working-capital movements and collections. Investing cash flow was $0.3 million, including $5.9 million proceeds from the sale of two Singapore buildings; capital expenditures were $5.6 million. Cash increased $24.5 million during the half.
- The company recorded a $3.9 million first-half gain on asset sales. It also recorded approximately $2.1 million for settlement under a Brazilian tax amnesty program; court-deposited funds were being returned, with approximately $4 million received in Q2.
- On April 30, AFGlobal gave notice to terminate the lease for the Houston forge facility. Dril-Quip expensed approximately $2.3 million in unbilled revenue as of June 30 and reported about $0.5 million of forgone leasing revenue for the quarter and half year. Management said it had other forging suppliers and did not expect a supply disruption.
Outlook, risks and contingencies
Management provided no numerical earnings or revenue guidance. It said existing cash and anticipated operating cash flows should meet ordinary-course cash needs for the next 12 months. Management expected COVID-19 to continue weighing on oilfield activity through most of 2021 and potentially into 2022; the Delta variant, oil prices, customer activity and the pace of subsea-market recovery remained uncertain.
Product backlog was $191.2 million at June 30, down from $196.7 million at March 31, 2021. Separately, remaining performance obligations for over-time product lines were $57.6 million; the company expected to recognize about 87% within 12 months. Backlog includes certain awards and orders that do not qualify as enforceable performance obligations under the revenue standard.
During Q2, Dril-Quip entered a collaboration and supply agreement with a peer subsea equipment provider, which management said could expand access to subsea projects and bids. The company also noted foreign-exchange exposure without material hedging and was evaluating the eventual replacement of LIBOR in its credit facility.
In the FMC Technologies trade-secrets case, a jury returned a verdict in Dril-Quip’s favor on April 29, 2021; FMC could appeal. In the Brazilian tax matter, the company elected a settlement program after earlier adverse lower-court rulings. Management also cited the risks of international operations, hazardous applications, oil-and-gas market volatility, trade restrictions and extended economic disruption.
Important facts for investors to verify
- Confirm that the supplied Dril-Quip filing, rather than an Innovex International filing, is the intended document.
- Review the drivers and sustainability of operating cash flow, including working-capital changes and tax-receivable collections.
- Assess the effect of restructuring, inventory write-downs, legal costs and the forge-lease termination on future costs and margins.
- Track backlog conversion, cancellations and customer activity; distinguish reported backlog from the $57.6 million of remaining performance obligations.
- Confirm the FMC litigation’s appeal status, the Brazilian tax settlement and recovery of deposited funds, and borrowing-base availability under the ABL facility.