Filing and reporting period
The supplied filing is Dril-Quip, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed February 27, 2019. It is not a filing for Innovex International, Inc.; the company identity in the request metadata does not match the filing. The report covers the full year, with selected fourth-quarter results also disclosed.
Dril-Quip designs, manufactures, sells and services drilling and production equipment, primarily for offshore, deepwater and harsh-environment applications. Operations are reported across the Western Hemisphere, Eastern Hemisphere and Asia Pacific. About 61% of 2018 revenue came from foreign sales.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $384.6 million | $455.5 million |
| Gross profit / margin | $113.1 million / 29.4% | $150.1 million / 33.0% |
| Operating income (loss) | $(122.7) million | $(69.1) million |
| Net income (loss) | $(95.7) million | $(100.6) million |
| Diluted loss per share | $(2.58) | $(2.69) |
| Operating cash flow | $45.5 million | $108.0 million |
| Capital expenditures | $32.1 million | $27.6 million |
| Cash and cash equivalents at year-end | $418.1 million | $493.2 million |
| Working capital at year-end | $770.7 million | $908.6 million |
| Total liabilities / stockholders’ equity | $96.3 million / $1,096.2 million | $105.3 million / $1,294.5 million |
Cost of sales was 70.5% of revenue, versus 67.0% in 2017. Adjusted EBITDA, a non-GAAP measure defined by the company, was $17.4 million, down from $60.5 million. Cash flow from operations less capital expenditures was approximately $13.4 million. The company reported no material off-balance-sheet financing arrangements.
At year-end, $52.2 million was available under a five-year, $100 million asset-backed revolving credit facility, after letters of credit. The filing does not report an outstanding borrowing balance. The company said cash on hand and operating cash flow should fund operations, working capital and anticipated capital spending for the next 12 months at current activity levels; higher activity could strain working capital.
Fourth-quarter 2018 revenue was $97.3 million, operating loss was $98.8 million and net loss was $74.9 million. The quarter included significant impairment and restructuring charges.
Changes versus prior periods
- Full-year revenue fell approximately 16%, primarily because product revenue declined $86.2 million, including an $82.1 million reduction in subsea equipment. Service revenue rose $10.5 million and leasing revenue rose $4.8 million.
- Gross margin declined about 3.5 percentage points, reflecting unabsorbed manufacturing costs, product mix and pricing concessions.
- Operating loss widened, principally due to $98.6 million of impairment, restructuring and other charges, compared with $61.0 million in 2017. Net loss narrowed modestly, partly reflecting a $19.3 million income tax benefit in 2018 versus $35.0 million of tax expense in 2017.
- Operating cash flow fell $62.5 million to $45.5 million. Cash declined $75.1 million during the year, including $100 million used to repurchase and cancel 1,991,206 shares.
- Product backlog increased 30% to approximately $270.0 million from $207.3 million. It included $11.7 million of cancellations/revisions and was reduced by $3.1 million of currency translation adjustments.
Outlook, commentary, risks and unusual items
- Management’s strategic review assumed offshore demand would not return to pre-downturn levels until after 2025. The company expected a slight improvement in certain markets in 2019, but warned of continued pressure on commodity prices and offshore activity.
- The company planned to complete its global restructuring by the end of 2019 and expected to reduce its workforce by approximately 15% in 2019. The 2018 restructuring and related charges included $7.3 million of severance, $32.1 million of inventory write-downs, $14.9 million of long-lived asset impairments and professional and exit costs.
- A fourth-quarter goodwill impairment of $38.6 million eliminated Western Hemisphere goodwill. Remaining Eastern Hemisphere goodwill was $7.7 million; its estimated fair value exceeded carrying value by 71% at the interim assessment. Further market deterioration could cause additional impairment.
- The company expected to deliver approximately 70%–80% of year-end product backlog by December 31, 2019. Backlog is not a firm measure of future revenue: customer orders may be changed or cancelled, and approximately $84 million related to contract awards that did not qualify as enforceable performance obligations under the stated accounting criteria.
- The offshore Vietnam Ca Rong Do project was included in backlog but could be delayed or cancelled amid territorial discussions between China and Vietnam. Under the Petrobras contract, only $9.3 million of purchase orders remained in backlog at year-end; the company also disclosed $1.0 million of completed equipment revenue not recognized pending customer acceptance.
- Key risks include oil-price and offshore-capital-spending volatility, customer concentration and creditworthiness, backlog cancellations, fixed-price project cost overruns, international and currency exposure, trade restrictions, regulatory and environmental changes, and potential asset impairments. BP and affiliates accounted for approximately 13% of 2018 revenue; the top 15 customers represented approximately 56%.
- A Brazilian tax dispute concerns assessments totaling approximately $13.0 million. The company deposited approximately $8.8 million with the court and accrued no liability, stating that success in the proceedings was probable. Management considered ordinary-course legal matters not expected to have a material adverse effect.
- On February 26, 2019, the board authorized a new share repurchase program of up to $100 million; no purchases had been made under it by the filing date. The company did not anticipate paying dividends in the foreseeable future.
- PwC issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal financial reporting controls were effective as of year-end.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Dril-Quip, Inc. (ticker DRQ), not Innovex International, Inc.
- Review the drivers and potential recurrence of the $98.6 million in 2018 impairment, restructuring and other charges, and the assumptions supporting goodwill valuations.
- Assess the quality, enforceability and timing of the $270.0 million backlog, including the Vietnam project, contract awards and Petrobras customer acceptance.
- Track product demand, margins, operating cash flow, inventory reserves and working-capital needs through the planned restructuring and any offshore-market recovery.
- Monitor liquidity and ABL covenant availability, the new repurchase authorization, and the outcome of the Brazilian tax dispute and other material contingencies.