Business context and reporting period
This is Dril-Quip, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2024—not a standalone filing by Innovex International, Inc. Dril-Quip and Innovex Downhole Solutions announced a proposed merger on March 18, 2024; after closing, the combined company is expected to be named Innovex International, Inc. The merger had not closed at quarter-end.
Dril-Quip designs, manufactures, sells and services drilling and production equipment. Its segments are Subsea Products, Subsea Services and Well Construction; Well Construction includes Great North, acquired in July 2023.
Financial results and liquidity
Amounts below are in millions of U.S. dollars unless noted.
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $110.3 | $90.9 |
| Gross profit / gross margin | $31.9 / 28.9% | $25.4 / 27.9% |
| Operating income (loss) | $(18.8) | $3.2 |
| Net income (loss) | $(20.0) | $2.3 |
| Diluted EPS | $(0.58) | $0.07 |
| Adjusted EBITDA (non-GAAP) | $10.2 | $8.8 |
| Operating cash flow | $(4.1) | $(52.9) |
| Capital expenditures | $4.8 | $5.4 |
Revenue rose 21.4%. Products contributed $64.6 million, services $30.2 million and leasing $15.5 million. Cost of sales was 71.1% of revenue, versus 72.1% a year earlier. Acquisition costs of $19.0 million, primarily associated with the proposed Innovex merger, drove much of the increase in corporate costs and the operating loss. The tax provision was $3.4 million despite a pretax loss; the reported effective tax rate was negative 20.3%.
At March 31, cash and cash equivalents were $198.2 million, restricted cash $4.1 million and short-term investments $4.0 million. The company reported no debt on its balance sheet; its ABL credit facility had been terminated in 2022. Restricted cash supports outstanding letters of credit. Management said anticipated operating cash flows should meet ordinary-course needs for the next 12 months.
Total assets were $1.02 billion, total liabilities $163.7 million and stockholders’ equity $857.4 million. Inventory increased to $209.2 million from $194.6 million at year-end 2023; unbilled receivables were $139.6 million.
Material changes versus the prior comparable period
- Well Construction revenue rose to $50.4 million from $20.9 million, including $25.1 million from Great North and growth in international offshore liner hangers.
- Subsea Products revenue fell to $35.3 million from $46.1 million, primarily on lower connector and surface equipment orders. Subsea Services revenue was $24.6 million versus $23.9 million.
- Segment operating income was $0.6 million for Subsea Products, $1.8 million for Subsea Services and $5.6 million for Well Construction. Corporate operating loss widened to $26.9 million from $8.3 million, principally due to merger-related costs.
- Operating cash use improved by $48.8 million year over year, mainly reflecting working-capital movements, including increased billings and transfers of contract assets to receivables. Investing cash flow included $21.9 million of short-term investment maturities.
- The prior-year period included a $6.7 million gain on property sales and $1.7 million of restructuring charges; Q1 2024 had a $0.2 million property-sale gain and no restructuring charges.
Outlook, risks and unusual items
The merger was expected to close in Q3 2024, subject to stockholder, regulatory and other closing conditions; the filing gives no assurance it will close. Dril-Quip shareholders were expected to own approximately 52% of the combined company and Innovex shareholders approximately 48%. A $31.9 million termination fee may apply in specified circumstances. The filing provides no company earnings or revenue guidance.
Management describes demand as dependent on oil and gas industry conditions, customer capital spending, commodity prices and offshore activity. It cites risks from price volatility, international operations, foreign exchange, regulation, tariffs, supply chains and merger execution and integration. The company reported subsea product bookings of approximately $41.1 million in Q1, compared with $43.2 million a year earlier and $96.8 million in Q4 2023. The EIA oil-price projections cited in the filing are external forecasts, not company guidance.
Q1 included a putative stockholder class action challenging certain merger-related voting and transfer provisions; the company and directors said they believe they have substantial defenses, but the outcome is uncertain. In a separate trade-secrets case, a Texas appeals court affirmed a judgment in Dril-Quip’s favor; FMC had petitioned the Texas Supreme Court for review.
The filing’s foreign-currency discussion is inconsistent: the income statement records a $1.9 million transaction gain, while the market-risk section describes a $1.9 million pretax loss. The cash-flow statement reports $10.9 million of cash increase, while its accompanying discussion and table describe investing maturities and other cash movements; check the statements and reconciliation when assessing cash generation. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
Important facts for investors to verify
- Confirm the merger’s status, approvals, closing timing, final terms and any subsequent developments; this quarter’s filing predates completion.
- Review the amount and nature of merger-related costs, their expected continuation and the potential termination fee.
- Assess whether Well Construction growth and Great North’s contribution can offset weaker Subsea Products revenue, and monitor bookings and margins.
- Reconcile reported cash flows and the filing’s conflicting foreign-currency gain/loss descriptions; evaluate working-capital needs, inventory and unbilled receivables.
- Check developments in merger litigation, the FMC appeal and other legal or regulatory contingencies.