Dril-Quip Disappoints in Q2 - Analyst Blog
August 08 2011 - 8:00AM
Zacks
Dril-Quip Inc. (DRQ) has reported
second-quarter 2011 earnings of 55 cents per share, missing the
Zacks Consensus Estimate of 58 cents and deteriorating 21.4% from
the year-ago profit level of 70 cents. The underperformance was
mainly due to the decrease in sales of offshore rig equipment.
The company registered total revenue of $137.0 million in the
quarter, down 3.5% from the year-ago level of $142.0 million.
Operating income fell more than 22% to $30.4 million in the
quarter from the year-earlier level of $39.3 million. The company
also faced a considerable increase in costs. On an annualized
basis, although selling, general and administrative (SG&A)
expenses fell marginally to $16.0 million from the year-earlier
level of $16.1 million, its engineering and product development
costs rose 21%.
Backlog
As of June 30, 2011, the company had a backlog of $727 million,
compared with $538 million at the end of the same period last year.
Although orders remain strong, higher engineering expenses and
testing of equipment prior to manufacture in a post-Macondo
environment is affecting the company’s ability to turn backlog into
revenues.
Capex
Capital expenditures in the quarter were $13.0 million, compared
with $14.4 million in the year-earlier quarter.
Guidance
Dril-Quip expects third quarter earnings to range between 50
cents and 60 cents per share, essentially flat with the reported
quarter.
Outlook
The key positive in the Dril-Quip story is its strong leverage
to continued strength in the global deepwater drilling markets,
especially in South America and the Asia-Pacific region.
Given the operator’s’ long-term outlook on the projects,
deepwater drilling and other related services will remain
relatively stable despite usual fluctuations in commodity
prices.
However, we believe the Gulf of Mexico glitches will remain at
least in the near term and Dril-Quip’s underlying business
fundamentals may be affected as a major portion of its total
revenue comes from this region. Start-up delays have affected
revenue conversion of the company’s backlog, with the Gulf of
Mexico moratorium and permitting delays restricting top-line
results. Further, competition from Cameron International
Corporation (CAM) is also a concern.
Our long-term Neutral rating for Dril-Quip shares remain
unchanged at this stage. The company holds a Zacks #3 Rank
(short-term Hold rating).
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