Dril-Quip Inc.’s (DRQ) adjusted first-quarter 2011 earnings of 58 cents per share beat the Zacks Consensus Estimate by a penny. However, quarterly earnings dropped 18% from the year-ago adjusted profit level of 71 cents a share.
The year-over-year disappointment is primarily a repercussion of the the Deepwater Horizon incident as well as project delays. Higher selling, general and administrative (SG&A), engineering and product development expenses as well as depreciation and amortization were also responsible for the downfall.
Total revenue in the quarter dropped 3.4% to $137.7 million from the year-ago level of $142.5 million, but surpassed the Zacks Consensus Estimate of $132 million.
Operating income fell more than 11% to $30.6 million in the quarter from the year-earlier level of $34.6 million. The company also faced a considerable increase in costs. On an annualized basis, SG&A expenses increased almost 36% and engineering and product development costs increased 28%. Depreciation and amortization expenses also crept up nearly 18% year over year.
Backlog
As of March 31, 2011, the company had a backlog of $655 million, compared with $550 million in the comparable period last year.
Liquidity
At the end of the quarter, the company had $268.3 million in cash and $155,000 in long-term debt with a debt-to-capitalization ratio of 0.02%. Capital expenditures in the quarter were $19.8 million, compared with $7.6 million in the year-earlier quarter.
Guidance
Dril-Quip expects its second 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.
We believe that the company might be able to draw solid revenues going forward from Papa Terra dry tree completion systems project with Petroleo Brasileiro (PBR), contracts from Royal Dutch Shell Plc (RDS.A) as well as the Big Foot Tension Leg Platform contract from Chevron Corp. (CVX).
Given the operators’ 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 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 the company’s total revenue comes from this region. 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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