Dril-Quip Inc. (DRQ) reported fourth-quarter earnings of 72 cents per share, beating the Zacks Consensus Estimate of 70 cents and year-earlier profit of 64 cents. The favorable statistics were mainly driven by contribution from service and subsea equipment revenues. Revenue was $141.3 million, up 4.3% from the year-earlier level.
 
Operating income for the quarter increased 9.6% from the year-earlier level to $36.6 million. Operating margin increased approximately 130 basis points to 25.9%.
 
We have not witnessed any movements in estimate revisions for the full fiscal 2010 in either the last 7 days or the last 30 days. The company’s earnings surprise for the preceding four quarters varies between 1.6% and 7.5%, with the average being 3.7%.
 
Currently, the Zacks Consensus Estimate for full fiscal 2010 earnings is $2.95 per share, which is well above the full fiscal 2009 earnings of $2.66.
 
Product revenue accounted for approximately 84% of the total revenue in the last year, while the rest was contributed by Service revenue. In 2009, Product revenue increased modestly from 2008 level to $456 million and Service revenue decreased approximately 6% to $84.2 million.
 
At the end of the quarter, the company had a backlog of $563 million, compared to $623 million in the previous quarter and $603 million at the end of the year-ago period. Management guided first-quarter EPS in the range of 62 cents to 72 cents.
 
Capital expenditures for the quarter were $6.6 million, compared to $10.8 million in the year-earlier quarter. At the end of the quarter, the company had $197.8 million in cash and $1.04 million in long-term debt.

The key positive in the Dril-Quip story is the company’s strong leverage to the continued strength in the deepwater drilling markets. Given the operators’ long-term view of these projects, deepwater drilling and other related services will remain relatively stable through the usual fluctuations in commodity prices.

Dril-Quip enjoys a strong market share for many of its established product lines and continues to see success from its new technologies. The company is also in excellent financial health, with an almost debt-free balance sheet and a significant amount of cash on hand. This gives it the financial flexibility to take advantage of new growth opportunities.

We are currently Neutral on Dril-Quip shares.

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