Zacks_Analysts' Blog : Drill-Quip Misses Zacks Consensus - Analyst Blog

Dril-Quip Inc. (DRQ) reported lower-than-expected adjusted fourth-quarter 2010 earnings of 67 cents per share, compared with the Zacks Consensus Estimate of 70 cents. Moreover, earnings also dropped approximately 7% from the year-earlier profit of 72 cents.

The disappointing results were mainly due to higher selling, general and administrative (SG&A), engineering and product development expenses as well as depreciation and amortization.

Total revenue in the quarter improved marginally to $141.6 million from the year-ago level of $141.3 million.

Operating income was $27.1 million in the quarter, down 26% from the year-earlier quarter. The company also experienced a considerable hike in costs. SG&A expenses increased 8% on an annualized basis.

As a percentage of revenue, it was approximately 11.3% in the quarter. Engineering and product development expenses increased 9% and depreciation and amortization expenses increased 20.1% year over year.

As on December 31, 2010, the company had a backlog of $627 million, compared with $563 million as on December 31, 2009.

Liquidity

At the end of the quarter, the company had $245.8 million in cash and $326,000 in long-term debt with a debt-to-capitalization ratio of 0.04%. Capital expenditures in the quarter were $26.2 million, compared with $6.6 million in the year-earlier quarter.

Guidance

Dril-Quip expects its first quarter 2011 earnings to fall in the range of 50–60 cents per share, primarily as an aftermath of the Deepwater Horizon incident as well as project delays.

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 operators’ long-term outlook on these projects, deepwater drilling and other related services will remain relatively stable despite usual fluctuations in commodity prices.

Importantly, construction of new facilities in Singapore and Brazil are nearing completion and is expected to have a significant positive impact on the company’s earnings going forward.

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).