Dril-Quip, Inc. (NYSE: DRQ), (the “Company” or “Dril-Quip”) today
reported operational and financial results for the second quarter
of 2020.
Key highlights for the second quarter of 2020
included:
- Generated $90.4 million of revenue on lower product volumes and
leasing revenues, reflecting the continued impacts of the COVID-19
pandemic on global operations;
- Reported second quarter net loss of $14.1 million, or $0.40 per
share, an improvement of $5.6 million, or $0.15 per share, from the
first quarter of 2020;
- Recorded adjusted EBITDA of $6.0 million, or 6.7% of
revenue;
- Improved sequential net cash provided by operating activities
by $24.3 million to $3.0 million increasing cash position to $345.8
million;
- Completed approximately $11.5 million of previously announced
annualized cost saving actions, with additional savings expected to
be captured in the second half of 2020;
- Selling, general and administrative expense declined $1.3
million in the second quarter compared to the first quarter of
2020;
- Announced strategic collaboration agreement with Proserv for
the development and manufacturing of subsea controls
Blake DeBerry, Dril-Quip’s Chief Executive
Officer, commented, “Dril-Quip continues to persevere through this
difficult and uncertain market environment brought about by the
COVID-19 pandemic and the associated disruptions it has caused the
global economy. Although these issues remain a headwind to
near-term growth, actions we are currently executing will position
us to better weather this storm and maintain focus on ensuring the
safety of our employees and suppliers while meeting our customer’s
needs.”
“Our operations experienced further negative
effects from the ongoing pandemic in the second quarter as we were
forced to make modifications that reduced our global production
output. Adapting to regulatory restrictions, implementing necessary
precautions and conforming to guidelines from health administrators
led to lower production output and higher costs. We also saw
historically low commodity prices and corresponding customer
capital spending reductions that resulted in the delay or deferment
of customer product delivery and booking decisions. These delays
and deferments led to recorded bookings of $40.5 million during the
second quarter. However, even with the sequential decline in
bookings, we expect our bookings will be approximately $200 million
for the full year 2020.”
“Despite these circumstances, we continue to
improve our manufacturing production output and remediate supply
chain interruptions, including the reinstatement of overtime at the
majority of our manufacturing facilities towards the end of the
quarter. We made significant progress on our cost cutting
initiatives which we began executing in the second quarter,
achieving $11.5 million in annualized cost savings, and we are on
track to deliver a further $9.0 million annualized savings in the
second half of 2020. Our top priority is to continue to meet these
challenges and improve operational and financial results in the
second half of 2020.”
“Additionally, we announced an agreement with
Proserv to manufacture and supply Dril-Quip with subsea controls
systems. This allows us to offer our customers a broader range of
cutting-edge technology control systems along with our innovative
subsea tree systems and wellheads. The transition of our controls
business will be seamless for our existing customers as they will
continue to receive the same level of service and support from
Proserv going forward. Collaborating with Proserv on controls not
only benefits our customers but allows us to avoid an estimated $8
million to $10 million per year of research and development and
other associated expense over the next three years in order to
offer our customers market leading controls.”
“As we look ahead to the second half of 2020,
Dril-Quip is well positioned with a strong balance sheet, backlog
of customer projects and an action plan to proactively address the
current environment. We expect these factors along with the efforts
of our dedicated employees will lead to improved financial
performance with an emphasis on cash flow generation.”
In conjunction with today’s release, the Company
posted a new investor presentation entitled “Second Quarter 2020
Supplemental Earnings Information” to its website,
www.dril-quip.com, on the “Events & Presentations” page under
the Investors tab. Investors should note that Dril-Quip announces
material financial information in Securities and Exchange
Commission (“SEC”) filings, press releases and public conference
calls. Dril-Quip may use the Investors section of its website
(www.dril-quip.com) to communicate with investors. It is possible
that the financial and other information posted there could be
deemed to be material information. Information on Dril-Quip’s
website is not part of this release.
Operational and Financial
Results
Revenue, Cost of Sales and Gross Operating
Margin
Consolidated revenue for the second quarter of
2020 was $90.4 million, down $5.6 million from the first quarter of
2020 and $13.4 million lower compared to the second quarter of
2019. The decrease in revenue sequentially and year-over-year was
driven by negative impacts to production output, delays in rentals
related to product installations, customer requests to extend
deliveries and supply chain disruptions, all of which were
attributed to the COVID-19 pandemic and the associated impacts on
the global oil and gas markets.
Cost of sales for the second quarter of 2020 was
$66.9 million, a decrease of $4.5 million sequentially and a
decrease of $6.9 million compared to the prior year. Gross
operating margin for the second quarter of 2020 was 26.0%, an
increase from 25.6% in the first quarter of 2020 and a decrease
from 28.8% in the second quarter of 2019. The improvement in gross
margin sequentially was driven primarily by improved product mix in
the Eastern Hemisphere and higher downhole tool products and
services revenue in Mexico. The decline in gross margin
year-over-year was primarily related to lower production output
globally due to increased days off of work and local or Company
precautionary workplace restrictions, lower product sales and other
increased costs associated with COVID-19 impacts. These factors
were partially offset by savings from the 2019 transformation
initiative and from leasing our forge facility to AFGlobal
Corporation during the fourth quarter of 2019.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”)
expenses for the second quarter of 2020 were $23.3 million, a
decrease of $1.3 million compared to the first quarter of 2020. The
sequential decline in SG&A was primarily due to lower corporate
overhead from cost saving actions completed in the second quarter,
partially offset by higher information technology expenses related
to establishing remote workstations for employees as a result of
COVID-19 of approximately $0.9 million. SG&A remained
relatively unchanged year-over-year compared to the $23.1 million
for the second quarter of 2019.
Net Loss, Adjusted EBITDA and Free Cash Flow
For the second quarter of 2020, the Company
reported a net loss of $14.1 million, or $0.40 per share, compared
to a net loss of $19.7 million, or $0.55 per share, for the first
quarter of 2020 and net income of $1.7 million, or $0.05 per
diluted share, for the second quarter of 2019. The sequential
decrease in net loss was a result of improved mix of product
revenue and lower restructuring and other charges, partially offset
by foreign currency exchange losses of $0.8 million compared to a
foreign currency exchange gains of $3.2 million in the first
quarter of 2020 and the previously noted increase in information
technology expenses. The decline in net income year-over-year was
driven by decreased product revenues and gross margins caused by
decreased production output as a result of COVID-19 related market
condition declines, increase in income tax provision and an
increase in foreign currency exchange losses.
Adjusted EBITDA totaled $6.0 million for the
second quarter of 2020 compared to $6.5 million for the first
quarter of 2020 and $13.4 million for the second quarter of 2019.
The sequential decrease in adjusted EBITDA is attributed to revenue
declines in product deliveries and leasing revenues caused by
operational and logistical challenges caused by the global COVID-19
pandemic, partially offset by an improved mix toward higher margin
products and increased service revenues in the Western Hemisphere.
The decrease in adjusted EBITDA year-over-year was due to fall
through from a decline in product and leasing revenues as a result
of market declines and higher SG&A costs, primarily from
pandemic related information technology spend.
Net cash provided by operations was $3.0 million
and free cash flow was approximately negative $1.1 million for the
second quarter of 2020. The improvement in net cash provided by
operations of $24.3 million compared to the first quarter of 2020
was primarily driven by improved collections of receivables and
successful negotiation of extended supplier payment terms,
partially offset by increases in stocking program inventory in
anticipation of product sales growth in the Eastern Hemisphere and
timing of deliveries due to logistical impacts caused by the global
pandemic. Capital expenditures in the second quarter of 2020 were
approximately $4.1 million, the majority of which was related to
rental tools for our downhole tools business as well as machinery
and equipment related to consolidating our Aberdeen manufacturing
operations into Houston.
Proserv Collaboration
Agreement
On June 24, 2020, the Company announced an
agreement with Proserv, a subsea controls technology company, for
the manufacture and supply of subsea controls systems. The
arrangement allows for the consolidation of the development and
supply of the Company’s subsea controls systems. The agreement also
establishes a framework where Proserv and Dril-Quip may pursue
joint marketing and collaboration efforts, with Dril-Quip providing
subsea trees and Proserv providing subsea controls. As part of the
collaboration, Proserv will assume the service and support for the
existing subsea controls customer base from Dril-Quip.
Cost Saving Initiatives
In the first quarter of 2020, the Company
announced its plans to achieve $20 million in annualized cost
savings in response to the deteriorating market conditions in 2020.
These actions will span manufacturing, supply chain, SG&A,
engineering and research and development and better align our
organization with anticipated market activity. During the second
quarter, the Company executed on approximately $11.5 million of
these annualized cost saving actions and plans to complete the
remainder of the full $20 million in annualized cost savings in the
second half of 2020
Balance Sheet and Liquidity
Dril-Quip’s cash on hand as of June 30, 2020 was
$345.8 million, which, together with amounts available under the
asset-based lending (ABL) facility, resulted in approximately
$383.8 million of available liquidity. The Company’s strong
liquidity position, combined with a debt-free balance sheet,
provides both financial and operational flexibility. The Company
intends to use its financial strength to pursue strategic
acquisitions and collaborations that differentiate its products
offerings and continue investing in the rapid commercialization of
new technologies. The Company expects to generate positive free
cash flow for the full year 2020. In addition, inclusive of an
expected cash tax benefit as a result of the CARES Act, we expect
to achieve a neutral year-end cash balance in 2020 compared to
2019.
Share Repurchases
For the three-month period ended June 30, 2020,
the Company did not purchase shares under its share repurchase plan
authorized by the Board of Directors in February of 2019. For the
first six months ended June 30, 2020, the Company purchased 808,389
shares under the share repurchase plan at an average price of
approximately $30.91 per share totaling approximately $25.0 million
and retired such shares. The Company has purchased approximately
$51 million of the $100 million authorized. The Company continues
to evaluate the amount and timing of its share repurchases and
intends for the total amount of shares repurchased in 2020 to not
exceed its full year free cash flow generation.
About Dril-Quip
Dril-Quip is a leading manufacturer of highly
engineered drilling and production equipment for use onshore and
offshore, which is particularly well suited for use in deep-water,
harsh environments and severe service applications.
Forward-Looking Statements
Statements contained herein relating to future
operations and financial results that are forward-looking
statements, including those related to the effects of COVID-19
pandemic, market conditions, anticipated project bookings, expected
timing of completing the strategic restructuring, anticipated
timing of delivery of new orders, anticipated revenues, costs, cost
synergies and savings, possible acquisitions, new product offerings
and related revenues, share repurchases and expectations regarding
operating results, are based upon certain assumptions and analyses
made by the management of the Company in light of its experience
and perception of historical trends, current conditions, expected
future developments and other factors. These statements are subject
to risks beyond the Company’s control, including, but not limited
to, the impact of the ongoing COVID-19 pandemic, the effects of
actions taken by third parties, including, but not limited to,
governmental authorities, customers, contractors and suppliers, in
response to the COVID-19 pandemic, the impact of the recent
significant decline in oil and natural gas prices, the volatility
of oil and natural gas prices and cyclicality of the oil and gas
industry, project terminations, suspensions or scope adjustments to
contracts, uncertainties regarding the effects of new governmental
regulations, the Company’s international operations, operating
risks, and other factors detailed in the Company’s public filings
with the SEC. Investors are cautioned that any such
statements are not guarantees of future performance and actual
outcomes may vary materially from those indicated.
Non-GAAP Financial
Information
Adjusted Net Income, Adjusted Diluted EPS, Free
Cash Flow and Adjusted EBITDA are non-GAAP measures.
Adjusted Net Income and Adjusted Diluted EPS are
defined as net income (loss) and earnings per share, respectively,
excluding the impact of foreign currency gains or losses as well as
other significant non-cash items and certain charges and
credits.
Free Cash Flow is defined as net cash provided
by operating activities less net cash used in the purchase of
property, plant and equipment.
Adjusted EBITDA is defined as net income
excluding income taxes, interest income and expense, depreciation
and amortization expense, non-cash gains or losses from foreign
currency exchange rate changes as well as other significant
non-cash items and items that can be considered non-recurring.
The Company believes that these non-GAAP
measures enable it to evaluate and compare more effectively the
results of our operations period over period and identify operating
trends by removing the effect of its capital structure from its
operating structure. In addition, the Company believes that
these measures are supplemental measurement tools used by analysts
and investors to help evaluate overall operating performance,
ability to pursue and service possible debt opportunities and make
future capital expenditures. Adjusted Net Income, Adjusted
EBITDA and Free Cash Flow do not represent funds available for our
discretionary use and are not intended to represent or to be used
as a substitute for net income or net cash provided by operating
activities, as measured under U.S. generally accepted accounting
principles (“GAAP”).
See “Unaudited Non-GAAP Financial Measures”
below for additional information concerning non-GAAP financial
information, including a reconciliation of the non-GAAP financial
information presented in this press release to the most directly
comparable financial information presented in accordance with GAAP.
Non-GAAP financial information supplements and should be read
together with, and is not an alternative or substitute for, the
Company’s financial results reported in accordance with GAAP.
Because non-GAAP financial information is not standardized, it may
not be possible to compare these financial measures with other
companies’ non-GAAP financial measures.
Investor Relations Contact
Blake Holcomb, Director of Investor Relations and Corporate
Planning(713) 939-7711Blake_Holcomb@dril-quip.com
|
|
|
|
|
|
|
|
|
|
|
|
Dril-Quip, Inc. |
Comparative Condensed Consolidated Income
Statement |
(Unaudited) |
|
|
|
|
|
|
|
Three months ended |
|
June 30, 2020 |
|
March 31, 2020 |
|
June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Products |
$ |
63,133 |
|
|
$ |
67,558 |
|
|
$ |
77,233 |
|
Services |
|
20,750 |
|
|
|
18,814 |
|
|
|
16,575 |
|
Leasing |
|
6,563 |
|
|
|
9,626 |
|
|
|
10,000 |
|
Total revenues |
|
90,446 |
|
|
|
95,998 |
|
|
|
103,808 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
66,937 |
|
|
|
71,414 |
|
|
|
73,867 |
|
Selling, general and administrative |
|
23,331 |
|
|
|
24,658 |
|
|
|
23,068 |
|
Engineering and product development |
|
5,364 |
|
|
|
5,525 |
|
|
|
5,157 |
|
Impairment |
|
- |
|
|
|
7,719 |
|
|
|
- |
|
Restructuring and other charges |
|
1,587 |
|
|
|
32,713 |
|
|
|
1,019 |
|
Gain on sale of assets |
|
(85 |
) |
|
|
(467 |
) |
|
|
(1,190 |
) |
Foreign currency transaction (gains) and losses |
|
817 |
|
|
|
(3,242 |
) |
|
|
(233 |
) |
Total costs and expenses |
|
97,951 |
|
|
|
138,320 |
|
|
|
101,688 |
|
Operating income (loss) |
|
(7,505 |
) |
|
|
(42,322 |
) |
|
|
2,120 |
|
Interest income |
|
653 |
|
|
|
1,206 |
|
|
|
2,680 |
|
Interest expense |
|
(209 |
) |
|
|
(191 |
) |
|
|
- |
|
Income tax provision (benefit) |
|
7,081 |
|
|
|
(21,609 |
) |
|
|
3,119 |
|
Net income (loss) |
$ |
(14,142 |
) |
|
$ |
(19,698 |
) |
|
$ |
1,681 |
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
(0.40 |
) |
|
$ |
(0.55 |
) |
|
$ |
0.05 |
|
Diluted |
$ |
(0.40 |
) |
|
$ |
(0.55 |
) |
|
$ |
0.05 |
|
Depreciation and amortization |
$ |
7,940 |
|
|
$ |
8,873 |
|
|
$ |
8,495 |
|
Capital expenditures |
$ |
4,131 |
|
|
$ |
4,187 |
|
|
$ |
1,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
35,023 |
|
|
|
35,695 |
|
|
|
35,967 |
|
Diluted |
|
35,023 |
|
|
|
35,695 |
|
|
|
36,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dril-Quip, Inc. |
Comparative Condensed Consolidated Balance
Sheets |
(Unaudited) |
|
|
|
|
|
June 30, 2020 |
|
December 31, 2019 |
|
|
|
|
|
|
|
(In thousands) |
Assets: |
|
|
|
Cash and cash equivalents |
$ |
345,808 |
|
$ |
398,946 |
Other current assets |
|
502,404 |
|
|
481,543 |
PP&E, net |
|
243,796 |
|
|
258,497 |
Other assets |
|
55,683 |
|
|
67,579 |
Total assets |
$ |
1,147,691 |
|
$ |
1,206,565 |
Liabilities and Equity: |
|
|
|
Current liabilities |
$ |
113,711 |
|
$ |
96,940 |
Deferred Income taxes |
|
3,609 |
|
|
4,150 |
Other long-term liabilities |
|
14,984 |
|
|
14,774 |
Total liabilities |
|
132,304 |
|
|
115,864 |
Total stockholders equity |
|
1,015,387 |
|
|
1,090,701 |
Total liabilities and equity |
$ |
1,147,691 |
|
$ |
1,206,565 |
|
|
|
|
Dril-Quip, Inc. |
Reconciliation of Net Income (Loss) to Adjusted Net Income
and Adjusted Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income and EPS: |
Three months ended |
|
June 30, 2020 |
|
March 31, 2020 |
|
June 30, 2019 |
|
Effect on net income (after-tax) |
|
Impact on diluted earnings per share |
|
Effect on net income (after-tax) |
|
Impact on diluted earnings per share |
|
Effect on net income (after-tax) |
|
Impact on diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts) |
Net income (loss) |
$ |
(14,142 |
) |
|
$ |
(0.40 |
) |
|
$ |
(19,698 |
) |
|
$ |
(0.55 |
) |
|
$ |
1,681 |
|
|
$ |
0.05 |
|
Adjustments (after tax): |
|
|
|
|
|
|
|
|
|
|
|
Reverse the effect of foreign currency |
|
646 |
|
|
|
0.02 |
|
|
|
(2,561 |
) |
|
|
(0.07 |
) |
|
|
(184 |
) |
|
|
(0.01 |
) |
Add back impairment and other charges |
|
- |
|
|
|
- |
|
|
|
6,098 |
|
|
|
0.17 |
|
|
|
- |
|
|
|
- |
|
Restructuring costs, including severance |
|
1,254 |
|
|
|
0.04 |
|
|
|
25,843 |
|
|
|
0.72 |
|
|
|
805 |
|
|
|
0.02 |
|
Gain on sale of assets |
|
(67 |
) |
|
|
- |
|
|
|
(369 |
) |
|
|
(0.01 |
) |
|
|
(940 |
) |
|
|
(0.03 |
) |
Adjusted net income (loss) |
$ |
(12,309 |
) |
|
$ |
(0.34 |
) |
|
$ |
9,313 |
|
|
$ |
0.26 |
|
|
$ |
1,362 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dril-Quip, Inc. |
Reconciliation of Net Cash Provided by Operating Activities
to Free Cash Flow |
|
|
|
|
|
|
Free Cash Flow: |
Three months ended |
|
June 30, 2020 |
|
March 31, 2020 |
|
June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
Net cash provided (used) by operating activities |
$ |
3,046 |
|
|
$ |
(21,237 |
) |
|
$ |
9,812 |
|
Less: |
|
|
|
|
|
Purchase of property, plant and equipment |
|
(4,131 |
) |
|
|
(4,187 |
) |
|
|
(1,071 |
) |
Free cash flow |
$ |
(1,085 |
) |
|
$ |
(25,424 |
) |
|
$ |
8,741 |
|
|
|
|
|
|
|
Dril-Quip, Inc. |
Reconciliation of Net Income (Loss) to Adjusted
EBITDA |
|
|
|
|
|
|
Adjusted EBITDA: |
Three months ended |
|
June 30, 2020 |
|
March 31, 2020 |
|
June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
Net income (loss) |
$ |
(14,142 |
) |
|
$ |
(19,698 |
) |
|
$ |
1,681 |
|
Add: |
|
|
|
|
|
Interest income, net |
|
(444 |
) |
|
|
(1,015 |
) |
|
|
(2,680 |
) |
Income tax expense (benefit) |
|
7,081 |
|
|
|
(21,609 |
) |
|
|
3,119 |
|
Depreciation and amortization expense |
|
7,940 |
|
|
|
8,873 |
|
|
|
8,495 |
|
Impairments |
|
- |
|
|
|
7,719 |
|
|
|
- |
|
Restructuring costs, including severance |
|
1,587 |
|
|
|
32,713 |
|
|
|
1,019 |
|
Gain on sale of assets |
|
(85 |
) |
|
|
(467 |
) |
|
|
(1,190 |
) |
Foreign currency loss (gain) |
|
817 |
|
|
|
(3,242 |
) |
|
|
(233 |
) |
Stock compensation expense |
|
3,282 |
|
|
|
3,176 |
|
|
|
3,221 |
|
Adjusted EBITDA |
$ |
6,036 |
|
|
$ |
6,450 |
|
|
$ |
13,432 |
|
|
|
|
|
|
|
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