Dril-Quip, Inc. (NYSE: DRQ), (the “Company” or “Dril-Quip”) today
reported operational and financial results for the third quarter of
2020.
Key highlights for the third quarter of 2020
included:
- Delivered $91.3 million of revenue from increased product
volumes, primarily driven by improved production output and product
mix in Asia Pacific and the U.S.;
- Reported third quarter net income of $14.3 million, or $0.41
per share, an improvement of $28.5 million, or $0.81 per share,
from the second quarter of 2020 primarily driven by federal income
tax benefits;
- Increased adjusted EBITDA to $10.2 million, or 11.1% of
revenue, from improved product margins and lower costs;
- Generated net cash provided by operating activities of $13.9
million and increased cash position by $13.4 million to $359.2
million with no debt;
- Executed on an additional $7.0 million of annualized cost
saving actions resulting in a year-to-date cumulative cost savings
of $18.5 million annualized;
- Selling, general and administrative expense declined $2.5
million in the third quarter compared to the second quarter of 2020
and $8.3 million from the third quarter of 2019;
Blake DeBerry, Dril-Quip’s Chief Executive
Officer, commented, “Our third quarter results reflect the progress
we are making as an organization in managing the continued
challenges to our operations and the overall commodity price
environment brought about by the COVID-19 pandemic and the
associated oil and gas demand declines. I am proud of our employees
in the manner in which they have remained productive and efficient
in our manufacturing plants, aftermarket services and remote work
locations. Our third quarter performance was a result of their
efforts.”
“We were able to improve our adjusted EBITDA by
nearly 70% sequentially on mostly flat revenue as we executed on
our previously announced cost reductions in response to the current
market environment. We generated free cash flow due to improved
collection efforts and a federal income tax refund related to
COVID-19 relief legislation. We also saw our quarterly
product bookings improve to $50.2 million during the third quarter.
These bookings included several subsea tree awards in Europe and
Asia and set us on a path toward achieving our $200 million
bookings target for the full year 2020.”
“While we have been able to manage the many
difficulties and disruptions posed by the global pandemic, we still
face obstacles that are out of our control, including in
particular, the demand destruction for oil and natural gas stemming
from the global economic slowdown associated with the pandemic. Our
customers are in the process of evaluating their portfolio of
opportunities and determining how to allocate budgets for projects
in the coming year. Additionally, they are seeking to delay some
current projects to a future period of more stable commodity
prices, resulting in higher inventory levels. Consequently, this
has had an estimated quarterly impact on cash flow generation of
$10 to $15 million and also has affected our ability to grow our
bookings.”
“While we have an experienced management team
with a track record of navigating through these types of
challenges, our expectation is that they will persist into 2021 as
the global economy works to regain its footing and commodity prices
begin to stabilize. Despite the potential for ongoing headwinds, we
remain in a strong financial position that lets us capitalize on
opportunities as they arise. This flexibility allows us to evaluate
potential acquisitions within our strategic planning framework,
which includes profitably expanding market share through
consolidation while maintaining a strong balance sheet. We are also
actively exploring alternative approaches towards monetizing our
innovative technology. We believe the potential to manufacture and
deliver subsea tree and wellhead technology to other offshore
equipment providers represents a unique opportunity to expand our
customer base, participate in more operator projects, help reduce
costs and further consolidate capacity in our industry. The pursuit
of these strategic initiatives gives me optimism about Dril-Quip’s
long-term future and its ability to generate value for all
stakeholders.”
In conjunction with today’s release, the Company
posted a new investor presentation entitled “Third 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 third quarter of
2020 was $91.3 million, up $0.8 million from the second quarter of
2020 and down $16.9 million from the third quarter of 2019. The
sequential increase in revenue was driven by increased product
volumes, particularly progress on subsea tree projects awarded in
the third quarter, partially offset by aftermarket service declines
in Asia Pacific. The decrease in revenue year-over-year was
primarily due to oil and gas demand declines caused primarily by
impacts of the COVID-19 pandemic.
Cost of sales for the third quarter of 2020 was
$67.2 million, an increase of $0.3 million sequentially and a
decrease of $8.8 million compared to the prior year. Gross
operating margin for the third quarter of 2020 was 26.4%, mostly
flat compared to the second quarter of 2020 and a decrease from
29.8% in the third quarter of 2019. Gross margin sequentially
remained flat due to an improvement in product margins driven
primarily by improved product mix in the Western Hemisphere, which
was partially offset by a decrease in aftermarket services revenue
related to resolution of a one-time customer dispute on rental
equipment in Asia Pacific. The decline in gross margin
year-over-year was primarily related to increased costs associated
with COVID-19 pandemic related costs comprising staggered shifts,
supply chain disruptions, additional freight charges and more
extensive cleaning and sanitization of workstations as well as
unfavorable product mix compared to the third quarter of 2019.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”)
expenses for the third quarter of 2020 were $20.8 million, a
decrease of $2.5 million compared to the second quarter of 2020 and
a decrease of $8.3 million compared to the third quarter of 2019.
The sequential and year-over-year decline in SG&A was primarily
due to lower corporate overhead from cost saving actions completed
in the second and third quarters. Engineering and product
development expenses for the third quarter of 2020 were $1.4
million lower compared to the second quarter of 2020 and $0.2
million higher compared to the third quarter of 2019. The decrease
sequentially was driven by cost reduction actions including
reprioritization of projects and the transfer of our controls
product line to Proserv. The modest increase in expense
year-over-year was related to increased research and development
costs, primarily related to the VXTe subsea tree
commercialization.
Net Income, Adjusted EBITDA and Free Cash
Flow
For the third quarter of 2020, the Company
reported net income of $14.3 million, or $0.41 per share, compared
to a net loss of $14.1 million, or $0.40 per share, for the second
quarter of 2020 and a net loss of $1.3 million, or $0.04 per
diluted share, for the third quarter of 2019. The sequential and
year-over-year increase in net income was a result of decreased
SG&A expenses from the execution of cost reduction actions and
a federal income tax benefit related to U.S. COVID-19 pandemic
relief.
Adjusted EBITDA totaled $10.2 million for the
third quarter of 2020 compared to $6.0 million for the second
quarter of 2020 and $15.3 million for the third quarter of 2019.
The sequential increase in adjusted EBITDA results from improved
product margin mix and cost reductions associated with the
realignment of manufacturing operations and lower engineering
spend. This was partially offset by a decrease in aftermarket
services related to resolution of a one-time customer dispute on
rental equipment in Asia Pacific. The decrease in adjusted EBITDA
year-over-year was due to declines in product and leasing revenues
as a result of a weaker market.
Net cash provided by operations was $13.9
million and free cash flow was approximately $12.0 million for the
third quarter of 2020. The improvement in net cash provided by
operations of $10.8 million compared to the second quarter of 2020
was primarily driven by a federal income tax benefit, improved
collections of receivables and successful negotiation of extended
supplier payment terms, partially offset by increases in stocking
program inventory and timing of deliveries due to logistical
disruptions and delays caused by the global pandemic. Capital
expenditures in the third quarter of 2020 were approximately $1.9
million, the majority of which was related to machinery and
equipment spend consolidating our Aberdeen manufacturing operations
into Houston.
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 third
quarter, the Company executed on approximately $7.0 million of
these annualized cost saving actions, resulting in a total of $18.5
million annualized year to date 2020. The remainder of the full $20
million in annualized cost savings are expected to be completed in
the fourth quarter of 2020.
Balance Sheet and Liquidity
Dril-Quip’s cash on hand as of September 30,
2020 was $359.2 million, which, together with amounts available
under the asset-based lending (ABL) facility, resulted in
approximately $403.8 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
received and expected cash tax benefits as a result of the CARES
Act, the Company is targeting to achieve close to a neutral
year-end cash balance in 2020 compared to 2019.
Share Repurchases
For the three-month period ended September 20,
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 nine months ended September 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, declines in investor and lender sentiment with respect
to, and new capital investments in, 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 (Loss), Adjusted Diluted
EPS, Free Cash Flow and Adjusted EBITDA are non-GAAP measures.
Adjusted Net Income (Loss) 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 (Loss),
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 |
|
September 30, 2020 |
|
June 30, 2020 |
|
September 30, 2019 |
|
(In thousands, except per share data) |
Revenues: |
|
|
|
|
|
Products |
$ |
66,451 |
|
|
$ |
63,133 |
|
|
$ |
81,851 |
|
Services |
|
17,778 |
|
|
|
20,750 |
|
|
|
17,884 |
|
Leasing |
|
7,066 |
|
|
|
6,563 |
|
|
|
8,492 |
|
Total revenues |
|
91,295 |
|
|
|
90,446 |
|
|
|
108,227 |
|
Costs and expenses: |
|
|
|
|
|
Cost of sales |
|
67,211 |
|
|
|
66,937 |
|
|
|
76,023 |
|
Selling, general and administrative |
|
20,843 |
|
|
|
23,331 |
|
|
|
29,105 |
|
Engineering and product development |
|
3,983 |
|
|
|
5,364 |
|
|
|
3,754 |
|
Restructuring and other charges |
|
602 |
|
|
|
1,587 |
|
|
|
546 |
|
Gain on sale of assets |
|
14 |
|
|
|
(85 |
) |
|
|
(280 |
) |
Foreign currency transaction (gains) and losses |
|
746 |
|
|
|
817 |
|
|
|
(1,143 |
) |
Total costs and expenses |
|
93,399 |
|
|
|
97,951 |
|
|
|
108,005 |
|
Operating income (loss) |
|
(2,104 |
) |
|
|
(7,505 |
) |
|
|
222 |
|
Interest income |
|
188 |
|
|
|
653 |
|
|
|
1,906 |
|
Interest expense |
|
(138 |
) |
|
|
(209 |
) |
|
|
(26 |
) |
Income tax provision (benefit) |
|
(16,380 |
) |
|
|
7,081 |
|
|
|
3,412 |
|
Net income (loss) |
$ |
14,326 |
|
|
$ |
(14,142 |
) |
|
$ |
(1,310 |
) |
Earnings (loss) per share |
|
|
|
|
|
Basic |
$ |
0.41 |
|
|
$ |
(0.40 |
) |
|
$ |
(0.04 |
) |
Diluted |
$ |
0.41 |
|
|
$ |
(0.40 |
) |
|
$ |
(0.04 |
) |
Depreciation and amortization |
$ |
7,908 |
|
|
$ |
7,940 |
|
|
$ |
8,304 |
|
Capital expenditures |
$ |
1,925 |
|
|
$ |
4,131 |
|
|
$ |
4,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
Basic |
|
35,049 |
|
|
|
35,023 |
|
|
|
35,559 |
|
Diluted |
|
35,249 |
|
|
|
35,023 |
|
|
|
35,559 |
|
|
|
|
|
Dril-Quip, Inc. |
Comparative Condensed Consolidated Balance
Sheets |
(Unaudited) |
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
(In thousands) |
Assets: |
|
|
|
Cash and cash equivalents |
$ |
359,171 |
|
$ |
398,946 |
Other current assets |
|
503,831 |
|
|
481,543 |
PP&E, net |
|
239,591 |
|
|
258,497 |
Other assets |
|
56,946 |
|
|
67,579 |
Total assets |
$ |
1,159,539 |
|
$ |
1,206,565 |
Liabilities and Equity: |
|
|
|
Current liabilities |
$ |
100,982 |
|
$ |
96,940 |
Deferred Income taxes |
|
3,657 |
|
|
4,150 |
Other long-term liabilities |
|
17,338 |
|
|
14,774 |
Total liabilities |
|
121,977 |
|
|
115,864 |
Total stockholders equity |
|
1,037,562 |
|
|
1,090,701 |
Total liabilities and equity |
$ |
1,159,539 |
|
$ |
1,206,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dril-Quip, Inc. |
Reconciliation of Net Income (Loss) to Adjusted Net Income
(Loss) and Adjusted Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income and EPS: |
Three months ended |
|
September 30, 2020 |
|
June 30, 2020 |
|
September 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) |
$ |
14,326 |
|
$ |
0.41 |
|
$ |
(14,142 |
) |
|
$ |
(0.40 |
) |
|
$ |
(1,310 |
) |
|
$ |
(0.04 |
) |
Adjustments (after tax): |
|
|
|
|
|
|
|
|
|
|
|
Reverse the effect of foreign currency |
|
589 |
|
|
0.02 |
|
|
646 |
|
|
|
0.02 |
|
|
|
(903 |
) |
|
|
(0.03 |
) |
Restructuring costs, including severance |
|
476 |
|
|
0.01 |
|
|
1,254 |
|
|
|
0.04 |
|
|
|
432 |
|
|
|
0.01 |
|
Gain on sale of assets |
|
11 |
|
|
- |
|
|
(67 |
) |
|
|
- |
|
|
|
(221 |
) |
|
|
(0.01 |
) |
Adjusted net income (loss) |
$ |
15,402 |
|
$ |
0.44 |
|
$ |
(12,309 |
) |
|
$ |
(0.34 |
) |
|
$ |
(2,002 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dril-Quip, Inc. |
Reconciliation of Net Cash Provided by Operating Activities
to Free Cash Flow |
|
|
|
|
|
|
Free Cash Flow: |
Three months ended |
|
September 30, 2020 |
|
June 30, 2020 |
|
September 30, 2019 |
|
|
|
|
|
|
|
(In thousands) |
Net cash provided (used) by operating activities |
$ |
13,889 |
|
|
$ |
3,046 |
|
|
$ |
(4,026 |
) |
Less: |
|
|
|
|
|
Purchase of property, plant and equipment |
|
(1,925 |
) |
|
|
(4,131 |
) |
|
|
(4,022 |
) |
Free cash flow |
$ |
11,964 |
|
|
$ |
(1,085 |
) |
|
$ |
(8,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Dril-Quip, Inc. |
Reconciliation of Net Income (Loss) to Adjusted
EBITDA |
|
|
|
|
|
|
Adjusted EBITDA: |
Three months ended |
|
September 30, 2020 |
|
June 30, 2020 |
|
September 30, 2019 |
|
|
|
|
|
|
|
(In thousands) |
Net income (loss) |
$ |
14,326 |
|
|
$ |
(14,142 |
) |
|
$ |
(1,310 |
) |
Add: |
|
|
|
|
|
Interest income, net |
|
(50 |
) |
|
|
(444 |
) |
|
|
(1,880 |
) |
Income tax expense (benefit) |
|
(16,380 |
) |
|
|
7,081 |
|
|
|
3,412 |
|
Depreciation and amortization expense |
|
7,908 |
|
|
|
7,940 |
|
|
|
8,304 |
|
Restructuring costs, including severance |
|
602 |
|
|
|
1,587 |
|
|
|
546 |
|
Gain on sale of assets |
|
14 |
|
|
|
(85 |
) |
|
|
(280 |
) |
Foreign currency loss (gain) |
|
746 |
|
|
|
817 |
|
|
|
(1,143 |
) |
Stock compensation expense |
|
3,003 |
|
|
|
3,282 |
|
|
|
7,663 |
|
Adjusted EBITDA |
$ |
10,169 |
|
|
$ |
6,036 |
|
|
$ |
15,312 |
|
|
|
|
|
|
|
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