Dril-Quip, Inc. (NYSE: DRQ), (the “Company” or “Dril-Quip”) today
reported operational and financial results for the first quarter of
2020.
Key highlights for the first quarter of 2020
included:
- Delivered $96.0 million of revenue,
despite lower product volumes and services primarily from COVID-19
related impacts;
- Reported a net loss of $19.7
million, or a $0.55 loss per share, driven by $40.4 million of
impairments, restructuring and other charges, partially offset by a
$21.6 million income tax benefit;
- Generated adjusted EBITDA of $6.5
million, or 6.7% of revenue;
- Announced action plan for an
additional $20 million in annualized cost savings, of which $10
million is expected to be realized in the second half of 2020;
- Maintained a strong balance sheet
with cash on hand of $343.5 million and no debt as of March 31,
2020;
- Reported net cash used by operating
activities of $21.2 million and free cash flow of negative $25.4
million, inclusive of $4.2 million of capital expenditures, largely
as a result from slower collections late in the quarter;
- Repurchased approximately $25
million or 800,000 of Company shares during the first quarter of
2020;
- Presented with a “Spotlight on New
Technology Award” by the 2020 Offshore Technology Conference for
the VXTe™ vertical subsea tree system
Blake DeBerry, Dril-Quip’s President and Chief
Executive Officer, commented, “I want to thank all Dril-Quip
employees for their determination and resilience in responding to
the hardships brought about by the COVID-19 pandemic as well as the
significant downturn in the energy industry. I appreciate their
dedication to perform their jobs safely and uphold our commitment
to the customer to deliver first-class products and services that
assist them in accomplishing their operational objectives.”
“Our first quarter results reflect the initial
impacts of the extraordinary challenges facing our industry today.
In response to the sharp decline in oil and gas prices late in the
first quarter, we saw operators act swiftly and decisively in
making deep cuts to capital spending plans and operating budgets.
These actions led to delays in customer decisions to order
equipment for scheduled and upcoming projects, resulting in product
bookings of $57.9 million. In addition to the shift in customer
behavior and capital investment priorities, we experienced
disruptions to our manufacturing productivity and global supply
chain as a result of the necessary actions taken in response to the
COVID-19 pandemic. These actions reduced our manufacturing capacity
as we implemented staggered shifts, social distancing, quarantine
of service personnel and, where possible, remote work arrangements.
The overall effect of this was reduced productivity in the delivery
of our products and services. All these factors contributed to our
lower than expected revenue, adjusted EBITDA margin and free cash
flow for the quarter.”
“While our first quarter results were not what
we had anticipated at the outset of 2020, they reflect the reality
of the uncertain and volatile environment facing our industry in
the coming quarters. The industry is experiencing extreme demand
destruction from the global economic shut down due to the COVID-19
pandemic on one side and a supply glut from oil and gas producing
nations seeking to solidify share in the global market on the other
side. While we have not experienced any significant order
cancellations to date, we are seeing customers delay delivery
requirements in our existing backlog. We will continue to execute
on our backlog, but given the uncertain environment, we remain
cautious on providing guidance for the year.”
“Despite these circumstances, we are confident
in our plan going forward to preserve the Company’s financial
strength without limiting our ability to meet customer expectations
during these extraordinary times. In response to these market
conditions, we are announcing today our intention to further
streamline our business operations. These actions are expected to
result in $20 million in cost savings on an annualized basis and
include changes to our organizational structure, manufacturing
footprint and research and development programs, including a
strategic repositioning of certain product lines. These savings
will be in addition to the realized savings from our previously
implemented 2019 transformation efforts.”
“Even with a less clear outlook for 2020, we
expect to generate positive free cash flow from operations and
overall cash neutrality for the full year 2020. Preserving our
balance sheet strength and the associated financial optionality it
brings, position Dril-Quip to successfully navigate this current
downturn and emerge from it a leaner, more agile and operationally
efficient organization.”
In conjunction with today’s release, the Company
posted a new investor presentation entitled “First 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 first quarter of
2020 was $96.0 million, down $12.5 million from the fourth quarter
of 2019 and up $1.7 million compared to the first quarter of 2019.
The sequential decline was primarily a result of lower product
volumes across all regions due to delays and disruptions related to
the global COVID-19 pandemic and an abrupt decrease in commodity
prices leading to customer deferrals of investment decisions. The
increase in revenue year-over-year was driven by higher product
volumes, primarily fabricated joints, partially offset by lower
leasing revenues.
Cost of sales for the first quarter of 2020 was
$71.4 million, a decrease of $4.3 million sequentially and an
increase of $2.0 million compared to the prior year. Gross
operating margin for the first quarter of 2020 was 25.6%, a
decrease from 30.2% in the fourth quarter of 2019 and a decrease of
from 26.4% in the first quarter of 2019. The reduction in gross
margins compared to both periods was mainly due to COVID-19 impacts
from reduced manufacturing productivity from staggered shifts,
quarantine of manufacturing and service personnel and temporary
plant shutdowns in some countries, increased logistics costs and
unfavorable product mix in the U.S. and Europe. Some of these
contributing factors to lower gross operating margins are expected
to continue in the near term as the Company employs steps to
mitigate negative impacts.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”)
expenses for the first quarter of 2020 were $21.4 million, or flat
compared to the fourth quarter of 2019 and $3.1 million lower from
the first quarter of 2019. The year-over-year decline in SG&A
is primarily attributed to a positive impact of the 2019
transformation efforts and foreign exchange gains. The Company also
experienced higher engineering and product development cost
sequentially and year-over-year due to timing of incremental
investment in the subsea production systems product line.
Net Loss, Adjusted EBITDA and Free Cash Flow
For the first quarter of 2020, the Company
reported a net loss of $19.7 million, or a $0.55 loss per share,
driven by $32.0 million of non-cash charges primarily related to
impairment of goodwill and inventory and long-lived assets
write-downs. The Company also incurred approximately $8.4 million
in employee termination benefits. These charges were partially
offset by a $21.6 million income tax benefit. The total impairment,
restructuring and other charges of $40.4 million were related to
the Company’s plan to reorganize certain facilities and reduce its
workforce in response to unfavorable market conditions. Adjusted
EBITDA totaled $6.5 million for the first quarter of 2020 compared
to $15.8 for the fourth quarter of 2019 and $9.3 million for the
first quarter of 2019. The decrease in adjusted EBITDA sequentially
and year-over-year can be mostly attributed to a decline in
activity and product deliveries due to inefficiencies and
scheduling delays associated with the global COVID-19 pandemic,
primarily in the Eastern Hemisphere.
Net cash used by operations was $21.2 million
and free cash flow was negative approximately $25 million for the
first quarter of 2020. This decrease was primarily driven by a
slow-down in the collection of receivables as cash preservation
became a priority and customer remote work arrangements impacted
collections productivity, which accounted for approximately $10
million. Additionally, the Company had seasonal related increases
in cash tax payments and payroll related expenses of approximately
$10 million in the first quarter of 2020 compared to the fourth
quarter of 2019 as well as approximately $4 million in capital
expenditures, the majority of which was related to rental tools,
machinery and equipment.
Cost Saving Initiatives
At the end of the fourth quarter of 2019,
Dril-Quip had completed the initial phase of its cost saving
initiatives with $52 million in annualized savings achieved, which
exceeded the original goal set in 2018 of $40 to $50 million. Some
examples of the progress made over the past 18 months include
reducing and rationalizing global footprints, optimizing
operational activities, supplier renegotiations and workforce
reductions.
Utilizing the skills gained during its recent
transformation, the Company intends to execute on approximately $20
million in additional annualized cost savings in response to the
deteriorating market conditions in 2020. These actions will span
across manufacturing, supply chain, SG&A, engineering and
research and development and better align our organization with the
anticipated market activity. The Company expects to realize
approximately $10 million of these additional cost savings in
2020.
Balance Sheet
Dril-Quip’s cash on hand as of March 31, 2020
was $343.5 million, which, together with amounts available under
the asset-based lending (ABL) facility, resulted in approximately
$388 million of available liquidity. This solid 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 an optimal R&D program. The Company
expects to generate free cash flow in 2020 and maintain overall
cash neutrality.
Share Repurchases
On February 26, 2019, the Board of Directors
authorized a share repurchase plan under which the Company can
repurchase up to $100 million of its common stock. The repurchase
plan has no set expiration date and any repurchased shares are
expected to be cancelled. The manner, timing and amount of any
purchase will be determined by management based on an evaluation of
market conditions, stock price, liquidity and other factors. The
program does not obligate the Company to acquire any particular
amount of common stock and may be modified or superseded at any
time at the Company’s discretion.
For the three-month period ended March 31, 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. Since the
inception of the authorized share repurchase program in February
2019, 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 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
Free Cash Flow and Adjusted EBITDA are non-GAAP
measures.
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 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
| |
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|
|
|
|
|
Dril-Quip, Inc. |
|
Comparative Condensed Consolidated Income
Statement |
|
(Unaudited) |
| |
|
|
|
|
|
|
| |
|
Three months ended |
| |
|
March 31, 2020 |
|
December 31, 2019 |
|
March 31, 2019 |
| |
|
|
|
|
|
|
| |
|
(In thousands, except per share data) |
|
Revenues: |
|
|
|
|
|
|
|
Products |
|
$ |
67,558 |
|
|
$ |
78,762 |
|
|
$ |
65,434 |
|
|
Services |
|
|
18,814 |
|
|
|
19,082 |
|
|
|
18,476 |
|
|
Leasing |
|
|
9,626 |
|
|
|
10,610 |
|
|
|
10,407 |
|
|
Total revenues |
|
|
95,998 |
|
|
|
108,454 |
|
|
|
94,317 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
Cost of sales |
|
|
71,414 |
|
|
|
75,741 |
|
|
|
69,376 |
|
|
Selling, general and administrative |
|
|
21,416 |
|
|
|
21,444 |
|
|
|
24,544 |
|
|
Engineering and product development |
|
|
5,525 |
|
|
|
4,798 |
|
|
|
3,617 |
|
|
Impairment |
|
|
7,719 |
|
|
|
435 |
|
|
|
- |
|
|
Restructuring and other charges |
|
|
32,713 |
|
|
|
- |
|
|
|
2,396 |
|
|
Gain on sale of assets |
|
|
(467 |
) |
|
|
(28 |
) |
|
|
(13 |
) |
|
Total costs and expenses |
|
|
138,320 |
|
|
|
102,390 |
|
|
|
99,920 |
|
|
Operating income (loss) |
|
|
(42,322 |
) |
|
|
6,064 |
|
|
|
(5,603 |
) |
|
Interest income |
|
|
1,206 |
|
|
|
1,347 |
|
|
|
2,006 |
|
|
Interest expense |
|
|
(191 |
) |
|
|
(166 |
) |
|
|
(121 |
) |
|
Income tax provision (benefit) |
|
|
(21,609 |
) |
|
|
(155 |
) |
|
|
2,333 |
|
|
Net income (loss) |
|
$ |
(19,698 |
) |
|
$ |
7,400 |
|
|
$ |
(6,051 |
) |
|
Earnings (loss) per share |
|
|
|
|
|
|
|
Basic |
|
$ |
(0.55 |
) |
|
$ |
0.21 |
|
|
$ |
(0.17 |
) |
|
Diluted |
|
$ |
(0.55 |
) |
|
$ |
0.21 |
|
|
$ |
(0.17 |
) |
|
Depreciation and amortization |
|
$ |
8,873 |
|
|
$ |
8,865 |
|
|
$ |
8,356 |
|
|
Capital expenditures |
|
$ |
4,187 |
|
|
$ |
2,881 |
|
|
$ |
3,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
Basic |
|
|
35,695 |
|
|
|
35,873 |
|
|
|
35,559 |
|
|
Diluted |
|
|
35,695 |
|
|
|
36,101 |
|
|
|
35,559 |
|
|
Dril-Quip, Inc. |
|
Comparative Condensed Consolidated Balance
Sheets |
|
(Unaudited) |
| |
|
|
|
|
| |
|
March 31, 2020 |
|
December 31, 2019 |
| |
|
|
|
|
| |
|
(In thousands) |
|
Assets: |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
343,472 |
|
|
$ |
398,946 |
|
|
Other current assets |
|
|
482,819 |
|
|
|
481,543 |
|
|
PP&E, net |
|
|
244,495 |
|
|
|
258,497 |
|
|
Other assets |
|
|
65,324 |
|
|
|
67,579 |
|
|
Total assets |
|
$ |
1,136,110 |
|
|
$ |
1,206,565 |
|
|
Liabilities and Equity: |
|
|
|
|
|
Current liabilities |
|
$ |
93,446 |
|
|
$ |
96,940 |
|
|
Deferred Income taxes |
|
|
3,495 |
|
|
|
4,150 |
|
|
Other long-term liabilities |
|
|
14,968 |
|
|
|
14,774 |
|
|
Total liabilities |
|
|
111,909 |
|
|
|
115,864 |
|
|
Total stockholders equity |
|
|
1,024,201 |
|
|
|
1,090,701 |
|
|
Total liabilities and equity |
|
$ |
1,136,110 |
|
|
$ |
1,206,565 |
|
|
Dril-Quip, Inc. |
|
Reconciliation of Net Income (Loss) to Adjusted
EBITDA |
| |
|
|
|
|
|
|
|
Adjusted EBITDA: |
|
Three months ended |
| |
|
March 31, 2020 |
|
December 31, 2019 |
|
March 31, 2019 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
Net income (loss) |
|
$ |
(19,698 |
) |
|
$ |
7,400 |
|
|
$ |
(6,051 |
) |
|
Add: |
|
|
|
|
|
|
|
Interest income, net |
|
|
(1,015 |
) |
|
|
(1,181 |
) |
|
|
(1,885 |
) |
|
Income tax expense (benefit) |
|
|
(21,609 |
) |
|
|
(155 |
) |
|
|
2,333 |
|
|
Depreciation and amortization expense |
|
|
8,873 |
|
|
|
8,865 |
|
|
|
8,356 |
|
|
Impairments |
|
|
7,719 |
|
|
|
435 |
|
|
|
- |
|
|
Restructuring costs, including severance |
|
|
32,713 |
|
|
|
- |
|
|
|
2,396 |
|
|
Gain on sale of assets |
|
|
(467 |
) |
|
|
(28 |
) |
|
|
(13 |
) |
|
Foreign currency loss (gain) |
|
|
(3,242 |
) |
|
|
449 |
|
|
|
(704 |
) |
|
Stock compensation expense |
|
|
3,176 |
|
|
|
(25 |
) |
|
|
4,862 |
|
|
Adjusted EBITDA |
|
$ |
6,450 |
|
|
$ |
15,760 |
|
|
$ |
9,294 |
|
|
|
|
Dril-Quip, Inc. |
|
|
|
|
|
Reconciliation of Net Cash Provided by Operating Activities
to Free Cash Flow |
| |
|
|
|
|
|
|
|
Free Cash Flow: |
|
Three months ended |
| |
|
March 31, 2020 |
|
December 31, 2019 |
|
March 31, 2019 |
| |
|
|
|
|
|
|
| |
|
(In thousands) |
|
Net cash provided (used) by operating activities |
|
$ |
(21,237 |
) |
|
$ |
8,054 |
|
|
$ |
838 |
|
|
Less: |
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(4,187 |
) |
|
|
(2,881 |
) |
|
|
(3,527 |
) |
|
Free cash flow |
|
$ |
(25,424 |
) |
|
$ |
5,173 |
|
|
$ |
(2,689 |
) |
| |
|
|
|
|
|
|
