Dril-Quip, Inc. Announces Third Quarter 2020 Results

HOUSTON, Oct. 29, 2020 (GLOBE NEWSWIRE) -- 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