UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): October 25, 2018
DRIL-QUIP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 001-13439 | 74-2162088 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
| 6401 N. Eldridge Parkway Houston, Texas |
77041 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (713) 939-7711
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2):
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition.
On October 25, 2018, Dril-Quip, Inc. (“Dril-Quip”) reported third quarter 2018 earnings. For additional information regarding Dril-Quip’s third quarter 2018 earnings, please refer to Dril-Quip’s press release attached to this report as Exhibit 99.1 (the “Press Release”), which Press Release is incorporated by reference herein.
Item 7.01 Regulation FD Disclosure.
On October 25, 2018, Dril-Quip posted the Q3 2018 Supplemental Earnings Information presentation (the “Presentation”) to its website at www.dril-quip.com. The Presentation is attached hereto as Exhibit 99.2.
The information in the Press Release and the Presentation is being furnished, not filed, pursuant to Items 2.02 and 7.01. Accordingly, the information in the Press Release and the Presentation will not be incorporated by reference into any registration statement filed by Dril-Quip under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference.
Item 9.01 Financial Statements and Exhibits.
| (d) | Exhibits. |
The exhibits listed below are being furnished pursuant to Items 2.02 and 7.01 of this Form 8-K:
| Exhibit No. |
Description | |
| 99.1 | Press Release issued October 25, 2018. | |
| 99.2 | Q3 2018 Supplemental Earnings Information Presentation. | |
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| DRIL-QUIP, INC. | ||
| By: | /s/ Jeffrey J. Bird | |
| Jeffrey J. Bird | ||
| Vice President and Chief Financial Officer | ||
Date: October 25, 2018
3
Exhibit 99.1
Dril-Quip, Inc. Announces Third Quarter 2018 Results
| • | Generated $93.3 million of revenue, above the high end of guidance range of $80 - $90 million |
| • | Reported a net loss of $10.4 million, or $0.28 loss per diluted share, including restructuring costs of $3.7 million |
| • | Incurred an adjusted net loss of $7.4 million excluding restructuring costs, or $0.20 loss per diluted share |
| • | Generated net cash provided by operating activities of $9.1 million |
| • | Reported cash on hand of $424.1 million as of September 30, 2018 |
| • | Completed $100 million share repurchase program in October 2018 |
| • | Maintained clean balance sheet with no debt as of September 30, 2018 |
| • | Progressed Sea Lion Phase I to frame agreement |
| • | Achieved $13.5 million of targeted $40 - $50 million of annualized cost reductions |
HOUSTON - October 25, 2018 / GlobeNewswire - Dril-Quip, Inc. (NYSE: DRQ) today reported operational and financial results for the third quarter of 2018.
Blake DeBerry, Dril-Quip’s President and Chief Executive Officer, commented, “In the third quarter, Dril-Quip generated positive Adjusted EBITDA of $0.8 million. We continue to believe that we are operating at the bottom of the current cycle and that backlog will trend upward over the next 18 months. Our cash position remained strong at $424.1 million as of September 30, 2018, which, coupled with our debt-free balance sheet, positions us to continue executing our long-term strategy. We entered into a Front End Engineering and Design (FEED) contract and Frame Agreement with Premier Oil Exploration and Production Limited in relation to the subsea production systems for the Sea Lion Phase 1 Development located offshore the Falkland Islands. We are excited that Premier has chosen Dril-Quip to be their trusted provider of subsea equipment for Sea Lion and that Dril-Quip’s scope of work for the project is progressing according to plan. We will continue to support Premier as they work towards FID and sanctioning for this project. The current estimated value of the equipment portion of the scope of work is $207 million.
“As we look to the future, we will leverage our technologically innovative products, first-class service and strong balance sheet to provide the equipment and support for major projects around the world. We are seeing international drilling activity continuing to increase as well as our quote activity, and we are closely monitoring several significant opportunities.
“Looking to the fourth quarter of 2018, our expectation is that the Company’s revenue will be between $80 million and $90 million, which is consistent with our prior guidance at the end of the second quarter. The Company’s backlog was $260.9 million and $249.0 million as of June 30, 2018 and September 30, 2018, respectively.
“Last quarter we announced a target of $40 million to $50 million of annualized cost savings to be fully completed by the end of 2019. This effort will focus on streamlining our cost base for the current environment and provide leverage and agility as we ultimately recover from the trough. During the third quarter, we recorded a charge of $3.7 million as we executed the first phase of our target. We expect this first phase to deliver $13.5 million of annualized savings, and we expect the impact of those savings to positively impact the fourth quarter by $3.4 million. These savings should help offset any impact from potentially lower revenue in the fourth quarter.”
In conjunction with today’s release, the Company posted a new investor presentation entitled “3rd Quarter 2018 Supplemental Earnings Information” to its website, www.dril-quip.com, in the Events & Presentations section under the Investors link.
Third Quarter Segment Review and Financial Discussion
Consolidated revenue was down $1.6 million quarter-on-quarter, essentially flat with prior quarter and slightly above Company guidance.
Western Hemisphere revenue decreased sequentially by $0.8 million, or 1%, primarily driven by light book and bill business in North America.
Eastern Hemisphere revenue increased sequentially by $2.1 million, or 9%, from increased activity levels in Norway.
Asia-Pacific revenue declined sequentially by $3.0 million, or 27%, on light book and bill activity in the quarter and current backlog deliveries being extended into future quarters.
Net loss was $10.4 million, resulting in a $0.28 loss per diluted share. The Company recorded a tax benefit due to the recognition of certain tax deductions. Adjusted net loss was $7.4 million, or $0.20 per diluted share, after excluding $0.08 per share related to the restructuring charges.
Adjusted EBITDA decreased sequentially by $0.8 million. The Company recorded expenses in the third quarter for bad debt related to prior work in Brazil and West Africa. The net impact of these charges was $1.8 million and reduced the Company’s Adjusted EBITDA for the quarter. Additionally, the Company incurred $3.4 million in extra cost during the quarter as the first phase of the cost reduction program was not initiated until September.
Balance Sheet
Dril-Quip’s cash on hand as of September 30, 2018 was $424.1 million, which together with the asset-based lending (ABL) facility that the Company executed on February 23, 2018, resulted in approximately $480 million of available liquidity. Liquidity remained strong despite completing approximately $71 million in additional share repurchases during the third quarter. This very attractive liquidity position provides both financial and operational flexibility through the current downturn and allows the Company to quickly capitalize on opportunities when the market rebounds. This robust cash position also allows management and the Board to continue to execute on Dril-Quip’s long-term strategy of investing in research and development, supporting the anticipated upturn, opportunistically returning cash to shareholders, and pursuing complementary acquisitions.
Share Repurchases
On July 26, 2016, the Board of Directors authorized up to $100 million in share repurchases with no set expiration date. During the third quarter of 2018, the Company repurchased approximately $71 million, or
approximately 1.4 million shares, of common stock at an average price of $50.93 per share as part of ongoing efforts to create value for shareholders. The repurchase plan was completed in October 2018 by repurchasing the remaining $19.1 million value in shares. The Company retired all of the shares repurchased on October 16, 2018.
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 market conditions, anticipated project bookings, expected timing of commencing new project work, anticipated revenues, costs, cost synergies and savings, possible acquisitions, new product offerings, 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 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 Securities and Exchange Commission. 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.
See tables 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 should be read together with, and are 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.
SOURCE: Dril-Quip, Inc.
Trevor Ashurst, Manager of Investor Relations, (713) 939-7711
Dril-Quip, Inc.
Comparative Condensed Consolidated Income Statement
(Unaudited)
| Three months ended | ||||||||||||
| September 30, 2018 | June 30, 2018 | September 30, 2017 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
| Revenues: |
||||||||||||
| Products |
$ | 63,246 | $ | 64,719 | $ | 75,885 | ||||||
| Services |
30,011 | 30,142 | 24,461 | |||||||||
|
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|
|
|
|
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| Total revenues |
93,257 | 94,861 | 100,346 | |||||||||
| Costs and expenses: |
||||||||||||
| Cost of sales |
65,630 | 69,443 | 63,050 | |||||||||
| Selling, general and administrative |
31,566 | 23,739 | 27,985 | |||||||||
| Engineering and product development |
10,159 | 10,526 | 10,379 | |||||||||
| Impairment and other charges |
— | — | 60,968 | |||||||||
| Gain on sale of assets |
(14 | ) | (5,099 | ) | 9 | |||||||
|
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|
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|
|
|||||||
| Total costs and expenses |
107,341 | 98,609 | 162,391 | |||||||||
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|
|
|||||||
| Operating income (loss) |
(14,084 | ) | (3,748 | ) | (62,045 | ) | ||||||
| Interest income |
1,893 | 2,275 | 957 | |||||||||
| Interest expense |
(195 | ) | (151 | ) | (12 | ) | ||||||
| Income tax provision (benefit) |
(2,028 | ) | 1,418 | (31,840 | ) | |||||||
|
|
|
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|
|
|
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| Net income (loss) |
$ | (10,358 | ) | $ | (3,042 | ) | $ | (29,260 | ) | |||
|
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|
|
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| Earnings (loss) per share |
$ | (0.28 | ) | $ | (0.08 | ) | $ | (0.78 | ) | |||
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| Depreciation and amortization |
$ | 8,724 | $ | 9,001 | $ | 9,518 | ||||||
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| Capital expenditures |
$ | 7,078 | $ | 9,034 | $ | 6,627 | ||||||
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Dril-Quip, Inc.
Comparative Condensed Consolidated Balance Sheets
(Unaudited)
| September 30, 2018 | December 31, 2017 | |||||||
| (In thousands) | ||||||||
| Assets: |
||||||||
| Cash and cash equivalents |
$ | 424,053 | $ | 493,180 | ||||
| Other current assets |
473,397 | 515,369 | ||||||
| PP&E,net |
292,667 | 284,247 | ||||||
| Other assets |
102,642 | 107,009 | ||||||
|
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|
|
|||||
| Total assets |
$ | 1,292,759 | $ | 1,399,805 | ||||
|
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| Liabilities and Stockholders’ Equity: |
||||||||
| Current liabilities |
$ | 68,262 | $ | 99,911 | ||||
| Long-term debt |
— | — | ||||||
| Deferred taxes |
3,211 | 3,432 | ||||||
| Income Taxes |
28,029 | — | ||||||
| Other long-term liabilities |
2,001 | 2,001 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
101,503 | 105,344 | ||||||
| Stockholders’ equity |
1,191,256 | 1,294,461 | ||||||
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|
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| Total liabilities and stockholders’ equity |
$ | 1,292,759 | $ | 1,399,805 | ||||
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Dril-Quip, Inc.
Unaudited Non-GAAP Financial Measures
Adjusted Net Income and EPS:
| Three months ended | ||||||||||||||||||||||||
| September 30, 2018 | June 30, 2018 | September 30, 2017 | ||||||||||||||||||||||
| 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 data) | ||||||||||||||||||||||||
| Net income (loss) |
$ | (10,358 | ) | $ | (0.28 | ) | $ | (3,042 | ) | $ | (0.08 | ) | $ | (29,260 | ) | $ | (0.78 | ) | ||||||
| Adjustments (after tax): |
||||||||||||||||||||||||
| Reverse the effect of foreign currency |
32 | — | (1,703 | ) | (0.05 | ) | 308 | 0.01 | ||||||||||||||||
| Add back restructuring costs |
2,959 | 0.08 | — | — | 35,876 | 0.96 | ||||||||||||||||||
| Less gain on sale of assets |
(11 | ) | — | (4,028 | ) | (0.11 | ) | — | — | |||||||||||||||
| Less one-time tax adjustments |
— | — | — | — | (6,075 | ) | (0.16 | ) | ||||||||||||||||
| Add back severance payments |
— | — | — | — | 942 | 0.03 | ||||||||||||||||||
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| Adjusted net income (loss) |
$ | (7,378 | ) | $ | (0.20 | ) | $ | (8,773 | ) | $ | (0.24 | ) | $ | 1,791 | $ | 0.06 | ||||||||
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Adjusted EBITDA:
| Three months ended | ||||||||||||
| September 30, 2018 | June 30, 2018 | September 30, 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Net Income (Loss) |
$ | (10,358 | ) | $ | (3,042 | ) | $ | (29,260 | ) | |||
| Add: |
||||||||||||
| Interest (income) expense |
(1,698 | ) | (2,124 | ) | (945 | ) | ||||||
| Income tax expense (benefit) |
(2,028 | ) | 1,418 | (31,840 | ) | |||||||
| Depreciation and amortization expense |
8,724 | 9,001 | 9,518 | |||||||||
| Restructuring costs |
3,745 | — | — | |||||||||
| Impairment and other charges |
— | — | 60,968 | |||||||||
| Gain on sale of assets |
(14 | ) | (5,099 | ) | — | |||||||
| Foreign currency loss (gain) |
41 | (2,155 | ) | 380 | ||||||||
| Severance costs |
— | — | 1,163 | |||||||||
| Stock compensation expense |
2,366 | 3,611 | 3,694 | |||||||||
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| Adjusted EBITDA |
$ | 778 | $ | 1,610 | $ | 13,678 | ||||||
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Free Cash Flow:
| Three months ended | ||||||||||||
| September 30, 2018 | June 30, 2018 | September 30, 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Net cash provided by operating activities |
$ | 9,141 | $ | 12,078 | $ | 36,035 | ||||||
| Less: |
||||||||||||
| Purchase of property, plant and equipment |
(7,078 | ) | (9,034 | ) | (6,627 | ) | ||||||
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| Free Cash Flow |
$ | 2,063 | $ | 3,044 | $ | 29,408 | ||||||
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3rd Quarter 2018 Supplemental Earnings Information dril-quip.com | NYSE: DRQ Exhibit 99.2
Cautionary Statement Forward-Looking Statements The information furnished in this presentation contains “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include goals, projections, estimates, expectations, market outlook, forecasts, plans and objectives, including revenue and new product revenue and other projections, acquisition opportunities, forecasted supply and demand, liquidity, cost savings, and share repurchases and are based on assumptions, estimates and risk analysis made by management of Dril-Quip in light of its experience and perception of historical trends, current conditions, expected future developments and other factors. No assurance can be given that actual future results will not differ materially from those contained in the forward-looking statements in this presentation. Although Dril-Quip believes that all such statements contained in this presentation are based on reasonable assumptions, there are numerous variables of an unpredictable nature or outside of Dril-Quip’s control that could affect Dril-Quip’s future results and the value of its shares. Each investor must assess and bear the risk of uncertainty inherent in the forward-looking statements contained in this presentation. Please refer to Dril-Quip’s filings with the SEC for additional discussion of risks and uncertainties that may affect Dril-Quip’s actual future results. Dril-Quip undertakes no obligation to update the forward-looking statements contained herein. Use of Non-GAAP Financial Measures Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA and Free Cash Flow 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. 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. Free Cash Flow is defined as net cash provided by operating activities less net cash used in the purchase of property, plant and equipment. We believe that these non-GAAP measures enable us to evaluate and compare more effectively the results of our operations period over period and identify operating trends by removing the effect of our capital structure from our operating structure. In addition, we believe 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. These measures 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. Non-GAAP financial information supplements should be read together with, and are not an alternative or substitute for, our 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. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure can be found on slides 21-22.
Dril-Quip Investment Highlights Leading Manufacturer of Highly Engineered Drilling & Production Equipment Technically Innovative Products & First-class Service Strong Financial Position Historically Superior Margins to Peers Experienced Management Team
Product & Service Offerings Subsea Equipment Subsea Wellheads Mudline Suspension Systems Surface Equipment Specialty Connectors Subsea Production Trees Subsea Manifolds Subsea Control Systems Production Risers Production Riser Tensioners Platform Wellheads Platform Production Trees Downhole Tools Liner Hangers Specialty DH Tools Offshore Rig Equipment Wellhead Connectors Diverters Aftermarket Services Production Packers Safety Valves Drilling Risers Reconditioning Rental Tools Technical Advisory
Revenue Mix By Product and Service Segment By Geographic Area FY 2017 Total Revenue: $455 million 3Q 2018 YTD Total Revenue: $287 million
Snapshot $MM
Q3 2018 Highlights Generated $93.3 million of revenue, above the high end of guidance range of $80 - $90 million Reported a net loss of $10.4 million, or $0.28 loss per diluted share, including restructuring costs of $3.7 million Incurred an adjusted net loss of $7.4 million excluding restructuring costs, or $0.20 loss per diluted share Generated net cash provided by operating activities of $9.1 million Reported cash on hand of $424.1 million as of September 30, 2018 Completed $100 million share repurchase program in October 2018 Maintained clean balance sheet with no debt as of September 30, 2018 Progressed Sea Lion Phase I to frame agreement Achieved $13.5 million of targeted $40 - $50 million of annualized cost reductions
Market Update Signs of increased bidding and service activity; oil price & rig environments improving but remain uncertain Signed frame agreement with a current estimated value of $207 million with Premier Oil for the subsea production equipment for Sea Lion Phase I Repsol’s Ca Rong Do (CRD) project continues to experience delays – Letter of Award extended through March 2019
+ 6.6 + 1.9 Global Supply & Demand Through 2030 Global oil supply growth 2017-2030 mmb/d Crude & condensate = 81.8 87.8 Net change 2017-2030 + 1.2 + 3.7 - 7.5 Already-discovered fields make up 85% of pre-FID deepwater production by 2030 New Deepwater Project Sanctions Necessary to Satisfy Long-Term Demand Unsanctioned projects Source: McKinsey Energy Insights
Evolving View of Timeline for Deepwater Recovery Global offshore wells drilled Number of wells % Deepwater well CAGR 2% CAGR ’17-’30 Percent 6% +2% p.a. +7% p.a. +5% p.a. Deepwater Market Recovery Expected to be Gradual Until 2020 Source: McKinsey Energy Insights
Well-Positioned to Serve Offshore Markets Deepwater wells drilled by region (Number of wells) 1 Includes all America except for Brazil and US GoM, with larger markets being Mexico, Colombia, Guyana, Trinidad & Tobago, and Venezuela Key Operating Hub Source: McKinsey Energy Insights Sales and/or Service Sales representatives
Executing Our Strategy Research & Development LEAN Implementation & Advanced Product Quality Planning (APQP) Commercial Excellence Supply Chain Streamline Organization Structure Champion Cost-Effective Operating Model Achieve Scalability Adopt Best Source Approach Expand Existing Market Share Capture New Product and New Customer Revenue Organization Optimization Leverage Product Differentiation Reduce Fixed Cost Base Develop Centralized Model Pursue Value & Solution Selling Focus on Operational Excellence
R&D is Key to Achieving Commercial Excellence Developing innovative products that structurally reduce total installed costs Expanding product portfolio to increase markets and market share Presented with OTC Spotlight on New Technology award for BigBore-IIe Wellhead System, DXe Wellhead Connector, and HFRe Hands-Free Drilling Riser BigBore-IIe Wellhead DXe Wellhead Connector HorizontalBore Subsea Tree HFRe Hands-Free Drilling Riser Concentric Monobore Tree
Executing on Commercial Excellence Targeting $100 million in new product revenue by 2021 Award-Winning R&D Efforts Driving New Product Revenue Subsea Production Systems DXe Connector Large customer standardizing on BB- IIe wellhead with DXe profile R&D efforts served as key element for Sea Lion LOI Emerging as the standard profile for HPHT wellhead connectors BigBore IIe Connector profile licensed to three large peers
Overview of the Business Transformation Structured Approach to Improve Cost Performance Across All Areas EBITDA Improvement – $40-50 million by YE2019 in run rate enhancement across all elements of cost structure Broad Workforce Engagement – including distributed initiative ownership and frontline idea generation Organized Transformation Infrastructure – systematically optimizing all cost elements with broad workforce engagement
Sustainable Cost-Saving Initiatives Manufacturing Supply chain SG&A Engineering and R&D Optimize footprint Implement lean practices Improve operational discipline Improve sourcing practices Consolidate supply base Optimize G&A functions Leverage global footprint Rationalize structure and support levels Business transformation workstreams and example focus areas (not comprehensive) Significant progress to date $11 million reduction in labor workforce $1+ million in supplier renegotiations $1 million reduction in rented facility footprint $0.5 million run-rate plus $2 million one-time benefits optimization Over 70 quick win initiatives in implementation Full transformation pipeline: 350+ initiatives Expecting $15+ Million of Recurring Cost Savings in Place by the End of 2018
Liquidity Allocation Strategy ($ millions) Internal Cash 424 ABL Credit Facility 56 Available Liquidity 480 SOURCES Notes Balances as of September 30, 2018 ABL put in place on February 23, 2018 Shelf registration statement filed on February 27, 2018 for general planning purposes ($ millions) Support R&D 50 – 100 Fund Upturn & Key Projects 150 – 200 Pursue Complementary Acquisitions 50 – 100 Liquidity in Place to Support Growing Market Share POTENTIAL USES
2018 Outlook & 2019 Targeted Cost Savings Streamlining Structural Cost Base to Operate in Current Environment Q4 2018 Revenue $80 - $90 million Adj. EBITDA Near Breakeven for Q4 2018 Due to Realized Cost Savings Actions Full-year 2018 Revenue $365 - $375 million Annualized Cost Savings in place by YE2019 $40 - $50 million Annualized Cost Savings in place by Q3 2018 $13.5 million
Appendix
Income Statement Dril-Quip, Inc. Comparative Condensed Consolidated Income Statement (Unaudited) Three months ended September 30, 2018 June 30, 2018 September 30, 2017 (In thousands, except per share data) Revenues: Products $ 63,246 $ 64,719 $ 75,885 Services 30,011 30,142 24,461 Total revenues 93,257 94,861 100,346 Costs and expenses: Cost of sales 65,630 69,443 63,050 Selling, general and administrative 31,566 23,739 27,985 Engineering and product development 10,159 10,526 10,379 Impairment and other charges — — 60,968 Gain on sale of assets (14 ) (5,099 ) 9 Total costs and expenses 107,341 98,609 162,391 Operating income (loss) (14,084 ) (3,748 ) (62,045 ) Interest income 1,893 2,275 957 Interest expense (195 ) (151 ) (12 ) Income tax provision (benefit) (2,028 ) 1,418 (31,840 ) Net income (loss) $ (10,358 ) $ (3,042 ) $ (29,260 ) Earnings (loss) per share $ (0.28 ) $ (0.08 ) $ (0.78 ) Depreciation and amortization $ 8,724 $ 9,001 $ 9,518 Capital expenditures $ 7,078 $ 9,034 $ 6,627
Balance Sheet Dril-Quip, Inc. Comparative Condensed Consolidated Balance Sheets (Unaudited) September 30, 2018 December 31, 2017 (In thousands) Assets: Cash and cash equivalents $ 424,053 $ 493,180 Other current assets 473,397 515,369 PP&E,net 292,667 284,247 Other assets 102,642 107,009 Total assets $ 1,292,759 $ 1,399,805 Liabilities and Stockholders' Equity: Current liabilities $ 68,262 $ 99,911 Long-term debt — — Deferred taxes 3,211 3,432 Income Taxes 28,029 — Other long-term liabilities 2,001 2,001 Total liabilities 101,503 105,344 Stockholders' equity 1,191,256 1,294,461 Total liabilities and stockholders' equity $ 1,292,759 $ 1,399,805
Non-GAAP Financial Measures Dril-Quip, Inc. Unaudited Non-GAAP Financial Measures Adjusted Net Income and EPS: Three months ended September 30, 2018 June 30, 2018 September 30, 2017 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 data) Net income (loss) $ (10,358 ) $ (0.28 ) $ (3,042 ) $ (0.08 ) $ (29,260 ) $ (0.78 ) Adjustments (after tax): Reverse the effect of foreign currency 32 — (1,703 ) (0.05 ) 308 0.01 Add back restructuring costs 2,959 0.08 — — 35,876 0.96 Less gain on sale of assets (11 ) — (4,028 ) (0.11 ) — — Less one-time tax adjustments — — — — (6,075 ) (0.16 ) Add back severance payments — — — — 942 0.03 Adjusted net income (loss) $ (7,378 ) $ (0.20 ) $ (8,773 ) $ (0.24 ) $ 1,791 $ 0.06
Non-GAAP Financial Measures Free Cash Flow: Three months ended September 30, 2018 June 30, 2018 September 30, 2017 (In thousands) Net cash provided by operating activities $ 9,141 $ 12,078 $ 36,035 Less: Purchase of property, plant and equipment (7,078 ) (9,034 ) (6,627 ) Free Cash Flow $ 2,063 $ 3,044 $ 29,408 Three months ended Adjusted EBITDA: September 30, 2018 June 30, 2018 September 30, 2017 (In thousands) Net Income (Loss) $ (10,358 ) $ (3,042 ) $ (29,260 ) Add: Interest (income) expense (1,698 ) (2,124 ) (945 ) Income tax expense (benefit) (2,028 ) 1,418 (31,840 ) Depreciation and amortization expense 8,724 9,001 9,518 Restructuring costs 3,745 — — Impairment and other charges — — 60,968 Gain on sale of assets (14 ) (5,099 ) — Foreign currency loss (gain) 41 (2,155 ) 380 Severance costs — — 1,163 Stock compensation expense 2,366 3,611 3,694 Adjusted EBITDA $ 778 $ 1,610 $ 13,678
Capital Expenditures $ mm Annual Maintenance Capex ~$15 - $20 million Note: Sum of components may not foot due to rounding.
Backlog $ mm 70% – 80% of year-end 2017 backlog expected to convert to revenue in twelve months or less Bookings require shorter lead times due to available capacity and inventory on hand Uncertainty of oil prices placing downward pressure on bookings Note: The backlog data shown above includes all bookings as of September 30, 2018, including contract awards and signed purchase orders for which the contracts would not be considered enforceable under ASC 606. Note: Sum of components may not foot due to rounding.
Financial Metric Definitions Market Capitalization = Share Price x Total Shares Outstanding Enterprise Value = Market Capitalization + Debt – Cash and Cash Equivalents Non-cash Working Capital = (Current Assets – Cash) – Current Liabilities Book Value / Share = Total Shareholders’ Equity / Total Shares Outstanding Cash / Share = Cash & Cash Equivalents / Total Shares Outstanding Non-cash Working Capital (WC) / Share = Noncash Working Capital / Total Shares Outstanding Total Debt / Capitalization = Total Debt (Short-term + Long-term) / (Total Debt + Total Shareholders’ Equity)