Drilling Tools International (DTI) - 2023 Q4 - Annual Results

Overview and Highlights Drilling Tools International Corp. (DTI) reported strong 2023 results, executed strategic acquisitions, and solidified its market leadership in downhole tool rentals 2023 Full Year Highlights & Strategic Moves Drilling Tools International Corp. (DTI) reported strong 2023 results with $152 million in revenue and $51 million in Adjusted EBITDA. Post year-end, the company has been active with strategic acquisitions and has significantly improved its liquidity by amending and extending its ABL Credit Facility to support future growth 2023 Full Year Financial Highlights | Metric | Value | | :--- | :--- | | Revenue | $152 million | | Net Income | $14.7 million | | Adjusted EBITDA | $51 million | | Adjusted EBITDA Margin | 33.6% | | Adjusted Free Cash Flow | $7.3 million | - Since the end of 2023, DTI has undertaken several key strategic actions: entered a definitive agreement to acquire Superior Drilling Products, Inc. (SDP), closed the acquisition of Deep Casing Tools, and amended and extended its ABL Credit Facility, increasing the revolving line of credit to $80 million and adding a $25 million term loan, both maturing in March 2029[3][11] Business & Market Position DTI positions itself as a market leader in downhole tool rentals for North America and the Gulf of Mexico, leveraging its extensive rental model and broad distribution for competitive advantage, particularly in volatile markets - DTI's competitive advantage stems from its extensive rental model with over 65,000 tools, broad distribution capabilities, and a diverse customer base, which allows for operational scalability and outperformance during commodity price volatility[4] - The company has established a robust M&A pipeline to strategically consolidate the industry, with recent acquisitions like Deep Casing Tools and the pending acquisition of SDP aimed at expanding growth opportunities internationally, particularly in Europe and the Middle East[4] Financial Performance DTI achieved significant revenue growth in 2023, driven by tool rentals, while strategically managing capital expenditures and enhancing liquidity 2023 Financial and Operating Results In 2023, DTI's total revenue grew 17.4% to $152 million, driven by a 20.4% increase in Tool Rental revenue. Operating income rose to $27.9 million. However, Adjusted Free Cash Flow decreased to $7.3 million from $16.5 million in 2022, primarily due to a significant $19 million increase in capital expenditures to support customer demand and future growth 2023 vs 2022 Financial Performance | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $152.0M | $129.6M | +17.4% | | Tool Rental Revenue | $119.2M | $99.0M | +20.4% | | Product Sales Revenue | $32.8M | $30.5M | +7.4% | | Operating Income | $27.9M | $25.3M | +10.3% | | Adjusted EBITDA | $51.0M | $41.2M | +23.8% | - Adjusted free cash flow decreased from $16.5 million in 2022 to $7.3 million in 2023, primarily caused by a ~$19 million year-over-year increase in capital expenditures aimed at meeting customer demand for new products[8] - Operating expenses increased to $124.1 million from $104.3 million in 2022, attributed to costs associated with going public and additional administrative and compliance expenses[6] Fourth Quarter 2023 Results The fourth quarter of 2023 saw a slight decline in revenue to $35.2 million compared to Q4 2022, reflecting industry-wide rig count and market activity declines. In response, DTI scaled back capital expenditures, successfully meeting its adjusted free cash flow target for the quarter Q4 2023 vs Q4 2022 Financial Performance | Metric | Q4 2023 | Q4 2022 | | :--- | :--- | :--- | | Total Revenue | $35.2M | $36.7M | | Operating Income | $4.5M | $8.0M | | Net Income | $3.8M | $6.8M | - The company scaled back on capital expenditures during the second half of the year to meet its adjusted free cash flow target of $6 to $8 million, demonstrating its ability to generate returns in lieu of growth[9] Financial Position and Liquidity As of December 31, 2023, DTI held $6 million in cash and had no debt. Subsequent to year-end, the company significantly enhanced its financial flexibility by amending its credit facility to increase borrowing capacity to $80 million and adding a new $25 million term loan, both maturing in March 2029 - At the end of 2023, DTI had $6 million of cash and cash equivalents and no debt[10] - On March 18, 2024, DTI amended its credit facility, increasing the revolving credit line from $60 million to $80 million and adding a new $25 million term loan, with maturity for both extended to March 2029[11] 2024 Outlook DTI anticipates doubling adjusted free cash flow in 2024, driven by industry trends and strategic acquisitions, with clear financial guidance provided Management's Expectations Management is optimistic about 2024, expecting to more than double the company's adjusted free cash flow. Growth is anticipated to be driven not just by rig count, but also by the industry trend of drilling longer laterals, where DTI's proprietary tools offer customers efficiency and cost savings - The company expects to more than double its adjusted free cash flow in 2024[13] - DTI's business is positively aligned with the trend of longer laterals in multi-well pads, as its advanced rental tools help customers lower drilling costs[13] 2024 Financial Guidance DTI provided its full-year 2024 outlook, which includes the impact of the recent Deep Casing Tools acquisition but excludes any contribution from the pending Superior Drilling Products acquisition. The company projects revenue between $170 million and $185 million and adjusted free cash flow between $20 million and $25.5 million Full Year 2024 Outlook | Metric | Low Estimate | High Estimate | | :--- | :--- | :--- | | Revenue | $170 million | $185 million | | Net Income | $15 million | $21 million | | Adjusted EBITDA | $50 million | $58.5 million | | Adjusted EBITDA Margin | 29% | 32% | | Adjusted Free Cash Flow | $20 million | $25.5 million | - The 2024 outlook includes the estimated impact from the Deep Casing Tools acquisition but does not include contributions from the pending acquisition of Superior Drilling Products (SDP), with guidance to be updated after the SDP transaction closes[14] Financial Statements DTI's 2023 financial statements reflect increased revenue, a shift in net income, growth in assets, and improved cash flow management Consolidated Statement of Operations For the full year 2023, DTI's revenue increased to $152.0 million from $129.6 million in 2022. However, due to higher operating costs and other expenses, net income decreased to $14.7 million from $21.1 million in the prior year. The fourth quarter showed a similar trend, with revenue slightly down year-over-year and net income falling to $3.8 million from $6.8 million in Q4 2022 Full Year Statement of Operations (in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Total revenue, net | $152,034 | $129,556 | | Operating income | $27,899 | $25,277 | | Net income | $14,748 | $21,080 | | Diluted earnings per share | $0.59 | $1.07 | Fourth Quarter Statement of Operations (in thousands) | Account | Q4 2023 | Q4 2022 | | :--- | :--- | :--- | | Total revenue, net | $35,189 | $36,660 | | Operating income | $4,528 | $7,950 | | Net income | $3,823 | $6,817 | Consolidated Balance Sheets As of December 31, 2023, DTI's total assets increased to $132.5 million from $105.2 million in 2022, primarily due to a rise in property, plant, and equipment. Total liabilities decreased significantly to $43.8 million from $56.1 million, largely because the revolving line of credit was paid down. Consequently, total shareholders' equity more than doubled to $88.7 million Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $46,408 | $40,155 | | Property, plant and equipment, net | $65,800 | $44,154 | | Total assets | $132,498 | $105,218 | | Total current liabilities | $22,288 | $36,240 | | Total liabilities | $43,808 | $56,116 | | Total shareholders' equity | $88,690 | $31,224 | Consolidated Statement of Cash Flows For the twelve months ended December 31, 2023, net cash from operating activities was $23.3 million, an increase from $14.0 million in 2022. Net cash used in investing activities was $23.9 million, mainly for equipment purchases. Net cash from financing activities was $4.3 million, reflecting proceeds from the merger and PIPE financing, offset by repayments on the revolving credit line. The company's cash position increased by $3.7 million to end the year at $6.0 million Consolidated Cash Flow Summary (in thousands) | Category | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $23,334 | $13,994 | | Net cash from investing activities | ($23,864) | ($2,530) | | Net cash from financing activities | $4,295 | ($9,337) | | Net Change in Cash | $3,651 | $2,300 | | Cash at End of Period | $6,003 | $2,352 | Non-GAAP Financial Measures The report defines and reconciles key non-GAAP measures, Adjusted EBITDA and Adjusted Free Cash Flow, for both historical performance and future outlook Definition of Non-GAAP Measures The company uses Adjusted EBITDA and Adjusted Free Cash Flow as supplemental non-GAAP measures. Adjusted EBITDA is defined as net income before interest, taxes, depreciation, and amortization, adjusted for specific items like stock-based compensation and transaction costs. Adjusted Free Cash Flow is defined as Adjusted EBITDA less Gross Capital Expenditures, used as a performance measure - Adjusted EBITDA: Defined as net earnings before interest, taxes, depreciation, and amortization, further adjusted for items such as stock-based compensation, transaction costs, and other non-recurring expenses to better reflect ongoing business performance[31] - Adjusted Free Cash Flow: Defined as Adjusted EBITDA less Gross Capital Expenditures, used by management as a performance measure for planning and evaluation, not as a liquidity measure[33] Reconciliation of GAAP to Non-GAAP Measures The report provides detailed reconciliations of Net Income to Adjusted EBITDA and Adjusted Free Cash Flow for both the full year and fourth quarter of 2023. For FY 2023, Net Income of $14.7 million was reconciled to Adjusted EBITDA of $51.0 million and Adjusted Free Cash Flow of $7.3 million. It also includes reconciliations for the 2024 financial outlook FY 2023 Reconciliation Summary (in thousands) | Measure | Amount | | :--- | :--- | | Net Income | $14,748 | | Adjustments (D&A, Tax, Interest, etc.) | $36,294 | | Adjusted EBITDA | $51,042 | | Gross capital expenditures | ($43,750) | | Adjusted Free Cash Flow | $7,292 | 2024 Outlook Reconciliation Summary (in thousands, High-End) | Measure | Amount | | :--- | :--- | | Net Income (High) | $21,000 | | Adjustments (D&A, Tax, Interest, etc.) | $37,500 | | Adjusted EBITDA (High) | $58,500 | | Gross capital expenditures (High) | ($33,000) | | Adjusted Free Cash Flow (High) | $25,500 |