8-K: Drilling Tools International Completes Acquisition of Superior Drilling Products and Announces Second Quarter Results

Drilling Tools International Corp. (DTI) has finalized its acquisition of Superior Drilling Products, Inc. (SDP) and reported its second quarter 2024 financial results.

Summary

• Drilling Tools International (DTI) has completed its acquisition of Superior Drilling Products (SDP) for approximately $32.2 million in cash and DTI stock.
• The merger was completed on August 1, 2024, with SDP becoming a wholly-owned subsidiary of DTI.
• Holders of approximately 80.5% of SDP shares elected to receive DTI stock, while 5.3% chose cash, and 14.2% received cash due to proration.
• DTI issued approximately 4,845,132 shares of common stock and paid $14,910,868.58 in cash as part of the merger consideration.
• DTI's second quarter 2024 revenue was $37.5 million, relatively flat compared to the same period last year.
• Tool rental revenue was $28.3 million, and product sales revenue was $9.2 million.
• Operating income for the quarter was $2.2 million, and adjusted EBITDA was $9.0 million.
• Adjusted free cash flow improved significantly by $3.2 million, from -$4.3 million to -$1.1 million year-over-year.
• DTI is maintaining its full-year adjusted free cash flow guidance of $20 million to $25 million.
• The company has implemented a cost reduction program expected to save $2.4 million annually.

Sentiment

Score: 7

Explanation: The document conveys a positive outlook due to the successful acquisition and maintained financial guidance, but there are some concerns about the flat revenue and negative free cash flow in the quarter.

Positives

• The acquisition of SDP is expected to provide significant synergies, including over $4.5 million in SG&A savings and tax benefits.
• DTI anticipates 60% CapEx savings on new DNR tools and a 45% Repair & Maintenance margin capture.
• The company's adjusted free cash flow improved by $3.2 million year-over-year.
• DTI is maintaining its full-year adjusted free cash flow guidance of $20 million to $25 million.
• The company has implemented a cost reduction program for an annualized savings of $2.4 million.
• DTI gained a $6.6 million receivable from the selling party, effectively reducing the overall transaction amount for the SDP acquisition.
• The acquisition includes a fully operational bit repair facility in the UAE and several hundred DNR tools in the Middle East.

Negatives

• The U.S. rig count experienced continued softness, leading to a decline in the quarter compared to earlier expectations.
• DTI's second quarter revenue was relatively flat compared to the same period last year.
• The company's adjusted free cash flow for the second quarter was still negative at -$1.1 million.

Risks

• The demand for DTI's products and services is influenced by the general level of activity in the oil and gas industry.
• DTI's ability to retain its customers, particularly those that contribute a large portion of its revenue, is a risk.
• The company's ability to employ and retain a sufficient number of skilled and qualified workers is a potential challenge.
• DTI faces risks related to sourcing tools and raw materials at a reasonable cost.
• The company operates in a competitive industry, which poses a risk to its ability to market its services.
• DTI's ability to execute, integrate, and realize the benefits of acquisitions is a risk.
• Potential liability for claims arising from the operation of DTI's tools is a concern.
• DTI's ability to obtain additional capital is a risk factor.
• Political, regulatory, economic, and social disruptions in the countries where DTI operates could impact the business.
• The company's dependence on its information technology systems is a risk.
• DTI must comply with applicable laws, regulations, and rules, including those related to the environment.
• The company's ability to maintain an effective system of disclosure controls and internal control over financial reporting is a risk.
• Volatility in the market price of DTI's common stock is a potential risk.
• Increased legal, accounting, administrative, and other costs incurred as a public company are a risk.
• The potential for the issuance of additional shares of DTI's common stock or other equity securities is a risk.
• DTI's ability to maintain the listing of its common stock on Nasdaq is a risk.
• The ability of DTI to realize the benefits of the acquisition of SDPI is a risk.

Future Outlook

DTI expects continued declines in the North American rig count throughout 2024, but maintains its full-year adjusted free cash flow guidance of $20 million to $25 million. The company anticipates significant synergies from the SDP acquisition over the next twelve months.

Management Comments

• Wayne Prejean, CEO of DTI, stated, 'We are pleased to announce the closing of the SDP acquisition and are excited to welcome SDPs talented team to the DTI family and add SDPs world-class manufacturing expertise into our broad-reaching and expanding global sales channels.'
• Prejean added, 'We expect to benefit from significant synergies over the next twelve months from this acquisition and have identified more than $4.5 million of SG&A synergies and realizable NOL tax benefits.'

Industry Context

The acquisition of SDP aligns with the trend of consolidation in the oilfield services industry, as companies seek to expand their offerings and achieve cost efficiencies. The focus on technology and international expansion also reflects broader industry trends.

Comparison to Industry Standards

• DTI's adjusted free cash flow margin is projected to be between 49% and 53% for 2024, which is competitive with some peers but lower than others.
• The company's return on capital employed (ROCE) is 1.83x, which is lower than some of its peers, such as Peer 1 (10.19x) and Peer 5 (10.05x).
• DTI's EV/EBITDA multiple is 6.47x, which is within the range of its peer group, but lower than some peers such as Peer 1 (10.19x) and Peer 5 (10.05x).
• The document references a peer group including BKR, BOOM, OIS, RES, RNGR, WHD, and XPRO, which are all established players in the oilfield services sector.

Stakeholder Impact

• Shareholders will see the impact of the merger and the potential for increased value through synergies.
• Employees of both DTI and SDP will be integrated into the combined company.
• Customers will have access to a broader range of products and services.
• Suppliers will be part of a larger supply chain.
• Creditors will be impacted by the new financial structure of the combined company.

Next Steps

• DTI will continue to integrate SDP into its operations.
• The company will focus on realizing synergies from the acquisition.
• DTI will continue to monitor and adjust to activity levels in North America.
• The company will continue with growth initiatives in other markets.
• DTI intends to file pro forma financial information under cover of Form 8-K/A not later than 71 calendar days after the date that this Current Report on Form 8-K is required to be filed.

Key Dates

Keywords

Drilling Tools International, Superior Drilling Products, acquisition, merger, oilfield services, drilling tools, financial results, EBITDA, free cash flow, tool rental, product sales, synergies, cost reduction, Drill-N-Ream, DNR