Drilling Tools International Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing; the supplied filing text does not provide standalone fourth-quarter results. DTI rents and services downhole drilling tools and sells replacement and related products to oilfield service companies and E&P operators, principally in North America. The company completed its merger and began Nasdaq trading as DTI in June 2023, so share counts and per-share comparisons reflect a major transaction during the year.
Financial performance and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $152.0 million | $129.6 million |
| Operating income | $27.9 million | $25.3 million |
| Net income | $14.7 million | $21.1 million |
| Basic / diluted EPS | $0.67 / $0.59 | $1.66 / $1.07 |
| Adjusted EBITDA (non-GAAP) | $51.0 million | $41.2 million |
| Cash from operations | $23.3 million | $14.0 million |
| Capital expenditures | $43.8 million | $24.7 million |
| Free cash flow (non-GAAP) | $(20.4) million | $(10.7) million |
Revenue rose 17%: tool-rental revenue increased 20% to $119.2 million and product-sale revenue increased 7% to $32.8 million. Management attributed growth mainly to market activity and customer pricing. Operating margin was approximately 18.4% versus 19.5%; net margin was approximately 9.7% versus 16.3%. The gross margin on tool-rental and product-sale costs combined was approximately 76.6% versus 74.5%.
Net income fell despite higher revenue and operating income, principally reflecting $6.0 million of transaction-related “other expense,” including $3.6 million of transaction fees and $2.3 million of stock compensation related to the merger, as well as higher SG&A and income-tax expense. SG&A rose 32% to $68.3 million, including higher personnel, public-company, insurance and stock-option costs. Adjusted EBITDA increased about 24%; it is a non-GAAP measure and includes specified adjustments.
At year-end, cash was $6.0 million, working capital was $24.1 million, and the current ratio was approximately 2.1, versus 1.1 in 2022. The $60 million revolving facility had no borrowings outstanding; DTI reported compliance with its covenants. Operating lease liabilities totaled approximately $18.9 million. Stockholders’ equity was $88.7 million. Operating cash flow improved, but capital spending substantially exceeded it, making free cash flow more negative. Cash-flow funding included $23.2 million of net merger and PIPE proceeds; the company also paid down $18.3 million on the revolver.
Material changes and management outlook
- Tool-rental growth was led by Directional Tool Rentals and Premium Tools; management cited increased activity and pricing across divisions. U.S. onshore rig counts declined year over year, averaging 667 in 2023 versus 705 in 2022.
- Capital expenditures increased to $43.8 million from $24.7 million, largely for rental tools and equipment. The company says continued fleet investment is important to maintain and grow its business.
- Management expected cash on hand, operating cash generation and available credit to meet working-capital needs and anticipated capital expenditures for at least 12 months from the filing. It anticipates further investment in the fleet and growth, and said pricing increases had so far offset inflation, while warning costs may continue rising. No quantified earnings or revenue guidance is provided.
- Subsequent to year-end, DTI announced a proposed acquisition of Superior Drilling Products, Inc. (March 6, 2024), agreed to acquire Casing Technologies Group Limited (March 18, 2024), and refinanced its facility (March 15, 2024) with an $80 million revolver and a $25 million term loan, maturing in March 2029. The acquisitions’ financial impacts were not estimable in the filing and remain subject to their stated conditions.
Risks, contingencies and unusual items
- Customer concentration: Three customers generated 39% of 2023 revenue; two largest customers generated 28.2%. Receivables from the three concentrated customers totaled approximately $11.1 million at year-end. The largest-customer supply agreement runs through February 28, 2025.
- Industry and operating exposure: Results depend on oil and gas activity, commodity prices, customer spending, pricing and tool utilization. Inflation, labor and equipment availability, permitting, environmental rules, weather, geopolitical disruption and foreign exchange may affect operations and demand.
- Product distribution: DTI remained the sole North American distributor of Drill-N-Ream, but its agreement is no longer contractually exclusive; the supplier could appoint competing distributors. The company also depends on supplier access and protection of intellectual property.
- Controls and reporting: Management concluded disclosure controls were not effective at year-end and reported an unremediated material weakness in internal control over financial reporting, including deficiencies in risk assessment, monitoring, documentation and IT controls. Management is implementing remediation. The auditor did not audit or opine on internal control effectiveness.
- Cash-flow revision: DTI revised its previously issued 2022 cash-flow statement for errors involving leases, inventory, property and equipment, and related cash-flow classifications. Management concluded the errors were not material to the prior financial statements taken as a whole; balance sheets and income statements were not affected.
- Other items: Routine litigation and claims are described; management stated no known pending matter was expected to have a material adverse effect. The filing identifies no material cybersecurity incident, while noting continuing cyber and third-party risks. DTI does not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether revenue growth and pricing can continue amid lower U.S. rig counts, and how utilization and margins develop.
- Whether heavy fleet investment can be funded without sustained negative free cash flow or increased leverage.
- Customer concentration, renewal of the largest-customer agreement, and the status of Drill-N-Ream distribution rights.
- Progress in remediating the material weakness, and whether future filings report effective controls.
- Final terms, closing status, financing and integration effects of the announced acquisitions and March 2024 credit refinancing.
- Reconciliation of adjusted EBITDA and free cash flow to GAAP measures, and the effect of merger-related and other unusual expenses on reported earnings.