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Service & Supply | Oilfield Services | Third Quarter (3Q) Update

ChampionX Reports Third Quarter 2020 Results

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   |    Thursday,October 29,2020

ChampionX announced third quarter of 2020 results, our first full quarter following the June 3, 2020 combination of the Company with the legacy ChampionX business.

For the third quarter of 2020, revenue was $633.5 million, net loss attributable to ChampionX was $7.9 million, and adjusted EBITDA was $86.8 million, including an incremental $12 million of estimated synergies realized on a sequential basis and $6.0 million of isolated benefits. The isolated benefits primarily include gains on dispositions of facilities, and collections of previously reserved customer receivables. Loss before income taxes margin was (1.8)%, and adjusted EBITDA margin was 13.7%. Cash provided by operating activities was $111.4 million, an increase of $62.6 million sequentially, and free cash flow was $98.6 million. Cash flow figures include payment of $33.4 million for final transaction expenses, and for integration expenses in the quarter.

Results on a pro forma basis for ChampionX for prior periods are provided supplementary to the actual results of the Company and represent results on a nine month to-date basis as if legacy ChampionX was combined with the Company for the entire period. Pro forma results are presented in the section titled "ChampionX Pro Forma Results." For additional information on the pro forma results see note titled "Results on a Pro Forma Basis" below and the tables included in this release.i

CEO Commentary

"The health and safety of our employees remains our highest priority, and we continue in our commitment to take all necessary steps to protect them as we navigate through this global pandemic," ChampionX's President and Chief Executive Officer Sivasankaran "Soma" Somasundaram said. "I thank all our employees for their continued dedication as they continue to demonstrate outstanding adaptability and flexibility during these uncertain and challenging times. It is a privilege and an honor for me to lead such a high-performing team."

"The third quarter marked our first full quarter as a new company. Our strong results demonstrate the power of our strengthened portfolio, expanded global scale, as well as meaningful synergy opportunities, all of which we identified as key reasons to bring together our two organizations. While our third quarter pro forma revenue increased a modest 3% sequentially, our adjusted EBITDA of $87 million represented a pro forma sequential increase of 38%. This speaks to our organization's laser focus on achieving our targeted cost synergies, as well as the future operating leverage of our combined company's fit-for-purpose cost structure as we prepare for the eventual global energy industry recovery.

"Amid this severe industry downturn, we further demonstrated the strong positive free cash flow profile of our company as we generated free cash flow of $99 million in the third quarter and we further strengthened our balance sheet by repaying $82 million of debt during the quarter. We ended the quarter with $527 million of liquidity, including $171 million of cash and $355 million of available capacity on our revolver. We remain focused on our free cash flow generation and we intend to continue paying down debt in coming quarters.

"We are proud of how our team is executing on our merger integration plans. Our execution and realization of cost synergies is accelerating and given our progress to date, we now expect to exit 2020 at an annualized run rate of $70 - $80 million. Given this performance and the pipeline of opportunities ahead of us, we are increasing our targeted cost synergies to $125 million (previously $75 million), which we still anticipate fully capturing within 24 months of the merger closing. In addition to the strong performance in cost synergies, we are starting to see early wins in revenue synergies. During the quarter, we secured a multi-year international contract for artificial lift in Eastern Europe, leveraging our Chemical Technologies footprint and relationships.

"Our performance is underpinned by our relentless focus on helping our customers succeed. In the recent supplier performance report on Artificial Lift published by Kimberlite, ChampionX was again ranked as the leader in customer loyalty, as measured by Net Promoter Score, based on feedback from 400+ customers from 200+ oil & gas companies globally. We have earned this honor five years in a row.

"As we look at the fourth quarter, while visibility continues to remain challenging due to the uncertainty caused by the COVID pandemic, combined with seasonal impacts of holidays and year end E&P budget exhaustion, we are encouraged by the stabilization in the price of oil and the October activity so far. On a consolidated basis, in the fourth quarter we expect revenue to be between $635 million and $650 million, driven by improvement in international Production Chemical Technologies revenue and Drilling Technologies activity, and we expect adjusted EBITDA, adjusting for approximately $6 million of favorable items in the third quarter which will not recur in the fourth quarter, of $80 million to $90 million.

"We are even more excited today about the possibilities for our combined company than we were at the closing of the merger. Our disciplined operating model, differentiated products and technology, strong free cash flow, and enhanced production-focused portfolio, combined with a strong and motivated team, will enable us to be a long-term winner in the evolving global oil & gas industry."

ChampionX Actual Results

    Three Months Ended   Variance
(dollars in thousands, except per share amounts)   Sep 30,
2020
  Jun 30,
2020
  Sep 30,
2019
  Sequential   Year-over-year
Revenue   $ 633,526     $ 298,914     $ 276,839     N/M   N/M
                     
Net income (loss) attributable to ChampionX   $ (7,914 )   $ (109,645 )   $ 11,394     N/M   N/M
Diluted earnings (loss) per share attributable to ChampionX   $ (0.04 )   $ (0.95 )   $ 0.15     N/M   N/M
                     
Adjusted net income (loss) attributable to ChampionX   $ 5,451     $ (49,234 )   $ 18,621     N/M   (71)%
Adjusted diluted earnings (loss) per share attributable to ChampionX   $ 0.03     $ (0.43 )   $ 0.24     N/M   (88)%
                     
Income (loss) before income taxes   $ (11,294 )   $ (110,001 )   $ 15,013     N/M   N/M
Income (loss) before income taxes margin   (1.8 )%   (36.8 )%   5.4 %   N/M   N/M
                     
Adjusted EBITDA   $ 86,822     $ 34,461     $ 63,648     152%   36%
Adjusted EBITDA margin   13.7 %   11.5 %   23.0 %   220 bps   (930) bps
                     
Net cash provided by operating activities   $ 111,399     $ 48,811     $ 64,089     $62,588   $47,310
Capital expenditures   $ 12,847     $ 11,855     $ 8,901     $992   $3,946
                                     

N/M - not meaningful

ChampionX consolidated actual results in the third quarter of 2020 include the results of operations of the legacy Apergy businesses and results from legacy ChampionX for the entire period. ChampionX consolidated actual results in the second quarter of 2020 include the results of operations of the legacy Apergy businesses for the entire period, and results from legacy ChampionX for June 2020. Third quarter 2019 results represent the results of operations of the legacy Apergy businesses.

Third quarter 2020 consolidated revenue includes $49.5 million of chemical sales to Ecolab Inc. As part of the Merger, the Company entered into a Cross Supply and Product Transfer Agreement with Ecolab in which certain products will be manufactured by one party for the other and sold at cost over a period of no longer than three years from the merger date. Revenue associated with these sales is reported in Corporate and Other within our financial statements.

Production Chemical Technologies - Actual Results

    Three Months Ended   Variance
(dollars in thousands)   Sep 30,
2020
  Jun 30,
2020
  Sequential
Revenue   $ 410,151     $ 136,002     N/M
Operating profit   $ 35,172     $ 9,922     N/M
Operating profit margin   8.6 %   7.3 %   130 bps
Adjusted segment EBITDA   $ 71,505     $ 22,431     N/M
Adjusted segment EBITDA margin   17.4 %   16.5 %   90 bps
                 

Actual results for Production Chemical Technologies for the second quarter of 2020 only includes the month of June, which makes sequential comparisons for the third quarter of 2020 not meaningful.

Production & Automation Technologies - Actual Results

    Three Months Ended   Variance
(dollars in thousands)   Sep 30,
2020
  Jun 30,
2020
  Sep 30,
2019
  Sequential   Year-over-year
Revenue   $ 136,921     $ 114,741     $ 221,962     19%   (38)%
Operating profit (loss)   $ (7,454 )   $ (37,168 )   $ 18,917     N/M   N/M
Operating profit (loss) margin   (5.4 )%   (32.4 )%   8.5 %   2700 bps   (1390) bps
Adjusted segment EBITDA   $ 24,995     $ 14,492     $ 50,462     72 %   (50 )%
Adjusted segment EBITDA margin   18.3 %   12.6 %   22.7 %   570 bps   (440) bps
                           

N/M - not meaningful

In the third quarter of 2020, Production & Automation Technologies revenue increased $22.2 million, or 19%, sequentially, due to higher volumes as E&P capital spending began to recover from the rapid reduction experienced earlier in 2020. Sequentially, North America revenue increased 22% and international revenue increased 10%.

Revenue from digital products was $18.6 million in the third quarter of 2020, a decrease of $4.5 million, or 20%, compared to $23.1 million in the second quarter of 2020. The sequential decline in digital revenue was driven by reduced hardware sales due to reductions in E&P capital budgets, however, production and artificial lift related digital revenue increased modestly on a sequential basis.

In the third quarter of 2020, segment operating loss was $7.5 million. Segment adjusted EBITDA was $25.0 million, which increased $10.5 million sequentially, or 72%, primarily due to higher volume and the benefits of cost reduction actions and $2.8 million of isolated benefits, including gains on dispositions of facilities.

Drilling Technologies - Actual Results

    Three Months Ended   Variance
(dollars in thousands)   Sep 30,
2020
  Jun 30,
2020
  Sep 30,
2019
  Sequential   Year-over-year
Revenue   $ 15,715     $ 20,948     $ 54,877     (25)%   (71)%
Operating profit (loss)   $ (5,127 )   $ (3,811 )   $ 13,797     N/M   N/M
Operating profit (loss) margin   (32.6 )%   (18.2 )%   25.1 %   (1440) bps   (5770) bps
Adjusted segment EBITDA   $ (2,782 )   $ 1,800     $ 16,567     N/M   N/M
Adjusted segment EBITDA margin   (17.7 )%   8.6 %   30.2 %   (2630) bps   (4790) bps
                           

N/M - not meaningful

In the third quarter of 2020, Drilling Technologies revenue decreased by $5.2 million, or 25%, sequentially, driven by the continued decline in worldwide drilling activity, customer destocking of polycrystalline diamond cutter inventories, a product shift mix toward lower price diamond cutters, and lower diamond bearings revenue.

Diamond bearings revenue in the third quarter of 2020 was $2.0 million, down $0.3 million, or 12%, sequentially.

In the third quarter of 2020, segment operating loss was $5.1 million, and segment adjusted EBITDA was a negative $2.8 million. Sequentially, segment adjusted EBITDA decreased by $4.6 million, due to the lower volumes and shift in product mix, partially offset by the benefits of cost reduction actions.

Sequentially, the average worldwide and U.S. rig counts declined 18% and 36%, respectively. On a year-over-year basis, the average worldwide and U.S. rig counts declined 53% and 72%, respectively.

Reservoir Chemical Technologies - Actual Results

    Three Months Ended   Variance
(dollars in thousands)   Sep 30,
2020
  Jun 30,
2020
  Sequential
Revenue   $ 21,264     $ 9,306     N/M
Operating loss   $ (3,819 )   $ (2,811 )   N/M
Operating loss margin   (18.0 )%   (30.2 )%   1220 bps
Adjusted segment EBITDA   $ (1,432 )   $ (314 )   N/M
Adjusted segment EBITDA margin   (6.7 )%   (3.4 )%   (330) bps
                 

Actual results for Reservoir Chemical Technologies for the second quarter of 2020 only includes the month of June, which makes sequential comparisons for third quarter of 2020 not meaningful.

ChampionX Pro Forma Results

Results on a pro forma basis for ChampionX are provided supplementary to the actual results of the Company and represent results as if legacy ChampionX was combined with the Company for the entire period.

    Three Months Ended   Variance
(dollars in thousands, except per share amounts)   Sep 30,
2020
  Jun 30,
2020
  Sep 30,
2019
  Sequential   Year-over-year
Pro forma revenue   $ 633,526     $ 614,684     $ 866,506     3%   (27)%
                     
Pro forma net income (loss) attributable to ChampionX   $ 4,667     $ (60,100 )   $ 53,251     N/M   (91)%
                     
Pro forma income (loss) before income taxes   $ 4,998     $ (45,089 )   $ 77,197     N/M   (94)%
Pro forma Income (loss) before income taxes margin   0.8 %   (7.3 )%   8.9 %   810 bps   (810) bps
                     
Pro forma adjusted EBITDA   $ 86,822     $ 62,754     $ 167,343     38%   (48)%
Pro forma adjusted EBITDA margin   13.7 %   10.2 %   19.3 %   350 bps   (560) bps
                           

N/M - not meaningful

Third quarter of 2020 consolidated revenue includes $49.5 million of chemical sales to Ecolab under the Cross Supply and Product Transfer Agreement with Ecolab.

Revenue for the full third quarter of 2020 was $633.5 million, representing a sequential increase of $18.8 million. Income before income taxes for the full third quarter was $5.0 million. Adjusted EBITDA was $86.8 million, representing an $24.1 million sequential increase from second quarter of 2020 pro forma adjusted EBITDA.

Production Chemical Technologies - Pro Forma Results

    Three Months Ended   Variance
(dollars in thousands)   Sep 30,
2020
  Jun 30,
2020
  Sep 30,
2019
  Sequential   Year-over-year
Revenue   $ 410,151     $ 433,128     $ 514,189     (5)%   (20)%
Operating profit   $ 42,793     $ 37,154     $ 69,536     15%   (38)%
Operating profit margin   10.4 %   8.6 %   13.5 %   180 bps   (310) bps
Adjusted segment EBITDA   $ 71,505     $ 58,466     $ 90,953     22%   (21)%
Adjusted segment EBITDA margin   17.4 %   13.5 %   17.7 %   390 bps   (30) bps
                           

Results on a pro forma basis for the Production Chemical Technologies segment are provided supplementary to the results of the segment included in the actual results for the Company. See note titled "Results on a Pro Forma Basis" below and the tables included in this release.

Production Chemical Technologies revenue for the full third quarter of 2020 decreased $23.0 million, or 5%, sequentially, due to lower international volumes driven by the continued curtailment of oil production and pricing concessions. Sequentially, North America revenue was flat and international revenue declined 9%.

Operating profit for the full third quarter of 2020 was $42.8 million. Segment adjusted EBITDA for the full quarter was $71.5 million, which increased $13.0 million sequentially, or 22%, due to cost reduction actions taken and favorable supply chain management, as well as $0.7 million of isolated benefits, including gains on dispositions of fixed assets and other benefits.

Reservoir Chemical Technologies - Pro Forma Results

    Three Months Ended   Variance
(dollars in thousands)   Sep 30,
2020
  Jun 30,
2020
  Sep 30,
2019
  Sequential   Year-over-year
Revenue   $ 21,264     $ 27,950     $ 75,441     (24)%   (72)%
Operating profit   $ (3,562 )   $ (16,072 )   $ 3,130     N/M   N/M
Operating profit margin   (16.8 )%   (57.5 )%   4.1 %   4070 bps   (2090) bps
Adjusted segment EBITDA   $ (1,432 )   $ (9,573 )   $ 9,657     N/M   N/M
Adjusted segment EBITDA margin   (6.7 )%   (34.3 )%   12.8 %   2760 bps   (1950) bps

N/M - not meaningful

Results on a pro forma basis for the Reservoir Chemical Technologies segment are provided supplementary to the results of the segment included in the actual results for the Company. See note titled "Results on a Pro Forma Basis" below and the tables included in this release.

Reservoir Chemical Technologies revenue for the full third quarter for 2020 decreased by $6.7 million, or 24%, sequentially, driven by the decline in drilling and completion activity.

For the full third quarter for 2020, segment operating loss was $3.6 million, and segment adjusted EBITDA was a negative $1.4 million, increasing sequentially by $8.1 million. Third quarter results included $2.5 million of isolated benefits, including collections of previously reserved customer receivables, and other benefits.

Other Business Highlights

  • In the third quarter, ChampionX and its employees were actively involved in hurricane relief efforts along the Louisiana and Texas Gulf Coast.
  • Production Chemical Technologies secured a sole-source contract with a leading E&P operator.
  • Production & Automation Technologies secured a multi-year international artificial lift contract, which resulted directly from our Better Together (production chemicals and artificial lift systems) joint sales efforts.
  • Our Digital team shipped an order for our Spotlight edge hardware (for monitoring and analysis of online compressors and engines) with a leading E&P operator in Latin America
  • Successful Drilling Technologies bearings tests continue for non-oilfield applications (e.g., power generation, industrial mixers, pumps and motors).
  • Drilling Technologies has been issued 29 patents year-to-date.

Conference Call Details

ChampionX Corporation will host a conference call on Thursday, October 29, 2020, to discuss its third quarter 2020 financial results. The call will begin at 10:00 a.m. Eastern Time. Presentation materials that supplement the conference call are available on ChampionX's website at investors.championx.com.

To listen to the call via a live webcast, please visit ChampionX's website at investor.championx.com. The call will also be available by dialing 1-888-424-8151 in the United States and Canada or 1-847-585-4422 for international calls. Please call approximately 15 minutes prior to the scheduled start time and reference ChampionX conference call number 6310 375.

A replay of the conference call will be available on ChampionX's website or at https://onlineexperiences.com/Launch/QReg/ShowUUID=A91BE40C-0628-492F-9708-DB6FE4F6676D&LangLocaleID=1033. Enter passcode 49983378.

Results on a Pro Forma Basis

On June 3, 2020, Apergy Corporation closed on the acquisition of ChampionX Holding, Inc. ("the Transaction") and assumed the name ChampionX Corporation ("ChampionX"). Actual results reflect the respective contributions from each company based on the close of the Transaction. For comparative purposes, management has also presented herein certain unaudited pro forma financial information as if the Transaction was completed on January 1, 2019, including results on a pro forma basis for revenue, income before income taxes, income before income taxes margin, adjusted EBITDA, adjusted EBITDA margin, segment revenue, segment operating profit (loss), adjusted segment EBITDA, adjusted segment EBITDA margin for the quarterly periods ended September 30, 2020, June 30, 2020, and September 30, 2019. The financial results on a pro forma basis are provided to assist investors in assessing ChampionX's performance on a basis that includes the combined results of operations of both Apergy Corporation and ChampionX Holding, Inc. for the full reporting period. ChampionX management believes this unaudited pro forma historical financial information helps investors understand the long-term profitability trends of its newly combined business giving effect to the Transaction and facilitates comparisons of our profitability to prior and future periods and to our peers. The historical financial results on a pro forma basis herein may not be comparable to similarly titled measures reported by other companies.


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