ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2019, included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, including Critical Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2018.
This section contains forward-looking statements based on our current expectations, estimates, and projections about our operations and the industry in which we operate. Our actual results may differ materially from those discussed in any forward-looking statement because of various risks and uncertainties, including those described in the section titled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.
OVERVIEW
Company Description
Nine Energy Service, Inc. (either individually or together with its subsidiaries, as the context requires, the “Company,” “Nine,” “we,” “us,” and “our”) is a leading North American onshore completion services provider that targets unconventional oil and gas resource development. We partner with our exploration and production (“E&P”) customers across all major onshore basins in both the U.S. and Canada as well as abroad to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. We believe our success is a product of our culture, which is driven by our intense focus on performance and wellsite execution as well as our commitment to forward-leaning technologies that aid us in the development of smarter, customized applications that drive efficiencies.
Recent Events
Production Solutions Divestiture
On August 30, 2019 (the “Divestiture Date”), we entered into a Membership Interest Purchase Agreement (“Production Solutions Purchase Agreement”) with Brigade Energy Services LLC (“Brigade”). Pursuant to the Production Solutions Purchase Agreement, on such date, through the sale of all of the limited liability interests of our wholly owned subsidiary, Beckman Holding Production Services, LLC, we sold our Production Solutions segment to Brigade for approximately $17.4 million in cash. The closing consideration is subject to working capital and other customary post-closing adjustments. We recorded a loss of $15.8 million in connection with this divestiture during the third quarter of 2019. For additional information on this divestiture, see Note 4 – Business Acquisitions and Divestitures included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Magnum Acquisition
On October 25, 2018, pursuant to the terms of a Securities Purchase Agreement dated October 15, 2018 (as amended on June 7, 2019, the “Magnum Purchase Agreement”), we acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities collectively, “Magnum” and such acquisition, the “Magnum Acquisition”) for approximately $334.5 million in upfront cash consideration, subject to customary adjustments, and 5.0 million shares of our common stock, which were issued to the sellers of Magnum in a private placement. The Magnum Purchase Agreement also includes the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes, and certain gains or losses) for the “E-Set” tools business in 2019 through 2026 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019. For additional information on the Magnum Acquisition, see Note 4 – Business Acquisitions and Divestitures included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Senior Notes
On October 25, 2018, we issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The proceeds from the Senior Notes, together with cash on hand and borrowings under the 2018 ABL Credit Facility (as defined below), were used to (i) fund a portion of the upfront cash purchase price of the Magnum Acquisition, (ii) repay all indebtedness under the credit facility entered into in conjunction with our initial public offering (the “IPO”), and (iii) pay fees and expenses associated with the issuance of the Senior Notes, the Magnum Acquisition, and the 2018 ABL Credit Facility (as
described below). For additional information on the Senior Notes, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
2018 ABL Credit Facility
On October 25, 2018, we entered into a credit agreement dated as of October 25, 2018 (the “2018 ABL Credit Agreement”) that permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the “2018 ABL Credit Facility”). Concurrent with the effectiveness of the 2018 ABL Credit Facility, we borrowed approximately $35.0 million to fund a portion of the upfront cash purchase price of the Magnum Acquisition. During the first six months of 2019, we fully repaid the outstanding revolver balance. For additional information on the 2018 ABL Credit Facility, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Initial Public Offering
In January 2018, we completed our IPO of 8,050,000 shares of common stock (including 1,050,000 shares pursuant to an over-allotment option) at a price to the public of $23.00 per share.
Business Segments
The Completion Solutions segment provides services integral to the completion of unconventional wells through a full range of tools and methodologies. Through the Completion Solutions segment, we provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies as well as a portfolio of completion technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug and perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool in lengths of up to 30,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.
On the Divestiture Date, we sold the Production Solutions segment to Brigade. For additional information on the Production Solutions divestiture, see Note 4 – Business Acquisitions and Divestitures. Prior to the Divestiture Date, we reported our results in two segments, the Completions Solutions segment and the Production Solutions segment. The Production Solutions segment provided a range of production enhancement and well workover services that were performed with a well servicing rig and ancillary equipment. Our well servicing business encompassed a full range of services performed with a mobile well servicing rig (or workover rig) and ancillary equipment throughout a well’s life cycle from completion to ultimate plug and abandonment. Our rigs and personnel installed and removed downhole equipment and eliminated obstructions in the well to facilitate the flow of oil and natural gas.
How We Generate Revenue and the Costs of Conducting Our Business
We generate our revenues by providing completion services to E&P customers across all major onshore basins in both the U.S. and Canada as well as abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically will enter into a Master Service Agreement (“MSA”) with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract, and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis.
The principal expenses involved in conducting our business include labor costs, materials and freight, the costs of maintaining our equipment, and fuel costs. Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Another key component of labor costs relates to the ongoing training of our field service employees, which improves safety rates and reduces employee attrition.
How We Evaluate Our Operations
We evaluate our performance based on a number of financial and non-financial measures, including the following:
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Revenue: We compare actual revenue achieved each month to the most recent projection for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the performance of our operations compared to historical revenue drivers or market metrics. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes.
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Adjusted Gross Profit (Excluding Depreciation and Amortization): Adjusted gross profit (excluding depreciation and amortization) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (excluding depreciation and amortization) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). Costs of revenues include direct and indirect labor costs, costs of materials, maintenance of equipment, fuel, transportation freight costs, contract services, crew cost, and other miscellaneous expenses. For additional information, see “Non-GAAP Financial Measures” below.
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Adjusted EBITDA: We define Adjusted EBITDA as net income (loss) before interest expense, taxes, and depreciation and amortization, further adjusted for (i) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions and our IPO, (iii) loss or gain from discontinued operations, (iv) loss or gain on revaluation of contingent liabilities, (v) loss or gain on equity method investment, (vi) stock-based compensation expense, (vii) loss or gain on sale of property and equipment, (viii) restructuring charges, (ix) loss or gain on the sale of subsidiaries, and (x) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business and restructuring costs. For additional information, see “Non-GAAP Financial Measures” below.
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Return on Invested Capital (“ROIC”): We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) transaction and integration costs related to acquisitions and our IPO, (ii) property and equipment, goodwill, and/or intangible asset impairment charges, (iii) interest expense (income), (iv) restructuring charges, (v) loss or gain on the sale of subsidiaries, and (vi) the provision or benefit for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis. For additional information, see “Non-GAAP Financial Measures” below.
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Safety: We measure safety by tracking the total recordable incident rate (“TRIR”), which is reviewed on a monthly basis. TRIR is a measure of the rate of recordable workplace injuries, defined below, normalized and stated on the basis of 100 workers for an annual period. The factor is derived by multiplying the number of recordable injuries in a calendar year by 200,000 (i.e., the total hours for 100 employees working 2,000 hours per year) and dividing this value by the total hours actually worked in the year. A recordable injury includes occupational death, nonfatal occupational illness, and other occupational injuries that involve loss of consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid.
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Factors Affecting the Comparability of Our Results of Operations
Our future results of operations may not be comparable to our historical results of operations for the periods presented, and our historical results of operations among the periods presented may not be comparable to each other, primarily due to the Magnum Acquisition and partially due to our divestiture of the Production Solutions segment.
The historical results of operations for the three and nine months ended September 30, 2019 included in this Quarterly Report on Form 10-Q include activity related to the Magnum Acquisition whereas the historical results of operations for the three and nine months ended September 30, 2018 do not include activity related to the Magnum Acquisition. As a result, the historical results of operations for the three and nine months ended September 30, 2018 may not give an accurate indication of what our actual results would have been if the Magnum Acquisition had been completed at the beginning of the period presented, or of what our future results of operations are likely to be for the following reasons:
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As a result of the Magnum Acquisition and the application of purchase accounting, these identifiable net assets have been adjusted to their estimated fair value as of October 25, 2018, the closing date of the Magnum Acquisition (the “Closing Date”). These adjusted valuations increase our operating expenses in periods after the Closing Date primarily due to an increase in the amortization of intangible assets with definite lives.
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Transaction and integration costs associated with the Magnum Acquisition increase operating expenses in periods after the Closing Date.
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Our completion tools line constitutes a larger portion of our business, due in large part to the Magnum Acquisition. We expect that the Magnum Acquisition will generate additional free cash flow, reduce overall capital intensity, and improve our margins. We also expect that the Magnum Acquisition will further diversify our basin exposure and add significant size and scale.
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We incurred significant indebtedness in connection with the consummation of the Magnum Acquisition, and our related interest expense is expected to be significantly higher than in prior periods.
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In addition, the historical results of operations for the three and nine months ended September 30, 2019 included in this Quarterly Report on Form 10-Q include activity related to the Production Solutions segment only through August 30, 2019 (which is the Divestiture Date) whereas the historical results of operations for the three and nine months ended September 30, 2018 include activity related to the Production Solutions segment for the entire periods. Furthermore, future results of operations will not include activity related to the Production Solutions segment. For additional information on the Magnum Acquisition and on the divestiture of the Production Solutions segment, see Note 4 – Business Acquisitions and Divestitures included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Industry Trends and Outlook
Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. During 2018, oil prices rose to their highest levels since the downturn that began in late 2014. However, during the fourth quarter of 2018, oil prices declined approximately 40%, which is generally believed to be due to concerns over a worldwide oversupply of oil as well as concerns over the possible slowing of global demand growth. In response, at the beginning of 2019, OPEC members and some nonmembers, including Russia, renewed pledges to reduce planned production in an effort to draw down a global oversupply and to rebalance supply and demand. These and other events provided support for an increase in oil prices during the first several months of 2019. Since then, due to, among other things, global geopolitical tensions, oil prices have slightly decreased, despite renewed pledges by OPEC members and some non-members, including Russia, to extend production cuts into 2020. We expect ongoing oil price volatility as compliance with the output reduction agreements, changes in oil inventories, GDP growth, and actual demand growth are reported. Similarly, natural gas prices have decreased significantly throughout 2019 and are expected to continue to be volatile, causing many operators in the more gas-exposed regions to curtail activity. Significant factors that are likely to affect 2019 commodity prices include the effect of U.S. energy, monetary, and trade policies; the pace of economic growth in the U.S. and throughout the world, including the potential for macro weakness; geopolitical and economic developments in the U.S. and globally; the extent to which members of OPEC and other oil exporting nations adhere to and agree to further extend the agreed oil production cuts; and overall North American natural gas supply and demand fundamentals, including the pace at which export capacity grows.
Customer budgets for 2019 were set at the end of 2018. As discussed above, there was a sharp decline in oil price during the fourth quarter of 2018. As a result, customer budgets for 2019 are more limited than previously anticipated, and on average, customers have decreased E&P investments in 2019 as compared to 2018, which could adversely affect our business. With this overall reduction, there has been a strong commitment from E&P operators to stay within capital budgets, prompting many of them to begin to scale back activity in the third quarter of 2019 and likely into the fourth quarter of 2019. Even if there
is price improvement in oil and natural gas during the remainder of 2019, it is expected that operator activity would not materially increase, as operators would likely remain focused on operating within their previously set capital plans.
Operators have continued to improve operational efficiencies in completions design, increasing the complexity and difficulty, making oilfield service selection more important. This increase in high-intensity, high-efficiency completions of oil and gas wells further enhances the demand for our services. We compete for the most complex and technically demanding wells in which we specialize, which are characterized by extended laterals, increased stage spacing, multi-well pads, cluster spacing, and high proppant loads. These well characteristics lead to increased operating leverage and returns for us, as we are able to complete more jobs and stages with the same number of units and crews. Service providers for these projects are selected based on their technical expertise and ability to execute safely and efficiently, rather than only price.
Results of Operations
Results for the Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018
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Three Months Ended September 30,
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2019
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2018
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Change
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(in thousands)
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Revenues
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Completion Solutions
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$
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186,252
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$
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196,608
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$
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(10,356
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)
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Production Solutions (1)
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16,053
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21,819
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(5,766
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)
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$
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202,305
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$
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218,427
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$
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(16,122
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)
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Cost of revenues (exclusive of depreciation and amortization shown separately below)
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Completion Solutions
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$
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152,679
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$
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147,178
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$
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5,501
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Production Solutions (1)
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14,170
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18,704
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(4,534
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)
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$
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166,849
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$
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165,882
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$
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967
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Adjusted gross profit
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Completion Solutions
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$
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33,573
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$
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49,430
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$
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(15,857
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)
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Production Solutions (1)
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1,883
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3,115
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(1,232
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)
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$
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35,456
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$
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52,545
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$
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(17,089
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)
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General and administrative expenses
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$
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19,222
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$
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21,816
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$
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(2,594
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)
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(Gain) loss on revaluation of contingent liabilities
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(5,771
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)
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45
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(5,816
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)
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Loss on sale of subsidiaries
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15,834
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—
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15,834
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Depreciation
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12,196
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13,661
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(1,465
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)
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Amortization of intangibles
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4,609
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1,857
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2,752
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Gain on sale of property and equipment
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(466
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)
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(1,190
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)
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724
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Income (loss) from operations
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(10,168
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)
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16,356
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(26,524
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)
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Non-operating expenses
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9,732
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1,568
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8,164
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Income (loss) before income taxes
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(19,900
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)
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14,788
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(34,688
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)
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Provision (benefit) for income taxes
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727
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1,130
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(403
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)
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Net income (loss)
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$
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(20,627
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)
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$
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13,658
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$
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(34,285
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)
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(1)We sold the Production Solutions segment to Brigade on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 4 – Business Acquisitions and Divestitures.
Revenues
Revenues decreased $16.1 million, or 7%, to $202.3 million for the third quarter of 2019 which is primarily related to pricing pressure across the company. The Completion Solutions segment and the historical Production Solutions segment depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the third quarter of 2019, the average closing price of oil was $56.34 per barrel, and the average closing price of natural gas was $2.38 per MMBtu. During the third quarter of 2018, the average closing price per barrel of oil was $69.69, and the average closing price of natural gas was $2.93 per MMBtu. The overall decrease is partially offset with an increase in completion tools revenue from the first nine months of 2018, due in large part to the Magnum Acquisition in the fourth quarter of 2018.
Additional information with respect to revenues by reportable segment is discussed below.
Completion Solutions: Revenues decreased $10.4 million, or 5%, to $186.3 million for the third quarter of 2019. The decrease was primarily related to a decrease in coiled tubing revenue of $16.8 million, or 35%, as total job count decreased by 39% in comparison to the third quarter of 2018. In addition, the decrease was partly related to a decrease in wireline revenue of $8.9 million, or 13%, mainly related to pricing pressure. Total completed wireline stages increased 10% in comparison to the third quarter of 2018. The overall decrease in Completions Solutions revenues was partially offset by an increase in completion tools revenue of $12.6 million, or 45%. The increase was primarily due to an increase of 10% in completion tool stages with a corresponding increase of 32% in completion tools revenues by stage due in large part to the Magnum Acquisition in the fourth quarter of 2018. Cementing revenues (including pump downs) also increased by $2.6 million, or 5%, which is in conjunction with the increase in cement job count of 4% quarter-over-quarter.
Production Solutions: Revenues decreased $5.8 million, or 26%, to $16.1 million for the third quarter of 2019. The overall decrease in revenue was primarily related to the fact that the Production Solutions segment was sold on August 30, 2019 and therefore only recorded two months of revenue in the third quarter of 2019 compared to recording three months of revenue in the third quarter of 2018.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased $1.0 million, or 1%, to $166.8 million for the third quarter of 2019. The increase was primarily related to additional costs of $5.8 million for materials installed and consumed while performing services. The increase in these costs was due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, the overall increase in cost of revenues was partly related to an increase in severance and other cost of revenue type restructuring charges of $1.8 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada. The overall increase in cost of revenues was partially offset by a decrease of $5.4 million in other employee-related costs, as well as a decrease of $1.2 million in other costs, which was mainly driven by reductions in repairs and maintenance, travel and meals and entertainment expenses in comparison to the third quarter of 2018.
Additional information with respect to cost of revenues by reportable segment is discussed below.
Completion Solutions: Cost of revenues increased $5.5 million, or 4%, to $152.7 million for the third quarter of 2019 primarily related to additional costs of $7.0 million for materials installed and consumed while performing services. The increase in these costs was due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, the overall increase in cost of revenues was partly related to an increase in severance and other cost of revenue type restructuring charges of $1.8 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada. The overall increase in cost of revenues was partially offset by a decrease of $2.8 million in other employee-related costs, as well as a decrease of $0.5 million in other costs, which was mainly driven by reductions in repairs and maintenance, travel and meals and entertainment in comparison to the third quarter of 2018.
Production Solutions: Cost of revenues decreased $4.5 million, or 24%, to $14.2 million for the third quarter of 2019. Employee-related costs decreased by $2.6 million while costs related to materials consumed while performing services decreased by $1.3 million, and other costs such as repairs and maintenance, vehicle and facilities expenses, decreased by $0.7 million in the third quarter of 2019. The primary driver behind the reduction of these costs of revenues related to the sale of the Production Solutions segment on August 30, 2019 as only two months of cost of revenues was recorded in the third quarter of 2019 compared to three months of cost of revenues recorded in the third quarter of 2018.
Adjusted Gross Profit
Completion Solutions: Adjusted gross profit (excluding depreciation and amortization) decreased $15.9 million to $33.6 million for the third quarter of 2019 due to the factors described above under “Revenues” and “Cost of Revenues.”
Production Solutions: Adjusted gross profit (excluding depreciation and amortization) decreased $1.2 million to $1.9 million for the third quarter of 2019 as a result of the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $2.6 million to $19.2 million for the third quarter of 2019. The decrease was primarily related to a decrease of $1.9 million in employee-related costs in comparison to the third quarter of 2018. The decrease is also partly related to a third quarter of 2018 settlement of $1.5 million associated with the Fair Labor Standards Act (“FLSA”) that did not recur in the third quarter of 2019, coupled with certain transaction costs recorded in the third quarter of 2018 associated with the Magnum Acquisition that also did not recur in the third quarter of 2019. The overall decrease in general and administrative expenses was partially offset by an increase in severance and other general and administrative type restructuring charges of $1.4 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada. General and administrative expenses as a percentage of revenue was 9.5% for the third quarter of 2019, compared to 10.0% for the third quarter of 2018.
(Gain) Loss on Revaluation of Contingent Liabilities
(Gain) loss on the revaluation of contingent liabilities changed $5.8 million from a loss of less than $0.1 million to a gain of $5.8 million for the third quarter of 2019. The change was primarily related to a reduction in the estimated sales of certain dissolvable plug products in 2019 associated with the Magnum Acquisition, which contributed to the reduction in fair value during the current quarter.
(Gain) Loss on Sale of Subsidiaries
Loss on the sale of subsidiaries was approximately $15.8 million for the third quarter of 2019 and was related to the sale of the Production Solutions segment on August 30, 2019. We did not record a loss on the sale of subsidiaries for the third quarter of 2018.
Depreciation
Depreciation expense decreased $1.5 million to $12.2 million for the third quarter of 2019. The overall decrease was primarily within service offerings in the Production Solutions segment as we recorded a property and equipment impairment charge recorded in the fourth quarter of 2018. Furthermore, the remaining property and equipment associated with the Production Solutions segment was sold on August 30, 2019.
Amortization of Intangibles
Amortization of intangibles increased $2.8 million to $4.6 million for the third quarter of 2019, primarily due to a $3.1 million increase in amortization associated with intangible assets acquired as part of the Magnum Acquisition and the acquisition of Frac Technology AS, a Norwegian private limited company (the “Frac Tech Acquisition”). The overall increase was partially offset by a reduction in amortization of $0.3 million associated with intangible assets in the Production Solutions segment, which were fully impaired in the fourth quarter of 2018.
Non-Operating Expenses
Non-operating expenses increased $8.2 million to $9.7 million for the third quarter of 2019. The increase in comparison to the third quarter of 2018 was primarily related to an increase in interest expense related to higher indebtedness and an increased interest rate in conjunction with the Senior Notes, which were entered into in the fourth quarter of 2018 in connection with the Magnum Acquisition.
Provision (Benefit) for Income Taxes
Our tax provision for the third quarter of 2019 was approximately $0.7 million as compared to a tax provision of $1.1 million for the third quarter of 2018. The $0.4 million decrease in the tax provision was primarily a result of the discrete tax impact from the sale of the Production Solutions segment on August 30, 2019, coupled with changes in pre-tax income between periods.
Adjusted EBITDA
Adjusted EBITDA decreased $14.1 million to $24.2 million for the third quarter of 2019. The Adjusted EBITDA decrease is primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.
Results for the Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
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Nine Months Ended September 30,
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2019
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2018
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Change
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(in thousands)
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Revenues
|
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Completion Solutions
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$
|
611,255
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|
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$
|
536,363
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|
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$
|
74,892
|
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Production Solutions (1)
|
58,272
|
|
|
61,363
|
|
|
(3,091
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)
|
|
$
|
669,527
|
|
|
$
|
597,726
|
|
|
$
|
71,801
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
|
|
|
|
|
Completion Solutions
|
$
|
480,140
|
|
|
$
|
414,606
|
|
|
$
|
65,534
|
|
Production Solutions (1)
|
49,854
|
|
|
53,094
|
|
|
(3,240
|
)
|
|
$
|
529,994
|
|
|
$
|
467,700
|
|
|
$
|
62,294
|
|
Adjusted gross profit
|
|
|
|
|
|
Completion Solutions
|
$
|
131,115
|
|
|
$
|
121,757
|
|
|
$
|
9,358
|
|
Production Solutions (1)
|
8,418
|
|
|
8,269
|
|
|
149
|
|
|
$
|
139,533
|
|
|
$
|
130,026
|
|
|
$
|
9,507
|
|
|
|
|
|
|
|
General and administrative expenses
|
$
|
60,979
|
|
|
$
|
51,837
|
|
|
$
|
9,142
|
|
(Gain) loss on revaluation of contingent liabilities
|
(20,701
|
)
|
|
1,715
|
|
|
(22,416
|
)
|
Loss on sale of subsidiaries
|
15,834
|
|
|
—
|
|
|
15,834
|
|
Depreciation
|
39,572
|
|
|
39,982
|
|
|
(410
|
)
|
Amortization of intangibles
|
13,925
|
|
|
5,653
|
|
|
8,272
|
|
Gain on sale of property and equipment
|
(799
|
)
|
|
(1,701
|
)
|
|
902
|
|
Income from operations
|
30,723
|
|
|
32,540
|
|
|
(1,817
|
)
|
Non-operating expenses
|
29,501
|
|
|
6,313
|
|
|
23,188
|
|
Income before income taxes
|
1,222
|
|
|
26,227
|
|
|
(25,005
|
)
|
Provision (benefit) for income taxes
|
(1,548
|
)
|
|
1,875
|
|
|
(3,423
|
)
|
Net income
|
$
|
2,770
|
|
|
$
|
24,352
|
|
|
$
|
(21,582
|
)
|
(1)We sold the Production Solutions segment to Brigade on August 30, 2019. For additional information on the Production Solutions divestiture, see Note 4 – Business Acquisitions and Divestitures.
Revenues
Revenues increased $71.8 million, or 12%, to $669.5 million for the first nine months of 2019. The increase is primarily related to an increase in completion tools revenue from the first nine months of 2018, due in large part to the Magnum Acquisition in the fourth quarter of 2018. The overall increase is partially offset with pricing pressure across the company. The Completion Solutions segment and the historical Production Solutions segment depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore in North America. In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the first nine months of 2019, the average closing price of oil was $57.04 per barrel, and the average closing price of natural gas was $2.62 per MMBtu. During the first nine months of 2018, the average closing price per barrel of oil was $66.93, and the average closing price of natural gas was $2.95 per MMBtu.
Additional information with respect to revenues by reportable segment is discussed below.
Completion Solutions: Revenues increased $74.9 million, or 14%, to $611.3 million for the first nine months of 2019. The increase was primarily related to an increase in completion tools revenue of $78.0 million, or 107%, with a corresponding increase of 65% in completion tool stages and 26% in completion tools revenues by stage due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, the increase was partly attributable to an increase in wireline revenue of $7.8 million, or 4%, as total wireline stages completed increased 19% due to an increase in activity in comparison to the first nine months of 2018. Furthermore, cementing revenues (including pump downs) increased by $19.0 million, or 13%, primarily due to a 12% increase in cement job count during the first nine months of 2019. The increase was partially offset with a decrease in coiled tubing revenue of $29.8 million, or 22%, as total job count decreased by 34% in comparison to the first nine months of 2018.
Production Solutions: Revenues decreased $3.1 million, or 5%, to $58.3 million for the first nine months of 2019 primarily related to a reduction of activity. The Production Solutions segment was sold on August 30, 2019.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased $62.3 million, or 13%, to $530.0 million for the first nine months of 2019. The increase was primarily related to increased revenues described above in comparison to the first nine months of 2018, which was due in large part to the Magnum Acquisition in the fourth quarter of 2018.
Additional information with respect to cost of revenues by reportable segment is discussed below.
Completion Solutions: Cost of revenues increased $65.5 million, or 16%, to $480.1 million for the first nine months of 2019. Costs related to materials installed and consumed while performing services increased $53.4 million and other employee-related costs increased $8.0 million in comparison to the first nine months of 2018, due in large part to the Magnum Acquisition in the fourth quarter of 2018. In addition, Magnum integration costs associated with cost of revenues was approximately $3.2 million in the third quarter of 2019. These costs did not occur in the third quarter of 2018. Furthermore, the increase in cost of revenues was partly related to an increase in severance and other cost of revenue type restructuring charges of $1.8 million mainly associated with the third quarter of 2019 wind-down of our wireline service offerings in Canada. The overall increase in cost of revenues was partially offset by a decrease of $0.9 million in other costs, which was mainly driven by reductions in repairs and maintenance, travel and meals and entertainment in comparison to the first nine months of 2018.
Production Solutions: Cost of revenues decreased $3.2 million, or 6%, to $49.9 million for the first nine months of 2019. Costs related to materials consumed while performing services decreased $1.7 million, employee-related costs decreased $1.2 million, and other costs such as repairs and maintenance, vehicle and facilities expenses, decreased $0.3 million in the third quarter of 2019. The primary drivers behind the reduction of these costs of revenues related to a reduction in activity for the first nine months of 2019 coupled with the ultimate sale of the Production Solutions segment on August 30, 2019.
Adjusted Gross Profit
Completion Solutions: Adjusted gross profit (excluding depreciation and amortization) increased $9.4 million to $131.1 million for the first nine months of 2019 due to the factors described above under “Revenues” and “Cost of Revenues.”
Production Solutions: Adjusted gross profit (excluding depreciation and amortization) increased $0.1 million to $8.4 million for the first nine months of 2019 as a result of the factors described above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses increased $9.1 million to $61.0 million for the first nine months of 2019. The increase in comparison to the first nine months of 2018 was primarily related to additional general and administrative costs, including integration, compensation, and benefits costs, associated with the Magnum Acquisition in the fourth quarter of 2018. General and administrative expenses as a percentage of revenue was 9.1% for the first nine months of 2019, compared to 8.7% for the first nine months of 2018.
(Gain) Loss on Revaluation of Contingent Liabilities
(Gain) loss on the revaluation of contingent liabilities changed $22.4 million from a loss of $1.7 million for the first nine months of 2018 to a gain of $20.7 million for the first nine months of 2019. The change was primarily related to a reduction in the estimated sales of certain dissolvable plug products in 2019 associated with the Magnum Acquisition, which contributed to the reduction in fair value during the first nine months of 2019.
(Gain) Loss on Sale of Subsidiaries
Loss on the sale of subsidiaries was approximately $15.8 million for the first nine months of 2019 and was related to the sale of the Production Solutions segment. We did not record a loss on the sale of subsidiaries for the first nine months of 2018.
Depreciation
Depreciation expense decreased $0.4 million to $39.6 million for the first nine months of 2019. The decrease was primarily within service offerings in the Production Solutions segment as we recorded a property and equipment impairment charge recorded in the fourth quarter of 2018. Furthermore, the remaining property and equipment associated with the Production Solutions segment was sold in the third quarter of 2019. The overall decrease is partially offset with an increase in depreciation expense in other lines of service where capital expenditure activity was larger in the first nine months of 2019 in comparison to the first nine months of 2018.
Amortization of Intangibles
Amortization of intangibles increased $8.3 million to $13.9 million for the first nine months of 2019, primarily due to a $9.4 million increase in amortization associated with intangible assets acquired as part of the Magnum Acquisition and Frac Tech Acquisition. The overall increase was partially offset by a reduction in amortization of $0.8 million associated with intangible assets in the Production Solutions segment, which were fully impaired in the fourth quarter of 2018.
Non-Operating Expenses
Non-operating expenses increased $23.2 million to $29.5 million for the first nine months of 2019. The increase in comparison to the first nine months of 2018 was primarily related to an increase in interest expense related to higher indebtedness and an increased interest rate in conjunction with the Senior Notes, which were entered into in the fourth quarter of 2018 in connection with the Magnum Acquisition.
Provision (Benefit) for Income Taxes
Our tax benefit for the first nine months of 2019 was approximately $1.5 million as compared to a tax provision of $1.9 million for the first nine months of 2018. The $3.4 million decrease in our tax provision was primarily related to changes in pre-tax income between periods coupled with the discrete tax impact from the sale of the Production Solutions segment during the first nine months of 2019.
Adjusted EBITDA
Adjusted EBITDA increased $8.3 million to $101.4 million for the first nine months of 2019. The Adjusted EBITDA increase is primarily due to the changes in revenues and expenses discussed above. See “Non-GAAP Financial Measures” below for further explanation.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures that are used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies.
We define EBITDA as net income (loss) before interest expense, depreciation, amortization of intangibles, and provision (benefit) for income taxes.
We define Adjusted EBITDA as EBITDA further adjusted for (i) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions and our IPO, (iii) loss or gain from discontinued operations, (iv) loss or gain on revaluation of contingent liabilities, (v) loss or gain on equity method investment, (vi) stock-based compensation expense, (vii) loss or gain on sale of property and equipment, and (viii) restructuring charges, (ix) loss or gain on the sale of subsidiaries, and (x) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business and restructuring costs.
Management believes EBITDA and Adjusted EBITDA are useful because they allow us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at these measures because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired. These measures should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) or as an indicator of our operating performance. Certain items excluded from these measures are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of these measures. Our computations of these measures may not be comparable to other similarly titled measures of other companies. We believe that these are widely followed measures of operating performance.
The following table presents a reconciliation of the non-GAAP financial measures of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
EBITDA reconciliation:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(20,627
|
)
|
|
$
|
13,658
|
|
|
$
|
2,770
|
|
|
$
|
24,352
|
|
Interest expense
|
9,843
|
|
|
1,756
|
|
|
29,940
|
|
|
6,763
|
|
Interest income
|
(111
|
)
|
|
(188
|
)
|
|
(439
|
)
|
|
(450
|
)
|
Depreciation
|
12,196
|
|
|
13,661
|
|
|
39,572
|
|
|
39,982
|
|
Amortization of intangibles
|
4,609
|
|
|
1,857
|
|
|
13,925
|
|
|
5,653
|
|
Provision (benefit) for income taxes
|
727
|
|
|
1,130
|
|
|
(1,548
|
)
|
|
1,875
|
|
EBITDA
|
$
|
6,637
|
|
|
$
|
31,874
|
|
|
$
|
84,220
|
|
|
$
|
78,175
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA reconciliation:
|
|
|
|
|
|
|
|
EBITDA
|
$
|
6,637
|
|
|
$
|
31,874
|
|
|
$
|
84,220
|
|
|
$
|
78,175
|
|
Transaction and integration costs
|
1,418
|
|
|
2,320
|
|
|
8,864
|
|
|
2,697
|
|
Loss on equity method investment
|
—
|
|
|
77
|
|
|
—
|
|
|
270
|
|
(Gain) loss on revaluation of contingent liabilities (1)
|
(5,771
|
)
|
|
45
|
|
|
(20,701
|
)
|
|
1,715
|
|
Loss on sale of subsidiaries
|
15,834
|
|
|
—
|
|
|
15,834
|
|
|
—
|
|
Restructuring charges
|
3,263
|
|
|
—
|
|
|
3,263
|
|
|
—
|
|
Stock-based compensation expense
|
3,286
|
|
|
3,508
|
|
|
10,553
|
|
|
9,719
|
|
Gain on sale of property and equipment
|
(466
|
)
|
|
(1,190
|
)
|
|
(799
|
)
|
|
(1,701
|
)
|
Legal fees and settlements (2)
|
22
|
|
|
1,721
|
|
|
165
|
|
|
2,203
|
|
Adjusted EBITDA
|
$
|
24,223
|
|
|
$
|
38,355
|
|
|
$
|
101,399
|
|
|
$
|
93,078
|
|
(1)Amounts relate to the revaluation of contingent liabilities associated with our 2018 acquisitions. The impact is included in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss). For additional information on contingent liabilities, see Note 10 – Commitments and Contingencies included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
(2)Amounts represent fees and legal settlements associated with legal proceedings brought pursuant to the FLSA and/or similar state laws.
Return on Invested Capital
ROIC is a supplemental non-GAAP financial measure. We define ROIC as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) transaction and integration costs related to acquisitions and our IPO, (ii) property and equipment, goodwill, and/or intangible asset impairment charges, (iii) interest expense (income), (iv) restructuring charges, (v) loss or gain on the sale of subsidiaries, and (vi) the provision or benefit for deferred income taxes. We define total capital as book value of equity plus the book value of debt less balance sheet cash and cash equivalents. We then take the average of the current and prior period-end total capital for use in this analysis.
Management believes ROIC is a meaningful measure because it quantifies how well we generate operating income relative to the capital we have invested in our business and illustrates the profitability of a business or project taking into account the capital invested. Management uses ROIC to assist them in capital resource allocation decisions and in evaluating business performance. Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC differ, and our computation of ROIC may not be comparable to other similarly titled measures of other companies.
The following table provides an explanation of our calculation of ROIC for the three and nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
|
(in thousands)
|
Net income (loss)
|
$
|
(20,627
|
)
|
|
$
|
2,770
|
|
Add back:
|
|
|
|
Interest expense
|
9,843
|
|
|
29,940
|
|
Interest income
|
(111
|
)
|
|
(439
|
)
|
Transaction and integration costs
|
1,418
|
|
|
8,864
|
|
Restructuring charges
|
3,263
|
|
|
3,263
|
|
Loss on sale of subsidiaries
|
15,834
|
|
|
15,834
|
|
Provision (benefit) for deferred income taxes
|
143
|
|
|
(2,876
|
)
|
After-tax net operating profit
|
$
|
9,763
|
|
|
$
|
57,356
|
|
Total capital as of prior period-end/year-end:
|
|
|
|
Total stockholders’ equity
|
$
|
624,309
|
|
|
$
|
594,823
|
|
Total debt
|
400,000
|
|
|
435,000
|
|
Less cash and cash equivalents
|
(16,886
|
)
|
|
(63,615
|
)
|
Total capital as of prior period-end/year-end
|
$
|
1,007,423
|
|
|
$
|
966,208
|
|
Total capital as of period-end:
|
|
|
|
Total stockholders’ equity
|
$
|
606,779
|
|
|
$
|
606,779
|
|
Total debt
|
400,000
|
|
|
400,000
|
|
Less cash and cash equivalents
|
(93,321
|
)
|
|
(93,321
|
)
|
Total capital as of period-end
|
$
|
913,458
|
|
|
$
|
913,458
|
|
Average total capital
|
$
|
960,441
|
|
|
$
|
939,833
|
|
ROIC
|
4.1%
|
|
8.1%
|
Adjusted Gross Profit (Excluding Depreciation and Amortization)
GAAP defines gross profit as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (excluding depreciation and amortization) as revenues less cost of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit because we do not include the impact of depreciation and amortization, which represent non-cash expenses.
Management uses adjusted gross profit (excluding depreciation and amortization) to evaluate operating performance. We prepare adjusted gross profit (excluding depreciation and amortization) to eliminate the impact of depreciation and amortization because we do not consider depreciation and amortization indicative of our core operating performance. Adjusted gross profit (excluding depreciation and amortization) should not be considered as an alternative to gross profit (loss), operating income (loss), or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted gross profit (excluding depreciation and amortization) may not be comparable to similarly titled measures of other
companies because other companies may not calculate adjusted gross profit (excluding depreciation and amortization) or similarly titled measures in the same manner as we do.
The following table presents a reconciliation of adjusted gross profit (excluding depreciation and amortization) to GAAP gross profit (loss) for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Calculation of gross profit
|
|
|
|
|
|
|
|
Revenues
|
$
|
202,305
|
|
|
$
|
218,427
|
|
|
$
|
669,527
|
|
|
$
|
597,726
|
|
Cost of revenues (exclusive of depreciation and amortization shown separately below)
|
166,849
|
|
|
165,882
|
|
|
529,994
|
|
|
467,700
|
|
Depreciation (related to cost of revenues)
|
11,994
|
|
|
13,434
|
|
|
38,916
|
|
|
39,319
|
|
Amortization of intangibles
|
4,609
|
|
|
1,857
|
|
|
13,925
|
|
|
5,653
|
|
Gross profit
|
$
|
18,853
|
|
|
$
|
37,254
|
|
|
$
|
86,692
|
|
|
$
|
85,054
|
|
Adjusted gross profit (excluding depreciation and amortization) reconciliation:
|
|
|
|
|
|
|
|
Gross profit
|
$
|
18,853
|
|
|
$
|
37,254
|
|
|
$
|
86,692
|
|
|
$
|
85,054
|
|
Depreciation (related to cost of revenues)
|
11,994
|
|
|
13,434
|
|
|
38,916
|
|
|
39,319
|
|
Amortization of intangibles
|
4,609
|
|
|
1,857
|
|
|
13,925
|
|
|
5,653
|
|
Adjusted gross profit (excluding depreciation and amortization)
|
$
|
35,456
|
|
|
$
|
52,545
|
|
|
$
|
139,533
|
|
|
$
|
130,026
|
|
Liquidity and Capital Resources
Sources and Uses of Liquidity
Historically, we have met our liquidity needs principally from cash flows from operating activities, external borrowings, proceeds from the IPO, and capital contributions (prior to the IPO). Our principal uses of cash are to fund capital expenditures and acquisitions, to service our outstanding debt, and to fund our working capital requirements. In 2018, we issued $400.0 million of Senior Notes to, together with cash on hand and borrowings under the 2018 ABL Credit Facility, fund the Magnum Acquisition as well as fully repay and terminate the term loan borrowings and the outstanding revolving credit commitments under our prior credit facility. For additional information regarding the Senior Notes, see Note 8 – Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q. In the third quarter of 2019, we divested the Production Solutions segment for approximately $17.4 million in cash. The closing consideration is subject to working capital and other customary post-closing adjustments. We plan to use such proceeds to fund our working capital requirements and capital expenditures.
We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue to access outside sources of capital. In addition, our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic conditions, the level of drilling, completion and production activity for North American onshore oil and natural gas resources, and financial and business and other factors, many of which are beyond our control.
Although we do not budget for acquisitions, pursuing growth through acquisitions is a significant part of our business strategy. Our ability to make significant additional acquisitions for cash will require us to obtain additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all.
At September 30, 2019, we had $93.3 million of cash and cash equivalents and $118.0 million of availability under the 2018 ABL Credit Facility, which resulted in a total liquidity position of $211.3 million.
2018 ABL Credit Facility
On October 25, 2018, we entered into the 2018 ABL Credit Agreement. The 2018 ABL Credit Agreement permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit. The 2018 ABL Credit Facility will mature on October 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date.
Loans to us and our domestic related subsidiaries (the “U.S. Credit Parties”) under the 2018 ABL Credit Facility may be base rate loans or LIBOR loans; and loans to Nine Energy Canada Inc., a corporation organized under the laws of Alberta, Canada, and its restricted subsidiaries (the “Canadian Credit Parties”) under the Canadian tranche may be CDOR loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on our leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments. The weighted average interest rate was 2.63% during the first nine months of 2019.
The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions) and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below a certain threshold or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. We were in compliance with all covenants under the 2018 ABL Credit Agreement at September 30, 2019.
All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of U.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties excluding certain assets. The 2018 ABL Credit Facility is guaranteed by the U.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and the U.S. Credit Parties.
Concurrent with the effectiveness of the 2018 ABL Credit Facility, we borrowed approximately $35.0 million to fund a portion of the upfront cash purchase price of the Magnum Acquisition. During the second quarter of 2019, we repaid our outstanding revolver borrowings in full.
At September 30, 2019, our availability under the 2018 ABL Credit Facility was approximately $118.0 million, net of an outstanding letter of credit of $0.2 million.
Cash Flows
Cash flows provided by (used in) operations by type of activity were as follows for the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
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|
2019
|
|
2018
|
|
(in thousands)
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Operating activities
|
$
|
86,808
|
|
|
$
|
50,756
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|
Investing activities
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(19,593
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)
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|
(26,011
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)
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Financing activities
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(37,546
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)
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|
44,559
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|
Impact of foreign exchange rate on cash
|
37
|
|
|
(283
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)
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Net change in cash and cash equivalents
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$
|
29,706
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|
|
$
|
69,021
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|
Operating Activities
Net cash provided by operating activities was $86.8 million for the first nine months of 2019 compared to $50.8 million in net cash provided by operating activities for the first nine months of 2018. The $36.0 million increase in net cash provided by operating activities was primarily a result of a $52.9 million increase in net cash provided through our working capital. The overall increase in net cash provided by operating activities was partially offset by a $16.9 million increase in cash flow used by continuing operations, adjusted for any non-cash items, primarily due to revenue growth for the first nine months of 2019 in comparison to the first nine months of 2018.
Investing Activities
Net cash used in investing activities was $19.6 million for the first nine months of 2019 compared to $26.0 million in net cash used in investing activities for the first nine months of 2018. The $6.4 million decrease in net cash used in investing activities was primarily related to $17.2 million in proceeds received from the sale of subsidiaries as well as $7.6 million in proceeds received from notes receivable payments, both of which occurred in the first nine months of 2019 and did not occur in the first nine months of 2018. The overall decrease in net cash used in investing activities was partially offset by an increase of $19.4 million in cash purchases of property and equipment for the first nine months of 2019.
Financing Activities
Net cash used in financing activities was $37.5 million for the first nine months of 2019 compared to $44.6 million in net cash flow provided by financing activities for the first nine months of 2018. The $82.1 million decrease in net cash provided by financing activities was primarily related to $171.8 million in proceeds received from the IPO and issuances of common stock and $125.0 million in proceeds received from our term loan entered into in conjunction with the IPO in the first nine months of 2018 that did not recur in the first nine months of 2019 as well as an increase in cash used of $2.7 million related to the vesting of restricted stock in the first nine months of 2019 compared to the first nine months of 2018. The overall decrease in net cash provided by financing activities was partially offset by $155.7 million in payments made on prior term loans and $1.4 million in deferred financing costs in the first nine months of 2018 that did not recur in the first nine months of 2019 as well as a reduction in net payments of $61.2 million on our revolving credit facilities in the first nine months of 2019 compared to the first nine months of 2018.
Contractual Obligations
Our contractual obligations at September 30, 2019 did not change materially, outside the normal course of business, from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations” in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2018.
Off-Balance Sheet Arrangements
At September 30, 2019, we had a letter of credit of $0.2 million, which represented an off-balance sheet arrangement as defined in Item 303(a)(4)(ii) of Regulation S-K. As of September 30, 2019, no liability has been recognized in our Condensed Consolidated Balance Sheets for the letter of credit.
Recent Accounting Pronouncements
See Note 3 – New Accounting Standards included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.