Nine Energy Service, Inc. — FY 2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter filing. Nine provides completion and production services to oil and gas exploration and production companies, principally in North America. Its segments are Completion Solutions and Production Solutions. Results include Magnum from its October 25, 2018 acquisition date.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $827.2 million | $543.7 million |
| Operating loss | $28.3 million | $57.0 million |
| Net loss | $53.0 million | $67.7 million |
| Operating cash flow | $89.6 million | $5.7 million |
| Adjusted EBITDA (non-GAAP) | $141.1 million | $58.2 million |
| Cash and equivalents at year-end | $63.6 million | $17.5 million |
- Revenue increased 52%. Completion Solutions revenue rose 60% to $745.3 million; Production Solutions revenue increased 5% to $81.9 million.
- Adjusted gross profit, excluding depreciation and amortization (non-GAAP), increased to $187.9 million from $95.2 million. Corresponding margins were approximately 22.7% and 17.5%. GAAP gross profit was $125.0 million, a margin of approximately 15.1%, versus $33.9 million, or 6.2%, in 2017.
- Full-year diluted loss per share was $2.17, compared with $4.55 in 2017. The unaudited fourth-quarter results show revenue of $229.4 million, operating loss of $60.8 million, net loss of $77.3 million, and diluted loss per share of $2.78. Fourth-quarter 2017 revenue was $154.3 million and net loss was $29.8 million.
- Operating cash flow improved substantially, while investing cash use was $389.8 million, chiefly reflecting $350.0 million of acquisition cash outflows. Capital expenditures were $52.6 million. Financing cash flow was $346.7 million.
- Year-end debt was $435.0 million before deferred financing costs ($425.0 million carrying value), including $400.0 million of 8.750% Senior Notes due 2023 and $35.0 million drawn on the asset-based revolver. The company reported $83.5 million of revolver availability and total liquidity of $147.1 million. It was in compliance with debt covenants at year-end.
Material changes and unusual items
- In October, Nine acquired Magnum, a completion-tools business, for approximately $334.5 million in upfront cash consideration and 5.0 million shares, with potential additional earnout payments. The purchase price allocation was preliminary and included $23.0 million of estimated contingent consideration.
- Nine issued $400.0 million of 8.750% Senior Notes and entered a new asset-based revolving facility to help fund the acquisition and refinance prior borrowings. Reported interest expense rose to $22.3 million from $15.7 million; the filing cites a $6.9 million commitment fee related to potential bridge financing among the drivers.
- Fourth-quarter deterioration in commodity prices and a shift in customer focus toward completions led to Production Solutions impairments: $45.7 million of property and equipment, $13.0 million of goodwill (a full write-off of that segment’s goodwill), and $19.1 million of intangible assets. Total impairment charges were $77.7 million.
- Completion Solutions’ adjusted gross profit increased to $176.8 million; Production Solutions’ declined to $11.1 million from $14.1 million despite modest revenue growth.
- Nine completed its IPO in January 2018, issuing 8.05 million shares at $23 per share. The Magnum acquisition also materially increased shares outstanding.
Outlook, risks, and contingencies
- Management said the sharp late-2018 oil-price decline—about 40% during the fourth quarter—created uncertainty and contributed to more limited customer capital budgets for 2019. The filing notes potential support from production cuts but expects continued oil and gas price volatility. No revenue or earnings guidance is provided.
- Management expected 2019 capital expenditures, excluding acquisitions, of $60 million to $70 million, compared with $52.6 million in 2018, and believed cash from operations and revolver borrowings would fund requirements for the next 12 months.
- Key exposures include the cyclicality of customer spending and commodity prices, competitive pricing, seasonality and weather, labor availability, supplier concentration in certain acquired product lines, acquisition integration and earnout obligations, environmental and hydraulic-fracturing regulation, safety and litigation claims, and foreign currency exposure. The company does not hedge fuel, interest-rate, or foreign-exchange risks.
- A lawsuit relating to a 2017 fatal worksite accident reached an agreement in principle to settle in December 2018. Nine expected insurance to fund the settlement; final documentation and court approval remained outstanding.
- Management and the CEO/CFO concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2018 because of a material weakness in segregation of certain accounting duties. A separate tax-reporting weakness was reported as remediated. The external auditor gave an unqualified opinion on the financial statements but did not attest to internal control effectiveness.
- The company reported no planned cash dividends. Its $163.6 million of federal and state net operating losses may be limited by ownership-change rules and may not be fully usable.
Important facts for investors to verify
- Whether 2019 customer activity, pricing, and cash generation withstand the late-2018 commodity-price downturn.
- Magnum’s realized contribution, integration progress, purchase-accounting adjustments, and potential earnout payments.
- Debt service capacity, revolver borrowing-base availability, covenant headroom, and refinancing exposure, especially the 2023 note maturity.
- The assumptions supporting the Production Solutions impairments and whether further asset or goodwill impairment is possible.
- Progress in remediating the remaining segregation-of-duties weakness and the effectiveness of related controls.
- Final resolution and insurance coverage of the fatal-accident settlement, as well as other uninsured litigation or environmental exposures.