Nine Energy Service, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Nine provides completion services to onshore oil and gas producers. The comparison with Q1 2019 is affected by the August 2019 sale of its Production Solutions segment: 2020 excludes that business, while 2019 includes it.
Financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $146.6 million | $229.7 million |
| GAAP gross profit | $8.5 million | $33.1 million |
| Adjusted gross profit, excluding D&A | $20.6 million | $51.1 million |
| Operating income (loss) | $(303.7) million | $26.9 million |
| Net income (loss) | $(300.9) million | $17.3 million |
| Adjusted EBITDA | $10.3 million | $39.2 million |
| Operating cash flow | $0.7 million | $5.9 million |
- Revenue decreased 36% year over year. Completion Solutions revenue fell 30% to $146.6 million, with declines across tools, wireline, coiled tubing, and cementing, reflecting lower activity and pricing pressure.
- Adjusted gross profit margin was approximately 14.1% of revenue, versus 22.3% in Q1 2019; GAAP gross margin was approximately 5.8%, versus 14.4%.
- The $296.2 million goodwill impairment, a noncash charge, drove the reported operating and net losses. Nine recorded a $10.1 million gain on extinguishment of debt after repurchasing approximately $13.8 million principal amount of Senior Notes for about $3.5 million.
- Cash and equivalents were $90.1 million at March 31, down from $93.0 million at year-end. Cash used in financing was $3.9 million; investing activities provided $0.5 million. Property and equipment purchases were $0.8 million.
Balance sheet and liquidity
- Total assets were $535.0 million, down from $850.9 million at December 31, 2019, principally reflecting the full goodwill write-off. Stockholders’ equity fell to $91.9 million from $389.9 million.
- Long-term debt, net of deferred financing costs, was $379.0 million; principal debt before those costs was $386.2 million. The 8.75% Senior Notes are due 2023. Their estimated fair value was $96.6 million at quarter-end, compared with $324.0 million at year-end.
- The $200 million ABL facility had no borrowings and approximately $93.5 million of availability, net of a $0.2 million letter of credit. Cash plus stated ABL availability totaled $183.6 million. The company reported compliance with debt covenants at March 31.
- After quarter-end, Nine repurchased a further $15.9 million principal amount of Senior Notes for approximately $3.9 million cash.
Outlook, risks, and unusual matters
- Management expected a significant decline in activity, revenue, and operating margins for the remainder of 2020, as customers reduced capital budgets amid COVID-19, economic disruption, and oil supply-demand turmoil. The company said the duration and ultimate effects were not reasonably estimable.
- Management believed cash, operating cash flow, and potential ABL borrowings should fund capital requirements for at least 12 months from issuance of the statements, but cautioned that forecasts and additional cost-cutting measures were uncertain.
- Nine cited potential further impairment charges, customer payment delays or defaults, supply-chain disruptions, contract force-majeure claims, workforce and operating constraints, and possible credit-rating and financing effects. Long-lived asset testing at March 31 did not result in impairment, but worsening conditions could trigger further reviews.
- On April 21, 2020, the NYSE notified Nine that its average closing share price had been below $1 for 30 consecutive trading days. The company said the notice did not immediately affect trading and stated its intention to regain compliance; delisting remained a risk.
- Disclosure controls were deemed ineffective as of March 31 because of a previously reported material weakness in segregation and independent review of certain accounting duties, including journal entries and reconciliations. Management reported immaterial misstatements had been identified.
- Routine litigation was not expected by management to have a material adverse effect. Contingent acquisition-related liabilities totaled $3.4 million at quarter-end.
Key facts investors should verify
- Subsequent quarterly revenue, margins, cash flow, and customer activity against management’s expected steep 2020 decline.
- Cash and ABL availability, covenant headroom, debt repurchases, and the ability to meet liquidity needs if operating cash flow weakens.
- Further goodwill or long-lived asset impairments and the assumptions behind any valuation changes.
- Progress remediating the material weakness and restoring effective disclosure controls.
- NYSE share-price compliance status and any actions or deadlines affecting the listing.