RIGNET, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying unaudited
condensed consolidated financial statements as of
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to a number of risks and uncertainties, many of which are beyond the Company's control. Forward-Looking statements may include statements about:
• the effects of the COVID-19 pandemic and reduced demand for oil and gas;
• expected forgiveness of any loan obtained by the Company pursuant to
the Paycheck Protection Program of the United States Small Business
Administration ;
• the level of drilling and production activity and the number of
offshore drilling, FPSOs and other vessels that are removed from
service, either temporarily or permanently;
• competition and competitive factors in the markets in which we operate;
• demand for our services and solutions;
• the advantages of our services compared to others;
• changes in technology and customer preferences and our ability to adapt
our product and services offerings;
• our ability to develop and maintain positive relationships with our
customers;
• our ability to retain and hire necessary employees and appropriately
staff our marketing, sales and distribution efforts;
• our cash and liquidity needs and expectations regarding cash flow from
operations, capital expenditures, covenant compliance and borrowing
availability under our Revolving Credit Facility;
• our expectations regarding the deductibility of goodwill for tax purposes;
• our business and corporate development strategy, including statements
concerning our ability to pursue, consummate and integrate merger and
acquisition opportunities successfully;
• the amount and timing of contingent consideration payments arising from
our acquisitions;
• our ability to manage and grow our business and execute our business
strategy, including developing and marketing additional Apps & IoT
solutions, expanding our market share, increasing secondary and
tertiary customer penetration at remote sites, enhancing systems
integration and extending our presence into complementary remote
communication segments through organic growth and strategic
acquisitions;
• our ability to develop and market additional products and services;
• our cost reduction, restructuring activities and related expenses;
• the buildout and upgrade of our Gulf of Mexico microwave network; and
• our financial performance, including our ability to expand Adjusted
EBITDA through our operational leverage.
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In some cases, forward-looking statements can be identified by terminology such as "may," "could," "should," "would," "expect," "plan," "project," "intend," "will," "anticipate," "believe," "estimate," "predict," "potential," "pursue," "target," "continue," the negative of such terms or other comparable terminology that convey uncertainty of future events or outcomes. All of these types of statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, are forward-looking statements.
The forward-looking statements contained in this Quarterly Report on Form 10-Q
are largely based on Company expectations, which reflect estimates and
assumptions made by Company management. These estimates and assumptions reflect
management's best judgment based on currently known market conditions and other
factors. Although the Company believes such estimates and assumptions to be
reasonable, they are inherently uncertain and involve a number of risks and
uncertainties beyond its control. In addition, management's assumptions may
prove to be inaccurate. The Company cautions that the forward-looking statements
contained in this Quarterly Report on Form 10-Q are not guarantees of future
performance, and it cannot assure any reader that such statements will be
realized or the forward-looking statements or events will occur. Future results
may differ materially from those anticipated or implied in forward-looking
statements due to factors listed in the "Risk Factors" section of our Annual
Report and elsewhere in this Quarterly Report on Form 10-
Our Operations
We are a leading provider of ultra-secure, intelligent networking solutions and specialized applications. Customers use our private networks to manage information flows and execute mission-critical operations primarily in remote areas where conventional telecommunications infrastructure is either unreliable or unavailable. We provide our clients what is often the sole means of communications for their remote operations. On top of and vertically integrated into these networks we provide services ranging from fully-managed voice, data, and video to more advanced services including: cyber security threat detection and prevention; applications to improve crew welfare, safety or workforce productivity; and a real-time AI-backed data analytics platform to enhance customer decision making and business performance.
Segment information is prepared consistent with the components of the enterprise for which separate financial information is available and regularly evaluated by the chief operating decision-maker for the purpose of allocating resources and assessing performance.
• Managed Communications Services (MCS). Our MCS segment provides remote
communications, telephony and technology services for offshore and
onshore drilling rigs and production facilities, support vessels, and
other remote sites.
• Applications and Internet-of-Things (Apps & IoT). Our Apps & IoT
segment provides applications over-the-top of the network layer
including Software as a Service (SaaS) offerings such as a real-time
machine learning and AI data platform (Intelie Pipes and Intelie LIVE),
Cyphre Encryption, Enhanced Cybersecurity Services (ECS), edge
computing solution services that assist customers with collecting and
standardizing the complex data produced by edge devices (LIVE-IT),
applications for safety and workforce productivity such as weather
monitoring primarily in the North Sea (MetOcean), and certain other
value-added services such as Adaptive Video Intelligence (AVI). This
segment also includes the private machine-to-machine IoT data networks
including Supervisory Control and Data Acquisition (SCADA) provided
primarily for pipelines.
• Systems Integration. Our Systems Integration segment provides design
and implementation services for customer telecommunications systems.
Solutions are delivered based on the customer's specifications,
adhering to international industry standards and best practices.
Project services may include consulting, design, engineering, project
management, procurement, testing, installation, commissioning and
maintenance. Additionally, Systems Integration provides complete
monitoring and maintenance for fire and gas detection systems and
PLC/automation control systems.
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Customers in our MCS and Apps & IoT segments are primarily served under fixed-price contracts, either on a monthly or day rate basis or for equipment sales. Our contracts are generally in the form of Master Service Agreements, or MSAs, with specific services being provided under individual service orders. Offshore contracts generally have a term of up to five years with renewal options. Land-based contracts are generally shorter term or terminable on short notice without a penalty. Service orders are executed under the MSA for individual remote sites or groups of sites, and generally permit early termination on short notice without penalty in the event of force majeure, breach of the MSA or cold stacking of a drilling rig (when a rig is taken out of service and is expected to be idle for a protracted period of time). Systems Integration customers are served primarily under fixed-price, long-term contracts.
Cost of revenue consists primarily of satellite charges, voice and data
termination costs, network operations expenses, internet connectivity fees,
equipment purchases for Systems Integration projects and direct service labor.
Satellite charges consist of the costs associated with obtaining satellite
bandwidth (the measure of capacity) used in the transmission of service to and
from contracted satellites. Direct service labor consists of field technicians,
our
Profitability generally increases or decreases at an MCS site as we add or lose customers and value-added services. Assumptions used in developing the rates for a site may not cover cost variances from inherent uncertainties or unforeseen obstacles, including both physical conditions and unexpected problems encountered with third-party service providers.
Recent Developments
The COVID-19 pandemic combined with an oversupply in the oil markets has caused
On
As of
In
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The amount eligible for forgiveness may be reduced if, among other things, we
reduce our full-time headcount or we reduce salaries and wages beyond certain
limits. While we expects all
Any amounts not forgiven must be repaid in two years and accrue interest at a
rate of 1.0% per year. No interest or principal payments are due for six
months, at which time interest and principal payments will be made on any
unforgiven balance under terms established by
Known Trends and Uncertainties
Operating Matters
Starting in the first quarter of 2020, we and our customers were adversely
impacted by the COVID-19 pandemic. We and our customers have had to close
certain offices and have certain employees work from home. Our customers have
had certain of their work sites for large projects closed and are operating
certain sites with only essential employees. Global economic activity and the
oil and gas industry declined substantially in the first quarter of 2020. Travel
to and from remote locations has been restricted and in some cases, suspended.
The global oil industry we serve has experienced reduced demand and furloughs as
a result. Furthermore, in
Uncertainties in the oil and gas industry will continue to impact our profitability. The fundamentals of the oil and gas industry we serve are expected to remain challenged throughout 2020. Many oil and gas companies have already cut their capital expenditures budget significantly, reduced and/or furloughed their workforces, and delayed decisions on future projects or canceled them altogether. During 2020, we expect both onshore and offshore drilling activity to decline compared to both the previous year and the previous forecast. SI project decision-making is likely to slow and construction on existing projects maybe be suspended or delayed due to the impacts of COVID-19. Finally, while our Apps & IoT segment may also be impacted, we believe our products provide much-needed solutions that enable our customers to be more productive, efficient, safe, and financially competitive.
In response to this rapidly changing environment,
In addition, uncertainties that could impact our profitability include service responsiveness to remote locations, communication network complexities, political and economic instability in certain regions, cyber-attacks, export restrictions, licenses and other trade barriers. These uncertainties may result in the delay of service initiation, which may negatively impact our results of operations. Additional uncertainties that could impact our operating cash flows include the availability and cost of satellite bandwidth, timing of collecting our receivables, and our ability to increase our contracted services through sales and marketing efforts while leveraging the contracted satellite and other communication service costs. We believe these trends have made lenders more reluctant to provide financing to companies operating in and serving the oil and gas industry. We may be unable to access additional credit to fund ongoing operations.
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Sales Tax Audit
We are undergoing a routine sales tax audit from a state where we have operations. The audit can cover up to a four-year period. We are in the early stages of the audit and do not have any estimates of further exposure, if any, for the tax years under review.
Results of Operations
The following table sets forth selected financial and operating data for the
periods indicated.
Three Months Ended
March 31,
2020 2019
(in thousands)
Revenue $ 58,761 $ 57,510
Expenses:Cost of revenue (excluding depreciation and amortization) 37,950 36,456
Depreciation and amortization 6,931 8,912 Impairment of goodwill 23,141 - Selling and marketing 2,812 3,793 General and administrative 13,829 16,470 Total expenses 84,663 65,631 Operating loss (25,902 ) (8,121 ) Other expense, net (1,849 ) (1,166 ) Loss before income taxes (27,751 ) (9,287 ) Income tax benefit (expense) 980 (2,666 ) Net loss (26,771 ) (11,953 ) Less: Net income attributable to non-controlling interest 70 30
Net loss attributable to
Other Non-GAAP Data: Adjusted EBITDA$ 8,351 $ 8,386 26
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The following represents selected financial operating results for our segments:
Three Months Ended
March 31,
2020 2019
(in thousands)Managed Communications Services:
Revenue$ 39,896 $ 42,333
Cost of revenue (excluding depreciation and amortization) 25,502 26,985
Depreciation and amortization 4,659 6,264 Impairment of goodwill 21,755 - Selling, general and administrative 2,807 3,797
Managed Communication Services operating income (loss)
Applications and Internet-of-Things:
Revenue$ 8,743 $ 8,015
Cost of revenue (excluding depreciation and amortization) 4,561 4,497
Depreciation and amortization 1,182 1,231 Impairment of goodwill - - Selling, general and administrative 1,620 565
Applications & Internet-of-Things operating income
Systems Integration:
Revenue$ 10,122 $ 7,162
Cost of revenue (excluding depreciation and amortization) 7,887 4,974
Depreciation and amortization 164 662 Impairment of goodwill 1,386 - Selling, general and administrative 404 1,124
Systems Integration and Automation operating income
Three Months Ended
Revenue. Revenue increased by
Cost of Revenue (excluding depreciation and amortization). Cost of revenue
(excluding depreciation and amortization) increased by
Depreciation and Amortization. Depreciation and amortization expense decreased
by
Impairment of
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Selling and Marketing. Selling and marketing expenses decreased
General and Administrative. General and administrative expenses decreased by
Income Tax Expense. Our effective income tax rates were 3.5% and (28.7%) for the
three months ended
Liquidity and Capital Resources
At
During the next twelve months, we expect our principal sources of liquidity to be cash flows from operating activities, the PPP Loan, cash and cash equivalents on hand. We believe we have sufficient liquidity and capital resources to meet our current operating requirements and any growth plans. We may elect to pursue expansion opportunities within the next year, which could require additional financing, either equity or debt, however, we acknowledge additional opportunity for borrowing will be limited. Additionally, during the COVID-19 pandemic and reduction of oil and gas activity, the company has cut spend including board, executive, and employee pay, professional fees, capital expenditures and other operating costs.
Beyond the next twelve months, we expect our principal sources of liquidity to be cash flows provided by operating activities, cash and cash equivalents on hand, availability under our Credit Agreement and additional financing activities we may pursue, which may include debt or equity offerings.
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