The accompanying notes are an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
The accompanying notes are an integral part of the condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The
interim unaudited condensed consolidated financial statements of RigNet, Inc. (the Company or RigNet) include all adjustments which, in the opinion of management, are necessary for a fair presentation of the Companys financial position and
results of operations. All such adjustments are of a normal recurring nature. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Rule
10-01 of Regulation S-X. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Estimates and assumptions about
future events and their effects cannot be perceived with certainty. Estimates may change as new events occur, as more experience is acquired, as additional information becomes available and as the Companys operating environment changes. Actual
results could differ from estimates. These interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016 included in the Companys Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 6, 2017.
Significant Accounting Policies
Please refer to RigNets Annual Report on Form 10-K for fiscal year 2016 for information regarding the Companys accounting policies.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from
Contracts with Customers (Topic 606). The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards Update No. 2015-14 (ASU 2015-14), Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. In March
2016, the FASB issued Accounting Standards Update No. 2016-08 (ASU 2016-08), Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the
implementation guidance on principal versus agent considerations. In April and May of 2016, the FASB issued Accounting Standards Update No. 2016-10 (ASU 2016-10) and Accounting Standards Update No. 2016-12 (ASU 2016-12), Revenue from
Contracts with Customers (Topic 606), respectively, that provide scope amendments, performance obligations clarification and practical expedients. These ASUs allow for the use of either the full or modified retrospective transition method and are
effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period. The Company will adopt this ASU on January 1, 2018. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases. This ASU is effective for annual
reporting periods beginning after December 15, 2018. This ASU introduces a new lessee model that generally brings leases on the balance sheet. The Company is currently in the process of evaluating the impact the adoption of this ASU will have
on the Companys condensed consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update
No. 2016-09 (ASU 2016-09), Share Based Compensation. The new ASU simplifies several aspects of share based compensation including income tax consequences, classification of awards as either equity or liabilities, and classification on the
statement of cash flows. This ASU is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company adopted ASU 2016-09 in the second quarter of 2016 and has applied the guidance as of
January 1, 2016. The adoption of this ASU did not have a material impact on the Companys condensed consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15 (ASU 2016-15), Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments. The new ASU reduces diversity of practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows,
and other Topics, including the treatment of contingent consideration payments made after a business combination. The ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The
Company is currently in the process of evaluating the impact the adoption of this ASU will have on the Companys condensed consolidated financial statements.
7
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In November 2016, the FASB issued Accounting Standards Update No. 2016-18 (ASU 2016-18),
which includes restricted cash in the cash and cash equivalents balance in the statement of cash flows. The ASU is effective for annual and interim reporting periods beginning after December 15, 2017. The Company is currently in the process of
evaluating the impact the adoption of this ASU will have on the Companys consolidated financial statements.
Note 2 Business
Combinations
Energy Satellite Services
On July 28, 2017, RigNet acquired substantially all the assets of Energy Satellite Services (ESS). ESS is a supplier of wireless
communications services via satellite networks primarily to the midstream sector of the oil and gas industry. The assets acquired enhance RigNets product offering, add to the Companys existing midstream Supervisory Control and Data
Acquisition (SCADA) customer portfolio, and strengthen the Companys US land and Internet-of-Things (IoT) market position. The Company has paid approximately $22.2 million in cash for the ESS assets. ESS is based in Texas.
For the six months ended June 30, 2017, RigNet incurred $0.2 million, of acquisition-related costs, which are reported as general and
administrative expense in the Companys Condensed Consolidated Statements of Comprehensive Loss. Additional costs related to this acquisition will be incurred and recorded as expense during the remainder of 2017.
Due to the limited time since the acquisition date, the initial purchase accounting for the business combination is incomplete at this time.
As a result, the Company is unable to provide amounts recognized as of the acquisition date for major classes of assets and liabilities acquired and resulting from the transaction, including any intangible assets or goodwill. The Company is also
unable to provide supplemental pro forma revenue and earnings of the combined entity. This information will be included in the Companys Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017.
Data Technology Solutions Acquisition
On July 24, 2017, RigNet acquired substantially all the assets of Data Technology Solutions (DTS). DTS provides comprehensive
communications and IT services to the onshore, offshore, and maritime industries, as well as disaster relief solutions to global corporate clients. The Company has paid approximately $5.2 million in cash for the DTS assets. DTS is based in
Louisiana.
For the six months ended June 30, 2017, RigNet incurred $0.1 million, of acquisition-related costs, which are reported as
general and administrative expense in the Companys Condensed Consolidated Statements of Comprehensive Loss. Additional costs related to this acquisition will be incurred and recorded as expense during the remainder of 2017.
Due to the limited time since the acquisition date, the initial purchase accounting for the business combination is incomplete at this time.
As a result, the Company is unable to provide amounts recognized as of the acquisition date for major classes of assets and liabilities acquired and resulting from the transaction, including any intangible assets or goodwill. The Company is also
unable to provide supplemental pro forma revenue and earnings of the combined entity. This information will be included in the Companys Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017.
Cyphre Security Solutions
On May 18, 2017, RigNet completed its acquisition of Cyphre Security Solutions (Cyphre) for an estimated aggregate purchase price of $12.0
million. Of this aggregate purchase price, RigNet paid $4.9 million in cash in May 2017, $3.3 million in stock and expects to pay $3.8 million of contingent consideration for intellectual property, estimated as of the date of acquisition. The
initial estimate of the contingent consideration for intellectual property is preliminary and remains subject to change based on certain post-closing contractual options under the acquisition agreement. Cyphre is a cybersecurity company that
provides advanced enterprise data protection leveraging BlackTIE
®
hardware-based encryption featuring low latency protection for files at rest and in transit for both public and private
cloud. Cyphre is based in Texas.
The contingent consideration for Cyphre is measured at fair value, based on level 3 inputs, with
any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period. As of June 30, 2017, the fair value of the contingent consideration was $3.8 million. During the three and six months
ended June 30, 2017, RigNet recognized accreted interest expense on the Cyphre contingent consideration of $0.1 million with corresponding increases to other liabilities.
8
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The assets and liabilities of Cyphre have been recorded at their estimated fair values at the
date of acquisition. The excess of the purchase price over the estimated fair values of the underlying net tangible and identifiable intangible assets and liabilities has been recorded as goodwill.
The goodwill of $4.6 million arising from the acquisition consists largely of growth prospects, synergies and other benefits that the Company
believes will result from combining the operations of the Company and Cyphre, as well as other intangible assets that do not qualify for separate recognition, such as assembled workforce in place at the date of acquisition. The goodwill recognized
is expected to be deductible for income tax purposes. The acquisition of Cyphre, including goodwill, is included in the Companys condensed consolidated financial statements as of the acquisition date and is reflected in the Managed Services
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Estimated Useful
Life (Years)
|
|
|
Fair Market Values
|
|
|
|
|
|
|
(in thousands)
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
$
|
18
|
|
Trade Name
|
|
|
7
|
|
|
|
1,590
|
|
|
|
|
|
Technology
|
|
|
7
|
|
|
|
5,571
|
|
|
|
|
|
Customer Relationships
|
|
|
7
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
|
|
|
|
|
|
|
|
|
7,493
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
4,591
|
|
Accrued Expenses
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
|
|
|
|
$
|
12,002
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes a $3.8 million contingent consideration, estimated as of the date of acquisition.
|
For
the six months ended June 30, 2017, RigNet incurred $0.4 million, of acquisition-related costs, which are reported as general and administrative expense in the Companys Condensed Consolidated Statements of Comprehensive Loss.
Actual and Pro Forma Impact of the Cyphre Acquisition
Cyphres revenue and net loss were zero and $0.3 million, respectively, for the three and six months ended June 30, 2017.
The Pro forma impact of the Cyphre acquisition was immaterial.
TECNOR
On
February 4, 2016, RigNet completed its acquisition of Orgtec S.A.P.I. de C.V., d.b.a. TECNOR (TECNOR) for an estimated aggregate purchase price of $11.4 million. Of this aggregate purchase price, RigNet paid $4.8 million in cash in February
2016, paid $0.1 million for final net working capital and expected to pay a $6.5 million contingent consideration earn-out, estimated as of the date of acquisition. The initial estimate of the earn-out payable was preliminary and remains subject to
change based on the achievement of certain post-closing performance targets under the acquisition agreement. The maximum earn-out is $21.3 million. TECNOR provides telecommunications solutions for remote sites on land, sea and air, including a wide
array of equipment, voice and data services, satellite coverage and bandwidth options in Mexico. These services are provided to industrial, commercial and private users in diverse activity segments including mission critical military and government
applications, oil and gas operations, commercial fishing and leisure. TECNOR is based in Monterrey, Mexico.
The assets and
liabilities of TECNOR have been recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the underlying net tangible and identifiable intangible assets and liabilities has
been recorded as goodwill.
The earn-out for TECNOR is measured at fair value, based on level 3 inputs, with any change to fair value
recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period. As of June 30, 2017, the fair value of the earn-out was $5.1 million. There was a $0.8 million reduction in fair value to the TECNOR earn-out for
the three and six months ended June 30, 2017 recorded as a reduction of other current liabilities and a decrease to general and administrative expense in the Corporate segment. The change in fair value was due to a forecast of TECNORs
future achievement of the post-closing performance targets. During the three and six months ended June 30, 2017, RigNet recognized accreted interest expense on the TECNOR earn-out liability of $0.1 million and $0.2 million, respectively, with
corresponding increases to other current liabilities. The earn-out is payable in 2018.
9
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The goodwill of $6.5 million arising from the acquisition consists largely of growth
prospects, synergies and other benefits that the Company believes will result from combining the operations of the Company and TECNOR, as well as other intangible assets that do not qualify for separate recognition, such as assembled workforce in
place at the date of acquisition. None of the goodwill recognized is expected to be deductible for income tax purposes. The acquisition of TECNOR, including goodwill, is included in the Companys condensed consolidated financial statements as
of the acquisition date and is reflected in the Managed Services segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Estimated Useful
Life (Years)
|
|
|
Fair Market Values
|
|
|
|
(in thousands)
|
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
$
|
2,672
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
1,280
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
|
809
|
|
Backlog
|
|
|
2
|
|
|
|
366
|
|
|
|
|
|
Customer Relationships
|
|
|
7
|
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
|
|
|
|
|
|
|
|
|
2,576
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
6,465
|
|
Accounts Payable
|
|
|
|
|
|
|
|
|
|
|
(1,914
|
)
|
Accrued Expenses
|
|
|
|
|
|
|
|
|
|
|
(494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
|
|
|
|
$
|
11,394
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes a $6.5 million contingent consideration earn-out, estimated as of the date of acquisition.
|
For the three and six months ended June 30, 2016, RigNet incurred $0.1 million and $0.2 million, respectively, of acquisition-related
costs, which are reported as general and administrative expense in the Companys Condensed Consolidated Statements of Comprehensive Loss.
Actual and Pro Forma Impact of the TECNOR Acquisition
TECNORs revenue and net income were $3.0 million and $0.2 million, respectively, for the three months ended June 30, 2016.
TECNORs revenue and net income were $5.1 million and $0.6 million, respectively, for the six months ended June 30, 2016.
The
following table represents supplemental pro forma information as if the TECNOR acquisition had occurred on January 1, 2016. Pro forma adjustments include:
|
|
|
Adjusting interest expense to remove interest on a debt instrument previously held by TECNOR; and
|
|
|
|
Removing nonrecurring transaction costs incurred in 2016 prior to acquisition.
|
10
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
118,287
|
|
Expenses
|
|
|
124,207
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,920
|
)
|
|
|
|
|
|
Net loss attributable to
RigNet, Inc. common stockholders
|
|
$
|
(5,881
|
)
|
|
|
|
|
|
Net loss per share attributable to
RigNet, Inc. common stockholders:
|
|
|
|
|
Basic
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
Diluted
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
Note 3 Business and Credit Concentrations
The Company is exposed to various business and credit risks including interest rate, foreign currency, credit and liquidity risks.
Interest Rate Risk
The Company has significant interest-bearing liabilities at variable interest rates which generally price monthly. The Companys variable
borrowing rates are tied to LIBOR resulting in interest rate risk (see Note 6 Long-Term Debt). The Company presently does not use financial instruments to hedge interest rate risk, but evaluates this on a regular basis and may utilize
financial instruments in the future if deemed necessary.
Foreign Currency Risk
The Company has exposure to foreign currency risk, as a portion of the Companys activities are conducted in currencies other than U.S.
dollars. Currently, the Norwegian kroner and the British pound sterling are the currencies that could materially impact the Companys financial position and results of operations. The Company presently does not hedge these risks, but evaluates
financial risk on a regular basis and may utilize financial instruments in the future if deemed necessary. Foreign currency translations are reported as accumulated other comprehensive loss in the Companys condensed consolidated financial
statements.
Credit Risk
Credit risk, with respect to accounts receivable, is due to the limited number of customers concentrated in the oil and gas industry. The
Company mitigates the risk of financial loss from defaults through defined collection terms in each contract or service agreement and periodic evaluations of the collectability of accounts receivable. The Company provides an allowance for doubtful
accounts which is adjusted when the Company becomes aware of a specific customers inability to meet its financial obligations or as a result of changes in the overall aging of accounts receivable.
Liquidity Risk
The Company maintains cash and cash equivalent balances with major financial institutions which, at times, exceed federally insured limits. The
Company monitors the financial condition of the financial institutions and has not experienced losses associated with these accounts during 2017 or 2016. Liquidity risk is managed by continuously monitoring forecasted and actual cash flows and by
matching the maturity profiles of financial assets and liabilities (see Note 6 Long-Term Debt).
11
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Goodwill and Intangibles
Goodwill
Goodwill
resulted from prior acquisitions as the consideration paid for the acquired businesses exceeded the fair value of acquired identifiable net tangible and intangible assets. Goodwill is reviewed for impairment at least annually with additional
evaluations being performed when events or circumstances indicate that the carrying value of these assets may not be recoverable.
The
Company acquired $4.6 million of goodwill in the Cyphre acquisition completed on May 18, 2017 (see Note 2 Business Combinations).
The Company acquired $6.5 million of goodwill in the TECNOR acquisition completed on February 4, 2016 (see Note 2 Business
Combinations).
The Company performs its annual impairment test on July 31
st
of
each year, with the most recent annual test being performed as of July 31, 2016. The July 2016 annual test resulted in no impairment as the fair value of each reporting unit exceeded the carrying value plus goodwill of that reporting unit. No
impairment indicators have been identified in any reporting unit as of June 30, 2017 and December 31, 2016.
As of June 30,
2017 and December 31, 2016, goodwill was $27.3 million and $22.0 million, respectively. Goodwill increases or decreases in value due to the effect of foreign currency translation, and increases with acquisitions.
Intangibles
Intangibles consist of customer relationships, brand name, technology, backlog and licenses acquired as part of the Companys
acquisitions. Intangibles also include internal-use software. The Companys intangibles have useful lives ranging from 1.7 to 7.0 years and are amortized on a straight-line basis. Impairment testing is performed when events or circumstances
indicate that the carrying value of the assets may not be recoverable.
In June 2016, the Company identified a triggering event for a
license in Kazakhstan associated with a decline in cash flow projections. In June 2016, the Company conducted an intangibles impairment test and as a result of such test, recognized a $0.4 million impairment of licenses in the Corporate segment,
which was the full amount of the Companys intangibles within Kazakhstan.
No impairment indicators have been identified in any
reporting unit as of June 30, 2017.
As of June 30, 2017 and December 31, 2016, intangibles were $20.9 million and $16.0
million, respectively. During the three months ended June 30, 2017 and 2016, the Company recognized amortization expense of $1.5 million and $1.3 million, respectively. During the six months ended June 30, 2017 and 2016, the Company
recognized amortization expense of $2.8 million and $2.6 million, respectively.
The following table sets forth expected amortization
expense of intangibles for the remainder of 2017 and the following years (in thousands):
|
|
|
|
|
2017
|
|
|
2,630
|
|
2018
|
|
|
4,984
|
|
2019
|
|
|
3,974
|
|
2020
|
|
|
3,065
|
|
2021
|
|
|
2,772
|
|
Thereafter
|
|
|
3,519
|
|
|
|
|
|
|
|
|
$
|
20,944
|
|
|
|
|
|
|
Note 5 Restricted Cash
As of June 30, 2017, the Company had restricted cash of $0.1 million and $1.5 million, in current and long-term assets, respectively. As
of December 31, 2016, the Company had restricted cash of $0.1 million and $1.5 million, in current and long-term assets, respectively. The restricted cash in long-term assets was primarily used to collateralize a performance bond in the Managed
12
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Services segment (see Note 6 Long-Term Debt). The restricted cash in current assets as of December 31, 2016 was an escrowed portion of the purchase price for the acquisition of
TECNOR.
Note 6 Long-Term Debt
As of June 30, 2017 and December 31, 2016, the following credit facilities and long-term debt arrangements with financial
institutions were in place:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Term loan, net of unamortized deferred financing costs
|
|
$
|
29,859
|
|
|
$
|
34,053
|
|
Revolving loan
|
|
|
17,000
|
|
|
|
27,000
|
|
Capital lease
|
|
|
257
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,116
|
|
|
|
61,468
|
|
Less: Current maturities of long-term debt
|
|
|
(8,412
|
)
|
|
|
(8,399
|
)
|
Current maturities of capital lease
|
|
|
(134
|
)
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,570
|
|
|
$
|
52,990
|
|
|
|
|
|
|
|
|
|
|
Term Loan
The Company has a term loan (Term Loan) issued under the second amended and restated credit agreement with four participating financial
institutions (credit agreement). On October 3, 2013, the Company amended its Term Loan, which increased the principal balance to $60.0 million from $54.6 million and extended the maturity of the loan from July 2017 to October 2018.
The amended Term Loan bears an interest rate of LIBOR plus a margin ranging from 1.5% to 2.5% based on a ratio of funded debt to Consolidated
EBITDA, a non-GAAP financial measure as defined in the credit agreement. Interest is payable monthly along with quarterly principal installments of $2.1 million, with the balance due October 2018. The weighted average interest rate for the three
months ended June 30, 2017 and 2016 was 3.1% and 2.4%, respectively. The weighted average interest rate for the six months ended June 30, 2017 and 2016 was 3.1% and 2.3%, respectively, with an interest rate of 3.2% at June 30, 2017.
The Term Loan is secured by substantially all the assets of the Company. As of June 30, 2017, the Term Loan had an outstanding
principal balance of $30.0 million.
Revolving Loans
Under the credit agreement, the Company maintains a $75.0 million revolving credit facility, which includes a $15 million sublimit for the
issuance of standby letters of credit. As of June 30, 2017, $17.0 million in draws remain outstanding on the revolving credit facility. The revolving credit facility matures in October 2018 with any outstanding borrowings then payable. As of
June 30, 2017, there were $6.3 million in standby letters of credit issued.
The revolving loan bears an interest rate of LIBOR plus
a margin ranging from 1.5% to 2.5% based on a ratio of funded debt to Consolidated EBITDA, a non-GAAP financial measure as defined in the credit agreement. The weighted average interest rate for the three months ended June 30, 2017 and 2016 was
3.1% and 2.3%, respectively. The weighted average interest rate for the six months ended June 30, 2017 and 2016 was 3.1% and 2.3%, respectively, with an interest rate of 3.2% at June 30, 2017.
Performance Bonds
On September 14, 2012, NesscoInvsat Limited, a subsidiary of RigNet, secured a performance bond facility with a lender in the amount of
£4.0 million, or $5.2 million. This facility has a maturity date of October 3, 2018. As of June 30, 2017, the amount available under this facility was £2.0 million or $2.6 million. As of June 30, 2017, there were
$5.6 million in standby letters of credit issued to collateralize this performance bond facility.
13
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In June 2016, the Company secured a performance bond facility with a lender in the amount of
$1.5 million for its Managed Services segment. This facility has a maturity date of June 2021. The Company maintains restricted cash on a dollar for dollar basis to secure this facility.
Covenants and Restrictions
The Companys credit agreement contains certain covenants and restrictions, including restricting the payment of cash dividends and
maintaining certain financial covenants such as a ratio of funded debt to Consolidated EBITDA, a non-GAAP financial measure as defined in the credit agreement, of less than or equal to 2.5 to 1.0 and a fixed charge coverage ratio of not less than
1.25 to 1.0 as of June 30, 2017. If any default occurs related to these covenants, the unpaid principal and any accrued interest shall be declared immediately due and payable. As of June 30, 2017, and December 31, 2016, the Company
believes it was in compliance with all covenants in the credit agreement.
In February 2016, the Company amended its credit agreement with
the most significant changes being the definition of Consolidated EBITDA, the calculation of the fixed charge coverage ratio and the timing associated with delivery of financial statements and compliance certificates to the administrative
agent.
In December 2016, the Company further amended its credit agreement with the most significant changes being voluntarily reducing
the revolving credit facility from $125 million to $75 million and changing the definition of Consolidated EBITDA and certain other definitions contained in the credit agreement.
Debt Maturities
The following table sets forth the aggregate principal maturities of long-term debt, net of deferred financing cost amortization for the
remainder of 2017 and the following years (in thousands):
|
|
|
|
|
2017
|
|
|
4,269
|
|
2018
|
|
|
42,771
|
|
2019
|
|
|
76
|
|
|
|
|
|
|
Total debt, including current maturities
|
|
$
|
47,116
|
|
|
|
|
|
|
Note 7 Fair Value Disclosures
The Company uses the following methods and assumptions to estimate the fair value of financial instruments:
|
|
|
Cash and Cash Equivalents
Reported amounts approximate fair value based on quoted market prices (Level 1).
|
|
|
|
Restricted Cash
Reported amounts approximate fair value.
|
|
|
|
Accounts Receivable
Reported amounts, net of the allowance for doubtful accounts, approximate fair value due to the short-term nature of these assets.
|
|
|
|
Accounts Payable, Including Income Taxes Payable and Accrued Expenses
Reported amounts approximate fair value due to the short-term nature of these liabilities.
|
|
|
|
Long-Term Debt
The carrying amount of the Companys floating-rate debt approximates fair value since the interest rates paid are based on short-term maturities and recent quoted rates from financial
institutions. The estimated fair value of debt was calculated based upon observable (Level 2) inputs regarding interest rates available to the Company at the end of each respective period.
|
The Companys non-financial assets, such as goodwill, intangibles and property, plant and equipment, are measured at fair value, based on
level 3 inputs, when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.
The
contingent consideration for Cyphre is measured at fair value, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period. As of June 30, 2017, the
fair value of the contingent consideration was $3.8 million. During the three and six months ended June 30, 2017, RigNet recognized accreted interest expense on the Cyphre contingent consideration of $0.1 million with corresponding increases to
other liabilities.
14
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The earn-out for TECNOR is measured at fair value, based on level 3 inputs, with any change
to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period. As of June 30, 2017, the fair value of the earn-out was $5.1 million. As of December 31, 2016, the fair value of the earn-out
was $5.7 million. There was a $0.8 million reduction in fair value to the TECNOR earn-out for the three and six months ended June 30, 2017 recorded as a reduction of other current liabilities and a decrease to general and administrative expense
in the Corporate segment. The change in fair value was due to a forecast of TECNORs future achievement of the post-closing performance targets. During the three and six months ended June 30, 2017, RigNet recognized accreted interest
expense on the TECNOR earn-out liability of $0.1 million and $0.2 million, respectively, with corresponding increases to other liabilities. (see Note 2 Business Combinations).
Note 8 Income Taxes
The
Companys effective income tax rate was 2.3% and (5.3%) for the three and six months ended June 30, 2017, respectively. The Companys effective income tax rate was (34.1%) and (53.6%) for the three and six months ended
June 30, 2016, respectively. The Companys effective tax rate is affected by factors including changes in valuation allowances, fluctuations in income across jurisdictions with varying tax rates, and changes in income tax reserves,
including related penalties and interest.
The Company has computed the provision for taxes for the current and comparative periods using
the actual year-to-date effective tax rate. The Companys financial projections for those periods did not provide the level of detail necessary to calculate a forecasted effective tax rate.
The Company believes that it is reasonably possible that a decrease of up to $3.1 million in unrecognized tax benefits, including related
interest and penalties, may be necessary within the coming year due to lapse in statute of limitations.
Note 9 Stock-Based Compensation
During the six months ended June 30, 2017, the Company granted a total of 226,974 restricted stock units (RSUs) to certain
directors, officers and employees of the Company under the 2010 Omnibus Incentive Plan (2010 Plan). Of these, the Company granted (i) 125,852 RSUs to certain officers and employees that generally vest over a four year period of continued
employment, with 25% of the RSUs vesting on each of the first four anniversaries of the grant date, (ii) 33,586 RSUs issued to directors that vest in May 2018 and (iii) 67,536 performance share units (PSUs) to certain officers and
employees that generally cliff vest on the third anniversary of the grant date and are subject to continued employment and certain performance based targets. The ultimate number of PSUs issued is based on a multiple determined by certain performance
based targets.
The fair value of restricted stock units is determined based on the closing trading price of the Companys common
stock on the grant date of the award. Compensation expense is recognized on a straight-line basis over the requisite service period of the entire award.
During the six months ended June 30, 2017, 63,293 RSUs and 20,863 stock options were forfeited.
Stock-based compensation expense related to the Companys stock-based compensation plans for the six months ended June 30, 2017 and
2016 was $1.9 million and $1.8 million, respectively. As of June 30, 2017, there was $9.5 million of total unrecognized compensation cost related to unvested options and restricted stock expected to vest. This cost is expected to be recognized
over a remaining weighted-average period of 2.1 years.
Note 10 Earnings (loss) per Share
Basic earnings (loss) per share (EPS) are computed by dividing loss attributable to RigNet common stockholders by the number of basic shares
outstanding. Basic shares equal the total of the common shares outstanding, weighted for the average days outstanding for the period. Basic shares exclude the dilutive effect of common shares that could potentially be issued due to the exercise of
stock options or vesting of restricted stock and RSUs. Diluted EPS is computed by dividing loss attributable to RigNet common stockholders by the number of diluted shares outstanding. Diluted shares equal the total of the basic shares outstanding
and all potentially issuable shares, other than antidilutive shares, if any, weighted for the average days outstanding for the period. The Company uses the treasury stock method to determine the dilutive effect. In periods when a net loss is
reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported, basic and dilutive loss per share
are the same.
15
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2017, there were approximately 541,964 and
575,214 potentially issuable shares, respectively, excluded from the Companys calculation of diluted EPS that were excluded because the Company incurred a loss in the period and to include them would have been anti-dilutive.
For the three and six months ended June 30, 2016, there were approximately 1,591,554 and 1,309,565 potentially issuable shares,
respectively, excluded from the Companys calculation of diluted EPS that were excluded because the Company incurred a loss in the period and to include them would have been anti-dilutive.
Note 11 Commitments and Contingencies
Global Xpress (GX) Dispute
Inmarsat plc (Inmarsat), a satellite telecommunications company, and the Company are in a dispute relating to a January 2014 agreement
regarding the purchase by the Company of up to $65.0 million, under certain conditions, of GX capacity from Inmarsat over several years (GX dispute). The parties are attempting to resolve the GX dispute through a contractually stipulated arbitration
process that began in October 2016. The parties dispute whether Inmarsat has met its contractual obligations with respect to the service under the agreement. In July 2017, pursuant to its contractual rights under the agreement, the Company
delivered a notice of termination of the agreement to Inmarsat.
The Company has incurred legal expenses of $0.5 million in connection
with the GX dispute for the six months ended June 30, 2017. The Company may continue to incur significant legal fees, related expenses and management time in the future. The Company cannot predict the ultimate outcome of the GX dispute, the
total costs to be incurred or the potential impact on personnel.
Based on the information available at this time and managements
understanding of the GX dispute, the Company does not deem the likelihood of a material loss related to this dispute to be probable, so it has not accrued any liability related to the dispute. At this stage of the arbitration, the range of
possible loss is not reasonably estimable, but could range from zero to the maximum amount payable under the contract for the services plus expenses.
Other Litigation
The Company, in the ordinary course of business, is a claimant or a defendant in various legal proceedings, including proceedings as to which
the Company has insurance coverage and those that may involve the filing of liens against the Company or its assets.
Sales Tax
Audit
The company is undergoing a routine sales tax audit in a state where it has operations for the period from August of 2011 to
May of 2015. It is expected that the audit and the appeals process, if necessary, will be completed within the next nine months. The Company does not believe that the outcome of the audit will result in a material impact to the consolidated
financial statements.
Contractual Dispute Settlement
The Companys Systems Integration and Automation (SI&A) business reached a settlement in the first quarter of 2016 related to a
contract dispute associated with a percentage of completion project. The dispute related to the payment for work related to certain change orders. After the settlement, the Company recognized $2.3 million of gain in the first quarter of 2016. In the
Companys Annual Report on form 10-K for the year ended December 31, 2016, the Company reported that it had received the certificate of final acceptance from the customer acknowledging completion of the project. The total loss incurred
over the life of this project amounted to $11.2 million.
The Company incurred legal expenses of $0.2 million in connection with the
dispute for the six months ended June 30, 2016.
16
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Operating Leases
The Company leases office space under lease agreements expiring on various dates through 2025. For the three months ended June 30, 2017
and 2016, the Company recognized expense under operating leases of $1.0 million and $1.0 million, respectively. For the six months ended June 30, 2017 and 2016, the Company recognized expense under operating leases of $2.0 million and $2.1
million, respectively.
As of June 30, 2017, future minimum lease obligations for the remainder of 2017 and future years were as
follows (in thousands):
|
|
|
|
|
2017
|
|
|
1,618
|
|
2018
|
|
|
1,650
|
|
2019
|
|
|
1,009
|
|
2020
|
|
|
740
|
|
2021
|
|
|
468
|
|
Thereafter
|
|
|
1,750
|
|
|
|
|
|
|
|
|
$
|
7,235
|
|
|
|
|
|
|
Commercial Commitments
The Company enters into contracts for satellite bandwidth and other network services with certain providers.
As of June 30, 2017, the Company had the following commercial commitments related to satellite and network services for the remainder of
2017 and the future years thereafter (in thousands):
|
|
|
|
|
2017
|
|
|
5,561
|
|
2018
|
|
|
5,440
|
|
2019
|
|
|
2,152
|
|
2020
|
|
|
693
|
|
2021
|
|
|
676
|
|
|
|
|
|
|
|
|
$
|
14,522
|
|
|
|
|
|
|
The Company is no longer reporting $65.0 million in the above table for capacity from Inmarsats GX
network. Please see paragraph GX Dispute above for details of the ongoing arbitration and the Companys notice to terminate the contract with Inmarsat.
Note 12 Segment Information
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.
The Company
previously operated under three reportable segments: Eastern Hemisphere, Western Hemisphere and Telecoms Systems Integration (TSI). During the fourth quarter of 2016 the Company reorganized its business and reportable segments on a basis consistent
with the revenue streams. The former TSI segment was renamed the Systems Integration and Automation (SI&A) segment. The Managed Services segment consists of the remote communication services that were common between the former Eastern Hemisphere
and Western Hemisphere segments as well as certain global Managed Services specific costs including the Network Operations Center (NOC) and engineering costs that in prior years were included in the Corporate segment. The Company now operates
Managed Services as one global segment. All historical segment financial data included herein has been recast to conform to the current year presentation.
17
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RigNet considers its business to consist of two segments:
|
|
|
Managed Services
.
The Managed Services segment provides remote communications and technology services for offshore and onshore drilling rigs and production facilities, support vessels,
midstream assets and other remote sites. The Managed Services segment primarily operates out of the Companys United States, United Kingdom, Norway, Qatar, UAE, Singapore, Brazil and Mexico based offices for customers globally.
|
|
|
|
Systems Integration and Automation (SI&A).
The SI&A segment provides customized solutions for customers telecommunications systems. SI&A solutions are delivered based on the
customers specifications, in addition to international industry standards and best practices. SI&A project elements may include consultancy services, design, engineering, project management, procurement, testing, installation,
commissioning and maintenance services. The SI&A segment primarily operates out of the Companys Aberdeen, Houston and Monterrey offices for customers globally.
|
Corporate and eliminations primarily represents unallocated corporate office activities, interest expense, income taxes and eliminations.
18
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Companys business segment information as of and for the three and six months ended
June 30, 2017 and 2016, is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
Managed
Services
|
|
|
Systems
Integration and
Automation
|
|
|
Corporate and
Eliminations
|
|
|
Consolidated
Total
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
43,055
|
|
|
$
|
6,107
|
|
|
$
|
|
|
|
$
|
49,162
|
|
Cost of revenue (excluding depreciation and amortization)
|
|
|
27,544
|
|
|
|
5,494
|
|
|
|
|
|
|
|
33,038
|
|
Depreciation and amortization
|
|
|
6,229
|
|
|
|
611
|
|
|
|
712
|
|
|
|
7,552
|
|
Selling, general and administrative
|
|
|
5,272
|
|
|
|
422
|
|
|
|
6,316
|
|
|
|
12,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
4,010
|
|
|
$
|
(420
|
)
|
|
$
|
(7,028
|
)
|
|
$
|
(3,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
4,266
|
|
|
|
|
|
|
|
645
|
|
|
|
4,911
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
Managed
Services
|
|
|
Systems
Integration and
Automation
|
|
|
Corporate and
Eliminations
|
|
|
Consolidated
Total
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
50,219
|
|
|
$
|
4,692
|
|
|
$
|
|
|
|
$
|
54,911
|
|
Cost of revenue (excluding depreciation and amortization)
|
|
|
29,682
|
|
|
|
3,594
|
|
|
|
|
|
|
|
33,276
|
|
Depreciation and amortization
|
|
|
7,585
|
|
|
|
9
|
|
|
|
1,419
|
|
|
|
9,013
|
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
397
|
|
|
|
397
|
|
Selling, general and administrative
|
|
|
7,635
|
|
|
|
721
|
|
|
|
7,163
|
|
|
|
15,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
5,317
|
|
|
$
|
368
|
|
|
$
|
(8,979
|
)
|
|
$
|
(3,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
4,020
|
|
|
|
|
|
|
|
650
|
|
|
|
4,670
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
Managed
Services
|
|
|
Systems
Integration and
Automation
|
|
|
Corporate and
Eliminations
|
|
|
Consolidated
Total
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
87,149
|
|
|
$
|
10,085
|
|
|
$
|
|
|
|
$
|
97,234
|
|
Cost of revenue (excluding depreciation and amortization)
|
|
|
54,346
|
|
|
|
8,567
|
|
|
|
|
|
|
|
62,913
|
|
Depreciation and amortization
|
|
|
12,260
|
|
|
|
1,198
|
|
|
|
1,410
|
|
|
|
14,868
|
|
Selling, general and administrative
|
|
|
10,237
|
|
|
|
892
|
|
|
|
12,829
|
|
|
|
23,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
10,306
|
|
|
$
|
(572
|
)
|
|
$
|
(14,239
|
)
|
|
$
|
(4,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
194,829
|
|
|
|
16,869
|
|
|
|
11,007
|
|
|
|
222,705
|
|
Capital expenditures
|
|
|
7,426
|
|
|
|
|
|
|
|
645
|
|
|
|
8,071
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
Managed
Services
|
|
|
Systems
Integration and
Automation
|
|
|
Corporate and
Eliminations
|
|
|
Consolidated
Total
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
104,640
|
|
|
$
|
12,612
|
|
|
$
|
|
|
|
$
|
117,252
|
|
Cost of revenue (excluding depreciation and amortization)
|
|
|
60,682
|
|
|
|
8,870
|
|
|
|
|
|
|
|
69,552
|
|
Depreciation and amortization
|
|
|
14,774
|
|
|
|
38
|
|
|
|
2,444
|
|
|
|
17,256
|
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
397
|
|
|
|
397
|
|
Selling, general and administrative
|
|
|
15,530
|
|
|
|
1,642
|
|
|
|
15,580
|
|
|
|
32,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
13,654
|
|
|
$
|
2,062
|
|
|
$
|
(18,421
|
)
|
|
$
|
(2,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
216,073
|
|
|
|
29,539
|
|
|
|
3,209
|
|
|
|
248,821
|
|
Capital expenditures
|
|
|
8,429
|
|
|
|
|
|
|
|
1,146
|
|
|
|
9,575
|
|
19
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenue earned from the Companys domestic and
international operations for the three and six months ended June 30, 2017 and 2016. Revenue is based on the location where services are provided or goods are sold. Due to the mobile nature of RigNets customer base and the services
provided, the Company works closely with its customers to ensure rig or vessel moves are closely monitored to ensure location of service information is properly reflected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Domestic
|
|
$
|
14,022
|
|
|
$
|
16,261
|
|
|
$
|
28,974
|
|
|
$
|
32,228
|
|
International
|
|
|
35,140
|
|
|
|
38,650
|
|
|
|
68,260
|
|
|
|
85,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,162
|
|
|
$
|
54,911
|
|
|
$
|
97,234
|
|
|
$
|
117,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents goodwill and long-lived assets, net of accumulated depreciation, for the
Companys domestic and international operations as of June 30, 2017 and December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Domestic
|
|
$
|
31,317
|
|
|
$
|
27,682
|
|
International
|
|
|
74,402
|
|
|
|
70,101
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
105,719
|
|
|
$
|
97,783
|
|
|
|
|
|
|
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Note 13 Restructuring Costs Cost Reduction Plans
During the three months ended June 30, 2016, the Company incurred pre-tax restructuring expense of $1.1 million in the corporate segment
consisting of $0.7 million of termination costs associated with the reduction of 26 employees and $0.4 million of exit costs from the corporate office lease. The termination costs are reported as $0.5 million and $0.2 million in general and
administrative expense and cost of revenue, respectively, in the Condensed Consolidated Statements of Comprehensive Income (Loss). The $0.4 million of exit costs from the lease for the corporate office are reported as general and administrative
expense in the Condensed Consolidated Statements of Comprehensive Income (Loss).
During the six months ended June 30, 2016, the
Company incurred net pre-tax restructuring expense of $0.5 million in the Corporate segment consisting of $0.4 million of exit costs from the corporate office lease and $0.9 million associated with the reduction of 42 employees partially offset by a
net reduction to restructuring charges of $0.8 million due to a reversal of previously accrued restructuring charges for employees that the Company did not release and expense not incurred. The Company undertook restructuring plans in 2016 to reduce
costs and improve the Companys competitive position.
Note 14 Executive Departure costs
Marty Jimmerson, the Companys former CFO, served as Interim CEO and President from January 7, 2016 to May 31, 2016, to replace
Mark Slaughter, the prior CEO and President. Mr. Jimmerson departed the Company on June 1, 2016. In connection with the departure of Mr. Slaughter, in the first quarter of 2016 the Company incurred a pre-tax executive departure
expense of $1.9 million in the Corporate segment. On May 31, 2016, Steven E. Pickett was named CEO and President of the Company.
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