NCS Multistage(NCSM) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the period ended September 30, 2022, show a net income of $4.0 million for Q3 2022, despite negative cash from operations for the nine-month period due to increased working capital Condensed Consolidated Balance Sheets Total assets decreased to $137.1 million as of September 30, 2022, from $142.3 million at year-end 2021, primarily due to a reduction in cash and cash equivalents Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $85,438 | $88,493 | | Total Assets | $137,148 | $142,325 | | Total Current Liabilities | $20,063 | $19,818 | | Total Liabilities | $31,724 | $31,658 | | Total Equity | $105,424 | $110,667 | | Cash and cash equivalents | $9,877 | $22,168 | Condensed Consolidated Statements of Operations Total revenues increased 50.8% to $48.9 million in Q3 2022, resulting in $3.9 million net income, while the nine-month period still recorded a $3.1 million net loss despite 40.1% revenue growth Q3 2022 vs Q3 2021 Operating Results (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $48,870 | $32,411 | 50.8% | | Income from Operations | $4,047 | $2,640 | 53.3% | | Net Income Attributable to NCS | $3,935 | $2,796 | | | Diluted EPS | $1.58 | $1.14 | | Nine Months 2022 vs 2021 Operating Results (in thousands, except per share data) | Metric | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Total Revenues | $115,446 | $82,386 | | Loss from Operations | ($4,066) | ($6,403) | | Net Loss Attributable to NCS | ($3,081) | ($6,396) | | Diluted EPS | ($1.27) | ($2.67) | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income for Q3 2022 was $0.6 million, a decrease from Q3 2021, primarily due to a $3.4 million negative foreign currency translation adjustment, leading to a $7.4 million comprehensive loss for the nine-month period Comprehensive Income (Loss) (in thousands) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | | | | Net income (loss) | $3,964 | $3,226 | | Foreign currency translation adjustments | ($3,359) | ($1,007) | | Comprehensive income (loss) | $605 | $2,219 | | Nine Months Ended Sep 30 | | | | Net income (loss) | ($3,243) | ($5,775) | | Foreign currency translation adjustments | ($4,118) | ($184) | | Comprehensive income (loss) | ($7,361) | ($5,959) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased from $110.7 million at year-end 2021 to $105.4 million as of September 30, 2022, driven by the nine-month net loss and negative foreign currency translation adjustments - The change in total equity from $110.7 million at the end of 2021 to $105.4 million at the end of Q3 2022 was primarily driven by the nine-month net loss and a cumulative negative currency translation adjustment of $4.1 million, which were partially offset by share-based compensation[15][18] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $9.0 million for the nine months ended September 30, 2022, a reversal from the prior year, primarily due to increases in accounts receivable and inventory, leading to a $12.3 million decrease in cash and cash equivalents Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($9,036) | $6,721 | | Net cash used in investing activities | ($440) | ($297) | | Net cash used in financing activities | ($2,387) | ($3,405) | | Net change in cash and cash equivalents | ($12,291) | $2,899 | | Cash and cash equivalents end of period | $9,877 | $18,444 | Notes to Condensed Consolidated Financial Statements Detailed notes disclose accounting policies, revenue disaggregation by geography (Canada largest market), the replacement of the prior credit facility with a new $35.0 million ABL Facility, and specifics on share-based compensation grants - The company provides engineered products and support services for oil and natural gas well construction and completions, operating primarily in North America with facilities in the US, Canada, Argentina, and Norway[25] Revenue by Geographic Region (Nine Months Ended Sep 30, in thousands) | Region | 2022 | 2021 | | :--- | :--- | :--- | | United States | $32,722 | $25,090 | | Canada | $76,136 | $51,530 | | Other Countries | $6,588 | $5,766 | | Total Revenues | $115,446 | $82,386 | - On May 3, 2022, the company terminated its Prior Senior Secured Credit Facility and entered into a new $35.0 million asset-based revolving credit facility (ABL Facility) which matures in 2027[53][54] - During the first nine months of 2022, the company granted 70,938 RSUs, 48,565 cash-settled ESUs, and 17,454 PSUs as part of its share-based compensation program[68][69][70] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the 50.8% YoY revenue increase in Q3 2022 driven by North American activity, noting significant cost pressures from raw materials and labor, while expecting continued strong industry activity despite risks from competition, a strong U.S. dollar, and potential economic slowdown Outlook The company anticipates increased drilling and completion activity in the U.S. and Canada for 2022, driven by strong commodity prices, but faces challenges from intense competition, rising raw material and labor costs, a strengthening U.S. dollar, and potential economic recession - Management expects U.S. drilling activity to increase over 30% and completion activity by over 10% in 2022, with Canadian drilling and completion activity expected to increase by 20% to 25%[84] - The company is experiencing increased prices for raw materials (steel, chemicals), components, and outsourced services, as well as labor cost inflation, which may negatively impact margins[86][111] - A strengthening U.S. dollar poses a risk, as over 60% of revenue is generated in Canada, resulting in lower reported revenue and gross profit when converted to U.S. dollars[87] Results of Operations Q3 2022 revenues increased 50.8% to $48.9 million, with income from operations growing 53.3% to $4.0 million, though cost of sales as a percentage of revenue increased due to supply chain costs and the absence of the ERC benefit Q3 2022 vs Q3 2021 Results Summary (in thousands) | Metric | Q3 2022 | Q3 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $48,870 | $32,411 | 50.8% | | Total Cost of Sales | $28,394 | $17,636 | 61.0% | | SG&A | $15,379 | $10,982 | 40.0% | | Income from Operations | $4,047 | $2,640 | 53.3% | - Q3 2022 revenue growth was driven by higher product sales and services volumes in Canada and the U.S. due to increased industry activity[115] - Cost of sales as a percentage of revenue increased in Q3 2022 to 58.1% from 54.4% in Q3 2021, due to supply chain cost increases and the non-recurrence of the U.S. employee retention credit (ERC)[116] Liquidity and Capital Resources As of September 30, 2022, the company had $9.9 million in cash and access to a $35.0 million ABL facility, with net cash used in operations for the first nine months totaling $9.0 million, primarily due to increased accounts receivable and inventory - Primary liquidity sources are cash ($9.9M), cash from operations, and a new $35.0M ABL Facility, with the ABL borrowing base at $23.8M and no outstanding borrowings as of Sep 30, 2022[126] - Net cash used in operating activities was ($9.0) million for the nine months ended Sep 30, 2022, compared to $6.7 million provided in the same period of 2021, primarily driven by increases in accounts receivable and inventory[24][131] - Planned capital expenditures for 2022 are approximately $1.0 million to $1.5 million[128] Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure, primarily interest rate and foreign currency risk, remains largely unchanged since year-end 2021, with the new ABL Facility exposing it to variable interest rates, though no outstanding borrowings minimize immediate risk - The company's primary market risk exposure is to interest rates through its new ABL Facility, which has variable rates based on SOFR and CDOR, but as of September 30, 2022, there was no outstanding indebtedness under the facility[146] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - Management concluded that as of September 30, 2022, the company's disclosure controls and procedures were effective[147] - No changes occurred during the quarter ended September 30, 2022, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[148] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various ordinary course legal proceedings, which management does not expect to have a material adverse effect on its financial position, results of operations, or cash flows - The company is subject to various legal proceedings in the ordinary course of business but does not expect them to have a material adverse effect on its financial position, results of operations, or cash flows[65][151] Risk Factors Updated risk factors primarily focus on the new ABL Facility, including potential adverse effects of indebtedness on financial condition, restrictive covenants limiting business strategies, and the impact of volatile credit markets on future financing - The company's new ABL Facility, secured by substantially all assets, has a borrowing base that excludes assets of Repeat Precision and could be insufficient to meet liquidity needs[153] - The ABL Facility contains restrictive covenants that limit the company's ability to incur debt, grant liens, make investments, pay dividends, and make acquisitions[157] - A breach of covenants, such as the fixed charge coverage ratio (tested when liquidity is low), could lead to an event of default and acceleration of debt[158][159] Exhibits Exhibits filed with the Form 10-Q include amended employment agreements for executives and required CEO and CFO certifications under the Sarbanes-Oxley Act - Exhibits filed include amended employment agreements for the CEO and another executive, as well as Sarbanes-Oxley certifications[162]