RigNet
RigNet, Inc. (Form: 10-Q, Received: 11/04/2013 16:46:49)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-35003

 

 

RigNet, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   76-0677208

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1880 S. Dairy Ashford, Suite 300

Houston, Texas

  77077-4760
(Address of principal executive offices)   (Zip Code)

(281) 674-0100

Registrant’s telephone number, including area code

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No   x

At October 31, 2013, there were outstanding 17,223,602 shares of the registrant’s Common Stock.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
  PART I – FINANCIAL INFORMATION   
Item 1  

Condensed Consolidated Financial Statements (Unaudited)

     3   
Item 2  

Management’s Discussion and Analysis of Financial Condition and  Results of Operations

     18   
Item 3  

Qualitative and Quantitative Disclosures about Market Risk

     26   
Item 4  

Controls and Procedures

     27   
  PART II – OTHER INFORMATION   
Item 1  

Legal Proceedings

     28   
Item 1A  

Risk Factors

     28   
Item 2  

Unregistered Sales of Equity Securities and Use of Proceeds

     28   
Item 3  

Defaults Upon Senior Securities

     28   
Item 4  

Mine Safety Disclosures

     28   
Item 5  

Other Information

     28   
Item 6  

Exhibits

     28   

 

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PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

RIGNET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,     December 31,  
     2013     2012  
     (in thousands, except share
amounts)
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 49,584      $ 59,744   

Restricted cash

     790        987   

Accounts receivable, net

     47,188        40,028   

Prepaid expenses and other current assets

     12,322        6,214   
  

 

 

   

 

 

 

Total current assets

     109,884        106,973   

Property and equipment, net

     57,167        46,650   

Restricted cash

     1,345        1,809   

Goodwill

     34,146        34,489   

Intangibles, net

     18,281        21,241   

Deferred tax and other assets

     5,540        4,770   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 226,363      $ 215,932   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

    

Accounts payable

   $ 12,365      $ 11,763   

Accrued expenses

     13,635        8,686   

Current maturities of long-term debt

     9,384        9,422   

Income taxes payable

     2,933        5,520   

Deferred revenue

     3,485        6,774   
  

 

 

   

 

 

 

Total current liabilities

     41,802        42,165   

Long-term debt

     44,778        51,871   

Deferred revenue

     379        302   

Deferred tax liability

     1,621        1,645   

Other liabilities

     20,487        17,977   
  

 

 

   

 

 

 

Total liabilities

     109,067        113,960   
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Equity:

    

Stockholders’ equity

    

Preferred stock—$0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at September 30, 2013 or December 31, 2012

     —          —     

Common stock—$0.001 par value; 190,000,000 shares authorized; 17,057,592 and 15,701,615 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

     17        16   

Additional paid-in capital

     127,017        120,050   

Accumulated deficit

     (10,097     (21,040

Accumulated other comprehensive income

     305        2,829   
  

 

 

   

 

 

 

Total stockholders’ equity

     117,242        101,855   

Non-redeemable, non-controlling interest

     54        117   
  

 

 

   

 

 

 

Total equity

     117,296        101,972   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 226,363      $ 215,932   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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RIGNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (in thousands, except per share amounts)  

Revenue

   $ 56,856      $ 47,939      $ 161,003      $ 112,389   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Cost of revenue (excluding depreciation and amortization)

     31,140        24,850        86,189        54,193   

Depreciation and amortization

     5,450        4,837        15,668        12,571   

Selling and marketing

     937        891        2,753        2,278   

General and administrative

     13,036        10,428        36,326        26,833   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     50,563        41,006        140,936        95,875   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,293        6,933        20,067        16,514   

Other income (expense):

        

Interest expense

     (432     (611     (1,379     (927

Other income (expense), net

     (873     (341     54        (176
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     4,988        5,981        18,742        15,411   

Income tax expense

     (2,581     (2,808     (7,645     (6,883
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     2,407        3,173        11,097        8,528   

Less: Net income (loss) attributable to Non-redeemable, non-controlling interest

     60        (65     154        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to RigNet, Inc. stockholders

   $ 2,347      $ 3,238      $ 10,943      $ 8,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

        

Net income

   $ 2,407      $ 3,173      $ 11,097      $ 8,528   

Foreign currency translation

     3,553        2,643        (2,524     2,422   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     5,960        5,816        8,573        10,950   

Less: Comprehensive income (loss) attributable to non-controlling interest

     60        (65     154        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to RigNet, Inc. stockholders

   $ 5,900      $ 5,881      $ 8,419      $ 10,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME PER SHARE—BASIC AND DILUTED

        

Net income attributable to RigNet, Inc. common stockholders

   $ 2,347      $ 3,238      $ 10,943      $ 8,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to RigNet, Inc. common stockholders, basic

   $ 0.15      $ 0.21      $ 0.69      $ 0.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to RigNet, Inc. common stockholders, diluted

   $ 0.13      $ 0.19      $ 0.63      $ 0.50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, basic

     16,148        15,647        15,958        15,564   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, diluted

     17,630        17,104        17,404        16,991   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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RIGNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended September 30,  
     2013     2012  
     (in thousands)  

Cash flows from operating activities:

    

Net income

   $ 11,097      $ 8,528   

Adjustments to reconcile net income to net cash provided by operations:

    

Depreciation and amortization

     15,668        12,571   

Stock-based compensation

     2,226        1,874   

Amortization of deferred financing costs

     122        58   

Deferred taxes

     (1,061     5,443   

(Gain) loss on sales of property and equipment, net of retirements

     167        (141

Changes in operating assets and liabilities, net of effect of acquisition:

    

Accounts receivable

     (7,653     (6,090

Prepaid expenses and other assets

     (6,215     546   

Accounts payable

     (1,403     (1,751

Accrued expenses

     2,882        (2,551

Deferred revenue

     (2,990     (3,879

Other liabilities

     2,513        2,851   
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,353        17,459   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of Nessco, net of cash acquired

     (85     (40,548

Capital expenditures

     (22,054     (16,609

Proceeds from sales of property and equipment

     87        328   

(Increase) decrease in restricted cash

     661        (2,862
  

 

 

   

 

 

 

Net cash used in investing activities

     (21,391     (59,691
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock

     4,742        710   

Repurchase of restricted shares from employees

     —          (89

Subsidiary distributions to non-controlling interest

     (217     (124

Proceeds from borrowings

     —          47,238   

Repayments of long-term debt

     (7,184     (6,772

Payments of financing fees

     (69     (579
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (2,728     40,384   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (8,766     (1,848
  

 

 

   

 

 

 

Cash and cash equivalents:

    

Balance, January 1,

     59,744        53,106   

Changes in foreign currency translation

     (1,394     2,422   
  

 

 

   

 

 

 

Balance, September 30,

   $ 49,584      $ 53,680   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Income taxes paid

   $ 8,123      $ 4,703   

Interest paid

   $ 1,287      $ 873   

Non-cash investing—capital expenditures accrued

   $ 3,718      $ 1,555   

Liabilities assumed—Nessco acquisition

   $ —        $ 19,041   

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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RIGNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

    Common Stock     Additional
Paid-In
    Accumulated     Accumulated
Other
Comprehensive
    Total
Stockholders’
    Non-Redeemable,
Non-Controlling
       
    Shares     Amount     Capital     Deficit     Income (Loss)     Equity     Interest     Total Equity  
    (in thousands)  

Balance, January 1, 2012

    15,441      $ 15      $ 116,740      $ (32,922   $ (610   $ 83,223      $ 162      $ 83,385   

Issuance of common stock upon the

    117        1        709        —          —          710        —          710   

exercise of stock options and warrants

               

Issuance of restricted common stock,net of share repurchase from employees

    118        —          (89     —          —          (89     —          (89

and share cancellations

               

Stock-based compensation

    —          —          1,874        —          —          1,874        —          1,874   

Foreign currency translation

    —          —          —          —          2,422        2,422        —          2,422   

Non-controlling owner distributions

    —          —          —          —          —          —          (124     (124

Net income

    —          —          —          8,503        —          8,503        25        8,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

    15,676      $ 16      $ 119,234      $ (24,419   $ 1,812      $ 96,643      $ 63      $ 96,706   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2013

    15,702      $ 16      $ 120,050      $ (21,040   $ 2,829      $ 101,855      $ 117      $ 101,972   

Issuance of common stock upon the exercise of stock options and warrants

    1,279        1        4,741        —          —          4,742        —          4,742   

Issuance of restricted common stock,

    77        —          —          —          —          —          —          —     

net of share cancellations

               

Stock-based compensation

    —          —          2,226        —          —          2,226        —          2,226   

Foreign currency translation

    —          —          —          —          (2,524     (2,524     —          (2,524

Non-controlling owner distributions

    —          —          —          —          —          —          (217     (217

Net income

    —          —          —          10,943        —          10,943        154        11,097   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

    17,058      $ 17      $ 127,017      $ (10,097   $ 305      $ 117,242      $ 54      $ 117,296   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The interim unaudited condensed consolidated financial statements of RigNet, Inc. (the “Company”) include all adjustments which, in the opinion of management, are necessary for a fair presentation of the Company’s 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 Company’s operating environment changes. Actual results could differ from estimates. These statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2013.

Significant Accounting Policies

Please refer to RigNet’s Annual Report on Form 10-K for fiscal year 2012 for information regarding the Company’s accounting policies.

Recently Issued Accounting Pronouncements

In July 2012, the FASB issued Accounting Standards Update No. 2012-02 (ASU 2012-02), Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 amends the guidance on testing indefinite-lived intangible assets for impairment. The revised guidance permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The Company adopted ASU 2012-02 as of January 1, 2013. The adoption of ASU 2012-02 did not have any impact on the Company’s condensed consolidated financial statements.

In February 2013, the FASB issued Accounting Standards Update No. 2013-02 (ASU 2013-02), Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update amends Accounting Standards Updates Nos. 2011-05 and 2011-12. This update requires the presentation of the components of amounts reclassified out of accumulated other comprehensive income either on the face of the statement of income or in the notes to the financial statements. The Company adopted ASU 2013-02 as of January 1, 2013. The adoption of ASU 2013-02 did not have any impact on the Company’s condensed consolidated financial statements.

In July 2013, the FASB issued Accounting Standards Update No. 2013-11 (ASU 2013-11), Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update defines the criteria as to when an unrecognized tax benefit should be presented as a liability and when it should be netted against a deferred tax asset on the face of the balance sheet. ASU 2013-11 is effective for fiscal years beginning after December 15, 2013. The Company will adopt ASU 2013-11 as of January 1, 2014. The Company does not expect the adoption of ASU 2013-11 to have a significant impact on the Company’s consolidated financial statements.

Note 2 – Business Combinations

Nessco

On July 5, 2012, RigNet acquired 100% of Nessco Group Holdings Ltd. (Nessco), an Aberdeen-based international company operating in the field of telecommunications systems integration for the oil and gas industry, for an aggregate purchase price of $42.6 million, net of cash acquired of $6.0 million. The purchase price includes $2.2 million of payments made under a $2.5 million contingent consideration arrangement, based on the collection of specific third-party receivables. As the collection period of these receivables has lapsed, no further payments will be made related to this contingent consideration arrangement. This acquisition broadens and strengthens RigNet’s communications offerings to the oil and gas industry, allowing the Company to provide its services over the life of the field from drilling through production, both offshore and onshore, around the globe.

The assets and liabilities of Nessco 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.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The goodwill of $19.7 million arising from the acquisition consists largely of the synergies and other benefits that the Company believes will result from combining the operations of the Company and Nessco, 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 Nessco, including goodwill, is included in the Company’s condensed consolidated financial statements as of the acquisition date and is reflected in the Europe /Africa reporting segment.

 

     Weighted Average                
     Estimated Useful                
     Life (Years)      Fair Market Values  
            (in thousands)  

Current assets

         $ 22,298 (a)(b) 

Property and equipment

           7,744   

Identifiable intangible assets:

        

Trade name

     7.0       $ 4,353      

Covenant not to compete

     1.7         151      

Backlog

     1.7         1,116      

Customer relationships

     7.0         11,706      
     

 

 

    

Total identifiable intangible assets

           17,326   

Goodwill

           19,678 (b) 

Other assets

           575   

Liabilities

           (19,041
        

 

 

 

Total purchase price

         $ 48,580 (a) 
        

 

 

 

 

(a) Includes $2.2 million of contingent consideration paid between July 2012 and March 2013 based on the collection of specific third-party revenue.
(b) Includes $0.5 million tax impact related to the contingent consideration.

Actual and Pro Forma Impact of the Nessco Acquisition

Nessco’s revenue and net loss included in the Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2012 were as follows (in thousands):

 

     Three and Nine
Months Ended

September 30, 2012
 

Revenue

   $ 10,333   

Net loss

   $ (1,283

 

The following table represents supplemental pro forma information as if the Nessco acquisition had occurred on January 1, 2011. Pro forma adjustments include:

 

    Reverse Nessco depreciation and amortization and reporting depreciation and amortization based on estimated fair values and remaining lives of the acquired assets at the date of acquisition.

 

    Adjust interest expense to recognize interest expense as if the acquisition-related debt of RigNet had been outstanding at January 1, 2011.

 

    Record nonrecurring transaction costs as if they had been incurred in 2011 rather than 2012.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

     Three Months Ended      Nine Months Ended  
     September 30, 2012      September 30, 2012  
     (in thousands)  

Revenue

   $ 47,939       $ 141,981   

Expenses

     44,305         132,151   
  

 

 

    

 

 

 

Net income from continuing operations

   $ 3,634       $ 9,830   
  

 

 

    

 

 

 

Income from continuing operations attributable to RigNet common stockholders

   $ 3,699       $ 9,805   
  

 

 

    

 

 

 

Income per share from continuing operations attributable to RigNet common stockholders

     

Basic

   $ 0.24       $ 0.63   
  

 

 

    

 

 

 

Diluted

   $ 0.22       $ 0.58   
  

 

 

    

 

 

 

Inmarsat’s Energy Broadband Operations

On August 1, 2013, RigNet reached a strategic agreement with Inmarsat plc (Inmarsat), a leading provider of global mobile satellite communications services.

RigNet has reached a definitive agreement to acquire Inmarsat’s Energy Broadband operations for a total cash consideration of $25.0 million, adding to RigNet’s technology solutions, customer base and geographic footprint. Under the terms of the agreement, Inmarsat will carve out and sell to RigNet all of its energy broadband assets, which include: microwave and WiMAX networks in the U.S. Gulf of Mexico serving drillers, producers and energy vessel owners; VSAT interests in Russia, the United Kingdom, U.S. and Canada; an M2M SCADA VSAT network in the continental U.S. serving the pipeline industry; a telecommunications systems integration business operating worldwide; and a global L-band MSS retail energy business. The energy carve-out includes assets, employees, contracts and working capital.

The overall transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close in or before the first quarter of 2014. RigNet expects to finance the transaction with the new credit facility announced on October 3, 2013, and existing cash (see Note 13 – Subsequent Events).

For the three and nine months ended September 30, 2013, RigNet has spent $2.8 million on acquisition-related costs, which are reported as general and administrative expense in our condensed consolidated financial statements.

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 Company’s variable borrowing rates are tied to LIBOR and prime resulting in interest rate risk (see Note 6 – Long-Term Debt). The Company does not currently use financial instruments to hedge these interest risk exposures, but evaluates this on a continual basis and may put financial instruments in place in the future if deemed necessary.

Foreign Currency Risk

The Company has exposure to foreign currency risk, as a portion of the Company’s 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 Company’s financial position and results of operations. The Company’s historical experience with exchange rates for these currencies has been relatively stable, and, consequently, the Company typically does not use financial instruments to hedge this risk, but evaluates it on a continual basis and may put financial instruments in place in the future if deemed necessary. Foreign currency translations are reported as accumulated other comprehensive income (loss) in the Company’s condensed consolidated financial statements.

 

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NOTES TO THE 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 evaluations include a review of customer credit reports and past transaction history with the customer. The Company provides an allowance for doubtful accounts which is adjusted when the Company becomes aware of a specific customer’s 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 2013 or 2012. 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).

Note 4 – Goodwill and Intangibles

Goodwill

Goodwill relates to the acquisitions of LandTel Communications LLC (LandTel), OilCamp AS (OilCamp), and Nessco as the consideration paid exceeded the fair value of acquired identifiable net tangible and intangible assets. Goodwill is reviewed for impairment annually with additional evaluations being performed when events or circumstances indicate that the carrying value of these assets may not be recoverable. The Company performs its annual impairment test on July 31 st , with the most recent test being performed as of July 31, 2013. This 2013 test resulted in no impairment as the fair value of each reporting unit exceeds the carrying value plus goodwill of that reporting unit. No impairment indicators have been identified through September 30, 2013. As of September 30, 2013 and December 31, 2012, goodwill was $34.1 million and $34.5 million, respectively. Goodwill increases or decreases in value due to the effect of foreign currency translation.

Intangibles

Intangibles consist of customer relationships (acquired as part of the LandTel, OilCamp and Nessco acquisitions), as well as trade name, covenant not-to-compete and backlog (acquired as part of the Nessco acquisition) and internal-use software. The Company’s intangibles have useful lives ranging from 1.7 to 9.0 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. No impairment indicators have been identified as of September 30, 2013. During the three months ended September 30, 2013 and 2012, the Company recognized amortization expense of $1.1 million and $1.1 million, respectively. During the nine months ended September 30, 2013 and 2012, the Company recognized amortization expense of $3.2 million and $1.7 million, respectively.

The following table sets forth amortization expense of intangibles for the remainder of 2013 and the following five years (in thousands):

 

2013

   $ 1,061   

2014

     3,590   

2015

     3,409   

2016

     3,259   

2017

     3,259   

Thereafter

     3,703   
  

 

 

 
   $ 18,281   
  

 

 

 

Note 5 – Restricted Cash

As of September 30, 2013, the Company had restricted cash of $0.8 million and $1.3 million, in current and long-term assets, respectively. As of December 31, 2012, the Company had restricted cash of $1.0 million and $1.8 million, in current and long-term assets, respectively. This restricted cash is being used to collateralize outstanding performance bonds for Nessco’s systems integration projects which were in effect prior to RigNet acquiring Nessco (see Note 6 – Long-Term Debt).

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 – Long-Term Debt

As of September 30, 2013 and December 31, 2012, the following credit facilities and long-term debt arrangements with financial institutions were in place:

 

     September 30,     December 31,  
     2013     2012  
     (in thousands)  

Term loan, net of unamortized deferred financing costs

   $ 54,114      $ 61,184   

Equipment notes

     48        109   
  

 

 

   

 

 

 
     54,162        61,293   

Less: Current maturities of long-term debt

     (9,384     (9,422
  

 

 

   

 

 

 
   $ 44,778      $ 51,871   
  

 

 

   

 

 

 

Term Loan

The Company has a term loan (Term Loan) with two participating financial institutions. In July 2012, the Company amended its Term Loan, increasing the principal balance by $47.2 million and extending the maturity of the loan from May 2014 to July 2017. Additionally, in March 2013 the Company amended the Term Loan to bear an interest rate of LIBOR plus a margin ranging from 2.0% to 3.0%, previously 2.25% to 3.5%, based on a ratio of funded debt to Adjusted EBITDA, a non-GAAP financial measure as defined in the agreement.

Interest is payable monthly along with quarterly principal installments of $2.4 million, with the balance due July 31, 2017. The weighted average interest rate for the three and nine months ended September 30, 2013 was 2.8% and 2.9%, respectively, with an interest rate of 2.7% at September 30, 2013.

The Term Loan is secured by substantially all the assets of the Company. As of September 30, 2013, the Term Loan had outstanding principal of $54.6 million.

Revolving Loans

Under the amended and restated credit agreement dated July 2, 2012, the Company secured a $10.0 million revolving credit facility which, subject to a borrowing base calculation based upon eligible receivables, can be used for working capital, performance bonds and letters of credit. As of September 30, 2013, no draws have been made on the facility.

Performance Bonds

Prior to acquisition, NesscoInvsat Limited, had performance bonds for Nessco’s systems integration projects which are currently outstanding and require the Company to maintain restricted cash balances to collateralize these bonds. As of September 30, 2013, the Company had restricted cash of $0.8 million and $1.3 million, in current and long-term assets, respectively, to satisfy this requirement.

On September 14, 2012, the Company, entered into an additional performance bond facility with a lender in the amount of £4.0 million, or $6.5 million. Interest of 1.5% per annum is paid quarterly on the utilized portion of the facility. This facility has a maturity date of June 30, 2017. As of September 30, 2013, the amount available under this facility was £2.5 million, or $4.0 million.

Covenants and Restrictions

The Company’s Term Loan contains certain covenants and restrictions, including restricting the payment of cash dividends under default and maintaining certain financial covenants such as a ratio of funded debt to Adjusted EBITDA, a non-GAAP financial measure as defined in the agreement, and a fixed charge coverage ratio. If any default occurs related to these covenants, the unpaid principal and any accrued interest shall be declared immediately due and payable. As of September 30, 2013 and December 31, 2012, the Company believes it was in compliance with all covenants.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 2013 and the following years (in thousands):

 

2013

   $ 2,370   

2014

     9,343   

2015

     9,370   

2016

     9,398   

2017

     23,681   
  

 

 

 

Total debt, including current maturities

   $ 54,162   
  

 

 

 

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 Company’s 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.

Note 8 – Income Taxes

The Company’s effective income tax rate was 51.7% and 46.9% for the three months ended September 30, 2013 and 2012, respectively. The Company’s effective income tax rate was 40.8% and 44.7% for the nine months ended September 30, 2013 and 2012, respectively. The Company’s effective tax rates are affected by factors including fluctuations in income across jurisdictions with varying tax rates, changes in valuation allowances related to operating in a loss jurisdiction for which a benefit cannot be claimed, 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 Company’s financial projections for those periods did not provide the level of detail necessary to calculate a forecasted effective tax rate.

The Company and the Internal Revenue Service agreed to close an audit of the Company’s 2010 income tax return in March of 2013. The final settlement did not have a material impact on the Company’s financial position or results of operations for the nine months ended September 30, 2013.

Note 9 – Stock-Based Compensation

During the nine months ended September 30, 2013, the Company granted 106,415 shares of restricted stock to certain directors, officers and employees of the Company under the 2010 Omnibus Incentive Plan (2010 Plan). Restricted shares have no exercise price and are considered issued and outstanding common stock. Restricted shares issued to officers and employees, totaling 89,295 shares, vest over a four year period of continued employment. Restricted shares issued to directors, totaling 17,120 shares, vest after a one year period of continued service.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The fair value of restricted stock is determined based on the closing trading price of the Company’s 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 nine months ended September 30, 2013, the Company also granted 236,768 stock options to certain officers and employees of the Company under the 2010 Plan. Options granted during this period have an exercise price of $19.96 to $27.97, a contractual term of ten years and vest over a four year period of continued employment, with 25% of shares vesting on each of the first four anniversaries of the grant date.

The fair value of each stock option award is estimated on the grant date using a Black-Scholes option valuation model, which uses certain assumptions as of the date of grant.

The assumptions used for the stock option grants made during the nine months ended September 30, 2013 and 2012, were as follows:

 

     Nine Months Ended September 30,
     2013   2012

Expected volatility

   50%   50%

Expected term (in years)

   7   7

Risk-free interest rate

   1.3% - 2.2%   2.8%

Dividend yield

   —     —  

Based on these assumptions, the weighted average grant date fair value of stock options granted during the nine months ended September 30, 2013 and 2012 was $11.25 and $9.45 per option, respectively.

Stock-based compensation expense related to the Company’s stock-based compensation plans for the nine months ended September 30, 2013 and 2012 was $2.2 million and $1.9 million, respectively. As of September 30, 2013, there was $6.2 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 2.6 years.

Note 10 – Related Party Transactions

One of the Company’s directors is the president and chief executive officer of a drilling corporation which is also a customer of the Company. Revenue recognized for the three months ended September 30, 2013 and 2012 was $0.4 million and $0.1 million, respectively. Revenue recognized for the nine months ended September 30, 2013 and 2012 was $1.3 million and $0.2 million, respectively. All revenue relates to services performed by the Company in the ordinary course of business.

Note 11 – Income per Share

Basic earnings per share (EPS) are computed by dividing net income 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 the exercise of warrants. Diluted EPS is computed by dividing net income 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, weighted for the average days outstanding for the period. The Company uses the treasury stock method to determine the dilutive effect.

For the three months ended September 30, 2013 and 2012, 1,481,719 and 1,457,495 shares of unexercised or unvested securities, respectively, were included in the diluted earnings per share computation due to the dilutive effect. For the nine months ended September 30, 2013 and 2012, 1,445,639 and 1,427,828 shares of unexercised or unvested securities, respectively, were included in the diluted earnings per share computation due to the dilutive effect.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 12 – Commitments and Contingencies

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. The Company does not consider its exposure in these proceedings, individually or in the aggregate, to be material.

Regulatory Matter

RigNet’s internal compliance program has recently detected potential violations of U.S. sanctions regulations by one of its foreign subsidiaries in connection with certain of its customers’ rigs that were moved into the territorial waters of countries sanctioned by the United States. The Company estimates that it received total revenue of approximately $0.1 million during the period related to the potential violations. The Company has voluntarily self-reported the potential violations to U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and the U.S Department of Commerce Bureau of Industry and Security (BIS) and retained outside counsel who conducted an investigation of the matter under the supervision of the Company’s Audit Committee and submitted a report to OFAC and BIS. The Company continues cooperating with OFAC and BIS with respect to resolution of the matter.

The Company incurred legal expenses of $0.9 million in connection with the investigation as of September 30, 2013. The Company may continue to incur significant legal fees and related expenses and the investigations may involve management time in the future in order to cooperate with OFAC and BIS. The Company cannot predict the ultimate outcome of the investigation, the total costs to be incurred in completing the investigation, the potential impact on personnel, the effect of implementing any further measures that may be necessary to ensure full compliance with applicable laws or to what extent, if at all, the Company could be subject to fines, sanctions or other penalties.

Based on the information available at this time and management’s understanding of the potential sanctions, the Company currently estimates that it may incur penalties associated with these potential violations within a range of $0.2 million to $1.5 million. The Company has accrued an estimated liability of $0.8 million as management believes this is the most probable outcome. This estimate is based on RigNet’s internal investigation and no assurance can be given as to what, if any, penalties OFAC or BIS will impose or whether it will identify or allege additional violations or remedies.

Operating Leases

The Company leases office space under lease agreements expiring on various dates through 2020. For the three months ended September 30, 2013 and 2012, the Company recognized expense under operating leases of $0.5 million and $0.4 million, respectively. For the nine months ended September 30, 2013 and 2012, the Company recognized expense under operating leases of $1.8 million and $1.1 million, respectively.

As of September 30, 2013, future minimum lease obligations for the remainder of 2013 and future years were as follows (in thousands):

 

2013

   $ 636   

2014

     1,572   

2015

     1,087   

2016

     483   

2017

     159   

Thereafter

     330   
  

 

 

 
   $ 4,267   
  

 

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Commercial Commitments

The Company enters into contracts for satellite bandwidth and other network services with certain providers.

As of September 30, 2013, the Company had the following commercial commitments related to satellite and network services (in thousands):

 

2013

   $ 7,020   

2014

     18,073   

2015

     8,100   

2016

     2,982   

2017

     1,045   
  

 

 

 
   $ 37,220   
  

 

 

 

Note 13 – Segment Information

Segment information has been 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. Certain operating segments are aggregated into one reportable segment based on similar economic characteristics. Accordingly, RigNet’s business consists of three reportable segments:

 

    Americas. The Americas segment provides remote communications services for offshore and onshore drilling rigs and production facilities, as well as, energy support vessels and other remote sites. The Americas segment services are performed out of the Company’s United States and Brazil based offices for onshore and offshore customers and rig sites located on the western side of the Atlantic Ocean primarily in the United States, Mexico and Brazil, and within the Gulf of Mexico.

 

    Europe/Africa. The Europe/Africa segment provides remote communications services for offshore drilling rigs, production facilities, energy support vessels and other remote sites, as well as, systems integration projects. The Europe/Africa segment services are performed out of the Company’s Norway and United Kingdom based offices for customers and rig sites located on the eastern side of the Atlantic Ocean primarily off the coasts of the United Kingdom, Norway and West Africa.

 

    Middle East/Asia Pacific (MEAP). The MEAP segment provides remote communications services for onshore and offshore drilling rigs, production facilities, energy support vessels and other remote sites. The MEAP segment services are primarily performed out of the Company’s Qatar and Singapore based offices for customers and rig sites located on the eastern side of the Atlantic Ocean primarily around the Indian Ocean in Qatar, Saudi Arabia and India, around the Pacific Ocean near Australia, and within the South China Sea.

Corporate and eliminations primarily represents unallocated corporate office activities, interest expenses, income taxes and eliminations.

The Company’s business segment information as of and for the three and nine months ended September 30, 2013 and 2012, is presented below. Prior year information has been recast to conform to the current year presentation.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

     Three Months Ended September 30, 2013  
                          Corporate and     Consolidated  
     Americas      Europe/Africa      MEAP      Eliminations     Total  
     (in thousands)  

Revenue

   $ 13,884       $ 26,277       $ 16,695       $ —        $ 56,856   

Cost of revenue (excluding depreciation and amortization)

     6,734         17,576         5,685         1,145        31,140   

Depreciation and amortization

     1,924         1,900         1,407         219        5,450   

Selling, general and administrative

     2,000         1,895         1,371         8,707        13,973   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 3,226       $ 4,906       $ 8,232       $ (10,071   $ 6,293   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Capital expenditures

     3,619         3,285         1,648         529        9,081   
     Three Months Ended September 30, 2012  
                          Corporate and     Consolidated  
     Americas      Europe/Africa      MEAP      Eliminations     Total  
     (in thousands)  

Revenue

   $ 13,053       $ 21,972       $ 12,914       $ —        $ 47,939   

Cost of revenue (excluding depreciation and amortization)

     5,765         13,536         4,512         1,037        24,850   

Depreciation and amortization

     1,909         1,774         1,153         1        4,837   

Selling, general and administrative

     2,012         2,655         1,088         5,564        11,319   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 3,367       $ 4,007       $ 6,161       $ (6,602   $ 6,933   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Capital expenditures

     2,620         690         1,722         98        5,130   
     Nine Months Ended September 30, 2013  
                          Corporate and     Consolidated  
     Americas      Europe/Africa      MEAP      Eliminations     Total  
     (in thousands)  

Revenue

   $ 39,440       $ 76,906       $ 44,657       $ —        $ 161,003   

Cost of revenue (excluding depreciation and amortization)

     18,164         47,905         16,196         3,924        86,189   

Depreciation and amortization

     5,566         5,458         4,074         570        15,668   

Selling, general and administrative

     5,767         6,414         5,403         21,495        39,079   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 9,943       $ 17,129       $ 18,984       $ (25,989   $ 20,067   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

     96,130         115,672         48,000         (33,439     226,363   

Capital expenditures

     8,596         8,339         6,670         660        24,265   
     Nine Months Ended September 30, 2012  
                          Corporate and     Consolidated  
     Americas      Europe/Africa      MEAP      Eliminations     Total  
     (in thousands)  

Revenue

   $ 37,065       $ 41,292       $ 34,032       $ —        $ 112,389   

Cost of revenue (excluding depreciation and amortization)

     17,012         21,869         12,442         2,870        54,193   

Depreciation and amortization

     5,536         3,267         3,767         1        12,571   

Selling, general and administrative

     5,738         4,848         3,085         15,440        29,111   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 8,779       $ 11,308       $ 14,738       $ (18,311   $ 16,514   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

     90,064         168,474         38,918         (87,693     209,763   

Capital expenditures

     7,237         2,638         5,963         125        15,963   

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents revenue earned from the Company’s domestic and international operations for the three and nine months ended September 30, 2013 and 2012. Revenue is based on the location where services are provided or goods are sold. Due to the mobile nature of RigNet’s 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      Nine Months Ended  
     September 30,      September 30,  
     2013      2012      2013      2012  
     (in thousands)  

Domestic

   $ 10,497       $ 11,738       $ 28,417       $ 29,678   

International

     46,359         36,201         132,586         82,711   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 56,856       $ 47,939       $ 161,003       $ 112,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents long-lived assets for the Company’s domestic and international operations as of September 30, 2013 and December 31, 2012.

 

     September 30,      December 31,  
     2013      2012  
     (in thousands)  

Domestic

   $ 34,096       $ 28,412   

International

     75,498         73,968   
  

 

 

    

 

 

 

Total

   $ 109,594       $ 102,380   
  

 

 

    

 

 

 

Note 14 – Subsequent Events

On October 3, 2013, RigNet entered into a second amendment and restatement of its Term Loan. The amended and restated agreement provides for a $60.0 million term loan facility and $125.0 million revolving credit facility, which includes a $15.0 million sublimit for the issuance of standby letters of credit. The revolving credit facility is no longer subject to a borrowing base calculation. The Company had a $54.6 million outstanding balance on its Term Loan immediately prior to this agreement and a $60.0 million outstanding balance immediately after giving effect to the second amendment and restatement.

The term loan facility matures in October 2018 and requires quarterly scheduled principal payments of $2.1 million commencing March 2014 through October 2018, with the remainder due at maturity. The revolving credit facility matures in October 2018 with any outstanding borrowings then payable. Borrowings under both the term and revolving facilities carry an interest rate of LIBOR plus an applicable margin ranging from 1.50% to 2.50%, which varies as a function of the Company’s leverage ratio.

The agreement contains customary covenants that restrict, among other things, the Company’s ability to obtain additional debt financing and to pay cash dividends. The agreement also contains financial covenants that the Company must meet, including leverage and fixed charge ratios. The loans under the agreement are secured by substantially all of the assets of the Company and its domestic subsidiaries. Loans under the agreement are subject to acceleration upon the occurrence of events of default that the Company considers usual and customary for an agreement of this type.

 

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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

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 September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 included elsewhere herein, and with our annual report on Form 10-K for the year ended December 31, 2012. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our annual report and elsewhere in this quarterly report. See “Forward-Looking Statements” below.

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. These statements may include statements about:

 

    new regulations, delays in drilling permits or other changes in the drilling industry;

 

    competition and competitive factors in the markets in which we operate;

 

    demand for our products and services;

 

    the advantages of our services compared to others;

 

    changes in 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 needs and expectations regarding cash flow from operations;

 

    our ability to manage and grow our business and execute our business strategy;

 

    our strategy;

 

    our financial performance; and

 

    the costs associated with being a public company.

In some cases, forward-looking statements can be identified by terminology such as “may,” “could,” “should,” “would,” “expect,” “plan,” “project,” “intend,” “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 and elsewhere in this Quarterly Report on Form 10-Q. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our future results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements speak only as of the date made, and other than as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

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Our Operations

We are a global provider of managed remote communications, systems integration (project management of turn-key engineered telecommunications solutions) and collaborative applications dedicated to the oil and gas industry, focusing on offshore and onshore drilling rigs, energy production facilities and energy maritime. We focus on developing customer relationships in the oil and gas industry resulting in a significant portion of our revenue being concentrated in a few customers. In addition, due to the concentration of our customers in the oil and gas industry, we face the challenge of service demands fluctuating with the exploration and development plans and capital expenditures of that industry.

Network service customers are primarily served under fixed-price, day-rate contracts, which are based on the concept of pay-per-day of use and are consistent with other service terms used in the oil and gas industry. Our contracts are generally in the form of Master Service Agreements, or MSAs, with specific services being provided under individual service orders that have a term of one to three years with renewal options, while land-based locations 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 may be terminated early 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).

Segment information has been 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. Certain operating segments are aggregated into one reportable segment based on similar economic characteristics.

We operate three reportable business segments based on geographic location, which are managed as distinct business units by our chief operating decision-maker.

 

    Americas. Our Americas segment provides remote communications services for offshore and onshore drilling rigs and production facilities, as well as, energy support vessels and other remote sites. Our Americas segment services are performed out of our United States and Brazil based offices for customers and rig sites located on the western side of the Atlantic Ocean primarily in the United States, Mexico and Brazil, and within the Gulf of Mexico.

 

    Europe/Africa. Our Europe/Africa segment provides remote communications services for offshore drilling rigs, production facilities, energy support vessels and other remote sites, as well as, systems integration projects. Our Europe/Africa segment services are performed out of our Norway and United Kingdom based offices for customers and rig sites located on the eastern side of the Atlantic Ocean primarily off the coasts of the United Kingdom, Norway and West Africa.

 

    Middle East/Asia Pacific (MEAP). Our MEAP segment provides remote communications services for onshore and offshore drilling rigs, production facilities, energy support vessels and other remote sites. Our MEAP segment services are primarily performed out of our Qatar and Singapore based offices for customers and rig sites located on the eastern side of the Atlantic Ocean primarily around the Indian Ocean in Qatar, Saudi Arabia and India, around the Pacific Ocean near Australia, and within the South China Sea.

Cost of revenue consists primarily of satellite charges, voice and data termination costs, network operations expenses, internet connectivity fees, equipment purchases related to 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 leased satellites. Network operations expenses consist primarily of costs associated with the operation of our network operations center, which is maintained 24 hours a day, seven days a week. Depreciation and amortization is recognized on all property and equipment either installed at a customer’s site or held at our corporate and regional offices, as well as intangibles arising from acquisitions and internal use software. Selling and marketing expenses consist primarily of salaries and commissions, travel costs and marketing communications. General and administrative expenses consist of expenses associated with our management, finance, contract, support and administrative functions.

Profitability increases at a site as we add customers and value-added services. Assumptions used in developing the day 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. Profitability risks include oil and gas market trends, service responsiveness to remote locations, communication network complexities, political and economic instability in certain regions, export restrictions, licenses and other trade barriers. These risks may result in the delay of service initiation, which may negatively impact our results of operations.

Recent Developments

On August 1, 2013, RigNet reached a strategic agreement with Inmarsat plc (Inmarsat), a leading provider of global mobile satellite communications services. The agreement includes the purchase of Inmarsat’s Energy Broadband business and the appointment of RigNet to become a key distribution partner to deliver Inmarsat’s Global Xpress (GX) services to the energy sector worldwide.

 

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We reached a definitive agreement to acquire Inmarsat’s Energy Broadband operations for a total cash consideration of $25.0 million, adding to our technology solutions, customer base and geographic footprint. Under the terms of the agreement, Inmarsat will carve out and sell to us all of its energy broadband assets, which include: microwave and WiMAX networks in the U.S. Gulf of Mexico serving drillers, producers and energy vessel owners; VSAT interests in Russia, the United Kingdom, U.S. and Canada; an M2M SCADA VSAT network in the continental U.S. serving the pipeline industry; a telecommunications systems integration business operating worldwide; and a global L-band MSS retail energy business. The energy carve-out includes assets, employees, contracts and working capital.

In addition, we have agreed, conditioned upon the closing of the acquisition, to become a key distributor of Inmarsat’s GX satellite communications network services, which will enable us to offer the next-generation satellite services to existing and new customers in the energy, energy maritime and natural resources industries. We have agreed to purchase, under certain conditions, capacity from the high-throughput GX network during the four years after it becomes operational in 2015. We expect to utilize the GX network capacity across its own business as well as that of the acquired Energy Broadband business.

The overall transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close in or before the first quarter of 2014. We expect to finance the transaction with the new credit facility announced on October 3, 2013, and existing cash. For the three and nine months ended September 30, 2013, RigNet has spent $2.8 million on acquisition-related costs, which are reported as general and administrative expense in our condensed consolidated financial statements.

Results of Operations

The following table sets forth selected financial and operating data for the periods indicated.

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  
     (in thousands)  

Revenue

   $ 56,856      $ 47,939      $ 161,003      $ 112,389   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Cost of revenue (excluding depreciation and amortization)

     31,140        24,850        86,189        54,193   

Depreciation and amortization

     5,450        4,837        15,668        12,571   

Selling and marketing

     937        891        2,753        2,278   

General and administrative

     13,036        10,428        36,326        26,833   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     50,563        41,006        140,936        95,875   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,293        6,933        20,067        16,514   

Other income (expense), net

     (1,305     (952     (1,325     (1,103
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     4,988        5,981        18,742        15,411   

Income tax expense

     (2,581     (2,808     (7,645     (6,883
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     2,407        3,173        11,097        8,528   

Less: Net income (loss) attributable to non-controlling interests

     60        (65     154        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to RigNet, Inc. stockholders

   $ 2,347      $ 3,238      $ 10,943      $ 8,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Non-GAAP Data:

        

Gross Profit (excluding depreciation and amortization)

   $ 25,716      $ 23,089      $ 74,814      $ 58,196   

Adjusted EBITDA

   $ 14,450      $ 12,392      $ 40,973      $ 31,765   

 

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The following represents selected financial operating results for our segments:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2013      2012      2013      2012  
     (in thousands)  

Americas:

           

Revenue

   $ 13,884       $ 13,053       $ 39,440       $ 37,065   

Cost of revenue (excluding depreciation and amortization)

     6,734         5,765         18,164         17,012   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross Profit (non-GAAP measure)

     7,150         7,288         21,276         20,053   

Depreciation and amortization

     1,924         1,909         5,566         5,536   

Selling, general and administrative

     2,000         2,012         5,767         5,738   
  

 

 

    

 

 

    

 

 

    

 

 

 

Americas operating income

   $ 3,226       $ 3,367       $ 9,943       $ 8,779   
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe/Africa:

           

Revenue

   $ 26,277       $ 21,972       $ 76,906       $ 41,292   

Cost of revenue (excluding depreciation and amortization)

     17,576         13,536         47,905         21,869   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross Profit (non-GAAP measure)

     8,701         8,436         29,001         19,423   

Depreciation and amortization

     1,900         1,774         5,458         3,267   

Selling, general and administrative

     1,895         2,655         6,414         4,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe/Africa operating income

   $ 4,906       $ 4,007       $ 17,129       $ 11,308   
  

 

 

    

 

 

    

 

 

    

 

 

 

Middle East/Asia Pacific:

           

Revenue

   $ 16,695       $ 12,914       $ 44,657       $ 34,032   

Cost of revenue (excluding depreciation and amortization)

     5,685         4,512         16,196         12,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross Profit (non-GAAP measure)

     11,010         8,402         28,461         21,590   

Depreciation and amortization

     1,407         1,153         4,074         3,767   

Selling, general and administrative

     1,371         1,088         5,403         3,085   
  

 

 

    

 

 

    

 

 

    

 

 

 

Middle East/Asia Pacific operating income

   $ 8,232       $ 6,161       $ 18,984       $ 14,738   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE: Consolidated balances include the three segments above along with corporate activities and intercompany eliminations.

Three Months Ended September 30, 2013 and 2012

Revenue. Revenue increased by $9.0 million, or 18.6%, to $56.9 million for the three months ended September 30, 2013 from $47.9 million for the three months ended September 30, 2012. Americas revenue increased $0.8 million, or 6.4%, Europe/Africa revenue increased $4.3 million, or 19.6%, and MEAP revenue increased $3.8 million, or 29.3%. These increases are primarily due to increases in systems integration revenue, sites served and increased revenue-per-site.

Cost of Revenue. Costs increased by $6.2 million, or 24.9% to $31.1 million for the three months ended September 30, 2013 from $24.9 million for the three months ended September 30, 2012. This increase is primarily due to systems integration projects and incremental network services and capacity required to serve the increased sites.

Gross Profit (excluding depreciation and amortization) increased by $2.6 million, or 11.4%, to $25.7 million for the three months ended September 30, 2013 from $23.1 million for the three months ended September 30, 2012. Gross Profit (excluding depreciation and amortization) as a percentage of revenue decreased to 45.2%, for the three months ended September 30, 2013 compared to 48.2% for the three months ended September 30, 2012. This decrease is primarily attributable to systems integration projects which were impacted by both margin profile and project timing compared to prior period.

 

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Depreciation and Amortization. Depreciation and amortization expense increased by $0.7 million to $5.5 million for the three months ended September 30, 2013 from $4.8 million for the three months ended September 30, 2012. This increase is primarily attributable to the continued increase in our capital expenditures which support our growing operations.

Selling and Marketing. Selling and marketing expenses stayed consistent at approximately $0.9 million for the three months ended September 30, 2013 and 2012.

General and Administrative. General and administrative expenses increased by $2.6 million to $13.0 million for the three months ended September 30, 2013 from $10.4 million for the three months ended September 30, 2012. General and administrative costs increased primarily due to costs related to the upcoming acquisition of Inmarsat plc’s (Inmarsat) Energy Broadband business and increased compensation resulting from headcount additions and increased stock-based compensation.

Income Tax Expense. Our effective income tax rate was 51.7% and 46.9% for the three months ended September 30, 2013 and 2012, respectively. Our effective tax rates are affected by factors including fluctuations in income across jurisdictions with varying tax rates, changes in valuation allowances related to operating in a loss jurisdiction for which a benefit cannot be claimed, and changes in income tax reserves, including related penalties and interest. The unfavorable variance in the effective tax rate between the reporting periods was primarily impacted by recognizing a larger valuation allowance during the three months ended September 30, 2013 due to increased domestic losses caused by costs related to the upcoming acquisition of Inmarsat plc’s (Inmarsat) Energy Broadband business.

Nine Months Ended September 30, 2013 and 2012

Revenue. Revenue increased by $48.6 million, or 43.3%, to $161.0 million for the nine months ended September 30, 2013 from $112.4 million for the nine months ended September 30, 2012. This increase includes an increase of $29.6 million of revenue contributed by Nessco and is included in the Europe/Africa segment. Exclusive of Nessco, the revenue increased in each of our reportable segments. Americas revenue increased $2.3 million, or 6.4%, Europe/Africa revenue increased $6.0 million, or 19.4%, and MEAP revenue increased $10.7 million, or 31.2%. These increases are primarily due to an increase in sites served and increased revenue-per-site resulting from bandwidth upgrades and additional value-added services provided.

Cost of Revenue. Costs increased by $32.0 million, or 59.0%, to $86.2 million for the nine months ended September 30, 2013 from $54.2 million for the nine months ended September 30, 2012. This increase includes an increase of $21.4 million of costs incurred by Nessco. Exclusive of Nessco, cost of revenue increased by $10.6 million, primarily due to incremental network services and capacity required to serve the increased sites and bandwidth upgrades.

Gross Profit (excluding depreciation and amortization) increased by $16.6 million, or 28.6%, to $74.8 million for the nine months ended September 30, 2013 from $58.2 million for the nine months ended September 30, 2012. This increase includes an increase of $8.2 million of Gross Profit (excluding depreciation and amortization) contributed by Nessco. Excluding Nessco, Gross Profit (excluding depreciation and amortization) as a percentage of revenue decreased to 54.5%, for the nine months ended September 30, 2013 compared to 56.4% for the nine months ended September 30, 2012. This decrease is primarily attributable to increased costs of bandwidth capacity associated with increased site counts, bandwidth upgrades and increased project lead-time.

Depreciation and Amortization. Depreciation and amortization expense increased by $3.1 million to $15.7 million for the nine months ended September 30, 2013 from $12.6 million for the nine months ended September 30, 2012. Amortization expense increased due to the intangible assets purchased in the Nessco acquisition as well as the continued increase in our capital expenditures, which support our growing operations.

Selling and Marketing. Selling and marketing expenses increased by $0.5 million, or 20.9%, to $2.8 million for the nine months ended September 30, 2013 from $2.3 million for the nine months ended September 30, 2012.

General and Administrative. General and administrative expenses increased by $9.5 million to $36.3 million for the nine months ended September 30, 2013 from $26.8 million for the nine months ended September 30, 2012. This increase includes an increase of $1.6 million in costs incurred by Nessco during the nine months ended September 30, 2013. Excluding Nessco, general and administrative costs increased $7.9 million primarily due to increased compensation resulting from headcount additions and increased stock-based compensation, costs related to the upcoming acquisition of Inmarsat’s Energy Broadband business, and a contingent liability, and related legal costs, accrued related to potential violations of U.S. sanctions regulations (see “Regulatory Matter” section below).

Income Tax Expense. Our effective income tax rate was 40.8% and 44.7% for the nine months ended September 30, 2013 and 2012, respectively. Our effective tax rates are affected by factors including fluctuations in income across jurisdictions with varying tax rates, changes in valuation allowances related to operating in a loss jurisdiction for which a benefit cannot be claimed, and changes in income tax reserves, including related penalties and interest. The favorable variance in the effective tax rate between the reporting periods was primarily impacted as a result of strategic legal entity restructuring completed on December 31, 2012, which had tax implications.

 

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Liquidity and Capital Resources

Our primary sources of liquidity and capital since our formation have been proceeds from private equity issuances, stockholder loans, cash flow from operations, bank borrowings and our IPO. To date, our primary use of capital has been to fund our growing operations and to finance acquisitions.

At September 30, 2013, we had working capital of $68.1 million, including cash and cash equivalents of $49.6 million, current restricted cash of $0.8 million, accounts receivable of $47.2 million and other current assets of $12.3 million, offset by $12.4 million in accounts payable, $13.6 million in accrued expenses, $9.4 million in current maturities of long-term debt, $2.9 million in tax related liabilities and $3.5 million in deferred revenue.

Over the past three years, annual capital expenditures have grown from $13.5 million to $21.9 million due to continued increase of sites served. Based on our current expectations, we believe our liquidity and capital resources will be sufficient for the conduct of our business and operations for the foreseeable future. We may also use a portion of our available cash to finance growth through the acquisition of, or investment into, businesses, products, services or technologies complementary to our current business, through mergers, acquisitions, and joint ventures or otherwise.

During the next twelve months, we expect our principal sources of liquidity to be cash flows from operating activities, availability under our undrawn credit facility, as well as financing activities related to our anticipated acquisition of Inmarsat’s Energy Broadband retail business. In forecasting our cash flows we have considered factors including contracted services related to long-term deepwater drilling programs, U.S. land rig count trends, projected oil and natural gas prices, contracted and available satellite bandwidth and the additional operations acquired from Nessco.

Beyond the next twelve months, we expect our principal sources of liquidity to be cash flows provided by operating activities, cash and cash equivalents and additional financing activities we may pursue, which may include equity offerings.

While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may want to pursue additional expansion opportunities within the next year which could require additional financing, either debt or equity.

 

     Nine Months Ended  
     September 30,  
     2013     2012  
     (in thousands)  

Condensed Consolidated Statements of Cash Flows Data:

    

Cash and cash equivalents, January 1,

   $ 59,744      $ 53,106   

Net cash provided by operating activities

     15,353        17,459   

Net cash used in investing activities

     (21,391     (59,691

Net cash provided by (used in) financing activities

     (2,728     40,384   

Changes in foreign currency translation

     (1,394     2,422   
  

 

 

   

 

 

 

Cash and cash equivalents, September 30,

   $ 49,584      $ 53,680   
  

 

 

   

 

 

 

Currently, the Norwegian kroner and the British pound sterling are the currencies that could materially impact our liquidity. Our historical experience with exchange rates for these currencies has been relatively stable and, consequently, we do not typically hedge these risks, but evaluate these risks on a continual basis and may put financial instruments in place in the future if deemed necessary. During the nine months ended September 30, 2013 and 2012, 62.1% and 72.1% of our revenue was denominated in U.S. dollars, respectively. This increase in non-U.S. dollar denominated revenue resulted from the addition of Nessco operations which are primarily denominated in British pounds sterling.

Operating Activities

Net cash provided by operating activities was $15.4 million for the nine months ended September 30, 2013 compared to $17.5 million for the nine months ended September 30, 2012. The decrease in cash provided by operating activities during 2013 of $2.1 million was primarily due to the increased deferred revenue related to systems integration projects accounted for under the percentage-of-completion method and the timing of collections of our accounts receivable, offset by the increased profitability of our core operations.

 

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Our cash provided by operations is subject to many variables, the most significant of which is the volatility of the oil and gas industry and, therefore, the demand for our services. Other factors impacting operating cash flows include the availability and cost of satellite bandwidth, as well as the timing of collecting our receivables. Our future cash flow from operations will depend on our ability to increase our contracted services through our sales and marketing efforts while leveraging the contracted satellite and other communication service costs.

Investing Activities

Net cash used in investing activities was $21.4 million and $59.7 million for the nine months ended September 30, 2013 and 2012, respectively. Net cash used during the nine months ended September 30, 2012 includes cash paid for the acquisition of Nessco totaling $40.5 million, net of cash acquired of $6.0 million.

Additionally, net cash used during the nine months ended September 30, 2013 and 2012 includes capital expenditures of $22.1 million and $16.6 million, respectively. We expect capital expenditures to continue to increase during 2013 primarily resulting from growth opportunities arising from increasing demand for our services.

Financing Activities

Net cash used in financing activities was $2.7 million and net cash provided by financing activities was $40.4 million in the nine months ended September 30, 2013 and 2012, respectively. Cash used by financing activities during these periods include $7.2 million and $6.8 million of principal payments on our long-term debt, respectively. Additionally, proceeds of $47.2 million from the amendment of our term loan in connection with the Nessco acquisition were received during the nine months ended September 30, 2012.

Term Loan

The Company has a term loan (Term Loan) with two participating financial institutions. In July 2012, the Company amended its Term Loan, increasing the principal balance by $47.2 million, extending the maturity of the loan from May 2014 to July 2017. Additionally, the amended Term Loan bears an interest rate of LIBOR plus a margin ranging from 2.00% to 3.00%, based on a ratio of funded debt to Adjusted EBITDA, a non-GAAP financial measure as defined in the agreement.

Interest is payable monthly along with quarterly principal installments of $2.4 million, with the balance due July 31, 2017. The weighted average interest rate for the three and nine months ended September 30, 2013 was 2.8% and 2.9%, respectively, with an interest rate of 2.7% at September 30, 2013.

The Term Loan is secured by substantially all the assets of the Company. As of September 30, 2013, the Term Loan had outstanding principal of $54.6 million.

The Term Loan agreement imposes certain restrictions including our ability to obtain additional debt financing and on our payment of cash dividends. It also requires us to maintain certain financial covenants such as a funded debt to Adjusted EBITDA ratio of less than or equal to 2.5 to 1.0 and a fixed charge coverage ratio of not less than 1.35 to 1.0. As of September 30, 2013 and December 31, 2012, we believe we were in compliance with all covenants.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet arrangements.

Regulatory Matter

Our internal compliance program has recently detected potential violations of U.S. sanctions regulations by one of our foreign subsidiaries in connection with certain of our customers’ rigs that were moved into the territorial waters of countries sanctioned by the United States. We estimate that we received total revenue of approximately $0.1 million during the period related to the potential violations. These countries are subject to a number of economic regulations, including sanctions administered by OFAC, and comprehensive restrictions on the export and re-export of U.S.-origin items to these countries administered by BIS. Our customers that are not based in the U.S. are not subject to the same restrictions on operating in these countries as we are, but we are prohibited from providing services or facilitating the provision of services to their rigs in transit to or while operating in a sanctioned country.

 

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Failure to comply with applicable laws and regulations relating to sanctions and export restrictions may subject us to criminal sanctions and civil remedies, including fines, denial of export privileges, injunctions or seizures of our assets. We have voluntarily self-reported the potential violations to OFAC and BIS and retained outside counsel who conducted an investigation of the matter and submitted a report to OFAC and BIS. We continue to cooperate with these agencies with respect to resolution of the matter.

We incurred legal expenses of $0.9 million in connection with the investigation as of September 30, 2013. We may continue to incur significant legal fees and related expenses, and the investigations may involve management time in the future in order to cooperate with OFAC and BIS. We cannot predict the ultimate outcome of the investigation, the total costs to be incurred in completing the investigation, the potential impact on personnel, the effect of implementing any further measures that may be necessary to ensure full compliance with applicable laws or to what extent, if at all, we could be subject to fines, sanctions or other penalties.

Non-GAAP Measures

The non-GAAP financial measures, Gross Profit (excluding depreciation and amortization) and Adjusted EBITDA, may not be comparable to similarly titled measures used by other companies. Therefore, these non-GAAP measures should be considered in conjunction with net income and other performance measures prepared in accordance with GAAP, such as gross profit, operating income or net cash provided by operating activities. Further, Gross Profit (excluding depreciation and amortization) and Adjusted EBITDA should not be considered in isolation or as a substitute for GAAP measures such as net income, gross profit, operating income or any other GAAP measure of liquidity or financial performance. Our Gross Profit (excluding depreciation and amortization) and Adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate Gross Profit (excluding depreciation and amortization), Adjusted EBITDA or similarly titled measures in the same manner as we do. We prepare Gross Profit (excluding depreciation and amortization) and Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We encourage you to evaluate these adjustments and the reasons we consider them appropriate.

We believe Adjusted EBITDA is useful to investors in evaluating our operating performance for the following reasons:

 

    Securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies, and we understand our investor and analyst presentations include Adjusted EBITDA;

 

    By comparing our Adjusted EBITDA in different periods, our investors may evaluate our operating results without the additional variations caused by items that we do not consider indicative of our core operating performance and which are not necessarily comparable from year to year; and

 

    Adjusted EBITDA is an integral component of the financial ratio covenants of our debt agreement.

Our management uses Adjusted EBITDA:

 

    To indicate profit contribution;

 

    For planning purposes, including the preparation of our annual operating budget and as a key element of annual incentive programs;

 

    To allocate resources to enhance the financial performance of our business; and

 

    In communications with our Board of Directors concerning our financial performance.

Although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:

 

    Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments;

 

    Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA does not reflect interest expense;

 

    Adjusted EBITDA does not reflect cash requirements for income taxes;

 

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    Adjusted EBITDA does not reflect the stock based compensation component of employee compensation;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements; and

 

    Other companies in our industry may calculate Adjusted EBITDA or similarly titled measures differently than we do, limiting its usefulness as a comparative measure.

The following table presents a reconciliation of our gross profit to Gross Profit (excluding depreciation and amortization).

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2013      2012      2013      2012  
     (in thousands)  

Gross profit

   $ 20,564       $ 18,487       $ 59,946       $ 46,264   

Depreciation and amortization related to cost of revenue

     5,152         4,602         14,868         11,932   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross Profit (excluding depreciation and amortization)

   $ 25,716       $ 23,089       $ 74,814       $ 58,196   
  

 

 

    

 

 

    

 

 

    

 

 

 

GAAP defines gross profit as revenue less cost of revenue, and includes in costs of revenue depreciation and amortization expenses related to revenue-generating long-lived and intangible assets. We define Gross Profit (excluding depreciation and amortization) as revenue less cost of revenue (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit as we do not include the impact of depreciation and amortization expenses related to revenue-generating long-lived and intangible assets which represent non-cash expenses. We use this measure to evaluate operating margins and the effectiveness of cost management.

The following table presents a reconciliation of our net income to Adjusted EBITDA.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013      2012     2013      2012  
     (in thousands)  

Net income

   $ 2,407       $ 3,173      $ 11,097       $ 8,528   

Interest expense

     432         611        1,379         927   

Depreciation and amortization

     5,450         4,837        15,668         12,571   

(Gain) loss on sales of property and equipment, net of retirements

     93         (90     167         (141

Stock-based compensation

     696         592        2,226         1,874   

Acquisition costs

     2,791         461        2,791         1,123   

Income tax expense

     2,581         2,808        7,645         6,883   
  

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted EBITDA (non-GAAP measure)

   $ 14,450       $ 12,392      $ 40,973       $ 31,765   
  

 

 

    

 

 

   

 

 

    

 

 

 

We evaluate Adjusted EBITDA generated from our operations and operating segments to assess the potential recovery of historical capital expenditures, determine timing and investment levels for growth opportunities, extend commitments of satellite bandwidth cost to expand our offshore production platform and vessel market share, invest in new products and services, expand or open new offices, service centers and SOIL nodes, and assist purchasing synergies.

Adjusted EBITDA increased by $2.1 million to $14.5 million for the three months ended September 30, 2013, from $12.4 million for the three months ended September 30, 2012. Adjusted EBITDA increased by $9.2 million to $41.0 million for the nine months ended September 30, 2013, from $31.8 million for the nine months ended September 30, 2012. These increases resulted from the addition of Nessco operations, as well as organic growth in our core offshore operations partially offset by costs associated with headcount additions and one-time costs related to potential violations of U.S. sanctions regulations (see “Regulatory Matter” section above).

Item 3. Qualitative and Quantitative Disclosures about Market Risk

We are subject to a variety of risks, including foreign currency exchange rate fluctuations relating to foreign operations and certain purchases from foreign vendors. In the normal course of business, we assess these risks and have established policies and procedures to manage our exposure to fluctuations in foreign currency values.

 

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Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates. We do not currently use foreign currency forward contracts to hedge our exposure on firm commitments denominated in foreign currencies, but evaluate this on a continual basis and may put financial instruments in place in the future if deemed necessary. During the nine months ended September 30, 2013 and 2012, 37.9% and 27.9%, respectively of our revenues were earned in non-U.S. currencies. This increase in non-U.S. dollar denominated revenue resulted from the addition of our Nessco operations which are primarily denominated in British pounds sterling. At September 30, 2013 and 2012, we had no significant outstanding foreign exchange contracts.

Our results of operations and cash flows are subject to fluctuations due to changes in interest rates primarily from our variable interest rate long-term debt. We do not currently use financial instruments to hedge these interest risk exposures, but evaluate this on a continual basis and may put financial instruments in place in the future if deemed necessary. The following analysis reflects the annual impacts of potential changes in our interest rate to net income (loss) attributable to us and our total stockholders’ equity based on our outstanding long-term debt on September 30, 2013 and December 31, 2012, assuming those liabilities were outstanding for the previous twelve months:

 

     September 30,      December 31,  
     2013      2012  
     (in thousands)  

Effect on Net Income and Equity—Increase/Decrease:

     

1% Decrease/increase in rate

   $ 542       $ 618   

2% Decrease/increase in rate

   $ 1,083       $ 1,235   

3% Decrease/increase in rate

   $ 1,625       $ 1,853   

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we have been subject to various claims and legal actions in the ordinary course of our business. We are not currently involved in any legal proceeding the ultimate outcome of which, in our judgment based on information currently available, would have a material impact on our business, financial condition or results of operations.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012 except that: our internal compliance program has identified and we have self-reported potential OFAC or BIS compliance issues involving certain of our customers’ rigs that were moved into the territorial waters of countries sanctioned by the United States. See “Part I- Financial Information, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Regulatory Matter” of this report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

 

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INDEX TO EXHIBITS

 

2.1    Share Purchase Agreement between RigNet, Inc. and the shareholders of Nessco Group Holdings Ltd. dated July 5, 2012 (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 2, 2012, and incorporated herein by reference)
3.1    Amended and Restated Certificate of Incorporation (filed as Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 [File No. 333-169723], as amended, and incorporated herein by reference)
3.2    Amended and Restated Bylaws (filed as Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1 [File No. 333-169723], as amended, and incorporated herein by reference)
4.1    Specimen certificate evidencing common stock (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 [File No. 333-169723], as amended, and incorporated herein by reference)
4.2    Registration Rights Agreement dated effective as of September 20, 2005 among the Registrant and the holders of our preferred stock party thereto (filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 [File No. 333-169723], as amended, and incorporated herein by reference)
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Schema Document
101.CAL    XBRL Calculation Linkbase Document
101.LAB    XBRL Label Linkbase Document
101.PRE    XBRL Presentation Linkbase Document
101.DEF    XBRL Definition Linkbase Document

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

        RIGNET, INC.
Date: November 4, 2013   By:   /s/ MARTIN L. JIMMERSON, JR.
   

 

    Martin L. Jimmerson, Jr.
   

Chief Financial Officer

(Principal Financial & Accounting Officer)

 

30

Exhibit 31.1

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER

OF RIGNET, INC.

PURSUANT TO 15 U.S.C. SECTION 7241, AS ADOPTED

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Mark Slaughter, certify that:

 

  a. I have reviewed this Quarterly Report on Form 10-Q of RigNet, Inc. (the “Registrant”);

 

  b. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  c. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

  d. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

  a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

  d. disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

  e. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

Date: November 4, 2013     By:   /s/ MARK SLAUGHTER
      Mark Slaughter
      Chief Executive Officer and President

Exhibit 31.2

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER

OF RIGNET, INC.

PURSUANT TO 15 U.S.C. SECTION 7241, AS ADOPTED

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Martin Jimmerson, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of RigNet, Inc. (the “Registrant”);

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

  4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

  a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

  d. disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

  5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

Date: November 4, 2013     By:   /s/ MARTIN JIMMERSON
      Martin Jimmerson
      Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER

OF RIGNET, INC.

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q for the period ended September 30, 2013 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark Slaughter, Chief Executive Officer of RigNet, Inc. (the “Company”), hereby certify, to my knowledge, that:

 

  1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 4, 2013       /s/ MARK SLAUGHTER
      Mark Slaughter
      Chief Executive Officer and President

Exhibit 32.2

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER

OF RIGNET, INC.

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q for the period ended September 30, 2013 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Martin Jimmerson, Chief Financial Officer of RigNet, Inc. (the “Company”), hereby certify, to my knowledge, that:

 

  1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 4, 2013       /s/ MARTIN JIMMERSON
      Martin Jimmerson
      Chief Financial Officer