NINE ENERGY SERVICE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements for the three and six months endedJune 30, 2020 , included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," including "Critical Accounting Policies," included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . This section contains forward-looking statements based on our current expectations, estimates, and projections about our operations and the industry in which we operate. Our actual results may differ materially from those discussed in any forward-looking statement because of various risks and uncertainties, including those described in the sections titled "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q, "Risk Factors" in our Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2020 , and "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . OVERVIEW Company DescriptionNine Energy Service, Inc. (either individually or together with its subsidiaries, as the context requires, the "Company," "Nine" "we," "us," and "our") is a leading North American onshore completion services provider that targets unconventional oil and gas resource development. We partner with our exploration and production ("E&P") customers across all major onshore basins in boththe United States andCanada as well as abroad to design and deploy downhole solutions and technology to prepare horizontal, multistage wells for production. We focus on providing our customers with cost-effective and comprehensive completion solutions designed to maximize their production levels and operating efficiencies. We believe our success is a product of our culture, which is driven by our intense focus on performance and wellsite execution as well as our commitment to forward-leaning technologies that aid us in the development of smarter, customized applications that drive efficiencies. Business Segments The Completion Solutions segment provides services integral to the completion of unconventional wells through a full range of tools and methodologies. Through the Completion Solutions segment, we provide (i) cementing services, which consist of blending high-grade cement and water with various solid and liquid additives to create a cement slurry that is pumped between the casing and the wellbore of the well, (ii) an innovative portfolio of completion tools, including those that provide pinpoint frac sleeve system technologies as well as a portfolio of completion technologies used for completing the toe stage of a horizontal well and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug and perf operations, (iii) wireline services, the majority of which consist of plug-and-perf completions, which is a multistage well completion technique for cased-hole wells that consists of deploying perforating guns to a specified depth, and (iv) coiled tubing services, which perform wellbore intervention operations utilizing a continuous steel pipe that is transported to the wellsite wound on a large spool in lengths of up to 30,000 feet and which provides a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well. OnAugust 30, 2019 , we entered into a Membership Interest Purchase Agreement ("Production Solutions Purchase Agreement") withBrigade Energy Services LLC ("Brigade"). Pursuant to the Production Solutions Purchase Agreement, on such date, through the sale of all of the limited liability interests of our wholly owned subsidiary,Beckman Holding Production Services, LLC , we sold our Production Solutions segment to Brigade. For additional information on this divestiture, see Note 13 - Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q. Prior toAugust 30, 2019 , we reported our results in two segments, the Completions Solutions segment and the Production Solutions segment. The Production Solutions segment provided a range of production enhancement and well workover services that were performed with a well servicing rig and ancillary equipment. Our well servicing business encompassed a full range of services performed with a mobile well servicing rig (or workover rig) and ancillary equipment throughout a well's life cycle from completion to ultimate plug and abandonment. Our rigs and personnel installed and removed downhole equipment and eliminated obstructions in the well to facilitate the flow of oil and natural gas. How We Generate Revenue and the Costs of Conducting Our Business We generate our revenues by providing completion services to E&P customers across all major onshore basins in both 18 --------------------------------------------------------------------------------the United States andCanada as well as abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically will enter into a Master Service Agreement ("MSA") with each customer that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Each specific job is obtained through competitive bidding or as a result of negotiations with customers. The rate we charge is determined by location, complexity of the job, operating conditions, duration of the contract, and market conditions. In addition to MSAs, we have entered into a select number of longer-term contracts with certain customers relating to our wireline and cementing services, and we may enter into similar contracts from time to time to the extent beneficial to the operation of our business. These longer-term contracts address pricing and other details concerning our services, but each job is performed on a standalone basis. The principal expenses involved in conducting our business include labor costs, materials and freight, the costs of maintaining our equipment, and fuel costs. Our direct labor costs vary with the amount of equipment deployed and the utilization of that equipment. Another key component of labor costs relates to the ongoing training of our field service employees, which improves safety rates and reduces employee attrition. How We Evaluate Our Operations We evaluate our performance based on a number of financial and non-financial measures, including the following: • Revenue: We compare actual revenue achieved each month to the most recent projection for that month and to the annual plan for the month established at the beginning of the year. We monitor our revenue to analyze trends in the performance of our operations compared to historical revenue drivers or market metrics. We are particularly interested in identifying positive or negative trends and investigating to understand the root causes. • Adjusted Gross Profit (Loss): Adjusted gross profit (loss) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). Costs of revenues include direct and indirect labor costs, costs of materials, maintenance of equipment, fuel and transportation freight costs, contract services, crew cost, and other miscellaneous expenses. For additional information, see "Non-GAAP Financial Measures" below. • Adjusted EBITDA: We define Adjusted EBITDA as net income (loss) before interest, taxes, and depreciation and amortization, further adjusted for (i) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) gain on extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (viii) loss or gain on sale of property and equipment, (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. For additional information, see "Non-GAAP Financial Measures" below. • Return onInvested Capital ("ROIC"): We define ROIC as
after-tax net
operating profit (loss), divided by average total capital. We define
after-tax net operating profit (loss) as net income (loss) plus (i)
property and equipment, goodwill, and/or intangible asset impairment
charges, (ii) transaction and integration costs related to
acquisitions, (iii) interest expense (income), (iv)restructuring
charges, (v) loss or gain on the sale of subsidiaries, (vi) gain on
extinguishment of debt, and (vii) the provision or benefit for
deferred income taxes. We define total capital as book value of
equity plus the book value of debt less balance sheet cash and cash
equivalents. We compute the average of the current and prior
period-end total capital for use in this analysis. For additional
information, see "Non-GAAP Financial Measures" below.
• Safety: We measure safety by tracking the total recordable incident
rate ("TRIR"), which is reviewed on a monthly basis. TRIR is a
measure of the rate of recordable workplace injuries, defined below,
normalized and stated on the basis of 100 workers for an annual
period. The factor is derived by multiplying the number of
recordable injuries in a calendar year by 200,000 (i.e., the total
hours for 100 employees working 2,000 hours per year) and dividing
this value by the total hours actually worked in the year. A
recordable injury includes occupational death, nonfataloccupational
illness, and other occupational injuries that involve loss of
consciousness, restriction of work or motion, transfer to another
job, or medical treatment other than first aid.
19--------------------------------------------------------------------------------
Factors Affecting the Comparability of Our Results of Operations Our future results of operations may not be comparable to our historical results of operations for the periods presented, and our historical results of operations among the periods presented may not be comparable to each other, primarily due to our divestiture of the Production Solutions segment.
The historical results of operations for the three and six months endedJune 30, 2020 included in this Quarterly Report on Form 10-Q do not include activity related to the Production Solutions segment whereas the historical results of operations for the three and six months endedJune 30, 2019 do include activity related to the Production Solutions segment for the entire period. Furthermore, future results of operations afterAugust 30, 2019 will not include activity related to the Production Solutions segment. For additional information on the divestiture of the Production Solutions segment, see Note 13 - Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q. Recent Events, Industry Trends, and Outlook Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by the current and expected oil and natural gas prices. The worldwide coronavirus outbreak in early 2020, which was declared a pandemic by theWorld Health Organization inMarch 2020 , the uncertainty regarding its impact, and various governmental actions taken to mitigate its impact have resulted in an unprecedented decline in demand for oil. In the midst of the ongoing pandemic, theOrganization of Petroleum Exporting Countries and other oil producing nations, includingRussia ("OPEC+"), were initially unable to reach an agreement on production levels for crude oil, at which pointSaudi Arabia andRussia initiated efforts to aggressively increase production. The convergence of these events created the unprecedented dual impact of a massive decline in the demand for oil coupled with the risk of a substantial increase in supply. While OPEC+ agreed inApril 2020 to cut production, downward pressure on commodity prices has remained and could continue for the foreseeable future. During the first half of the year, the posted price for West Texas Intermediate ("WTI") oil decreased from a high of$63 per barrel in earlyJanuary 2020 to a one-day low of$(37) per barrel in lateApril 2020 , a level which had not been previously experienced, with physical markets showing signs of distress as spot prices have been negatively impacted by the lack of available storage capacity. In response to lower oil prices, our customers have generally revised their capital budgets downward and adjusted their operations accordingly, which has caused a significant decline in demand for our products and services. These reductions were most evident in thePermian Basin where total completions have declined by approximately 77% in June from the 2020 high in February. This overall decline in activity, coupled with downward pricing pressure, has led to a significant reduction in our revenue and profitability in the second quarter of 2020. We expect these trends to continue through at least the remainder of the year. While we cannot predict the length of time that market disruptions resulting from the coronavirus pandemic and efforts to mitigate its effects will continue, the ultimate impact on our business, or the pace or extent of any subsequent recovery, we expect the coronavirus pandemic and related effects to continue to have an adverse impact on commodity prices and our business generally. We have experienced inefficiencies and logistical challenges surrounding stay-at-home orders and remote work arrangements, travel restrictions, and an inability to commute to certain facilities and job sites, as we provide services and products to our customers. For additional information regarding risks relating to the coronavirus outbreak, see "Risk Factors" in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2020 . During the pandemic, we have maintained our commitment to the safety of our employees, customers, vendors, and community at large, and we have taken, and are continuing to take, a proactive approach to navigating the pandemic. To mitigate exposure and risk, we have implemented processes and procedures across our entire organization based on federal, regional, and local guidelines and mandates, and our Health, Safety & Environment and management teams are in frequent communication with our entire employee base to ensure they are receiving updated guidelines, processes, and procedures. In response to the pandemic, we have implemented the following changes, for example: at the field level, we are working closely with our customers and vendors to update standard operating procedures, based on social distancing, hand washing, and other recommended best practices set forth by theCenters for Disease Control and Prevention ; electronic assessments have been employed to check the health of employees prior to reporting to work, to ensure facilities are being properly cleaned and sanitized, and to check visitor health before arrival to a Nine location; internal case managers have been identified to handle all coronavirus-related cases, and all confirmed and potential cases are tracked through closure; many of our corporate and office employees are working virtually to avoid unnecessary risk and exposure; and we have significantly limited any work-related travel. We are actively monitoring updates from regulatory and government bodies and evolving our strategy accordingly in an effort to keep our workforce and communities healthy. 20 -------------------------------------------------------------------------------- Other significant factors that are likely to affect commodity prices for the remainder of the year include the extent to which members of OPEC+ and other oil exporting nations continue to reduce oil export prices and increase production; the effect of energy, monetary, and trade policies ofthe United States ; the pace of economic growth inthe United States and throughout the world, including the potential for macro weakness; geopolitical and economic developments inthe United States and globally; the outcome ofthe United States presidential election and subsequent energy andEnvironmental Protection Agency policies; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows. Even with price improvements in oil and natural gas, operator activity may not materially increase, as operators remain focused on operating within their capital plans, and uncertainty remains around supply and demand fundamentals. In this challenging environment, we will nevertheless continue to focus on generating returns and cash flow. Due to our high level of variable costs and the asset-light make-up of our business, we have been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. These cost-cutting measures include salary reductions for key employees ranging from 10% to 15%, the suspension of the company match (which totaled$4.8 million in 2019) under ourNine Energy Service 401(k) Plan, and headcount reductions of 56% across the entire organization as ofJuly 20, 2020 in comparison toDecember 31, 2019 . In addition, we have revised our capital expenditure budget, excluding possible acquisitions, to between$10.0 million to$15.0 million for 2020 and deferred or eliminated certain capital projects, where necessary. During the first six months of 2020, we incurred approximately$5.0 million of capital expenditures compared to$37.3 million for the first six months of 2019. Generally, operators have continued to improve operational efficiencies in completions design, increasing the complexity and difficulty, making oilfield service selection more important. This increase in high-intensity, high-efficiency completions of oil and gas wells further enhances the demand for our services. We compete for the most complex and technically demanding wells in which we specialize, which are characterized by extended laterals, increased stage spacing, multi-well pads, cluster spacing, and high proppant loads. These well characteristics lead to increased operating leverage and returns for us, as we are able to complete more jobs and stages with the same number of units and crews. Service providers for these projects are selected based on their technical expertise and ability to execute safely and efficiently, rather than only price. 21 -------------------------------------------------------------------------------- Results of Operations Results for the Three Months EndedJune 30, 2020 Compared to the Three Months EndedJune 30, 2019 Three Months Ended June 30, 2020 2019 Change (in thousands) Revenues Completion Solutions$ 52,735 $ 215,871 $ (163,136 ) Production Solutions (1) -
21,646 (21,646 )
$ 52,735 $ 237,517 $ (184,782 ) Cost of revenues (exclusive of depreciation and amortization shown separately below) Completion Solutions$ 56,703 $
166,022
Production Solutions (1) -
18,533 (18,533 )
$ 56,703 $ 184,555 $ (127,852 ) Adjusted gross profit (loss) Completion Solutions$ (3,968 ) $
49,849
Production Solutions (1) -
3,113 (3,113 )
$ (3,968 ) $
52,962
General and administrative expenses$ 11,284 $ 21,818 $ (10,534 ) Depreciation 8,449 13,846 (5,397 ) Amortization of intangibles 4,116 4,628 (512 ) Impairment of goodwill - - - (Gain) loss on revaluation of contingent liabilities 910 (975 ) 1,885 Gain on sale of property and equipment (1,790 ) (310 ) (1,480 ) Income (loss) from operations (26,937 ) 13,955 (40,892 ) Non-operating (income) expenses (2,580 ) 10,603 (13,183 ) Income (loss) before income taxes (24,357 ) 3,352 (27,709 ) Benefit for income taxes (186 ) (2,735 ) 2,549 Net income (loss)$ (24,171 ) $ 6,087 $ (30,258 ) (1)We sold the Production Solutions segment to Brigade onAugust 30, 2019 . For additional information on the Production Solutions divestiture, see Note 13 - Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q. 22 --------------------------------------------------------------------------------
Revenues
Revenues decreased$184.8 million , or 78%, to$52.7 million for the second quarter of 2020 which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in comparison to the second quarter of 2019. We depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore inNorth America . In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the second quarter of 2020, the average closing price was$27.96 per barrel of WTI, and the average closing price of natural gas was$1.70 per MMBtu. During the second quarter of 2019, the average closing price of WTI was$59.88 per barrel, and the average closing price of natural gas was$2.57 per MMBtu. Additional information with respect to revenues by historical reportable segment is discussed below. Completion Solutions: Revenue decreased$163.1 million , or 76%, to$52.7 million for the second quarter of 2020. The decrease was prevalent across all lines of service and was a direct reflection of pricing pressures caused by reasons described above. More specifically, wireline revenue decreased$54.5 million , or 85%, as total completed wireline stages decreased by 81%, in comparison to the second quarter of 2019. Tools revenue decreased$41.0 million , or 73%, as completion tools stages decreased by 70%, and completion tools revenue by stage decreased by 12% in comparison to the second quarter of 2019. Cementing revenue (including pump downs) decreased by$36.3 million , or 64% as our total cement job count decreased 62% in comparison to the second quarter of 2019, and coiled tubing revenue decreased by$31.3 million , or 81%, as total days worked decreased by 70% in comparison to the second quarter of 2019. Production Solutions: Revenue decreased$21.7 million , or 100%, for the second quarter of 2020 as the Production Solutions segment was sold onAugust 30, 2019 . Cost of Revenues (Exclusive of Depreciation and Amortization) Cost of revenues decreased$127.9 million , or 69%, to$56.7 million for the second quarter of 2020, which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic as well as international pricing and production disputes, in comparison to the second quarter of 2019. Additional information with respect to cost of revenues by historical reportable segment is discussed below. Completion Solutions: Cost of revenues decreased$109.3 million , or 66%, to$56.7 million for the second quarter of 2020. The decrease in comparison to the second quarter of 2019 was prevalent across all lines of service and was a direct reflection of reasons described above. More specifically, the decrease was primarily related to a$68.3 million decrease in materials installed and consumed while performing services, a$33.3 million decrease in employee costs, and a$10.8 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses. The overall decrease in cost of revenues was partially offset by a$1.7 million increase in bad debt expense between periods, coupled with a$1.4 million increase in severance and other cost of revenue type restructuring costs mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry. Production Solutions: Cost of revenues decreased$18.6 million , or 100%, for the second quarter of 2020 as the Production Solutions segment was sold onAugust 30, 2019 . Adjusted Gross Profit (Loss) Completion Solutions: Adjusted gross profit decreased$53.8 million to a$4.0 million loss for the second quarter of 2020 due to the factors described above under "Revenues" and "Cost of Revenues." Production Solutions: Adjusted gross profit decreased$3.1 million to$0.0 million for the second quarter of 2020 as a result of the factors described above under "Revenues" and "Cost of Revenues." General and Administrative Expenses General and administrative expenses decreased$10.5 million to$11.3 million for the second quarter of 2020. The decrease in comparison to the second quarter of 2019 was primarily related to a$6.8 million decrease in employee costs due mainly to headcount reductions across the organization. The overall decrease was also partly attributed to a$2.4 million decrease in transaction and integration costs associated with the Magnum Acquisition and a$2.0 million decrease in other costs 23 -------------------------------------------------------------------------------- such as professional fees, marketing, and travel expenses, as well as expenses associated with the recently sold Production Solutions segment. The overall decrease in general and administrative expenses was partially offset by an increase in severance and other general and administrative type restructuring costs of$0.7 million mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry. Depreciation Depreciation expense decreased$5.4 million to$8.4 million for the second quarter of 2020. The decrease in comparison to the second quarter of 2019 was primarily related to a$2.6 million reduction in depreciation expense associated with our coiled tubing business mainly due to the property and equipment charge recorded in the fourth quarter of 2019, coupled with a$1.9 million reduction in depreciation expense in the Production Solutions segment, which was sold onAugust 30, 2019 , and a$0.9 million reduction in depreciation expense in other lines of service within our Completion Solutions segment due to a decrease in capital expenditures between periods. Amortization of Intangibles Amortization of intangibles decreased$0.5 million to$4.1 million for the second quarter of 2020, primarily due to a$0.3 million decrease in amortization associated with certain non-compete agreements that were fully amortized in 2019, coupled with a$0.2 million decrease in intangible assets associated with our coiled tubing business mainly due to the intangible asset impairment charge recorded in the fourth quarter of 2019. (Gain) Loss on Revaluation of Contingent Liabilities We recorded a$0.9 million loss on the revaluation of contingent liabilities for the second quarter of 2020 compared to a$1.0 million gain on the revaluation of contingent liabilities for the second quarter of 2019. The$1.9 million change was primarily related to a$0.6 million loss on the revaluation of the Magnum Earnout (as defined in Note 10 - Commitments and Contingencies included in Item 1 of Part I of this Quarterly Report on Form 10-Q) for the second quarter of 2020 compared to a$1.3 million gain on the revaluation of the Magnum Earnout for the second quarter of 2019. The Magnum Earnout was terminated in the second quarter of 2020. Non-Operating (Income) Expenses We recorded$2.6 million in non-operating income for the second quarter of 2020 compared to$10.6 million in non-operating expenses for the second quarter of 2019. The$13.2 million change was primarily related to an$11.6 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined in "Liquidity and Capital Resources") in the second quarter of 2020 that did not occur in the second quarter of 2019. The change is also partly attributed to a$1.6 million reduction in interest expense between periods. Provision (Benefit) for Income Taxes We recorded a$0.2 million income tax benefit for the second quarter of 2020 compared to a$2.7 million income tax benefit for the second quarter of 2019. The$2.5 million decrease in the income tax benefit was primarily a result of the valuation allowance movement recorded during the second quarter of 2019 that did not recur during the second quarter of 2020. Adjusted EBITDA Adjusted EBITDA decreased$49.1 million to a loss of$11.0 million for the second quarter of 2020. The Adjusted EBITDA decrease was primarily due to the changes in revenues and expenses discussed above. See "Non-GAAP Financial Measures" below for further explanation. 24 -------------------------------------------------------------------------------- Results for the Six Months EndedJune 30, 2020 Compared to the Six Months EndedJune 30, 2019 Six Months Ended June 30, 2020 2019 Change (in thousands) Revenues Completion Solutions$ 199,359 $ 425,003 $ (225,644 ) Production Solutions (1) - 42,219 (42,219 )$ 199,359 $ 467,222 $ (267,863 ) Cost of revenues (exclusive of depreciation and amortization shown separately below) Completion Solutions$ 182,711 $ 327,461 $ (144,750 ) Production Solutions (1) - 35,684 (35,684 )$ 182,711 $ 363,145 $ (180,434 ) Adjusted gross profit Completion Solutions$ 16,648 $ 97,542 $ (80,894 ) Production Solutions (1) - 6,535 (6,535 )$ 16,648 $ 104,077 $ (87,429 ) General and administrative expenses$ 27,679 $ 41,757 $ (14,078 ) Depreciation 16,990 27,376 (10,386 ) Amortization of intangibles 8,285 9,316 (1,031 ) Impairment of goodwill 296,196 - 296,196 (Gain) loss on revaluation of contingent liabilities 484 (14,930 ) 15,414 Gain on sale of property and equipment (2,365 ) (333 ) (2,032 ) Income (loss) from operations (330,621 ) 40,891 (371,512 ) Non-operating (income) expenses (3,239 ) 19,769 (23,008 ) Income (loss) before income taxes (327,382 ) 21,122 (348,504 ) Benefit for income taxes (2,311 ) (2,275 ) (36 ) Net income (loss)$ (325,071 ) $ 23,397 $ (348,468 ) (1)We sold the Production Solutions segment to Brigade onAugust 30, 2019 . For additional information on the Production Solutions divestiture, see Note 13 - Segment Information included in Item 1 of Part I of this Quarterly Report on Form 10-Q. 25 --------------------------------------------------------------------------------
Revenues
Revenues decreased$267.9 million , or 57%, to$199.4 million for the first six months of 2020 which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in comparison to the first six months of 2019. We depend, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies onshore inNorth America . In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the first six months of 2020, the average closing price was$36.58 per barrel of WTI, and the average closing price of natural gas was$1.80 per MMBtu. During the first six months of 2019, the average closing price of WTI was$57.39 per barrel, and the average closing price of natural gas was$2.74 per MMBtu. Additional information with respect to revenues by historical reportable segment is discussed below. Completion Solutions: Revenue decreased$225.7 million , or 53%, to$199.4 million for the first six months of 2020. The decrease was prevalent across all lines of service and was a direct reflection of pricing pressures caused by reasons described above. More specifically, wireline revenue decreased$73.0 million , or 57%, as total completed wireline stages decreased by 50% in comparison to the first six months of 2019. Tools revenue decreased$62.5 million , or 57%, as completion tools stages decreased by 47%, and completion tools revenue by stage decreased by 21% in comparison to the first six months of 2019. Coiled tubing revenue decreased$49.2 million , or 64%, as total days worked decreased by 53% in comparison to the first six months of 2019, and cementing revenue (including pump downs) decreased by$41.0 million , or 37%, as our total cement job count decreased 35% in comparison to the first six months of 2019. Production Solutions: Revenue decreased$42.2 million , or 100%, for the first six months of 2020 as the Production Solutions segment was sold onAugust 30, 2019 . Cost of Revenues (Exclusive of Depreciation and Amortization) Cost of revenues decreased$180.4 million , or 50%, to$182.7 million for the first six months of 2020, which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions, including an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes, in comparison to the first six months of 2019. Additional information with respect to cost of revenues by historical reportable segment is discussed below. Completion Solutions: Cost of revenues decreased$144.8 million , or 44%, to$182.7 million for the first six months of 2020. The decrease in comparison to the first six months of 2019 was prevalent across all lines of service and was a direct reflection of reasons described above. More specifically, the decrease was primarily related to an$88.6 million decrease in materials installed and consumed while performing services, a$43.2 million decrease in employee costs, a$14.0 million decrease in other costs such as repair and maintenance, vehicle, travel, meals and entertainment, and office expenses, and a$2.7 million decrease in transaction and integration costs associated with the Magnum Acquisition. The overall decrease in cost of revenues was partially offset by a$2.3 million increase in severance and other cost of revenue type restructuring costs mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry, coupled with a$1.4 million increase in bad debt expense between periods. Production Solutions: Cost of revenues decreased$35.7 million , or 100%, for the first six months of 2020 as the Production Solutions segment was sold onAugust 30, 2019 . Adjusted Gross Profit (Loss) Completion Solutions: Adjusted gross profit decreased$80.9 million to$16.6 million for the first six months of 2020 due to the factors described above under "Revenues" and "Cost of Revenues." Production Solutions: Adjusted gross profit decreased$6.5 million to$0.0 million for the first six months of 2020 as a result of the factors described above under "Revenues" and "Cost of Revenues." General and Administrative Expenses General and administrative expenses decreased$14.1 million to$27.7 million for the first six months of 2020. The decrease in comparison to the first six months of 2019 was primarily related to an$8.8 million decrease in employee costs due mainly to headcount reductions across the organization. The overall decrease was also partly attributed to a$4.6 million 26 -------------------------------------------------------------------------------- decrease in transaction and integration costs associated with the Magnum Acquisition and a$2.8 million decrease in other costs such as professional fees, marketing, and travel expenses, as well as expenses associated with the recently sold Production Solutions segment. The overall decrease in general and administrative expenses was partially offset by an increase in severance and other general and administrative type restructuring costs of$2.1 million mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry. Depreciation Depreciation expense decreased$10.4 million to$17.0 million for the first six months of 2020. The decrease in comparison to the first six months of 2019 was primarily related to a$4.7 million reduction in depreciation expense associated with our coiled tubing business mainly due to the property and equipment charge recorded in the fourth quarter of 2019, coupled with a$3.8 million reduction in depreciation expense in the Production Solutions segment, which was sold onAugust 30, 2019 and a$1.9 million reduction in depreciation expense in other lines of service within our Completion Solutions segment due to a decrease in capital expenditures between periods. Amortization of Intangibles Amortization of intangibles decreased$1.0 million to$8.3 million for the first six months of 2020, primarily due to a$0.6 million decrease in amortization associated with certain non-compete agreements that were fully amortized in 2019, coupled with a$0.4 million decrease in intangible assets associated with our coiled tubing business mainly due to the intangible asset impairment charge recorded in the fourth quarter of 2019. Impairment ofGoodwill We recorded goodwill impairment charges of$296.2 million for the first six months of 2020 in our tools, cementing, and wireline reporting units due to sharp declines in global crude oil demand and an economic recession associated with the coronavirus pandemic, as well as, sharp declines in oil and natural gas prices associated with international pricing and production disputes. No goodwill impairment charges were recorded for the first six months of 2019. (Gain) Loss on Revaluation of Contingent Liabilities We recorded a$0.5 million loss on the revaluation of contingent liabilities for the first six months of 2020 compared to a$14.9 million gain on the revaluation of contingent liabilities for the first six months of 2019. The$15.4 million change was primarily related to an$0.8 million loss on the revaluation of the Magnum Earnout (as defined in Note 10 - Commitments and Contingencies included in Item 1 of Part I of this Quarterly Report on Form 10-Q) for the first six months of 2020 compared to a$15.4 million gain on the revaluation of the Magnum Earnout for the first six months of 2019. The Magnum Earnout was terminated in the second quarter of 2020. The change was partially offset by a$0.3 million gain on the revaluation of the earnout associated with our acquisition of Frac Technology AS (the "Frac Tech Earnout") for the first six months of 2020 compared to a$0.5 million loss on the revaluation of the Frac Tech Earnout for the first six months of 2019. Non-Operating (Income) Expenses We recorded$3.2 million in non-operating income for the first six months of 2020 compared to$19.8 million in non-operating expenses for the first six months of 2019. The$23.0 million change was primarily related to a$21.7 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined in "Liquidity and Capital Resources") in the first six months of 2020 that did not occur in the first six months of 2019. The change is also partly attributed to a$1.1 million reduction in interest expense between periods. Provision (Benefit) for Income Taxes We recorded a$2.3 million income tax benefit for both the first six months of 2020 and the first six months of 2019. The tax benefit for both periods was primarily driven by our valuation allowance movement. Adjusted EBITDA Adjusted EBITDA decreased$77.9 million to a loss of$0.7 million for the first six months of 2020. The Adjusted EBITDA decrease was primarily due to the changes in revenues and expenses discussed above. See "Non-GAAP Financial Measures" below for further explanation. 27 -------------------------------------------------------------------------------- Non-GAAP Financial Measures EBITDA and Adjusted EBITDA EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures that are used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies. We define EBITDA as net income (loss) before interest, depreciation, amortization of intangibles, and provision (benefit) for income taxes. We define Adjusted EBITDA as EBITDA further adjusted for (i) property and equipment, goodwill, and/or intangible asset impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) gain on extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. Management believes EBITDA and Adjusted EBITDA are useful because they allow us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at these measures because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired. These measures should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with accounting principles generally accepted inthe United States of America ("GAAP") or as an indicator of our operating performance. Certain items excluded from these measures are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of these measures. Our computations of these measures may not be comparable to other similarly titled measures of other companies. We believe that these are widely followed measures of operating performance. The following table presents a reconciliation of the non-GAAP financial measures of EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) for the three and six months endedJune 30, 2020 and 2019: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) (in thousands) EBITDA reconciliation: Net income (loss)$ (24,171 ) $ 6,087 $ (325,071 ) $ 23,397 Interest expense 9,186 10,771 19,014 20,097 Interest income (179 ) (168 ) (550 ) (328 ) Depreciation 8,449 13,846 16,990 27,376 Amortization of intangibles 4,116 4,628 8,285 9,316 Benefit for income taxes (186 ) (2,735 ) (2,311 ) (2,275 ) EBITDA$ (2,785 ) $ 32,429 $ (283,643 ) $ 77,583 Adjusted EBITDA reconciliation: EBITDA$ (2,785 ) $ 32,429 $ (283,643 ) $ 77,583 Impairment of goodwill - - 296,196 - Transaction and integration costs - 2,684 146 7,446 (Gain) loss on revaluation of contingent liabilities (1) 910 (975 ) 484 (14,930 ) Gain on extinguishment of debt (11,587 ) - (21,703 ) - Restructuring charges 2,094 - 4,423 - Stock-based compensation expense 2,105 4,114 5,697 7,267 Gain on sale of property and equipment (1,790 ) (310 ) (2,365 ) (333 ) Legal fees and settlements (2) 20 75 24 143 Adjusted EBITDA$ (11,033 ) $ 38,017 $ (741 )$ 77,176
(1)Amounts relate to the revaluation of contingent liabilities associated with our 2018 acquisitions. The impact is
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included in our Condensed Consolidated Statements of Income and Comprehensive
Income (Loss). For additional information on contingent liabilities, see Note 10
- Commitments and Contingencies included in Item 1 of Part I of this Quarterly
Report on Form 10-Q.
(2)Amounts represent fees and legal settlements associated with legal
proceedings brought pursuant to the Fair Labor Standards Act and/or similar
state laws.
Return on Invested Capital
ROIC is a supplemental non-GAAP financial measure. We define ROIC as after-tax
net operating profit (loss), divided by average total capital. We define
after-tax net operating profit (loss) as net income (loss) plus (i) property and
equipment, goodwill, and/or intangible asset impairment charges, (ii)
transaction and integration costs related to acquisitions, (iii) interest
expense (income), (iv) restructuring charges, (v) loss or gain on the sale of
subsidiaries, (vi) gain on extinguishment of debt, and (vii) the provision or
benefit for deferred income taxes. We define total capital as book value of
equity plus the book value of debt less balance sheet cash and cash equivalents.
We compute the average of the current and prior period-end total capital for use
in this analysis.
Management believes ROIC is a meaningful measure because it quantifies how well
we generate operating income relative to the capital we have invested in our
business and illustrates the profitability of a business or project taking into
account the capital invested. Management uses ROIC to assist them in capital
resource allocation decisions and in evaluating business performance. Although
ROIC is commonly used as a measure of capital efficiency, definitions of ROIC
differ, and our computation of ROIC may not be comparable to other similarly
titled measures of other companies.
The following table provides an explanation of our calculation of ROIC for the
three and six months ended June 30, 2020 and 2019:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Net income (loss) $ (24,171 ) $ 6,087 $ (325,071 ) $ 23,397
Add back:
Impairment of goodwill - - 296,196 -
Transaction and integration costs - 2,684 146 7,446
Interest expense 9,186 10,771 19,014 20,097
Interest income (179 ) (168 ) (550 ) (328 )
Restructuring charges 2,094 - 4,423 -
Gain on extinguishment of debt (11,587 ) - (21,703 ) -
Benefit for deferred income taxes - (2,541 ) (1,588 ) (3,019 )
After-tax net operating profit (loss) $ (24,657 ) $ 16,833 $ (29,133 ) $ 47,593
Total capital as of prior period-end:
Total stockholders' equity $ 91,851 $ 615,467 $ 389,877 $ 594,823
Total debt 386,171 415,000 400,000 435,000
Less cash and cash equivalents (90,116 ) (31,157 ) (92,989 ) (63,615 )
Total capital as of prior period-end $ 387,906 $ 999,310 $ 696,888 $ 966,208
Total capital as of period-end:
Total stockholders' equity $ 69,950 $ 624,309 $ 69,950 $ 624,309
Total debt 372,584 400,000 372,584 400,000
Less cash and cash equivalents (88,678 ) (16,886 ) (88,678 ) (16,886 )
Total capital as of period-end $ 353,856 $ 1,007,423 $ 353,856 $ 1,007,423
Average total capital $ 370,881 $ 1,003,367 $ 525,372 $ 986,816
ROIC (26.6)% 6.7% (11.1)% 9.6%
Adjusted Gross Profit (Loss)
GAAP defines gross profit (loss) as revenues less cost of revenues and includes
depreciation and amortization in costs of revenues. We define adjusted gross
profit (loss) as revenues less direct and indirect costs of revenues (excluding
depreciation and amortization). This measure differs from the GAAP definition of
gross profit (loss) because we do not include the impact of depreciation and
amortization, which represent non-cash expenses.
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Management uses adjusted gross profit (loss) to evaluate operating performance.
We prepare adjusted gross profit (loss) to eliminate the impact of depreciation
and amortization because we do not consider depreciation and amortization
indicative of our core operating performance. Adjusted gross profit (loss)
should not be considered as an alternative to gross profit (loss), operating
income (loss), or any other measure of financial performance calculated and
presented in accordance with GAAP. Adjusted gross profit (loss) may not be
comparable to similarly titled measures of other companies because other
companies may not calculate adjusted gross profit (loss) or similarly titled
measures in the same manner as we do.
The following table presents a reconciliation of adjusted gross profit (loss) to
GAAP gross profit (loss) for the three and six months ended June 30, 2020 and
2019:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Calculation of gross profit (loss)
Revenues $ 52,735 $ 237,517 $ 199,359 $ 467,222
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 56,703 184,555 182,711 363,145
Depreciation (related to cost of
revenues) 7,858 13,616 15,801 26,922
Amortization of intangibles 4,116 4,628 8,285 9,316
Gross profit (loss) $ (15,942 ) $ 34,718 $ (7,438 ) $ 67,839
Adjusted gross profit (loss)
reconciliation:
Gross profit (loss) $ (15,942 ) $ 34,718 $ (7,438 ) $ 67,839
Depreciation (related to cost of
revenues) 7,858 13,616 15,801 26,922
Amortization of intangibles 4,116 4,628 8,285 9,316
Adjusted gross profit (loss) $ (3,968 ) $ 52,962 Liquidity and Capital Resources Sources and Uses of Liquidity Historically, we have met our liquidity needs principally from cash on hand, cash flows from operating activities and, if needed, external borrowings. Our principal uses of cash are to fund capital expenditures and acquisitions, to service our outstanding debt, and to fund our working capital requirements. In 2018, we issued$400.0 million principal amount of 8.750% Senior Notes due 2023 (the "Senior Notes") to, together with cash on hand and borrowings under the 2018 ABL Credit Facility (as defined and described below), fund the Magnum Acquisition as well as fully repay and terminate the term loan borrowings and the outstanding revolving credit commitments under our prior credit facility. For additional information regarding the Senior Notes, see "Liquidity and Capital Resources - Senior Notes" below. In the third quarter of 2019, we divested the Production Solutions segment for approximately$17.1 million in cash. We plan to use such proceeds to fund a portion of our 2020 capital expenditures and support working capital requirements. We continually monitor potential capital sources, including equity and debt financing, to meet our investment and target liquidity requirements. Our future success and growth will be highly dependent on our ability to continue to access outside sources of capital. In addition, our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic conditions, the level of drilling, completion and production activity for North American onshore oil and natural gas resources, and financial and business and other factors, many of which are beyond our control. Although we do not budget for acquisitions, pursuing growth through acquisitions may continue to be a significant part of our business strategy. Our ability to make significant additional acquisitions for cash will require us to obtain additional equity or debt financing, which we may not be able to obtain on terms acceptable to us or at all. We may also, from time to time, make open market debt repurchases (including our Senior Notes) when it is opportunistic to do to manage our debt maturity profile. We repurchased approximately$15.9 million and$29.7 million of Senior Notes at a repurchase price of approximately$3.9 million and$7.4 million in cash for the three and six months endedJune 30, 2020 , respectively. Deferred financing costs associated with these transactions were$0.3 million and$0.5 million for the three and six months endedJune 30, 2020 , respectively. As a result, for the three and six months endedJune 30, 2020 , we recorded a$11.6 million gain and a$21.7 million gain, respectively, on the extinguishment of debt. 30 -------------------------------------------------------------------------------- AtJune 30, 2020 , we had$88.7 million of cash and cash equivalents and$44.8 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of$133.5 million . In response to rapidly deteriorating market conditions driven in large part by the coronavirus pandemic and international pricing and production disputes, we have implemented certain cost-cutting measures across the organization to continue to maintain our current liquidity position. Based on our current forecasts, we believe that, cash on hand, together with cash flow from operations, and borrowings under the 2018 ABL Credit Facility, should be sufficient to fund our capital requirements for at least the next twelve months from the issuance date of our condensed consolidated financial statements. However, we can make no assurance regarding our ability to achieve our forecasts. Furthermore, depending on our financial performance and the ever-changing market, we may implement additional cost-cutting measures, as necessary, to continue to meet our liquidity and capital resource needs for at least the next twelve months from the issuance date of our condensed consolidated financial statements. We can make no assurance regarding our ability to successfully implement such measures, or whether such measures would be sufficient to mitigate a decline in our financial performance. Senior Notes OnOctober 25, 2018 , we issued the Senior Notes due 2023 under an indenture, dated as ofOctober 25, 2018 (the "Indenture"), by and among us, including certain of our subsidiaries, and Wells Fargo, National Association, as Trustee. The Senior Notes bear interest at an annual rate of 8.750% payable onMay 1 andNovember 1 of each year, and the first interest payment was due onMay 1, 2019 . The Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed on a senior unsecured basis by each of our current domestic subsidiaries and by certain future subsidiaries. The Indenture contains covenants that limit our ability and the ability of our restricted subsidiaries to engage in certain activities. We were in compliance with the provisions of the Indenture atJune 30, 2020 . Upon an event of default, the trustee or the holders of at least 25% in aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable, except that a default resulting from certain events of bankruptcy or insolvency with respect to us, any of our restricted subsidiaries that are a significant subsidiary or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable. Unamortized deferred financing costs associated with the Senior Notes were$6.4 million and$7.9 million atJune 30, 2020 andDecember 31, 2019 , respectively. These costs are direct deductions from the carrying amount of the Senior Notes and are being amortized through interest expense through the maturity date of the Senior Notes using the effective interest method. 2018 ABL Credit Facility OnOctober 25, 2018 , we entered into a credit agreement dated as ofOctober 25, 2018 (the "2018 ABL Credit Agreement"), by and among us,Nine Energy Canada, Inc. ,JP Morgan Chase Bank, N.A. as administrative agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders. The 2018 ABL Credit Agreement permits aggregate borrowings of up to$200.0 million , subject to a borrowing base, including a Canadian tranche with a sub-limit of up to$25.0 million and a sub-limit of$50.0 million for letters of credit (the "2018 ABL Credit Facility"). The 2018 ABL Credit Facility will mature onOctober 25, 2023 or, if earlier, on the date that is 180 days before the scheduled maturity date of the Senior Notes if they have not been redeemed or repurchased by such date. Loans to us and our domestic related subsidiaries (the "U.S. Credit Parties") under the 2018 ABL Credit Facility may be base rate loans or London Interbank Offered Rate ("LIBOR") loans; and loans toNine Energy Canada Inc. , a corporation organized under the laws ofAlberta, Canada , and its restricted subsidiaries (the "Canadian Credit Parties") under the Canadian tranche may be Canadian Dollar Offered Rate ("CDOR") loans or Canadian prime rate loans. The applicable margin for base rate loans and Canadian prime rate loans vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans or CDOR loans vary from 1.75% to 2.25%, in each case depending on our leverage ratio. In addition, a commitment fee of 0.50% per annum will be charged on the average daily unused portion of the revolving commitments. The 2018 ABL Credit Agreement contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other restricted payments, investments (including acquisitions) and transactions with affiliates. In addition, the 2018 ABL Credit Agreement contains a minimum fixed charge ratio covenant of 1.00 to 1.00 that is tested quarterly when the availability under the 2018 ABL Credit Facility drops below$18.75 million or a default has occurred until the availability exceeds such threshold for 30 consecutive days and such default is no longer outstanding. We were in compliance with all covenants under the 2018 ABL Credit Agreement atJune 30, 2020 . 31 -------------------------------------------------------------------------------- All of the obligations under the 2018 ABL Credit Facility are secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property ofU.S. Credit Parties, excluding certain assets. The obligations under the Canadian tranche are further secured by first priority perfected security interests (subject to permitted liens) in substantially all of the personal property of Canadian Credit Parties excluding certain assets. The 2018 ABL Credit Facility is guaranteed by theU.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and theU.S. Credit Parties. AtJune 30, 2020 , our availability under the 2018 ABL Credit Facility was approximately$44.8 million , net of an outstanding letter of credit of$0.5 million . Cash Flows Cash flows provided by (used in) operations by type of activity were as follows for the six months endedJune 30, 2020 and 2019: Six Months Ended June 30, 2020 2019 (in thousands) Operating activities$ 2,359 $ 17,408 Investing activities 1,768 (27,070 ) Financing activities (8,263 ) (37,185 ) Impact of foreign exchange rate on cash (175 ) 118
Net change in cash and cash equivalents
Operating Activities Net cash provided by operating activities was$2.4 million for the first six months of 2020 compared to$17.4 million in net cash provided by operating activities for the first six months of 2019. The$15.0 million decrease in net cash provided by operating activities was primarily a result of a$72.3 million decrease in cash flow provided by operations, adjusted for any non-cash items, primarily due to a decrease in revenue for the first six months of 2020 compared to the first six months of 2019. The overall decrease in net cash provided by operating activities was partially offset by an increase of$57.3 million in cash collections and other changes in working capital which provided an increased source of cash flow for the first six months of 2020 in comparison to the first six months of 2019. Investing Activities Net cash provided by investing activities was$1.8 million for the first six months of 2020 compared to$27.1 million in net cash used in investing activities for the first six months of 2019. The$28.9 million decrease in net cash used in investing activities was primarily related to a decrease of$34.5 million in cash purchases of property and equipment for the first six months of 2020 in comparison to the first six months of 2019. The overall decrease was also partly due to an increase in proceeds from sales of property and equipment (including insurance) of$2.0 million in the first six months of 2020 compared to the first six months of 2019. The overall decrease in net cash used in investing activities was partially offset by$7.6 million in proceeds from notes receivable payments which were received in the first six months of 2019 but did not recur in the first six months of 2020. Financing Activities Net cash used in financing activities was$8.3 million for the first six months of 2020 compared to$37.2 million in net cash flow used in financing activities for the first six months of 2019. The$28.9 million decrease in net cash used in financing activities was primarily related to$45.0 million in payments on the 2018 ABL Credit Facility in the first six months of 2019 that did not recur in the first six months of 2020. The overall decrease was also partly due to a decrease of$1.5 million in cash used for the vesting of restricted stock in the first six months of 2020 compared to net cash used in the first six months of 2019. The overall decrease in net cash used in financing activities was partially offset by$10.0 million in proceeds from the 2018 ABL Credit Facility in the first six months of 2019 that did not recur in the first six months of 2020, coupled with$7.4 million of purchases of the Senior Notes in the first six months of 2020 that did not occur in the first six months of 2019. Contractual Obligations Our contractual obligations atJune 30, 2020 did not change materially, outside the normal course of business, from 32
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those disclosed under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Off-Balance Sheet Arrangements AtJune 30, 2020 , we had letters of credit of$0.5 million , which represented off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. As ofJune 30, 2020 , no liability has been recognized in our Condensed Consolidated Balance Sheets for the letters of credit. Recent Accounting Pronouncements See Note 3 - New Accounting Standards included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.
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