UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended SeptemberJune 30, 20162017
OR
¨ Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number: 001-36053
Frank’s International N.V.
(Exact name of registrant as specified in its charter)
|
| | | | |
| The Netherlands | | 98-1107145 | |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification number) | |
| | | | |
| Mastenmakersweg 1 | | | |
| 1786 PB Den Helder, The Netherlands | | Not Applicable | |
| (Address of principal executive offices) | | (Zip Code) | |
Registrant’s telephone number, including area code: +31 (0)22 367 0000
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 þ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ 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 or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filer | þ | Accelerated filer | ¨ |
Non-accelerated filer | ¨(Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
As of November 1, 2016,July 31, 2017, there were 222,391,338223,053,572 shares of common stock, €0.01 par value per share, outstanding.
|
| | |
TABLE OF CONTENTS |
| | Page |
PART I. FINANCIAL INFORMATION |
| | |
Item 1. | Financial Statements | |
| Condensed Consolidated Balance Sheets (Unaudited) at SeptemberJune 30, 20162017 and December 31, 20152016 | |
| Condensed Consolidated Statements of Operations (Unaudited) for the Three and NineSix Months | |
| Ended SeptemberJune 30, 20162017 and 20152016 | |
| Condensed Consolidated Statements of Comprehensive IncomeLoss (Unaudited) for the Three and NineSix Months | |
| Ended SeptemberJune 30, 20162017 and 20152016 | |
| Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the NineSix Months | |
| Ended SeptemberJune 30, 20162017 and 20152016 | |
| Condensed Consolidated Statements of Cash Flows (Unaudited) for the NineSix Months | |
| Ended SeptemberJune 30, 20162017 and 20152016 | |
| Notes to the Unaudited Condensed Consolidated Financial Statements | |
| | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and | |
| Results of Operations | |
| | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
| | |
Item 4. | Controls and Procedures | |
| | |
PART II. OTHER INFORMATION |
| | |
Item 1. | Legal Proceedings | |
| | |
Item 1A. | Risk Factors | |
| | |
Item 6. | Exhibits | |
| | |
Signatures | | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
| | FRANK'S INTERNATIONAL N.V. | FRANK'S INTERNATIONAL N.V. | FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED BALANCE SHEETS | CONDENSED CONSOLIDATED BALANCE SHEETS | CONDENSED CONSOLIDATED BALANCE SHEETS |
(In thousands, except share data) | (In thousands, except share data) | (In thousands, except share data) |
| | | | | | |
| September 30, | | December 31, | June 30, | | December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Assets | (Unaudited) | | | (Unaudited) | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 529,850 |
| | $ | 602,359 |
| $ | 274,950 |
| | $ | 319,526 |
|
Accounts receivables, net | 155,363 |
| | 246,191 |
| 167,965 |
| | 167,417 |
|
Inventories | 136,616 |
| | 161,263 |
| 135,098 |
| | 139,079 |
|
Assets held for sale | | 4,876 |
| | — |
|
Other current assets | 8,382 |
| | 13,923 |
| 10,895 |
| | 14,027 |
|
Total current assets | 830,211 |
| | 1,023,736 |
| 593,784 |
| | 640,049 |
|
| | | | | | |
Property, plant and equipment, net | 573,874 |
| | 624,959 |
| 525,839 |
| | 567,024 |
|
Goodwill and intangible assets, net | 23,846 |
| | 25,210 |
| 250,503 |
| | 256,146 |
|
Deferred tax assets | | 90,335 |
| | 79,309 |
|
Other assets | 98,448 |
| | 52,933 |
| 32,991 |
| | 45,533 |
|
Total assets | $ | 1,526,379 |
| | $ | 1,726,838 |
| $ | 1,493,452 |
| | $ | 1,588,061 |
|
| | | | | | |
Liabilities and Equity | | | | | | |
Current liabilities: | | | | | | |
Short-term debt | $ | 315 |
| | $ | 7,321 |
| $ | 121 |
| | $ | 276 |
|
Accounts payable | 13,673 |
| | 12,784 |
| 19,540 |
| | 16,081 |
|
Deferred revenue | 28,163 |
| | 57,637 |
| 10,367 |
| | 18,072 |
|
Accrued and other current liabilities | 79,121 |
| | 111,884 |
| 71,101 |
| | 64,950 |
|
Total current liabilities | 121,272 |
| | 189,626 |
| 101,129 |
| | 99,379 |
|
| | | | | | |
Deferred tax liabilities | — |
| | 40,257 |
| 4,796 |
| | 20,951 |
|
Other non-current liabilities | 157,174 |
| | 44,824 |
| 153,034 |
| | 156,412 |
|
Total liabilities | 278,446 |
| | 274,707 |
| 258,959 |
| | 276,742 |
|
| | | | | | |
Commitments and contingencies (Note 18) |
|
| |
|
| |
| | | | |
Series A preferred stock, €0.01, par value: no shares authorized, issued or outstanding at 2016; 52,976,000 shares authorized, issued and outstanding at 2015 | — |
| | 705 |
| |
Commitments and contingencies (Note 15) | |
|
| |
|
|
| | | | | | |
Stockholders' equity: | | | | | | |
Common stock, €0.01, par value, 798,096,000 shares authorized: 210,283,042 shares issued and 209,542,050 shares outstanding at 2016 and 745,120,000 shares authorized, 155,661,150 shares issued and 155,146,338 shares outstanding at 2015 | 2,661 |
| | 2,045 |
| |
Common stock, €0.01 par value, 798,096,000 shares authorized, 223,896,772 shares issued and 223,052,279 shares outstanding at 2017 and 223,161,356 shares issued and 222,401,427 shares outstanding at 2016 | | 2,811 |
| | 2,802 |
|
Additional paid-in capital | 889,375 |
| | 712,486 |
| 1,045,486 |
| | 1,036,786 |
|
Retained earnings | 400,135 |
| | 531,621 |
| 231,231 |
| | 317,270 |
|
Accumulated other comprehensive loss | (31,894 | ) | | (25,555 | ) | (31,897 | ) | | (32,977 | ) |
Treasury stock (at cost), 740,992 at 2016 and 514,812 shares at 2015 | (12,344 | ) | | (9,298 | ) | |
Total stockholders' equity | 1,247,933 |
| | 1,211,299 |
| |
Noncontrolling interest | — |
| | 240,127 |
| |
Treasury stock (at cost), 844,493 shares at 2017 and 759,929 shares at 2016 | | (13,138 | ) | | (12,562 | ) |
Total equity | 1,247,933 |
| | 1,451,426 |
| 1,234,493 |
| | 1,311,319 |
|
Total liabilities and equity | $ | 1,526,379 |
| | $ | 1,726,838 |
| $ | 1,493,452 |
| | $ | 1,588,061 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
| | FRANK'S INTERNATIONAL N.V. | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | (In thousands, except per share data) | (Unaudited) | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 30, | | September 30, | June 30, | | June 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | | | | | | | | | | | | | |
Equipment rentals and services | $ | 85,698 |
| | $ | 176,553 |
| | $ | 312,132 |
| | $ | 610,240 |
| $ | 93,533 |
| | $ | 95,177 |
| | $ | 179,855 |
| | $ | 226,434 |
|
Products | 19,416 |
| | 63,330 |
| | 67,414 |
| | 161,384 |
| 24,126 |
| | 25,769 |
| | 48,535 |
| | 47,998 |
|
Total revenue | 105,114 |
| | 239,883 |
| | 379,546 |
| | 771,624 |
| 117,659 |
| | 120,946 |
| | 228,390 |
| | 274,432 |
|
| | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | |
Cost of revenues, exclusive of depreciation | | | | | | | | |
and amortization | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization | | | | | | | | |
Equipment rentals and services | 47,002 |
| | 72,389 |
| | 155,367 |
| | 242,681 |
| 60,777 |
| | 64,309 |
| | 117,884 |
| | 132,658 |
|
Products | 13,237 |
| | 34,174 |
| | 42,594 |
| | 90,081 |
| 17,567 |
| | 19,926 |
| | 34,412 |
| | 35,417 |
|
General and administrative expenses | 52,774 |
| | 66,929 |
| | 182,036 |
| | 210,523 |
| 42,419 |
| | 55,667 |
| | 85,144 |
| | 98,909 |
|
Depreciation and amortization | 26,545 |
| | 29,032 |
| | 84,278 |
| | 80,743 |
| 30,951 |
| | 28,283 |
| | 62,050 |
| | 57,733 |
|
Severance and other charges | 14,534 |
| | 1,186 |
| | 18,858 |
| | 14,208 |
| (299 | ) | | 3,718 |
| | 738 |
| | 4,324 |
|
Change in value of contingent consideration | — |
| | (1,532 | ) | | — |
| | (1,532 | ) | |
Gain on sale of assets | (46 | ) | | (1,392 | ) | | (1,095 | ) | | (521 | ) | |
Operating income (loss) | (48,932 | ) | | 39,097 |
| | (102,492 | ) | | 135,441 |
| |
(Gain) loss on sale of assets | | 210 |
| | (279 | ) | | (1,262 | ) | | (1,049 | ) |
Operating loss | | (33,966 | ) | | (50,678 | ) | | (70,576 | ) | | (53,560 | ) |
| | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | |
Other income | 984 |
| | 918 |
| | 2,145 |
| | 2,976 |
| |
Other income, net | | 598 |
| | 1,658 |
| | 732 |
| | 1,161 |
|
Interest income, net | 646 |
| | 173 |
| | 1,050 |
| | 150 |
| 753 |
| | 198 |
| | 1,151 |
| | 404 |
|
Foreign currency loss | (1,696 | ) | | (5,329 | ) | | (5,907 | ) | | (6,563 | ) | |
Mergers and acquisition expense | | (10 | ) | | — |
| | (459 | ) | | — |
|
Foreign currency gain (loss) | | 599 |
| | (4,170 | ) | | 1,345 |
| | (4,211 | ) |
Total other income (expense) | (66 | ) | | (4,238 | ) | | (2,712 | ) | | (3,437 | ) | 1,940 |
| | (2,314 | ) | | 2,769 |
| | (2,646 | ) |
| | | | | | | | | | | | | | |
Income (loss) before income tax expense (benefit) | (48,998 | ) | | 34,859 |
| | (105,204 | ) | | 132,004 |
| |
Income tax expense (benefit) | (6,800 | ) | | 10,771 |
| | (15,311 | ) | | 32,662 |
| |
Net income (loss) | (42,198 | ) | | 24,088 |
| | (89,893 | ) | | 99,342 |
| |
Net income (loss) attributable to noncontrolling interest | (5,216 | ) | | 7,523 |
| | (20,741 | ) | | 27,668 |
| |
Net income (loss) attributable to Frank's International N.V. | (36,982 | ) | | 16,565 |
| | (69,152 | ) | | 71,674 |
| |
Loss before income tax benefit | | (32,026 | ) | | (52,992 | ) | | (67,807 | ) | | (56,206 | ) |
Income tax benefit | | (6,076 | ) | | (7,705 | ) | | (15,194 | ) | | (8,511 | ) |
Net loss | | (25,950 | ) | | (45,287 | ) | | (52,613 | ) | | (47,695 | ) |
Net loss attributable to noncontrolling interest | | — |
| | (13,889 | ) | | — |
| | (15,525 | ) |
Net loss attributable to Frank's International N.V. | | (25,950 | ) | | (31,398 | ) | | (52,613 | ) | | (32,170 | ) |
Preferred stock dividends | — |
| | — |
| | (1 | ) | | (2 | ) | — |
| | (1 | ) | | — |
| | (1 | ) |
Net income (loss) available to Frank's International N.V. | | | | | | | | |
common shareholders | $ | (36,982 | ) | | $ | 16,565 |
| | $ | (69,153 | ) | | $ | 71,672 |
| |
Net loss available to Frank's International N.V. common shareholders | | $ | (25,950 | ) | | $ | (31,399 | ) | | $ | (52,613 | ) | | $ | (32,171 | ) |
| | | | | | | | | | | | | | |
Earnings (loss) per common share: | | | | | | | | |
Basic | $ | (0.21 | ) | | $ | 0.11 |
| | $ | (0.43 | ) | | $ | 0.46 |
| |
Diluted | $ | (0.21 | ) | | $ | 0.11 |
| | $ | (0.43 | ) | | $ | 0.46 |
| |
Dividends per common share | | $ | 0.075 |
| | $ | 0.15 |
| | $ | 0.15 |
| | $ | 0.30 |
|
| | | | | | | | |
Loss per common share: | | | | | | | | |
Basic and diluted | | $ | (0.12 | ) | | $ | (0.20 | ) | | $ | (0.24 | ) | | $ | (0.21 | ) |
| | | | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | |
Basic | 177,125 |
| | 154,813 |
| | 162,656 |
| | 154,502 |
| |
Diluted | 177,125 |
| | 209,349 |
| | 162,656 |
| | 209,052 |
| |
Basic and diluted | | 222,914 |
| | 155,440 |
| | 222,740 |
| | 155,342 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
| | FRANK'S INTERNATIONAL N.V. | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS | | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS |
(In thousands) | (Unaudited) | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| September 30, | | September 30, | June 30, | | June 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | | | |
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
| |
Net loss | | $ | (25,950 | ) | | $ | (45,287 | ) | | $ | (52,613 | ) | | $ | (47,695 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | |
Foreign currency translation adjustments | 74 |
| | (3,713 | ) | | 1,824 |
| | (12,287 | ) | 838 |
| | (912 | ) | | 1,321 |
| | 1,750 |
|
Marketable securities: | | | | | | | | | | | | | | |
Unrealized gain (loss) on marketable securities | (50 | ) | | (330 | ) | | 1,066 |
| | (1,621 | ) | 77 |
| | 700 |
| | (4 | ) | | 1,116 |
|
Reclassification to net income | | — |
| | — |
| | (395 | ) | | — |
|
Deferred tax asset / liability change | (5 | ) | | 137 |
| | (465 | ) | | 374 |
| — |
| | (235 | ) | | 158 |
| | (460 | ) |
Unrealized gain (loss) on marketable securities, net of tax | (55 | ) | | (193 | ) | | 601 |
| | (1,247 | ) | 77 |
| | 465 |
| | (241 | ) | | 656 |
|
Total other comprehensive income (loss) | 19 |
| | (3,906 | ) | | 2,425 |
| | (13,534 | ) | 915 |
| | (447 | ) | | 1,080 |
| | 2,406 |
|
Comprehensive income (loss) | (42,179 | ) | | 20,182 |
| | (87,468 | ) | | 85,808 |
| |
Less: Comprehensive income (loss) attributable to noncontrolling interest | (5,264 | ) | | 6,527 |
| | (20,180 | ) | | 24,216 |
| |
Add: Transfer of MHI interest to FINV attributable to comprehensive loss (See Note 11) | (8,203 | ) | | — |
| | (8,203 | ) | | — |
| |
Comprehensive income (loss) attributable to Frank's International N.V. | $ | (45,118 | ) | | $ | 13,655 |
| | $ | (75,491 | ) | | $ | 61,592 |
| |
Comprehensive loss | | (25,035 | ) | | (45,734 | ) | | (51,533 | ) | | (45,289 | ) |
Less: Comprehensive loss attributable to noncontrolling interest | | — |
| | (14,003 | ) | | — |
| | (14,916 | ) |
Comprehensive loss attributable to Frank's International N.V. | | $ | (25,035 | ) | | $ | (31,731 | ) | | $ | (51,533 | ) | | $ | (30,373 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
| | FRANK'S INTERNATIONAL N.V. | FRANK'S INTERNATIONAL N.V. | FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
(In thousands) | (In thousands) | (In thousands) |
(Unaudited) | (Unaudited) | (Unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2015 | Six Months Ended June 30, 2016 |
| | | | | | | | | Accumulated | | | | | | | | | | | | | | | Accumulated | | | | | | |
| | | | | Additional | | | | Other | | | | Non- | | Total | | | | | Additional | | | | Other | | | | Non- | | Total |
| Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | controlling | | Stockholders' | Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | controlling | | Stockholders' |
| Shares | | Value | | Capital | | Earnings | | Income (Loss) | | Stock | | Interest | | Equity | Shares | | Value | | Capital | | Earnings | | Income (Loss) | | Stock | | Interest | | Equity |
Balances at December 31, 2014 | 154,327 |
| | $ | 2,033 |
| | $ | 683,611 |
| | $ | 545,357 |
| | $ | (14,210 | ) | | $ | (4,801 | ) | | $ | 260,546 |
| | $ | 1,472,536 |
| |
Net income | — |
| | — |
| | — |
| | 71,674 |
| | — |
| | — |
| | 27,668 |
| | 99,342 |
| |
Balances at December 31, 2015 | | 155,146 |
| | $ | 2,045 |
| | $ | 712,486 |
| | $ | 531,621 |
| | $ | (25,555 | ) | | $ | (9,298 | ) | | $ | 240,127 |
| | $ | 1,451,426 |
|
Net loss | | — |
| | — |
| | — |
| | (32,170 | ) | | — |
| | — |
| | (15,525 | ) | | (47,695 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (9,154 | ) | | — |
| | (3,133 | ) | | (12,287 | ) | — |
| | — |
| | — |
| | — |
| | 1,306 |
| | — |
| | 444 |
| | 1,750 |
|
Unrealized loss on marketable securities | — |
| | — |
| | — |
| | — |
| | (928 | ) | | — |
| | (319 | ) | | (1,247 | ) | |
Change in marketable securities | | — |
| | — |
| | — |
| | — |
| | 491 |
| | — |
| | 165 |
| | 656 |
|
Equity-based compensation expense | — |
| | — |
| | 24,753 |
| | — |
| | — |
| | — |
| | — |
| | 24,753 |
| — |
| | — |
| | 8,528 |
| | — |
| | — |
| | — |
| | — |
| | 8,528 |
|
Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (43,539 | ) | | (43,539 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,027 | ) | | (8,027 | ) |
Common stock dividends ($0.45 per share) | — |
| | — |
| | — |
| | (69,573 | ) | | — |
| | — |
| | — |
| | (69,573 | ) | |
Common stock dividends ($0.30 per share) | | — |
| | — |
| | — |
| | (46,842 | ) | | — |
| | — |
| | — |
| | (46,842 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
Common shares issued upon vesting of restricted stock units | 1,040 |
| | 12 |
| | (12 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| 384 |
| | 4 |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Common shares issued for ESPP | 20 |
| | — |
| | 290 |
| | — |
| | — |
| | — |
| | — |
| | 290 |
| |
Common shares issued for employee stock purchase plan (ESPP) | | 76 |
| | 1 |
| | 972 |
| | — |
| | — |
| | — |
| | — |
| | 973 |
|
Treasury shares withheld | (262 | ) | | — |
| | — |
| | — |
| | — |
| | (4,359 | ) | | — |
| | (4,359 | ) | (91 | ) | | — |
| | — |
| | — |
| | — |
| | (1,396 | ) | | — |
| | (1,396 | ) |
Balances at September 30, 2015 | 155,125 |
| | $ | 2,045 |
| | $ | 708,642 |
| | $ | 547,456 |
| | $ | (24,292 | ) | | $ | (9,160 | ) | | $ | 241,223 |
| | $ | 1,465,914 |
| |
Balances at June 30, 2016 | | 155,515 |
| | $ | 2,050 |
| | $ | 721,982 |
| | $ | 452,608 |
| | $ | (23,758 | ) | | $ | (10,694 | ) | | $ | 217,184 |
| | $ | 1,359,372 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 | Six Months Ended June 30, 2017 |
| | | | | | | | | Accumulated | | | | | | | | | | | | | | | Accumulated | | | | | | |
| | | | | Additional | | | | Other | | | | Non- | | Total | | | | | Additional | | | | Other | | | | Non- | | Total |
| Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | controlling | | Stockholders' | Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | controlling | | Stockholders' |
| Shares | | Value | | Capital | | Earnings | | Loss | | Stock | | Interest | | Equity | Shares | | Value | | Capital | | Earnings | | Income (Loss) | | Stock | | Interest | | Equity |
Balances at December 31, 2015 | 155,146 |
| | $ | 2,045 |
| | $ | 712,486 |
| | $ | 531,621 |
| | $ | (25,555 | ) | | $ | (9,298 | ) | | $ | 240,127 |
| | $ | 1,451,426 |
| |
Balances at December 31, 2016 | | 222,401 |
| | $ | 2,802 |
| | $ | 1,036,786 |
| | $ | 317,270 |
| | $ | (32,977 | ) | | $ | (12,562 | ) | | $ | — |
| | $ | 1,311,319 |
|
Net loss | — |
| | — |
| | — |
| | (69,152 | ) | | — |
| | — |
| | (20,741 | ) | | (89,893 | ) | — |
| | — |
| | — |
| | (52,613 | ) | | — |
| | — |
| | — |
| | (52,613 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | 1,443 |
| | — |
| | 381 |
| | 1,824 |
| — |
| | — |
| | — |
| | — |
| | 1,321 |
| | — |
| | — |
| | 1,321 |
|
Unrealized gain on marketable securities | — |
| | — |
| | — |
| | — |
| | 421 |
| | — |
| | 180 |
| | 601 |
| |
Change in marketable securities | | — |
| | — |
| | — |
| | — |
| | (241 | ) | | — |
| | — |
| | (241 | ) |
Equity-based compensation expense | — |
| | — |
| | 12,356 |
| | — |
| | — |
| | — |
| | — |
| | 12,356 |
| — |
| | — |
| | 9,116 |
| | — |
| | — |
| | — |
| | — |
| | 9,116 |
|
Distribution to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,027 | ) | | (8,027 | ) | |
Common stock dividends ($0.375 per share) | — |
| | — |
| | — |
| | (62,333 | ) | | — |
| | — |
| | — |
| | (62,333 | ) | |
Preferred stock dividends | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | |
Transfer of MHI interest to FINV | — |
| | — |
| | 238,367 |
| | — |
| | (8,203 | ) | | — |
| | (211,920 | ) | | 18,244 |
| |
Common shares issued on conversion of Series A preferred stock | 52,976 |
| | 597 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 597 |
| |
Common stock dividends ($0.15 per share) | | — |
| | — |
| | — |
| | (33,426 | ) | | — |
| | — |
| | — |
| | (33,426 | ) |
Common shares issued upon vesting of restricted stock units | 1,569 |
| | 18 |
| | (18 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| 685 |
| | 7 |
| | (7 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Tax Receivable Agreement ("TRA") and associated deferred taxes | — |
| | — |
| | (74,788 | ) | | — |
| | — |
| | — |
| | — |
| | (74,788 | ) | |
Common shares issued for ESPP | 76 |
| | 1 |
| | 972 |
| | — |
| | — |
| | — |
| | — |
| | 973 |
| 50 |
| | 1 |
| | 525 |
| | — |
| | — |
| | — |
| | — |
| | 526 |
|
Treasury shares issued upon vesting of restricted stock units | | 1 |
| | — |
| | (31 | ) | | — |
| | — |
| | 23 |
| | — |
| | (8 | ) |
Treasury shares issued for ESPP | | 105 |
| | 1 |
| | (903 | ) | | — |
| | — |
| | 1,642 |
| | — |
| | 740 |
|
Treasury shares withheld | (225 | ) | | — |
| | — |
| | — |
| | — |
| | (3,046 | ) | | — |
| | (3,046 | ) | (190 | ) | | — |
| | — |
| | — |
| | — |
| | (2,241 | ) | | — |
| | (2,241 | ) |
Balances at September 30, 2016 | 209,542 |
| | $ | 2,661 |
| | $ | 889,375 |
| | $ | 400,135 |
| | $ | (31,894 | ) | | $ | (12,344 | ) | | $ | — |
| | $ | 1,247,933 |
| |
Balances at June 30, 2017 | | 223,052 |
| | $ | 2,811 |
| | $ | 1,045,486 |
| | $ | 231,231 |
| | $ | (31,897 | ) | | $ | (13,138 | ) | | $ | — |
| | $ | 1,234,493 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
| | FRANK'S INTERNATIONAL N.V. | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (In thousands) | (Unaudited) | | | | | | | |
| Nine Months Ended | Six Months Ended |
| September 30, | June 30, |
| 2016 | | 2015 | 2017 | | 2016 |
Cash flows from operating activities | | | | | | |
Net income (loss) | $ | (89,893 | ) | | $ | 99,342 |
| |
Adjustments to reconcile net income (loss) to cash provided by operating activities | | | | |
Net loss | | $ | (52,613 | ) | | $ | (47,695 | ) |
Adjustments to reconcile net loss to cash (used in) provided by operating activities | | | | |
Depreciation and amortization | 84,278 |
| | 80,743 |
| 62,050 |
| | 57,733 |
|
Equity-based compensation expense | 12,356 |
| | 24,753 |
| 9,116 |
| | 8,528 |
|
Amortization of deferred financing costs | 123 |
| | 123 |
| 246 |
| | 82 |
|
Deferred tax provision (benefit) | (25,772 | ) | | 13,823 |
| |
Deferred tax benefit | | (20,320 | ) | | (9,071 | ) |
Provision for bad debts | 10,410 |
| | (122 | ) | 371 |
| | 10,374 |
|
(Gain) loss on sale of assets | (1,095 | ) | | (521 | ) | |
Changes in fair value of marketable securities | (1,061 | ) | | 1,736 |
| |
Unrealized gain on derivative | 296 |
| | — |
| |
Change in value of contingent consideration | — |
| | (1,532 | ) | |
Gain on sale of assets | | (1,262 | ) | | (1,049 | ) |
Changes in fair value of investments | | (1,474 | ) | | (329 | ) |
Realized loss on sale of investment | | 478 |
| | — |
|
Unrealized (gain) loss on derivatives | | 730 |
| | (319 | ) |
Other | — |
| | (3,909 | ) | (1,876 | ) | | — |
|
Changes in operating assets and liabilities | | | | | | |
Accounts receivable | 82,042 |
| | 62,711 |
| (6,697 | ) | | 68,766 |
|
Inventories | 20,032 |
| | 37,576 |
| 5,627 |
| | 11,378 |
|
Other current assets | 5,990 |
| | 11,801 |
| 3,102 |
| | 3,058 |
|
Other assets | (4 | ) | | 2,479 |
| 1,745 |
| | 188 |
|
Accounts payable | 474 |
| | 1,162 |
| (439 | ) | | (2,166 | ) |
Deferred revenue | (29,479 | ) | | (17,672 | ) | (7,707 | ) | | (21,223 | ) |
Accrued and other current liabilities | (28,556 | ) | | (17,991 | ) | 4,839 |
| | (17,958 | ) |
Other non-current liabilities | (12,295 | ) | | 885 |
| (3,383 | ) | | (2,260 | ) |
Net cash provided by operating activities | 27,846 |
| | 295,387 |
| |
Net cash (used in) provided by operating activities | | (7,467 | ) | | 58,037 |
|
| | | | | | |
Cash flows from investing activities | | | | | | |
Acquisition of Timco Services, Inc. (net of acquired cash) | — |
| | (78,676 | ) | |
Purchases of property, plant and equipment | (29,777 | ) | | (88,296 | ) | (15,197 | ) | | (18,371 | ) |
Proceeds from sale of assets and equipment | 2,235 |
| | 3,100 |
| |
Proceeds from sale of assets | | 2,200 |
| | 1,957 |
|
Proceeds from sale of investments | 11,101 |
| | — |
| 11,499 |
| | — |
|
Purchase of marketable securities | (921 | ) | | (94 | ) | |
Purchase of investments | | (118 | ) | | (838 | ) |
Other | | (43 | ) | | — |
|
Net cash used in investing activities | (17,362 | ) | | (163,966 | ) | (1,659 | ) | | (17,252 | ) |
| | | | | | |
Cash flows from financing activities | | | | | | |
Repayments of borrowings | (7,120 | ) | | (57 | ) | (154 | ) | | (4,960 | ) |
Proceeds from borrowings | 318 |
| | — |
| — |
| | 256 |
|
Costs of Series A convertible preferred stock conversion to common stock | (595 | ) | | — |
| |
Dividends paid on common stock | (62,333 | ) | | (69,573 | ) | (33,426 | ) | | (46,842 | ) |
Dividends paid on preferred stock | (1 | ) | | (2 | ) | — |
| | (1 | ) |
Distribution to noncontrolling interest | (8,027 | ) | | (43,539 | ) | — |
| | (8,027 | ) |
Treasury shares withheld | (3,046 | ) | | (4,359 | ) | |
Net treasury shares withheld | | (2,249 | ) | | (1,396 | ) |
Proceeds from the issuance of ESPP shares | 973 |
| | 290 |
| 1,266 |
| | 973 |
|
Net cash used in financing activities | (79,831 | ) | | (117,240 | ) | (34,563 | ) | | (59,997 | ) |
Effect of exchange rate changes on cash | (3,162 | ) | | 3,518 |
| (887 | ) | | (1,776 | ) |
Net increase (decrease) in cash | (72,509 | ) | | 17,699 |
| |
Net decrease in cash and cash equivalents | | (44,576 | ) | | (20,988 | ) |
Cash and cash equivalents at beginning of period | 602,359 |
| | 489,354 |
| 319,526 |
| | 602,359 |
|
Cash and cash equivalents at end of period | $ | 529,850 |
| | $ | 507,053 |
| $ | 274,950 |
| | $ | 581,371 |
|
| | | | |
Non-cash transactions: | | | | |
Change in accounts payable and accrued expenses related to capital expenditures | | $ | 2,901 |
| | $ | 739 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Basis of Presentation
Nature of Business
Frank’s International N.V. ("FINV"), a limited liability company organized under the laws of The Netherlands, is a global provider of highly engineered tubular services, tubular fabrication and specialty well construction and well intervention solutions to the oil and gas industry. FINV provides services to leading exploration and production companies in both offshore and onshore environments with a focus on complex and technically demanding wells.
Basis of Presentation
The condensed consolidated financial statements of FINV for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 include the activities of Frank's International C.V. ("FICV") and its wholly owned subsidiaries (collectively, the "Company," "we," "us" or "our"). All intercompany accounts and transactions have been eliminated for purposes of preparing these condensed consolidated financial statements.
Our accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. The Consolidated Balance Sheetconsolidated balance sheet at December 31, 20152016 is derived from audited financial statements. However, certain information and footnote disclosures required by generally accepted accounting principles in the United States of America ("GAAP") for complete annual financial statements have been omitted and, therefore, these interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2015,2016, which are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 29, 2016.24, 2017 ("Annual Report"). In the opinion of management, these condensed consolidated financial statements, which have been prepared pursuant to the rules of the SEC and GAAP for interim financial reporting, reflect all adjustments, which consisted only of normal recurring adjustments that were necessary for a fair statement of the interim periods presented. The results of operations for interim periods are not necessarily indicative of those for a full year.
The condensed consolidated financial statements have been prepared on a historical cost basis using the United States dollar as the reporting currency. Our functional currency is primarily the United States dollar.
Reclassifications
Historically, and through December 31, 2016, certain direct and indirect costs related to operations and manufacturing were classified and reported as general and administrative expenses ("G&A"). The historical classification was consistent with the information used by the Company’s chief operating decision maker ("CODM") to assess performance of the Company’s segments and make resource allocation decisions, and the classification of such costs within the condensed consolidated statements of income was aligned with the segment presentation. Effective January 1, 2017, the company changed the classification of certain of these costs in its segment reporting disclosures and within the condensed consolidated statements of income to reflect a change in the presentation of the information used by the Company’s CODM.
This reclassification of costs between cost of revenue and G&A has no net impact to the condensed consolidated statements of income or to total segment reporting. The change will better reflect the CODM's philosophy on assessing performance and allocating resources, as well as improve comparability to the Company's peer group. This is a change in costs classification and has been reflected retrospectively for all periods presented.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of reclassifications to previously reported amounts (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2016 | | Six Months Ended June 30, 2016 |
| As previously reported | | Reclassifications | | As currently reported | | As previously reported | | Reclassifications | | As currently reported |
Condensed Consolidated Statements of Operations | | | | | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization | | | | | | | | | | | |
Equipment rentals and services | $ | 52,564 |
| | $ | 11,745 |
| | $ | 64,309 |
| | $ | 108,365 |
| | $ | 24,293 |
| | $ | 132,658 |
|
Products | 17,028 |
| | 2,898 |
| | 19,926 |
| | 29,357 |
| | 6,060 |
| | 35,417 |
|
General and administrative expenses | 70,310 |
| | (14,643 | ) | | 55,667 |
| | 129,262 |
| | (30,353 | ) | | 98,909 |
|
Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification.
We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and were either determined to be not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
In May 2017, the FASB issued guidance to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when accounting for a change to the terms and conditions of a share-based payment award. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The amendments in this guidance should be applied prospectively to an award modified on or after the adoption date. Management is evaluating the provisions of this new accounting guidance, including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.
In January 2017, the FASB issued guidance that simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. The new standard will be applied prospectively, and is effective for public companies for their annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company has adopted the provisions of this new accounting guidance for the Company's annual goodwill impairment analysis for the year ended December 31, 2017.
In January 2017, the FASB issued new accounting guidance for business combinations clarifying the definition of a business. The objective of the guidance is to help companies and other organizations which have acquired or sold a business to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, the guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted under certain circumstances. Management is evaluating the provisions of this new accounting guidance, including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.
In October 2016, the FASB issued new accounting guidance for recognition of income tax consequences of an intra-entity transfer of an asset other than inventory. The objective of the guidance is to eliminate the exception for an intra-entity transfer of an asset other than inventory and requires an entity to recognize the income tax consequences at the time of transfer rather than when the asset is sold to a third party. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not yet been issued. Management is evaluating the provisions of this new accounting guidance, including
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.
In August 2016, the FASB issued new accounting guidance for classification of certain cash receipts and cash payments in the statement of cash flows. The objective of the guidance is to reduce the existing diversity in practice related to the presentation and classification of certain cash receipts and cash payments. The guidance addresses eight specific cash flow issues including but not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and proceeds from the settlement of corporate-owned life insurance policies. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and is retrospective for all periods presented. Early adoption is permitted including for interim periods. Management is evaluating the provisions of this new accounting guidance, including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.
In June 2016, the FASB issued new accounting guidance for credit losses on financial instruments. The guidance includes the replacement of the “incurred loss” approach for recognizing credit losses on financial assets, including
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
trade receivables, with a methodology that reflects expected credit losses, which considers historical and current information as well as reasonable and supportable forecasts. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is evaluating the provisions of this new accounting guidance, including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.
In March 2016, the FASB issued accounting guidance on equity compensation, which simplifies the accounting for the taxes related to equity-based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. The ASU also gives an option to recognize actual forfeitures when they occur and clarifies the statement of cash flow presentation for certain components of share-based awards. ThisWe adopted this guidance is effective for fiscal years,on January 1, 2017 and interim periods within those years, beginning after December 31, 2016.have elected to recognize actual forfeitures when they occur. The adoption of this guidance isdid not expected to have a materialan impact on our consolidated financial statements.
In February 2016, the FASB issued accounting guidance for leases. The main objective of the accounting guidance is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and the new guidance is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The new guidance requires lessees to recognize assets and liabilities arising from leases on the balance sheet and further defines a lease as a contract that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefit from the use of the asset and (2) the right to direct the use of the asset. The accounting guidance requires disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; early application is permitted. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.
In January 2016, the FASB issued accounting guidance on the recognition and measurement of financial assets and financial liabilities. Under this guidance, equity investments will be measured at fair value with changes in fair value recognized in net income. The guidance requires public businesses to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. The guidance also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The guidance is not applicable to equity investments accounted for under the equity method of accounting. The guidance is effective for interim and annual periods beginning after December 15, 2017. Management does not believe the adoption will have a material impact on our consolidated financial statements.
In July 2015, the FASB issued accounting guidance on simplifying the measurement of inventory. Under this guidance, inventory will be measured at the lower of cost and net realizable value. Options that currently exist for market value will be eliminated. The guidance defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. This guidance will be effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement and has not determined what impact the adoption of the new accounting guidance will have on our consolidated financial statements.
In February 2015, the FASB issued guidance on the amendments to the consolidation analysis, which affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those for registered money market funds. We adopted this guidance on January 1, 20162017, and the adoption did not have a material impact on our consolidated financial statements.
In January 2015, the FASB issued guidance on the income statement presentation, which eliminates the concept of extraordinary items while retaining certain presentation and disclosure guidance for items that are unusual in nature or occur infrequently. We adopted this guidance on January 1, 2016 and the adoption did not have a material impact on our consolidated financial statements.
10
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In August 2014, the FASB issued accounting guidance on the disclosure of uncertainties about an entity's ability to continue as a going concern. This update requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We are currently assessing the impact of the adoption of this guidance on our consolidated financial position and results of operations.
In May 2014, the FASB issued amendments to guidance on the recognition of revenue based upon the entity’s contracts with customers to transfer goods or services. Under the new standard, update, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard creates a five step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. The standard allows for several transition methods: (a) a full retrospective adoption in which the standard is applied to all of the periods presented, or (b) a modified retrospective adoption in which the standard is applied only to the most current period presented in the financial statements, including additional disclosures of the standard’s application impact to individual financial statement line items. On July 9, 2015, the FASB deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB will also permit early adoption of the standard, but not before the original effective date of December 15, 2016.
We are currently evaluatingdetermining the impacts of the new standard on our contract portfolio. Our implementation efforts to date include the identification of revenue streams with similar contract structures, performing a detailed review of key contracts by revenue stream and comparing historical policies and practices to the new standard. Our evaluation of the impact of this accounting standard updatethe new guidance on our consolidated financial statements.statements is ongoing and we continue to evaluate the quantitative and qualitative impacts of the standard on timing of recognition for various revenues, which may be accelerated or deferred depending on the features of the customer arrangements and the presentation of contract costs (whether presented gross or offset against revenues). We currently anticipate adopting this standard using the modified retrospective method.
Note 2—Noncontrolling Interest
We hold an economic interest in FICV and are responsible for all operational, management and administrative decisions relating to FICV’s business. As a result,Effective with the financial resultsAugust 2016 conversion of all of Mosing Holdings, LLC's ("Mosing Holdings") Series A preferred stock (the "Preferred Stock"), Mosing Holdings transferred all its interest in FICV are consolidatedto us and the noncontrolling interest associated with ours andMosing Holdings was eliminated.
Historically we recordrecorded a noncontrolling interest on our condensed consolidated balance sheet with respect to the remaining economic interest in FICV held by Mosing Holdings, Inc. ("MHI").Holdings. Net income (loss)loss attributable to noncontrolling interest on the statements of operations representsrepresented the portion of earnings or losses attributable to the economic interest in FICV held by MHI.Mosing Holdings. The allocable domestic income (loss)loss from FICV to FINV iswas subject to U.S. taxation.
Effective with the August 2016 conversion of all of MHI's Series A preferred stock (see Note 11 – Preferred Stock), MHI transferred all its interest in FICV to us. As a result, the amount included in net income (loss) attributable to noncontrolling interest for the three and nine months ended September 30, 2016 is through August 26, 2016.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of net income (loss)loss attributable to noncontrolling interest is detailed as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
|
Add: Net loss after MHI contributed interest to FINV (1) | 18,355 |
| | — |
| | 18,355 |
| | — |
|
Add: Provision (benefit) for U.S. income taxes of FINV (2) | 3,078 |
| | 4,570 |
| | (10,414 | ) | | 11,645 |
|
Less: (Income) loss of FINV (3) | 97 |
| | 903 |
| | 23 |
| | (2,487 | ) |
Net income (loss) subject to noncontrolling interest | (20,668 | ) | | 29,561 |
| | (81,929 | ) | | 108,500 |
|
Noncontrolling interest percentage (4) | 25.2 | % | | 25.4 | % | | 25.2 | % | | 25.4 | % |
Net income (loss) attributable to noncontrolling interest | $ | (5,216 | ) | | $ | 7,523 |
| | $ | (20,741 | ) | | $ | 27,668 |
|
|
| | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2016 |
Net loss | | $ | (45,287 | ) | | $ | (47,695 | ) |
Add: Benefit for U.S. income taxes of FINV (1) | | (9,609 | ) | | (13,493 | ) |
Less: (Income) loss of FINV (2) | | 88 |
| | (74 | ) |
Net loss subject to noncontrolling interest | | (54,808 | ) | | (61,262 | ) |
Noncontrolling interest percentage (3) | | 25.3 | % | | 25.3 | % |
Net loss attributable to noncontrolling interest | | $ | (13,889 | ) | | $ | (15,525 | ) |
| |
(1) | Represents net loss after August 26, 2016 when MHI transferred its interest to FINV. |
| |
(2) | Represents income tax expense (benefit)benefit of entities outside of FICV as well as income tax attributable to our proportionate share of the U.S. operations of our partnership interests in FICV as of August 26, 2016.FICV. |
| |
(3)(2) | Represents results of operations for entities outside of FICV as of August 26, 2016.FICV. |
| |
(4)(3) | Represents the economic interest in FICV held by MHI before the preferred stock conversion on August 26,Mosing Holdings at June 30, 2016. This percentage changed as additional shares of FINV common stock were issued. Effective August 26, 2016, MHIMosing Holdings delivered its economic interest in FICV to us. |
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3—Acquisition and Divestiture
Blackhawk Acquisition
On AprilNovember 1, 2015, Frank’s International,2016, we completed a transaction to acquire all outstanding shares in Blackhawk Group Holdings, Inc., the ultimate parent company of Blackhawk Specialty Tools LLC, ("Blackhawk") pursuant to the terms of a Texas limited liability company (“Frank’s LLC”)definitive merger agreement dated October 6, 2016. Blackhawk is a leading provider of well construction and an indirectwell intervention services and products and the acquisition will allow us to combine Blackhawk’s cementing tool expertise and well intervention services with our global tubular running services. In conjunction with the acquisition, FI Tools Holdings, LLC, our newly formed subsidiary, merged with and into Blackhawk, with Blackhawk surviving the merger as our wholly-owned subsidiarysubsidiary. The merger consideration was comprised of FICV closeda combination of $150.4 million of cash on hand and 12.8 million shares of our common stock, on a transaction, which was not a significant acquisition, to purchase all of the outstanding equity interests of Timco Services, Inc. ("Timco"), a Louisiana corporation with a strong presence in the Permian Basin and Eagle Ford Shale regions, in exchangecash-free, debt-free basis, for consideration consisting of (i) approximately $81.0 million inclusive of a tax reimbursement payment of $8.0 million as well as closing adjustments for normal operating activity and customary purchase price adjustments and (ii) contingenttotal consideration of up to $20.0$294.6 million payable in two separate payments(based on our closing share price on October 31, 2016 of $10.0 million based upon exceeding certain targets of the United States land rotary rig count, as reported by Baker Hughes, over prescribed time periods. As of September 30, 2016, the contingent consideration had a fair value of approximately $7.0 thousand. In addition, each party agreed to indemnify the other for breaches of representations$11.25 and warranties, breaches of covenants and certain other matters, subject to certain exceptions.including working capital adjustments).
The Timcounaudited pro forma financial information presented below includes adjustments for amortization expense for identified intangible assets and depreciation expense based on the fair value and estimated lives of acquired property, plant and equipment. In addition, acquisition related costs are excluded from the unaudited pro forma financial information.
The following table shows our unaudited pro forma financial information assuming the transaction occurred on January 1, 2015 (in thousands, except per share amounts):
|
| | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2016 |
Revenue | $ | 136,680 |
| | $ | 311,060 |
|
Net loss applicable to common shares | (37,353 | ) | | (40,964 | ) |
Loss per common share: | | | |
Basic and diluted | $ | (0.22 | ) | | $ | (0.24 | ) |
The Blackhawk acquisition was accounted for as a business combination in accordance with accounting guidance.combination. The purchase price is allocated to the fair value of assets acquired and liabilities assumed based on a discounted cash flow model and goodwill is recognized for the excess consideration transferred over the fair value of the net assets. We recognized $4.9 million of goodwill. The goodwill was assigned to the U.S. Services segment and is deductible for tax purposes. The purchase price allocation was finalized during the fourth quarter of 2015.
In connection with the Timco acquisition, we acquired intangible assets in the amount of $7.9 million related to customer relationships, trade names and non-compete clauses. The intangible assets are amortized over their estimated useful lives. Amortization expense for the intangible assets for the Timco acquisition was $0.5 million for each of the three months ended September 30, 2016 and 2015 and $1.4 million and $0.9 million for the nine months ended September 30, 2016 and 2015, respectively.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The preliminary purchase price allocation was prepared in connection with our annual financial statements filed on our Annual Report. In 2017, we adjusted the purchase price allocation for a litigation settlement and the final valuation report. The following table summarizes the preliminary and the final purchase price allocations of the fair values of the assets acquired and liabilities assumed as part of the Blackhawk acquisition as of November 1, 2016 as determined in accordance with business combination accounting guidance (in thousands):
|
| | | | | | | | | | | |
| Preliminary purchase price allocation | | Purchase price adjustments | | Final purchase price allocation |
Current assets, excluding cash | $ | 23,626 |
| | $ | — |
| | $ | 23,626 |
|
Property, plant and equipment | 45,091 |
| | 55 |
| | 45,146 |
|
Other long-term assets | 3,139 |
| | — |
| | 3,139 |
|
Intangible assets | 41,972 |
| | 153 |
| | 42,125 |
|
Assets acquired | $ | 113,828 |
| | $ | 208 |
| | $ | 114,036 |
|
Current liabilities assumed | 11,132 |
| | 185 |
| | 11,317 |
|
Other long-term liabilities | 542 |
| | — |
| | 542 |
|
Liabilities assumed | $ | 11,674 |
| | $ | 185 |
| | $ | 11,859 |
|
Fair value of net assets acquired | 102,154 |
| | 23 |
| | 102,177 |
|
Total consideration transferred | 294,563 |
| | — |
| | 294,563 |
|
Goodwill | $ | 192,409 |
| | $ | (23 | ) | | $ | 192,386 |
|
In conjunction with the merger, we created a fourth segment, Blackhawk, and have recorded goodwill of $192.4 million in that segment.
Divestiture
On March 15, 2017, we sold a fully depreciated aircraft for a total sales price of $1.3 million and recorded a gain on sale of $1.3 million.
Note 4—Accounts Receivable, net
Accounts receivable at SeptemberJune 30, 20162017 and December 31, 20152016 were as follows (in thousands):
| | | September 30, | | December 31, | June 30, | | December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Trade accounts receivable, net of allowance | | | | |
of $12,260 and $2,528, respectively | $ | 95,713 |
| | $ | 166,256 |
| |
Trade accounts receivable, net of allowance of $14,064 and $14,337, respectively | | $ | 108,753 |
| | $ | 89,096 |
|
Unbilled revenue | 25,442 |
| | 40,033 |
| 24,829 |
| | 30,882 |
|
Taxes receivable | 30,900 |
| | 34,163 |
| 29,614 |
| | 42,870 |
|
Affiliated (1) | 750 |
| | 3,966 |
| 838 |
| | 717 |
|
Other receivables | 2,558 |
| | 1,773 |
| 3,931 |
| | 3,852 |
|
Total accounts receivable | $ | 155,363 |
| | $ | 246,191 |
| $ | 167,965 |
| | $ | 167,417 |
|
| |
(1) | Amounts represent expenditures on behalf of non-consolidated affiliates and receivables for aircraft charter income. |
Note 5—Inventories
Inventories at September 30, 2016 and December 31, 2015 were as follows (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2016 | | 2015 |
Pipe and connectors | $ | 111,566 |
| | $ | 137,245 |
|
Finished goods | 4,207 |
| | 4,020 |
|
Work in progress | 5,739 |
| | 5,230 |
|
Raw materials, components and supplies | 15,104 |
| | 14,768 |
|
Total inventories | $ | 136,616 |
| | $ | 161,263 |
|
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5—Inventories
Inventories at June 30, 2017 and December 31, 2016 were as follows (in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2017 | | 2016 |
Pipe and connectors | $ | 92,281 |
| | $ | 102,360 |
|
Finished goods | 15,850 |
| | 14,257 |
|
Work in progress | 7,933 |
| | 7,099 |
|
Raw materials, components and supplies | 19,034 |
| | 15,363 |
|
Total inventories | $ | 135,098 |
| | $ | 139,079 |
|
Note 6—Property, Plant and Equipment
The following is a summary of property, plant and equipment at SeptemberJune 30, 20162017 and December 31, 20152016 (in thousands):
| | | Estimated Useful Lives in Years | | September 30, 2016 | | December 31, 2015 | Estimated Useful Lives in Years | | June 30, 2017 | | December 31, 2016 |
Land | — | | $ | 14,446 |
| | $ | 10,119 |
| — | | $ | 15,948 |
| | $ | 15,730 |
|
Land improvements | 8-15 | | 9,379 |
| | 9,289 |
| 8-15 | | 9,256 |
| | 9,379 |
|
Buildings and improvements | 39 | | 70,715 |
| | 74,152 |
| 39 | | 129,967 |
| | 73,211 |
|
Rental machinery and equipment | 7 | | 910,720 |
| | 898,134 |
| 7 | | 933,489 |
| | 933,667 |
|
Machinery and equipment - other | 7 | | 60,278 |
| | 60,250 |
| 7 | | 58,559 |
| | 60,182 |
|
Furniture, fixtures and computers | 5 | | 18,197 |
| | 18,240 |
| 5 | | 20,767 |
| | 19,073 |
|
Automobiles and other vehicles | 5 | | 41,962 |
| | 48,402 |
| 5 | | 32,650 |
| | 36,796 |
|
Aircraft | 7 | | 16,267 |
| | 16,267 |
| 7 | | — |
| | 16,267 |
|
Leasehold improvements | 7-15, or lease term if shorter | | 8,043 |
| | 7,947 |
| 7-15, or lease term if shorter | | 10,261 |
| | 8,027 |
|
Construction in progress - machinery and equipment and buildings | — | | 111,260 |
| | 102,432 |
| — | | 70,050 |
| | 120,937 |
|
| | 1,261,267 |
| | 1,245,232 |
| | 1,280,947 |
| | 1,293,269 |
|
Less: Accumulated depreciation | | (687,393 | ) | | (620,273 | ) | | (755,108 | ) | | (726,245 | ) |
Total property, plant and equipment, net | | $ | 573,874 |
| | $ | 624,959 |
| | $ | 525,839 |
| | $ | 567,024 |
|
Note 7—Other Assets
Other assets at SeptemberJune 30, 20162017 and December 31, 20152016 consisted of the following (in thousands):
| | | September 30, | | December 31, | June 30, | | December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Marketable securities held in Rabbi Trust (1) | $ | 36,135 |
| | $ | 45,254 |
| |
Deferred tax asset (2) | 54,045 |
| | 536 |
| |
Cash surrender value of life insurance policies (1) | | $ | 29,088 |
| | $ | 36,269 |
|
Deposits | 2,307 |
| | 2,031 |
| 2,217 |
| | 2,343 |
|
Other | 5,961 |
| | 5,112 |
| 1,686 |
| | 6,921 |
|
Total other assets | $ | 98,448 |
| | $ | 52,933 |
| $ | 32,991 |
| | $ | 45,533 |
|
| |
(1) | See Note 10 – Fair Value Measurements |
| |
(2) | See Note 16 – Income Taxes |
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8—Accrued and Other Current Liabilities
Accrued and other current liabilities at SeptemberJune 30, 20162017 and December 31, 20152016 consisted of the following (in thousands):
| | | September 30, | | December 31, | June 30, | | December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
| | | | | | |
Accrued compensation | $ | 15,919 |
| | $ | 25,281 |
| $ | 12,239 |
| | $ | 10,250 |
|
Accrued property and other taxes | 23,011 |
| | 23,790 |
| 23,819 |
| | 19,740 |
|
Accrued severance and other charges | 15,436 |
| | 22,244 |
| 1,942 |
| | 6,150 |
|
Income taxes | 4,746 |
| | 7,385 |
| 5,653 |
| | 6,857 |
|
Accrued inventory | — |
| | 5,281 |
| |
Accrued medical claims | 2,042 |
| | 4,141 |
| 907 |
| | 604 |
|
Accrued purchase orders | 1,680 |
| | 5,562 |
| 6,260 |
| | 2,083 |
|
Other | 16,287 |
| | 18,200 |
| 20,281 |
| | 19,266 |
|
Total accrued and other current liabilities | $ | 79,121 |
| | $ | 111,884 |
| $ | 71,101 |
| | $ | 64,950 |
|
Note 9—Debt
Credit Facility
We have a $100.0 million revolving credit facility with certain financial institutions, including up to $20.0 million in letters of credit and up to $10.0 million in swingline loans, which matures in August 2018 (the “Credit Facility”). Subject to the terms of the Credit Facility, we have the ability to increase the commitments to $150.0 million. At SeptemberJune 30, 20162017 and December 31, 20152016, we had no outstanding indebtedness under the Credit Facility. In addition, we had $3.8$4.4 million and $4.7$3.7 million, respectively, in letters of credit outstanding as of September 30, 2016and December 31, 2015, respectively. If our Adjusted EBITDA levels do not increase in future quarters, our borrowing capacityno outstanding borrowings under the Credit Facility could be reduced.this facility.
Borrowings under the Credit Facility bear interest, at our option, at either a base rate or an adjusted Eurodollar rate. Base rate loans under the Credit Facility bear interest at a rate equal to the higher of (i) the prime rate as published in the Wall Street Journal, (ii) the Federal Funds Effective Rate plus 0.50% or (iii) the adjusted Eurodollar rate plus 1.00%, plus an applicable margin ranging from 0.50% to 1.50%, subject to adjustment based on a leverage ratio. Interest is in each case payable quarterly for base-rate loans. Eurodollar loans under the Credit Facility bear interest at an adjusted Eurodollar rate equal to the Eurodollar rate for such interest period multiplied by the statutory reserves, plus an applicable margin ranging from 1.50% to 2.50%. Interest is payable at the end of applicable interest periods for Eurodollar loans, except that if the interest period for a Eurodollar loan is longer than three months, interest is paid at the end of each three-month period. The unused portion of the Credit Facility is subject to a commitment fee ranging from 0.250% to 0.375% based on certain leverage ratios.
The Credit Facility contains various covenants that, among other things, limit our ability to grant certain liens, make certain loans and investments, enter into mergers or acquisitions, enter into hedging transactions, change our lines of business, prepay certain indebtedness, enter into certain affiliate transactions, incur additional indebtedness or engage in certain asset dispositions.
The Credit Facility also contains financial covenants, which, among other things, require us, on a consolidated basis, to maintain: (i) a ratio of total consolidated funded debt to adjusted EBITDA (as defined in our credit agreement)Credit Agreement) of not more than 2.50 to 1.0 and (ii) a ratio of EBITDA to interest expense of not less than 3.0 to 1.0. As of September 30, 2016, we were in compliance with all financial covenants under the Credit Facility.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Credit Facility contains customary events of default, including, among others, the failure to make required payments, the failure to comply with certain covenants or other agreements, breach of the representations and covenants contained in the agreements, default of certain other indebtedness, certain events of bankruptcy or insolvency and the occurrence of a change in control.
AFCO
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On April 28, 2017, the Company obtained a limited waiver under its Revolving Credit Corporation - Insurance Notes PayableAgreement, dated August 14, 2013, by and among FICV (as borrower), Amegy Bank National Association (as administrative agent), Capital One, National Association (as syndication agent) and the other lenders party thereto (the "Credit Agreement"), of its leverage ratio and interest coverage ratio for the fiscal quarters ending March 31, 2017 and June 30, 2017 (the “Waiver”) in order to not be in default for first quarter of 2017 testing. The Company agreed to comply with the following conditions during the period from the effective date of the Waiver until the delivery of its compliance certificate with respect to the fiscal quarter ending September 30, 2017: (i) maintain no less than $250.0 million in liquidity; (ii) abide by certain restrictions regarding the issuance of senior unsecured debt; and (iii) pay interest and commitment fees based on the highest “Applicable Margin” (as defined in the Credit Agreement) level. In connection with the Waiver, the Company paid a waiver fee to each lender that executed the Waiver equal to five basis points of the respective lender’s commitment under the Credit Agreement.
Citibank Credit Facility
In 2015,2016, we entered into a notethree-year credit facility with Citibank N.A., UAE Branch in the amount of $6.0 million for the issuance of standby letters of credit and guarantees. The credit facility also allows for open ended guarantees. Outstanding amounts under the credit facility bear interest of 1.25% per annum for amounts outstanding up to finance annual insurance premiums for $7.6 million. The note bearsone year. Amounts outstanding more than one year bear interest at an annual rate1.5% per annum. As of 1.9%June 30, 2017 and will mature in October 2016. At September 30,December 31, 2016, we had no outstanding balance. At December 31, 2015, the total outstanding balance was $6.9 million.$3.0 million and $2.2 million, respectively, in letters of credit outstanding.
Note 10—Fair Value Measurements
We follow fair value measurement authoritative accounting guidance for measuring fair values of assets and liabilities in financial statements. We have consistently used the same valuation techniques for all periods presented. Please see Note 10 - Fair value is the price that would be received to sell an asset or paid to transfer a liabilityValue Measurements in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that market participants who are independent, knowledgeable, and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. We are able to classify fair value balances based on the observability of these inputs. The authoritative guidanceour Annual Report for fair value measurements establishes three levels of the fair value hierarchy, defined as follows:
Level 1: Unadjusted, quoted prices for identical assets or liabilities in active markets.
Level 2: Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability.
Level 3: Significant, unobservable inputs for use when little or no market data exists, requiring a significant degree of judgment.
The hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. Depending on the particular asset or liability, input availability can vary depending on factors such as product type, longevity of a product in the market and other particular transaction conditions. In some cases, certain inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. For disclosure purposes under the accounting guidance, the lowest level that contains significant inputs used in valuation should be chosen.
further discussion.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financial Assets and Liabilities
A summary of financial assets and liabilities that are measured at fair value on a recurring basis, as of SeptemberJune 30, 20162017 and December 31, 20152016, were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| (Level 1) | | (Level 2) | | (Level 3) | | Total |
September 30, 2016 | | | | | | | |
Assets: | | | | | | | |
Investments available-for-sale: | | | | | | | |
Marketable securities - deferred | | | | | | | |
compensation plan | $ | — |
| | $ | 36,135 |
| | $ | — |
| | $ | 36,135 |
|
Marketable securities - other | 3,616 |
| | — |
| | — |
| | 3,616 |
|
Liabilities: | | | | | | | |
Derivative financial instruments | — |
| | 86 |
| | — |
| | 86 |
|
Marketable securities - deferred | | | | | | | |
compensation plan | — |
| | 31,204 |
| | — |
| | 31,204 |
|
|
| | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | |
Assets: | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | 210 |
| | $ | — |
| | $ | 210 |
|
Investments available-for-sale: | | | | | | | |
Marketable securities - deferred | | | | | | | |
compensation plan | — |
| | 45,254 |
| | — |
| | 45,254 |
|
Marketable securities - other | 2,387 |
| | — |
| | — |
| | 2,387 |
|
Liabilities: | | | | | | | |
Marketable securities - deferred | | | | | | | |
compensation plan | — |
| | 43,568 |
| | — |
| | 43,568 |
|
|
| | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| (Level 1) | | (Level 2) | | (Level 3) | | Total |
June 30, 2017 | | | | | | | |
Assets: | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 25 |
|
Investments: | | | | | | | |
Cash surrender value of life insurance policies - deferred compensation plan | — |
| | 29,088 |
| | — |
| | 29,088 |
|
Marketable securities - other | 164 |
| | — |
| | — |
| | 164 |
|
Liabilities: | | | | | | | |
Derivative financial instruments | — |
| | 609 |
| | — |
| | 609 |
|
Deferred compensation plan | — |
| | 27,586 |
| | — |
| | 27,586 |
|
| | | | | | | |
December 31, 2016 | | | | | | | |
Assets: | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | 146 |
| | $ | — |
| | $ | 146 |
|
Investments: | | | | | | | |
Cash surrender value of life insurance policies - deferred compensation plan | — |
| | 36,269 |
| | — |
| | 36,269 |
|
Marketable securities - other | 3,692 |
| | — |
| | — |
| | 3,692 |
|
Liabilities: | | | | | | | |
Deferred compensation plan | — |
| | 30,307 |
| | — |
| | 30,307 |
|
Our derivative financial instruments consist of short-duration foreign currency forward contracts. The fair value of our derivative financial instruments is based on quoted market values including foreign exchange forward rates and interest rates. The fair value is computed by discounting the projected future cash flow amounts to present value. At September 30, 2016 and December 31, 2015, derivativeDerivative financial instruments are included in our condensed consolidated balance sheets in accounts receivable, net and accrued and other current liabilities at June 30, 2017 and in accounts receivable, net, respectively, in our condensed consolidated balance sheets.at December 31, 2016.
Our investments associated with our deferred compensation plan consist primarily of marketable securities thatthe cash surrender value of life insurance policies and are heldincluded in other assets on the condensed consolidated balance sheets. Our investments change as a result of contributions, payments, and fluctuations in the form of investments in mutual funds and insurance contracts.market. Assets and liabilities, measured using significant observable inputs, are reported at fair value based on third-party broker statements, which are derived from the fair value of the funds' underlying investments. OtherWe also have marketable securities in publicly traded equity securities as an indirect result of strategic investments. They are reported at fair value based on the price of the stock and are included in other assets on the condensed consolidated balance sheets.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
We apply the provisions of the fair value measurement standard to our non-recurring, non-financial measurements including business combinations as well as impairment related to goodwill and other long-lived assets. For business combinations (see Note 3 - Acquisition and Divestiture), the purchase price is allocated to the assets acquired and liabilities assumed based on a discounted cash flow model for most intangibles as well as market assumptions for the valuation of equipment and other fixed assets.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
valuation of equipment and other fixed assets. We utilize a discounted cash flow model in evaluating impairment considerations related to goodwill and long-lived assets. Given the unobservable nature of the inputs, the discounted cash flow models are deemed to use Level 3 inputs.
Other Fair Value Considerations
The carrying values on our condensed consolidated balance sheet of our cash and cash equivalents, trade accounts receivable, other current assets, accounts payable, accrued and other current liabilities and lines of credit approximatesapproximate fair values due to their short maturities.
Note 11—Preferred Stock
At December 31, 2015, we had 52,976,000 shares of Series A preferred stock, par value €0.01 per share (the "Preferred Stock"), issued and outstanding, all of which were held by MHI. Each share of Preferred Stock had a liquidation preference equal to its par value of €0.01 per share and was entitled to an annual dividend equal to 0.25% of its par value. We paid the annual dividend for the year ended December 31, 2015 of $1,476 on June 3, 2016. Additionally, each share of Preferred Stock entitled its holder to one vote. Preferred stockholders voted with the common stockholders as a single class on all matters presented to FINV's shareholders for their vote.
Before the conversion, MHI had the right to convert all or a portion of its Preferred Stock into shares of our common stock by delivery of an equivalent portion of its interest in FICV to us. Accordingly, the increase in our interest in FICV in connection with a conversion would decrease the noncontrolling interest in our financial statements that was attributable to MHI's interest in FICV.
On August 19, 2016, we received notice from MHI that it was exercising its right to exchange, for 52,976,000 common shares, each of the following securities: (i) 52,976,000 shares of Preferred Stock and (ii) 52,976,000 units in FICV. On August 26, 2016, we issued 52,976,000 common shares to MHI. Upon conversion of the Preferred Stock, we had no issued or outstanding convertible preferred shares and the number of common shares of authorized capital was increased by 52,976,000 shares, equal to the number of convertible preferred shares that were converted into common shares. Additionally, upon the exchange of the convertible preferred stock, MHI was entitled to receive an amount in cash equal to the nominal value of each convertible preferred share plus any accrued but unpaid dividends with respect to such stock. The cash payment of $0.6 million was paid on September 23, 2016. In conjunction with the conversion, MHI delivered its interest in FICV to us and no longer owns any interest in FICV. As a result of the transaction, we have also reallocated the accumulated other comprehensive loss attributable to the noncontrolling interest.
The Preferred Stock was classified outside of permanent equity in our condensed consolidated balance sheet at its redemption value of par plus accrued and unpaid dividends because the conversion provisions were not solely within our control.
Note 12— Derivatives
In December 2015, we began enteringWe enter into short-duration foreign currency forward derivative contracts to reduce the risk of foreign currency fluctuations. We use these instruments to mitigate our exposure to non-local currency operating working capital. We record these contracts at fair value on our condensed consolidated balance sheets. Although the derivative contracts will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they are not formally designated as hedge contracts for hedge accounting treatment. Accordingly, any changes in the fair value of the derivative instruments during a period will be included in our condensed consolidated statements of operations.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, we had the following foreign currency derivative contracts outstanding in U.S. dollars (in thousands):
| | | | September 30, 2016 | | | | | | |
| | Notional | | Contractual | | Settlement | | June 30, 2017 |
Derivative Contracts | | Amount | | Exchange Rate | | Date | | Notional Amount | | Contractual Exchange Rate | | Settlement Date |
Canadian dollar | | $ | 4,597 |
| | 1.3052 | | 12/12/2016 | | $ | 6,040 |
| | 1.3245 | | 9/14/2017 |
Euro | | 4,280 |
| | 1.1264 | | 12/13/2016 | | 7,747 |
| | 1.1227 | | 9/15/2017 |
Euro | | 2,304 |
| | 1.1240 | | 10/14/2016 | | 2,260 |
| | 1.1302 | | 7/14/2017 |
Norwegian kroner | | 6,041 |
| | 8.2766 | | 12/13/2016 | |
Norwegian krone | | | 9,472 |
| | 8.4461 | | 9/15/2017 |
Pound sterling | | 5,702 |
| | 1.3260 | | 12/13/2016 | | 11,479 |
| | 1.2755 | | 9/15/2017 |
| | | | December 31, 2015 | | | | | | |
| | Notional | | Contractual | | Settlement | | December 31, 2016 |
Derivative Contracts | | Amount | | Exchange Rate | | Date | | Notional Amount | | Contractual Exchange Rate | | Settlement Date |
Canadian dollar | | $ | 5,091 |
| | 1.3751 | | 1/13/2016 | | $ | 4,553 |
| | 1.3179 | | 3/14/2017 |
Euro | | 19,706 |
| | 1.0948 | | 1/13/2016 | | 4,753 |
| | 1.0563 | | 3/14/2017 |
Norwegian kroner | | 11,498 |
| | 8.6973 | | 1/13/2016 | |
Euro | | | 2,558 |
| | 1.0659 | | 1/13/2017 |
Norwegian krone | | | 3,643 |
| | 8.5101 | | 3/14/2017 |
Pound sterling | | 7,516 |
| | 1.5031 | | 1/13/2016 | | 3,908 |
| | 1.2607 | | 3/14/2017 |
The following table summarizes the location and fair value amounts of all derivative contracts in the condensed consolidated balance sheets as of SeptemberJune 30, 20162017 and December 31, 20152016 (in thousands):
|
| | | | | | | | | | |
Derivatives not Designated as Hedging Instruments | | Consolidated Balance Sheet Location | | June 30, 2017 | | December 31, 2016 |
Foreign currency contracts | | Accounts receivable, net | | $ | 25 |
| | $ | 146 |
|
Foreign currency contracts | | Accrued and other current liabilities | | (609 | ) | | — |
|
|
| | | | | | | | | | |
Derivatives not Designated as Hedging Instruments | | Consolidated Balance Sheet Location | | September��30, 2016 | | December 31, 2015 |
Foreign currency contracts | | Accounts receivable, net | | $ | — |
| | $ | 210 |
|
Foreign currency contracts | | Accrued and other current liabilities | | (86 | ) | | — |
|
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the location and amounts of the realized and unrealized gains and losses on derivative contracts in the condensed consolidated statements of operations (in thousands):
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
Derivatives not Designated as Hedging Instruments | | Location of Loss Recognized in Income on Derivative Contracts | | 2016 | | 2015 | | 2016 | | 2015 | | Location of Gain (Loss) Recognized in Income on Derivative Contracts | | 2017 | | 2016 | | 2017 | | 2016 |
Unrealized loss on foreign currency contracts | Other income | | $ | (615 | ) | | $ | — |
| | $ | (296 | ) | | $ | — |
| |
Realized gain (loss) on foreign currency contracts | | Other income | | 511 |
| | — |
| | (1,068 | ) | | — |
| |
Unrealized gain (loss) on foreign currency contracts | | | Other income, net | | $ | (274 | ) | | $ | 1,293 |
| | $ | (730 | ) | | $ | 319 |
|
Realized loss on foreign currency contracts | | | Other income, net | | (807 | ) | | (865 | ) | | (552 | ) | | (1,579 | ) |
Total net income (loss) on foreign currency contracts | | $ | (104 | ) | | $ | — |
| | $ | (1,364 | ) | | $ | — |
| | $ | (1,081 | ) | | $ | 428 |
| | $ | (1,282 | ) | | $ | (1,260 | ) |
Our derivative transactions are governed through International Swaps and Derivatives Association ("ISDA") master agreements. These agreements include stipulations regarding the right of offset in the event that we or our counterparty default on our performance obligations. If a default were to occur, both parties have the right to net amounts payable and receivable into a single net settlement between parties. Our accounting policy is to offset derivative assets and liabilities executed with the same counterparty when a master netting arrangement exists.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the gross and net fair values of our derivatives at SeptemberJune 30, 20162017 and December 31, 20152016 (in thousands):
| | | | Derivative Asset Positions | | Derivative Liability Positions | | Derivative Asset Positions | | Derivative Liability Positions |
| | September 30, 2016 | | December 31, 2015 | | September 30, 2016 | | December 31, 2015 | | June 30, 2017 | | December 31, 2016 | | June 30, 2017 | | December 31, 2016 |
Gross position - asset / (liability) | | $ | 1 |
| | $ | 316 |
| | $ | 1 |
| | $ | (106 | ) | | $ | 25 |
| | $ | 181 |
| | $ | (609 | ) | | $ | (35 | ) |
Netting adjustment | | (1 | ) | | (106 | ) | | (87 | ) | | 106 |
| | — |
| | (35 | ) | | — |
| | 35 |
|
Net position - asset / (liability) | | $ | — |
| | $ | 210 |
| | $ | (86 | ) | | $ | — |
| | $ | 25 |
| | $ | 146 |
| | $ | (609 | ) | | $ | — |
|
Note 13—Treasury Stock
At September 30, 2016, common shares held in treasury totaled 740,992 with a cost of $12.3 million and at December 31, 2015, common shares held in treasury totaled 514,812 shares with a cost of $9.3 million. These shares were withheld from employees to settle personal tax withholding obligations that arose as a result of restricted stock units that vested.
Note 14—12—Related Party Transactions
We have engaged in certain transactions with other companies related to us by common ownership. We have entered into various operating leases to lease office space from an affiliated company. Rent expense related to these leases was $1.8$1.7 million and $2.5$1.8 million for each of the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and $6.2$3.5 million and $6.5$4.5 million for the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, respectively.
We are a party to certain agreements relating to the rental of aircraft to Western Airways ("WA"), an entity owned by the Mosing family. The WA agreements reflect both dry lease and wet lease rental, whereby we are charged a flat monthly fee primarily for crew, hangar, maintenance and administration costs in addition to other variable costs for fuel and maintenance. We also earn charter income from third party usage through a revenue sharing agreement. We recorded $0.7 million and $0.5 million of net charter expense of $0.3 million and net charter revenue of $0.1 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and $0.6 million and $0.5 million of net charter expense of $0.8 million and $0.7 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
During the first quarter of 2017, we committed to a formal plan to sell two aircraft and determined those assets met the criteria to be classified as held for sale in our unaudited condensed consolidated balance sheet.
Tax Receivable Agreement
MHIMosing Holdings and its permitted transferees converted all of itstheir Preferred Stock into shares of our common stock on a one-for-one basis on August 26, 2016, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, by delivery of an equivalent portion of its interesttheir interests in FICV to us (a(the “Conversion”). FICV will make an election under Section 754 of the Internal Revenue Code. Pursuant
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to the Section 754 election, the Conversion will result in an adjustment to the tax basis of the tangible and intangible assets of FICV with respect to the portion of FICV now held by FINV. These adjustments will be allocated to FINV. The adjustments to the tax basis of the tangible and intangible assets of FICV described above would not have been available absent this Conversion. The basis adjustments are expected to reduce the amount of tax that FINV would otherwise be required to pay in the future. These basis adjustments may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
The tax receivable agreement (the "TRA") that we entered into with FICV and MHIMosing Holdings in connection with our IPOinitial public offering ("IPO") generally provides for the payment by FINV of 85% of the amount of the actual reductions, if any, in payments of U.S. federal, state and local income tax or franchise tax (which reductions we refer to as “cash savings”) in periods after our IPO as a result of (i) the tax basis increases resulting from the Conversion and (ii) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the TRA. In addition, the TRA provides for payment by us of interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. The payments under the TRA will not be conditioned upon a holder of rights under the TRA having a continued ownership interest in either FICV or FINV. We will retain the remaining 15% of cash savings, if any.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of Septemberboth June 30, 2017 and December 31, 2016, our estimated TRA liability was $124.6 million. This represents 85% of the future cash savings expected from the utilization of the original basis adjustments plus subsequent basis adjustments that will result from payments under the TRA agreement. The estimation of the TRA liability is by its nature imprecise and subject to significant assumptions regarding the amount and timing of taxable income in the future and the tax rates then applicable. The time period over which the cash savings is expected to be realized is estimated to be over 20 years. Based on FINV’s forecastedestimated tax lossposition, we expect to make a TRA payment in 2017 of approximately $2.1 million for the 2016 tax year no payment under the TRA is expected forending December 31, 2016.
The payment obligations under the TRA are our obligations and are not obligations of FICV. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless FINV elects to exercise its sole right to terminate the TRA early. If FINV elects to terminate the TRA early, which it may do so in its sole discretion, it would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA (based upon certain assumptions and deemed events set forth in the TRA, including the assumption that it has sufficient taxable income to fully utilize such benefits and that any FICV interests that MHIMosing Holdings or its transferees own on the termination date are deemed to be exchanged on the termination date). Any early termination payment may be made significantly in advance of the actual realization, if any, of such future benefits. In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control. In these situations, FINV’s obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. For example, if the TRA were terminated on SeptemberJune 30, 2016,2017, the estimated termination payment would be approximately $105.3$100.8 million (calculated using a discount rate of 4.96%5.61%). The foregoing number is merely an estimate and the actual payment could differ materially.
Because FINV is a holding company with no operations of its own, its ability to make payments under the TRA is dependent on the ability of FICV to make distributions to it in an amount sufficient to cover FINV’s obligations under such agreements; this ability, in turn, may depend on the ability of FICV’s subsidiaries to provide payments to it. The ability of FICV and its subsidiaries to make such distributions will be subject to, among other things, the applicable provisions of Dutch law that may limit the amount of funds available for distribution and restrictions in our debt instruments. To the extent that FINV is unable to make payments under the TRA for any reason, except in the case of an acceleration of payments thereunder occurring in connection with an early termination of the TRA or certain mergers or change of control, such payments will be deferred and will accrue interest until paid, and FINV will be prohibited from paying dividends on its common stock.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 15—Earnings (Loss)13 - Loss Per Common Share
Basic earnings (loss)loss per common share is determined by dividing net income (loss), less preferred stock dividends,loss by the weighted average number of common shares outstanding during the period. Diluted earnings (loss)loss per share is determined by dividing net income (loss)loss attributable to common stockholders by the weighted average number of common shares outstanding, assuming all potentially dilutive shares were issued.
We apply the treasury stock method to determine the dilutive weighted average common shares represented by the unvested restricted stock units and ESPPemployee stock purchase plan shares. Through August 26, 2016, the date of the conversion of all of MHI'sMosing Holdings' Preferred Stock and MHI'sMosing Holdings' transfer of interest in FICV to us, (see Note 11 – Preferred Stock), the diluted earnings (loss)loss per share calculation assumed the conversion of 100% of our outstanding Preferred Stock on an as if converted basis. Accordingly, the numerator was also adjusted to include the earnings allocated to the noncontrolling interest after taking into account the tax effect of such exchange.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the basic and diluted earnings (loss)loss per share calculations (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Numerator - Basic | | | | | | | |
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
|
Less: Net (income) loss attributable to noncontrolling interest | 5,216 |
| | (7,523 | ) | | 20,741 |
| | (27,668 | ) |
Less: Preferred stock dividends | — |
| | — |
| | (1 | ) | | (2 | ) |
Net income (loss) available to common shareholders | $ | (36,982 | ) | | $ | 16,565 |
| | $ | (69,153 | ) | | $ | 71,672 |
|
| | | | | | | |
Numerator - Diluted | | | | | | | |
Net (loss) attributable to common shareholders | $ | (36,982 | ) | | $ | 16,565 |
| | $ | (69,153 | ) | | $ | 71,672 |
|
Add: Net income attributable to noncontrolling interest (1), (2) | — |
| | 5,911 |
| | — |
| | 23,513 |
|
Add: Preferred stock dividends (2) | — |
| | — |
| | — |
| | 2 |
|
Dilutive net income (loss) available to common shareholders | $ | (36,982 | ) | | $ | 22,476 |
| | $ | (69,153 | ) | | $ | 95,187 |
|
| | | | | | | |
Denominator | | | | | | | |
Basic weighted average common shares | 177,125 |
| | 154,813 |
| | 162,656 |
| | 154,502 |
|
Exchange of noncontrolling interest for common stock (Note 11), (2) | — |
| | 52,976 |
| | — |
| | 52,976 |
|
Restricted stock units (2) | — |
| | 1,559 |
| | — |
| | 1,573 |
|
Stock to be issued pursuant to ESPP (2) | — |
| | 1 |
| | — |
| | 1 |
|
Diluted weighted average common shares | 177,125 |
| | 209,349 |
| | 162,656 |
| | 209,052 |
|
| | | | | | | |
Earnings (loss) per common share: | | | | | | | |
Basic | $ | (0.21 | ) | | $ | 0.11 |
| | $ | (0.43 | ) | | $ | 0.46 |
|
Diluted | $ | (0.21 | ) | | $ | 0.11 |
| | $ | (0.43 | ) | | $ | 0.46 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Numerator | | | | | | | |
Net loss | $ | (25,950 | ) | | $ | (45,287 | ) | | $ | (52,613 | ) | | $ | (47,695 | ) |
Less: Net loss attributable to noncontrolling interest | — |
| | 13,889 |
| | — |
| | 15,525 |
|
Less: Preferred stock dividends | — |
| | (1 | ) | | — |
| | (1 | ) |
Net loss available to common shareholders | $ | (25,950 | ) | | $ | (31,399 | ) | | $ | (52,613 | ) | | $ | (32,171 | ) |
Denominator | | | | | | | |
Basic and diluted (1) weighted average common shares | 222,914 |
| | 155,440 |
| | 222,740 |
| | 155,342 |
|
Loss per common share: | | | | | | | |
Basic and diluted | $ | (0.12 | ) | | $ | (0.20 | ) | | $ | (0.24 | ) | | $ | (0.21 | ) |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | |
(1) | Adjusted for the additional tax expense upon the assumed conversion of the Preferred Stock | $ | — |
| | $ | 1,612 |
| | $ | — |
| | $ | 4,155 |
|
| | | | | | | | |
(2) | Approximate number of shares of potentially convertible preferred stock to common stock up until the time of conversion on August 26, 2016, unvested restricted stock units and stock to be issued pursuant to the ESPP have been excluded from the computation of diluted earnings (loss) per share as the effect would be anti-dilutive when the results from operations are at a net loss. | 32,977 |
| | — |
| | 47,273 |
| | — |
|
|
| | | | | | | | | | | | |
| | | | | | | | |
(1) | Approximate number of shares of potentially convertible preferred stock to common stock up until the time of conversion on August 26, 2016, unvested restricted stock units and stock to be issued pursuant to the employee stock purchase plan have been excluded from the computation of diluted loss per share as the effect would be anti-dilutive when the results from operations are at a net loss. | 425 |
| | 54,534 |
| | 616 |
| | 54,489 |
|
Note 16—14—Income Taxes
For interim financial reporting, we estimate the annual tax rate based on projected pre-tax income (loss) for the full year and record a quarterly income tax provision (benefit) in accordance with accounting guidance for income taxes. As the year progresses, we refine the estimate of the year's pre-tax income (loss) as new information becomes available. The continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, we adjust the income tax provision (benefit) during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.
Our effective tax rate on income from continuing operationsloss before income taxes was 13.9%19.0% and 30.9%14.5% for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and 14.6%22.4% and 24.7%15.1% for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The lower rates arehigher rate is due primarily a result of a decrease in taxable income and
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to a change in jurisdictional mix. In addition, the tax rate for all periods is lower than the U.S. statutory income tax rate of 35% due to lower statutory tax rates in certain foreign jurisdictions where we operate.
As of September 30, 2016, we had a deferred tax asset in the amount of $54.0 million. For the quarter ended June 30, 2016, we had a deferred tax liability of $31.3 million. The change relates primarily to MHI’s conversion of preferred shares into common shares on August 26, 2016. (See Note 11 – Preferred Stock.) In conjunction with the conversion, MHI delivered its interest in FICV to us and no longer owns any interest in FICV. At the conversion date, FINV recorded a deferred tax asset in the amount of $18.7 million related to the excess of tax over book basis in its investment in FICV. In addition, we recorded a deferred tax asset in the amount of $49.9 million related to the future increases in tax basis that will result from the payment of the TRA liability. (See Note 14 – Related Party Transactions.) Other changes in the deferred tax balance result from the recording of the 2015 return to provision adjustment and normal provision of taxes for the 2016 tax year.
As of SeptemberJune 30, 20162017, there were no significant changes to our unrecognized tax benefits as reported in our audited financial statements for the year ended December 31, 20152016.
Note 17—Severance and Other Charges21
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During 2015, we executed a workforce reduction plan as part of our cost savings initiatives due to depressed oil and gas prices. During 2016, we have continued to take steps to adjust our workforce to meet the depressed demand in the industry. The reduction was communicated to affected employees on various dates. Also, the then Chairman of the board of supervisory directors (who also held the role of Executive Chairman of our company) transitioned to a non-executive director of the supervisory board effective as of December 31, 2015. At September 30, 2016, our outstanding accrual was approximately $15.4 million and included severance payments, other employee-related termination costs and lease termination fees. Below is a reconciliation of the beginning and ending liability balance (in thousands):
|
| | | | | | | | | | | | | | | |
| International Services | | U.S. Services | | Tubular Sales | | Total |
Beginning balance, December 31, 2015 | $ | 78 |
| | $ | 22,166 |
| | $ | — |
| | $ | 22,244 |
|
Additions for costs expensed | 10,608 |
| | 8,065 |
| | 185 |
| | 18,858 |
|
Other adjustments | — |
| | (535 | ) | | 535 |
| | — |
|
Severance and other payments | (3,886 | ) | | (21,254 | ) | | (526 | ) | | (25,666 | ) |
Ending balance, September 30, 2016 | $ | 6,800 |
| | $ | 8,442 |
| | $ | 194 |
| | $ | 15,436 |
|
We expect to pay a significant portion of the remaining liability no later than the fourth quarter of 2016.
Note 18—15—Commitments and Contingencies
We are the subject of lawsuits and claims arising in the ordinary course of business from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. We had no material accruals for loss contingencies, individually or in the aggregate, as of SeptemberJune 30, 20162017 and December 31, 2015.2016. We believe the probability is remote that the ultimate outcome of these matters would have a material adverse effect on our financial position, results of operations or cash flows.
We are conducting an internal investigation of the operations of certain of our foreign subsidiaries in West Africa including possible violations of the U.S. Foreign Corrupt Practices Act, our policies and other applicable laws. In June 2016, we voluntarily disclosed the existence of our extensive internal review to the U.S. Securities and Exchange Commission,SEC, the United States Department of Justice and other governmental entities. It is our intent to fully cooperate with these agencies and any other applicable authorities in connection with any further investigation that may be conducted in connection with this matter. While our review doeshas not
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
currently indicate indicated that there has been any material impact on our previously filed financial statements, we continuehave continued to collect information and cooperate with the authorities, but at this time are unable to predict the ultimate resolution of these matters with these agencies. In addition, during the course of the investigation, we discovered historical business transactions (and bids to enter into business transactions) in certain countries that may have been subject to U.S. and other international sanctions. We have disclosed this information to various governmental entities (including those involved in our ongoing investigation), but at this time are unable to predict the ultimate resolution of these matters with these agencies, including any financial impact to us.
Note 19—16—Segment Information
Reporting Segments
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker (“CODM”)CODM in deciding how to allocate resources and assess performance. We are comprised of threefour reportable segments: International Services, U.S. Services, Tubular Sales and Tubular Sales.Blackhawk.
The International Services segment provides tubular services in international offshore markets and in several onshore international regions. Our customers in these international markets are primarily large exploration and production companies, including integrated oil and gas companies and national oil and gas companies.
The U.S. Services segment provides tubular services in almost all of the active onshore oil and gas drilling regions in the U.S., including the Permian Basin, Bakken Shale, Barnett Shale, Eagle Ford Shale, Haynesville Shale, Marcellus Shale, DJ Basin and Utica Shale, as well as in the U.S. Gulf of Mexico.
The Tubular Sales segment designs, manufactures and distributes large outside diameter ("OD") pipe, connectors and casing attachments and sells large OD pipe originally manufactured by various pipe mills. We also provide specialized fabrication and welding services in support of offshore projects, including drilling and production risers, flowlines and pipeline end terminations, as well as long length tubulars (up to 300 feet in length) for use as caissons or pilings. This segment also designs and manufactures proprietary equipment for use in our International and U.S. Services segments.
The Blackhawk segment provides well construction and well intervention rental equipment, services and products, in addition to cementing tool expertise, in the U.S. and Mexican Gulf of Mexico, onshore U.S. and other select international locations.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before net interest income, or expense,net, depreciation and amortization, income tax benefit or expense, asset impairments, gain or loss on sale of assets, foreign currency gain or loss, equity-based compensation, unrealized and realized gain or loss, other non-cash adjustments and unusualother charges. We review Adjusted EBITDA on both a consolidated basis and on a segment basis. We use Adjusted EBITDA to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team (such as, income tax, rates).foreign currency exchange rates and other charges and credits. Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles inGAAP. Previously reported Adjusted EBITDA for the U.S. ("GAAP").three and six months ended June 30, 2016 has been adjusted for investigation-related matters by $1.4 million and $3.3 million, respectively, as management believes removing the effect of these items allows for better comparability across periods.
Our CODM uses Adjusted EBITDA as the primary measure of segment reporting performance.
The following table presents a reconciliation of Segment Adjusted EBITDA to net loss (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Segment Adjusted EBITDA: | | | | | | | |
International Services | $ | 9,022 |
| | $ | (4,159 | ) | | $ | 14,308 |
| | $ | 27,220 |
|
U.S. Services | (9,238 | ) | | (9,753 | ) | | (16,453 | ) | | (7,023 | ) |
Tubular Sales | 815 |
| | 1,624 |
| | 3,069 |
| | 1,178 |
|
Blackhawk | 2,965 |
| | — |
| | 4,176 |
| | — |
|
| 3,564 |
| | (12,288 | ) | | 5,100 |
| | 21,375 |
|
Interest income, net | 753 |
| | 198 |
| | 1,151 |
| | 404 |
|
Income tax benefit | 6,076 |
| | 7,705 |
| | 15,194 |
| | 8,511 |
|
Depreciation and amortization | (30,951 | ) | | (28,283 | ) | | (62,050 | ) | | (57,733 | ) |
Gain (loss) on sale of assets | (210 | ) | | 279 |
| | 1,262 |
| | 1,049 |
|
Foreign currency gain (loss) | 599 |
| | (4,170 | ) | | 1,345 |
| | (4,211 | ) |
Charges and credits (1) | (5,781 | ) | | (8,728 | ) | | (14,615 | ) | | (17,090 | ) |
Net loss | $ | (25,950 | ) | | $ | (45,287 | ) | | $ | (52,613 | ) | | $ | (47,695 | ) |
| |
(1) | Comprised of Equity-based compensation expense (for the three months ended June 30, 2017 and 2016: $3,415 and $4,320, respectively, and for the six months ended June 30, 2017 and 2016: $9,116 and $8,528, respectively), Mergers and acquisition expense (for the three months ended June 30, 2017 and 2016: $10 and none, respectively, and for the six months ended June 30, 2017 and 2016: $459 and none, respectively), Severance and other charges (for the three months ended June 30, 2017 and 2016: $(299) and $3,718, respectively, and for the six months ended June 30, 2017 and 2016: $738 and $4,324, respectively), Unrealized and realized gains (losses) (for the three months ended June 30, 2017 and 2016: $(1,088) and $695, respectively, and for the six months ended June 30, 2017 and 2016: $(1,696) and $(963), respectively) and Investigation-related matters (for the three months ended June 30, 2017 and 2016: $1,567 and $1,385, respectively, and for the six months ended June 30, 2017 and 2016: $2,606 and $3,275, respectively). |
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a reconciliation of Segment Adjusted EBITDA to net income (loss) (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Segment Adjusted EBITDA: | | | | | | | |
International Services | $ | 4,532 |
| | $ | 39,157 |
| | $ | 31,752 |
| | $ | 146,752 |
|
U.S. Services | (7,933 | ) | | 18,251 |
| | (18,433 | ) | | 79,914 |
|
Tubular Sales | 165 |
| | 15,985 |
| | 1,343 |
| | 27,082 |
|
Corporate and other | 159 |
| | 12 |
| | 361 |
| | 37 |
|
Adjusted EBITDA Total | (3,077 | ) | | 73,405 |
| | 15,023 |
| | 253,785 |
|
Interest income, net | 646 |
| | 173 |
| | 1,050 |
| | 150 |
|
Income tax benefit (expense) | 6,800 |
| | (10,771 | ) | | 15,311 |
| | (32,662 | ) |
Depreciation and amortization | (26,545 | ) | | (29,032 | ) | | (84,278 | ) | | (80,743 | ) |
Gain on sale of assets | 46 |
| | 1,392 |
| | 1,095 |
| | 521 |
|
Foreign currency loss | (1,696 | ) | | (5,329 | ) | | (5,907 | ) | | (6,563 | ) |
Equity-based compensation expense | (3,828 | ) | | (6,096 | ) | | (12,356 | ) | | (22,470 | ) |
Severance and other charges | (14,534 | ) | | (1,186 | ) | | (18,858 | ) | | (14,208 | ) |
Change in value of contingent consideration | — |
| | 1,532 |
| | — |
| | 1,532 |
|
Unrealized and realized gains (losses) | (10 | ) | | — |
| | (973 | ) | | — |
|
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
|
The following tables set forth certain financial information with respect to our reportable segments. Included in “Corporate and Other” are intersegment eliminations and costs associated with activities of a general naturesegments (in thousands):
| | | International Services | | U.S. Services | | Tubular Sales | | Corporate and Other | | Total | International Services | | U.S. Services | | Tubular Sales | | Blackhawk | | Eliminations | | Total |
| | | | | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | | |
Three Months Ended June 30, 2017 | | | | | | | | | | | | |
Revenue from external customers | $ | 51,028 |
| | $ | 34,057 |
| | $ | 20,029 |
| | $ | — |
| | $ | 105,114 |
| $ | 53,499 |
| | $ | 29,905 |
| | $ | 16,141 |
| | $ | 18,114 |
| | $ | — |
| | $ | 117,659 |
|
Inter-segment revenues | (1 | ) | | 3,641 |
| | 5,036 |
| | (8,676 | ) | | — |
| |
Inter-segment revenue | | 12 |
| | 4,543 |
| | 3,564 |
| | 72 |
| | (8,191 | ) | | — |
|
Operating income (loss) | | (6,980 | ) | | (24,292 | ) | | 805 |
| | (3,499 | ) | | — |
| | (33,966 | ) |
Adjusted EBITDA | 4,532 |
| | (7,933 | ) | | 165 |
| | 159 |
| | (3,077 | ) | 9,022 |
| | (9,238 | ) | | 815 |
| | 2,965 |
| | — |
| | * |
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2015 | | | | | | | | | | |
Three Months Ended June 30, 2016 | | | | | | | | | | | | |
Revenue from external customers | $ | 103,076 |
| | $ | 74,417 |
| | $ | 62,390 |
| | $ | — |
| | $ | 239,883 |
| $ | 57,350 |
| | $ | 37,118 |
| | $ | 26,478 |
| | $ | — |
| | $ | — |
| | $ | 120,946 |
|
Inter-segment revenues | 102 |
| | 5,654 |
| | 7,188 |
| | (12,944 | ) | | — |
| |
Inter-segment revenue | | 29 |
| | 3,940 |
| | 4,351 |
| | — |
| | (8,320 | ) | | — |
|
Operating income (loss) | | (22,430 | ) | | (28,649 | ) | | 401 |
| | — |
| | — |
| | (50,678 | ) |
Adjusted EBITDA | 39,157 |
| | 18,251 |
| | 15,985 |
| | 12 |
| | 73,405 |
| (4,159 | ) | | (9,753 | ) | | 1,624 |
| | — |
| | — |
| | * |
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | |
Six Months Ended June 30, 2017 | | | | | | | | | | | | |
Revenue from external customers | $ | 191,440 |
| | $ | 119,955 |
| | $ | 68,151 |
| | $ | — |
| | $ | 379,546 |
| $ | 100,109 |
| | $ | 60,871 |
| | $ | 33,086 |
| | $ | 34,324 |
| | $ | — |
| | $ | 228,390 |
|
Inter-segment revenues | 45 |
| | 11,691 |
| | 15,053 |
| | (26,789 | ) | | — |
| |
Inter-segment revenue | | 15 |
| | 8,828 |
| | 7,239 |
| | 72 |
| | (16,154 | ) | | — |
|
Operating income (loss) | | (16,493 | ) | | (47,639 | ) | | 3,185 |
| | (9,629 | ) | | — |
| | (70,576 | ) |
Adjusted EBITDA | 31,752 |
| | (18,433 | ) | | 1,343 |
| | 361 |
| | 15,023 |
| 14,308 |
| | (16,453 | ) | | 3,069 |
| | 4,176 |
| | — |
| | * |
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2015 | | | | | | | | | | |
Six Months Ended June 30, 2016 | | | | | | | | | | | | |
Revenue from external customers | $ | 349,918 |
| | $ | 262,120 |
| | $ | 159,586 |
| | $ | — |
| | $ | 771,624 |
| $ | 140,412 |
| | $ | 85,898 |
| | $ | 48,122 |
| | $ | — |
| | $ | — |
| | $ | 274,432 |
|
Inter-segment revenues | 709 |
| | 20,211 |
| | 29,622 |
| | (50,542 | ) | | — |
| |
Inter-segment revenue | | 45 |
| | 8,050 |
| | 10,017 |
| | — |
| | (18,112 | ) | | — |
|
Operating loss | | (8,137 | ) | | (44,307 | ) | | (1,116 | ) | | — |
| | — |
| | (53,560 | ) |
Adjusted EBITDA | 146,752 |
| | 79,914 |
| | 27,082 |
| | 37 |
| | 253,785 |
| 27,220 |
| | (7,023 | ) | | 1,178 |
| | — |
| | — |
| | * |
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 20—Subsequent Event
On October 6, 2016, we announced that we entered into a definitive merger agreement (“Merger Agreement”) to acquire Blackhawk Group Holdings, Inc. (“Blackhawk”). Blackhawk is the ultimate parent of Blackhawk Specialty Tools LLC, a leading provider of well construction and well intervention services and products. Certain investment funds affiliated with Bain Capital Partners LLC (collectively “Bain Capital”) currently own approximately 70% of the capital stock of Blackhawk. Concurrently with the execution and delivery of the Merger Agreement, Bain Capital and other stockholders of Blackhawk delivered a written consent adopting the Merger Agreement with respect to the shares of Blackhawk capital stock owned by them.
Pursuant to the Merger Agreement, by and among us, FI Tools Holdings, LLC, our newly formed subsidiary (“Merger Sub”), Blackhawk and Bain Capital Private Equity, LP, solely in its capacity as stakeholder representative, Merger Sub will merge with and into Blackhawk, with Blackhawk surviving the Merger as our wholly-owned subsidiary. The merger consideration comprises a combination of approximately $150.4 million of cash on hand and approximately 12.8 million shares of our common stock (“Common Stock”), on a cash-free, debt-free basis (with approximately $79.5 million of Blackhawk debt being repaid at closing with proceeds from the transaction), for total consideration of approximately $294.4 million (based on our closing share price on October 31, 2016 of $11.25 and including the working capital adjustment).
On November 1, 2016, we completed our previously announced acquisition of Blackhawk. Due to the short amount of time that has elapsed from the closing of the acquisition, the initial accounting for the business combination is incomplete at this time. As a result, we are unable to provide amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, including the information required for intangible assets and goodwill.
In conjunction with the closing, we have placed certain of the shares of Common Stock comprising the equity consideration in escrow as partial security for Blackhawk’s indemnity obligations under the Merger Agreement, which include indemnities for our benefit for breaches of Blackhawk’s representations, warranties and covenants and certain other matters (subject to certain limitations). The Merger Agreement contains caps on certain losses arising under the Merger Agreement of up to approximately 17% of the aggregate transaction value. Such caps do* Non-GAAP financial measure not apply to fraud or intentional misconduct. Portions of the escrow will also apply to post-closing working capital adjustments.
The completion of the Merger was subject to a number of closing conditions, including among others, (i) the expiration or termination of applicable U.S. anti-trust laws and the waiting period and receipt of Brazilian merger control approvals, (ii) subject to certain exceptions, the accuracy of the representations and warranties and material compliance with covenants, (iii) the absence of any event, circumstance or change that would have a material adverse effect on Blackhawk and (iv) delivery of various closing documentation. The Merger Agreement also contained certain termination rights for both us and Blackhawk, including a right to terminate if the Merger was not consummated by December 5, 2016 (subject to certain exceptions).
In connection with the delivery of shares of Common Stock at closing, we will enter into a Registration Rights Agreement with Bain Capital and certain other stockholders of Blackhawk, pursuant to which, among other things, we will register the resale of the shares of Common Stock issued to such stockholders of Blackhawk. In addition, Bain Capital will have certain demand registration rights with respect to underwritten offerings that may be undertaken by Bain Capital following the closing. In connection with the grant of these demand rights, we have agreed to seek waivers from certain stockholders who were previously granted certain piggyback registration rights pursuant to a certain previous registration rights agreement, dated August 14, 2013. If we are unable to obtain the requisite approvals for such waiver and the holders of the pre-existing piggyback registration rights exercise those rights in respect of an underwritten offering by Bain Capital, we have agreed to either (i) repurchase a number of shares of Common Stock from Bain Capital equal to $50 million less any shares actually sold by Bain Capital in its underwritten offering (such repurchase may be funded through a primary issuance of shares of Common Stock by us, in our discretion) or (ii) purchase such number of shares of Common Stock from the pre-existing holders of the piggyback registration rights
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
such that Bain Capital would no longer be required to reduce the number of shares it proposed to include in its underwritten offering below $50 million. All expenses incident to such registrations will be borne by us.
The Merger Agreement and related transaction documents contain representations, warranties, covenants and conditions customary for a transaction of this nature. The representations and warranties set forth in the Merger Agreement and related transaction documents were made by the parties to each other as of specific dates and to evidence their agreement on various issues, and were made solely for purposes of the Merger and may be subject to important qualifications and limitations or other factors agreed to by the parties in connection with negotiating the terms of the Merger. Based on the foregoing, one should not rely on the representations, warranties and disclosures included in the Merger Agreement or related transaction documents as statements of fact.
disclosed.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include those that express a belief, expectation or intention, as well as those that are not statements of historical fact. Forward-looking statements include information regarding our future plans and goals and our current expectations with respect to, among other things:
our business strategy and prospects for growth;
our cash flows and liquidity;
our financial strategy, budget, projections and operating results;
the amount, nature and timing of capital expenditures;
the availability and terms of capital;
competition and government regulations; and
general economic conditions.
Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal” or other terms that convey the uncertainty of future events or outcomes, although not all forward-looking statements contain such identifying words. The forward-looking statements in this Form 10-Q speak only as of the date of this report; we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. Forward-looking statements are not assurances of future performance and involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties include, but are not limited to, the following:
the level of activity in the oil and gas industry;
further or sustained declines in oil and gas prices;prices, including those resulting from weak global demand;
the timing, magnitude, probability and/or sustainability of any oil and gas price recovery;
unique risks associated with our offshore operations;
political, economic and regulatory uncertainties in our international operations;
our ability to develop new technologies and products;
our ability to protect our intellectual property rights;
our ability to employ and retain skilled and qualified workers;
the level of competition in our industry;
operational safety laws and regulations; and
weather conditions and natural disasters.
These and other important factors that could affect our operating results and performance are described in (1) “Risk Factors” in Part II, Item IA of this Form 10-Q, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Form 10-Q, and elsewhere within this Form 10-Q, (2) our Annual Report on Form 10-K for the year ended December 31, 2015,2016, filed with the SEC on February 29, 201624, 2017 (our "Annual Report"), (3) our other reports and filings we make with the SEC from time to time and (4) other announcements we make from time to time. Should one or more of the risks or uncertainties described in the documents above or in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statements. All such forward-looking statements in this Form 10-Q are expressly qualified in their entirety by the cautionary statements in this section.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q and the audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report.
This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in any forward-looking statement because of various factors, including those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” of this
Form 10-Q.
Overview of Business
We are a global provider of highly engineered tubular services, tubular fabrication and specialty well construction and well intervention solutions to the oil and gas industry and have been in business for over 75 years. We provide our services to leading exploration and production companies in both offshore and onshore environments, with a focus on complex and technically demanding wells.
We conduct our business through threefour operating segments:
International Services. We currently provide our services in approximately 60 countries on six continents. Our customers in these international markets are primarily large exploration and production companies, including integrated oil and gas companies and national oil and gas companies.
U.S. Services. We service customers in the offshore areas of the U.S. Gulf of Mexico. In addition, we have a presence in almost all of the active onshore oil and gas drilling regions in the U.S., including the Permian Basin, Bakken Shale, Barnett Shale, Eagle Ford Shale, Haynesville Shale, Marcellus Shale, DJ Basin and Utica Shale.
Tubular Sales. We design, manufacture and distribute large outside diameter ("OD")OD pipe, connectors and casing attachments and sell large OD pipe originally manufactured by various pipe mills. We also provide specialized fabrication and welding services in support of offshore projects, including drilling and production risers, flowlines and pipeline end terminations, as well as long-length tubulars (up to 300 feet in length) for use as caissons or pilings. This segment also designs and manufactures proprietary equipment for use in our International and U.S. Services segments.
Blackhawk. We provide well construction and well intervention rental equipment, services and products, in addition to cementing tool expertise, in the U.S. and Mexican Gulf of Mexico, onshore U.S. and other select international locations.
Market Outlook
The persistent lowmarket for our products and services continues to be challenged by depressed oil and gas commodity price environment continues to negatively impact our business across all operating segments. Decreasedprices and reduced customer spending on offshore spendingexploration and rigdevelopment projects. Despite some stabilization in commodity prices and increases in U.S. onshore activity and profitability, commodity prices remain below levels necessary for meaningful increases in offshore activity, particularly in our corethe markets of West Africa and the U.S. Gulf of Mexico, have led to lower demand and pricing for our products and services.Mexico. For the remainder of 2016 and into 2017, we anticipateexpect to see further project delays, suspensionsdeterioration of pricing and cancellations byactivity in the U.S. Gulf of Mexico and, consequently, our customers barring significant improvementsTubular Sales business segment. International markets are beginning to show signs of stabilization and the potential for reaching an activity bottom in commodity prices or project economics. Despite modest improvementsthe next twelve months. We expect to see growth in our Blackhawk segment both in the U.S. onshore rig count,and in select international markets during the year as we expand its operational footprint. In order to offset some of the declines in activity remains below levels that would result in a material recovery in prices or profitability. Weand pricing, we continue to take actionslook for ways to mitigate these declines through cost reductionsimprove our operational efficiency and growing marketgrow share in markets in which we have historically been underrepresented, markets including international land and offshore shelf opportunities. We also continue to evaluate potential acquisitions that would augmentto broaden our revenueswell construction offering and position the company for revenue growth in a market recovery.
How We Evaluate Our Operations
We use a number of financial and operational measures to routinely analyze and evaluate the performance of our business, including revenue, Adjusted EBITDA, Adjusted EBITDA margin and safety performance.
Revenue
We analyze our revenue growth by comparing actual monthly revenue to our internal projections for each month to assess our performance. We also assess incremental changes in our monthly revenue across our operating segments to identify potential areas for improvement.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income (loss) before net interest income, or expense,net, depreciation and amortization, income tax benefit or expense, asset impairments, gain or loss on sale of assets, foreign currency gain or loss, equity-based compensation, unrealized and realized gain or loss, other non-cash adjustments and unusualother charges or credits. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. We review Adjusted EBITDA and Adjusted EBITDA margin on both a consolidated basis and on a segment basis. We use Adjusted EBITDA and Adjusted EBITDA margin to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and, items outside the control of our management team (such as income tax and foreign currency exchange rates). and other charges outside the normal course of business. Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles in the U.S. ("GAAP"). Previously reported Adjusted EBITDA for the three and six months ended June 30, 2016 has been adjusted for investigation-related matters by $1.4 million and $3.3 million, respectively, as management believes removing the effect of these items allows for better comparability across periods.
The following table presents a reconciliation of net income (loss)loss to Adjusted EBITDA, our most directly comparable GAAP performance measure, as well as Adjusted EBITDA margin for each of the periods presented (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Net loss | $ | (25,950 | ) | | $ | (45,287 | ) | | $ | (52,613 | ) | | $ | (47,695 | ) |
Interest income, net | (753 | ) | | (198 | ) | | (1,151 | ) | | (404 | ) |
Depreciation and amortization | 30,951 |
| | 28,283 |
| | 62,050 |
| | 57,733 |
|
Income tax benefit | (6,076 | ) | | (7,705 | ) | | (15,194 | ) | | (8,511 | ) |
(Gain) loss on sale of assets | 210 |
| | (279 | ) | | (1,262 | ) | | (1,049 | ) |
Foreign currency (gain) loss | (599 | ) | | 4,170 |
| | (1,345 | ) | | 4,211 |
|
Charges and credits (1) | 5,781 |
| | 8,728 |
| | 14,615 |
| | 17,090 |
|
Adjusted EBITDA | $ | 3,564 |
| | $ | (12,288 | ) | | $ | 5,100 |
| | $ | 21,375 |
|
Adjusted EBITDA margin | 3.0 | % | | (10.2 | )% | | 2.2 | % | | 7.8 | % |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | |
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
|
Interest income, net | (646 | ) | | (173 | ) | | (1,050 | ) | | (150 | ) |
Depreciation and amortization | 26,545 |
| | 29,032 |
| | 84,278 |
| | 80,743 |
|
Income tax (benefit) expense | (6,800 | ) | | 10,771 |
| | (15,311 | ) | | 32,662 |
|
Gain on sale of assets | (46 | ) | | (1,392 | ) | | (1,095 | ) | | (521 | ) |
Foreign currency loss | 1,696 |
| | 5,329 |
| | 5,907 |
| | 6,563 |
|
Equity-based compensation expense | 3,828 |
| | 6,096 |
| | 12,356 |
| | 22,470 |
|
Severance and other charges (See Note 17) | 14,534 |
| | 1,186 |
| | 18,858 |
| | 14,208 |
|
Changes in contingent consideration | — |
| | (1,532 | ) | | — |
| | (1,532 | ) |
Unrealized and realized (gains) losses | 10 |
| | — |
| | 973 |
| | — |
|
Adjusted EBITDA | $ | (3,077 | ) | | $ | 73,405 |
| | $ | 15,023 |
| | $ | 253,785 |
|
Adjusted EBITDA margin | (2.9 | )% | | 30.6 | % | | 4.0 | % | | 32.9 | % |
| |
(1) | Comprised of Equity-based compensation expense (for the three months ended June 30, 2017 and 2016: $3,415 and $4,320, respectively, and for the six months ended June 30, 2017 and 2016: $9,116 and $8,528, respectively), Mergers and acquisition expense (for the three months ended June 30, 2017 and 2016: $10 and none, respectively, and for the six months ended June 30, 2017 and 2016: $459 and none, respectively), Severance and other charges ((for the three months ended June 30, 2017 and 2016: $(299) and $3,718, respectively, and for the six months ended June 30, 2017 and 2016: $738 and $4,324, respectively), Unrealized and realized (gains) losses (for the three months ended June 30, 2017 and 2016: $1,088 and $(695), respectively, and for the six months ended June 30, 2017 and 2016: $1,696 and $963, respectively) and Investigation-related matters (for the three months ended June 30, 2017 and 2016: $1,567 and $1,385, respectively, and for the six months ended June 30, 2017 and 2016: $2,606 and $3,275, respectively). |
For a reconciliation of our Adjusted EBITDA on a segment basis to the most comparable measure calculated in accordance with GAAP, see “—Operating“Operating Segment Results.”
Safety Performance
Maintaining a strong safety record is a critical component of our operational success. Many of our larger customers have safety standards we must satisfy before we can perform services for them. Weservices. As a result, we continually monitor and improve our safety cultureperformance through the useevaluation of employee safety observations, job and customer surveys, and trend analysis, and we modify existing programs or develop new programs accordingsafety data. The primary measure for our safety performance is the tracking of the Total Recordable Incident Rate in addition to the data obtained. One way to measure safety is by tracking the total recordable incident
rate (“TRIR”) and the lost time incident rate (“LTIR”),Lost Time Incident Rate, which are reviewed on both a monthly and rolling twelve-month basis.
Consolidated Results of Operations
The following table presents our consolidated results for the periods presented (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (Unaudited) |
Revenues: | | | | | | | |
Equipment rentals and services | $ | 85,698 |
| | $ | 176,553 |
| | $ | 312,132 |
| | $ | 610,240 |
|
Products (1) | 19,416 |
| | 63,330 |
| | 67,414 |
| | 161,384 |
|
Total revenue | 105,114 |
| | 239,883 |
| | 379,546 |
| | 771,624 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Cost of revenues, exclusive of | | | | | | | |
depreciation and amortization | | | | | | | |
Equipment rentals and services | 47,002 |
| | 72,389 |
| | 155,367 |
| | 242,681 |
|
Products | 13,237 |
| | 34,174 |
| | 42,594 |
| | 90,081 |
|
General and administrative expenses | 52,774 |
| | 66,929 |
| | 182,036 |
| | 210,523 |
|
Depreciation and amortization | 26,545 |
| | 29,032 |
| | 84,278 |
| | 80,743 |
|
Severance and other charges | 14,534 |
| | 1,186 |
| | 18,858 |
| | 14,208 |
|
Change in value of contingent consideration | — |
| | (1,532 | ) | | — |
| | (1,532 | ) |
Gain on sale of assets | (46 | ) | | (1,392 | ) | | (1,095 | ) | | (521 | ) |
Operating income (loss) | (48,932 | ) | | 39,097 |
| | (102,492 | ) | | 135,441 |
|
|
Other income (expense): | | | | | | | |
Other income | 984 |
| | 918 |
| | 2,145 |
| | 2,976 |
|
Interest income, net | 646 |
| | 173 |
| | 1,050 |
| | 150 |
|
Foreign currency loss | (1,696 | ) | | (5,329 | ) | | (5,907 | ) | | (6,563 | ) |
Total other income (expense) | (66 | ) | | (4,238 | ) | | (2,712 | ) | | (3,437 | ) |
| | | | | | | |
Income (loss) before income tax expense (benefit) | (48,998 | ) | | 34,859 |
| | (105,204 | ) | | 132,004 |
|
Income tax expense (benefit) | (6,800 | ) | | 10,771 |
| | (15,311 | ) | | 32,662 |
|
Net income (loss) | (42,198 | ) | | 24,088 |
| | (89,893 | ) | | 99,342 |
|
Less: Net income (loss) attributable to noncontrolling interest | (5,216 | ) | | 7,523 |
| | (20,741 | ) | | 27,668 |
|
| | | | | | | |
Net income (loss) attributable to Frank's International N.V. | $ | (36,982 | ) | | $ | 16,565 |
| | $ | (69,152 | ) | | $ | 71,674 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Unaudited) |
Revenues: | | | | | | | |
Equipment rentals and services | $ | 93,533 |
| | $ | 95,177 |
| | $ | 179,855 |
| | $ | 226,434 |
|
Products | 24,126 |
| | 25,769 |
| | 48,535 |
| | 47,998 |
|
Total revenue | 117,659 |
| | 120,946 |
| | 228,390 |
| | 274,432 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization | | | | | | | |
Equipment rentals and services (1) | 60,777 |
| | 64,309 |
| | 117,884 |
| | 132,658 |
|
Products (1) | 17,567 |
| | 19,926 |
| | 34,412 |
| | 35,417 |
|
General and administrative expenses (1) | 42,419 |
| | 55,667 |
| | 85,144 |
| | 98,909 |
|
Depreciation and amortization | 30,951 |
| | 28,283 |
| | 62,050 |
| | 57,733 |
|
Severance and other charges | (299 | ) | | 3,718 |
| | 738 |
| | 4,324 |
|
(Gain) loss on sale of assets | 210 |
| | (279 | ) | | (1,262 | ) | | (1,049 | ) |
Operating loss | (33,966 | ) | | (50,678 | ) | | (70,576 | ) | | (53,560 | ) |
|
Other income (expense): | | | | | | | |
Other income, net | 598 |
| | 1,658 |
| | 732 |
| | 1,161 |
|
Interest income, net | 753 |
| | 198 |
| | 1,151 |
| | 404 |
|
Mergers and acquisition expense | (10 | ) | | — |
| | (459 | ) | | — |
|
Foreign currency gain (loss) | 599 |
| | (4,170 | ) | | 1,345 |
| | (4,211 | ) |
Total other income (expense) | 1,940 |
| | (2,314 | ) | | 2,769 |
| | (2,646 | ) |
| | | | | | | |
Loss before income tax benefit | (32,026 | ) | | (52,992 | ) | | (67,807 | ) | | (56,206 | ) |
Income tax benefit | (6,076 | ) | | (7,705 | ) | | (15,194 | ) | | (8,511 | ) |
Net loss | (25,950 | ) | | (45,287 | ) | | (52,613 | ) | | (47,695 | ) |
Less: Net loss attributable to noncontrolling interest | — |
| | (13,889 | ) | | — |
| | (15,525 | ) |
| | | | | | | |
Net loss attributable to Frank's International N.V. | $ | (25,950 | ) | | $ | (31,398 | ) | | $ | (52,613 | ) | | $ | (32,170 | ) |
| |
(1) | For the three months ended June 30, 2016, $11,745 and $2,898 have been reclassified from general and administrative expenses to equipment rentals and services and products, respectively, and $24,293 and $6,060, respectively, for the six months ended June 30, 2016. See Note 1 - Basis of Presentation in the Notes to Unaudited Condensed Consolidated products revenue includes a small amount of revenues attributable to the U.S. Services and International Services segments.Financial Statements. |
Three Months Ended SeptemberJune 30, 20162017 Compared to Three Months Ended SeptemberJune 30, 20152016
Revenues. Revenues from external customers, excluding intersegment sales, for the three months ended SeptemberJune 30, 20162017 decreased by $134.8$3.3 million, or 56.2%2.7%, to $105.1$117.7 million from $239.9$121.0 million for the three months ended SeptemberJune 30, 2015.2016. The revenue decrease was primarily attributable to lower revenues in allthe majority of our segments due to declining activity as depressed oil and gas prices resulted in reduced rig count, downward pricing pressures, rig cancellations and delays as well as deferred work scopes in the International and offshore U.S. Servicesservices regions while revenues
for Tubular Sales decreased due to lower international demand and decreased deep waterdeepwater fabrication revenue. revenue. The decrease in total revenues was partially offset by revenues from our recently acquired Blackhawk segment of $18.1 million. Revenues for our segments are discussed separately below under the heading "Operating Segment Results."
Cost of revenues, exclusive of depreciation and amortization. Cost of revenues for the three months ended SeptemberJune 30, 20162017 decreased by $46.3$5.9 million, or 43.5%7.0%, to $60.2$78.3 million from $106.6$84.2 million for the three months ended SeptemberJune 30, 2015.2016. Our cost of revenues decline was consistent with our lower revenue which was slightly offset by our fixedand cost structure.cutting initiative.
General and administrative expenses. General and administrative expenses for the three months ended SeptemberJune 30, 20162017 decreased by $14.2$13.2 million, or 21.1%23.8%, to $52.8$42.4 million from $66.9$55.6 million for the three months ended SeptemberJune 30, 2015 as a result of cost initiatives, which included workforce reductions and lease terminations. Also, equity-based compensation2016 primarily due to bad debt expense decreased by $2.3 million as the IPO grants for retirement-eligible employees had a two year service requirement, which was completed during the third quarter of 2015. The lower costs were partially offset by an increaserecognized in higher professional fees of $3.1 million as a result of2016 ongoing global corporate initiatives, acquisition costs and our investigation as mentionedrelated to difficulty in Note 18 - Commitments and Contingencies collecting certain receivables in the Notes to Unaudited Condensed Consolidated Financial Statements. Venezuela.
Severance and other charges. Severance and other charges for the three months ended SeptemberJune 30, 2016 increased2017 decreased by $13.3$4.0 million, or 1,125.5%108.0%, to $14.5$(0.3) million from $1.2$3.7 million for the three months ended SeptemberJune 30, 2015 as a result of a2016 due to higher workforce reductionreductions in the thirdsecond quarter of 2016 compared to 20152017 as we continued to taketook steps to adjust our workforce to meet the depressed demand in the industry. See Note 17 - Severance and Other Charges in the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.
Foreign currency lossgain (loss). Foreign currency gain for the three months ended June 30, 2017 was $0.6 million as compared to a foreign currency loss for the three months ended June 30, 2016 of $4.2 million. The change in foreign currency gain (loss) year-over-year was $1.7primarily driven by a devaluation of the Nigerian Naira during the three months ended June 30, 2016.
Income tax benefit. Income tax benefit for the three months ended June 30, 2017 decreased by $1.6 million, or 21.1%, to $6.1 million from $7.7 million for the three months ended SeptemberJune 30, 2016, compared to $5.3 million for the three months ended September 30, 2015 primarily due to the devaluation of the Nigerian Naira.
Income tax expense (benefit). Income tax expense (benefit) for the three months ended September 30, 2016 decreased by $17.6 million, or 163.1%, to $(6.8) million from $10.8 million for the three months ended September 30, 2015 primarily as a result of a decrease in taxable incomeloss and a changechanges in jurisdictional mix. We are subject to many U.S. and foreign tax jurisdictions and many tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases such as income before taxes, deemed profits (which is generally determined using a percentage of revenues rather than profits) and withholding taxes based on revenues; consequently, the relationship between our pre-tax income from operations and our income tax provision varies from period to period.
NineSix Months Ended SeptemberJune 30, 20162017 Compared to NineSix Months Ended SeptemberJune 30, 20152016
Revenues. Revenues from external customers, excluding intersegment sales, for the ninesix months ended SeptemberJune 30, 20162017 decreased by $392.1$46.0 million,, or 50.8%16.8%, to $379.5$228.4 million from $771.6$274.4 million for the ninesix months ended SeptemberJune 30, 2015.2016. The decrease was primarily attributable to lower revenues in allthe majority of our segments due to declining activity as depressed oil and gas prices resulted in reduced rig count, downward pricing pressures, rig cancellations and delays as well as deferred work scopes in the International and offshore U.S. Services regions while revenues for Tubular Sales decreased due to lower international demand and decreased deep waterdeepwater fabrication revenue. The decrease in total revenues was partially offset by revenues from our recently acquired Blackhawk segment of $34.3 million. Revenues for our segments are discussed separately below under the heading "Operating Segment Results."
Cost of revenues, exclusive of depreciation and amortization. Cost of revenues for the ninesix months ended SeptemberJune 30, 20162017 decreased by $134.8$15.8 million, or 40.5%9.4%, to $198.0$152.3 million from $332.8$168.1 million for the ninesix months ended SeptemberJune 30, 2015.2016. Our cost of revenues decline was consistent with our lower revenue which was slightly offset by our fixedand cost structure.cutting initiative.
General and administrative expenses. expenses. General and administrative expenses for the ninesix months ended SeptemberJune 30, 20162017 decreased by $28.5$13.8 million, or 13.5%13.9%, to $182.0$85.1 million from $210.5$98.9 million for the ninesix months ended SeptemberJune 30, 2015. Excluding the2016 primarily due to bad debt expense of $9.7 millionrecognized in 2016 related to the collectability ofdifficulty in collecting certain receivables in
Venezuela (see "Customer Credit Risk" in Part I, Item 3), general and administrative expenses for the nine months ended September 30, 2016 decreased by $38.2 million, or 18.1%, primarily as a result of cost initiatives, which included workforce reductions and lease terminations. Also, equity-based compensation expense decreased by $10.1 million as the IPO grants for retirement-eligible employees had a two year service requirement, which was completed during the third quarter of 2015. The decreased costs were partially offset by $7.7 million of professional fees, which included costs related to our ongoing global corporate initiatives, acquisition costs and the investigation mentioned in Note 18 - Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements.
Depreciation and amortization. Depreciation and amortization for the nine months ended September 30, 2016 increased by $3.5 million, or 4.4%, to $84.3 million from $80.7 million for the nine months ended September 30, 2015. The increase was primarily attributable to our Timco acquisition of $2.5 million as well as capital expenditures in the current period. Venezuela.
Severance and other charges. Severance and other charges for the ninesix months ended SeptemberJune 30, 2016 increased2017 decreased by $4.7$3.6 million, or 32.7%82.9%, to $18.9$0.7 million from $14.2$4.3 million for the ninesix months ended SeptemberJune 30, 20152016 as a result of additionala higher workforce reductionsreduction in the first half of 2016 compared to the prior year2017 as we continued to tooktake steps to adjust our workforce to meet the depressed demand in the industry.
See Note 17 - Severance and Other Charges in the Notes to Unaudited Condensed Consolidated Financial Statements for further discussionForeign currency gain (loss). Foreign currency gain for the six months ended June 30, 2017 was $1.3 million as compared to a foreign currency loss for the six months ended June 30, 2016 of $4.2 million. The change in foreign
currency gain (loss) year-over-year was primarily driven by a devaluation of the Nigerian Naira during the six months ended June 30, 2016.
Income tax expense (benefit).benefit. Income tax expense (benefit)benefit for the ninesix months ended SeptemberJune 30, 2016 decreased2017 increased by $48.0$6.7 million or 146.9%, to $(15.3)$15.2 million from $32.7$8.5 million for the ninesix months ended SeptemberJune 30, 20152016 primarily as a result of a decreasean increase in taxable incomeloss and a changechanges in jurisdictional mix. We are subject to many U.S. and foreign tax jurisdictions and many tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases such as income before taxes, deemed profits (which is generally determined using a percentage of revenues rather than profits) and withholding taxes based on revenues; consequently, the relationship between our pre-tax income from operations and our income tax provision varies from period to period.
Operating Segment Results
Revenue pertaining to our segments as stated in the following discussions include intersegment sales. Adjusted EBITDA includes the impact of intersegment operating activity. See Note 19 - Segment Information in the Notes to Unaudited Condensed Consolidated Financial Statements.
The following table presents revenues and Adjusted EBITDA by segment and a reconciliation of Adjusted EBITDA to net income (loss), which is the most comparable GAAP financial measure (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenue: | | | | | | | |
International Services | $ | 51,027 |
| | $ | 103,178 |
| | $ | 191,485 |
| | $ | 350,627 |
|
U.S. Services | 37,698 |
| | 80,071 |
| | 131,646 |
| | 282,331 |
|
Tubular Sales | 25,065 |
| | 69,578 |
| | 83,204 |
| | 189,208 |
|
Intersegment sales | (8,676 | ) | | (12,944 | ) | | (26,789 | ) | | (50,542 | ) |
Total | $ | 105,114 |
| | $ | 239,883 |
| | $ | 379,546 |
| | $ | 771,624 |
|
| | | | | | | |
Segment Adjusted EBITDA: | | | | | | | |
International Services | $ | 4,532 |
| | $ | 39,157 |
| | $ | 31,752 |
| | $ | 146,752 |
|
U.S. Services | (7,933 | ) | | 18,251 |
| | (18,433 | ) | | 79,914 |
|
Tubular Sales | 165 |
| | 15,985 |
| | 1,343 |
| | 27,082 |
|
Corporate and other (1) | 159 |
| | 12 |
| | 361 |
| | 37 |
|
Adjusted EBITDA Total (2) | (3,077 | ) | | 73,405 |
| | 15,023 |
| | 253,785 |
|
Interest income, net | 646 |
| | 173 |
| | 1,050 |
| | 150 |
|
Income tax benefit (expense) | 6,800 |
| | (10,771 | ) | | 15,311 |
| | (32,662 | ) |
Depreciation and amortization | (26,545 | ) | | (29,032 | ) | | (84,278 | ) | | (80,743 | ) |
Gain on sale of assets | 46 |
| | 1,392 |
| | 1,095 |
| | 521 |
|
Foreign currency loss | (1,696 | ) | | (5,329 | ) | | (5,907 | ) | | (6,563 | ) |
Equity-based compensation expense | (3,828 | ) | | (6,096 | ) | | (12,356 | ) | | (22,470 | ) |
Severance and other charges | (14,534 | ) | | (1,186 | ) | | (18,858 | ) | | (14,208 | ) |
Change in value of contingent consideration | — |
| | 1,532 |
| | — |
| | 1,532 |
|
Unrealized and realized gains (losses) | (10 | ) | | — |
| | (973 | ) | | — |
|
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue: | | | | | | | |
International Services | $ | 53,499 |
| | $ | 57,350 |
| | $ | 100,109 |
| | $ | 140,412 |
|
U.S. Services | 29,905 |
| | 37,118 |
| | 60,871 |
| | 85,898 |
|
Tubular Sales | 16,141 |
| | 26,478 |
| | 33,086 |
| | 48,122 |
|
Blackhawk | 18,114 |
| | — |
| | 34,324 |
| | — |
|
Total | $ | 117,659 |
| | $ | 120,946 |
| | $ | 228,390 |
| | $ | 274,432 |
|
| | | | | | | |
Segment Adjusted EBITDA (1): | | | | | | | |
International Services | $ | 9,022 |
| | $ | (4,159 | ) | | $ | 14,308 |
| | $ | 27,220 |
|
U.S. Services | (9,238 | ) | | (9,753 | ) | | (16,453 | ) | | (7,023 | ) |
Tubular Sales | 815 |
| | 1,624 |
| | 3,069 |
| | 1,178 |
|
Blackhawk | 2,965 |
| | — |
| | 4,176 |
| | — |
|
| $ | 3,564 |
| | $ | (12,288 | ) | | $ | 5,100 |
| | $ | 21,375 |
|
| |
(1) | Corporate and other represents amounts not directly associated with an operating segment. |
| |
(2) | Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. (For a reconciliation of our Adjusted EBITDA, see "Adjusted EBITDA and Adjusted EBITDA Margin"). |
Three Months Ended SeptemberJune 30, 20162017 Compared to Three Months Ended SeptemberJune 30, 20152016
International Services
Revenue for the International Services segment decreased by $52.2$3.9 million for the three months ended SeptemberJune 30, 2016,2017, or 50.5%6.7%, compared to the same period in 2015,2016, primarily due to depressed oil and gas prices which have challenged the economics of currentour customers' development projects, particularly in Europe and caused the termination of ongoing drilling campaignsAfrica where complex deepwater wells had previously been large revenue drivers. Contract terminations, delays and the delaydeferments in the commencement of new projects as well as cancellations or deferred work scopes.and an extremely competitive price environment have been the key drivers of the decline.
Adjusted EBITDA for the International Services segment decreasedincreased by $34.6$13.2 million for the three months ended SeptemberJune 30, 2016,2017, or 88.4%316.9%, compared to the same period in 20152016, primarily driven by the absence of non-recurring charges recognized in 2016 of $9.7 million for bad debt primarily related to difficulty in collecting certain receivables in Venezuela and $2.5 million of additional payroll related costs for Nigeria and Mexico, as well as lower expenses in 2017 due to reduced activity and cost-cutting measures.
U.S. Services
Revenue for the U.S. Services segment decreased by $7.2 million for the three months ended June 30, 2017, or 19.4%, compared to the same period in 2016. Onshore services revenue increased by $5.1 million as a result of improved activity from increased rig counts. The offshore business saw a decrease in revenue of $12.2 million as a result of overall lower activity due to rig cancellations and delays in the Gulf of Mexico, coupled with downward pricing pressures.
Adjusted EBITDA for the U.S. Services segment increased by $0.5 million for the three months ended June 30, 2017, or 5.3%, compared to the same period in 2016 due to an increase in onshore services activity, partially offset by lower activity in our offshore services.
Tubular Sales
Revenue for the Tubular Sales segment decreased by $10.3 million for the three months ended June 30, 2017, or 39.0%, compared to the same period in 2016 primarily due to lower deepwater activity in the $52.2Gulf of Mexico.
Adjusted EBITDA for the Tubular Sales segment decreased by $0.8 million for the three months ended June 30, 2017, or 49.8%, compared to the same period in 2016 primarily due to the decrease in revenue, which was partially offset by lower expenses due to reduced activity and cost-cutting measures.measures.
U.S. ServicesBlackhawk
RevenueThe Blackhawk segment is comprised solely of the assets we acquired on November 1, 2016. Revenues and Adjusted EBITDA for the U.S. Services segment decreased by $42.4were $18.1 million and $3.0 million for the three months ended SeptemberJune 30, 2016, or 52.9%, compared to the same period in 2015. Onshore services revenue decreased by $10.4 million as a result of lower activity from declining rig counts2017. See Note 3 - Acquisition and pricing discounts. The offshore business saw a decrease in revenue of $32.0 million as a result of overall lower activity from weaknesses seenDivestiture in the Gulf of Mexico dueNotes to rig cancellations and delays, coupled with downward pricing pressures.
Adjusted EBITDAUnaudited Condensed Consolidated Financial Statements for the U.S. Services segment decreased by $26.2 million for the three months ended September 30, 2016, or 143.5%, compared to the same period in 2015 primarily due to higher pricing concessions and lower activity of $21.2 million and higher corporate and other costs of $5.0 million primarily due to increased professional fees, which were attributable to the investigation, ongoing global corporate initiatives and acquisition costs.
Tubular Sales
Revenue for the Tubular Sales segment decreased by $44.5 million for the three months ended September 30, 2016, or 64.0%, compared to the same period in 2015 primarily as a result of lower international demand and decreased deep water fabrication revenue.
Adjusted EBITDA for the Tubular Sales segment decreased by $15.8 million for the three months ended September 30, 2016, or 99.0%, compared to the same period in 2015 as it was negatively impacted by fixed costs associated with the manufacturing division and decreased revenues.additional information on our Blackhawk acquisition.
NineSix Months Ended SeptemberJune 30, 20162017 Compared to NineSix Months Ended SeptemberJune 30, 20152016
International Services
Revenue for the International Services segment decreased by $159.1$40.3 million for the ninesix months ended SeptemberJune 30, 2016,2017, or 45.4%28.7%, compared to the same period in 2015,2016, primarily due to depressed oil and gas prices which have challenged the economics of currentour customers' development projects, particularly in Europe and caused the termination of ongoing drilling campaignsAfrica where complex deepwater wells had previously been large revenue drivers. Contract terminations, delays and the delaydeferments in the commencement of new projects as well as cancellations or deferred work scopes.and an extremely competitive price environment have been the key drivers of the decline.
Adjusted EBITDA for the International Services segment decreased by $115.0$12.9 million for the ninesix months ended SeptemberJune 30, 2016,2017, or 78.4%47.4%, compared to the same period in 20152016 primarily due to the $159.1 million decrease in revenue, which was partially offset by the absence of non-recurring charges recognized in 2016 of $9.7 million offor bad debt expenseprimarily related to the collectability ofdifficulty in collecting certain receivables in Venezuela (see "Customer Credit Risk"in Part I, Item 3) and $2.5 million of additional payroll related costs for Nigeria and Mexico, which were partially offset byas well as lower expenses in 2017 due to reduced activity and cost-cutting measures.measures.
U.S. Services
Revenue for the U.S. Services segment decreased by $150.7$25.0 million for the ninesix months ended SeptemberJune 30, 2016,2017, or 53.4%29.1%, compared to the same period in 2015.2016. Onshore services revenue decreasedincreased by $45.3$5.7 million as a result of lowerimproved activity from decliningincreased rig counts and pricing discounts.counts. The offshore business saw a decrease in revenue of $105.4$30.6 million as a result of overall lower activity from weaknesses seen in the Gulf of Mexico due to rig cancellations and delays in the Gulf of Mexico, coupled with downward pricing pressures.
Adjusted EBITDA for the U.S. Services segment decreased by $98.3$9.4 million for the ninesix months ended SeptemberJune 30, 2016, or 123.1%,2017 compared to the same period in 20152016 primarily due to higher pricing concessions and lower
activity of $80.1 million and higher corporate and other costs of $18.2 million primarily due to increased professional fees, which were attributable to the investigation, ongoing global corporate initiatives and acquisition costs.in our offshore services, partially offset by an increase in onshore services activity.
Tubular Sales
Revenue for the Tubular Sales segment decreased by $106.0$15.0 million for the ninesix months ended SeptemberJune 30, 2016,2017, or 56.0%31.2%, compared to the same period in 20152016 primarily as a result of lower international demand and decreased deep water fabrication revenue.deepwater activity in the Gulf of Mexico.
Adjusted EBITDA for the Tubular Sales segment decreasedincreased by $25.7$1.9 million for the ninesix months ended SeptemberJune 30, 2016, or 95.0%,2017 compared to the same period in 20152016 as it was negativelypositively impacted by fixed costs associated withcost-cutting measures undertaken during 2016.
Blackhawk
The Blackhawk segment is comprised solely of the manufacturing divisionassets we acquired on November 1, 2016. Revenues and decreased revenues.Adjusted EBITDA for the segment were $34.3 million and $4.2 million for the six months ended June 30, 2017. See Note 3 - Acquisition and Divestiture in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information on our Blackhawk acquisition.
Liquidity and Capital Resources
Liquidity
At SeptemberJune 30, 2016,2017, we had cash and cash equivalents of $529.9$275.0 million and debt of $0.3$0.1 million. Our primary sources of liquidity to date have been cash flows from operations. Our primary uses of capital have been for organic growth capital expenditures and acquisitions.expenditures. We continually monitor potential capital sources, including equity and debt financing, in order to meet our investment and target liquidity requirements.
Our total capital expenditures are estimated at $50.0$40.0 million for 2016.2017. We expect to spend approximately $20.0$22.0 million for the purchase and manufacture of equipment and $30.0$18.0 million for other property, plant and equipment, inclusive of the purchase or construction of facilities. The actual amount of capital expenditures for the manufacture of equipment may fluctuate based on market conditions. During the ninesix months ended SeptemberJune 30, 20162017 and 20152016, capital expenditures were $29.8$15.2 million and $88.3$18.4 million,, respectively, all of which were funded from internally generated funds. We believe our cash on hand cash flows from operations and potential borrowings under our Credit Facility (as defined below), should be sufficient to fund our capital expenditure and liquidity requirements for the remainder of 2016 and all of 2017.
We paid dividends on our common stock of $62.3$33.4 million, or an aggregate of $0.375$0.15 per common share in addition to $8.0 million in distributions to our noncontrolling interests during the ninesix months ended SeptemberJune 30, 20162017. On July 22, 2016, our board of directors approved the decrease of our quarterly dividend from $0.15 per share to $0.075 per share. The timing, declaration, amount of, and payment of any dividends is within the discretion of our board of managing directors subject to the approval of our board of supervisory directors and will depend upon many factors, including our financial condition, earnings, capital requirements, covenants associated with certain of our debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets, and other factors deemed relevant by our board of managing directors and our board of supervisory directors. We do not have a legal obligation to pay any dividend and there can be no assurance that we will be able to do so. The timing of distributions to our noncontrolling interests and the resulting tax arising from their membership interests in Frank's International C.V. ("FICV") was determined pursuant to the Limited Partnership Agreement of FICV.
On August 19, 2016, we received notice from Mosing Holdings, Inc. (“MHI”) that it was exercising its right to exchange, for 52,976,000 common shares, each of the following securities: (i) 52,976,000 Preferred Shares and (ii) 52,976,000 units in FICV. We issued 52,976,000 common shares to MHI on August 26, 2016. As a result, there will be no remaining issued or outstanding Preferred Shares and the Mosing family will beneficially own approximately 173,837,084 common shares of the Company.
Credit Facility
We have a $100.0 million revolving credit facility with certain financial institutions, including up to $20.0 million in letters of credit and up to $10.0 million in swingline loans, which matures in August 2018 (the “Credit Facility”). Subject to the terms of the Credit Facility, we have the ability to increase the commitments to $150.0 million. At
September June 30, 20162017 and December 31, 2015,2016, we did not have any outstanding indebtedness under the Credit Facility. We had $3.8$4.4 million and $4.7$3.7 million, respectively, in letters of credit outstanding as of September 30, 2016 and December 31, 2015, respectively. If our Adjusted EBITDA levels do not increase in future quarters, our borrowing capacityno outstanding borrowings under the Credit Facility could be reduced.this facility.
Borrowings under the Credit Facility bear interest, at our option, at either a base rate or an adjusted Eurodollar rate. Base rate loans under the Credit Facility bear interest at a rate equal to the higher of (i) the prime rate as published in the Wall Street Journal, (ii) the Federal Funds Effective Rate plus 0.50% or (iii) the adjusted Eurodollar rate plus
1.00%, plus an applicable margin ranging from 0.50% to 1.50%, subject to adjustment based on a leverage ratio. Interest is in each case payable quarterly for base-rate loans. Eurodollar loans under the Credit Facility bear interest at an adjusted Eurodollar rate equal to the Eurodollar rate for such interest period multiplied by the statutory reserves, plus an applicable margin ranging from 1.50% to 2.50%. Interest is payable at the end of applicable interest periods for Eurodollar loans, except that if the interest period for a Eurodollar loan is longer than three months, interest is paid at the end of each three-month period. The unused portion of the Credit Facility is subject to a commitment fee ranging from 0.250% to 0.375% based on certain leverage ratios.
The Credit Facility contains various covenants that, among other things, limit our ability to grant certain liens, make certain loans and investments, enter into mergers or acquisitions, enter into hedging transactions, change our lines of business, prepay certain indebtedness, enter into certain affiliate transactions, incur additional indebtedness or engage in certain asset dispositions.
The Credit Facility also contains financial covenants, which, among other things, require us, on a consolidated basis, to maintain: (i) a ratio of total consolidated funded debt to adjusted EBITDA (as defined in the Credit Facility)Agreement) of not more than 2.50 to 1.0 and (ii) a ratio of EBITDA to interest expense of not less than 3.0 to 1.0. As of September 30, 2016, we were in compliance with all financial covenants under the Credit Facility.
In addition, the Credit Facility contains customary events of default, including, among others, the failure to make required payments, failure to comply with certain covenants or other agreements, breach of the representations and covenants contained in the agreements, default of certain other indebtedness, certain events of bankruptcy or insolvency and the occurrence of a change in control.
On April 28, 2017, the Company obtained a limited waiver under its Revolving Credit Agreement, dated August 14, 2013, by and among FICV (as borrower), Amegy Bank National Association (as administrative agent), Capital One, National Association (as syndication agent) and the other lenders party thereto (the "Credit Agreement"), of its leverage ratio and interest coverage ratio for the fiscal quarters ending March 31, 2017 and June 30, 2017 (the “Waiver”) in order to not be in default for first quarter of 2017 testing. The Company agreed to comply with the following conditions during the period from the effective date of the Waiver until the delivery of its compliance certificate with respect to the fiscal quarter ending September 30, 2017: (i) maintain no less than $250.0 million in liquidity; (ii) abide by certain restrictions regarding the issuance of senior unsecured debt; and (iii) pay interest and commitment fees based on the highest “Applicable Margin” (as defined in the Credit Agreement) level. In connection with the Waiver, the Company paid a waiver fee to each lender that executed the Waiver equal to five basis points of the respective lender’s commitment under the Credit Agreement.
Citibank Credit Facility
In 2016, we entered into a three-year credit facility with Citibank N.A., UAE Branch in the amount of $6.0 million for issuance of standby letters of credit and guarantees. The credit facility also allows for open ended guarantees. Outstanding amounts under the credit facility bear interest of 1.25% per annum for amounts outstanding up to one year. Amounts outstanding more than one year bear interest at 1.5% per annum. As of June 30, 2017 and December 31, 2016, we had $3.0 million and $2.2 million in letters of credit outstanding.
Tax Receivable Agreement
We entered into a tax receivable agreement (the “TRA”) with FICVFrank's International C.V. ("FICV") and MHIMosing Holdings, LLC ("Mosing Holdings") in connection with our IPO.initial public offering ("IPO"). The TRA generally provides for the payment by us to MHIMosing Holdings of 85% of the amount of the actual reductions, if any, in payments of U.S. federal, state and local income tax or franchise tax in periods after our IPO (which reductions we refer to as "cash savings") as a result of (i) the tax basis increases resulting from the transfer of FICV interests to us in connection with the conversion of shares of Preferred Stock into shares of our common stock on August 26, 2016 and (ii) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the TRA. In addition, the TRA provides for interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. We will retain the remaining 15% of cash savings, if any. The payment
obligations under the TRA are our obligations and not obligations of FICV. The term of the TRA continues until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the TRA.
If we elect to execute our sole right to terminate the TRA early, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA (based upon certain assumptions and deemed events set forth in the TRA, including the assumption that it has sufficient taxable income to fully utilize such benefits and that any FICV interests that MHIMosing Holdings or its transferees own on the termination date are deemed to be exchanged on the termination date). In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control.
In certain circumstances, we may be required to make payments under the TRA that we have entered into with
MHI. Mosing Holdings. In most circumstances, these payments will be associated with the actual cash savings that we recognize in connection with the conversion of Preferred Stock, which would reduce the actual tax benefit to us. If we were to elect
to exercise our sole right to terminate the TRA early or enter into certain change of control transactions, we may incur payment obligations prior to the time we actually incur any tax benefit. In those circumstances, we would need to pay the amounts out of cash on hand, finance the payments or refrain from triggering the obligation. Though we do not have any present intention of triggering an advance payment under the TRA, based on our current liquidity and our expected ability to access debt and equity financing, we believe we would be able to make such a payment if necessary. Any such payment could reduce our cash on hand and our borrowing availability, however, which would also reduce the amount of cash available to operate our business, to fund capital expenditures and to be paid as dividends to our stockholders, among other things. Please see Note 1412 - Related Party Transactions in the Notes to Unaudited Condensed Consolidated Financial Statements.
Cash Flows from Operating, Investing and Financing Activities
Cash flows provided by (used in) our operations, investing and financing activities are summarized below (in thousands):
|
| | | | | | | | | |
| | Nine Months Ended | |
| | September 30, | |
| | 2016 | | 2015 | |
| Operating activities | $ | 27,846 |
| | $ | 295,387 |
| |
| Investing activities | (17,362 | ) | | (163,966 | ) | |
| Financing activities | (79,831 | ) | | (117,240 | ) | |
| | (69,347 | ) | | 14,181 |
| |
| Effect of exchange rate changes on cash activities | (3,162 | ) | | 3,518 |
| |
| Increase (decrease) in cash and cash equivalents | $ | (72,509 | ) | | $ | 17,699 |
| |
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2017 | | 2016 |
Operating activities | $ | (7,467 | ) | | $ | 58,037 |
|
Investing activities | (1,659 | ) | | (17,252 | ) |
Financing activities | (34,563 | ) | | (59,997 | ) |
| (43,689 | ) | | (19,212 | ) |
Effect of exchange rate changes on cash | (887 | ) | | (1,776 | ) |
Net decrease in cash and cash equivalents | $ | (44,576 | ) | | $ | (20,988 | ) |
Statements of cash flows for entities with international operations that use the local currency as the functional currency exclude the effects of the changes in foreign currency exchange rates that occur during any given year, as these are noncash changes. As a result, changes reflected in certain accounts on the condensed consolidated statements of cash flows may not reflect the changes in corresponding accounts on the condensed consolidated balance sheets.
Operating Activities
Cash flow fromused in operating activities was $27.8$7.5 million for the ninesix months ended SeptemberJune 30, 2016 as2017 compared to cash flow provided by operating activities of $295.458.0 million infor the comparablesame period in 2015.2016. The decrease in 2016cash flow in 2017 was due to a net loss, lower deferred tax provision andunfavorable changes in working capital, primarily in accounts receivable inventories, deferred revenue and accrued expenses and other liabilities. The changes werefor the six months ended June 30, 2017 as compared to the same period in 2016 as a result of lower activity due to depressed oil and gas prices. Non-current liabilities also decreased primarily as a result of payments to former key employees pursuant to our executive deferred compensation plan.
Investing Activities
Cash flow used in investing activities was $17.4$1.7 million for the ninesix months ended SeptemberJune 30, 20162017 as compared to $164.017.3 million in the comparablesame period in 2015.2016. The decrease in net cash used in investing activities was primarily related to the Timco acquisition that occurreda decrease in the prior year in addition to lower capital expenditures forpurchases of property, plant and equipment for the nine months ended September 30, 2016 in comparison to the same period in 2015 as a result of a reductionand an increase in the need for additional equipment and machinery to service our customers due to declining rig activity caused by lower oil and gas prices. We also received $11.1 million in proceeds from the sale of investments in our executive deferred compensation plan, which was used to make payments to former key employees.during the six months ended June 30, 2017.
Financing Activities
Cash flow used in financing activities was $79.8$34.6 million for the ninesix months ended SeptemberJune 30, 20162017 as compared to $117.260.0 million in the comparablesame period in 2015.2016. The decrease in cash flow used in financing activities was primarily due to lower dividend payments and the absence of a payment to our noncontrolling interest payments of $35.5$8.0 million due to less estimable income tax associated withmade in the partnership partially offset by repayments on borrowings of $7.1 million.six months ended June 30, 2016.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.arrangements with the exception of operating leases.
Critical Accounting Policies
There were no changes to our significant accounting policies from those disclosed in our Annual Report.
Impact of Recent Accounting Pronouncements
Refer to Note 1 - Basis of Presentation in the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of accounting standards we recently adopted or will be required to adopt.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks that are inherent in our financial instruments and arise from changes in foreign currency exchange rates and interest rates. A discussion of our market risk exposure in financial instruments is presented below.
The primary objective of the following information is to provide forward-lookingFor quantitative and qualitative informationdisclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our potential2016 Annual Report on Form 10-K. Except for the change below, our exposure to market risks. The disclosures arerisk has not meant to be precise indicators of expected future losses or gains, but rather indicators of reasonably possible losses or gains. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.
Foreign Currency Exchange Rates
We operate in virtually every oil and natural gas exploration and production region in the world. In some parts of the world, the currency of our primary economic environment is the U.S. dollar, and we use the U.S. dollar as our functional currency. In other parts of the world, such as Europe, Norway, Africa and Brazil, we conduct our business in currencies other than the U.S. dollar, and the functional currency is the applicable local currency. Assets and liabilities of entities for which the functional currency is the local currency are translated into U.S. dollars using the exchange rates in effect at the balance sheet date, resulting in translation adjustments that are reflected in accumulated other comprehensive income (loss) in the shareholders’ equity section on our condensed consolidated balance sheets. A portion of our net assets are impacted by changes in foreign currencies in relation to the U.S. dollar.
For the nine months ended September 30, 2016, on a U.S. dollar-equivalent basis, approximately 24.9% of our revenue was represented by currencies other than the U.S. dollar. However, no single foreign currency poses a primary risk to us. A hypothetical 10% decrease in the exchange rates for each of the foreign currencies in which a portion of our revenues is denominated would result in a 2.3% decrease in our overall revenues for the nine months ended September 30,changed materially since December 31, 2016.
In December 2015, we began entering into short-duration foreign currency forward contracts. We use these instruments to mitigate our exposure to non-local currency operating working capital. We are also exposed to market risk on our forward contracts related to potential non-performance by our counterparty. It is our policy to enter into derivative contracts with counterparties that are creditworthy institutions.
We account for our derivative activities under the accounting guidance for derivatives and hedging. Derivatives are recognized on the condensed consolidated balance sheet at fair value. Although the derivative contracts will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they are not formally designated as hedge contracts for hedge accounting treatment. Accordingly, any changes in the fair value of the derivative instruments during a period will be included in our condensed consolidated statements of operations.
As of September 30, 2016 and December 31, 2015, we had the following foreign currency derivative contracts outstanding in U.S. dollars (thousands):
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| | | | | | | | | | |
| | | | | | Fair Value at |
| | Notional | | Contractual | | September 30, |
Foreign Currency | | Amount | | Exchange Rate | | 2016 |
Canadian dollar | | $ | 4,597 |
| | 1.3052 | | $ | 29 |
|
Euro | | 4,280 |
| | 1.1264 | | (6 | ) |
Euro | | 2,304 |
| | 1.1240 | | 1 |
|
Norwegian kroner | | 6,041 |
| | 8.2766 | | (217 | ) |
Pound sterling | | 5,702 |
| | 1.3260 | | 107 |
|
| | | | | | $ | (86 | ) |
|
| | | | | | | | | | |
| | | | | | Fair Value at |
| | Notional | | Contractual | | December 31, |
Foreign Currency | | Amount | | Exchange Rate | | 2015 |
Canadian dollar | | $ | 5,091 |
| | 1.3751 | | $ | 48 |
|
Euro | | 19,706 |
| | 1.0948 | | (106 | ) |
Norwegian kroner | | 11,498 |
| | 8.6973 | | 162 |
|
Pound sterling | | 7,516 |
| | 1.5031 | | 106 |
|
| | | | | | $ | 210 |
|
Based on the derivative contracts that were in place as of SeptemberJune 30, 2016,2017, a simultaneous 10% devaluationweakening of the U.S. dollar as compared to the Canadian dollar, Euro, Norwegian kroner,krone, and Pound sterling compared to the U.S. dollar would result in a $1.7$3.5 million increasedecrease in the market value of our forward contracts.
In February 2015, the Venezuelan government created a new open market Please see Item 1. Financial Statements - Note 11 - Derivatives for additional information regarding our foreign exchange system, the Marginal Currency System, or SIMADI, which was the third systemcurrency derivative contracts outstanding in a three-tier exchange control mechanism. SIMADI was a floating market rate for the conversion of Venezuelan Bolivar Fuertes ("Bolivars") to U.S. dollars based on supply and demand. The three-tier exchange rate mechanisms included the following: (i) the National Centeras of Foreign Commerce official rate of 6.3 Bolivars per U.S. dollar, which remained unchanged; (ii) the SICAD I, which continued to hold periodic auctions for specific sectors of the economy; and (iii) the SIMADI.
On March 9, 2016, the Central Bank of Venezuela issued Exchange Agreement No. 35, which changed the three-tiered official currency control system to a dual foreign exchange system. The preferential exchange rate, now called DIPRO, has an official rate of 10 Bolivars to the U.S. dollar and replaces the official rate of 6.3 Bolivars. DIPRO is available for essential imports and transactions. All other transactions will be subject to the DICOM rate, which is the replacement for the SIMADI.
As of SeptemberJune 30, 2016, we applied the SIMADI exchange rate as we believed that this rate best represented the economics of our business activity in Venezuela. At September 30, 2016, we had approximately ($21,437) in net monetary assets denominated in Bolivars using the SIMADI rate, which was approximately 658.89 Bolivars to the U.S. dollar. In the event of a devaluation of the current exchange mechanism in Venezuela or any other new exchange
mechanism that might emerge for financial reporting purposes, it would result in our recording a devaluation charge in our condensed consolidated statements of operations.
Interest Rate Risk
As of September 30, 2016, we did not have an outstanding funded debt balance under the Credit Facility. If we borrow under the Credit Facility in the future, we will be exposed to changes in interest rates on our floating rate borrowings under the Credit Facility. Although we do not currently utilize interest rate derivative instruments to reduce interest rate exposure, we may do so in the future.
Customer Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. International sales also present various risks including governmental activities that may limit or disrupt markets and restrict the movement of funds. We operate in more than 60 countries and as such our accounts receivables are spread over many countries and customers. As of September 30, 2016, two customers in Venezuela and Angola accounted for approximately 13% of our gross accounts receivables balance. Our receivables in Venezuela and Angola are denominated in U.S. dollars. We have experienced payment delays from our national oil company customer in Venezuela and have been notified of a six month delay in payment from the national oil company in Angola as it is undergoing restructuring. These receivables are not disputed, and we have not historically had material write-offs relating to these customers. We maintain an allowance for uncollectible accounts receivables based on expected collectability and ongoing credit evaluations of our customers’ financial condition. If the financial condition of our customers were to diminish resulting in an impairment of their ability to make payments, adjustments to the allowance may be required. Due to the uncertainty of collection from our national oil company customer in Venezuela, we recorded an allowance of $9.7 million during the second quarter of 2016. In the first quarter of 2016, we also made a decision to curtail operations in Venezuela and operations in Angola are significantly down due to the drop in oil prices.
We are also exposed to credit risk because our customers are concentrated in the oil and natural gas industry. This concentration of customers may impact overall exposure to credit risk, either positively or negatively, because our customers may be similarly affected by changes in economic and industry conditions, including sensitivity to commodity prices. While current energy prices are important contributors to positive cash flow for our customers, expectations about future prices and price volatility are generally more important for determining future spending levels. However, any prolonged increase or decrease in oil and natural gas prices affects the levels of exploration, development and production activity, as well as the entire health of the oil and natural gas industry, and can therefore negatively impact spending by our customers.2017.
Item 4. Controls and Procedures
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(a) | Evaluation of Disclosure Controls and Procedures. |
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure, and such information is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 20162017 at the reasonable assurance level.
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(b) | Change in Internal Control Over Financial Reporting. |
There have been no changes in our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 2016,2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are the subject of lawsuits and claims arising in the ordinary course of business from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. We had no material accruals for loss contingencies, individually or in the aggregate, as of SeptemberJune 30, 20162017 and December 31, 2015.2016. We believe the probability is remote that the ultimate outcome of these matters would have a material adverse effect on our financial position, results of operations or cash flows. Please see Note 15 - Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements.
We are conducting an internal investigation of the operations of certain of our foreign subsidiaries in West Africa including possible violations of the U.S. Foreign Corrupt Practices Act, our policies and other applicable laws. In June 2016, we voluntarily disclosed the existence of our extensive internal review to the U.S. Securities and Exchange Commission, the United States Department of Justice and other governmental entities. It is our intent to fully cooperate with these agencies and any other applicable authorities in connection with any further investigation that may be conducted in connection with this matter. While our review doeshas not currently indicateindicated that there has been any material impact on our previously filed financial statements, we continuehave continued to collect information and cooperate with the authorities, but at this time are unable to predict the ultimate resolution of these matters with these agencies. In addition, during the course of the investigation, we discovered historical business transactions (and bids to enter into business transactions) in certain countries that may have been subject to U.S. and other international sanctions. We have disclosed this information to various governmental entities (including those involved in our ongoing investigation), but at this time are unable to predict the ultimate resolution of these matters with these agencies, including any financial impact to us. Our board and management are committed to continuously enhancing our internal controls that support improved compliance and transparency throughout our global operations.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risks under the heading “Risk Factors” in our Annual Report, which risks could materially affect our business, financial condition or future results. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As part of our initial public offering in August 2013, we issued 52,976,000 shares of our Series A convertible preferred stock (the “Preferred Stock”) to Mosing Holdings, Inc., a Delaware corporation and affiliate of the Company with Mosing family entities as its shareholders (“MHI”). Under our Amended Articles of Association, upon the written election of MHI, each Preferred Share, together with a unit in Frank’s International C.V. (“FICV”), our subsidiary, is convertible into a share of our common stock on a one-for-one basis.
On August 19, 2016, we received notice from MHI exercising its right to exchange (the “Exchange Right”) for an equivalent number of each of the following securities for common shares: (i) 52,976,000 Preferred Shares and (ii) 52,976,000 units in FICV. We issued 52,976,000 common shares to MHI on August 26, 2016. As a result, there will be no remaining issued Preferred Shares and the Mosing family will beneficially own approximately 173,837,084 of our common shares.
The issuance of the common shares to MHI in connection with the exercise of the Exchange Right was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.
Item 6. Exhibits
The Exhibit Index, which follows the signature page to this report and is incorporated by reference herein, sets forth a list of exhibits to this report.
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.
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| | | |
| | | FRANK'S INTERNATIONAL N.V. |
| | | |
Date: November 3, 2016August 7, 2017 | | By: | /s/ Jeffrey J. BirdKyle McClure |
| | | Jeffrey J. BirdKyle McClure |
| | | ExecutiveSenior Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
EXHIBIT INDEX
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3.1 | Deed of Amendment to Articles of Association of Frank's International N.V., dated May 14, 201419, 2016 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-36053), filed on May 16, 2014)25, 2017). |
*† *10.110.1 | SeparationIndemnification Agreement and Release, dated as of July 27, 2016 and effective as of August 15, 2016,March 2, 2017, by and between Frank's International LLCN.V. and William John Walker.Kyle McClure. |
*†10.2 | Amendment No. 9 to the Limited PartnershipIndemnification Agreement of Frank's International C.V., dated as of August 26, 2016.May 19, 2017, by and between Frank's International N.V. and Robert W. Drummond. |
*†10.3 | Offer Letter for Kyle McClure effective as of June 5, 2017. |
*31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) under the Securities Exchange Act of 1934. |
*31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
**32.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
**32.2 | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
*101.INS | XBRL Instance Document. |
*101.SCH | XBRL Taxonomy Extension Schema Document. |
*101.CAL | XBRL Taxonomy Calculation Linkbase Document. |
*101.DEF | XBRL Taxonomy Definition Linkbase Document. |
*101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
*101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
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† | Represents management contract or compensatory plan or arrangement. |