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.
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 7580 years. We provide our services and products to leading exploration and production companies in both offshore and onshore environments, with a focus on complex and technically demanding wells.
Blackhawk. We provide well construction and well intervention rentalefficiency of rig operations. It provides specialized equipment, services and products in addition to cementing tool expertise,utilized in the U.S.construction of the wellbore in both onshore and Mexican Gulfoffshore environments. The product portfolio includes casing accessories that serve to improve the installation of Mexico, onshore U.S.casing, centralization and wellbore zonal isolation, as well as enhance cementing operations through advance wiper plug and float equipment technology. The CE segment also provides services and products utilized in the construction, completion or abandonment of the wellbore. These solutions are primarily used to isolate portions of the wellbore through the setting of barriers downhole to allow for rig evacuation in case of inclement weather, maintenance work on other select international locations.rig equipment, squeeze cementing, pressure testing within the wellbore, hydraulic fracturing and temporary and permanent abandonments. These offerings improve operational efficiencies and limit non-productive time if unscheduled events are encountered at the wellsite.
Market Outlook
The Two significant events that began during the first quarter are continuing to create headwinds across the oil and gas markets. First, there was a breakdown in the Organization of Petroleum Exporting Countries (“OPEC”) and Russia production cut agreements and during the period of dispute, meaningful downward pressure on commodity prices occurred. There was an ultimate agreement made amongst these parties in April 2020 which took effect beginning in May 2020. Despite this agreement, there continues to be excess inventory of oil. This is due to the second event, the global Covid-19 pandemic which created an energy demand decline and has given rise to logistical challenges in furthering certain existing drilling programs. Both of these events have caused our customers to reduce capital spending, with the U.S. onshore market seeing a large reduction from initial 2020 guidance. International customer spending has also been reduced although at a lower rate than the U.S. onshore markets. In Africa, travel restrictions have led to significant activity disruptions. We continue to believe that the effects of Covid-19 will depress the oil and gas markets in the short to intermediate term. We expect commodity over-supply issues to have a long-term effect over the next 24 months, requiring time for the market supply and demand curve to return to balance.
As of June 30, 2020, the full impact of the Covid-19 outbreak and the reduction in oil sector activity continues to evolve daily. It is uncertain how long either event will last. With the significant decline in oil prices as well as the general economic decline caused by the impacts of Covid-19, we expect the lower demand for our products and services continues to be challenged by depressed oilcontinue due to much lower capital expenditure budgets throughout the industry.
Although Covid-19 has contributed to a decline in demand for our offerings, the direct impact of the outbreak on our ability to conduct operations has been minor. We have implemented a work-from-home directive for office personnel across the globe, split-shift rotation protocols for our manufacturing and gas commodity pricesoperations facilities, social distancing guidelines in manufacturing and reduced customer spendingoperations facilities, and quarantine protocols for employees at risk of exposure to Covid-19. In addition, we have experienced local disruptions of activity in response to outbreaks of Covid-19 at certain offshore drilling locations, and disruptions due to travel restrictions and local governmental orders. However, in the majority of locations, our products and services have been deemed essential economic activity and have continued during local restrictions on offshore explorationbusiness activity.
In this challenging and uncertain environment, we are continuing and building upon our profitability improvement project to further reduce our cost base. We are implementing workforce reductions, in conjunction with changes to our compensation and benefits programs and concurrent with the pursuit of several government-sponsored relief support programs globally that will capture additional labor savings. We are also working to reduce our non-labor spend, engaging in active discussions with our vendors and scrutinizing research and development 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, particularlyspending. We are also working to optimize working capital, with workstreams under way in the marketsareas of West Africacollections, capital expenditures, inventory management and the U.S. Gulf of Mexico. For the remainder of 2017, we expect to see further deterioration of pricing and activity in the U.S. Gulf of Mexico and, consequently, our Tubular Sales business segment. International markets are beginning to show signs of stabilization and the potential for reaching an activity bottom in the next twelve months. We expect to see growth in our Blackhawk segment both in the U.S. onshore and in select international markets during the next several quarters as we expand its operational footprint. In order to offset some of the declines in activity and pricing, we continue to look for ways to improve our operational efficiency and grow share in markets in which we have historically been underrepresented, including international land and shelf opportunities.disbursements.
We also continue to evaluatemonitor potential goodwill impairments as a result of Covid-19. For further information, see Note 6—Goodwill and Intangible Assets in our Notes to Unaudited Condensed Consolidated Financial Statements.
While management anticipates that the industry and economic impact of Covid-19 and OPEC’s actions will have a negative effect on our results of operations in 2020 and perhaps beyond, the degree to which these factors will impact our business remains uncertain. Please read Item 1A, Risk Factors, in this Quarterly Report.
28
acquisitions to broaden our well 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 interest income, net, depreciation and amortization, income tax benefit or expense, asset impairments, gain or loss on saledisposal of assets, foreign currency gain or loss, equity-based compensation, unrealized gainand realized gains or loss,losses, the effects of the tax receivable agreement ("TRA"(“TRA”), other non-cash adjustments and other charges or credits. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues.revenue. 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), items outside the control of our management team (such as income tax, and foreign currency exchange rates)rates and other charges outside the normal course of business.and credits. 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"(“GAAP”). Previously reported Adjusted EBITDA for the three and nine months ended September 30, 2016 has been adjusted for investigation-related matters by $1.8 million and $5.1 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 loss to Adjusted EBITDA and Adjusted EBITDA margin to net income (loss) for each of the periods presented (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | |
| Net income (loss) | $ | 2,296 |
| | $ | (42,198 | ) | | $ | (50,317 | ) | | $ | (89,893 | ) |
| Interest income, net | (1,019 | ) | | (646 | ) | | (2,170 | ) | | (1,050 | ) |
| Depreciation and amortization | 30,650 |
| | 26,545 |
| | 92,700 |
| | 84,278 |
|
| Income tax expense (benefit) | 87,613 |
| | (6,800 | ) | | 72,419 |
| | (15,311 | ) |
| Gain on sale of assets | (829 | ) | | (46 | ) | | (2,091 | ) | | (1,095 | ) |
| Foreign currency (gain) loss | (1,839 | ) | | 1,696 |
| | (3,184 | ) | | 5,907 |
|
Derecognition of the TRA liability (1) | (122,515 | ) | | — |
| | (122,515 | ) | | — |
|
Charges and credits (2) | 7,616 |
| | 20,151 |
| | 22,231 |
| | 37,241 |
|
| Adjusted EBITDA | $ | 1,973 |
| | $ | (1,298 | ) | | $ | 7,073 |
| | $ | 20,077 |
|
| Adjusted EBITDA margin | 1.8 | % | | (1.2 | )% | | 2.1 | % | | 5.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | | | June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| Net loss | $ | (34,245) | | | $ | (15,160) | | | $ | (120,223) | | | $ | (43,447) | |
| Goodwill impairment | — | | | — | | | 57,146 | | | — | |
| Severance and other charges, net | 5,162 | | | 815 | | | 25,887 | | | 1,270 | |
| Interest income, net | (178) | | | (426) | | | (711) | | | (1,194) | |
| Depreciation and amortization | 17,252 | | | 23,913 | | | 36,970 | | | 49,155 | |
| Income tax expense (benefit) | 8,986 | | | 3,300 | | | (6,577) | | | 13,073 | |
| (Gain) loss on disposal of assets | (650) | | | 154 | | | (590) | | | 381 | |
| Foreign currency (gain) loss | (1,693) | | | 661 | | | 8,199 | | | 178 | |
| TRA related adjustments | — | | | (220) | | | — | | | (220) | |
Charges and credits (1) | 3,674 | | | 4,126 | | | 5,266 | | | 7,625 | |
| Adjusted EBITDA | $ | (1,692) | | | $ | 17,163 | | | $ | 5,367 | | | $ | 26,821 | |
| Adjusted EBITDA margin | (2.0) | % | | 11.0 | % | | 2.6 | % | | 8.9 | % |
| |
(1)
| Please see Note 12 - Related Party Transactions in the Notes to the Unaudited Condensed Consolidated Financial Statements for further discussion. |
(1) Comprised of Equity-based compensation expense (for the three months ended June 30, 2020 and 2019: $3,515 and $3,017, respectively, and for the six months ended June 30, 2020 and 2019: $5,661 and $5,591, respectively), Unrealized and realized (gains) losses (for the three months ended June 30, 2020 and 2019: $111 and $(383), respectively, and for the six months ended June 30, 2020 and 2019: $(1,593) and $(691), respectively), and Investigation-related matters (for the three months ended June 30, 2020 and 2019: $48 and $1,492, respectively, and for the six months ended June 30, 2020 and 2019: $1,198 and $2,725, respectively).
| |
(2)
| Comprised of Equity-based compensation expense (for the three months ended September 30, 2017 and 2016: $2,342 and $3,828, respectively, and for the nine months ended September 30, 2017 and 2016: $11,458 and $12,356, respectively), Mergers and acquisition expense (for the three months ended September 30, 2017 and 2016: none and none, respectively, and for the nine months ended September 30, 2017 and 2016: $459 and none, respectively), Severance and other charges (for the three months ended September 30, 2017 and 2016: $1,648 and $14,534, respectively, and for the nine months ended September 30, 2017 and 2016: $2,386 and $18,858, respectively), Unrealized and realized losses (for the three months ended September 30, 2017 and 2016: $1,123 and $10, respectively, and for the nine months ended September 30, 2017 and 2016: $2,819 and $973, respectively) and Investigation-related matters (for the three months ended September 30, 2017 and 2016: $2,503 and $1,779, respectively, and for the nine months ended September 30, 2017 and 2016: $5,109 and $5,054, respectively). |
For a reconciliation of our Adjusted EBITDA on a segment basis to the most comparable measure calculated in accordance with GAAP, see “Operating Segment Results.”
Safety and Quality Performance
Safety is one of our primary core values. Maintaining a strong safety record is a critical component of our operational success. Many of our customers have safety standards we must satisfy before we can perform services. As a result, we continually monitor and improve our safety performance through the evaluation of safety observations, job and customer surveys, and safety data. The primary measure for our safety performance is the tracking of the Total Recordable Incident Rate in addition to the Lost Time Incident Rate, which areis reviewed on both a monthly and rolling twelve-month basis.
Our business is dependent on our ability to provide highly reliable and safe equipment. If our equipment does not meet statutory regulations and/or our clients do not accept the quality of our equipment, we could encounter loss of contracts and/or loss of reputation, which could materially impact our operations and profitability. Further, the failure of our equipment could subject us to litigation, regulatory fines and/or adverse customer reaction. In addition, equipment certification requirements vary by region and changes in these requirements could impact our ability to operate in certain markets if our tools do not comply with these requirements.
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, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Unaudited) |
| Revenues: | | | | | | | |
| Equipment rentals and services | $ | 92,547 |
| | $ | 85,698 |
| | $ | 272,402 |
| | $ | 312,132 |
|
Products | 15,536 |
| | 19,416 |
| | 64,071 |
| | 67,414 |
|
| Total revenue | 108,083 |
| | 105,114 |
| | 336,473 |
| | 379,546 |
|
| | | | | | | | |
| Operating expenses: | | | | | | | |
| Cost of revenues, exclusive of depreciation and amortization | | | | | | | |
Equipment rentals and services (1) | 60,981 |
| | 57,307 |
| | 178,865 |
| | 189,965 |
|
Products (1) | 10,750 |
| | 16,029 |
| | 45,162 |
| | 51,446 |
|
General and administrative expenses (1) | 39,963 |
| | 39,677 |
| | 125,107 |
| | 138,586 |
|
| Depreciation and amortization | 30,650 |
| | 26,545 |
| | 92,700 |
| | 84,278 |
|
| Severance and other charges | 1,648 |
| | 14,534 |
| | 2,386 |
| | 18,858 |
|
| Gain on sale of assets | (829 | ) | | (46 | ) | | (2,091 | ) | | (1,095 | ) |
| Operating loss | (35,080 | ) | | (48,932 | ) | | (105,656 | ) | | (102,492 | ) |
| |
| Other income (expense): | | | | | | | |
Derecognition of the TRA liability (2) | 122,515 |
| | — |
| | 122,515 |
| | — |
|
| Other income (expense), net | (384 | ) | | 984 |
| | 348 |
| | 2,145 |
|
| Interest income, net | 1,019 |
| | 646 |
| | 2,170 |
| | 1,050 |
|
| Mergers and acquisition expense | — |
| | — |
| | (459 | ) | | — |
|
| Foreign currency gain (loss) | 1,839 |
| | (1,696 | ) | | 3,184 |
| | (5,907 | ) |
| Total other income (expense) | 124,989 |
| | (66 | ) | | 127,758 |
| | (2,712 | ) |
| | | | | | | | |
| Income (loss) before income tax expense (benefit) | 89,909 |
| | (48,998 | ) | | 22,102 |
| | (105,204 | ) |
| Income tax expense (benefit) | 87,613 |
| | (6,800 | ) | | 72,419 |
| | (15,311 | ) |
| Net income (loss) | 2,296 |
| | (42,198 | ) | | (50,317 | ) | | (89,893 | ) |
| Less: Net loss attributable to noncontrolling interest | — |
| | (5,216 | ) | | — |
| | (20,741 | ) |
| | | | | | | | |
| Net income (loss) attributable to Frank's International N.V. | $ | 2,296 |
| | $ | (36,982 | ) | | $ | (50,317 | ) | | $ | (69,152 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | | | June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (Unaudited) | | | | | | |
| Revenue: | | | | | | | |
| Services | $ | 74,583 | | | $ | 127,091 | | | $ | 179,666 | | | $ | 242,497 | |
Products | 11,518 | | | 28,563 | | | 29,927 | | | 57,565 | |
| Total revenue | 86,101 | | | 155,654 | | | 209,593 | | | 300,062 | |
| | | | | | | |
| Operating expenses: | | | | | | | |
| Cost of revenue, exclusive of depreciation and amortization | | | | | | | |
| Services | 61,051 | | | 85,785 | | | 140,431 | | | 169,024 | |
Products | 8,286 | | | 23,475 | | | 22,274 | | | 43,603 | |
| General and administrative expenses | 22,286 | | | 34,026 | | | 48,969 | | | 69,437 | |
| Depreciation and amortization | 17,252 | | | 23,913 | | | 36,970 | | | 49,155 | |
| Goodwill impairment | — | | | — | | | 57,146 | | | — | |
| Severance and other charges, net | 5,162 | | | 815 | | | 25,887 | | | 1,270 | |
| (Gain) loss on disposal of assets | (650) | | | 154 | | | (590) | | | 381 | |
| Operating loss | (27,286) | | | (12,514) | | | (121,494) | | | (32,808) | |
| | | | | | | |
| Other income (expense): | | | | | | | |
| TRA related adjustments | — | | | 220 | | | — | | | 220 | |
| Other income, net | 156 | | | 669 | | | 2,182 | | | 1,198 | |
| Interest income, net | 178 | | | 426 | | | 711 | | | 1,194 | |
| | | | | | | |
| Foreign currency gain (loss) | 1,693 | | | (661) | | | (8,199) | | | (178) | |
| Total other income (expense) | 2,027 | | | 654 | | | (5,306) | | | 2,434 | |
| | | | | | | |
| Loss before income taxes | (25,259) | | | (11,860) | | | (126,800) | | | (30,374) | |
| Income tax expense (benefit) | 8,986 | | | 3,300 | | | (6,577) | | | 13,073 | |
| Net loss | $ | (34,245) | | | $ | (15,160) | | | $ | (120,223) | | | $ | (43,447) | |
| |
(1)
| For the three months ended September 30, 2016, $10,305 and $2,792 have been reclassified from general and administrative expenses to equipment rentals and services and products, respectively, and $34,598 and $8,852, respectively, for the nine months ended September 30, 2016. See Note 1 - Basis of Presentation in the Notes to Unaudited Condensed Consolidated Financial Statements.
|
| |
(2)
| Please see Note 12 - Related Party Transactions in the Notes to the Unaudited Condensed Consolidated Financial Statements for further discussion. |
Three Months Ended SeptemberJune 30, 20172020 Compared to Three Months Ended SeptemberJune 30, 20162019
Revenues. RevenuesRevenue. Revenue from external customers, excluding intersegment sales, for the three months ended SeptemberJune 30, 2017 increased2020 decreased by $3.0$69.6 million, or 2.8%44.7%, to $108.1$86.1 million from $105.1$155.7 million for the three months ended SeptemberJune 30, 2016. The revenue increase was primarily attributable2019. Revenue decreased across all segments due to our recently acquired Blackhawk segment the Covid-19 pandemic and our International Services segment, partially offset by a decreasethe sharp decline in our U.S. Services and Tubular Sales segments. Revenuesoil prices. Revenue for our segments areis discussed separately below under the heading "Operating“Operating Segment Results."”
Cost of revenues,revenue, exclusive of depreciation and amortization. Cost of revenuesrevenue for the three months ended SeptemberJune 30, 20172020 decreased by $1.6$40.0 million, or 2.2%36.6%, to $71.7$69.3 million from $73.3$109.3 million for the three months ended SeptemberJune 30, 2016 2019. The decrease was driven by lower activity levels and mix of work in the TRS, Tubulars, and CE segments.
General and administrative expenses. General and administrative expenses for the three months ended June 30, 2020 decreased by $11.7 million, or 34.4%, to $22.3 million from $34.0 million for the three months ended June 30, 2019 due to ourpreviously implemented restructuring and cost cutting initiatives.measures.
Depreciation and amortization.Depreciation and amortization for the three months ended SeptemberJune 30, 2017 increased2020 decreased by $4.1$6.6 million, or 15.5%27.6%, to $30.7$17.3 million from $26.5$23.9 million for the three months ended SeptemberJune 30, 2016, primarily due to our recently acquired Blackhawk segment.2019, as a result of a lower depreciable base and less intangible asset amortization.
Severance and other charges, net. Severance and other charges, net for the three months ended SeptemberJune 30, 2017 decreased2020 increased by $12.9$4.4 million, or 88.7%550.0%, to $1.6$5.2 million from $14.5$0.8 million for the three months ended SeptemberJune 30, 2016 due to higher workforce reductions in the third quarter of 2016 compared to 2017 as we took steps to adjust our workforce to meet the depressed demand in the industry.
Foreign currency gain (loss). Foreign currency gain2019. Severance and other charges, net for the three months ended SeptemberJune 30, 20172020 was $1.8 millionunfavorably impacted by higher severance costs recorded during the quarter as compared to a foreign currency loss for the three months ended September 30, 2016 of $1.7 million. The change in foreign currency gain (loss) year-over-year was primarily driven by the weakening of the U.S. dollar against other currencies.
Income tax expense (benefit). Income tax expense for the three months ended September 30, 2017 increased by $94.4 million to $87.6 million from a benefit of $6.8 million for the three months ended September 30, 2016, primarily as a result of recording valuation allowances against our net deferred tax assets. The deferred tax assets relate to net operating losses, outside basis differences in our partnership investment and other timing differences primarily associated with our U.S. operations.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Revenues. Revenues from external customers, excluding intersegment sales, for the nine months ended September 30, 2017 decreased by $43.1 million, or 11.3%, to $336.5 million from $379.5 million for the nine months ended September 30, 2016. The decrease was primarily attributable to lower revenues in the 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 deepwater fabrication revenue. The decrease in total revenues was partially offset by revenues from our recently acquired Blackhawk segment of $51.9 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 nine months ended September 30, 2017 decreased by $17.4 million, or 7.2%, to $224.0 million from $241.4 million for the nine months ended September 30, 2016. Our cost of revenues decline was consistent with our lower revenue and cost cutting initiative.
General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2017 decreased by $13.5 million, or 9.7%, to $125.1 million from $138.6 million for the nine months ended September 30, 2016 primarily due to bad debt expense recognized in 2016 related to difficulty in collecting certain receivables in Venezuela and cost cutting initiatives.
Depreciation and amortization. Depreciation and amortization for the nine months ended September 30, 2017 increased by $8.4 million, or 10.0%, to $92.7 million from $84.3 million for the nine months ended September 30, 2016, primarily due to our recently acquired Blackhawk segment, partially offset by a lower depreciable base related to our legacy assets.
prior year. See Note 16—Severance and other charges. Severance and other charges for the nine months ended September 30, 2017 decreased by $16.5 million, or 87.3%, to $2.4 million from $18.9 million for the nine months ended September 30, 2016 as a result of a higher workforce reduction in 2016 compared to 2017 as we took steps to adjust our workforce to meet the depressed demand in the industry.
Foreign currency gain (loss). Foreign currency gain for the nine months ended September 30, 2017 was $3.2 million as compared to a foreign currency loss for the nine months ended September 30, 2016 of $5.9 million. The improvement in foreign currency gain (loss) year-over-year was primarily driven by the weakening of the U.S. dollar against other currencies which positively impacted foreign currency gain (loss) for the nine months ended September 30, 2017 and the absence of the devaluation of the Nigerian Naira which negatively impacted foreign currency gain (loss) for the nine months ended September 30, 2016.
Income tax expense (benefit). Income tax expense for the nine months ended September 30, 2017 increased by $87.7 million to $72.4 million from a benefit of $15.3 million for the nine months ended September 30, 2016, primarily as a result of recording valuation allowances against ourOther Charges, net deferred tax assets. The deferred tax assets relate to net operating losses, outside basis differences in our partnership investment and other timing differences primarily associated with our U.S. operations.
Operating Segment Results
The following table presents revenues and Adjusted EBITDA by segment (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenue: | | | | | | | |
| International Services | $ | 53,742 |
| | $ | 51,028 |
| | $ | 153,851 |
| | $ | 191,440 |
|
| U.S. Services | 29,065 |
| | 34,057 |
| | 89,936 |
| | 119,955 |
|
| Tubular Sales | 7,701 |
| | 20,029 |
| | 40,787 |
| | 68,151 |
|
| Blackhawk | 17,575 |
| | — |
| | 51,899 |
| | — |
|
| Total | $ | 108,083 |
| | $ | 105,114 |
| | $ | 336,473 |
| | $ | 379,546 |
|
| | | | | | | | |
Segment Adjusted EBITDA (2): | | | | | | | |
| International Services | $ | 11,151 |
| | $ | 4,532 |
| | $ | 25,459 |
| | $ | 31,752 |
|
U.S. Services (1) | (11,322 | ) | | (5,995 | ) | | (27,775 | ) | | (13,018 | ) |
| Tubular Sales | (1,333 | ) | | 165 |
| | 1,736 |
| | 1,343 |
|
| Blackhawk | 3,477 |
| | — |
| | 7,653 |
| | — |
|
| | $ | 1,973 |
| | $ | (1,298 | ) | | $ | 7,073 |
| | $ | 20,077 |
|
| |
(1)
| Amounts previously reported as Corporate and other of $159 and $361 for the three and nine months ended September 30, 2016, respectively, have been reclassified to U.S. Services to conform to the current presentation. |
| |
(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 September 30, 2017 Compared to Three Months Ended September 30, 2016
International Services
Revenue for the International Services segment increased by $2.7 million for the three months ended September 30, 2017, or 5.3%, compared to the same period in 2016, primarily due to an increase in Middle East onshore activity, European offshore shelf activity, and increased offshore activity in Latin America and Canada, partially offset by declines in revenue attributable to the Africa and Asia Pacific regions.
Adjusted EBITDA for the International Services segment increased by $6.6 million for the three months ended September 30, 2017, or 146.1%, compared to the same period in 2016, primarily driven by increased revenue as well as lower expenses in 2017 due to cost cutting measures.
U.S. Services
Revenue for the U.S. Services segment decreased by $5.0 million for the three months ended September 30, 2017, or 14.7%, compared to the same period in 2016. Onshore services revenue increased by $6.3 million as a result of improved activity from increased rig counts. The offshore business saw a decrease in revenue of $11.3 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 decreased by $5.3 million for the three months ended September 30, 2017, or 88.9%, compared to the same period in 2016 due to overall lower offshore activity and increased pricing pressures partially offset by higher activity in our onshore services.
Tubular Sales
Revenue for the Tubular Sales segment decreased by $12.3 million for the three months ended September 30, 2017, or 61.6%, compared to the same period in 2016 primarily due to lower deepwater activity in the Gulf of Mexico and delays in projects.
Adjusted EBITDA for the Tubular Sales segment decreased by $1.5 million for the three months ended September 30, 2017, 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.
Blackhawk
The Blackhawk segment is comprised solely of the assets we acquired on November 1, 2016. Revenues and Adjusted EBITDA for the segment were $17.6 million and $3.5 million for the three months ended September 30, 2017. See Note 3 - Acquisition and Divestitures in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information on our Blackhawk acquisition.information.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
International Services
RevenueForeign currency gain (loss). Foreign currency gain (loss) for the International Services segment decreasedthree months ended June 30, 2020 changed by $37.6$2.4 million, or 342.9%, to a gain of $1.7 million from a loss of $(0.7) million for the ninethree months ended SeptemberJune 30, 2017, or 19.6%,2019. The change in foreign currency results year-over-year was primarily driven by weakening of the U.S. dollar in the current period as compared to the sameprior year period, in 2016, primarily due to depressed oilpartially against the Norwegian Krone and gas prices which have challenged the economics of our customers' development projects, particularly in Europe and Africa where complex deepwater wells had previously been large revenue drivers. This was partially offset by improved revenue in the Middle East due to increased onshore activity.Euro.
Adjusted EBITDAIncome tax expense. Income tax expense for the International Services segment decreasedthree months ended June 30, 2020 increased by $6.3$5.7 million to $9.0 million from $3.3 million for the ninethree months ended SeptemberJune 30, 2017, or 19.8%, compared to the same period in 2016 primarily due to the decrease in revenue, which was partially offset 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 $30.0 million for the nine months ended September 30, 2017, or 25.0%, compared to the same period in 2016. Onshore services revenue increased by $12.0 million as a result of improved activity from increased rig counts. The offshore business saw a decrease in revenue of $42.0 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 decreased by $14.8 million for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to lower activity in our offshore services, partially offset by an increase in onshore services activity.
Tubular Sales
Revenue for the Tubular Sales segment decreased by $27.4 million for the nine months ended September 30, 2017, or 40.2%, compared to the same period in 20162019, primarily as a result of lower deepwater activitya change in the Gulfjurisdictional sources of Mexico, which more than offset higherincome, namely an increase in revenue in certain regions that apply withholding or revenue based taxes. In addition, the three months ending June 30, 2019 included additional tax benefits recorded to update the previous quarter’s activity to the most recent estimated effective tax rate. 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 revenue rather than profits) and withholding taxes based on revenue; consequently, the relationship between our international markets.pre-tax income from operations and our income tax provision varies from period to period based on the overall effective tax rate for all jurisdictions in which we operate.
Adjusted EBITDASix Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Revenue. Revenue from external customers, excluding intersegment sales, for the Tubular Sales segment increasedsix months ended June 30, 2020 decreased by $0.4$90.5 million, or 30.2%, to $209.6 million from $300.1 million for the ninesix months ended SeptemberJune 30, 2017 compared2019. Revenue decreased across all segments due to the same periodCovid-19 pandemic and the sharp decline in 2016 as itoil prices. Revenue for our segments is discussed separately below under the heading “Operating Segment Results.”
Cost of revenue, exclusive of depreciation and amortization. Cost of revenue for the six months ended June 30, 2020 decreased by $49.9 million, or 23.5%, to $162.7 million from $212.6 million for the six months ended June 30, 2019. The decrease was positively impacteddriven by lower activity levels and mix of work in the TRS, Tubulars, and CE segments.
General and administrative expenses. General and administrative expenses for the six months ended June 30, 2020 decreased by $20.4 million, or 29.4%, to $49.0 million from $69.4 million for the six months ended June 30, 2019 due to the restructuring and cost cutting measures undertakenwe implemented during 2016.2019.
Blackhawk
The Blackhawk segment is comprised solely of the assets we acquired on November 1, 2016. RevenuesDepreciation and Adjusted EBITDAamortization. Depreciation and amortization for the segment were $51.9six months ended June 30, 2020 decreased by $12.2 million, and $7.7or 24.8%, to $37.0 million from $49.2 million for the ninesix months ended SeptemberJune 30, 2017. 2019, as a result of a lower depreciable base and less intangible asset amortization.
Goodwill impairment. We recognized a goodwill impairment of $57.1 million during the six months ended June 30, 2020. There was no goodwill impairment charge during the six months ended June 30, 2019. See Note 3 - Acquisition6—Goodwill and DivestituresIntangible Assets in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information oninformation.
Severance and other charges, net. Severance and other charges, net for the six months ended June 30, 2020 increased by $24.6 million to $25.9 million from $1.3 million for the six months ended June 30, 2019. Severance and other charges, net for the six months ended June 30, 2020 was unfavorably impacted by fixed asset impairment charges of $15.5 million, intangible asset impairments of $4.7 million and severance and other costs of $5.3 million, primarily driven by Covid-19-related activity disruptions and customer spending cuts in response to falling oil prices. See Note 16—Severance and Other Charges, net in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.
Foreign currency gain (loss). Foreign currency loss for the six months ended June 30, 2020 increased by $8.0 million, to $8.2 million compared to $0.2 million for the six months ended June 30, 2019. The change in foreign currency results year-over-year was primarily driven by increased strengthening of the U.S. dollar in the current period as compared to the prior year period, partially due to the impact of Covid-19.
Income tax expense (benefit). Income tax expense (benefit) for the six months ended June 30, 2020 increased by $19.7 million to a benefit of $(6.6) million from an expense of $13.1 million for the six months ended June 30, 2019. The variance in effective tax rates compared to the same period last year is due to the beneficial impact in the current period from the 5-year net operating loss carryback provision included in the recently-enacted Coronavirus Aid, Relief, and Economic Security Act.
Operating Segment Results
The following table presents revenue and Adjusted EBITDA by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | | | June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Revenue: | | | | | | | |
| Tubular Running Services | $ | 62,327 | | | $ | 106,615 | | | $ | 151,824 | | | $ | 204,694 | |
| Tubulars | 8,741 | | | 22,334 | | | 21,283 | | | 40,991 | |
| Cementing Equipment | 15,033 | | | 26,705 | | | 36,486 | | | 54,377 | |
| Total | $ | 86,101 | | | $ | 155,654 | | | $ | 209,593 | | | $ | 300,062 | |
| | | | | | | |
Segment Adjusted EBITDA (1): | | | | | | | |
| Tubular Running Services | $ | 4,049 | | | $ | 25,400 | | | $ | 17,354 | | | $ | 43,135 | |
| Tubulars | 681 | | | 3,934 | | | 2,077 | | | 8,046 | |
| Cementing Equipment | 886 | | | 3,029 | | | 3,430 | | | 6,823 | |
Corporate (2) | (7,308) | | | (15,200) | | | (17,494) | | | (31,183) | |
| $ | (1,692) | | | $ | 17,163 | | | $ | 5,367 | | | $ | 26,821 | |
(1)Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our Blackhawk acquisition.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”).
(2)Includes certain expenses not attributable to a particular segment, such as costs related to support functions and corporate executives.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Tubular Running Services
Revenue for the TRS segment was $62.3 million for the three months ended June 30, 2020, a decrease of $44.3 million, or 41.6%, compared to $106.6 million for the same period in 2019. The decrease was driven by Covid-19-related activity disruptions and customer spending cuts in response to falling oil prices, primarily in the U.S. land and offshore markets. In Africa, transportation issues as a result of Covid-19 and reduced activity levels further contributed to the decline.
Adjusted EBITDA for the TRS segment was $4.0 million for the three months ended June 30, 2020, a decrease of $21.4 million, or 84.3%, compared to $25.4 million for the same period in 2019. Segment results were negatively impacted by the activity declines in Africa and the U.S. land and offshore markets.
Tubulars
Revenue for the Tubulars segment was $8.7 million for the three months ended June 30, 2020, a decrease of $13.6 million, or 61.0%, compared to $22.3 million for the same period in 2019, primarily as a result of lower drilling tools activity and lower tubular sales during the current period, due in part to Covid-19-related activity disruptions and customer spending cuts in response to falling oil prices.
Adjusted EBITDA for the Tubulars segment was $0.7 million for the three months ended June 30, 2020, a decrease of $3.2 million, or 82.1%, compared to $3.9 million for the same period in 2019. Lower drilling tools activity and lower tubular sales impacted the current period.
Cementing Equipment
Revenue for the CE segment was $15.0 million for the three months ended June 30, 2020, a decrease of $11.7 million, or 43.8%, compared to $26.7 million for the same period in 2019, driven by lower drilling activity and lower product sales in the U.S. as a result of falling oil prices.
Adjusted EBITDA for the CE segment was $0.9 million for the three months ended June 30, 2020, a decrease of $2.1 million, or 70.0%, compared to $3.0 million for the same period in 2019, primarily due to lower revenue, particularly in the U.S. offshore market.
Corporate
Adjusted EBITDA for Corporate was a loss of $7.3 million for the three months ended June 30, 2020, an improvement of $7.9 million, or 52.0%, compared to a loss of $15.2 million for the same period in 2019, primarily due to lower costs as a result of restructuring and cost cutting measures.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Tubular Running Services
Revenue for the TRS segment was $151.8 million for the six months ended June 30, 2020, a decrease of $52.9 million, or 25.8%, compared to $204.7 million for the same period in 2019. The decrease was driven by Covid-19-related activity disruptions and customer spending cuts in response to falling oil prices in the U.S., Africa, the Middle East, Canada and the Caribbean.
Adjusted EBITDA for the TRS segment was $17.4 million for the six months ended June 30, 2020, a decrease of $25.7 million, or 59.6%, compared to $43.1 million for the same period in 2019. Segment results were negatively impacted by the activity declines in Africa, the U.S., the Middle East, Canada and the Caribbean.
Tubulars
Revenue for the Tubulars segment was $21.3 million for the six months ended June 30, 2020, a decrease of $19.7 million, or 48.0%, compared to $41.0 million for the same period in 2019, primarily as a result of lower drilling tools activity and lower tubular sales during the current period, due in part to Covid-19-related activity disruptions and customer spending cuts in response to falling oil prices.
Adjusted EBITDA for the Tubulars segment was $2.1 million for the six months ended June 30, 2020, a decrease of $5.9 million, or 73.8%, compared to $8.0 million for the same period in 2019. Lower drilling tools activity and lower tubular sales impacted the current period.
Cementing Equipment
Revenue for the CE segment was $36.5 million for the six months ended June 30, 2020, a decrease of $17.9 million, or 32.9%, compared to $54.4 million for the same period in 2019, driven by lower drilling activity and product sales in the U.S. as a result of falling oil prices.
Adjusted EBITDA for the CE segment was $3.4 million for the six months ended June 30, 2020, a decrease of $3.4 million, or 50.0%, compared to $6.8 million for the same period in 2019, primarily due to lower revenue, particularly in the U.S. offshore market.
Corporate
Adjusted EBITDA for Corporate was a loss of $17.5 million for the six months ended June 30, 2020, an improvement of $13.7 million, or 43.9%, compared to a loss of $31.2 million for the same period in 2019, primarily due to lower costs as a result of restructuring and cost cutting measures.
Liquidity and Capital Resources
Liquidity
At SeptemberJune 30, 2017,2020, we had cash and cash equivalents and short-term investments of $293.9$192.9 million and debt of $0.1 million.no debt. 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. We continually monitor potential capital sources, including equity and debt financing, in order to meet our investment and target liquidity requirements. The Covid-19 pandemic has significantly reduced economic activity levels across the globe, which has resulted in lower demand for oil and natural gas, as well as for our services and products. The reduced demand for our services and products has had, and is likely to continue to have, a material adverse impact on our business, results of operations and financial condition. In consideration of these risks, we are undertaking additional measures to protect liquidity. These measures include increased focus on collection of receivables, enhanced customer credit review, special measures to reduce risks of high-cost inventory items, and enhanced cash reporting requirements.
Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately $38,502,322 remained authorized for repurchases as of June 30, 2020; subject to the limitation set in our shareholder authorization for repurchases of our common stock, which is currently 10% of the common stock outstanding as of April 30, 2020. From the inception of this program in February 2020 through June 30, 2020, we repurchased 570,044 shares of our common stock for a total cost of approximately $1.5 million. This program was suspended during the second quarter of 2020 due to the impacts of Covid-19 and commodity price declines and will be revisited when market conditions stabilize sufficiently to provide greater clarity to anticipated business results.
Our total capital expenditures are estimated at $40.0to range between $25.0 million for 2017. Weand $30.0 million in 2020, of which we expect to spend approximately $22.0 million90% will be used for the purchase and manufacture of equipment and $18.0 million10% for other property, plant and equipment, inclusive of the purchase or construction of facilities.capitalized enterprise resource planning software implementation costs.
The increased estimate is attributable to prior year approved expenditures in progress during 2020 and delivered more quickly than anticipated. The actual amount of capital expenditures for the manufacture of equipment may fluctuate based on market conditions.conditions and timing of deliveries. During the ninesix months ended SeptemberJune 30, 20172020 and 2016, capital2019, cash expenditures related to property, plant and equipment and intangibles were $18.6$20.3 million and $29.8$17.2 million, respectively, all of which were funded from internally generated funds. We believe our cash on hand and cash flows from operations should be sufficient to fund our capital expenditure and liquidity requirements for the remainder of 2017.2020.
We paid dividends on our common stock of $50.4 million, or $0.225 per common share during the nine months ended September 30, 2017. On October 27, 2017, the Board of Managing Directors of the Company, with the approval from the Board of Supervisory Directors of the Company, approved a plan to suspend the Company’s quarterly dividend in order to preserve capital for various purposes, including to invest in growth opportunities.
Credit Facility
We haveAsset Based Revolving Credit Facility
On November 5, 2018, FICV, Frank’s International, LLC and Blackhawk, as borrowers, and FINV, certain of FINV’s subsidiaries, including FICV, Frank’s International, LLC, Blackhawk, Frank’s International GP, LLC, Frank’s International, LP, Frank’s International LP B.V., Frank’s International Partners B.V., Frank’s International Management B.V., Blackhawk Intermediate Holdings, LLC, Blackhawk Specialty Tools, LLC, and Trinity Tool Rentals, L.L.C., as guarantors, entered into a $100.0 millionfive-year senior secured revolving credit facility (the “ABL Credit Facility”) with certainJPMorgan Chase Bank, N.A., as administrative agent (the “ABL Agent”), and other financial institutions as lenders with total commitments of $100.0 million including up to $20.0$15.0 million inavailable for letters of credit and up to $10.0 million in swingline loans, which matures in August 2018 (the “Credit Facility”).credit. Subject to the terms of the ABL Credit Facility, we have the ability to increase the commitments to $150.0$200.0 million. At September 30, 2017 and December 31, 2016, we had $2.8 million and $3.7 million, respectively, in letters of credit outstanding and no outstanding borrowings under this facility. As of September 30, 2017, our ability toThe maximum amount that the Company may borrow under the ABL Credit Facility has been reducedis subject to approximately $30 million as a resultborrowing base, which is based on a percentage of our decreased Adjusted EBITDA. Our borrowing capacitycertain eligible accounts receivable and eligible inventory, subject to customary reserves and other adjustments.
All obligations under the ABL Credit Facility could be further reduced or eliminated dependingare fully and unconditionally guaranteed jointly and severally by FINV’s subsidiaries, including FICV, Frank’s International, LLC, Blackhawk, Frank’s International GP, LLC, Frank’s International, LP, Frank’s International LP B.V., Frank’s International Partners B.V., Frank’s International Management B.V., Blackhawk Intermediate Holdings, LLC, Blackhawk Specialty Tools, LLC, and Trinity Tool Rentals, L.L.C., subject to customary exceptions and exclusions. In addition, the obligations under the ABL Credit Facility are secured by first priority liens on our future Adjusted EBITDA. As a resultsubstantially all of this, our overall liquidity would be diminished.
the assets and property of the borrowers and guarantors, including pledges of equity interests in certain of FINV’s subsidiaries, subject to certain exceptions. Borrowings under the ABL Credit Facility bear interest at ourFINV’s option at either a base rate or an adjusted Eurodollar rate.(a) the Alternate Base rate loans underRate (“ABR”) (as defined therein), calculated as the Credit Facility bear interest at a rate equal to the highergreatest of (i) the prime rate as published inof interest publicly quoted by the Wall Street Journal, as the “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, (ii) the Federal Funds Effective Ratefederal funds effective rate that is subject to a 0.00% interest rate floor plus 0.50% or, and (iii) the adjusted Eurodollar rateone-month Adjusted LIBO Rate (as defined therein) plus 1.00%, or (b) the Adjusted LIBO Rate, 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. The applicable interest rate margin rangingranges from 1.00% to 1.50% per annum for ABR loans and 2.00% to 2.50%. Interest is payable at the end of applicable interest periods per annum for Eurodollar loans except that if the interest period for a Eurodollar loanand, in each case, is longer than three months, interest is paid at the end of each three-month period.based on FINV’s leverage ratio. The unused portion of the ABL Credit Facility is subject to a commitment fee rangingthat varies from 0.250% to 0.375% basedper annum, according to average daily unused commitments under the ABL Credit Facility. Interest on certain leverage ratios.Eurodollar loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on ABR loans is payable monthly in arrears.
The ABL Credit Facility contains various covenants that,and restrictive provisions which limit, subject to certain customary exceptions and thresholds, FINV’s ability to, among other things, limit our ability to grant certain liens,(1) enter into asset sales; (2) incur additional indebtedness; (3) make certaininvestments, acquisitions, or loans and investments, enter into mergerscreate or acquisitions, enter into hedging transactions, change our lines of business, prepayincur liens; (4) pay certain indebtedness, enter into certain affiliate transactions, incur additional indebtednessdividends or make other distributions and (5) engage in certain asset dispositions.transactions with affiliates. The ABL Credit Facility also requires FINV to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 based on the ratio of (a) consolidated EBITDA (as defined therein) minus unfinanced capital expenditures to (b) Fixed Charges (as defined therein), when either (i) an event of default occurs under the ABL Credit Facility or (ii) availability under the ABL Credit Facility falls for at least two consecutive calendar days below the greater of (A) $12.5 million and (B) 15% of the lesser of the borrowing base and aggregate commitments (a “FCCR Trigger Event”). Accounts receivable received by FINV’s U.S. subsidiaries that are parties to the ABL Credit Facility will be deposited into deposit accounts subject
to deposit control agreements in favor of the ABL Agent. After a FCCR Trigger Event, these deposit accounts would be subject to “springing” cash dominion. After a FCCR Trigger Event, the Company will be subject to compliance with the fixed charge coverage ratio and “springing” cash dominion until no default exists under the ABL Credit Facility and availability under the facility for the preceding thirty consecutive days has been equal to at least the greater of (x) $12.5 million and (y) 15% of the lesser of the borrowing base and the aggregate commitments. If FINV fails to perform its obligations under the agreement that results in an event of default, the commitments under the ABL Credit Facility could be terminated and any outstanding borrowings under the ABL Credit Facility may be declared immediately due and payable. The ABL Credit Facility also contains financial covenants, which, amongcross default provisions that apply to FINV’s other things, require us, on a consolidated basis, to maintain: (i) a ratioindebtedness.
As of total consolidated funded debt to adjusted EBITDA (as defined in the Credit Agreement) of not more than 2.5 to 1.0 and (ii) a ratio of EBITDA to interest expense of not less than 3.0 to 1.0.
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) maintain2020, FINV had 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 commitmentborrowings outstanding under the Credit Agreement. As of September 30, 2017, we were in compliance with the covenants included in the Credit Agreement.
CitibankABL 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 outstanding of $9.2 million and guarantees. The credit facility also allows for open ended guarantees. Outstanding amountsavailability of $25.1 million. At this time, due to our expected abilityto fund our capital expenditure and liquidity requirements from cash on hand, we do not anticipate a need to borrow under the credit facility bear interestABL Credit Facility during the remainder 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. As2020. Further, we do not believe that an FCCR Trigger Event will occur in the remainder of September 30, 2017 and December 31, 2016, we had $2.5 million and $2.2 million in letters of credit outstanding.2020.
Tax Receivable Agreement
We entered into a tax receivable agreement (the “TRA”)the TRA with Frank's International C.V. ("FICV")FICV and Mosing Holdings LLC ("Mosing Holdings") in connection with our initial public offering ("IPO").IPO. The TRA generally provides for the payment by usFINV to Mosing Holdings of 85% of the amount of the actual reductions,net cash savings, if any, in payments of U.S. federal, state and local income tax orand franchise tax that FINV actually realizes (or is deemed to realize in certain circumstances) 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, 2016Conversion and (ii) imputed
interest deemed to be paid by usFINV as a result of, and additional tax basis arising from, payments under the TRA. In addition,We will retain the benefit of the remaining 15% of these cash savings, if any. Payments FINV makes under the TRA provides forwill be increased by any interest earnedaccrued from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. WeThe payments under the TRA will retainnot be conditioned upon a holder of rights under the remaining 15%TRA having a continued ownership interest in FINV. As of cash savings, if any. July 28, 2020, based on the best information available to us, the Mosing family collectively owns approximately 49%, of our common shares.
The payment obligations under the TRA are ourFINV’s obligations and are not obligations of FICV. The term of the TRA continuescommenced upon the completion of the IPO and will continue until all such tax benefits that are subject to the TRA have been utilized or expired, unless weFINV elects to exercise our right to terminate the TRA.
If we elect to execute our soleits right to terminate the TRA (or the TRA is terminated due to other circumstances, including our breach of a material obligation thereunder or certain mergers or other changes of control), and FINV makes the termination payment specified by the TRA.
If FINV elects to terminate the TRA early, wewhich it may do in its sole discretion (or if it terminates early as a result of our breach), it would be required to make ana substantial, immediate lump-sum payment equal to the present value of the anticipatedhypothetical future tax benefits subjectpayments that could be required to be paid under 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 Mosing Holdings or its transferees ownbenefits), determined by applying a discount rate equal to the long-term Treasury rate in effect on the applicable date plus 300 basis points. Any early termination date are deemed topayment may be exchanged onmade significantly in advance of the termination date).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 certain circumstances, weFINV may be required to make payments under the TRA that we haveit has entered into with Mosing Holdings. In most circumstances, these payments will be associated with the actual cash savings that we recognize in connection withFINV recognizes from tax benefits resulting from the conversion of Preferred Stock,Conversion, which would reduce the actual tax benefit to us.FINV. If we wereFINV was to elect to exercise ourits sole right to terminate the TRA early or enter into certain change of control transactions, weFINV may incur payment obligations prior to the time weit actually incurincurs any tax benefit. In those circumstances, weFINV would need to pay the amounts out of cash on hand, finance the payments or refrain from triggeringincurring the obligation.obligation (including by not entering into a change of control transaction). Though we do not have any present intention of triggeringincurring an advance payment under the TRA, based on our current liquidity and our expected
ability to access debt and equity financing, we believe weFINV 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 12 - 12—Related Party Transactions in the Notes to Unaudited Condensed Consolidated Financial Statements.Statements.
Cash Flows from Operating, Investing and Financing Activities
Cash flows provided by (used in)from our operations, investing and financing activities are summarized below (in thousands):
| | | | | | | | | | | |
| Six Months Ended | | |
| June 30, | | |
| 2020 | | 2019 |
| Operating activities | $ | 4,146 | | | $ | (17,389) | |
| Investing activities | (11,118) | | | (5,426) | |
| Financing activities | (2,032) | | | (4,526) | |
| (9,004) | | | (27,341) | |
| Effect of exchange rate changes on cash | 6,543 | | | (416) | |
| Net decrease in cash, cash equivalents and restricted cash | $ | (2,461) | | | $ | (27,757) | |
|
| | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
| Operating activities | $ | 24,585 |
| | $ | 27,846 |
|
| Investing activities | (57,243 | ) | | (17,362 | ) |
| Financing activities | (51,634 | ) | | (79,831 | ) |
| | (84,292 | ) | | (69,347 | ) |
| Effect of exchange rate changes on cash | (1,896 | ) | | (3,162 | ) |
| Net decrease in cash and cash equivalents | $ | (86,188 | ) | | $ | (72,509 | ) |
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 provided by (used in) operating activities was $24.6$4.1 million for the ninesix months ended SeptemberJune 30, 20172020 compared to cash flow provided byused in operating activities of $27.8$(17.4) million for the same period in 2016.2019. The decreasechange in cash flow provided byfrom operating activities of $21.5 million was primarily due to lower activity as a result of depressed oil and gas prices, which resulted in a decreasefavorable changes in accounts receivable of $58.1$38.8 million, partially offset by an increased net loss and unfavorable changes in other noncurrent liabilities of $3.8 million and inventories of $13.9 million, partially offset
by a decrease in accrued expenses and other current liabilities of $37.8 million, deferred revenue of $20.4 million and other non-current liabilities of $8.7$2.2 million.
Investing Activities
Cash flow used in investing activities was $57.2$11.1 million for the ninesix months ended SeptemberJune 30, 20172020 compared to $17.4$5.4 million in the same period in 2016.2019. The increasechange in cash flow used infrom investing activities of $5.7 million was primarily related todriven by a $3.0 million increase in the purchase of investments of $59.8 million, partially offset by lower purchases of property, plant, equipment and equipment of $11.2 million and higherintangibles, offset by an increase in proceeds from the sale of assets of $8.5 million during the nine$6.3 million. The six months ended SeptemberJune 30, 2017.2019 investing activities included net proceeds from sales of investments of $8.7 million that did not reoccur in the six months ended June 30, 2020.
Financing Activities
Cash flow used in financing activities was $51.6$2.0 million for the ninesix months ended SeptemberJune 30, 20172020 compared to $79.8$4.5 million in the same period in 2016.2019. The decrease in cash flow used in financing activities of $2.5 million was primarily due to lower dividend paymentsdecreased repayment of $11.9borrowings of $3.5 million and treasury shares withheld of $0.5 million, partially offset by repurchases under our publicly announced share repurchase program of $1.5 million during the absence of a payment to our noncontrolling interest of $8.0 million made in the ninesix months ended SeptemberJune 30, 2016, and lower repayments on borrowings of $6.9 million.2020.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements with the exception of operating leases.purchase obligations.
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 - 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
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2016 Annual Report on Form 10-K. Except for the change below, ourReport. Our exposure to market risk has not changed materially since December 31, 2016.2019.
We account for our derivative activities under the accounting guidance for derivatives and hedging. Derivatives are recognized on the condensed consolidated balance sheets 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. Based on the derivative contracts that were in place as of September 30, 2017, a 10% weakening of the U.S. dollar as compared to the Canadian dollar, Euro, Norwegian krone, and Pound sterling would result in a $2.4 million decrease in the market value of our forward contracts. Please see Item 1. Financial Statements - Note 11 - Derivatives for additional information regarding our foreign currency derivative contracts outstanding in U.S. dollars as of September 30, 2017.
Item 4. Controls and Procedures
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(a) | Evaluation of Disclosure Controls and Procedures. |
(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, 20172020 at the reasonable assurance level.
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(b) | Change in Internal Control Over Financial Reporting. |
(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, 2017,2020, 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, 20172020 and December 31, 2016.2019. 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 - 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 (“FCPA”), 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 StatesU.S. Department of Justice (“DOJ”) and other governmental entities. It is our intent to continue 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 has not indicated that there has been any material impact on our previously filed financial statements, we have 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
As disclosed above, our investigation into possible violations of the investigation,FCPA remains ongoing, and we discovered historical business transactions (and bidswill continue to enter into business transactions) in certain countries that may have been subject to U.S.cooperate with the SEC, DOJ and other international sanctions. We have disclosed this information to variousrelevant governmental entities (including those involved in our ongoing investigation), but atconnection therewith. At this time, we 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 discussed below and 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.
Our business depends on the level of activity in the oil and gas industry, which is significantly affected by oil and gas prices and other factors.
Our business depends on the level of activity in oil and gas exploration, development and production in market sectors worldwide. Oil and gas prices and market expectations of potential changes in these prices significantly affect this level of activity. However, higher commodity prices do not necessarily translate into increased drilling or well construction and completion activity, since customers’ expectations of future commodity prices typically drive demand for our services and products. The availability of quality drilling prospects, exploration success, relative production costs, the stage of reservoir development and political and regulatory environments also affect the demand for our services and products. Worldwide military, political and economic events have in the past contributed to oil and gas price volatility and continue to do so at present. Average daily prices for New York Mercantile Exchange West Texas Intermediate ranged from a high of approximately $63/Bbl in January 2020 to a low of negative $37/Bbl in April 2020. This significant decline in crude oil prices has largely been attributable to the recent actions of Saudi Arabia and Russia, which have resulted in a substantial decrease in oil and natural gas prices, and the global outbreak of Covid-19, which has reduced demand for oil and natural gas because of significantly reduced global and national economic activity. Specifically, in March 2020, Saudi Arabia and Russia failed to agree on a plan to cut production of oil and gas within OPEC and Russia. Subsequently, Saudi Arabia announced plans to increase production to record levels and reduce the prices at which they sell oil. We cannot predict whether or when oil production and economic activities will return to normalized levels. Saudi Arabia and Russia subsequently announced production cuts, but even with such cuts oil prices could remain at current levels, or decline further, for an extended period of time. If current levels are sustained or decline further, certain of our customers may be unable
to pay their vendors and service providers, including us, as a result of the decline in commodity prices. Reduced activity in our areas of operation as a result of decreased capital spending could have a negative long-term impact on our business, even in an environment of stronger oil and natural gas prices.
The demand for our services and products may also be generally affected by numerous factors, including:
•the level of worldwide oil and gas exploration and production;
•the cost of exploring for, producing and delivering oil and gas;
•demand for energy, which is affected by worldwide economic activity and population growth;
•the level of excess production capacity;
•the discovery rate of new oil and gas reserves;
•the ability of OPEC to set and maintain production levels for oil;
•the level of production by non-OPEC countries;
•global or national health concerns, including health epidemics such as the outbreak of Covid-19 at the beginning of 2020;
•the location of oil and gas drilling and production activity, including the relative amounts of activity onshore and offshore;
•the technical specifications of wells including depth of wells and complexity of well design;
•U.S. and global political and economic uncertainty or inactivity, socio-political unrest and instability or hostilities;
•demand for, availability of and technological viability of, alternative sources of energy; and
•technological advances affecting energy exploration, production, transportation and consumption.
Demand for our offshore services and products substantially depends on the level of activity in offshore oil and gas exploration, development and production. The level of offshore activity is historically cyclical and characterized by large fluctuations in response to relatively minor changes in a variety of factors, including oil and gas prices, which could have a material adverse effect on our business, financial condition and results of operations.
A significant amount of our U.S. onshore business is focused on unconventional shale resource plays. The demand for those services and products is substantially affected by oil and gas prices and market expectations of potential changes in these prices. If commodity prices remain depressed, demand for our services and products in the U.S. onshore market could be reduced, which could have a material adverse effect on our business, financial condition and results of operations. Any actual or anticipated reduction in oil or gas prices may reduce the level of exploration, drilling and production activities. Prolonged low oil prices have resulted in softer demand for our products and services and if prices remain at current levels, demand could be further reduced. Additionally, we have reduced pricing in some of our customer contracts in light of the volatility of the oil and gas market.
Furthermore, the oil and gas industry has historically experienced periodic downturns, which have been characterized by reduced demand for oilfield products and services and downward pressure on the prices we charge. A significant downturn in the oil and gas industry has adversely affected the demand for oilfield services and our business, financial condition and results of operations since late 2014. In the first and second quarters of 2020, demand further decreased due to the Covid-19 outbreak and increased oil production out of Saudi Arabia and Russia. With the continued downturn, demand for our products and services has not returned to the levels experienced prior to late 2014. We cannot be assured that there will be a significant recovery in the demand for our products and services to equal or approach levels experienced prior to the downturn.
The recent downturns in 2014 and 2020 in the oil and gas industry have negatively affected, and will likely continue to affect, our ability to accurately predict customer demand, causing us to potentially hold excess or obsolete inventory and experience a reduction in gross margins and financial results.
We may not be able to accurately predict what or how many products our customers will need in the future. Orders are placed with our suppliers based on forecasts of customer demand and, in some instances, we may establish buffer inventories to accommodate anticipated demand. Our forecasts of customer demand are based on multiple assumptions, each of which may introduce errors into the estimates. In addition, many of our suppliers
require a longer lead time to provide products than our customers demand for delivery of our finished products. If we overestimate customer demand, we may allocate resources to the purchase of material or manufactured products that we may not be able to sell when we expect to, if at all. As a result, we would hold excess or obsolete inventory, which would reduce gross margin and adversely affect financial results. We overestimated customer demand for our pipe and connectors inventory, and this resulted in a material impairment charge in 2017. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would miss revenue opportunities and potentially lose market share and damage our customer relationships. In addition, any future significant cancellations or deferrals of product orders or the return of previously sold products could materially and adversely affect profit margins, increase product obsolescence and restrict our ability to fund our operations. Recently, the uncertainty surrounding the duration and spread of the Covid-19 pandemic along with the market volatility due to increased oil production from Russia and Saudi Arabia have further decreased our ability to accurately estimate demand for our services and products. In particular, sporadic suspensions of activity in certain locations due to local outbreaks of Covid-19 are difficult or impossible to anticipate, and can cause interruption of revenue and delays in availability of equipment and personnel for subsequent work, interfering with our ability to plan allocation of resources over time.
We may be exposed to unforeseen risks in our services and product manufacturing, which could adversely affect our results of operations.
We operate a number of manufacturing facilities to support our operations. In addition, we also manufacture certain products, including large OD pipe connectors and cementing products that we sell directly to external customers. The equipment and management systems necessary for such operations may break down, perform poorly or fail, resulting in fluctuations in manufacturing efficiencies. In addition, in the event of an outbreak of Covid-19 among workers at a manufacturing facility, all or some of the workers at the facility might become temporarily unavailable due to required public health measures. Any such disruptions caused by equipment or personnel availability could negatively impact our ability to manufacture and timely deliver products to our customers or our field operations, which could materially and negatively impact the results of our operations. In addition, in such circumstances our customers might cancel purchase orders for failure to timely deliver the products, potentially leading to us holding excess or obsolete inventory, which would reduce gross margin and adversely affect financial results.
Additionally, some of our U.S. onshore business may be conducted under fixed price or “turnkey” contracts. Under fixed price contracts, we agree to perform a defined scope of work for a fixed price. Prices for these contracts are based largely upon estimates and assumptions relating to project scope and specifications, personnel and material needs.
Fluctuations in our manufacturing process and inaccurate estimates and assumptions used in our projects may occur due to factors out of our control, resulting in cost overruns, which we may be required to absorb and could have a material adverse effect on our business, financial condition and results of operations. Such fluctuations or incorrect estimates may affect our ability to deliver services and products to our customers on a timely basis and we may suffer financial penalties and a diminution of our commercial reputation and future product orders, which could adversely affect our business, financial condition and results of operations.
We may be unable to employ a sufficient number of skilled and qualified workers to sustain or expand our current operations.
Our operations require personnel with specialized skills and experience. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force. The demand for skilled workers is high, the supply can be limited in certain jurisdictions, and the cost to attract and retain qualified personnel has increased over the past few years. In addition, we are currently a party to collective bargaining or similar agreements in certain international areas in which we operate, which could result in increases in the wage rates that we must pay to retain our employees. Furthermore, a significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or
both. Finally, the recent Covid-19 pandemic provides an illustrative example of how a pandemic or other health crisis can impact our operations and business by affecting the health of skilled workers and rendering them unable to work or travel. These events may cause our capacity to be diminished, our ability to respond quickly to customer demands or strong market conditions may be inhibited and our growth potential could be impaired, any of which could have a material adverse effect on our business, financial condition and results of operations.
Our operations and our customers’ operations are subject to a variety of governmental laws and regulations that may increase our costs, limit the demand for our services and products or restrict our operations.
Our business and our customers’ businesses may be significantly affected by:
•federal, state and local restrictions on business activity and travel including stay at home orders and quarantines such as those enacted in response to Covid-19;
•federal, state and local and non-U.S. laws and other regulations relating to oilfield operations, worker safety and protection of the environment and natural resources;
•changes in these laws and regulations; and
•the level of enforcement of these laws and regulations.
In addition, we depend on the demand for our services and products from the oil and gas industry. This demand is affected by changing taxes, price controls and other laws and regulations relating to the oil and gas industry in general. For example, the adoption of laws and regulations curtailing exploration and development drilling for oil and gas for economic or other policy reasons could adversely affect our operations by limiting demand for our products. In addition, some non-U.S. countries may adopt regulations or practices that give advantage to indigenous oil companies in bidding for oil leases, or require indigenous companies to perform oilfield services currently supplied by international service companies. To the extent that such companies are not our customers, or we are unable to develop relationships with them, our business may suffer. We cannot determine the extent to which our future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations.
Because of our non-U.S. operations and sales, we are also subject to changes in non-U.S. laws and regulations that may encourage or require hiring of local contractors or require non-U.S. contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. If we fail to comply with any applicable law or regulation, our business, financial condition and results of operations may be adversely affected.
Our business is dependent on capital spending by our customers, and reductions in capital spending in response to declining commodity prices will have a material adverse effect on our business.
Any change in capital expenditures by our customers or reductions in their capital spending could directly impact our business by reducing demand for our products and services and could have a material adverse effect on our business. Our customers are subject to risks which, in turn, could impact our business, including recent volatile oil and gas prices caused by Covid-19 and increased oil production from Russia and Saudi Arabia, difficulty accessing capital on economically advantageous terms and adverse developments in their own business or operations. With respect to national oil company customers, we are also subject to risk of policy, regime and budgetary changes.
We face risks related to natural disasters, which could result in severe property damage or materially and adversely disrupt our operations and affect travel required for our worldwide operations.
Some of our operations involve risks of, among other things, property damage, which could curtail our operations. For example, disruptions in operations or damage to a manufacturing plant could reduce our ability to produce products and satisfy customer demand. In particular, we have offices and manufacturing facilities in Houston, Texas and Houma and Lafayette, Louisiana as well as in various places throughout the Gulf Coast region of the United States. These offices and facilities are particularly susceptible to severe tropical storms, hurricanes and flooding, which may disrupt our operations. If one or more manufacturing facilities we own are damaged by severe
weather or any other disaster, accident, catastrophe or event, our operations could be significantly interrupted. Similar interruptions could result from damage to production or other facilities that provide supplies or other raw materials to our plants or other stoppages arising from factors beyond our control. These interruptions might involve significant damage to, among other things, property, and repairs might take from a week or less for a minor incident to many months or more for a major interruption.
In addition, a portion of our business involves the movement of people and certain parts and supplies to or from foreign locations. Any restrictions on travel or shipments to and from foreign locations, due to the occurrence of natural disasters such as earthquakes, floods or hurricanes, in these locations, could significantly disrupt our operations and decrease our ability to provide services to our customers. If a natural disaster were to impact a location where we have a high concentration of business and resources, our local facilities and workforce could be affected by such an occurrence or outbreak which could also significantly disrupt our operations and decrease our ability to provide services and products to our customers.
Events outside of our control, including a pandemic, epidemic or outbreak of an infectious disease, such as the recent global outbreak of Covid-19, have materially adversely affected, and may further materially adversely affect, our business.
We face risks related to pandemics, epidemics, outbreaks or other public health events that are outside of our control, and could significantly disrupt our operations and adversely affect our financial condition. For example, the recent global outbreak of Covid-19 has reduced demand for oil and natural gas because of significantly reduced global and national economic activity. In addition, the impact of Covid-19 or other public health events may adversely affect our operations or the health of our workforce and the workforces of our customers and service providers by rendering employees or contractors unable to work or unable to access our and their facilities for an indefinite period of time. On March 13, 2020, the United States declared the Covid-19 pandemic a national emergency, and several states, including Texas and Louisiana, and municipalities have declared public health emergencies. Along with these declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of Covid-19 in regions across the United States and the world, including mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Our business involves movement of people and certain parts and supplies to or from foreign locations, and the travel restrictions many governments have imposed due to Covid-19 have significantly disrupted such movement and decreased our ability to provide products and services to our customers. To the extent Covid-19 continues or worsens, governments may impose additional similar restrictions.
In addition, the technology required for the corresponding transition to remote work increases our vulnerability to cybersecurity threats, including threats to gain unauthorized access to sensitive information or to render data or systems unusable, the impact of which may have material adverse effects on our business and operations. See “Item 1A. Risk Factors—Risks Related to Our Business-Our business could be negatively affected by cybersecurity threats and other disruptions” in our Annual Report on Form 10-K for the year ended December 31, 2019.
As the potential impact from Covid-19 is difficult to predict, the extent to which it may negatively affect our operating results or the duration of any potential business disruption is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the severity and duration of Covid-19 and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our operating results.
Customer credit risks could result in losses.
The concentration of our customers in the energy industry may impact our overall exposure to credit risk as customers may be similarly affected by prolonged changes in economic and industry conditions. Those countries that rely heavily upon income from hydrocarbon exports would be hit particularly hard by a drop in oil prices such as the drop that has occurred in recent months. The impact of the most recent downturn on our customers and their ability to continue operations and pay for our services is uncertain. Further, laws in some jurisdictions in which we
operate could make collection difficult or time consuming. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. While we maintain reserves for potential credit losses, we cannot assure such reserves will be sufficient to meet write-offs of uncollectible receivables or that our losses from such receivables will be consistent with our expectations.
Furthermore, some of our customers may be highly leveraged and subject to their own operating and regulatory risks, which increases the risk that they may default on their obligations to us. To the extent one or more of our key customers is in financial distress or commences bankruptcy proceedings, contracts with these customers may be subject to renegotiation or rejection under applicable provisions of the United States Bankruptcy Code and similar international laws. Any material nonpayment or nonperformance by our key customers could adversely affect our business, financial condition and results of operations. The current downturn in our industry as a result of the Covid-19 pandemic along with the market volatility due to increased oil production from Russia and Saudi Arabia has exacerbated these credit risks.
In addition, customers experiencing financial difficulty may delay payment for our products and services. Such delays, even if accounts are ultimately paid in full, could reduce our cash resources available and materially and adversely impact our credit available from suppliers and financial institutions.
Our executive officers and certain key personnel are critical to our business, and these officers and key personnel may not remain with us in the future.
Our future success depends in substantial part on our ability to hire and retain our executive officers and other key personnel who possess extensive expertise, talent and leadership and are critical to our success. The diminution or loss of the services of these individuals, or other integral key personnel affiliated with entities that we acquire in the future, could have a material adverse effect on our business. The public health concerns posed by Covid-19 could pose a risk to our employees and may render our employees unable to work or travel. The extent to which Covid-19 may impact our employees, and subsequently our business, cannot be predicted at this time. We continue to monitor the situation, have actively implemented policies and practices to address the situation, and may adjust our current policies and practices as more information and guidance become available. Furthermore, we may not be able to enforce all of the provisions in agreements we have entered into with certain of our executive officers, and such agreements may not otherwise be effective in retaining such individuals. In addition, we may not be able to retain key employees of entities that we acquire in the future. This may impact our ability to successfully integrate or operate the assets we acquire.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Following is a summary of our repurchases of our common stock during the three months ended June 30, 2020.
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| Period | Total Number of Shares Purchased (1) | Average
Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Program (2) |
| April 1 - April 30 | 197,362 | | $ | 2.43 | | 197,362 | | $ | 38,502,322 | |
| May 1 - May 31 | — | | $ | — | | — | | $ | 38,502,322 | |
| June 1 - June 30 | — | | $ | — | | — | | $ | 38,502,322 | |
| Total | 197,362 | | $ | 2.43 | | 197,362 | | |
(1)This table excludes shares withheld from employees to satisfy tax withholding requirements on equity-based transactions. The Company administers cashless settlements and does not repurchase stock in connection with cashless settlements.
(2)Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately $38,502,322 remained authorized for repurchases as of June 30, 2020; subject to the limitation set in our shareholder authorization for repurchases of our common stock, which is currently 10% of the common stock outstanding as of April 30, 2020. From the inception of this program in February 2020 through June 30, 2020, we repurchased 570,044 shares of our common stock for a total cost of approximately $1.5 million. This program was suspended during the second quarter of 2020.
Item 6. Exhibits
The exhibits required to be filed by Item 6 are set forth in 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.included below.
EXHIBIT INDEX
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Exhibit Number | Description |
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| *101.1 | The following materials from Frank’s International N.V.’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Loss; (iv) Condensed Consolidated Statements of Stockholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements. |
| *104.1 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
† Represents management contract or compensatory plan or arrangement.
* Filed herewith.
** Furnished herewith.
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. |
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| Date: | August 4, 2020 | | FRANK'S INTERNATIONAL N.V. |
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Date: November 2, 2017 | | By: | /s/ Kyle McClureMelissa Cougle |
| | | Kyle McClureMelissa Cougle |
| | | Senior Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
EXHIBIT INDEX
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Exhibit
Number
| Description |
3.1 | Deed of Amendment to Articles of Association of Frank's International N.V., dated May 19, 2016 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-36053), filed on May 25, 2017). |
| Frank's International N.V. 2013 Long-Term Incentive Plan Employee Restricted Stock Unit Agreement (Supplemental Grant Form). |
| Employment Offer Letter for Michael C. Kearney effective as of September 26, 2017. |
| Separation Agreement by and between Douglas G. Stephens, Frank’s International, LLC and Frank’s International N.V., dated October 5, 2017.
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| Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) under the Securities Exchange Act of 1934. |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
| Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
| 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. |