UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31,September 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 001-38441
Apergy CorporationChampionX Corporation
(Exact name of registrant as specified in its charter)

Delaware82-3066826
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
2445 Technology Forest Blvd,Building 4, 12th Floor 
The Woodlands,Texas77381
(Address of principal executive offices)(Zip Code)
(281) 403-5772
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.01 par valueAPYCHXNew York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☑ Accelerated filer☐
Non-accelerated filer☐ Smaller reporting company☐
   Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

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

The registrant had 77,505,318199,833,331 shares of common stock, $0.01 par value, outstanding as of May 7,October 26, 2020.


APERGYCHAMPIONX CORPORATION

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (unaudited)
 
 
Condensed Consolidated Statements of Income (Loss)
1
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
2
 
Condensed Consolidated Balance Sheets
3
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity
4
 
Condensed Consolidated Statements of Cash Flows
56
 
Notes to Condensed Consolidated Financial Statements
67
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1831
 
Executive Overview and Business Outlook
1831
 
Consolidated Results of Operations
2434
 
Segment Results of Operations
2536
 
Capital Resources and Liquidity
2638
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
2942
Item 4.
Controls and Procedures
2943
   
PART II — OTHER INFORMATION
 
Item 1.
Legal Proceedings
3245
Item 1A.
Risk Factors
3245
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
3445
Item 3.
Defaults Upon Senior Securities
3445
Item 4.
Mine Safety Disclosures
3445
Item 5.
Other Information
3445
Item 6.
Exhibits
3446
SIGNATURES
35
EXHIBIT INDEX
3647





CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements are often identified by the words “believe,” “anticipate,” “expect,” “may,” “intend,” “foresee,” “guidance,” “estimate,” “potential,” “outlook,” “plan,” “should,” “would,” “could,” “target,” “forecast” and similar expressions, including the negative thereof. The absence of these words, however, does not mean that the statements are not forward-looking statements. Forward-looking statements are based on our current expectations, beliefs and assumptions concerning future developments and business conditions and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate.

All of our forward-looking statements involve risks, uncertainties (some of which are significant or beyond our control) and assumptions that could cause actual results to materially differ from our historical experience and our present expectations or projections. Known material factors that could cause actual results to materially differ from those contemplated in the forward-looking statements includeare those set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and Part II, Item 1A, “Risk Factors” in thisof our Quarterly Report on Form 10-Q
including for the following:quarterly period ended June 30, 2020.

Demand for our products and services,We wish to caution you not to place undue reliance on any forward-looking statements, which is affected by changes in the price of, and demand for, crude oil and natural gas in domestic and international markets;
Our ability to successfully compete with other companies in our industry;
Our ability to develop and implement new technologies and services,speak only as well as our ability to protect and maintain critical intellectual property assets;
Cost inflation and availability of raw materials;
Changes in federal, state and local legislation and regulations relating to oil and gas development and the potential for related litigation or restrictions on our customers;
Changes in environmental and health and safety laws and regulations which may increase our costs, limit the demand for our products and services or restrict our operations;
Our ability to successfully execute potential acquisitions;
Potential liabilities arising out of the installation or use of our products;
Continuing consolidation within our customers’ industry;
A failure of our information technology infrastructure or any significant breach of security;
Risks relating to our existing international operations and expansion into new geographical markets;
The impact of tariffs and other trade measures on our business;
Changes in domestic and foreign governmental public policies, risks associated with entry into emerging markets, changes in statutory tax rates and unanticipated outcomes with respect to tax audits;
Failure to attract, retain and develop personnel for key management;
Credit risks related to our customer base or the loss of significant customers;
Our ability to protect or obtain intellectual property rights;
Disruptions in the political, regulatory, economic and social conditions of the countries in which we conduct business;
Deterioration in future expected profitability or cash flows and its effect on our goodwill;
Risks relating to improper conduct by any of our employees, agents or business partners;
Fluctuations in currency markets worldwide;
The impact of natural disasters and other unusual weather conditions on our business;
The impact of the novel coronavirus (“COVID-19”) on our business, liquidity, consolidated results of operations and consolidated financial condition;
The impact of our indebtedness on our financial position and operating flexibility; and
Our ability to remediate the material weaknesses in internal control over financial reporting;

date hereof. We undertake no obligation to publicly update, revise or correct any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except to the extent required under the federal securities laws.


PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

APERGYCHAMPIONX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
Three Months Ended March 31,Three Months Ended
September 30,		 Nine Months Ended
September 30,
(in thousands, except per share data)2020 20192020 2019 2020 2019
Product revenue$230,882
 $269,342
$540,825
 $239,867
 $1,014,140
 $775,489
Other revenue30,552
 31,152
Service revenue76,665
 23,979
 138,436
 71,853
Lease and other revenue16,036
 12,993
 41,298
 36,161
Total revenue261,434
 300,494
633,526
 276,839
 1,193,874
 883,503
Cost of goods and services179,095
 197,483
505,066
 184,140
 950,845
 579,033
Gross profit82,339
 103,011
128,460
 92,699
 243,029
 304,470
Selling, general and administrative expense78,143
 64,129
122,156
 68,405
 330,956
 199,221
Goodwill impairment616,271
 —
0
 0
 616,271
 0
Long-lived asset impairment40,980
 1,746
0
 0
 40,980
 1,746
Interest expense, net9,039
 10,527
15,935
 9,590
 36,236
 30,226
Other (income) expense, net(1,633) 1,102
1,663
 (309) 342
 3,469
Income (loss) before income taxes(660,461) 25,507
(11,294) 15,013
 (781,756) 69,808
Provision for (benefit from) income taxes(27,006) 5,569
(3,962) 3,425
 (31,922) 15,274
Net income (loss)(633,455) 19,938
(7,332) 11,588
 (749,834) 54,534
Net income attributable to noncontrolling interest273
 282
Net income (loss) attributable to Apergy$(633,728) $19,656
Less: Net income attributable to noncontrolling interest582
 194
 1,453
 547
Net income (loss) attributable to ChampionX$(7,914) $11,394
 $(751,287) $53,987
          
Earnings (loss) per share attributable to Apergy:   
Earnings (loss) per share attributable to ChampionX:       
Basic$(8.18) $0.25
$(0.04) $0.15
 $(5.73) $0.70
Diluted$(8.18) $0.25
$(0.04) $0.15
 $(5.73) $0.70
Weighted-average shares outstanding:          
Basic77,477
 77,363
199,809
 77,460
 131,064
 77,416
Diluted77,477
 77,640
199,809
 77,573
 131,064
 77,615


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

APERGYCHAMPIONX CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended March 31,Three Months Ended
September 30,		 Nine Months Ended
September 30,
(in thousands)2020 20192020 2019 2020 2019
Net income (loss)$(633,455) $19,938
$(7,332) $11,588
 $(749,834) $54,534
Other comprehensive income (loss), net of tax:          
Foreign currency translation adjustments (1)
(11,052) 1,090
3,782
 (2,900) (1,567) (836)
Pension and other post-retirement benefit plans:   
Net actuarial loss arising during period—
 (323)
Reclassification adjustment for net actuarial loss included in net income99
 67
Reclassification adjustment for settlement losses included in net income—
 355
Total pension and other post-retirement benefit plans (2)
99
 99
Cash flow hedges(862) 0
 (209) 0
Defined pension and other post-retirement benefits adjustments, net(2)
99
 68
 297
 235
Other comprehensive income (loss)(10,953) 1,189
3,019
 (2,832) (1,479) (601)
Comprehensive income (loss)(644,408) 21,127
(4,313) 8,756
 (751,313) 53,933
Comprehensive income attributable to noncontrolling interest273
 282
582
 194
 1,453
 547
Comprehensive income (loss) attributable to Apergy$(644,681) $20,845
Comprehensive income (loss) attributable to ChampionX$(4,895) $8,562
 $(752,766) $53,386
_______________________
(1) Net of income tax (expense) benefit of nil$0 for the three and nine months ended March 31,September 30, 2020 and 2019.
(2) Net of income tax (expense) benefit of $33 and $38$23 for the three months ended March 31,September 30, 2020 and 2019, respectively, and $99 and $202 for the nine months ended September 30, 2020 and 2019, respectively.


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

APERGYCHAMPIONX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)March 31, 2020 December 31, 2019September 30, 2020 December 31, 2019
Assets      
Cash and cash equivalents$53,636
 $35,290
$171,462
 $35,290
Receivables, net of allowances of $11,279 in 2020 and $8,072 in 2019218,903
 219,874
Receivables, net516,245
 219,874
Inventories, net206,948
 211,342
471,331
 211,342
Prepaid expenses and other current assets25,016
 26,934
73,713
 26,934
Total current assets504,503
 493,440
1,232,751
 493,440
Property, plant and equipment, net of accumulated depreciation of $431,760 in 2020 and $426,722 in 2019235,114
 248,181
Property, plant and equipment, net of accumulated depreciation of $495,380 in 2020 and $426,722 in 2019868,111
 248,181
Operating lease right-of-use assets118,993
 24,289
Goodwill291,718
 911,113
660,329
 911,113
Intangible assets, net183,926
 238,707
509,789
 238,707
Other non-current assets29,981
 31,384
63,759
 7,095
Total assets$1,245,242
 $1,922,825
$3,453,732
 $1,922,825
Liabilities and Equity      
Current portion of long-term debt$31,470
 $4,845
Accounts payable$118,791
 $120,291
262,092
 120,291
Accrued compensation and employee benefits30,770
 38,470
60,566
 38,470
Current portion of finance lease liabilities4,696
 4,845
Current portion of operating lease liabilities33,888
 7,620
Accrued distributor fees36,386
 0
Accrued expenses and other current liabilities44,495
 36,075
150,005
 28,455
Total current liabilities198,752
 199,681
574,407
 199,681
Long-term debt559,532
 559,821
989,690
 559,821
Deferred income taxes55,059
 84,060
141,047
 84,060
Operating lease liabilities80,261
 19,419
Other long-term liabilities39,605
 43,049
82,295
 23,630
Total liabilities852,948
 886,611
1,867,700
 886,611
Stockholders’ equity: 
  
 
  
Common stock (2.5 billion shares authorized, $0.01 par value)
77.5 million shares issued and outstanding in 2020 and 2019
775
 775
Common stock (2.5 billion shares authorized, $0.01 par value)
199.8 million shares and 77.5 million shares issued and outstanding in 2020 and 2019, respectively
1,998
 775
Capital in excess of par value of common stock971,235
 969,174
2,288,930
 969,174
Retained earnings (accumulated deficit)(528,253) 107,048
(645,863) 107,048
Accumulated other comprehensive loss(54,990) (44,037)(45,516) (44,037)
Total stockholders’ equity388,767
 1,032,960
1,599,549
 1,032,960
Noncontrolling interest3,527
 3,254
(13,517) 3,254
Total equity392,294
 1,036,214
1,586,032
 1,036,214
Total liabilities and equity$1,245,242
 $1,922,825
$3,453,732
 $1,922,825

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

APERGYCHAMPIONX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

Common Stock        Common stock        
(in thousands)Shares 
Par
Value
 Capital in Excess of Par Value Retained Earnings 
Accum.
Other
Comp.
Loss
 Non-controlling Interest TotalShares 
Par
Value
 Capital in Excess of Par Value Retained Earnings (Accum. Deficit) 
Accum.
Other
Comp.
Loss
 Non-controlling Interest Total
December 31, 201877,353
 $774
 $960,773
 $54,884
 $(42,906) $2,458
 $975,983
Net income—
 —
 —
 19,656
 —
 282
 19,938
December 31, 201977,460
 $775
 $969,174
 $107,048
 $(44,037) $3,254
 $1,036,214
Cumulative effect of accounting changes, net of tax (Note 3)—
 —
 —
 (1,573) —
 —
 (1,573)
Net income (loss)—
 —
 —
 (633,728) —
 273
 (633,455)
Other comprehensive loss—
 —
 —
 —
 (10,953) —
 (10,953)
Stock-based compensation44
 0
 2,429
 —
 —
 —
 2,429
Taxes withheld on issuance of stock-based awards—
 —
 (368) —
 —
 —
 (368)
March 31, 202077,504
 $775
 $971,235
 $(528,253) $(54,990) $3,527
 $392,294
Issuance of common stock related to the Merger122,237
 1,223
 1,262,708
 —
 —
 —
 1,263,931
Issuance of replacement awards related to the Merger—
 —
 43,964
 —
 —
 —
 43,964
Non-controlling interest acquired in the Merger—
 —
 —
 —
 —
 (16,015) (16,015)
Net income (loss)—
 —
 —
 (109,645) —
 598
 (109,047)
Other comprehensive income—
 —
 —
 —
 6,455
 —
 6,455
Stock-based compensation67
 —
 5,433
 —
 —
 —
 5,433
Taxes withheld on issuance of stock-based awards—
 —
 (244) —
 —
 —
 (244)
Distributions to noncontrolling interest—
 —
 —
 —
 —
 (2,200) (2,200)
Other—
 —
 —
 37
 —
 (12) 25
June 30, 2020199,808
 $1,998
 $2,283,096
 $(637,861) $(48,535) $(14,102) $1,584,596
Net income (loss)—
 —
 —
 (7,914) —
 582
 (7,332)
Other comprehensive income—
 —
 —
 —
 1,189
 —
 1,189
—
 —
 —
 —
 3,019
 —
 3,019
Stock-based compensation39
 —
 2,285
 —
 —
 —
 2,285
12
 —
 5,856
 —
 —
 —
 5,856
Taxes withheld on issuance of stock-based awards—
 —
 (719) —
 —
 —
 (719)—
 —
 (28) —
 —
 —
 (28)
Other—
 —
 —
 —
 —
 14
 14
—
 —
 6
 (88) —
 3
 (79)
March 31, 201977,392
 $774
 $962,339
 $74,540
 $(41,717) $2,754
 $998,690
September 30, 2020199,820
 $1,998
 $2,288,930
 $(645,863) $(45,516) $(13,517) $1,586,032


 Common Stock        
(in thousands)Shares 
Par
Value
 Capital in Excess of Par Value Retained Earnings 
Accum.
Other
Comp.
Loss
 Non-controlling Interest Total
December 31, 201877,353
 $774
 $960,773
 $54,884
 $(42,906) $2,458
 $975,983
Net income—
 —
 —
 19,656
 —
 282
 19,938
Other comprehensive income—
 —
 —
 —
 1,189
 —
 1,189
Stock-based compensation39
 —
 2,285
 —
 —
 —
 2,285
Taxes withheld on issuance of stock-based awards—
 —
 (719) —
 —
 —
 (719)
Other—
 —
 —
 —
 —
 14
 14
March 31, 201977,392
 $774
 $962,339
 $74,540
 $(41,717) $2,754
 $998,690
Net income—
 —
 —
 22,937
 —
 71
 23,008
Other comprehensive income—
 —
 —
 —
 1,042
 —
 1,042
Stock-based compensation67
 1
 2,735
 —
 —
 —
 2,736
Taxes withheld on issuance of stock-based awards—
 —
 (1,080) —
 —
 —
 (1,080)
Other—
 —
 —
 —
 —
 (14) (14)
June 30, 201977,459
 $775
 $963,994
 $97,477
 $(40,675) $2,811
 $1,024,382
Net income—
 —
 —
 11,394
 —
 194
 11,588
Other comprehensive loss—
 —
 —
 —
 (2,832) —
 (2,832)
Stock-based compensation—
 —
 2,524
 —
 —
 —
 2,524
Other—
 —
 (42) —
 —
 

 (42)
September 30, 201977,459
 $775
 $966,476
 $108,871
 $(43,507) $3,005
 $1,035,620

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



CHAMPIONX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Common stock        
(in thousands)Shares 
Par
Value
 Capital in Excess of Par Value Retained Earnings (Accum. Deficit) 
Accum.
Other
Comp.
Loss
 Non-controlling Interest Total
December 31, 201977,460
 $775
 $969,174
 $107,048
 $(44,037) $3,254
 $1,036,214
Cumulative effect of accounting changes, net of tax (Note 2)—
 —
 —
 (1,573) —
 —
 (1,573)
Net income (loss)—
 —
 —
 (633,728) —
 273
 (633,455)
Other comprehensive loss—
 —
 —
 —
 (10,953) —
 (10,953)
Stock-based compensation44
 —
 2,429
 —
 —

—
 2,429
Taxes withheld on issuance of stock-based awards—
 —
 (368) —
 —
 —
 (368)
March 31, 202077,504
 $775
 $971,235
 $(528,253) $(54,990) $3,527
 $392,294

 Nine Months Ended
September 30,
(in thousands)2020 2019
Cash provided by (used for) operating activities:   
Net income (loss)$(749,834) $54,534
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation101,434
 51,126
Amortization47,827
 38,504
Stock-based compensation13,718
 7,545
Loss (gain) on disposal of fixed assets3,685
 (846)
Loss on goodwill and long-lived asset impairment657,251
 1,746
Loss on sale of business0
 2,475
Provision for losses on accounts receivable2,945
 122
Provision for inventory obsolescence and write-downs15,626
 (997)
Amortization of deferred loan costs and accretion of discount2,480
 1,943
Deferred income taxes(34,318) (4,439)
Employee benefit plan expense1,606
 1,506
Other(1,696) 386
Changes in operating assets and liabilities (net of effects of foreign exchange):   
Receivables91,204
 14,133
Inventories62,225
 13,232
Prepaid expenses and other current assets17,737
 (16,270)
Accounts payable(48,519) (16,861)
Accrued compensation and employee benefits1,518
 (3,651)
Accrued expenses and other liabilities12,846
 14,121
Leased assets(7,799) (34,305)
Other(504) (614)
Net cash provided by operating activities189,432
 123,390
    
Cash provided by (used for) investing activities: 
  
Capital expenditures(32,169) (31,589)
Acquisitions, net of cash acquired57,588
 (12,500)
Proceeds from sale of fixed assets9,295
 2,954
Payment on sale of business0
 (2,194)
Net cash provided by (used for) investing activities34,714
 (43,329)
    
Cash provided by (used for) financing activities: 
  
Proceeds from long-term debt125,000
 36,500
Payment of debt issue costs(4,356) 0
Repayment of long-term debt(206,713) (111,500)
Distribution to noncontrolling interest(2,200) 0
Payment of finance lease obligations(4,536) (4,108)
Payments related to taxes withheld on stock-based compensation(640) (1,841)
Net cash used for financing activities(93,445) (80,949)
    
Effect of exchange rate changes on cash and cash equivalents5,471
 (317)
    
Net increase (decrease) in cash and cash equivalents136,172
 (1,205)
Cash and cash equivalents at beginning of period35,290
 41,832
Cash and cash equivalents at end of period$171,462
 $40,627
The accompanying notes are an integral part of the condensed consolidated financial statements.

APERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months Ended March 31,
(in thousands)2020 2019
Cash provided (required) by operating activities:   
Net income (loss)$(633,455) $19,938
Adjustments to reconcile net income to net cash provided (required) by operating activities:   
Depreciation16,970
 17,071
Amortization12,862
 12,844
Stock-based compensation2,429
 2,285
Loss (gain) on sale of fixed assets(386) 12
Loss on goodwill and long-lived asset impairment657,251
 1,746
Provision for losses on accounts receivable2,427
 (117)
Amortization of deferred loan costs and accretion of discount708
 648
Deferred income taxes(28,417) (5,856)
Employee benefit plan expense383
 770
Other349
 109
Changes in operating assets and liabilities (net of effects of foreign exchange):   
Receivables(6,740) (7,260)
Inventories6,587
 664
Prepaid expenses and other current assets4,129
 4,096
Accounts payable3,068
 (8,160)
Accrued compensation and employee benefits(9,799) (10,584)
Accrued expenses and other liabilities12,153
 11,576
Leased assets(7,972) (20,501)
Other(3,325) 629
Net cash provided by operating activities29,222
 19,910
    
Cash provided (required) by investing activities: 
  
Capital expenditures(7,467) (9,718)
Proceeds from sale of fixed assets721
 2,475
Net cash required by investing activities(6,746) (7,243)
    
Cash provided (required) by financing activities: 
  
Payment of debt issue costs(1,284) —
Repayment of long-term debt—
 (25,000)
Payment of finance lease obligations(1,492) (1,234)
Payments related to taxes withheld on stock-based compensation(368) —
Net cash required by financing activities(3,144) (26,234)
    
Effect of exchange rate changes on cash and cash equivalents(986) 89
    
Net increase (decrease) in cash and cash equivalents18,346
 (13,478)
Cash and cash equivalents at beginning of period35,290
 41,832
Cash and cash equivalents at end of period$53,636
 $28,354
The accompanying notes are an integral part of the condensed consolidated financial statements.

APERGYCHAMPIONX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1—BASIS OF PRESENTATION

ApergyChampionX Corporation (“Apergy”) is a leading provider ofglobal leader in chemistry solutions and highly engineered equipment and technologies that help companies drill for and produce oil and gas safely and efficiently around the world. Our products provide efficient functioning throughout the lifecycle of a well—from drilling to completion to production. We report our results of operations in the following reporting segments: Production & Automation Technologies and Drilling Technologies. Our Production & Automation Technologies segment offerings consist of artificial lift equipment and solutions, including rod pumping systems, electric submersible pump systems, progressive cavity pumps and drive systems and plunger lifts, as well as a full automation and digital offerings consisting of equipment, software and Industrial Internet of Things solutions for downhole monitoring, wellsite productivity enhancement and asset integrity management. Our Drilling Technologies segment offerings provide market leading polycrystalline diamond cutters and bearings that result in cost effective and efficient drilling.

Separation and DistributionUnless the context requires otherwise, references in this report to “we,” “us,” “our,” “the Company,” or “ChampionX” mean ChampionX Corporation, together with our subsidiaries where the context requires.

On May 9, 2018, Apergy became an independent, publicly tradedJune 3, 2020, the Company and Ecolab Inc. (“Ecolab”) completed a Reverse Morris Trust transaction in which Ecolab transferred their upstream energy business to Champion X Holding, Inc. (“legacy ChampionX”) and, thereafter, distributed all of the shares of legacy ChampionX common stock to certain Ecolab stockholders (“the Distribution”). Immediately following the Distribution, a wholly owned subsidiary of the Company merged with and into legacy ChampionX, with legacy ChampionX continuing as the surviving company in the Merger and as a resultwholly owned subsidiary of the distribution by DoverCompany (“the Merger”). In association with the completion of the Merger, the Company has changed its name from Apergy Corporation (“Dover”Apergy”) of 100% of the outstandingto ChampionX Corporation, and common stock of Apergy to Dover’s stockholders. Dover’s Board of Directors approved the distribution on April 18, 2018 and Apergy’s Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission (“SEC”) on April 19, 2018. On May 9, 2018, Dover’s stockholders of record as of the close of business on the record date of April 30, 2018 received one share of Apergy stock for every two shares of Dover stock held at the close of business on the record date (the “Separation”). Following the Separation, Dover retained no ownership interest in Apergy. Apergy’s common stock began “regular-way” trading on the New York Stock Exchange (“NYSE”) under the “APY” symbol “CHX”.

As a result of the Merger, the results of operations of legacy ChampionX have been reflected in our accompanying condensed consolidated financial statements from the closing date of the Merger through September 30, 2020. Results for the periods prior to June 3, 2020 reflect the financial and operating results of Apergy and do not include the financial and operating results of legacy ChampionX. See Note 2—Merger Transaction for additional information on May 9, 2018.the Merger.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ApergyChampionX have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted. Therefore, these financial statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2019.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions that we may undertake in the future, actual results may differ from our estimates. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments unless otherwise specified) necessary for a fair statement of our financial condition and results of operations as of and for the periods presented. Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these financial statements may not be representative of the results that may be expected for the year ending December 31, 2020.

Noncontrolling InterestChange in Accounting Estimate

ForDuring the quarters ended March 31, 2020,second quarter, we entered into new commercial agreements, which changed the economics of the leased asset program of our Electrical Submersible Pump (“ESP”) subsidiary in our Production & Automation Technologies segment. As such, we re-evaluated the estimated useful life and 2019, we did not declare or pay distributionssalvage value of our assets based on the combination of new commercial contracts and historical operating trends related to the noncontrolling interest holderaging of our lease fleet, including functioning assets beyond original expected life. Based on our analysis, effective April 1, 2020, we changed our estimate of useful life and salvage values for certain equipment to better reflect the useful life and estimated values of these assets at the end of their useful life. The estimated useful life, previously estimated at 12 months, was increased to 18 months. The estimated salvage value of the equipment, previously estimated at 50%, was decreased to 0%. The effect of the changes in Apergy Middle East Services LLC,estimate for the three and nine months ended September 30, 2020, was an increase in depreciation expense of $8.6 million and $26.2 million, respectively, a subsidiarydecrease in net income of $5.7 million and $17.6 million, and a decrease in basic and diluted earnings per share of $0.03 per share and $0.13 per share, respectively.

Reclassifications

Certain prior period amounts have been reclassified to conform to the Sultanatepresentation of Oman. We have a commission arrangement with our noncontrolling interest for 5% of certain annual product sales.the current period financial statements. These reclassifications had no effect on the previously reported net loss.

Revisions and Reclassifications

We revised our previously issued financial statements for the three and nine months ended March 31,September 30, 2019, for the correction of immaterial errors related to: (i) the assessing and recording of liabilities for state sales tax and associated penalties and interest, primarily resulting in an understatement of our selling, general, and administrative expense and interest expense for the three

and nine months ended March 31,September 30, 2019; and (ii) previously recorded amounts including, but not limited to, the write-off of inventory and leased assets, timing of revenue recognition, and revenue classification, that the Company concluded were immaterial to our previously filed condensed consolidated financial statements. See the following table for the impact of the corrections on our condensed consolidated financial statements:

Condensed Consolidated Statement of Income
Three Months Ended March 31, 2019Three Months Ended
September 30, 2019
(in thousands, except per share data)As Reported Adjustments As RevisedAs Reported Adjustments As Revised
Product revenue(1)$269,534
 $(192) $269,342
$244,651
 $(4,784) $239,867
Other revenue (1)
32,157
 (1,005) 31,152
Service revenue (1)
20,708
 3,271
 23,979
Lease and other revenue (1)
13,022
 (29) 12,993
Total revenue301,691
 (1,197) 300,494
278,381
 (1,542) 276,839
Cost of goods and services196,142
 1,341
 197,483
186,862
 (2,722) 184,140
Gross profit105,549
 (2,538) 103,011
91,519
 1,180
 92,699
Selling, general and administrative expense63,601
 528
 64,129
68,813
 (408) 68,405
Long-lived asset impairment (2)
1,746
 —
 1,746
Interest expense, net10,474
 53
 10,527
9,537
 53
 9,590
Other expense, net1,090
 12
 1,102
Income before income taxes28,638
 (3,131) 25,507
13,478
 1,535
 15,013
Provision for (benefit from) income taxes6,069
 (500) 5,569
Provision for income taxes3,059
 366
 3,425
Net income22,569
 (2,631) 19,938
10,419
 1,169
 11,588
Net income attributable to noncontrolling interest282
 —
 282
Net income attributable to Apergy$22,287
 $(2,631) $19,656
Net income attributable to ChampionX$10,225
 $1,169
 $11,394
          
Earnings (loss) per share attributable to Apergy:     
Earnings per share attributable to ChampionX:     
Basic$0.29
 $(0.04) $0.25
$0.13
 $0.02
 $0.15
Diluted$0.29
 $(0.04) $0.25
$0.13
 $0.02
 $0.15
          
Comprehensive income$23,758
 $(2,631) $21,127
$7,587
 $1,169
 $8,756
Comprehensive income attributable to Apergy$23,476
 $(2,631) $20,845
Comprehensive income attributable to ChampionX$7,393
 $1,169
 $8,562
_______________________
(1) Includes “Service revenue” and “Lease and other revenue”Certain as reported in the condensed consolidated statements of income for the three months ended March 31, 2019.
(2) Long-lived asset impairment hasamounts have been reclassified from selling, general, and administrative expense to conformfor consistency with the with our current period presentation of long-lived asset impairmentpresentation. These reclassifications had no effect on the condensed consolidated statements ofreported net income (loss).



 Nine Months Ended
September 30, 2019
(in thousands, except per share data)As Reported Adjustments As Revised
Product revenue (1)
$787,698
 $(12,209) $775,489
Service revenue (1)
62,056
 9,797
 71,853
Lease and other revenue (1)
36,372
 (211) 36,161
Total revenue886,126
 (2,623) 883,503
Cost of goods and services579,289
 (256) 579,033
Gross profit306,837
 (2,367) 304,470
Selling, general and administrative expense199,044
 177
 199,221
Long-lived asset impairment (1)
1,746
 0
 1,746
Interest expense, net30,068
 158
 30,226
Income before income taxes72,510
 (2,702) 69,808
Provision for income taxes15,672
 (398) 15,274
Net income56,838
 (2,304) 54,534
Net income attributable to ChampionX$56,291
 $(2,304) $53,987
      
Earnings per share attributable to ChampionX:     
Basic$0.73
 $(0.03) $0.70
Diluted$0.73
 $(0.03) $0.70
      
Comprehensive income$56,237
 (2,304) $53,933
Comprehensive income attributable to ChampionX$55,690
 (2,304) $53,386


(1) Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported net income (loss).
Condensed Consolidated Statement of Changes in Stockholders’ Equity
March 31, 2019September 30, 2019
(in thousands)As Reported Adjustments As RevisedAs Reported Adjustments As Revised
Stockholders’ Equity:    
    
Capital in excess of par value of common stock$966,938
 $(4,599) $962,339
$971,075
 $(4,599) $966,476
Retained earnings76,454
 (1,914) 74,540
110,458
 (1,587) 108,871
Total equity1,005,203
 (6,513) 998,690
1,041,806
 (6,186) 1,035,620

(in thousands)As Reported Adjustments As Revised
Total equity at December 31, 2018$981,527
 $(5,544) $975,983
Cumulative effect of accounting changes(1,662) 1,662
 0
Net income22,569
 (2,631) 19,938
Total equity at March 31, 20191,005,203
 (6,513) 998,690
Net income23,850
 (842) 23,008
Total equity at June 30, 20191,031,737
 (7,355) 1,024,382
Net income10,419
 1,169
 11,588
September 30, 20191,041,806
 (6,186) 1,035,620



(in thousands)As Reported Adjustments As Revised
Total equity at December 31, 2018$981,527
 $(5,544) $975,983
Cumulative effect of accounting changes(1,662) 1,662
 —
Net income22,569
 (2,631) 19,938
Total equity at March 31, 20191,005,203
 (6,513) 998,690

Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2019Nine Months Ended September 30, 2019
(in thousands)As Reported Adjustments As RevisedAs Reported Adjustments As Revised
Cash provided (required) by operating activities:

     
Cash provided by (used for) operating activities:     
Net income$22,569
 $(2,631) $19,938
$56,838
 $(2,304) $54,534
Adjustments to reconcile net income to net cash provided (required) by operating activities:

          
Depreciation17,080
 (9) 17,071
Deferred income taxes(5,366) (490) (5,856)(3,717) (722) (4,439)
Loss (gain) on sale of fixed assets (1)
12
 —
 12
Gain on sale of fixed assets (1)
(846) 0
 (846)
Provision for losses on accounts receivable (1)
(117) —
 (117)122
 0
 122
Amortization of deferred loan costs and accretion of discount (1)
648
 —
 648
1,943
 0
 1,943
Other131
 (22) 109
386
 0
 386
Changes in operating assets and liabilities (net of effects of foreign exchange):

          
Receivables(8,462) 1,202
 (7,260)12,218
 1,915
 14,133
Inventories(2,229) 2,893
 664
11,455
 1,777
 13,232
Prepaid expenses and other current assets(16,742) 472
 (16,270)
Accounts payable(6,279) (1,881) (8,160)(15,532) (1,329) (16,861)
Accrued compensation and employee benefits(12,827) 2,243
 (10,584)(3,651) 0
 (3,651)
Accrued expenses and other liabilities13,849
 (2,273) 11,576
14,288
 (167) 14,121
Leased assets(21,460) 959
 (20,501)(34,645) 340
 (34,305)
Other620
 9
 629
(634) 20
 (614)
_______________________
(1) Each of these amounts were included within “Other”other on the condensed consolidated statements of cash flows reported for the threenine months ended March 31,September 30, 2019. These amounts have been reclassified consistent with the presentation in the current reporting period.

NOTE 2—MERGER TRANSACTION

On June 3, 2020 we completed the acquisition of the legacy ChampionX business through the merger of one of our wholly owned subsidiaries with legacy ChampionX. Immediately prior to the Merger, Ecolab transferred their upstream energy business to legacy ChampionX. Pursuant to the Merger, shares of Ecolab common stock that were tendered through an exchange offer were converted into common shares of legacy ChampionX on a 1-for-24.6667 basis, with each share of legacy ChampionX automatically converting into one share of the Company. To complete the acquisition, we issued 122.2 million shares of common stock, at a share price of $10.34 per share, in exchange for 100% equity ownership of legacy ChampionX. The transaction resulted in legacy ChampionX equityholders owning approximately 62% of the Company on a fully diluted basis, with equityholders of the Company prior to the Merger owning approximately 38% on a fully diluted basis.

Acquisition-related costs associated with the Merger were expensed as incurred and total $3.1 million and $60.9 million for the three and nine months ended September 30, 2020, respectively, and are included in selling, general and administrative expense in our condensed consolidated statements of income (loss). The acquisition-related transaction costs consisted primarily of investment banker fees and legal and accounting costs. 

The Merger constitutes a business combination, with the Company (formerly known as Apergy) treated as the accounting acquirer and legacy ChampionX treated as the acquired company for accounting purposes.

Legacy ChampionX provides on-site, technology-driven chemistry programs and value-enabling solutions and services to the global upstream oil and natural gas industry. 


Preliminary Purchase Price Allocation

The acquisition-date fair value of the consideration transferred consisted of the following:
(in thousands) 
Equity consideration$1,263,931
Replacement awards attributable to pre-combination services(1)
43,964
Unfavorable supply agreement(2)
44,000
Favorable supply agreement(2)
(55,000)
Fair value of consideration transferred$1,296,895

_______________________
(1) Represents the fair value of the replacement equity awards to the extent services were provided by employees of legacy ChampionX prior to closing. See Note 12—Equity And Cash Incentive Programs for additional information about the replacement equity awards.
(2) As part of the Merger, the Company entered into a Cross Supply and Product Transfer Agreement with Ecolab in which over a period of approximately three years from the merger date, certain products will be manufactured by one party for the other. The cross selling prices in which each party will transfer their products, and include a take-or-pay element, have been set forth within this agreement and are not reflective of market terms. As a result, we recognized an intangible asset recorded at fair value for the favorable terms and a liability recorded at fair value for the unfavorable terms. The intangible asset will be amortized on a straight-line basis over a three-year period into cost of goods and services and the liability will be amortized as a component of product revenue.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their preliminary fair value estimates as of the acquisition date. The measurements of assets acquired and liabilities assumed, other than debt which was measured using Level 2 measurements, are based on inputs that are not observable in the market and thus represent Level 3 inputs. The excess of the purchase price over such fair values was recorded as goodwill. The purchase price allocation is based upon a preliminary valuation only and will be finalized upon completion of certain valuation procedures. Our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas in which the preliminary purchase price allocation is not yet finalized relate to the fair values of certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, certain working capital items, deferred income taxes and residual goodwill. We will complete the purchase price allocation and valuation during the 12-month period following the Merger date.

The following table provides the preliminary allocation of the purchase price as of the acquisition date.
(in thousands) 
Cash and cash equivalents$57,588
Receivables392,409
Inventories339,214
Prepaid expenses and other current assets62,011
Property, plant, and equipment690,047
Identifiable intangible assets(1)
305,000
Other non-current assets156,002
Total identifiable assets acquired2,002,271
Accounts payable183,445
Other current liabilities(1)
170,433
Long-term debt (2)
537,000
Deferred tax liabilities93,290
Other liabilities(1)
104,980
Total liabilities assumed1,089,148
Net identifiable assets acquired913,123
Add: Negative fair value of non-controlling interests16,052
Goodwill367,720
Total net assets acquired$1,296,895

_______________________
(1) The fair value of the consideration transferred related to the Favorable and Unfavorable supply agreements has been excluded.
(2) In connection with the Merger, we assumed a term loan from legacy ChampionX, of which approximately $26.9 million has been classified as short-term representing the mandatory amortization payments due within the next twelve months. See Note 6—Debt for further information.

Summary of Significant Fair Value Methods

Inventories
Acquired inventory is comprised of raw materials and finished goods.  The preliminary fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort. The preliminary fair value of raw materials and supplies was determined based on replacement cost which approximates historical carrying value.  The preliminary fair value step-up of $13.6 million of inventories measured on a First In First Out (“FIFO”) basis is amortized to cost of goods and services in the condensed consolidated financial statements as the inventory is sold, which is expected to be a period of three months from the acquisition date.  For inventories measured on a Last In First Out (“LIFO”) basis, the acquired inventory becomes the LIFO base layer inventory.

Property, Plant, and Equipment
The preliminary fair value of identifiable fixed assets was calculated using a combination of valuation approaches, primarily including the cost approach which adjusts estimates of replacement cost for the age, condition and utility of the associated assets, as well as the market approach to value asset types where market comparable data is available, and is summarized below:
(in thousands)Fair Value Useful Life (years)
Land and land improvements$125,733
 -
Buildings and leasehold improvements207,427
 5 to 40
Machinery, equipment and other337,374
 3 to 20
Capitalized software and computer hardware19,513
 3 to 7
Total property, plant, and equipment acquired$690,047
  


Identifiable Intangible Assets

The preliminary fair values of trademarks, trade names, and developed technology were determined using a relief from royalty methodology which estimates cost savings generated by a company related to the ownership of an asset for which otherwise have had to pay royalties or license fees on revenues earned through the use of the asset. Customer relationships were determined using the multi-period excess earnings method which involves isolating the net earnings attributable to the asset being measured based on the present value of the incremental after-tax cash flows attributable solely to the intangible assets over its remaining useful life. Preliminary fair values are summarized below:
(in thousands)Fair Value Useful Life (years)
Trademarks and trade names$25,000
 15
Developed technology115,000
 7
Customer relationships165,000
 15
Total identifiable intangible assets acquired305,000
 
Favorable supply agreements55,000
 3
Total identifiable intangible assets recognized$360,000
  


The weighted average amortization period for identifiable intangible assets recognized is 10.5 years.

Leases

Lease-related assets and liabilities acquired were remeasured at the present value of the future minimum lease payments over the remaining lease term utilizing an updated incremental borrowing rate of the Company as if the acquired leases were new leases as of the acquisition date. Right-of-use assets were further adjusted for any off-market terms of the lease. The remaining lease term is based on the remaining term at the acquisition date plus any renewal or extension options that the Company is reasonably certain will be exercised. Additionally, the Company has elected short-term lease treatment for those acquired lease contracts which, at the acquisition date, have a remaining lease term of 12 months or less. For the leases acquired through the

Merger, the Company will retain the previous lease classification. This resulted in legacy ChampionX assets and liabilities of $100.6 million and $93.2 million, respectively, as of the acquisition date.

Goodwill

Goodwill of $367.7 million arising from the acquisition consisted largely of the expected synergies and economies of scale from combining the operations of the Company and legacy ChampionX. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. We have allocated goodwill of $278.7 million and $89.0 million to our Production Chemical Technologies and Reservoir Chemical Technologies operating segments, respectively. See Note 5—Goodwill And Intangible Assets for a rollforward of our goodwill balance by operating segment.

Pro forma financial information

The results of operations for legacy ChampionX that have been included in our condensed consolidated financial statements from the June 3, 2020 acquisition date through September 30, 2020 include revenue of $644.5 million and net income of $23.1 million. The following unaudited pro forma results of operations have been prepared as though the Merger was completed on January 1, 2019. Pro forma amounts are based on the preliminary purchase price allocation of the acquisition and are not necessarily indicative of results that may be reported in the future. Non-recurring pro forma adjustments including acquisition-related costs directly attributable to the Merger are included within the reported pro forma revenue and net income (loss).
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per share data)2020 2019 2020 2019
Revenues$633,526
 $866,506
 $2,068,904
 $2,634,009
Net income (loss) attributable to ChampionX4,667
 53,251
 (789,858) 163,130

Transactions with Ecolab

Certain agreements have been entered into between the Company and Ecolab, including, among others, a Tax Matters Agreement, an Intellectual Property Matters Agreement, a Cross Supply and Product Transfer Agreement, and a Transition Services Agreement, each entered into on the Closing Date; as well as the Employee Matters Agreement entered into on December 18, 2019. Pursuant to the Transition Services Agreement, Ecolab and its subsidiaries as well as legacy ChampionX and its subsidiaries will provide each other with specified support services and other assistance for a limited time following the closing of the Merger.  Charges for services under the agreement are representative of our best estimate of market price and will be determined on an allocated cost basis, subject to an overall annual aggregate cap.  Revenue recognized under the Cross Supply and Product Transfer Agreement for the three and nine months ended September 30, 2020 was $49.5 million and $67.4 million, respectively. The Cross Supply and Product Transfer Agreement also includes a take-or-pay element which requires the Company to purchase a minimum of 13.7 million kilograms of product over a ten-year period, approximately $23.3 million. The Company has the option to terminate early beginning in the fifth year upon a two-year’s notice, subject to a termination fee which declines over the contract term.

NOTE 2—3—NEW ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

Effective January 1, 2020, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This update amends the impairment model to utilize an expected credit loss methodology in place of the incurred credit loss methodology for financial instruments. We applied the provisions of this ASU to our financial instruments, mostly consisting of trade receivables, as of January 1, 2020. We utilized the modified retrospective method of adoption; therefore, prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting policies. As of January 1, 2020, we recorded a cumulative adjustment to retained earnings of $1.6 million, net of $0.5$0.4 million of income tax benefit.

Our exposure to credit losses is primarily the result of product sales to our customers, resulting in trade receivables with payment terms generally ranging from 30 days to 90 days. We manage credit risk on trade receivables by transacting only with what management believes are financially secure customers. Our expected loss Accounts receivable are carried at the invoiced amounts, less an

allowance for doubtful accounts, and generally do not bear interest. The Company estimates the allowance for doubtful accounts for expected credit losses by analyzing accounts receivable is estimated utilizing a single loss rate,balances by applying historical write-off and collection trend rates as our customer base generally has similar collectability risk characteristics. We develop our loss rate estimate based on historical collection experience, andwell as current economic and market conditions. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Account balances are written off against the allowance when it is determined the receivable will not be recovered.

The following table provides a rollforward of our allowance for credit losses balance:

(in thousands)Allowance for Credit LossesAllowance for Credit Losses
December 31, 2019$8,072
$8,072
Impact of adoption on January 1, 20202,042
2,042
Provision for expected credit losses2,427
3,384
Accounts written off(1,207)(1,947)
Recoveries1,770
Foreign currency translation(55)(470)
March 31, 2020$11,279
September 30, 2020$12,851



NOTE 3—4—INVENTORIES

Inventories consisted of the following:
(in thousands)March 31, 2020 December 31, 2019September 30, 2020 December 31, 2019
Raw materials$47,542
 $50,099
$140,875
 $50,099
Work in progress13,438
 13,325
11,051
 13,325
Finished goods170,370
 175,774
354,584
 175,774
231,350
 239,198
506,510
 239,198
LIFO and valuation adjustments(24,402) (27,856)
Inventory reserve(17,237) (12,067)
LIFO adjustments(17,942) (15,789)
Inventories, net$206,948
 $211,342
$471,331
 $211,342



NOTE 4—ASSET IMPAIRMENTS5—GOODWILL AND INTANGIBLE ASSETS

During the first quarter of 2020, certain unprecedented events caused the rapid decline of several market indicators in the oil and gas industry. On March 6, 2020, Russia andDecisions by the Organization of Petroleum Exporting Countries (“OPEC”) producers were unable to agree on the need to maintain and extend compliance with previously agreed upon production cuts. Consequently, Russia and Saudi Arabia each announced that they would reduce the prices at which they makeother oil available to the market and raise theirproducing nations resulted in an oversupply of crude oil production, leading to a price war and a substantial surplus in the supply of oil. The price per barrel of WTI crude oil decreased from $41.14 on March 6, 2020 to $20.51 on March 31, 2020, a decline of 50%.



Compounding this situation, demand for oil and gas commodities declined significantly as the world was impacted by the COVID-19 outbreak, which the World Health Organization declared asresulted in a pandemic on March 11, 2020. Since that time, various jurisdictions have attempted to implement or have implemented measures designed to contain the spread of the virus, including travel restrictions, stay-at-home or shelter-in-place orders and shutdowns of non-essential business, reducing the overall demand forsharp decline in crude oil and gas commodities. In response to lower oil prices and deteriorating market conditions, oil producers announced reductions of previously budgeted capital expenditures. The reduction in rig count levels in the first quarter of 2020 provided further evidence that oil producers were committed to reduced levels of capital investment in drilling especially in North America, which has led to reduced levels of demand for capital equipment and pricing pressures.

Additionally, Apergy’s common stock price declined from an average closing price of $24.62 during February 2020 to an average closing price of $8.26 during March 2020. On March 23, 2020 Apergy’s common stock price ended trading at $3.02, the lowest end of day stock price since Apergy’s stock began “regular-way” trading on the NYSE on May 9, 2018. We believeprices. Consequently, our market capitalization has beenwas negatively impacted as a result of these market conditions and overall impact to our industry as described above.industry.

Management determined that these events and their related impact to future revenues and cash flows constituted a triggering event in the first quarter of 2020, requiring us to perform a recoverability test of our long-lived assets and an interim impairment assessment of goodwill as of March 31, 2020.



Goodwill Impairment
The carrying amount of goodwill, including changes therein, by reporting segment is below:
(in thousands)Production & Automation Technologies Drilling Technologies TotalProduction Chemical Technologies Production & Automation Technologies Drilling Technologies Reservoir Chemical Technologies Total
December 31, 2019$809,977
 $101,136
 $911,113
$0
 $809,977
 $101,136
 $0
 $911,113
Acquisition (1)
278,723
 0
 0
 88,997
 $367,720
Impairment(616,271) —
 (616,271)0
 (616,271) 0
 0
 $(616,271)
Foreign currency translation(3,124) —
 (3,124)243
 (2,473) 0
 (3) $(2,233)
March 31, 2020$190,582
 $101,136
 $291,718
September 30, 2020$278,966
 $191,233
 $101,136
 $88,994
 $660,329

_______________________
(1) See Note 2—Merger Transaction for additional information related to the acquisition completed during June 2020.

Goodwill is not subject to amortization but is tested for impairment on an annual basis or more frequently if impairment indicators arise.
 
WeDuring the first quarter of 2020, we performed a quantitative analysis for each of our reporting units to determine the existence of goodwill impairment and the amount of the impairment loss. In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches, which determined that the fair values were less than the respective carrying values for our Artificial Lift and Automation reporting units.
Our income-based valuation method determines the present value of estimated future cash flows to estimate the fair value of a reporting unit. Significant assumptions used in estimating our reporting unit fair values include: (i) annual revenue growth rates; (ii) operating margins; (iii) risk-adjusted discount rate; and (iv) terminal value determined using a long-term growth rate. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. Given the unprecedented uncertainty of both short-term and long-term market conditions, we utilized a weighted-average projection for estimated future cash flows that consists of three estimated future cash flows scenarios with the following weightings: (i) low case scenario with a 40% weighting, (ii) base case scenario with a 40% weighting, and (iii) high case scenario with a 20% weighting.
Under the market approach, we estimateestimated a fair value based on comparable companies'companies’ market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factorfactored in a control premium. Finally, we comparecompared our estimates of fair values to our March 31, 2020 total public market capitalization and assessassessed an implied control premium based on the 20-day average of our common stock. 
The reporting unit carrying values were adjusted based on the long-lived asset impairment assessment noted below. Financial and credit market volatility directly impacts our fair value measurement through the weighted average cost of capital used to determine a discount rate. During times of volatility, significant judgment must be applied to determine whether credit market changes are a short-term or long-term trend. We utilized discount rates of 14.5% and 16.5% for our Artificial Lift and Automation reporting units, respectively.


 
During the first quarter of 2020, we recorded a $616.3 million impairment charge to goodwill, consisting of $539.2 million and $77.1 million in our Artificial Lift reporting unit and our Automation reporting unit, respectively. Both reporting units are within our Production & Automation Technologies reportable segment. The goodwill impairment charge includes $560.1 million of non-taxable goodwill, which was recognized as a discrete item in determining our effective tax rate for the period. We did not identify any triggering events at any of our reporting units during the third quarter of 2020.

Long-lived Asset Impairment
Long-lived assets, which include property, plant and equipment, right of useright-of-use assets, and identified intangible assets, comprise a significant amount of our total assets. The Company makes judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and estimated useful lives.
 


The negative market indicators described above, as well as the results of the previously mentioned fair value determinations of certain of our reporting units, were triggering events indicating that certain of our long-lived tangible and intangible assets may be impaired. We performed recoverability tests on our asset groups as of March 31, 2020, which indicated that long-lived assets associated with two of our asset groups within Production and& Automation Technologies were not recoverable as the aggregate amount of estimated undiscounted cash flows of these asset groups was determined to be below their respective carrying values. We estimateestimated the fair value of these intangible and fixed assets using an income approach that requiresrequired us to make long-term forecasts of our future revenues and costs related to the assets subject to review. These forecasts requireutilized assumptions about demand for our products and services, future market conditions and technological developments. The forecasts are dependent upon assumptions including those regarding oil prices and the general outlook for the global oil and gas industry, among other factors. Financial and credit market volatility directly impacts our fair value measurement through our income forecast. Changes to these assumptions, including, but not limited to: variability of spot and futures prices for crude oil; sustained declines in worldwide rig counts below current analysts’ forecasts; significant deterioration of external financing for our customers; higher risk premiums or higher cost of equity; or any other significant adverse economic news could require a provision for impairment.
 
Accordingly, the estimated fair value of each of these asset groups was below their respective carrying value and as a result, we recorded a long-lived asset impairment charge of $41.0 million in the first quarter of 2020, consisting of $40.4 million to customer relationships and $0.6 million to trademarks. We did not identify impairment triggering events at any of our asset groups during the third quarter of 2020.

The components of our definite- and indefinite-lived intangible assets were as follows:
March 31, 2020 December 31, 2019September 30, 2020 December 31, 2019
(in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Definite-lived intangible assets:                      
Customer relationships (1)
$442,696
 $287,833
 $154,863
 $560,316
 $353,189
 $207,127
$610,091
 $309,762
 $300,329
 $560,316
 $353,189
 $207,127
Trademarks (1)
34,045
 24,671
 9,374
 35,695
 24,830
 10,865
59,860
 26,459
 33,401
 35,695
 24,830
 10,865
Patents37,798
 27,053
 10,745
 38,436
 26,838
 11,598
38,280
 28,547
 9,733
 38,436
 26,838
 11,598
Unpatented technologies13,700
 9,878
 3,822
 13,700
 9,811
 3,889
128,700
 15,349
 113,351
 13,700
 9,811
 3,889
Favorable supply agreements (2)
54,728
 5,929
 48,799
 0
 0
 0
Drawings and manuals2,478
 1,678
 800
 2,558
 1,758
 800
1,739
 1,739
 0
 2,558
 1,758
 800
Other5,199
 4,477
 722
 5,332
 4,504
 828
5,299
 4,723
 576
 5,332
 4,504
 828
535,916
 355,590
 180,326
 656,037
 420,930
 235,107
898,697
 392,508
 506,189
 656,037
 420,930
 235,107
Indefinite-lived intangible assets:                      
Trademarks3,600
 —
 3,600
 3,600
 —
 3,600
3,600
 —
 3,600
 3,600
 —
 3,600
Total$539,516
 $355,590
 $183,926
 $659,637
 $420,930
 $238,707
$902,297
 $392,508
 $509,789
 $659,637
 $420,930
 $238,707
_______________________
(1) Includes impairment of customer relationship and trademark intangible assets of $40.4 million and $0.6 million, respectively, all of which relate to asset groups included within our Artificial Lift business.




(2) Favorable supply agreements were entered into as part of the Merger transaction. See Note 2—Merger Transaction for further information.

NOTE 5—6—DEBT

Long-term debt consisted of the following:
(in thousands)March 31, 2020 December 31, 2019September 30, 2020 December 31, 2019
Revolving credit facility$—
 $—
Term loan facility265,000
 265,000
2018 Credit Facility$0
 $0
2018 Term Loan Facility190,000
 265,000
2020 Term Loan Facility530,287
 0
6.375% Senior Notes due 2026300,000
 300,000
300,000
 300,000
Finance lease obligations4,079
 4,530
9,561
 9,375
Total569,079
 569,530
1,029,848
 574,375
Net unamortized discounts and issuance costs(9,547) (9,709)(8,688) (9,709)
Total long-term debt$559,532
 $559,821
$1,021,160
 $564,666
Current portion of long-term debt (1)
(31,470) (4,845)
Long-term debt, less current portion$989,690
 $559,821

_______________________
(1) Primarily includes the mandatory amortization payments due within twelve months related to the 2020 Term Loan Facility.

2018 Credit Facility
On February 14, 2020, Apergythe Company entered into an amendment to its existing credit facility dated May 9, 2018 (as amended, its credit agreement,the “2018 Credit Facility”), which (i) providesprovided for the incurrence of an additional $150 million of revolving commitments under the amended credit agreement,2018 Credit Facility, upon consummation of the planned merger with ChampionX (the “Merger”),Merger, (ii) permitspermitted the consummation of the Merger and the incurrence of a senior secured term loan facility (“2020 Term Loan Facility”) in an aggregate amount up to $537 million by legacy ChampionX, and (iii) continuescontinued to provide that all obligations under the amended agreement2018 Credit Facility continue to be guaranteed by certain of Apergy’sthe Company’s wholly owned U.S. subsidiaries, including upon the consummation of the Merger, certain legacy ChampionX wholly owned U.S. subsidiaries. The weighted average interest rate on borrowings during the period was 2.69%.
Subsequent event2020 Term Loan Facility

In preparationOn June 3, 2020, legacy ChampionX entered into a term loan facility for settling transaction expenses associated with$537.0 million (“2020 Term Loan Facility”). Proceeds from the 2020 Term Loan Facility were utilized to fund a cash payment of $527.4 million from legacy ChampionX to Ecolab upon the completion of the Merger. We assumed the 2020 Term Loan Facility upon completion of the Merger, which is fully and unconditionally guaranteed by the Company and certain of its wholly owned domestic subsidiaries, which also guarantee the obligations under the 2018 Credit Facility. The 2020 Term Loan Facility matures at the earlier of (i) June 3, 2027 or (ii) January 30, 2026 in the event the Company’s senior unsecured notes due May 1, 2026 remain outstanding. Amounts outstanding under the 2020 Term Loan Facility bear interest, at the option of the Company, at a rate equal to increase liquidity(a) LIBOR plus 5.0% for eurocurrency rate loans (to the extent LIBOR is less than 1%, the LIBOR rate will be deemed to be 1%) or (b) the highest of (i) the Federal Funds Rate plus 1/2 of 1%, (ii) the “prime rate” quoted by Bank of America, N.A., (iii) LIBOR plus 1.00% and (iv) 1.00%, plus 4.0%. The 2020 Term Loan Facility contains customary representations and warranties, covenants, and events of default for loan facilities of this type. The weighted average interest rate on borrowings during current market conditions, we increased our cash balancethe period was 6.00%.

The term loan is subject to mandatory amortization payments of $6.7 million paid quarterly, beginning on September 30, 2020. Any voluntary prepayment of the 2020 Term Loan Facility which occurs prior to June 3, 2022, is subject to a make-whole prepayment premium on the aggregate prepaid principal amount of the 2020 Term Loan Facility.

Senior Notes

ChampionX has senior notes outstanding, the payment obligations of which are fully and unconditionally guaranteed by drawing $125.0 millioncertain wholly owned subsidiaries of ChampionX on our revolver on April 24,a joint and several basis. On June 18, 2020, leaving $118.9 millionthe wholly owned subsidiaries of available borrowing capacity.legacy ChampionX that guarantee the 2018 Credit Facility and the 2020 Term Loan Facility, delivered a Supplemental Indenture to join as guarantors of the senior notes.




NOTE 6—COMMITMENT7—COMMITMENTS AND CONTINGENCIES

The Company is subject to various claims and contingencies related to, among other things, workers’ compensation, general liability (including product liability), automobile claims, health care claims, environmental matters and lawsuits. We record liabilities where a contingent loss is probable and can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. In accordance with applicable GAAP, the Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred.

Guarantees and Indemnifications

We have provided indemnities in connection with sales of certain businesses and assets, including representations and warranties, covenants and related indemnities for environmental health and safety, tax and employment matters. We do not have any material liabilities recorded for these indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities.

In connection with the Separation,Company’s separation from Dover Corporation (“Dover”) in 2018 (the “Separation”), we entered into agreements with Dover that govern the treatment between Dover and us for certain indemnification matters and litigation responsibility. Generally, the separation and distribution agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and to place financial responsibility for the obligations and liabilities of Dover’s business with Dover. The separation and distribution agreement also establishes procedures for handling claims subject to indemnification and related matters. In addition, pursuant to the tax matters agreement, we have agreed to indemnify Dover and its affiliates against any and all tax-related liabilities incurred by them relating to the Separation and/or certain related transactions to the extent caused by an acquisition of ApergyChampionX stock or assets or by any other action or failure to act undertaken by ApergyChampionX or its affiliates.

Pursuant to the provisions of the tax matters agreement with Dover, we recorded an indemnification liability of $3.4 million as of December 31, 2019, with respect to certain liabilities related to tax audits for the 2012-2016 tax years. We received notification in February 2020 that the tax audits and related assessments were completed, resulting in a final settlement amount of $3.0 million, which was paid in April 2020.

In connection with the Merger, we entered into agreements with Ecolab that govern the treatment between Ecolab and us for certain indemnification matters and litigation responsibility. Generally, the separation and distribution agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and to place financial responsibility for the obligations and liabilities of Ecolab’s business with Ecolab. The separation and distribution agreement also establishes procedures for handling claims subject to indemnification and related matters. In addition, pursuant to the Tax Matters Agreement, we have recordedagreed to indemnify Ecolab and its affiliates for (i) all taxes for which ChampionX is responsible as defined within the Tax Matters Agreement, (ii) all taxes resulting from a breach by ChampionX of any of its representations (but only to the extent relating to a breach occurring after the consummation of the Merger) or any of its covenants under the Tax Matters Agreement, (iii) all taxes resulting from an indemnification liabilityacquisition after the Merger of any of the stock or assets of ChampionX, other than as a result of March 31, 2020.the Merger or a repayment of the ChampionX Credit Facilities and (iv) reasonable costs and expenses (including reasonable attorneys’ fees and expenses) related to the foregoing.

As of March 31,September 30, 2020 and December 31, 2019, we had $15.2$51.6 million and $15.7 million, respectively, of outstanding letters of credit, surety bonds and guarantees which expire at various dates through 2025. These financial instruments are primarily maintained as security for insurance, warranty and other performance obligations. Generally, we would only be liable for the amount of these letters of credit and surety bonds in the event of default in the performance of our obligations, the probability of which we believe is remote.



Litigation and Environmental Matters

We are involved in various pending or potential legallawsuits, claims and environmental actions that have arisen in the ordinary course of our business. These proceedings primarily involve claims by private parties alleging injury arising out of use of our products, patent infringement, employment matters, and commercial disputes.disputes, as well as possible obligations to investigate and mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and either operating or owned facilities. We review the probable outcome of such proceedings, the costs and


expenses reasonably expected to be incurred and accrued to-date,to date, and the availability and extent of insurance coverage. We accrue a liability for legal matters that are probable and estimable, and ascan be reasonably estimated. If the reasonable estimate of March 31, 2020 and December 31, 2019, these liabilities were not material. Managementa probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. We are unable to predict the ultimate outcome of these actions because of the inherent uncertainty of litigation.litigation and unfavorable rulings or developments could occur, and there can be no certainty that the Company may not ultimately incur changes in excess of recorded liabilities. However, management believeswe believe the most probable, ultimate resolution of these matters will not have a material adverse effect on our condensed consolidated financial position, results of operations or cash flows.

Environmental Matters

The Company is currently participating in environmental assessments and remediation at approximately 11 locations, the majority of which are in the U.S., and environmental liabilities have been accrued reflecting our best estimate of future costs. Potential insurance reimbursements are not anticipated in the Company’s accruals for environmental liabilities. As of September 30, 2020 environmental liability accruals related to these locations were $8.9 million.

Prior to the Separation, groundwater contamination was discovered at the Norris Sucker Rods plant site located in Tulsa, Oklahoma ("Norris"). Initial remedial efforts were undertaken at the time of discovery of the contamination and Norris has since coordinated monitoring and remediation with the Oklahoma Department of Environmental Quality ("ODEQ"). As part of the ongoing long-term remediation process, Norris contracted an engineering and consulting firm to develop a range of possible additional remedial alternatives in order to accelerate the remediation process and associated cost estimates for the work. In October 2019, we received the firm’s preliminary remedial alternatives for consideration. Now that we have such recommendations, we have begun discussions with ODEQ regarding our proposed long-term remediation plan. The plan is subject to ODEQ’s review, input, and approval. Because we have not yet finalized a plan for further remediation at the site and discussions with ODEQ remain ongoing, we cannot fully anticipate the timing, outcome or possible impact of such further remedial activities, financial or otherwise. As a result of the recommendations in the report, we accrued liabilities for these remediation efforts of approximately $2.0 million as of December 31, 2019. Liabilities could increase in the future at such time as we ultimately reach agreement with ODEQ on our remediation plan and such liabilities become probable and can be reasonably estimated, however, there have been no changes to our estimated liability as of March 31,September 30, 2020.

Matters Related to Deepwater Horizon Incident Response

On April 22, 2010, the deepwater drilling platform, the Deepwater Horizon, operated by a subsidiary of BP plc, sank in the Gulf of Mexico after an explosion and fire, resulting in a massive oil spill. Certain entities that are now subsidiaries of ChampionX as a result of the Merger (collectively the “COREXIT Defendants”) supplied COREXIT™ 9500, an oil dispersant product listed on the U.S. EPA National Contingency Plan Product Schedule, which was used in the response to the spill. In connection with the provision of COREXIT™, the COREXIT Defendants were named in several lawsuits. Cases arising out of the Deepwater Horizon accident were administratively transferred and consolidated for pre-trial purposes under In Re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, Case No. 10-md-02179 (E.D. La.) (“MDL 2179”). Claims related to the response to the oil spill were consolidated in a master complaint captioned the “B3 Master Complaint.” In 2011, Transocean Deepwater Drilling, Inc. and its affiliates (the “Transocean Entities”) named the COREXIT Defendants and other unaffiliated companies as first party defendants (In re the Complaint and Petition of Triton Asset Leasing GmbH, et al, MDL No. 2179, Civil Action 10-2771). In April and May 2011, the Transocean Entities, Cameron International Corporation, Halliburton Energy Services, Inc., M-I L.L.C., Weatherford U.S., L.P. and Weatherford International, Inc. (collectively, the “Cross Claimants”) filed cross claims in MDL 2179 against the COREXIT Defendants and other unaffiliated cross defendants. In April and June 2011, in support of its defense of the claims against it, the COREXIT Defendants filed counterclaims against the Cross Claimants. On May 18, 2012, the COREXIT Defendants filed a motion for summary judgment as to the claims in the B3 Master Complaint. On November 28, 2012, the Court granted the COREXIT Defendants’ motion and dismissed with prejudice the claims in the B3 Master Complaint asserted against the COREXIT Defendants. There currently remain three cases pending against the COREXIT Defendants relating to the Deepwater Horizon oil spill, all of which are expected to ultimately be dismissed pursuant to the Court’s November 28, 2012 order granting the COREXIT Defendants’ motion for summary judgment.
​
The Company believes the claims asserted against the COREXIT Defendants are without merit and intends to defend these lawsuits vigorously. The Company also believes that it has rights to contribution and/or indemnification (including legal expenses) from third parties. However, we cannot predict the outcome of these lawsuits, the involvement it might have in these matters in the future, or the potential for future litigation.

NOTE 78 — ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss—Accumulated other comprehensive loss consisted of the following:
(in thousands)Foreign Currency Translation Defined Pension and Other Post-Retirement Benefits Accumulated Other Comprehensive LossForeign Currency Translation Defined Pension and Other Post-Retirement Benefits Cash Flow Hedges Accumulated Other Comprehensive Loss
December 31, 2018$(36,146) $(6,760) $(42,906)$(36,146) $(6,760) $0
 $(42,906)
Other comprehensive income (loss) before reclassifications, net of tax1,090
 (323) 767
1,090
 (323) 0
 767
Reclassification adjustment for net losses included in net income, net of tax—
 422
 422
0
 422
 0
 422
Other comprehensive income, net of tax1,090
 99
 1,189
1,090
 99
 0
 1,189
March 31, 2019$(35,056) $(6,661) $(41,717)$(35,056) $(6,661) $0
 $(41,717)
Other comprehensive income (loss) before reclassifications, net of tax974
 0
 0
 974
Reclassification adjustment for net losses included in net income, net of tax0
 68
 0
 68
Other comprehensive income (loss), net of tax974
 68
 0
 1,042
June 30, 2019$(34,082) $(6,593) $0
 $(40,675)
Other comprehensive loss before reclassifications, net of tax(2,900) —
 0
 (2,900)
Reclassification adjustment for net losses included in net income, net of tax0
 68
 0
 68
Other comprehensive income (loss), net of tax(2,900) 68
 0
 (2,832)
September 30, 2019$(36,982) $(6,525) $0
 $(43,507)


(in thousands)Foreign Currency Translation Defined Pension and Other Post-Retirement Benefits Accumulated Other Comprehensive LossForeign Currency Translation Defined Pension and Other Post-Retirement Benefits Cash Flow Hedges Accumulated Other Comprehensive Loss
December 31, 2019$(35,210) $(8,827) $(44,037)$(35,210) $(8,827) $0
 $(44,037)
Other comprehensive loss before reclassifications, net of tax(11,052) —
 (11,052)(11,052) 0
 0
 (11,052)
Reclassification adjustment for net losses included in net income, net of tax—
 99
 99
0
 99
 0
 99
Other comprehensive income (loss), net of tax(11,052) 99
 (10,953)(11,052) 99
 0
 (10,953)
March 31, 2020$(46,262) $(8,728) $(54,990)$(46,262) $(8,728) $0
 $(54,990)
Other comprehensive income before reclassifications, net of tax5,703
 0
 653
 6,356
Reclassification adjustment for net losses included in net income, net of tax0
 99
 0
 99
Other comprehensive income, net of tax5,703
 99
 653
 6,455
June 30, 2020$(40,559) $(8,629) $653
 $(48,535)
Other comprehensive loss before reclassifications, net of tax3,782
 0
 (862) 2,920
Reclassification adjustment for net losses included in net income, net of tax0
 99
 0
 99
Other comprehensive income (loss), net of tax3,782
 99
 (862) 3,019
September 30, 2020$(36,777) $(8,530) $(209) $(45,516)




Reclassifications from accumulated other comprehensive loss—Reclassification adjustments from accumulated other comprehensive loss to net income (loss) related to defined pension and other post-retirement benefits consisted of the following:

Three Months Ended March 31, Affected line items on the condensed consolidated statements of incomeThree Months Ended September 30, Nine Months Ended September 30, Affected line items on the condensed consolidated statements of income (loss)
(in thousands)2020 2019 2020 2019 2020
2019 
Pensions and other post-retirement benefits:Pensions and other post-retirement benefits:
Amortization of actuarial loss and other$132
 $91
 Other (income) expense, net$132
 $91
 $396
 $274
 Other (income) expense, net
Settlement loss—
 486
 Other (income) expense, net0
 0
 0
 486
 Other (income) expense, net
Total before tax132
 577
 Income (loss) before income taxes132
 91
 396
 760
 Income (loss) before income taxes
Tax benefit(33) (155) Provision for (benefit from) income taxes(33) (23) (99) (202) Provision for (benefit from) income taxes
$99
 $422
 Net income (loss)
Net of tax$99
 $68
 $297
 $558
 Net income (loss)




NOTE 8—9 — EARNINGS PER SHARE

A reconciliation of the number of shares used for the basic and diluted earnings (loss) per share calculation was as follows:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per share data)2020 20192020 2019 2020 2019
Net income (loss) attributable to Apergy$(633,728) $19,656
Net income (loss) attributable to ChampionX$(7,914) $11,394
 $(751,287) $53,987
          
Weighted-average number of shares outstanding77,477
 77,363
199,809
 77,460
 131,064
 77,416
Dilutive effect of stock-based compensation (1)
—
 277
0
 113
 0
 199
Total shares and dilutive securities77,477
 77,640
199,809
 77,573
 131,064
 77,615
          
Basic earnings (loss) per share attributable to Apergy$(8.18) $0.25
Diluted earnings (loss) per share attributable to Apergy$(8.18) $0.25
Basic earnings (loss) per share attributable to ChampionX$(0.04) $0.15
 $(5.73) $0.70
Diluted earnings (loss) per share attributable to ChampionX$(0.04) $0.15
 $(5.73) $0.70
_______________________
(1)See Note 12—Equity And Cash Incentive Programs for share-based awards outstanding as of March 31, 2020, all of which were excluded from diluted weighted-average number of shares outstanding during the three months ended March 31, 2020 due to their anti-dilutive impact. We excluded 0.3 million shares from our calculation as of March 31, 2019 due to their anti-dilutive impact.
For all periods presented, the computation of diluted earnings (losses) per share excludes awards with an anti-dilutive impact. For the three and nine months ended September 30, 2020, we excluded all outstanding equity awards from the calculation of weighted-average shares outstanding, because their inclusion would be anti-dilutive as we were in a loss position. For the three and nine months ended September 30, 2019, the diluted shares include the dilutive impact of equity awards except for approximately 0.4 million shares that were excluded because their inclusion would be anti-dilutive.


NOTE 9—10—REVENUE

Our revenue is generated primarily from product sales. Service revenue is generated from providing services to our customers. These services include laboratory and logistics services, chemical management services, troubleshooting, reporting, water treatment services, technical advisory assistance and field services. Lease revenue is derived from rental income of leased production equipment. These lease arrangements generally allow customers to rent equipment on a daily basis with no stated end date. Management accounts for these arrangements as a daily renewal option beginning on the lease commencement date, with the lease term determined as the period in which it is reasonably certain the option will be exercised. We do not track cost of goods sold separately for all of our revenue streams.

Within our Production & Automation Technologies and Drilling Technologies segments, substantially all of our performance obligations are recognized at a point in time and are primarily related to our product revenue derived from the sale of drilling and production equipment. Revenue is recognized when control transfers to the customer upon shipment or completion of installation, testing, or certification as required under the contract. Within our Production Chemical Technologies and Reservoir Chemical Technologies segments, revenue recognized from the sale of products and equipment is recognized at the point in time when the obligations in the contract with the customer are satisfied, which generally occurs with the transfer of the product or delivery of the equipment.

In certain markets, the Company utilizes joint ventures and independent third-party distributors and sales agents to sell and market products and services. Amounts payable to independent third-party distributors and sales agents may fluctuate based on sales and timing of distributor fee payments. For services rendered by such independent third-party distributors and sales agents, the Company records the consideration received on a net basis within product revenue in our condensed consolidated statements of income. As of September 30, 2020, accrued distributor fees were $36.4 million and nil at December 31, 2019.



Disaggregation of Revenue

Revenue disaggregated by revenue type was as follows:
 Three Months Ended March 31,
(in thousands)2020 2019
Product revenue$230,882
 $269,342
Service revenue18,487
 20,421
Lease and other revenue12,065
 10,731
Total revenue$261,434
 $300,494
Revenue disaggregated by end market in each of our reporting segments was as follows:
 Three Months Ended March 31,
(in thousands)2020 2019
Drilling Technologies$55,955
 $77,535
Production & Automation Technologies:   
Artificial lift159,400
 170,907
Digital products33,922
 31,290
Other production equipment12,259
 21,005
Intra-segment eliminations(102) (243)
 205,479
 222,959
Total revenue$261,434
 $300,494
 Three Months Ended September 30, Nine Months Ended
September 30,
(in thousands)2020 2019 2020 2019
Production Chemical Technologies:       
Product revenue$361,167
 $0
 $480,634
 $0
Service revenue46,933
 0
 63,165
 0
Lease and other revenue2,051
 0
 2,354
 0
Total Production Chemical Technologies revenue$410,151
 $0
 $546,153
 $0
Production & Automation Technologies:       
Product revenue$96,605
 $185,051
 $347,477
 $572,797
Service revenue26,331
 23,918
 70,720
 71,781
Lease and other revenue13,985
 12,993
 38,944
 36,161
Total Production & Automation Technologies revenue$136,921
 $221,962
 $457,141
 $680,739
Drilling Technologies:       
Product revenue$15,706
 $54,816
 $92,576
 $202,692
Service revenue9
 61
 42
 72
Total Drilling Technologies revenue$15,715
 $54,877
 $92,618
 $202,764
Reservoir Chemical Technologies:       
Product revenue$21,234
 $0
 $30,473
 $0
Service revenue30
 0
 97
 0
Total Reservoir Chemical Technologies revenue$21,264
 $0
 $30,570
 $0
Corporate and other: (1)
       
Product revenue$46,113
 $0
 $62,980
 $0
Service revenue3,362
 0
 4,412
 0
Total Corporate and other revenue$49,475
 $0
 $67,392
 $0
Total Revenue:       
Product revenue$540,825
 $239,867
 $1,014,140
 $775,489
Service revenue76,665
 23,979
 138,436
 71,853
Lease and other revenue16,036
 12,993
 41,298
 36,161
Total revenue$633,526
 $276,839
 $1,193,874
 $883,503

_______________________
(1) Revenue generated from the Cross Supply and Product Transfer Agreement with Ecolab is recorded to Corporate. See Note 2—Merger Transaction for additional information on this arrangement.


Revenue disaggregated by geography was as follows:
Three Months Ended March 31,Three Months Ended September 30, 2020
(in thousands)2020 2019Production Chemical Technologies Production & Automation Technologies Drilling Technologies Reservoir Chemical Technologies Corporate Total
United States$195,370
 $231,358
$136,689
 $100,875
 $11,308
 $10,901
 $33,125
 $292,898
Canada17,952
 18,915
53,681
 6,018
 942
 686
 136
 61,463
Middle East12,363
 13,604
66,352
 10,899
 182
 4,696
 6,048
 88,177
Europe12,030
 16,959
45,720
 1,823
 1,948
 715
 5,822
 56,028
Australia9,268
 5,982
5,944
 11,266
 32
 82
 0
 17,324
Latin America7,582
 7,722
80,761
 4,319
 0
 1,696
 1,278
 88,054
Asia-Pacific5,486
 5,545
11,931
 1,382
 818
 882
 3,066
 18,079
Other1,383
 409
9,073
 339
 485
 1,606
 0
 11,503
Total revenue$261,434
 $300,494
$410,151
 $136,921
 $15,715
 $21,264
 $49,475
 $633,526


 Nine Months Ended September 30, 2020
(in thousands)Production Chemical Technologies Production & Automation Technologies Drilling Technologies Reservoir Chemical Technologies Corporate Total
United States$178,442
 $338,457
 $66,142
 $15,177
 $45,057
 $643,275
Canada69,641
 23,140
 6,213
 817
 198
 100,009
Middle East94,500
 33,065
 722
 7,583
 8,485
 144,355
Europe62,864
 9,481
 9,543
 987
 7,048
 89,923
Australia7,827
 32,801
 101
 93
 0
 40,822
Latin America105,795
 15,034
 22
 2,183
 1,768
 124,802
Asia-Pacific15,623
 4,653
 8,495
 1,155
 4,836
 34,762
Other11,461
 510
 1,380
 2,575
 0
 15,926
Total revenue$546,153
 $457,141
 $92,618
 $30,570
 $67,392
 $1,193,874

 Three Months Ended September 30, 2019
(in thousands)Production Chemical Technologies Production & Automation Technologies Drilling Technologies Reservoir Chemical Technologies Corporate Total
United States$0
 $169,658
 $39,705
 $0
 $0
 $209,363
Canada0
 14,012
 5,212
 0
 0
 19,224
Middle East0
 16,030
 286
 0
 0
 16,316
Europe0
 4,530
 5,939
 0
 0
 10,469
Australia0
 7,919
 83
 0
 0
 8,002
Latin America0
 6,816
 19
 0
 0
 6,835
Asia-Pacific0
 2,239
 3,335
 0
 0
 5,574
Other0
 758
 298
 0
 0
 1,056
Total revenue$0
 $221,962
 $54,877
 $0
 $0
 $276,839


 Nine Months Ended September 30, 2019
(in thousands)Production Chemical Technologies Production & Automation Technologies Drilling Technologies Reservoir Chemical Technologies Corporate Total
United States$0
 $527,893
 $149,880
 $0
 $0
 $677,773
Canada0
 39,712
 14,296
 0
 0
 54,008
Middle East0
 43,440
 920
 0
 0
 44,360
Europe0
 14,384
 26,134
 0
 0
 40,518
Australia0
 21,927
 83
 0
 0
 22,010
Latin America0
 23,917
 19
 0
 0
 23,936
Asia-Pacific0
 8,307
 10,678
 0
 0
 18,985
Other0
 1,159
 754
 0
 0
 1,913
Total revenue$0
 $680,739
 $202,764
 $0
 $0
 $883,503


Revenue is attributed to regions based on the location of our direct customer, which in some instances is an intermediary and not necessarily the end user.

Contract balances

Contract assets and contract liabilities from contracts with customers were as follows:
(in thousands)March 31, 2020 December 31, 2019September 30, 2020 December 31, 2019
Contract assets$6
 $285
$0
 $285
Contract liabilities - current9,393
 6,148
16,883
 6,148



NOTE 10—11—RESTRUCTURING AND OTHER RELATED CHARGES

Restructuring and other related charges as classified in our condensed consolidated statements of income (loss) were as follows:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended
September 30,
(in thousands)2020 20192020 2019 2020 2019
Segment restructuring charges:   
Segment restructuring charges (1):
       
Production Chemical Technologies$2,305
 $0
 $2,305
 $0
Production & Automation Technologies$671
 $410
914
 1,246
 9,919
 2,317
Drilling Technologies2,095
 —
0
 526
 5,521
 526
Reservoir Chemical Technologies207
 0
 207
 0
Corporate0
 0
 368
 0
Total$2,766
 $410
$3,426
 $1,772
 $18,320
 $2,843
  
Statements of Income (Loss) classification:          
Cost of goods and services$2,039
 $331
$2,228
 $1,344
 $12,974
 $1,743
Selling, general and administrative expense727
 79
1,198
 428
 5,346
 1,100
Total$2,766
 $410
Total (1)
$3,426
 $1,772
 $18,320
 $2,843

_______________________
(1) Total restructuring expenses include asset write-downs, which are not included in the restructuring accrual below.

Restructuring and other related charges during the three and nine months ended March 31,September 30, 2020 wereincluded the following activities, which the Company expects will be completed by early 2021:

Production Chemical Technologies. Production Chemical Technologies incurred restructuring charges of $2.3 million during the three and nine months ended September 30, 2020, primarily due to costs associated with employee severance and related benefits at our as a result of workforce reductions to better align the cost base with the significantly lower demand environment.


Production & Automation Technologies. Production & Automation Technologies incurred restructuring charges of $0.9 million and $9.9 million during the three and nine months ended September 30, 2020, respectively, related to various programs, primarily focused on facility closures and consolidations, exit of certain nonstrategic product lines, and workforce reductions.

Drilling Technologies. Drilling Technologies segments. These programs were initiatedincurred restructuring charges of $5.5 million during the nine months ended September 30, 2020, primarily due to costs associated with employee severance and related benefits as a result of workforce reductions and facility closures to better align ourthe cost base with the significantly lower demand environment.

Reservoir Chemical Technologies. Reservoir Chemical Technologies incurred restructuring charges of $0.2 million during the three and nine months ended September 30, 2020, primarily due to costs associated with employee severance and operationsrelated benefits as a result of workforce reductions to better align the cost base with current market conditions.the significantly lower demand environment.

The following table details our restructuring accrual activities during the threenine months ended March��31,September 30, 2020:
(in thousands)Restructuring Accrual BalanceRestructuring Accrual Balance
December 31, 2019$130
$130
Restructuring charges2,766
Restructuring charges and asset write downs10,993
Payments(516)(12,078)
Liabilities assumed in the Merger4,843
Other, including foreign currency translation117
(39)
March 31, 2020$2,497
September 30, 2020$3,849


Our liability balance for restructuring and other exit activitiesrelated charges at March 31,September 30, 2020, reflects employee severance and related benefits initiated during the period.period as well as liabilities assumed in the Merger. Additional programs may be initiated during 2020 with related restructuring charges.


NOTE 11—INCOME TAXES

For the three months ended March 31, 2020, we recorded a tax benefit of $27.0 million on a loss before income taxes of $660.5 million, resulting in an effective tax rate of 4.1%. The effective tax rate was primarily impacted by the tax effects of impairment of non-taxable goodwill of $560.1 million, recognized as a discrete item during the quarter. During the three months ended March 31, 2019, we recorded income tax expense of $5.6 million on earnings before income tax of $25.5 million, resulting in an effective tax rate of 21.8%.

On March 27, 2020, as part of the business stimulus package in response to the COVID-19 pandemic, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide relief to businesses impacted by the disruptions of the COVID-19 pandemic. The CARES Act provides the opportunity to utilize a five year carryback of net operating losses generated in years 2018 through 2020. Our effective tax rate was not materially impacted by the CARES Act for the three months ended March 31, 2020; however, as the carryback period is prior to the Separation we are continuing to evaluate the potential benefit to Apergy for future periods in connection with the tax matters agreement with Dover.



NOTE 12—EQUITY AND CASH INCENTIVE PROGRAMS

Stock-based compensation expense is reported within “Selling, general and administrative expense” in the condensed consolidated statements of income (loss). Stock-based compensation expense relating to all stock-based incentive plans was as follows:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2020 20192020 2019 2020 2019
Stock-based compensation expense$2,429
 $2,285
$5,856
 $2,524
 $13,718
 $7,545
Tax benefit(599) (558)(1,342) (615) (3,144) (1,841)
Stock-based compensation expense, net of tax$1,830
 $1,727
$4,514
 $1,909
 $10,574
 $5,704



A summary of activity relating to our share-based awards for the threenine months ended March 31,September 30, 2020, was as follows:
(in shares)Stock-Settled Appreciation Rights Performance Share Awards Restricted Stock Units
Outstanding at January 1, 2020422,361
 174,726
 440,048
Granted—
 —
 164,513
Forfeited(1,758) (5,011) (12,657)
Exercised / vested—
 —
 (62,740)
Outstanding at March 31, 2020420,603
 169,715
 529,164
(in shares)Stock-Settled Appreciation Rights Performance Share Awards Restricted Stock Units Non-Qualified Stock Options
Outstanding at January 1, 2020422,361
 174,726
 440,048
 0
Granted0
 121,261
 583,814
 0
Replacement awards (1)
0
 0
 2,357,733
 7,324,853
Forfeited(7,030) (5,011) (24,834) (9,693)
Exercised / vested0
 (6,891) (164,314) (946)
Outstanding at September 30, 2020415,331
 284,085
 3,192,447
 7,314,214
_______________________

(1) In connection with the Merger, the Company entered into the Employee Matters Agreement dated December 18, 2019, which provided the terms in which certain Ecolab share-based awards held by legacy ChampionX employees were replaced with share-based awards of the Company on the merger date. The fair value of the replacement awards has been allocated between each employee’s pre-combination and post-combination services. Amounts allocated to pre-combination services have been included as consideration transferred as part of the Merger. See Note 2—Merger Transaction for a summary of consideration


transferred. Compensation costs of $15.8 million allocated to post-combination services will be recorded as stock-based compensation expense over each employees’ remaining service period.

NOTE 13—FAIR VALUE MEASUREMENTS

We had no outstanding derivative contractsFair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of March 31, 2020the measurement date. A hierarchy has been established for inputs used in measuring fair value that maximizes the use of observable inputs and December 31, 2019. Otherminimizes the use of unobservable inputs by requiring the most observable inputs be used when available. The hierarchy is broken down into three levels:
​
Level 1- Inputs are quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
​
Level 2- Inputs include observable inputs other than quoted prices in active markets.
​
Level 3- Inputs are unobservable inputs for which there is little or no market data available.
​
The carrying amount and the estimated fair value for assets and liabilities measured at fair value on a recurring basis are as of March 31, 2020 and December 31, 2019, were not significant; thus, no fair value disclosures are presented.follows:
 September 30, 2020
 Carrying Amount Fair Value Measurements
(in thousands) Level 1 Level 2 Level 3
Assets       
Foreign currency forward contracts$1,392
 $0
 $1,392
 $0
        
Liabilities       
Foreign currency forward contracts$4,647
 $0
 $4,647
 $0


The carrying value of foreign currency forward contracts is at fair value, which is determined based on Level 1 quoted marketforeign currency exchange rates of our Senior Notes was approximately $233.5 million at March 31, 2020, as compared to the $300.0 million face value of the debt. Thebalance sheet date and is classified within Level 2. For purposes of fair value based on Level 2 quoted market rates,disclosure above, derivative values are presented gross. See Note 14—Derivatives And Hedging Transactions for further discussion of our term loan facility was approximately $246.5 million at March 31, 2020, as compared to the $265.0 million face valuegross versus net presentation of the debt.Company’s derivatives.

The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, as well as amounts included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair value due to their short-term nature.

The fair value of our senior notes is based on Level 1 quoted market prices. The fair value of our term loan facilities are based on Level 2 quoted market prices for the same or similar debt instruments. The carrying amount and the estimated fair value of long-term debt, including current maturities, held by the Company were:
 September 30, 2020 December 31, 2019
(in thousands)Carrying Amount Fair Value Carrying Amount Fair Value
2018 Term Loan Facility$190,000
 $185,963
 $265,000
 $266,161
2020 Term Loan Facility$530,287
 $527,636
 $0
 $0
6.375% Senior Notes due 2026$300,000
 $288,300
 $300,000
 $316,710


We consider the inputs for our long-lived asset and goodwill impairment calculations to be Level 3 inputs in the fair value hierarchy. See Note 4—Asset Impairments5—Goodwill And Intangible Assets for further information.



NOTE 14—DERIVATIVES AND HEDGING TRANSACTIONS

The Company uses foreign currency forward contracts to manage risks associated with foreign currency exchange rates. The Company does not hold derivative financial instruments of a speculative nature or for trading purposes. Derivative contracts are recorded as assets and liabilities on the balance sheet at fair value. We evaluate hedge effectiveness at contract inception and thereafter on a quarterly basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Changes in fair value attributable to changes in spot exchange rates for derivative contracts that have been designated as cash flow hedges are recognized in accumulated other comprehensive income (loss) (“AOCI”) and reclassified into earnings in the same period the hedged transaction affects earnings and are presented in the same income statement line as the earnings effect of the hedged item. Cash flows from derivatives are classified in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships.

The Company is exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts. We monitor our exposure to credit risk by using major global banks and financial institutions as counterparties and monitoring their financial condition and credit profile. The Company does not anticipate nonperformance by any of these counterparties, and therefore, recording a valuation allowance against the Company’s derivative balance is not considered necessary.

Derivative Positions Summary

Certain of the Company’s derivative transactions are subject to master netting arrangements that allow the Company to settle with the same counterparties. These arrangements generally do not call for collateral and as of the applicable dates presented in the following table, no cash collateral had been received or pledged related to the underlying derivatives. We have elected to present our derivative balances on a gross basis on the condensed consolidated balance sheet.

The following table summarizes the gross fair value of the Company’s outstanding derivatives and the lines in which they are presented on the condensed consolidated balance sheet. We did not have outstanding derivatives at December 31, 2019:
 September 30, 2020
(in thousands)Derivative Assets Derivative Liabilities
Prepaid expenses and other current assets$1,392
 $—
Accrued expenses and other current liabilities—
 4,647
 $1,392
 $4,647

The following table summarizes the notional values of the Company’s outstanding derivatives:
(in thousands)September 30, 2020 December 31, 2019
Notional value of foreign currency forward contracts$457,239
 $0


Cash Flow Hedges

The Company utilizes foreign currency forward contracts to hedge the effect of foreign currency exchange rate fluctuations on forecasted foreign currency transactions, primarily related to inventory purchases. These forward contracts are designated as cash flow hedges. The changes in fair value of these contracts attributable to changes in spot exchange rates are recorded in AOCI until the hedged items affect earnings, at which time the gain or loss is reclassified into the same line item in the condensed consolidated statements of income (loss) as the underlying exposure being hedged. The forward points are marked-to-market monthly and recognized in the same line item in the condensed consolidated statement of income as the underlying exposure being hedged.

Derivatives Not Designated as Hedging Instruments

The Company also uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated assets and liabilities, primarily receivables and payables, which are remeasured at the end of each period. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Therefore, changes in the

value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.
​
Effect of Derivative Instruments on Income

The loss of all derivative instruments recognized is summarized below:
 Three Months Ended September 30, Nine Months Ended
September 30,
(in thousands)2020 2019 2020 2019
Loss reclassified from AOCI to income on cash flow hedges:       
Cost of goods and services$19
 $0
 $34
 $0
Loss on derivatives not designated as hedging instruments:       
Other (income) expense, net772
 0
 1,483
 0
Total loss of derivative instruments$791
 $0
 $1,517
 $0


NOTE 15 — SEGMENT INFORMATION

We reportUpon completion of the Merger, the Company re-evaluated its reporting segments. Our determination of reporting segments was made on the basis of our results of operationsstrategic priorities within each segment and corresponds to the manner in which our chief operating decision maker reviews and evaluates operating performance to make decisions about resources to be allocated to the segment. In addition to our strategic priorities, segment reporting is also based on differences in the followingproducts and services we provide. As a result, we added two new reportable segments - Production Chemical Technologies and Reservoir Chemical Technologies. The legacy Apergy reportable segments remain unchanged.

Our reporting segments: segments are:

Production Chemical Technologies—provides oil and natural gas production and midstream markets with solutions to manage and control corrosion, oil and water separation, flow assurance, sour gas treatment and a host of water-related issues.

Production & Automation TechnologiesTechnologies—designs, manufactures, markets and services a full range of artificial lift equipment, end-to-end digital automation solutions, as well as other production equipment. Production & Automation Technologies’ products are sold under a collection of brands including Harbison-Fischer, Norris, Alberta Oil Tool, Oil Lift Technology, PCS Ferguson, Pro-Rod, Upco, Unbridled ESP, Norriseal-Wellmark, Quartzdyne, Spirit, Theta, Timberline and Windrock.

Drilling Technologies. Technologies—designs, manufactures and markets polycrystalline diamond cutters and bearings for use in oil and gas drill bits under the US Synthetic brand.

Reservoir Chemical Technologies—manufactures specialty products that support well stimulation, construction (including drilling and cementing) and remediation needs in the oil and natural gas industry.

Business activities that do not meet the criteria of an operating segment have been combined into Corporate and other. Corporate and other includes (i) corporate and overhead expenses, and (ii) revenue and costs for activities that are not operating segments.



Segment revenue and segment operating profit were as follows:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2020 20192020 2019 2020 2019
Segment revenue:          
Production Chemical Technologies$410,151
 $0
 $546,153
 $0
Production & Automation Technologies$205,479
 $222,959
136,921
 221,962
 457,141
 680,739
Drilling Technologies55,955
 77,535
15,715
 54,877
 92,618
 202,764
Reservoir Chemical Technologies21,264
 0
 30,570
 0
Corporate and other (1)
49,475
 0
 67,392
 0
Total revenue$261,434
 $300,494
$633,526
 $276,839
 $1,193,874
 $883,503
          
Income before income taxes:  
Segment operating profit: 
  
Segment operating profit (loss): 
  
    
Production Chemical Technologies$35,172
 $0
 $45,094
 $0
Production & Automation Technologies$(648,591) $13,064
(7,454) 18,917
 (693,213) 51,849
Drilling Technologies11,359
 26,806
(5,127) 13,797
 2,421
 64,853
Total segment operating profit(637,232) 39,870
Corporate expense and other (1)
14,190
 3,836
Reservoir Chemical Technologies(3,819) 0
 (6,630) 0
Total segment operating profit (loss)18,772
 32,714
 (652,328) 116,702
Corporate and other (1)
14,131
 8,111
 93,192
 16,668
Interest expense, net9,039
 10,527
15,935
 9,590
 36,236
 30,226
Income before income taxes$(660,461) $25,507
Income (loss) before income taxes$(11,294) $15,013
 $(781,756) $69,808
_______________________
(1)Corporate expense and other includes costs not directly attributable or allocated to our reporting segments such as corporate executive management and other administrative functions, and the results attributable to our noncontrolling interest. Additionally, the sales and expenses related to the Cross Supply Agreement with Ecolab are included within Corporate and other. See Note 2—Merger Transaction for further information.

Legacy ChampionX has an integrated supply chain function that serves the Production Chemical Technologies and Reservoir Chemical Technologies reportable segments. As such, asset information for these reportable segments has not been provided and is not available, since the Company does not produce or utilize such information.

NOTE 15—16—CASH FLOW INFORMATION

Supplemental cash flow information is as follows:
 Three Months Ended March 31, Nine Months Ended September 30,
(in thousands) 2020 2019 2020 2019
Non-cash information:        
Finance lease additions $942
 $1,326
 $4,071
 $3,990


Lease program

Our ESP leased asset program is reported in our Production & Automation Technologies segment. At the time of purchase, assets are recorded to inventory and are transferred to property, plant, and equipment when a customer contracts for an asset under our lease program. During the threenine months ended March 31,September 30, 2020 and March 31,September 30, 2019, we transferred $7.2$26.5 million and $19.8$61.2 million, respectively, of inventory into property, plant, and equipment as a result of assets entering our leased asset program.

Expenditures for assets having a useful life of greater than one year, that are placed into our leased asset program expected to be recovered through sale are reported in leased assets in the operating section of our condensed consolidated statements of cash flows.  All other capitalizable expenditures for assets that are placed into our lease asset program are reported in “Capital expenditures”classified as capital expenditures in the investing section of our condensed consolidated statements of cash flows. During the threenine months ended March 31,September 30, 2020 and 2019, such expenditures were estimated to be $1.4$12.9 million and $5.8$13.9 million, respectively. Expenditures for assets that are expected to be placed into our leased asset program and with a useful life of one year are reported in “Leased assets” in the operating section of our condensed consolidated statement of cash flows. The recovery of the carrying value from the sale of assets on lease is presented in “Leased assets” in the operating section of our condensed consolidated statements of cash flows.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis is our analysis of our financial performance, financial condition and significant trends that may affect our future performance. It should be read in conjunction with the condensed consolidated financial statements, and notes thereto, included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to Apergy’sChampionX’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the words “believe,” “anticipate,” “expect,” “may,” “intend,” “foresee,” “guidance,” “estimate,” “potential,” “outlook,” “plan,” “should,” “would,” “could,” “target,” “forecast” and similar expressions, including the negative thereof. We undertake no obligation to publicly update, revise or correct any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except to the extent required under the federal securities laws.
Readers are cautioned that such forward-looking statements should be read in conjunction with the disclosures under the heading “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.”


EXECUTIVE OVERVIEW AND BUSINESS OUTLOOK

ApergyChampionX is a leading provider ofglobal leader in chemistry solutions and highly engineered equipment and technologies that help companies drill for and produce oil and gas safely and efficiently around the world. OurChampionX’s products provide efficient functioning throughout the lifecycle of a well—well with a focus on the production phase of wells. Our Production Chemical Technologies segment provides chemistry solutions to maximize production from flowing oil and gas wells, and our Reservoir Chemical Technologies segment provides chemistry solutions used in drilling toand completion to production.activities. ChampionX’s Production & Automation Technologies offerings consist of artificial lift equipment and solutions, including rod pumping systems, electric submersible pump systems, progressive cavity pumps and drive systems and plunger lifts, as well as a full automation and digital offering consisting of equipment and software for Industrial Internet of Things (“IIoT”) solutions for downhole monitoring, wellsite productivity enhancement, and asset integrity management. ChampionX’s Drilling Technologies offering provides market leading polycrystalline diamond cutters and bearings that result in cost effective and efficient drilling.

Separation and Distribution

On May 9, 2018, Apergy became an independent, publicly traded company as a result ofJune 3, 2020, the distribution by Dover of 100% of the outstanding common stock of Apergy to Dover’s stockholders. Dover’s Board of Directors approved the distribution on April 18, 2018 and Apergy’s Registration Statement on Form 10 was declared effective by the SEC on April 19, 2018. On May 9, 2018, Dover’s stockholders of record as of the close of business on the record date of April 30, 2018 received one share of Apergy stock for every two shares of Dover stock held at the close of business on the record date. Following the Separation, Dover retained no ownership interest in Apergy. Apergy’s common stock began “regular-way” trading on the NYSE under the “APY” symbol on May 9, 2018.

Merger Agreement with ChampionX

On December 19, 2019, ApergyCompany and Ecolab Inc. (“Ecolab”) announced the execution of an Agreement and Plan of Merger and Reorganization in which Ecolab will separate their upstream energy business (“ChampionX”) and simultaneously combine it with Apergy incompleted a Reverse Morris Trust transaction (“the Merger”). Immediately prior to the Merger,in which Ecolab will transfertransferred their upstream energy business to legacy ChampionX and, its subsidiaries (“ChampionX Separation”) and, thereafter, will distribute 100%distributed all of the shares of legacy ChampionX common stock to certain Ecolab stockholders (“the Distribution”). On May 1, 2020, Ecolab commenced an exchange offer to its stockholders, whereby shareholders have the option to exchange all or a portion of their shares of Ecolab common stock for shares of ChampionX common stock (“Exchange Offer”). In the event the Exchange Offer is not fully subscribed, Ecolab will distribute the remaining shares of ChampionX common stock owned by Ecolab on a pro-rata basis to Ecolab stockholders whose shares of Ecolab common stock remain outstanding after the Exchange Offer.stockholders. Immediately following the Distribution, Athena Merger Sub, Inc., a wholly owned subsidiary of Apergy, will mergethe Company merged with and into legacy ChampionX, with legacy ChampionX continuing as the surviving company in the Merger and as a wholly owned subsidiary of Apergy. References to “the Transactions” refer to the transactions describedCompany. The Merger constitutes a business combination, with the Company (formerly known as Apergy) treated as the accounting acquirer and legacy ChampionX Separation,treated as the Distribution andacquired company for accounting purposes. In association with the Merger.

Upon completion of the Merger, each issuedthe Company has changed its name from Apergy Corporation to ChampionX Corporation, and outstanding sharecommon shares began trading on the New York Stock Exchange under the symbol “CHX”. See Note 2—Merger to our condensed consolidated financial statements included in Part I, Item 1 of ChampionX common stock will be converted into the right to receive a number of shares of Apergy common stock at an exchange ratio calculated such that followingthis Quarterly Report on Form 10-Q for more information.

In connection with the Merger, we reorganized our reportable segments. As a result, we have identified two new reportable segments, Production Chemical Technologies and Reservoir Chemical Technologies, which include the results of operations of legacy ChampionX. The legacy Apergy reportable segments remain unchanged. The results of operations of legacy ChampionX equityholders will own,have been reflected in our accompanying condensed consolidated financial statements from the aggregate, approximately 62%closing date of the issued and outstanding shares of the combined company. Apergy equityholders will own, in the aggregate, approximately 38% of the issued and outstanding shares of the combined company. The Board of DirectorsMerger through September 30, 2020. Results for the combined company willperiods prior to June 3, 2020 reflect the financial and operating results of legacy Apergy and do not include the seven current membersfinancial and operating results of Apergylegacy ChampionX. As such, our historical results of operations are not comparable from period to period and two members designated by Ecolab. The Merger is expectedmay not be comparable to close during the second quarterour financial results of 2020.operations in future periods.






Basis of Presentation

We revised our previously issued financial statements for the three and nine months ended March 31,September 30, 2019, for the correction of immaterial errors. In addition, we made certain reclassifications to conform to the presentation of the current period financial statements. Refer to Note 1—Basis of Presentation for information on the basis of presentation of theto our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. For more information on our segments, see Note 15 — Segment Information to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

For the quarters ended March 31, 2020, and 2019, we did not declare or pay distributions to the noncontrolling interest holder in Apergy Middle East Services LLC, a subsidiary in the Sultanate of Oman. We have a commission arrangement with our noncontrolling interest for 5% of certain annual product sales.


Business Environment

We focus on economic- and industry-specific drivers and key risk factors affecting our business segments as we formulate our strategic plans and make decisions related to allocating capital and human resources. Our business segments provide a broad range of technologies and products for the oil and gas drilling and production industry and, as a result, are substantially dependent upon activity levels in the oil and gas industry. Demand for our products, technologies and services is impacted by overall global demand for oil and gas, ongoing depletion rates of existing wells which produce oil and gas, and our customers’ willingness to invest in the development and production of oil and gas resources. Our customers determine their operating and capital budgets based on current and future crude oil and natural gas prices, U.S. and worldwide rig count and U.S. well completions, among other factors. Crude oil and natural gas prices are impacted by supply and demand, which are influenced by geopolitical, macroeconomic and local events and have historically been subject to substantial volatility and cyclicality. Future higher crude oil and natural gas prices typically translate into higher exploration and production budgets. Rig count, footage drilled and exploration and production investment by oil and gas operators have often been used as leading indicators for the level of drilling and development activity in the oil and gas sector.

Market Conditions and Outlook

InDuring the first quarterhalf of 2020, certain unprecedented events caused the rapid decline of oil prices began to decline significantly asprices. Decisions by the Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing nations (collectively “OPEC+”) were unable to agree on the need to maintain and extend compliance with previously agreed upon production cuts. Consequently,resulted in March 2020 Russia and Saudi Arabia announced that each party would increase oil production and reduce the prices at which they make oil available to market, resulting in a battle for increased market share.

an oversupply of crude oil. Compounding this situation, demand for oil and gas commodities declined significantly as the world was impacted by the novel coronavirus (“COVID-19”) outbreak, which the World Health Organization declared asresulted in a pandemic on March 11, 2020. Since that time, various jurisdictions have attempted to implement or have implemented measures designed to contain the spread of the virus, including travel restrictions, stay-at-home or shelter-in-place orders and shutdowns of non-essential businesses, reducing the overall demand forsharp decline in crude oil and gas commodities. In an attempt to stabilize global oil markets, OPEC+ reached an agreement in April 2020 to cut production beginning in the second quarter of 2020, however, due to the uncertainty of the ongoing COVID-19 pandemic’s impact on oil demand, the impact of these production cuts on oil prices is unclear at this time.

prices. In response to the significant reduction in oil prices, customer spending associated with drilling and exploration and production (E&P) activity deteriorated at a rapid pace during March 2020 due to reduced drilling activities, lower budgeted capital and operating expenditures and cost cutting initiatives. Due to the short-cycle nature of our business and recent global events,

Although oil prices rebounded moderately, we are still below average oil prices experienced during 2019. We expect market conditions to remain challenging throughout the remainder of 2020 and potentially longer,into 2021 as we believe it will take time for global oil demand to recover from the COVID-19 pandemic and for oil supplies to return to normal levels. FromOutside of the incremental revenues associated with the Merger, we experienced a geographic perspective, we expectsequential increase in revenue in North AmericanAmerica, primarily within our Production and Automation Technologies segment. This increase was driven by higher volumes across our artificial lift portfolio as customer spending began to recover from the compressed levels experienced during the second quarter. Internationally, markets including the Permian Basin, to be the most challenging due to the significant amount of announced E&P capital expenditure reductions. We expect international markets to behave been more resilient, particularly in Australia and the Middle East, as the need for artificial lift in those regions is increasing and the international sales cycle is longer than the North American cycle.


Average crude oil and natural gas prices, rig counts and aggregate well completions are summarized below:
 2019 2020
 Q1Q2Q3Q4FY Q1
WTI Crude (per bbl) (a)54.82
59.88
56.34
56.86
56.99
 45.59
Brent Crude (per bbl) (a)63.10
60.56
61.95
63.27
62.22
 50.26
Henry Hub Natural Gas (per mmBtu) (a)2.92
2.57
2.38
2.40
2.56
 1.91
        
U.S. Rig Count (b)1,043
989
920
820
941
 785
Canada Rig Count (b)183
82
132
139
134
 196
International Rig Count (b)1,030
1,051
1,059
1,056
1,049
 1,037
Worldwide Rig Count2,256
2,122
2,111
2,015
2,124
 2,018
        
Aggregate U.S. Well Completions (a)3,814
4,161
4,193
3,639
15,807
 3,231
_______________________
(a) Source: U.S. Energy Information Administration (EIA), as of April 15, 2020.
(b) Source: Baker Hughes Rig Count, as of April 15, 2020. Excludes Ukraine rig count.

Apergy’s Response to the COVID-19 Pandemic

In response to impacts of the COVID-19 pandemic, which included market volatility and a steep decline in the global demand for crude oil, and the contemporaneous oversupply of crude oil associated with the decision by Saudi Arabia to materially increase crude oil production in response to a dispute with Russia over crude oil production levels, we implemented a set of immediate actions to reduce operating costs and capital spending. These actions which we expect to complete as part of our restructuring plan in the second and third quarters of 2020, are expected to generate annualized operating cost savings of $85$135 million during fiscal year 2020 and include:

reduction in total ApergyChampionX headcount;
company-wide salary reductions, including steeper reductions for executive management and the highest reduction for our chief executive officer; and
facility rationalization and elimination of non-essential expenses.

Additionally, we arehave significantly reducingreduced capital expenditures and investment inexpect a full year reduction of approximately $50 million, including ESP leased assets within our Production & Automation Technologies segmentsegment. On our recently acquired Chemical Technologies business, we have reduced capital spend by $50 million as compared to spending in 2019.50% against prior year levels. We are continuing to monitor market developments and will take additional restructuring actions should further declines in drillingoilfield service activities occur.

Ensuring the health and safety of our employees is paramount. As our businesses are classified as critical infrastructure, our manufacturing and field locations continue to operate and support the vital oil and gas infrastructure around the world. In order to protect our employees during this period, we mobilized our crisis management team and have adopted a comprehensive response plan, which includes:

taking precautions consistent with local, state, and national government health authority guidelines, including the Centers for Disease Control and Prevention and the World Health Organization;
daily
meetings between the crisis management team and executive management to ensure real-time understanding of developments as they occur such that our communications and responses are appropriate and timely;
equipping our employees with additional personal protective equipment;
introducing new employee screening procedures in our operations; and
enacting social distancing procedures, including staggering shifts, implementing rotating work schedules, and modifying workspaces and break areas.



CRITICAL ACCOUNTING ESTIMATES

Refer to our “Critical Accounting Estimates” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of our critical accounting estimates.estimates, together with the following additional critical accounting estimate:

Long-LivedDetermination of Fair Value in Business Combinations

Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets acquired and Intangible Assets Valuation
Long-lived assetsliabilities assumed at their respective fair values. The determination of fair value requires the use of significant estimates and assumptions, and in making these determinations, management uses all available information. If necessary, we have up to be heldone year after the acquisition closing date to finalize these fair value determinations under the applicable GAAP. For tangible and used, including property, plant and equipment, identifiable intangible assets being amortizedacquired in a business combination, the determination of fair value utilizes several valuation methodologies including discounted cash flows which has assumptions with respect to the timing and capitalized software costs are reviewed for impairment whenever events or circumstances indicate the carrying amount of the long-lived asset mayfuture revenue and expenses associated with an asset. The assumptions made in performing these valuations include, but are not be recoverable. The carrying amountlimited to, discount rates, future revenues and operating costs, projections of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the usecapital costs, and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management. Because there usually is a lack of quoted market prices for long-lived assets, fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount ratesother assumptions believed to be consistent with those used by principal market participants, or based on a multipleparticipants. Due to the specialized nature of operating cash flow validated with historical market transactions of similar assets where possible. The expected future cash flows used for impairment reviews and related fair valuethese calculations, are based on judgmental assessments of future productivity of the asset, operating costs and capital decisions and all available information at the date of review. If future market conditions deteriorate fromwe engage third-party specialists to assist management in evaluating our current expectations or assumptions impairment of long-lived assets may be identified if we conclude that the carrying amounts are no longer recoverable. Long-lived assets classified as held for sale are reported at the disposal group’s fair value, less cost to sell, beginning in the period in which the held-for-sale criteria have been met. An impairment loss is recognized in the amount in which the carrying amount of the disposal group exceeds its fair value. The fair value of a disposal group is measured based on market information when available, suchwell as negotiated selling price. Because there usually is a lack of market prices for long-lived assets,appropriately measuring the fair value of impaired held for sale assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants.
In 2019, we recorded an asset impairment of $1.8 million related to classifying our pressure vessel manufacturing business in our Production & Automated Technologies segment as held for sale.
Impairment Assessment - March 31, 2020
We determined that certain events in the first quarter of 2020, which we determined constituted a triggering event as discussed below in Valuation of Goodwill, caused us to review all asset groups within our Artificial Liftacquired and Automation reporting units at March 31, 2020. Additionally, Artificial Lift and Automation had fair values below their respective carrying value, which also caused us to perform a review at the asset group level for each reporting unit.
As part of our asset impairment review at March 31, 2020, we engaged a third-party valuation firm to assist us. Based upon the results of the analysis, we identified two asset groups, PCS Ferguson (“PCS”) and Spirit Global Energy Services, Inc. (“Spirit”), that had a fair value less than the carrying value of their respective assets as follows. Both of these asset groups are reported within the Artificial Lift reporting unit. The outlook for these asset groups has been significantly impacted by the reduction in capital expenditure budgets by E&P companies operating in North America. The unprecedented nature of the impact of the COVID-19 pandemic on demand for crude oil presents a challenging market for our products in the short-term and uncertainty in the long-term with respect to its impact on the overall oil and gas commodities market.
Accordingly, we recorded a long-lived asset impairment charge totaling $41.0 million the first quarter of 2020, which consisted of a $29.1 million charge related to definite-lived intangible asset impairment for customer relationships in PCS, and a $11.9 million charge related to definite-lived intangible asset impairment for customer relationships and trademarks in Spirit. The impairment charge was recorded to “Long-lived asset impairment” in the condensed consolidated statements of income.
Valuation of Goodwill
We assess the recoverability of goodwill as of October 1 on an annual basis, or more frequently if impairment indicators arise. Goodwill is tested at the reporting unit level, which is at or one level below our operating segments. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. The goodwill impairment test involves comparing management’s estimate of fair value of a reporting unit with its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying value, then goodwill is impaired to the extent of the difference; however, the impairment may not exceed the balance of goodwill assigned to that reporting unit.
Fair value of reporting units is determined using a combination of two valuation methods: an income approach and a market approach with each method given equal weight in determining the fair value assigned to each reporting unit. Absent an

indication of fair value from a potential buyer or similar specific transaction, we believe the use of these two methods provides a reasonable estimate of a reporting unit’s fair value.
The income approach is based on forecasted future debt-free cash flows that are discounted to present value using factors that consider timing and risk of future cash flows. We believe this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. Discounted cash flow projections are based on financial forecasts developed from operating plans and economic outlooks, growth rates, estimates of future expected changes in operating margins, terminal value growth rates, future capital expenditures and changes in working capital requirements. Estimates of discounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions which are inherently uncertain and unpredictable and do not reflect unanticipated events and circumstances that may occur, changes to business models, regulatory or political environment changes, changes in customer demand, changes in our weighted average cost of capital (“WACC”), or changes in operating performance. The discount rate applied to the estimated future cash flows is one of the most significant assumptions utilized under the income approach. We determine the appropriate discount rate for each reporting unit based on the WACC for each individual reporting unit. The WACC takes into account both the pre-tax cost of debt and cost of equity, as well as, company-specific risks associated with each reporting unit.
The market approach estimates fair value by first determining earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples for comparable publicly-traded companies with similar characteristics of the reporting unit. The EBITDA multiples for comparable companies are based upon current enterprise value. The enterprise value is based upon current market capitalization and includes a control premium. We believe this approach is appropriate as it provides a fair value estimate using multiples from entities with operations and economic characteristics comparable to its reporting unit; however, past performance may not be indicative of future performance, especially in our current market environment.
Impairment Assessment - March 31, 2020
On March 31, 2020, we performed an interim impairment assessment of goodwill as certain events, which occurred during the first quarter of 2020, impacted our future revenues and cash flows and were deemed to be a triggering event. These events include: (i) on March 6, 2020, Russia and the Organization of Petroleum Exporting Countries (“OPEC”) producers were unable to agree on the need to maintain and extend compliance with previously agreed upon production cuts, which led to reduced crude oil prices and a substantial surplus in the supply of oil; (ii) on March 11, 2020, the World Health Organization declared COVID-19 as a pandemic, which greatly reduced travel and other non-essential activities across the world, and resulted in a decrease in global demand for oil and related decrease in capital investment for drilling activities, especially in North America; and (iii) on March 23, 2020, Apergy’s common stock price ended trading at $3.02, the lowest end of day stock price since Apergy’s stock began “regular-way” trading on the NYSE on May 9, 2018, which we believe reflects the negative impacts of current market conditions and effects to the oil and gas industry in relation to our market capitalization.
We had three reporting units for purposes of assessing goodwill at March 31, 2020 as follows: Artificial Lift, Automation and Drilling Technologies. Our recorded goodwill balance was $908.0 million at the interim impairment testing date, consisting of $577.3 million for Artificial Lift, $229.6 million for Automation, and $101.1 million for Drilling Technologies. The Artificial Lift and Automation reporting units are within our Production & Automation Technologies segment and the Drilling Technologies reporting unit is within our Drilling Technologies segment.
Given the unprecedented uncertainty of both short-term and long-term market conditions, we utilized a weighted-average projection for estimated future cash flows that consists of three estimated future cash flows scenarios with the following weightings: (i) low case scenario with a 40% weighting, (ii) base case scenario with a 40% weighting, and (iii) high case scenario with a 20% weighting.
Significant assumptions used in our March 31, 2020 goodwill impairment review included: (i) WACC ranging from 14.5% to 16.5%; (ii) annual revenue growth rates generally ranging from (56.4%) to 41.9% in the short term and 3.0% to 25.0% in the long term; (iii) operating margins ranging from (11.4%) to 25.1% in the short term associated with market declines, but sustained or slightly increased gross margins long term; (iv) terminal values for each reporting unit using a long-term growth rate of 3.0%; and (v) peer group EBITDA multiples. If actual results differ from estimates used in these calculations, we could incur future impairment charges. As discussed above, we engaged a third-party valuation firm to assist us in our interim impairment review, which included assistance with certain significant assumptions such as discount rates for reporting units and peer group EBITDA multiples.
The carrying value of our Artificial Lift reporting unit exceeded its fair value by $539.2 million, or 52%. The value derived from the income approach decreased 62.1% from our October 1, 2019 annual goodwill impairment review. Revenue growth rates in the short-term ranged from (35.0%) to 14.1%, long-term revenue growth rates ranged from 3.0% to 13.2%, and the

WACC was 14.5%. We utilized a long-term growth rate of 3.0% in computing the terminal value. The outlook for Artificial Lift has been significantly impacted by the reduction in capital expenditure budgets by E&P companies operating in North America. The unprecedented nature of the impact of the COVID-19 pandemic on demand for crude oil presents a challenging market for our products in the short-term and uncertainty in the long-term with respect to its impact on the overall oil and gas commodities market.
The carrying value of our Automation reporting unit exceeded its fair value by $77.1 million, or 26%. The value derived from the income approach decreased 69.9% from our October 1, 2019 review. Revenue growth rates in the short-term ranged from (35.2%) to 18.4%, long-term revenue growth rates ranged from 3.0% to 16.8%, and the WACC was 16.5%. We utilized a long-term growth rate of 3.0% in computing the terminal value. Similar to Artificial Lift, the outlook for Automation reflects the deterioration in demand for our products as a result of the sharp decline in our customers’ capital expenditure budgets resulting from depressed crude oil prices.
The fair value of our Drilling Technologies reporting unit exceeded its carrying value by $253 million or 135%, and as such, no impairment to recorded goodwill was required. The value derived from the income approach decreased 34.7% from our October 1, 2019 review. Revenue growth rates in the short-term ranged from (56.4%) to 41.9%, long-term revenue growth rates ranged from 3.0% to 25.0%, and the WACC was 15.5%. We utilized a long-term growth rate of 3.0% in computing the terminal value. The outlook for our Drilling Technologies has been significantly impacted by declining worldwide rig counts as a result of depressed oil and gas commodity prices.
In the first quarter of 2020, we recorded a goodwill impairment charge totaling $616.3 million, which consisted of a $539.2 million charge in Artificial Lift and a $77.1 million charge in Automation. The impairment charge was recorded to “Goodwill impairment” in the condensed consolidated statements of income.
Assuming all other assumptions and inputs used in each of the respective discounted cash flow analysis were held constant, a change in the following assumptions would have the following effect on the fair value derived from the income approach: (i) a decrease in revenue growth rates by 100 basis points decreases the fair value by approximately $30 million, and (ii) an increase in the discount rate assumption by 100 basis point decreases the fair value by approximately $30 million.
Certain of the inherent estimates and assumptions used in determining fair value of the reporting units are outside of the control of management. While the Company believes it has made reasonable estimates and assumptions to calculate the fair values of the reporting units, actual results may differ from those used in the Company’s valuations and could result in additional impairment charges. The Company will continue to monitor its reporting units for additional triggering events or other signs of impairment. The Company may be required to perform additional interim impairment tests based on changes in the economic environment, further sustained deterioration of the Company’s market capitalization, and other factors in the future.liabilities assumed.


CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2020 AND 2019

Three Months Ended    Three Months Ended    
March 31, ChangeSeptember 30, Change
(dollars in thousands)2020 2019 $ %2020 2019 $ %
Revenue$261,434
 $300,494
 (39,060) (13.0)$633,526
 $276,839
 356,687
 128.8%
Cost of goods and services179,095
 197,483
 (18,388) (9.3)505,066
 184,140
 320,926
 *
Gross profit82,339
 103,011
 (20,672) (20.1)128,460
 92,699
 35,761
 38.6%
Selling, general and administrative expense78,143
 64,129
 14,014
 21.9
122,156
 68,405
 53,751
 78.6%
Goodwill impairment616,271
 —
 616,271
 *
Long-lived asset impairment40,980
 1,746
 39,234
 *
Interest expense, net9,039
 10,527
 (1,488) (14.1)15,935
 9,590
 6,345
 66.2%
Other (income) expense, net(1,633) 1,102
 (2,735) *
1,663
 (309) 1,972
 *
Income (loss) before income taxes(660,461) 25,507
 (685,968) *
(11,294) 15,013
 (26,307) *
Provision for (benefit from) income taxes(27,006) 5,569
 (32,575) *
(3,962) 3,425
 (7,387) *
Net income (loss)(633,455) 19,938
 (653,393) *
(7,332) 11,588
 (18,920) *
Net income attributable to noncontrolling interest273
 282
 (9) *
582
 194
 388
 *
Net income (loss) attributable to Apergy$(633,728) $19,656
 (653,384) *
Net income (loss) attributable to ChampionX$(7,914) $11,394
 (19,308) *
              
Gross profit margin31.5% 34.3%   (280) bps.
20.3% 33.5%   (1320) bps.
SG&A expense, percent of revenue29.9% 21.3%   860 bps.
19.3% 24.7%   (540) bps.
Effective tax rate4.1% 21.8%   (1770) bps.
35.1% 22.8%   1230 bps.
_______________________
*
Not meaningful

Revenue. Revenue decreased $39.1increased $356.7 million, or 13.0%128.8%, in the firstthird quarter of 2020 compared to prior year driven byas a decrease in revenueresult of $21.6$481.2 million inof incremental revenues from our Drillingrecently acquired Chemicals Technologies segment primarily due tobusiness. Offsetting these incremental revenues was a steep decline in U.S. land-based rig count and drilling activity in the first quarter of 2020, and a $17.5$85.0 million decrease in revenue in our Production & Automation Technologies segment driven by a decline in drilling and completion activities and related reduced customer spending in North America and internationally, which affected our artificial lift, digital products, and other production equipment offerings. Additionally, there was a $39.2 million decrease in revenue in our Drilling Technologies segment primarily due to a steep decline in U.S. land-based rig count and drilling activity in the first quarter of 2020.

Gross profit. Gross profit decreased $20.7increased $35.8 million, or 20.1%38.6%, in the firstthird quarter of 2020 compared to the prior year mainly due to $100.1 million of gross profit generated by our recently acquired Chemicals Technologies business, offset by lower sales volume at both Production & Automation Technologies and Drilling Technologies segments, and a $1.7 millionan increase in restructuring charges.depreciation expense of $23.2 million primarily due to a change in salvage value estimate for certain of our leased assets, and depreciation expense incurred on assets acquired related to the Merger.

Selling, general and administrative expense. Selling, general and administrative expense increased $14.0$53.8 million, or 21.9%78.6%, in the firstthird quarter of 2020 compared to the prior year primarily due to $11.1$68.0 million of selling, general and administrative expense generated by our recently acquired Chemicals Technologies business subsequent to the acquisition date. The increase also includes acquisition and integration costs of $8.4 million associated with the planned merger with ChampionX, $2.7legacy ChampionX. The increase in selling, general and administrative expense was partially offset by cost savings resulting from restructuring actions taken in the latter half of 2019 and the second quarter of 2020.

Interest expense, net. Interest expense, net increased $6.3 million in the third quarter of increased professional fees2020 compared to prior year primarily due to incremental interest expense related to the remediationterm loan assumed as part of the material weaknesses identifiedMerger.

Provision for (benefit from) income taxes. Our provision for (benefit from) income taxes reflected effective tax rates of 35.1% and 22.8%, in the third quarter of 2020 and 2019, respectively. The effective tax rate was impacted by the effects of valuation allowances in loss jurisdictions and $2.5foreign branch earnings.



CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

 Nine Months Ended    
 September 30, Change
(dollars in thousands)2020 2019 $ %
Revenue$1,193,874
 $883,503
 $310,371
 35.1 %
Cost of goods and services950,845
 579,033
 371,812
 64.2 %
Gross profit243,029
 304,470
 (61,441) (20.2)%
Selling, general and administrative expense330,956
 199,221
 131,735
 66.1 %
Goodwill impairment616,271
 —
 616,271
 *
Long-lived asset impairment40,980
 1,746
 39,234
 *
Interest expense, net36,236
 30,226
 6,010
 19.9 %
Other (income) expense, net342
 3,469
 (3,127) (90.1)%
Income (loss) before income taxes(781,756) 69,808
 (851,564) *
Provision for (benefit from) income taxes(31,922) 15,274
 (47,196) *
Net income (loss)(749,834) 54,534
 (804,368) *
Net income attributable to noncontrolling interest1,453
 547
 906
 *
Net income (loss) attributable to ChampionX$(751,287) $53,987
 (805,274) *
        
Gross profit margin20.4% 34.5%   (1410) bps.
SG&A expense, percent of revenue27.7% 22.5%   520 bps.
Effective tax rate4.1% 21.9%   (1780) bps.
_______________________
* Not meaningful

Revenue. Revenue for the first nine months of 2020 increased $310.4 million, or 35.1%, year-over-year driven by $644.5 million of incremental revenues associated with our recently acquired Chemicals Technologies business. The increase in revenue was offset by a decrease in Drilling Technologies revenue of $110.1 million year-over-year due to lower volumes and pricing pressure. Additionally, Production & Automation Technologies revenue decreased $223.6 million year-over-year, driven by lower volumes in North America and internationally, and the disposition of our pressure vessel manufacturing business in the second quarter of 2019.

Gross profit. Gross profit for the first nine months of 2020 decreased $61.4 million, or 20.2%, year-over year, reflecting lower sales volumes in our Production & Automation Technologies and Drilling Technologies segments. The decrease is also attributable to an increase in depreciation expense of $45.8 million, primarily due to a change in salvage value estimate for certain of our leased assets and incremental depreciation expense incurred on assets acquired related to the Merger. The decrease in gross profit in Drilling Technologies and Production & Automation Technologies is partially offset with gross profit of $127.0 million generated subsequent to the Merger date by our recently acquired Chemicals Technologies business.

Selling, general and administrative expense. Selling, general and administrative expense for the first nine months of 2020 increased bad debt expense.$131.7 million, or 66.1%, year-over-year, primarily due to $92.7 million of selling, general and administrative expense generated subsequent to the acquisition date by our recently acquired Chemicals Technologies business as well as acquisition and integration costs of $78.0 million related to the Merger. The increase also includes an increase of $4.2 million for restructuring charges, and $5.3 million for professional fees incurred related to material weakness remediation. The increase in selling, general and administrative expense was partially offset by cost savings from restructuring actions taken in the second half of 2019.2019 and the second quarter of 2020.

Goodwill and long-lived asset impairment. We incurred goodwill and long-lived asset impairment charges of $616.3 million and $41.0 million, respectively, resulting from a significant decrease in current and expected future customer spending in capital investments for drilling activities primarily in North America. The decrease in current and expected future customer spending is due to the negative impacts of the COVID-19 pandemic, which greatly reduced the global demand for oil, and the surplus in the supply of crude oil associated with the recent increase in oil production from OPEC and Russia.

Interest expense, net. Interest expense, net decreased $1.5 million in the first quarternine months of 2020 compared to prior yearincreased $6.0 million year-over-year due to lower average balances ofa draw on our revolving credit facility during the second quarter, as well as incremental interest expense related to the term loan facilityassumed as a resultpart of debt repayments over the last twelve months.Merger, partially offset by the repayment of $75 million of the Company’s term loan during the quarter.


Provision for (benefit from) income taxes. Our provision for (benefit from) income taxes reflectedThe effective tax rates of 4.1% and 21.8%, infor the first quarternine months of 2020 and 2019 were 4.1% and 21.9% respectively. The tax benefit recognized for the first quarter ofduring 2020 reflects the loss before income taxes, largely due to goodwill and intangible asset impairment charges recorded during the first quarter. The effective tax rate was primarily impacted by the tax effects of impairment of non-taxable goodwill of $560.1 million, recognized as a discrete item duringitem. Other items impacting the quarter.rate include the effects of valuation allowances in loss jurisdictions and foreign branch earnings.


SEGMENT RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2020 AND 2019

Production Chemical Technologies
(dollars in thousands) Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020 (1)
Revenue $410,151
$546,153
Operating profit 35,172
45,094
Operating profit margin 8.6%8.3%
    
Depreciation and amortization $26,407
$33,364
_______________________
(1) The results of operations of the Production Chemical Technologies segment have been reflected in the table above from the closing date of the Merger through September 30, 2020.

Revenue. Production Chemical Technologies revenue is primarily generated from providing E&P and other customers in the oil and natural gas production and midstream markets with solutions to manage and control corrosion, oil and water separation, flow assurance, sour gas treatment and a host of water-related issues. Revenue was $410.2 million for the period. Deteriorating market conditions during the second and third quarters of 2020 have significantly impacted customer demand; however, as Production Chemical Technologies mostly supports existing production, sales are somewhat less sensitive to changes in customers’ capital and operating expenditure budgets related to the exploration for and development of new oil and natural gas reserves, which are more directly affected by trends in oil and natural gas prices.

Operating profit. Production Chemical Technologies generated operating profit of $35.2 million during the three months ended September 30, 2020, which includes depreciation and amortization expense of $26.4 million and an increase to cost of goods sold related to the step-up of inventory as part of the purchase price allocation of $7.6 million.

 Production & Automation Technologies
  Three Months Ended March 31, Change
(dollars in thousands) 2020 2019 $ %
Revenue $205,479
 $222,959
 (17,480) (7.8)
Operating profit (648,591) 13,064
 (661,655) (5,064.7)
Operating profit margin (315.6)% 5.9%   (32150) bps.
         
Depreciation and amortization $27,572
 $27,284
 288
 1.1
Goodwill impairment 616,271
 —
 *
 *
Long-lived asset impairment 40,980
 1,746
 39,234
 2,247.1
Restructuring and other related charges 671
 896
 (225) (25.1)
         
Bookings $223,970
 $219,465
 4,505
 2.1
  Three Months Ended September 30, Change
(dollars in thousands) 2020 2019 $ %
Revenue $136,921
 $221,962
 (85,041) (38.3)%
Operating profit (loss) (7,454) 18,917
 (26,371) (139.4)%
Operating profit (loss) margin (5.4)% 8.5%   (1390) bps.
         
Depreciation and amortization $30,221
 $27,196
 3,025
 11.1 %
Restructuring and other related charges 914
 2,194
 (1,280) (58.3)%
Environmental costs —
 1,988
 (1,988) (100.0)%
Acquisition transaction costs 250
 167
 83
 49.7 %
______________________
*
Not meaningful

Revenue. Production & Automation Technologies revenue decreased $17.5$85.0 million, or 7.8%38.3%, as compared to the prior year, primarily due to a decline in customer spending as a result of deteriorating market conditions during the first quartersecond and third quarters of 2020. The decline in customer spending led to lower volumes and associated lower revenue in our artificial lift, digital products and other production equipment offerings in North America. Partially offsetting the decrease in revenue was an increase in revenue from digital products of $2.6 million, or 8.4%, to $33.9America and international markets.


Operating profit. Production & Automation Technologies operating profit decreased $26.4 million in the firstthird quarter of 2020 compared to the prior year primarily due to lower sales volume as noted above. The decrease in costs of goods and services of approximately $42.9 million as well as an increasea $14.5 million reduction in selling, general and administrative costs partially offset the decline in revenue. The decline in costs is predominantly volume driven, further supplemented by various cost reduction initiatives initiated during the latter part of $4.52019 and first half of 2020 in response to the economic downturn. These cost initiatives were implemented to better align the segment’s cost base with the significantly lower demand environment.

  Nine Months Ended September 30, Change
(dollars in thousands) 2020 2019 $ %
Revenue $457,141
 $680,739
 (223,598) (32.8)%
Operating profit (loss) (693,213) 51,849
 (745,062) *
Operating profit (loss) margin (151.6)% 7.6%   (15920) bps.
         
Depreciation and amortization $99,327
 $82,177
 17,150
 20.9 %
Goodwill impairment 616,271
 —
 616,271
 *
Long Lived Asset Impairment 40,980
 1,746
 39,234
 *
Restructuring and other related charges **
 9,919
 6,225
 3,694
 59.3 %
Environmental costs —
 1,988
 (1,988) (100.0)%
Acquisition transaction costs 910
 167
 743
 *
_______________________
*
Not meaningful
** Includes a $2.5 million loss on disposal during the nine months ended September 30, 2019, related to our pressure vessel manufacturing business.

Revenue. Production & Automation Technologies revenue for the nine months of 2020 decreased $223.6 million, or 32.8%, year-over-year, driven by lower volumes in revenue generatedNorth America and internationally due to deteriorating market conditions during the first half of 2020, and the disposition of our pressure vessel manufacturing business in markets outsidethe second quarter of North America.2019.

Operating profit. Production & Automation Technologies operating profit decreased$661.7 $745.1 million in the first quarter of 2020 compared to the prior yearyear-over-year primarily driven by goodwill and long-lived asset impairment charges of $616.3 million and $41.0 million, respectively, in the first quarter of 2020. Excluding impairment charges, operating profit decreased $4.4$89.6 million, in the first quarter of 2020 compared to the prior year, primarily due to lower sales volume, professional feesan increase in depreciation and amortization expense of $2.7$17.2 million primarily related to remediation activities associated with material weaknesses that were identified during 2019a change in salvage value estimate for certain of our leased assets, and increased bad debtrestructuring expense and other related charges of $3.7 million, partially offset by decreased environmental costs of $2.0 million. Partially offsetting the decrease in operating profit were increases associated with cost savings from restructuring actions taken in the second half of 2019, productivity savings and gains on foreign currency transactions.


Drilling Technologies
 Three Months Ended March 31, Change Three Months Ended September 30, Change
(dollars in thousands) 2020 2019 $ % 2020 2019 $ %
Revenue $55,955
 $77,535
 (21,580) (27.8) $15,715
 $54,877
 (39,162) (71.4)%
Operating profit 11,359
 26,806
 (15,447) (57.6)
Operating profit (loss) (5,127) 13,797
 (18,924) (137.2)%
Operating profit margin 20.3% 34.6%   (1430) bps.
 (32.6)% 25.1%   (5770) bps.
                
Depreciation and amortization $2,105
 $2,509
 (404) (16.1) $1,936
 $2,244
 (308) (13.7)%
Restructuring and other related charges 2,095
 —
 2,095
   —
 526
 (526) (100.0)%
        
Bookings $54,039
 $78,586
 (24,547) (31.2)

Revenue. Drilling Technologies revenue decreased $21.6$39.2 million, or 27.8%71.4%, in the firstthird quarter of 2020 compared to the prior year primarily due to a steep decline in U.S. land-based rig count and associated decline in customer spending on drilling activities, which negatively impacted sales volumes of our diamond cutters and diamond bearings products.

Operating profit. Drilling Technologies operating profit decreased $15.4$18.9 million in the firstthird quarter of 2020 compared to the prior year period primarily due to lower revenue.


  Nine Months Ended
September 30,		 Change
(dollars in thousands) 2020 2019 $ %
Revenue $92,618
 $202,764
 (110,146) (54.3)%
Operating profit 2,421
 64,853
 (62,432) (96.3)%
Operating profit margin 2.6% 32.0%   (2940) bps.
         
Depreciation and amortization $6,045
 7,079
 (1,034) (14.6)%
Restructuring and other related charges 5,521
 526
 4,995
 *

Revenue. Drilling Technologies revenue decreased $110.1 million, or 54.3%, year-over-year primarily due to a steep decline in U.S. land-based rig count and associated decline in customer spending on drilling activities, which negatively impacted sales volumes of our diamond cutters and diamond bearings products.

Operating profit. Drilling Technologies operating profit decreased $62.4 million year-over-year due to lower revenue and increased restructuring charges of $2.1$5.0 million associated with employee severance and related benefits, partially offset by productivity savings.

Reservoir Chemical Technologies
(dollars in thousands) Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020 (1)
Revenue $21,264
$30,570
Operating loss (3,819)(6,630)
Operating loss margin (18.0)%(21.7)%
    
Depreciation and amortization $1,923
$4,141
______________________
(1) The results of operations of the Reservoir Chemical Technologies segment have been reflected in the table above from the closing date of the Merger through September 30, 2020.


Revenue. Reservoir Chemical Technologies revenue is primarily comprised of the sale of specialty products that support well stimulation, construction (including drilling and cementing) and remediation needs to service and equipment companies that support global E&P companies. Revenue was $21.3 million for the period. Reservoir Chemical Technologies products are sensitive to changes in its customers’ capital expenditure budgets as they relate closely to the exploration and development of new oil and natural gas reserves. This exploration and development activity is affected by trends in oil and natural gas prices and its customers’ corresponding levels of drilling activity, capital investment and well development.

Operating profit. Reservoir Chemical Technologies generated operating loss of $3.8 million in the third quarter of 2020, which includes depreciation and amortization expense of $1.9 million. Reservoir Chemical Technologies generated operating loss of $6.6 million for the nine months of 2020, which includes depreciation and amortization expense of $4.1 million and an increase in cost of goods sold related to the step-up of inventory as part of the purchase price allocation of $0.5 million.

CAPITAL RESOURCES AND LIQUIDITY

Overview

At March 31,September 30, 2020, we had cash and cash equivalent balances of $53.6$171.5 million of which approximately $16.1 million, or 30.1%, were held outside the United States for the primary purpose of working capital and operational support needs. During the second quarter, in order to ensure appropriate liquidity as a result of the industry downturn, the negative business impacts of COVID-19, and to have sufficient funds to extinguish merger-related transaction expenses, we borrowed $125 million against our revolving credit facility. As a result of ongoing robust cash generation throughout the second and third quarters, the Company was able to fully repay the $125 million borrowing during the second quarter as well as an additional $82 million during the third quarter.


All of our cash held outside the United States could be repatriated; however, we have not provided for foreign withholding taxes on our undistributed foreign earnings from jurisdictions which impose such taxes since we have determined that such earnings are indefinitely reinvested in those jurisdictions.

Our primary source of cash is from operating activities. We have historically generated, and expect to continue to generate, positive cash flow from operations. Cash generated from operations is generally allocated to working capital requirements, investments in facilities and systems, acquisitions that create value with add-on capabilities that broaden our existing businesses and overall growth strategy, and debt repayments.

At March 31,September 30, 2020, we had a long-term debt balance of $559.5$989.7 million, net of the current portion of long-term debt of $31.5 million, primarily consisting of our term loan due 2027 with a principal amount of $530.3 million, our senior notes due in 2026 with a principal amount of $300.0 million, and our term loan due in 2025 with a principal amount of $265.0$190.0 million. We also have access to a revolving credit facility throughwhich expires in May of 2023, which had an unused capacity of $243.9$355.4 million at March 31,September 30, 2020.

Outlook

We expect to generate our liquidity and capital resources through operations and, when needed, through our revolving credit facility. The volatility in credit, equity and commodity markets resulting from current market conditions createscan create uncertainty for our businesses. However, managementthe Company believes, based on our current financial condition and current expectations of future market conditions, that we will meet our short- and long-term needs with a combination of cash on hand, cash generated from operations, our use of our revolving credit facility and access to capital markets.

Given the uncertainty created by the lack of visibility of future operating conditions in the current market environment and over the nextremainder of the year, we are restricting our capital expenditures to maintenance requirements only, and weintegration related investments only. We expect our full year 2020 capital expenditures, combined with investment in leased assets in the net cash from operating activities section of our consolidated statement of cash flows, to be approximately $30between $50 to $55 million. Additionally, in preparation for settling transaction expenses associated with our planned merger with ChampionX, and to increase liquidity during current market conditions, we recently increased our cash balance by drawing $125.0 million on our revolver on April 24, 2020, leaving $118.9 million of available borrowing capacity.


Cash Flows
Three Months Ended March 31,Nine Months Ended September 30,
(in thousands)2020 20192020 2019
Cash provided by operating activities$29,222
 $19,910
$189,432
 $123,390
Cash required by investing activities(6,746) (7,243)
Cash required by financing activities(3,144) (26,234)
Cash provided by (used in) investing activities34,714
 (43,329)
Cash used in financing activities(93,445) (80,949)
Effect of exchange rate changes on cash and cash equivalents(986) 89
5,471
 (317)
Net increase (decrease) in cash and cash equivalents$18,346
 $(13,478)$136,172
 $(1,205)

Operating Activities

Cash provided by operating activities in the threenine months ended March 31,September 30, 2020 increased $9.3$66.0 million compared to 2019. The increase in cash provided byby operating activities was primarily driven by increases from changeschanges in our operating assets and liabilities in 2020 as compared to 2019, primarily due to an increase in cash received related to the collection of trade receivables and a reduction in our cash outflowoutflows for inventory procurement and cash outflows on leased assets due to strict adherence to cost and capital discipline. Partially offsetting the increase in cash provided by operating cash flows was lower net income, adjusted for non-cash items.items, and merger related acquisition and integration costs incurred during the period.

“Leased assets”Expenditures for assets that are placed into our lease asset program expected to be recovered through sale are reported in leased assets in the operating cash flows section of our condensed consolidated statements of cash flows includeflows.  All other capitalizable expenditures for cable and downhole equipment expected to beassets that are placed into our leasedlease asset program are classified as well ascapital expenditures in the recoveryinvesting section of net book value associated with the saleour condensed consolidated statements of damaged leased equipment during the period.cash flows.

Investing Activities

Cash requiredprovided by investing activities was $6.7$34.7 million for the threenine months ended March 31,September 30, 2020, and was primarily comprised of capital expenditurescash acquired in the merger with legacy ChampionX of $7.5$57.6 million partially offset by $0.7and $9.3 million of cash proceeds on sale of fixed assets.assets, partially offset by capital expenditures of $32.2 million.


Cash required byused in investing activities was $7.2$43.3 million for the threenine months ended March 31,September 30, 2019 and was primarily comprised of capital expenditures of $9.7$31.6 million, a $12.5 million payment to acquire a business comprising certain assets used in the manufacturing of downhole monitoring systems, and a $2.2 million payment related to the sale of our pressure vessel manufacturing business in our Production & Automation Technologies segment, partially offset by $2.5$3.0 million of cash proceeds onfrom the sale of fixed assets.

Financing Activities

Cash used in financing activities of $3.1$93.4 million for the threenine months ended March 31,September 30, 2020, was primarily the result of $1.3repayments totaling $81.7 million on our Term Loan Facilities, $4.4 million in debt issuance costs related to the amendment of the credit agreement, as discussed in Note 5—6—Debt and $1.5to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, $4.5 million of payments of finance lease obligations, duringand a distribution of $2.2 million to one of our non-controlling interests. Net borrowings under our revolving credit facility totaled zero in 2020 as we borrowed and fully repaid the quarter.borrowing within the same period.

Cash used in financing activities of $26.2$80.9 million for the threenine months ended March 31,September 30, 2019, was primarily the result of $25.0$111.5 million of debt repayment on the principal balance of our term loan and payments totaling $1.2$4.1 million for capitalfinance lease obligations. Net borrowings under our revolving credit facility totaled zero in 2019.obligations, partially offset by proceeds on long-term debt of $36.5 million.

Long-term Debt

Senior Notes

Refer to Note 10—Debt, included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019, for information related to our Senior Notes, which are fully and unconditionally guaranteed by certain 100-percent-owned subsidiaries (the “Guarantors”) of ApergyChampionX on a joint and several basis. DuringOn June 18, 2020, the first quarterwholly-owned subsidiaries of legacy ChampionX that guarantee the 2018 Credit Facility and the 2020 we early adoptedTerm Loan Facility, delivered a Supplemental Indenture to join as guarantors of the SEC’s, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules, which simplify the disclosure requirements related to our registered securities under Rule 3-10 of Regulation S-X.senior notes.

The Senior Notes indenture restricts the ability of the Guarantors to pay dividends or other distributions, make loans or advances, or sell, lease or otherwise transfer property and other assets to certain restricted subsidiaries or the Parent.
As part of the Senior Notes indenture, a guarantee of the senior notes by ApergyChampionX or a Guarantor is subject to release in the following circumstances:


the sale, exchange or transfer (by merger or otherwise) of (i) the capital stock of the Guarantor after which the Guarantor is no longer a restricted subsidiary or (ii) all or substantially all of the assets of such Guarantor made in a manner not in violation of the indenture;
the release or discharge of the guarantee by, or direction obligation of, such Guarantor with respect to the Senior Credit Facilities or capital markets debt securities that resulted in the creation of such guarantee, except a discharge by or as a result of payment under such guarantee;
the designation of the subsidiary as an unrestricted subsidiary under the indenture;
the legal defeasance or covenant defeasance of the Senior Notes in accordance with the terms of the indenture;
the merger or consolidation of any Guarantor with and into the Issuer or another Guarantor that is the surviving person in such merger or consolidation, or upon the liquidation of such Guarantor following the transfer of all its assets to the Parent or another Guarantor; or
an amendment of the Senior Note indenture agreement.

The obligations of each Guarantor under its note guarantee are limited as necessary to prevent such note guarantee from constituting a fraudulent conveyance under applicable law.

The following summarized financial information presents the Parent and Guarantors (collectively and together with the Parent, the “Obligor Group”) on a combined basis:

Condensed Combined Statement of Loss of the Obligor Group
(dollars in thousands) Three Months Ended March 31, 2020 Nine Months Ended September 30, 2020
Total Revenue $228,435
 $1,113,381
Cost of goods and services

 152,150
 882,034
Selling, general and administrative expense

 72,205
 318,327
Goodwill impairment 364,529
 (396,017)
Long-lived asset impairment 40,980
 (40,980)
Loss before income taxes (409,299) (559,541)
Net loss $(390,289) $(533,277)

Condensed Combined Balance Sheets of the Obligor Group
(dollars in thousands) March 31, 2020 December 31, 2019 September 30, 2020 December 31, 2019
Current assets:        
Current assets $430,225
 $419,692
 $1,264,872
 $419,692
Non-current assets:        
Goodwill 274,751
 639,280
 611,223
 639,280
Advances due from affiliates 24,487
 18,534
 17,421
 18,534
Other non-current assets 368,295
 430,553
 1,230,457
 430,553
Total assets $1,097,758
 $1,508,059
 $3,123,973
 $1,508,059
        
Current liabilities:        
Current liabilities $175,339
 $173,372
 $652,004
 $173,372
Non-current liabilities:        
Advances due to affiliates 88,239
 87,682
 91,686
 87,682
Other non-current liabilities 642,675
 664,581
 1,279,455
 664,581
Total liabilities $906,253
 $925,635
 $2,023,145
 $925,635




Senior Secured Credit Facilities

In May 2018, Apergywe entered into a credit agreement (“credit agreement”) governing the terms of itsour senior secured credit facilities, consisting of (i) a seven-year senior secured term loan B facility (“term loan facility”) and (ii) a five-year senior secured revolving credit facility (“revolving credit facility,” and together with the term loan facility, the “senior secured credit facilities”). Refer to Note 10—Debt included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019, for additional information related to our senior secured credit facilities.

On February 14, 2020, Apergywe amended itsour credit agreement, which (i) provides for the incurrence of an additional $150 million of revolving commitments under the amended credit agreement, upon consummation of the Merger, (ii) permits the consummation of the Merger and the incurrence of a senior secured term loan facility in an aggregate amount up to $537 million by ChampionX, and (iii) continues to provide that all obligations under the amended agreement continue to be guaranteed by certain of Apergy’s wholly ownedour wholly-owned U.S. subsidiaries.
During the threenine months ended March 31,September 30, 2020, we made no paymentsa $75.0 million payment on our term loan facility.2018 Term Loan Facility and amortization payments of $6.7 million on the 2020 Term Loan Facility.


Revolving Credit Facility

A summary of our revolving credit facility at March 31,September 30, 2020, was as follows:
(in millions)
Description
Amount 
Debt
Outstanding
 
Letters
of
Credit
 Unused Capacity MaturityAmount 
Debt
Outstanding
 
Letters
of
Credit
 Unused Capacity Maturity
Five-year revolving credit facility$250.0
 $—
 $6.1
 $243.9
 May 2023$400.0
 $—
 $44.6
 $355.4
 May 2023

Additionally, we have a letter of credit outside of the revolving credit facility of approximately $0.2 million. As of March 31,September 30, 2020, we were in compliance with all restrictive covenants under our revolving credit facility.

2020 Term Loan Facility

On June 3, 2020, prior to the closing of the Merger, legacy ChampionX entered into a term loan facility for $537.0 million (“2020 Term Loan Facility”). Proceeds from the 2020 Term Loan Facility were utilized to fund a cash payment of $527.4 million from legacy ChampionX to Ecolab prior to the closing of the Merger. We assumed the 2020 Term Loan Facility upon completion of the Merger, which is fully and unconditionally guaranteed by the Company and certain of its wholly-owned domestic subsidiaries, which also guarantee the obligations under the 2018 Term Loan Facility. The 2020 Term Loan Facility matures at the earlier of (i) June 3, 2027 or (ii) January 30, 2026 in the event the Company’s senior unsecured notes due May 1, 2026 remain outstanding. Amounts outstanding under the 2020 Term Loan Facility bear interest, at the option of the Company, at a rate equal to (a) LIBOR plus 5.0% for eurocurrency rate loans or (b) the highest of (i) the Federal Funds Rate plus 1/2 of 1%, (ii) the “prime rate” quoted by Bank of America, N.A., (iii) LIBOR plus 1.00% and (iv) 1.00%, plus 4.0%. The 2020 Term Loan Facility contains customary representations and warranties, covenants, and events of default for loan facilities of this type.

OFF-BALANCE SHEET ARRANGEMENTS

Information related to guarantees is incorporated herein by reference from Note 6—Commitment7—Commitments And Contingencies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.


RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 2—3—New Accounting Standards to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitativeWe may be exposed to certain market risks arising from the use of financial instruments in the ordinary course of business. This risk arises primarily as a result of potential changes in the fair market value of financial instruments due to adverse fluctuations in commodity prices, foreign currency exchange rates, and qualitative disclosures aboutinterest rates as discussed below. We do not use derivative financial instruments where the objective is to generate profits solely from trading activities.

Commodity Price Risk

We use a variety of raw materials, primarily metals and semi-processed or finished components, that are generally available from various sources. Commodity pricing for metals, such as nickel, chrome, molybdenum, vanadium, manganese and steel scrap, fluctuate with the market. As a result, our earnings are exposed to commodity market price fluctuations. Although some cost increases may be recovered through increased prices to customers, we attempt to control such costs through fixed-price contracts with suppliers and various other programs, such as our global supply chain activities.



Foreign Currency Risk

We conduct operations around the world in a number of different currencies. Many of our foreign subsidiaries have designated the local currency as their functional currency. Our earnings are therefore subject to change due to fluctuations in foreign currency exchange rates when the earnings in foreign currencies are translated into U.S. dollars. We do not hedge this translation impact on earnings. When transactions are denominated in currencies other than our subsidiaries’ respective functional currencies, both with external parties and intercompany relationships, these transactions result in increased exposure to foreign currency exchange effects. The Company uses foreign currency forward contracts to manage risks associated with foreign currency exchange rates. As of September 30, 2020, the amount of gain or loss in the fair value of derivative instruments that would have resulted from a 10 percent increase or decrease in the underlying price of the contracts was not material.

Interest Rate Risk

Our use of fixed- or variable-rate debt directly exposes us to interest rate risk. Fixed-rate debt, such as the senior notes, exposes us to changes in the fair value of our debt due to changes in market interest rates. Fixed-rate debt also exposes us to the risk affecting Apergy, seethat we may need to refinance maturing debt with new debt at higher rates, or that we may be obligated to pay rates higher than the current market rate. Variable-rate debt, such as our term loan or borrowings under our revolving credit facility, exposes us to short-term changes in market rates that impact our interest expense.

As of September 30, 2020, we had unhedged variable rate debt of $190.0 million related to our 2018 Term Loan Facility with an interest rate of 2.69%. A hypothetical 10% adverse movement in the interest rate, or 27 basis points, would result in an increase to interest expense of $0.5 million on an annualized basis.

We also had unhedged variable rate debt of $530.3 million related to our 2020 Term Loan Facility with an interest rate of 6.00%. A hypothetical 10% adverse movement in the interest rate, or 60 basis points, would result in an increase to interest expense of $1.9 million. As the 2020 Term Loan Facility was acquired as part of the Merger on June 3, 2020, we have calculated the interest rate sensitivity on the interest expense expected to be incurred for the period subsequent to the Merger date through December 31, 2020.

Fair Value of Financial Instruments

The fair value of our fixed rate long-term debt and variable rate debt is estimated based on quoted market prices or prices quoted from third-party financial institutions. We do not currently intend to enter into any interest rate hedging agreements, but will continue to monitor interest rate exposure. See Note 13—Fair Value Measurements to our condensed consolidated financial statements included in Part II,I, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual1 of this Quarterly Report on Form 10-K10-Q for the year ended December 31, 2019. Our exposure to market risk has not materially changed since December 31, 2019.

further discussion of our financial instruments.

ITEM 4. CONTROLS AND PROCEDURES

With the participation of management, our principal executive officer and principal financial officer carried out an evaluation, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31,September 30, 2020 because of the material weaknesses in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) described below.in Item 9A - Controls and Procedures in our Form 10-K for the year ended December 31, 2019.


In conducting management’s evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2020, we have excluded the operations of ChampionX Holding Inc. (“legacy ChampionX”) as permitted by the SEC. As part of our ongoing integration of legacy ChampionX, we continue to incorporate our controls and procedures into legacy ChampionX subsidiaries and to expand our company-wide controls to reflect the risks inherent in an acquisition of this size and complexity. The legacy ChampionX subsidiaries account for approximately 51.1% of our total assets as of September 30, 2020.

Notwithstanding thesethe material weaknesses noted above, our management, including our principal executive officer and principal financial officer, has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with GAAP for each of the periods presented.
 
Material Weaknesses


Remediation Activities

As described in Internal Control Over Financial ReportingItem 9A - Controls and Procedures in our Form 10-K for the year ended December 31, 2019, we identified
A material weakness is a deficiency, or a combination of deficiencies,weaknesses in our internal control over financial reporting, such that there isreporting. Management, with oversight from the Audit Committee, developed a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Management identified a material weakness in the control environment component of internal control as the Company did not maintain a sufficient complement of personnel with the appropriate level of knowledge, experience and training in internal control over financial reporting commensurate with its financial reporting requirements to allow for the consistent execution of control activities at its Artificial Lift business within the Production and Automation Technologies (“PAT”) segment. Further, management identified a material weakness in the risk assessment component of internal control as the Company did not appropriately design controls in response to the risk of misstatement at its Electrical Submersible Pump (“ESP”) subsidiary, a subsidiary within the PAT segment and part of the Artificial Lift business, to ensure that the subsidiary had the proper resources to operate a complex business model, which was experiencing significant growth and turnover in personnel. These material weaknesses gave rise to the following additional control deficiencies at the Artificial Lift business, which management also determined constituted a material weakness:

•
Material weakness related to revenue recognition and accounts receivable at certain of the Company’s subsidiaries within the Artificial Lift businesses within PAT: The Company did not design or maintain effective controls within certain of its Artificial Lift businesses over the completeness, accuracy, occurrence and cut-off of revenue and within ESP over the valuation of accounts receivable. Specifically, controls were not designed or maintained to ensure (i) accuracy of the price and quantity, including the evidence of the existence of a customer contract during the revenue recognition process, and (ii) appropriate valuation of accounts receivable reserves in response to updated assessments of expected collectability. This material weakness resulted in audit adjustments to the consolidated financial statements as of and for the years ended December 31, 2019 and 2018. In addition, previously-issued interim financial statements have been revised to correct immaterial misstatements of selling, general and administrative expense and revenue for the quarters ended March 31, June 30, and September 30, 2019 and 2018. This material weakness could result in a misstatement of revenue and accounts receivable or the related disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Additionally, the material weaknesses in control environment and risk assessment described above gave rise to the following additional control deficiencies at ESP, which were also determined to be material weaknesses:
•
Material weakness related to manual journal entries: The Company did not maintain effective controls over the recording of manual journal entries. Specifically, controls were not operating effectively to ensure that journal entries were properly prepared with appropriate supporting documentation and/or were reviewed and approved appropriately to ensure the accuracy of journal entries. This material weakness did not result in any material misstatements to the Company’s consolidated financial statements or disclosures, however, previously-issued interim financial statements have been revised to correct immaterial misstatements to cost of goods sold for the quarters ended June 30 and September 30, 2019. Additionally, this material weakness could result in a misstatement of accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

•
Material weakness related to inventory and fixed assets: The Company did not design and maintain effective controls over the completeness, accuracy, existence and presentation and disclosure of inventory and fixed assets. Specifically, controls were not designed or maintained to (a) properly account for asset disposals and active and terminated leases, and (b) properly account for transfers between inventory and leased assets. This material weakness did not result in any material misstatements to the Company’s consolidated financial statements or disclosures, however, this material weakness resulted in audit adjustments to the consolidated financial statements as of and for the year ended December 31, 2019. In addition, previously-issued interim financial statements have been revised to correct immaterial misstatements to cost of goods sold, inventory and fixed assets for the quarters ended March 31, June 30 and September 30, 2019. Additionally, this material weakness could result in a misstatement of the aforementioned account


balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
In addition, management identified a material weakness related to the granting of access to system capabilities to authorized users within the general ledger system across the Company. Specifically, the Company did not design and maintain effective controls over user roles, which defines the actions an individual can perform within the system. As a result, there was a lack of segregation of duties as personnel had the ability to both prepare and post journal entries. This material weakness did not result in a material misstatement. However, this material weakness could result in a material misstatement to the accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Activities
In orderremediation plan to address the material weaknesses in internal control over financial reporting described above, management, with direction from the Audit Committee, is in the processweaknesses. As part of developingour remediation plan, we have implemented new and implementing remediation plansenhanced processes, procedures and controls to address certain control deficiencies that led to thesethe material weaknesses. Specifically, management has:
Initiated personnel changes
Reviewed staffing competencies and resource requirements at ESP and within the Artificial Lift business;business and used the results of our review as part of our overall financial statement risk assessment process.

Made personnel changes, including terminations and hiring of staff for both current and newly created positions, at ESP and within the Artificial Lift business in order to strengthen the control environment and to ensure we have a sufficient complement of resources with an appropriate degree of knowledge, expertise and skills commensurate with our financial statement requirements.

Engaged third party experts to assist management in assessing current processes and designing improvednew and enhanced processes, procedures, and controls, including automation of certain processes and controls, at ESP and within the Artificial Lift business; andbusiness.
Reviewed business processes surrounding revenue recognition, manual journal entries, inventory and fixed assets, and the performance of the risk assessment to identify and begin the implementation of enhanced procedures and related internal controls at ESP.
In addition, management’s planned actions to further address the material weaknesses include:
Enhance and augment business process policies and procedure documentation for greater transparency, scalability, and sustainability;
Establish training and education programs for business personnel regarding updatedImplemented policies, procedures and control activities.
Complete implementation of enhanced policies, procedures,controls at ESP and related internal controls to standardize business processes.
Management will continue to review and make necessary changes to the overall design of the Company’s internal control environment within the Artificial Lift business to (i) ensure price and quantity are accurately recorded and supported by agreements with customers as part of the revenue recognition process and (ii) properly calculate and support management’s review and assessment for the valuation of accounts receivable reserves.

Implemented policies, procedures and controls at ESP to (i) ensure manual journal entries are properly prepared and reviewed for accuracy and appropriate supporting documentation and (ii) properly account for inventory transfers and fixed asset deployments and disposals as part of ESP’s leased asset program.

Conducted policies and procedural training for all personnel responsible for the performance of control activities over financial reporting as well as policiesspecific training for personnel responsible for control activities associated with manual journal entries, revenue recognition, accounts receivable, inventory and proceduresfixed assets at ESP and within the Artificial lift business.

Enhanced and formalized certain elements of our Enterprise Risk Management program, including our review and response to improvesignificant business changes, within our risk assessment process.

Implemented controls to ensure proper segregation of duties associated with user access rights to system capabilities within the overall effectivenessgeneral ledger, specifically the restriction of internal control over financial reporting. Management believes the measures described abovea system user’s ability to both prepare and others that will be implemented will remediate the material weaknesses identified and will strengthen the Company’s internal control over financial reporting. The weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Management expects these remedial actions and other remedial actions related to these material weaknesses to be effectively implemented in 2020.post journal entries.

Changes in Internal Control Over Financial Reporting
Except as described above, there were no changes in internal control over financial reporting identified in the evaluation for the quarter ended March 31,September 30, 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 involved in various pending or potential legal actions in the ordinary course of our business. Management is unable to predict the ultimate outcome of these actions because of the inherent uncertainty of litigation. However, management believes the most probable, ultimate resolution of these matters will not have a material adverse effect on our condensed consolidated financial position, results of operations or cash flows.

 See Note 7—Commitments And Contingencies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

Other than theInformation concerning our risk factors set forth below, and the risk factors relevant to the Company set forth in the section entitled “Risk Factors” in the Company's Registration Statement on Form S-4 (File No. 333-236379), there have not been material changes from the risk factors previously disclosedis contained in Part I,II, Item 1A of our AnnualQuarterly Report on Form 10-K10-Q for the yearquarter ended December 31, 2019.June 30, 2020 and is incorporated by reference herein.

The COVID-19 pandemic and related economic repercussions have had, and are expected to continue to have, a significant impact on our business, and depending on the duration of the pandemic and its effect on the oil and gas industry, could have a material adverse effect on our business, liquidity, consolidated results of operations and consolidated financial condition.

The recent COVID-19 pandemic has resulted in a significant reduction in demand for oil and gas commodities as various jurisdictions have attempted to implement or have implemented measures designed to contain the spread of the virus, including travel restrictions, stay-at-home or shelter-in-place orders and shutdowns of non-essential business. Oil demand has significantly deteriorated as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus. Compounding this situation, the members of OPEC+ were unable to agree on the need to maintain and extend compliance with previously agreed upon production cuts. Consequently, in March 2020 Russia and Saudi Arabia announced that each party would increase oil production and reduce the prices at which they make oil available to market, resulting in an over supply of oil in the market. In an attempt to stabilize global oil markets, OPEC+ reached an agreement in April 2020 to cut production beginning in the second quarter of 2020, however, due to the uncertainty of the ongoing COVID-19 pandemic the impact of these production cuts on oil prices is not yet known.

While the full impact of the COVID-19 pandemic is not yet known, potential risk associated with the COVID-19 outbreak could adversely impact our business, results of operations, financial condition and cash flows and include, but are not limited to:
Disruptions to our supply chain resulting from limited access to vendors or vendors’ limited access to their facilities or our ability to transport raw materials from our vendors, adversely affecting the price of and our ability to obtain materials essential to our products and our business. A significant price increase in raw materials, or their unavailability, could result in a loss of customers and revenue;
reduction in revenues as a result of lower demand for our products as upstream oil and gas companies across the industry reduce their drilling activities, lower budgeted capital expenditures and institute additional capital discipline measures;
liquidity challenges, including impacts related to delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies and if a significant number of our customers experience a prolonged business decline or disruption, we may incur increased exposure to credit risk and bad debts;
a credit rating downgrade of our corporate debt if COVID-19 and the current oil market have a significant impact on our long-term profitability which could result in higher borrowing costs or reduced availability of sources of financing;
additional costs associated with the reduction of our global workforce to adjust to market conditions, including severance payments, retention issues, and increased expenses if we are unable to hire employees when market conditions improve;
workforce availability resulting from reductions to adjust to market conditions or due to restrictions that we and our customers impose, including limiting worksite access and facility shutdowns, to ensure the safety of employees and others, which could adversely affect our ability to timely fulfill customer orders and service requests;
the continuation of the measures taken by various governments to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns;


costs associated with rationalization of our portfolio of real estate facilities, including possible exit of leases and facility closures to align with expected activity and workforce capacity;
additional asset impairments, including an impairment of the carrying value of our goodwill, along with other accounting charges as demand for our services and products decreases;
operational challenges and efforts to mitigate the spread of the virus, including logistical challenges, remote work arrangements, and staggered work shifts to protect the health and well-being of our employees, which could increase expenses and adversely impact our ability to timely fulfill customer orders and service requests;
compliance with financial covenants in our credit agreement if we experience a significant and prolonged decrease in our earnings before income tax, depreciation and amortization which would cause amounts borrowed to become due and payable; and
disruption of the U.S. and global economic and financial markets limiting our ability to access capital markets or other sources of financing.




ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)None.
(b)None.
(c)None.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5. OTHER INFORMATION

None.Iran Threat Reduction and Syria Human Rights Act of 2012

Under the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) of the Securities Exchange Act of 1934, the Company is required to disclose in its periodic reports if it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with entities or individuals designated pursuant to certain Executive Orders. Disclosure is required even where the activities are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and even if the activities are not covered or prohibited by U.S. law.

As authorized by the U.S. Treasury’s Office of Foreign Assets Control (OFAC), a non-U.S. subsidiary of the Company which is part of legacy ChampionX completed sales of products used for process and water treatment applications in upstream oil and gas production related to the operation of and production from the Rhum gas field off the Scottish coast (Rhum) totaling $0.13 million during the period from July 1, 2020 to September 30, 2020. The net profit before taxes associated with these sales for each period were nominal. Rhum is jointly owned by Serica Energy plc and Iranian Oil Company (U.K.) Limited. Our non-U.S. subsidiary intends to continue the Rhum-related activities, consistent with a specific license obtained from OFAC by its customers, and such activities may require additional disclosure pursuant to the abovementioned statute.

ITEM 6. EXHIBITS

Information required by this item is incorporated herein by reference from the section entitled “Exhibit Index” of this Quarterly Report on Form 10-Q for the period ended March 31, 2020.

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.

APERGY CORPORATION
(Registrant)
/s/ MICHAEL D. WHITE
Michael D. White
Vice President, Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer and a Duly Authorized Officer)
Date:May 11, 2020

EXHIBIT INDEX

   
Exhibit
No.
 Exhibit Description
10.1
Amendment No. 1, dated February 14, 2020, amending that certain Credit Agreement dated as of May 9, 2018, by and among the Company, as borrower, the lenders party thereto and JPMorgan Chase Bank N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to Apergy’s Current Report on From 8-K filed February 18, 2020)

22.1*
 
List of Issuer and Subsidiary Guarantors of Guaranteed Securities (incorporated by reference to Exhibit 22.1 to ChampionX’s From 10-Q for the quarterly period ended June 30, 2020 filed August 7, 2020)

31.1*
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2*
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1**
 
Certification of Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.
32.2**
 
Certification of Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
104* 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

   
* Filed herewith
** Furnished herewith
† Denotes management contract or compensatory plan or arrangement

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.

CHAMPIONX CORPORATION
(Registrant)
/s/ ANTOINE MARCOS
Antoine Marcos
Vice President, Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer and a Duly Authorized Officer)
Date:October 30, 2020

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