Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2018
OR
¨ Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number: 001-36053
Frank’s International N.V.
(Exact name of registrant as specified in its charter)
|
| | | | |
| The Netherlands | | 98-1107145 | |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification number) | |
| | | | |
| Mastenmakersweg 1 | | | |
| 1786 PB Den Helder, The Netherlands | | Not Applicable | |
| (Address of principal executive offices) | | (Zip Code) | |
Registrant’s telephone number, including area code: +31 (0)22 367 0000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | þ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
As of July 31, 2018, there were 224,186,545 shares of common stock, €0.01 par value per share, outstanding.
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TABLE OF CONTENTS |
| | Page |
PART I. FINANCIAL INFORMATION |
| | |
Item 1. | Financial Statements | |
| Condensed Consolidated Balance Sheets (Unaudited) at June 30, 2018 and December 31, 2017 | |
| Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017 | |
| Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017 | |
| Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the Six Months Ended June 30, 2018 and 2017 | |
| Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2018 and 2017 | |
| Notes to the Unaudited Condensed Consolidated Financial Statements | |
| | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and | |
| Results of Operations | |
| | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
| | |
Item 4. | Controls and Procedures | |
| | |
PART II. OTHER INFORMATION |
| | |
Item 1. | Legal Proceedings | |
| | |
Item 1A. | Risk Factors | |
| | |
Item 6. | Exhibits | |
| | |
Signatures | | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
|
| | | | | | | |
FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(In thousands, except share data) |
| | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
Assets | (Unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 178,764 |
| | $ | 213,015 |
|
Short-term investments | 66,414 |
| | 81,021 |
|
Accounts receivables, net | 147,642 |
| | 127,210 |
|
Inventories, net | 69,417 |
| | 76,420 |
|
Assets held for sale | 7,441 |
| | 3,792 |
|
Other current assets | 8,566 |
| | 10,437 |
|
Total current assets | 478,244 |
| | 511,895 |
|
| | | |
Property, plant and equipment, net | 422,034 |
| | 469,646 |
|
Goodwill | 211,040 |
| | 211,040 |
|
Intangible assets, net | 29,490 |
| | 33,895 |
|
Other assets | 34,172 |
| | 35,293 |
|
Total assets | $ | 1,174,980 |
| | $ | 1,261,769 |
|
| | | |
Liabilities and Equity | | | |
Current liabilities: | | | |
Short-term debt | $ | 1,800 |
| | $ | 4,721 |
|
Accounts payable and accrued liabilities | 92,057 |
| | 108,885 |
|
Deferred revenue | 47 |
| | 4,703 |
|
Total current liabilities | 93,904 |
| | 118,309 |
|
| | | |
Deferred tax liabilities | 223 |
| | 229 |
|
Other non-current liabilities | 28,271 |
| | 27,330 |
|
Total liabilities | 122,398 |
| | 145,868 |
|
| | | |
Commitments and contingencies (Note 14) |
|
| |
|
|
| | | |
Stockholders' equity: | | | |
Common stock, €0.01 par value, 798,096,000 shares authorized, 225,174,579 and 224,228,071 shares issued and 224,038,183 and 223,289,389 shares outstanding | 2,825 |
| | 2,814 |
|
Additional paid-in capital | 1,056,592 |
| | 1,050,873 |
|
Retained earnings | 39,757 |
| | 106,923 |
|
Accumulated other comprehensive loss | (31,638 | ) | | (30,972 | ) |
Treasury stock (at cost), 1,136,396 and 938,682 shares | (14,954 | ) | | (13,737 | ) |
Total stockholders' equity | 1,052,582 |
| | 1,115,901 |
|
Total liabilities and equity | $ | 1,174,980 |
| | $ | 1,261,769 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
|
| | | | | | | | | | | | | | | |
FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
(In thousands, except per share data) |
(Unaudited) |
| | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | |
Services | $ | 105,746 |
| | $ | 93,533 |
| | $ | 197,094 |
| | $ | 179,855 |
|
Products | 26,339 |
| | 24,126 |
| | 50,560 |
| | 48,535 |
|
Total revenue | 132,085 |
| | 117,659 |
| | 247,654 |
| | 228,390 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Cost of revenues, exclusive of depreciation and amortization | | | | | | | |
Services | 65,015 |
| | 55,317 |
| | 128,225 |
| | 107,000 |
|
Products | 20,306 |
| | 23,027 |
| | 39,053 |
| | 45,296 |
|
General and administrative expenses | 40,352 |
| | 42,419 |
| | 79,082 |
| | 85,144 |
|
Depreciation and amortization | 28,862 |
| | 30,951 |
| | 57,162 |
| | 62,050 |
|
Severance and other charges | 1,115 |
| | (299 | ) | | 2,369 |
| | 738 |
|
(Gain) loss on disposal of assets | 217 |
| | 210 |
| | 452 |
| | (1,262 | ) |
Operating loss | (23,782 | ) | | (33,966 | ) | | (58,689 | ) | | (70,576 | ) |
| | | | | | | |
Other income (expense): | | | | | | | |
Tax receivable agreement ("TRA") related adjustments | (1,171 | ) | | — |
| | (4,112 | ) | | — |
|
Other income, net | 2,033 |
| | 598 |
| | 1,593 |
| | 732 |
|
Interest income, net | 609 |
| | 753 |
| | 1,553 |
| | 1,151 |
|
Mergers and acquisition expense | — |
| | (10 | ) | | (58 | ) | | (459 | ) |
Foreign currency gain (loss) | (4,267 | ) | | 599 |
| | (2,563 | ) | | 1,345 |
|
Total other income (expense) | (2,796 | ) | | 1,940 |
| | (3,587 | ) | | 2,769 |
|
| | | | | | | |
Loss before income taxes | (26,578 | ) | | (32,026 | ) | | (62,276 | ) | | (67,807 | ) |
Income tax expense (benefit) | (815 | ) | | (6,076 | ) | | 5,560 |
| | (15,194 | ) |
Net loss | $ | (25,763 | ) | | $ | (25,950 | ) | | $ | (67,836 | ) | | $ | (52,613 | ) |
| | | | | | | |
Dividends per common share | $ | — |
| | $ | 0.075 |
| | $ | — |
| | $ | 0.15 |
|
| | | | | | | |
Loss per common share: | | | | | | | |
Basic and diluted | $ | (0.12 | ) | | $ | (0.12 | ) | | $ | (0.30 | ) | | $ | (0.24 | ) |
| | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic and diluted | 223,981 |
| | 222,914 |
| | 223,775 |
| | 222,740 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
|
| | | | | | | | | | | | | | | |
FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
(In thousands) |
(Unaudited) |
| | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
Net loss | $ | (25,763 | ) | | $ | (25,950 | ) | | $ | (67,836 | ) | | $ | (52,613 | ) |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | (835 | ) | | 838 |
| | (748 | ) | | 1,321 |
|
Marketable securities: | | | | | | | |
Unrealized gain (loss) on marketable securities | 167 |
| | 77 |
| | 82 |
| | (4 | ) |
Reclassification to net income | — |
| | — |
| | — |
| | (395 | ) |
Deferred tax asset / liability change | — |
| | — |
| | — |
| | 158 |
|
Unrealized gain (loss) on marketable securities, net of tax | 167 |
| | 77 |
| | 82 |
| | (241 | ) |
Total other comprehensive income (loss) | (668 | ) | | 915 |
| | (666 | ) | | 1,080 |
|
Comprehensive loss | $ | (26,431 | ) | | $ | (25,035 | ) | | $ | (68,502 | ) | | $ | (51,533 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
(In thousands) |
(Unaudited) |
| | | | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
| | | | | | | | | Accumulated | | | | |
| | | | | Additional | | | | Other | | | | Total |
| Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | Stockholders' |
| Shares | | Value | | Capital | | Earnings | | Income (Loss) | | Stock | | Equity |
Balances at December 31, 2016 | 222,401 |
| | $ | 2,802 |
| | $ | 1,036,786 |
| | $ | 317,270 |
| | $ | (32,977 | ) | | $ | (12,562 | ) | | $ | 1,311,319 |
|
Net loss | — |
| | — |
| | — |
| | (52,613 | ) | | — |
| | — |
| | (52,613 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | 1,321 |
| | — |
| | 1,321 |
|
Change in marketable securities | — |
| | — |
| | — |
| | — |
| | (241 | ) | | — |
| | (241 | ) |
Equity-based compensation expense | — |
| | — |
| | 9,116 |
| | — |
| | — |
| | — |
| | 9,116 |
|
Common stock dividends ($0.15 per share) | — |
| | — |
| | — |
| | (33,426 | ) | | — |
| | — |
| | (33,426 | ) |
Common shares issued upon vesting of share-based awards | 685 |
| | 7 |
| | (7 | ) | | — |
| | — |
| | — |
| | — |
|
Common shares issued for employee stock purchase plan ("ESPP") | 50 |
| | 1 |
| | 525 |
| | — |
| | — |
| | — |
| | 526 |
|
Treasury shares issued upon vesting of share-based awards | 1 |
| | — |
| | (31 | ) | | — |
| | — |
| | 23 |
| | (8 | ) |
Treasury shares issued for ESPP | 105 |
| | 1 |
| | (903 | ) | | — |
| | — |
| | 1,642 |
| | 740 |
|
Treasury shares withheld | (190 | ) | | — |
| | — |
| | — |
| | — |
| | (2,241 | ) | | (2,241 | ) |
Balances at June 30, 2017 | 223,052 |
| | $ | 2,811 |
| | $ | 1,045,486 |
| | $ | 231,231 |
| | $ | (31,897 | ) | | $ | (13,138 | ) | | $ | 1,234,493 |
|
| | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
| | | | | | | | | Accumulated | | | | |
| | | | | Additional | | | | Other | | | | Total |
| Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | Stockholders' |
| Shares | | Value | | Capital | | Earnings | | Income (Loss) | | Stock | | Equity |
Balances at December 31, 2017 | 223,289 |
| | $ | 2,814 |
| | $ | 1,050,873 |
| | $ | 106,923 |
| | $ | (30,972 | ) | | $ | (13,737 | ) | | $ | 1,115,901 |
|
Cumulative effect of accounting change | — |
| | — |
| | — |
| | 670 |
| | — |
| | — |
| | 670 |
|
Net loss | — |
| | — |
| | — |
| | (67,836 | ) | | — |
| | — |
| | (67,836 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (748 | ) | | — |
| | (748 | ) |
Change in marketable securities | — |
| | — |
| | — |
| | — |
| | 82 |
| | — |
| | 82 |
|
Equity-based compensation expense | — |
| | — |
| | 5,168 |
| | — |
| | — |
| | — |
| | 5,168 |
|
Common shares issued upon vesting of share-based awards | 848 |
| | 10 |
| | (10 | ) | | — |
| | — |
| | — |
| | — |
|
Common shares issued for ESPP | 99 |
| | 1 |
| | 561 |
| | — |
| | — |
| | — |
| | 562 |
|
Treasury shares withheld | (198 | ) | | — |
| | — |
| | — |
| | — |
| | (1,217 | ) | | (1,217 | ) |
Balances at June 30, 2018 | 224,038 |
| | $ | 2,825 |
| | $ | 1,056,592 |
| | $ | 39,757 |
| | $ | (31,638 | ) | | $ | (14,954 | ) | | $ | 1,052,582 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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| | | | | | | |
FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(In thousands) |
(Unaudited) |
| | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2017 |
Cash flows from operating activities | | | |
Net loss | $ | (67,836 | ) | | $ | (52,613 | ) |
Adjustments to reconcile net loss to cash used in operating activities | | | |
Depreciation and amortization | 57,162 |
| | 62,050 |
|
Equity-based compensation expense | 5,168 |
| | 9,116 |
|
Amortization of deferred financing costs | — |
| | 246 |
|
Deferred tax benefit | — |
| | (20,320 | ) |
Provision for bad debts | 41 |
| | 371 |
|
(Gain) loss on disposal of assets | 452 |
| | (1,262 | ) |
Changes in fair value of investments | (417 | ) | | (1,474 | ) |
Realized loss on sale of investment | — |
| | 478 |
|
Unrealized (gain) loss on derivatives | (765 | ) | | 730 |
|
Other | — |
| | (1,876 | ) |
Changes in operating assets and liabilities | | | |
Accounts receivable | (21,712 | ) | | (6,697 | ) |
Inventories | (1,461 | ) | | 5,627 |
|
Other current assets | 2,042 |
| | 3,102 |
|
Other assets | 324 |
| | 1,745 |
|
Accounts payable and accrued liabilities | (10,192 | ) | | 4,400 |
|
Deferred revenue | (424 | ) | | (7,707 | ) |
Other non-current liabilities | (244 | ) | | (3,383 | ) |
Net cash used in operating activities | (37,862 | ) | | (7,467 | ) |
| | | |
Cash flows from investing activities | | | |
Purchases of property, plant and equipment and intangibles | (11,265 | ) | | (15,240 | ) |
Proceeds from sale of assets | 1,755 |
| | 2,200 |
|
Proceeds from sale of investments | 56,946 |
| | 11,499 |
|
Purchase of investments | (42,279 | ) | | (118 | ) |
Net cash (used in) provided by investing activities | 5,157 |
| | (1,659 | ) |
| | | |
Cash flows from financing activities | | | |
Repayments of borrowings | (2,921 | ) | | (154 | ) |
Dividends paid on common stock | — |
| | (33,426 | ) |
Net treasury shares withheld for taxes | (1,217 | ) | | (2,249 | ) |
Proceeds from the issuance of ESPP shares | 562 |
| | 1,266 |
|
Deferred financing costs | (48 | ) | | — |
|
Net cash used in financing activities | (3,624 | ) | | (34,563 | ) |
Effect of exchange rate changes on cash | 2,078 |
| | (887 | ) |
Net decrease in cash and cash equivalents | (34,251 | ) | | (44,576 | ) |
Cash and cash equivalents at beginning of period | 213,015 |
| | 319,526 |
|
Cash and cash equivalents at end of period | $ | 178,764 |
| | $ | 274,950 |
|
| | | |
Non-cash transactions: | | | |
Change in accounts payable and accrued liabilities related to capital expenditures | $ | (3,460 | ) | | $ | 2,901 |
|
Net transfers from inventory to property, plant and equipment | (2,028 | ) | | (1,358 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Basis of Presentation
Nature of Business
Frank’s International N.V. ("FINV"), a limited liability company organized under the laws of The Netherlands, is a global provider of highly engineered tubular services, tubular fabrication and specialty well construction and well intervention solutions to the oil and gas industry. FINV provides services and products to leading exploration and production companies in both offshore and onshore environments with a focus on complex and technically demanding wells.
Basis of Presentation
The condensed consolidated financial statements of FINV for the three and six months ended June 30, 2018 and 2017 include the activities of Frank's International C.V. ("FICV"), Blackhawk Group Holdings, LLC ("Blackhawk") and their wholly owned subsidiaries (collectively, the "Company," "we," "us" or "our"). All intercompany accounts and transactions have been eliminated for purposes of preparing these condensed consolidated financial statements.
Our accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. The consolidated balance sheet at December 31, 2017 is derived from audited financial statements. However, certain information and footnote disclosures required by generally accepted accounting principles in the United States of America ("GAAP") for complete annual financial statements have been omitted and, therefore, these interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2017, which are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 27, 2018 ("Annual Report"). In the opinion of management, these condensed consolidated financial statements, which have been prepared pursuant to the rules of the SEC and GAAP for interim financial reporting, reflect all adjustments, which consisted only of normal recurring adjustments that were necessary for a fair statement of the interim periods presented. The results of operations for interim periods are not necessarily indicative of those for a full year.
The condensed consolidated financial statements have been prepared on a historical cost basis using the United States dollar as the reporting currency. Our functional currency is primarily the United States dollar.
Reclassifications
Certain prior-period amounts have been reclassified to conform to the current period's presentation. These reclassifications had no impact on our net income (loss), working capital, cash flows or total equity previously reported.
Our financial statements for the three and six months ended June 30, 2017 have been revised to decrease "cost of revenues, services" and increase "cost of revenues, products" by the following immaterial amounts in order to correct a misclassification associated with Blackhawk product costs. While the revisions do impact two financial statement line items, the revisions had no impact on our net income (loss), working capital, cash flows or total equity previously reported (in thousands):
|
| | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2017 | | June 30, 2017 |
Cost of revenues, exclusive of depreciation and amortization | | | |
Services, as previously reported | $ | 60,777 |
| | $ | 117,884 |
|
Blackhawk adjustment | (5,460 | ) | | (10,884 | ) |
Services, as revised | $ | 55,317 |
| | $ | 107,000 |
|
| | | |
Products, as previously reported | $ | 17,567 |
| | $ | 34,412 |
|
Blackhawk adjustment | 5,460 |
| | 10,884 |
|
Products, as revised | $ | 23,027 |
| | $ | 45,296 |
|
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") generally in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification.
We consider the applicability and impact of all accounting pronouncements. ASUs not listed below were assessed and were either determined to be not applicable or are expected to have immaterial impact on our consolidated financial position, results of operations and cash flows.
In June 2018, the FASB issued new guidance which is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. Management is evaluating the provisions of this new accounting guidance, including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.
In May 2017, the FASB issued new guidance to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when accounting for a change to the terms and conditions of a share-based payment award. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in this guidance should be applied prospectively to an award modified on or after the adoption date. We adopted the guidance on January 1, 2018 and the adoption did not have an impact on our consolidated financial statements.
In January 2017, the FASB issued new accounting guidance for business combinations clarifying the definition of a business. The objective of the guidance is to help companies and other organizations which have acquired or sold a business to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, the guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. We adopted the guidance on January 1, 2018 and the adoption did not have an impact on our consolidated financial statements.
In June 2016, the FASB issued new accounting guidance for credit losses on financial instruments. The guidance includes the replacement of the “incurred loss” approach for recognizing credit losses on financial assets, including trade receivables, with a methodology that reflects expected credit losses, which considers historical and current information as well as reasonable and supportable forecasts. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is evaluating the provisions of this new accounting guidance, including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for leases. The main objective of the accounting guidance is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and the new guidance is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The new guidance requires lessees to recognize assets and liabilities arising from leases on the balance sheet and further defines a lease as a contract that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefit from the use of the asset and (2) the right to direct the use of the asset. The accounting guidance requires disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB amended the new lease accounting standard in an effort to reduce the burden of adoption. With the adoption of the new amended lease accounting standard, companies have the option of electing to apply the new lease accounting standard either on a retrospective or prospective basis. For public
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements and plan to adopt the new lease accounting standard, as amended, on a prospective basis effective January 1, 2019. While we are still evaluating its impact, we anticipate that the adoption of the lease accounting standard will have an impact to the Company's consolidated balance sheets in addition to the disclosures contained in the notes of its consolidated financial statements.
In May 2014, the FASB issued amendments to guidance on the recognition of revenue based upon the entity’s contracts with customers to transfer goods or services. Under the new revenue standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. The standard allows for two transition methods: (a) a full retrospective adoption in which the standard is applied to all periods presented, or (b) a modified retrospective adoption in which the standard is applied only to the most current period presented in the financial statements, including additional disclosures of the standard’s application impact to individual financial statement line items. In July 2015, the FASB deferred the effective date to December 15, 2017 for annual periods, and interim reporting periods within those fiscal years, beginning after that date.
We adopted the new revenue standard effective January 1, 2018 using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Our adjustment related solely to revenues from certain product sales with bill-and-hold arrangements in our Tubular Sales segment. The comparative information has not been restated and continues to be reported under the accounting standards which were in effect for those periods. The impact to revenue of applying the new revenue recognition standard for the three and six months ended June 30, 2018 was immaterial. We expect the impact of the adoption of the new standard to be immaterial to our financial results on an ongoing basis.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard was as follows (in thousands):
|
| | | | | | | | | | | |
| Balance at | | Impact of | | Balance at |
| December 31, 2017 | | Adjustments | | January 1, 2018 |
Balance Sheet | | | | | |
Assets | | | | | |
Inventories, net | $ | 76,420 |
| | $ | (3,560 | ) | | $ | 72,860 |
|
Liabilities | | | | | |
Deferred revenue | 4,703 |
| | (4,230 | ) | | 473 |
|
Stockholders' Equity | | | | | |
Retained earnings | 106,923 |
| | 670 |
| | 107,593 |
|
Note 2—Revenues
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Payment terms on services and products generally range from 30 days to 120 days. Given the short-term nature of our service and product offerings, our contracts do not have a significant financing component and the consideration we receive is generally fixed.
Service revenues are recognized over time as services are performed or rendered. We generally perform services either under direct service purchase orders or master service agreements which are supplemented by individual call-out provisions. For customers contracted under such arrangements, an accrual is recorded in unbilled revenue for revenue earned but not yet invoiced.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenues on product sales are generally recognized at a point in time when the product has shipped and significant risks of ownership have passed to the customer. The sales arrangements typically do not include a right of return or other similar provisions, nor do they contain any other post-delivery obligations.
Some of our Tubular Sales and Blackhawk segment customers have requested that we store pipe, connectors and other products purchased from us in our facilities. We recognize revenues for these “bill and hold” sales once the following criteria have been met: (1) there is a substantive reason for the arrangement, (2) the product is identified as the customer's asset, (3) the product is ready for delivery to the customer, and (4) we cannot use the product or direct it to another customer.
Practical Expedients
We elected to apply certain practical expedients available under the new revenue standard. We elected to expense cost of obtaining contracts, such as sales commissions, when incurred because the amortization period would have been one year or less due to the length of our contracts. We have also elected not to assess immaterial promises in the context of our contracts as performance obligations and to exclude taxes from the assessment of transaction price in arrangements where taxes are collected by the entity from a customer.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Because our contracts with customers are short-term in nature and fall within this exemption, we do not have significant unsatisfied performance obligations as defined by the new revenue standard.
Note 3—Accounts Receivable, net
Accounts receivable at June 30, 2018 and December 31, 2017 were as follows (in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
Trade accounts receivable, net of allowance of $4,050 and $4,777, respectively | $ | 92,722 |
| | $ | 83,482 |
|
Unbilled revenue | 38,996 |
| | 25,670 |
|
Taxes receivable | 9,553 |
| | 11,305 |
|
Affiliated (1) | 549 |
| | 716 |
|
Other receivables | 5,822 |
| | 6,037 |
|
Total accounts receivable, net | $ | 147,642 |
| | $ | 127,210 |
|
| |
(1) | Amounts represent expenditures on behalf of non-consolidated affiliates. |
Note 4—Inventories, net
Inventories at June 30, 2018 and December 31, 2017 were as follows (in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
Pipe and connectors, net of allowance of $20,466 and $20,064, respectively | $ | 24,574 |
| | $ | 33,620 |
|
Finished goods, net of allowance of $1,490 and $1,520, respectively | 16,823 |
| | 14,541 |
|
Work in progress | 7,478 |
| | 9,206 |
|
Raw materials, components and supplies | 20,542 |
| | 19,053 |
|
Total inventories, net | $ | 69,417 |
| | $ | 76,420 |
|
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5—Property, Plant and Equipment
The following is a summary of property, plant and equipment at June 30, 2018 and December 31, 2017 (in thousands):
|
| | | | | | | | | |
| Estimated Useful Lives in Years | | June 30, 2018 | | December 31, 2017 |
Land | — | | $ | 14,834 |
| | $ | 15,314 |
|
Land improvements (1) | 8-15 | | 15,110 |
| | 14,594 |
|
Buildings and improvements (1) | 39 | | 110,092 |
| | 119,380 |
|
Rental machinery and equipment | 7 | | 894,279 |
| | 898,146 |
|
Machinery and equipment - other | 7 | | 61,603 |
| | 55,049 |
|
Furniture, fixtures and computers | 5 | | 24,735 |
| | 27,259 |
|
Automobiles and other vehicles | 5 | | 29,675 |
| | 29,971 |
|
Leasehold improvements (1) | 7-15, or lease term if shorter | | 11,903 |
| | 10,030 |
|
Construction in progress - machinery and equipment and land improvements (1) | — | | 61,920 |
| | 61,836 |
|
| | | 1,224,151 |
| | 1,231,579 |
|
Less: Accumulated depreciation | | | (802,117 | ) | | (761,933 | ) |
Total property, plant and equipment, net | | | $ | 422,034 |
| | $ | 469,646 |
|
| |
(1) | See Note 11 - Related Party Transactions for additional information. |
During the third quarter of 2017, we committed to sell certain of our buildings in the International Services segment and determined those assets met the criteria to be classified as held for sale in our condensed consolidated balance sheet. As a result, we reclassified the buildings, with a net book value of $4.1 million, from property, plant and equipment to assets held for sale and recognized a $0.3 million loss. During the first quarter of 2018, we sold one of the buildings classified as held for sale for $0.8 million and recorded an immaterial loss. During the second quarter of 2018, additional assets with a net book value of $4.5 million met the criteria to be classified as held for sale and were reclassified from property, plant and equipment to assets held for sale on our condensed consolidated balance sheet.
The following table presents the depreciation and amortization expense associated with each line item for the three and six months ended June 30, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Services | | $ | 24,302 |
| | $ | 26,252 |
| | $ | 47,881 |
| | $ | 52,895 |
|
Products | | 1,131 |
| | 1,252 |
| | 2,268 |
| | 2,561 |
|
General and administrative expenses | | 3,429 |
| | 3,447 |
| | 7,013 |
| | 6,594 |
|
Total | | $ | 28,862 |
| | $ | 30,951 |
| | $ | 57,162 |
| | $ | 62,050 |
|
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6—Other Assets
Other assets at June 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
Cash surrender value of life insurance policies (1) | $ | 30,706 |
| | $ | 30,351 |
|
Deposits | 2,502 |
| | 2,564 |
|
Other | 964 |
| | 2,378 |
|
Total other assets | $ | 34,172 |
| | $ | 35,293 |
|
| |
(1) | See Note 9 – Fair Value Measurements for additional information. |
Note 7—Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at June 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
Accounts payable | $ | 22,516 |
| | $ | 33,912 |
|
Accrued compensation | 21,207 |
| | 25,510 |
|
Accrued property and other taxes | 14,620 |
| | 16,908 |
|
Accrued severance and other charges | 925 |
| | 1,444 |
|
Income taxes | 9,410 |
| | 8,091 |
|
Accrued purchase orders and other | 23,379 |
| | 23,020 |
|
Total accounts payable and accrued liabilities | $ | 92,057 |
| | $ | 108,885 |
|
Note 8—Debt
Credit Facility
We have a $100.0 million revolving credit facility with certain financial institutions, including up to $20.0 million in letters of credit and up to $10.0 million in swingline loans, which matures in August 2018 (the “Credit Facility”). Subject to the terms of the Credit Facility, we have the ability to increase the commitments to $150.0 million. At June 30, 2018 and December 31, 2017, we had $2.3 million and $2.8 million, respectively, in letters of credit outstanding and no outstanding borrowings under the Credit Facility. Our borrowing capacity is equal to 2.5x our trailing 12-month Adjusted EBITDA less letters of credit outstanding under the Credit Facility.
Borrowings under the Credit Facility bear interest, at our option, at either a base rate or an adjusted Eurodollar rate. Base rate loans under the Credit Facility bear interest at a rate equal to the higher of (i) the prime rate as published in the Wall Street Journal, (ii) the Federal Funds Effective Rate plus 0.50% or (iii) the adjusted Eurodollar rate plus 1.00%, plus an applicable margin ranging from 0.50% to 1.50%, subject to adjustment based on a leverage ratio. Interest is in each case payable quarterly for base-rate loans. Eurodollar loans under the Credit Facility bear interest at an adjusted Eurodollar rate equal to the Eurodollar rate for such interest period multiplied by the statutory reserves, plus an applicable margin ranging from 1.50% to 2.50%. Interest is payable at the end of applicable interest periods for Eurodollar loans, except that if the interest period for a Eurodollar loan is longer than three months, interest is paid at the end of each three-month period. The unused portion of the Credit Facility is subject to a commitment fee ranging from 0.250% to 0.375% based on certain leverage ratios.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Credit Facility contains various covenants that, among other things, limit our ability to grant certain liens, make certain loans and investments, enter into mergers or acquisitions, enter into hedging transactions, change our lines of business, prepay certain indebtedness, enter into certain affiliate transactions, incur additional indebtedness or engage in certain asset dispositions.
The Credit Facility also contains financial covenants, which, among other things, require us, on a consolidated basis, to maintain: (i) a ratio of total consolidated funded debt to adjusted EBITDA (as defined in our Credit Agreement) of not more than 2.5 to 1.0 and (ii) a ratio of EBITDA to interest expense of not less than 3.0 to 1.0. As of June 30, 2018, we were in compliance with the covenants included in the Credit Agreement.
In addition, the Credit Facility contains customary events of default, including, among others, the failure to make required payments, the failure to comply with certain covenants or other agreements, breach of the representations and covenants contained in the agreements, default of certain other indebtedness, certain events of bankruptcy or insolvency and the occurrence of a change in control.
We are currently negotiating a new credit facility which we expect to be in place on or around the expiration of the existing Credit Facility in August 2018.
Citibank Credit Facility
In 2016, we entered into a three-year credit facility with Citibank N.A., UAE Branch in the amount of $6.0 million for the issuance of standby letters of credit and guarantees. The credit facility also allows for open ended guarantees. Outstanding amounts under the credit facility bear interest of 1.25% per annum for amounts outstanding up to one year. Amounts outstanding more than one year bear interest at 1.5% per annum. As of June 30, 2018 and December 31, 2017, we had $4.9 million and $2.6 million, respectively, in letters of credit outstanding.
Insurance Notes Payable
In 2017, we entered into three notes to finance our annual insurance premiums totaling $5.1 million. The notes bear interest at an annual rate of 2.9% with a final maturity date in October 2018. At June 30, 2018 and December 31, 2017, the total outstanding balance was $1.8 million and $4.7 million, respectively.
Note 9—Fair Value Measurements
We follow fair value measurement authoritative accounting guidance for measuring fair values of assets and liabilities in financial statements. We have consistently used the same valuation techniques for all periods presented. Please see Note 10 - Fair Value Measurements in our Annual Report for further discussion.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of financial assets and liabilities that are measured at fair value on a recurring basis, as of June 30, 2018 and December 31, 2017, were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| (Level 1) | | (Level 2) | | (Level 3) | | Total |
June 30, 2018 | | | | | | | |
Assets: | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | 278 |
| | $ | — |
| | $ | 278 |
|
Investments: | | | | | | | |
Cash surrender value of life insurance policies - deferred compensation plan | — |
| | 30,706 |
| | — |
| | 30,706 |
|
Marketable securities - other | 54 |
| | — |
| | — |
| | 54 |
|
Liabilities: | | | | | | | |
Deferred compensation plan | — |
| | 26,158 |
| | — |
| | 26,158 |
|
| | | | | | | |
December 31, 2017 | | | | | | | |
Assets: | | | | | | | |
Investments: | | | | | | | |
Cash surrender value of life insurance policies - deferred compensation plan | $ | — |
| | $ | 30,351 |
| | $ | — |
| | $ | 30,351 |
|
Marketable securities - other | 113 |
| | — |
| | — |
| | 113 |
|
Liabilities: | | | | | | | |
Derivative financial instruments | — |
| | 487 |
| | — |
| | 487 |
|
Deferred compensation plan | — |
| | 26,797 |
| | — |
| | 26,797 |
|
Our derivative financial instruments consist of short-duration foreign currency forward contracts. The fair value of our derivative financial instruments is based on quoted market values including foreign exchange forward rates and interest rates. The fair value is computed by discounting the projected future cash flow amounts to present value. Derivative financial instruments are included in our condensed consolidated balance sheets in accounts receivable, net at June 30, 2018 and in accounts payable and accrued liabilities at December 31, 2017.
Our investments associated with our deferred compensation plan consist primarily of the cash surrender value of life insurance policies and are included in other assets on the condensed consolidated balance sheets. Our investments change as a result of contributions, payments, and fluctuations in the market. Our liabilities associated with our deferred compensation plan are included in other non-current liabilities on the condensed consolidated balance sheets. Assets and liabilities, measured using significant observable inputs, are reported at fair value based on third-party broker statements, which are derived from the fair value of the funds' underlying investments. We also have marketable securities in publicly traded equity securities as an indirect result of strategic investments. They are reported at fair value based on the price of the stock and are included in other assets on the condensed consolidated balance sheets.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
We apply the provisions of the fair value measurement standard to our non-recurring, non-financial measurements including business combinations as well as impairment related to goodwill and other long-lived assets.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other Fair Value Considerations
The carrying values on our condensed consolidated balance sheet of our cash and cash equivalents, short-term investments, trade accounts receivable, other current assets, accounts payable, accrued and other current liabilities and lines of credit approximate fair values due to their short maturities.
Note 10— Derivatives
We enter into short-duration foreign currency forward derivative contracts to reduce the risk of foreign currency fluctuations. We use these instruments to mitigate our exposure to non-local currency operating working capital. We record these contracts at fair value on our condensed consolidated balance sheets. Although the derivative contracts will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they are not formally designated as hedge contracts for hedge accounting treatment. Accordingly, any changes in the fair value of the derivative instruments during a period will be included in our condensed consolidated statements of operations.
As of June 30, 2018 and December 31, 2017, we had the following foreign currency derivative contracts outstanding in U.S. dollars (in thousands):
|
| | | | | | | | |
| | June 30, 2018 |
Derivative Contracts | | Notional Amount | | Contractual Exchange Rate | | Settlement Date |
Canadian dollar | | $ | 5,904 |
| | 1.3041 | | 7/16/2018 |
Euro | | 8,598 |
| | 1.1777 | | 7/16/2018 |
Norwegian krone | | 5,233 |
| | 8.0266 | | 7/16/2018 |
Pound sterling | | 9,332 |
| | 1.3331 | | 7/16/2018 |
|
| | | | | | | | |
| | December 31, 2017 |
Derivative Contracts | | Notional Amount | | Contractual Exchange Rate | | Settlement Date |
Canadian dollar | | $ | 6,226 |
| | 1.2850 | | 3/15/2018 |
Euro | | 5,326 |
| | 1.1836 | | 3/15/2018 |
Norwegian krone | | 6,212 |
| | 8.3704 | | 3/15/2018 |
Pound sterling | | 6,039 |
| | 1.3419 | | 3/15/2018 |
The following table summarizes the location and fair value amounts of all derivative contracts in the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017 (in thousands):
|
| | | | | | | | | | |
Derivatives not Designated as Hedging Instruments | | Consolidated Balance Sheet Location | | June 30, 2018 | | December 31, 2017 |
Foreign currency contracts | | Accounts receivable, net | | $ | 278 |
| | $ | — |
|
Foreign currency contracts | | Accounts payable and accrued liabilities | | — |
| | (487 | ) |
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the location and amounts of the realized and unrealized gains and losses on derivative contracts in the condensed consolidated statements of operations (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | Six Months Ended |
| | | | June 30, | | June 30, |
Derivatives not Designated as Hedging Instruments | | Location of Gain (Loss) Recognized in Income on Derivative Contracts | | 2018 | | 2017 | | 2018 | | 2017 |
Unrealized gain (loss) on foreign currency contracts | | Other income, net | | $ | 204 |
| | $ | (274 | ) | | $ | 765 |
| | $ | (730 | ) |
Realized gain (loss) on foreign currency contracts | | Other income, net | | 1,065 |
| | (807 | ) | | 125 |
| | (552 | ) |
Total net gain (loss) on foreign currency contracts | | | | $ | 1,269 |
| | $ | (1,081 | ) | | $ | 890 |
| | $ | (1,282 | ) |
Our derivative transactions are governed through International Swaps and Derivatives Association master agreements. These agreements include stipulations regarding the right of offset in the event that we or our counterparty default on our performance obligations. If a default were to occur, both parties have the right to net amounts payable and receivable into a single net settlement between parties. Our accounting policy is to offset derivative assets and liabilities executed with the same counterparty when a master netting arrangement exists.
The following table presents the gross and net fair values of our derivatives at June 30, 2018 and December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Derivative Asset Positions | | Derivative Liability Positions |
| | June 30, 2018 | | December 31, 2017 | | June 30, 2018 | | December 31, 2017 |
Gross position - asset / (liability) | | $ | 278 |
| | $ | — |
| | $ | — |
| | $ | (487 | ) |
Netting adjustment | | — |
| | — |
| | — |
| | — |
|
Net position - asset / (liability) | | $ | 278 |
| | $ | — |
| | $ | — |
| | $ | (487 | ) |
Note 11—Related Party Transactions
We have engaged in certain transactions with other companies related to us by common ownership. We have entered into various operating leases to lease facilities from these affiliated companies. The majority of these lease obligations expire in 2018. These leases may be extended or allowed to expire by us depending on operational needs, market prices and the ability for us to negotiate and secure, at our discretion, alternative leases or replacement locations. Rent expense associated with our related party leases was $1.7 million for both the three months ended June 30, 2018 and 2017, and $3.9 million and $3.5 million for the six months ended June 30, 2018 and 2017, respectively.
In certain cases, we have made improvements to properties subject to related party leases referenced above, including the construction of buildings. As of June 30, 2018, the net book value associated with buildings we constructed on properties subject to related party leases was $58.4 million. We are depreciating the costs associated with these buildings over their estimated remaining useful lives of approximately 37 years, which exceeds the remaining lease terms that primarily expire in 2018. Upon expiration of the leases, the buildings, land improvements and leasehold improvements could be construed as becoming the property of the related party lessors. As of June 30, 2018, the net book value associated with leasehold and land improvements we constructed on properties subject to related party leases was $17.6 million, a portion of which is in construction in progress. We are depreciating the costs associated with these leasehold and land improvements over their estimated remaining lives of approximately 10 years, which exceeds the remaining lease terms that primarily expire in 2018. We are currently engaged in negotiations to extend, renew or replace the related party property leases such that we have unrestricted use of the buildings and improvements throughout their estimated useful lives. Extension, renewal or replacement of the related party property leases is dependent on negotiations with related parties, the failure of which could result in material disputes with the related
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
parties. In the event we do not extend, renew or replace these related party property leases, we will revise the remaining estimated useful lives of the buildings and other improvements accordingly.
We were a party to certain agreements relating to the rental of aircraft to Western Airways ("WA"), an entity owned by the Mosing family. The WA agreements reflected both dry lease and wet lease rentals, whereby we were charged a flat monthly fee primarily for crew, hangar, maintenance and administration costs in addition to other variable costs for fuel and maintenance. We also earned charter income from third party usage through a revenue sharing agreement. We recorded $0.7 million and $0.6 million of net charter expense for the three and six months ended June 30, 2017, respectively. In March 2017, we sold a fully depreciated aircraft for a total sales price of $1.3 million and recorded a gain on sale of $1.3 million. The rental agreements were terminated with WA effective December 29, 2017, upon the sale of our last aircraft.
Tax Receivable Agreement
Mosing Holdings and its permitted transferees converted all their Preferred Stock into shares of our common stock on a one-for-one basis on August 26, 2016, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, by delivery of an equivalent portion of their interests in FICV to us (the “Conversion”). FICV made an election under Section 754 of the Internal Revenue Code. Pursuant to the Section 754 election, the Conversion resulted in an adjustment to the tax basis of the tangible and intangible assets of FICV with respect to the portion of FICV now held by FINV. These adjustments will be allocated to FINV. The adjustments to the tax basis of the tangible and intangible assets of FICV described above would not have been available absent this Conversion. These basis adjustments may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
The TRA that we entered into with FICV and Mosing Holdings in connection with our initial public offering ("IPO") generally provides for the payment by FINV of 85% of the amount of the actual reductions, if any, in payments of U.S. federal, state and local income tax or franchise tax (which reductions we refer to as “cash savings”) in periods after our IPO as a result of (i) the tax basis increases resulting from the Conversion and (ii) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the TRA. In addition, the TRA provides for payment by us of interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. The payments under the TRA will not be conditioned upon a holder of rights under the TRA having a continued ownership interest in either FICV or FINV. We will retain the remaining 15% of cash savings, if any.
The estimation of the liability under the TRA is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income. As of June 30, 2018, FINV has a cumulative loss over the prior 36-month period. Based on this history of losses, as well as uncertainty regarding the timing and amount of future taxable income, we are unable to conclude that there will be future cash savings that will lead to additional payouts under the TRA beyond the estimated $6.2 million as of June 30, 2018. Additional TRA liability may be recognized in the future based on changes in expectations regarding the timing and likelihood of future cash savings.
The payment obligations under the TRA are our obligations and are not obligations of FICV. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless FINV elects to exercise its sole right to terminate the TRA early. If FINV elects to terminate the TRA early, which it may do so in its sole discretion, it would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA (based upon certain assumptions and deemed events set forth in the TRA, including the assumption that it has sufficient taxable income to fully utilize such benefits and that any FICV interests that Mosing Holdings or its transferees own on the termination date are deemed to be exchanged on the termination date). Any early termination payment may be made significantly in advance of the actual realization, if any, of such future benefits. In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control. In these situations, FINV’s obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. For example, if the TRA were terminated on June 30, 2018, the estimated termination payment would be
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
approximately $55.1 million (calculated using a discount rate of 5.91%). The foregoing number is merely an estimate and the actual payment could differ materially.
Because FINV is a holding company with no operations of its own, its ability to make payments under the TRA is dependent on the ability of FICV to make distributions to it in an amount sufficient to cover FINV’s obligations under such agreements; this ability, in turn, may depend on the ability of FICV’s subsidiaries to provide payments to it. The ability of FICV and its subsidiaries to make such distributions will be subject to, among other things, the applicable provisions of Dutch law that may limit the amount of funds available for distribution and restrictions in our debt instruments. To the extent that FINV is unable to make payments under the TRA for any reason, except in the case of an acceleration of payments thereunder occurring in connection with an early termination of the TRA or certain mergers or change of control, such payments will be deferred and will accrue interest until paid, and FINV will be prohibited from paying dividends on its common stock.
Note 12—Loss Per Common Share
Basic loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is determined by dividing net loss by the weighted average number of common shares outstanding, assuming all potentially dilutive shares were issued. We apply the treasury stock method to determine the dilutive weighted average common shares represented by the unvested restricted stock units and ESPP shares.
The following table summarizes the basic and diluted loss per share calculations (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Numerator | | | | | | | |
Net loss | $ | (25,763 | ) | | $ | (25,950 | ) | | $ | (67,836 | ) | | $ | (52,613 | ) |
Denominator | | | | | | | |
Basic and diluted weighted average common shares (1) | 223,981 |
| | 222,914 |
| | 223,775 |
| | 222,740 |
|
Loss per common share: | | | | | | | |
Basic and diluted | $ | (0.12 | ) | | $ | (0.12 | ) | | $ | (0.30 | ) | | $ | (0.24 | ) |
|
| | | | | | | | | | | | |
| | | | | | | | |
(1) | Approximate number of unvested restricted stock units and stock to be issued pursuant to the ESPP that have been excluded from the computation of diluted loss per share as the effect would be anti-dilutive when results from operations are at a net loss position. | 678 |
| | 425 |
| | 639 |
| | 616 |
|
Note 13—Income Taxes
For interim financial reporting, we estimate the annual tax rate based on projected pre-tax income (loss) for the full year and record a quarterly income tax provision (benefit) in accordance with accounting guidance for income taxes. As the year progresses, we refine the estimate of the year's pre-tax income (loss) as new information becomes available. The continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, we adjust the income tax provision (benefit) during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the most current expected annual tax rate.
Our effective tax rate was 3.1% and 19.0% for the three months ended June 30, 2018 and 2017, respectively, and (8.9)% and 22.4% for the six months ended June 30, 2018 and 2017, respectively. The decrease in tax rates as compared to the same periods last year is primarily due to recording valuation allowances against the U.S. and certain foreign tax losses incurred to date in 2018. For the six months ended June 30, 2018, we have a negative tax rate primarily due
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to recording tax expense in various foreign jurisdictions even though we had a net consolidated loss for the current period.
In determining that a valuation allowance must be recorded in the current period, we assessed the available positive and negative evidence and concluded that it is not more likely than not that sufficient future taxable income would be generated to permit the use of our deferred tax assets. This conclusion is primarily the result of cumulative losses incurred in the most recent three-year period, and uncertainty regarding when we will return to profitability. The amount of deferred tax asset considered realizable and the related need for a valuation allowance may be adjusted in future periods as the available evidence changes.
We are under audit by the U.S. and certain foreign jurisdictions for the years 2014 - 2016. We do not expect the results of these audits to have any material effect on our financial statements.
As of June 30, 2018, there were no significant changes to our unrecognized tax benefits as reported in our audited financial statements for the year ended December 31, 2017.
Note 14—Commitments and Contingencies
We are the subject of lawsuits and claims arising in the ordinary course of business from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. We had no material accruals for loss contingencies, individually or in the aggregate, as of June 30, 2018 and December 31, 2017. We believe the probability is remote that the ultimate outcome of these matters would have a material adverse effect on our financial position, results of operations or cash flows.
We are conducting an internal investigation of the operations of certain of our foreign subsidiaries in West Africa including possible violations of the U.S. Foreign Corrupt Practices Act ("FCPA"), our policies and other applicable laws. In June 2016, we voluntarily disclosed the existence of our extensive internal review to the SEC, the U.S. Department of Justice ("DOJ") and other governmental entities. It is our intent to continue to fully cooperate with these agencies and any other applicable authorities in connection with any further investigation that may be conducted in connection with this matter. While our review has not indicated that there has been any material impact on our previously filed financial statements, we have continued to collect information and cooperate with the authorities, but at this time are unable to predict the ultimate resolution of these matters with these agencies.
In addition, during the course of the investigation, we discovered historical business transactions (and bids to enter into business transactions) in certain countries that may have been subject to U.S. and other international sanctions. We disclosed this information to the U.S. Department of Commerce’s Bureau of Industry and Security, Office of Export Enforcement (“OEE”) and to the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) (as well as to the agencies involved in our ongoing investigation discussed above). We received a No Action Letter dated April 20, 2018 from OEE, stating that OEE had closed its investigation without taking further action. In addition, we received a No Action Letter dated April 23, 2018 from OFAC, stating that OFAC had closed its investigation without taking further action.
As disclosed above, our investigation into possible violations of the FCPA remains ongoing, and we will continue to cooperate with the SEC, DOJ and other relevant governmental entities in connection therewith. At this time, we are unable to predict the ultimate resolution of these matters with these agencies, including any financial impact to us. Our board and management are committed to continuously enhancing our internal controls that support improved compliance and transparency throughout our global operations.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 15—Segment Information
Reporting Segments
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the Company's chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance. We are comprised of four reportable segments: International Services, U.S. Services, Tubular Sales and Blackhawk.
The International Services segment provides tubular services in international offshore markets and in several onshore international regions. Our customers in these international markets are primarily large exploration and production companies, including integrated oil and gas companies and national oil and gas companies, and other oilfield services companies.
The U.S. Services segment provides tubular services in the active onshore oil and gas drilling regions in the U.S., including the Permian Basin, Eagle Ford Shale, Haynesville Shale, Marcellus/Utica Shale, Niobrara Shale, Woodford Shale, Green River Basin and Uintah Basin, as well as in the U.S. Gulf of Mexico.
The Tubular Sales segment designs, manufactures and distributes large outside diameter ("OD") pipe, connectors and casing attachments and sells large OD pipe originally manufactured by various pipe mills. We also provide specialized fabrication and welding services in support of offshore projects, including drilling and production risers, flowlines and pipeline end terminations, as well as long length tubulars (up to 300 feet in length) for use as caissons or pilings. This segment also designs and manufactures proprietary equipment for use in our International and U.S. Services segments.
The Blackhawk segment provides well construction and well intervention services and products, in addition to cementing tool expertise, in the U.S. and Mexican Gulf of Mexico, onshore U.S. and other select international locations. Blackhawk’s customer base consists primarily of major and independent oil and gas companies as well as other oilfield services companies.
Revenues
We disaggregate our revenue from contracts with customers by geography for each of our segments, as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following tables presents our revenues disaggregated by geography based on the location where our services were provided and products sold (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
| International Services | | U.S. Services | | Tubular Sales | | Blackhawk | | Consolidated |
United States | $ | — |
| | $ | 35,136 |
| | $ | 14,001 |
| | $ | 18,418 |
| | $ | 67,555 |
|
International | 59,361 |
| | — |
| | 60 |
| | 5,109 |
| | 64,530 |
|
Total Revenues | $ | 59,361 |
| | $ | 35,136 |
| | $ | 14,061 |
| | $ | 23,527 |
| | $ | 132,085 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
| International Services | | U.S. Services | | Tubular Sales | | Blackhawk | | Consolidated |
United States | $ | — |
| | $ | 29,905 |
| | $ | 15,775 |
| | $ | 17,791 |
| | $ | 63,471 |
|
International | 53,499 |
| | — |
| | 366 |
| | 323 |
| | 54,188 |
|
Total Revenues | $ | 53,499 |
| | $ | 29,905 |
| | $ | 16,141 |
| | $ | 18,114 |
| | $ | 117,659 |
|
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
| International Services | | U.S. Services | | Tubular Sales | | Blackhawk | | Consolidated |
United States | $ | — |
| | $ | 67,743 |
| | $ | 29,105 |
| | $ | 35,472 |
| | $ | 132,320 |
|
International | 108,094 |
| | — |
| | 176 |
| | 7,064 |
| | 115,334 |
|
Total Revenues | $ | 108,094 |
| | $ | 67,743 |
| | $ | 29,281 |
| | $ | 42,536 |
| | $ | 247,654 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
| International Services | | U.S. Services | | Tubular Sales | | Blackhawk | | Consolidated |
United States | $ | — |
| | $ | 60,871 |
| | $ | 32,334 |
| | $ | 33,942 |
| | $ | 127,147 |
|
International | 100,109 |
| | — |
| | 752 |
| | 382 |
| | 101,243 |
|
Total Revenues | $ | 100,109 |
| | $ | 60,871 |
| | $ | 33,086 |
| | $ | 34,324 |
| | $ | 228,390 |
|
Revenue by geographic area was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
United States | $ | 67,555 |
| | $ | 63,471 |
| | $ | 132,320 |
| | $ | 127,147 |
|
Europe/Middle East/Africa | 34,447 |
| | 36,719 |
| | 64,693 |
| | 65,205 |
|
Latin America | 12,983 |
| | 9,128 |
| | 20,457 |
| | 19,060 |
|
Asia Pacific | 7,669 |
| | 4,926 |
| | 13,663 |
| | 9,489 |
|
Other countries | 9,431 |
| | 3,415 |
| | 16,521 |
| | 7,489 |
|
Total Revenues | $ | 132,085 |
| | $ | 117,659 |
| | $ | 247,654 |
| | $ | 228,390 |
|
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest income, net, depreciation and amortization, income tax benefit or expense, asset impairments, gain or loss on disposal of assets, foreign currency gain or loss, equity-based compensation, unrealized and realized gain or loss, the effects of the TRA, other non-cash adjustments and other charges. We review Adjusted EBITDA on both a consolidated basis and on a segment basis. We use Adjusted EBITDA to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), income tax, foreign currency exchange rates and other charges and credits. Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP.
Our CODM uses Adjusted EBITDA as the primary measure of segment reporting performance.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a reconciliation of Segment Adjusted EBITDA to net loss (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Segment Adjusted EBITDA: | | | | | | | |
International Services | $ | 13,458 |
| | $ | 9,022 |
| | $ | 16,046 |
| | $ | 14,308 |
|
U.S. Services (1) | (6,379 | ) | | (9,238 | ) | | (15,680 | ) | | (16,453 | ) |
Tubular Sales | 170 |
| | 815 |
| | 2,358 |
| | 3,069 |
|
Blackhawk | 3,704 |
| | 2,965 |
| | 6,070 |
| | 4,176 |
|
| 10,953 |
| | 3,564 |
| | 8,794 |
| | 5,100 |
|
Interest income, net | 609 |
| | 753 |
| | 1,553 |
| | 1,151 |
|
Depreciation and amortization | (28,862 | ) | | (30,951 | ) | | (57,162 | ) | | (62,050 | ) |
Income tax (expense) benefit | 815 |
| | 6,076 |
| | (5,560 | ) | | 15,194 |
|
Gain (loss) on disposal of assets | (217 | ) | | (210 | ) | | (452 | ) | | 1,262 |
|
Foreign currency gain (loss) | (4,267 | ) | | 599 |
| | (2,563 | ) | | 1,345 |
|
TRA related adjustments | (1,171 | ) | | — |
| | (4,112 | ) | | — |
|
Charges and credits (2) | (3,623 | ) | | (5,781 | ) | | (8,334 | ) | | (14,615 | ) |
Net loss | $ | (25,763 | ) | | $ | (25,950 | ) | | $ | (67,836 | ) | | $ | (52,613 | ) |
| |
(1) | Includes all corporate general and administrative expenses. |
| |
(2) | Comprised of Equity-based compensation expense (for the three months ended June 30, 2018 and 2017: $2,888 and $3,415, respectively, and for the six months ended June 30, 2018 and 2017: $5,168 and $9,116, respectively), Mergers and acquisition expense (for the three months ended June 30, 2018 and 2017: none and $10, respectively, and for the six months ended June 30, 2018 and 2017: $58 and $459, respectively), Severance and other charges (for the three months ended June 30, 2018 and 2017: $1,115 and $(299), respectively, and for the six months ended June 30, 2018 and 2017: $2,369 and $738, respectively), Unrealized and realized gains (losses) (for the three months ended June 30, 2018 and 2017: $1,561 and $(1,088), respectively, and for the six months ended June 30, 2018 and 2017: $1,161 and $(1,696), respectively) and Investigation-related matters (for the three months ended June 30, 2018 and 2017: $1,181 and $1,567, respectively, and for the six months ended June 30, 2018 and 2017: $1,900 and $2,606, respectively). |
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth certain financial information with respect to our reportable segments (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| International Services | | U.S. Services | | Tubular Sales | | Blackhawk | | Eliminations | | Total |
Three Months Ended June 30, 2018 | | | | | | | | | | | |
Revenue from external customers | $ | 59,361 |
| | $ | 35,136 |
| | $ | 14,061 |
| | $ | 23,527 |
| | $ | — |
| | $ | 132,085 |
|
Inter-segment revenue | (56 | ) | | 4,639 |
| | 96 |
| | 344 |
| | (5,023 | ) | | — |
|
Operating income (loss) | (2,052 | ) | | (19,920 | ) | | (829 | ) | | (981 | ) | | — |
| | (23,782 | ) |
Adjusted EBITDA | 13,458 |
| | (6,379 | ) | | 170 |
| | 3,704 |
| | — |
| | * |
| | | | | | | | | | | |
Three Months Ended June 30, 2017 | | | | | | | | | | | |
Revenue from external customers | $ | 53,499 |
| | $ | 29,905 |
| | $ | 16,141 |
| | $ | 18,114 |
| | $ | — |
| | $ | 117,659 |
|
Inter-segment revenue | 12 |
| | 4,543 |
| | 3,564 |
| | 72 |
| | (8,191 | ) | | — |
|
Operating income (loss) | (6,980 | ) | | (24,292 | ) | | 805 |
| | (3,499 | ) | | — |
| | (33,966 | ) |
Adjusted EBITDA | 9,022 |
| | (9,238 | ) | | 815 |
| | 2,965 |
| | — |
| | * |
| | | | | | | | | | | |
Six Months Ended June 30, 2018 | | | | | | | | | | | |
Revenue from external customers | $ | 108,094 |
| | $ | 67,743 |
| | $ | 29,281 |
| | $ | 42,536 |
| | $ | — |
| | $ | 247,654 |
|
Inter-segment revenue | (79 | ) | | 8,855 |
| | 193 |
| | 554 |
| | (9,523 | ) | | — |
|
Operating income (loss) | (13,773 | ) | | (41,900 | ) | | 436 |
| | (3,452 | ) | | — |
| | (58,689 | ) |
Adjusted EBITDA | 16,046 |
| | (15,680 | ) | | 2,358 |
| | 6,070 |
| | — |
| | * |
| | | | | | | | | | | |
Six Months Ended June 30, 2017 | | | | | | | | | | | |
Revenue from external customers | $ | 100,109 |
| | $ | 60,871 |
| | $ | 33,086 |
| | $ | 34,324 |
| | $ | — |
| | $ | 228,390 |
|
Inter-segment revenue | 15 |
| | 8,828 |
| | 7,239 |
| | 72 |
| | (16,154 | ) | | — |
|
Operating income (loss) | (16,493 | ) | | (47,639 | ) | | 3,185 |
| | (9,629 | ) | | — |
| | (70,576 | ) |
Adjusted EBITDA | 14,308 |
| | (16,453 | ) | | 3,069 |
| | 4,176 |
| | — |
| | * |
* Non-GAAP financial measure not disclosed.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include those that express a belief, expectation or intention, as well as those that are not statements of historical fact. Forward-looking statements include information regarding our future plans and goals and our current expectations with respect to, among other things:
| |
• | our business strategy and prospects for growth; |
| |
• | our cash flows and liquidity; |
| |
• | our financial strategy, budget, projections and operating results; |
| |
• | the amount, nature and timing of capital expenditures; |
| |
• | the availability and terms of capital; |
| |
• | competition and government regulations; and |
| |
• | general economic conditions. |
Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal” or other terms that convey the uncertainty of future events or outcomes, although not all forward-looking statements contain such identifying words. The forward-looking statements in this Form 10-Q speak only as of the date of this report; we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. Forward-looking statements are not assurances of future performance and involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inh