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 September 30, 2016
OR
¨ Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number: 001-36053
Frank’s International N.V.
(Exact name of registrant as specified in its charter)
|
| | | | |
| The Netherlands | | 98-1107145 | |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification number) | |
| | | | |
| Mastenmakersweg 1 | | | |
| 1786 PB Den Helder, The Netherlands | | Not Applicable | |
| (Address of principal executive offices) | | (Zip Code) | |
Registrant’s telephone number, including area code: +31 (0)22 367 0000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filer | þ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
As of November 1, 2016, there were 222,391,338 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 September 30, 2016 and December 31, 2015 | |
| Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months | |
| Ended September 30, 2016 and 2015 | |
| Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months | |
| Ended September 30, 2016 and 2015 | |
| Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the Nine Months | |
| Ended September 30, 2016 and 2015 | |
| Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months | |
| Ended September 30, 2016 and 2015 | |
| 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) |
| | | |
| September 30, | | December 31, |
| 2016 | | 2015 |
Assets | (Unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 529,850 |
| | $ | 602,359 |
|
Accounts receivables, net | 155,363 |
| | 246,191 |
|
Inventories | 136,616 |
| | 161,263 |
|
Other current assets | 8,382 |
| | 13,923 |
|
Total current assets | 830,211 |
| | 1,023,736 |
|
| | | |
Property, plant and equipment, net | 573,874 |
| | 624,959 |
|
Goodwill and intangible assets, net | 23,846 |
| | 25,210 |
|
Other assets | 98,448 |
| | 52,933 |
|
Total assets | $ | 1,526,379 |
| | $ | 1,726,838 |
|
| | | |
Liabilities and Equity | | | |
Current liabilities: | | | |
Short-term debt | $ | 315 |
| | $ | 7,321 |
|
Accounts payable | 13,673 |
| | 12,784 |
|
Deferred revenue | 28,163 |
| | 57,637 |
|
Accrued and other current liabilities | 79,121 |
| | 111,884 |
|
Total current liabilities | 121,272 |
| | 189,626 |
|
| | | |
Deferred tax liabilities | — |
| | 40,257 |
|
Other non-current liabilities | 157,174 |
| | 44,824 |
|
Total liabilities | 278,446 |
| | 274,707 |
|
| | | |
Commitments and contingencies (Note 18) |
|
| |
|
|
| | | |
Series A preferred stock, €0.01, par value: no shares authorized, issued or outstanding at 2016; 52,976,000 shares authorized, issued and outstanding at 2015 | — |
| | 705 |
|
| | | |
Stockholders' equity: | | | |
Common stock, €0.01, par value, 798,096,000 shares authorized: 210,283,042 shares issued and 209,542,050 shares outstanding at 2016 and 745,120,000 shares authorized, 155,661,150 shares issued and 155,146,338 shares outstanding at 2015 | 2,661 |
| | 2,045 |
|
Additional paid-in capital | 889,375 |
| | 712,486 |
|
Retained earnings | 400,135 |
| | 531,621 |
|
Accumulated other comprehensive loss | (31,894 | ) | | (25,555 | ) |
Treasury stock (at cost), 740,992 at 2016 and 514,812 shares at 2015 | (12,344 | ) | | (9,298 | ) |
Total stockholders' equity | 1,247,933 |
| | 1,211,299 |
|
Noncontrolling interest | — |
| | 240,127 |
|
Total equity | 1,247,933 |
| | 1,451,426 |
|
Total liabilities and equity | $ | 1,526,379 |
| | $ | 1,726,838 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
|
| | | | | | | | | | | | | | | |
FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
(In thousands, except per share data) |
(Unaudited) |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues: | | | | | | | |
Equipment rentals and services | $ | 85,698 |
| | $ | 176,553 |
| | $ | 312,132 |
| | $ | 610,240 |
|
Products | 19,416 |
| | 63,330 |
| | 67,414 |
| | 161,384 |
|
Total revenue | 105,114 |
| | 239,883 |
| | 379,546 |
| | 771,624 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Cost of revenues, exclusive of depreciation | | | | | | | |
and amortization | | | | | | | |
Equipment rentals and services | 47,002 |
| | 72,389 |
| | 155,367 |
| | 242,681 |
|
Products | 13,237 |
| | 34,174 |
| | 42,594 |
| | 90,081 |
|
General and administrative expenses | 52,774 |
| | 66,929 |
| | 182,036 |
| | 210,523 |
|
Depreciation and amortization | 26,545 |
| | 29,032 |
| | 84,278 |
| | 80,743 |
|
Severance and other charges | 14,534 |
| | 1,186 |
| | 18,858 |
| | 14,208 |
|
Change in value of contingent consideration | — |
| | (1,532 | ) | | — |
| | (1,532 | ) |
Gain on sale of assets | (46 | ) | | (1,392 | ) | | (1,095 | ) | | (521 | ) |
Operating income (loss) | (48,932 | ) | | 39,097 |
| | (102,492 | ) | | 135,441 |
|
| | | | | | | |
Other income (expense): | | | | | | | |
Other income | 984 |
| | 918 |
| | 2,145 |
| | 2,976 |
|
Interest income, net | 646 |
| | 173 |
| | 1,050 |
| | 150 |
|
Foreign currency loss | (1,696 | ) | | (5,329 | ) | | (5,907 | ) | | (6,563 | ) |
Total other income (expense) | (66 | ) | | (4,238 | ) | | (2,712 | ) | | (3,437 | ) |
| | | | | | | |
Income (loss) before income tax expense (benefit) | (48,998 | ) | | 34,859 |
| | (105,204 | ) | | 132,004 |
|
Income tax expense (benefit) | (6,800 | ) | | 10,771 |
| | (15,311 | ) | | 32,662 |
|
Net income (loss) | (42,198 | ) | | 24,088 |
| | (89,893 | ) | | 99,342 |
|
Net income (loss) attributable to noncontrolling interest | (5,216 | ) | | 7,523 |
| | (20,741 | ) | | 27,668 |
|
Net income (loss) attributable to Frank's International N.V. | (36,982 | ) | | 16,565 |
| | (69,152 | ) | | 71,674 |
|
Preferred stock dividends | — |
| | — |
| | (1 | ) | | (2 | ) |
Net income (loss) available to Frank's International N.V. | | | | | | | |
common shareholders | $ | (36,982 | ) | | $ | 16,565 |
| | $ | (69,153 | ) | | $ | 71,672 |
|
| | | | | | | |
Earnings (loss) per common share: | | | | | | | |
Basic | $ | (0.21 | ) | | $ | 0.11 |
| | $ | (0.43 | ) | | $ | 0.46 |
|
Diluted | $ | (0.21 | ) | | $ | 0.11 |
| | $ | (0.43 | ) | | $ | 0.46 |
|
| | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic | 177,125 |
| | 154,813 |
| | 162,656 |
| | 154,502 |
|
Diluted | 177,125 |
| | 209,349 |
| | 162,656 |
| | 209,052 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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| | | | | | | | | | | | | | | |
FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
(In thousands) |
(Unaudited) |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | |
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | 74 |
| | (3,713 | ) | | 1,824 |
| | (12,287 | ) |
Marketable securities: | | | | | | | |
Unrealized gain (loss) on marketable securities | (50 | ) | | (330 | ) | | 1,066 |
| | (1,621 | ) |
Deferred tax asset / liability change | (5 | ) | | 137 |
| | (465 | ) | | 374 |
|
Unrealized gain (loss) on marketable securities, net of tax | (55 | ) | | (193 | ) | | 601 |
| | (1,247 | ) |
Total other comprehensive income (loss) | 19 |
| | (3,906 | ) | | 2,425 |
| | (13,534 | ) |
Comprehensive income (loss) | (42,179 | ) | | 20,182 |
| | (87,468 | ) | | 85,808 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interest | (5,264 | ) | | 6,527 |
| | (20,180 | ) | | 24,216 |
|
Add: Transfer of MHI interest to FINV attributable to comprehensive loss (See Note 11) | (8,203 | ) | | — |
| | (8,203 | ) | | — |
|
Comprehensive income (loss) attributable to Frank's International N.V. | $ | (45,118 | ) | | $ | 13,655 |
| | $ | (75,491 | ) | | $ | 61,592 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
(In thousands) |
(Unaudited) |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2015 |
| | | | | | | | | Accumulated | | | | | | |
| | | | | Additional | | | | Other | | | | Non- | | Total |
| Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | controlling | | Stockholders' |
| Shares | | Value | | Capital | | Earnings | | Income (Loss) | | Stock | | Interest | | Equity |
Balances at December 31, 2014 | 154,327 |
| | $ | 2,033 |
| | $ | 683,611 |
| | $ | 545,357 |
| | $ | (14,210 | ) | | $ | (4,801 | ) | | $ | 260,546 |
| | $ | 1,472,536 |
|
Net income | — |
| | — |
| | — |
| | 71,674 |
| | — |
| | — |
| | 27,668 |
| | 99,342 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (9,154 | ) | | — |
| | (3,133 | ) | | (12,287 | ) |
Unrealized loss on marketable securities | — |
| | — |
| | — |
| | — |
| | (928 | ) | | — |
| | (319 | ) | | (1,247 | ) |
Equity-based compensation expense | — |
| | — |
| | 24,753 |
| | — |
| | — |
| | — |
| | — |
| | 24,753 |
|
Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (43,539 | ) | | (43,539 | ) |
Common stock dividends ($0.45 per share) | — |
| | — |
| | — |
| | (69,573 | ) | | — |
| | — |
| | — |
| | (69,573 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) |
Common shares issued upon vesting of restricted stock units | 1,040 |
| | 12 |
| | (12 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Common shares issued for ESPP | 20 |
| | — |
| | 290 |
| | — |
| | — |
| | — |
| | — |
| | 290 |
|
Treasury shares withheld | (262 | ) | | — |
| | — |
| | — |
| | — |
| | (4,359 | ) | | — |
| | (4,359 | ) |
Balances at September 30, 2015 | 155,125 |
| | $ | 2,045 |
| | $ | 708,642 |
| | $ | 547,456 |
| | $ | (24,292 | ) | | $ | (9,160 | ) | | $ | 241,223 |
| | $ | 1,465,914 |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| | | | | | | | | Accumulated | | | | | | |
| | | | | Additional | | | | Other | | | | Non- | | Total |
| Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | controlling | | Stockholders' |
| Shares | | Value | | Capital | | Earnings | | Loss | | Stock | | Interest | | Equity |
Balances at December 31, 2015 | 155,146 |
| | $ | 2,045 |
| | $ | 712,486 |
| | $ | 531,621 |
| | $ | (25,555 | ) | | $ | (9,298 | ) | | $ | 240,127 |
| | $ | 1,451,426 |
|
Net loss | — |
| | — |
| | — |
| | (69,152 | ) | | — |
| | — |
| | (20,741 | ) | | (89,893 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | 1,443 |
| | — |
| | 381 |
| | 1,824 |
|
Unrealized gain on marketable securities | — |
| | — |
| | — |
| | — |
| | 421 |
| | — |
| | 180 |
| | 601 |
|
Equity-based compensation expense | — |
| | — |
| | 12,356 |
| | — |
| | — |
| | — |
| | — |
| | 12,356 |
|
Distribution to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,027 | ) | | (8,027 | ) |
Common stock dividends ($0.375 per share) | — |
| | — |
| | — |
| | (62,333 | ) | | — |
| | — |
| | — |
| | (62,333 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
Transfer of MHI interest to FINV | — |
| | — |
| | 238,367 |
| | — |
| | (8,203 | ) | | — |
| | (211,920 | ) | | 18,244 |
|
Common shares issued on conversion of Series A preferred stock | 52,976 |
| | 597 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 597 |
|
Common shares issued upon vesting of restricted stock units | 1,569 |
| | 18 |
| | (18 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Tax Receivable Agreement ("TRA") and associated deferred taxes | — |
| | — |
| | (74,788 | ) | | — |
| | — |
| | — |
| | — |
| | (74,788 | ) |
Common shares issued for ESPP | 76 |
| | 1 |
| | 972 |
| | — |
| | — |
| | — |
| | — |
| | 973 |
|
Treasury shares withheld | (225 | ) | | — |
| | — |
| | — |
| | — |
| | (3,046 | ) | | — |
| | (3,046 | ) |
Balances at September 30, 2016 | 209,542 |
| | $ | 2,661 |
| | $ | 889,375 |
| | $ | 400,135 |
| | $ | (31,894 | ) | | $ | (12,344 | ) | | $ | — |
| | $ | 1,247,933 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
|
| | | | | | | |
FRANK'S INTERNATIONAL N.V. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(In thousands) |
(Unaudited) |
| | | |
| Nine Months Ended |
| September 30, |
| 2016 | | 2015 |
Cash flows from operating activities | | | |
Net income (loss) | $ | (89,893 | ) | | $ | 99,342 |
|
Adjustments to reconcile net income (loss) to cash provided by operating activities | | | |
Depreciation and amortization | 84,278 |
| | 80,743 |
|
Equity-based compensation expense | 12,356 |
| | 24,753 |
|
Amortization of deferred financing costs | 123 |
| | 123 |
|
Deferred tax provision (benefit) | (25,772 | ) | | 13,823 |
|
Provision for bad debts | 10,410 |
| | (122 | ) |
(Gain) loss on sale of assets | (1,095 | ) | | (521 | ) |
Changes in fair value of marketable securities | (1,061 | ) | | 1,736 |
|
Unrealized gain on derivative | 296 |
| | — |
|
Change in value of contingent consideration | — |
| | (1,532 | ) |
Other | — |
| | (3,909 | ) |
Changes in operating assets and liabilities | | | |
Accounts receivable | 82,042 |
| | 62,711 |
|
Inventories | 20,032 |
| | 37,576 |
|
Other current assets | 5,990 |
| | 11,801 |
|
Other assets | (4 | ) | | 2,479 |
|
Accounts payable | 474 |
| | 1,162 |
|
Deferred revenue | (29,479 | ) | | (17,672 | ) |
Accrued and other current liabilities | (28,556 | ) | | (17,991 | ) |
Other non-current liabilities | (12,295 | ) | | 885 |
|
Net cash provided by operating activities | 27,846 |
| | 295,387 |
|
| | | |
Cash flows from investing activities | | | |
Acquisition of Timco Services, Inc. (net of acquired cash) | — |
| | (78,676 | ) |
Purchases of property, plant and equipment | (29,777 | ) | | (88,296 | ) |
Proceeds from sale of assets and equipment | 2,235 |
| | 3,100 |
|
Proceeds from sale of investments | 11,101 |
| | — |
|
Purchase of marketable securities | (921 | ) | | (94 | ) |
Net cash used in investing activities | (17,362 | ) | | (163,966 | ) |
| | | |
Cash flows from financing activities | | | |
Repayments of borrowings | (7,120 | ) | | (57 | ) |
Proceeds from borrowings | 318 |
| | — |
|
Costs of Series A convertible preferred stock conversion to common stock | (595 | ) | | — |
|
Dividends paid on common stock | (62,333 | ) | | (69,573 | ) |
Dividends paid on preferred stock | (1 | ) | | (2 | ) |
Distribution to noncontrolling interest | (8,027 | ) | | (43,539 | ) |
Treasury shares withheld | (3,046 | ) | | (4,359 | ) |
Proceeds from the issuance of ESPP shares | 973 |
| | 290 |
|
Net cash used in financing activities | (79,831 | ) | | (117,240 | ) |
Effect of exchange rate changes on cash | (3,162 | ) | | 3,518 |
|
Net increase (decrease) in cash | (72,509 | ) | | 17,699 |
|
Cash and cash equivalents at beginning of period | 602,359 |
| | 489,354 |
|
Cash and cash equivalents at end of period | $ | 529,850 |
| | $ | 507,053 |
|
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 to the oil and gas industry. FINV provides services to leading exploration and production companies in both offshore and onshore environments with a focus on complex and technically demanding wells.
Basis of Presentation
The condensed consolidated financial statements of FINV for the three and nine months ended September 30, 2016 and 2015 include the activities of Frank's International C.V. ("FICV") and its wholly owned subsidiaries (collectively, the "Company," "we," "us" or "our"). All intercompany accounts and transactions have been eliminated for purposes of preparing these condensed consolidated financial statements. Our accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. The Consolidated Balance Sheet at December 31, 2015 is derived from audited financial statements. However, certain information and footnote disclosures required by generally accepted accounting principles in the United States of America ("GAAP") for complete annual financial statements have been omitted and, therefore, these interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2015, which are included in our most recent Annual Report on Form 10-K filed with the Securities Exchange Commission ("SEC") on February 29, 2016. 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.
Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification.
We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and were either determined to be not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
In August 2016, the FASB issued new accounting guidance for classification of certain cash receipts and cash payments in the statement of cash flows. The objective of the guidance is to reduce the existing diversity in practice related to the presentation and classification of certain cash receipts and cash payments. The guidance addresses eight specific cash flow issues including but not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and proceeds from the settlement of corporate-owned life insurance policies. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and is retrospective for all periods presented. Early adoption is permitted including for interim periods. Management is evaluating the provisions of this new accounting guidance including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.
In June 2016, the FASB issued new accounting guidance for credit losses on financial instruments. The guidance includes the replacement of the “incurred loss” approach for recognizing credit losses on financial assets, including
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
trade receivables, with a methodology that reflects expected credit losses, which considers historical and current information as well as reasonable and supportable forecasts. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is evaluating the provisions of this new accounting guidance, including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.
In March 2016, the FASB issued accounting guidance on equity compensation, which simplifies the accounting for the taxes related to equity-based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. The ASU also gives an option to recognize actual forfeitures when they occur and clarifies the statement of cash flow presentation for certain components of share-based awards. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 31, 2016. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued accounting guidance for leases. The main objective of the accounting guidance is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and the new guidance is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The new guidance requires lessees to recognize assets and liabilities arising from leases on the balance sheet and further defines a lease as a contract that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefit from the use of the asset and (2) the right to direct the use of the asset. The accounting guidance requires disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; early application is permitted. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.
In January 2016, the FASB issued accounting guidance on the recognition and measurement of financial assets and financial liabilities. Under this guidance, equity investments will be measured at fair value with changes in fair value recognized in net income. The guidance requires public businesses to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. The guidance also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The guidance is not applicable to equity investments accounted for under the equity method of accounting. The guidance is effective for interim and annual periods beginning after December 15, 2017. Management does not believe the adoption will have a material impact on our consolidated financial statements.
In July 2015, the FASB issued accounting guidance on simplifying the measurement of inventory. Under this guidance, inventory will be measured at the lower of cost and net realizable value. Options that currently exist for market value will be eliminated. The guidance defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. This guidance will be effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement and has not determined what impact the adoption of the new accounting guidance will have on our consolidated financial statements.
In February 2015, the FASB issued guidance on the amendments to the consolidation analysis, which affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those for registered money market funds. We adopted this guidance on January 1, 2016 and the adoption did not have a material impact on our consolidated financial statements.
In January 2015, the FASB issued guidance on the income statement presentation, which eliminates the concept of extraordinary items while retaining certain presentation and disclosure guidance for items that are unusual in nature or occur infrequently. We adopted this guidance on January 1, 2016 and the adoption did not have a material impact on our consolidated financial statements.
In August 2014, the FASB issued accounting guidance on the disclosure of uncertainties about an entity's ability to continue as a going concern. This update requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We are currently assessing the impact of the adoption of this guidance on our consolidated financial position and results of operations.
In May 2014, the FASB issued amendments to guidance on the recognition of revenue based upon the entity’s contracts with customers to transfer goods or services. Under the new standard update, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB will also permit early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.
Note 2—Noncontrolling Interest
We hold an economic interest in FICV and are responsible for all operational, management and administrative decisions relating to FICV’s business. As a result, the financial results of FICV are consolidated with ours and we record a noncontrolling interest on our condensed consolidated balance sheet with respect to the remaining economic interest in FICV held by Mosing Holdings, Inc. ("MHI"). Net income (loss) attributable to noncontrolling interest on the statements of operations represents the portion of earnings or losses attributable to the economic interest in FICV held by MHI. The allocable domestic income (loss) from FICV to FINV is subject to U.S. taxation.
Effective with the August 2016 conversion of all of MHI's Series A preferred stock (see Note 11 – Preferred Stock), MHI transferred all its interest in FICV to us. As a result, the amount included in net income (loss) attributable to noncontrolling interest for the three and nine months ended September 30, 2016 is through August 26, 2016.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of net income (loss) attributable to noncontrolling interest is detailed as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
|
Add: Net loss after MHI contributed interest to FINV (1) | 18,355 |
| | — |
| | 18,355 |
| | — |
|
Add: Provision (benefit) for U.S. income taxes of FINV (2) | 3,078 |
| | 4,570 |
| | (10,414 | ) | | 11,645 |
|
Less: (Income) loss of FINV (3) | 97 |
| | 903 |
| | 23 |
| | (2,487 | ) |
Net income (loss) subject to noncontrolling interest | (20,668 | ) | | 29,561 |
| | (81,929 | ) | | 108,500 |
|
Noncontrolling interest percentage (4) | 25.2 | % | | 25.4 | % | | 25.2 | % | | 25.4 | % |
Net income (loss) attributable to noncontrolling interest | $ | (5,216 | ) | | $ | 7,523 |
| | $ | (20,741 | ) | | $ | 27,668 |
|
| |
(1) | Represents net loss after August 26, 2016 when MHI transferred its interest to FINV. |
| |
(2) | Represents income tax expense (benefit) of entities outside of FICV as well as income tax attributable to our proportionate share of the U.S. operations of our partnership interests in FICV as of August 26, 2016. |
| |
(3) | Represents results of operations for entities outside of FICV as of August 26, 2016. |
| |
(4) | Represents the economic interest in FICV held by MHI before the preferred stock conversion on August 26, 2016. This percentage changed as additional shares of FINV common stock were issued. Effective August 26, 2016, MHI delivered its economic interest in FICV to us. |
Note 3—Acquisition
On April 1, 2015, Frank’s International, LLC, a Texas limited liability company (“Frank’s LLC”) and an indirect wholly-owned subsidiary of FICV closed on a transaction, which was not a significant acquisition, to purchase all of the outstanding equity interests of Timco Services, Inc. ("Timco"), a Louisiana corporation with a strong presence in the Permian Basin and Eagle Ford Shale regions, in exchange for consideration consisting of (i) approximately $81.0 million inclusive of a tax reimbursement payment of $8.0 million as well as closing adjustments for normal operating activity and customary purchase price adjustments and (ii) contingent consideration of up to $20.0 million, payable in two separate payments of $10.0 million based upon exceeding certain targets of the United States land rotary rig count, as reported by Baker Hughes, over prescribed time periods. As of September 30, 2016, the contingent consideration had a fair value of approximately $7.0 thousand. In addition, each party agreed to indemnify the other for breaches of representations and warranties, breaches of covenants and certain other matters, subject to certain exceptions.
The Timco acquisition was accounted for as a business combination in accordance with accounting guidance. The purchase price is allocated to the fair value of assets acquired and liabilities assumed based on a discounted cash flow model and goodwill is recognized for the excess consideration transferred over the fair value of the net assets. We recognized $4.9 million of goodwill. The goodwill was assigned to the U.S. Services segment and is deductible for tax purposes. The purchase price allocation was finalized during the fourth quarter of 2015.
In connection with the Timco acquisition, we acquired intangible assets in the amount of $7.9 million related to customer relationships, trade names and non-compete clauses. The intangible assets are amortized over their estimated useful lives. Amortization expense for the intangible assets for the Timco acquisition was $0.5 million for each of the three months ended September 30, 2016 and 2015 and $1.4 million and $0.9 million for the nine months ended September 30, 2016 and 2015, respectively.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4—Accounts Receivable, net
Accounts receivable at September 30, 2016 and December 31, 2015 were as follows (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2016 | | 2015 |
Trade accounts receivable, net of allowance | | | |
of $12,260 and $2,528, respectively | $ | 95,713 |
| | $ | 166,256 |
|
Unbilled revenue | 25,442 |
| | 40,033 |
|
Taxes receivable | 30,900 |
| | 34,163 |
|
Affiliated (1) | 750 |
| | 3,966 |
|
Other receivables | 2,558 |
| | 1,773 |
|
Total accounts receivable | $ | 155,363 |
| | $ | 246,191 |
|
| |
(1) | Amounts represent expenditures on behalf of non-consolidated affiliates and receivables for aircraft charter income. |
Note 5—Inventories
Inventories at September 30, 2016 and December 31, 2015 were as follows (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2016 | | 2015 |
Pipe and connectors | $ | 111,566 |
| | $ | 137,245 |
|
Finished goods | 4,207 |
| | 4,020 |
|
Work in progress | 5,739 |
| | 5,230 |
|
Raw materials, components and supplies | 15,104 |
| | 14,768 |
|
Total inventories | $ | 136,616 |
| | $ | 161,263 |
|
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6—Property, Plant and Equipment
The following is a summary of property, plant and equipment at September 30, 2016 and December 31, 2015 (in thousands):
|
| | | | | | | | | |
| Estimated Useful Lives in Years | | September 30, 2016 | | December 31, 2015 |
Land | — | | $ | 14,446 |
| | $ | 10,119 |
|
Land improvements | 8-15 | | 9,379 |
| | 9,289 |
|
Buildings and improvements | 39 | | 70,715 |
| | 74,152 |
|
Rental machinery and equipment | 7 | | 910,720 |
| | 898,134 |
|
Machinery and equipment - other | 7 | | 60,278 |
| | 60,250 |
|
Furniture, fixtures and computers | 5 | | 18,197 |
| | 18,240 |
|
Automobiles and other vehicles | 5 | | 41,962 |
| | 48,402 |
|
Aircraft | 7 | | 16,267 |
| | 16,267 |
|
Leasehold improvements | 7-15, or lease term if shorter | | 8,043 |
| | 7,947 |
|
Construction in progress - machinery and equipment and buildings | — | | 111,260 |
| | 102,432 |
|
| | | 1,261,267 |
| | 1,245,232 |
|
Less: Accumulated depreciation | | | (687,393 | ) | | (620,273 | ) |
Total property, plant and equipment, net | | | $ | 573,874 |
| | $ | 624,959 |
|
Note 7—Other Assets
Other assets at September 30, 2016 and December 31, 2015 consisted of the following (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2016 | | 2015 |
Marketable securities held in Rabbi Trust (1) | $ | 36,135 |
| | $ | 45,254 |
|
Deferred tax asset (2) | 54,045 |
| | 536 |
|
Deposits | 2,307 |
| | 2,031 |
|
Other | 5,961 |
| | 5,112 |
|
Total other assets | $ | 98,448 |
| | $ | 52,933 |
|
| |
(1) | See Note 10 – Fair Value Measurements |
| |
(2) | See Note 16 – Income Taxes |
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8—Accrued and Other Current Liabilities
Accrued and other current liabilities at September 30, 2016 and December 31, 2015 consisted of the following (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2016 | | 2015 |
| | | |
Accrued compensation | $ | 15,919 |
| | $ | 25,281 |
|
Accrued property and other taxes | 23,011 |
| | 23,790 |
|
Accrued severance and other charges | 15,436 |
| | 22,244 |
|
Income taxes | 4,746 |
| | 7,385 |
|
Accrued inventory | — |
| | 5,281 |
|
Accrued medical claims | 2,042 |
| | 4,141 |
|
Accrued purchase orders | 1,680 |
| | 5,562 |
|
Other | 16,287 |
| | 18,200 |
|
Total accrued and other current liabilities | $ | 79,121 |
| | $ | 111,884 |
|
Note 9—Debt
Credit Facility
We have a $100.0 million revolving credit facility with certain financial institutions, including up to $20.0 million in letters of credit and up to $10.0 million in swingline loans, which matures in August 2018 (the “Credit Facility”). Subject to the terms of the Credit Facility, we have the ability to increase the commitments to $150.0 million. At September 30, 2016 and December 31, 2015, we had no outstanding indebtedness under the Credit Facility. In addition, we had $3.8 million and $4.7 million in letters of credit outstanding as of September 30, 2016 and December 31, 2015, respectively. If our Adjusted EBITDA levels do not increase in future quarters, our borrowing capacity under the Credit Facility could be reduced.
Borrowings under the Credit Facility bear interest, at our option, at either a base rate or an adjusted Eurodollar rate. Base rate loans under the Credit Facility bear interest at a rate equal to the higher of (i) the prime rate as published in the Wall Street Journal, (ii) the Federal Funds Effective Rate plus 0.50% or (iii) the adjusted Eurodollar rate plus 1.00%, plus an applicable margin ranging from 0.50% to 1.50%, subject to adjustment based on a leverage ratio. Interest is in each case payable quarterly for base-rate loans. Eurodollar loans under the Credit Facility bear interest at an adjusted Eurodollar rate equal to the Eurodollar rate for such interest period multiplied by the statutory reserves, plus an applicable margin ranging from 1.50% to 2.50%. Interest is payable at the end of applicable interest periods for Eurodollar loans, except that if the interest period for a Eurodollar loan is longer than three months, interest is paid at the end of each three-month period. The unused portion of the Credit Facility is subject to a commitment fee ranging from 0.250% to 0.375% based on certain leverage ratios.
The Credit Facility contains various covenants that, among other things, limit our ability to grant certain liens, make certain loans and investments, enter into mergers or acquisitions, enter into hedging transactions, change our lines of business, prepay certain indebtedness, enter into certain affiliate transactions, incur additional indebtedness or engage in certain asset dispositions.
The Credit Facility also contains financial covenants, which, among other things, require us, on a consolidated basis, to maintain: (i) a ratio of total consolidated funded debt to adjusted EBITDA (as defined in our credit agreement) of not more than 2.50 to 1.0 and (ii) a ratio of EBITDA to interest expense of not less than 3.0 to 1.0. As of September 30, 2016, we were in compliance with all financial covenants under the Credit Facility.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Credit Facility contains customary events of default, including, among others, the failure to make required payments, the failure to comply with certain covenants or other agreements, breach of the representations and covenants contained in the agreements, default of certain other indebtedness, certain events of bankruptcy or insolvency and the occurrence of a change in control.
AFCO Credit Corporation - Insurance Notes Payable
In 2015, we entered into a note to finance annual insurance premiums for $7.6 million. The note bears interest at an annual rate of 1.9% and will mature in October 2016. At September 30, 2016, we had no outstanding balance. At December 31, 2015, the total outstanding balance was $6.9 million.
Note 10—Fair Value Measurements
We follow fair value measurement authoritative accounting guidance for measuring fair values of assets and liabilities in financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that market participants who are independent, knowledgeable, and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. We are able to classify fair value balances based on the observability of these inputs. The authoritative guidance for fair value measurements establishes three levels of the fair value hierarchy, defined as follows:
| |
• | Level 1: Unadjusted, quoted prices for identical assets or liabilities in active markets. |
| |
• | Level 2: Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability. |
| |
• | Level 3: Significant, unobservable inputs for use when little or no market data exists, requiring a significant degree of judgment. |
The hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. Depending on the particular asset or liability, input availability can vary depending on factors such as product type, longevity of a product in the market and other particular transaction conditions. In some cases, certain inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. For disclosure purposes under the accounting guidance, the lowest level that contains significant inputs used in valuation should be chosen.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financial Assets and Liabilities
A summary of financial assets and liabilities that are measured at fair value on a recurring basis, as of September 30, 2016 and December 31, 2015 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| (Level 1) | | (Level 2) | | (Level 3) | | Total |
September 30, 2016 | | | | | | | |
Assets: | | | | | | | |
Investments available-for-sale: | | | | | | | |
Marketable securities - deferred | | | | | | | |
compensation plan | $ | — |
| | $ | 36,135 |
| | $ | — |
| | $ | 36,135 |
|
Marketable securities - other | 3,616 |
| | — |
| | — |
| | 3,616 |
|
Liabilities: | | | | | | | |
Derivative financial instruments | — |
| | 86 |
| | — |
| | 86 |
|
Marketable securities - deferred | | | | | | | |
compensation plan | — |
| | 31,204 |
| | — |
| | 31,204 |
|
|
| | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | |
Assets: | | | | | | | |
Derivative financial instruments | $ | — |
| | $ | 210 |
| | $ | — |
| | $ | 210 |
|
Investments available-for-sale: | | | | | | | |
Marketable securities - deferred | | | | | | | |
compensation plan | — |
| | 45,254 |
| | — |
| | 45,254 |
|
Marketable securities - other | 2,387 |
| | — |
| | — |
| | 2,387 |
|
Liabilities: | | | | | | | |
Marketable securities - deferred | | | | | | | |
compensation plan | — |
| | 43,568 |
| | — |
| | 43,568 |
|
Our derivative financial instruments consist of short-duration foreign currency forward contracts. The fair value of derivative financial instruments is based on quoted market values including foreign exchange forward rates and interest rates. The fair value is computed by discounting the projected future cash flow amounts to present value. At September 30, 2016 and December 31, 2015, derivative financial instruments are included in accrued and other current liabilities and accounts receivable, net, respectively, in our condensed consolidated balance sheets.
Our investments associated with our deferred compensation plan consist of marketable securities that are held in the form of investments in mutual funds and insurance contracts. 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. Other marketable securities are included in other assets on the condensed consolidated balance sheets.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
We apply the provisions of the fair value measurement standard to our non-recurring, non-financial measurements including business combinations as well as impairment related to goodwill and other long-lived assets. For business combinations, the purchase price is allocated to the assets acquired and liabilities assumed based on a discounted cash flow model for most intangibles as well as market assumptions for the valuation of equipment and other fixed assets.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We utilize a discounted cash flow model in evaluating impairment considerations related to goodwill and long-lived assets. Given the unobservable nature of the inputs, the discounted cash flow models are deemed to use Level 3 inputs.
Other Fair Value Considerations
The carrying values on our condensed consolidated balance sheet of our cash and cash equivalents, trade accounts receivable, other current assets, accounts payable, accrued and other current liabilities and lines of credit approximates fair values due to their short maturities.
Note 11—Preferred Stock
At December 31, 2015, we had 52,976,000 shares of Series A preferred stock, par value €0.01 per share (the "Preferred Stock"), issued and outstanding, all of which were held by MHI. Each share of Preferred Stock had a liquidation preference equal to its par value of €0.01 per share and was entitled to an annual dividend equal to 0.25% of its par value. We paid the annual dividend for the year ended December 31, 2015 of $1,476 on June 3, 2016. Additionally, each share of Preferred Stock entitled its holder to one vote. Preferred stockholders voted with the common stockholders as a single class on all matters presented to FINV's shareholders for their vote.
Before the conversion, MHI had the right to convert all or a portion of its Preferred Stock into shares of our common stock by delivery of an equivalent portion of its interest in FICV to us. Accordingly, the increase in our interest in FICV in connection with a conversion would decrease the noncontrolling interest in our financial statements that was attributable to MHI's interest in FICV.
On August 19, 2016, we received notice from MHI that it was exercising its right to exchange, for 52,976,000 common shares, each of the following securities: (i) 52,976,000 shares of Preferred Stock and (ii) 52,976,000 units in FICV. On August 26, 2016, we issued 52,976,000 common shares to MHI. Upon conversion of the Preferred Stock, we had no issued or outstanding convertible preferred shares and the number of common shares of authorized capital was increased by 52,976,000 shares, equal to the number of convertible preferred shares that were converted into common shares. Additionally, upon the exchange of the convertible preferred stock, MHI was entitled to receive an amount in cash equal to the nominal value of each convertible preferred share plus any accrued but unpaid dividends with respect to such stock. The cash payment of $0.6 million was paid on September 23, 2016. In conjunction with the conversion, MHI delivered its interest in FICV to us and no longer owns any interest in FICV. As a result of the transaction, we have also reallocated the accumulated other comprehensive loss attributable to the noncontrolling interest.
The Preferred Stock was classified outside of permanent equity in our condensed consolidated balance sheet at its redemption value of par plus accrued and unpaid dividends because the conversion provisions were not solely within our control.
Note 12— Derivatives
In December 2015, we began entering into short-duration foreign currency forward derivative contracts to reduce the risk of foreign currency fluctuations. We use these instruments to mitigate our exposure to non-local currency operating working capital. We record these contracts at fair value on our condensed consolidated balance sheets. Although the derivative contracts will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they are not formally designated as hedge contracts for hedge accounting treatment. Accordingly, any changes in the fair value of the derivative instruments during a period will be included in our condensed consolidated statements of operations.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2016 and December 31, 2015, we had the following foreign currency derivative contracts outstanding in U.S. dollars (in thousands):
|
| | | | | | | | |
| | September 30, 2016 |
| | Notional | | Contractual | | Settlement |
Derivative Contracts | | Amount | | Exchange Rate | | Date |
Canadian dollar | | $ | 4,597 |
| | 1.3052 | | 12/12/2016 |
Euro | | 4,280 |
| | 1.1264 | | 12/13/2016 |
Euro | | 2,304 |
| | 1.1240 | | 10/14/2016 |
Norwegian kroner | | 6,041 |
| | 8.2766 | | 12/13/2016 |
Pound sterling | | 5,702 |
| | 1.3260 | | 12/13/2016 |
|
| | | | | | | | |
| | December 31, 2015 |
| | Notional | | Contractual | | Settlement |
Derivative Contracts | | Amount | | Exchange Rate | | Date |
Canadian dollar | | $ | 5,091 |
| | 1.3751 | | 1/13/2016 |
Euro | | 19,706 |
| | 1.0948 | | 1/13/2016 |
Norwegian kroner | | 11,498 |
| | 8.6973 | | 1/13/2016 |
Pound sterling | | 7,516 |
| | 1.5031 | | 1/13/2016 |
The following table summarizes the location and fair value amounts of all derivative contracts in the condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015 (in thousands):
|
| | | | | | | | | | |
Derivatives not Designated as Hedging Instruments | | Consolidated Balance Sheet Location | | September 30, 2016 | | December 31, 2015 |
Foreign currency contracts | | Accounts receivable, net | | $ | — |
| | $ | 210 |
|
Foreign currency contracts | | Accrued and other current liabilities | | (86 | ) | | — |
|
The following table summarizes the location and amounts of the realized and unrealized losses on derivative contracts in the condensed consolidated statements of operations (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
Derivatives not Designated as Hedging Instruments | | Location of Loss Recognized in Income on Derivative Contracts | | 2016 | | 2015 | | 2016 | | 2015 |
Unrealized loss on foreign currency contracts | Other income | | $ | (615 | ) | | $ | — |
| | $ | (296 | ) | | $ | — |
|
Realized gain (loss) on foreign currency contracts | | Other income | | 511 |
| | — |
| | (1,068 | ) | | — |
|
Total net income (loss) on foreign currency contracts | | | | $ | (104 | ) | | $ | — |
| | $ | (1,364 | ) | | $ | — |
|
Our derivative transactions are governed through International Swaps and Derivatives Association ("ISDA") master agreements. These agreements include stipulations regarding the right of offset in the event that we or our counterparty default on our performance obligations. If a default were to occur, both parties have the right to net amounts payable and receivable into a single net settlement between parties. Our accounting policy is to offset derivative assets and liabilities executed with the same counterparty when a master netting arrangement exists.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the gross and net fair values of our derivatives at September 30, 2016 and December 31, 2015 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Derivative Asset Positions | | Derivative Liability Positions |
| | September 30, 2016 | | December 31, 2015 | | September 30, 2016 | | December 31, 2015 |
Gross position - asset / (liability) | | $ | 1 |
| | $ | 316 |
| | $ | 1 |
| | $ | (106 | ) |
Netting adjustment | | (1 | ) | | (106 | ) | | (87 | ) | | 106 |
|
Net position - asset / (liability) | | $ | — |
| | $ | 210 |
| | $ | (86 | ) | | $ | — |
|
Note 13—Treasury Stock
At September 30, 2016, common shares held in treasury totaled 740,992 with a cost of $12.3 million and at December 31, 2015, common shares held in treasury totaled 514,812 shares with a cost of $9.3 million. These shares were withheld from employees to settle personal tax withholding obligations that arose as a result of restricted stock units that vested.
Note 14—Related Party Transactions
We have engaged in certain transactions with other companies related to us by common ownership. We have entered into various operating leases to lease office space from an affiliated company. Rent expense related to these leases was $1.8 million and $2.5 million for each of the three months ended September 30, 2016 and 2015, respectively, and $6.2 million and $6.5 million for the nine months ended September 30, 2016 and 2015, respectively.
We are a party to certain agreements relating to the rental of aircraft to Western Airways ("WA"), an entity owned by the Mosing family. The WA agreements reflect both dry lease and wet lease rental, whereby we are charged a flat monthly fee primarily for crew, hangar, maintenance and administration costs in addition to other variable costs for fuel and maintenance. We also earn charter income from third party usage through a revenue sharing agreement. We recorded net charter expense of $0.3 million and net charter revenue of $0.1 million for the three months ended September 30, 2016 and 2015, respectively, and net charter expense of $0.8 million and $0.7 million for the nine months ended September 30, 2016 and 2015, respectively.
Tax Receivable Agreement
MHI and its permitted transferees converted all of its Preferred Stock into shares of our common stock on a one-for-one basis on August 26, 2016, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, by delivery of an equivalent portion of its interest in FICV to us (a “Conversion”). FICV will make an election under Section 754 of the Code. Pursuant to the Section 754 election, the Conversion will result in an adjustment to the tax basis of the tangible and intangible assets of FICV with respect to the portion of FICV now held by FINV. These adjustments will be allocated to FINV. The adjustments to the tax basis of the tangible and intangible assets of FICV described above would not have been available absent this Conversion. The basis adjustments are expected to reduce the amount of tax that FINV would otherwise be required to pay in the future. These basis adjustments may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
The tax receivable agreement (the "TRA") that we entered into with FICV and MHI in connection with our IPO generally provides for the payment by FINV of 85% of the amount of the actual reductions, if any, in payments of U.S. federal, state and local income tax or franchise tax (which reductions we refer to as “cash savings”) in periods after our IPO as a result of (i) the tax basis increases resulting from the Conversion and (ii) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the TRA. In addition, the TRA provides for payment by us of interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. The payments under the TRA will not be conditioned upon a holder of rights under the TRA having a continued ownership interest in either FICV or FINV. We will retain the remaining 15% of cash savings, if any.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2016 our estimated TRA liability was $124.6 million. This represents 85% of the future cash savings expected from the utilization of the original basis adjustments plus subsequent basis adjustments that will result from payments under the TRA agreement. The estimation of the TRA liability is by its nature imprecise and subject to significant assumptions regarding the amount and timing of taxable income in the future and the tax rates then applicable. The time period over which the cash savings is expected to be realized is estimated to be over 20 years. Based on FINV’s forecasted tax loss for the 2016 tax year, no payment under the TRA is expected for 2016.
The payment obligations under the TRA are our obligations and are not obligations of FICV. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless FINV elects to exercise its sole right to terminate the TRA early. If FINV elects to terminate the TRA early, 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 MHI 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 September 30, 2016, the estimated termination payment would be approximately $105.3 million (calculated using a discount rate of 4.96%). 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 15—Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is determined by dividing net income (loss), less preferred stock dividends, by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is determined by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding, assuming all potentially dilutive shares were issued.
We apply the treasury stock method to determine the dilutive weighted average common shares represented by the unvested restricted stock units and ESPP shares. Through August 26, 2016, the date of the conversion of all of MHI's Preferred Stock and MHI's transfer of interest in FICV to us (see Note 11 – Preferred Stock), the diluted earnings (loss) per share calculation assumed the conversion of 100% of our outstanding Preferred Stock on an as if converted basis. Accordingly, the numerator was also adjusted to include the earnings allocated to the noncontrolling interest after taking into account the tax effect of such exchange.
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the basic and diluted earnings (loss) per share calculations (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Numerator - Basic | | | | | | | |
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
|
Less: Net (income) loss attributable to noncontrolling interest | 5,216 |
| | (7,523 | ) | | 20,741 |
| | (27,668 | ) |
Less: Preferred stock dividends | — |
| | — |
| | (1 | ) | | (2 | ) |
Net income (loss) available to common shareholders | $ | (36,982 | ) | | $ | 16,565 |
| | $ | (69,153 | ) | | $ | 71,672 |
|
| | | | | | | |
Numerator - Diluted | | | | | | | |
Net (loss) attributable to common shareholders | $ | (36,982 | ) | | $ | 16,565 |
| | $ | (69,153 | ) | | $ | 71,672 |
|
Add: Net income attributable to noncontrolling interest (1), (2) | — |
| | 5,911 |
| | — |
| | 23,513 |
|
Add: Preferred stock dividends (2) | — |
| | — |
| | — |
| | 2 |
|
Dilutive net income (loss) available to common shareholders | $ | (36,982 | ) | | $ | 22,476 |
| | $ | (69,153 | ) | | $ | 95,187 |
|
| | | | | | | |
Denominator | | | | | | | |
Basic weighted average common shares | 177,125 |
| | 154,813 |
| | 162,656 |
| | 154,502 |
|
Exchange of noncontrolling interest for common stock (Note 11), (2) | — |
| | 52,976 |
| | — |
| | 52,976 |
|
Restricted stock units (2) | — |
| | 1,559 |
| | — |
| | 1,573 |
|
Stock to be issued pursuant to ESPP (2) | — |
| | 1 |
| | — |
| | 1 |
|
Diluted weighted average common shares | 177,125 |
| | 209,349 |
| | 162,656 |
| | 209,052 |
|
| | | | | | | |
Earnings (loss) per common share: | | | | | | | |
Basic | $ | (0.21 | ) | | $ | 0.11 |
| | $ | (0.43 | ) | | $ | 0.46 |
|
Diluted | $ | (0.21 | ) | | $ | 0.11 |
| | $ | (0.43 | ) | | $ | 0.46 |
|
|
| | | | | | | | | | | | | | | | |
| | | | | | | | |
(1) | Adjusted for the additional tax expense upon the assumed conversion of the Preferred Stock | $ | — |
| | $ | 1,612 |
| | $ | — |
| | $ | 4,155 |
|
| | | | | | | | |
(2) | Approximate number of shares of potentially convertible preferred stock to common stock up until the time of conversion on August 26, 2016, unvested restricted stock units and stock to be issued pursuant to the ESPP have been excluded from the computation of diluted earnings (loss) per share as the effect would be anti-dilutive when the results from operations are at a net loss. | 32,977 |
| | — |
| | 47,273 |
| | — |
|
Note 16—Income Taxes
For interim financial reporting, we estimate the annual tax rate based on projected pre-tax income (loss) for the full year and record a quarterly income tax provision (benefit) in accordance with accounting guidance for income taxes. As the year progresses, we refine the estimate of the year's pre-tax income (loss) as new information becomes available. The continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, we adjust the income tax provision (benefit) during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.
Our effective tax rate on income from continuing operations before income taxes was 13.9% and 30.9% for the three months ended September 30, 2016 and 2015, respectively, and 14.6% and 24.7% for the nine months ended September 30, 2016 and 2015, respectively. The lower rates are primarily a result of a decrease in taxable income and
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
a change in jurisdictional mix. In addition, the tax rate for all periods is lower than the U.S. statutory income tax rate of 35% due to lower statutory tax rates in certain foreign jurisdictions where we operate.
As of September 30, 2016, we had a deferred tax asset in the amount of $54.0 million. For the quarter ended June 30, 2016, we had a deferred tax liability of $31.3 million. The change relates primarily to MHI’s conversion of preferred shares into common shares on August 26, 2016. (See Note 11 – Preferred Stock.) In conjunction with the conversion, MHI delivered its interest in FICV to us and no longer owns any interest in FICV. At the conversion date, FINV recorded a deferred tax asset in the amount of $18.7 million related to the excess of tax over book basis in its investment in FICV. In addition, we recorded a deferred tax asset in the amount of $49.9 million related to the future increases in tax basis that will result from the payment of the TRA liability. (See Note 14 – Related Party Transactions.) Other changes in the deferred tax balance result from the recording of the 2015 return to provision adjustment and normal provision of taxes for the 2016 tax year.
As of September 30, 2016, there were no significant changes to our unrecognized tax benefits as reported in our audited financial statements for the year ended December 31, 2015.
Note 17—Severance and Other Charges
During 2015, we executed a workforce reduction plan as part of our cost savings initiatives due to depressed oil and gas prices. During 2016, we have continued to take steps to adjust our workforce to meet the depressed demand in the industry. The reduction was communicated to affected employees on various dates. Also, the then Chairman of the board of supervisory directors (who also held the role of Executive Chairman of our company) transitioned to a non-executive director of the supervisory board effective as of December 31, 2015. At September 30, 2016, our outstanding accrual was approximately $15.4 million and included severance payments, other employee-related termination costs and lease termination fees. Below is a reconciliation of the beginning and ending liability balance (in thousands):
|
| | | | | | | | | | | | | | | |
| International Services | | U.S. Services | | Tubular Sales | | Total |
Beginning balance, December 31, 2015 | $ | 78 |
| | $ | 22,166 |
| | $ | — |
| | $ | 22,244 |
|
Additions for costs expensed | 10,608 |
| | 8,065 |
| | 185 |
| | 18,858 |
|
Other adjustments | — |
| | (535 | ) | | 535 |
| | — |
|
Severance and other payments | (3,886 | ) | | (21,254 | ) | | (526 | ) | | (25,666 | ) |
Ending balance, September 30, 2016 | $ | 6,800 |
| | $ | 8,442 |
| | $ | 194 |
| | $ | 15,436 |
|
We expect to pay a significant portion of the remaining liability no later than the fourth quarter of 2016.
Note 18—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 September 30, 2016 and December 31, 2015. We believe the probability is remote that the ultimate outcome of these matters would have a material adverse effect on our financial position, results of operations or cash flows.
We are conducting an internal investigation of the operations of certain of our foreign subsidiaries in West Africa including possible violations of the U.S. Foreign Corrupt Practices Act, our policies and other applicable laws. In June 2016, we voluntarily disclosed the existence of our extensive internal review to the U.S. Securities and Exchange Commission, the United States Department of Justice and other governmental entities. While our review does not
FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
currently indicate that there has been any material impact on our previously filed financial statements, we continue to collect information and are unable to predict the ultimate resolution of these matters with these agencies.
Note 19—Segment Information
Reporting Segments
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. We are comprised of three reportable segments: International Services, U.S. Services and Tubular Sales.
The International Services segment provides tubular services in international offshore markets and in several onshore international regions. Our customers in these international markets are primarily large exploration and production companies, including integrated oil and gas companies and national oil and gas companies.
The U.S. Services segment provides tubular services in almost all of the active onshore oil and gas drilling regions in the U.S., including the Permian Basin, Bakken Shale, Barnett Shale, Eagle Ford Shale, Haynesville Shale, Marcellus Shale and Utica Shale, as well as in the U.S. Gulf of Mexico.
The Tubular Sales segment designs 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.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before net interest income or expense, depreciation and amortization, income tax benefit or expense, asset impairments, gain or loss on sale of assets, foreign currency gain or loss, equity-based compensation, unrealized and realized gain or loss, other non-cash adjustments and unusual charges. We review Adjusted EBITDA on both a consolidated basis and on a segment basis. We use Adjusted EBITDA to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team (such as income tax rates). Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles in the U.S. ("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 income (loss) (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Segment Adjusted EBITDA: | | | | | | | |
International Services | $ | 4,532 |
| | $ | 39,157 |
| | $ | 31,752 |
| | $ | 146,752 |
|
U.S. Services | (7,933 | ) | | 18,251 |
| | (18,433 | ) | | 79,914 |
|
Tubular Sales | 165 |
| | 15,985 |
| | 1,343 |
| | 27,082 |
|
Corporate and other | 159 |
| | 12 |
| | 361 |
| | 37 |
|
Adjusted EBITDA Total | (3,077 | ) | | 73,405 |
| | 15,023 |
| | 253,785 |
|
Interest income, net | 646 |
| | 173 |
| | 1,050 |
| | 150 |
|
Income tax benefit (expense) | 6,800 |
| | (10,771 | ) | | 15,311 |
| | (32,662 | ) |
Depreciation and amortization | (26,545 | ) | | (29,032 | ) | | (84,278 | ) | | (80,743 | ) |
Gain on sale of assets | 46 |
| | 1,392 |
| | 1,095 |
| | 521 |
|
Foreign currency loss | (1,696 | ) | | (5,329 | ) | | (5,907 | ) | | (6,563 | ) |
Equity-based compensation expense | (3,828 | ) | | (6,096 | ) | | (12,356 | ) | | (22,470 | ) |
Severance and other charges | (14,534 | ) | | (1,186 | ) | | (18,858 | ) | | (14,208 | ) |
Change in value of contingent consideration | — |
| | 1,532 |
| | — |
| | 1,532 |
|
Unrealized and realized gains (losses) | (10 | ) | | — |
| | (973 | ) | | — |
|
Net income (loss) | $ | (42,198 | ) | | $ | 24,088 |
| | $ | (89,893 | ) | | $ | 99,342 |
|
The following tables set forth certain financial information with respect to our reportable segments. Included in “Corporate and Other” are intersegment eliminations and costs associated with activities of a general nature (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| International Services | | U.S. Services | | Tubular Sales | | Corporate and Other | | Total |
| | | | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | |
Revenue from external customers | $ | 51,028 |
| | $ | 34,057 |
| | $ | 20,029 |
| | $ | — |
| | $ | 105,114 |
|
Inter-segment revenues | (1 | ) | | 3,641 |
| | 5,036 |
| | (8,676 | ) | | — |
|
Adjusted EBITDA | 4,532 |
| | (7,933 | ) | | 165 |
| | 159 |
| | (3,077 | ) |
| | | | | | | | | |
Three Months Ended September 30, 2015 | | | | | | | | | |
Revenue from external customers | $ | 103,076 |
| | $ | 74,417 |
| | $ | 62,390 |
| | $ | — |
| | $ | 239,883 |
|
Inter-segment revenues | 102 |
| | 5,654 |
| | 7,188 |
| | (12,944 | ) | | — |
|
Adjusted EBITDA | 39,157 |
| | 18,251 |
| | 15,985 |
| | 12 |
| | 73,405 |
|
| | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | |
Revenue from external customers | $ | 191,440 |
| | $ | 119,955 |
| | $ | 68,151 |
| | $ | — |
| | $ | 379,546 |
|
Inter-segment revenues | 45 |
| | 11,691 |
| | 15,053 |
| | (26,789 | ) | | — |
|
|