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.




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
 



2


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



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


8

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


9

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.



10

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.



11

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




12

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



13

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.



14

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.



15

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.


16

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.



17

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.



18

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.


19

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.



20

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


21

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


22

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.



23

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
)