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EXPRO GROUP HOLDINGS N.V. - Quarter Report: 2019 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, €0.01 par value
FI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
As of October 31, 2019, there were 225,503,348 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, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018
 
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
FRANKS INTERNATIONAL N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
 
 
 
September 30,
 
December 31,
 
2019
 
2018
Assets
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
190,522

 
$
186,212

Restricted cash
1,252

 

Short-term investments

 
26,603

Accounts receivables, net
179,169

 
189,414

Inventories, net
86,817

 
69,382

Assets held for sale
13,776

 
7,828

Other current assets
8,490

 
12,651

Total current assets
480,026

 
492,090

 
 
 
 
Property, plant and equipment, net
366,452

 
416,490

Goodwill
211,040

 
211,040

Intangible assets, net
22,527

 
31,069

Deferred tax assets, net
14,085

 
14,621

Operating lease right-of-use assets
32,423

 

Other assets
31,013

 
28,619

Total assets
$
1,157,566

 
$
1,193,929

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
517

 
$
5,627

Accounts payable and accrued liabilities
116,455

 
123,981

Current portion of operating lease liabilities
7,848

 

Deferred revenue
226

 
116

Total current liabilities
125,046

 
129,724

 
 
 
 
Deferred tax liabilities
3,570

 
221

Non-current operating lease liabilities
24,576

 

Other non-current liabilities
28,340

 
29,212

Total liabilities
181,532

 
159,157

 
 
 
 
Commitments and contingencies (Note 15)


 


 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, €0.01 par value, 798,096,000 shares authorized, 226,990,788 and 225,478,506 shares issued and 225,503,348 and 224,289,902 shares outstanding
2,846

 
2,829

Additional paid-in capital
1,072,768

 
1,062,794

Retained earnings (deficit)
(52,712
)
 
16,860

Accumulated other comprehensive loss
(29,623
)
 
(32,338
)
Treasury stock (at cost), 1,487,440 and 1,188,604 shares
(17,245
)
 
(15,373
)
Total stockholders’ equity
976,034

 
1,034,772

Total liabilities and equity
$
1,157,566

 
$
1,193,929


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,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Services
$
119,572

 
$
103,911

 
$
362,069

 
$
301,005

Products
20,845

 
25,075

 
78,410

 
75,635

Total revenue
140,417

 
128,986

 
440,479

 
376,640

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of revenue, exclusive of depreciation and amortization
 
 
 
 
 
 
 
Services
86,745

 
74,769

 
255,769

 
219,819

Products
14,247

 
17,988

 
57,850

 
54,415

General and administrative expenses
26,921

 
29,916

 
96,358

 
94,799

Depreciation and amortization
21,482

 
26,998

 
70,637

 
84,160

Severance and other charges (credits), net
5,222

 
(4,852
)
 
6,492

 
(2,483
)
(Gain) loss on disposal of assets
603

 
(2,242
)
 
984

 
(1,790
)
Operating loss
(14,803
)
 
(13,591
)
 
(47,611
)
 
(72,280
)
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Tax receivable agreement (“TRA”) related adjustments

 
(1,170
)
 
220

 
(5,282
)
Other income, net
1,620

 
314

 
2,818

 
1,907

Interest income, net
563

 
866

 
1,757

 
2,419

Mergers and acquisition expense

 

 

 
(58
)
Foreign currency loss
(3,872
)
 
(879
)
 
(4,050
)
 
(3,442
)
Total other income (expense)
(1,689
)
 
(869
)
 
745

 
(4,456
)
 
 
 
 
 
 
 
 
Loss before income taxes
(16,492
)
 
(14,460
)
 
(46,866
)
 
(76,736
)
Income tax expense (benefit)
7,297

 
(7,461
)
 
20,370

 
(1,901
)
Net loss
$
(23,789
)
 
$
(6,999
)
 
$
(67,236
)
 
$
(74,835
)
 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.11
)
 
$
(0.03
)
 
$
(0.30
)
 
$
(0.33
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
225,415

 
224,182

 
225,043

 
223,912



The accompanying notes are an integral part of these condensed consolidated financial statements.
4



FRANK’S INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net loss
$
(23,789
)
 
$
(6,999
)
 
$
(67,236
)
 
$
(74,835
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
371

 
95

 
1,079

 
(653
)
Unrealized gain on marketable securities

 
28

 

 
110

Total other comprehensive income (loss)
371

 
123

 
1,079

 
(543
)
Comprehensive loss
$
(23,418
)
 
$
(6,876
)
 
$
(66,157
)
 
$
(75,378
)


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, 2018
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
Total
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury
 
Stockholders’
 
Shares
 
Value
 
Capital
 
Earnings
 
Income (Loss)
 
Stock
 
Equity
Balances at December 31, 2017
223,289

 
$
2,814

 
$
1,050,873

 
$
106,923

 
$
(30,972
)
 
$
(13,737
)
 
$
1,115,901

Cumulative effect of accounting change

 

 

 
670

 

 

 
670

Net loss

 

 

 
(42,073
)
 

 

 
(42,073
)
Foreign currency translation adjustments

 

 

 

 
87

 

 
87

Change in marketable securities

 

 

 

 
(85
)
 

 
(85
)
Equity-based compensation expense

 

 
2,280

 

 

 

 
2,280

Common shares issued upon vesting of share-based awards
601

 
8

 
(8
)
 

 

 

 

Common shares issued for employee stock purchase plan
99

 
1

 
560

 

 

 

 
561

Treasury shares withheld
(167
)
 

 

 

 

 
(1,035
)
 
(1,035
)
Balances at March 31, 2018
223,822

 
$
2,823

 
$
1,053,705

 
$
65,520

 
$
(30,970
)
 
$
(14,772
)
 
$
1,076,306

Net loss

 

 

 
(25,763
)
 

 

 
(25,763
)
Foreign currency translation adjustments

 

 

 

 
(835
)
 

 
(835
)
Change in marketable securities

 

 

 

 
167

 

 
167

Equity-based compensation expense

 

 
2,888

 

 

 

 
2,888

Common shares issued upon vesting of share-based awards
247

 
2

 
(2
)
 

 

 

 

Common shares issued for employee stock purchase plan

 

 
1

 

 

 

 
1

Treasury shares withheld
(31
)
 

 

 

 

 
(182
)
 
(182
)
Balances at June 30, 2018
224,038

 
$
2,825

 
$
1,056,592

 
$
39,757

 
$
(31,638
)
 
$
(14,954
)
 
$
1,052,582

Net loss

 

 

 
(6,999
)
 

 

 
(6,999
)
Foreign currency translation adjustments

 

 

 

 
95

 

 
95

Change in marketable securities

 

 

 

 
28

 

 
28

Equity-based compensation expense

 

 
3,008

 

 

 

 
3,008

Common shares issued upon vesting of share-based awards
90

 
1

 
(1
)
 

 

 

 

Common shares issued for employee stock purchase plan
133

 
2

 
751

 

 

 

 
753

Treasury shares withheld
(33
)
 

 

 

 

 
(284
)
 
(284
)
Balances at September 30, 2018
224,228

 
$
2,828

 
$
1,060,350

 
$
32,758

 
$
(31,515
)
 
$
(15,238
)
 
$
1,049,183

 
 
 
 
 
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
6



FRANK’S INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
Retained
 
Other
 
 
 
Total
 
Common Stock
 
Paid-In
 
Earnings
 
Comprehensive
 
Treasury
 
Stockholders’
 
Shares
 
Value
 
Capital
 
(Deficit)
 
Income (Loss)
 
Stock
 
Equity
Balances at December 31, 2018
224,290

 
$
2,829

 
$
1,062,794

 
$
16,860

 
$
(32,338
)
 
$
(15,373
)
 
$
1,034,772

Cumulative effect of accounting change

 

 

 
(700
)
 

 

 
(700
)
Net loss

 

 

 
(28,287
)
 

 

 
(28,287
)
Foreign currency translation adjustments

 

 

 

 
250

 

 
250

Equity-based compensation expense

 

 
2,574

 

 

 

 
2,574

Common shares issued upon vesting of share-based awards
720

 
8

 
(8
)
 

 

 

 

Common shares issued for employee stock purchase plan
154

 
2

 
690

 

 

 

 
692

Treasury shares withheld
(220
)
 

 

 

 

 
(1,452
)
 
(1,452
)
Balances at March 31, 2019
224,944

 
$
2,839

 
$
1,066,050

 
$
(12,127
)
 
$
(32,088
)
 
$
(16,825
)
 
$
1,007,849

Net loss

 

 

 
(15,160
)
 

 

 
(15,160
)
Foreign currency translation adjustments

 

 

 

 
458

 

 
458

Reclassification of marketable securities

 

 

 
(1,636
)
 
1,636

 

 

Equity-based compensation expense

 

 
3,017

 

 

 

 
3,017

Common shares issued upon vesting of share-based awards
186

 
2

 
(2
)
 

 

 

 

Treasury shares withheld
(15
)
 

 

 

 

 
(88
)
 
(88
)
Balances at June 30, 2019
225,115

 
$
2,841

 
$
1,069,065

 
$
(28,923
)
 
$
(29,994
)
 
$
(16,913
)
 
$
996,076

Net loss

 

 

 
(23,789
)
 

 

 
(23,789
)
Foreign currency translation adjustments

 

 

 

 
371

 

 
371

Equity-based compensation expense

 

 
2,647

 

 

 

 
2,647

Common shares issued upon vesting of share-based awards
217

 
2

 
(2
)
 

 

 

 

Common shares issued for employee stock purchase plan
236

 
3

 
1,058

 

 

 

 
1,061

Treasury shares withheld
(65
)
 

 

 

 

 
(332
)
 
(332
)
Balances at September 30, 2019
225,503

 
$
2,846

 
$
1,072,768

 
$
(52,712
)
 
$
(29,623
)
 
$
(17,245
)
 
$
976,034


The accompanying notes are an integral part of these condensed consolidated financial statements.
7



FRANK’S INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
 
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(67,236
)
 
$
(74,835
)
Adjustments to reconcile net loss to cash from operating activities
 
 
 
Depreciation and amortization
70,637

 
84,160

Equity-based compensation expense
8,238

 
8,176

Amortization of deferred financing costs
274

 

Deferred tax provision
3,887

 

Provision for (recovery of) bad debts
(27
)
 
68

(Gain) loss on disposal of assets
984

 
(1,790
)
Changes in fair value of investments
(1,935
)
 
(1,295
)
Unrealized gain on derivative instruments
(349
)
 
(442
)
Loss on asset impairments
4,268

 

Other
(566
)
 

Changes in operating assets and liabilities
 
 
 
Accounts receivable
9,872

 
(37,252
)
Inventories
(14,191
)
 
(3,470
)
Other current assets
2,537

 
2,237

Other assets
179

 
204

Accounts payable and accrued liabilities
(7,844
)
 
(10,249
)
Deferred revenue
110

 
(346
)
Other non-current liabilities
(353
)
 
(560
)
Net cash provided by (used in) operating activities
8,485

 
(35,394
)

 
 
 
Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment and intangibles
(26,979
)
 
(14,557
)
Proceeds from sale of assets
353

 
4,419

Proceeds from sale of investments
46,739

 
67,934

Purchase of investments
(20,304
)
 
(67,011
)
Net cash used in investing activities
(191
)
 
(9,215
)
 
 
 
 
Cash flows from financing activities
 
 
 
Repayments of borrowings
(5,110
)
 
(4,289
)
Treasury shares withheld for taxes
(1,874
)
 
(1,501
)
Proceeds from the issuance of ESPP shares
1,752

 
1,315

Deferred financing costs
(184
)
 
(161
)
Net cash used in financing activities
(5,416
)
 
(4,636
)
Effect of exchange rate changes on cash
2,684

 
2,357

Net increase (decrease) in cash, cash equivalents and restricted cash
5,562

 
(46,888
)
Cash, cash equivalents and restricted cash at beginning of period
186,212

 
213,015

Cash, cash equivalents and restricted cash at end of period
$
191,774

 
$
166,127


The accompanying notes are an integral part of these condensed consolidated financial statements.
8


FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1—Basis of Presentation

Nature of Business

Frank’s International N.V. (“FINV”), a limited liability company organized under the laws of the Netherlands, is a global provider of highly engineered tubular services, tubular fabrication and specialty well construction and well intervention solutions to the oil and gas industry. FINV provides services and products to leading exploration and production companies in both offshore and onshore environments with a focus on complex and technically demanding wells.

Basis of Presentation

The condensed consolidated financial statements of FINV for the three and nine months ended September 30, 2019 and 2018 include the activities of Frank’s International C.V. (“FICV”), Blackhawk Group Holdings, LLC (“Blackhawk”) and their wholly owned subsidiaries (collectively, the “Company,” “we,” “us” or “our”). All intercompany accounts and transactions have been eliminated for purposes of preparing these condensed consolidated financial statements.

Our accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. The consolidated balance sheet at December 31, 2018 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, 2018, which are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 25, 2019 (“Annual Report”). In the opinion of management, these condensed consolidated financial statements, which have been prepared pursuant to the rules of the SEC and GAAP for interim financial reporting, reflect all adjustments, which consisted only of normal recurring adjustments that were necessary for a fair statement of the interim periods presented. The results of operations for interim periods are not necessarily indicative of those for a full year.

The condensed consolidated financial statements have been prepared on a historical cost basis using the United States dollar as the reporting currency. Our functional currency is primarily the United States dollar.

Reclassifications

Certain prior-period amounts have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on our operating income (loss), net income (loss), working capital, cash flows or total equity previously reported.
During the first quarter of 2019, the Company changed its reportable segment structure. Please see Note 16—Segment Information for additional information. As part of the change in reportable segments, the Company also changed the classification of certain costs within the condensed consolidated statements of operations to reflect a change in presentation of the information used by the Company’s chief operating decision maker (“CODM”). Historically, and through December 31, 2018, certain direct and indirect costs related to operations were classified and reported as general and administrative expenses (“G&A”) and certain costs associated with our Tubular Running Services manufacturing operations were classified as cost of revenue, products (“COR – Products”). The historical classification was consistent with the information used by the CODM to assess the performance of the Company’s segments and make resource allocation decisions. As part of the change in reportable segments, and to provide the CODM with additional oversight over costs that directly support operations versus costs that are more general and administrative in nature, certain costs previously classified as G&A have been reclassified as cost of revenue – services (“COR – Services”). In addition, certain manufacturing costs previously classified as COR – Products have been reclassified to COR – Services as a result of the change in segment reporting.


9

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following is a summary of reclassifications to previously reported amounts (in thousands):
 
 
Three Months Ended September 30, 2018
 
 
As previously reported
 
Reclassifications
 
As currently reported
Condensed Consolidated Statements of Operations
 
 
 
 
 
 
Cost of revenue, exclusive of depreciation and amortization
 
 
 
 
 
 
Services
 
$
65,726

 
$
9,043

 
$
74,769

Products
 
19,421

 
(1,433
)
 
17,988

General and administrative expenses
 
37,526

 
(7,610
)
 
29,916

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
As previously reported
 
Reclassifications
 
As currently reported
Condensed Consolidated Statements of Operations
 
 
 
 
 
 
Cost of revenue, exclusive of depreciation and amortization
 
 
 
 
 
 
Services
 
$
193,951

 
$
25,868

 
$
219,819

Products
 
58,474

 
(4,059
)
 
54,415

General and administrative expenses
 
116,608

 
(21,809
)
 
94,799



Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) generally in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.

We consider the applicability and impact of all accounting pronouncements. ASUs not listed below were assessed and were either determined to be not applicable or are expected to have immaterial impact on our consolidated financial position, results of operations and cash flows.

In June 2018, the FASB issued new guidance which is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. We adopted the guidance on January 1, 2019, and the adoption did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued new accounting guidance for credit losses on financial instruments. The guidance includes the replacement of the “incurred loss” approach for recognizing credit losses on financial assets, including trade receivables, with a methodology that reflects expected credit losses, which considers historical and current information as well as reasonable and supportable forecasts. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is evaluating the provisions of this new accounting guidance, including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.

In February 2016, the FASB issued new accounting guidance for leases. We adopted the new lease standard effective January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption, including not restating comparative periods. In our financial statements, the comparative period continues to be reported under the accounting standards which were in effect for that period.



10

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Adoption of the new standard resulted in recording lease assets of $34.9 million, lease liabilities of $34.4 million and an adjustment to retained earnings of $0.7 million as of January 1, 2019. The standard had no impact on our net income (loss) and cash flows.

We elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical lease classification. In addition, we elected not to separate lease and non-lease components for all classes of leased assets. Also, leases with an initial term of 12 months or less are not recorded on the balance sheet.

Note 2—Leases
 
We have operating leases for real estate, vehicles and certain equipment. Our leases have remaining lease terms of less than one year to 14 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within one year. At the present time, all of our leases are classified as operating leases. Our short-term lease expense was $1.0 million and $2.7 million for the three and nine months ended September 30, 2019, respectively.

The accounting for some of our leases may require significant judgment, which includes determining the incremental borrowing rates to utilize in our net present value calculation of lease payments for lease agreements, which do not provide an implicit rate, and assessing the likelihood of renewal or termination options.
 
 
Three Months Ended
 
Nine Months Ended
Long-term Lease Cost (in thousands)
 
September 30, 2019
 
September 30, 2019
Operating lease cost (a)
 
$
2,824

 
$
8,803

 
 
 
 
 
Sublease income
 
$
(136
)
 
$
(400
)
(a)
Includes variable lease costs, which are immaterial.
 
 
Three Months Ended
 
Nine Months Ended
Other Information (in thousands)
 
September 30, 2019
 
September 30, 2019
Cash paid for amounts included in measurement of lease liabilities:
 
 
 
 
Operating cash flows from operating leases
 
$
2,202

 
$
7,770

 
 
 
 
 
Right-of-use assets obtained in an exchange for lease obligations
 
 
 
 
Operating leases
 
$
738

 
$
4,239



11

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Lease Term and Discount Rate
 
September 30, 2019
Weighted average remaining lease term (years)
 
 
Operating leases
 
6.26
 
 
 
Weighted average discount rate
 
 
Operating leases
 
10.45%
Maturity of Operating Lease Liabilities (in thousands)
 
September 30, 2019
2019
 
$
3,103

2020
 
9,857

2021
 
8,172

2022
 
6,244

2023
 
4,406

Thereafter
 
13,289

Total undiscounted lease payments
 
45,071

Less: interest
 
12,647

Present value of lease liabilities
 
$
32,424



Future minimum lease commitments under noncancelable operating leases with initial or remaining terms of one year or more at December 31, 2018, were as follows (in thousands):
Year Ending December 31,
 
Amount
2019
 
$
10,544

2020
 
9,120

2021
 
7,370

2022
 
6,006

2023
 
4,251

Thereafter
 
13,103

Total future lease commitments
 
$
50,394



Note 3—Cash, Cash Equivalents and Restricted Cash

Amounts reported in the condensed consolidated balance sheets and condensed consolidated statements of cash flows as cash, cash equivalents and restricted cash at September 30, 2019 and December 31, 2018 were as follows (in thousands):
 
September 30,
 
December 31,
 
2019
 
2018
Cash and cash equivalents
$
190,522

 
$
186,212

Restricted cash
1,252

 

Total cash, cash equivalents and restricted cash shown in the statements of cash flows
$
191,774

 
$
186,212



Restricted cash consists of cash deposits that collateralize our credit card program.



12

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4—Accounts Receivable, net

Accounts receivable at September 30, 2019 and December 31, 2018 were as follows (in thousands):
 
September 30,
 
December 31,
 
2019
 
2018
Trade accounts receivable, net of allowance of $3,816 and $3,925, respectively
$
122,684

 
$
114,630

Unbilled receivables
34,066

 
54,591

Taxes receivable
18,649

 
15,762

Affiliated (1)
549

 
549

Other receivables
3,221

 
3,882

Total accounts receivable, net
$
179,169

 
$
189,414

 
 
 

(1) 
Amounts represent expenditures on behalf of non-consolidated affiliates.

Note 5—Inventories, net

Inventories at September 30, 2019 and December 31, 2018 were as follows (in thousands):
 
September 30,
 
December 31,
 
2019
 
2018
Pipe and connectors, net of allowance of $18,758 and $21,270, respectively
$
26,049

 
$
18,026

Finished goods, net of allowance of $868 and $1,354, respectively
29,420

 
22,608

Work in progress
4,529

 
8,285

Raw materials, components and supplies
26,819

 
20,463

Total inventories, net
$
86,817

 
$
69,382





13

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, 2019 and December 31, 2018 (in thousands):
 
Estimated
Useful Lives
in Years
 
September 30,
2019
 
December 31,
2018
Land
 
$
31,438

 
$
32,945

Land improvements
8-15
 
7,128

 
8,316

Buildings and improvements
13-39
 
115,141

 
125,088

Rental machinery and equipment
7
 
896,483

 
887,064

Machinery and equipment - other
7
 
60,571

 
61,796

Furniture, fixtures and computers
5
 
20,091

 
24,745

Automobiles and other vehicles
5
 
29,243

 
29,696

Leasehold improvements
7-15, or lease term if shorter
 
14,740

 
15,392

Construction in progress - machinery
     and equipment and land improvements
 
68,743

 
65,152

 
 
 
1,243,578

 
1,250,194

Less: Accumulated depreciation
 
 
(877,126
)
 
(833,704
)
Total property, plant and equipment, net
 
 
$
366,452

 
$
416,490




During the first quarter of 2018, we sold a building classified as held for sale for $0.8 million and recorded an immaterial loss. During the second quarter of 2018, additional assets with a net book value of $4.5 million met the criteria to be classified as held for sale and were reclassified from property, plant and equipment to assets held for sale on our condensed consolidated balance sheet. During the third quarter of 2018, we sold a building classified as held for sale with a net book value of $0.3 million for $2.6 million. In addition, a building with a net book value of $5.0 million met the criteria to be classified as held for sale and was reclassified from property, plant and equipment to assets held for sale on our condensed consolidated balance sheet.

During the first quarter of 2019, buildings with a net book value of $1.1 million met the criteria to be classified as held for sale and were reclassified from property, plant and equipment to assets held for sale on our condensed consolidated balance sheet. During the second quarter of 2019, we sold a building classified as held for sale for $0.2 million and recorded an immaterial loss. During the third quarter of 2019, an additional building met the criteria to be classified as held for sale and a $4.0 million impairment loss was recorded, which is included in severance and other charges (credits), net on our condensed consolidated statements of operations. The building's remaining net book value of $5.3 million was reclassified from property, plant and equipment to assets held for sale on our condensed consolidated balance sheets.


14

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following table presents the depreciation and amortization expense associated with each line item for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Services
 
$
18,224

 
$
22,584

 
$
60,636

 
$
70,465

Products
 
376

 
1,051

 
1,235

 
3,319

General and administrative expenses
 
2,882

 
3,363

 
8,766

 
10,376

Total
 
$
21,482

 
$
26,998

 
$
70,637

 
$
84,160



Note 7—Other Assets

Other assets at September 30, 2019 and December 31, 2018 consisted of the following (in thousands):
 
September 30,
 
December 31,
 
2019
 
2018
Cash surrender value of life insurance policies (1)
$
26,467

 
$
23,784

Deposits
2,118

 
2,269

Other
2,428

 
2,566

Total other assets
$
31,013

 
$
28,619

 
 
 

        
(1) 
See Note 10—Fair Value Measurements for additional information.

Note 8—Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at September 30, 2019 and December 31, 2018 consisted of the following (in thousands):
 
September 30,
 
December 31,
 
2019
 
2018
Accounts payable
$
17,445

 
$
28,045

Accrued compensation
24,761

 
30,822

Accrued property and other taxes
20,082

 
16,301

Accrued severance and other charges
499

 
2,328

Income taxes
17,619

 
12,075

Affiliated (1)
679

 
3,915

Accrued purchase orders and other
35,370

 
30,495

Total accounts payable and accrued liabilities
$
116,455

 
$
123,981


 
 
 

(1) 
Represents amounts owed to non-consolidated affiliates.



15

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 9—Debt

Credit Facility

Asset Based Revolving Credit Facility

On November 5, 2018, FICV, Frank’s International, LLC and Blackhawk, as borrowers, and FINV, certain of FINV’s subsidiaries, including FICV, Frank’s International, LLC, Blackhawk, Frank’s International GP, LLC, Frank’s International, LP, Frank’s International LP B.V., Frank’s International Partners B.V., Frank’s International Management B.V., Blackhawk Intermediate Holdings, LLC, Blackhawk Specialty Tools, LLC, and Trinity Tool Rentals, L.L.C., as guarantors, entered into a 5-year senior secured revolving credit facility (the “ABL Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent (the “ABL Agent”), and other financial institutions as lenders with total commitments of $100.0 million including up to $15.0 million available for letters of credit. Subject to the terms of the ABL Credit Facility, we have the ability to increase the commitments to $200.0 million. The maximum amount that the Company may borrow under the ABL Credit Facility is subject to a borrowing base, which is based on a percentage of certain eligible accounts receivable and eligible inventory, subject to customary reserves and other adjustments.

All obligations under the ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by FINV’s subsidiaries, including FICV, Frank’s International, LLC, Blackhawk, Frank’s International GP, LLC, Frank’s International, LP, Frank’s International LP B.V., Frank’s International Partners B.V., Frank’s International Management B.V., Blackhawk Intermediate Holdings, LLC, Blackhawk Specialty Tools, LLC, and Trinity Tool Rentals, L.L.C., subject to customary exceptions and exclusions. In addition, the obligations under the ABL Credit Facility are secured by first priority liens on substantially all of the assets and property of the borrowers and guarantors, including pledges of equity interests in certain of FINV’s subsidiaries, subject to certain exceptions. Borrowings under the ABL Credit Facility bear interest at FINV’s option at either (a) the Alternate Base Rate (ABR) (as defined therein), calculated as the greatest of (i) the rate of interest publicly quoted by the Wall Street Journal, as the “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, (ii) the federal funds effective rate that is subject to a 0.00% interest rate floor plus 0.50%, and (iii) the one-month Adjusted LIBO Rate (as defined therein) plus 1.00%, or (b) the Adjusted LIBO Rate, plus, in each case, an applicable margin. The applicable interest rate margin ranges from 1.00% to 1.50% per annum for ABR loans and 2.00% to 2.50% per annum for Eurodollar loans and, in each case, is based on FINV’s leverage ratio. The unused portion of the ABL Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to average daily unused commitments under the ABL Credit Facility. Interest on Eurodollar loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on ABR loans is payable monthly in arrears.

The ABL Credit Facility contains various covenants and restrictive provisions which limit, subject to certain customary exceptions and thresholds, FINV’s ability to, among other things, (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments, acquisitions, or loans and create or incur liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. The ABL Credit Facility also requires FINV to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 based on the ratio of (a) consolidated EBITDA (as defined therein) minus unfinanced capital expenditures to (b) Fixed Charges (as defined therein), when either (i) an event of default occurs under the ABL Credit Facility or (ii) availability under the ABL Credit Facility falls for at least two consecutive calendar days below the greater of (A) $12.5 million and (B) 15% of the lesser of the borrowing base and aggregate commitments (a “FCCR Trigger Event”). Accounts receivable received by FINV’s U.S. subsidiaries that are parties to the ABL Credit Facility will be deposited into deposit accounts subject to deposit control agreements in favor of the ABL Agent. After a FCCR Trigger Event, these deposit accounts would be subject to “springing” cash dominion. After a FCCR Trigger Event, the Company will be subject to compliance with the fixed charge coverage ratio and “springing” cash dominion until no default exists under the ABL Credit Facility and availability under the facility for the preceding thirty consecutive days has been equal to at least the greater of (x) $12.5 million and (y) 15% of the lesser of the borrowing base and the aggregate commitments. If FINV fails to perform its obligations under the agreement that results in an event of default, the commitments under the ABL Credit Facility could be terminated and any outstanding


16

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

borrowings under the ABL Credit Facility may be declared immediately due and payable. The ABL Credit Facility also contains cross default provisions that apply to FINV’s other indebtedness.

As of September 30, 2019, FINV had no borrowings outstanding under the ABL Credit Facility, letters of credit outstanding of $6.5 million and availability of $55.0 million.

Insurance Notes Payable

In 2018, we entered into a note to finance our annual insurance premiums totaling $6.8 million. The note bears interest at an annual rate of 3.9% with a final maturity date in October 2019. At September 30, 2019 and December 31, 2018, the outstanding balance was $0.5 million and $5.6 million, respectively.

Note 10—Fair Value Measurements

We follow fair value measurement authoritative accounting guidance for measuring fair values of assets and liabilities in financial statements. We have consistently used the same valuation techniques for all periods presented. Please see Note 10Fair Value Measurements in our Annual Report for further discussion.

A summary of financial assets and liabilities that are measured at fair value on a recurring basis, as of September 30, 2019 and December 31, 2018, 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, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Derivative financial instruments
$

 
$
248

 
$

 
$
248

Investments:
 
 
 
 
 
 
 
Cash surrender value of life insurance policies - deferred compensation plan

 
26,467

 

 
26,467

Marketable securities - other
15

 

 

 
15

Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan

 
23,522

 

 
23,522

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Cash surrender value of life insurance policies - deferred compensation plan
$

 
$
23,784

 
$

 
$
23,784

Marketable securities - other
37

 

 

 
37

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments

 
101

 

 
101

Deferred compensation plan

 
23,663

 

 
23,663



Our derivative financial instruments consist of short-duration foreign currency forward contracts. The fair value of our derivative financial instruments is based on quoted market values including foreign exchange forward rates and interest rates. The fair value is computed by discounting the projected future cash flow amounts to present value. Derivative financial instruments are included in our condensed consolidated balance sheets in accounts receivables, net at September 30, 2019 and accounts payable and accrued liabilities at December 31, 2018.



17

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our investments associated with our deferred compensation plan consist primarily of the cash surrender value of life insurance policies and are included in other assets on the condensed consolidated balance sheets. Our investments change as a result of contributions, payments, and fluctuations in the market. Our liabilities associated with our deferred compensation plan are included in other non-current liabilities on the condensed consolidated balance sheets. Assets and liabilities, measured using significant observable inputs, are reported at fair value based on third-party broker statements, which are derived from the fair value of the funds’ underlying investments. We also have marketable securities in publicly traded equity securities as an indirect result of strategic investments. They are reported at fair value based on the price of the stock and are included in other assets on the condensed consolidated balance sheets.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

We apply the provisions of the fair value measurement standard to our non-recurring, non-financial measurements including business combinations and assets identified as held for sale, as well as impairment related to goodwill and other long-lived assets.

Other Fair Value Considerations

The carrying values on our condensed consolidated balance sheets of our cash and cash equivalents, restricted cash, short-term investments, trade accounts receivable, other current assets, accounts payable and accrued liabilities and lines of credit approximate fair values due to their short maturities.

Note 11—Derivatives

We enter into short-duration foreign currency forward derivative contracts to reduce the risk of foreign currency fluctuations. We use these instruments to mitigate our exposure to non-local currency operating working capital. We record these contracts at fair value on our condensed consolidated balance sheets. Although the derivative contracts will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they are not formally designated as hedge contracts for hedge accounting treatment. Accordingly, any changes in the fair value of the derivative instruments during a period will be included in our condensed consolidated statements of operations.

As of September 30, 2019 and December 31, 2018, we had the following foreign currency derivative contracts outstanding in U.S. dollars (in thousands):
 
 
September 30, 2019
Derivative Contracts
 
Notional Amount
 
Contractual Exchange Rate
 
Settlement Date
Canadian dollar
 
$
1,362

 
1.3220
 
12/16/2019
Euro
 
7,457

 
1.1130
 
12/16/2019
Norwegian krone
 
10,254

 
8.9717
 
12/16/2019
Pound sterling
 
16,089

 
1.2377
 
12/16/2019
 
 
December 31, 2018
Derivative Contracts
 
Notional Amount
 
Contractual Exchange Rate
 
Settlement Date
Canadian dollar
 
$
2,248

 
1.3343
 
3/18/2019
Euro
 
6,967

 
1.1421
 
3/18/2019
Norwegian krone
 
7,713

 
8.5566
 
3/18/2019
Pound sterling
 
16,452

 
1.2655
 
3/18/2019




18

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the location and fair value amounts of all derivative contracts in the condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018 (in thousands):
Derivatives not Designated as Hedging Instruments
 
Consolidated Balance Sheet Location
 
September 30, 2019
 
December 31, 2018
Foreign currency contracts
 
Accounts receivables, net
 
$
248

 
$

Foreign currency contracts
 
Accounts payable and accrued liabilities
 

 
(101
)


The following table summarizes the location and amounts of the realized and unrealized gains and losses on derivative contracts in the condensed consolidated statements of operations (in thousands):
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
September 30,
 
September 30,
Derivatives not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in Income on Derivative Contracts
 
2019
 
2018
 
2019
 
2018
Unrealized gain (loss) on foreign currency contracts
 
Other income, net
 
$
553

 
$
(323
)
 
$
349

 
$
442

Realized gain on foreign currency contracts
 
Other income, net
 
1,059

 
447

 
1,471

 
572

Total net gain on foreign currency contracts
 
 
 
$
1,612

 
$
124

 
$
1,820

 
$
1,014



Our derivative transactions are governed through International Swaps and Derivatives Association master agreements. These agreements include stipulations regarding the right of offset in the event that we or our counterparty default on our performance obligations. If a default were to occur, both parties have the right to net amounts payable and receivable into a single net settlement between parties. Our accounting policy is to offset derivative assets and liabilities executed with the same counterparty when a master netting arrangement exists.

The following table presents the gross and net fair values of our derivatives at September 30, 2019 and December 31, 2018 (in thousands):
 
 
Derivative Asset Positions
 
Derivative Liability Positions
 
 
September 30, 2019
 
December 31, 2018
 
September 30, 2019
 
December 31, 2018
Gross position - asset / (liability)
 
$
248

 
$
113

 
$

 
$
(214
)
Netting adjustment
 

 
(113
)
 

 
113

Net position - asset / (liability)
 
$
248

 
$

 
$

 
$
(101
)


Note 12—Related Party Transactions

We have engaged in certain transactions with other companies related to us by common ownership. We have entered into various operating leases to lease facilities from these affiliated companies. Rent expense associated with our related party leases was $0.6 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively, and $2.0 million and $5.0 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, $6.8 million of our operating lease right-of-use assets and $7.5 million of our lease liabilities were associated with related party leases.

On November 2, 2018, Frank’s International, LLC entered into a purchase agreement with Mosing Ventures, LLC, Mosing Land & Cattle Company, LLC, Mosing Queens Row Properties, LLC, and 4-M Investments, each of which are companies related to us by common ownership (the “Mosing Companies”). Under the purchase agreement, we acquired real property that we previously leased from the Mosing Companies, and two additional properties located adjacent to those properties. The total purchase price was $37.0 million, including legal fees and closing adjustments


19

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for normal operating activity. The purchase closed on December 18, 2018. The properties are conveyed as-is, except that until 10 years following the Closing Date, the parties will continue to have certain rights and obligations under the terms of the agreements by which some of the purchased properties were acquired by the Mosing Companies at the time of our initial public offering. We made improvements on the purchased properties during the lease period, and the purchase price was calculated excluding the value of those improvements. As of the purchase closing, we no longer lease the acquired properties from the Mosing Companies.
 
Tax Receivable Agreement

Mosing Holdings and its permitted transferees converted all their Preferred Stock into shares of our common stock on a one-for-one basis on August 26, 2016, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, by delivery of an equivalent portion of their interests in FICV to us (the “Conversion”). FICV made an election under Section 754 of the Internal Revenue Code. Pursuant to the Section 754 election, the Conversion resulted in an adjustment to the tax basis of the tangible and intangible assets of FICV with respect to the portion of FICV now held by FINV. These adjustments are 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 may 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 TRA that we entered into with FICV and Mosing Holdings in connection with our initial public offering (“IPO”) generally provides for the payment by FINV of 85% of the amount of the actual reductions, if any, in payments of U.S. federal, state and local income tax or franchise tax (which reductions we refer to as “cash savings”) in periods after our IPO as a result of (i) the tax basis increases resulting from the Conversion and (ii) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the TRA. In addition, the TRA provides for payment by us of interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. The payments under the TRA will not be conditioned upon a holder of rights under the TRA having a continued ownership interest in either FICV or FINV. We will retain the remaining 15% of cash savings, if any.

The estimation of the liability under the TRA is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income. As of September 30, 2019, FINV has a cumulative loss over the prior 36-month period. Based on this history of losses, as well as uncertainty regarding the timing and amount of future taxable income, we are unable to conclude that there will be future cash savings that will lead to additional payouts under the TRA beyond the estimated $0.2 million as of September 30, 2019. Additional TRA liability may be recognized in the future based on changes in expectations regarding the timing and likelihood of future cash savings.

The payment obligations under the TRA are our obligations and are not obligations of FICV. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless FINV elects to exercise its sole right to terminate the TRA early. If FINV elects to terminate the TRA early, which it may do so in its sole discretion, it would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA (based upon certain assumptions and deemed events set forth in the TRA, including the assumption that it has sufficient taxable income to fully utilize such benefits and that any FICV interests that Mosing Holdings or its transferees own on the termination date are deemed to be exchanged on the termination date). Any early termination payment may be made significantly in advance of the actual realization, if any, of such future benefits. In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control. In these situations, FINV’s obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. For example, if the TRA were terminated on September 30, 2019, the estimated termination payment would be approximately $51.3 million (calculated using a discount rate of 4.94%). The foregoing number is merely an estimate and the actual payment could differ materially.



20

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 its subsidiaries to make distributions to it in an amount sufficient to cover FINV’s obligations under such agreements. The ability of FINV’s 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 13—Loss Per Common Share

Basic loss per common share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is determined by dividing net loss by the weighted average number of common shares outstanding, assuming all potentially dilutive shares were issued. We apply the treasury stock method to determine the dilutive weighted average common shares represented by unvested restricted stock units and employee stock purchase plan (“ESPP”) shares.

The following table summarizes the basic and diluted loss per share calculations (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Numerator
 
 
 
 
 
 
 
Net loss
$
(23,789
)
 
$
(6,999
)
 
$
(67,236
)
 
$
(74,835
)
Denominator
 
 
 
 
 
 
 
Basic and diluted weighted average common shares (1)
225,415

 
224,182

 
225,043

 
223,912

Loss per common share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.11
)
 
$
(0.03
)
 
$
(0.30
)
 
$
(0.33
)
 
 
 
 
 
 
 
 
 
(1) 
Approximate number of unvested restricted stock units and stock to be issued pursuant to the ESPP that have been excluded from the computation of diluted loss per share as the effect would be anti-dilutive when results from operations are at a net loss position.
587

 
1,075

 
722

 
779



Note 14—Income Taxes

For interim financial reporting, we estimate the annual tax rate based on projected pre-tax income (loss) for the full year and record a quarterly income tax provision (benefit) in accordance with accounting guidance for income taxes. As the year progresses, we refine the estimate of the year’s pre-tax income (loss) as new information becomes available. The continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, we adjust the income tax provision (benefit) during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the most current expected annual tax rate.

Our effective tax rate was (44.2)% and 51.6% for the three months ended September 30, 2019 and 2018, respectively, and (43.5)% and 2.5% for the nine months ended September 30, 2019 and 2018, respectively. The increase in tax rates compared to the same period last year is primarily the result of an increase in taxable income and a change in the jurisdiction mix resulting in additional revenue-based taxes during 2019. Also impacting the three months ending September 30, 2018 was a significant tax benefit recorded to update the estimated effective tax rate. Finally, the nine months ending September 30, 2019 included expense related to recording additional valuation allowances related to certain indefinite-lived intangibles. We are subject to tax in many U.S. and foreign jurisdictions. In many foreign


21

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

jurisdictions we are taxed on bases other than income such as deemed profits or withholding taxes based on revenue. Consequently, the relationship between our pre-tax income and our income tax provision varies from period to period.

We are under audit by certain foreign jurisdictions for the years 2008 - 2017. We do not expect the results of these audits to have any material effect on our financial statements.

As of September 30, 2019, there were no significant changes to our uncertain tax positions as reported in our audited financial statements for the year ended December 31, 2018.

Note 15—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, 2019 and December 31, 2018. We believe the probability is remote that the ultimate outcome of these matters would have a material adverse effect on our financial position, results of operations or cash flows.

We are conducting an internal investigation of the operations of certain of our foreign subsidiaries in West Africa including possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”), our policies and other applicable laws. In June 2016, we voluntarily disclosed the existence of our extensive internal review to the SEC, the U.S. Department of Justice (“DOJ”) and other governmental entities. It is our intent to continue to fully cooperate with these agencies and any other applicable authorities in connection with any further investigation that may be conducted in connection with this matter. While our review has not indicated that there has been any material impact on our previously filed financial statements, we have continued to collect information and cooperate with the authorities, but at this time are unable to predict the ultimate resolution of these matters with these agencies.

In addition, during the course of the investigation, we discovered historical business transactions (and bids to enter into business transactions) in certain countries that may have been subject to U.S. and other international sanctions. We disclosed this information to the U.S. Department of Commerce’s Bureau of Industry and Security, Office of Export Enforcement (“OEE”) and to the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) (as well as to the agencies involved in our ongoing investigation discussed above). We received a No Action Letter dated April 20, 2018 from OEE, stating that OEE had closed its investigation without taking further action. In addition, we received a No Action Letter dated April 23, 2018 from OFAC, stating that OFAC had closed its investigation without taking further action.

As disclosed above, our investigation into possible violations of the FCPA remains ongoing, and we will continue to cooperate with the SEC, DOJ and other relevant governmental entities in connection therewith. At this time, we are unable to predict the ultimate resolution of these matters with these agencies, including any financial impact to us. Our board and management are committed to continuously enhancing our internal controls that support improved compliance and transparency throughout our global operations.

Note 16—Segment Information

Reporting Segments

Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the Company’s CODM in deciding how to allocate resources and assess performance. During 2018, changes to the Company’s organizational structure were internally announced. These changes allow each segment to operate as an “independent” business in order to drive accountability and streamline decision-making, while leveraging the advantages of our global infrastructure. During the first quarter of 2019, the Company’s CODM changed the information he regularly reviews to allocate resources and assess performance and we accordingly realigned our reporting segments into three reportable segments: Tubular Running Services (“TRS”) segment, Tubulars segment and Cementing Equipment (“CE”) segment. The TRS segment represents the prior International Services and U.S. Services


22

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

segments, as well as the costs associated with manufacturing the TRS equipment. Corporate costs that were previously included in the International Services and U.S. Services segments are now included in a separate Corporate component. The Tubulars segment represents the prior Tubular Sales segment and the Drilling Technologies business which was previously included within the International Services and U.S. Services segments, less costs associated with TRS equipment manufacturing. The CE segment is comprised of the prior Blackhawk segment. In addition, regional support costs that were previously included in the International Services and U.S. Services segments are now allocated amongst the three current segments, generally based on revenue or headcount. We have revised our segment reporting to reflect our current management approach and recast prior periods to conform to the current segment presentation.

The TRS segment provides tubular running services globally. Internationally, the TRS segment operates in the majority of the offshore oil and gas markets and also in several onshore regions with operations in approximately 50 countries on six continents. In the U.S., the TRS segment provides services in the active onshore oil and gas drilling regions, including the Permian Basin, Eagle Ford Shale, Haynesville Shale, Marcellus Shale and Utica Shale, and in the U.S. Gulf of Mexico. Our customers are primarily large exploration and production companies, including international oil and gas companies, national oil and gas companies, major independents and other oilfield service companies.

The Tubulars segment designs, manufactures and distributes connectors and casing attachments for large outside diameter (“OD”) heavy wall pipe. Additionally, the Tubulars segment sells large OD pipe originally manufactured by various pipe mills, as plain end or fully fabricated with proprietary welded or thread-direct connector solutions and provides specialized fabrication and welding services in support of offshore deepwater projects, including drilling and production risers, flowlines and pipeline end terminations, as well as long-length tubular assemblies up to 400 feet in length. The Tubulars segment also specializes in the development, manufacture and supply of proprietary drilling tool solutions that focus on improving drilling productivity through eliminating or mitigating traditional drilling operational risks.

The CE segment provides specialty equipment to enhance the safety and efficiency of rig operations. It provides specialized equipment, services and products utilized in the construction of the wellbore in both onshore and offshore environments. The product portfolio includes casing accessories that serve to improve the installation of casing, centralization and wellbore zonal isolation, as well as enhance cementing operations through advance wiper plug and float equipment technology. The CE segment also provides services and products utilized in the construction, completion or abandonment of the wellbore. These solutions are primarily used to isolate portions of the wellbore through the setting of barriers downhole to allow for rig evacuation in case of inclement weather, maintenance work on other rig equipment, squeeze cementing, pressure testing within the wellbore, hydraulic fracturing and temporary and permanent abandonments. These offerings improve operational efficiencies and limit non-productive time if unscheduled events are encountered at the wellsite.

Revenue

We disaggregate our revenue from contracts with customers by geography for each of our segments, as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Intersegment revenue is immaterial.



23

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following tables presents our revenue disaggregated by geography, based on the location where our services were provided and products sold (in thousands):
 
Three Months Ended September 30, 2019
 
Tubular Running Services
 
Tubulars
 
Cementing Equipment
 
Consolidated
United States
$
34,903

 
$
10,148

 
$
20,044

 
$
65,095

International
67,374

 
2,371

 
5,577

 
75,322

Total Revenue
$
102,277

 
$
12,519

 
$
25,621

 
$
140,417

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
Tubular Running Services
 
Tubulars
 
Cementing Equipment
 
Consolidated
United States
$
36,817

 
$
14,310

 
$
19,096

 
$
70,223

International
52,972

 
955

 
4,836

 
58,763

Total Revenue
$
89,789

 
$
15,265

 
$
23,932

 
$
128,986

 
Nine Months Ended September 30, 2019
 
Tubular Running Services
 
Tubulars
 
Cementing Equipment
 
Consolidated
United States
$
114,466

 
$
45,163

 
$
62,963

 
$
222,592

International
192,505

 
8,347

 
17,035

 
217,887

Total Revenue
$
306,971

 
$
53,510

 
$
79,998

 
$
440,479

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
Tubular Running Services
 
Tubulars
 
Cementing Equipment
 
Consolidated
United States
$
101,117

 
$
46,857

 
$
54,568

 
$
202,542

International
159,064

 
3,134

 
11,900

 
174,098

Total Revenue
$
260,181

 
$
49,991

 
$
66,468

 
$
376,640




24

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revenue by geographic area were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
United States
$
65,095

 
$
70,223

 
$
222,592

 
$
202,542

Europe/Middle East/Africa
41,071

 
30,064

 
116,126

 
91,154

Latin America
19,181

 
11,984

 
56,520

 
32,441

Asia Pacific
9,727

 
8,934

 
27,753

 
26,200

Other countries
5,343

 
7,781

 
17,488

 
24,303

Total Revenue
$
140,417

 
$
128,986

 
$
440,479

 
$
376,640



Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) before interest income, net, depreciation and amortization, income tax benefit or expense, asset impairments, gain or loss on disposal of assets, foreign currency gain or loss, equity-based compensation, unrealized and realized gain or loss, the effects of the TRA, other non-cash adjustments and other charges. We review Adjusted EBITDA on both a consolidated basis and on a segment basis. We use Adjusted EBITDA to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), income tax, foreign currency exchange rates and other charges and credits. Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP.

Our CODM uses Adjusted EBITDA as the primary measure of segment reporting performance.

The following table presents a reconciliation of Segment Adjusted EBITDA to net loss (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Segment Adjusted EBITDA:
 
 
 
 
 
 
 
Tubular Running Services
$
23,884

 
$
17,070

 
$
67,019

 
$
40,876

Tubulars
456

 
1,541

 
8,502

 
8,461

Cementing Equipment
3,031

 
1,972

 
9,854

 
7,074

Corporate (1)
(11,350
)
 
(8,967
)
 
(42,533
)
 
(36,001
)
 
16,021

 
11,616

 
42,842

 
20,410

Interest income, net
563

 
866

 
1,757

 
2,419

Depreciation and amortization
(21,482
)
 
(26,998
)
 
(70,637
)
 
(84,160
)
Income tax (expense) benefit
(7,297
)
 
7,461

 
(20,370
)
 
1,901

Gain (loss) on disposal of assets
(603
)
 
2,242

 
(984
)
 
1,790

Foreign currency loss
(3,872
)
 
(879
)
 
(4,050
)
 
(3,442
)
TRA related adjustments

 
(1,170
)
 
220

 
(5,282
)
Charges and credits (2)
(7,119
)
 
(137
)
 
(16,014
)
 
(8,471
)
Net loss
$
(23,789
)
 
$
(6,999
)
 
$
(67,236
)
 
$
(74,835
)

 
 



25

FRANK’S INTERNATIONAL N.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) 
Includes certain expenses not attributable to a particular segment, such as costs related to support functions and corporate executives.
(2) 
Comprised of Equity-based compensation expense (for the three months ended September 30, 2019 and 2018: $2,647 and $3,008, respectively, and for the nine months ended September 30, 2019 and 2018: $8,238 and $8,176, respectively), Mergers and acquisition expense (for the three months ended September 30, 2019 and 2018: none and none, respectively, and for the nine months ended September 30, 2019 and 2018: none and $58, respectively), Severance and other (charges) credits, net (for the three months ended September 30, 2019 and 2018: $(5,222) and $4,852, respectively, and for the nine months ended September 30, 2019 and 2018: $(6,492) and $2,483, respectively), Unrealized and realized gains (for the three months ended September 30, 2019 and 2018: $1,382 and $360, respectively, and for the nine months ended September 30, 2019 and 2018: $2,073 and $1,521, respectively) and Investigation-related matters (for the three months ended September 30, 2019 and 2018: $632 and $2,341, respectively, and for the nine months ended September 30, 2019 and 2018: $3,357 and $4,241, respectively).

The following tables set forth certain financial information with respect to our reportable segments (in thousands):
 
Tubular Running Services
 
Tubulars
 
Cementing Equipment
 
Corporate
 
Total
Three Months Ended September 30, 2019
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
102,277

 
$
12,519

 
$
25,621

 
$

 
$
140,417

Operating income (loss)
8,253

 
(377
)
 
(1,610
)
 
(21,069
)
 
(14,803
)
Adjusted EBITDA
23,884

 
456

 
3,031

 
(11,350
)
 
*
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
89,789

 
$
15,265

 
$
23,932

 
$

 
$
128,986

Operating income (loss)
4,099

 
46

 
(2,226
)
 
(15,510
)
 
(13,591
)
Adjusted EBITDA
17,070

 
1,541

 
1,972

 
(8,967
)
 
*
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
306,971

 
$
53,510

 
$
79,998

 
$

 
$
440,479

Operating income (loss)
17,094

 
5,906

 
(4,744
)
 
(65,867
)
 
(47,611
)
Adjusted EBITDA
67,019

 
8,502

 
9,854

 
(42,533
)
 
*
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
260,181

 
$
49,991

 
$
66,468

 
$

 
$
376,640

Operating income (loss)
(16,409
)
 
5,702

 
(5,981
)
 
(55,592
)
 
(72,280
)
Adjusted EBITDA
40,876

 
8,461

 
7,074

 
(36,001
)
 
*

 
 
* Non-GAAP financial measure not disclosed.


26


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include those that express a belief, expectation or intention, as well as those that are not statements of historical fact. Forward-looking statements include information regarding our future plans and goals and our current expectations with respect to, among other things:

our business strategy and prospects for growth;
our cash flows and liquidity;
our financial strategy, budget, projections and operating results;
the amount, nature and timing of capital expenditures;
the availability and terms of capital;
competition and government regulations; and
general economic conditions.

Our forward-looking statements are generally accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “goal,” “plan,” “potential,” “predict,” “project,” or other terms that convey the uncertainty of future events or outcomes, although not all forward-looking statements contain such identifying words. The forward-looking statements in this Form 10-Q speak only as of the date of this report; we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. Forward-looking statements are not assurances of future performance and involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties include, but are not limited to, the following:

the level of activity in the oil and gas industry;
further or sustained declines in oil and gas prices, including those resulting from weak global demand;
the timing, magnitude, probability and/or sustainability of any oil and gas price recovery;
unique risks associated with our offshore operations;
political, economic and regulatory uncertainties in our international operations;
our ability to develop new technologies and products;
our ability to protect our intellectual property rights;
our ability to employ and retain skilled and qualified workers;
the level of competition in our industry;
operational safety laws and regulations;
international trade laws and sanctions;
weather conditions and natural disasters; and
policy or regulatory changes domestically in the United States.

These and other important factors that could affect our operating results and performance are described in (1) “Risk Factors” in Part II, Item 1A of this Form 10-Q, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Form 10-Q, and elsewhere within this Form 10-Q, (2) our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 25, 2019 (our “Annual Report”), (3) our other reports and filings we make with the SEC from time to time and (4) other announcements we make from time to time. Should one or more of the risks or uncertainties described in the documents above or in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statements. All such forward-looking statements in this Form 10-Q are expressly qualified in their entirety by the cautionary statements in this section.



27


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q and the audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report.

This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in any forward-looking statement because of various factors, including those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” of this Form 10-Q.

Overview of Business

We are a global provider of highly engineered tubular services, tubular fabrication and specialty well construction and well intervention solutions to the oil and gas industry and have been in business for over 80 years. We provide our services and products to leading exploration and production companies in both offshore and onshore environments, with a focus on complex and technically demanding wells.

During the first quarter of 2019, the Company changed its reportable segment structure. Please see Note 16—Segment Information in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information. We conduct our business through three operating segments:

Tubular Running Services. The Tubular Running Services (“TRS”) segment provides tubular running services globally. Internationally, the TRS segment operates in the majority of the offshore oil and gas markets and also in several onshore regions with operations in approximately 50 countries on six continents. In the U.S., the TRS segment provides services in the active onshore oil and gas drilling regions, including the Permian Basin, Eagle Ford Shale, Haynesville Shale, Marcellus Shale and Utica Shale, and in the U.S. Gulf of Mexico. Our customers are primarily large exploration and production companies, including international oil and gas companies, national oil and gas companies, major independents and other oilfield service companies.

Tubulars. The Tubulars segment designs, manufactures and distributes connectors and casing attachments for large outside diameter (“OD”) heavy wall pipe. Additionally, the Tubulars segment sells large OD pipe originally manufactured by various pipe mills, as plain end or fully fabricated with proprietary welded or thread-direct connector solutions and provides specialized fabrication and welding services in support of offshore deepwater projects, including drilling and production risers, flowlines and pipeline end terminations, as well as long-length tubular assemblies up to 400 feet in length. The Tubulars segment also specializes in the development, manufacture and supply of proprietary drilling tool solutions that focus on improving drilling productivity through eliminating or mitigating traditional drilling operational risks.

Cementing Equipment. The Cementing Equipment (“CE”) segment provides specialty equipment to enhance the safety and efficiency of rig operations. It provides specialized equipment, services and products utilized in the construction of the wellbore in both onshore and offshore environments. The product portfolio includes casing accessories that serve to improve the installation of casing, centralization and wellbore zonal isolation, as well as enhance cementing operations through advance wiper plug and float equipment technology. The CE segment also provides services and products utilized in the construction, completion or abandonment of the wellbore. These solutions are primarily used to isolate portions of the wellbore through the setting of barriers downhole to allow for rig evacuation in case of inclement weather, maintenance work on other rig equipment, squeeze cementing, pressure testing within the wellbore, hydraulic fracturing and temporary and permanent abandonments. These offerings improve operational efficiencies and limit non-productive time if unscheduled events are encountered at the wellsite.



28


Outlook

We have observed and expect to see increased customer spending globally on oil and natural gas exploration and production in response to the continued stabilization of commodity prices. Exploration and development spending has started to shift toward offshore and internationally focused projects. Activity in the deep and ultra-deep offshore markets is already benefiting from a modest improvement that is expected to continue through 2020. In certain markets, pricing associated with newly sanctioned offshore projects is anticipated to be marginally higher than recent trends. We anticipate the rate of spending on U.S. onshore projects to decrease in 2020 from 2019 levels as operators adjust budgets.

In many international offshore shelf markets, we see increased activity as operators recognize improved economics at current commodity prices. Overall, we expect continued and modest improvement in both operator spend and activity through 2020 in the offshore and international markets, which will be offset by the ongoing retraction in U.S. onshore spend and activity. Our client base continues to expand as drilling contractors and integrated service providers look for differentiated technology and efficiency-based solutions.

We will continue our efforts to expand our newer product lines that have been historically weighted to the U.S. offshore market to international markets, with a focus on operational efficiency gains and prioritizing projects that improve market share and profitability. In furtherance of these efforts, we are undertaking a comprehensive review of our geographic footprint, ongoing initiatives, cost structure and asset base. We are undertaking this review to drive profitability improvements across the organization, assess that required economic returns on assets and new technologies can be achieved, and ensure that the resources of the Company are being maximized given current and expected market conditions.

How We Evaluate Our Operations

We use a number of financial and operational measures to routinely analyze and evaluate the performance of our business, including revenue, Adjusted EBITDA, Adjusted EBITDA margin and safety performance.

Revenue

We analyze our revenue growth by comparing actual monthly revenue to our internal projections for each month to assess our performance. We also assess incremental changes in our monthly revenue across our operating segments to identify potential areas for improvement.

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as net income (loss) before interest income, net, depreciation and amortization, income tax benefit or expense, asset impairments, gain or loss on disposal of assets, foreign currency gain or loss, equity-based compensation, unrealized and realized gains or losses, the effects of the tax receivable agreement (“TRA”), other non-cash adjustments and other charges or credits. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenue. We review Adjusted EBITDA and Adjusted EBITDA margin on both a consolidated basis and on a segment basis. We use Adjusted EBITDA and Adjusted EBITDA margin to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), income tax, foreign currency exchange rates and other charges and credits. Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”).



29


The following table presents a reconciliation of net loss to Adjusted EBITDA and Adjusted EBITDA margin for each of the periods presented (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net loss
$
(23,789
)
 
$
(6,999
)
 
$
(67,236
)
 
$
(74,835
)
Interest income, net
(563
)
 
(866
)
 
(1,757
)
 
(2,419
)
Depreciation and amortization
21,482

 
26,998

 
70,637

 
84,160

Income tax expense (benefit)
7,297

 
(7,461
)
 
20,370

 
(1,901
)
(Gain) loss on disposal of assets
603

 
(2,242
)
 
984

 
(1,790
)
Foreign currency loss
3,872

 
879

 
4,050

 
3,442

TRA related adjustments

 
1,170

 
(220
)
 
5,282

Charges and credits (1)
7,119

 
137

 
16,014

 
8,471

Adjusted EBITDA
$
16,021

 
$
11,616

 
$
42,842

 
$
20,410

Adjusted EBITDA margin
11.4
%
 
9.0
%
 
9.7
%
 
5.4
%
 
 
(1) 
Comprised of Equity-based compensation expense (for the three months ended September 30, 2019 and 2018: $2,647 and $3,008, respectively, and for the nine months ended September 30, 2019 and 2018: $8,238 and $8,176, respectively), Mergers and acquisition expense (for the three months ended September 30, 2019 and 2018: none and none, respectively, and for the nine months ended September 30, 2019 and 2018: none and $58, respectively), Severance and other charges (credits), net (for the three months ended September 30, 2019 and 2018: $5,222 and $(4,852), respectively, and for the nine months ended September 30, 2019 and 2018: $6,492 and $(2,483), respectively), Unrealized and realized gains (for the three months ended September 30, 2019 and 2018: $1,382 and $360, respectively, and for the nine months ended September 30, 2019 and 2018: $2,073 and $1,521, respectively) and Investigation-related matters (for the three months ended September 30, 2019 and 2018: $632 and $2,341, respectively, and for the nine months ended September 30, 2019 and 2018: $3,357 and $4,241, respectively).

For a reconciliation of our Adjusted EBITDA on a segment basis to the most comparable measure calculated in accordance with GAAP, see “Operating Segment Results.”

Safety and Quality Performance

Safety is one of our primary core values. Maintaining a strong safety record is a critical component of our operational success. Many of our customers have safety standards we must satisfy before we can perform services. As a result, we continually monitor our safety performance through the evaluation of safety observations, job and customer surveys, and safety data. The primary measure for our safety performance is the tracking of the Total Recordable Incident Rate which is reviewed on both a monthly and rolling twelve-month basis.



30


Consolidated Results of Operations

The following table presents our consolidated results for the periods presented (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(Unaudited)
Revenue:
 
 
 
 
 
 
 
Services
$
119,572

 
$
103,911

 
$
362,069

 
$
301,005

Products 
20,845

 
25,075

 
78,410

 
75,635

Total revenue
140,417

 
128,986

 
440,479

 
376,640

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of revenue, exclusive of depreciation and amortization
 
 
 
 
 
 
 
Services (1)
86,745

 
74,769

 
255,769

 
219,819

Products (1)
14,247

 
17,988

 
57,850

 
54,415

General and administrative expenses (1)
26,921

 
29,916

 
96,358

 
94,799

Depreciation and amortization
21,482

 
26,998

 
70,637

 
84,160

Severance and other charges (credits), net
5,222

 
(4,852
)
 
6,492

 
(2,483
)
(Gain) loss on disposal of assets
603

 
(2,242
)
 
984

 
(1,790
)
Operating loss
(14,803
)
 
(13,591
)
 
(47,611
)
 
(72,280
)
 
Other income (expense):
 
 
 
 
 
 
 
TRA related adjustments

 
(1,170
)
 
220

 
(5,282
)
Other income, net
1,620

 
314

 
2,818

 
1,907

Interest income, net
563

 
866

 
1,757

 
2,419

Mergers and acquisition expense

 

 

 
(58
)
Foreign currency loss
(3,872
)
 
(879
)
 
(4,050
)
 
(3,442
)
Total other income (expense)
(1,689
)
 
(869
)
 
745

 
(4,456
)
 
 
 
 
 
 
 
 
Loss before income taxes
(16,492
)
 
(14,460
)
 
(46,866
)
 
(76,736
)
Income tax expense (benefit)
7,297

 
(7,461
)
 
20,370

 
(1,901
)
Net loss
$
(23,789
)
 
$
(6,999
)
 
$
(67,236
)
 
$
(74,835
)
 
 
 
(1) 
For the three months ended September 30, 2018, $7,610 and $1,433 have been reclassified from general and administrative expenses and cost of revenue, products, respectively, to cost of revenue, services. For the nine months ended September 30, 2018, $21,809 and $4,059 have been reclassified from general and administrative expenses and cost of revenue, products, respectively, to cost of revenue, services. See Note 1—Basis of Presentation in the Notes to Unaudited Condensed Consolidated Financial Statements.

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Revenue. Revenue from external customers, excluding intersegment sales, for the three months ended September 30, 2019 increased by $11.4 million, or 8.9%, to $140.4 million from $129.0 million for the three months ended September 30, 2018. The increase in revenue was primarily driven by improved results in the Tubular Running Services segment. Revenue for our segments is discussed separately below under the heading Operating Segment Results.

Cost of revenue, exclusive of depreciation and amortization. Cost of revenue for the three months ended September 30, 2019 increased by $8.2 million, or 8.9%, to $101.0 million from $92.8 million for the three months ended September 30, 2018. The increase was driven by higher activity levels and mix of work in the TRS and CE segments, partially offset by productivity and cost efficiency actions taken in prior periods.



31


General and administrative expenses. General and administrative expenses for the three months ended September 30, 2019 decreased by $3.0 million, or 10.0%, to $26.9 million from $29.9 million for the three months ended September 30, 2018 due to sales and use tax refunds received in the current period, as well as due to cost reduction efforts.

Depreciation and amortization. Depreciation and amortization for the three months ended September 30, 2019 decreased by $5.5 million, or 20.4%, to $21.5 million from $27.0 million for the three months ended September 30, 2018, as a result of a lower depreciable base due to decreased capital expenditures during the current and prior year, partially offset by increased intangible asset amortization expense.

Severance and other charges (credits), net. Severance and other charges (credits), net for the three months ended September 30, 2019 increased by $10.1 million, or 207.6%, to a charge of $5.2 million from a credit of $4.9 million for the three months ended September 30, 2018. Severance and other charges (credits), net for the three months ended September 30, 2018 was favorably impacted by the recovery of accounts receivable previously written off in Angola. Severance and other charges (credits), net for the three months ended September 30, 2019 was unfavorably impacted by a $4.0 million impairment charge associated with assets identified as held for sale during the quarter.

Foreign currency loss. Foreign currency loss for the three months ended September 30, 2019 increased by $3.0 million, or 340.5%, to $3.9 million from $0.9 million for the three months ended September 30, 2018. The change in foreign currency results year-over-year was primarily driven by increased strengthening of the U.S. dollar in the current period as compared to the prior year period, particularly in comparison to the Norwegian krone, Euro, and Brazilian real.

Income tax expense (benefit). Income tax expense (benefit) for the three months ended September 30, 2019 increased by $14.8 million to an expense of $7.3 million from a benefit of $7.5 million for the three months ended September 30, 2018, primarily as a result of a change in the jurisdictional sources of income, namely an increase in revenue in certain regions that apply withholding or revenue based taxes. In addition, the three months ending September 30, 2018 included additional tax benefit recorded to update the previous quarter’s activity to the most recent estimated effective tax rate. We are subject to many U.S. and foreign tax jurisdictions and many tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases such as income before taxes, deemed profits (which is generally determined using a percentage of revenue rather than profits) and withholding taxes based on revenue; consequently, the relationship between our pre-tax income from operations and our income tax provision varies from period to period based on the overall effective tax rate for all jurisdictions in which we operate.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Revenue. Revenue from external customers, excluding intersegment sales, for the nine months ended September 30, 2019 increased by $63.8 million, or 16.9%, to $440.5 million from $376.6 million for the nine months ended September 30, 2018. Revenue increased across all segments. Revenue for our segments is discussed separately below under the heading Operating Segment Results.

Cost of revenue, exclusive of depreciation and amortization. Cost of revenue for the nine months ended September 30, 2019 increased by $39.4 million, or 14.4%, to $313.6 million from $274.2 million for the nine months ended September 30, 2018. The increase was driven by higher activity levels and mix of work in the TRS and CE segments, partially offset by productivity and cost efficiency actions taken in 2018.

General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2019 increased by $1.6 million, or 1.6%, to $96.4 million from $94.8 million for the nine months ended September 30, 2018 due to increased insurance costs driven by a premium adjustment in the first quarter of 2019, which was partially offset by sales and use tax refunds received during the third quarter of 2019.

Depreciation and amortization. Depreciation and amortization for the nine months ended September 30, 2019 decreased by $13.5 million, or 16.1%, to $70.6 million from $84.2 million for the nine months ended September 30,


32


2018, as a result of a lower depreciable base due to decreased capital expenditures during the current and prior year, partially offset by increased intangible asset amortization expense.

Severance and other charges (credits), net. Severance and other charges (credits), net for the nine months ended September 30, 2019 increased by $9.0 million, or 361.5%, to a charge of $6.5 million from a credit of $2.5 million for the nine months ended September 30, 2018. Severance and other charges (credits), net for the nine months ended September 30, 2018 was favorably impacted by the recovery of accounts receivable previously written off in Angola. Severance and other charges (credits), net for the nine months ended September 30, 2019 was unfavorably impacted by a $4.0 million impairment charge associated with assets identified as held for sale during the third quarter of 2019.

Foreign currency loss. Foreign currency loss for the nine months ended September 30, 2019 increased by $0.6 million, or 17.7%, to $4.1 million from $3.4 million for the nine months ended September 30, 2018. The change in foreign currency results year-over-year was primarily driven by increased strengthening of the U.S. dollar in the current period as compared to the prior year period, particularly in comparison to the Norwegian krone, Euro, and Brazilian real.

Income tax expense (benefit). Income tax expense (benefit) for the nine months ended September 30, 2019 increased by $22.3 million to an expense of $20.4 million from a benefit of $1.9 million for the nine months ended September 30, 2018. The change is primarily due to an increase in taxable income earned in jurisdictions applying revenue-based tax rates. In addition, the nine months ending September 30, 2019 included expense related to recording additional valuation allowances related to certain indefinite-lived intangibles. We are subject to many U.S. and foreign tax jurisdictions and many tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases such as income before taxes, deemed profits (which is generally determined using a percentage of revenue rather than profits) and withholding taxes based on revenue; consequently, the relationship between our pre-tax income from operations and our income tax provision varies from period to period based on the overall effective tax rate for all jurisdictions in which we operate.

Operating Segment Results

The following table presents revenue and Adjusted EBITDA by segment (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Tubular Running Services
$
102,277

 
$
89,789

 
$
306,971

 
$
260,181

Tubulars
12,519

 
15,265

 
53,510

 
49,991

Cementing Equipment
25,621

 
23,932

 
79,998

 
66,468

Total
$
140,417

 
$
128,986

 
$
440,479

 
$
376,640

 
 
 
 
 
 
 
 
Segment Adjusted EBITDA (1):
 
 
 
 
 
 
 
Tubular Running Services
$
23,884

 
$
17,070

 
$
67,019

 
$
40,876

Tubulars
456

 
1,541

 
8,502

 
8,461

Cementing Equipment
3,031

 
1,972

 
9,854

 
7,074

Corporate (2)
(11,350
)
 
(8,967
)
 
(42,533
)
 
(36,001
)
 
$
16,021

 
$
11,616

 
$
42,842

 
$
20,410

 
 
 
(1) 
Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. (For a reconciliation of our Adjusted EBITDA, see Adjusted EBITDA and Adjusted EBITDA Margin).
(2) 
Includes certain expenses not attributable to a particular segment, such as costs related to support functions and corporate executives.



33


Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Tubular Running Services

Revenue for the TRS segment was $102.3 million for the three months ended September 30, 2019, an increase of $12.5 million, or 13.9%, compared to $89.8 million for the same period in 2018, primarily due to activity improvements in Africa, Europe and the Gulf of Mexico.

Adjusted EBITDA for the TRS segment was $23.9 million for the three months ended September 30, 2019, an increase of $6.8 million, or 39.9%, compared to $17.1 million for the same period in 2018. Segment results were positively impacted by activity improvements in Africa, Europe and the Gulf of Mexico.

Tubulars

Revenue for the Tubulars segment was $12.5 million for the three months ended September 30, 2019, a decrease of $2.7 million, or 18.0%, compared to $15.3 million for the same period in 2018, primarily due to lower tubular sales during the current period. Tubular product sales were lower primarily as a result of customer drilling schedule changes in the U.S. Gulf of Mexico.

Adjusted EBITDA for the Tubulars segment was $0.5 million for the three months ended September 30, 2019, a decrease of $1.1 million, or 70.4%, compared to $1.5 million for the same period in 2018, primarily due to the lower tubular sales revenue during the current period.

Cementing Equipment

Revenue for the CE segment was $25.6 million for the three months ended September 30, 2019, an increase of $1.7 million, or 7.1%, compared to $23.9 million for the same period in 2018, driven by increased drilling activity and market share in the U.S. Gulf of Mexico and increased international activity in new and existing markets.

Adjusted EBITDA for the CE segment was $3.0 million for the three months ended September 30, 2019, an increase of $1.1 million, or 53.7%, compared to $2.0 million for the same period in 2018, primarily due to improved operational results, particularly in offshore international markets and the U.S. offshore market, as well as lower costs.

Corporate

Adjusted EBITDA for Corporate was a loss of $11.4 million for the three months ended September 30, 2019, an unfavorable change of $2.4 million, or 26.6%, compared to a loss of $9.0 million for the same period in 2018, primarily due to higher professional fees and compensation related expenses.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Tubular Running Services

Revenue for the TRS segment was $307.0 million for the nine months ended September 30, 2019, an increase of $46.8 million, or 18.0%, compared to $260.2 million for the same period in 2018. The increase was driven by activity improvements in the U.S., Latin America, Africa, and Europe, partially offset by lower activity levels in Canada.

Adjusted EBITDA for the TRS segment was $67.0 million for the nine months ended September 30, 2019, an increase of $26.1 million, or 64.0%, compared to $40.9 million for the same period in 2018. Segment results were positively impacted by activity improvements in Africa, the U.S., Europe and Latin America.



34


Tubulars

Revenue for the Tubulars segment was $53.5 million for the nine months ended September 30, 2019, an increase of $3.5 million, or 7.0%, compared to $50.0 million for the same period in 2018, primarily as a result of higher drilling tools activity, partially offset by lower tubular sales during the current period.

Adjusted EBITDA for the Tubulars segment was $8.5 million for both the nine months ended September 30, 2019 and 2018. Higher drilling tools activity was offset by lower tubular sales during the current period.

Cementing Equipment

Revenue for the CE segment was $80.0 million for the nine months ended September 30, 2019, an increase of $13.5 million, or 20.4%, compared to $66.5 million for the same period in 2018, driven by expansion to international markets, increased market share and product sales in the U.S. Gulf of Mexico and improved market share in the U.S. onshore market.

Adjusted EBITDA for the CE segment was $9.9 million for the nine months ended September 30, 2019, an increase of $2.8 million, or 39.3%, compared to $7.1 million for the same period in 2018, primarily due to improved operational results, particularly in offshore international markets and the U.S. onshore market.

Corporate

Adjusted EBITDA for Corporate was a loss of $42.5 million for the nine months ended September 30, 2019, an unfavorable change of $6.5 million, or 18.1%, compared to a loss of $36.0 million for the same period in 2018, primarily due to increased insurance costs driven by a premium adjustment, as well as higher professional fees and compensation related expenses.

Liquidity and Capital Resources

Liquidity

At September 30, 2019, we had cash and cash equivalents of $190.5 million and debt of $0.5 million. Our primary sources of liquidity to date have been cash flows from operations. Our primary uses of capital have been for organic growth capital expenditures. We continually monitor potential capital sources, including equity and debt financing, in order to meet our investment and target liquidity requirements.

Our total capital expenditures are estimated to be approximately $40.0 million in 2019, of which we expect approximately 65% will be used for the purchase and manufacture of equipment and 35% for other property, plant and equipment, inclusive of the purchase or construction of facilities. The actual amount of capital expenditures for the manufacture of equipment may fluctuate based on market conditions and timing of deliveries. During the nine months ended September 30, 2019 and 2018, cash expenditures related to property, plant and equipment and intangibles were $27.0 million and $14.6 million, respectively, all of which were funded from internally generated funds. We believe our cash on hand should be sufficient to fund our capital expenditure and liquidity requirements for the remainder of 2019.



35


Credit Facility

Asset Based Revolving Credit Facility

On November 5, 2018, FICV, Frank’s International, LLC and Blackhawk, as borrowers, and FINV, certain of FINV’s subsidiaries, including FICV, Frank’s International, LLC, Blackhawk, Frank’s International GP, LLC, Frank’s International, LP, Frank’s International LP B.V., Frank’s International Partners B.V., Frank’s International Management B.V., Blackhawk Intermediate Holdings, LLC, Blackhawk Specialty Tools, LLC, and Trinity Tool Rentals, L.L.C., as guarantors, entered into a five-year senior secured revolving credit facility (the “ABL Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent (the “ABL Agent”), and other financial institutions as lenders with total commitments of $100.0 million including up to $15.0 million available for letters of credit. Subject to the terms of the ABL Credit Facility, we have the ability to increase the commitments to $200.0 million. The maximum amount that the Company may borrow under the ABL Credit Facility is subject to a borrowing base, which is based on a percentage of certain eligible accounts receivable and eligible inventory, subject to customary reserves and other adjustments.

All obligations under the ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by FINV’s subsidiaries, including FICV, Frank’s International, LLC, Blackhawk, Frank’s International GP, LLC, Frank’s International, LP, Frank’s International LP B.V., Frank’s International Partners B.V., Frank’s International Management B.V., Blackhawk Intermediate Holdings, LLC, Blackhawk Specialty Tools, LLC, and Trinity Tool Rentals, L.L.C., subject to customary exceptions and exclusions. In addition, the obligations under the ABL Credit Facility are secured by first priority liens on substantially all of the assets and property of the borrowers and guarantors, including pledges of equity interests in certain of FINV’s subsidiaries, subject to certain exceptions. Borrowings under the ABL Credit Facility bear interest at FINV’s option at either (a) the Alternate Base Rate (ABR) (as defined therein), calculated as the greatest of (i) the rate of interest publicly quoted by the Wall Street Journal, as the “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, (ii) the federal funds effective rate that is subject to a 0.00% interest rate floor plus 0.50%, and (iii) the one-month Adjusted LIBO Rate (as defined therein) plus 1.00%, or (b) the Adjusted LIBO Rate, plus, in each case, an applicable margin. The applicable interest rate margin ranges from 1.00% to 1.50% per annum for ABR loans and 2.00% to 2.50% per annum for Eurodollar loans and, in each case, is based on FINV’s leverage ratio. The unused portion of the ABL Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to average daily unused commitments under the ABL Credit Facility. Interest on Eurodollar loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on ABR loans is payable monthly in arrears.

The ABL Credit Facility contains various covenants and restrictive provisions which limit, subject to certain customary exceptions and thresholds, FINV’s ability to, among other things, (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments, acquisitions, or loans and create or incur liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. The ABL Credit Facility also requires FINV to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 based on the ratio of (a) consolidated EBITDA (as defined therein) minus unfinanced capital expenditures to (b) Fixed Charges (as defined therein), when either (i) an event of default occurs under the ABL Credit Facility or (ii) availability under the ABL Credit Facility falls for at least two consecutive calendar days below the greater of (A) $12.5 million and (B) 15% of the lesser of the borrowing base and aggregate commitments (a “FCCR Trigger Event”). Accounts receivable received by FINV’s U.S. subsidiaries that are parties to the ABL Credit Facility will be deposited into deposit accounts subject to deposit control agreements in favor of the ABL Agent. After a FCCR Trigger Event, these deposit accounts would be subject to “springing” cash dominion. After a FCCR Trigger Event, the Company will be subject to compliance with the fixed charge coverage ratio and “springing” cash dominion until no default exists under the ABL Credit Facility and availability under the facility for the preceding thirty consecutive days has been equal to at least the greater of (x) $12.5 million and (y) 15% of the lesser of the borrowing base and the aggregate commitments. If FINV fails to perform its obligations under the agreement that results in an event of default, the commitments under the ABL Credit Facility could be terminated and any outstanding borrowings under the ABL Credit Facility may be declared immediately due and payable. The ABL Credit Facility also contains cross default provisions that apply to FINV’s other indebtedness.



36


As of September 30, 2019, FINV had no borrowings outstanding under the ABL Credit Facility, letters of credit outstanding of $6.5 million and availability of $55.0 million.

Insurance Notes Payable

In 2018, we entered into a note to finance our annual insurance premiums totaling $6.8 million. The note bears interest at an annual rate of 3.9% with a final maturity date in October 2019. At September 30, 2019 and December 31, 2018, the outstanding balance was $0.5 million and $5.6 million, respectively.

Tax Receivable Agreement

We entered into a tax receivable agreement with Frank’s International C.V. (“FICV”) and Mosing Holdings, LLC (“Mosing Holdings”) in connection with our initial public offering (“IPO”). The TRA generally provides for the payment by us to Mosing Holdings 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 in periods after our IPO (which reductions we refer to as “cash savings”) as a result of (i) the tax basis increases resulting from the transfer of FICV interests to us in connection with the conversion of shares of Preferred Stock into shares of our common stock on August 26, 2016 and (ii) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the TRA. As of October 31, 2019, the Mosing family collectively owns 123,919,840, or 55%, of our common shares.

In addition, the TRA provides for interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. We will retain the remaining 15% of cash savings, if any. The payment obligations under the TRA are our obligations and not obligations of FICV. The term of the TRA continues until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the TRA.

If we elect to execute our sole right to terminate the TRA early, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA (based upon certain assumptions and deemed events set forth in the TRA, including the assumption that it has sufficient taxable income to fully utilize such benefits and that any FICV interests that Mosing Holdings or its transferees own on the termination date are deemed to be exchanged on the termination date). In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control.

In certain circumstances, we may be required to make payments under the TRA that we have entered into with Mosing Holdings. In most circumstances, these payments will be associated with the actual cash savings that we recognize in connection with the conversion of Preferred Stock, which would reduce the actual tax benefit to us. If we were to elect to exercise our sole right to terminate the TRA early or enter into certain change of control transactions, we may incur payment obligations prior to the time we actually incur any tax benefit. In those circumstances, we would need to pay the amounts out of cash on hand, finance the payments or refrain from triggering the obligation. Though we do not have any present intention of triggering an advance payment under the TRA, based on our current liquidity and our expected ability to access debt and equity financing, we believe we would be able to make such a payment if necessary. Any such payment could reduce our cash on hand and our borrowing availability, however, which would also reduce the amount of cash available to operate our business, to fund capital expenditures and to be paid as dividends to our stockholders, among other things. Please see Note 12—Related Party Transactions in the Notes to Unaudited Condensed Consolidated Financial Statements.



37


Cash Flows from Operating, Investing and Financing Activities

Cash flows from our operations, investing and financing activities are summarized below (in thousands):
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Operating activities
$
8,485

 
$
(35,394
)
Investing activities
(191
)
 
(9,215
)
Financing activities
(5,416
)
 
(4,636
)
 
2,878

 
(49,245
)
Effect of exchange rate changes on cash
2,684

 
2,357

Net increase (decrease) in cash, cash equivalents and restricted cash
$
5,562

 
$
(46,888
)

Statements of cash flows for entities with international operations that use the local currency as the functional currency exclude the effects of the changes in foreign currency exchange rates that occur during any given year, as these are noncash changes. As a result, changes reflected in certain accounts on the condensed consolidated statements of cash flows may not reflect the changes in corresponding accounts on the condensed consolidated balance sheets.

Operating Activities

Cash flow provided by operating activities was $8.5 million for the nine months ended September 30, 2019 compared to cash flow used in operating activities of $35.4 million for the same period in 2018. The change in cash flow from operating activities of $43.9 million was primarily due to a reduced net loss year-over-year of $7.6 million and favorable accounts receivable changes of $47.1 million, partially offset by an unfavorable change in inventory of $10.7 million.

Investing Activities

Cash flow used in investing activities was $0.2 million for the nine months ended September 30, 2019 compared to $9.2 million in the same period in 2018. The change in cash flow from investing activities of $9.0 million was driven by an increase in net proceeds from investments of $25.5 million, partially offset by a $12.4 million increase in the purchases of property, plant, equipment and intangibles and a decrease in proceeds from the sale of assets of $4.1 million.

Financing Activities

Cash flow used in financing activities was $5.4 million for the nine months ended September 30, 2019 compared to $4.6 million in the same period in 2018. The increase in cash flow used in financing activities of $0.8 million was due to increased repayment of borrowings of $0.8 million.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements with the exception of purchase obligations.

Critical Accounting Policies

There were no changes to our significant accounting policies from those disclosed in our Annual Report with the exception of leases. Please see Note 2—Leases in the Notes to Unaudited Condensed Consolidated Financial Statements.



38


Impact of Recent Accounting Pronouncements

Refer to Note 1—Basis of Presentation in the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of accounting standards we recently adopted or will be required to adopt.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report. Except for the change below, our exposure to market risk has not changed materially since December 31, 2018.

Based on the derivative contracts that were in place as of September 30, 2019, a simultaneous 10% weakening of the U.S. dollar compared to the Canadian dollar, Euro, Norwegian krone, and Pound sterling would result in a $3.6 million decrease in the market value of our forward contracts. Please see Note 11—Derivatives in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our foreign currency derivative contracts outstanding in U.S. dollars as of September 30, 2019.

Item 4. Controls and Procedures

(a)
Evaluation of Disclosure Controls and Procedures.

As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure, and such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2019 at the reasonable assurance level.

(b)
Change in Internal Control Over Financial Reporting.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


39


PART II. OTHER INFORMATION
Item 1.    Legal Proceedings

We are the subject of lawsuits and claims arising in the ordinary course of business from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. We had no material accruals for loss contingencies, individually or in the aggregate, as of September 30, 2019 and December 31, 2018. We believe the probability is remote that the ultimate outcome of these matters would have a material adverse effect on our financial position, results of operations or cash flows. Please see Note 15—Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements.

We are conducting an internal investigation of the operations of certain of our foreign subsidiaries in West Africa including possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”), our policies and other applicable laws. In June 2016, we voluntarily disclosed the existence of our extensive internal review to the U.S. Securities and Exchange Commission (“SEC”), the U.S. Department of Justice (“DOJ”) and other governmental entities. It is our intent to continue to fully cooperate with these agencies and any other applicable authorities in connection with any further investigation that may be conducted in connection with this matter. While our review has not indicated that there has been any material impact on our previously filed financial statements, we have continued to collect information and cooperate with the authorities, but at this time are unable to predict the ultimate resolution of these matters with these agencies.

In addition, during the course of the investigation, we discovered historical business transactions (and bids to enter into business transactions) in certain countries that may have been subject to U.S. and other international sanctions. We disclosed this information to the U.S. Department of Commerce’s Bureau of Industry and Security, Office of Export Enforcement (“OEE”) and to the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) (as well as to the agencies involved in our ongoing investigation discussed above). We received a No Action Letter dated April 20, 2018 from OEE, stating that OEE had closed its investigation without taking further action. In addition, we received a No Action Letter dated April 23, 2018 from OFAC, stating that OFAC had closed its investigation without taking further action.

As disclosed above, our investigation into possible violations of the FCPA remains ongoing, and we will continue to cooperate with the SEC, DOJ and other relevant governmental entities in connection therewith. At this time, we are unable to predict the ultimate resolution of these matters with these agencies, including any financial impact to us. Our board and management are committed to continuously enhancing our internal controls that support improved compliance and transparency throughout our global operations.

Item 1A.     Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risks under the heading “Risk Factors” in our Annual Report, which risks could materially affect our business, financial condition or future results. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

    


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Item 6. Exhibits

The exhibits required to be filed by Item 6 are set forth in the Exhibit Index included below.

EXHIBIT INDEX

Exhibit
Number
Description
3.1
†10.1
*31.1
*31.2
**32.1
**32.2
*101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
*101.SCH
Inline XBRL Taxonomy Extension Schema Document.
*101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
*101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
*101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
*101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
*104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
 
 
 
Represents management contract or compensatory plan or arrangement.
*
Filed herewith.
**
Furnished herewith.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
 
 
FRANK’S INTERNATIONAL N.V.
 
 
 
 
Date:
November 5, 2019
By:
/s/ Melissa Cougle
 
 
 
Melissa Cougle
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)




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