0001575828-18-000026.txt : 20181106 0001575828-18-000026.hdr.sgml : 20181106 20181106163053 ACCESSION NUMBER: 0001575828-18-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 81 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181106 DATE AS OF CHANGE: 20181106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANK'S INTERNATIONAL N.V. CENTRAL INDEX KEY: 0001575828 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 981107145 STATE OF INCORPORATION: P7 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36053 FILM NUMBER: 181163411 BUSINESS ADDRESS: STREET 1: MASTENMAKERSWEG 1 CITY: DEN HELDER STATE: P7 ZIP: 1786 PB BUSINESS PHONE: 31223670000 MAIL ADDRESS: STREET 1: POSTBUS 9182 CITY: AMSTERDAM STATE: P7 ZIP: 1006 AD FORMER COMPANY: FORMER CONFORMED NAME: Frank's International N.V. DATE OF NAME CHANGE: 20130501 10-Q 1 a09302018-documentfy18q3.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
OR
¨ Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the transition period from ______ to ______
Commission file number: 001-36053

Frank’s International N.V.
(Exact name of registrant as specified in its charter)
 
The Netherlands
 
98-1107145
 
 
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification number)
 
 
 
 
 
 
 
Mastenmakersweg 1
 
 
 
 
1786 PB Den Helder, The Netherlands
 
Not Applicable
 
 
(Address of principal executive offices)
 
(Zip Code)
 

Registrant’s telephone number, including area code: +31 (0)22 367 0000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically 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 þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
þ
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
As of October 31, 2018, there were 224,242,222 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, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2018 and 2017
 
Notes to the Unaudited Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and
 
 
Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
Signatures
 



2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRANK'S INTERNATIONAL N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
 
 
 
September 30,
 
December 31,
 
2018
 
2017
Assets
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
166,127

 
$
213,015

Short-term investments
80,438

 
81,021

Accounts receivables, net
163,020

 
127,210

Inventories, net
70,925

 
76,420

Assets held for sale
12,048

 
3,792

Other current assets
8,271

 
10,437

Total current assets
500,829

 
511,895

 
 
 
 
Property, plant and equipment, net
398,695

 
469,646

Goodwill
211,040

 
211,040

Intangible assets, net
26,838

 
33,895

Other assets
35,000

 
35,293

Total assets
$
1,172,402

 
$
1,261,769

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
432

 
$
4,721

Accounts payable and accrued liabilities
94,484

 
108,885

Deferred revenue
125

 
4,703

Total current liabilities
95,041

 
118,309

 
 
 
 
Deferred tax liabilities
223

 
229

Other non-current liabilities
27,955

 
27,330

Total liabilities
123,219

 
145,868

 
 
 
 
Commitments and contingencies (Note 14)


 


 
 
 
 
Stockholders' equity:
 
 
 
Common stock, €0.01 par value, 798,096,000 shares authorized, 225,397,828 and 224,228,071 shares issued and 224,228,269 and 223,289,389 shares outstanding
2,828

 
2,814

Additional paid-in capital
1,060,350

 
1,050,873

Retained earnings
32,758

 
106,923

Accumulated other comprehensive loss
(31,515
)
 
(30,972
)
Treasury stock (at cost), 1,169,559 and 938,682 shares
(15,238
)
 
(13,737
)
Total stockholders' equity
1,049,183

 
1,115,901

Total liabilities and equity
$
1,172,402

 
$
1,261,769


The accompanying notes are an integral part of these condensed consolidated financial statements.
3



FRANK'S INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Services
$
103,911

 
$
92,547

 
$
301,005

 
$
272,402

Products
25,075

 
15,536

 
75,635

 
64,071

Total revenue
128,986

 
108,083

 
376,640

 
336,473

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of revenues, exclusive of depreciation and amortization
 
 
 
 
 
 
 
Services
65,726

 
55,501

 
193,951

 
162,501

Products
19,421

 
16,230

 
58,474

 
61,526

General and administrative expenses
37,526

 
39,963

 
116,608

 
125,107

Depreciation and amortization
26,998

 
30,650

 
84,160

 
92,700

Severance and other charges (credits), net
(4,852
)
 
1,648

 
(2,483
)
 
2,386

Gain on disposal of assets
(2,242
)
 
(829
)
 
(1,790
)
 
(2,091
)
Operating loss
(13,591
)
 
(35,080
)
 
(72,280
)
 
(105,656
)
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Tax receivable agreement (“TRA”) related adjustments
(1,170
)
 
122,515

 
(5,282
)
 
122,515

Other income (expense), net
314

 
(384
)
 
1,907

 
348

Interest income, net
866

 
1,019

 
2,419

 
2,170

Mergers and acquisition expense

 

 
(58
)
 
(459
)
Foreign currency gain (loss)
(879
)
 
1,839

 
(3,442
)
 
3,184

Total other income (expense)
(869
)
 
124,989

 
(4,456
)
 
127,758

 
 
 
 
 
 
 
 
Income (loss) before income taxes
(14,460
)
 
89,909

 
(76,736
)
 
22,102

Income tax expense (benefit)
(7,461
)
 
87,613

 
(1,901
)
 
72,419

Net income (loss)
$
(6,999
)
 
$
2,296

 
$
(74,835
)
 
$
(50,317
)
 
 
 
 
 
 
 
 
Dividends per common share
$

 
$
0.075

 
$

 
$
0.225

 
 
 
 
 
 
 
 
Income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(0.03
)
 
$
0.01

 
$
(0.33
)
 
$
(0.23
)
Diluted
$
(0.03
)
 
$
0.01

 
$
(0.33
)
 
$
(0.23
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
224,182

 
223,056

 
223,912

 
222,847

Diluted
224,182

 
223,581

 
223,912

 
222,847



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



FRANK'S INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income (loss)
$
(6,999
)
 
$
2,296

 
$
(74,835
)
 
$
(50,317
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
95

 
1,488

 
(653
)
 
2,809

Marketable securities:
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
28

 
(101
)
 
110

 
(105
)
Reclassification to net income

 

 

 
(395
)
Deferred tax asset / liability change

 

 

 
158

Unrealized gain (loss) on marketable securities, net of tax
28

 
(101
)
 
110

 
(342
)
Total other comprehensive income (loss)
123

 
1,387

 
(543
)
 
2,467

Comprehensive income (loss)
$
(6,876
)
 
$
3,683

 
$
(75,378
)
 
$
(47,850
)


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, 2017
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
Total
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury
 
Stockholders'
 
Shares
 
Value
 
Capital
 
Earnings
 
Income (Loss)
 
Stock
 
Equity
Balances at December 31, 2016
222,401

 
$
2,802

 
$
1,036,786

 
$
317,270

 
$
(32,977
)
 
$
(12,562
)
 
$
1,311,319

Net loss

 

 

 
(50,317
)
 

 

 
(50,317
)
Foreign currency translation adjustments

 

 

 

 
2,809

 

 
2,809

Change in marketable securities

 

 

 

 
(342
)
 

 
(342
)
Equity-based compensation expense

 

 
11,458

 

 

 

 
11,458

Common stock dividends ($0.225 per share)

 

 

 
(50,424
)
 

 

 
(50,424
)
Common shares issued upon vesting of share-based awards
694

 
7

 
(7
)
 

 

 

 

Common shares issued for employee stock purchase plan (ESPP)
50

 
1

 
511

 

 

 

 
512

Treasury shares issued upon vesting of share-based awards
4

 

 
(84
)
 

 

 
66

 
(18
)
Treasury shares issued for ESPP
106

 

 
(166
)
 
(736
)
 

 
1,642

 
740

Treasury shares withheld
(193
)
 

 

 

 

 
(2,254
)
 
(2,254
)
Balances at September 30, 2017
223,062

 
$
2,810

 
$
1,048,498

 
$
215,793

 
$
(30,510
)
 
$
(13,108
)
 
$
1,223,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 

 
(74,835
)
 

 

 
(74,835
)
Foreign currency translation adjustments

 

 

 

 
(653
)
 

 
(653
)
Change in marketable securities

 

 

 

 
110

 

 
110

Equity-based compensation expense

 

 
8,176

 

 

 

 
8,176

Common shares issued upon vesting of share-based awards
938

 
11

 
(11
)
 

 

 

 

Common shares issued for ESPP
232

 
3

 
1,312

 

 

 

 
1,315

Treasury shares withheld
(231
)
 

 

 

 

 
(1,501
)
 
(1,501
)
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 CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
 
 
Nine Months Ended
 
September 30,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net loss
$
(74,835
)
 
$
(50,317
)
Adjustments to reconcile net loss to cash used in operating activities
 
 
 
Derecognition of the TRA liability

 
(122,515
)
Depreciation and amortization
84,160

 
92,700

Equity-based compensation expense
8,176

 
11,458

Amortization of deferred financing costs

 
267

Deferred tax benefit

 
12,824

Reversal of deferred tax assets associated with the TRA

 
49,775

Provision for bad debts
68

 
358

Gain on disposal of assets
(1,790
)
 
(2,091
)
Changes in fair value of investments
(1,295
)
 
(2,009
)
Realized loss on sale of investment

 
478

Unrealized (gain) loss on derivatives
(442
)
 
49

Other

 
(1,187
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable
(37,252
)
 
23,917

Inventories
(3,470
)
 
6,146

Other current assets
2,237

 
7,097

Other assets
204

 
1,948

Accounts payable and accrued liabilities
(10,249
)
 
8,310

Deferred revenue
(346
)
 
(9,039
)
Other non-current liabilities
(560
)
 
(3,584
)
Net cash (used in) provided by operating activities
(35,394
)
 
24,585


 
 
 
Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment and intangibles
(14,557
)
 
(18,604
)
Proceeds from sale of assets
4,419

 
10,690

Proceeds from sale of investments
67,934

 
11,499

Purchase of investments
(67,011
)
 
(60,764
)
Other

 
(64
)
Net cash used in investing activities
(9,215
)
 
(57,243
)
 
 
 
 
Cash flows from financing activities
 
 
 
Repayments of borrowings
(4,289
)
 
(190
)
Dividends paid on common stock

 
(50,424
)
Net treasury shares withheld for taxes
(1,501
)
 
(2,272
)
Proceeds from the issuance of ESPP shares
1,315

 
1,252

Deferred financing costs
(161
)
 

Net cash used in financing activities
(4,636
)
 
(51,634
)
Effect of exchange rate changes on cash
2,357

 
(1,896
)
Net decrease in cash and cash equivalents
(46,888
)
 
(86,188
)
Cash and cash equivalents at beginning of period
213,015

 
319,526

Cash and cash equivalents at end of period
$
166,127

 
$
233,338

 
 
 
 
Non-cash transactions:
 
 
 
Change in accounts payable and accrued liabilities related to capital expenditures
$
(1,733
)
 
$
3,983

Transfers from property, plant and equipment to assets held for sale
9,322

 
3,792

Net transfers from inventory to property, plant and equipment
(3,253
)
 
(2,348
)

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


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


Note 1—Basis of Presentation

Nature of Business

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

Basis of Presentation

The condensed consolidated financial statements of FINV for the three and nine months ended September 30, 2018 and 2017 include the activities of Frank's International C.V. (“FICV”), Blackhawk Group Holdings, LLC (“Blackhawk”) and their wholly owned subsidiaries (collectively, the “Company,” “we,” “us” or “our”). All intercompany accounts and transactions have been eliminated for purposes of preparing these condensed consolidated financial statements.

Our accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. The consolidated balance sheet at December 31, 2017 is derived from audited financial statements. However, certain information and footnote disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for complete annual financial statements have been omitted and, therefore, these interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2017, which are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2018 (“Annual Report”). In the opinion of management, these condensed consolidated financial statements, which have been prepared pursuant to the rules of the SEC and GAAP for interim financial reporting, reflect all adjustments, which consisted only of normal recurring adjustments that were necessary for a fair statement of the interim periods presented. The results of operations for interim periods are not necessarily indicative of those for a full year.

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

Reclassifications

Certain prior-period amounts have been reclassified to conform to the current period's presentation. These reclassifications had no impact on our net income (loss), working capital, cash flows or total equity previously reported.
Our financial statements for the three and nine months ended September 30, 2017 have been revised to decrease “cost of revenues, services” and increase “cost of revenues, products” by the following immaterial amounts in order to correct a misclassification associated with Blackhawk product costs. While the revisions do impact two financial statement line items, the revisions had no impact on our net income (loss), working capital, cash flows or total equity previously reported (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2017
Cost of revenues, exclusive of depreciation and amortization
 
 
 
Services, as previously reported
$
60,981

 
$
178,865

Blackhawk adjustment
(5,480
)
 
(16,364
)
Services, as revised
$
55,501

 
$
162,501

 
 
 
 
Products, as previously reported
$
10,750

 
$
45,162

Blackhawk adjustment
5,480

 
16,364

Products, as revised
$
16,230

 
$
61,526



8

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

During 2018, the Company’s chief operating decision maker (“CODM”) changed the methodology used to allocate bonus and medical claims expenses among segments. Previously, all U.S. bonus and medical claims expenses were absorbed by our U.S. Services segment. Beginning in the first quarter of 2018 for bonus expenses and the second quarter of 2018 for medical claims expenses, a portion of these expenses attributable to Blackhawk employees were allocated to the Blackhawk segment. The change in the allocation of all U.S. bonus and medical claims expenses had no impact on our consolidated operating income (loss), net income (loss), adjusted EBITDA, working capital, cash flows or total equity previously reported. However, segment operating income (loss) and segment adjusted EBITDA for the Blackhawk and U.S. Services segments were impacted. The Blackhawk segment for the three and nine months ended September 30, 2018 was charged $1.6 million and $3.2 million, respectively, for bonus and medical claims expenses which would have previously been charged to the U.S. Services segment.

Recent Accounting Pronouncements

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

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

In June 2018, the FASB issued new guidance which is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. Management is evaluating the provisions of this new accounting guidance, including which period to adopt, and has not determined what impact the adoption will have on our consolidated financial statements.

In May 2017, the FASB issued new guidance to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when accounting for a change to the terms and conditions of a share-based payment award. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in this guidance should be applied prospectively to an award modified on or after the adoption date. We adopted the guidance on January 1, 2018 and the adoption did not have an impact on our consolidated financial statements.

In January 2017, the FASB issued new accounting guidance for business combinations clarifying the definition of a business. The objective of the guidance is to help companies and other organizations which have acquired or sold a business to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, the guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. We adopted the guidance on January 1, 2018 and the adoption did not have an impact on our consolidated financial statements.

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

In February 2016, the FASB issued new accounting guidance for leases. The main objective of the accounting guidance is to increase transparency and comparability among organizations by recognizing lease assets and lease


9

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

liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and the new guidance is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The new guidance requires lessees to recognize assets and liabilities arising from leases on the balance sheet and further defines a lease as a contract that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefit from the use of the asset and (2) the right to direct the use of the asset. The accounting guidance requires disclosures by both lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Further, in July 2018, the FASB amended the new lease accounting standard in an effort to reduce the burden of adoption. With the adoption of the new lease accounting standard, as amended, companies have the option of electing to apply the new lease accounting standard either on a retrospective or prospective basis. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact the new accounting guidance for leases will have on our consolidated financial statements and plan to adopt the new lease accounting standard, as amended, on a prospective basis effective January 1, 2019. Additionally, we are implementing an enterprise-wide lease management system to assist in the accounting and are evaluating additional changes to our processes and internal controls to ensure we meet the standard's reporting and disclosure requirements. While we are still evaluating its impact, we anticipate that the adoption of the lease accounting standard will have an impact to the Company's consolidated balance sheets and the disclosures contained in the notes of its consolidated financial statements. At the present time, we do not anticipate any changes to either the statement of operations or statement of cash flows from the adoption of the new lease accounting standard.

In May 2014, the FASB issued amendments to guidance on the recognition of revenue based upon the entity’s contracts with customers to transfer goods or services. Under the new revenue standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. The standard allows for two transition methods: (a) a full retrospective adoption in which the standard is applied to all periods presented, or (b) a modified retrospective adoption in which the standard is applied only to the most current period presented in the financial statements, including additional disclosures of the standard’s application impact to individual financial statement line items. In July 2015, the FASB deferred the effective date to December 15, 2017 for annual periods, and interim reporting periods within those fiscal years, beginning after that date.

We adopted the new revenue standard effective January 1, 2018 using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Our adjustment related solely to revenues from certain product sales with bill-and-hold arrangements in our Tubular Sales segment. The comparative information has not been restated and continues to be reported under the accounting standards which were in effect for those periods. The impact to revenue of applying the new revenue recognition standard for the three and nine months ended September 30, 2018 was immaterial. We expect the impact of the adoption of the new standard to be immaterial to our financial results on an ongoing basis.


10

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

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard was as follows (in thousands):
 
Balance at
 
Impact of
 
Balance at
 
December 31, 2017
 
Adjustments
 
January 1, 2018
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Inventories, net
$
76,420

 
$
(3,560
)
 
$
72,860

Liabilities
 
 
 
 
 
Deferred revenue
4,703

 
(4,230
)
 
473

Stockholders' Equity
 
 
 
 
 
Retained earnings
106,923

 
670

 
107,593


Note 2—Revenues

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Payment terms on services and products generally range from 30 days to 120 days. Given the short-term nature of our service and product offerings, our contracts do not have a significant financing component and the consideration we receive is generally fixed.
Service revenues are recognized over time as services are performed or rendered. We generally perform services either under direct service purchase orders or master service agreements which are supplemented by individual call-out provisions. For customers contracted under such arrangements, an accrual is recorded in unbilled revenue for revenue earned but not yet invoiced.
Revenues on product sales are generally recognized at a point in time when the product has shipped and significant risks of ownership have passed to the customer. The sales arrangements typically do not include a right of return or other similar provisions, nor do they contain any other post-delivery obligations.
Some of our Tubular Sales and Blackhawk segment customers have requested that we store pipe, connectors and other products purchased from us in our facilities. We recognize revenues for these “bill and hold” sales once the following criteria have been met: (1) there is a substantive reason for the arrangement, (2) the product is identified as the customer's asset, (3) the product is ready for delivery to the customer, and (4) we cannot use the product or direct it to another customer.

Practical Expedients

We elected to apply certain practical expedients available under the new revenue standard. We elected to expense cost of obtaining contracts, such as sales commissions, when incurred because the amortization period would have been one year or less due to the length of our contracts. We have also elected not to assess immaterial promises in the context of our contracts as performance obligations and to exclude taxes from the assessment of transaction price in arrangements where taxes are collected by the entity from a customer.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Because our contracts with customers are short-term in nature and fall within this exemption, we do not have significant unsatisfied performance obligations as defined by the new revenue standard.


11

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

Note 3—Accounts Receivable, net

Accounts receivable at September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
Trade accounts receivable, net of allowance of $3,915 and $4,777, respectively
$
98,997

 
$
83,482

Unbilled revenue
49,700

 
25,670

Taxes receivable
9,423

 
11,305

Affiliated (1)
549

 
716

Other receivables
4,351

 
6,037

Total accounts receivable, net
$
163,020

 
$
127,210

 
 
 

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

Note 4—Inventories, net

Inventories at September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
Pipe and connectors, net of allowance of $20,911 and $20,064, respectively
$
24,023

 
$
33,620

Finished goods, net of allowance of $1,463 and $1,520, respectively
18,142

 
14,541

Work in progress
8,071

 
9,206

Raw materials, components and supplies
20,689

 
19,053

Total inventories, net
$
70,925

 
$
76,420




12

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

Note 5—Property, Plant and Equipment

The following is a summary of property, plant and equipment at September 30, 2018 and December 31, 2017 (in thousands):
 
Estimated
Useful Lives
in Years
 
September 30,
2018
 
December 31,
2017
Land
 
$
14,827

 
$
15,314

Land improvements (1)
8-15
 
15,082

 
14,594

Buildings and improvements (1)
39
 
104,077

 
119,380

Rental machinery and equipment
7
 
895,083

 
898,146

Machinery and equipment - other
7
 
61,531

 
55,049

Furniture, fixtures and computers
5
 
24,718

 
27,259

Automobiles and other vehicles
5
 
29,533

 
29,971

Leasehold improvements (1)
7-15, or lease term if shorter
 
11,823

 
10,030

Construction in progress - machinery
     and equipment and land improvements (1)
 
65,277

 
61,836

 
 
 
1,221,951

 
1,231,579

Less: Accumulated depreciation
 
 
(823,256
)
 
(761,933
)
Total property, plant and equipment, net
 
 
$
398,695

 
$
469,646

 
 
 

(1) 
See Note 16—Subsequent Events for additional information.

During the third quarter of 2017, we committed to sell certain of our buildings in the International Services segment and determined those assets met the criteria to be classified as held for sale in our condensed consolidated balance sheet. As a result, we reclassified the buildings, with a net book value of $4.1 million, from property, plant and equipment to assets held for sale and recognized a $0.3 million loss.

During the first quarter of 2018, we sold one of the buildings classified as held for sale for $0.8 million and recorded an immaterial loss.

During the second quarter of 2018, additional buildings 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.


13

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, 2018 and 2017 (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Services
 
$
22,584

 
$
25,663

 
$
70,465

 
$
78,558

Products
 
1,051

 
1,278

 
3,319

 
3,838

General and administrative expenses
 
3,363

 
3,709

 
10,376

 
10,304

Total
 
$
26,998

 
$
30,650

 
$
84,160

 
$
92,700


Note 6—Other Assets

Other assets at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
Cash surrender value of life insurance policies (1)
$
31,306

 
$
30,351

Deposits
2,619

 
2,564

Other
1,075

 
2,378

Total other assets
$
35,000

 
$
35,293

 
 
 

        
(1) 
See Note 9—Fair Value Measurements for additional information.

Note 7—Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
Accounts payable
$
17,064

 
$
33,912

Accrued compensation
28,557

 
25,510

Accrued property and other taxes
13,685

 
16,908

Accrued severance and other charges
704

 
1,444

Income taxes
41

 
8,091

Accrued purchase orders and other
34,433

 
23,020

Total accounts payable and accrued liabilities
$
94,484

 
$
108,885





14

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

Note 8—Debt

At both September 30, 2018 and December 31, 2017, we had $2.8 million in letters of credit outstanding.

Credit Facility

We had a $100.0 million revolving credit facility with certain financial institutions, including up to $20.0 million in letters of credit and up to $10.0 million in swingline loans, which matured in August 2018.

During the fourth quarter of 2018, we entered into a new credit facility. Please see Note 16—Subsequent Events for further discussion.

Citibank Credit Facility

In 2016, we entered into a three-year credit facility with Citibank N.A., UAE Branch in the amount of $6.0 million for the issuance of standby letters of credit and guarantees. The credit facility also allows for open ended guarantees. Outstanding amounts under the credit facility bear interest of 1.25% per annum for amounts outstanding up to one year. Amounts outstanding more than one year bear interest at 1.5% per annum. As of September 30, 2018 and December 31, 2017, we had $2.3 million and $2.6 million, respectively, in letters of credit outstanding.

Insurance Notes Payable

In 2017, we entered into three notes to finance our annual insurance premiums totaling $5.1 million. The notes bear interest at an annual rate of 2.9% with a final maturity date in October 2018. At September 30, 2018 and December 31, 2017, the total outstanding balance was $0.4 million and $4.7 million, respectively.

Note 9—Fair Value Measurements

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


15

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


A summary of financial assets and liabilities that are measured at fair value on a recurring basis, as of September 30, 2018 and December 31, 2017, were as follows (in thousands):
 
Quoted Prices
in Active
Markets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
September 30, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Cash surrender value of life insurance policies - deferred compensation plan
$

 
$
31,306

 
$

 
$
31,306

Marketable securities - other
54

 

 

 
54

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments

 
45

 

 
45

Deferred compensation plan

 
25,970

 

 
25,970

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Cash surrender value of life insurance policies - deferred compensation plan
$

 
$
30,351

 
$

 
$
30,351

Marketable securities - other
113

 

 

 
113

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments

 
487

 

 
487

Deferred compensation plan

 
26,797

 

 
26,797


Our derivative financial instruments consist of short-duration foreign currency forward contracts. The fair value of our derivative financial instruments is based on quoted market values including foreign exchange forward rates and interest rates. The fair value is computed by discounting the projected future cash flow amounts to present value. Derivative financial instruments are included in our condensed consolidated balance sheets in accounts payable and accrued liabilities at both September 30, 2018 and December 31, 2017.

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

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

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



16

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

Other Fair Value Considerations

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

Note 10—Derivatives

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

As of September 30, 2018 and December 31, 2017, we had the following foreign currency derivative contracts outstanding in U.S. dollars (in thousands):
 
 
September 30, 2018
Derivative Contracts
 
Notional Amount
 
Contractual Exchange Rate
 
Settlement Date
Canadian dollar
 
$
4,307

 
1.3003
 
12/17/2018
Euro
 
5,046

 
1.1734
 
12/17/2018
Norwegian krone
 
6,207

 
8.2171
 
12/17/2018
Pound sterling
 
13,136

 
1.3136
 
12/17/2018
 
 
December 31, 2017
Derivative Contracts
 
Notional Amount
 
Contractual Exchange Rate
 
Settlement Date
Canadian dollar
 
$
6,226

 
1.2850
 
3/15/2018
Euro
 
5,326

 
1.1836
 
3/15/2018
Norwegian krone
 
6,212

 
8.3704
 
3/15/2018
Pound sterling
 
6,039

 
1.3419
 
3/15/2018

The following table summarizes the location and fair value amounts of all derivative contracts in the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 (in thousands):
Derivatives not Designated as Hedging Instruments
 
Consolidated Balance Sheet Location
 
September 30, 2018
 
December 31, 2017
Foreign currency contracts
 
Accounts payable and accrued liabilities
 
$
(45
)
 
$
(487
)



17

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

The following table summarizes the location and amounts of the realized and unrealized gains and losses on derivative contracts in the condensed consolidated statements of operations (in thousands):
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
September 30,
 
September 30,
Derivatives not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in Income on Derivative Contracts
 
2018
 
2017
 
2018
 
2017
Unrealized gain (loss) on foreign currency contracts
 
Other income (expense), net
 
$
(323
)
 
$
681

 
$
442

 
$
(49
)
Realized gain (loss) on foreign currency contracts
 
Other income (expense), net
 
447

 
(1,794
)
 
572

 
(2,346
)
Total net gain (loss) on foreign currency contracts
 
 
 
$
124

 
$
(1,113
)
 
$
1,014

 
$
(2,395
)

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, 2018 and December 31, 2017 (in thousands):
 
 
Derivative Asset Positions
 
Derivative Liability Positions
 
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
Gross position - asset / (liability)
 
$
64

 
$

 
$
(109
)
 
$
(487
)
Netting adjustment
 
(64
)
 

 
64

 

Net position - asset / (liability)
 
$

 
$

 
$
(45
)
 
$
(487
)

Note 11—Related Party Transactions

We have engaged in certain transactions with other companies related to us by common ownership. We have entered into various operating leases to lease facilities from these affiliated companies. Rent expense associated with our related party leases was $1.1 million and $1.8 million for the three months ended September 30, 2018 and 2017, respectively, and $5.0 million and $5.3 million for the nine months ended September 30, 2018 and 2017, respectively. Please see Note 16—Subsequent Events for further discussion on our related party leases.
 
We were a party to certain agreements relating to the rental of aircraft to Western Airways (“WA”), an entity owned by the Mosing family. The WA agreements reflected both dry lease and wet lease rentals, whereby we were charged a flat monthly fee primarily for crew, hangar, maintenance and administration costs in addition to other variable costs for fuel and maintenance. We also earned charter income from third party usage through a revenue sharing agreement. We recorded $0.4 million and $1.0 million of net charter expense for the three and nine months ended September 30, 2017, respectively. In March 2017, we sold a fully depreciated aircraft for a total sales price of $1.3 million and recorded a gain on sale of $1.3 million. In August 2017, we sold an additional aircraft for a net sales price of $4.9 million and recorded an immaterial loss. The rental agreements were terminated with WA effective December 29, 2017, upon the sale of our last aircraft.

Tax Receivable Agreement

Mosing Holdings and its permitted transferees converted all their Preferred Stock into shares of our common stock on a one-for-one basis on August 26, 2016, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, by delivery of an equivalent portion of their interests in


18

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

FICV to us (the “Conversion”). FICV made an election under Section 754 of the Internal Revenue Code. Pursuant to the Section 754 election, the Conversion resulted in an adjustment to the tax basis of the tangible and intangible assets of FICV with respect to the portion of FICV now held by FINV. These adjustments will be allocated to FINV. The adjustments to the tax basis of the tangible and intangible assets of FICV described above would not have been available absent this Conversion. These basis adjustments may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

The TRA that we entered into with FICV and Mosing Holdings in connection with our initial public offering (“IPO”) generally provides for the payment by FINV of 85% of the amount of the actual reductions, if any, in payments of U.S. federal, state and local income tax or franchise tax (which reductions we refer to as “cash savings”) in periods after our IPO as a result of (i) the tax basis increases resulting from the Conversion and (ii) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the TRA. In addition, the TRA provides for payment by us of interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. The payments under the TRA will not be conditioned upon a holder of rights under the TRA having a continued ownership interest in either FICV or FINV. We will retain the remaining 15% of cash savings, if any.

The estimation of the liability under the TRA is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income. As of September 30, 2018, FINV has a cumulative loss over the prior 36-month period. Based on this history of losses, as well as uncertainty regarding the timing and amount of future taxable income, we are unable to conclude that there will be future cash savings that will lead to additional payouts under the TRA beyond the estimated $7.4 million as of September 30, 2018. Additional TRA liability may be recognized in the future based on changes in expectations regarding the timing and likelihood of future cash savings.

The payment obligations under the TRA are our obligations and are not obligations of FICV. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless FINV elects to exercise its sole right to terminate the TRA early. If FINV elects to terminate the TRA early, which it may do so in its sole discretion, it would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA (based upon certain assumptions and deemed events set forth in the TRA, including the assumption that it has sufficient taxable income to fully utilize such benefits and that any FICV interests that Mosing Holdings or its transferees own on the termination date are deemed to be exchanged on the termination date). Any early termination payment may be made significantly in advance of the actual realization, if any, of such future benefits. In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control. In these situations, FINV’s obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. For example, if the TRA were terminated on September 30, 2018, the estimated termination payment would be approximately $55.7 million (calculated using a discount rate of 6.13%). The foregoing number is merely an estimate and the actual payment could differ materially.

Because FINV is a holding company with no operations of its own, its ability to make payments under the TRA is dependent on the ability of FICV to make distributions to it in an amount sufficient to cover FINV’s obligations under such agreements; this ability, in turn, may depend on the ability of FICV’s subsidiaries to provide payments to it. The ability of FICV and its subsidiaries to make such distributions will be subject to, among other things, the applicable provisions of Dutch law that may limit the amount of funds available for distribution and restrictions in our debt instruments. To the extent that FINV is unable to make payments under the TRA for any reason, except in the case of an acceleration of payments thereunder occurring in connection with an early termination of the TRA or certain mergers or change of control, such payments will be deferred and will accrue interest until paid, and FINV will be prohibited from paying dividends on its common stock.

Note 12—Income (Loss) Per Common Share

Basic income (loss) per common share is determined by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is determined by dividing net income


19

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

(loss) by the weighted average number of common shares outstanding, assuming all potentially dilutive shares were issued. We apply the treasury stock method to determine the dilutive weighted average common shares represented by the unvested restricted stock units and ESPP shares.

The following table summarizes the basic and diluted income (loss) per share calculations (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Numerator
 
 
 
 
 
 
 
Net income (loss)
$
(6,999
)
 
$
2,296

 
$
(74,835
)
 
$
(50,317
)
Denominator
 
 
 
 
 
 
 
Basic weighted average common shares
224,182

 
223,056

 
223,912

 
222,847

Restricted stock units (1)

 
525

 

 

Diluted weighted average common shares (1)
224,182

 
223,581

 
223,912

 
222,847

Income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(0.03
)
 
$
0.01

 
$
(0.33
)
 
$
(0.23
)
Diluted
$
(0.03
)
 
$
0.01

 
$
(0.33
)
 
$
(0.23
)
 
 
 
 
 
 
 
 
 
(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 income (loss) per share as the effect would be anti-dilutive when results from operations are at a net loss position.
1,075

 

 
779

 
624


Note 13—Income Taxes

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

Our effective tax rate was 51.6% and 97.4% for the three months ended September 30, 2018 and 2017, respectively, and 2.5% and 327.7% for the nine months ended September 30, 2018 and 2017, respectively. The decrease in tax rates as compared to the same periods last year is primarily due to recording valuation allowances against deferred tax assets related to the U.S. and certain foreign jurisdictions. In both periods we recorded valuation allowances against the net deferred tax assets accrued in that period. However, for the three months ended September 30, 2017 we also recorded valuation allowances against the net deferred tax assets that had been accrued for all periods prior to 2017. The recording of valuation allowances against the accumulated pre-2017 balances resulted in significantly higher tax expense in 2017.

In determining that a valuation allowance must be recorded in the current period, we assessed the available positive and negative evidence and concluded that it is not more likely than not that sufficient future taxable income would be generated to permit the use of our deferred tax assets. This conclusion is primarily the result of cumulative losses incurred in the most recent three-year period, and uncertainty regarding when we will return to profitability. The amount of deferred tax asset considered realizable and the related need for a valuation allowance may be adjusted in future periods as the available evidence changes.

We are under audit by the U.S. and certain foreign jurisdictions for the years 2014 - 2016. We do not expect the results of these audits to have any material effect on our financial statements.


20

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


As of September 30, 2018, there were no significant changes to our unrecognized tax benefits as reported in our audited financial statements for the year ended December 31, 2017.

Note 14—Commitments and Contingencies

We are the subject of lawsuits and claims arising in the ordinary course of business from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. We had no material accruals for loss contingencies, individually or in the aggregate, as of September 30, 2018 and December 31, 2017. We believe the probability is remote that the ultimate outcome of these matters would have a material adverse effect on our financial position, results of operations or cash flows.

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

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

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

Note 15—Segment Information

Reporting Segments

Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the Company's CODM in deciding how to allocate resources and assess performance. We are comprised of four reportable segments: International Services, U.S. Services, Tubular Sales and Blackhawk.

The International Services segment provides tubular services in international offshore markets and in several onshore international regions. Our customers in these international markets are primarily large exploration and production companies, including integrated oil and gas companies and national oil and gas companies, and other oilfield services companies.

The U.S. Services segment provides tubular services in the active onshore oil and gas drilling regions in the U.S., including the Permian Basin, Eagle Ford Shale, Haynesville Shale, Marcellus/Utica Shale, Niobrara Shale, Woodford Shale, Green River Basin and Uintah Basin, as well as in the U.S. Gulf of Mexico.



21

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

The Tubular Sales segment designs, manufactures and distributes large outside diameter (OD) pipe, connectors and casing attachments and sells large OD pipe originally manufactured by various pipe mills. We also provide specialized fabrication and welding services in support of offshore projects, including drilling and production risers, flowlines and pipeline end terminations, as well as long length tubulars (up to 300 feet in length) for use as caissons or pilings. This segment also designs and manufactures proprietary equipment for use in our International and U.S. Services segments.

The Blackhawk segment provides well construction and well intervention services and products, in addition to cementing tool expertise, in the U.S. and Mexican Gulf of Mexico, onshore U.S. and other select international locations. Blackhawk’s customer base consists primarily of major and independent oil and gas companies as well as other oilfield services companies.

Revenues

We disaggregate our revenue from contracts with customers by geography for each of our segments, as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following tables presents our revenues disaggregated by geography based on the location where our services were provided and products sold (in thousands):
 
Three Months Ended September 30, 2018
 
International Services
 
U.S. Services
 
Tubular Sales
 
Blackhawk
 
Consolidated
United States
$

 
$
38,292

 
$
12,835

 
$
19,096

 
$
70,223

International
53,891

 

 
36

 
4,836

 
58,763

Total Revenues
$
53,891

 
$
38,292

 
$
12,871

 
$
23,932

 
$
128,986

 
Three Months Ended September 30, 2017
 
International Services
 
U.S. Services
 
Tubular Sales
 
Blackhawk
 
Consolidated
United States
$

 
$
29,065

 
$
7,209

 
$
17,432

 
$
53,706

International
53,742

 

 
492

 
143

 
54,377

Total Revenues
$
53,742

 
$
29,065

 
$
7,701

 
$
17,575

 
$
108,083

 
Nine Months Ended September 30, 2018
 
International Services
 
U.S. Services
 
Tubular Sales
 
Blackhawk
 
Consolidated
United States
$

 
$
106,035

 
$
41,939

 
$
54,568

 
$
202,542

International
161,985

 

 
213

 
11,900

 
174,098

Total Revenues
$
161,985

 
$
106,035

 
$
42,152

 
$
66,468

 
$
376,640

 
Nine Months Ended September 30, 2017
 
International Services
 
U.S. Services
 
Tubular Sales
 
Blackhawk
 
Consolidated
United States
$

 
$
89,936

 
$
39,543

 
$
51,374

 
$
180,853

International
153,851

 

 
1,244

 
525

 
155,620

Total Revenues
$
153,851

 
$
89,936

 
$
40,787

 
$
51,899

 
$
336,473




22

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

Revenue by geographic area was as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
United States
$
70,223

 
$
53,706

 
$
202,542

 
$
180,853

Europe/Middle East/Africa
31,972

 
37,381

 
96,665

 
102,586

Latin America
11,984

 
6,897

 
32,441

 
25,957

Asia Pacific
7,026

 
5,302

 
20,689

 
14,791

Other countries
7,781

 
4,797

 
24,303

 
12,286

Total Revenues
$
128,986

 
$
108,083

 
$
376,640

 
$
336,473


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.



23

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

The following table presents a reconciliation of Segment Adjusted EBITDA to net income (loss) (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Segment Adjusted EBITDA:
 
 
 
 
 
 
 
International Services
$
7,848

 
$
11,151

 
$
23,894

 
$
25,459

U.S. Services (1)
(846
)
 
(11,322
)
 
(16,526
)
 
(27,775
)
Tubular Sales
286

 
(1,333
)
 
2,644

 
1,736

Blackhawk
4,328

 
3,477

 
10,398

 
7,653

 
11,616

 
1,973

 
20,410

 
7,073

Interest income, net
866

 
1,019

 
2,419

 
2,170

Depreciation and amortization
(26,998
)
 
(30,650
)
 
(84,160
)
 
(92,700
)
Income tax (expense) benefit
7,461

 
(87,613
)
 
1,901

 
(72,419
)
Gain on disposal of assets
2,242

 
829

 
1,790

 
2,091

Foreign currency gain (loss)
(879
)
 
1,839

 
(3,442
)
 
3,184

TRA related adjustments
(1,170
)
 
122,515

 
(5,282
)
 
122,515

Charges and credits (2)
(137
)
 
(7,616
)
 
(8,471
)
 
(22,231
)
Net income (loss)
$
(6,999
)
 
$
2,296

 
$
(74,835
)
 
$
(50,317
)
 
 
(1) 
Includes all corporate general and administrative expenses.
(2) 
Comprised of Equity-based compensation expense (for the three months ended September 30, 2018 and 2017: $3,008 and $2,342, respectively, and for the nine months ended September 30, 2018 and 2017: $8,176 and $11,458, respectively), Mergers and acquisition expense (for the three months ended September 30, 2018 and 2017: none and none, respectively, and for the nine months ended September 30, 2018 and 2017: $58 and $459, respectively), Severance and other (charges) credits, net (for the three months ended September 30, 2018 and 2017: $4,852 and $(1,648), respectively, and for the nine months ended September 30, 2018 and 2017: $2,483 and $(2,386), respectively), Unrealized and realized gains (losses) (for the three months ended September 30, 2018 and 2017: $360 and $(1,123), respectively, and for the nine months ended September 30, 2018 and 2017: $1,521 and $(2,819), respectively) and Investigation-related matters (for the three months ended September 30, 2018 and 2017: $2,341 and $2,503, respectively, and for the nine months ended September 30, 2018 and 2017: $4,241 and $5,109, respectively).



24

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

The following tables set forth certain financial information with respect to our reportable segments (in thousands):
 
International
Services
 
U.S.
Services
 
Tubular Sales
 
Blackhawk
 
Eliminations
 
Total
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
53,891

 
$
38,292

 
$
12,871

 
$
23,932

 
$

 
$
128,986

Inter-segment revenue
(44
)
 
4,694

 
92

 
2,036

 
(6,778
)
 

Operating income (loss)
1,423

 
(14,482
)
 
(493
)
 
(39
)
 

 
(13,591
)
Adjusted EBITDA
7,848

 
(846
)
 
286

 
4,328

 

 
*
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
53,742

 
$
29,065

 
$
7,701

 
$
17,575

 
$

 
$
108,083

Inter-segment revenue
3

 
4,062

 
3,111

 
33

 
(7,209
)
 

Operating loss
(2,647
)
 
(25,453
)
 
(3,967
)
 
(3,013
)
 

 
(35,080
)
Adjusted EBITDA
11,151

 
(11,322
)
 
(1,333
)
 
3,477

 

 
*
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
161,985

 
$
106,035

 
$
42,152

 
$
66,468

 
$

 
$
376,640

Inter-segment revenue
(123
)
 
13,549

 
285

 
2,590

 
(16,301
)
 

Operating loss
(12,350
)
 
(56,382
)
 
(57
)
 
(3,491
)
 

 
(72,280
)
Adjusted EBITDA
23,894

 
(16,526
)
 
2,644

 
10,398

 

 
*
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
153,851

 
$
89,936

 
$
40,787

 
$
51,899

 
$

 
$
336,473

Inter-segment revenue
18

 
12,890

 
10,350