S-1 1 d552789ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on June 1, 2018.

Registration No. 333- 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

Registration Statement

Under

The Securities Act of 1933

 

 

AFG Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3533   80-0872623

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

945 Bunker Hill Road, Suite 500

Houston, Texas 77024

(713) 393-4200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Curtis Samford

President and Chief Executive Officer

945 Bunker Hill Road, Suite 500

Houston, Texas 77024

(713) 393-4200

(Name, address, including zip code, and telephone number, including area code, of agent for services)

 

 

Copies to:

Matthew R. Pacey

Michael W. Rigdon

Kirkland & Ellis LLP

609 Main Street

Houston, Texas 77002

(713) 836-3600

 

Ryan J. Maierson

Latham & Watkins LLP

811 Main Street

Houston, TX 77002

(713) 546-5400

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  
    (Do not check if a 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 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  

Proposed maximum

aggregate offering price(1)(2)

   Amount of
registration fee

Common Stock, par value $0.01 per share

   $100,000,000    $12,450

 

 

(1) Includes shares of common stock that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JUNE 1, 2018

PROSPECTUS

Shares

 

LOGO

AFG Holdings, Inc.

Common Stock

 

 

This is our initial public offering. We are offering                 shares of our common stock and the selling stockholders are selling                 shares of common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price will be between $         and $         per share. We have applied to list our common stock on the New York Stock Exchange (the “NYSE”) under the symbol “AFGL.” We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and will be subject to reduced public company reporting requirements.

See “Risk Factors” beginning on page 22 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                 $             

Underwriting discounts and commissions(1)

   $    $

Proceeds, before expenses, to AFG Holdings, Inc.

   $    $

Proceeds, before expenses, to the selling stockholders

   $    $

 

(1) Please read “Underwriting” for a description of all underwriting compensation payable in connection with this offering.

The underwriters have the option to purchase up to an additional                 shares from the selling stockholders at the initial public offering price, less the underwriting discounts.

 

 

Delivery of the shares of common stock is expected to be made on or about                     , 2018 through the book-entry facilities of The Depository Trust Company.

Joint Book-Running Managers

 

Goldman Sachs & Co. LLC   Credit Suisse  

Simmons & Company International

Energy Specialists of Piper Jaffray

Barclays   Citigroup   Evercore ISI   Wells Fargo Securities

Co-Managers

 

Jefferies   Raymond James    Tudor, Pickering, Holt & Co.

 

 

Prospectus dated                      , 2018.


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You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us or on behalf of us or to which we have referred you. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

 

 

TABLE OF CONTENTS

 

SUMMARY

     1  

THE OFFERING

     15  

SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

     17  

RISK FACTORS

     22  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     44  

USE OF PROCEEDS

     46  

DIVIDEND POLICY

     47  

CAPITALIZATION

     48  

DILUTION

     49  

SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

     51  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     53  

INDUSTRY

     83  

BUSINESS

     91  

MANAGEMENT

     107  

EXECUTIVE COMPENSATION

     111  

PRINCIPAL AND SELLING STOCKHOLDERS

     118  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     121  

DESCRIPTION OF CAPITAL STOCK

     123  

SHARES ELIGIBLE FOR FUTURE SALE

     127  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     130  

CERTAIN CONSIDERATIONS APPLICABLE TO U.S. RETIREMENT PLANS AND ARRANGEMENTS

     134  

UNDERWRITING

     137  

LEGAL MATTERS

     143  

EXPERTS

     143  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     144  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

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TRADEMARKS, SERVICE MARKS AND TRADE NAMES

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and does not imply, a relationship with, or endorsement or sponsorship by us or third parties. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.

INDUSTRY AND MARKET DATA

The data included in this prospectus regarding the industry in which we operate, including descriptions of trends in the market and our position and the position of our competitors within our industries, is based on a variety of sources, including independent publications, government publications, information obtained from customers, distributors, suppliers, trade and business organizations and publicly available information, as well as our good faith estimates, which have been derived from our management’s knowledge and experience in the industry in which we operate. The industry data is sourced from Spears & Associates, Baker Hughes, a GE company (“Baker Hughes”), the American Chemistry Counsel, International Air Transport Association (“IATA”), and the U.S. Energy Information Administration and the International Energy Agency. We believe that these third-party sources are reliable and that the third-party information included in this prospectus and in our estimates is materially accurate and complete.

BASIS OF PRESENTATION

Our historical financial and operating information as of December 31, 2017 (Successor) and for the period from June 9, 2017 to December 31, 2017 (Successor) may not be comparable to the historical financial and operating information for the period from January 1, 2017 to June 8, 2017 (Predecessor) and as of and for the year ended December 31, 2016. We emerged from bankruptcy on June 8, 2017, and as a result, our financial statements after June 8, 2017 reflect the application of fresh start accounting. References to “Successor” in this prospectus relate to our financial position and results of operations subsequent to June 8, 2017, the date of our emergence from bankruptcy, and references to “Predecessor” in this prospectus relate to our financial position and results of operations prior to, and including, June 8, 2017.

 

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SUMMARY

This summary provides a brief overview of information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the financial statements and the notes to those financial statements included in this prospectus. Unless indicated otherwise, the information presented in this prospectus assumes an initial public offering price of $         per share (the midpoint of the price range on the cover page of this prospectus) and that the underwriters do not exercise their option to purchase additional shares. You should read “Risk Factors” for more information about important risks that you should consider carefully before buying our common stock.

Unless the context otherwise requires, references in this prospectus to “AFG Holdings,” the “Company,” “our company,” “we,” “our” and “us,” or like terms, refer to AFG Holdings, Inc. and its subsidiaries.

Our Company

We are a leading original equipment manufacturer (“OEM”) that designs and manufactures highly-engineered, mission critical equipment and provides complementary consumable products, parts and aftermarket services. We serve a diverse range of customers in the global oil and gas and general industrial end markets. We have a proven track record in new technology development and product commercialization, as well as decades of experience working with our customers to manufacture state-of-the-art, specialized equipment that meets their stringent requirements. Our fully-integrated business model allows us to optimize our supply chain, deliver high quality products and control our cost structure, resulting in high margins and a compelling cash flow profile. We have minimal debt and significant liquidity, which will enable us to continue pursuing strategic organic growth initiatives and acquisitions of synergistic businesses. We believe we are well-positioned to capture additional market share through these initiatives and acquisitions, while taking advantage of improving secular trends and fundamentals in our end markets.

We were founded in 1996 in Houston, Texas, and by 2014 we had grown both organically and through a targeted acquisition strategy to operate as both an OEM and as a supplier for customers across a variety of industries. In 2015, we began a business transformation in response to the oil and gas industry’s downturn by adopting a new strategy that involved consolidating our broad portfolio to focus on high-return business segments, OEM products, and our fully-integrated business model. We also consolidated our facilities from more than 25 in 2014 to 15 currently without sacrificing our core profitable products and services, which resulted in more than $90 million of annual cost savings. Despite these efforts, due to our significant outstanding indebtedness made unsustainable by the market downturn that began in 2014 and persisted into 2016, we sought relief under Chapter 11 of the Bankruptcy Code in April of 2017 which substantially improved our liquidity profile upon emergence in June of 2017. Please see “—Recent Developments—Restructuring and Financial Deleveraging.” We believe we have established market-leading positions in the manufacturing of pressure pumping equipment for the onshore oil and gas market and high-technology offshore oil and gas equipment. We believe our managed pressure drilling (“MPD”) systems and new DuraStim frac pump are cutting-edge technologies and are capable of disrupting the markets in which we operate.

Our Technology and Research & Development Capabilities

We deploy innovative technology and have several decades of experience developing tailored products and services for our customers. This experience has helped position us as the provider of



 

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choice for mission critical onshore and offshore oil and gas equipment. We have over 40 dedicated research and engineering professionals who use their experience to develop globally appealing, innovative technologies. We believe the technology we developed in the last five years will account for approximately 75% of our revenues and profits in 2018. There are several aspects of our technology solutions that differentiate us from our competitors:

 

    Leading pressure pumping equipment offering.    We believe we offer the most technologically advanced pressure pumping equipment currently available. Our controls and data management systems enable our customers to improve ultimate recovery from oil and gas reservoirs and make more informed, real-time decisions. Additionally, we believe that our proprietary blender technology offers our customers best-in-class efficiency and reliability.

 

    Proprietary, disruptive pressure pumping technology.    We are developing innovative new technology to provide the hydraulic fracturing industry with eco-friendly, efficient, low-cost frac equipment. We have recently developed the patented DuraStim™, a 6,000 hydraulic horsepower (“HHP”) frac pump that we expect to commercially offer to our customers in the second half of 2018. DuraStim™ provides more than twice the horsepower with roughly the same footprint and weight as a conventional system. Additionally, we believe our design is more environmentally friendly, more robust and will reduce non-productive time for our customers. We believe it provides an opportunity to capture a large portion of the pressure pumping equipment market and expand our market share.

 

    Broad portfolio of patent-protected products servicing the offshore oil and gas industry.    We believe our MPD systems are at the forefront of the next generation of drilling technology. These state-of-the-art systems offer significant safety and efficiency benefits for customers through precise control of the wellbore and well pressure. Improved control allows drillers to reduce nonproductive time and decrease the likelihood of disruptive events.

 

    Extensive portfolio of intellectual property.    We have a portfolio of approximately 386 active patents related to equipment, assets and techniques that support or protect our products and technologies. For example, we hold patents related to subsea equipment including Retlock® Technology and VirtusTM connection systems, the basis for our core subsea connector technology.

Our Segments and Products

We design and manufacture equipment and products (and report our operations relating to these equipment and products) through three segments: Onshore Oil & Gas OEM, Offshore Oil & Gas OEM and Connectors & Precision Manufacturing. Each segment also provides supporting aftermarket services for our own products and competing OEM products. Our lines of business within these segments are detailed below.

 

   

Onshore Oil & Gas OEM.    We design, engineer and manufacture equipment and products, and provide aftermarket parts and services, primarily for pressure pumping and gas compression operations. Our pressure pumping equipment is used in the hydraulic fracturing and cementing of oil and gas wells. We manufacture what we believe to be one of the industry’s most complete suites of equipment for pressure pumping operations, including pump units, blenders, hydration units and proprietary end-to-end automation, controls and data management, and we are in the process of commercializing our fluid end and power end product lines. We believe we are also the only pressure pumping equipment manufacturer that builds its own U.S. Department of Transportation compliant fuel tanks, trailer frames, fluid



 

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tanks, platforms, racks and other structures used with its equipment. We also manufacture gas compression packages used in artificial lift applications.

 

    Offshore Oil & Gas OEM.    We design, engineer and manufacture equipment and products, and provide aftermarket parts and services, for drilling, production and intervention operations primarily in the offshore, deepwater and subsea markets. Our products include market-leading, patent-protected MPD systems for both retrofits and new-build rigs, drilling risers, riser gas management, early kick/loss detection, dual gradient drilling, continuous circulation, buoyancy and subsea connectors. We hold 351 patents related to this segment. Our MPD systems are state-of-the-art in that they enable active control of downhole drilling pressure, resulting in safety and drilling efficiency for offshore drillships, semi-submersible rigs and jackup rigs. In addition, we offer a corollary product, rotating control devices (“RCDs”), in the onshore space with a similar value proposition as in offshore markets. We also provide software, controls, analytics and testing. In particular, our proprietary testing and simulation equipment and software includes the unique capability to test MPD scenarios and equipment beyond standard industry requirements and simulate drilling conditions.

 

    Connectors & Precision Manufacturing.    We design, engineer and manufacture connectors, forgings, forged products and rolled rings for the global oil and gas industry, including midstream, refining, LNG and petrochemical, as well as general industrial, power generation, transportation and aerospace markets, and provide private label manufacturing services for other OEMs. Our proprietary connector design utilizes metal-to-metal seal ring technology providing superior leak-free reliability compared to traditional gaskets. In addition to our connector and sealing products, we also provide engineering, forging and private label precision manufacturing services that meet stringent industrial specifications and processes. Our forging capabilities include open and closed die forgings, ranging in tonnage from approximately 650 to 6,500 tons.


 

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Onshore Oil & Gas OEM

 

Offshore Oil & Gas OEM

 

Connectors &
Precision Manufacturing

Key

Segment

End Markets

 

•  Pressure Pumping

•  Onshore E&P

•  Artificial Lift

•  Compression

 

•  Offshore Drilling

•  Offshore E&P

•  Oilfield Equipment Manufacturers

 

•  Oil and Gas

•  Midstream

•  U.S. Refining

•  LNG

•  Petrochemical

•  Power Generation

•  Transportation

•  Aerospace

Products/

Services

 

Equipment

 

•  DuraStim™ 6,000 HHP Frac Pumps

•  2,250 and 2,500 HHP Frac Pumps

•  Fluid ends*

•  Power ends

•  140 BPM Blenders

•  200 and 250 BBL Hydration Units

•  44 ft. Data Vans

•  16 Port Manifold Trailers

•  1,400 HP Twin Cementers

•  Automation and Control Systems

•  200 and 400 HP Compressor Packages for Artificial Lift

•  3 Stage Compressor Packages

 

Services

 

•  Aftermarket Service and Repairs

 

Drilling Equipment

 

•  MPD Systems

•  Active Control Devices/ Rotating Control Devices

•  Riser Gas Handling Systems

•  Risers

•  Choke Systems

•  Dual Gradient Drilling Systems

•  Diverter Manifolds

•  Continuous Circulation Systems

•  Elastomer Products

•  Control Systems

 

Subsea Equipment

 

•  Flowline Connection Systems

•  Retlock® Clamp Connectors

•  Virtus Connection Systems

 

Services

 

•  Asset Management

•  Buoyancy

•  Aftermarket Service and Repairs

 

•  Taper-Lok® Pressure-Energized Connectors

•  Coffer-Lok Specialty Flanges

•  Commodity Forgings

•  Forged Products

•  Private Label Manufacturing Services

•  Fuel Nozzle Assemblies

•  Oil and Gas Chassis

•  Gas Turbine Combustion Covers

 

* Under commercialization.

Our business is diversified across our three segments and has a strong backlog of contracted work as reflected in the following charts:

 

    Revenue Composition for 2017    

 

Backlog (in millions)

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We focus on organic development of innovative, differentiated technologies in our core markets, facilitating our current market-leading OEM positions in pressure pumping equipment and MPD systems. We also completed four complementary acquisitions during 2016 and 2017 that enhanced our portfolio of products. We plan to continue selectively acquiring businesses that enhance our research and development capabilities and product offerings, while also undertaking high-return organic growth initiatives to further entrench our products and services with our customer base and position us for continued long-term growth.

For the year ended December 31, 2017, we generated pro forma net income of approximately $72.3 million, Adjusted EBITDA of approximately $46.2 million (consisting of $9.4 million for the period from January 1, 2017 to June 8, 2017 and $36.8 million for the period from June 9, 2017 to December 31, 2017) and Adjusted EBITDA margin of approximately 10.5%. For the three months ended March 31, 2018, we generated net income of approximately $7.5 million, Adjusted EBITDA of approximately $26.1 million and Adjusted EBITDA margin of approximately 15.3%. As of March 31, 2018, our backlog of contracted work was approximately $482 million. For definitions of Adjusted EBITDA and Adjusted EBITDA margin, each of which are non-GAAP financial measures, and reconciliations to their most directly comparable GAAP measure, please read “Summary Historical and Unaudited Pro Forma Financial Data—Non-GAAP Financial Measures.”

Our Competitive Strengths

We believe the following strengths differentiate us from our peers and will position us to achieve our primary business objective of creating value for our stockholders:

 

    Market-Leading, Fully-Integrated OEM of Highly-Engineered, Mission Critical Equipment.    We are a fully-integrated manufacturing company focused on being a market-leading OEM in the global oil and gas and general industrial markets we serve. The vertical integration of our business model enables us to control our manufacturing costs, product quality, safety controls and ability to provide on-time delivery of critical equipment, products and services to our customers. By participating throughout the manufacturing process, we are ideally positioned to control costs and innovate new OEM technologies by leveraging our expertise in metallurgy, engineering, forging and sealing to enhance product integrity, safety and efficiency for our customers.

 

    Market Leadership in Pressure Pumping Equipment Market.    We are a market leader in pressure pumping equipment in North America. According to Spears & Associates, industry-wide net pressure pumping capacity decreased by 1 million HHP during the past two years. However, over this same period we sold more than 210 newly manufactured pressure pumping units, representing more than 525,000 HHP collective capacity and an increase in our units and capacity sold versus prior years. With increasing completion intensity driving down the average useful lives of equipment, we believe our market-leading position will allow us to benefit from increasing OEM sales and aftermarket needs as pressure pumping equipment is refurbished or replaced at an increased cadence. We also believe we are well-positioned to capture additional favorable trends, including accumulated demand for new equipment and parts due to deferred maintenance during the downturn and a significant wave of replacement demand from pressure pumping equipment installed over five years ago. Additionally, our customers often install our hydraulic fracturing control systems and software on competitors’ equipment. This provides us with broader market penetration and the opportunity to gain share in aftermarket customer spending that will potentially drive future OEM sales as older equipment is replaced.


 

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    Leading Provider of Managed Pressure Drilling Systems.    We are a market leading OEM for high-technology MPD systems, and we believe we have the most complete suite of deepwater MPD products currently available to the market. MPD is an adaptive drilling process that is used to precisely control the annular pressure profile throughout the wellbore. By using MPD systems, drilling contractors can drill to total depth effectively and accurately, avoiding hazards that decrease drilling efficiency and increase costs to the operator. Our MPD systems have the technology necessary to become the standard for the next generation of drilling equipment. We expect our MPD business to continue benefitting from service providers retrofitting current fleets due to safety and efficiency benefits. As offshore activity increases, we believe that demand for our MPD packages will increase as our MPD upgrades enable offshore drilling rigs to drill faster and more safely. Exploration and production (“E&P”) operators increasingly require drillers to include MPD equipment in their drilling packages, reinforcing our belief that the industry will continue to adopt this technology. In addition, our MPD technology is utilized onshore in RCDs with a similar value proposition as in offshore markets.

 

    Strength of Our Diverse and Blue Chip Customer Base.    Our customers include some of the largest companies operating in the oil and gas industry, including oilfield services companies (e.g., Keane, ProPetro, ProFrac), offshore drilling contractors (e.g., Ensco, Noble Corporation, Transocean), other equipment manufacturers (e.g., Baker Hughes/GE, National Oilwell Varco, Schlumberger), international oil companies (“IOCs”) (e.g., BP, Chevron, Conoco Phillips, Marathon), national oil companies (“NOCs”) (e.g., Aramco, CNOOC, Petrobras, Statoil), engineering, procurement and construction (“EPC”) companies (e.g., SBM, Subsea 7, TechnipFMC, WorleyParsons) and general industrial customers (e.g., Dodson Global and General Electric). Given the scale and breadth of most of our customers’ operations, we believe they generally seek to partner with suppliers like us because we can serve them on a global basis.

 

    Global Manufacturing Footprint with Strong Safety Record.    We have a global manufacturing presence that includes 11 manufacturing facilities and three service facilities in seven countries across four continents. Additionally, our safety record is among the best across any industry and significantly better than most of our manufacturing peers. In 2017, our total recordable incident rate (“TRIR”) was 0.63 and our days away, restricted or transferred (“DART”) was 0.35, comparing favorably to most recently available industrial equipment manufacturing benchmarks of 6.2 and 3.9, respectively, published by the U.S. Bureau of Labor and Statistics. We believe that our global manufacturing footprint and reputation for quality and safety help us win new business and prevent lower-quality manufacturers from effectively competing with us.

 

   

Proven Track Record of Expanding and Enhancing OEM Product Offering Through Focused Acquisition Strategy.    We have consistently grown our business by combining a disciplined acquisition strategy with organic growth. We have recently focused on acquisitions of companies to complement our value-added OEM products and enable technologies that can leverage our fully-integrated manufacturing business model, global footprint, and diverse customer base. As a result of our investments, we believe that we have a greater overall earnings capacity relative to 2014 when adjusting for industry activity levels. We made four acquisitions during 2016 and 2017 that have each made important contributions to our current market position and growth strategies in key product areas. For example, we acquired Advanced Measurements Inc. (“AMI”), a key provider of automation, controls and data management systems. This acquisition served as an important vehicle to further develop more advanced control and data management offerings, enhancing our ability to help customers achieve stronger production gains and make better real-time decisions. We are focused on fully



 

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expanding our controls and data management portfolio in pressure pumping controls into new markets, such as MPD and gas compression.

 

    Highly Attractive Financial Profile.    We participate in the global oil and gas and general industrial markets with attractive growth trends, and our business generates strong Adjusted EBITDA margins. Our financial profile and cash flow generation are further enhanced by our low capital requirements, as demonstrated by our capital expenditures averaging approximately 3% of revenues over the last two years. Our margin profile and low capital requirements result in strong and stable cash flows that we believe will enable us to deploy our capital to fund strategic initiatives to drive innovation and organic growth opportunities and finance value-enhancing acquisitions. We believe that our financial profile, which has been enhanced by our business transformation that reduced our number of facilities by half and our headcount by approximately 60%, reflects a strong and attractive business with potential for significant earnings growth over time. As a result of significant outstanding indebtedness, we sought bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and significantly reduced our outstanding debt and bolstered our liquidity profile upon emergence in 2017. Please see “—Recent Developments—Restructuring and Financial Deleveraging” below. Our liquidity profile and cash flow safely support our capital expenditure budget of approximately $14.4 million for 2018.

 

    Experienced Management and Operating Team with Strong Industry Relationships and Track Record of Success.    Since our chief executive officer assumed such role in 2015, our management team has been critical in pursuing key opportunities and effectively managing challenges facing our business. Our management team has successfully implemented a business transformation strategy to navigate the significant downturn in the oil and gas industry, position the company for continued long-term growth, and continue to drive earnings growth in the ongoing market recovery. Our current management team, comprised of individuals with extensive operational, financial and managerial experience, has demonstrated a track record of success via organic growth, acquisitions and cost reduction. Our senior management team has an average of over 30 years of experience and has strong customer relationships across all of the industries we serve.

Our Growth Strategies

We intend to achieve our primary business objective of creating value for our stockholders by successfully executing the following strategies:

 

    Capitalize on Demand for Pressure Pumping Equipment.    Pressure pumping services demand is rebounding with increased oil and gas drilling and completion activity. We expect continued strong demand for pressure pumping equipment as a result of the need to replace aging equipment that has not been well-maintained during the downturn. According to Spears & Associates, a large and growing percentage of the 22 million of North American frac HHP as of 2017 is over five years old. Additionally, changing completion designs are causing meaningful compression of useful lives, as well as resulting in extensive annual repair and maintenance needs. We anticipate this older equipment will require significant overhaul or replacement to serve today’s demanding operational environment. We believe these trends have led, and will continue to lead, to increased purchasing of pressure pumping equipment. With this observed elevated demand for our pressure pumping equipment, we are investing in expanding manufacturing and aftermarket service capacity and view this as a significant opportunity for growth. Our sales backlog for our pressure pumping-related equipment and products stood at approximately $414 million as of March 31, 2018.


 

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    Commercially Deploy Innovative and Disruptive Technologies.    We are focused on high value technologies that could contribute to our high margin OEM portfolio of products, including our patented DuraStim™ frac pumps. We expect to allow customers to begin to place orders for DuraStim™ later this year for delivery in 2019. We believe DuraStim™ will disrupt the frac pump market by providing more than double the horsepower of a conventional hydraulic frac pump. DuraStim™ is much more cost efficient to maintain and is considerably quieter than a conventional frac pump. We believe our pressure pumping equipment market share will increase with the introduction of DuraStim™. Additionally, in 2017 we launched a new RCD for use in onshore drilling. We will continue to work closely with our customer base to innovate and manufacture novel products to match the demand of our customers’ evolving needs.

 

    Continue to Target High Return Low-Capital Intensity Investments to Support our Global, Fully-Integrated Supply Chain.    We are continually focused on improving the capabilities of our global, fully-integrated platform and strive to achieve high levels of performance for our product lines and supporting aftermarket services. Our investments are typically not capital-intensive relative to other participants in the oil and gas industry and still produce high returns. For example, we are currently investing in upgrading existing forging equipment to meet increased sales volumes and the increased demands of our customers. These upgrades will increase capacity and productivity of our equipment, as well as expand the capabilities of the equipment manufactured at this facility. We believe these investments will provide significant cost savings, and ultimately enhance Adjusted EBITDA performance in 2018 and beyond.

 

    Expand Aftermarket Service Infrastructure to Drive Highly Profitable Recurring Revenues.    We aim to provide our customers with products that maximize uptime and have placed service facilities close to our customers’ field locations to improve customer response time. In addition to servicing our products and equipment, we also service our competitors’ products and equipment which ultimately increases our customer base and provides us with broader market penetration and additional opportunities to gain market share through cross-selling. We currently have three service facilities. We are in the process of expanding our maintenance and service facility footprint within West Texas and adding locations in New Mexico and Pennsylvania later this year to support major pressure pumping customers and to meet growing demand for outsourced repairs and maintenance.

 

    Continue Product and Technology Acquisition Strategy to Complement Organic Growth.    We have a track record of completing successful acquisitions to augment and expand our current offerings. We believe our ability to leverage our fully-integrated business model, global footprint and blue chip customer base helps us realize significant synergies in acquisitions and generate attractive returns on investments. We have consistently employed a disciplined approach to acquisitions focused on opportunities that (i) strengthen our existing portfolio, (ii) allow us to establish new platforms in attractive markets, and (iii) enhance our aftermarket offerings.

 

    Leverage Increased Manufacturing Capacity to Provide Additional Offerings in the Connectors & Precision Manufacturing Segment.    We believe our commercial networks and global operating footprint allow us to provide additional offerings in global oil and gas and general industrial markets as well as access new geographic markets. For example, we intend to expand our product lines to include high-spec, severe service bolts for the offshore oil and gas market. This opportunity will allow us to leverage our existing asset base and operating model to access an attractive, high margin market.

 

   

Continue to Maintain Financial Discipline.    We intend to maintain a conservative balance sheet, with a focus on cash flow generation, which will allow us to react to potential changes in



 

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industry and market conditions and opportunistically grow our business through acquisitions or capital expenditures for organic growth projects. We approach our capital allocation with discipline, and make organic or inorganic investment decisions to meet anticipated return thresholds in excess of our cost of capital. We intend to manage our liquidity by continuously monitoring cash flow, capital spending and debt capacity. Our focus on maintaining our financial stability, coupled with the low capital intensity of our operations, allows us the flexibility to execute our strategy throughout commodity price cycles and industry volatility. We currently intend to maintain significantly lower debt levels than in previous years to maintain a strong and stable financial profile. As of December 31, 2017 we had a net positive cash position, and after giving effect to this offering, we will have $         million of liquidity in the form of cash on hand and undrawn borrowing capacity under our asset-based revolving credit facility (the “ABL Facility”).

Industry

The demand for our products and services is primarily driven by drilling, production and completion activity by E&P companies, which depends on the current and anticipated profitability of developing oil and gas reserves. We believe that the recent recovery in commodity price levels will result in increased demand for our products and services, both in the onshore and offshore oil and gas sectors. Our business also serves general industrial markets where we believe we have benefited from the global economic recovery over the past several years.

Onshore Oil and Gas

The North American onshore oil and gas market has experienced a recovery, driven in part by the recent improvement in oil prices. However, the majority of the increase in North American onshore oil and gas activity levels will be driven by other factors described below that we believe will support North America’s outpaced growth in the broader global oil and gas industry.

 

    Growth in North American Land Rig and Well Counts.    Demand for our services is influenced by the number of drilling rigs our potential customers operate and the number of wells that our potential customers drill. Oil and gas wells in North American unconventional resource plays typically experience rapid declines in productivity over time. As a result, new wells are required to be drilled and completed in order to replace declining production. We believe that as sustained production from wells drilled over the last several years continues to decline, the number of horizontal drilling rigs and the North American well count will increase, as well as the prevalence of pad drilling. According to Spears & Associates, the total North American land drilling rig count is expected to average 1,248 rigs during 2018, and 33,801 wells are expected to be drilled during the year. These figures represent increases of 18% and 16% from the North American land drilling rig count and North American land well count over 2017 levels, respectively. Horizontal wells in particular typically enable more wellbore contact within the targeted geological zone, resulting in more productive wells, and more productive wells can potentially result in more business for our business segments. According to Spears & Associates, horizontal wells, as a percentage of total wells drilled in the U.S., has increased each year since 2011, such that in 2017, 67% of total wells drilled in the U.S. were horizontal wells. Horizontal wells typically require more intensive completion than vertical wells due to their longer reach to total depth and complexity. We believe this growth trend is favorable for our Onshore Oil & Gas OEM segment and associated aftermarket parts business, as an average single active rig is now expected to generate more demand for hydraulic fracturing due to the increase in service intensity.


 

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    Growth in North American Onshore Drilling and Completions Spending.    We believe that North American unconventional shale resources will continue to capture a growing share of global capital spending on oil and gas resource development as a result of the shale resources’ competitive positioning on the global cost curve. Spears & Associates estimates that capital spending for drilling and completions in the North American onshore market will reach approximately $124 billion in 2018, and will increase approximately 43% over the next four years to $177 billion.

 

    Increasing Number of Drilled but Uncompleted Wells.    As a result of a shortage of available hydraulic frac crews, long lead-times on new frac equipment and constrained E&P capital budgets, there is a large inventory of wells in the North American land market that E&P operators previously drilled but did not complete in an effort to defer capital spending. The U.S. Energy Information Administration (“EIA”) estimates that there are 7,677 drilled but uncompleted wells (“DUCs”) in the U.S. as of April 2018. These DUCs represent a backlog of uncompleted wells that we expect will provide additional demand for completion services and equipment.

 

    Increasing Lateral Lengths, Hydraulic Fracturing Intensity and Volume of Proppant Used.    As E&P companies have gained more experience operating in unconventional resource plays and a better understanding of reservoir characteristics, they have applied new drilling and completion equipment and technology in order to maximize the recovery of hydrocarbons and reduce the costs associated with each well. Recently, the industry has favored increasing lateral lengths, a higher number of hydraulic fracturing stages and substantially increased amounts of proppant pumped into each well, as operators focus on lowering costs associated with wells drilled. Each of these trends increases the amount of required HHP at well sites. Spears & Associates estimates that the increase in average lateral length, number of hydraulic fracturing stages per 1,000 lateral feet and pounds of proppant pumped per lateral foot in the North American land market to be 26%, 46% and 79%, respectively from 2014 to 2018.

 

    Growth in Hydraulic Fracturing Demand.    Demand for HHP in the North American market is increasing substantially as a result of all of the factors described above. Spears & Associates estimates that demand for HHP will average 14.3 million HHP in 2018, which is an increase of approximately 185% relative to the recent trough demand level in 2016. Additionally, demand for new HHP favors new generation technology and fit-for-purpose hydraulic fracturing pumps that can both maximize operators’ run time and withstand the rigors of challenging operating environments throughout the North American land market.

 

   

Aging Frac Equipment and Ensuing Replacement Cycle.    As the prevalence of horizontal drilling and hydraulic fracturing in unconventional resource plays grew between 2010 and 2015, new equipment and services with the capability of approximately 15 million HHP entered the North American market, resulting in an oversupply of HHP relative to demand. As a result of the oversupply of HHP, pricing for hydraulic fracturing services declined significantly. This led many hydraulic fracturing service providers to defer critical maintenance spending and allow equipment conditions to deteriorate. Equipment conditions have deteriorated so much that large portions of the North American hydraulic fracturing fleets are becoming obsolete. Spears & Associates estimates that as of October 2017 approximately 29% of all North American HHP was older than five years. Additionally, the useful life for the average frac pump unit has declined from approximately seven to ten years in 2010 to three to five years in the current operating environment as a result of increased completion intensity, a shift towards twenty-four hour frac operations, and equipment quality degradation driven by the idling of assets during periods of low activity levels such as the recent industry downturn. As older equipment becomes obsolete, the market demands leading edge frac equipment of the type we



 

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design and manufacture. Thus, we believe that as the North American pressure pumping fleet requires replacement over the next several years, demand for our equipment, technology and designs will increase.

Offshore Oil and Gas

The global offshore oil and gas market is beginning to see signs of recovery. The costs of exploring for and producing oil and gas are declining as a result of technological advances and recent efficiency improvements, resulting in increased offshore oil and gas capital expenditures.

We believe the following offshore oil and gas trends will positively affect our business over the coming years.

 

    Growth in Global Offshore Rig and Well Count.    The global offshore rig and well count has begun to stabilize, and Spears & Associates estimates that the offshore rig count will grow 5% annually through 2022, and the offshore well count will grow 4% annually through 2022.

 

    Growth in Global Offshore Drilling and Completions Spending.    Capital spending for offshore drilling and completions is expected to grow 6% annually to $68 billion by 2022. A sustained recovery in global oil and gas prices could accelerate offshore spending.

 

    Improvements in Global Offshore Operating Efficiency and Utilization.     As offshore activity and rig utilization begin to increase, we believe that operators will be motivated to install MPD packages and other advanced drilling systems that offer significant improvements in operating efficiency and safety. We are well-positioned to benefit from improving offshore drilling activity and rig dayrates through the deployment of our MPD advanced drilling systems which have significant efficiency and safety benefits for customers. We are also targeting the retrofit markets for drillships, floaters and jackups.

Connectors & Precision Manufacturing

The strength of the overall economy, general economic expansion, the lowest unemployment rate in 10 years, projected GDP growth of 2.7% for 2018, and the general recovery of onshore and offshore oil and gas activity, bode well for our Connectors & Precision Manufacturing segment as economic expansion leads to growth in many sectors of the energy and industrial value chains where our manufactured parts are sold. Plant turnarounds and maintenance activities, which may be supported by continued economic expansion can provide a source of recurring revenue for connectors. Continued spending on domestic pipeline infrastructure should provide consistent demand for these products going forward.

We also serve a variety of end markets including the general industrial, midstream, refining, LNG, petrochemical, power generation, transportation and aerospace sectors. We provide private label manufacturing services to customers in many of these sectors. Over the past several years these markets have benefited from the global economic recovery. Participating in the general industrial markets serves to diversify our customer and geographic concentration of revenues and reduce volatility of our earnings.

We believe the following trends will continue to positively drive our business over the coming years.

 

   

Onshore and Offshore Oil & Gas Industry Capital Expenditures.    Through the manufacture of connectors, riser strings and other equipment used in drilling and completion



 

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applications, and our new fluid end product line, our Connectors & Precision Manufacturing segment is well-positioned to capitalize on an upstream recovery, particularly in North American pressure pumping and in the global offshore drilling market. We believe we are exposed to some of the highest growth market drivers in the context of the onshore and offshore oil and gas industry. Secular trends are driving increased demand for and replacement of manufactured equipment. The quickly growing demand for fracturing HHP, increased service intensity, and other factors, are causing an accelerated wear and tear on frac pumps and associated aftermarket parts, consumables and related services. Spears & Associates estimates that capital spending for drilling and completions in the North American onshore market will reach approximately $124 billion in 2018, increasing at a compound annual growth rate (“CAGR”) of approximately 9% per year until 2022. In addition, Spears & Associates estimates global offshore drilling and completions spending will increase at a CAGR of approximately 6% per year until 2022.

 

    Midstream Capital Spending Continues to be Robust.    As domestic onshore production continues to meet growing global demand, multiple basins in the U.S. are expected to have a shortfall of midstream takeaway capacity in the next three to five years. Large investments in midstream and downstream energy end-markets are expected to drive sales of our equipment and future sales in aftermarket parts and services as facilities age. Our Connectors & Precision Manufacturing segment is well-positioned to benefit from both ongoing maintenance spending as well as growth spending in the midstream and downstream sectors.

 

    U.S. Refining Capital Expenditures Expected To Increase.    Over the last several years, low priced crude oil and strong demand for refined products have incentivized refiners to increase maintenance capital expenditures and delay full turnarounds in order to maximize facility production uptime. However, recent lower-than-typical crack spreads are expected to lead refiners to increase capital expenditures in 2018 as maintenance and turnaround projects that had been deferred over the last several years are planned. We believe that the connectors business will benefit from increased industry spending on refinery turnaround projects that were delayed over the last several years.

 

    LNG Export Capacity is Projected to Grow Significantly.    Prolific gas production in the Appalachian Basin and growing associated gas production in the Permian Basin and Mid-Continent has served as a governor on natural gas prices. Lower domestic gas prices relative to global gas prices has led to a growing number of approved and proposed LNG export facilities. This abundance of gas has led to the establishment of multiple LNG export facilities.

 

    Shale Gas-Oriented Petrochemical Expansion.    Consistently low gas prices are expected to contribute to a continued build out of petrochemical processing facilities, with a significant percentage of these plants expected to be located along the Gulf Coast. At the end of 2017, the American Chemistry Council determined there were an estimated 317 petrochemical projects completed, currently under construction or planned, representing an aggregate $185 billion in capital investment. The American Chemistry Council forecasts the annual U.S. capital spending by the chemical industry to reach $48 billion by 2022, more than double the level of spending in 2010.

 

    Power Generation Growth.    The EIA expects aggregate global energy use to grow 28% by 2040, driven in large part by demand for natural gas for electricity generation. In addition, developed countries are supporting policies for reduced emissions and are increasing capital spending on the modernization of their power generation facilities. These improvements in new facilities are driven by low prices and abundant production of natural gas.


 

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    The Transportation and Aerospace Industries are Benefitting from Favorable Industry Trends.    Global economic growth has resulted in increasing demand for commercial air travel, air freight services, heavy-truck and off-highway industries. The IATA estimates that global commercial airline passenger traffic has grown approximately 6.6% annually over the last five years. Demand for expedited delivery of goods and lean retail inventory levels have driven increasing air freight traffic, while the expansion of the middle class in emerging markets has also contributed to growth in the market for airline travel. Defense spending levels have risen over the last several years in the U.S. and internationally. Manufacturers of aircrafts are well-positioned to capitalize on the ongoing equipment replacement cycle, because older airplanes continue to be phased out of the global fleet in favor of newer, state-of-the-art aircrafts that offer fuel efficiency, reduced noise emissions and improved customer experiences. In addition, we believe that primary products including wheel hubs, fly wheels and torque tube for the transportation industry will continue to benefit from the global economic growth.

Recent Developments

Restructuring and Financial Deleveraging

Our financial performance depends, in large part, on conditions in the global oil and gas and general industrial markets we serve and on the general condition of the global economy, which impacts these markets. Due to significant outstanding indebtedness and the significant decline in and subsequent period of low commodity prices beginning in 2014, we voluntarily filed prepackaged restructuring petitions on April 30, 2017 under Chapter 11 of the U.S. Bankruptcy Code. On June 8, 2017, we emerged from bankruptcy with our consensual prepackaged restructuring (the “Restructuring”) resulting in a significant reduction in our debt and interest burden and a substantial increase in our liquidity.

Following the completion of the Restructuring, our debt and other obligations were reduced by approximately $743.5 million. The Restructuring significantly delevered our balance sheet, provided us with working capital to fund ongoing operations both during the Restructuring and after, and maximized recoveries for the stakeholders.

The Restructuring preserved the going-concern value of the business and allowed us to reorganize and right-size our business through a reduction of our number of facilities by half and of our headcount by approximately 60% without sacrificing our core products or services. For additional information about our bankruptcy proceedings and emergence, please see Note 2 to the audited consolidated financial statements included elsewhere in this prospectus.

Risk Factors

Investing in our common stock involves risks. You should read carefully the section of this prospectus titled “Risk Factors” beginning on page 22 and other information in this prospectus for an explanation of these risks before investing in our common stock.

Principal Executive Offices and Internet Address

Our principal executive offices are located at 945 Bunker Hill Road, Suite 500, Houston, Texas 77024, and our telephone number is (713) 393-4200. Our website is located at www.afglobalcorp.com.



 

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We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (the “SEC”) available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Our Emerging Growth Company Status

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the JOBS Act. As an emerging growth company, we may, for up to five years, take advantage of specified exemptions from reporting and other regulatory requirements that are otherwise applicable generally to public companies. These exemptions include:

 

    the presentation of only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

 

    deferral of the auditor attestation requirement on the effectiveness of our system of internal control over financial reporting;

 

    exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

    exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; and

 

    reduced disclosure about executive compensation arrangements.

We intend to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act. We may take advantage of these provisions until we are no longer an emerging growth company, which will occur on the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue, (iii) the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period and (iv) the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods under Section 107 of the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act. Please see “Risk Factors—We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.”



 

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THE OFFERING

 

Issuer

   AFG Holdings, Inc.

Common stock offered by us

               shares.

Common stock offered by the selling stockholders

  


            shares (or             shares, if the underwriters exercise in full their option to purchase additional shares).

Common stock outstanding after this offering

               shares (or             shares, if the underwriters exercise in full their option to purchase additional shares).

Option to purchase additional shares

   The selling stockholders have granted the underwriters a 30-day option to purchase up to an aggregate of             additional shares of our common stock.

Use of proceeds

  

We expect to receive approximately $        million of net proceeds from this offering, based upon the assumed initial public offering price of $            per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and estimated offering expenses payable by us.

 

We intend to use approximately $            million of the net proceeds from this offering to repay in full and terminate our Credit Agreement, dated as of June 8, 2017, among AFG Holdings, Inc. as Parent, Ameriforge Group Inc. as the Borrower, the other guarantors party thereto, Cortland Capital Market Services LLC, and the other lenders party thereto (the “Term Loan”). We will use any remaining proceeds for general corporate purposes. Please read “Use of Proceeds.”

 

We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders in this offering, including pursuant to any exercise by the underwriters of their option to purchase additional shares of our common stock from the selling stockholders.

Dividend policy

   We do not anticipate paying any cash dividends on our common stock. Please read “Dividend Policy.”


 

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Listing and trading symbol

   We have applied to list our common stock on the NYSE under the symbol “AFGL”.

Risk factors

   You should carefully read and consider the information set forth under the heading “Risk Factors” and all other information set forth in this prospectus before deciding to invest in our common stock.


 

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

The following table presents summary historical and unaudited pro forma financial data of AFG Holdings, Inc. as of the dates and for the periods indicated. The summary historical financial data as of and for the three months ended March 31, 2018 and for the three months ended March 31, 2017 is derived from the unaudited condensed consolidated financial statements appearing elsewhere in this prospectus. The summary historical and financial data as of December 31, 2017 and 2016 and for the periods from June 9, 2017 through December 31, 2017, January 1, 2017 through June 8, 2017 and for the Year ended December 31, 2016 are derived from the audited consolidated financial statements appearing elsewhere in this prospectus. The summary unaudited pro forma financial data for the year ended December 31, 2017 is derived from the unaudited pro forma condensed consolidated financial statements appearing elsewhere in this prospectus. References to “Successor” relate to our financial position and results of operations subsequent to June 8, 2017, the date of our reorganization. References to “Predecessor” relate to our financial position and results of operations prior to, and including, June 8, 2017. As a result of the application of fresh start accounting following our emergence from bankruptcy, the Successor and Predecessor periods may not be readily comparable.

The summary unaudited pro forma financial data for the year ended December 31, 2017 has been prepared to give pro forma effect to our emergence from bankruptcy and the application of fresh start accounting, as if our emergence was completed on January 1, 2017. This information is subject to and gives effect to the assumptions and adjustments described in the notes accompanying the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The summary unaudited pro forma financial data should not be considered indicative of actual results of operations that would have been achieved had the applicable transactions been consummated on the date indicated, and do not purport to be indicative of results of operations for any future period. The following table should be read together with “Use of Proceeds,” “Selected Historical and Unaudited Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

    Successor     Predecessor     Successor     Predecessor     Pro Forma  
    Three Months
Ended
March 31,
2018
    Three Months
Ended
March 31,
2017
    Period from
June 9, 2017
through
December 31,

2017
    Period from
January 1,
2017
through
June 8, 2017
    Year Ended
December 31,
2016
    Year Ended
December 31,
2017
 
(in thousands, except per
share data)
                       

Revenue, net

  $ 170,505     $ 69,260     $ 285,539     $ 156,238     $ 216,719     $ 441,777  

Cost of products and services

    (130,041     (64,542     (221,491     (143,234     (200,271     (364,725

Depreciation and amortization

    (2,477     (4,558     (34,465     (8,026     (18,106     (38,980

Impairment of property, equipment

    —         —         —         —         (3,518     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Revenues

    (132,518     (69,100     (255,956     (151,260     (221,895     (403,705
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Margin (Loss)

    37,987       160       29,583       4,978       (5,176     38,072  

Operating Expenses

               

Selling, general and administrative

    (15,718     (26,919     (41,601     (41,490     (65,002     (83,526

Depreciation and amortization

    (10,361     (3,086     (23,389     (5,440     (11,938     (40,408

Goodwill and intangible impairment and restructuring charges

    —         —         —         —         (3,070     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

    (26,079     (30,005     (64,990     (46,930     (80,010     (123,934
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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    Successor     Predecessor     Successor     Predecessor     Pro Forma  
    Three Months
Ended
March 31,
2018
    Three Months
Ended
March 31,
2017
    Period from
June 9, 2017
through
December 31,

2017
    Period from
January 1,
2017
through
June 8, 2017
    Year Ended
December 31,
2016
    Year Ended
December 31,
2017
 
(in thousands, except per
share data)
                       

Income (loss) from Operations

    11,908       (29,845     (35,407     (41,952     (85,186     (85,862

Other Income (Expense)

               

Interest income

    149       29       128       46       123       174  

Interest expense

    (2,620     (12,388     (7,188     (27,348     (54,228     (11,598

Gain on extinguishment of debt

    —         —         —         —         32,076       —    

Reorganization items, net

    —         —         —         385,654       —         —    

Other, net

    47       117       70       636       333       706  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income (Expense)

    (2,424     (12,242     (6,990     358,988       (21,696     (10,718

Income (Loss) From Continuing Operations Before Income Taxes

    9,484       (42,087     (42,397     317,036       (106,882     (96,580

Income Tax Expense (Benefit)

    1,960       345       (39,340     372       (1,835     (168,895
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) from Continuing Operations

    7,524       (42,432     (3,057     316,664       (105,047     72,315  

Income (Loss) on Discontinued Operations:

               

Income (Loss) from operations of discontinued Italian business (including loss on disposal of $81,805 in 2016)

    —         —         —         —         (80,087     —    

Income tax expense

    —         —         —         —         1,429       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from Discontinued Operations

    —         —         —         —         (81,516     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

  $ 7,524     $ (42,432   $ (3,057   $ 316,664     $ (186,563   $ 72,315  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

Per share information:

               

Net income (loss) per common share:

               

Basic and diluted

  $ 0.77     $ (0.89   $ (0.26   $ 6.64     $ (3.90   $ 7.30  

Weighted average common shares outstanding:

               

Basic and diluted

    10,045       47,734       10,009       47,734       47,734       10,009  
   

Balance Sheet Data as of:

               

Cash and cash equivalents

  $ 71,075       $ 73,884       $ 52,487    

Property and equipment—net of accumulated depreciation

    135,600         134,788         112,053    

Total assets

    819,659         789,956         580,210    

Long-term debt—net of deferred loan costs

    67,006         67,637         319    

Total stockholders’ equity (deficit)

    506,222         497,231         (341,858  
   

Cash Flow Statement Data:

               

Net cash provided by (used in) operating activities

  $ 4,162     $ (21,188   $ 22,341     $ (48,388   $ (35,636  

Net cash provided by (used in) investing activities

    (7,104     (1,193     (5,709     (3,193     20,138    

Net cash provided by (used in) financing activities

    812       (1,705     (1,819     55,729       52,613    
   

Other Financial Data:

               

Adjusted EBITDA(1)

  $ 26,147     $ (82   $ 36,760     $ 9,420     $ (22,984   $ 46,180  

Adjusted EBITDA margin(1)

    15.3     (0.1 )%      12.9     6.0     (10.6 )%      10.5

 

(1) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a definition of Adjusted EBITDA and Adjusted EBITDA margin, as well as each respective definition’s reconciliation to its most directly comparable GAAP measure, please see “—Non-GAAP Financial Measures.”


 

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Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA and Adjusted EBITDA margin are financial measures not determined in accordance with GAAP. We define Adjusted EBITDA as net income before interest expense, income tax benefit (expense), depreciation and amortization, loss from discontinued operations, net, gain on extinguishments of debt, impairment and restructuring charges, fresh start inventory adjustment, non-cash inventory write-offs, stock-based compensation, reorganization items, net and certain other items that we do not view as indicative of our ongoing performance. We define Adjusted EBITDA margin as the ratio of Adjusted EBITDA to revenue, net.

We believe Adjusted EBITDA and Adjusted EBITDA margin are useful performance measures because they allow for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at Adjusted EBITDA because these amounts can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historical costs of depreciable assets, none of which are reflected in Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an indication that our results will be unaffected by the items excluded from Adjusted EBITDA. Our computations of Adjusted EBITDA may not be identical to other similarly titled measures of other companies.



 

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The following table presents reconciliations of net income (loss), our most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA and Adjusted EBITDA margin.

 

    Successor     Predecessor     Successor     Predecessor     Pro Forma  
    Three
Months
Ended

March 31,
2018
    Three
Months
Ended

March 31,
2017
    Period from
June 9, 2017
through
December 31,
2017
    Period from
January 1, 2017
through
June 8, 2017
    Year Ended
December 31,
2016
    Year Ended
December 31,
2017
 
(in thousands)                        

Net income (loss)

  $ 7,524     $ (42,432   $ (3,057   $ 316,664     $ (186,563   $ 72,315  

Interest expense

    2,620       12,388       7,188       27,348       54,228       11,598  

Income tax expense
(benefit)

    1,960       345       (39,340     372       (1,835     (168,895

Depreciation and amortization

    12,838       7,644       57,854       13,466       30,044       79,388  

Loss from discontinued operations, net

    —         —         —         —         81,516       —    

Gain on extinguishments of debt

    —         —         —         —         (32,076     —    

Impairment and restructuring charges(1)

    795       12,313       4,451       16,724       16,043       21,175  

Fresh start inventory adjustment(2)

    438       —         4,852       —         —         4,852  

Non-cash inventory write-offs(3)

    —         7,749       330       15,272       2,714       15,602  

Stock-based compensation(4)

    186       —         311       —         —         746  

Reorganization items, net

    —         —         —         (385,654     —         —    

Transaction costs and IPO readiness(5)

    1,171       —         —         —         —         —    

Other(6)

    (1,385     1,911       4,171       5,228       12,945       9,399  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 26,147     $ (82   $ 36,760     $ 9,420     $ (22,984   $ 46,180  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin(7)

    15.3     (0.1 )%      12.9     6.0     (10.6 )%      10.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Impairment and restructuring charges consist of (i) impairment of property and equipment of $3.5 million for the year ended December 31, 2016, (ii) goodwill and intangible impairment charges of $3.0 million for the year ended December 31, 2016, (iii) expenses related to restructuring and facility closures in the amount of $0.8 million for the three months ended March 31, 2018, $12.3 million for the three months ended March 31, 2017, $4.5 million for the period from June 9, 2017 to December 31, 2017 (Successor), $16.7 million for the period from January 1, 2017 to June 8, 2017 (Predecessor), and $9.5 million for the year ended December 31, 2016 (Predecessor).
(2) Fresh start inventory adjustment reflects the amortization of inventory step-up from the adoption of fresh start accounting.
(3) Non-cash inventory write-offs reflect non-cash charges for slow-moving or obsolescence inventory reserve.
(4) Reflects non-cash charges related to stock-based compensation programs.
(5) Reflects transaction and IPO readiness fees of $1.2 million for the three months ended March 31, 2018.
(6)

Other adjustments for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor) primarily include (i) remeasurement of contingent consideration adjustments in the amount of $(2.1) million for the three months ended March 31, 2018, and $1.3 million for the three months ended March 31, 2017; (ii) other non-recurring



 

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  expenses of $0.7 million for the three months ended March 31, 2018, and $0.6 million for the three months ended March 31, 2017. Other adjustments for the period from June 9, 2017 through December 31, 2017 (Successor), January 1, 2017 through June 8, 2017 (Predecessor) and year ended December 31, 2017 (Predecessor) include (i) the remeasurement of contingent consideration in the amount of $2.0 million for the period from June 9, 2017 to December 31, 2017 (Successor) and $1.3 million for the period from January 1, 2017 to June 8, 2017 (Predecessor); (ii) the write-off of an abandoned research and development project of $1.3 million for the period from January 1, 2017 to June 8, 2017 (Predecessor); (iii) non-cash reserves for contract losses in the amount of $2.4 million for the period from January 1, 2017 to June 8, 2017 (Predecessor) and $4.5 million for the year ended December 31, 2016 (Predecessor); (iv) expenses relating to acquisitions and divestitures in the amount of $1.9 million for the period from June 9, 2017 to December 31, 2017 (Successor), $0.1 million for the period from January 1, 2017 to June 8, 2017 (Predecessor) and $7.8 million for the year ended December 31, 2016 (Predecessor); (v) adjustments to eliminate non-cash effects of the variable interest entity for $0.1 million for the period from June 9, 2017 to December 31, 2017 (Successor), $0.1 million for the period from January 1, 2017 to June 8, 2017 (Predecessor) and $0.2 million for the year ended December 31, 2016 (Predecessor); and (vi) foreign currency losses of $0.1 million for the period from June 9, 2017 to December 31, 2017 (Successor), $0.1 million for the period from January 1, 2017 to June 8, 2017 (Predecessor), and $0.4 million for the year ended December 31, 2016 (Predecessor).
(7) Adjusted EBITDA margin is a non-GAAP financial measure that represents the ratio of Adjusted EBITDA to revenue, net. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.


 

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RISK FACTORS

Investing in shares of our common stock involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in shares of our common stock. If any of the following risks were to occur, our business, financial condition, results of operations and cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business

Demand for many of our products depends on onshore and offshore oil and gas industry activity and expenditure levels, which industry activity and expenditure levels are directly affected by trends in the demand for and price of crude oil and natural gas.

Industry activity levels in the onshore and offshore oil and gas industry includes the number of drilling rigs in operation, the number of oil and gas wells being drilled, and oil and gas companies’ corresponding capital spending. Oil and gas prices worldwide, which have historically been volatile, heavily influence these industry activity levels.

Factors affecting the prices of oil and natural gas include, but are not limited to, the following:

 

    demand for hydrocarbons, which is affected by, among other things, worldwide population growth, economic growth rates and general economic and business conditions;

 

    costs of exploring for, producing and delivering oil and natural gas;

 

    political and economic uncertainty and sociopolitical unrest;

 

    available excess production capacity within the Organization of Petroleum Exporting Countries (“OPEC”) and the level of oil production by non-OPEC countries;

 

    oil refining capacity;

 

    shifts in end-customer preferences toward fuel efficiency and the use of natural gas;

 

    technological advances which lower the demand for energy consumption;

 

    potential acceleration of the development of alternative fuels;

 

    our customers’ access to capital and credit markets, which may increase or decrease our customers’ activity levels and spending for our products, depending on our customers’ respective circumstances;

 

    the relative strength of the U.S. dollar;

 

    changes in laws and regulations related to hydraulic fracturing activities;

 

    changes in environmental laws and regulations (including those changes relating to the use of coal in power plants); and

 

    natural disasters.

The oil and gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for products and services in our industry and downward pressure on the prices we charge. A downturn in the oil and gas industry could result in a reduction in demand for our products and could adversely affect our financial condition, results of operations or cash flows.

 

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If oil prices or natural gas prices remain volatile or decline, the demand for our products could materially and adversely decline.

Volatility or weakness in oil prices or natural gas prices (or the perception that prices will decrease) lowers the spending patterns of our customers and potentially results in industry companies’ drilling fewer new wells, lowering their production spending on their existing wells or delaying the replacement of aging equipment. This, in turn, could result in lower demand for certain of our products and service offerings.

Historical prices for crude oil and natural gas have been extremely volatile and are expected to continue to be volatile. As a result of the significant decline in the price of oil, beginning in late 2014, E&P companies moved to significantly cut costs, both by decreasing drilling and completion activity and by demanding price concessions from their service providers and suppliers. If these conditions persist, they could adversely impact our operations. A prolonged low level of activity in the oil and gas industry could adversely affect the demand for our products, our services and our financial condition, prospects and results of operations. Additionally, the commercial development of economically viable alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels) could reduce demand for our products.

The cyclicality of the oil and gas industry may cause our operating results to fluctuate.

We derive a significant portion of our revenues from companies in the oil and gas E&P onshore and offshore industries, which are historically cyclical with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices. We have experienced and may in the future experience significant fluctuations in operating results as a result of our customers’ reactions to changes in oil and natural gas prices. For example, prolonged low commodity prices during the last few years, combined with adverse changes in the capital and credit markets, caused many E&P companies to reduce their capital budgets and drilling activity.

The possible growth of our business through acquisitions may expose us to various risks, including those relating to difficulties in identifying suitable, accretive acquisition opportunities and integrating businesses, assets and personnel, as well as difficulties in obtaining financing for targeted acquisitions and the potential for increased leverage or debt service requirements.

As a component of our business strategy, we may pursue selected, accretive acquisitions of complementary assets, businesses and technologies. Acquisitions involve numerous risks, including:

 

    unanticipated costs and assumptions of liabilities and exposure to unforeseen liabilities of the acquired business, including, but not limited to, environmental liabilities;

 

    difficulties in integrating the operations and assets of the acquired business and the acquired personnel;

 

    limitations on our ability to properly assess and maintain an effective internal control environment over an acquired business;

 

    potential losses of key employees and customers of an acquired business;

 

    risks of entering markets in which we have limited prior experience; and

 

    increases in our expenses and working capital requirements.

The process of integrating an acquired business may involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a significant amount of time and resources. Our failure to incorporate an acquired business and associated assets into our existing

 

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operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. Furthermore, there is considerable competition for acquisition opportunities in our industry. Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions.

In addition, we may not have sufficient capital resources to complete any additional acquisitions. We may incur substantial indebtedness to finance future acquisitions and also may issue equity, debt or convertible securities in connection with such acquisitions. Debt service requirements could represent a significant burden on our results of operations and financial condition and the issuance of additional equity or convertible securities could be dilutive to our existing stockholders. Furthermore, we may not be able to obtain additional financing on satisfactory terms. Even if we have access to the necessary capital, we may be unable to continue to identify suitable acquisition opportunities, negotiate acceptable terms or successfully acquire identified targets.

Our exposure to the risks associated with instability in the global economy and financial markets means we face the risk that we lose some or all of our revenues, liquidity, suppliers and customers.

Our financial performance depends, in large part, on conditions in the global oil and gas and general industrial markets we serve and on the general condition of the global economy, which impacts these markets. Any sustained weakness in demand for our products resulting from uncertainty in the global economy could adversely impact our revenues and profitability.

In addition, many of our customers rely on global credit markets to provide liquidity. Our customers also, in some cases, utilize external financing to purchase products or finance operations. If our customers are unable to access credit markets or external financing such that our customers as a result lack liquidity, our customers’ demand for our products may decline.

If we are unable to or if we unsuccessfully develop new products and technologies, our competitive position may be impaired, which could materially and adversely affect our sales and market share.

The global oil and gas and general industrial markets in which we operate are characterized by changing technologies and introductions of new products. Our ability to develop, market and sell new products based on technological innovation can affect our competitive position and often requires us to invest significant resources. Difficulties or delays in research, development or production of new products and technologies, or failure to gain market acceptance of our new products and technologies may significantly reduce future revenues and materially and adversely affect our competitive position. We cannot assure you that we will have sufficient resources to continue to make the investment required to maintain or increase our market share, or that our investments will be successful. If we do not compete successfully, our financial condition, results of operations or cash flows could be adversely affected.

The oil and gas industry is undergoing continuing consolidation that may impact our results of operations.

The oil and gas industry is rapidly consolidating and, as a result, some of our largest customers have consolidated and are using their size and purchasing power to seek economies of scale and pricing concessions from third-party equipment and service providers like us. This consolidation may result in our customers’ reducing their capital spending or acquiring one or more of our primary customers, which may lead to our customers’ and potential customers’ decreased demand for our products. We cannot assure you that we will be able to maintain our level of sales to a customer that

 

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has consolidated or increased business activity with other customers. As a result, the acquisition, expansion or combination of one or more of our primary customers may have a significant adverse effect on our results of operations, financial position or cash flows. We are unable to predict what effect consolidations in the industry may have on price, our customers’ capital spending, our selling strategies, our competitive position, our ability to retain customers or our ability to negotiate favorable agreements with our customers.

Reliance on large customers may adversely affect our results of operations.

In any given year we may rely on a limited number of customers for a significant portion of our revenue. If these customers fail to pay us, our revenue would be impacted and our operating results and financial condition could be materially harmed.

Additionally, if we were to lose significant customers, we may not be able to redeploy our services at similar utilization or pricing levels or within a short period of time and such loss could have a material adverse effect on our business until the services are redeployed at similar utilization or pricing levels. Please read “Business—Our Customers” for a further discussion of our customers.

We currently rely on a limited number of suppliers for certain components and raw materials to manufacture our products.

We currently rely on a limited number of suppliers for certain components and raw materials for our products. If demand for our products or the components necessary to build such products increases or our suppliers face financial distress or bankruptcy, our suppliers may not be able to provide such components or raw materials on schedule or at the current price. In particular, steel is the principal raw material used in the manufacture of our products, and the price of steel has historically fluctuated on a cyclical basis and has often depended on a variety of factors over which we have no control. If our suppliers are unable to provide the components or raw materials needed to manufacture our products on schedule or at the current price, we could be required to seek out other suppliers, which may adversely affect our revenues or increase our costs.

The prices of raw materials we use are volatile.

The prices of raw materials used in our manufacturing processes are volatile. If the prices of raw materials rise, or tariffs are imposed on their importation, we may not be able to pass along such increases to our customers, which could have an adverse impact on our financial condition, results of operations or cash flows. Significant increases in the prices of raw materials could adversely impact our customers’ demand for certain products which could have a material adverse impact on our revenues, consolidated financial position and results of operations.

Our business could be impaired by delays or restrictions in ours or our customers’ obtaining operational permits.

In most states, our operations and the operations of our oil and gas producing customers require permits from one or more governmental agencies in order to perform drilling and completion activities, construct impoundments tanks and operate pipelines or trucking services. State agencies typically issue such permits, but federal and local governments may also require permits. The requirements for such permits vary depending on the location where such drilling and completion, and pipeline and gathering, activities will be conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether the governmental body or agency will grant a permit, the time it will take for a permit to be issued, the conditions that may be imposed in connection with the granting of the permit and whether the permit may be terminated. Under certain circumstances, federal agencies may

 

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cancel proposed leases for federal lands and refuse to grant or delay required approvals. Therefore, our customers’ operations in certain areas of the U.S. may be interrupted or suspended for varying lengths of time, causing a loss of revenue to us and adversely affecting our results of operations in support of those customers.

We face competition in the markets we serve. This competition could materially and adversely affect our operating results.

We actively compete with many companies that produce products similar to ours, which similarities may include price, quality, performance and availability. We also compete, with respect to at least some of our product lines, against many divisions of larger companies that possess greater financial resources than we do. As a result, these competitors may be both domestically and internationally better able to withstand a change in conditions within the markets in which we compete and throughout the global economy as a whole.

In addition, our ability to compete effectively depends on how successfully we anticipate and respond to new competitors entering our markets, new competitors introducing new products and services, customer preferences changing, new or increased pricing pressures and new government regulations. If we are unable to anticipate our competitors’ development of new products, identify customer needs and preferences on a timely basis, or successfully introduce new products and services or modify existing products and service offerings in response to such competitive factors, we could lose customers to competitors. If we cannot compete successfully, our sales and operating results could be materially and adversely affected.

We may be involved in legal proceedings that could result in substantial liabilities.

Like many companies involved in the oil and gas industry, we are, from time to time and in the ordinary course of our business, involved in various legal and other proceedings, such as regulatory compliance matters and personal injury or property damage matters or contractual disputes. Such legal proceedings are inherently uncertain and their results cannot be predicted. Regardless of the outcome, such proceedings could have an adverse impact on us because of legal costs, diversion of management and other personnel and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in liability, penalties or sanctions, as well as judgments, consent decrees or orders requiring a change in our business practices, which could materially and adversely affect our business, operating results and financial condition. Accruals for such liability, penalties or sanctions may be insufficient. Judgments and estimates to determine accruals or range of losses related to legal and other proceedings could change from one period to the next, and such changes could be material.

Our business could be negatively affected by security threats, including cybersecurity threats, and other disruptions.

We face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the security of our facilities and infrastructure or third-party facilities and infrastructure, such as processing plants and pipelines, and threats from terrorist acts. The potential for such security threats subjects our operations to increased risks and costs, disruptions in critical systems, unauthorized release of confidential or otherwise protected information and the corruption of data that could have a material adverse effect on our business. These events could lead to financial losses from remedial actions, loss of business or potential liability. In particular, our implementation of various procedures and controls to monitor and mitigate security threats and to increase security for our information, facilities and infrastructure may result in increased capital and operating costs. Moreover, there can be no assurance that such

 

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procedures and controls will be sufficient to prevent security breaches from occurring. If any of these security breaches were to occur, they could lead to losses of sensitive information, critical infrastructure or capabilities essential to our operations, and they could have a material adverse effect on our reputation, financial position, results of operations or cash flows. Cybersecurity attacks in particular are becoming more sophisticated and include but are not limited to, malicious software, attempts to gain unauthorized access to data systems and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could lead to financial losses from remedial actions, loss of business or potential liability.

If we are unable to accurately predict customer demand or if customers cancel their orders on short notice, we may hold excess or obsolete inventory, which would reduce gross margins.

At times we develop a backlog of products to be manufactured, assembled, tested and delivered. The following factors, in addition to others not listed, could reduce our margins on these backlogged contracts, adversely impact completion of these contracts, adversely affect our position in the market or subject us to contractual penalties:

 

    financial challenges for customers of our products;

 

    credit market conditions for customers of our products;

 

    our failure to adequately estimate costs for manufacturing our products;

 

    our inability to deliver products that meet contracted technical requirements;

 

    our inability to maintain quality standards during the design and manufacturing process;

 

    our inability to secure parts made by third-party vendors at reasonable costs and within required timeframes;

 

    unexpected increases in the costs of raw materials;

 

    our inability to manage unexpected delays due to weather, labor shortages or other factors beyond our control; and

 

    the imposition of tariffs or duties between countries.

Our existing contracts generally carry significant down payment and progress billing terms favorable to the ultimate completion of these projects and the majority do not allow customers to cancel projects for convenience. Anticipating demand is difficult because our customers face unpredictable demand for their own products and are increasingly focused on cash preservation and tighter inventory management, and unfavorable market conditions or financial difficulties experienced by our customers may result in cancellation of contracts or the delay or abandonment of projects. Any such developments could have a material adverse effect on our operating results and financial condition.

Our business involves occupational hazards to our workforce.

Our operations rely heavily on our workforce, which is exposed to a wide range of operational hazards typical for the oil and gas services equipment industry. These hazards arise from working at industrial sites, operating heavy machinery and performing other hazardous activities. Although we provide our workforce with occupational health and safety training and, as appropriate and necessary, safety equipment, and believe that our safety standards and procedures are adequate, accidents at our sites and facilities have occurred in the past and may occur in the future as a result of unexpected circumstances, failure of employees to follow proper safety procedures, human error or otherwise. If any of these circumstances were to occur in the future, they could result in personal injury, business

 

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interruption, possible legal liability and damage to our business reputation and corporate image and, in severe cases, fatalities, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects. We have general liability and workers compensation insurance to protect us against such risks, but recoveries under the insurance coverage that we obtain in the future, if any, may not fully offset our costs in the event of a claim.

If we are unable to fully protect our intellectual property rights or the confidentiality of our trade secrets, we may suffer a loss in our competitive advantage or market share.

We hold 386 patents and 16 trademarks relating to many of our key products and services. Our customers or competitors may, over time, replicate the technology protected by these patents. If we are not able to maintain the confidentiality of our trade secrets, or if our customers or competitors are able to replicate our technology or manufacturing, our competitive advantage would be diminished. We also cannot assure you that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent our competitors from employing comparable technologies or processes.

Restrictive covenants in our debt agreements may restrict our ability to pursue our business strategies. If we fail to comply with the restrictions and covenants in our debt agreements, there could be an event of default under the terms of such agreements, which could result in an acceleration of payment.

Our debt agreements limit our ability to, among other things:

 

    incur indebtedness or contingent obligations;

 

    issue preferred stock;

 

    pay dividends or make distributions to our stockholders;

 

    repurchase or redeem our capital stock or subordinated indebtedness;

 

    make investments;

 

    create liens;

 

    enter into sale/leaseback transactions;

 

    incur restrictions on the ability of our subsidiaries to pay dividends or to make payments to us;

 

    enter into transactions with our stockholders and affiliates;

 

    sell and pledge assets; and

 

    acquire the assets of, or merge or consolidate with, other companies or transfer all or substantially all of our assets.

These covenants may also impair our ability to engage in favorable business activities and impair our ability to finance future operations or capital needs in furtherance of our business strategies. Moreover, the form or level of our indebtedness may prevent us from raising additional capital on attractive terms or obtaining additional financing if needed. A breach of any of these covenants would result in a default under the applicable agreement after any applicable grace periods. A default could result in acceleration of the indebtedness which would have a material adverse effect on us. If an acceleration occurs, it would likely accelerate all of our indebtedness through cross-default provisions and we would likely be unable to make all of the required payments to refinance such indebtedness. Even if new financing were available at that time, it may not be on terms that are acceptable to us.

 

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In the future, our borrowing levels and debt service obligations could adversely affect our financial condition and impair our ability to fulfill our obligations under our ABL Facility.

At March 31, 2018, we had total outstanding indebtedness of approximately $71.7 million, $71.5 million of which is outstanding under our Term Loan. At March 31, 2018, we had $14.1 million of letters of credit and no outstanding borrowings under our ABL Facility. Our indebtedness could:

 

    require us to dedicate a substantial portion of our cash flows from operations to the repayment of debt, which could reduce the cash available for us to use for other business purposes;

 

    limit our ability to obtain additional financing and create additional liens on our assets;

 

    limit our flexibility in planning for, and reacting to, changes in our business;

 

    place us at a competitive disadvantage if we are more leveraged than our competitors;

 

    make us more vulnerable to adverse economic and industry conditions; and

 

    restrict us from making additional investments or acquisitions by limiting our aggregate debt obligations.

To the extent that new debt is incurred in addition to our current debt levels, the leverage risks described directly above could increase and could have an adverse effect on our liquidity and financial position.

Increases in interest rates could adversely impact the price of our shares, our ability to issue equity or incur debt for acquisitions or other purposes.

Interest rates on future borrowings, credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. Rising interest rates could adversely impact the price of our shares, our ability to issue equity or incur debt for acquisitions or other purposes. Rising interest rates could also cause our cost of doing business to increase.

A portion of our assets consists of goodwill and other intangible assets, the value of which may be reduced if we determine that those assets are impaired.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the tangible and identifiable intangible assets acquired, liabilities assumed and any non-controlling interest. Intangible assets, including goodwill, are assigned to our reporting segments based upon their fair value at the time of acquisition. In accordance with GAAP, goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if circumstances indicate impairment may have occurred. If we determine that the carrying value of our goodwill is less than fair value, we may be required to record additional charges in the future.

Our success depends on our executive management and other key personnel.

Our future success depends to a significant degree on the skills, experience and efforts of our executive management and other key personnel, and their ability to provide us with uninterrupted leadership and direction. The failure to retain our executive officers and other key personnel or a failure to provide adequate succession plans could have an adverse impact on our revenues, profitability and potential for growth. The availability of highly qualified talent is limited, and the market competition for this talent is robust. However, we provide long-term equity incentives and certain other benefits to our executive officers which provide incentives for them to make a long-term commitment to us. Our future

 

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success will also depend on our ability to have adequate succession plans in place and to attract, retain and develop qualified personnel. If we fail to efficiently replace executive management members and other key personnel and to attract, retain and develop new qualified personnel, our operations and implementation of our strategic plan could be adversely impacted.

We may be unable to employ a sufficient number of skilled and qualified workers to sustain or expand our current operations.

The manufacture of our products requires personnel with specialized skills and experience. Our systems and services require skilled workers who can perform physically demanding work. Our ability to be productive and profitable depends upon our ability to attract and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force. The demand for skilled workers is high, the supply of these skilled workers is limited, and the cost to attract and retain the qualified of these skilled workers has recently increased.

During industry downturns, skilled workers may leave the industry, sometimes permanently, reducing the availability of immediately available qualified workers that we may hire when conditions improve. In addition, a significant increase in wages paid by competing employers could result in increases in the wage rates that we must pay. If we are not able to employ and retain skilled workers, our ability to respond quickly to customer demands or strong market conditions may inhibit our growth, which could have a material adverse effect on our financial condition, results of operations or cash flows.

Unionization efforts and labor regulations in certain areas in which we operate could materially increase our costs or limit our flexibility.

We are not a party to any collective bargaining agreements within the U.S. However we operate in certain states within the U.S. that have a history of unionization and we may become the subject of a unionization campaign. If some or all of our workforce were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements or work practices, our costs could be increased, our flexibility in terms of work schedules and reductions in force could be limited, and we could be subject to strikes or work slowdowns, among other things.

Of those employees located outside of the U.S., only those in Brazil are unionized. Although we believe that our relations with employees are satisfactory and have not experienced any material work stoppages, work stoppages may occur in the future and we may not be successful in negotiating new collective bargaining agreements.

Our operations and our customers’ operations are subject to a variety of governmental laws and regulations that may directly or indirectly restrict our operations, increase our costs or limit the demand for our products or services.

Our business and our customers’ businesses may be significantly affected by:

 

    federal, state, local and foreign laws and regulations relating to onshore and offshore oilfield operations, workplace health and safety and the protection of the environment and natural resources;

 

    changes in these and other applicable laws and regulations;

 

    levels of enforcement of applicable laws and regulations; and

 

    changes in courts’ and agencies’ interpretation of existing laws and regulations.

 

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In addition, we depend on the demand for our products from the oil and gas industry. This demand is affected by changing taxes, price controls and other laws and regulations relating to the oil and gas industry in general, including those specifically directed to offshore operations. For example, the adoption of laws and regulations curtailing exploration and development drilling for oil and gas could adversely affect our operations by limiting demand for our products. We cannot determine the extent to which our future operations and earnings may be affected by new legislation, new regulations or changes in existing laws and regulations and enforcement thereof.

Since 2010, various new regulations have increased the complexity of the drilling permit process and may limit the opportunity for some operators to continue deepwater drilling in the U.S. Gulf of Mexico. Third-party challenges to industry operations in the U.S. Gulf of Mexico may also serve to further delay or restrict our customers activities. If our current or future customers view the new regulations, policies, operating procedures and possibility of increased legal liability as a significant impairment to expected profitability on projects, our current or future customers could discontinue or curtail their offshore operations, thereby adversely affecting our financial condition, results of operation or cash flows by decreasing demand for our products.

Because of our foreign operations and sales, we are also subject to changes in foreign laws and regulations that may encourage or require hiring of local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. If we fail to comply with any applicable law or regulation, our business, results of operations, financial position and cash flows may be adversely affected.

Customer credit risks could result in losses.

The concentration of our customers in the energy industry may impact our overall exposure to credit risk when customers may be similarly affected by prolonged changes in economic and industry conditions. In addition, laws in some jurisdictions outside of the U.S. in which we operate could make our collecting fees or amounts owed from these customers difficult or time consuming. While we maintain reserves for potential credit losses, we cannot guarantee that such reserves will be sufficient to meet write-offs of uncollectible receivables or that our losses from such receivables will be consistent with our expectations.

To the extent one or more of our key customers commences bankruptcy proceedings, our contracts with these customers may be subject to rejection under applicable provisions of the U.S. Bankruptcy Code, or may be renegotiated. Further, during any such bankruptcy proceeding, prior to assumption, rejection or renegotiation of such contracts, the bankruptcy court may temporarily authorize the payment of value for our products that is less than contractually required, which could materially adversely affect our business, results of operations, cash flows and financial condition.

We manufacture and sell equipment that is used in oil and gas exploration and production activities, which may subject us to liability, including claims for personal injury, property damage, environmental contamination and damage to natural resources should such equipment fail to perform to specifications.

We provide products and systems to customers involved in oil and gas exploration and production. Some of our equipment is designed to operate in deepwater and/or high-pressure environments, and some equipment is designed for use in onshore, unconventional, well completion activities. Because of applications to which our products are exposed, particularly those involving offshore environments, a failure of such equipment, or a failure of our customer to maintain or operate the equipment properly, could cause damage to the equipment, damage to the property of customers and others, personal injury, environmental contamination and damage to natural resources and could

 

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lead to a variety of claims against us that could have an adverse effect on our business, results of operations, financial condition or cash flows.

We indemnify our customers against certain claims and liabilities resulting or arising from our provision of products or services to them. In addition, we rely on customer indemnifications, generally, and third-party insurance as part of our risk mitigation strategy. However, our insurance may not be adequate to cover our liabilities. Such potential liabilities could have a material adverse effect on our business, results of operations, financial condition or cash flows.

We may incur liabilities to customers as a result of warranty claims.

We provide warranties of workmanship and conformance to specifications of the products we manufacture. Failure of our products to meet specifications may increase costs by requiring additional engineering resources and service, replacement of parts and equipment or monetary reimbursement to a customer. We have in the past received warranty claims, and we expect to continue to receive them in the future. To the extent that we incur substantial warranty claims in any period, our reputation, ability to obtain future business and earnings could be adversely affected.

Our operations may be exposed to significant delays, costs and liabilities as a result of environmental and occupational health and safety requirements applicable to our business activities.

Our operations are subject to stringent and complex international, federal, state and local laws and regulations governing the discharge of materials into the environment and the occupational health and safety aspects of our operations, or otherwise relating to the protection of the environment and natural resources. These laws and regulations may impose numerous obligations on us, including the acquisition of a permit or other approval before conducting regulated activities; the restriction of the types, quantities and concentration of materials that can be released into the environment; the application of specific health and safety criteria addressing worker protection; or the imposition of substantial liabilities for pollution resulting from our operations. Numerous governmental authorities, such as the U.S. Environmental Protection Agency (“EPA”) and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them. Such enforcement actions may require us to perform difficult and costly compliance measures or corrective actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, natural resource damages, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of our operations. In addition, we may experience delays in obtaining, or be unable to obtain, required permits, which may delay or interrupt our operations and limit our growth and revenue.

Certain environmental laws impose strict as well as joint and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been released into the environment. We may be required to remediate contaminated properties currently or formerly operated by us or our predecessors in interest or facilities of third parties that received waste generated by our operations, regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. From time to time, we are notified that we are a potentially responsible party and may have liability in connection with off-site disposal facilities. There can be no assurance that we will be able to resolve pending and future matters relating to off-site disposal facilities at all or for nominal sums. In connection with certain acquisitions, we could acquire, or be required to provide indemnification against, environmental liabilities that could expose us to material losses. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. The trend of more expansive and stringent

 

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environmental legislation and regulations could continue, resulting in increased costs of doing business and, consequently, affecting profitability. For additional information, please read “Business— Environmental and Occupational Health and Safety Regulations.”

Our operations are subject to inherent risks, some of which are beyond our control. These risks may be fully insured, or may not be fully covered under our insurance policies.

Our assets may be affected by natural or man-made disasters and other external events that may disrupt our manufacturing operations. These hazards can also cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage, and suspension or cancellation of operations. In addition, our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters.

The occurrence of a significant event or adverse claim in excess of the insurance coverage that we maintain or that is not covered by insurance could have a material adverse effect on our liquidity, results of operations and financial condition. Litigation arising from a catastrophic occurrence at a location where our systems are deployed or services are provided may result in our being named as a defendant in lawsuits asserting large claims.

We do not have insurance against all foreseeable risks, either because insurance is not available or because of high premium costs that make such insurance prohibitively expensive. The occurrence of an event not fully insured against or the failure of an insurer to meet its insurance obligations could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if insurance is available, it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance prohibitively expensive.

Climate change legislation and regulations that are focused on restricting or regulating emissions of greenhouse gases could result in increased operating and capital costs for us and our customers and reduced demand for our products or services.

Climate change continues to attract considerable public and scientific attention. As a result, regulatory bodies and the public have made numerous proposals to monitor and limit emissions of greenhouse gases (“GHG”), which proposals include cap-and-trade programs, carbon taxes, increased efficiency standards, incentives or mandates for renewable energy, and GHG reporting and tracking programs and regulations that directly limit GHG emissions from certain sources.

The adoption and implementation of any such international, federal or state legislation or regulations could result in increased compliance costs or additional operating restrictions on us or our customers and reduced demand for our products and services, and could have a material adverse effect on our business, financial condition, results of operations and cash flows. For additional information, please read “Business—Environmental and Occupational Health and Safety Regulations.”

Also, increasing concentrations of GHG in the earth’s atmosphere may produce climate changes that could have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. If any such climate changes were to occur, they could have an adverse effect on our financial condition and results of operations and the financial condition and results of operations of our customers.

 

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Potential governmental laws and regulations and increased public attention regarding hydraulic fracturing and induced seismicity could reduce demand for our products or services.

Hydraulic fracturing is a common practice that is used to stimulate the production of oil and/or natural gas from dense subsurface rock formations. The hydraulic fracturing process involves the injection of water, proppants and chemicals under pressure into targeted subsurface formations to fracture the surrounding rock and stimulate production. Oil and natural gas extracted from unconventional sources, such as shale, tight sands and coal bed methane, frequently require hydraulic fracturing. Hydraulic fracturing is typically regulated by state oil and natural gas commissions, but the EPA has asserted federal regulatory authority pursuant to the U.S. Safe Drinking Water Act (the “SDWA”) over certain hydraulic fracturing activities. Congress has from time to time considered legislation to provide for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process. In addition, in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources “under some circumstances.”

Some state and federal regulatory agencies have also recently focused on a possible connection between the operation of injection wells used for oil and gas waste disposal and seismic activity. These agencies and others have raised concerns that hydraulic fracturing may also contribute to seismic activity. Increased regulation and attention given to hydraulic fracturing and induced seismicity could lead to greater opposition to, and litigation concerning, oil and natural gas activities utilizing hydraulic fracturing or injection wells for waste disposal, which could adversely affect some of our customers and their demand for our products or services, which in turn could have a material adverse effect on our business, results of operations and financial condition. For additional information, please read “Business—Environmental and Occupational Health and Safety Regulations.”

Our operations require us to comply with various domestic and international regulations, violations of which could have a material adverse effect on our financial condition, operating results or cash flows.

We are exposed to a variety of federal, state, local and international laws and regulations relating to environmental, workplace, health and safety, labor and employment, import/export control, currency exchange, bribery and corruption and taxation matters. If the scope of these laws and regulations expand or become increasingly more stringent in the future, the incremental cost of compliance could adversely impact our financial condition, operating results or cash flows.

Our operations outside of the U.S. require us to comply with numerous anti-bribery and anti-corruption regulations. The U.S. Foreign Corrupt Practices Act, among others, applies to us and our operations. Our policies, procedures and programs may not always protect us from reckless or criminal acts committed by our employees or agents, and we may be subject to severe criminal or civil sanctions as a result of our violating these laws. We are also subject to the risks that our employees and agents outside of the U.S. may fail to comply with applicable laws.

In addition, we import raw materials, semi-finished goods, as well as finished products into the U.S. for use in manufacturing and/or finishing for re-export and import into another country for use or further integration into equipment or systems. Most movement of raw materials, semi-finished or finished products involves imports and exports. As a result, compliance with multiple trade sanctions, embargoes and import/export laws and regulations, including tariffs, pose a constant challenge and risk to us because a portion of our business is conducted outside of the U.S. through our subsidiaries. Our failure to comply with these laws and regulations or any increase in our costs imposed by tariffs could materially affect our reputation, financial condition and operating results.

 

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Political, regulatory, economic and social disruptions in the countries in which we conduct business could adversely affect our business or results of operations.

In addition to our facilities in the United States, we have facilities in Canada, Mexico, Brazil, the United Kingdom, Dubai, and China. Instability and unforeseen changes in any of the markets in which we conduct business could have an adverse effect on the demand for, or supply of, our products, our financial condition or our results of operations. These factors include, but are not limited to, the following:

 

    nationalization and expropriation;

 

    potentially burdensome taxation;

 

    inflationary and recessionary markets, including capital and equity markets;

 

    civil unrest, labor issues, political instability, terrorist attacks, cyber-terrorism, military activity and wars;

 

    supply disruptions in key oil producing countries;

 

    trade restrictions, trade protection measures or price controls;

 

    foreign ownership restrictions;

 

    import or export licensing requirements;

 

    restrictions on operations, trade practices, trade partners and investment decisions resulting from domestic and foreign laws and regulations;

 

    changes in, and the administration of, laws and regulations;

 

    inability to repatriate income or capital;

 

    reductions in the availability of qualified personnel;

 

    foreign currency fluctuations or currency restrictions; and

 

    fluctuations in the interest rate component of forward foreign currency rates.

Adverse weather conditions could impact demand for our products or materially impact our costs.

Our business could be materially adversely affected by adverse weather conditions, including natural disasters. For example, unusually warm winters could adversely affect the demand for our products by decreasing the demand for natural gas or unusually cold winters could cause delays in the delivery of components and raw materials needed to manufacture our products. Adverse weather can also directly impede our own operations. Repercussions of adverse weather conditions may include:

 

    weather-related damage to facilities and equipment, resulting in delays in operations;

 

    inability to deliver products to customers in accordance with contract schedules; and

 

    loss of productivity.

We recently emerged from bankruptcy, which could adversely affect our business and relationships.

Although we have not, to our knowledge, experienced adverse impacts to date, it is possible that our having filed for bankruptcy and our recent emergence from the Chapter 11 bankruptcy proceedings

 

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could adversely affect our business and relationships with customers, employees and suppliers. Due to uncertainties, many risks exist, including the following:

 

    key suppliers could terminate their relationship with us or require financial assurances or enhanced performance;

 

    our ability to renew existing contracts and compete for new business may be adversely affected;

 

    our ability to attract, motivate and/or retain key executives and employees may be adversely affected;

 

    employees may be distracted from performance of their duties or more easily attracted to other employment opportunities; and

 

    competitors may take business away from us, and our ability to attract and retain customers may be adversely impacted.

The occurrence of one or more of these events could have a material and adverse effect on our operations, financial condition and reputation. In addition, upon our emergence from bankruptcy, we adopted fresh start accounting, as a consequence of which we became a new entity for financial reporting purposes with no ending retained earnings or deficit balance. Upon adoption of fresh start accounting, our assets and liabilities were recorded at their fair values which differed materially from the recorded values of those same assets and liabilities prior to our emergence from bankruptcy. Accordingly, our future financial conditions and results of operations following our emergence may not be comparable to the financial condition or results of operations reflected in our historical financial statements. We cannot assure you that having been subject to bankruptcy protection will not adversely affect our operations in the future. Please read “Summary—Recent Developments—Restructuring and Financial Deleveraging” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Impacting the Comparability of Results of Operations Restructuring Transactions and Fresh Start Accounting.”

Risks Related to This Offering and Ownership of Our Common Stock

The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the NYSE, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will also incur costs associated with our public company reporting requirements and with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NYSE. These rules and regulations will increase our legal and financial compliance costs and make some activities more time-consuming and costly. The rules and regulations will also make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.

We will be required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act. Section 404 requires that we document and test our internal control over financial reporting and issue

 

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management’s assessment of our internal control over financial reporting. This section also requires that our independent registered public accounting firm opine on those internal controls upon our becoming a large accelerated filer, as defined in the SEC rules, or otherwise ceasing to qualify as an emerging growth company under the JOBS Act. We are evaluating our existing controls against the standards adopted by the Committee of Sponsoring Organizations of the Treadway Commission. During the course of our ongoing evaluation and integration of the internal control over financial reporting, we may identify areas requiring improvement, and we may have to design enhanced processes and controls to address issues identified through this review. For example, we anticipate the need to hire additional administrative and accounting personnel to conduct our financial reporting.

If we fail to continue to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if we or our auditors identify and report material weaknesses in internal control over financial reporting, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and financial condition.

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and stock price.

We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, our stock price.

We did not design or maintain an effective control environment commensurate with our financial reporting requirements. This resulted in our inability to appropriately analyze, record and disclose accounting matters timely and accurately. Our limited personnel resulted in a failure to operate review controls and a failure to design processes to identify and address financial reporting matters, including reconciliation, close processes, financial statement classification and related disclosures.

We also failed to design and maintain formal accounting policies, processes and controls to identify and address significant and complex transactions or accounting matters, including the accounting for certain components of fresh start accounting and accounting for equity-based compensation.

These material weaknesses or any newly identified material weakness could result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected.

We are currently implementing measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses, including hiring

 

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additional finance and accounting personnel and initiating design and implementation of our financial control environment, including the expansion of formal accounting policies and procedures, financial reporting controls and controls to properly account for and disclose complex transactions.

The measures we have taken to date, and actions we may take in the future, may not be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or may not prevent or avoid potential future material weaknesses. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, we may be unable to prevent fraud, our business could be harmed, investors may lose confidence in our financial reporting, and our share price may decline as a result.

In addition, neither our management nor an independent registered public accounting firm has performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified.

The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering. In addition, an active, liquid and orderly trading market for our common stock may not develop or be maintained, and our stock price may be volatile.

Prior to this offering, our common stock was not traded on any market. An active, liquid and orderly trading market for our common stock may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. The initial public offering price will be negotiated between us, the selling stockholders and representatives of the underwriters, based on numerous factors, and may not be indicative of the market price of our common stock after this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in this offering. For more information, please read “Underwriting.”

The following is a non-exhaustive list of factors that could affect our stock price:

 

    our financial and operational performance;

 

    quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues;

 

    the public reaction to our press releases, our other public announcements and our filings with the SEC;

 

    strategic actions by our competitors;

 

    changes in revenues or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

    speculation in the press or investment community;

 

    the failure of research analysts to cover our common stock;

 

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    sales of our common stock by us or other stockholders, or the perception that such sales may occur;

 

    equity capital markets transactions by competitors, including by way of initial public offerings;

 

    changes in accounting principles, policies, guidance, interpretations or standards;

 

    additions or departures of key management personnel;

 

    actions by our stockholders;

 

    general market conditions, including fluctuations in commodity prices;

 

    changes in, or investors’ perception of, the industries in which we operate;

 

    litigation involving us, our industry, or both;

 

    domestic and international economic, legal and regulatory factors unrelated to our performance; and

 

    the realization of any risks described under this “Risk Factors” section.

The stock markets in general have experienced volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.

Some of our existing stockholders and their affiliates, and our directors affiliated with some of our existing stockholders and their affiliates, are not limited in their ability to compete with us, and the corporate opportunity provisions in our amended and restated certificate of incorporation could enable some of our existing stockholders to benefit from corporate opportunities that might otherwise be available to us.

Our governing documents will provide that some of our existing stockholders and their affiliated entities are not restricted from owning assets or engaging in businesses that compete directly or indirectly with us. In particular, subject to the limitations of applicable law, our amended and restated certificate of incorporation will, among other things:

 

    permit some of our existing stockholders and their affiliates, including any of our directors affiliated with such stockholders, to conduct business that competes with us and to make investments in any kind of business, asset or property in which we may make investments; and

 

    provide that if some of our existing stockholders or their affiliates, including any of our directors affiliated with such stockholders, become aware of a potential business opportunity, transaction or other matter, they will have no duty to communicate or offer that opportunity to us (unless such opportunity is expressly offered to such director in his capacity as one of our directors).

Some of our existing stockholders and their affiliates, or our non-employee directors, may become aware, from time to time, of certain business opportunities (such as, among other things, acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. In addition, some of our stockholders and their affiliates, or our non-employee directors, may

 

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dispose of assets in the future, without any obligation to offer us the opportunity to purchase any of those assets. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to some of our existing stockholders and their affiliates, or our non-employee directors, could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours. For additional information, please read “Description of Capital Stock.”

Some of our existing stockholders and their affiliates potentially have access to resources greater than ours, which may make it more difficult for us to compete with such stockholders and their affiliates with respect to commercial activities as well as for potential acquisitions. We cannot assure you that any conflicts that may arise between us and our stockholders, on the one hand, and some of our existing stockholders, on the other hand, will be resolved in our favor. As a result, competition from some of our existing stockholders and their affiliates could adversely impact our results of operations.

If securities or industry analysts do not publish research reports or publish unfavorable research about our business, the price and trading volume of our common stock could decline.

The trading market for our common stock depends in part on the research reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us the trading price for our common stock and other securities would be negatively affected. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. We do not have any control over these analysts. If one or more of these analysts cease to cover us or fail to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common stock and other securities and their trading volume to decline. Moreover, if one or more of the analysts who cover us downgrades our securities, the price of our securities would likely decline.

Our certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock.

Our amended and restated certificate of incorporation will authorize our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us.

In addition, some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including:

 

    after Carlyle, First Reserve, Eaton Vance and Stellex (collectively, the “Sponsor Group”) and each of its affiliates no longer collectively hold more than 50% of the voting power of our common stock, dividing our board of directors into three classes of directors, with each class serving staggered one-year terms;

 

    after the Sponsor Group and each of its affiliates no longer collectively hold more than 50% of the voting power of our common stock, providing that all vacancies, including newly created directorships, may, except as otherwise required by law or, if applicable, the rights of holders of a series of preferred stock, only be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum (prior to such time, vacancies may also be filled by stockholders holding a majority of the outstanding shares entitled to vote);

 

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    after the Sponsor Group and each of its affiliates no longer collectively hold more than 50% of the voting power of our common stock, permitting any action by stockholders to be taken only at an annual meeting or special meeting rather than by a written consent of the stockholders, subject to the rights of any series of preferred stock with respect to such rights;

 

    after the Sponsor Group and each of its affiliates no longer collectively hold more than 50% of the voting power of our common stock, permitting our amended and restated certificate of incorporation and amended and restated bylaws to be amended by the affirmative vote of the holders of at least a supermajority of our then outstanding shares of stock entitled to vote thereon;

 

    after the Sponsor Group and each of its affiliates no longer collectively hold more than 50% of the voting power of our common stock, permitting special meetings of our stockholders to be called only by our board of directors pursuant to a resolution adopted by the affirmative vote of a majority of the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships (prior to such time, a special meeting may also be called at the request of stockholders holding a majority of the outstanding shares entitled to vote);

 

    after the Sponsor Group and each of its affiliates no longer collectively hold more than 50% of the voting power of our common stock, requiring the affirmative vote of the holders of at least a supermajority in voting power of all then outstanding common stock entitled to vote generally in the election of directors, voting together as a single class, to remove any or all of the directors from office at any time, and directors will be removable only for “cause”;

 

    prohibiting cumulative voting in the election of directors;

 

    establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders; and

 

    providing that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws.

Investors in this offering will experience immediate and substantial dilution of $         per share.

Based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution of $         per share in the net tangible book value per share of common stock from the initial public offering price, and our historical and pro forma net tangible book deficit as of                 , 2017 would have been $             per share. Please read “Dilution.”

We do not intend to pay dividends on our common stock, and our debt agreements place certain restrictions on our ability to do so. Consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We do not plan to declare dividends on shares of our common stock in the foreseeable future. Additionally, our ABL Facility places certain restrictions on our ability to pay cash dividends. Consequently, unless we revise our dividend policy, your only opportunity to achieve a return on your investment in us will be if you sell your common stock at a price greater than you paid for it. There is no guarantee that the price of our common stock that will prevail in the market will ever exceed the price that you pay in this offering.

Future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.

We may sell additional shares of common stock in subsequent public offerings. We may also issue additional shares of common stock or convertible securities. After the completion of this offering,

 

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assuming no exercise of the underwriters’ option to purchase additional shares, we will have             shares of common stock outstanding. Please read “Shares Eligible for Future Sale.”

In connection with this offering, we intend to file a registration statement with the SEC on Form S-8 providing for the registration of shares of our common stock issued or reserved for issuance under our equity incentive plan. Subject to the satisfaction of vesting conditions, the expiration of lock-up agreements and the requirements of Rule 144, shares registered under the registration statement on Form S-8 will be available for resale immediately in the public market without restriction.

We cannot predict the size of future issuances of our common stock or securities convertible into common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock.

We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.

Our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.

The underwriters of this offering may waive or release parties to the lock-up agreements entered into in connection with this offering, which could adversely affect the price of our common stock.

Prior to this offering, we, all of our directors and executive officers and holders of substantially all of our common stock will enter into lock-up agreements with respect to our and their common stock, pursuant to which we and they are subject to certain resale restrictions for a period of days following the effectiveness date of the registration statement of which this prospectus forms a part.             may, at any time and without notice, release all or any portion of the common stock subject to the foregoing lock-up agreements. If the restrictions under the lock-up agreements are waived, then common stock will be available for sale into the public markets, which could cause the market price of our common stock to decline and impair our ability to raise capital.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not initially being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act or with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, reduced disclosure obligations regarding executive compensation in

 

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our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, become a “large accelerated filer” or issue more than $1.0 billion of non-convertible debt over a rolling three-year period.

To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common stock to be less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Because we have elected to use the extended transition period for complying with new or revised accounting standards for an emerging growth company, our financial statements may not be comparable to companies that comply with public company effective dates.

Under Section 102(b)(1) of the JOBS Act, emerging growth companies can elect to delay their adoption of new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates, and thus investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “may,” “could,” “plan,” “project,” “budget,” “predict,” “pursue,” “target,” “seek,” “objective,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures and the impact of such expenditures on our performance, the costs of being a publicly-traded corporation and our capital programs.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

 

    demand for our products and services, which is affected by, among other things, changes in the price of, and demand for, crude oil and natural gas in domestic and international markets;

 

    the level of growth in number of rigs;

 

    the level of fracturing activity and the availability of fracturing equipment and pressure pumping services;

 

    the size and timing of orders;

 

    market conditions in the offshore drilling industry;

 

    availability of raw materials;

 

    expectations regarding raw materials, overhead and operating costs and margins;

 

    availability of skilled and qualified workers;

 

    our ability to implement new technologies and services;

 

    potential liabilities arising out of the installation, use or misuse of our products;

 

    the possibility of cancellation of orders;

 

    our business strategy;

 

    our financial strategy, operating cash flows, liquidity and capital required for our business;

 

    general economic conditions;

 

    our future revenue, income and operating performance;

 

    the termination of relationships with major customers or suppliers;

 

    warranty and product liability claims;

 

    operating hazards inherent in our industry;

 

    laws and regulations, including environmental regulations, that may increase our costs, limit the demand for our products and services or restrict our operations;

 

    disruptions in the political, regulatory, economic and social conditions domestically or internationally;

 

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    political and social issues affecting the countries in which we do business;

 

    a failure of our information technology infrastructure or any significant breach of security;

 

    potential uninsured claims and litigation against us;

 

    a downgrade in the ratings of our debt that could restrict our ability to access the capital markets;

 

    the ability to establish and maintain effective internal controls over financial reporting;

 

    our dependence on the continuing services of certain of our key managers and employees;

 

    the lack of a public market for our securities;

 

    plans, objectives, expectations and intentions contained in this prospectus that are not historical; and

 

    other factors discussed in this prospectus.

You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under “Risk Factors,” which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

 

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USE OF PROCEEDS

We expect to receive $         million of net proceeds from the sale of shares of common stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses. We intend to use approximately $         million of the net proceeds we receive from this offering to repay in full and terminate our Term Loan, with any remaining proceeds used for general corporate purposes.

We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders. We will pay all expenses related to this offering, other than underwriting discounts and commissions related to the shares sold by the selling stockholders.

Our Term Loan matures on June 8, 2022. As of December 31, 2017, $71.5 million was outstanding under the Term Loan. The interest rate of the Term Loan as of December 31, 2017 was 10.7%. Borrowings under the Term Loan were incurred to refinance existing loans and for general corporate purposes.

Affiliates of each of Carlyle Group (“Carlyle”), Eaton Vance Corp. (“Eaton Vance”) and Stellex Capital Management (“Stellex”) are lenders under the Term Loan and will receive a portion of proceeds from this offering pursuant to the repayment of the Term Loan. Please see “Certain Relationships and Related Party Transactions—Term Loan Agreement.”

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would cause the net proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses, received by us to increase or decrease, respectively, by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. If the proceeds increase due to a higher initial public offering price or due to the issuance of additional shares, we would use the additional net proceeds to fund growth capital expenditures or for general corporate purposes. If the proceeds decrease due to a lower initial public offering price or a decrease in the number of shares issued, then we would reduce by a corresponding amount the net proceeds directed to fund our development program and general corporate purposes.

 

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DIVIDEND POLICY

We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our board of directors may deem relevant. In addition, certain of our debt agreements place restrictions on our ability to pay cash dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2018:

 

    on a historical successor basis; and

 

    as adjusted to give effect to this offering and the application of the net proceeds from this offering as described under “Use of Proceeds.”

This table is derived from, should be read together with and is qualified in its entirety by reference to the historical consolidated financial statements and the accompanying notes. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of March 31, 2018  
     Actual      As Adjusted(1)  
     (in thousands)  

Cash and cash equivalents

   $ 71,075      $                 
  

 

 

    

 

 

 

Long-term debt:

     

ABL Facility

   $ —        $ —    

Term Loan

     71,462     

Non-interest bearing supplier note payable

     162        162  
  

 

 

    

 

 

 

Total debt(2)

   $ 71,624      $  

Stockholders’ equity:

     

Common stock, $0.01 par value; 50,000,000 shares authorized, 10,050,001 shares issued and outstanding (actual);             shares authorized,             shares issued and outstanding (as adjusted)

   $ 101      $  

Additional paid-in capital

     489,372     

Accumulated deficit

     5,124     

Receivable from stockholders

     (1,250)     

Accumulated other comprehensive income

     1,039     
  

 

 

    

 

 

 

Total stockholders’ equity of AFG Holdings, Inc.

     494,386     

Non-controlling interest

     11,836     
  

 

 

    

 

 

 

Total stockholders’ equity

   $ 506,222      $  
  

 

 

    

 

 

 

Total capitalization

   $ 819,659      $  
  

 

 

    

 

 

 

 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) each of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of one million shares offered by us at an assumed offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) cash and cash equivalents by approximately $         (        ) million and increase (decrease) additional paid-in capital, total stockholders’ equity and total capitalization each by approximately $         (        ) million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(2) Represents gross debt amounts, which are not calculated net of issuance costs.

 

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DILUTION

Purchasers of our common stock in this offering will experience immediate and substantial dilution in the net tangible book value (tangible assets less total liabilities) per share of our common stock for accounting purposes. Our net tangible book value as of March 31, 2018 was approximately $         million, or $         per share.

Pro forma net tangible book value per share is determined by dividing our net tangible book value, or total tangible assets less total liabilities, by our shares of common stock that will be outstanding immediately prior to the closing of this offering. Assuming an initial public offering price of $         per share (which is the midpoint of the price range set forth on the cover page of this prospectus), after giving effect to the sale of the shares in this offering and further assuming the receipt of the estimated net proceeds (after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us), our adjusted pro forma net tangible book value as of March 31, 2018 would have been approximately $         million, or $         per share. This represents an immediate increase in the net tangible book value of $         per share to our existing stockholders and an immediate dilution to new investors purchasing shares in this offering of $         per share, resulting from the difference between the offering price and the pro forma as adjusted net tangible book value after this offering. The following table illustrates the per share dilution to new investors purchasing shares in this offering:

 

Assumed initial public offering price per share

      $               

Increase per share to existing common stockholders attributable to new investors in this offering

   $                  

As adjusted pro forma net tangible book value per share (after giving effect to this offering)

      $  

Dilution in pro forma net tangible book value per share to new investors in this offering

      $  

A $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our as adjusted pro forma net tangible book value per share after the offering by $         million and increase (decrease) the dilution to new investors in this offering by $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on an adjusted pro forma basis as of March 31, 2018, the total number of shares of common stock owned by existing stockholders and to be owned by new investors at $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and the total consideration paid and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at $            , the midpoint of the price range set forth on the cover page of this prospectus, calculated before deduction of estimated underwriting discounts and commissions.

 

     Shares Acquired     Total
Consideration
    Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Existing Stockholders(1)

               $                            $               

New Investors in this offering(2)

            
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $        100   $  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The number of shares disclosed for the existing stockholders includes             shares as selling stockholders in this offering.

 

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(2) The number of shares disclosed for the new investors does not include the             shares being purchased by the new investors from the existing stockholders in this offering.

The above table and discussion are based on the number of shares of our common stock to be outstanding as of the closing of this offering, and does not include any shares that would be issued if the underwriters exercise their option to purchase additional shares or any shares that may be issued under our 2018 Incentive Award Plan in the future.

 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

The following table presents selected historical financial data of AFG Holdings, Inc. as of the dates and for the periods indicated. The summary historical financial data as of and for the three months ended March 31, 2018 and for the three months ended March 31, 2017 is derived from the unaudited condensed consolidated financial statements appearing elsewhere in this prospectus. The summary historical and financial data as of December 31, 2017 and 2016 and for the periods from June 9, 2017 through December 31, 2017, January 1, 2017 through June 8, 2017 and for the Year ended December 31, 2016 are derived from the audited consolidated financial statements appearing elsewhere in this prospectus. The summary unaudited pro forma financial data for the year ended December 31, 2017 is derived from the unaudited pro forma condensed consolidated financial statements appearing elsewhere in this prospectus. References to “Successor” relate to our financial position and results of operations subsequent to June 8, 2017, the date of our reorganization. References to “Predecessor” relate to our financial position and results of operations prior to, and including, June 8, 2017. As a result of the application of fresh start accounting following our emergence from bankruptcy, the Successor and Predecessor periods may lack comparability.

The selected unaudited pro forma financial data for the year ended December 31, 2017 has been prepared to give pro forma effect to our emergence from bankruptcy and the application of fresh start accounting, as if our emergence had been completed as of January 1, 2017. This information is subject to and gives effect to the assumptions and adjustments described in the notes accompanying the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The summary unaudited pro forma financial data should not be considered indicative of actual results of operations that would have been achieved had the applicable transactions been consummated on the date indicated, and do not purport to be indicative of results of operations for any future period. The following table should be read together with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

    Successor     Predecessor     Successor     Predecessor     Pro Forma  
    Three
Months
Ended
March 31,
2018
    Three
Months
Ended
March 31,
2017
    Period from
June 9, 2017
through
December 31,
2017
    Period from
January 1,
2017
through
June 8, 2017
    Year Ended
December 31,
2016
    Year Ended
December 31,
2017
 

(in thousands, except per

share data)

                                   

Revenue, net

  $ 170,505     $ 69,260     $ 285,539     $ 156,238     $ 216,719     $ 441,777  

Cost of products and services

    (130,041     (64,542     (221,491     (143,234     (200,271     (364,725

Depreciation and amortization

    (2,477     (4,558     (34,465     (8,026     (18,106     (38,980

Impairment of property and equipment

    —         —         —         —         (3,518     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Revenues

    (132,518     (69,100     (255,956     (151,260     (221,895     (403,705
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Margin (Loss)

    37,987       160       29,583       4,978       (5,176     38,072  

Operating Expenses

               

Selling, general and administrative

    (15,718     (26,919     (41,601     (41,490     (65,002     (83,526

Depreciation and amortization

    (10,361     (3,086     (23,389     (5,440     (11,938     (40,408

Goodwill and intangible impairment and restructuring charges

    —         —         —         —         (3,070     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

    (26,079     (30,005     (64,990     (46,930     (80,010     (123,934
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from Operations

    11,908       (29,845     (35,407     (41,952     (85,186     (85,862

Other Income (Expense)

               

Interest income

    149       29       128       46       123       174  

Interest expense

    (2,620     (12,388     (7,188     (27,348     (54,228     (11,598

Gain on extinguishment of debt

    —         —         —         —         32,076       —    

Reorganization items, net

    —         —         —         385,654       —         —    

Other, net

    47       117       70       636       333       706  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income (Expense)

    (2,424     (12,242     (6,990     358,988       (21,696     (10,718

Income (Loss) From Continuing Operations Before Income Taxes

    9,484       (42,087     (42,397     317,036       (106,882     (96,580

Income Tax Expense (Benefit)

    1,960       345       (39,340     372       (1,835     (168,895
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Successor     Predecessor     Successor     Predecessor     Pro Forma  
    Three
Months
Ended
March 31,
2018
    Three
Months
Ended
March 31,
2017
    Period from
June 9, 2017
through
December 31,
2017
    Period from
January 1,
2017
through
June 8, 2017
    Year Ended
December 31,
2016
    Year Ended
December 31,
2017
 

(in thousands, except per

share data)

                                   

Income (Loss) from Continuing Operations

    7,524       (42,432     (3,057     316,664       (105,047     72,315  

Income (Loss) on Discontinued Operations:

               

Income (Loss) from operations of discontinued Italian business (including loss on disposal of $81,805 in 2016)

    —         —         —         —         (80,087     —    

Income tax expense

    —         —         —         —         1,429       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from Discontinued Operations

    —         —         —         —         (81,516     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

  $ 7,524     $ (42,432   $ (3,057   $ 316,664     $ (186,563   $ 72,315  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

Per share information:

               

Net income (loss) per common share:

        .            

Basic and diluted

  $ 0.77     $ (0.89   $ (0.26   $ 6.64     $ (3.90   $ 7.30  

Weighted average common shares outstanding:

               

Basic and diluted

    10,045       47,734       10,009       47,734       47,734       10,009  
   

Balance Sheet Data as of:

               

Cash and cash equivalents

  $ 71,075       $ 73,884       $ 52,487    

Property and equipment—net of accumulated depreciation

    135,600         134,788         112,053    

Total assets

    819,659         789,956         580,210    

Long-term debt—net of deferred loan costs

    67,006         67,637         319    

Total stockholders’ equity (deficit)

    506,222         497,231         (341,858  
   

Cash Flow Statement Data:

               

Net cash provided by (used in) operating activities

  $ 4,162     $ (21,188   $ 22,341     $ (48,388   $ (35,636  

Net cash provided by (used in) investing activities

    (7,104     (1,193     (5,709     (3,193     20,138    

Net cash provided by (used in) financing activities

    812       (1,705     (1,819     55,729       52,613    
   

Other Financial Data:

               

Adjusted EBITDA(1)

  $ 26,147     $ (82   $ 36,760     $ 9,420     $ (22,984   $ 46,180  

Adjusted EBITDA margin(1)

    15.3     (0.1 )%      12.9     6.0     (10.6 )%      10.5

 

(1) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a definition of Adjusted EBITDA and Adjusted EBITDA margin, as well as each respective definition’s reconciliation to its most directly comparable GAAP measure, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the “Prospectus Summary—Summary Historical and Unaudited Pro Forma Financial Data,” “Selected Historical and Unaudited Pro Forma Financial Data” and the consolidated financial statements and related notes appearing elsewhere in this prospectus. References to “Successor” relate to the consolidated financial position and results of operations of the reorganized company subsequent to June 8, 2017. References to “Predecessor” relate to the financial position and results of operations of the Company prior to, and including, June 8, 2017. As a result of the application of fresh start accounting following our emergence from bankruptcy, the Successor and Predecessor periods may lack comparability as described below. The unaudited pro forma condensed consolidated financial statements for the period ended December 31, 2017, treats the Successor as if it emerged from bankruptcy, and the application of fresh start accounting began, on January 1, 2017.

This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this prospectus, particularly in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements.

Company Overview

We are a leading OEM that designs and manufactures highly-engineered, mission critical equipment and provides complementary consumable products, parts and aftermarket services. We serve a diverse range of customers in the global oil and gas and general industrial end markets. We have a proven track record in new technology development and product commercialization, as well as decades of experience working with our customers to manufacture state-of-the-art, specialized equipment that meets their stringent requirements.

Our Segments

We conduct and report our operations through three segments: Onshore Oil & Gas OEM, Offshore Oil & Gas OEM, and Connectors & Precision Manufacturing.

Onshore Oil & Gas OEM

Our Onshore Oil & Gas OEM segment designs, engineers and manufactures equipment and products, and provides aftermarket parts and services, primarily for pressure pumping and gas compression operations. Our pressure pumping equipment is used in the hydraulic fracturing and cementing of oil and gas wells. We manufacture what we believe to be one of the industry’s most complete suites of equipment for pressure pumping operations, including pump units, blenders, hydration units and proprietary end-to-end automation, controls and data management, and we are in the process of commercializing our fluid end and power end product lines. We believe we are also the only pressure pumping equipment manufacturer that builds its own U.S. Department of Transportation compliant fuel tanks, trailer frames, fluid tanks, platforms, racks and other structures used with its

 

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equipment. We also manufacture gas compression packages used in artificial lift applications. We hold 15 patents related to this segment, including DuraStim™, our recently-developed, patented 6,000 HHP frac pump that we expect to commercially offer to our customers in the second half of 2018. DuraStim™ provides greater power density and efficiency than conventional diesel engines.

Offshore Oil & Gas OEM

Our Offshore Oil & Gas OEM segment designs, engineers and manufactures equipment and products, and provides aftermarket parts and services, for drilling, production and intervention operations primarily in the offshore, deepwater and subsea markets. Our products include market-leading, patent-protected MPD systems for both retrofits and new-build rigs, drilling risers, riser gas management, early kick/loss detection, dual gradient drilling, continuous circulation, buoyancy and subsea connectors. We hold 351 patents related to this segment. Our MPD systems are state-of-the-art in that they enable active control of downhole drilling pressure, resulting in safety and drilling efficiency for offshore drillships, semi-submersible rigs and jackup rigs. In addition, we offer a corollary product, RCDs, in the onshore space with a similar value proposition as in offshore markets. We also provide software, controls, analytics and testing. In particular, our proprietary testing and simulation equipment and software includes the unique capability to test MPD scenarios and equipment beyond standard industry requirements and simulate drilling conditions.

Connectors & Precision Manufacturing

Our Connectors & Precision Manufacturing segment designs, engineers and manufactures connectors, forgings, forged products and rolled rings for the global oil and gas industry, including midstream, refining, LNG and petrochemical, as well as general industrial, power generation, transportation, and aerospace markets, and provide private label manufacturing services for other OEMs. Our systems solve chronic problems associated with standard industry pipe connector sealing technology. Our proprietary connector design utilizes metal-to-metal seal ring technology providing superior leak-free reliability compared to traditional gaskets. This metal-to-metal seal ring technology is specifically designed to handle fatigue and high bending moments, and offers significant weight and space savings while handling extremely high temperatures and pressures. We hold 20 patents related to this segment, including our proprietary Taper-Lok® pressure-energized connectors that provide safe, leak-free sealing solutions in a broad range of applications. In addition to our connector and sealing products, we also provide engineering, forging and private label precision manufacturing services that meet stringent industrial specifications and processes. Our forging capabilities include open and closed die forgings, ranging in tonnage from approximately 650 to 6,500 tons.

Business Outlook

We sell products and provide services directly and indirectly to customers who operate primarily in the oil and gas industry. The demand for our products and services is primarily driven by drilling and completion activity by E&P companies, which depends on the current and anticipated profitability of developing oil and natural gas reserves. We believe that the recent stabilization in commodity price levels will result in increased demand for our products and services.

Crude oil prices have increased from their recent lows of $26.21 per barrel (“Bbl”) in early 2016 to $67.88 per Bbl as of May 25, 2018 (based on the West Texas Intermediate (“WTI”) spot oil price). Natural gas prices have increased from recent lows of $1.64 per million British Thermal Units (“MMBtu”) in early 2016 to $2.96 per MMBtu as of May 25, 2018 (based on the Henry Hub Natural Gas Spot Price).

As commodity prices have improved, drilling and completion activity by E&P companies has increased, which has driven increased demand for the oil and gas equipment and services we provide.

 

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We believe that the current commodity price environment will support growth in both our Onshore Oil & Gas OEM and Offshore Oil & Gas OEM business segments.

The strength of the overall economy, general economic expansion, the unemployment rate being at its lowest level in the last 10 years, projected GDP growth of 2.7% for 2018, and the general recovery of onshore and offshore oil and gas activity, bodes well for our Connectors & Precision Manufacturing segment as economic expansion leads to growth in many sectors of the energy and industrial value chains where our manufactured parts are sold. Plant turnarounds and maintenance activities, which may be supported by continued economic expansion can provide a source of recurring revenue.

Onshore Oil & Gas OEM Segment

Pressure pumping equipment is undergoing a major replacement cycle. This cycle is driven by the aging of the North American pressure pumping fleet and the increasing wear-and-tear and declining useful life of in-service equipment. We estimate that the useful life for frac pump units has declined from approximately seven to 10 years in 2010 to three to five years in the current operating environment. Although the U.S. pressure pumping fleet experienced tremendous growth between 2010 and 2015, which resulted in an oversupply of HHP when market conditions deteriorated during the recent industry downturn, other industry conditions mitigated this oversupply in HHP. In particular, deferred maintenance, few additions to the overall U.S. fleet and obsolescence of older vintage equipment are now driving an ongoing equipment replacement cycle that is creating demand for young, modern frac fleets of increasing size to execute leading edge frac designs required by today’s market.

According to Spears & Associates, approximately 4.3 million net HHP has been added to the North American pressure pumping fleet over the last five years, and approximately 95% of the total U.S. pressure pumping fleet is at least three years old. Improved commodity prices, net attrition to the U.S. fleet in 2016 and increasing wear and tear on older vintage equipment due to higher completion intensity, expanding E&P capital budgets, and a growing number of wells drilled all provide tailwinds that support the fundamentals of our pressure pumping equipment and aftermarket services.

Offshore Oil & Gas OEM Segment

Demand for our Offshore Oil & Gas OEM products and aftermarket services is primarily driven by global offshore capital spending. As commodity prices have improved and become more supportive of offshore projects, the global offshore rig count has begun to increase, with jackup and floater utilization increasing. Technological advances and efficiency gains have also lowered project costs, supporting the outlook for offshore expansion. We are well-positioned to benefit from improving offshore drilling activity and rig dayrates, especially through the deployment of our highly-engineered MPD technology, which has significant efficiency and safety benefits for our customers and targets the drillship, floater and jackup markets for retrofit.

According to Spears & Associates, global spending on offshore drilling grew to $115 billion in 2014, and subsequently experienced a precipitous decline as a result of the global industry downturn in 2015. Global offshore drilling spending in 2017 of $50 billion was the lowest level experienced since 2000. However, Spears & Associates projects that it will grow at over 6% per year through 2022, ultimately reaching $68 billion. A recovery offshore spending should result in increased demand for our offshore oil and gas products and services.

Connectors & Precision Manufacturing Segment

Midstream infrastructure spending and refining capital expenditures are key drivers for demand for our connectors. These products are well-positioned to benefit from both ongoing maintenance

 

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spending as well as growth spending in the midstream and downstream sectors. Plant turnarounds and maintenance activities provide a source of recurring revenue for connectors. Continued spending on domestic pipeline infrastructure should provide consistent demand for these products going forward. Our connectors are also often sold into the downstream market, which we typically access through distributors. We believe that our connectors business will benefit from increased spending on refinery turnaround projects that were delayed over the last several years in order for refiners to capture attractive crack spreads.

We also serve a variety of end markets including the general industrial, petrochemical, power generation, transportation and aerospace sectors. We provide private label manufacturing services to customers in many of these sectors. Over the past several years these markets have benefited from the global economic recovery. Participating in the general industrial markets serves to diversify our customer and geographic concentration of revenues and reduce volatility associated with the cyclicality of the oil and gas industry.

How We Generate Revenues

Our Onshore Oil & Gas OEM segment and Offshore Oil & Gas OEM segment generate revenue primarily through sales of equipment and products. Each segment also provides supporting aftermarket services for our own products and competing OEM products. The Onshore Oil & Gas OEM segment sells pressure pumping equipment and aftermarket services to the completion service providers. We also generate revenues through the sale of gas compression equipment primarily for artificial lift applications onshore. The Offshore Oil & Gas OEM segment generates revenue through the sale of MPD systems, drilling, subsea production and other related offshore equipment and aftermarket services primarily to drilling contractors and, in the case of subsea equipment, the engineering and construction companies. We also sell directly to the E&P operators which are increasingly requiring drillers to include MPD equipment in their drilling packages.

Our Connectors & Precision Manufacturing segment generates revenue through sales of forgings and connectors, as well as through private label manufacturing services. We offer a wide array of forged products ranging from commodity flanges to highly engineered connectors and components that can be used in multiple end markets. Commodity flanges are primarily sold to a large network of distributors that are primarily for end users in the midstream and downstream end markets. Highly-engineered connectors, including our proprietary, severe service Taper-Lok® product, are primarily sold directly to the end users, including subsea operators and service companies in upstream, midstream and downstream applications. Our private label manufacturing services includes design, engineering and production manufacturing services for complex machined components to various customers operating throughout the global oil and gas industry and including refining and petrochemical, as well as general industrial, power generation, transportation and aerospace markets. We leverage our manufacturing expertise and capacity to serve as a single source for manufacturing from the design phase to mass production of our products for our customers.

Costs of Conducting Our Business

Cost of Sales

The principal costs involved in conducting our business are the direct and indirect costs to manufacture and supply our products, including labor, materials, machine time, lease expenses related to our leased facilities and freight. We also incur costs for field service and labor, equipment depreciation, backlog amortization, fuel and supplies.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expense is comprised of costs such as sales and marketing, engineering expenses, general corporate overhead, business development expenses, compensation expense, information technology expenses, safety and environmental expenses, legal expenses and other related administrative functions.

Other Expenses, Net

Other expenses, net is comprised primarily of interest expense associated with our indebtedness, including our Term Loan.

How We Evaluate Our Operations

We use a variety of financial and operational metrics to assess the financial performance of our operations, including various non-GAAP financial measures, including:

 

    Revenues;

 

    Adjusted EBITDA; and

 

    Adjusted EBITDA margin.

Revenues, Net

We analyze our revenues by comparing our actual revenues to our internal projections for a given period and to prior periods. We believe that revenues are a meaningful indicator of our performance and of the demand for and pricing of our equipment and services. Revenues are net of any value added, sales or use tax.

Adjusted EBITDA and Adjusted EBITDA Margin

We view Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP financial measures, as important indicators of performance, as they exclude certain items that do not correspond to changes in the operations of our business. We define Adjusted EBITDA as net income before interest expense, income tax benefit (expense), depreciation and amortization, loss from discontinued operations, net, gain on extinguishments of debt, impairment and restructuring charges, fresh start inventory adjustment, non-cash inventory write-offs, stock-based compensation, reorganization items, net and certain other items that we do not view as indicative of our ongoing performance. We define Adjusted EBITDA margin as the ratio of Adjusted EBITDA to revenue, net. See “Prospectus Summary—Summary Historical and Unaudited Pro Forma Financial Data” and “—Results of Operations—Non-GAAP Financial Measures” for more information and reconciliations of Adjusted EBITDA and Adjusted EBITDA margin to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.

Key Factors Impacting the Comparability of Results of Operations

As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Key factors affecting the comparability of our results of operations are summarized below.

 

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Restructuring Transactions and Fresh Start Accounting

On April 30, 2017, we filed petitions under Chapter 11 in the U.S. Bankruptcy Court in the Southern District of Texas, Houston Division. We received bankruptcy court confirmation of our plan of reorganization on May 22, 2017 and emerged from bankruptcy on June 8, 2017 (the “Effective Date”). For additional information about our bankruptcy proceedings and emergence, please see Note 2 to the audited consolidated financial statements included elsewhere in this prospectus. As a result of our Restructuring, we emerged with a significantly reduced level of indebtedness and interest burden. Our pro forma interest expense for the year ended December 31, 2017 was substantially lower than for the year ended December 31, 2016 (Predecessor).

Upon emergence from bankruptcy, we adopted fresh start accounting and became a new entity for financial reporting purposes with no ending retained earnings or deficit balance as of the Effective Date. Upon adoption of fresh start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date, which differed materially from the recorded values of those same assets and liabilities prior to the Effective Date. As a result, our balance sheet and statement of operations subsequent to the Effective Date are not comparable to our balance sheet and statements of operations prior to the Effective Date. For additional information about our application of fresh start accounting, please see Note 2 to the audited consolidated financial statements included elsewhere in this prospectus.

As a result of the restructuring, at December 31, 2017 (Successor), we had a U.S. net operating loss carryforward of approximately $47.3 million and R&D tax credits of approximately $2.8 million, which will begin to expire in 2025 and 2030, respectively. Additionally, we had a state net operating loss carryforward of approximately $110.2 million, subject to various carryforward limitations depending upon the state authority, and an alternative minimum tax credit carryforward of approximately $0.9 million. Due to the change in control associated with bankruptcy, the U.S. net operating loss carryforward is subject to a limitation calculated under Section 382. It is expected our state net operating loss carryforward may have similar Section 382 limitations. We have foreign net operating loss carryforwards of approximately $146 million. For additional information, please see Note 13 to our audited financial statements included herein.

Significant Downturn in Upstream Oil and Gas and Subsequent Recovery

The decline in the upstream oil and gas industry since 2014 has negatively impacted our historical financial results. During the past seven years, the posted price for WTI oil has ranged from a high of $113.39 per barrel in April 2011 to a low of $26.19 per barrel in February 2016. However, the industry is recovering with a posted price for West Texas Intermediate oil of $67.88 as of May 25, 2018. As a result of this volatility from 2011 to 2016, however, many E&P companies scaled back drilling activity. With these declines and volatility in E&P activity, many E&P and service companies deferred maintenance and growth capital expenditures, and those declined rates may exist if the price of oil reverses its recent increases.

Our exposure to upstream oil and gas production levels, coupled with reduced exploration activity and the deferral of maintenance and growth capital expenditures by upstream energy companies, negatively impacted our financial results in 2016 and 2017. We believe it is helpful to consider the impact of our exposure to upstream oil and gas in evaluating our business, in order to better understand other drivers of our performance during those periods. Please see “—Business Outlook” above or “Industry” for a description of where we believe industry activity currently is and where we believe it will be going forward.

 

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Public Company Costs

We expect to incur incremental, non-recurring costs related to our transition to a publicly traded and taxable corporation, including the costs of this initial public offering and the costs associated with the initial implementation of our Sarbanes-Oxley Section 404 internal control implementation and internal testing. We also expect to incur additional significant and recurring expenses as a publicly traded corporation, including costs associated with the employment of additional personnel, compliance under the Exchange Act, annual and quarterly reports to common stockholders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation.

 

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Results of Operations

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

The following table sets forth our selected results of operations for our business for the periods indicated below.

 

     Successor      Predecessor  
     Three Months
Ended March
31, 2018
     Three Months
Ended March
31, 2017
 
     (in thousands)      (in thousands)  

Revenue, net:

     

Total Revenue

   $ 170,505      $ 69,260  

Cost of products and services

     (130,041      (64,542

Depreciation & amortization

     (2,477      (4,558
  

 

 

    

 

 

 

Total Cost of Revenues

   $ (132,518    $ (69,100
  

 

 

    

 

 

 

Gross Margin (Loss)

   $ 37,987      $ 160  

Operating Expenses:

     

Selling, general and administrative

     (15,718      (26,919

Depreciation & amortization

     (10,361      (3,086
  

 

 

    

 

 

 

Total Operating Expenses

   $ (26,079    $ (30,005
  

 

 

    

 

 

 

Income (Loss) from Operations:

     11,908        (29,845

Other Income (Expense):

     

Interest income

     149        29  

Interest expense

     (2,620      (12,388

Other, net

     47        117  
  

 

 

    

 

 

 

Total Other Income (Expense)

   $ (2,424    $ (12,242
  

 

 

    

 

 

 

Income (Loss) From Continuing Operations Before Income Tax

     9,484        (42,087

Income Tax Expense

     1,960        345  
  

 

 

    

 

 

 

Net Income (Loss)

     7,524        (42,432
  

 

 

    

 

 

 

Other Financial Data:

     

Adjusted EBITDA(1)

   $ 26,147      $ (82

Adjusted EBITDA margin(1)

     15.3      (0.1 )% 

 

(1) For a definition of Adjusted EBITDA and Adjusted EBITDA margin, as well as a reconciliation to the most directly comparable GAAP measure, please see “—Non-GAAP Financial Measures.”

Revenues.    Revenues, net were $170.5 million and $69.3 million for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor), respectively. The increase in revenues was primarily due to increased sales within Onshore Oil & Gas OEM of $82.8M. Additionally, Offshore Oil & Gas OEM had an increase in revenue of $5.9 million and Connectors and Precision Manufacturing had an increase of $12.6 million.

Cost of Revenues.    Cost of revenues which includes cost of products and services, depreciation and amortization and impairment of property and equipment was $132.5 million and $69.1 million for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor), respectively.

Cost of products and services as a percentage of revenues, net were 76.3% and 93.2% for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017

 

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(Predecessor), respectively. The improvement in margin was mainly due to higher volumes and increased productivity in the Connectors and Precision Manufacturing business as well as increased sales in the Offshore Oil and Gas OEM business.

Selling, General and Administrative.    Selling, general and administrative expenses were $15.7 million and $26.9 million for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor), respectively. This decrease was primarily the result of recent cost-saving initiatives and an elevated level of expenses in 2017 due to the restructuring.

Depreciation and Amortization.    Depreciation and amortization expenses, which are reflected in cost of revenues and operating expenses, were $12.8 million and $7.6 million for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor), respectively. This increase is due to the step up in intangibles of approximately $277.0 million and fixed assets of approximately $26.4 million as a result of the adoption of fresh start accounting.

Interest Income.    Interest income was $0.1 million and $0 million for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor), respectively. This increase primarily reflects interest income on higher cash balances in 2018 due to our improved financial condition upon our emergence from bankruptcy.

Interest Expense.    Interest expense was $2.6 million and $12.4 million for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor), respectively. This decrease is primarily the result of lower debt levels due to restructuring and settlement of liabilities subject to compromise upon our emergence from bankruptcy.

Other, net.    Other, net was $0 million and $0.1 million for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor), respectively. This decrease primarily reflects a combination of gains and losses on foreign exchange and asset sales.

Adjusted EBITDA.    Adjusted EBITDA was $26.1 million and $(0.1) million for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor), respectively. This increase primarily reflects cost efficiencies on higher levels of production and improved margins, as a result of improved pricing and cost reduction efforts.

The following table sets forth our selected results of operations for each of the Company’s business segment for the periods indicated below.

 

     Three Months
Ended March
31, 2018
     Three Months
Ended
March 31,
2017
 
     (in thousands)      (in thousands)  

Net Revenue

     

Onshore Oil & Gas OEM

   $ 112,360      $ 29,601  

Offshore Oil & Gas OEM

     14,124        8,207  

Connectors & Precision Manufacturing

     44,021        31,452  
  

 

 

    

 

 

 

Total

   $ 170,505      $ 69,260  
  

 

 

    

 

 

 

Adjusted EBITDA

     

Onshore Oil & Gas OEM

   $ 23,907      $ 8,587  

Offshore Oil & Gas OEM

     479        (5,854

Connectors & Precision Manufacturing

     7,033        2,497  

Other

     (5,272      (5,312
  

 

 

    

 

 

 

Total

   $ 26,147      $ (82
  

 

 

    

 

 

 

 

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Onshore Oil & Gas OEM

Revenues, net for the Onshore Oil & Gas OEM segment were $112.4 million and $29.6 million for the three months ended March 31, 2018 and the three months ended March 31, 2017, respectively. The increase in net revenues was primarily due to higher sales of pressure pumping equipment due to improvement in onshore drilling and completion activity. Additionally, our recent AMI acquisition contributed to increased sales with the addition of its automation and control products.

Adjusted EBITDA for the Onshore Oil & Gas OEM segment was $23.9 million and $8.6 million for the three months ended March 31, 2018 and the three months ended March 31, 2017, respectively. The increase in Adjusted EBITDA was primarily due to increased sales.

Offshore Oil & Gas OEM

Revenues, net for the Offshore Oil & Gas OEM segment were $14.1 million and $8.2 million for the three months ended March 31, 2018 and the three months ended March 31, 2017, respectively. The increase in net revenues was primarily due to increased orders.

Adjusted EBITDA for the Offshore OEM segment was $0.5 million and $(5.9) million for the three months ended March 31, 2018 and the three months ended March 31, 2017, respectively. The increase in Adjusted EBITDA was primarily due to increased sales and improved cost efficiencies.

Connectors & Precision Manufacturing

Revenues, net for the Connectors & Precision Manufacturing segment were $44.0 million and $31.5 million for the three months ended March 31, 2018 and the three months ended March 31, 2017, respectively. The Connectors & Precision Manufacturing segment saw revenue improvement in line with increased maintenance and growth spending in the midstream and downstream oil and gas sectors, as well as in the general industrial market. In particular, our connectors products saw increased revenues and strong demand levels, as a result of strong demand and market share gains.

Adjusted EBITDA for the Connectors & Precision Manufacturing segment was $7.0 million and $2.5 million for the three months ended March 31, 2018 and the three months ended March 31, 2017, respectively. The increase in Adjusted EBITDA was primarily due to cost efficiencies on a higher level of production.

 

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Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

The following table sets forth our selected results of operations for our business for the periods indicated below.

 

    Successor     Predecessor     Pro Forma  
    Period from
June 9, 2017
through
December 31,
2017
    Period from
January 1,
2017
through
June 8, 2017
    Year Ended
December 31,
2016
    Year Ended
December 31,
2017
 
    (in thousands)     (in thousands)  

Revenue, net

  $ 285,539       156,238       216,719       441,777  

Cost of products and services

    (221,491     (143,234     (200,271     (364,725

Depreciation and amortization

    (34,465     (8,026     (18,106     (38,980

Impairment of property and equipment

    —         —         (3,518     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Revenues

    (255,956     (151,260     (221,895     (403,705
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross Margin (Loss)

    29,583       4,978       (5,176     38,072  

Operating Expenses

         

Selling, general and administrative

    (41,601     (41,490     (65,002     (83,526

Depreciation and amortization

    (23,389     (5,440     (11,938     (40,408

Goodwill and intangible impairment and restructuring charges

    —         —         (3,070     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

    (64,990     (46,930     (80,010     (123,934
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from Operations

    (35,407     (41,952     (85,186     (85,862

Other Income (Expense)

         

Interest income

    128       46       123       174  

Interest expense

    (7,188     (27,348     (54,228     (11,598

Gain on extinguishment of debt

    —         —         32,076       —    

Reorganization items, net

    —         385,654       —         —    

Other, net

    70       636       333       706  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income (Expense)

    (6,990     358,988       (21,696     (10,718
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) From Continuing Operations Before Income Taxes

    (42,397     317,036       (106,882     (96,580

Income Tax Expense (Benefit)

    (39,340     372       (1,835     (168,895
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) from Continuing Operations

    (3,057     316,664       (105,047     72,315  

Income (Loss) on Discontinued Operations:

         

Income (Loss) from operations of discontinued Italian business (including loss on disposal of $81,805 in 2016)

    —         —         (80,087     —    

Income tax expense

    —         —         1,429       —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from Discontinued Operations

    —         —         (81,516     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

  $ (3,057   $ 316,664     $ (186,563   $ 72,315  
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

         

Adjusted EBITDA(1)

  $ 36,760     $ 9,420     $ (22,984   $ 46,180  

Adjusted EBITDA margin(1)

    12.9     6.0     (10.6)     10.5

 

(1) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a definition of Adjusted EBITDA and Adjusted EBITDA margin, as well as each respective definition’s reconciliation to each respective definition’s most directly comparable GAAP measure, please see “—Non-GAAP Financial Measures.”

Revenues, Net.    Revenues, net were $285.5 million and $156.2 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $216.7 million for the year ended December 31, 2016 (Predecessor). On a pro forma basis, revenues for the year ended December 31, 2017 were $441.8 million as compared to $216.7 million for the Predecessor in 2016. The increase in revenues was primarily due to higher sales of pressure pumping equipment due to the improvement in drilling and

 

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completion activity within the Onshore Oil & Gas OEM segment. The Connectors & Precision Manufacturing segment saw revenue improvement in line with increased maintenance and growth spending in the midstream and downstream oil and gas sectors, as well as in the general industrial market. In particular, our connectors products saw increased revenues, as a result of strong demand and market share gains. The Offshore Oil & Gas OEM segment saw a decrease in revenues due to the suppressed deepwater and offshore oil and gas market.

Cost of Revenues.    Cost of revenues which includes cost of products and services, depreciation and amortization and impairment of property and equipment was $256.0 million and $151.3 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $221.9 million for the year ended December 31, 2016 (Predecessor). On a pro forma basis, cost of revenues which includes cost of products and services, depreciation and amortization, and impairment of property and equipment for the year ended December 31, 2017 was $403.7 million as compared to $221.9 million for the Predecessor in 2016.

Cost of products and services as a percentage of revenues, net were 77.6% and 91.7% for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor) and 82.6% on a pro forma basis for the year ended December 31, 2017, respectively, as compared to 92.4% for the year ended December 31, 2016 (Predecessor). The decrease in cost of products and services as a percentage of sales in the Successor period was a result of cost efficiencies on higher production levels.

Impairment of property and equipment was $0 million and $0 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $3.5 million for the year ended December 31, 2016 (Predecessor). Impairment in 2016 was a result of lower level of activity in both the oil and gas and general industrial markets, which prompted us to restructure and adjust our operations and cost structure to reflect current and expected near-term activity levels. These restructuring activities resulted in facility closures and the removal of excess machinery and equipment in 2016 that resulted in asset impairments.

Selling, General and Administrative.    Selling, general and administrative expenses were $41.6 million and $41.5 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $65.0 million for the year ended December 31, 2016 (Predecessor). On a pro forma basis, selling, general and administrative expenses for the year ended December 31, 2017 were $83.5 million as compared to $65.0 million for the Predecessor in 2016. This increase primarily reflects professional fees in the amount of $9.4 million incurred related to restructuring expenses.

Depreciation and Amortization.    Depreciation and amortization expenses, which are reflected in cost of revenues and operating expenses, were $57.9 million and $13.5 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $30.0 million for the year ended December 31, 2016 (Predecessor). This increase is due to the step up in intangibles of approximately $277.0 million and fixed assets of approximately $26.4 million as a result of the adoption of fresh start accounting.

Goodwill and Intangible Impairment and Restructuring Charges.    Goodwill and intangible impairment and restructuring charges were $0 million and $0 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $3.1 million for the year ended December 31, 2016 (Predecessor). This decrease primarily reflects the absence of goodwill and intangible impairment and restructuring charges in 2017.

 

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Interest Income.    Interest income was $0.1 million and $0 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $0.1 million for the year ended December 31, 2016 (Predecessor). On a pro forma basis, interest income for the year ended December 31, 2017 was $0.2 million as compared to $0.1 million for the Predecessor in 2016. This increase primarily reflects interest income on higher cash balances in 2017 due to our improved financial condition upon our emergence from bankruptcy.

Interest Expense.    Interest expense was $7.2 million and $27.3 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $54.2 million for the year ended December 31, 2016 (Predecessor). On a pro forma basis, interest expense for the year ended December 31, 2017 was $11.6 million as compared to $54.2 million for the Predecessor in 2016. This decrease is primarily the result of lower debt levels in 2017 as a result of restructuring and settlement of liabilities subject to compromise upon our emergence from bankruptcy.

Gain on Extinguishment of Debt.    Gain on extinguishment of debt was $0 million and $0 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $32.1 million for the year ended December 31, 2016 (Predecessor). This decrease primarily reflects the absence in 2017 of the gain on extinguishment of debt in 2016, where an affiliate of our major stockholder purchased and extinguished $47.2 million of our second lien term loan payable at a discount, using proceeds from a sale of preferred stock. There was no similar transaction in 2017.

Reorganization Items, Net.    Reorganization items, net was $0 million and $385.7 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $0 million for the year ended December 31, 2016 (Predecessor). This amount in the period January 1 through June 8, 2017 (Predecessor) reflects the reorganization items resulting from our emergence from bankruptcy.

Other, Net.    Other, net was $0.1 million and $0.6 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $0.3 million for the year ended December 31, 2016 (Predecessor). On a pro forma basis, other, net for the year ended December 31, 2017 was $0.7 million as compared to $0.3 million for the Predecessor in 2016. This increase primarily reflects gains on asset sales.

Adjusted EBITDA.    Adjusted EBITDA was $36.8 million and $9.4 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $(23.0) million for the year ended December 31, 2016 (Predecessor). This increase primarily reflects cost efficiencies on higher levels of production and improved margins, primarily in the Onshore Oil & Gas OEM and Connectors & Precision Manufacturing segments.

 

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Segment Results

The following table sets forth our selected results of operations for each of our business segments for the periods indicated below.

 

    Successor     Predecessor     Pro Forma  
    Period from
June 9, 2017
through
December 31,
2017
    Period from
January 1, 2017
through
June 8,

2017
    Year Ended
December 31,
2016
    Year Ended
December 31,
2017
 
    (in thousands)     (in thousands)  

Revenue, net

         

Onshore Oil & Gas OEM

  $ 161,255     $ 84,442     $ 49,703     $ 245,697  

Offshore Oil & Gas OEM

    25,220       14,117       50,203       39,337  

Connectors & Precision Manufacturing

    99,064       57,679       116,813       156,743  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 285,539     $ 156,238     $ 216,719     $ 441,777  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

         

Onshore Oil & Gas OEM

  $ 38,654     $ 24,089     $ 4,294     $ 62,743  

Offshore Oil & Gas OEM

    (4,756     (9,878     (14,505     (14,634

Connectors & Precision Manufacturing

    15,551       4,455       4,241       20,006  

Corporate and Other

    (12,689     (9,246     (17,014     (21,935
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 36,760     $ 9,420     $ (22,984   $ 46,180  
 

 

 

   

 

 

   

 

 

   

 

 

 

Onshore Oil & Gas OEM

Revenues, net for the Onshore Oil & Gas OEM segment were $161.3 million and $84.4 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $50.1 million for the year ended December 31, 2016 (Predecessor). The increase in net revenues was primarily due to higher sales of pressure pumping equipment due to improvement in onshore drilling and completion activity. Additionally, our recent AMI acquisition contributed to increased sales in 2017 with the addition of automation and control products.

Adjusted EBITDA for the Onshore Oil & Gas OEM segment was $38.7 million and $24.1 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $4.3 million for the year ended December 31, 2016 (Predecessor). The increase in Adjusted EBITDA was primarily due to increased sales and cost efficiencies on a higher level of production.

Offshore Oil & Gas OEM

Revenues, net for the Offshore Oil & Gas OEM segment were $25.2 million and $14.1 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $50.2 million for the year ended December 31, 2016 (Predecessor). The decrease in net revenues was primarily due to the suppressed deepwater and offshore oil and gas market.

Adjusted EBITDA for the Offshore OEM segment was $(4.7) million and $(9.9) million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $(14.5) million for the year ended December 31,

 

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2016 (Predecessor). The slight decrease in Adjusted EBITDA was primarily due to a decline in revenues which was partially offset by certain cost efficiencies.

Connectors & Precision Manufacturing

Revenues, net for the Connectors & Precision Manufacturing segment were $99.1 million and $57.7 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $116.8 million for the year ended December 31, 2016 (Predecessor). The Connectors & Precision Manufacturing segment saw revenue improvement in line with increased maintenance and growth spending in the midstream and downstream oil and gas sectors, as well as in the general industrial market. In particular, our connectors products saw increased revenues, as a result of strong demand and market share gains.

Adjusted EBITDA for the Connectors & Precision Manufacturing segment was $15.6 million and $4.5 million for the period from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor), respectively, as compared to $4.2 million for the year ended December 31, 2016 (Predecessor). The increase in Adjusted EBITDA was primarily due to cost efficiencies on a higher level of production.

Internal Controls and Procedures

We and our independent registered public accounting firm identified certain material weaknesses in our internal control over financial reporting as of December 31, 2017. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.

We did not design or maintain an effective control environment commensurate with our financial reporting requirements. This resulted in our inability to appropriately analyze, record and disclose accounting matters timely and accurately. Our limited personnel resulted in a failure to operate review controls and a failure to design processes to identify and address financial reporting matters, including reconciliation, close processes, financial statement classification and related disclosures.

We also failed to design and maintain formal accounting policies, processes and controls to identify and address significant and complex transactions or accounting matters including the accounting for certain components of fresh start accounting and accounting for equity-based compensation.

We are currently implementing measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses, including hiring additional finance and accounting personnel and initiating design and implementation of our financial control environment, including the expansion of formal accounting policies and procedures, financial reporting controls and controls to account for and disclose complex transactions. We can give no assurance that these actions will remediate these material weaknesses in internal controls or that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our reporting obligations.

We are not currently required to comply with the SEC’s rules implementing Section 404 of Sarbanes-Oxley, and are therefore not required in connection with this offering to make a formal

 

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assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Section 302 of Sarbanes-Oxley, which will require our management to certify financial and other information in our quarterly and annual reports. We will be required to provide an annual management report on the effectiveness of our internal control over financial reporting beginning with our annual report for the year ended December 31, 2019. We will not be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404 until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of Section 2(a)(19) of the Securities Act.

Liquidity and Capital Resources

We expect that our primary sources of liquidity and capital resources after the consummation of this offering will be cash flows generated by operating activities and borrowings under our ABL Facility. Depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.

As described in “Use of Proceeds,” we intend to use approximately $         million of the net proceeds we receive from this offering to repay in full and terminate our Term Loan. Please see “Use of Proceeds.” We believe that, following completion of this offering, our cash on hand, operating cash flow and available borrowings under our ABL Facility will be sufficient to fund our operations for at least the next twelve months.

Historically, our primary sources of liquidity have been cash flows from operations, borrowings under our credit facilities and equity provided by investors. To date, for near-term periods prior to the Restructuring, our capital was primarily directed towards principal and interest on indebtedness, acquisition capital expenditures, and facility maintenance capital expenditures. Since the Restructuring, our primary use of capital has been capital expenditures and principal and interest on indebtedness. As of March 31, 2018 and as adjusted for the completion of this offering, we had an aggregate of $         million in cash on hand and $         million of borrowings available under our ABL Facility.

On June 8, 2017, we emerged from the Restructuring that resulted in a significant reduction in our debt and interest burden and a substantially enhanced liquidity position. Following the completion of the Restructuring, our debt and other obligations were reduced by approximately $743.5 million on a post-emergence basis. The Restructuring significantly delevered our balance sheet and provided us with working capital to fund ongoing operations during the Restructuring and post-emergence and maximized recoveries for the stakeholders. On the Effective Date, we emerged from the Restructuring with no borrowings outstanding under our ABL Facility and $70.0 million outstanding under our Term Loan. For additional information about our bankruptcy proceedings and emergence, please see Note 2 to the audited consolidated financial statements included elsewhere in this prospectus.

Capital Requirements and Sources of Liquidity

Our 2018 capital budget is approximately $14.4 million, including growth projects to increase capacity and productivity. However, the amount and timing of these 2018 capital expenditures is largely discretionary and within our control. We could choose to defer or increase a portion of these planned 2018 capital expenditures depending on a variety of factors, including, but not limited to, additional contracts awarded above and beyond our projections. As we pursue growth, we monitor which capital resources, including equity and debt financings, are available to us to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. However, future cash flows are subject to a number of variables, including the ability to maintain existing contracts,

 

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obtain new contracts and manage our operating expenses. The failure to achieve anticipated revenue and cash flows from operations could result in a reduction in future capital spending. We cannot assure you that operations and other needed capital will be available on acceptable terms or at all. In the event we make additional acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures or seek additional capital. We cannot assure you that needed capital will be available on acceptable terms or at all.

Cash Flows

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

The following table sets forth our cash flows for the periods indicated:

 

     Successor     Predecessor  
     Three Months
Ended March
31, 2018
    Three Months
Ended March
31, 2017
 
     (in thousands)     (in thousands)  

Net cash flows provided by (used in) operating activities

   $ 4,162     $ (21,188

Net cash flows used in investing activities

     (7,104     (1,193

Net cash flows provided by (used in) financing activities

     812       (1,705

Effect of exchange rate changes on cash and cash equivalents

     (679     1,008  
  

 

 

   

 

 

 

Net change in cash

   $ (2,809   $ (23,078
  

 

 

   

 

 

 

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2018 (Successor) was $4.2 million. This was attributed to net income of $7.5 million primarily adjusted for: $12.8 million of depreciation and amortization expense, $0.2 million of amortization of debt issue costs, $(2.1) million related to remeasurement of contingent consideration, $0.2 million in stock compensation expense, and $3.6 million in deferred income tax benefit. In addition, operating cash flows were negatively impacted by a net $11.0 million increase in our working capital components. The net decrease in cash flows related to our working capital components was primarily driven by an increase in accounts receivable and costs incurred and estimated earnings in excess of billings on uncompleted contracts, largely due to the timing of payments on large contracts and an increase in prepaid expenses and other assets. The decrease was also due to an increase in deferred contract costs, because the direct materials and other costs related to contract performance which relate to work orders for which revenues have not yet been recognized increased during the first quarter of 2018. The decrease was partially offset by a decrease in inventories due to an increase in orders in the first quarter of 2018, timing of payments to our vendors, an increase in deferred revenue and an increase in billings in excess of costs incurred and estimated earnings on uncompleted contracts.

Net cash used in operating activities for the three months ended March 31, 2017 (Predecessor) was $21.2 million. This was attributed to a net loss of $42.4 million primarily adjusted for: $7.6 million of depreciation and amortization expense, $1.1 million of amortization of debt issue cost, $1.3 million related to remeasurement of contingent consideration, $7.7 million inventory obsolescence, and $0.2 million of deferred income tax benefit. In addition, operating cash flows were positively impacted by a net $3.5 million decrease in our working capital components. The net decrease in cash flows related to our working capital components were primarily driven by an increase in inventories and increase in prepaid expenses and other assets, a decrease in deferred revenues, and a decrease in accrued expenses and other current liabilities. This decrease was offset by an increase in billings in excess of costs incurred and estimated earnings on uncompleted contracts, along with an increase in accounts payable—trade in connection with inventory purchases.

 

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Investing Activities

Net cash used in investing activities for the three months ended March 31, 2018 (Successor) was $7.1 million which was attributed to $5.8 million of property and equipment expenditures and $1.3 million of developed software expenditures during the period.

Net cash used in investing activities for the three months ended March 31, 2017 (Predecessor) was $1.2 million. This was attributed to $2.8 million of property and equipment expenditures, offset by $1.6 million in proceeds from sale of discontinued business, net of cash left in the business.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2018 (Successor) was $0.8 million. This was primarily attributed to $1.0 million in proceeds from issuance of common stock.

Net cash used in financing activities for the three months ended March 31, 2017 (Predecessor) was $1.7 million. This was primarily attributed to $1.4 million in payments on bank term loans and notes payable and $0.2 million in distributions to noncontrolling interest members.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

The following table sets forth our cash flows for the periods indicated:

 

    Successor     Predecessor  
    Period from
June 9, 2017
through
December 31,
2017
    Period from
January 1, 2017
through
June 8, 2017
    Year Ended
December 31,
2016
 
    (in thousands)     (in thousands)  

Net cash flows provided by (used in) operating activities

  $ 22,341     $ (48,388   $ (35,636

Net cash flows provided by (used in) investing activities

    (5,709     (3,193     20,138  

Net cash flows provided by (used in) financing activities

    (1,819     55,729       52,613  

Effect of exchange rate changes on cash and cash equivalents

    (239     2,675       4,226  
 

 

 

   

 

 

   

 

 

 

Net change in cash

  $ 14,574     $ 6,823     $ 41,341  
 

 

 

   

 

 

   

 

 

 

Operating Activities

Net cash provided by operating activities for the period from June 9, 2017 to December 31, 2017 (Successor) was $22.3 million. This was attributed to a net loss of $3.1 million primarily adjusted for: $57.9 million of depreciation and amortization expense, $0.5 million of amortization of debt issue costs, $2.0 million related to remeasurement of contingent consideration, $1.8 million non-cash payment-in-kind interest, $2.4 million inventory obsolescence and $0.3 million in stock compensation expense, offset by $40.1 million of deferred income tax expense. In addition, operating cash flows were negatively impacted by a net $0.6 million increase in our working capital components. The net decrease in cash flows related to our working capital components was primarily driven by an increase in deferred revenues coupled with an increase in costs incurred and estimated earnings in excess of billings on uncompleted contracts. The net decrease was also due to increases in collections of accounts receivable and due to timing of payments to our vendors. In connection with the increase in sales, inventories increased and billings in excess of costs incurred and estimated earnings on uncompleted contracts decreased due to timing of customer payments and recognition of related revenues on long-term contracts.

 

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Net cash used in operating activities for the period from January 1, 2017 to June 8, 2017 (Predecessor) was $48.4 million. This was attributed to net income of $316.7 million primarily adjusted for: $13.5 million of depreciation and amortization expense, $8.7 million of amortization of debt issue cost, $1.3 million related to remeasurement of contingent consideration, $2.3 million inventory obsolescence, offset by a gain of $256.8 million on reorganization items for settlement of liabilities subject to compromise and $138.3 million in adjustments due to the adoption of fresh start accounting. In addition, operating cash flows were positively impacted by a net $4.4 million decrease in our working capital components. The net increase in cash flows related to our working capital components were primarily driven by a decrease in inventories and increase in billings in excess of costs incurred and estimated earnings on uncompleted contracts due to increase in orders for the second half of 2017. This increase was offset by an increase in accounts receivable and costs incurred and estimated earnings in excess of billings on uncompleted contracts, largely due to the timing of payments on large contracts.

Net cash used in operating activities for the year ended December 31, 2016 (Predecessor) was $35.6 million, which includes $2.7 million used from discontinued operations. This was attributed to net loss of $186.6 million primarily adjusted for: $81.5 million loss for discontinued operations, $30.0 million of depreciation and amortization expense, $6.1 million of debt issue costs, $0.7 million inventory obsolescence, $1.9 million in provision for bad debts, $4.8 million in goodwill and long-lived asset impairment offset by a $32.1 million gain on extinguishment of debt and $1.8 million deferred tax expense. In addition, operating cash flows were favorably impacted by a net $63.0 million decrease in working capital components. The net increase in cash flows related to our working capital components were primarily driven by a decrease in trade accounts receivable due to the timing of payments on large contracts, and a decrease in inventories, costs incurred and estimated earnings in excess of billings on uncompleted contracts and increase deferred revenues. These increases during the period were a result of us collecting cash during the down cycle and preparing for an expected increase in sales to come through in 2017. These increases were partially offset by payments made on accounts payable during the period.

Investing Activities

Net cash used in investing activities for the period from June 9, 2017 to December 31, 2017 (Successor) was $5.7 million. This was attributed to $1.3 million of proceeds from the sale of property and equipment, $5.3 million of proceeds from the sale of discontinued operations, offset by $8.7 million in property and equipment expenditures and $3.7 million in cash paid for business acquisitions, net of cash acquired.

Net cash used in investing activities for the period from January 1, 2017 to June 8, 2017 (Predecessor) was $3.2 million. This was attributed to $1.6 million in proceeds from the sale of discontinued operations, $0.7 million in proceeds on sale of property and equipment, offset by $5.5 million in property and equipment expenditures.

Net cash provided by investing activities for the year ended December 31, 2016 (Predecessor) was $20.1 million, of which $1.7 million was related to discontinued operations. This was attributed to $33.2 million in proceeds from the sale of discontinued operations, $0.4 million in proceeds from the sale of property and equipment, offset by $5.9 million in property and equipment expenditures and $9.3 million in cash paid for business acquisitions, net of cash acquired.

Financing Activities

Net cash used in financing activities for the period from June 9, 2017 to December 31, 2017 (Successor) was $1.8 million. This was primarily attributed to $0.8 million in distributions to non-

 

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controlling interest by the variable interest entity, $0.6 million in payments on bank term loans and notes payable and $0.3 million in payments on real estate loan by the variable interest entity.

Net cash provided by financing activities for the period from January 1, 2017 to June 8, 2017 (Predecessor) was $55.7 million. This was primarily attributed to $70.0 million in net borrowings from term loan, offset by $11.6 million in payments for debt issuance costs, $1.5 million in payments on bank term loans and notes payable and $0.8 million for the settlement of contingent consideration. Proceeds from term loan were used to repay debtor-in-possession financing which was drawn earlier in the year.

Net cash provided by financing activities for the year ended December 31, 2016 (Predecessor) was $52.6 million. This was primarily attributed to $64.5 million in net borrowings from bank revolving loan, $12.2 million proceeds on sale lease-backs under financing lease, $8.6 million in capital contributed by non-controlling interest to the variable interest entity, $14.1 million in proceeds from real estate loan issue to variable interest entity, $15.2 million from the issuance of preferred stock, offset by $40.0 million in repayments of note payable to stockholder, $21.1 million in payments on bank term loans and notes payable, and $0.7 million in distributions to non-controlling interest by variable entity.

Working Capital

Our working capital, which we define as total current assets (excluding cash and cash equivalents) less total current liabilities (excluding current maturities of long-term debt, net of debt issuance costs), totaled $64.4 million at March 31, 2018 (Successor), $51.3 million at December 31, 2017 (Successor), and $44.9 million at December 31, 2016 (Predecessor). This increase was primarily attributable to an increase in our revenues.

Our Debt Agreements

ABL Facility

On June 8, 2017, we entered into the ABL Facility. Under the terms of the ABL Facility, up to $50 million may be borrowed, subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory. We did not have any balances outstanding under the ABL Facility as of March 31, 2018 or December 31, 2017. The ABL Facility is collateralized by accounts receivable and inventory. The ABL Facility matures on the earlier of June 8, 2022, or 91 days prior to the final maturity of the Term Loan.

Borrowings under the ABL Facility bear interest at LIBOR, plus an applicable LIBOR rate margin of 2.5% to 2.25% or base rate margin of 1.5% to 1.25%, as defined in the ABL Facility credit agreement. The interest rate as of March 31, 2018 and December 31, 2017 was 4.6% and 3.8%, respectively. The unused portion of the ABL Facility is subject to an unused commitment fee of 0.375%. Interest and fees are payable in arrears on the last day of each quarter.

The ABL Facility includes certain non-financial covenants, including but not limited to restrictions on incurring additional debt and certain distributions. The ABL Facility requires, until the later (i) June 8, 2018 and (ii) the first date on which the fixed charge coverage ratio (as defined in the ABL Facility) is at least 1.0 to 1.0, that we maintain a minimum liquidity (as defined in the ABL Facility) of (x) for any period of five consecutive days, $15.0 million and (y) at any time, $10.0 million. The ABL Facility is not subject to other financial covenants unless excess availability (as defined in the credit agreement governing the ABL Facility) is less than 10% of the borrowing base or $7.5 million, whichever is greater, at which point we are required to maintain a minimum fixed charge coverage ratio, as defined, of 1.0 to 1.0 for each trailing twelve-month period. We were in compliance with these covenants as of March 31, 2018 and December 31, 2017.

 

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Term Loan

On June 8, 2017, we entered into the Term Loan, of which $71.5 million was outstanding as of March 31, 2018 and December 31, 2017. The Term Loan is collateralized by our fixed assets. The Term Loan Facility matures on June 8, 2022.

Borrowings under the Term Loan bear (A) if EBITDA for the most recently completed four quarter period is less than $25.0 million, (i) cash interest at LIBOR or a base rate, plus an applicable margin of 8.0% or 7.0%, respectively and (ii) interest paid in kind at a rate of 5.0%, (B) if EBITDA for the most recently completed four quarter period is greater than or equal to $25.0 million but less or equal to than $50.0 million, (i) cash interest at LIBOR or a base rate, plus an applicable margin of 8.0% or 7.0%, respectively and (ii) interest paid in kind at a rate of 1.0% and (C) if EBITDA for the most recently completed four quarter period is greater than $50.0 million, cash interest at LIBOR or a base rate, plus an applicable margin of 7.0% or 6.0%, respectively. The annual interest rate as of December 31, 2017, including PIK interest, was 10.7%. Interest and fees are payable in arrears on the first day of each month.

The Term Loan includes certain non-financial covenants, including but not limited to restrictions on incurring additional debt and certain distributions. The Term Loan is not subject to financial maintenance covenants. We were in compliance with these covenants as of March 31, 2018 and December 31, 2017.

Contractual and Commercial Commitments

The following table summarizes our contractual obligations and commercial commitments as of December 31, 2017:

 

    Total     2018     2019     2020     2021     2022     Thereafter  
    (in thousands)  

Debt Principal(1)

  $ 71,715     $ 956     $ 700     $ 700     $ 700     $ 68,659     $ —    

Interest Payments(2)

    33,606       7,599       7,524       7,449       7,375       3,659       —    

Real Estate Loan to VIE(3)

    15,241       967       950       933       12,391       —         —    

Operating Leases Obligations

    8,362       3,957       1,778       1,147       238       232       1,010  

Capital Leases Obligations(4)

    214       66       66       66       16       —         —    

Financing Leases Obligations

    26,461       1,293       1,309       1,326       1,343       1,360       19,830  

Warranty Claims(5)

    9,000       1,800       1,800       1,800       1,800       1,800       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total(6)

  $ 164,599     $ 16,638     $ 14,127     $ 13,421     $ 23,863     $ 75,710     $ 20,840  

 

(1) Debt principal consists of short-term and long-term debt obligations, and excludes debt discounts, deferred financing costs, and interest.
(2) Represents estimated interest payments on our outstanding debt balance as of December 31, 2017. The loan bears interest quarterly at prime or the applicable LIBOR interest rate, at our election, plus a margin. The amounts above include PIK interest and are calculated using an interest rate of 10.7% which is the interest rate as of December 31, 2017. The actual interest rates on the variable indebtedness incurred and the amount of our indebtedness could vary from those used to compute the above interest payments.
(3) Includes principal and interest payments with respect to the Real Estate Loan to variable interest entities (“VIEs”), interest payments for the VIEs represent estimated interest payments of the variable interest entity real property loan payable. The loan bears interest monthly. The actual interest rates on the variable indebtedness incurred and the amount of our indebtedness could vary from those used to compute the above interest payments.
(4) Capital leases reflect the principal amount of capital lease obligations, including related interest.

 

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(5) Warranty claims relate to settlements in 2017 on certain contracts we agreed to pay through 2022.
(6) Total contractual cash obligations in the table above exclude income taxes and contingent consideration under an earn-out agreement related to the Managed Pressure Operations acquisition, which was $27.9 million as of December 31, 2017 as we are unable to make a reasonably reliable estimate of the timing for the remaining payments in future years. The contingent consideration expires in July 2022.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA and Adjusted EBITDA margin are financial measures not determined in accordance with GAAP. We define Adjusted EBITDA as net income before interest expense, income tax benefit (expense), depreciation and amortization, loss from discontinued operations, net, gain on extinguishments of debt, impairment and restructuring charges, fresh start inventory adjustment, non-cash inventory write-offs, stock-based compensation, reorganization items, net and certain other items that we do not view as indicative of our ongoing performance. We define Adjusted EBITDA margin as the ratio of Adjusted EBITDA to revenue, net.

We believe Adjusted EBITDA and Adjusted EBITDA margin are useful performance measures because they allow for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at Adjusted EBITDA because these amounts can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historical costs of depreciable assets, none of which are reflected in Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an indication that our results will be unaffected by the items excluded from Adjusted EBITDA. Our computations of Adjusted EBITDA may not be identical to other similarly titled measures of other companies.

The following table presents reconciliations of net income (loss), our most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented.

 

     Successor      Predecessor  
     Three Months Ended
March 31, 2018
     Three Months Ended
March 31, 2017
 

Net income (loss)

   $ 7,524      $ (42,432

Interest expense

     2,620        12,388  

Income tax provision

     1,960        345  

Depreciation and amortization

     12,838        7,644  

Impairment and restructuring charges (1)

     795        12,313  

Fresh start inventory adjustment (2)

     438        —    

Non-cash inventory write-offs (3)

     —          7,749  

Stock-based compensation (4)

     186        —    

Transaction costs and IPO readiness (5)

     1,171        —    

Other (6)

     (1,385      1,911  
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 26,147      $ (82
  

 

 

    

 

 

 

Adjusted EBITDA margin (7)

     15.3      (0.1 )% 
  

 

 

    

 

 

 

 

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(1) Impairment and restructuring charges consist of expenses related to restructuring and facility closures in the amount of $0.8 million for the three months ended March 31, 2018 and $12.3 million for the three months ended March 31, 2017.
(2) Fresh start inventory adjustment reflects the amortization of inventory step-up from the adoption of fresh start accounting.
(3) Reflects non-cash inventory write-off of $7.7 million for the three months ended March 31, 2017 for obsolete inventory.
(4) Reflects non-cash charges related to stock-based compensation programs.
(5) Reflects transaction and IPO readiness fees of $1.2 million for the three months ended March 31, 2018.
(6) Other adjustments for the three months ended March 31, 2018 (Successor) and the three months ended March 31, 2017 (Predecessor) consist primarily of (i) remeasurement adjustments for contingent consideration of $(2.1) million for the three months ended March 31, 2018, and $1.3 million for the three months ended March 31, 2017; and (ii) other non-recurring expenses of $0.7 million for the three months ended March 31, 2018, and $0.6 million for the three months ended March 31, 2017.
(7) Adjusted EBITDA margin is a non-GAAP financial measure that represents the ratio of Adjusted EBITDA to revenue, net. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.

The following table presents reconciliations of net income (loss), our most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented.

 

    Successor     Predecessor     Pro Forma  
    Period from
June 9, 2017
through
December 31,
2017
    Period from
January 1, 2017
through
June 8, 2017
    Year Ended
December 31,
2016
    Year Ended
December 31,
2017
 
    (in thousands)     (in thousands)  

Net income (loss)

  $ (3,057   $ 316,664     $ (186,563   $ 72,315  

Interest expense

    7,188       27,348       54,228       11,598  

Income tax (benefit) expense

    (39,340     372       (1,835     (168,895

Depreciation and amortization

    57,854       13,466       30,044       79,388  

Loss from discontinued operations, net

    —         —         81,516       —    

Gain on extinguishments of debt

    —         —         (32,076     —    

Impairment and restructuring charges(1)

    4,451       16,724       16,043       21,175  

Fresh start inventory adjustment(2)

    4,852       —         —         4,852  

Non-cash inventory write-offs(3)

    330       15,272       2,714       15,602  

Stock-based compensation(4)

    311       —         —         746  

Reorganization items, net

    —         (385,654     —         —    

Other(5)

    4,171       5,228       12,945       9,399  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 36,760     $ 9,420     $ (22,984   $ 46,180  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin(6)

    12.9     6.0     (10.6)     10.5
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Impairment and restructuring charges consist of (i) impairment of property and equipment of $3.5 million for the year ended December 31, 2016, (ii) goodwill and intangible impairment charges of $3.0 million for the year ended December 31, 2016, (iii) expenses related to restructuring and facility closures in the amount of $4.5 million for the period from June 9, 2017 to December 31, 2017 (Successor), $16.7 million for the period from January 1, 2017 to June 8, 2017 (Predecessor), and $9.5 million for the year ended December 31, 2016 (Predecessor).
(2) Fresh start inventory adjustment reflects the amortization of inventory step-up from the adoption of fresh start accounting.
(3) Non-cash inventory write-offs reflect non-cash charges for slow-moving or obsolescence inventory reserve.
(4) Reflects non-cash charges related to stock-based compensation programs.

 

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(5) Other adjustments include (i) the write-off of an abandoned research and development project of $1.3 million for the period from January 1, 2017 to June 8, 2017 (Predecessor); (ii) non-cash reserves for contract losses in the amount of $2.4 million for the period from January 1, 2017 to June 8, 2017 (Predecessor) and $4.5 million for the year ended December 31, 2016 (Predecessor); (iii) expenses relating to acquisitions and divestitures in the amount of $1.9 million for the period from June 9, 2017 to December 31, 2017 (Successor), $0.1 million for the period from January 1, 2017 to June 8, 2017 (Predecessor) and $7.8 million for the year ended December 31, 2016 (Predecessor); (iv) adjustments to eliminate non-cash effects of the variable interest entity for $0.1 million for the period from June 9, 2017 to December 31, 2017 (Successor), $0.1 million for the period from January 1, 2017 to June 8, 2017 (Predecessor) and $0.2 million for the year ended December 31, 2016 (Predecessor); (v) foreign currency losses of $0.1 million for the period from June 9, 2017 to December 31, 2017 (Successor), $0.1 million for the period from January 1, 2017 to June 8, 2017 (Predecessor), and $0.4 million for the year ended December 31, 2016 (Predecessor); and (vi) remeasurement of contingent consideration of $2.1 million for the period from June 9, 2017 to December 31, 2017 (Successor).
(6) Adjusted EBITDA margin is a non-GAAP financial measure that represents the ratio of Adjusted EBITDA to revenue, net. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. In connection with preparing our consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expense and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time we prepare our consolidated financial statements. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates.

Our significant accounting policies are discussed in our audited historical consolidated financial statements included elsewhere in this prospectus. Management believes that the following accounting estimates are those most critical to fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

Fresh Start Accounting

Upon emergence from bankruptcy, we adopted fresh start accounting, which resulted in us becoming a new entity for financial reporting purposes. Upon adoption of fresh start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical consolidated balance sheet as of December 31, 2016 (Predecessor). The effects of the Restructuring and the application of fresh start accounting were implemented as of June 8, 2017 and the related adjustments thereto were recorded in our consolidated statement of operations as reorganization items for the Predecessor period of January 1, 2017 through June 8, 2017.

Our reorganization value represents the estimated fair value of our long-term debt, stockholders’ equity and other liabilities and was prepared using financial projections, market and other financial information and applying standard valuation techniques, including risked net asset value analysis and public comparable company analyses. Our reorganization value was allocated to our assets in

 

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conformity with the procedures specified by ASC 805, Business Combinations. Liabilities existing as of the Effective Date, other than deferred taxes, were recorded at the present value of amounts expected to be paid using appropriate risk adjusted interest rates. Deferred taxes were determined in conformity with applicable income tax accounting standards. Predecessor accumulated depreciation, accumulated amortization, retained deficit, common stock, preferred stock and additional paid in capital and accumulated other comprehensive loss were eliminated. The excess reorganization value over the fair value of the identified tangible and intangible assets is recorded as goodwill. Fair values of assets and liabilities represent our best estimates based on our appraisals and valuations. Where the foregoing were not available, industry data and trends or references to relevant market rates and transactions were used. These estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond our reasonable control. Moreover, the market value of our capital stock may differ materially from the fresh start equity valuation.

Revenue Recognition

We recognize revenue, net of sales taxes, related to the sale of inventory products once the following four criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery of the equipment has occurred or the customer has taken title and risk of loss or services have been rendered, (iii) the price of the equipment or service is fixed and determinable and (iv) collectability is reasonably assured. For certain fixed price, construction-type contracts that involve significant design, engineering, procurement and manufacturing to customer supplied specifications, are recognized on the percentage-of-completion method of accounting. Progress is primarily measured by the percentage of total costs incurred to date to estimated total costs for each contract or the total costs for major components of a large contract. Actual results could differ from those estimates.

Percentage-of-completion is generally determined by the input method based upon the amount of labor hours expended compared to the total labor hours expected to be expended plus the estimated amount of labor hours to complete the project. For certain other projects, total costs incurred to date as compared to estimated total cost for each contract is used as an input for the percentage-of-completion method as it provides a better measure of progress towards completion. We consider these methods to be the best available measure of progress for the respective contracts. The percentage-of-completion method requires the use of various estimates, including among others, the extent of progress towards completion, contract revenues and contract completion costs. Contract revenues and contract costs to be recognized are dependent on the accuracy of estimates, including quantities of materials, labor productivity and other cost estimates. We have a history of making reasonable estimates of the extent of progress towards completion, contract revenues and contract completion costs. Due to uncertainties inherent in the estimation process, it is possible that actual contract revenues and completion costs may vary from estimates. Revenue on contracts not accounted for using the percentage-of-completion method is recognized utilizing the completed contract method. Under the completed contract method, revenue and contract costs are deferred and are both recognized when all deliverables are completed.

Contract costs include all direct material, labor, subcontractor costs, equipment and those indirect costs related to contract performance, such as indirect labor, depreciation, supplies, tools and repairs. Pre-contract costs such as engineering, procurement and project management costs are generally expensed as incurred, but in certain cases may be deferred if certain criteria are met. Selling, general and administrative costs are charged to operations as incurred.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and revenue and are recognized in the period in which the revisions are determined.

 

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Revenues recognized in excess of amounts billed are classified as current assets under “costs incurred and estimated earnings in excess of billings on uncompleted contracts.” Billings in excess of costs and estimated earnings recognized are classified under current liabilities as “billings in excess of costs incurred and estimated earnings on uncompleted contracts.”

Recording revenue involves the use of estimates and management judgment. We must make a determination at the time our services are provided whether the customer has the ability to make payments to us. While we do utilize past payment history, and, to the extent available for new customers, public credit information in making our assessment, the determination of whether collectability is reasonably assured is ultimately a judgment decision that must be made by management.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost (which approximates average cost) and weighted average methods. Costs include an application of related direct labor and overhead cost. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Reserves are made for obsolete and slow-moving items based on a range of factors, including age, usage and technological or market changes that may impact demand for those products. The amount of allowance recorded is subjective and it may be that the level of provision required may be different from that initially recorded.

The inventory obsolescence reserve as of March 31, 2018 (Successor) was $2.3 million, compared to $2.4 million as of December 31, 2017 (Successor) and $33.3 million as of December 31, 2016 (Predecessor). The reserve amounts represented 2.7%, 2.4%, and 28.7% of our consolidated gross inventories as of March 31, 2018 (Successor), December 31, 2017 (Successor), and December 31, 2016 (Predecessor), respectively. A 10% increase in our inventory obsolescence reserve at March 31, 2018 would result in an increase of approximately $0.2 million and a change in income (loss) from continuing operations before income taxes by the same amount. Currently, management does not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that were used to calculate our inventory obsolescence reserve.

Goodwill

We record the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the tangible and identifiable intangible assets acquired, liabilities assumed and any non-controlling interest as goodwill. In the Successor period, goodwill also reflects the excess of the reorganization value of the Successor over the fair value of tangible and identifiable intangible assets as determined upon the adoption of fresh start accounting. The goodwill relating to each of our reportable segments is tested for impairment annually as well as when an event, or change in circumstances, indicates an impairment may have occurred.

Under U.S. GAAP, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one of its reporting units is greater than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if we conclude otherwise, then we are required to perform a quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded based on that difference.

 

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We have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test.

In the Predecessor periods, we allocated goodwill to its four reporting units which were predominantly based on our geographic regions. In connection with the emergence from our Restructuring and the application of fresh start accounting, we changed our internal reporting structure in the second quarter of 2017 to better support and assess the operations of the business going forward. As a result, we now have six reporting units centered around product groupings. As a result of the change in reporting units, we elected to perform quantitative goodwill impairment tests immediately before and after this change in reporting units and determined that there was no impairment. During the year ended December 31, 2016 (Predecessor) we recorded $1.3 million of goodwill impairment.

The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to our future cash flows, discount rates commensurate with the risks involved in the assets, future economic and market conditions, as well as other key assumptions. We believe that the amounts recorded in our consolidated financial statements related to goodwill are based on the best estimates and judgments although actual outcomes could differ from our estimates.

Impairment of Long-Lived Assets and Intangible Assets

We evaluate the recoverability of the carrying value of long-lived assets, including property and equipment, intangible assets and investments, whenever events or circumstances indicate the carrying amount may not be recoverable. If such circumstances are determined to exist, an estimate of future cash flows produced by the long-lived assets, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. A detailed determination of the fair value may be carried forward from one year to the next if certain criteria have been met. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.

Factors we generally consider important in our evaluation and that could trigger an impairment review of the carrying value of long-lived assets include significant underperformance relative to expected operating trends, significant changes in the way assets are used, underutilization of our tangible assets and significant negative industry or economic trends.

We recorded $3.5 million in property and equipment impairment for the year ended December 31, 2016 (Predecessor). There were no material impairment charges recorded for the periods from June 9, 2017 through December 31, 2017 (Successor) and January 1, 2017 to June 8, 2017 (Predecessor).

Property and Equipment

We state all property and equipment at cost. Under this method of accounting, we depreciate the cost of property and equipment using the straight-line method over the estimated useful lives or amortizes the value of assets under capital leases over the shorter of the lease terms or estimated useful lives. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss are reflected in income for the period. The cost of maintenance and repairs are charged to income as incurred; significant renewals and improvements are capitalized.

Contingencies

We accrue for costs relating to litigation when such liabilities become probable and can be reasonably estimated. Such estimates may be based on advice from third parties, amounts specified

 

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by contract, amounts designated by legal statute or management’s judgment, as appropriate. Revisions to contingent liabilities are reflected in income in the period in which different facts or information become known or circumstances change that affect our previous assumptions with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of contingent liabilities may be materially different from previous estimates and could require adjustments to the estimated reserves to be recognized in the period such new information becomes known. Please see Note 14 to the audited consolidated financial statements included elsewhere in this prospectus for more information related to contingencies.

Stock-Based Compensation

We measure and recognize stock-based compensation expense for all stock-based awards made to employees and directors using fair value-based methods over the requisite service period on which the stock-based compensation is based, adjusted for estimated forfeiture rates based on historical experience. The cost of equity-classified awards is based on the grant date fair value calculated using a Black-Scholes or Monte Carlo valuation model, depending on the nature of the award. Immediately prior to emergence from our Restructuring, all stock options of the Predecessor were cancelled.

Stock-based compensation expense for awards with a service only condition is recognized over the employee’s requisite service period. For awards with a performance condition that affects vesting, the performance condition is not considered in determining the award’s grant date fair value; however, the conditions are considered when estimating the quantity of awards that are expected to vest. No compensation expense is recorded for awards with performance conditions until the performance condition is determined to be probable of achievement. Estimating when a performance condition is probable of achievement requires management judgment. Management considers all available factors and available information in making this determination including, measurement against the performance condition, historical results, volatility, remaining contractual period of the awards and future forecasts and market outlook.

We use the Black-Scholes-Merton and Monte Carlo simulation option pricing models to estimate the fair value of stock options, which require the use of weighted average assumptions for estimated expected volatility, estimated expected term of stock options, risk-free rate, estimated expected dividend yield, and the fair value of the underlying common stock at the date of grant. The computation of expected volatility is based on a weighted-average of comparable public companies within our industry. Expected life is based on the estimated time-frame of the occurrence of the performance condition. The risk-free interest rate is based on the yield of zero-coupon U.S. Treasury securities of comparable terms. We do not anticipate paying dividends in the foreseeable future. The estimated forfeitures are based on actual forfeiture experience, analysis of employee turnover and other factors. We adopted ASU 2016-09 on June 9, 2017 and have elected to continue to estimate the forfeiture rate upon adoption. Due to the absence of an active market for our common stock, the fair value of our common stock is determined in good faith by us, based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid. The key assumptions we used in our valuations to determine the fair value of our common stock on each valuation date included forecasted financial performance, multiples of guideline public companies, and a lack of marketability discount. Each of these assumptions involves estimates that are highly complex and subjective. Following the offering, these estimates will not be necessary to determine the value of our common stock, as there will be an established market price for our shares.

Stock-based compensation expense is classified as selling expenses or general and administrative expenses consistent with other compensation expense associated with the award recipient.

 

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Variable Interest Entities

In addition to the consolidation of our majority owned subsidiaries, we also consolidate VIEs when we are determined to be the primary beneficiary. Determination of the primary beneficiary of a VIE is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE.

We entered into a sale-leaseback for one of our manufacturing facilities with a landlord that was set-up by a third-party beneficiary for the specific purpose of owning and renting the facility to us. The twenty-year lease includes an option for us to purchase the property in March 2023, a right of first refusal and an option to extend the lease for an additional term of five years at a fixed rental rate. Because we share the potential benefits of appreciation of the property in addition to its right-of-use, we determined it is the primary beneficiary of the special purpose entity. Our assets can be used to satisfy the obligations of the variable interest entity but, assets of the variable interest entity cannot be used to satisfy our obligations. Accordingly, we have included the assets, liabilities and the results of the variable interest entity in our consolidated financial statements.

Income Taxes

Income taxes have been provided based upon the tax laws and rates in effect in the countries in which operations are conducted and income is earned. Deferred income tax assets and liabilities are computed for differences between the financial statement basis and tax basis of such assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. We recognize interest and penalties related to income taxes as a component of income tax expense.

Accumulated Other Comprehensive Income (Loss)

Certain of our international operations maintain their accounting records in the local currencies that are their functional currencies. For these operations, the functional currency financial statements are converted to United States dollar equivalents, with the effect of foreign currency translation adjustment reflected as a component of accumulated other comprehensive income (loss). Accumulated other comprehensive income (loss) is included in stockholders’ equity in the accompanying consolidated balance sheets and consists of the cumulative currency translation adjustments associated with such international operations. Activity within accumulated other comprehensive income includes no reclassifications to net income (loss).

Recent Accounting Pronouncements

Please see Note 3 to the audited consolidated financial statements included elsewhere in this prospectus for a discussion of recent accounting pronouncements.

Under the JOBS Act, we expect that we will meet the definition of an “emerging growth company,” which would allow us to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. We have elected to use this extended transition period for complying with new or revised accounting standards.

 

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Quantitative and Qualitative Disclosure about Market Risks

Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Going forward our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.

Interest Rate Risk

As of March 31, 2018, we had long term debt (non-VIE and net of debt issuance costs), including current maturities, of approximately $67.8 million with a weighted average interest rate of 11.3%. A 1.0% increase or decrease in the weighted average interest rate would increase or decrease interest expense by approximately $0.7 million per year.

Credit Risk

While we are exposed to credit risk in the event of non-performance by counterparties, the majority of our customers are creditworthy and we do not anticipate non-performance. We mitigate the associated credit risk by performing credit evaluations and monitoring the payment patterns of our customers.

Off-Balance Sheet Arrangements

We currently have no material off-balance sheet arrangements.

 

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INDUSTRY

Unless otherwise indicated, the information set forth under “Industry,” including all statistical data and related forecasts, is derived from Spears & Associates’ “Drilling & Production Outlook,” Baker Hughes’ “North America Rotary Rig Count” published on March 16, 2018, the U.S. Energy Information Administration (“EIA”) and the International Energy Agency (“IEA”) all published in the first quarter of 2018. We believe that these third-party sources are reliable and that the third-party information included in this prospectus is accurate and complete. While we are not aware of any misstatements regarding the industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”

The demand for our products and services is primarily driven by drilling, production and completion activity by E&P companies, which depends on the current and anticipated profitability of developing oil and gas reserves. We believe that the recent recovery in commodity price levels will result in increased demand for our products and services, both in the onshore and offshore oil and gas sectors. Our business also serves general industrial markets where we believe we have benefited from the global economic recovery over the past several years.

As commodity prices have improved, drilling and completion activity by E&P companies has increased which has increased demand for our equipment and services. Although North American land drilling and completion activity has largely led the market recovery, we believe that the current commodity price environment will support growth in our Onshore Oil & Gas OEM and Offshore Oil & Gas OEM segments globally. Finally, the positive economic outlook for GDP growth, midstream capital spending, U.S. refining capital expenditures, LNG export capacity growth, power generation, petrochemical industry expansion, transportation and aerospace industry trends, in addition to the aforementioned recovery of commodity prices, support growth in our Connectors & Precision Manufacturing segment.

Oil and Gas Supply and Demand Dynamics

The oil and gas market has experienced a recovery of WTI oil prices from $26.21 per barrel in February 2016 (which price represented a cycle trough) to $67.88 per barrel as of May 25, 2018 or an approximate 159% increase. The recovery has been driven by improving demand and a mitigation of longer-term supply growth in certain international markets. This stabilization of commodity price levels allows us to generate attractive returns on the development of both unconventional onshore and offshore projects.

 

                        WTI Prompt Month Future                        

(Dollar per Barrel)

 

LOGO

Source: Bloomberg

 

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Global supply of oil normalized in 2017 as a result of agreed-upon OPEC production cuts and flat international (non-OPEC) production. The IEA estimates global crude oil stocks to be only 90 MMBbls above the five-year average (down from a peak of 366 MMBbls in July 2016). However, U.S. oil production has rebounded significantly and production growth estimates for 2018 have been mostly revised higher. Furthermore, the EIA estimates that U.S. production peaked at 9.6 MMBbls/d in June 2015, subsequently troughed at 8.5 MMBbls/d in September 2016, and has since increased to a new high of 10.3 MMBbls/d in February 2018. Despite the recovery in U.S. production, the EIA estimates the global crude oil market to be stable in 2018 as global demand is expected to grow while OPEC and other major exporters have extended their production cuts of 1.8 MMBbls/d through the end of 2018, resulting in an implied global undersupply from OPEC.

            Annual Difference Between OPEC Supply And Demand On OPEC            

(MMBbls/d)

 

LOGO

Source: International Energy Agency

As a result of improving commodity prices and increasing demand for oil in an under supplied environment, global E&P capital budgets are expanding. Spears & Associates expects global drilling and completion spending to significantly increase at projected five-year annual growth rate of 10%. North American unconventional resource plays continue to capture a growing share of global E&P capital spending, the short lead-time from permitting to production and the relatively low degree of legal and political risk associated with North American operations.

Onshore Oil and Gas

The North American onshore oil and gas market has experienced a recovery, driven in part by the recent improvement in oil prices. However, the majority of the increase in North American onshore oil and gas activity levels will be driven by other factors described below that we believe will support North America’s outpaced growth in the broader global oil and gas industry.

 

   

Growth in North American Land Rig and Well Counts.    Demand for our services is influenced by the number of drilling rigs our potential customers operate and the number of wells that our potential customers drill. Oil and gas wells in North American unconventional resource plays typically experience rapid declines in productivity over time. As a result, new wells are required to be drilled and completed in order to replace declining production. We

 

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believe that as sustained production from wells drilled over the last several years continues to decline, the number of horizontal drilling rigs and the North American well count will increase, as well as the prevalence of pad drilling. According to Spears & Associates, the total North American land drilling rig count is expected to average 1,248 rigs during 2018, and 33,801 wells are expected to be drilled during the year. These figures represent increases of 18% and 16% from the North American land drilling rig count and North American land well count over 2017 levels, respectively. Horizontal wells in particular typically enable more wellbore contact within the targeted geological zone, resulting in more productive wells, and more productive wells can potentially result in more business for our business segments. According to Spears & Associates, horizontal wells, as a percentage of total wells drilled in the U.S., has increased each year since 2011, such that in 2017, 67% of total wells drilled in the U.S. were horizontal wells. Horizontal wells typically require more intensive completion than vertical wells due to their longer reach to total depth and complexity. We believe this growth trend is favorable for our Onshore Oil & Gas OEM segment and associated aftermarket parts business, as an average single active rig is now expected to generate more demand for hydraulic fracturing due to the increase in service intensity.

 

North American Land Rig Count

 

  

North American Land Wells Drilled

 

(Rigs)

 

  

(Wells)

 

LOGO

 

  

LOGO

 

Source: Spears & Associates    Source: Spears & Associates

Percentage of Horizontal Wells in the U.S.

 

(Wells)

 

LOGO

Source: Spears & Associates

 

    Growth in North American Onshore Drilling and Completions Spending.    We believe that North American unconventional shale resources will continue to capture a growing share of global capital spending on oil and gas resource development as a result of the shale resources’ competitive positioning on the global cost curve. Spears & Associates estimates that capital spending for drilling and completions in the North American onshore market will reach approximately $124 billion in 2018, and will increase approximately 43% over the next four years to $177 billion.

 

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North American Onshore Drilling & Completion Spending

 

(Dollar Amounts In Billions)

 

LOGO

Source: Spears & Associates

 

    Increasing Number of DUCs.    As a result of a shortage of available hydraulic frac crews, long lead-times on new frac equipment and constrained E&P capital budgets, there is a large inventory of wells in the North American land market that E&P operators previously drilled but did not complete in an effort to defer capital spending. The EIA estimates that there are 7,677 DUCs in the U.S. as of April 2018. These DUCs represent a backlog of uncompleted wells that we expect will provide additional demand for completion services and equipment.

LOGO

Source: EIA

 

LOGO

 

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    Increasing Lateral Lengths, Hydraulic Fracturing Intensity and Volume of Proppant Used.    As E&P companies have gained more experience operating in unconventional resource plays and a better understanding of reservoir characteristics, they have applied new drilling and completion equipment and technology in order to maximize the recovery of hydrocarbons and reduce the costs associated with each well. Recently, the industry has favored increasing lateral lengths, a higher number of hydraulic fracturing stages and substantially increased amounts of proppant pumped into each well, as operators focus on lowering costs associated with wells drilled. Each of these trends increases the amount of required HHP at well sites. Spears & Associates estimates that the increase in average lateral length, number of hydraulic fracturing stages per 1,000 lateral feet and pounds of proppant pumped per lateral foot in the North American land market to be 26%, 46% and 79%, respectively from 2014 to 2018.

 

    Growth in Hydraulic Fracturing Demand.    Demand for HHP in the North American market is increasing substantially as a result of all of the factors described above. Spears & Associates estimates that demand for HHP will average 14.3 million HHP in 2018, which is an increase of approximately 185% relative to the recent trough demand level in 2016. Additionally, demand for new HHP favors new generation technology and fit-for-purpose hydraulic fracturing pumps that can both maximize operators’ run time and withstand the rigors of challenging operating environments throughout the North American land market.

LOGO

Source: Spears & Associates

 

   

Aging Frac Equipment and Ensuing Replacement Cycle.    As the prevalence of horizontal drilling and hydraulic fracturing in unconventional resource plays grew between 2010 and 2015, new equipment and services with the capability of approximately 15 million HHP entered the North American market, resulting in an oversupply of HHP relative to demand. As a result of the oversupply of HHP, pricing for hydraulic fracturing services declined significantly. This led many hydraulic fracturing service providers to defer critical maintenance spending and allow equipment conditions to deteriorate. Equipment conditions have deteriorated so much that large portions of the North American hydraulic fracturing fleets are becoming obsolete. Spears & Associates estimates that as of October 2017 approximately 29% of all North American HHP was older than five years. Additionally, the useful life for the average frac pump unit has declined from approximately seven to ten years in 2010 to three to five years in the current operating environment as a result of increased completion intensity, a shift towards twenty-four hour frac operations, and equipment quality degradation driven by the idling of assets during periods of low activity levels such as the recent industry downturn. As older equipment becomes obsolete, the market demands leading edge frac equipment of the type we design and manufacture. Thus, we

 

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believe that as the North American pressure pumping fleet requires replacement over the next several years, demand for our equipment, technology and designs will increase.

 

North American HHP Net Additions

 

  

Current Age Of Frac Equipment

 

(Amounts In Millions)    (Amounts In Millions of HHP)
LOGO    LOGO
Source: Spears & Associates    Source: Spears & Associates

Offshore Oil and Gas

The global offshore oil and gas market is beginning to see signs of recovery. The costs of exploring for and producing oil and gas are declining as a result of technological advances and recent efficiency improvements, resulting in increased offshore oil and gas capital expenditures.

We believe the following offshore oil and gas trends will positively affect our business over the coming years.

 

    Growth in Global Offshore Rig and Well Count. The global offshore rig and well count has begun to stabilize, and Spears & Associates estimates that the offshore rig count will grow 5% annually through 2022, and the offshore well count will grow 4% annually through 2022.

 

Global Offshore Rig Count Over Time

 

  

Global Offshore Wells Drilled

 

(Rigs)    (Wells)

LOGO

  

LOGO

Source: Baker Hughes, Spears & Associates    Source: Spears & Associates

 

    Growth in Global Offshore Drilling and Completions Spending. Capital spending for offshore drilling and completions is expected to grow 6% annually to $68 billion by 2022. A sustained recovery in global oil and gas prices could accelerate offshore spending.

 

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Global Offshore Drilling & Completions Spending

 

(Dollar Amounts In Billions)

 

LOGO

Source: Spears & Associates

 

    Improvements in Global Offshore Operating Efficiency and Utilization. As offshore activity and rig utilization begin to increase, we believe that operators will be motivated to install MPD packages and other advanced drilling systems that offer significant improvements in operating efficiency and safety. We are well-positioned to benefit from improving offshore drilling activity and rig dayrates through the deployment of our MPD advanced drilling systems which have significant efficiency and safety benefits for customers. We are also targeting the retrofit markets for drillships, floaters and jackups.

Connectors & Precision Manufacturing

The strength of the overall economy, general economic expansion, the lowest unemployment rate in 10 years, projected GDP growth of 2.7% for 2018, and the general recovery of onshore and offshore oil and gas activity, bode well for our Connectors & Precision Manufacturing segment as economic expansion leads to growth in many sectors of the energy and industrial value chains where our manufactured parts are sold. Plant turnarounds and maintenance activities, which may be supported by continued economic expansion can provide a source of recurring revenue for connectors. Continued spending on domestic pipeline infrastructure should provide consistent demand for these products going forward.

We also serve a variety of end markets including the midstream, refining, LNG and petrochemical, as well as general industrial, power generation, transportation and aerospace sectors. We provide private label manufacturing services to customers in many of these sectors. Over the past several years these markets have benefited from the global economic recovery. Participating in the general industrial markets serves to diversify our customer and geographic concentration of revenues and reduce volatility of our earnings.

We believe the following trends will continue to positively drive our business over the coming years.

 

    Onshore and Offshore Oil & Gas Industry Capital Expenditures.    Through the manufacture of connectors, riser strings and other equipment used in drilling and completion applications, and our new fluid end product line, our Connectors & Precision Manufacturing segment is well-positioned to capitalize on an upstream recovery, particularly in North American pressure pumping and in the global offshore drilling market. We believe we are exposed to some of the highest growth market drivers in the context of the onshore and offshore oil and gas industry. Secular trends are driving increased demand for and replacement of manufactured equipment. The quickly growing demand for fracturing HHP, increased service intensity, and other factors, are causing an accelerated wear and tear on frac pumps and associated aftermarket parts, consumables and related services. Spears & Associates estimates that capital spending for drilling and completions in the North American onshore market will reach approximately $124 billion in 2018, increasing at a CAGR of approximately 9% per year until 2022. In addition, Spears & Associates estimates global offshore drilling and completions spending will increase at a CAGR of approximately 6% per year until 2022.

 

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    Midstream Capital Spending Continues to be Robust.    As domestic onshore production continues to meet growing global demand, multiple basins in the U.S. are expected to have a shortfall of midstream takeaway capacity in the next three to five years. Large investments in midstream and downstream energy end-markets are expected to drive sales of our equipment and future sales in aftermarket parts and services as facilities age. Our Connectors & Precision Manufacturing segment is well-positioned to benefit from both ongoing maintenance spending as well as growth spending in the midstream and downstream sectors.

 

    U.S. Refining Capital Expenditures Expected To Increase.    Over the last several years, low priced crude oil and strong demand for refined products have incentivized refiners to increase maintenance capital expenditures and delay full turnarounds in order to maximize facility production uptime. However, recent lower-than-typical crack spreads are expected to lead refiners to increase capital expenditures in 2018 as maintenance and turnaround projects that had been deferred over the last several years are planned. We believe that the connectors business will benefit from increased industry spending on refinery turnaround projects that were delayed over the last several years.

 

    LNG Export Capacity is Projected to Grow Significantly.    Prolific gas production in the Appalachian Basin and growing associated gas production in the Permian Basin and Mid-Continent has served as a governor on natural gas prices. Lower domestic gas prices relative to global gas prices has led to a growing number of approved and proposed LNG export facilities. This abundance of gas has led to the establishment of multiple LNG export facilities.

 

    Shale Gas-Oriented Petrochemical Expansion.    Consistently low gas prices are expected to contribute to a continued build out of petrochemical processing facilities, with a significant percentage of these plants expected to be located along the Gulf Coast. At the end of 2017, the American Chemistry Council determined there were an estimated 317 petrochemical projects completed, currently under construction or planned, representing an aggregate $185 billion in capital investment. The American Chemistry Council forecasts the annual U.S. capital spending by the chemical industry to reach $48 billion by 2022, more than double the level of spending in 2010.

 

    Power Generation Growth.    The EIA expects aggregate global energy use to grow 28% by 2040, driven in large part by demand for natural gas for electricity generation. In addition, developed countries are supporting policies for reduced emissions and are increasing capital spending on the modernization of their power generation facilities. These improvements in new facilities are driven by low prices and abundant production of natural gas.

 

    The Transportation and Aerospace Industries are Benefitting from Favorable Industry Trends.    Global economic growth has resulted in increasing demand for commercial air travel, air freight services, heavy-truck and off-highway industries. The IATA estimates that global commercial airline passenger traffic has grown approximately 6.6% annually over the last five years. Demand for expedited delivery of goods and lean retail inventory levels have driven increasing air freight traffic, while the expansion of the middle class in emerging markets has also contributed to growth in the market for airline travel. Defense spending levels have risen over the last several years in the U.S. and internationally. Manufacturers of aircrafts are well-positioned to capitalize on the ongoing equipment replacement cycle, because older airplanes continue to be phased out of the global fleet in favor of newer, state-of-the-art aircrafts that offer fuel efficiency, reduced noise emissions and improved customer experiences. In addition, we believe that primary products including wheel hubs, fly wheels and torque tube for the transportation industry will continue to benefit from the global economic growth.

 

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BUSINESS

Our Company

We are a leading OEM that designs and manufactures highly-engineered, mission critical equipment and provides complementary consumable products, parts and aftermarket services. We serve a diverse range of customers in the global oil and gas and general industrial end markets. We have a proven track record in new technology development and product commercialization, as well as decades of experience working with our customers to manufacture state-of-the-art, specialized equipment that meets their stringent requirements. Our fully-integrated business model allows us to optimize our supply chain, deliver high quality products and control our cost structure, resulting in high margins and a compelling cash flow profile. We have minimal debt and significant liquidity, which will enable us to continue pursuing strategic organic growth initiatives and acquisitions of synergistic businesses. We believe we are well-positioned to capture additional market share through these initiatives and acquisitions, while taking advantage of improving secular trends and fundamentals in our end markets.

Our History

We were founded in 1996 in Houston, Texas, and by 2014 we had grown both organically and through a targeted acquisition strategy to operate as both an OEM and as a supplier for customers across a variety of industries. We are a holding company and conduct our operations through Ameriforge Group, Inc., under the name AFGlobal Corporation. In 2015, we began a business transformation in response to the oil and gas industry’s downturn by adopting a new strategy that involved consolidating our broad portfolio to focus on high-return business segments, OEM products, and our fully-integrated business model. We also consolidated our facilities from more than 25 in 2014 to 15 currently without sacrificing our core profitable products and services, which resulted in more than $90 million of annual cost savings. Despite these efforts, due to our significant outstanding indebtedness made unsustainable by the market downturn that began in 2014 and persisted into 2016, we sought relief under Chapter 11 of the Bankruptcy Code in April of 2017 which substantially improved our liquidity profile upon emergence in June of 2017. Please see “Summary—Recent Developments—Restructuring and Financial Deleveraging”. We believe we have established market-leading positions in the manufacturing of pressure pumping equipment for the onshore oil and gas market and high-technology offshore oil and gas equipment. We believe our MPD systems and new DuraStim frac pump are cutting-edge technologies and are capable of disrupting the markets in which we operate.

We focus on organic development of complementary, innovative, differentiated technologies in our core markets, facilitating our current market-leading OEM positions in pressure pumping equipment and MPD systems. We made the following four acquisitions during 2016 and 2017:

 

    Managed Pressure Operations (July 2016).    We acquired Managed Pressure Operations, a subsidiary of MHWirth, which specializes in the active control of downhole drilling pressure and enhances safety and drilling efficiency on offshore drillships, semi-submersible rigs and jackup rigs. The acquisition expanded our full-service offering of offshore products and provided us with entry into a new, broader rig-based service offering. This acquisition also expanded our onshore capability, further positioning us as the market leader in market share and technological differentiation. Following the acquisition, we are positioned as the only integrated provider of a complete MPD package.

 

    Discover Integral Solutions SA de C.V. (December 2016).    We acquired Discover Integral Solutions SA de C.V., based in Monterrey, Mexico. This acquisition completed our full line of pressure management components. These pressure management components include elastomers and proprietary RCDs that we use in our RCD product line, as well as the RCD product line of nearly all onshore RCD competitors.

 

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    Advanced Measurements Inc. (June 2017).    We acquired AMI, a key provider of automation, controls and data management systems. This acquisition served as an important vehicle to further develop more advanced control and data management offerings, enhancing our ability to help customers achieve stronger production gains and make better real-time decisions. We are focused on fully expanding the controls and data management portfolio beyond AMI’s legacy stronghold in pressure pumping controls into new markets, such as MPD and compression.

 

    Axon pressure pump technology and product line (October 2017).    We acquired the Axon pressure pump technology and product line from Amkin Technologies. The acquisition of Axon pressure pump technologies will help our customers realize a dramatic improvement in cost, durability and capability with ease of systems integration across a broad spectrum of pumping technologies, including cementing, acidizing, coiled tubing support and well servicing.

We plan to continue selective acquisitions that enhance our research and development capabilities and product offering while undertaking high-return organic growth initiatives to further entrench our products and services with our customer base and position the company for continued long-term growth.

Our Technology and Research & Development Capabilities

We deploy innovative technology and have several decades of experience developing tailored products and services for our customers. This experience has helped position us as the provider of choice for mission critical onshore and offshore oil and gas equipment. We have over 40 dedicated research and engineering professionals who use their experience to develop globally appealing, innovative technologies. We believe the technology we developed in the last five years will account for approximately 75% of our revenues and profits in 2018. There are several aspects of our technology solutions that differentiate us from our competitors:

 

    Leading pressure pumping equipment offering.    We believe we offer the most technologically advanced pressure pumping equipment currently available. Our controls and data management systems enable our customers to improve ultimate recovery from oil and gas reservoirs and make more informed, real-time decisions. Additionally, we believe that our proprietary blender technology offers our customers best-in-class efficiency and reliability.

 

    Proprietary, disruptive pressure pumping technology.    We are developing innovative new technology to provide the hydraulic fracturing industry with eco-friendly, efficient, low-cost frac equipment. We have recently developed the patented DuraStim™, a 6,000 HHP frac pump that we expect to commercially offer to our customers in the second half of 2018. DuraStim™ provides more than twice the horsepower with roughly the same footprint and weight as a conventional system. Additionally, we believe our design is more environmentally friendly, more robust and will reduce non-productive time for our customers. We believe it provides an opportunity to capture a large portion of the pressure pumping equipment market and expand our market share.

 

    Broad portfolio of patent-protected products servicing the offshore oil and gas industry.    We believe our MPD systems are at the forefront of the next generation of drilling technology. These state-of-the-art systems offer significant safety and efficiency benefits for customers through precise control of the wellbore and well pressure. Improved control allows drillers to reduce nonproductive time and decrease the likelihood of disruptive events.

 

   

Extensive portfolio of intellectual property.    We have a portfolio of approximately 386 active patents related to equipment, assets and techniques that support or protect our products

 

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and technologies. For example, we hold patents related to subsea equipment including Retlock® Technology and VirtusTM connection systems, the basis for our core subsea connector technology.

Our Segments and Products

We design and manufacture equipment and products (and report our operations relating to these equipment and products) through three segments: Onshore Oil & Gas OEM, Offshore Oil & Gas OEM and Connectors & Precision Manufacturing. Each segment also provides supporting aftermarket services for our own products and competing OEM products. Our lines of business within these segments are detailed below.

 

   

Onshore Oil & Gas OEM

 

Offshore Oil & Gas OEM

 

Connectors &
Precision Manufacturing

Key Segment End Markets  

•  Pressure Pumping

•  Onshore E&P

•  Artificial Lift

•  Compression

 

•  Offshore Drilling

•  Offshore E&P

•  Oilfield Equipment Manufacturers

 

•  Oil and Gas

•  Midstream

•  U.S. Refining

•  LNG

•  Petrochemical

•  Power Generation

•  Transportation

•  Aerospace

Products/ Services  

Equipment

 

•  DuraStim™ 6,000 HHP Frac Pumps

•  2,250 and 2,500 HHP Frac Pumps

•  Fluid ends*

•  Power ends

•  140 BPM Blenders

•  200 and 250 BBL Hydration Units

•  44 ft. Data Vans

•  16 Port Manifold Trailers

•  1,400 HP Twin Cementers

•  Automation and Control Systems

•  200 and 400 HP Compressor Packages for Artificial Lift

•  3 Stage Compressor Packages

 

 

Services

 

•  Aftermarket Service and Repairs

 

Drilling Equipment

 

•  MPD Systems

•  Active Control Devices Rotating Control Devices

•  Riser Gas Handling Systems

•  Risers

•  Choke Systems

•  Dual Gradient Drilling Systems

•  Diverter Manifolds

•  Continuous Circulation Systems

•  Elastomer Products

•  Control Systems

 

Subsea Equipment

 

•  Flowline Connection Systems

•  Retlock® Clamp Connectors

•  Virtus Connection Systems

 

 

Services

 

•  Asset Management

•  Buoyancy

•  Aftermarket Service and Repairs

 

•  Taper-Lok® Pressure-Energized Connectors

•  Coffer-Lok Specialty Flanges

•  Commodity Forgings

•  Forged Products

•  Private Label Manufacturing Services

•  Fuel Nozzle Assemblies

•  Oil and Gas Chassis

•  Gas Turbine Combustion Covers

 

 

* Under commercialization.

 

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Our business is diversified across our three segments and has a strong backlog of contracted work as reflected in the following charts:

 

    Revenue Composition for 2017    

 

Backlog (in millions)

LOGO  

LOGO

For the year ended December 31, 2017, we generated pro forma net income of approximately $72.3 million, Adjusted EBITDA of approximately $46.2 million (consisting of $9.4 million for the period from January 1, 2017 to June 8, 2017 and $36.8 million for the period from June 9, 2017 to December 31, 2017) and Adjusted EBITDA margin of approximately 10.5%. For the three months ended March 31, 2018, we generated net income of approximately $7.5 million, Adjusted EBITDA of approximately $26.1 million and Adjusted EBITDA margin of approximately 15.3%. As of March 31, 2018, our backlog of contracted work was approximately $482 million. For definitions of Adjusted EBITDA and Adjusted EBITDA margin, each of which are non-GAAP financial measures, and reconciliations to their most directly comparable GAAP measure, please read “Summary Historical and Unaudited Pro Forma Financial Data—Non-GAAP Financial Measures.”

Onshore Oil & Gas OEM

Our Onshore Oil & Gas OEM segment designs, engineers and manufactures equipment and products, and provides aftermarket parts and services, primarily for pressure pumping and gas compression operations. Our pressure pumping equipment is used in the hydraulic fracturing and cementing of oil and gas wells. We manufacture what we believe to be one of the industry’s most complete suites of equipment for pressure pumping operations, including pump units, blenders, hydration units and proprietary end-to-end automation, controls and data management, and we are in the process of commercializing our fluid end and power end product lines. We believe we are also the only pressure pumping equipment manufacturer that builds its own U.S. Department of Transportation compliant fuel tanks, trailer frames, fluid tanks, platforms, racks and other structures used with its equipment. We also manufacture gas compression packages used in artificial lift applications. We are capitalizing on our customers’ impending need for maintaining their aging frac equipment and replacing their outmoded equipment, as many hydraulic fracturing service providers have deferred critical maintenance spending following the recent downturn in commodity prices. We also believe that declining equipment useful lives as a result of increasing completion intensity and growth in hydraulic fracturing demand due to increased North American onshore drilling and completions segment activity will continue to drive demand for our products and services in our Onshore Oil & Gas OEM segment. We hold 15 patents related to this segment, including DuraStim™, our recently-developed, patented 6,000 HHP frac pump that we expect to commercially offer to our customers in the second half of 2018. DuraStim™ provides greater power density and efficiency than conventional diesel engines. It also has twice the horsepower with roughly the same footprint and weight as a conventional system, and we believe it provides an opportunity to capture a large portion of the market and expand our market share. In addition to the products listed above, our RCD,

 

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which has historically been used in our Offshore Oil & Gas OEM segment has been increasingly adopted in onshore use. Our publicly-traded competitors for our Onshore Oil & Gas OEM segment include Gardner Denver, Kirby Corporation, TechnipFMC and Weir Group. For the year ended December 31, 2017 our Onshore Oil & Gas OEM segment generated $62.7 million of segment pro forma Adjusted EBITDA consisting of $24.1 million for the period from January 1, 2017 to June 8, 2017 and $38.7 million for the period from June 9, 2017 to December 31, 2017. Please read “Summary Historical and Unaudited Pro Forma Financial Data—Non-GAAP Financial Measures.”

Offshore Oil & Gas OEM

Our Offshore Oil & Gas OEM segment designs, engineers and manufactures equipment and products, and provides aftermarket parts and services, for drilling, production and intervention operations primarily in the offshore, deepwater and subsea markets. Our products include market-leading, patent-protected MPD systems for both retrofits and new-build rigs, drilling risers, riser gas management, early kick/loss detection, dual gradient drilling, continuous circulation, buoyancy and subsea connectors. We hold 351 patents related to this segment. Our MPD systems are state-of-the-art in that they enable active control of downhole drilling pressure, resulting in safety and drilling efficiency for offshore drillships, semi-submersible rigs and jackup rigs. In addition, we offer a corollary product, RCDs, in the onshore space with a similar value proposition as in offshore markets. We also provide software, controls, analytics and testing. In particular, our proprietary testing and simulation equipment and software includes the unique capability to test MPD scenarios and equipment beyond standard industry requirements and simulate drilling conditions. In addition to servicing our products, we are the only OEM that services our competitors’ products, resulting in a substantially larger available market for aftermarket services and repairs. We believe our growth in the Offshore Oil & Gas OEM segment will be supported by growth in offshore drilling and completions spending along with the increased tightness in the supply market resulting in higher offshore dayrates and utilization. As our product lines and services continue to advance, many of our offerings can be utilized in both the Onshore Oil & Gas OEM segment and the Offshore Oil & Gas OEM segment. For example, our MPD systems can be utilized for certain onshore activities. Publicly-traded competitors for our Offshore Oil & Gas OEM segment include Aker Solutions, Dril-Quip, National Oilwell Varco, Oceaneering International, Oil States International, TechnipFMC and certain divisions of Halliburton, Baker Hughes, Schlumberger, and Weatherford International. For the year ended December 31, 2017, our Offshore Oil & Gas OEM segment generated $(14.6) million of segment pro forma Adjusted EBITDA, consisting of $(9.9) million for the period from January 1, 2017 to June 8, 2017 and $(4.8) million for the period from June 9, 2017 to December 31, 2017. Please read “Summary Historical and Unaudited Pro Forma Financial Data—Non-GAAP Financial Measures.”

Connectors & Precision Manufacturing

Our Connectors & Precision Manufacturing segment designs, engineers and manufactures connectors, forgings, forged products and rolled rings for the global oil and gas industry, including midstream, refining, LNG and petrochemical, as well as general industrial, power generation, transportation and aerospace markets, and provide private label manufacturing services for other OEMs. Our systems solve chronic problems associated with standard industry pipe connector sealing technology. Our proprietary connector design utilizes metal-to-metal seal ring technology providing superior leak-free reliability compared to traditional gaskets. This metal-to-metal seal ring technology is specifically designed to handle fatigue and high bending moments, and offers significant weight and space savings while handling extremely high temperatures and pressures. We believe our Connectors & Precision Manufacturing segment will grow in the near-term because, the global manufacturing market and the oil and gas sector are showing increased activity and demand for this segment. We hold 20 patents related to this segment, including our proprietary Taper-Lok® pressure-energized connectors that provide safe, leak-free sealing solutions in a broad range of applications. In

 

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addition to our connector and sealing products, we also provide engineering, forging and private label precision manufacturing services that meet stringent industrial specifications and processes. Our forging capabilities include open and closed die forgings, ranging in tonnage from approximately 650 to 6,500 tons. Competition in our Connectors & Precision Manufacturing segment is highly fragmented. For the year ended December 31, 2017, our Connectors & Precision Manufacturing generated $20.0 million of segment pro forma Adjusted EBITDA, consisting of $4.5 million for the period from January 1, 2017 to June 8, 2017 and $15.6 million for the period from June 9, 2017 to December 31, 2017. Please read “Summary Historical and Unaudited Pro Forma Financial Data—Non-GAAP Financial Measures.”

Our Competitive Strengths

We believe the following strengths differentiate us from our peers and will position us to achieve our primary business objective of creating value for our stockholders:

 

    Market-Leading, Fully-Integrated OEM of Highly-Engineered, Mission Critical Equipment.    We are a fully-integrated manufacturing company focused on being a market-leading OEM in the global oil and gas and general industrial markets we serve. The vertical integration of our business model enables us to control our manufacturing costs, product quality, safety controls and ability to provide on-time delivery of critical equipment, products and services to our customers. By participating throughout the manufacturing process, we are ideally positioned to control costs and innovate new OEM technologies by leveraging our expertise in metallurgy, engineering, forging and sealing to enhance product integrity, safety and efficiency for our customers.

 

    Market Leadership in Pressure Pumping Equipment Market.    We are a market leader in pressure pumping equipment in North America. According to Spears & Associates, industry-wide net pressure pumping capacity decreased by 1 million HHP during the past two years. However, over this same period we sold more than 210 newly manufactured pressure pumping units, representing more than 525,000 HHP collective capacity and an increase in our units and capacity sold versus prior years. With increasing completion intensity driving down the average useful lives of equipment, we believe our market-leading position will allow us to benefit from increasing OEM sales and aftermarket needs as pressure pumping equipment is refurbished or replaced at an increased cadence. We also believe we are well-positioned to capture additional favorable trends, including accumulated demand for new equipment and parts due to deferred maintenance during the downturn and a significant wave of replacement demand from pressure pumping equipment installed over five years ago. Additionally, our customers often install our hydraulic fracturing control systems and software on competitors’ equipment. This provides us with broader market penetration and the opportunity to gain share in aftermarket customer spending that will potentially drive future OEM sales as older equipment is replaced.

 

   

Leading Provider of Managed Pressure Drilling Systems.    We are a market leading OEM for high-technology MPD systems, and we believe we have the most complete suite of deepwater MPD products currently available to the market. MPD is an adaptive drilling process that is used to precisely control the annular pressure profile throughout the wellbore. By using MPD systems, drilling contractors can drill to total depth effectively and accurately, avoiding hazards that decrease drilling efficiency and increase costs to the operator. Our MPD systems have the technology necessary to become the standard for the next generation of drilling equipment. We expect our MPD business to continue benefitting from service providers retrofitting current fleets due to safety and efficiency benefits. As offshore activity increases, we believe that demand for our MPD packages will increase as our MPD upgrades enable offshore drilling rigs to drill faster and more safely. E&P operators increasingly require drillers to include MPD equipment in their drilling packages, reinforcing our belief that the industry will continue to

 

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adopt this technology. In addition, our MPD technology is utilized onshore in RCDs with a similar value proposition as in offshore markets.

 

    Strength of Our Diverse and Blue Chip Customer Base.    Our customers include some of the largest companies operating in the oil and gas industry, including oilfield services companies (e.g., Keane, ProPetro, ProFrac), offshore drilling contractors (e.g., Ensco, Noble Corporation, Transocean), other equipment manufacturers (e.g., Baker Hughes/GE, National Oilwell Varco, Schlumberger), IOCs (e.g., BP, Chevron, Conoco Phillips, Marathon), NOCs (e.g., Aramco, CNOOC, Petrobras, Statoil) EPCs (e.g., SBM, Subsea 7, TechnipFMC, WorleyParsons) and general industrial customers (e.g., Dodson Global and General Electric). Given the scale and breadth of most of our customers’ operations, we believe they generally seek to partner with suppliers like us because we can serve them on a global basis.

 

    Global Manufacturing Footprint with Strong Safety Record.    We have a global manufacturing presence that includes 11 manufacturing facilities and three service facilities in seven countries across four continents. Additionally, our safety record is among the best across any industry and significantly better than most of our manufacturing peers. In 2017, our TRIR was 0.63 and our DART was 0.35, comparing favorably to most recently available industrial equipment manufacturing benchmarks of 6.2 and 3.9, respectively, published by the U.S. Bureau of Labor and Statistics. We believe that our global manufacturing footprint and reputation for quality and safety help us win new business and prevent lower-quality manufacturers from effectively competing with us.

 

    Proven Track Record of Expanding and Enhancing OEM Product Offering Through Focused Acquisition Strategy.    We have consistently grown our business by combining a disciplined acquisition strategy with organic growth. We have recently focused on acquisitions of companies to complement our value-added OEM products and enable technologies that can leverage our fully-integrated manufacturing business model, global footprint and diverse customer base. As a result of our investments, we believe that we have a greater overall earnings capacity relative to 2014 when adjusting for industry activity levels. We made four acquisitions during 2016 and 2017 that have each made important contributions to our current market position and growth strategies in key product areas. For example, we acquired AMI, a key provider of automation, controls and data management systems. This acquisition served as an important vehicle to further develop more advanced control and data management offerings, enhancing our ability to help customers achieve stronger production gains and make better real-time decisions. We are focused on fully expanding our controls and data management portfolio in pressure pumping controls into new markets, such as MPD and gas compression.

 

    Highly Attractive Financial Profile.    We participate in the global oil and gas and general industrial markets with attractive growth trends, and our business generates strong Adjusted EBITDA margins. Our financial profile and cash flow generation are further enhanced by our low capital requirements, as demonstrated by our capital expenditures averaging approximately 3% of revenues over the last two years. Our margin profile and low capital requirements result in strong and stable cash flows that we believe will enable us to deploy our capital to fund strategic initiatives to drive innovation and organic growth opportunities and finance value-enhancing acquisitions. We believe that our financial profile, which has been enhanced by our business transformation that reduced our number of facilities by half and our headcount by approximately 60%, reflects a strong and attractive business with potential for significant earnings growth over time. As a result of significant outstanding indebtedness, we sought bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and significantly reduced our outstanding debt and bolstered our liquidity profile upon emergence in 2017. Please see “Summary—Recent Developments—Restructuring and Financial Deleveraging.” Our liquidity profile and cash flow safely support our capital expenditure budget of approximately $14.4 million for 2018.

 

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    Experienced Management and Operating Team with Strong Industry Relationships and Track Record of Success.    Since our chief executive officer assumed such role in 2015, our management team has been critical in pursuing key opportunities and effectively managing challenges facing our business. Our management team has successfully implemented a business transformation strategy to navigate the significant downturn in the oil and gas industry, position the company for continued long-term growth, and continue to drive earnings growth in the ongoing market recovery. Our current management team, comprised of individuals with extensive operational, financial and managerial experience, has demonstrated a track record of success via organic growth, acquisitions and cost reduction. Our senior management team has an average of over 30 years of experience and has strong customer relationships across all of the industries we serve.

Our Growth Strategies

We intend to achieve our primary business objective of creating value for our stockholders by successfully executing the following strategies:

 

    Capitalize on Demand for Pressure Pumping Equipment.    Pressure pumping services demand is rebounding with increased oil and gas drilling and completion activity. We expect continued strong demand for pressure pumping equipment as a result of the need to replace aging equipment that has not been well-maintained during the downturn. According to Spears & Associates, a large and growing percentage of the 22 million of North American frac HHP as of October 2017 is over five years old. Additionally, changing completion designs are causing meaningful compression of useful lives, as well as resulting in extensive annual repair and maintenance needs. We anticipate this older equipment will require significant overhaul or replacement to serve today’s demanding operational environment. We believe these trends have led, and will continue to lead, to increased purchasing of pressure pumping equipment. With this observed elevated demand for our pressure pumping equipment, we are investing in expanding manufacturing and aftermarket service capacity and view this as a significant opportunity for growth. Our sales backlog for our pressure pumping-related equipment and products stood at approximately $414 million as of March 31, 2018.

 

    Commercially Deploy Innovative and Disruptive Technologies.    We are focused on high value technologies that could contribute to our high margin OEM portfolio of products, including our patented DuraStim™ frac pumps. We expect to allow customers to begin to place orders for DuraStim™ later this year for delivery in 2019. We believe DuraStim™ will disrupt the frac pump market by providing more than double the horsepower of a conventional hydraulic frac pump. DuraStim™ is much more cost efficient to maintain and is considerably quieter than a conventional frac pump. We believe our pressure pumping equipment market share will increase with the introduction of DuraStim™. Additionally, in 2017 we launched a new RCD for use in onshore drilling. We will continue to work closely with our customer base to innovate and manufacture novel products to match the demand of our customers’ evolving needs.

 

    Continue to Target High Return Low-Capital Intensity Investments to Support our Global, Fully-Integrated Supply Chain.    We are continually focused on improving the capabilities of our global, fully-integrated platform and strive to achieve high levels of performance for our product lines and supporting aftermarket services. Our investments are typically not capital-intensive relative to other participants in the oil and gas industry and still produce high returns. For example, we are currently investing in upgrading existing forging equipment to meet increased sales volumes and the increased demands of our customers. These upgrades will increase capacity and productivity of our equipment, as well as expand the capabilities of the equipment manufactured at this facility. We believe these investments will provide significant cost savings, and ultimately enhance Adjusted EBITDA performance in 2018 and beyond.

 

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    Expand Aftermarket Service Infrastructure to Drive Highly Profitable Recurring Revenues.    We aim to provide our customers with products that maximize uptime and have placed service facilities close to our customers’ field locations to improve customer response time. In addition to servicing our products and equipment, we also service our competitors’ products and equipment which ultimately increases our customer base and provides us with broader market penetration and additional opportunities to gain market share through cross-selling. We currently have three service facilities. We are in the process of expanding our maintenance and service facility footprint within West Texas and adding locations in New Mexico and Pennsylvania later this year to support major pressure pumping customers and to meet growing demand for outsourced repairs and maintenance.

 

    Continue Product and Technology Acquisition Strategy to Complement Organic Growth.    We have a track record of completing successful acquisitions to augment and expand our current offerings. We believe our ability to leverage our fully-integrated business model, global footprint and blue chip customer base helps us realize significant synergies in acquisitions and generate attractive returns on investments. We have consistently employed a disciplined approach to acquisitions focused on opportunities that (i) strengthen our existing portfolio, (ii) allow us to establish new platforms in attractive markets, and (iii) enhance our aftermarket offerings.

 

    Leverage Increased Manufacturing Capacity to Provide Additional Offerings in the Connectors & Precision Manufacturing Segment.    We believe our commercial networks and global operating footprint allow us to provide additional offerings in global oil and gas and general industrial markets as well as to access new geographic markets. For example, we intend to expand our product lines to include high-spec, severe service bolts for the offshore oil and gas market. This opportunity will allow us to leverage our existing asset base and operating model to access an attractive, high margin market.

 

    Continue to Maintain Financial Discipline.    We intend to maintain a conservative balance sheet, with a focus on cash flow generation, which will allow us to react to potential changes in industry and market conditions and opportunistically grow our business through acquisitions or capital expenditures for organic growth projects. We approach our capital allocation with discipline, and make organic or inorganic investment decisions to meet anticipated return thresholds in excess of our cost of capital. We intend to manage our liquidity by continuously monitoring cash flow, capital spending and debt capacity. Our focus on maintaining our financial stability, coupled with the low capital intensity of our operations, allows us the flexibility to execute our strategy throughout commodity price cycles and industry volatility. We currently intend to maintain significantly lower debt levels than in previous years to maintain a strong and stable financial profile. As of December 31, 2017 we had a net positive cash position, and after giving effect to this offering, we will have $         million of liquidity in the form of cash on hand and undrawn borrowing capacity under our ABL Facility.

 

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Properties

Our corporate headquarters are located at 945 Bunker Hill Road, Suite 500, Houston, TX 77024. The following table sets forth information with respect to our material facilities:

 

Location

  

Type

  

Own/
Lease

  

Principal Use

Houston, Texas    Office    Lease    Headquarters
Houston, Texas    Manufacturing    Lease    Offshore Oil & Gas OEM / Connectors & Precision Manufacturing
Houston, Texas    Manufacturing    Lease    All Segments
Tomball, Texas    Manufacturing    Lease    Onshore Oil & Gas OEM
Woodville, Texas    Manufacturing    Own    Connectors & Precision Manufacturing
Midland, Texas    Services    Lease    Onshore Oil & Gas OEM
New Iberia, Louisiana    Manufacturing    Lease    Offshore Oil & Gas OEM
Redford, Michigan    Manufacturing    Lease    Connectors & Precision Manufacturing
Newport, New Hampshire    Manufacturing    Own    Connectors & Precision Manufacturing
Calgary, AB, Canada    Manufacturing    Lease    Onshore Oil & Gas OEM
Monterrey, Mexico    Manufacturing    Lease    Offshore Oil & Gas OEM
Macaé, Brazil    Services    Own    Offshore Oil & Gas OEM
Bromborough, U.K.    Manufacturing    Lease    Offshore Oil & Gas OEM
Dubai, U.A.E.    Services    Lease    Offshore Oil & Gas OEM
Guangdong, China    Manufacturing    Lease    Connectors & Precision Manufacturing

Our Customers

We serve customers which consist of some of the largest companies operating in the oil and gas industry, including oilfield service companies, drilling rig contractors, other OEMs, IOCs, NOCs, major E&P companies, EPC companies and distributors. For the year ended December 31, 2017, ProPetro accounted for more than 10% of our total revenue on a pro forma basis.

Competition

The global oil and gas and general industrial markets in which we operate are competitive, with a focus on product quality, price, performance, efficiency and customer service. Our primary publicly-traded competitors in our Onshore Oil & Gas OEM segment are Gardner Denver, Kirby Corporation, National Oilwell Varco, TechnipFMC, Weir Group and certain divisions of Weatherford. Publicly-traded competitors for our Offshore Oil & Gas OEM segment include Aker Solutions, Dril-Quip, National Oilwell Varco, Oceaneering International, Oil States International, TechnipFMC and certain divisions of Halliburton, Baker Hughes, Schlumberger and Weatherford International. Competition in our Connectors & Precision Manufacturing segment is highly fragmented.

Seasonality

Our business is not significantly impacted by seasonality, although our fourth quarter has historically generated slightly weaker operating results. We typically experience a pause by our customers around the holiday season in the fourth quarter, which may be compounded as our customers exhaust their annual capital spending budgets towards year end. Our business is also impacted by spending patterns and industry capital expenditure budgets generally, and general economic conditions may impact future seasonal variations.

 

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Operating Risks and Insurance

Despite our focus on maintaining safety standards, as evidenced by our best-in-class safety record, we from time to time have suffered accidents in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations.

We maintain commercial general liability, workers’ compensation, business auto, commercial property, umbrella liability, in certain instances, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have sudden and accidental pollution coverage for our business entities, which would cover, among other things, costs of clean-up relating to releases caused by our products or by us in the provision of our services.

Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available for certain risks or because of high premium costs relative to certain perceived risks. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage. These fluctuations could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. Please read “Risk Factors” for a description of certain risks associated with our insurance policies.

Environmental and Occupational Health and Safety Regulations

Our operations are subject to domestic (including U.S. federal, state and local) and international laws and regulations with regard to air, land and water quality and other environmental, health and safety matters. Failure to comply with these laws and regulations can result in substantial penalties. We believe we are in substantial compliance with these laws and regulations. Laws and regulations to minimize and mitigate risks to the environment and to workplace health and safety continue to be enacted. Changes in standards of enforcement of existing laws and regulations, as well as the enactment and enforcement of new legislation and regulations, may require us and our customers to modify, supplement or replace equipment or facilities or to change or discontinue present methods of operation. Our environmental, health and safety expenditures, including capital costs for environmental control equipment, and the market for our products and services may change accordingly.

Hazardous Substances and Waste.    The Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. We are required to manage the transportation, storage and disposal of hazardous and non-hazardous wastes generated by our operations in compliance with applicable laws, including RCRA.

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conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current and former owner or operator of the site where the release occurred, and anyone who disposed of or arranged for the disposal of a hazardous substance released at the site.

We currently own, lease, or operate numerous properties used for manufacturing and other operations. We also contract with waste removal services and landfills. In the event of a release from these properties, under CERCLA, RCRA and analogous state laws, we could be required to remove substances and wastes, remediate contamination, perform operations to prevent future contamination, or pay for damage to natural resources, even if the release is not from our operations. From time to time, we are notified that we are a potentially responsible party and may have liability in connection with off-site disposal facilities. There can be no assurance that we will be able to resolve pending and future matters relating to off-site disposal facilities at all or for nominal sums. In addition, neighboring landowners and other third parties may also file claims for personal injury and property damage allegedly caused by releases into the environment. Any obligations to undertake removal, remedial or similar operations in the future or to pay for damage to natural resources, and any related third-party claims, may increase our cost of doing business and may have a material adverse effect on our financial condition and results of operation.

Water Discharges.    The Federal Water Pollution Control Act (as amended, the “Clean Water Act”) and analogous state laws restrict and control the discharge of pollutants into waters of the U.S. Discharges to water associated with our operations require appropriate permits, and compliance with water quality laws and regulations may add material costs to our operations. The adoption of more stringent criteria in the future may also increase our costs of operation. The Clean Water Act and analogous state laws also provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the Oil Pollution Act of 1990, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges.

In addition, in 2015 the EPA and U.S. Army Corps of Engineers (“Corps”) finalized a rule that expanded the scope of waters subject to Clean Water Act jurisdiction. If implemented, this rule may have a material adverse effect on the operating costs of customers, thereby potentially reducing demand for our products and services. However, the rule was stayed nationwide in late 2015 by the Sixth Circuit Court of Appeals, and the EPA and the Corps have proposed to repeal the rule and reinstate the pre-2015 rule. In January 2018, the U.S. Supreme Court ruled that federal district courts, not federal courts of appeals, have sole original jurisdiction to hear legal challenges to the 2015 rule, resulting in the Sixth Circuit lifting its stay. In response, the EPA and the Corps finalized a rule delaying the implementation of the 2015 rule until 2020. However, the delay rule has been challenged by several states and environmental groups. As a result, the scope of the jurisdictional reach of the Clean Water Act will likely remain uncertain for some time.

Workplace Health and Safety.    We are subject to a number of federal and state laws and regulations, including the Occupational Safety and Health Act (“OSHA”) and comparable state statutes, establishing requirements to protect the health and safety of workers. In addition, the OSHA hazard communication standard, the EPA emergency planning and community right-to-know regulations under Title III of the federal Superfund Amendments and Reauthorization Act and comparable state statutes require that information be maintained concerning hazardous materials used or produced in our operations and that this information be provided to employees, government authorities and the public. Substantial fines and penalties can be imposed and orders or injunctions limiting or prohibiting certain operations may be issued in connection with any failure to comply with laws and regulations relating to worker health and safety. Further, in December 2015, the U.S. Department of Labor and the U.S. Department of Justice, Environment and Natural Resources Division released a Memorandum of

 

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Understanding announcing an inter-agency effort to increase the enforcement of workplace safety crimes that occur in conjunction with environmental crimes. Under the leadership of our current management team, for the year ended December 31, 2017 our TRIR was 0.63 and our DART was 0.35, comparing favorably to most recently available industrial equipment manufacturing benchmarks of 6.2 and 3.9, respectively, published by the U.S. Bureau of Labor and Statistics.

API Certifications.    Our manufacturing and production facilities are in compliance and, where necessary, have all of the API and ISO certifications needed to execute our business plan.

API and ISO standards have been incorporated into regulations adopted by the Bureau of Safety and Environmental Enforcement (“BSEE”) that apply to the oil and gas industries that operate on the outer continental shelf. API’s standards are subject to revision, however, and there is no guarantee that future amendments or substantive changes to the standards would not require us to modify our operations or manufacturing processes to meet the new standards. Doing so may materially affect our operation costs. We also cannot guarantee that changes to the standards would not lead to the rescission of our licenses should we be unable to make the changes necessary to meet the new standards. Furthermore, our manufacturing facility and our production facility are subjected to annual audits by the API and ISO. Loss of our API licenses could materially affect demand for our products.

Air Emissions and Climate Change.    The Clean Air Act and analogous state laws restrict and control air emissions associated with our operations. Air emissions from our operations require appropriate permits, and compliance with air quality laws and regulations may add material costs to our operations. The adoption of more stringent criteria in the future may also increase our costs of operation. The Clean Air Act and analogous state laws also provide for administrative, civil and criminal penalties for unauthorized emissions.

International, national, state and local governments and agencies are currently evaluating and/or promulgating legislation and regulations that are focused on restricting emissions commonly referred to as GHG emissions. These measures include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. Consideration of further legislation or regulation may be impacted by the Paris Agreement, which was announced by the Parties to the United Nations Framework Convention on Climate Change in December 2015 and which calls on signatories to set progressive GHG emission reduction goals. Although the U.S. became a party to the Paris Agreement in April 2016, the Trump administration announced in June 2017 its intention to either withdraw from the Paris Agreement or renegotiate more favorable terms. However, the Paris Agreement stipulates that participating countries must wait four years before withdrawing from the agreement. Despite the planned withdrawal, certain U.S. state and local governments have announced their intention to satisfy their proportionate obligations under the Paris Agreement. These commitments could further reduce demand and prices for fossil fuels produced by our customers. In the U.S., the EPA has made findings under the Clean Air Act that GHG emissions endanger public health and the environment, resulting in the EPA’s adoption of regulations requiring construction and operating permit reviews of both existing and new stationary sources with major emissions of GHGs, which reviews could require the installation of new GHG emission control technologies. The EPA has also promulgated rules requiring the monitoring and annual reporting of GHG emissions from certain sources, including onshore and offshore oil and natural gas production facilities and onshore oil and natural gas processing, transmission, storage and distribution facilities. In addition, in May 2016, the EPA finalized a rule that set additional emissions limits for volatile organic compounds, methane and toxic air pollutants for certain new, modified or reconstructed equipment and processes in the oil and natural gas source category, including production, processing, transmission and storage activities. In June 2017, the EPA issued a proposal to stay certain of these requirements for two years and reconsider the entirety of the 2016 rule; however, the rule currently remains in effect.

 

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It is too early to determine whether, or in what form, further legislative or regulatory action regarding GHG emissions will be adopted or what specific impact a new legislative or regulatory action might have on us or our customers. Generally, the anticipated actions do not appear to affect us in any material respect that is different, or to any materially greater or lesser extent, than other companies that are our competitors. However, to the extent our customers are subject to these or other similar proposed or newly enacted laws and regulations, the additional costs incurred by our customers to comply with such laws and regulations could impact their ability or desire to continue to operate at current or anticipated levels, which would negatively impact their demand for our products and services. In addition, any new laws or regulations establishing cap-and-trade or that favor the increased use of non-fossil fuels may dampen demand for oil and gas production and lead to lower spending by our customers for our products and services. Similarly, to the extent we are or become subject to any of these or other similar proposed or newly enacted laws and regulations, we expect that our efforts to monitor, report and comply with such laws and regulations, and any related taxes imposed on companies by such programs, will increase our cost of doing business and may have a material adverse effect on our financial condition and results of operation. Moreover, climate change laws and regulations could ultimately restrict the E&P of fossil fuels, which could adversely affect demand for our products and services.

Hydraulic Fracturing and Seismic Regulations.    Many of our customers utilize hydraulic fracturing in their operations. Environmental concerns have been raised regarding the potential impact of hydraulic fracturing on underground water supplies. Although hydraulic fracturing currently is generally exempt from regulation under the SDWA Underground Injection Control program, concerns have led to several regulatory and governmental initiatives in the U.S. to restrict the hydraulic fracturing process, which could have an adverse impact on our customers’ completion or production activities. For example, in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources “under some circumstances.” The EPA has also issued final regulations under the Clean Air Act governing performance standards for the capture of air emissions released during hydraulic fracturing, though the EPA is currently reconsidering these standards. The EPA published in June 2016 a final rule under the Clean Water Act prohibiting the discharge of wastewater from hydraulic fracturing operations to publicly owned wastewater treatment plants. Also, the U.S. Bureau of Land Management (“BLM”) finalized rules in March 2015 that imposed new or more stringent standards for performing hydraulic fracturing on federal and American Indian lands. While the agency subsequently published a final rule rescinding the 2015 rule in December 2017, California and environmental groups filed lawsuits in January 2018 challenging BLM’s rescission of the rule. In addition, in some instances, state and local governments have enacted more stringent hydraulic fracturing restrictions or bans on hydraulic fracturing activities. For example, Texas, Colorado and North Dakota, among others, have adopted regulations that impose new or more stringent permitting, disclosure, disposal and well construction requirements on hydraulic fracturing operations. New York prohibited high volume hydraulic fracturing altogether in 2015. Local land use restrictions, such as city ordinances, also restrict drilling in general and hydraulic fracturing in particular. These and other similar regulatory initiatives, if adopted, would establish additional levels of regulation for our customers that could make it more difficult for our customers to complete natural gas and oil wells and could adversely affect the demand for our equipment and services, which, in turn, could adversely affect our financial condition, results of operations or cash flows.

State and federal regulatory agencies have also recently focused on a possible connection between the operation of injection wells used for oil and gas waste disposal and seismic activity. Similar concerns have been raised that hydraulic fracturing may also contribute to seismic activity. When caused by human activity, such events are called induced seismicity. Developing research suggests that the link between seismic activity and wastewater disposal may vary by region, and that only a very small fraction of the tens of thousands of injection wells have been suspected to be, or

 

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have been, the likely cause of induced seismicity. In March 2016, the U.S. Geological Survey identified six states with the most significant hazards from induced seismicity, including Oklahoma, Kansas, Texas, Colorado, New Mexico and Arkansas. In light of these concerns, some state regulatory agencies have modified their regulations or issued orders to address induced seismicity. For example, in December 2016, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division (the “OCC Division”) and the Oklahoma Geologic Survey released well completion seismicity guidance, which requires operators to take certain prescriptive actions, including mitigation, following anomalous seismic activity within 1.25 miles of hydraulic fracturing operations. In February 2017, the OCC Division issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce earthquakes in the state. Increased regulation and attention given to induced seismicity could lead to greater opposition to, and litigation concerning, oil and gas activities utilizing hydraulic fracturing or injection wells for waste disposal, which could indirectly impact our business, financial condition and results of operations. In addition, these concerns may give rise to private tort suits from individuals who claim they are adversely impacted by seismic activity they allege was induced. Such claims or actions could result in liability for property damage, exposure to waste and other hazardous materials, nuisance or personal injuries, and require our customers to expend additional resources or incur substantial costs or losses. This could in turn adversely affect the demand for our products and services.

Although we do not conduct hydraulic fracturing or operate injection wells used for oil and gas waste disposal, increased regulation and attention given to these processes could lead to greater opposition to oil and gas production activities. In addition, the adoption of new laws or regulations at the federal, state, local or foreign level imposing reporting obligations on, or otherwise limiting, delaying or banning, the hydraulic fracturing process or other processes, such as water disposal, could make it more difficult to complete oil and natural gas wells and increase our customers’ costs of compliance and doing business, which could negatively impact demand for our products and services.

Offshore Drilling.    Various new regulations intended to improve offshore safety systems and environmental protection have been issued since 2010 that have increased the complexity of the drilling permit process and may limit the opportunity for some operators to continue deepwater drilling in the U.S. Gulf of Mexico, which could have an adverse impact on our customers’ activities. For example, in April 2016, BSEE published a final blowout preventer systems and well control rule that focuses on blowout preventer requirements and includes reforms in well design, well control, casing, cementing, real-time well monitoring and subsea containment. Additionally, in July 2016, the Bureau of Ocean Energy Management (“BOEM”) issued a notice to lessees, which became effective in September 2016, setting out new financial assurance requirements for offshore leases intended to ensure that leaseholders will be able to cover the costs of decommissioning. However, BOEM announced in June 2017 that the implementation timeline of the new financial assurance requirements would be extended except in certain high-risk circumstances. If these new financial assurance requirements are implemented, they may increase our customers’ operating costs and impact our customers’ ability to obtain leases, thereby reducing demand for our products and services. Additional regulation includes a third-party certification requirement promulgated by BSEE in September 2016 under which offshore operators must certify through an independent third-party that their critical safety and pollution prevention equipment is operational and will function as designed in the most extreme conditions. However, BSEE published a proposed rule in December 2017 to rescind this requirement, allowing the adequacy of such equipment to be demonstrated through various industry standards, such as those established by the API. Third-party challenges to industry operations in the U.S. Gulf of Mexico may also serve to further delay or restrict activities. If the new regulations, policies, operating procedures and possibility of increased legal liability are viewed by our current or future customers as a significant impairment to expected profitability on projects or an unjustifiable increase in risk, they could discontinue or curtail their offshore operations, thereby adversely affecting the demand for our

 

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equipment and services, which, in turn, could adversely affect our financial condition, results of operation or cash flows.

Endangered or Protected Species.    The operations of the energy industry are subject to wildlife-protection laws and regulations, such as the Migratory Bird Treaty Act (the “MBTA”) and the Endangered Species Act, which may impact exploration, development, and production activities through regulations intended to protect certain species. For example, regulations under the MBTA sometimes require companies to cover reserve pits that are open for more than 90 days in certain areas to prevent the taking of birds. Compliance with wildlife protection laws and regulations could increase our customers’ costs of compliance and doing business, which could negatively impact demand for our products and services.

Employees

As of December 31, 2017, we had approximately 1,150 full-time employees and approximately 150 contract employees. None of our employees are represented by labor unions or subject to collective bargaining agreements.

Legal Proceedings

From time to time we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings that we believe would have a material adverse effect on our financial position, results of operations or cash flows and are not aware of any material legal proceedings contemplated by governmental authorities.

 

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MANAGEMENT

Directors and Executive Officers of AFG Holdings, Inc.

The following table sets forth the names, ages and titles of our directors and executive officers. Directors hold office until their successors have been elected or qualified or until their earlier death, resignation, removal or disqualification. Executive officers are appointed by, and serve at the discretion of, the board of directors. In April of 2017, we voluntarily filed a petition under Chapter 11 of the U.S. Bankruptcy Code and on June 8, 2017 we emerged from bankruptcy. Curtis Samford served as an executive officer and director and Thomas Giles served as an executive officer of our Company at that time.

 

Name

   Age     

Position

Curtis Samford

     57      President, Chief Executive Officer and Director (Principal Executive Officer)

Lawrence Blackburn

     63      Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Thomas Giles

     72      Executive Vice President and General Counsel

David Aloise

     63      Director

Evan Middleton

     41      Director

Shary Moalemzadeh

     47      Director

Michael Stewart

     49      Director

Jeffrey Quake

     44      Director

Curtis Samford

Curtis Samford has served as our Chief Executive Officer and as a director since June 2015. Mr. Samford joined the Company in 2012 as President, was promoted to Chief Operating Officer in July 2013 and to Chief Executive Officer in June 2015. Mr. Samford has over 30 years of experience in the oil and gas industry, beginning his career with Dresser Atlas as a field engineer. Over the course of his career, he has held escalating positions of responsibility at Shell Oil Co., Alcoa and Precision Castparts. Mr. Samford is a graduate of Texas A&M University. Our board of directors has concluded that Mr. Samford should serve as a director because of his significant experience in the oil and gas industry.

Lawrence Blackburn

Lawrence Blackburn has served as our Executive Vice President and Chief Financial Officer since December 2017. Prior to joining the Company, Mr. Blackburn served as Executive Vice President and Chief Financial Officer of Goodman Global, Inc. since September 2001. Before joining Goodman Global, Inc., Mr. Blackburn served as Vice President and Chief Financial Officer of Amana Appliances from February 2000 to July 2001, when substantially all of the assets of Amana Appliances were acquired by Maytag Corporation. Mr. Blackburn is also a member of the board of directors, the chairman of the audit committee and a member of the compensation committee of Associated Materials Group, Inc. He is a CPA with over 40 years of professional experience. Mr. Blackburn is a graduate of Bowling Green State University.

Thomas Giles

Thomas E. Giles has served as our Executive Vice President and General Counsel since August 1, 2011. Mr. Giles has 45 years of experience in the oil and gas and power generation markets.

 

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Prior to joining the Company, Mr. Giles was a consultant to companies in the oil and gas and contracting industries, President and CEO of Sound Energy Solutions (a Mitsubishi-Conoco Phillips JV), Senior VP of Technology & Business Development at KBR, and he held multiple senior roles, including SVP & General Counsel for The M.W. Kellogg Company. Mr. Giles holds a Juris Doctor from the University of Texas at Austin.

David Aloise

David A. Aloise has served as our director since March 2018. Mr. Aloise is the Founder and Principal of Aloise & Associates, LLC. Since 2001, Mr. Aloise has been at Eaton Vance, where he is currently a Senior Workout Advisor. Prior to that, Mr. Aloise worked for 20 years at the Bank Boston Corporation, holding various executive positions in the areas of C&I loan workout, real estate workout, corporate banking and small business banking. Since November 2017, Mr. Aloise has served as a director on the board of Newreal Inc., the general partner of New England Realty Associates LP. He currently serves as a training instructor for the Risk Management Association, FleetBoston Financial, Citizens Bank and GE Commercial Finance. Mr. Aloise received a Bachelor of Science in finance and accounting from Boston College and also attended the National Commercial Lending Graduate School at the University of Oklahoma. Our board of directors has concluded that Mr. Aloise should serve as a director because he has significant directorship experience and has significant core business skills, including financial and strategic planning.

Evan Middleton

Evan Middleton has served as our director since June 2017. Mr. Middleton is a Managing Director with The Carlyle Group, focusing on special situations investment opportunities. Prior to joining Carlyle in September 2015, Mr. Middleton spent eight years at American Securities Opportunities Fund, a New York-based private equity firm and was ultimately a Managing Director. Before American Securities, Mr. Middleton was a Vice President at Evercore Partners, a leading independent investment banking advisory firm, where he was involved in numerous restructurings, recapitalizations, and M&A transactions. Mr. Middleton currently serves on the Board of Directors of Basin Production and Completion, Liberty Tire, and Prime Clerk and has previously served on the boards of directors of numerous companies. Mr. Middleton received a Bachelor of the Arts in mathematics and economics, with a minor in Japanese language, from the University of Virginia. Our board of directors has concluded that Mr. Middleton should serve as a director because he has significant directorship experience and has significant core business skills, including financial and strategic planning.

Shary Moalemzadeh

Shary Moalemzadeh has served as our director since June 2017. Mr. Moalemzadeh is a Managing Director with The Carlyle Group and Co-Head of Carlyle Strategic Partners, the firm’s special situation franchise. Mr. Moalemzadeh is a founding member of Carlyle Strategic Partners having joined the firm in 2003. Prior to joining Carlyle, Mr. Moalemzadeh was a Principal and founding member of Jacksons LLC, a New York-based private equity firm. Prior to that, Mr. Moalemzadeh worked at Vestar Capital Partners, a New York-based leveraged buyout firm focused on management buyouts and recapitalizations. Before joining Vestar Capital Partners, Mr. Moalemzadeh worked in the Leveraged Finance Group at Merrill Lynch. Mr. Moalemzadeh currently serves on the Board of Directors of Basin Production & Completion, Liberty Tire, Prime Clerk, Service King and Sterling LLC and has previously served on the boards of directors of numerous companies. Mr. Moalemzadeh received a Bachelor of Science in finance and graduated cum laude from New York University’s Stern School of Business. Our board of directors has concluded that Mr. Moalemzadeh should serve as a director because he has significant directorship experience and has significant core business skills, including financial and strategic planning.

 

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Michael Stewart

Michael Stewart has served as our director since June 2017. Mr. Stewart is a Founder and Managing Partner at Stellex Capital Management. Before joining Stellex in 2014, Mr. Stewart was a partner of The Carlyle Group and a managing director and co-head of Carlyle Strategic Partners. Prior to joining Carlyle, Mr. Stewart was one of the original principals of Sunrise Capital Partners, L.P. Before that, Mr. Stewart spent eight years at Houlihan Lokey in the Financial Restructuring Group. Mr. Stewart currently serves as director for Dominion Hospitality Limited. Mr. Stewart holds a Bachelor of Science in finance, business economics and entrepreneurial studies from the University of Southern California. Our board of directors has concluded that Mr. Stewart should serve as a director because he has significant directorship experience and has significant core business skills, including financial and strategic planning.

Jeffrey Quake

Jeffrey Quake has served as our director since June 2017. Mr. Quake is currently a Managing Director at First Reserve. Prior to joining First Reserve in 2005, Mr. Quake was a member of the investment team at J.P. Morgan’s private equity fund for five years. Prior to J.P. Morgan, he was a member of the Corporate Finance team at Lehman Brothers, Inc. Mr. Quake holds a Master of Business Administration from Harvard Business School and a Bachelor of the Arts from Williams College. Our board of directors has concluded that Mr. Quake should serve as a director because he has significant directorship experience and has significant core business skills, including financial and strategic planning.

Board of Directors and Committees

Audit Committee

Our board of directors will establish an audit committee in connection with this offering whose functions include the following:

 

    assist the board of directors in its oversight responsibilities regarding the integrity of our financial statements, our compliance with legal and regulatory requirements, the independent accountant’s qualifications and independence and our accounting and financial reporting processes of and the audits of our financial statements;

 

    prepare the report required by the SEC for inclusion in our annual proxy or information statement;

 

    approve audit and non-audit services to be performed by the independent accountants;

 

    perform such other functions as the board of directors may from time to time assign to the audit committee.

The specific functions and responsibilities of the audit committee will be set forth in the audit committee charter. We anticipate that our audit committee will initially be comprised of             ,             and             , each of whom will be independent and will satisfy the financial literacy standards for audit committee members under the Exchange Act and NYSE listing standards. We also anticipate that             will qualify as an “audit committee financial expert” under applicable SEC rules. Within one year after completion of the offering, we expect that our audit committee will be composed of three members that will satisfy the independence requirements of the Exchange Act and NYSE listing standards.

Pursuant to our bylaws, our board of directors may, from time to time, establish other committees to facilitate the management of our business and operations.

 

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Compensation Committee

Our compensation committee will initially be comprised of             ,             and                 , each of whom will satisfy the independence requirements of the Exchange Act and NYSE listing standards. This committee will establish salaries, incentives and other forms of compensation for officers and directors. The compensation committee will also administer our 2018 Incentive Award Plan.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee will initially be comprised of             ,             and             , each of whom will satisfy the independence requirements of the Exchange Act and NYSE listing standards. The nominating and corporate governance committee is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serve on the board of directors or compensation committee of a company that has an executive officer that serves on our board or compensation committee. No member of our board is an executive officer of a company in which one of our executive officers serves as a member of the board of directors or compensation committee of that company.

Board Role in Risk Oversight

Our corporate governance guidelines will provide that the board of directors is responsible for reviewing the process for assessing the major risks facing us and the options for their mitigation. This responsibility will be largely satisfied by our audit committee, which is responsible for reviewing and discussing with management and our independent registered public accounting firm our major risk exposures and the policies management has implemented to monitor such exposures, including our financial risk exposures and risk management policies.

 

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EXECUTIVE COMPENSATION

This section discusses the material components of the executive compensation program for our executive officers who are named in the “2017 Summary Compensation Table” below. This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the completion of this offering may differ materially from the currently planned programs summarized in this discussion.

2017 Summary Compensation Table

We are providing compensation disclosure that satisfies the requirements applicable to emerging growth companies, as defined in the JOBS Act. The following table sets forth information concerning the compensation of our named executive officers for the fiscal year ended December 31, 2017.

2017 Summary Compensation Table

 

Name and Principal Position

   Salary
($)
     Bonus
($)(1)
     Option
Awards
($)(2)
     All Other
Compensation
($)(3)
     Total  

Curtis Samford
(President and Chief Executive Officer)

     575,000        1,753,750        1,722,276        38,612        4,090,138  

Lawrence Blackburn
(Executive Vice President and Chief Financial Officer)

     500,000        301,250        744,768        —          1,546,018  

Thomas Giles
(Executive Vice President and General Counsel)

     335,711        371,998        217,224        24,117        949,050  

 

(1) Amounts shown represent the payment of annual bonuses for the applicable year. For a description of the annual bonuses for 2017 see the “—Additional Narrative to Disclosures—Bonus” section below.
(2) The amounts in this column represent the aggregate grant date fair value of the options granted under the Equity and Performance Incentive Plan (the “2017 Plan”), not the actual amounts paid to or realized by the named executive officers during the covered fiscal year. The value of the options include the full performance and service-based components of the awards and was determined in accordance with FASB ASC Topic 718, Compensation—Stock Compensation, based on the probable outcome of the applicable performance conditions and excluding the effect of estimated forfeitures. The assumptions used in determining the grant date fair value of these awards are set forth in Note 12 to our audited consolidated financial statements for the fiscal year ended December 31, 2017.
(3) Amounts reported include company contributions under our 401(k) plan, company paid insurance premiums, and company paid housing.

 

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