09.30.2013 - Document FY13 Q3



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2013
OR
¨ Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from    ______    to    ______
Commission file number: 001-36053

Frank’s International N.V.
(Exact name of registrant as specified in its charter)
 
The Netherlands
 
98-1107145
 
 
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification number)
 
 
 
 
 
 
 
Prins Bernhardplein 200
 
 
 
 
1097 JB Amsterdam, The Netherlands
 
Not Applicable
 
 
(Address of principal executive offices)
 
(Zip Code)
 

Registrant’s telephone number, including area code: +31 (0)20 52 14 777
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
þ
Smaller reporting company
¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
As of November 12, 2013, there were 153,524,000 shares of common stock, €0.01 par value per share, outstanding.




TABLE OF CONTENTS
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
Financial Statements
 
 
Consolidated Balance Sheets at September 30, 2013 and December 31, 2012
 
Consolidated Statements of Income for the Three and Nine Months
 
 
Ended September 30, 2013 and 2012
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months
 
 
Ended September 30, 2013 and 2012
 
Consolidated Statements of Stockholders' Equity for the Nine Months
 
 
Ended September 30, 2013 and 2012
 
Consolidated Statements of Cash Flows for the Nine Months
 
 
Ended September 30, 2013 and 2012
 
Notes to the Consolidated Financial Statements
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and
 
 
Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
Signatures
 



2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 FRANK'S INTERNATIONAL N.V.
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share data)
 (Unaudited)
 
 
 
 
 
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
449,522

 
$
152,945

Accounts receivables, net
342,708

 
313,657

Inventories
161,469

 
108,543

Other current assets
12,415

 
16,632

Total current assets
966,114

 
591,777

 
 
 
 
Property, plant and equipment, net
473,885

 
426,500

Goodwill
13,742

 
15,239

Intangible assets, net
1,223

 
1,832

Other assets
52,284

 
72,613

Total assets
$
1,507,248

 
$
1,107,961

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and capital lease obligations
$
486

 
$
6,317

Current portion of notes payable - affiliated

 
323,476

Accounts payable
17,078

 
19,377

Deferred revenue
65,052

 
23,172

Accrued and other current liabilities
112,569

 
104,627

Total current liabilities
195,185

 
476,969

 
 
 
 
Long-term debt:
 
 
 
Long-term debt and capital lease obligations
96

 
1,051

Notes payable - affiliated

 
145,087

Total long-term debt
96

 
146,138

 
 
 
 
Deferred tax liabilities
3,409

 
6,575

Other non-current liabilities
36,345

 
30,586

Total liabilities
235,035

 
660,268

 
 
 
 
Commitments and contingencies (Note 16)


 


 
 
 
 
Series A preferred stock, €0.01 par value, 60,000,000 shares authorized;
 
 
 
52,976,000 shares issued and outstanding
705

 
705

 
 
 
 
Stockholders' equity
 
 
 
Common stock, €0.01 par value, 180,000,000 shares authorized; 153,524,000
 
 
 
shares issued and outstanding at September 30, 2013; 119,024,000
 
 
 
shares issued and outstanding at December 31, 2012
2,019

 
1,561

Additional paid-in capital
637,464

 
651

Retained earnings
408,966

 
327,436

Accumulated other comprehensive income (loss)
(2,026
)
 
3,254

Total stockholders' equity
1,046,423

 
332,902

Noncontrolling interest
225,085

 
114,086

Total equity
1,271,508

 
446,988

Total liabilities and equity
$
1,507,248

 
$
1,107,961


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



 FRANK'S INTERNATIONAL N.V.
 CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share data)
 (Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Equipment rentals and services
$
228,069

 
$
225,937

 
$
668,582

 
$
647,307

Products
42,033

 
40,470

 
127,068

 
116,883

Total revenue
270,102

 
266,407

 
795,650

 
764,190

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of revenues, exclusive of depreciation
 
 
 
 
 
 
 
and amortization
 
 
 
 
 
 
 
Equipment rentals and services
86,932

 
74,444

 
248,104

 
222,418

Products
23,862

 
33,063

 
72,481

 
83,367

General and administrative expenses
64,104

 
46,524

 
160,016

 
134,005

Depreciation and amortization
19,887

 
16,827

 
56,593

 
48,480

Loss on sale of assets
124

 
36

 
68

 
141

Operating income
75,193

 
95,513

 
258,388

 
275,779

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Other income
1,128

 
3,228

 
8,535

 
6,655

Interest income (expense), net
170

 
112

 
(493
)
 
305

Foreign currency gain (loss)
3,161

 
80

 
(2,114
)
 
418

Total other income (expense)
4,459

 
3,420

 
5,928

 
7,378

Income from continuing operations before
 
 
 
 
 
 
 
income tax expense
79,652

 
98,933

 
264,316

 
283,157

Income tax expense
20,185

 
8,634

 
32,569

 
24,028

Income from continuing operations
59,467

 
90,299

 
231,747

 
259,129

Income from discontinued operations

 
1,251

 
42,635

 
5,590

Net income
59,467

 
91,550

 
274,382

 
264,719

Net income attributable to noncontrolling interest
18,653

 
23,483

 
74,005

 
67,900

Net income attributable to
 
 
 
 
 
 
 
Frank's International N.V.
$
40,814

 
$
68,067

 
$
200,377

 
$
196,819

 
 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.30

 
$
0.56

 
$
1.35

 
$
1.62

Discontinued operations

 
0.01

 
0.25

 
0.03

Total
$
0.30

 
$
0.57

 
$
1.60

 
$
1.65

 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.29

 
$
0.53

 
$
1.33

 
$
1.52

Discontinued operations

 

 
0.18

 
0.02

Total
$
0.29

 
$
0.53

 
$
1.51

 
$
1.54

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
137,024

 
119,024

 
125,090

 
119,024

Diluted
190,435

 
172,000

 
178,211

 
172,000



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



 FRANK'S INTERNATIONAL N.V.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (In thousands)
 (Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net income
$
59,467

 
$
91,550

 
$
274,382

 
$
264,719

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation
 
 
 
 
 
 
 
adjustments, net of tax
(911
)
 
895

 
(8,243
)
 
(636
)
Unrealized gain on marketable
 
 
 
 
 
 
 
securities, net of tax
1,462

 
52

 
1,142

 
88

Total other comprehensive income (loss)
551

 
947

 
(7,101
)
 
(548
)
Comprehensive income
60,018

 
92,497

 
267,281

 
264,171

Less: Comprehensive income attributable to
 
 
 
 
 
 
 
noncontrolling interest
18,794

 
23,726

 
72,184

 
67,759

Comprehensive income attributable to
 
 
 
 
 
 
 
Frank's International N.V.
$
41,224

 
$
68,771

 
$
195,097

 
$
196,412



The accompanying notes are an integral part of these consolidated financial statements.
5



 FRANK'S INTERNATIONAL N.V.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 (In thousands)
 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
Total
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Noncontrolling
 
Stockholders'
 
Shares
 
Value
 
Capital
 
Earnings
 
Income (Loss)
 
Interest
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2011
119,024

 
$
1,561

 
$
651

 
$
491,062

 
$
3,302

 
$
170,552

 
$
667,128

Net income

 

 

 
196,819

 

 
67,900

 
264,719

Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
 
adjustments

 

 

 

 
(473
)
 
(163
)
 
(636
)
Unrealized gain on marketable
 
 
 
 
 
 
 
 
 
 
 
 
 
securities

 

 

 

 
65

 
23

 
88

Distributions to stockholders

 

 

 
(64,696
)
 

 
(22,319
)
 
(87,015
)
Balances at September 30, 2012
119,024

 
$
1,561

 
$
651

 
$
623,185

 
$
2,894

 
$
215,993

 
$
844,284

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
Total
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Noncontrolling
 
Stockholders'
 
Shares
 
Value
 
Capital
 
Earnings
 
Income (Loss)
 
Interest
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2012
119,024

 
$
1,561

 
$
651

 
$
327,436

 
$
3,254

 
$
114,086

 
$
446,988

Net income

 

 

 
200,377

 

 
74,005

 
274,382

Distribution of net assets
 
 
 
 
 
 
 
 
 
 
 
 
 
to Mosing Holdings

 

 

 
(40,507
)
 

 
(13,974
)
 
(54,481
)
Capital contribution by NCI
 
 
 
 
 
 
 
 
 
 
 
 
 
equity holders to subsidiary

 

 

 

 

 
3,002

 
3,002

Issuance of common stock upon
 
 
 
 
 
 
 
 
 
 
 
 
 
IPO, net of offering costs
34,500

 
458

 
634,239

 

 

 
76,814

 
711,511

Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
 
adjustments

 

 

 

 
(6,129
)
 
(2,114
)
 
(8,243
)
Unrealized gain on marketable
 
 
 
 
 
 
 
 
 
 
 
 
 
securities

 

 

 

 
849

 
293

 
1,142

Stock-based compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
expense

 

 
2,520

 

 

 

 
2,520

Distributions to stockholders

 

 

 
(78,340
)
 

 
(27,027
)
 
(105,367
)
Other

 

 
54

 

 

 

 
54

Balances at September 30, 2013
153,524

 
$
2,019

 
$
637,464

 
$
408,966

 
$
(2,026
)
 
$
225,085

 
$
1,271,508


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



FRANK'S INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
 
 
Nine Months Ended
 
September 30,
 
2013
 
2012
Cash flows from operating activities
 
 
 
Net income
$
274,382

 
$
264,719

Adjustments to reconcile net income to cash provided by operating activities
 
 
 
Depreciation and amortization
56,738

 
48,786

Stock-based compensation expense
2,520

 

Amortization of deferred financing costs
43

 

Venezuelan currency devaluation charge
1,755

 

Deferred tax provision
(2,806
)
 
(203
)
Provision for bad debts
11,786

 
1,673

(Gain) loss on sale of assets
(39,561
)
 
141

Changes in fair value of marketable securities
(2,381
)
 
(1,758
)
Increase in value of life insurance policies
(815
)
 
(345
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable
(57,904
)
 
(73,583
)
Inventories
(57,829
)
 
(7,753
)
Other current assets
1,738

 
5,442

Other assets
(1,747
)
 
805

Accounts payable
(1,912
)
 
5,849

Deferred revenue
41,880

 
(5,820
)
Accrued expenses and other current liabilities
8,511

 
7,913

Other noncurrent liabilities
5,759

 
5,457

Net cash provided by operating activities
240,157

 
251,323

 
 
 
 
Cash flows from investing activities
 
 
 
Purchase of property, plant and equipment
(126,763
)
 
(136,605
)
Proceeds from sale of assets and equipment
50,471

 
284

Purchase of marketable securities
(1,187
)
 
(2,220
)
Premiums on life insurance policies
(2,142
)
 
(2,912
)
Other

 
(196
)
Net cash used in investing activities
(79,621
)
 
(141,649
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from initial public offering, net of offering costs
711,511

 

Repayments of borrowings
(471,864
)
 
(14,488
)
Proceeds from borrowings
170

 
10,095

Deferred financing costs
(972
)
 

Distributions to stockholders
(105,367
)
 
(87,015
)
Net cash provided by (used in) financing activities
133,478

 
(91,408
)
Effect of exchange rate changes on cash due to Venezuelan devaluation
575

 

Effect of exchange rate changes on cash
1,988

 
(1,561
)
Net increase in cash
296,577

 
16,705

Cash and cash equivalents at beginning of period
152,945

 
98,649

Cash and cash equivalents at end of period
$
449,522

 
$
115,354


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





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

 
Note 1—Basis of Presentation and Significant Accounting Policies

Nature of Business

Frank’s International is a global provider of highly engineered tubular services to the oil and gas industry. Frank’s International provides services to leading exploration and production companies in both offshore and onshore environments with a focus on complex and technically demanding wells.

Basis of Presentation

The consolidated financial statements of Frank's International N.V. ("FINV"), a limited liability company organized under the laws of The Netherlands, for the three and nine months ended September 30, 2013 and 2012 include the activities of Frank's International C.V. ("FICV") and its wholly owned subsidiaries (collectively, the "Company," "we," "us" and "our"). All intercompany accounts and transactions have been eliminated for purposes of preparing these consolidated financial statements.

Certain information and footnote disclosures required by generally accepted accounting principles in the United States of America ("GAAP") for complete annual financial statements have been omitted and, therefore, these interim financial statements should be read in conjunction with the audited financial statements and other information contained in our final prospectus dated August 8, 2013 (the “Prospectus”) as filed with the Securities and Exchange Commission (the "SEC") on August 9, 2013. In the opinion of management, these financial statements, which have been prepared pursuant to the rules of the SEC and GAAP for interim financial reporting, reflect all adjustments, which consisted only of normal recurring adjustments that were necessary for a fair statement of the interim periods presented. The results of operations for interim periods are not necessarily indicative of those for a full year.

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

Recast of Historical Financial Presentation

The reorganization discussed below has been reflected retroactively on a historical cost basis for all periods presented as it was a reorganization of entities under common control. The impact of the reorganization was to combine all of the previously separate entities under a single capital structure to facilitate the initial public offering ("IPO") of FINV. This presentation reflects the consolidation of each of the previously separate entities into FINV, the 25.7% noncontrolling interest in Frank's International C.V. ("FICV") and issuance of the Series A preferred stock, par value €0.01 per share (the "Preferred Stock") as outstanding for each period. This presentation allows comparability with prior periods, including earnings per share ("EPS") calculations.

Initial Public Offering and Reorganization

We completed our IPO on August 14, 2013. We sold 34,500,000 shares of common stock, including 4,500,000 shares of common stock pursuant to the underwriters' option to purchase additional shares, at an offering price of $22.00 per share. After deducting underwriting discounts and commissions and offering expenses payable by us, we received net proceeds of approximately $711.5 million. We used a portion of the proceeds from our IPO to repay in full the outstanding notes payable to FWW B.V. (“FWW”), an entity owned by the Mosing family, and expect to use the remainder for general corporate purposes.

Prior to the completion of our IPO, we engaged in a corporate reorganization. On August 1, 2013, each of Frank's International, Inc. ("FII"), Frank's Casing Crew and Rental Tools, Inc. ("FCC") and Frank's Tong Service, Inc. ("FTS"), subsidiaries of Mosing Holdings, Inc. (“Mosing Holdings”), converted from corporations to limited liability companies.

    



8




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

On August 14, 2013, immediately prior to the completion of our IPO, Mosing Holdings contributed all of the outstanding membership interests in each of Frank's International, LLC, Frank's Casing Crew & Rental Tools, LLC and Frank's Tong Service, LLC to FICV in exchange for 52,976,000 shares of Preferred Stock and a 25.7% limited partnership interest in FICV. Excluded from the contribution were certain assets that generated a de minimus amount of revenue, including aircraft, real estate and life insurance policies, which were retained by Mosing Holdings. FINV contributed all of its foreign operating subsidiaries and a portion of the proceeds from the IPO to FICV. Following the Reorganization and the completion of the IPO, FINV's sole material asset consists of our ownership of 74.2% of the limited partnership interest and the 0.1% general partnership interest in FICV. Mosing Holdings holds the remaining 25.7% limited partnership interest in FICV. The above transactions are collectively referred to as the “Reorganization.”

Mosing Holdings has the right to redeem all or a portion of its Preferred Stock for cash equal to the par value of each share of Preferred Stock redeemed plus any accrued but unpaid dividends thereon. Simultaneously, a proportionate amount of limited partner interests in FICV would then be exchanged for FINV common stock (the "Exchange"). As the Preferred Stock is redeemed, our noncontrolling interest will be reduced and our outstanding shares of common stock will increase.

Tax Receivable Agreement

On August 14, 2013, in connection with the completion of our IPO, we entered into a tax receivable agreement (the “TRA”) with FICV and Mosing Holdings. The TRA generally provides for the payment by us to Mosing Holdings of 85% of the amount of the benefits, if any, in payments of U.S. federal, state and local income tax or franchise tax in periods after the IPO as a result of increases in tax basis and certain other tax benefits resulting from the Exchanges, including tax benefits attributable to payments under the TRA. We will retain the remaining 15% of cash savings, if any, in realized income tax savings. The payment obligations under the TRA are our obligations and not obligations of FICV. The term of the TRA continues until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the TRA.

If we elect to terminate the TRA early, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA. In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control.
    
Venezuelan Currency Devaluation

In February 2013, the Venezuelan government announced a devaluation of the Bolivar Fuerte ("Bolivar"), resulting in the exchange rate declining from 4.3 to 6.3 Bolivars to the U.S. Dollar. As a result of the devaluation, we recorded a foreign currency loss of $1.8 million during the three months ended March 31, 2013, related to the remeasurement of the Bolivar denominated net monetary assets of our Venezuelan operations as of the date of the devaluation. In future periods, foreign exchange gains (losses) arising due to the appreciation (depreciation) of the Bolivar versus the U.S. Dollar will result in benefits (charges) to the statements of income based on the value of the Bolivar-denominated net monetary assets at the time when such exchange rate changes become effective.

Recent Accounting Pronouncements
    
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”). This ASU requires entities to present separately, among other items, the amount of the change that is due to reclassifications, and the amount that is due to current period other comprehensive income. We adopted this guidance during the first quarter of 2013 and it did not have a material impact on our consolidated financial position, results of operations or cash flows as there are currently no items reclassified from AOCI.

    



9




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

In July 2013, the FASB issued ASU No. 2013-11 relating to income taxes, which provides guidance on the presentation of unrecognized tax benefits. The intent is to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the impact, if any, that the adoption of this standard may have on our consolidated financial statements.

Significant Accounting Policies

We adopted the following new accounting policies subsequent to the IPO.

Deferred Financing Costs

Deferred financing costs consist of fees and expenses paid in connection with the closing of credit facilities and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the term of the credit facilities.
    
Earnings Per Share

Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities to issue common stock were exercised or converted to common stock.

Stock-Based Compensation

Our stock-based compensation plan provides for the granting of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units ("RSUs"), dividend equivalent rights and other types of equity and cash incentive awards to employees, non-employee directors and service providers. Stock-based compensation expense is measured at the grant date of the share-based awards based on their value and is recognized on a straight-line basis over the vesting period, net of an estimated forfeiture rate and is included in general and administrative expense in the consolidated statements of income.

Our stock-based compensation currently consists of RSUs. The grant date fair value of the RSUs, which are not entitled to receive dividends until vested, is measured by reducing the share price at that date by the present value of the dividends expected to be paid during the requisite vesting period, discounted at the appropriate risk-free interest rate.

Note 2—Noncontrolling Interest

We hold an approximate 74.3% economic interest in FICV and are responsible for all operational, management and administrative decisions relating to FICV’s business. As a result, the financial results of FICV are consolidated with ours and we record a noncontrolling interest on our consolidated balance sheet with respect to the remaining approximately 25.7% economic interest in FICV held by Mosing Holdings. Net income attributable to noncontrolling interest on the statements of income represents the portion of earnings or loss attributable to the economic interest in FICV held by Mosing Holdings. As a result of certain of the reorganization transactions, the allocable domestic income from FICV to FINV is now subject to U.S. taxation.


10




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

A reconciliation of net income attributable to noncontrolling interest is detailed as follows ($ in thousands):
 
Three Months
 
Nine Months
 
Ended
 
Ended
 
September 30,
 
September 30,
 
2013
 
2013
 
 
 
 
Net income
$
59,467

 
$
274,382

Add: Provision for U.S. income taxes of FINV (1)
13,838

 
13,838

Less: (Income) loss in FINV (2)
(583
)
 
297

Net income subject to noncontrolling interest
72,722

 
288,517

Noncontrolling interest percentage
25.7%

 
25.7%

Net income attributable to noncontrolling interest
$
18,653

 
$
74,005

 
 
 
(1)
Represents income tax expense attributable to U.S. operations of our 74.3% partnership interests in FICV.
(2)
Represents results of operations for entities outside of FICV.

Prior year periods have not been included in the table above since income for U.S. operations for the periods was not subject to income tax.

Note 3—Discontinued Operations

On June 14, 2013, we sold a component of our Tubular Sales (previously referred to as Pipe and Products) segment, which manufactured centralizers for sales to third parties, and recognized a gain on sale of $39.6 million, which is included in income from discontinued operations on the consolidated statements of income. As a result, for the three and nine months ended September 30, 2013 and 2012, the operations from that component have been reported as discontinued operations.

The following table presents the results of discontinued operations (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Revenues
$

 
$
3,513

 
$
7,554

 
$
13,402

 
 
 
 
 
 
 
 
Income from discontinued operations
$

 
$
1,251

 
$
3,036

 
$
5,653

Gain on sale of discontinued operations

 

 
39,629

 

Income from discontinued operations
 
 
 
 
 
 
 
before income taxes

 
1,251

 
42,665

 
5,653

Income tax expense

 

 
30

 
63

 
 
 
 
 
 
 
 
Net income from discontinued operations
$

 
$
1,251

 
$
42,635

 
$
5,590




11




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

The major classes of assets and liabilities as of June 14, 2013, which were included in the disposition were as follows (in thousands):
 
Accounts receivable, net
$
1,968

 
 
Inventory
4,905

 
 
Prepaid and other current assets
53

 
 
Property, plant and equipment
2,260

 
 
Goodwill
1,497

 
 
   Total assets
$
10,683

 
 
 
 
 
 
   Total liabilities
$
312

 

Cash flows from discontinued operations are included with cash flows from continuing operations in the consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012.

Note 4—Accounts Receivable, net

Accounts receivable at September 30, 2013 and December 31, 2012 were as follows (in thousands):
 
September 30,
2013
 
December 31,
2012
Trade accounts receivable, net of allowance
 
 
 
of $13,001 and $1,697, respectively
$
212,557

 
$
188,095

Unbilled receivables
117,484

 
108,713

Affiliated (1)
3,098

 
4,551

Other receivables
9,569

 
12,298

Total accounts receivable
$
342,708

 
$
313,657

 
 
 

(1)
Amounts represent expenditures on behalf of non-consolidated affiliates and receivables for aircraft charter income.

Note 5—Inventories

Inventories at September 30, 2013 and December 31, 2012 were as follows (in thousands):
 
September 30,
2013
 
December 31,
2012
 
 
 
 
Pipe and connectors
$
144,222

 
$
87,083

Finished goods
6,257

 
6,985

Work in progress
1,273

 
2,411

Raw materials, components and supplies
9,717

 
12,064

Total inventories
$
161,469

 
$
108,543




12




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

Note 6—Property, Plant and Equipment

The following is a summary of property, plant and equipment at September 30, 2013 and December 31, 2012 (in thousands):
 
Estimated
Useful Lives
in Years
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
 
Land

 
$
15,982

 
21,344

Buildings and improvements
39

 
56,368

 
82,005

Rental machinery and equipment
7

 
643,806

 
563,368

Machinery and equipment - other
7

 
50,378

 
43,086

Furniture, fixtures and computers
5

 
17,111

 
16,707

Automobiles and other vehicles
5

 
36,699

 
33,940

Aircraft
7

 
8,167

 
21,541

Leasehold improvements
7

 
5,453

 
4,843

Construction in progress - machinery
 
 
 
 
 
and equipment

 
86,008

 
62,122

 
 
 
919,972

 
848,956

Less: Accumulated depreciation
 
 
(446,087
)
 
(422,456
)
Total property, plant and equipment, net
 
 
$
473,885

 
$
426,500


Note 7—Other Assets

Other assets at September 30, 2013 and December 31, 2012 consisted of the following (in thousands):
 
September 30,
2013
 
December 31,
2012
 
 
 
 
Marketable securities held in Rabbi Trust (1)
$
40,148

 
$
36,479

Split-dollar life insurance

 
18,799

Notes receivable - affiliates (2)

 
6,939

Deposits
1,839

 

Other
10,297

 
10,396

    Total other assets
$
52,284

 
$
72,613

 
 
 

        
(1)
See Note 10 – Fair Value Measurements
(2)
Represented amounts due from members of the Mosing family related to split-dollar life insurance policy premiums that we maintained prior to the IPO.



13




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

Note 8—Accrued and Other Current Liabilities

Accrued and other current liabilities at September 30, 2013 and December 31, 2012 consisted of the following (in thousands):
 
September 30,
2013
 
December 31,
2012
 
 
 
 
Accrued compensation
$
27,728

 
$
23,978

Accrued property and other taxes
24,253

 
19,627

Income taxes
18,025

 
4,220

Accrued inventory
12,566

 
17,273

Other accrued purchases
29,997

 
39,529

Total accrued and other current liabilities
$
112,569

 
$
104,627


Note 9—Long-term Debt

The following is summary of long-term debt at September 30, 2013 and December 31, 2012 (in thousands):
 
September 30,
2013
 
December 31,
2012
 
 
 
 
Lines of credit
$

 
$
2,000

Notes payable
394

 
4,464

Equipment financing

 
818

Capital lease obligations
188

 
86

 
582

 
7,368

Less: current portion
(486
)
 
(6,317
)
Long-term portion
96

 
1,051

 
 
 
 
Notes payable - affiliated

 
468,563

Less: current portion

 
(323,476
)
Long-term portion

 
145,087

 
 
 
 
Total long-term debt
$
96

 
$
146,138


In connection with the IPO, we entered into two revolving credit facilities with certain financial institutions: (i) a $100.0 million revolving credit facility, including up to $20.0 million for letters of credit and up to $10.0 million in swingline loans, which matures in August 2018 (the “Five Year Facility”); and (ii) a $100.0 million revolving credit facility which matures in August 2014 (the “One Year Facility” and, together with the Five Year Facility, the “Credit Facilities”). Subject to the terms of the credit agreements, we have the ability to increase the commitments under the Credit Facilities by $150.0 million. As of September 30, 2013, we did not have any outstanding indebtedness under the Credit Facilities and had $5.3 million in letters of credit outstanding. We incurred approximately $1.0 million of deferred financing costs related to the new credit agreements.

Borrowings under the Credit Facilities bear interest, at our option, at either a base rate or an adjusted Eurodollar rate. Base rate loans under the credit facilities bear interest at a rate equal to the higher of (a) the prime rate as published in the Wall Street Journal, (b) the Federal Funds Effective Rate plus 0.50% or (c) the adjusted Eurodollar rate plus 1.00%, plus an applicable margin ranging from 0.50% to 1.50%, subject to adjustment based on the leverage ratio. Interest is in each case payable quarterly for base-rate loans. Eurodollar loans under the Credit Facilities bear interest at an adjusted Eurodollar rate equal to the Eurodollar rate for such interest period multiplied by the statutory reserves, plus an applicable margin ranging from 1.50% to 2.50%. Interest is payable at the end of applicable interest periods for Eurodollar loans, except that if the interest period for a Eurodollar loan is longer than three months, interest is paid at the end of each three-month period. The unused portion of the Five Year Facility is subject to a commitment fee of up to 0.375%.


14




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

The credit agreements contain various covenants that, among other things, limit our ability to grant certain liens, make certain loans and investments, enter into mergers or acquisition, enter into hedging transactions, change our lines of business, prepay certain indebtedness, enter into certain affiliate transactions, incur additional indebtedness or engage in certain asset dispositions. Additionally, the credit agreements limit our ability to incur additional indebtedness subject to certain exceptions.

The credit agreements also contain financial covenants, which, among other things, require us, on a consolidated basis, to maintain: (i) a ratio of total consolidated funded debt to adjusted EBITDA (as defined in the credit agreements) of not more than 2.50 to 1.0; and (ii) a ratio of EBITDA to interest expense of not less than 3.0 to 1.0. As of September 30, 2013, we were in compliance with all financial covenants under the credit agreements.

In addition, the credit agreements contain customary events of default, including, among others, the failure to make required payments, borrower's failure to comply with certain covenants or other agreements, borrower's breach of the representation and covenants contained in the agreements, borrower's default of certain other indebtedness, certain events of bankruptcy or insolvency and the occurrence of a change in control (as defined in the credit agreements).

Prior to the completion of the IPO, we had two revolving credit facilities, with available borrowing capacities of $40.0 million and $5.0 million. In connection with the completion of our IPO, these credit facilities were repaid in full and terminated.

Notes Payable - Affiliated

In 2012, we made a non-cash distribution of $484.0 million to our owners in the form of two unsecured promissory notes payable to FWW. Interest was charged on the notes at the applicable short-term monthly applicable federal rate as published by the Internal Revenue Service. In connection with the completion of our IPO, the $415.3 million balance of the notes to FWW was repaid in full. We also had various notes payable – affiliated, which were either repaid in full or transferred to Mosing Holdings in connection with the completion of our IPO.

All other affiliated indebtedness existing prior to the IPO was repaid.

Note 10—Fair Value Measurements

We follow fair value measurement authoritative accounting guidance for measuring fair values of assets and liabilities in financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants who are independent, knowledgeable, and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. We are able to classify fair value balances based on the observability of these inputs. The authoritative guidance for fair value measurements establishes three levels of the fair value hierarchy, defined as follows:

Level 1: Unadjusted, quoted prices for identical assets or liabilities in active markets.
Level 2: Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability.
Level 3: Significant, unobservable inputs for use when little or no market data exists, requiring a significant degree of judgment.

The hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. Depending on the particular asset or liability, input availability can vary depending on factors such as product type, longevity of a product in the market and other particular transaction conditions. In some cases, certain inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. For disclosure purposes under the accounting guidance, the lowest level that contains significant inputs used in valuation should be chosen.



15




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

Financial Assets and Liabilities

A summary of financial assets and liabilities that are measured at fair value on a recurring basis, as of September 30, 2013 and December 31, 2012 were as follows (in thousands):
 
Quoted Prices
in Active
Markets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
September 30, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan
$
40,148

 
$

 
$

 
$
40,148

Marketable securities - other
4,520

 

 

 
4,520

Liabilities:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan
35,829

 

 

 
35,829

 
Quoted Prices
in Active
Markets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
December 31, 2012
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan
$
36,479

 
$

 
$

 
$
36,479

Marketable securities - other
3,717

 

 

 
3,717

Liabilities:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan
30,143

 

 

 
30,143


Our investments associated with our deferred compensation plan consist of marketable securities and mutual funds that are publicly traded and for which market prices are readily available. Other marketable securities are included in other assets on the consolidated balance sheets.

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

We apply the provisions of the fair value measurement standard to our non-recurring, non-financial measurements including business combinations as well as impairment related to goodwill and other long-lived assets. For business combinations, the purchase price is allocated to the assets acquired and liabilities assumed based on a discounted cash flow model for most intangibles as well as market assumptions for the valuation of equipment and other fixed assets. We utilize a discounted cash flow model in evaluating impairment considerations related to goodwill and long-lived assets. Given the unobservable nature of the inputs, the discounted cash flow models are deemed to use Level 3 inputs. There were no non-recurring measurements during the interim periods presented.



16




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

Other Fair Value Considerations

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

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. It was not practical to determine the fair value of the long-term portion of the notes payable to FWW at December 31, 2012 due to their related-party nature. The balance of the notes due FWW was repaid in August 2013.

Note 11—Preferred Stock

At September 30, 2013, we had 52,976,000 shares of Preferred Stock issued and outstanding, which are held by Mosing Holdings. Each share of Preferred Stock has a liquidation preference equal to its par value of €0.01 per share and is entitled to an annual dividend equal to 0.25% of its par value. Additionally, each share of Preferred Stock entitles its holder to one vote. Preferred stockholders vote with the common stock as a single class on all matters presented to FINV's shareholders for their vote.

The FICV Limited Partnership Agreement contains provisions linking each share of Preferred Stock to a proportionate portion of the limited partnership interest in FICV held by Mosing Holdings. Mosing Holdings has the right to redeem all or a portion of its Preferred Stock for cash equal to the par value of each share of Preferred Stock redeemed plus any accrued but unpaid dividends thereon. Simultaneously, a proportionate amount of limited partner
interests in FICV would then be exchanged for FINV common stock. As of September 30, 2013, there have been no redemptions of the Preferred Stock or conversions of the FICV limited partner interests. Exchanges are subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.

The Preferred Stock is classified outside of permanent equity in our consolidated balance sheet at its redemption value of par plus accrued and unpaid dividends because the conversion provisions are not solely within our control.

Note 12—Related Party Transactions

We have engaged in certain transactions with other companies related to us by common ownership. We have entered into various operating leases to lease office space from an affiliated partnership. Rent expense related to these leases was $1.4 million and $0.8 million for the three months ended September 30, 2013 and 2012, respectively, and $3.1 million and $2.3 million for the nine months ended September 30, 2013 and 2012, respectively.

We are a party to certain agreements relating to the rental of aircraft to Western Airways ("WA"), an entity owned by the Mosing family. Prior to the IPO, we were under agreements, whereby we leased the aircraft as needed for a rental fee per hour and reimbursed WA for a management fee and hangar rental. The rental fees exceeded the reimbursement costs and we recorded net charter income. Subsequent to the IPO, we entered into new agreements with WA for the aircraft that was retained by us whereby we are paid a flat monthly fee. We recorded net charter income of $0.3 million and $0.8 million for the three months ended September 30, 2013 and 2012, respectively, and $0.2 million and $0.7 million for the nine months ended September 30, 2013 and 2012, respectively.

We had receivables totaling $5.6 million at December 31, 2012, due from our chief executive officer and certain members of the Mosing family, relating to amounts owed to us for split-dollar life insurance policy premiums that we previously maintained. The receivables were recorded in other assets on the consolidated balance sheets. The cash surrender value of $18.8 million related to such policies was recorded in other assets as of December 31, 2012. We recorded unrealized gains of $0.8 million and $0.3 million for the nine months ended September 30, 2013 and 2012, respectively, in general and administrative expenses on the consolidated statements of income related to the change in the cash surrender value of the policies. The split dollar life insurance policies were transferred to Mosing Holdings in connection with the Reorganization.

In addition, we had two outstanding notes payable to FWW that were repaid in full in connection with the completion of our IPO. See Note 9 – Long-term Debt.

Note 13—Earnings Per Common Share

Basic earnings per common share is determined dividing net income, less preferred stock dividends, by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding, assuming all potentially dilutive shares were issued.

We apply the treasury stock method to determine the dilutive weighted average common shares represented by the unvested restricted stock units. The diluted earnings per share calculation assumes exchange of 100% of our outstanding Preferred Stock on an as if converted basis. Accordingly, the numerator is also adjusted to include the earnings allocated to the noncontrolling interest after taking into account the tax effect of such exchange.



17




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

The following table summarizes the basic and diluted earnings per share calculations (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Numerator - Basic
 
 
 
 
 
 
 
Income from continuing operations
$
59,467

 
$
90,299

 
$
231,747

 
$
259,129

Less: Net income attributable to
 
 
 
 
 
 
 
noncontrolling interest
(18,653
)
 
(23,483
)
 
(74,005
)
 
(67,900
)
Less: Preferred stock dividends

 

 

 

Discontinued operations attributable
 
 
 
 
 
 
 
to noncontrolling interest

 
321

 
10,935

 
1,434

Income from continuing operations
 
 
 
 
 
 
 
attributable to common shareholders
40,814

 
67,137

 
168,677

 
192,663

Income from discontinued operations
 
 
 
 
 
 
 
attributable to FINV

 
930

 
31,700

 
4,156

Net income attributable to common shareholders
$
40,814

 
$
68,067

 
$
200,377

 
$
196,819

 
 
 
 
 
 
 
 
Numerator - Diluted
 
 
 
 
 
 
 
Income from continuing operations
 
 
 
 
 
 
 
applicable to common shareholders
$
40,814

 
$
67,137

 
$
168,677

 
$
192,663

Add: Net income attributable to
 
 
 
 
 
 
 
noncontrolling interest (1)
13,893

 
23,483

 
69,245

 
67,900

Add: Preferred stock dividends

 

 

 

Diluted income from continuing operations
 
 
 
 
 
 
 
applicable to common shareholders
54,707

 
90,620

 
237,922

 
260,563

Income from discontinued operations
 
 
 
 
 
 
 
attributable to FINV

 
930

 
31,700

 
4,156

Dilutive net income available
 
 
 
 
 
 
 
to common shareholders
$
54,707

 
$
91,550

 
$
269,622

 
$
264,719

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Basic weighted average common shares
137,024

 
119,024

 
125,090

 
119,024

Exchange of noncontrolling interest
 
 
 
 
 
 
 
for common stock (Note 11)
52,976

 
52,976

 
52,976

 
52,976

Restricted stock units
435

 

 
145

 

Diluted weighted average common shares
190,435

 
172,000

 
178,211

 
172,000

 
 
 
 
 
 
 
 
 Basic earnings per common share:
 
 
 
 
 
 
 
 Continuing operations
$
0.30

 
$
0.56

 
$
1.35

 
$
1.62

 Discontinued operations

 
0.01

 
0.25

 
0.03

 Total
$
0.30

 
$
0.57

 
$
1.60

 
$
1.65

 
 
 
 
 
 
 
 
 Diluted earnings per common share:
 
 
 
 
 
 
 
 Continuing operations
$
0.29

 
$
0.53

 
$
1.33

 
$
1.52

 Discontinued operations

 

 
0.18

 
0.02

 Total
$
0.29

 
$
0.53

 
$
1.51

 
$
1.54

 
 
 
(1)
Adjusted for additional tax expense of $4.8 million for the three and nine months ended September 30, 2013 upon the assumed conversion of the Preferred Stock.


18




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

Note 14—Stock-Based Compensation

2013 Long-Term Incentive Plan

In connection with the completion of our IPO, we adopted the Frank's International N.V. 2013 Long-Term Incentive Plan (the “LTIP”), under which stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, dividend equivalent rights and other types of equity and cash incentive awards may be granted to employees, non-employee directors and service providers. The LTIP expires after 10 years, unless prior to that date the maximum number of shares available for issuance under the plan has been issued or our board of directors terminates the plan. There are 20 million shares of common stock reserved for issuance under the LTIP.

Restricted Stock Units

Subsequent to the completion of the IPO and pursuant to the LTIP, we issued 3,522,158 RSUs to management and employees. Substantially all RSUs granted under the LTIP vest ratably over a period of three years (one-third on each anniversary of the grant), except for certain grants that vest 20% on the first three anniversaries and the remaining 40% at the end of three and a half years.

Employees granted restricted stock awards are not entitled to dividends declared on the underlying shares while the restricted stock is unvested. As such, the grant date fair value of the award is measured by reducing the grant date price of our common stock by the present value of the dividends expected to be paid on the underlying shares during the requisite service period, discounted at the appropriate risk-free interest rate. The resulting fair value of the restricted stock awards granted was $21.03. Compensation expense is recognized ratably over the vesting period. As of September 30, 2013, we assumed no annual forfeiture rate because of our lack of turnover and history for this type of award.

Stock-based compensation expense relating to RSUs for both the three and nine months ended September 30, 2013, was $2.5 million and is included in general and administrative expenses on the consolidated statements of income. Unamortized stock compensation expense as of September 30, 2013 relating to RSUs totaled approximately $75.0 million which will be expensed over a weighted average period of 3.2 years.

Employee Stock Purchase Plan

In connection with the completion of our IPO, we adopted the Frank's International N.V. Employee Stock Purchase Plan (the “ESPP”), which will become effective January 1, 2014. The ESPP is designed to enable eligible employees to periodically purchase shares of our common stock at a discount. Purchases are accomplished through participation in discrete offering periods. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. We have reserved three million shares of our common stock for issuance under the ESPP.

Note 15—Income Taxes

Prior to the Reorganization, FII, FCC and FTS were classified as S-corporations for U.S. income tax purposes and therefore were not subject to federal or state income taxation. Following the Reorganization, FICV is taxed as a partnership for U.S. federal income tax purposes and its domestic subsidiaries are classified as limited liability companies not subject to federal or state income taxation. As a partner in FICV, we are now subject to U.S. taxation on our allocable share of U.S. taxable income and the noncontrolling member will pay taxes with respect to its allocable share of U.S. taxable income.

For interim financial reporting, we estimate the annual tax rate based on projected pre-tax income for the full year and record a quarterly income tax provision (benefit) in accordance with Accounting Standards Codification Topic 740-270, Income taxes—Interim Reporting. As the year progresses, we refine the estimate of the year's pre-tax income as new information becomes available. The continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, we adjust the income tax provision (benefit) during the quarter in which the change in estimate occurs so that the year to date provision reflects the expected annual tax rate.


19




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

Our effective tax rate on income from continuing operations before income taxes was 25.3% and 8.7% for the three months ended September 30, 2013 and 2012, respectively, and 12.3% and 8.5% for the nine months ended September 30, 2013 and 2012, respectively. The tax rate for the three and nine months ended September 30, 2013 and 2012 is lower than the U.S. statutory income tax rate of 35% due to the exclusion of taxes on U.S. domestic income through August 14, 2013, the IPO date, as well as lower statutory tax rates in certain foreign jurisdictions where we operate.
    
As of September 30, 2013, there were no significant changes to our unrecognized tax benefits as reported in our audited financial statements for the year ended December 31, 2012.

Note 16—Commitments and Contingencies

We are the subject of lawsuits and claims arising in the ordinary course of business. Management cannot predict the ultimate outcome of such lawsuits and claims. While the lawsuits and claims are asserted for amounts that may be material should an unfavorable outcome be the result, management does not expect that the currently pending matters will have a material adverse effect on our financial position or results of operations.

Note 17—Segment Information

Reporting Segments

Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. We are comprised of three reportable segments: International Services, U.S. Services and Tubular Sales. We previously referred to the Tubular Sales segment as the Pipe and Products segment. We renamed this segment to better describe the business activities conducted within this segment after the sale of our centralizer manufacturing business (See Note 3).

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

The U.S. Services segment provides tubular services in almost all of the active onshore oil and gas drilling regions in the U.S., including the Permian Basin, Bakken Shale, Barnett Shale, Eagleford Shale, Haynesville Shale, Marcellus Shale and Utica Shale, as well as in the U.S. Gulf of Mexico.

The Tubular Sales segment designs and manufactures certain products that we sell or rent directly to external customers, including large outside diameter ("OD") pipe connectors and casing attachments. Finally, we distribute large OD pipe manufactured by third parties that we have equipped with weld-on end connections.

The operating results of the Tubular Sales component that was sold in June 2013 have been accounted for as discontinued operations and have been excluded from the segment results below.

Adjusted EBITDA

We define Adjusted EBITDA as income from continuing operations before net interest income or expense, depreciation and amortization, income tax benefit or expense, asset impairments, gain or loss on sale of assets, foreign currency gain or loss, stock-based compensation, other non-cash adjustments and unusual or non-recurring charges. Our CODM uses Adjusted EBITDA as the primary measure of segment reporting performance.



20




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

The following table presents a reconciliation of Segment Adjusted EBITDA to income from continuing operations (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Segment Adjusted EBITDA:
 
 
 
 
 
 
 
International Services
$
48,752

 
$
55,957

 
$
153,134

 
$
165,872

U.S. Services
47,215

 
57,178

 
149,494

 
149,213

Tubular Sales
5,338

 
2,464

 
25,893

 
16,051

Corporate and other
(33
)
 
5

 
3

 
(81
)
Adjusted EBITDA Total
101,272

 
115,604

 
328,524

 
331,055

Interest income (expense), net
170

 
112

 
(493
)
 
305

Income tax expense
(20,185
)
 
(8,634
)
 
(32,569
)
 
(24,028
)
Depreciation and amortization
(19,887
)
 
(16,827
)
 
(56,593
)
 
(48,480
)
Loss on sale of assets
(124
)
 
(36
)
 
(68
)
 
(141
)
Foreign currency gain (loss)
3,161

 
80

 
(2,114
)
 
418

Stock-based compensation expense
(2,520
)
 

 
(2,520
)
 

IPO transaction-related costs
(2,420
)
 

 
(2,420
)
 

Income from continuing operations
$
59,467

 
$
90,299

 
$
231,747

 
$
259,129


The following tables set forth certain financial information with respect to our reportable segments. Included in “Corporate and Other” are intersegment eliminations and costs associated with activities of a general nature (in thousands):
 
International
Services
 
U.S.
Services
 
Tubular Sales
 
Corporate
and Other
 
Total
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
121,680

 
$
108,126

 
$
40,296

 
$

 
$
270,102

Inter-segment revenues
1,253

 
5,122

 
17,775

 
(24,150
)
 

Adjusted EBITDA
48,752

 
47,215

 
5,338

 
(33
)
 
101,272

 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
115,847

 
$
112,286

 
$
38,274

 
$

 
$
266,407

Inter-segment revenues
722

 
4,518

 
13,393

 
(18,633
)
 

Adjusted EBITDA
55,957

 
57,178

 
2,464

 
5

 
115,604

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
353,041

 
$
321,295

 
$
121,314

 
$

 
$
795,650

Inter-segment revenues
2,700

 
15,452

 
53,455

 
(71,607
)
 

Adjusted EBITDA
153,134

 
149,494

 
25,893

 
3

 
328,524

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
339,370

 
$
315,589

 
$
109,231

 
$

 
$
764,190

Inter-segment revenues
1,596

 
13,692

 
32,811

 
(48,099
)
 

Adjusted EBITDA
165,872

 
149,213

 
16,051

 
(81
)
 
331,055




21


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

the level of activity in the oil and gas industry;
the volatility of oil and gas prices;
unique risks associated with our offshore operations;
political, economic and regulatory uncertainties in our international operations;
our ability to develop new technologies and products;
our ability to protect our intellectual property rights;
our ability to employ and retain skilled and qualified workers;
the level of competition in our industry;
operational safety laws and regulations; and
weather conditions and natural disasters

These and other important factors that could affect our operating results and performance are described in (1) “Risk Factors” in Part II, Item IA of this Form 10-Q, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Form 10-Q, and elsewhere within this Form 10-Q, (2) our final prospectus dated August 8, 2013 and filed with the SEC on August 9, 2013 (File No. 333-188536) (the “Prospectus”), (3) our other reports and filings we make with the SEC from time to time and (4) other announcements we make from time to time. Should one or more of the risks or uncertainties described in the documents above or in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statements.



22


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q and the audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2012 included in the Prospectus.

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

Overview of Business

We are a 75 year-old global provider of highly engineered tubular services to the oil and gas industry. We provide our services to leading exploration and production companies in both offshore and onshore environments, with a focus on complex and technically demanding wells.

We conduct our business through three operating segments:

International Services. We currently provide our services in approximately 60 countries on six continents. Our customers in these international markets are primarily large exploration and production companies, including integrated oil and gas companies and national oil and gas companies.

U.S. Services. We service customers in the deep water areas of the U.S. Gulf of Mexico. In addition, we have a significant presence in almost all of the active onshore oil and gas drilling regions in the U.S., including the Permian Basin, Bakken Shale, Barnett Shale, Eagle Ford Shale, Haynesville Shale, Marcellus Shale and Utica Shale.