06.30.2014 - Document FY14 Q2



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 June 30, 2014
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)20 693 8597
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
þ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
As of August 6, 2014, 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 June 30, 2014 and December 31, 2013
 
Consolidated Statements of Income for the Three and Six Months
 
 
Ended June 30, 2014 and 2013
 
Consolidated Statements of Comprehensive Income for the Three and Six Months
 
 
Ended June 30, 2014 and 2013
 
Consolidated Statements of Stockholders' Equity for the Six Months
 
 
Ended June 30, 2014 and 2013
 
Consolidated Statements of Cash Flows for the Six Months
 
 
Ended June 30, 2014 and 2013
 
Notes to the Unaudited Consolidated Financial Statements
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and
 
 
Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 6.
Exhibits
 
 
 
Signatures
 



2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 FRANK'S INTERNATIONAL N.V.
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share data)
 (Unaudited)
 
 
 
 
 
June 30,
 
December 31,
 
2014
 
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
443,676

 
$
404,947

Accounts receivables, net
360,295

 
364,817

Inventories
213,522

 
185,589

Other current assets
15,531

 
15,843

Total current assets
1,033,024

 
971,196

 
 
 
 
Property, plant and equipment, net
546,033

 
511,199

Goodwill and intangible assets, net
14,520

 
14,814

Other assets
64,477

 
63,986

Total assets
$
1,658,054

 
$
1,561,195

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
340

 
$
376

Accounts payable
15,745

 
22,254

Deferred revenue
69,918

 
62,610

Accrued and other current liabilities
95,343

 
90,484

Total current liabilities
181,346

 
175,724

 
 
 
 
Deferred tax liabilities
15,315

 
13,114

Other non-current liabilities
41,234

 
38,325

Total liabilities
237,895

 
227,163

 
 
 
 
Commitments and contingencies (Note 15)


 


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

 
705

 
 
 
 
Stockholders' equity:
 
 
 
Common stock, €0.01 par value, 745,120,000 shares authorized;
 
 
 
153,524,000 shares issued and outstanding
2,019

 
2,019

Additional paid-in capital
662,400

 
642,164

Retained earnings
509,681

 
455,632

Accumulated other comprehensive loss
(1,838
)
 
(2,383
)
Total stockholders' equity
1,172,262

 
1,097,432

Noncontrolling interest
247,192

 
235,895

Total equity
1,419,454

 
1,333,327

Total liabilities and equity
$
1,658,054

 
$
1,561,195


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Equipment rentals and services
$
231,838

 
$
234,649

 
$
452,651

 
$
440,513

Products
41,099

 
58,326

 
84,778

 
85,035

Total revenue
272,937

 
292,975

 
537,429

 
525,548

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of revenues, exclusive of depreciation
 
 
 
 
 
 
 
and amortization
 
 
 
 
 
 
 
Equipment rentals and services
90,029

 
82,061

 
174,020

 
149,638

Products
26,261

 
36,060

 
52,290

 
60,153

General and administrative expenses
71,760

 
51,987

 
131,211

 
95,912

Depreciation and amortization
21,895

 
19,013

 
43,088

 
36,706

(Gain) loss on sale of assets
154

 
(79
)
 
(87
)
 
(56
)
Operating income
62,838

 
103,933

 
136,907

 
183,195

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Other income
2,918

 
5,280

 
5,289

 
7,407

Interest income (expense), net
80

 
(461
)
 
36

 
(663
)
Foreign currency gain (loss)
65

 
(1,688
)
 

 
(5,275
)
Total other income (expense)
3,063

 
3,131

 
5,325

 
1,469

Income from continuing operations before
 
 
 
 
 
 
 
income tax expense
65,901

 
107,064

 
142,232

 
184,664

Income tax expense
15,852

 
6,081

 
31,821

 
12,384

Income from continuing operations
50,049

 
100,983

 
110,411

 
172,280

Income from discontinued operations, net of tax

 
40,887

 

 
42,635

Net income
50,049

 
141,870

 
110,411

 
214,915

Net income attributable to noncontrolling interest
14,833

 
36,506

 
33,332

 
55,351

Net income attributable to
 
 
 
 
 
 
 
Frank's International N.V.
$
35,216

 
$
105,364

 
$
77,079

 
$
159,564

 
 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.23

 
$
0.63

 
$
0.50

 
$
1.07

Discontinued operations

 
0.26

 

 
0.27

Total
$
0.23

 
$
0.89

 
$
0.50

 
$
1.34

 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.23

 
$
0.59

 
$
0.50

 
$
1.00

Discontinued operations

 
0.23

 

 
0.25

Total
$
0.23

 
$
0.82

 
$
0.50

 
$
1.25

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
153,524

 
119,024

 
153,524

 
119,024

Diluted
207,822

 
172,000

 
207,641

 
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
50,049

 
$
141,870

 
$
110,411

 
$
214,915

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation
 
 
 
 
 
 
 
adjustments, net of tax
948

 
(3,056
)
 
891

 
(7,332
)
Unrealized gain (loss) on marketable
 
 
 
 
 
 
 
securities, net of tax
215

 
(513
)
 
(157
)
 
(320
)
Total other comprehensive income (loss)
1,163

 
(3,569
)
 
734

 
(7,652
)
Comprehensive income
51,212

 
138,301

 
111,145

 
207,263

Less: Comprehensive income attributable to
 
 
 
 
 
 
 
noncontrolling interest
15,131

 
35,591

 
33,521

 
53,388

Comprehensive income attributable to
 
 
 
 
 
 
 
Frank's International N.V.
$
36,081

 
$
102,710

 
$
77,624

 
$
153,875



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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 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

 

 

 
159,564

 

 
55,351

 
214,915

Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
 
adjustments

 

 

 

 
(5,451
)
 
(1,881
)
 
(7,332
)
Unrealized loss on marketable
 
 
 
 
 
 
 
 
 
 
 
 
 
securities

 

 

 

 
(238
)
 
(82
)
 
(320
)
Distributions to stockholders

 

 

 
(78,340
)
 

 
(27,027
)
 
(105,367
)
Balances at June 30, 2013
119,024

 
$
1,561

 
$
651

 
$
408,660

 
$
(2,435
)
 
$
140,447

 
$
548,884

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
Total
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Noncontrolling
 
Stockholders'
 
Shares
 
Value
 
Capital
 
Earnings
 
Income (Loss)
 
Interest
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2013
153,524

 
$
2,019

 
$
642,164

 
$
455,632

 
$
(2,383
)
 
$
235,895

 
$
1,333,327

Net income

 

 

 
77,079

 

 
33,332

 
110,411

Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
 
adjustments

 

 

 

 
662

 
229

 
891

Unrealized loss on marketable
 
 
 
 
 
 
 
 
 
 
 
 
 
securities

 

 

 

 
(117
)
 
(40
)
 
(157
)
Stock-based compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
expense

 

 
20,236

 

 

 

 
20,236

Distribution to
 
 
 
 
 
 
 
 
 
 
 
 
 
noncontrolling interest

 

 

 

 

 
(22,224
)
 
(22,224
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
($0.15 per share)

 

 

 
(23,029
)
 

 

 
(23,029
)
Preferred stock dividends

 

 

 
(1
)
 

 

 
(1
)
Balances at June 30, 2014
153,524

 
$
2,019

 
$
662,400

 
$
509,681

 
$
(1,838
)
 
$
247,192

 
$
1,419,454


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)
 
 
 
 
 
Six Months Ended
 
June 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
110,411

 
$
214,915

Adjustments to reconcile net income to cash provided by operating activities
 
 
 
Depreciation and amortization
43,088

 
36,851

Stock-based compensation expense
20,236

 

Amortization of deferred financing costs
172

 

Venezuelan currency devaluation charge

 
1,755

Deferred tax provision
3,021

 
(1,201
)
Provision for (recovery of) bad debts
(222
)
 
3,757

Gain on sale of assets
(87
)
 
(39,686
)
Changes in fair value of marketable securities
(1,305
)
 
(1,289
)
Increase in value of life insurance policies

 
(815
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable
4,371

 
(58,599
)
Inventories
(40,178
)
 
(48,173
)
Other current assets
1,826

 
(2,095
)
Other assets
1,556

 
(566
)
Accounts payable
411

 
(150
)
Deferred revenue
7,307

 
36,803

Accrued expenses and other current liabilities
8,432

 
4,449

Other noncurrent liabilities
2,906

 
3,998

Net cash provided by operating activities
161,945

 
149,954

 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(77,722
)
 
(87,468
)
Proceeds from sale of assets and equipment
2,489

 
50,253

Purchase of marketable securities
(1,539
)
 
(1,024
)
Premiums on life insurance policies

 
(2,366
)
Net cash used in investing activities
(76,772
)
 
(40,605
)
 
 
 
 
Cash flows from financing activities
 
 
 
Repayments of borrowings
(36
)
 
(53,404
)
Dividends paid on common stock
(23,029
)
 

Dividends paid on preferred stock
(1
)
 

Distribution to noncontrolling interest
(22,224
)
 

Distributions to stockholders

 
(105,367
)
Net cash used in financing activities
(45,290
)
 
(158,771
)
Effect of exchange rate changes on cash due to Venezuelan devaluation

 
575

Effect of exchange rate changes on cash
(1,154
)
 
1,909

Net increase (decrease) in cash
38,729

 
(46,938
)
Cash and cash equivalents at beginning of period
404,947

 
152,945

Cash and cash equivalents at end of period
$
443,676

 
$
106,007


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

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 six months ended June 30, 2014 and 2013 include the activities of Frank's International C.V. ("FICV") and its wholly owned subsidiaries (collectively, the "Company," "we," "us" or "our"). All intercompany accounts and transactions have been eliminated for purposes of preparing these 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 our audited consolidated financial statements and notes thereto for the year ended December 31, 2013, which are included in our Annual Report on Form 10-K filed with the Securities Exchange Commission ("SEC") on March 4, 2014. 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. Our functional currency is primarily the United States dollar.

Reclassifications

In reporting periods prior to the fourth quarter of 2013, certain costs of equipment rentals and services and product sales were misclassified between the two line items. There was no impact to previously reported operating income, income from continuing operations, net income, earnings per share or cash flow. Corrections have been made to the relevant period presented in the financial statements included herein. These corrections resulted in reductions of cost of equipment rentals and services with corresponding increases to cost of products of $3.8 million and $11.5 million for the three months and six months ended June 30, 2013.

We have evaluated and concluded that the identified amount was not material to our previously filed quarterly financial statements.

Out-Of-Period Adjustment

During our review of the three months ended June 30, 2014, we identified a non-cash error that originated in prior periods. The error related to the attribution of the cost of share-based compensation to the requisite service periods of retirement-eligible employees. Awards made pursuant to the 2013 Long-Term Incentive Plan generally provided that the awards vest if the employee retires. The requisite service period for awards does not extend beyond the date on which an employee becomes eligible to retire, which causes the requisite service period to be either two years or the period from grant date to the date on which each employee becomes retirement eligible. In the second quarter of 2014, we discovered that share-based compensation expense related to retirement-eligible employees was cumulatively understated through the first quarter of 2014 by approximately $7.5 million. Because the errors were immaterial both in the periods in which they arose and in which they were corrected, the correction was recorded as an out-of-period adjustment in the second quarter of 2014 and is included in general and administrative expenses on the consolidated statements of income.


8




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

Recent Accounting Pronouncements

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

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

In June 2014, the FASB issued amendments to guidance on stock-based compensation which states that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. The guidance is effective for us beginning January 1, 2016 and is not expected to have a material impact on our consolidated financial financial statements.

In May 2014, the FASB issued amendments to guidance that provide explicit guidance on the recognition of revenue based upon the entity’s contracts with customers to transfer goods or services. Under the new standard update, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for us in the first quarter of 2017. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.

In April 2014, the FASB issued amendments to guidance for reporting discontinued operations and disposals of components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The implementation of the amended guidance is not expected to have a material impact on our consolidated financial statements.

In July 2013, the FASB issued amendments to guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments require entities to present an unrecognized tax benefit netted against certain deferred tax assets when specific requirements are met. However, the amendments only affect gross versus net presentation and do not impact the calculation of the unrecognized tax benefit. We adopted this guidance on January 1, 2014 and the adoption did not have a material impact on our consolidated financial statements.

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, Inc. ("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. The allocable domestic income from FICV to FINV is subject to U.S. taxation.



9




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 Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
50,049

 
$
141,870

 
$
110,411

 
$
214,915

Add: Provision for U.S. income taxes of FINV (1)
7,936

 

 
19,360

 

Less: (Income) loss of FINV (2)
(155
)
 
456

 
180

 
880

Net income subject to noncontrolling interest
57,830

 
142,326

 
129,951

 
215,795

Noncontrolling interest percentage
25.7%

 
25.7%

 
25.7%

 
25.7%

Net income attributable to noncontrolling interest
$
14,833

 
$
36,506

 
$
33,332

 
$
55,351

 
 
 
(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.

Note 3—Discontinued Operations

On June 14, 2013, we sold a component of our Tubular Sales segment, which manufactured centralizers for sales to third parties and recognized a gain on the 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 six months ended June 30, 2013, the operations from that component have been reported as discontinued operations on the consolidated statement of income.

Revenue and net income from the discontinued component were $3.4 million and $40.9 million, respectively, for the three months ended June 30, 2013 and $7.6 million and $42.6 million, respectively, for the six months ended June 30, 2013. Net assets of $10.4 million as of June 14, 2013 were included in the disposition.

Cash flows from discontinued operations are included with cash flows from continuing operations in the consolidated statements of cash flows for the six months ended June 30, 2013.

Note 4—Accounts Receivable, net

Accounts receivable at June 30, 2014 and December 31, 2013 were as follows (in thousands):
 
June 30,
 
December 31,
 
2014
 
2013
Trade accounts receivable, net of allowance
 
 
 
of $13,333 and $13,614, respectively
$
242,652

 
$
232,409

Unbilled receivables
86,759

 
105,824

Taxes receivable
24,355

 
20,075

Affiliated (1)
3,242

 
3,921

Other receivables
3,287

 
2,588

Total accounts receivable
$
360,295

 
$
364,817

 
 
 

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



10




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

Note 5—Inventories

Inventories at June 30, 2014 and December 31, 2013 were as follows (in thousands):
 
June 30,
 
December 31,
 
2014
 
2013
Pipe and connectors
$
197,102

 
$
168,639

Finished goods
2,831

 
4,114

Work in progress
2,659

 
2,284

Raw materials, components and supplies
10,930

 
10,552

Total inventories
$
213,522

 
$
185,589


Note 6—Property, Plant and Equipment

The following is a summary of property, plant and equipment at June 30, 2014 and December 31, 2013 (in thousands):
 
Estimated
Useful Lives
in Years
 
June 30,
2014
 
December 31,
2013
Land and land improvements (1)
8-15

 
$
23,193

 
$
22,460

Buildings and improvements
39

 
64,120

 
63,412

Rental machinery and equipment
7

 
716,101

 
669,729

Machinery and equipment - other
7

 
68,052

 
55,306

Furniture, fixtures and computers
5

 
18,781

 
18,265

Automobiles and other vehicles
5

 
36,878

 
35,649

Aircraft
7

 
14,868

 
14,868

Leasehold improvements
7

 
6,131

 
5,729

Construction in progress - machinery
 
 
 
 
 
and equipment and buildings

 
98,707

 
88,801

 
 
 
1,046,831

 
974,219

Less: Accumulated depreciation
 
 
(500,798
)
 
(463,020
)
Total property, plant and equipment, net
 
 
$
546,033

 
$
511,199

    
(1) The estimated useful life presented is only land improvements. Land does not have a depreciable life.

Note 7—Other Assets

Other assets at June 30, 2014 and December 31, 2013 consisted of the following (in thousands):
 
June 30,
 
December 31,
 
2014
 
2013
Marketable securities held in Rabbi Trust (1)
$
45,028

 
$
42,184

Deferred tax asset
6,895

 
7,391

Deposits
3,368

 
3,132

Other
9,186

 
11,279

    Total other assets
$
64,477

 
$
63,986

 
 
 

        
(1)
See Note 10 – Fair Value Measurements


11




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

Note 8—Accrued and Other Current Liabilities

Accrued and other current liabilities at June 30, 2014 and December 31, 2013 consisted of the following (in thousands):
 
June 30,
 
December 31,
 
2014
 
2013
 
 
 
 
Accrued compensation
$
30,780

 
$
26,252

Accrued property and other taxes
28,112

 
23,018

Income taxes
2,395

 
2,870

Accrued inventory
2,758

 
5,419

Accrued capital expenditures
3,072

 
4,188

Accrued medical claims
2,533

 
2,779

Accrued purchase orders
4,575

 
5,632

Other
21,118

 
20,326

Total accrued and other current liabilities
$
95,343

 
$
90,484


Note 9—Debt

We have 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. At June 30, 2014 and December 31, 2013, we did not have any outstanding indebtedness under the Credit Facilities. In addition, we had $10.0 million in letters of credit outstanding as of June 30, 2014.

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%.

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

The Credit Facilities 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 June 30, 2014, we were in compliance with all financial covenants under the Credit Facilities.





12




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

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

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.



13




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 June 30, 2014 and December 31, 2013 were as follows (in thousands):
 
Quoted Prices
in Active
Markets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
June 30, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan
$

 
$
45,028

 
$

 
$
45,028

Marketable securities - other
6,881

 

 

 
6,881

Liabilities:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan

 
41,234

 

 
41,234

December 31, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan
$

 
$
42,184

 
$

 
$
42,184

Marketable securities - other
7,038

 

 

 
7,038

Liabilities:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan

 
37,980

 

 
37,980


Our investments associated with our deferred compensation plan consist of marketable securities that are held in the form of investments in mutual funds and insurance contracts. Assets and liabilities measured using significant observable inputs are reported at fair value based on third-party broker statements which are derived from the fair value of the funds' underlying investments. Other marketable securities are included in other assets on the 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.

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.


14




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

Note 11—Preferred Stock

At June 30, 2014, we had 52,976,000 shares of Preferred Stock issued and outstanding, which were 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. The preferred dividend of $705 was paid on May 29, 2014. 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.

Mosing Holdings has the right to convert all or a portion of its Preferred Stock into shares of our common stock by delivery of an equivalent portion of its interest in FICV to us. Accordingly, the increase in our interest in FICV in connection with such conversion will decrease the noncontrolling interest in our financial statements that is attributable to Mosing Holdings' interest in FICV. As of June 30, 2014, 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 $1.6 million and $0.8 million for the three months ended June 30, 2014 and 2013, respectively, and $3.5 million and $2.0 million for the six months ended June 30, 2014 and 2013, 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 our initial public offering (the "IPO"), we had entered into 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 for dry lease rental and are charged block hours monthly. We recorded net charter expense of $0.3 million and net charter revenue of $0.3 million for the three months ended June 30, 2014 and 2013, respectively, and net charter expense of $0.7 million and net charter revenue of $0.5 million for the six months ended June 30, 2014 and 2013, respectively.

Tax Receivable Agreement

Mosing Holdings and its permitted transferees may exchange the required proportion of the holder's interest in FICV for cash accompanied by the conversion of such shares into shares of our common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions (the “Exchange”). FICV intends to make an election under Section 754 of the Code effective for each taxable year in which an Exchange occurs. Pursuant to the Section 754 election, each future Exchange is expected to result in an adjustment to the tax basis of the tangible and intangible assets of FICV, and these adjustments will be allocated to FINV. Certain of the adjustments to the tax basis of the tangible and intangible assets of FICV described above would not have been available absent these future Exchanges. The anticipated basis adjustments are expected to increase the tax basis (and thereby reduce the amount of tax that FINV would otherwise be required to pay in the future). These basis adjustments may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

The tax receivable agreement generally provides for the payment by FINV of 85% of actual reductions, if any, in payments of U.S. federal, state and local income tax or franchise tax (which reductions we refer to as “cash savings”) in periods after our initial public offering as a result of (i) the basis increases resulting from the Exchanges and (ii) imputed interest deemed to be paid by FINV as a result of, and additional tax basis arising from, payments under the tax receivable agreement. In addition, the tax receivable agreement will provide for payment by FINV of interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the tax receivable agreement.


15




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

The payment obligations under the tax receivable agreement are FINV’s obligations and are not obligations of FICV. The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless FINV exercises its right to terminate the tax receivable agreement.

Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise. The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of exchanges, the relative value of FINV’s U.S. and international assets at the time of the exchange, the price of FINV’s common stock at the time of the exchange, the extent to which such exchanges are taxable, the amount and timing of the taxable income FINV realizes in the future and the tax rate then applicable, FINV’s use of loss carryovers and the portion of its payments under the tax receivable agreement constituting imputed interest or depreciable or amortizable basis. FINV expects that the payments that it will be required to make under the tax receivable agreement will be substantial but that it will be able to fund such payments. There may be a negative impact on our liquidity if, as a result of timing discrepancies, the payments under the tax receivable agreement exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement. The payments under the tax receivable agreement will not be conditioned upon a holder of rights under a tax receivable agreement having a continued ownership interest in either FICV or FINV.

The tax receivable agreement provides that we may terminate it early. If FINV elects to terminate the tax receivable agreement early, it would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the tax receivable agreement (based upon certain assumptions and deemed events set forth in the tax receivable agreement, including the assumption that it has sufficient taxable income to fully utilize such benefits and that any FICV interests that Mosing Holdings or its transferees own on the termination date are deemed to be exchanged on the termination date). Any early termination payment may be made significantly in advance of the actual realization, if any, of such future benefits. In addition, payments due under the tax receivable agreement will be similarly accelerated following certain mergers or other changes of control. In these situations, FINV’s obligations under the tax receivable agreement could have a substantial negative impact on FINV’s liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. For example, if the tax receivable agreement were terminated on June 30, 2014, the estimated termination payment would be approximately $76.0 million (calculated using a discount rate of 3.4%). The foregoing number is merely an estimate and the actual payment could differ materially.

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

Note 13—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.


16




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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Numerator - Basic
 
 
 
 
 
 
 
Income from continuing operations
$
50,049

 
$
100,983

 
$
110,411

 
$
172,280

Less: Net income attributable to
 
 
 
 
 
 
 
noncontrolling interest
(14,833
)
 
(36,506
)
 
(33,332
)
 
(55,351
)
Discontinued operations attributable
 
 
 
 
 
 
 
to noncontrolling interest

 
10,488

 

 
10,936

Less: Preferred stock dividends
(1
)
 

 
(1
)
 

Income from continuing operations
 
 
 
 
 
 
 
attributable to common shareholders
35,215

 
74,965

 
77,078

 
127,865

Income from discontinued operations
 
 
 
 
 
 
 
attributable to FINV

 
30,399

 

 
31,699

Net income available to common shareholders
$
35,215

 
$
105,364

 
$
77,078

 
$
159,564

 
 
 
 
 
 
 
 
Numerator - Diluted
 
 
 
 
 
 
 
Income from continuing operations
 
 
 
 
 
 
 
attributable to common shareholders
$
35,215

 
$
74,965

 
$
77,078

 
$
127,865

Add: Exchange of noncontrolling interest
 
 
 
 
 
 
 
for common stock (1)
11,776

 
26,018

 
26,336

 
44,415

Add: Preferred stock dividends
1

 

 
1

 

Diluted income from continuing operations
 
 
 
 
 
 
 
attributable to common shareholders
46,992

 
100,983

 
103,415

 
172,280

Income from discontinued operations, net of tax

 
40,887

 

 
42,635

Dilutive net income available
 
 
 
 
 
 
 
to common shareholders
$
46,992

 
$
141,870

 
$
103,415

 
$
214,915

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Basic weighted average common shares
153,524

 
119,024

 
153,524

 
119,024

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

 
52,976

 
52,976

 
52,976

Restricted stock units
1,322

 

 
1,141

 

Diluted weighted average common shares
207,822

 
172,000

 
207,641

 
172,000

 
 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.23

 
$
0.63

 
$
0.50

 
$
1.07

Discontinued operations

 
0.26

 

 
0.27

Total
$
0.23

 
$
0.89

 
$
0.50

 
$
1.34

 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.23

 
$
0.59

 
$
0.50

 
$
1.00

Discontinued operations

 
0.23

 

 
0.25

Total
$
0.23

 
$
0.82

 
$
0.50

 
$
1.25

 
 
 
(1)
Adjusted for additional tax expense of $3.1 million and $7 million for the three and six months ended June 30, 2014, respectively, upon the assumed conversion of the Preferred Stock.






17




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

Note 14—Income Taxes

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.

Our effective tax rate on income from continuing operations before income taxes was 24.1% and 5.7% for the three months ended June 30, 2014 and 2013, respectively, and 22.4% and 6.7% for the six months ended June 30, 2014 and 2013, respectively. The tax rate for all periods is lower than the U.S. statutory income tax rate of 35% due to lower statutory tax rates in certain foreign jurisdictions where we operate; however, our 2014 effective tax rate is higher due to our U.S. operations becoming taxable subsequent to our restructuring concurrent with the IPO.
    
As of June 30, 2014, there were no significant changes to our unrecognized tax benefits as reported in our audited financial statements for the year ended December 31, 2013.



18




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

Note 15—Commitments and Contingencies

We are the subject of lawsuits and claims arising in the ordinary course of business from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. We had no material accruals for loss contingencies, individually or in the aggregate, as of June 30, 2014. We believe the probability is remote that the ultimate outcome of these matters would have a material adverse effect on our financial position, results of operations or cash flows.

Note 16—Segment Information

Reporting Segments

Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. We are comprised of three reportable segments: International Services, U.S. Services and Tubular Sales.

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

The U.S. Services segment provides tubular services in almost all of the active onshore oil and gas drilling regions in the U.S., including the Permian Basin, Bakken Shale, Barnett Shale, 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 directly to external customers, including large outside diameter ("OD") pipe connectors and casing attachments. We also provide specialized fabrication and welding services in support of deep water projects in the U.S. Gulf of Mexico, including drilling and production risers, flowlines and pipeline end terminations, as well as long length tubulars (up to 300 feet in length) for use as caissons or pilings. In addition, we distribute large OD pipe manufactured by third parties that we have equipped with weld-on end connections. This segment also designs and manufactures proprietary equipment for use in our International and U.S. Services segments.

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. We review Adjusted EBITDA on both a consolidated basis and on a segment basis. We use Adjusted EBITDA to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team (such as income tax rates). Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with generally accepted accounting principles in the U.S. ("GAAP").

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



19




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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Segment Adjusted EBITDA:
 
 
 
 
 
 
 
International Services
$
48,873

 
$
54,423

 
$
99,902

 
$
104,382

U.S. Services
44,968

 
59,486

 
86,846

 
102,279

Tubular Sales
9,311

 
14,054

 
18,685

 
20,555

Corporate and other

 
184

 

 
36

Adjusted EBITDA Total
103,152

 
128,147

 
205,433

 
227,252

Interest income (expense), net
80

 
(461
)
 
36

 
(663
)
Income tax expense
(15,852
)
 
(6,081
)
 
(31,821
)
 
(12,384
)
Depreciation and amortization
(21,895
)
 
(19,013
)
 
(43,088
)
 
(36,706
)
Gain (loss) on sale of assets
(154
)
 
79

 
87

 
56

Foreign currency gain (loss)
65

 
(1,688
)
 

 
(5,275
)
Stock-based compensation expense
(15,347
)
 

 
(20,236
)
 

Income from continuing operations
$
50,049

 
$
100,983

 
$
110,411

 
$
172,280


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 June 30, 2014
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
129,456

 
$
105,564

 
$
37,917

 
$

 
$
272,937

Inter-segment revenues
230

 
5,624

 
19,575

 
(25,429
)
 

Adjusted EBITDA
48,873

 
44,968

 
9,311

 

 
103,152

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
120,872

 
$
115,612

 
$
56,491

 
$

 
$
292,975

Inter-segment revenues
631

 
5,165

 
19,431

 
(25,227
)
 

Adjusted EBITDA
54,423

 
59,486

 
14,054

 
184

 
128,147

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
248,041

 
$
209,319

 
$
80,069

 
$

 
$
537,429

Inter-segment revenues
371

 
10,724

 
35,671

 
(46,766
)
 

Adjusted EBITDA
99,902

 
86,846

 
18,685

 

 
205,433

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
231,361

 
$
213,169

 
$
81,018

 
$

 
$
525,548

Inter-segment revenues
1,446

 
10,330

 
35,679

 
(47,455
)
 

Adjusted EBITDA
104,382

 
102,279

 
20,555

 
36

 
227,252





20


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 Annual Report on Form 10-K for the year ended December 31, 2013 ("Annual Report"), (3) our other reports and filings we make with the SEC from time to time and (4) other announcements we make from time to time. Should one or more of the risks or uncertainties described in the documents above or in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statements.



21


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” included in our Annual Report.

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

Overview of Business

We are a 76 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.

Tubular Sales. We design and manufacture certain products that we sell directly to external customers, including large outside diameter ("OD") pipe connectors and casing attachments. We also provide specialized fabrication and welding services in support of deep water projects in the U.S. Gulf of Mexico, including drilling and production risers, flowlines and pipeline end terminations, as well as long length tubulars (up to 300 feet in length) for use as caissons or pilings. In addition, we distribute large OD pipe manufactured by third parties that we have equipped with weld-on end connections. This segment also designs and manufactures proprietary equipment for use in our International and U.S. Services segments.

How We Generate Our Revenue

A significant majority of our services revenues are derived primarily from two sources:

personnel rates for our specially trained employees who perform tubular services for our customers; and

rental rates for the suite of products and equipment that our employees use to perform tubular services.

In addition, our customers typically reimburse us for transportation costs that we incur in connection with transporting our products and equipment from our staging areas to the customers’ job sites.

In contrast, our Tubular Sales revenues are derived from sales of certain products, including large OD pipe connectors, casing attachments and large OD pipe manufactured by third parties, directly to external customers.



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How We Evaluate Our Operations

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

Revenue

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

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as 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. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. We review Adjusted EBITDA and Adjusted EBITDA margin on both a consolidated basis and on a segment basis. We use Adjusted EBITDA and Adjusted EBITDA margin to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team (such as income tax rates). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with generally accepted accounting principles in the U.S. ("GAAP").

The following table presents a reconciliation of income from continuing operations to Adjusted EBITDA, our most directly comparable GAAP performance measure, for each of the periods presented (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Income from continuing operations
$
50,049

 
$
100,983

 
$
110,411

 
$
172,280

Interest (income) expense, net
(80
)
 
461

 
(36
)
 
663

Depreciation and amortization
21,895

 
19,013

 
43,088

 
36,706

Income tax expense
15,852

 
6,081

 
31,821

 
12,384

(Gain) loss on sale of assets
154

 
(79
)
 
(87
)
 
(56
)
Foreign currency (gain) loss
(65
)
 
1,688

 

 
5,275

Stock-based compensation expense
15,347

 

 
20,236

 

Adjusted EBITDA
$
103,152

 
$
128,147

 
$
205,433

 
$
227,252


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



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Consolidated Results of Operations

The following table presents our consolidated results for the periods presented (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Equipment rentals and services
$
231,838

 
$
234,649

 
$
452,651

 
$
440,513

Products (1)
41,099

 
58,326

 
84,778

 
85,035

Total revenue
272,937

 
292,975

 
537,429

 
525,548

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of revenues, exclusive of
 
 
 
 
 
 
 
depreciation and amortization
 
 
 
 
 
 
 
Equipment rentals and services
90,029

 
82,061

 
174,020

 
149,638

Products
26,261

 
36,060

 
52,290

 
60,153

General and administrative expenses
71,760

 
51,987

 
131,211

 
95,912

Depreciation and amortization
21,895

 
19,013

 
43,088

 
36,706

(Gain) loss on sale of assets
154

 
(79
)
 
(87
)
 
(56
)
Operating income
62,838

 
103,933

 
136,907

 
183,195

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Other income
2,918

 
5,280

 
5,289

 
7,407

Interest income (expense), net
80

 
(461
)
 
36

 
(663
)
Foreign currency gain (loss)
65

 
(1,688
)
 

 
(5,275
)
Total other income (expense)
3,063

 
3,131

 
5,325

 
1,469

Income from continuing operations
 
 
 
 
 
 
 
before income tax expense
65,901

 
107,064

 
142,232