10-Q


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, 2015
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
þ
Accelerated filer
¨
Non-accelerated filer
¨ (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 November 2, 2015, there were 155,130,193 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, 2015 and December 31, 2014
 
Consolidated Statements of Income for the Three and Nine Months
 
 
Ended September 30, 2015 and 2014
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months
 
 
Ended September 30, 2015 and 2014
 
Consolidated Statements of Stockholders' Equity for the Nine Months
 
 
Ended September 30, 2015 and 2014
 
Consolidated Statements of Cash Flows for the Nine Months
 
 
Ended September 30, 2015 and 2014
 
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)
 
 
 
 
 
September 30,
 
December 31,
 
2015
 
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
507,053

 
$
489,354

Accounts receivables, net
324,527

 
390,977

Inventories
173,495

 
204,008

Other current assets
11,453

 
23,080

Total current assets
1,016,528

 
1,107,419

 
 
 
 
Property, plant and equipment, net
643,313

 
580,142

Goodwill and intangible assets, net
25,770

 
14,163

Other assets
50,533

 
56,957

Total assets
$
1,736,144

 
$
1,758,681

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
247

 
$
304

Accounts payable
16,997

 
16,496

Deferred revenue
58,439

 
76,112

Accrued and other current liabilities
100,625

 
114,227

Total current liabilities
176,308

 
207,139

 
 
 
 
Deferred tax liabilities
49,209

 
35,321

Other non-current liabilities
44,008

 
42,980

Total liabilities
269,525

 
285,440

 
 
 
 
Commitments and contingencies (Note 17)


 


 
 
 
 
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:
 
 
 
155,631,381 shares issued and 155,124,960 shares outstanding at 2015 and
 
 
 
154,571,229 shares issued and 154,327,383 shares outstanding at 2014
2,045

 
2,033

Additional paid-in capital
708,642

 
683,611

Retained earnings
547,456

 
545,357

Accumulated other comprehensive loss
(24,292
)
 
(14,210
)
Treasury stock (at cost), 506,421 at 2015 and 243,846 shares at 2014
(9,160
)
 
(4,801
)
Total stockholders' equity
1,224,691

 
1,211,990

Noncontrolling interest
241,223

 
260,546

Total equity
1,465,914

 
1,472,536

Total liabilities and equity
$
1,736,144

 
$
1,758,681


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,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Equipment rentals and services
$
176,553

 
$
254,047

 
$
610,240

 
$
706,698

Products
63,330

 
42,136

 
161,384

 
126,914

Total revenue
239,883

 
296,183

 
771,624

 
833,612

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of revenues, exclusive of depreciation
 
 
 
 
 
 
 
and amortization
 
 
 
 
 
 
 
Equipment rentals and services
72,389

 
97,919

 
242,681

 
271,939

Products
34,174

 
23,237

 
90,081

 
75,527

General and administrative expenses
66,929

 
65,220

 
210,523

 
196,431

Depreciation and amortization
29,032

 
23,254

 
80,743

 
66,342

Severance and other charges
1,186

 

 
14,208

 

Change in value of contingent consideration
(1,532
)
 

 
(1,532
)
 

Loss (gain) on sale of assets
(1,392
)
 
280

 
(521
)
 
193

Operating income
39,097

 
86,273

 
135,441

 
223,180

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Other income
918

 
1,483

 
2,976

 
6,772

Interest income (expense), net
173

 
(13
)
 
150

 
23

Foreign currency gain (loss)
(5,329
)
 
(526
)
 
(6,563
)
 
(526
)
Total other income (expense)
(4,238
)
 
944

 
(3,437
)
 
6,269

 
 
 
 
 
 
 
 
Income before income tax expense
34,859

 
87,217

 
132,004

 
229,449

Income tax expense
10,771

 
19,777

 
32,662

 
51,598

Net income
24,088

 
67,440

 
99,342

 
177,851

Net income attributable to noncontrolling interest
7,523

 
20,094

 
27,668

 
53,426

Net income attributable to Frank's International N.V.
16,565

 
47,346

 
71,674

 
124,425

Preferred stock dividends

 

 
(2
)
 
(1
)
Net income available to Frank's International N.V.
 
 
 
 
 
 
 
common shareholders
$
16,565

 
$
47,346

 
$
71,672

 
$
124,424

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.31

 
$
0.46

 
$
0.81

Diluted
$
0.11

 
$
0.31

 
$
0.46

 
$
0.80

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
154,813

 
153,923

 
154,502

 
153,659

Diluted
209,349

 
207,934

 
209,052

 
207,751



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,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
24,088

 
$
67,440

 
$
99,342

 
$
177,851

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
(3,713
)
 
(6,260
)
 
(12,287
)
 
(5,369
)
Unrealized gain (loss) on marketable securities, net of tax
(193
)
 
(1,900
)
 
(1,247
)
 
(2,057
)
Total other comprehensive income (loss)
(3,906
)
 
(8,160
)
 
(13,534
)
 
(7,426
)
Comprehensive income
20,182

 
59,280

 
85,808

 
170,425

Less: Comprehensive income attributable to noncontrolling interest
6,527

 
18,007

 
24,216

 
51,528

Comprehensive income attributable to Frank's International N.V.
$
13,655

 
$
41,273

 
$
61,592

 
$
118,897



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, 2014
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
Non-
 
Total
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury
 
controlling
 
Stockholders'
 
Shares
 
Value
 
Capital
 
Earnings
 
Income (Loss)
 
Stock
 
Interest
 
Equity
Balances at December 31, 2013
153,524

 
$
2,019

 
$
642,164

 
$
455,632

 
$
(2,383
)
 
$

 
$
235,895

 
$
1,333,327

Net income

 

 

 
124,425

 

 

 
53,426

 
177,851

Foreign currency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
translation adjustments

 

 

 

 
(3,996
)
 

 
(1,373
)
 
(5,369
)
Unrealized loss on
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
marketable securities

 

 

 

 
(1,532
)
 

 
(525
)
 
(2,057
)
Stock-based compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
expense

 

 
29,450

 

 

 

 

 
29,450

Distributions to noncontrolling
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
interest

 

 

 

 

 

 
(32,470
)
 
(32,470
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($0.30 per share)

 

 

 
(46,170
)
 

 

 

 
(46,170
)
Preferred stock dividends

 

 

 
(1
)
 

 

 

 
(1
)
Common shares issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
upon vesting of restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units
954

 
13

 
(13
)
 

 

 

 

 

Treasury shares withheld
(205
)
 

 

 

 

 
(4,154
)
 

 
(4,154
)
Balances at September 30, 2014
154,273

 
2,032

 
671,601

 
533,886

 
(7,911
)
 
(4,154
)
 
254,953

 
1,450,407

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
Non-
 
Total
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury
 
controlling
 
Stockholders'
 
Shares
 
Value
 
Capital
 
Earnings
 
Loss
 
Stock
 
Interest
 
Equity
Balances at December 31, 2014
154,327

 
$
2,033

 
$
683,611

 
$
545,357

 
$
(14,210
)
 
$
(4,801
)
 
$
260,546

 
$
1,472,536

Net income

 

 

 
71,674

 

 

 
27,668

 
99,342

Foreign currency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
translation adjustments

 

 

 

 
(9,154
)
 

 
(3,133
)
 
(12,287
)
Unrealized loss on
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
marketable securities

 

 

 

 
(928
)
 

 
(319
)
 
(1,247
)
Stock-based
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
compensation expense

 

 
24,606

 

 

 

 

 
24,606

Amount withheld for employee
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
stock purchase plan ("ESPP")

 

 
147

 

 

 

 

 
147

Distribution to
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
noncontrolling interest

 

 

 

 

 

 
(43,539
)
 
(43,539
)
Common stock dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($0.45 per share)

 

 

 
(69,573
)
 

 

 

 
(69,573
)
Preferred stock dividends

 

 

 
(2
)
 

 

 

 
(2
)
Common shares issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
upon vesting of restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
stock units
1,040

 
12

 
(12
)
 

 

 

 

 

Common shares issued for ESPP
20

 

 
290

 
 
 
 
 
 
 
 
 
290

Treasury shares withheld
(262
)
 

 

 

 

 
(4,359
)
 

 
(4,359
)
Balances at September 30, 2015
155,125

 
$
2,045

 
$
708,642

 
$
547,456

 
$
(24,292
)
 
$
(9,160
)
 
$
241,223

 
$
1,465,914


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,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
99,342

 
$
177,851

Adjustments to reconcile net income to cash provided by operating activities
 
 
 
Depreciation and amortization
80,743

 
66,342

Stock-based compensation expense
24,606

 
29,450

ESPP expense
147

 

Amortization of deferred financing costs
123

 
235

Deferred tax provision
13,823

 
1,966

Provision for (recovery of) bad debts
(122
)
 
(113
)
(Gain) loss on sale of assets
(521
)
 
193

Changes in fair value of marketable securities
1,736

 
(723
)
Change in value of contingent consideration
(1,532
)
 

Other
(3,909
)
 

Changes in operating assets and liabilities
 
 
 
Accounts receivable
62,711

 
(5,779
)
Inventories
37,576

 
(37,890
)
Other current assets
11,801

 
(71
)
Other assets
2,479

 
2,215

Accounts payable
1,162

 
2,907

Deferred revenue
(17,672
)
 
14,615

Accrued and other current liabilities
(17,991
)
 
18,671

Other non-current liabilities
885

 
4,058

Net cash provided by operating activities
295,387

 
273,927

 
 
 
 
Cash flows from investing activities
 
 
 
Acquisition of Timco Services, Inc. (net of acquired cash)
(78,676
)
 

Purchases of property, plant and equipment
(88,296
)
 
(124,187
)
Proceeds from sale of assets and equipment
3,100

 
653

Purchase of marketable securities
(94
)
 
(1,539
)
Net cash used in investing activities
(163,966
)
 
(125,073
)
 
 
 
 
Cash flows from financing activities
 
 
 
Repayments of borrowings
(57
)
 
(54
)
Dividends paid on common stock
(69,573
)
 
(46,170
)
Dividends paid on preferred stock
(2
)
 
(1
)
Distribution to noncontrolling interest
(43,539
)
 
(32,470
)
Treasury shares withheld
(4,359
)
 
(4,154
)
Proceeds from the issuance of ESPP shares
290

 

Net cash used in financing activities
(117,240
)
 
(82,849
)
Effect of exchange rate changes on cash
3,518

 
(2,564
)
Net increase in cash
17,699

 
63,441

Cash and cash equivalents at beginning of period
489,354

 
404,947

Cash and cash equivalents at end of period
$
507,053

 
$
468,388


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 N.V. ("FINV"), a limited liability company organized under the laws of The Netherlands, is a global provider of highly engineered tubular services to the oil and gas industry. FINV 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 FINV for the three and nine months ended September 30, 2015 and 2014 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, 2014, which are included in our most recent Annual Report on Form 10-K filed with the Securities Exchange Commission ("SEC") on March 6, 2015. 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.

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 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 the 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.

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 July 2015, the FASB issued accounting guidance on simplifying the measurement of inventory. Under this guidance, inventory will be measured at the lower of cost and net realizable value. Options that currently exist for


8




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

market value will be eliminated. The guidance defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. This guidance will be effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of the new accounting guidance will have on our consolidated financial statements.

In April 2015, the FASB issued amended guidance on the presentation of debt issuance costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset, consistent with debt discounts and premiums. Amortization of the costs will be reported as interest expense. In August 2015, additional guidance was provided to address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. The SEC staff stated that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We do not expect this guidance will have a material impact on our consolidated financial statements.

In February 2015, the FASB issued guidance on the amendments to the consolidation analysis, which affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those for registered money market funds. This pronouncement is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We are evaluating the impact that the adoption of this standard will have on our consolidated financial statements

In January 2015, the FASB issued guidance on the income statement presentation, which eliminates the concept of extraordinary items while retaining certain presentation and disclosure guidance for items that are unusual in nature or occur infrequently. The standard is effective prospectively for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided the guidance is applied from the beginning of the fiscal year of adoption. We do not expect to adopt this guidance early and do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
    
In May 2014, the FASB issued amendments to guidance on the recognition of revenue based upon the entity’s contracts with customers to transfer goods or services. Under the new 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. On July 9, 2015, the FASB deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB will also permit early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.
    
Note 2—Noncontrolling Interest

We hold an 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 economic interest in FICV held by Mosing Holdings, Inc. ("MHI"). Net income attributable to noncontrolling interest on the statements of income represents the portion of earnings or losses attributable to the economic interest in FICV held by MHI. 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
24,088

 
$
67,440

 
$
99,342

 
$
177,851

Add: Provision for U.S. income taxes of FINV (1)
4,570

 
11,733

 
11,645

 
31,093

Less: (Income) loss of FINV (2)
903

 
(735
)
 
(2,487
)
 
(555
)
Net income subject to noncontrolling interest
29,561

 
78,438

 
108,500

 
208,389

Noncontrolling interest percentage (3)
25.4%

 
25.6%

 
25.4%

 
25.6%

Net income attributable to noncontrolling interest
$
7,523

 
$
20,094

 
$
27,668

 
$
53,426

 
 
 
(1)
Represents income tax expense attributable to our proportionate share of the U.S. operations of our partnership interests in FICV.
(2)
Represents results of operations for entities outside of FICV.
(3)
Represents the economic interest in FICV held by MHI. This percentage will change as additional shares of FINV common stock are issued.

Note 3—Acquisition

On April 1, 2015, Frank’s International, LLC, a Texas limited liability company (“Frank’s LLC”) and an indirect wholly-owned subsidiary of FICV closed on a transaction to purchase all of the outstanding equity interests of Timco Services, Inc. ("Timco"), a Louisiana corporation with a strong presence in the Permian Basin and Eagle Ford Shale regions, in exchange for consideration consisting of (i) approximately $81.0 million inclusive of a tax reimbursement payment of $8.0 million as well as closing adjustments for normal operating activity and customary purchase price adjustments and (ii) contingent consideration of up to $20.0 million, payable in two separate payments of $10.0 million based upon exceeding certain targets of the United States land rotary rig count, as reported by Baker Hughes, over prescribed time periods, which is revalued each quarter as discussed in Note 10 - Fair Value Measurements. As of September 30, 2015, the contingent consideration had a fair value of approximately $7.0 thousand. In addition, each party agreed to indemnify the other for breaches of representations and warranties, breaches of covenants and certain other matters, subject to certain exceptions.

The Timco acquisition was accounted for as a business combination in accordance with accounting guidance. As described in Note 10 - Fair Value Measurements, the purchase price is allocated to the fair value of assets acquired and liabilities assumed based on a discounted cash flow model and goodwill is recognized for the excess consideration transferred over the fair value of the net assets. We recognized $4.9 million of goodwill. The goodwill is assigned to the U.S. Services segment and is deductible for tax purposes. The purchase price allocation is preliminary and is expected to be finalized in the fourth quarter. Adjustments to provisional amounts (such as property, plant and equipment) will occur as we integrate Timco into our operations. We do not expect the adjustments to materially change the purchase price allocation. Additional changes to the purchase price allocation may result in a corresponding change to goodwill in the period of the change.

In connection with the Timco acquisition, we acquired intangible assets in the amount of $7.9 million related to customer relationships, trade names and non-compete clauses. The intangible assets will be amortized over their estimated useful lives. Amortization expense for the intangible assets for the Timco acquisition was $0.5 million and $0.9 million for the three and nine months ended September 30, 2015.



10




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

Note 4—Accounts Receivable, net

Accounts receivable at September 30, 2015 and December 31, 2014 were as follows (in thousands):
 
September 30,
 
December 31,
 
2015
 
2014
Trade accounts receivable, net of allowance
 
 
 
of $2,217 and $2,477, respectively
$
224,549

 
$
291,140

Unbilled revenue
50,002

 
62,993

Taxes receivable
43,105

 
32,056

Affiliated (1)
3,824

 
3,370

Other receivables
3,047

 
1,418

Total accounts receivable
$
324,527

 
$
390,977

 
 
 

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

Note 5—Inventories

Inventories at September 30, 2015 and December 31, 2014 were as follows (in thousands):
 
September 30,
 
December 31,
 
2015
 
2014
Pipe and connectors
$
150,432

 
$
185,076

Finished goods
4,085

 
4,291

Work in progress
4,523

 
3,363

Raw materials, components and supplies
14,455

 
11,278

Total inventories
$
173,495

 
$
204,008




11




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, 2015 and December 31, 2014 (in thousands):
 
Estimated
Useful Lives
in Years
 
September 30,
2015
 
December 31,
2014
Land and land improvements (1)
8-15
 
$
19,949

 
$
21,804

Buildings and improvements
39
 
74,023

 
69,827

Rental machinery and equipment
7
 
890,542

 
763,722

Machinery and equipment - other
7
 
60,753

 
64,648

Furniture, fixtures and computers
5
 
18,081

 
17,915

Automobiles and other vehicles
5
 
48,913

 
37,417

Aircraft
7
 
16,267

 
14,868

Leasehold improvements
7-15, or lease term if shorter
 
7,352

 
6,353

Construction in progress - machinery
 
 
 
 
 
and equipment and buildings
 
104,906

 
114,308

 
 
 
1,240,786

 
1,110,862

Less: Accumulated depreciation
 
 
(597,473
)
 
(530,720
)
Total property, plant and equipment, net
 
 
$
643,313

 
$
580,142

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

Note 7—Other Assets

Other assets at September 30, 2015 and December 31, 2014 consisted of the following (in thousands):
 
September 30,
 
December 31,
 
2015
 
2014
Marketable securities held in Rabbi Trust (1)
$
43,484

 
$
45,126

Deferred tax asset
1,550

 
1,507

Deposits
1,827

 
4,043

Other
3,672

 
6,281

    Total other assets
$
50,533

 
$
56,957

 
 
 

        
(1)
See Note 10 – Fair Value Measurements



12




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, 2015 and December 31, 2014 consisted of the following (in thousands):
 
September 30,
 
December 31,
 
2015
 
2014
 
 
 
 
Accrued compensation
$
28,572

 
$
35,097

Accrued property and other taxes
24,095

 
32,190

Accrued severance and other charges
4,220

 

Income taxes
5,094

 
3,362

Accrued inventory
13,558

 
6,235

Accrued capital expenditures
1,728

 
708

Accrued medical claims
4,271

 
3,218

Accrued purchase orders
2,740

 
8,081

Other
16,347

 
25,336

Total accrued and other current liabilities
$
100,625

 
$
114,227


Note 9—Debt

We have a $100.0 million revolving credit facility with certain financial institutions, 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 “Credit Facility”). Subject to the terms of the Credit Facility, we have the ability to increase the commitments by $150.0 million. At September 30, 2015 and December 31, 2014, we did not have any outstanding indebtedness under the Credit Facility. In addition, we had $5.8 million in letters of credit outstanding as of September 30, 2015.

Borrowings under the Credit Facility bear interest, at our option, at either a base rate or an adjusted Eurodollar rate. Base rate loans under the Credit Facility 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 a leverage ratio. Interest is in each case payable quarterly for base-rate loans. Eurodollar loans under the Credit Facility 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 Credit Facility is subject to a commitment fee ranging from 0.250% to 0.375% based on certain leverage ratios.

The Credit Facility contains 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 Facility also contains 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 our credit agreement) 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, 2015, we were in compliance with all financial covenants under the Credit Facility.

In addition, the Credit Facility contains 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.


13




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


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. 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.



14




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, 2015 and December 31, 2014 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, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan
$

 
$
43,484

 
$

 
$
43,484

Marketable securities - other
2,282

 

 

 
2,282

Liabilities:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan

 
43,077

 

 
43,077

Contingent consideration

 

 
7

 
7

December 31, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan
$

 
$
45,126

 
$

 
$
45,126

Marketable securities - other
2,257

 

 

 
2,257

Liabilities:
 
 
 
 
 
 
 
Marketable securities - deferred
 
 
 
 
 
 
 
compensation plan

 
42,968

 

 
42,968


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. Our valuation technique used to estimate the fair value of contingent consideration payable in connection with our acquisition of Timco (as described in Note 3) is the Monte Carlo simulation lattice option-pricing model which uses weekly rig count forecasts through June 30, 2017 as a basis for the simulation. The contingent consideration is included in other non-current liabilities on the balance sheet. We used the following assumptions in the Monte Carlo simulation lattice option-pricing model:

 
September 30, 2015
Assumptions:
 
Rig count volatility
1.85
%
Cost of debt
5.31
%
Date of first contingent consideration payment
December 31, 2016

Date of second contingent consideration payment
June 30, 2017




15




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

The following table sets forth a reconciliation of the changes in the fair value of the contingent consideration payable, which changed as a result of the significant reduction in the rig count forecast. The contingent consideration is classified as Level 3 in the fair value hierarchy (in thousands):
 
Significant
 
Unobservable
Beginning balance, December 31, 2014
$

 Issuance of contingent consideration
1,539

 Change in value of contingent consideration
(1,532
)
Ending balance, September 30, 2015
$
7


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.

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.

Note 11—Preferred Stock

At September 30, 2015, we had 52,976,000 shares of Series A preferred stock, par value €0.01 per share (the "Preferred Stock"), issued and outstanding, all of which were held by MHI. 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. We paid the annual dividend for the year ended December 31, 2014 of $1,506 on June 30, 2015. Additionally, each share of Preferred Stock entitles its holder to one vote. Preferred stockholders vote with the common stockholders as a single class on all matters presented to FINV's shareholders for their vote.

MHI 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 a conversion will decrease the noncontrolling interest in our financial statements that is attributable to MHI's interest in FICV. As of September 30, 2015, there have been no conversions of the Preferred Stock or exchanges 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—Treasury Stock

At September 30, 2015, common shares held in treasury totaled 506,421 with a cost of $9.2 million. These shares were withheld from employees to settle personal tax withholding obligations that arose as a result of restricted stock units that vested.



16




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

Note 13—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 $2.5 million and $2.1 million for each of the three months ended September 30, 2015 and 2014, respectively, and $6.5 million and $5.6 million for the nine months ended September 30, 2015 and 2014, 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. Subsequent to our initial public offering ("IPO") in 2013, 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 during 2014 were also charged block hours monthly. In 2015, we amended the agreements to reflect both dry lease and wet lease rental, whereby we are charged a flat monthly fee and earn charter income from third party usage. We recorded net charter revenue of $0.1 million and net charter expense of $0.4 million for the three months ended September 30, 2015 and 2014, respectively, and net charter expense of $0.7 million and $1.1 million for the nine months ended September 30, 2015 and 2014, respectively.

Tax Receivable Agreement

MHI and its permitted transferees may convert all or a portion of its Preferred Stock 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, by delivery of an equivalent portion of its interest in FICV to us (a “Conversion”). FICV has made an election under Section 754 of the Code. Pursuant to the Section 754 election, each future Conversion 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 Conversions. The anticipated basis adjustments are expected to 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 (the "TRA") that we entered into with FICV and MHI in connection with our IPO generally provides for the payment by FINV of 85% of the amount of the actual reductions, if any, in payments of U.S. federal, state and local income tax or franchise tax (which reductions we refer to as “cash savings”) in periods after our IPO as a result of (i) the tax basis increases resulting from the Conversions and (ii) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the TRA. In addition, the TRA provides for payment by us of interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRA. We will retain the remaining 15% of cash savings, if any.

The payment obligations under the TRA are our obligations and are not obligations of FICV. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the TRA.

Estimating the amount of payments that may be made under the TRA is by its nature imprecise. The actual increase in tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including the timing of Conversions, the relative value of our U.S. and international assets at the time of the Conversion, the price of our common stock at the time of the Conversion, the extent to which such Conversions 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 TRA constituting imputed interest or depreciable or amortizable basis. FINV expects that the payments that it will be required to make under the TRA 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 TRA exceed the actual benefits we realize in respect of the tax attributes subject to the TRA. The payments under the TRA will not be conditioned upon a holder of rights under a TRA having a continued ownership interest in either FICV or FINV.



17




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

The TRA provides that FINV may terminate it early. If FINV elects to terminate the TRA early, it would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA (based upon certain assumptions and deemed events set forth in the TRA, including the assumption that it has sufficient taxable income to fully utilize such benefits and that any FICV interests that MHI or its transferees own on the termination date are deemed to be exchanged on the termination date). Any early termination payment may be made significantly in advance of the actual realization, if any, of such future benefits. In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control. In these situations, FINV’s obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. For example, if the TRA were terminated on September 30, 2015, the estimated termination payment would be approximately $48.3 million (calculated using a discount rate of 5.51%). The foregoing number is merely an estimate and the actual payment could differ materially.

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

Note 14—Earnings Per Common Share

Basic earnings per common share is determined by 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 and employee stock purchase plan shares. The diluted earnings per share calculation assumes the conversion 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.



18




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,
 
2015
 
2014
 
2015
 
2014
Numerator - Basic
 
 
 
 
 
 
 
Income from continuing operations
$
24,088

 
$
67,440

 
$
99,342

 
$
177,851

Less: Net income attributable to noncontrolling interest
(7,523
)
 
(20,094
)
 
(27,668
)
 
(53,426
)
Less: Preferred stock dividends

 

 
(2
)
 
(1
)
Net income available to common shareholders
$
16,565

 
$
47,346

 
$
71,672

 
$
124,424

 
 
 
 
 
 
 
 
Numerator - Diluted
 
 
 
 
 
 
 
Income from continuing operations attributable to common shareholders
$
16,565

 
$
47,346

 
$
71,672

 
$
124,424

Add: Net income attributable to noncontrolling interest (1)
5,911

 
16,335

 
23,513

 
42,671

Add: Preferred stock dividends

 

 
2

 
1

Dilutive net income available to common shareholders
$
22,476

 
$
63,681

 
$
95,187

 
$
167,096

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Basic weighted average common shares
154,813

 
153,923

 
154,502

 
153,659

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

 
52,976

 
52,976

 
52,976

Restricted stock units
1,559

 
1,035

 
1,573

 
1,116

Stock to be issued pursuant to employee stock purchase plan
1

 

 
1

 

Diluted weighted average common shares
209,349

 
207,934

 
209,052

 
207,751

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.31

 
$
0.46

 
$
0.81

Diluted
$
0.11

 
$
0.31

 
$
0.46

 
$
0.80

 
 
 
 
 
 
 
 
 
(1)
Adjusted for the additional tax expense upon the assumed conversion of the Preferred Stock
$
1,612

 
$
3,759

 
$
4,155

 
$
10,755


Note 15—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 30.9% and 22.7% for the three months ended September 30, 2015 and 2014, respectively, and 24.7% and 22.5% for the nine months ended September 30, 2015 and 2014, respectively. In addition, 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.
    
As of September 30, 2015, there were no significant changes to our unrecognized tax benefits as reported in our audited financial statements for the year ended December 31, 2014.




19




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

Note 16—Severance and Other Charges

During 2015, we executed a workforce reduction plan as part of our cost savings initiatives due to depressed oil prices. The reduction was communicated to affected employees on various dates. The plan resulted in a reduction of approximately 600 to 800 employees in which we recorded an accrual of approximately $14.2 million for the nine months ended September 30, 2015, which included cash severance payments, accelerated vesting of RSU grants for certain individuals and other employee-related termination costs as well as base rationalization and lease termination fees. These costs are also reflected in our consolidated statements of income under severance and other charges. Below is a reconciliation of the beginning and ending liability balance (in thousands):

 
International Services
 
U.S. Services
 
Tubular Sales
 
Total
Beginning balance, December 31, 2014
$

 
$

 
$

 
$

Additions for costs expensed
493

 
12,569

 
1,146

 
14,208

Other adjustments

 
(40
)
 

 
(40
)
Severance and other payments
(493
)
 
(6,274
)
 
(898
)
 
(7,665
)
Reclass to equity for accelerated RSU grants

 
(2,283
)
 

 
(2,283
)
Ending balance, September 30, 2015
$

 
$
3,972

 
$
248

 
$
4,220


We expect to pay the remaining liability in the fourth quarter of 2015.

Note 17—Commitments and Contingencies

We are the subject of lawsuits and claims arising in the ordinary course of business from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. We had no material accruals for loss contingencies, individually or in the aggregate, as of September 30, 2015. 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 18—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, Eagle Ford Shale, Haynesville Shale, Marcellus Shale and Utica Shale, as well as in the U.S. Gulf of Mexico.

The Tubular Sales segment designs, manufactures and distributes large outside diameter ("OD") pipe, connectors and casing attachments. We also provide specialized fabrication and welding services in support of offshore projects, including drilling and production risers, flowlines and pipeline end terminations, as well as long length tubulars (up to


20




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

300 feet in length) for use as caissons or pilings. This segment also designs and manufactures proprietary equipment for use in our International and U.S. Services segments.

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 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.

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,
 
2015
 
2014
 
2015
 
2014
Segment Adjusted EBITDA:
 
 
 
 
 
 
 
International Services
$
39,157

 
$
65,359

 
$
146,752

 
$
165,260

U.S. Services
18,190

 
45,796

 
79,767

 
132,643

Tubular Sales
15,985

 
9,343

 
27,082

 
28,028

Corporate and other
12

 
6

 
37

 
6

Adjusted EBITDA Total
73,344

 
120,504

 
253,638

 
325,937

Interest income (expense), net
173

 
(13
)
 
150

 
23

Income tax expense
(10,771
)
 
(19,777
)
 
(32,662
)
 
(51,598
)
Depreciation and amortization
(29,032
)
 
(23,254
)
 
(80,743
)
 
(66,342
)
(Loss) gain on sale of assets
1,392

 
(280
)
 
521

 
(193
)
Foreign currency gain (loss)
(5,329
)
 
(526
)
 
(6,563
)
 
(526
)
Stock-based compensation expense
(6,035
)
 
(9,214
)
 
(22,323
)
 
(29,450
)
Severance and other charges
(1,186
)
 

 
(14,208
)
 

Change in value of contingent consideration
1,532

 

 
1,532

 

Income from continuing operations
$
24,088

 
$
67,440

 
$
99,342

 
$
177,851




21




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

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, 2015
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
103,076

 
$
74,417

 
$
62,390

 
$

 
$
239,883

Inter-segment revenues
102

 
5,654

 
7,188

 
(12,944
)
 

Adjusted EBITDA
39,157

 
18,190

 
15,985

 
12

 
73,344

 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
143,330

 
$
112,149

 
$
40,704

 
$

 
$
296,183

Inter-segment revenues
501

 
6,209

 
15,097

 
(21,807
)
 

Adjusted EBITDA
65,359

 
45,796

 
9,343

 
6

 
120,504

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
349,918

 
$
262,120

 
$
159,586

 
$

 
$
771,624

Inter-segment revenues
709

 
20,211

 
29,622

 
(50,542
)
 

Adjusted EBITDA
146,752

 
79,767

 
27,082

 
37

 
253,638

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
Revenue from external customers
$
391,371

 
$
321,468

 
$
120,773

 
$

 
$
833,612

Inter-segment revenues
873

 
16,933

 
50,767

 
(68,573
)
 

Adjusted EBITDA
165,260

 
132,643

 
28,028

 
6

 
325,937





22


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, which have declined significantly in recent periods;
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, 2014 (our "Annual Report"), (3) our other reports and filings we make with the SEC from time to time and (4) other announcements we make from time to time. Should one or more of the risks or uncertainties described in the documents above or in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statements.



23


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 global provider of highly engineered tubular services to the oil and gas industry and have been in business for over 75 years. 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 offshore areas of the U.S. Gulf of Mexico. In addition, we have a 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, manufacture and distribute large outside diameter ("OD") pipe, connectors and casing attachments. We also provide specialized fabrication and welding services in support of offshore projects, including drilling and production risers, flowlines and pipeline end terminations, as well as long-length tubulars (up to 300 feet in length) for use as caissons or pilings. This segment also designs and manufactures proprietary equipment for use in our International and U.S Services segments.

Market Outlook

We continue to face a challenging environment in the oilfield services industry due to the dramatic drop in oil prices and expect this to continue for the foreseeable future. The impact of reduced commodity prices has resulted in global pricing pressure and a decrease in activity levels for our services. We believe that the cost savings initiatives we completed this year will result in ongoing savings that will help mitigate the negative impact of the current market conditions and we continue to believe in the strength of the long-term objectives of our business. We expect these industry-driven unfavorable market conditions to persist across the majority of our business segments and intend to remain focused on looking beyond the down cycle by continuing to invest in capital and strategic programs. We will make further modifications to our business as required to adapt to market conditions.

How We Evaluate Our Operations

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

Revenue

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


24



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 charges or credits. 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, as well as Adjusted EBITDA margin for each of the periods presented (in thousands):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Income from continuing operations
$
24,088

 
$
67,440

 
$
99,342

 
$
177,851

Interest (income) expense, net
(173
)
 
13

 
(150
)
 
(23
)
Depreciation and amortization
29,032

 
23,254

 
80,743