NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BASIS OF PRESENTATION
Apergy Corporation (“Apergy”) is a leading provider of highly engineered equipment and technologies that help companies drill for and produce oil and gas safely and efficiently around the world. Our products provide efficient functioning throughout the lifecycle of a well—from drilling to completion to production. We report our results of operations in the following reporting segments: Production & Automation Technologies and Drilling Technologies. Our Production & Automation Technologies segment offerings consist of artificial lift equipment and solutions, including rod pumping systems, electric submersible pump systems, progressive cavity pumps and drive systems and plunger lifts, as well as a full automation and digital offerings consisting of equipment, software and Industrial Internet of Things solutions for downhole monitoring, wellsite productivity enhancement and asset integrity management. Our Drilling Technologies segment offerings provide market leading polycrystalline diamond cutters and bearings that result in cost effective and efficient drilling.
Separation and Distribution
On May 9, 2018, Apergy became an independent, publicly traded company as a result of the distribution by Dover Corporation (“Dover”) of 100% of the outstanding common stock of Apergy to Dover’s stockholders. Dover’s Board of Directors approved the distribution on April 18, 2018 and Apergy’s Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission (“SEC”) on April 19, 2018. On May 9, 2018, Dover’s stockholders of record as of the close of business on the record date of April 30, 2018 received one share of Apergy stock for every two shares of Dover stock held at the close of business on the record date (the “Separation”). Following the Separation, Dover retained no ownership interest in Apergy. Apergy’s common stock began “regular-way” trading on the New York Stock Exchange (“NYSE”) under the “APY” symbol on May 9, 2018.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Apergy have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted. Therefore, these financial statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2019.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions that we may undertake in the future, actual results may differ from our estimates. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments unless otherwise specified) necessary for a fair statement of our financial condition and results of operations as of and for the periods presented. Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these financial statements may not be representative of the results that may be expected for the year ending December 31, 2020.
Noncontrolling Interest
For the quarters ended March 31, 2020, and 2019, we did not declare or pay distributions to the noncontrolling interest holder in Apergy Middle East Services LLC, a subsidiary in the Sultanate of Oman. We have a commission arrangement with our noncontrolling interest for 5% of certain annual product sales.
Revisions and Reclassifications
We revised our previously issued financial statements for the three months ended March 31, 2019, for the correction of immaterial errors related to: (i) the assessing and recording of liabilities for state sales tax and associated penalties and interest, primarily resulting in an understatement of our selling, general, and administrative expense and interest expense for the three
months ended March 31, 2019; and (ii) previously recorded amounts including, but not limited to, the write-off of inventory and leased assets, timing of revenue recognition, and revenue classification, that the Company concluded were immaterial to our previously filed condensed consolidated financial statements. See the following table for the impact of the corrections on our condensed consolidated financial statements:
Condensed Consolidated Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
(in thousands, except per share data)
|
As Reported
|
|
Adjustments
|
|
As Revised
|
Product revenue
|
$
|
269,534
|
|
|
$
|
(192
|
)
|
|
$
|
269,342
|
|
Other revenue (1)
|
32,157
|
|
|
(1,005
|
)
|
|
31,152
|
|
Total revenue
|
301,691
|
|
|
(1,197
|
)
|
|
300,494
|
|
Cost of goods and services
|
196,142
|
|
|
1,341
|
|
|
197,483
|
|
Gross profit
|
105,549
|
|
|
(2,538
|
)
|
|
103,011
|
|
Selling, general and administrative expense
|
63,601
|
|
|
528
|
|
|
64,129
|
|
Long-lived asset impairment (2)
|
1,746
|
|
|
—
|
|
|
1,746
|
|
Interest expense, net
|
10,474
|
|
|
53
|
|
|
10,527
|
|
Other expense, net
|
1,090
|
|
|
12
|
|
|
1,102
|
|
Income before income taxes
|
28,638
|
|
|
(3,131
|
)
|
|
25,507
|
|
Provision for (benefit from) income taxes
|
6,069
|
|
|
(500
|
)
|
|
5,569
|
|
Net income
|
22,569
|
|
|
(2,631
|
)
|
|
19,938
|
|
Net income attributable to noncontrolling interest
|
282
|
|
|
—
|
|
|
282
|
|
Net income attributable to Apergy
|
$
|
22,287
|
|
|
$
|
(2,631
|
)
|
|
$
|
19,656
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Apergy:
|
|
|
|
|
|
Basic
|
$
|
0.29
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.25
|
|
Diluted
|
$
|
0.29
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
23,758
|
|
|
$
|
(2,631
|
)
|
|
$
|
21,127
|
|
Comprehensive income attributable to Apergy
|
$
|
23,476
|
|
|
$
|
(2,631
|
)
|
|
$
|
20,845
|
|
_______________________
(1) Includes “Service revenue” and “Lease and other revenue” as reported in the condensed consolidated statements of income for the three months ended March 31, 2019.
(2) Long-lived asset impairment has been reclassified from selling, general, and administrative expense to conform the with our current period presentation of long-lived asset impairment on the condensed consolidated statements of income (loss).
Condensed Consolidated Statement of Changes in Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
(in thousands)
|
As Reported
|
|
Adjustments
|
|
As Revised
|
Stockholders’ Equity:
|
|
|
|
|
|
Capital in excess of par value of common stock
|
$
|
966,938
|
|
|
$
|
(4,599
|
)
|
|
$
|
962,339
|
|
Retained earnings
|
76,454
|
|
|
(1,914
|
)
|
|
74,540
|
|
Total equity
|
1,005,203
|
|
|
(6,513
|
)
|
|
998,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
As Reported
|
|
Adjustments
|
|
As Revised
|
Total equity at December 31, 2018
|
$
|
981,527
|
|
|
$
|
(5,544
|
)
|
|
$
|
975,983
|
|
Cumulative effect of accounting changes
|
(1,662
|
)
|
|
1,662
|
|
|
—
|
|
Net income
|
22,569
|
|
|
(2,631
|
)
|
|
19,938
|
|
Total equity at March 31, 2019
|
1,005,203
|
|
|
(6,513
|
)
|
|
998,690
|
|
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
(in thousands)
|
As Reported
|
|
Adjustments
|
|
As Revised
|
Cash provided (required) by operating activities:
|
|
|
|
|
|
Net income
|
$
|
22,569
|
|
|
$
|
(2,631
|
)
|
|
$
|
19,938
|
|
Adjustments to reconcile net income to net cash provided (required) by operating activities:
|
|
|
|
|
|
Depreciation
|
17,080
|
|
|
(9
|
)
|
|
17,071
|
|
Deferred income taxes
|
(5,366
|
)
|
|
(490
|
)
|
|
(5,856
|
)
|
Loss (gain) on sale of fixed assets (1)
|
12
|
|
|
—
|
|
|
12
|
|
Provision for losses on accounts receivable (1)
|
(117
|
)
|
|
—
|
|
|
(117
|
)
|
Amortization of deferred loan costs and accretion of discount (1)
|
648
|
|
|
—
|
|
|
648
|
|
Other
|
131
|
|
|
(22
|
)
|
|
109
|
|
Changes in operating assets and liabilities (net of effects of foreign exchange):
|
|
|
|
|
|
Receivables
|
(8,462
|
)
|
|
1,202
|
|
|
(7,260
|
)
|
Inventories
|
(2,229
|
)
|
|
2,893
|
|
|
664
|
|
Accounts payable
|
(6,279
|
)
|
|
(1,881
|
)
|
|
(8,160
|
)
|
Accrued compensation and employee benefits
|
(12,827
|
)
|
|
2,243
|
|
|
(10,584
|
)
|
Accrued expenses and other liabilities
|
13,849
|
|
|
(2,273
|
)
|
|
11,576
|
|
Leased assets
|
(21,460
|
)
|
|
959
|
|
|
(20,501
|
)
|
Other
|
620
|
|
|
9
|
|
|
629
|
|
_______________________
(1) Each of these amounts were included within “Other” on the condensed consolidated statements of cash flows reported for the three months ended March 31, 2019. These amounts have been reclassified consistent with the presentation in the current reporting period.
NOTE 2—NEW ACCOUNTING STANDARDS
Recently Adopted Accounting Standards
Effective January 1, 2020, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This update amends the impairment model to utilize an expected credit loss methodology in place of the incurred credit loss methodology for financial instruments. We applied the provisions of this ASU to our financial instruments, mostly consisting of trade receivables, as of January 1, 2020. We utilized the modified retrospective method of adoption; therefore, prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting policies. As of January 1, 2020, we recorded a cumulative adjustment to retained earnings of $1.6 million, net of $0.5 million of income tax benefit.
Our exposure to credit losses is primarily the result of product sales to our customers, resulting in trade receivables with payment terms generally ranging from 30 days to 90 days. We manage credit risk on trade receivables by transacting only with what management believes are financially secure customers. Our expected loss allowance for accounts receivable is estimated utilizing a single loss rate, as our customer base generally has similar collectability risk characteristics. We develop our loss rate estimate based on historical collection experience, and current economic and market conditions. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.
The following table provides a rollforward of our allowance for credit losses balance:
|
|
|
|
|
(in thousands)
|
Allowance for Credit Losses
|
December 31, 2019
|
$
|
8,072
|
|
Impact of adoption on January 1, 2020
|
2,042
|
|
Provision for expected credit losses
|
2,427
|
|
Accounts written off
|
(1,207
|
)
|
Foreign currency translation
|
(55
|
)
|
March 31, 2020
|
$
|
11,279
|
|
NOTE 3—INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2020
|
|
December 31, 2019
|
Raw materials
|
$
|
47,542
|
|
|
$
|
50,099
|
|
Work in progress
|
13,438
|
|
|
13,325
|
|
Finished goods
|
170,370
|
|
|
175,774
|
|
|
231,350
|
|
|
239,198
|
|
LIFO and valuation adjustments
|
(24,402
|
)
|
|
(27,856
|
)
|
Inventories, net
|
$
|
206,948
|
|
|
$
|
211,342
|
|
NOTE 4—ASSET IMPAIRMENTS
During the first quarter of 2020, certain unprecedented events caused the rapid decline of several market indicators in the oil and gas industry. On March 6, 2020, Russia and the Organization of Petroleum Exporting Countries (“OPEC”) producers were unable to agree on the need to maintain and extend compliance with previously agreed upon production cuts. Consequently, Russia and Saudi Arabia each announced that they would reduce the prices at which they make oil available to the market and raise their crude oil production, leading to a price war and a substantial surplus in the supply of oil. The price per barrel of WTI crude oil decreased from $41.14 on March 6, 2020 to $20.51 on March 31, 2020, a decline of 50%.
Compounding this situation, demand for oil and gas commodities declined significantly as the world was impacted by the COVID-19 outbreak, which the World Health Organization declared as a pandemic on March 11, 2020. Since that time, various jurisdictions have attempted to implement or have implemented measures designed to contain the spread of the virus, including travel restrictions, stay-at-home or shelter-in-place orders and shutdowns of non-essential business, reducing the overall demand for oil and gas commodities. In response to lower oil prices and deteriorating market conditions, oil producers announced reductions of previously budgeted capital expenditures. The reduction in rig count levels in the first quarter of 2020 provided further evidence that oil producers were committed to reduced levels of capital investment in drilling especially in North America, which has led to reduced levels of demand for capital equipment and pricing pressures.
Additionally, Apergy’s common stock price declined from an average closing price of $24.62 during February 2020 to an average closing price of $8.26 during March 2020. On March 23, 2020 Apergy’s common stock price ended trading at $3.02, the lowest end of day stock price since Apergy’s stock began “regular-way” trading on the NYSE on May 9, 2018. We believe our market capitalization has been negatively impacted as a result of these market conditions and overall impact to our industry as described above.
Management determined that these events and their related impact to future revenues and cash flows constituted a triggering event in the first quarter of 2020, requiring us to perform a recoverability test of our long-lived assets and an interim impairment assessment of goodwill as of March 31, 2020.
Goodwill Impairment
The carrying amount of goodwill, including changes therein, by reporting segment is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Production & Automation Technologies
|
|
Drilling Technologies
|
|
Total
|
December 31, 2019
|
$
|
809,977
|
|
|
$
|
101,136
|
|
|
$
|
911,113
|
|
Impairment
|
(616,271
|
)
|
|
—
|
|
|
(616,271
|
)
|
Foreign currency translation
|
(3,124
|
)
|
|
—
|
|
|
(3,124
|
)
|
March 31, 2020
|
$
|
190,582
|
|
|
$
|
101,136
|
|
|
$
|
291,718
|
|
Goodwill is not subject to amortization but is tested for impairment on an annual basis or more frequently if impairment indicators arise.
We performed a quantitative analysis for each of our reporting units to determine the existence of goodwill impairment and the amount of the impairment loss. In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches, which determined that the fair values were less than the respective carrying values for our Artificial Lift and Automation reporting units.
Our income-based valuation method determines the present value of estimated future cash flows to estimate the fair value of a reporting unit. Significant assumptions used in estimating our reporting unit fair values include: (i) annual revenue growth rates; (ii) operating margins; (iii) risk-adjusted discount rate; and (iv) terminal value determined using a long-term growth rate. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. Given the unprecedented uncertainty of both short-term and long-term market conditions, we utilized a weighted-average projection for estimated future cash flows that consists of three estimated future cash flows scenarios with the following weightings: (i) low case scenario with a 40% weighting, (ii) base case scenario with a 40% weighting, and (iii) high case scenario with a 20% weighting.
Under the market approach, we estimate a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factor in a control premium. Finally, we compare our estimates of fair values to our March 31, 2020 total public market capitalization and assess an implied control premium based on the 20-day average of our common stock.
The reporting unit carrying values were adjusted based on the long-lived asset impairment assessment noted below. Financial and credit market volatility directly impacts our fair value measurement through the weighted average cost of capital used to determine a discount rate. During times of volatility, significant judgment must be applied to determine whether credit market changes are a short-term or long-term trend. We utilized discount rates of 14.5% and 16.5% for our Artificial Lift and Automation reporting units, respectively.
During the first quarter of 2020, we recorded a $616.3 million impairment charge to goodwill, consisting of $539.2 million and $77.1 million in our Artificial Lift reporting unit and our Automation reporting unit, respectively. Both reporting units are within our Production & Automation Technologies reportable segment.
Long-lived Asset Impairment
Long-lived assets, which include property, plant and equipment, right of use assets, and identified intangible assets, comprise a significant amount of our total assets. The Company makes judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and estimated useful lives.
The negative market indicators described above, as well as the results of the previously mentioned fair value determinations of certain of our reporting units, were triggering events indicating that certain of our long-lived tangible and intangible assets may be impaired. We performed recoverability tests on our asset groups as of March 31, 2020, which indicated that long-lived assets associated with two of our asset groups within Production and Automation Technologies were not recoverable as the aggregate amount of estimated undiscounted cash flows of these asset groups was determined to be below their respective carrying values. We estimate the fair value of these intangible and fixed assets using an income approach that requires us to make long-term forecasts of our future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for our products and services, future market conditions and technological developments. The forecasts are dependent upon assumptions including those regarding oil prices and the general outlook for the global oil and gas industry, among other factors. Financial and credit market volatility directly impacts our fair value measurement through our income forecast. Changes to these assumptions, including, but not limited to: variability of spot and futures prices for crude oil; sustained declines in worldwide rig counts below current analysts’ forecasts; significant deterioration of external financing for our customers; higher risk premiums or higher cost of equity; or any other significant adverse economic news could require a provision for impairment.
Accordingly, the estimated fair value of each of these asset groups was below their respective carrying value and as a result, we recorded a long-lived asset impairment charge of $41.0 million in the first quarter of 2020, consisting of $40.4 million to customer relationships and $0.6 million to trademarks.
The components of our definite- and indefinite-lived intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
(in thousands)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (1)
|
$
|
442,696
|
|
|
$
|
287,833
|
|
|
$
|
154,863
|
|
|
$
|
560,316
|
|
|
$
|
353,189
|
|
|
$
|
207,127
|
|
Trademarks (1)
|
34,045
|
|
|
24,671
|
|
|
9,374
|
|
|
35,695
|
|
|
24,830
|
|
|
10,865
|
|
Patents
|
37,798
|
|
|
27,053
|
|
|
10,745
|
|
|
38,436
|
|
|
26,838
|
|
|
11,598
|
|
Unpatented technologies
|
13,700
|
|
|
9,878
|
|
|
3,822
|
|
|
13,700
|
|
|
9,811
|
|
|
3,889
|
|
Drawings and manuals
|
2,478
|
|
|
1,678
|
|
|
800
|
|
|
2,558
|
|
|
1,758
|
|
|
800
|
|
Other
|
5,199
|
|
|
4,477
|
|
|
722
|
|
|
5,332
|
|
|
4,504
|
|
|
828
|
|
|
535,916
|
|
|
355,590
|
|
|
180,326
|
|
|
656,037
|
|
|
420,930
|
|
|
235,107
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
3,600
|
|
|
—
|
|
|
3,600
|
|
|
3,600
|
|
|
—
|
|
|
3,600
|
|
Total
|
$
|
539,516
|
|
|
$
|
355,590
|
|
|
$
|
183,926
|
|
|
$
|
659,637
|
|
|
$
|
420,930
|
|
|
$
|
238,707
|
|
_______________________
(1) Includes impairment of customer relationship and trademark intangible assets of $40.4 million and $0.6 million, respectively, all of which relate to asset groups included within our Artificial Lift business.
NOTE 5—DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2020
|
|
December 31, 2019
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
—
|
|
Term loan facility
|
265,000
|
|
|
265,000
|
|
6.375% Senior Notes due 2026
|
300,000
|
|
|
300,000
|
|
Finance lease obligations
|
4,079
|
|
|
4,530
|
|
Total
|
569,079
|
|
|
569,530
|
|
Net unamortized discounts and issuance costs
|
(9,547
|
)
|
|
(9,709
|
)
|
Total long-term debt
|
$
|
559,532
|
|
|
$
|
559,821
|
|
On February 14, 2020, Apergy amended its credit agreement, which (i) provides for the incurrence of an additional $150 million of revolving commitments under the amended credit agreement, upon consummation of the planned merger with ChampionX (the “Merger”), (ii) permits the consummation of the Merger and the incurrence of a senior secured term loan facility in an aggregate amount up to $537 million by ChampionX, and (iii) continues to provide that all obligations under the amended agreement continue to be guaranteed by certain of Apergy’s wholly owned U.S. subsidiaries.
Subsequent event
In preparation for settling transaction expenses associated with the Merger, and to increase liquidity during current market conditions, we increased our cash balance by drawing $125.0 million on our revolver on April 24, 2020, leaving $118.9 million of available borrowing capacity.
NOTE 6—COMMITMENT AND CONTINGENCIES
Guarantees and Indemnifications
We have provided indemnities in connection with sales of certain businesses and assets, including representations and warranties, covenants and related indemnities for environmental health and safety, tax and employment matters. We do not have any material liabilities recorded for these indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities.
In connection with the Separation, we entered into agreements with Dover that govern the treatment between Dover and us for certain indemnification matters and litigation responsibility. Generally, the separation and distribution agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and to place financial responsibility for the obligations and liabilities of Dover’s business with Dover. The separation and distribution agreement also establishes procedures for handling claims subject to indemnification and related matters. In addition, pursuant to the tax matters agreement, we have agreed to indemnify Dover and its affiliates against any and all tax-related liabilities incurred by them relating to the Separation and/or certain related transactions to the extent caused by an acquisition of Apergy stock or assets or by any other action or failure to act undertaken by Apergy or its affiliates.
Pursuant to the provisions of the tax matters agreement with Dover, we recorded an indemnification liability of $3.4 million as of December 31, 2019, with respect to certain liabilities related to tax audits for the 2012-2016 tax years. We received notification in February 2020 that the tax audits and related assessments were completed, resulting in a final settlement amount of $3.0 million, which we have recorded as an indemnification liability as of March 31, 2020.
As of March 31, 2020 and December 31, 2019, we had $15.2 million and $15.7 million, respectively, of outstanding letters of credit, surety bonds and guarantees which expire at various dates through 2025. These financial instruments are primarily maintained as security for insurance, warranty and other performance obligations. Generally, we would only be liable for the amount of these letters of credit and surety bonds in the event of default in the performance of our obligations, the probability of which we believe is remote.
Litigation and Environmental Matters
We are involved in various pending or potential legal actions in the ordinary course of our business. These proceedings primarily involve claims by private parties alleging injury arising out of use of our products, patent infringement, employment matters, and commercial disputes. We review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred and accrued to-date, and the availability and extent of insurance coverage. We accrue a liability for legal matters that are probable and estimable, and as of March 31, 2020 and December 31, 2019, these liabilities were not material. Management is unable to predict the ultimate outcome of these actions because of the inherent uncertainty of litigation. However, management believes the most probable, ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Prior to the Separation, groundwater contamination was discovered at the Norris Sucker Rods plant site located in Tulsa, Oklahoma ("Norris"). Initial remedial efforts were undertaken at the time of discovery of the contamination and Norris has since coordinated monitoring and remediation with the Oklahoma Department of Environmental Quality ("ODEQ"). As part of the ongoing long-term remediation process, Norris contracted an engineering and consulting firm to develop a range of possible additional remedial alternatives in order to accelerate the remediation process and associated cost estimates for the work. In October 2019, we received the firm’s preliminary remedial alternatives for consideration. Now that we have such recommendations, we have begun discussions with ODEQ regarding our proposed long-term remediation plan. The plan is subject to ODEQ’s review, input, and approval. Because we have not yet finalized a plan for further remediation at the site and discussions with ODEQ remain ongoing, we cannot fully anticipate the timing, outcome or possible impact of such further remedial activities, financial or otherwise. As a result of the recommendations in the report, we accrued liabilities for these remediation efforts of approximately $2.0 million as of December 31, 2019. Liabilities could increase in the future at such time as we ultimately reach agreement with ODEQ on our remediation plan and such liabilities become probable and can be reasonably estimated, however, there have been no changes to our estimated liability as of March 31, 2020.
NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss—Accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Foreign Currency Translation
|
|
Defined Pension and Other Post-Retirement Benefits
|
|
Accumulated Other Comprehensive Loss
|
December 31, 2018
|
$
|
(36,146
|
)
|
|
$
|
(6,760
|
)
|
|
$
|
(42,906
|
)
|
Other comprehensive income (loss) before reclassifications, net of tax
|
1,090
|
|
|
(323
|
)
|
|
767
|
|
Reclassification adjustment for net losses included in net income, net of tax
|
—
|
|
|
422
|
|
|
422
|
|
Other comprehensive income, net of tax
|
1,090
|
|
|
99
|
|
|
1,189
|
|
March 31, 2019
|
$
|
(35,056
|
)
|
|
$
|
(6,661
|
)
|
|
$
|
(41,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Foreign Currency Translation
|
|
Defined Pension and Other Post-Retirement Benefits
|
|
Accumulated Other Comprehensive Loss
|
December 31, 2019
|
$
|
(35,210
|
)
|
|
$
|
(8,827
|
)
|
|
$
|
(44,037
|
)
|
Other comprehensive loss before reclassifications, net of tax
|
(11,052
|
)
|
|
—
|
|
|
(11,052
|
)
|
Reclassification adjustment for net losses included in net income, net of tax
|
—
|
|
|
99
|
|
|
99
|
|
Other comprehensive income (loss), net of tax
|
(11,052
|
)
|
|
99
|
|
|
(10,953
|
)
|
March 31, 2020
|
$
|
(46,262
|
)
|
|
$
|
(8,728
|
)
|
|
$
|
(54,990
|
)
|
Reclassifications from accumulated other comprehensive loss—Reclassification adjustments from accumulated other comprehensive loss to net income (loss) related to defined pension and other post-retirement benefits consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Affected line items on the condensed consolidated statements of income
|
(in thousands)
|
2020
|
|
2019
|
|
Amortization of actuarial loss and other
|
$
|
132
|
|
|
$
|
91
|
|
|
Other (income) expense, net
|
Settlement loss
|
—
|
|
|
486
|
|
|
Other (income) expense, net
|
Total before tax
|
132
|
|
|
577
|
|
|
Income (loss) before income taxes
|
Tax benefit
|
(33
|
)
|
|
(155
|
)
|
|
Provision for (benefit from) income taxes
|
|
$
|
99
|
|
|
$
|
422
|
|
|
Net income (loss)
|
NOTE 8—EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and diluted earnings (loss) per share calculation was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands, except per share data)
|
2020
|
|
2019
|
Net income (loss) attributable to Apergy
|
$
|
(633,728
|
)
|
|
$
|
19,656
|
|
|
|
|
|
Weighted-average number of shares outstanding
|
77,477
|
|
|
77,363
|
|
Dilutive effect of stock-based compensation (1)
|
—
|
|
|
277
|
|
Total shares and dilutive securities
|
77,477
|
|
|
77,640
|
|
|
|
|
|
Basic earnings (loss) per share attributable to Apergy
|
$
|
(8.18
|
)
|
|
$
|
0.25
|
|
Diluted earnings (loss) per share attributable to Apergy
|
$
|
(8.18
|
)
|
|
$
|
0.25
|
|
_______________________
|
|
(1)
|
See Note 12—Equity And Cash Incentive Programs for share-based awards outstanding as of March 31, 2020, all of which were excluded from diluted weighted-average number of shares outstanding during the three months ended March 31, 2020 due to their anti-dilutive impact. We excluded 0.3 million shares from our calculation as of March 31, 2019 due to their anti-dilutive impact.
|
NOTE 9—REVENUE
Disaggregation of Revenue
Revenue disaggregated by revenue type was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2020
|
|
2019
|
Product revenue
|
$
|
230,882
|
|
|
$
|
269,342
|
|
Service revenue
|
18,487
|
|
|
20,421
|
|
Lease and other revenue
|
12,065
|
|
|
10,731
|
|
Total revenue
|
$
|
261,434
|
|
|
$
|
300,494
|
|
Revenue disaggregated by end market in each of our reporting segments was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2020
|
|
2019
|
Drilling Technologies
|
$
|
55,955
|
|
|
$
|
77,535
|
|
Production & Automation Technologies:
|
|
|
|
Artificial lift
|
159,400
|
|
|
170,907
|
|
Digital products
|
33,922
|
|
|
31,290
|
|
Other production equipment
|
12,259
|
|
|
21,005
|
|
Intra-segment eliminations
|
(102
|
)
|
|
(243
|
)
|
|
205,479
|
|
|
222,959
|
|
Total revenue
|
$
|
261,434
|
|
|
$
|
300,494
|
|
Revenue disaggregated by geography was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2020
|
|
2019
|
United States
|
$
|
195,370
|
|
|
$
|
231,358
|
|
Canada
|
17,952
|
|
|
18,915
|
|
Middle East
|
12,363
|
|
|
13,604
|
|
Europe
|
12,030
|
|
|
16,959
|
|
Australia
|
9,268
|
|
|
5,982
|
|
Latin America
|
7,582
|
|
|
7,722
|
|
Asia-Pacific
|
5,486
|
|
|
5,545
|
|
Other
|
1,383
|
|
|
409
|
|
Total revenue
|
$
|
261,434
|
|
|
$
|
300,494
|
|
Revenue is attributed to regions based on the location of our direct customer, which in some instances is an intermediary and not necessarily the end user.
Contract balances
Contract assets and contract liabilities from contracts with customers were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2020
|
|
December 31, 2019
|
Contract assets
|
$
|
6
|
|
|
$
|
285
|
|
Contract liabilities - current
|
9,393
|
|
|
6,148
|
|
NOTE 10—RESTRUCTURING AND OTHER RELATED CHARGES
Restructuring and other related charges as classified in our condensed consolidated statements of income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2020
|
|
2019
|
Segment restructuring charges:
|
|
|
|
Production & Automation Technologies
|
$
|
671
|
|
|
$
|
410
|
|
Drilling Technologies
|
2,095
|
|
|
—
|
|
Total
|
$
|
2,766
|
|
|
$
|
410
|
|
|
Statements of Income (Loss) classification:
|
|
|
|
Cost of goods and services
|
$
|
2,039
|
|
|
$
|
331
|
|
Selling, general and administrative expense
|
727
|
|
|
79
|
|
Total
|
$
|
2,766
|
|
|
$
|
410
|
|
Restructuring and other related charges during the three months ended March 31, 2020 were due to costs associated with employee severance and related benefits at our Production & Automation Technologies and Drilling Technologies segments. These programs were initiated to better align our costs and operations with current market conditions.
The following table details our restructuring accrual activities during the three months ended March 31, 2020:
|
|
|
|
|
(in thousands)
|
Restructuring Accrual Balance
|
December 31, 2019
|
$
|
130
|
|
Restructuring charges
|
2,766
|
|
Payments
|
(516
|
)
|
Other, including foreign currency translation
|
117
|
|
March 31, 2020
|
$
|
2,497
|
|
Our liability balance for restructuring and other exit activities at March 31, 2020, reflects employee severance and related benefits initiated during the period. Additional programs may be initiated during 2020 with related restructuring charges.
NOTE 11—INCOME TAXES
For the three months ended March 31, 2020, we recorded a tax benefit of $27.0 million on a loss before income taxes of $660.5 million, resulting in an effective tax rate of 4.1%. The effective tax rate was primarily impacted by the tax effects of impairment of non-taxable goodwill of $560.1 million, recognized as a discrete item during the quarter. During the three months ended March 31, 2019, we recorded income tax expense of $5.6 million on earnings before income tax of $25.5 million, resulting in an effective tax rate of 21.8%.
On March 27, 2020, as part of the business stimulus package in response to the COVID-19 pandemic, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide relief to businesses impacted by the disruptions of the COVID-19 pandemic. The CARES Act provides the opportunity to utilize a five year carryback of net operating losses generated in years 2018 through 2020. Our effective tax rate was not materially impacted by the CARES Act for the three months ended March 31, 2020; however, as the carryback period is prior to the Separation we are continuing to evaluate the potential benefit to Apergy for future periods in connection with the tax matters agreement with Dover.
NOTE 12—EQUITY AND CASH INCENTIVE PROGRAMS
Stock-based compensation expense is reported within “Selling, general and administrative expense” in the condensed consolidated statements of income (loss). Stock-based compensation expense relating to all stock-based incentive plans was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2020
|
|
2019
|
Stock-based compensation expense
|
$
|
2,429
|
|
|
$
|
2,285
|
|
Tax benefit
|
(599
|
)
|
|
(558
|
)
|
Stock-based compensation expense, net of tax
|
$
|
1,830
|
|
|
$
|
1,727
|
|
A summary of activity relating to our share-based awards for the three months ended March 31, 2020, was as follows:
|
|
|
|
|
|
|
|
|
|
(in shares)
|
Stock-Settled Appreciation Rights
|
|
Performance Share Awards
|
|
Restricted Stock Units
|
Outstanding at January 1, 2020
|
422,361
|
|
|
174,726
|
|
|
440,048
|
|
Granted
|
—
|
|
|
—
|
|
|
164,513
|
|
Forfeited
|
(1,758
|
)
|
|
(5,011
|
)
|
|
(12,657
|
)
|
Exercised / vested
|
—
|
|
|
—
|
|
|
(62,740
|
)
|
Outstanding at March 31, 2020
|
420,603
|
|
|
169,715
|
|
|
529,164
|
|
NOTE 13—FAIR VALUE MEASUREMENTS
We had no outstanding derivative contracts as of March 31, 2020 and December 31, 2019. Other assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, were not significant; thus, no fair value disclosures are presented.
The fair value, based on Level 1 quoted market rates, of our Senior Notes was approximately $233.5 million at March 31, 2020, as compared to the $300.0 million face value of the debt. The fair value, based on Level 2 quoted market rates, of our term loan facility was approximately $246.5 million at March 31, 2020, as compared to the $265.0 million face value of the debt.
The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, as well as amounts included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair value due to their short-term nature.
We consider the inputs for our long-lived asset and goodwill impairment calculations to be Level 3 inputs in the fair value hierarchy. See Note 4—Asset Impairments for further information.
NOTE 14—SEGMENT INFORMATION
We report our results of operations in the following reporting segments: Production & Automation Technologies and Drilling Technologies. Segment revenue and segment operating profit were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2020
|
|
2019
|
Segment revenue:
|
|
|
|
Production & Automation Technologies
|
$
|
205,479
|
|
|
$
|
222,959
|
|
Drilling Technologies
|
55,955
|
|
|
77,535
|
|
Total revenue
|
$
|
261,434
|
|
|
$
|
300,494
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
Segment operating profit:
|
|
|
|
|
|
Production & Automation Technologies
|
$
|
(648,591
|
)
|
|
$
|
13,064
|
|
Drilling Technologies
|
11,359
|
|
|
26,806
|
|
Total segment operating profit
|
(637,232
|
)
|
|
39,870
|
|
Corporate expense and other (1)
|
14,190
|
|
|
3,836
|
|
Interest expense, net
|
9,039
|
|
|
10,527
|
|
Income before income taxes
|
$
|
(660,461
|
)
|
|
$
|
25,507
|
|
_______________________
|
|
(1)
|
Corporate expense and other includes costs not directly attributable or allocated to our reporting segments such as corporate executive management and other administrative functions, and the results attributable to our noncontrolling interest.
|
NOTE 15—CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Non-cash information:
|
|
|
|
|
Finance lease additions
|
|
$
|
942
|
|
|
$
|
1,326
|
|
Lease program
Our ESP leased asset program is reported in our Production & Automation Technologies segment. At the time of purchase, assets are recorded to inventory and are transferred to property, plant, and equipment when a customer contracts for an asset under our lease program. During the three months ended March 31, 2020 and March 31, 2019, we transferred $7.2 million and $19.8 million, respectively, of inventory into property, plant, and equipment as a result of assets entering our leased asset program.
Expenditures for assets, having a useful life of greater than one year, that are expected to be placed into our lease asset program are reported in “Capital expenditures” in the investing section of our condensed consolidated statements of cash flows. During the three months ended March 31, 2020 and 2019, such expenditures were estimated to be $1.4 million and $5.8 million, respectively. Expenditures for assets that are expected to be placed into our leased asset program and with a useful life of one year are reported in “Leased assets” in the operating section of our condensed consolidated statement of cash flows. The recovery of the carrying value from the sale of assets on lease is presented in “Leased assets” in the operating section of our condensed consolidated statements of cash flows.