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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020
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: 001-38441
ChampionX Corporation
(Exact name of registrant as specified in its charter)
Delaware
82-3066826
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
2445 Technology Forest Blvd,
Building 4, 12th Floor
 
The Woodlands,
Texas
77381
(Address of principal executive offices)
(Zip Code)
(281) 403-5772
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value
CHX
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes   No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

The registrant had 199,833,331 shares of common stock, $0.01 par value, outstanding as of October 26, 2020.



CHAMPIONX CORPORATION

TABLE OF CONTENTS

Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements are often identified by the words “believe,” “anticipate,” “expect,” “may,” “intend,” “foresee,” “guidance,” “estimate,” “potential,” “outlook,” “plan,” “should,” “would,” “could,” “target,” “forecast” and similar expressions, including the negative thereof. The absence of these words, however, does not mean that the statements are not forward-looking statements. Forward-looking statements are based on our current expectations, beliefs and assumptions concerning future developments and business conditions and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate.

All of our forward-looking statements involve risks, uncertainties (some of which are significant or beyond our control) and assumptions that could cause actual results to materially differ from our historical experience and our present expectations or projections. Known material factors that could cause actual results to materially differ from those contemplated in the forward-looking statements are those set forth in Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020.

We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update, revise or correct any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except to the extent required under the federal securities laws.



PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHAMPIONX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands, except per share data)
2020
 
2019
 
2020
 
2019
Product revenue
$
540,825

 
$
239,867

 
$
1,014,140

 
$
775,489

Service revenue
76,665

 
23,979

 
138,436

 
71,853

Lease and other revenue
16,036

 
12,993

 
41,298

 
36,161

Total revenue
633,526

 
276,839

 
1,193,874

 
883,503

Cost of goods and services
505,066

 
184,140

 
950,845

 
579,033

Gross profit
128,460

 
92,699

 
243,029

 
304,470

Selling, general and administrative expense
122,156

 
68,405

 
330,956

 
199,221

Goodwill impairment

 

 
616,271

 

Long-lived asset impairment

 

 
40,980

 
1,746

Interest expense, net
15,935

 
9,590

 
36,236

 
30,226

Other (income) expense, net
1,663

 
(309
)
 
342

 
3,469

Income (loss) before income taxes
(11,294
)
 
15,013

 
(781,756
)
 
69,808

Provision for (benefit from) income taxes
(3,962
)
 
3,425

 
(31,922
)
 
15,274

Net income (loss)
(7,332
)
 
11,588

 
(749,834
)
 
54,534

Less: Net income attributable to noncontrolling interest
582

 
194

 
1,453

 
547

Net income (loss) attributable to ChampionX
$
(7,914
)
 
$
11,394

 
$
(751,287
)
 
$
53,987

 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to ChampionX:
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
$
0.15

 
$
(5.73
)
 
$
0.70

Diluted
$
(0.04
)
 
$
0.15

 
$
(5.73
)
 
$
0.70

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
199,809

 
77,460

 
131,064

 
77,416

Diluted
199,809

 
77,573

 
131,064

 
77,615



The accompanying notes are an integral part of the condensed consolidated financial statements.

1


CHAMPIONX CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2020
 
2019
 
2020
 
2019
Net income (loss)
$
(7,332
)
 
$
11,588

 
$
(749,834
)
 
$
54,534

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments (1)
3,782

 
(2,900
)
 
(1,567
)
 
(836
)
Cash flow hedges
(862
)
 

 
(209
)
 

Defined pension and other post-retirement benefits adjustments, net(2)
99

 
68

 
297

 
235

Other comprehensive income (loss)
3,019

 
(2,832
)
 
(1,479
)
 
(601
)
Comprehensive income (loss)
(4,313
)
 
8,756

 
(751,313
)
 
53,933

Comprehensive income attributable to noncontrolling interest
582

 
194

 
1,453

 
547

Comprehensive income (loss) attributable to ChampionX
$
(4,895
)
 
$
8,562

 
$
(752,766
)
 
$
53,386

_______________________
(1) Net of income tax (expense) benefit of $0 for the three and nine months ended September 30, 2020 and 2019.
(2) Net of income tax (expense) benefit of $33 and $23 for the three months ended September 30, 2020 and 2019, respectively, and $99 and $202 for the nine months ended September 30, 2020 and 2019, respectively.


The accompanying notes are an integral part of the condensed consolidated financial statements.

2


CHAMPIONX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
September 30, 2020
 
December 31, 2019
Assets
 
 
 
Cash and cash equivalents
$
171,462

 
$
35,290

Receivables, net
516,245

 
219,874

Inventories, net
471,331

 
211,342

Prepaid expenses and other current assets
73,713

 
26,934

Total current assets
1,232,751

 
493,440

Property, plant and equipment, net of accumulated depreciation of $495,380 in 2020 and $426,722 in 2019
868,111

 
248,181

Operating lease right-of-use assets
118,993

 
24,289

Goodwill
660,329

 
911,113

Intangible assets, net
509,789

 
238,707

Other non-current assets
63,759

 
7,095

Total assets
$
3,453,732

 
$
1,922,825

Liabilities and Equity
 
 
 
Current portion of long-term debt
$
31,470

 
$
4,845

Accounts payable
262,092

 
120,291

Accrued compensation and employee benefits
60,566

 
38,470

Current portion of operating lease liabilities
33,888

 
7,620

Accrued distributor fees
36,386

 

Accrued expenses and other current liabilities
150,005

 
28,455

Total current liabilities
574,407

 
199,681

Long-term debt
989,690

 
559,821

Deferred income taxes
141,047

 
84,060

Operating lease liabilities
80,261

 
19,419

Other long-term liabilities
82,295

 
23,630

Total liabilities
1,867,700

 
886,611

Stockholders’ equity:
 

 
 
Common stock (2.5 billion shares authorized, $0.01 par value)
199.8 million shares and 77.5 million shares issued and outstanding in 2020 and 2019, respectively
1,998

 
775

Capital in excess of par value of common stock
2,288,930

 
969,174

Retained earnings (accumulated deficit)
(645,863
)
 
107,048

Accumulated other comprehensive loss
(45,516
)
 
(44,037
)
Total stockholders’ equity
1,599,549

 
1,032,960

Noncontrolling interest
(13,517
)
 
3,254

Total equity
1,586,032

 
1,036,214

Total liabilities and equity
$
3,453,732

 
$
1,922,825


The accompanying notes are an integral part of the condensed consolidated financial statements.

3


CHAMPIONX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

 
Common stock
 
 
 
 
 
 
 
 
(in thousands)
Shares
 
Par
Value
 
Capital in Excess of Par Value
 
Retained Earnings (Accum. Deficit)
 
Accum.
Other
Comp.
Loss
 
Non-controlling Interest
 
Total
December 31, 2019
77,460

 
$
775

 
$
969,174

 
$
107,048

 
$
(44,037
)
 
$
3,254

 
$
1,036,214

Cumulative effect of accounting changes, net of tax (Note 3)

 

 

 
(1,573
)
 

 

 
(1,573
)
Net income (loss)

 

 

 
(633,728
)
 

 
273

 
(633,455
)
Other comprehensive loss

 

 

 

 
(10,953
)
 

 
(10,953
)
Stock-based compensation
44

 

 
2,429

 

 

 

 
2,429

Taxes withheld on issuance of stock-based awards

 

 
(368
)
 

 

 

 
(368
)
March 31, 2020
77,504

 
$
775

 
$
971,235

 
$
(528,253
)
 
$
(54,990
)
 
$
3,527

 
$
392,294

Issuance of common stock related to the Merger
122,237

 
1,223

 
1,262,708

 

 

 

 
1,263,931

Issuance of replacement awards related to the Merger

 

 
43,964

 

 

 

 
43,964

Non-controlling interest acquired in the Merger

 

 

 

 

 
(16,015
)
 
(16,015
)
Net income (loss)

 

 

 
(109,645
)
 

 
598

 
(109,047
)
Other comprehensive income

 

 

 

 
6,455

 

 
6,455

Stock-based compensation
67

 

 
5,433

 

 

 

 
5,433

Taxes withheld on issuance of stock-based awards

 

 
(244
)
 

 

 

 
(244
)
Distributions to noncontrolling interest

 

 

 

 

 
(2,200
)
 
(2,200
)
Other

 

 

 
37

 

 
(12
)
 
25

June 30, 2020
199,808

 
$
1,998

 
$
2,283,096

 
$
(637,861
)
 
$
(48,535
)
 
$
(14,102
)
 
$
1,584,596

Net income (loss)

 

 

 
(7,914
)
 

 
582

 
(7,332
)
Other comprehensive income

 

 

 

 
3,019

 

 
3,019

Stock-based compensation
12

 

 
5,856

 

 

 

 
5,856

Taxes withheld on issuance of stock-based awards

 

 
(28
)
 

 

 

 
(28
)
Other

 

 
6

 
(88
)
 

 
3

 
(79
)
September 30, 2020
199,820

 
$
1,998

 
$
2,288,930

 
$
(645,863
)
 
$
(45,516
)
 
$
(13,517
)
 
$
1,586,032



4


 
Common Stock
 
 
 
 
 
 
 
 
(in thousands)
Shares
 
Par
Value
 
Capital in Excess of Par Value
 
Retained Earnings
 
Accum.
Other
Comp.
Loss
 
Non-controlling Interest
 
Total
December 31, 2018
77,353

 
$
774

 
$
960,773

 
$
54,884

 
$
(42,906
)
 
$
2,458

 
$
975,983

Net income

 

 

 
19,656

 

 
282

 
19,938

Other comprehensive income

 

 

 

 
1,189

 

 
1,189

Stock-based compensation
39

 

 
2,285

 

 

 

 
2,285

Taxes withheld on issuance of stock-based awards

 

 
(719
)
 

 

 

 
(719
)
Other

 

 

 

 

 
14

 
14

March 31, 2019
77,392

 
$
774

 
$
962,339

 
$
74,540

 
$
(41,717
)
 
$
2,754

 
$
998,690

Net income

 

 

 
22,937

 

 
71

 
23,008

Other comprehensive income

 

 

 

 
1,042

 

 
1,042

Stock-based compensation
67

 
1

 
2,735

 

 

 

 
2,736

Taxes withheld on issuance of stock-based awards

 

 
(1,080
)
 

 

 

 
(1,080
)
Other

 

 

 

 

 
(14
)
 
(14
)
June 30, 2019
77,459

 
$
775

 
$
963,994

 
$
97,477

 
$
(40,675
)
 
$
2,811

 
$
1,024,382

Net income

 

 

 
11,394

 

 
194

 
11,588

Other comprehensive loss

 

 

 

 
(2,832
)
 

 
(2,832
)
Stock-based compensation

 

 
2,524

 

 

 

 
2,524

Other

 

 
(42
)
 

 

 


 
(42
)
September 30, 2019
77,459

 
$
775

 
$
966,476

 
$
108,871

 
$
(43,507
)
 
$
3,005

 
$
1,035,620


The accompanying notes are an integral part of the condensed consolidated financial statements.



5


CHAMPIONX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
September 30,
(in thousands)
2020
 
2019
Cash provided by (used for) operating activities:
 
 
 
Net income (loss)
$
(749,834
)
 
$
54,534

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
101,434

 
51,126

Amortization
47,827

 
38,504

Stock-based compensation
13,718

 
7,545

Loss (gain) on disposal of fixed assets
3,685

 
(846
)
Loss on goodwill and long-lived asset impairment
657,251

 
1,746

Loss on sale of business

 
2,475

Provision for losses on accounts receivable
2,945

 
122

Provision for inventory obsolescence and write-downs
15,626

 
(997
)
Amortization of deferred loan costs and accretion of discount
2,480

 
1,943

Deferred income taxes
(34,318
)
 
(4,439
)
Employee benefit plan expense
1,606

 
1,506

Other
(1,696
)
 
386

Changes in operating assets and liabilities (net of effects of foreign exchange):
 
 
 
Receivables
91,204

 
14,133

Inventories
62,225

 
13,232

Prepaid expenses and other current assets
17,737

 
(16,270
)
Accounts payable
(48,519
)
 
(16,861
)
Accrued compensation and employee benefits
1,518

 
(3,651
)
Accrued expenses and other liabilities
12,846

 
14,121

Leased assets
(7,799
)
 
(34,305
)
Other
(504
)
 
(614
)
Net cash provided by operating activities
189,432

 
123,390

 
 
 
 
Cash provided by (used for) investing activities:
 

 
 

Capital expenditures
(32,169
)
 
(31,589
)
Acquisitions, net of cash acquired
57,588

 
(12,500
)
Proceeds from sale of fixed assets
9,295

 
2,954

Payment on sale of business

 
(2,194
)
Net cash provided by (used for) investing activities
34,714

 
(43,329
)
 
 
 
 
Cash provided by (used for) financing activities:
 

 
 

Proceeds from long-term debt
125,000

 
36,500

Payment of debt issue costs
(4,356
)
 

Repayment of long-term debt
(206,713
)
 
(111,500
)
Distribution to noncontrolling interest
(2,200
)
 

Payment of finance lease obligations
(4,536
)
 
(4,108
)
Payments related to taxes withheld on stock-based compensation
(640
)
 
(1,841
)
Net cash used for financing activities
(93,445
)
 
(80,949
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
5,471

 
(317
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
136,172

 
(1,205
)
Cash and cash equivalents at beginning of period
35,290

 
41,832

Cash and cash equivalents at end of period
$
171,462

 
$
40,627

The accompanying notes are an integral part of the condensed consolidated financial statements.

6


CHAMPIONX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1—BASIS OF PRESENTATION

ChampionX Corporation is a global leader in chemistry solutions and highly engineered equipment and technologies that help companies drill for and produce oil and gas safely and efficiently around the world.

Unless the context requires otherwise, references in this report to “we,” “us,” “our,” “the Company,” or “ChampionX” mean ChampionX Corporation, together with our subsidiaries where the context requires.

On June 3, 2020, the Company and Ecolab Inc. (“Ecolab”) completed a Reverse Morris Trust transaction in which Ecolab transferred their upstream energy business to Champion X Holding, Inc. (“legacy ChampionX”) and, thereafter, distributed all of the shares of legacy ChampionX common stock to certain Ecolab stockholders (“the Distribution”). Immediately following the Distribution, a wholly owned subsidiary of the Company merged with and into legacy ChampionX, with legacy ChampionX continuing as the surviving company in the Merger and as a wholly owned subsidiary of the Company (“the Merger”). In association with the completion of the Merger, the Company has changed its name from Apergy Corporation (“Apergy”) to ChampionX Corporation, and common shares began trading on the New York Stock Exchange under the symbol “CHX”.

As a result of the Merger, the results of operations of legacy ChampionX have been reflected in our accompanying condensed consolidated financial statements from the closing date of the Merger through September 30, 2020. Results for the periods prior to June 3, 2020 reflect the financial and operating results of Apergy and do not include the financial and operating results of legacy ChampionX. See Note 2—Merger Transaction for additional information on the Merger.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ChampionX 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.

Change in Accounting Estimate

During the second quarter, we entered into new commercial agreements, which changed the economics of the leased asset program of our Electrical Submersible Pump (“ESP”) subsidiary in our Production & Automation Technologies segment. As such, we re-evaluated the estimated useful life and salvage value of our assets based on the combination of new commercial contracts and historical operating trends related to the aging of our lease fleet, including functioning assets beyond original expected life. Based on our analysis, effective April 1, 2020, we changed our estimate of useful life and salvage values for certain equipment to better reflect the useful life and estimated values of these assets at the end of their useful life. The estimated useful life, previously estimated at 12 months, was increased to 18 months. The estimated salvage value of the equipment, previously estimated at 50%, was decreased to 0%. The effect of the changes in estimate for the three and nine months ended September 30, 2020, was an increase in depreciation expense of $8.6 million and $26.2 million, respectively, a decrease in net income of $5.7 million and $17.6 million, and a decrease in basic and diluted earnings per share of $0.03 per share and $0.13 per share, respectively.

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Reclassifications

Certain prior period amounts have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

Revisions

We revised our previously issued financial statements for the three and nine months ended September 30, 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 and nine months ended September 30, 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
September 30, 2019
(in thousands, except per share data)
As Reported
 
Adjustments
 
As Revised
Product revenue (1)
$
244,651

 
$
(4,784
)
 
$
239,867

Service revenue (1)
20,708

 
3,271

 
23,979

Lease and other revenue (1)
13,022

 
(29
)
 
12,993

Total revenue
278,381

 
(1,542
)
 
276,839

Cost of goods and services
186,862

 
(2,722
)
 
184,140

Gross profit
91,519

 
1,180

 
92,699

Selling, general and administrative expense
68,813

 
(408
)
 
68,405

Interest expense, net
9,537

 
53

 
9,590

Income before income taxes
13,478

 
1,535

 
15,013

Provision for income taxes
3,059

 
366