UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38441
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(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 | ||||||
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.
| ☑ | 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 201,339,489 shares of common stock, $0.01 par value, outstanding as of April 23, 2021.
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 I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 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 March 31, | |||||||||||
| (in thousands, except per share data) | 2021 | 2020 | |||||||||
| Product revenue | $ | $ | |||||||||
| Service revenue | |||||||||||
| Lease and other revenue | |||||||||||
| Total revenue | |||||||||||
| Cost of goods and services | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expense | |||||||||||
| Goodwill impairment | |||||||||||
| Long-lived asset impairment | |||||||||||
| Interest expense, net | |||||||||||
| Other (income) expense, net | ( | ( | |||||||||
| Income (loss) before income taxes | ( | ||||||||||
| Provision for (benefit from) income taxes | ( | ||||||||||
| Net income (loss) | ( | ||||||||||
| Less: Net income (loss) attributable to noncontrolling interest | ( | ||||||||||
| Net income (loss) attributable to ChampionX | $ | $ | ( | ||||||||
| Earnings (losses) per share attributable to ChampionX: * | |||||||||||
| Basic | $ | $ | ( | ||||||||
| Diluted | $ | $ | ( | ||||||||
| Weighted-average shares outstanding: * | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
_______________________
* See Note 12 — Earnings Per Share
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 March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
Foreign currency translation adjustments (1) | ( | ||||||||||
Cash flow hedges (2) | |||||||||||
Defined pension and other post-retirement benefits adjustments, net (3) | |||||||||||
| Other comprehensive income (loss) | ( | ||||||||||
| Comprehensive income (loss) | ( | ||||||||||
| Comprehensive income (loss) attributable to noncontrolling interest | ( | ||||||||||
| Comprehensive income (loss) attributable to ChampionX | $ | $ | ( | ||||||||
_______________________
(1) Net of income tax (expense) benefit of $0
(2) Net of income tax (expense) benefit of $(72 ) for the three months ended March 31, 2021.
(3) Net of income tax (expense) benefit of $47 and $33 for the three months ended March 31, 2021 and 2020, respectively.
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
CHAMPIONX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property, plant and equipment, net of accumulated depreciation of $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Equity | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation and employee benefits | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Accrued distributor fees | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock ( | |||||||||||
| Capital in excess of par value of common stock | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| ChampionX stockholders’ equity | |||||||||||
| Noncontrolling interest | ( | ( | |||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
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 | Accum. Deficit | Accum. Other Comp. Loss | Non-controlling Interest | Total | ||||||||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Taxes withheld on issuance of stock-based awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Cumulative effect of accounting changes | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Taxes withheld on issuance of stock-based awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| March 31, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
CHAMPIONX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Cash provided by (used for) operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Loss (gain) on disposal of fixed assets | ( | ||||||||||
| Loss on goodwill and long-lived asset impairment | |||||||||||
| Provision (recovery) of bad debt | ( | ||||||||||
| Provision for inventory obsolescence and write-downs | |||||||||||
| Amortization of deferred loan costs and accretion of discount | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Employee benefit plan expense | |||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities (net of effects of foreign exchange): | |||||||||||
| Receivables | ( | ||||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued compensation and employee benefits | ( | ( | |||||||||
| Accrued expenses and other liabilities | ( | ||||||||||
| Leased assets | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash provided by (used for) investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sale of fixed assets | |||||||||||
| Net cash used for investing activities | ( | ( | |||||||||
| Cash provided by (used for) financing activities: | |||||||||||
| Payment of debt issue costs | ( | ||||||||||
| Repayment of long-term debt | ( | ||||||||||
| Distributions to noncontrolling interest | ( | ||||||||||
| Payment of finance lease obligations | ( | ( | |||||||||
| Proceeds from exercise of stock options | |||||||||||
| Payments related to taxes withheld on stock-based compensation | ( | ( | |||||||||
| Net cash used for financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net increase (decrease) in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
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. Our products provide efficient functioning throughout the lifecycle of a well with a focus on the production phase of wells.
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 we acquired the Chemical Technologies business (“the Merger”). In association with the completion of the Merger, the Company changed its name from Apergy Corporation (“Apergy”) to ChampionX Corporation.
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 fiscal year ended December 31, 2020.
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, 2021.
6
NOTE 2—MERGER TRANSACTION
On June 3, 2020 we completed the acquisition of the Chemical Technologies business. To complete the acquisition, we issued 122.2 million shares of common stock, at a share price of $10.34 per share, in exchange for 100 % equity ownership of Chemical Technologies.
Preliminary Purchase Price Allocation
The acquisition-date fair value of the consideration transferred consisted of the following:
| (in thousands) | |||||
| Equity consideration | $ | ||||
Replacement awards attributable to pre-combination services(1) | |||||
Unfavorable supply agreement(2) | |||||
Favorable supply agreement(2) | ( | ||||
| Fair value of consideration transferred | $ | ||||
_______________________
(1) Represents the fair value of the replacement equity awards to the extent services were provided by employees of Chemical Technologies prior to closing.
As of March 31, 2021, we have substantially completed the allocation of the consideration. The primary areas in which the preliminary purchase price allocation is not yet finalized relate to filing of income tax returns that provide taxes payable and receivable from tax authorities as well as under the Tax Matters Agreement with Ecolab, deferred income taxes and residual goodwill. We will complete the purchase price allocation and valuation during the second quarter of 2021.
The following table provides the preliminary allocation of the purchase price as of the acquisition date.
| (in thousands) | |||||
| Cash and cash equivalents | $ | ||||
| Receivables | |||||
| Inventories | |||||
| Prepaid expenses and other current assets | |||||
| Property, plant, and equipment | |||||
Identifiable intangible assets(1) | |||||
| Other non-current assets | |||||
| Total identifiable assets acquired | |||||
| Accounts payable | |||||
Other current liabilities(1) | |||||
Long-term debt (2) | |||||
| Deferred tax liabilities | |||||
Other liabilities(1) | |||||
| Total liabilities assumed | |||||
| Net identifiable assets acquired | |||||
| Add: Negative fair value of non-controlling interests | |||||
| Goodwill | |||||
| Total net assets acquired | $ | ||||
_______________________
(1) The fair value of the consideration transferred related to the favorable and unfavorable terms of the cross supply agreement has been excluded.
(2) In connection with the Merger, we assumed a term loan from Chemical Technologies, of which approximately $26.9 million has been classified as short-term representing the mandatory amortization payments due within the next twelve months. See Note 7—Debt for further information.
7
Pro forma financial information
The following unaudited pro forma results of operations have been prepared as though the Merger was completed on January 1, 2019. Pro forma amounts are based on the preliminary purchase price allocation of the acquisition and are not necessarily indicative of results that may be reported in the future. Non-recurring pro forma adjustments including acquisition-related costs directly attributable to the Merger are included within the reported pro forma revenue and net income (loss).
| Three Months Ended March 31, | |||||
| (in thousands, except per share data) | 2020 | ||||
| Revenues | $ | ||||
| Net income (loss) attributable to ChampionX | ( | ||||
Included in the net income (loss) attributable to ChampionX on a pro forma basis were goodwill and long-lived asset impairment charges of $805.0 million during the three months ended March 31, 2020.
NOTE 3—NEW ACCOUNTING STANDARDS
8
NOTE 4 — SEGMENT INFORMATION
Our reporting segments are:
•Production Chemical Technologies—provides oil and natural gas production and midstream markets with solutions to manage and control corrosion, oil and water separation, flow assurance, sour gas treatment and a host of water-related issues.
•Production & Automation Technologies—designs, manufactures, markets and services a full range of artificial lift equipment, end-to-end digital automation solutions, as well as other production equipment. Production & Automation Technologies’ products are sold under a collection of brands including Harbison-Fischer, Norris, Alberta Oil Tool, Oil Lift Technology, PCS Ferguson, Pro-Rod, Upco, Unbridled ESP, Norriseal-Wellmark, Quartzdyne, Spirit, Theta, Timberline and Windrock.
•Drilling Technologies—designs, manufactures and markets polycrystalline diamond cutters and bearings for use in oil and gas drill bits under the US Synthetic brand.
•Reservoir Chemical Technologies—manufactures specialty products that support well stimulation, construction (including drilling and cementing) and remediation needs in the oil and natural gas industry.
Business activities that do not meet the criteria of an operating segment have been combined into Corporate and other. Corporate and other includes (i) corporate and overhead expenses, and (ii) revenue and costs for activities that are not operating segments.
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Segment revenue: | |||||||||||
| Production Chemical Technologies | $ | $ | |||||||||
| Production & Automation Technologies | |||||||||||
| Drilling Technologies | |||||||||||
| Reservoir Chemical Technologies | |||||||||||
Corporate and other (1) | |||||||||||
| Total revenue | $ | $ | |||||||||
| Segment operating profit (loss): | |||||||||||
| Production Chemical Technologies | $ | $ | |||||||||
| Production & Automation Technologies | ( | ||||||||||
| Drilling Technologies | |||||||||||
| Reservoir Chemical Technologies | ( | ||||||||||
| Total segment operating profit (loss) | ( | ||||||||||
Corporate and other (1) | |||||||||||
| Interest expense, net | |||||||||||
| Income (loss) before income taxes | $ | $ | ( | ||||||||
_______________________
(1) Corporate 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. Additionally, the sales and expenses related to the Cross Supply Agreement with Ecolab are included within Corporate and other. See Note 2—Merger Transaction for further information.
9
NOTE 5—REVENUE
Our revenue is generated primarily from product sales. Service revenue is generated from providing services to our customers. These services include installation, repair and maintenance, laboratory and logistics services, chemical management services, troubleshooting, reporting, water treatment services, technical advisory assistance and other field services. Lease revenue is derived from rental income of leased production equipment. These lease arrangements generally allow customers to rent equipment on a daily basis with no stated end date. Management accounts for these arrangements as a daily renewal option beginning on the lease commencement date, with the lease term determined as the period in which it is reasonably certain the option will be exercised. As our costs are shared across the various revenue categories, cost of goods sold is not tracked separately and is not discretely identifiable.
Revenue disaggregated by geography was as follows:
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||
| (in thousands) | Production Chemical Technologies | Production & Automation Technologies | Drilling Technologies | Reservoir Chemical Technologies | Corporate | Total | |||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Canada | |||||||||||||||||||||||||||||||||||
| Middle East & Africa | |||||||||||||||||||||||||||||||||||
| Europe | |||||||||||||||||||||||||||||||||||
| Australia | |||||||||||||||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||||||||||||||
| Asia-Pacific | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||
| (in thousands) | Production Chemical Technologies | Production & Automation Technologies | Drilling Technologies | Reservoir Chemical Technologies | Corporate | Total | |||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Canada | |||||||||||||||||||||||||||||||||||
| Middle East & Africa | |||||||||||||||||||||||||||||||||||
| Europe | |||||||||||||||||||||||||||||||||||
| Australia | |||||||||||||||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||||||||||||||
| Asia-Pacific | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Contract liabilities - current | $ | $ | |||||||||
10
NOTE 6—INTANGIBLE ASSETS
The components of our definite- and indefinite-lived intangible assets were as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||
| Definite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Trademarks | |||||||||||||||||||||||||||||||||||
| Patents | |||||||||||||||||||||||||||||||||||
| Unpatented technologies | |||||||||||||||||||||||||||||||||||
| Favorable supply agreements | |||||||||||||||||||||||||||||||||||
| Drawings and manuals | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| Trademarks | — | — | |||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
NOTE 7—DEBT
Long-term debt consisted of the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| 2018 Credit Facility | $ | $ | |||||||||
| 2018 Term Loan Facility | |||||||||||
| 2020 Term Loan Facility | |||||||||||
| Total | |||||||||||
| Net unamortized discounts and issuance costs | ( | ( | |||||||||
| Total long-term debt | $ | $ | |||||||||
Current portion of long-term debt (1) | ( | ( | |||||||||
| Long-term debt, less current portion | $ | $ | |||||||||
_______________________
(1) Represents the mandatory amortization payments due within twelve months related to the 2020 Term Loan Facility.
NOTE 8—COMMITMENTS AND CONTINGENCIES
11
even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred.
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 Company’s separation from Dover Corporation (“Dover”) in 2018, 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 ChampionX stock or assets or by any other action or failure to act undertaken by ChampionX or its affiliates.
In connection with the Merger, we entered into agreements with Ecolab that govern the treatment between Ecolab 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 Ecolab’s business with Ecolab. 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 Ecolab and its affiliates for (i) all taxes for which ChampionX is responsible as defined within the Tax Matters Agreement, (ii) all taxes resulting from a breach by ChampionX of any of its representations (but only to the extent relating to a breach occurring after the consummation of the Merger) or any of its covenants under the Tax Matters Agreement, (iii) all taxes resulting from an acquisition after the Merger of any of the stock or assets of ChampionX, other than as a result of the Merger or a repayment of the ChampionX Credit Facilities and (iv) reasonable costs and expenses (including reasonable attorneys’ fees and expenses) related to the foregoing.
As of March 31, 2021 and December 31, 2020, we had $88.0 million and $88.8 million, respectively, of outstanding letters of credit, surety bonds and guarantees which expire at various dates through 2027. 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 lawsuits, claims and environmental actions that have arisen 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, as well as possible obligations to investigate and mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and either operating or owned facilities. 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 can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. We are unable to predict the ultimate outcome of these actions because of the inherent uncertainty of litigation and unfavorable rulings or developments could occur, and there can be no certainty that the Company may not ultimately incur changes in excess of recorded liabilities. However, we believe 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.
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Environmental Matters
The Company is currently participating in environmental assessments and remediation at approximately 11 locations, the majority of which are in the U.S., and environmental liabilities have been accrued reflecting our best estimate of future costs. Potential insurance reimbursements are not anticipated in the Company’s accruals for environmental liabilities. As of March 31, 2021 environmental liability accruals related to these locations were $7.7 million.
Prior to the separation from Dover in 2018, 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. We have submitted our long-term remediation plan and it was approved by ODEQ. We are now in discussion with ODEQ to finalize a consent order. Because we have not yet finalized the consent order 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, 2020. 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, 2021.
Matters Related to Deepwater Horizon Incident Response
On April 22, 2010, the deepwater drilling platform, the Deepwater Horizon, operated by a subsidiary of BP plc, sank in the Gulf of Mexico after an explosion and fire, resulting in a massive oil spill. Certain entities that are now subsidiaries of ChampionX as a result of the Merger (collectively the “COREXIT Defendants”) supplied COREXIT™ 9500, an oil dispersant product listed on the U.S. EPA National Contingency Plan Product Schedule, which was used in the response to the spill. In connection with the provision of COREXIT™, the COREXIT Defendants were named in several lawsuits. Cases arising out of the Deepwater Horizon accident were administratively transferred and consolidated for pre-trial purposes under In Re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, Case No. 10-md-02179 in the United States District Court in the Eastern District of Louisiana (E.D. La.) (“MDL 2179”). Claims related to the response to the oil spill were consolidated in a master complaint captioned the “B3 Master Complaint.” In 2011, Transocean Deepwater Drilling, Inc. and its affiliates (the “Transocean Entities”) named the COREXIT Defendants and other unaffiliated companies as first party defendants (In re the Complaint and Petition of Triton Asset Leasing GmbH, et al, MDL No. 2179, Civil Action 10-2771). In April and May 2011, the Transocean Entities, Cameron International Corporation, Halliburton Energy Services, Inc., M-I L.L.C., Weatherford U.S., L.P. and Weatherford International, Inc. (collectively, the “Cross Claimants”) filed cross claims in MDL 2179 against the COREXIT Defendants and other unaffiliated cross defendants. In April and June 2011, in support of its defense of the claims against it, the COREXIT Defendants filed counterclaims against the Cross Claimants. On May 18, 2012, the COREXIT Defendants filed a motion for summary judgment as to the claims in the B3 Master Complaint. On November 28, 2012, the Court granted the COREXIT Defendants’ motion and dismissed with prejudice the claims in the B3 Master Complaint asserted against the COREXIT Defendants. There currently remain three “B3” cases that had asserted claims against Nalco and that remain pending against other defendants. Because the Court’s decision was not a “final judgment” for purposes of appeal with respect to those claims, under Federal Rule of Appellate Procedure 4(a), plaintiffs will have 30 days after entry of final judgment in each case to appeal the Court’s summary judgment decision.
The Company believes the claims asserted against the COREXIT Defendants are without merit and intends to defend these lawsuits vigorously. The Company also believes that it has rights to contribution and/or indemnification (including legal expenses) from third parties. However, we cannot predict the outcome of these lawsuits, the involvement it might have in these matters in the future, or the potential for future litigation.
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NOTE 9—RESTRUCTURING AND OTHER RELATED CHARGES
During 2021, we approved a restructuring plan (the 2021 Plan) related to the consolidation of product lines and associated facility closures and workforce reductions. As a result, we recognized charges of $4.3 million during the three months ended March 31, 2021 consisting of employee severance and related benefits. During the three months ended March 31, 2020, we recorded restructuring and other charges of $2.8 million.
The following table presents the restructuring and other related charges by segment as classified in our condensed consolidated statements of income (loss).
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Segment restructuring charges: | |||||||||||
| Production Chemical Technologies | $ | $ | |||||||||
| Production & Automation Technologies | |||||||||||
| Drilling Technologies | |||||||||||
| Reservoir Chemical Technologies | |||||||||||
| Total | $ | $ | |||||||||
| Statements of Income (Loss) classification: | |||||||||||
| Cost of goods and services | $ | $ | |||||||||
| Selling, general and administrative expense | |||||||||||
| Total | $ | $ | |||||||||
Our liability balance for restructuring and other related charges at March 31, 2021, reflects employee severance and related benefits initiated during the period as well as liabilities assumed in the Merger. Additional programs may be initiated during 2021 with related restructuring charges.
The following table details our restructuring accrual activities during the three months ended March 31, 2021:
| (in thousands) | Restructuring Accrual Balance | ||||
| December 31, 2020 | $ | ||||
| Restructuring charges and asset write downs | |||||
| Payments | ( | ||||
| Other, including foreign currency translation | ( | ||||
| March 31, 2021 | $ | ||||
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NOTE 10—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) | 2021 | 2020 | |||||||||
| Stock-based compensation expense | $ | $ | |||||||||
| Tax benefit | ( | ( | |||||||||
| Stock-based compensation expense, net of tax | $ | $ | |||||||||
A summary of activity relating to our share-based awards for the three months ended March 31, 2021, was as follows:
| (in shares) | Stock-Settled Appreciation Rights | Performance Share Awards | Restricted Stock Units | Non-Qualified Stock Options | |||||||||||||||||||
| Outstanding at January 1, 2021 | |||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Forfeited | ( | ( | ( | ||||||||||||||||||||
| Exercised / vested | ( | ( | |||||||||||||||||||||
| Outstanding at March 31, 2021 | |||||||||||||||||||||||
NOTE 11 — 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 | Cash Flow Hedges | Accumulated Other Comprehensive Loss | |||||||||||||||||||
| December 31, 2019 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | ( | ( | |||||||||||||||||||||
| Reclassification adjustment for net losses included in net income, net of tax | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ( | ( | |||||||||||||||||||||
| March 31, 2020 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| (in thousands) | Foreign Currency Translation | Defined Pension and Other Post-Retirement Benefits | Cash Flow Hedges | Accumulated Other Comprehensive Loss | |||||||||||||||||||
| December 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss before reclassifications, net of tax | |||||||||||||||||||||||