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, 2023
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 197,973,797 shares of common stock, $0.01 par value, outstanding as of April 20, 2023.
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, 2022, including the following:
•Demand for, and profitability of our products and services, is affected by changes in the price of, and demand for, crude oil and natural gas in domestic and international markets;
•Cost inflation and availability of raw materials;
•The impact of inflation on wholesale product costs, labor rates, transportation costs, and on our customers’ financial position and ability to purchase our products;
•Global economic conditions, inflation, geopolitical issues, supply chain disruptions, and availability and cost of credit, and its impact on our operations and those of our customers and suppliers;
•Our ability to successfully compete with other companies in our industry;
•Our ability to develop and implement or introduce new technologies, products, and services, as well as our ability to protect and maintain intellectual property assets;
•Our ability to successfully execute potential acquisitions and integrate acquired businesses;
•Potential liabilities arising out of the installation or use of our products or from a chemical spill or release;
•Continuing consolidation within our customers’ industry;
•Credit risks related to our customer base or the loss of significant customers;
•A failure of our information technology infrastructure or any significant breach of security;
•Risks relating to our existing international operations and expansion into new geographical markets;
•Risks relating to improper conduct by any of our employees, agents or business partners;
•Failure to attract, retain and develop personnel;
•The impact of natural disasters and other unusual weather conditions on our business;
•Investor sentiment towards companies in the oil and gas industry due to climate change, fossil fuels and other environmental, social and governance matters;
•Changes in domestic and foreign governmental public policies and actions of governments that impact oil and gas operations or favor renewable energy projects, risks associated with entry into emerging markets, changes in statutory tax rates and unanticipated outcomes with respect to tax audits;
•Disruptions in the political, regulatory, economic and social conditions of the countries in which we conduct business;
•Fluctuations in currency markets worldwide and disruptions in capital and credit markets;
•The impact of our indebtedness on our financial position and operating flexibility;
•Disruptions in the capital and credit markets;
•The impact of war, terrorism and civil unrest;
•Changes in federal, state and local legislation and regulations relating to oil and gas development and the potential for related litigation or restrictions on our customers;
•Changes in environmental and health and safety laws and regulations which may increase our costs, limit the demand for our products and services or restrict our operations; and
•The impact of tariffs and other trade measures on our business.
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
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands, except per share data) | 2023 | 2022 | |||||||||
| Revenue: | |||||||||||
| Product revenue | $ | $ | |||||||||
| Service revenue | |||||||||||
| Lease and other revenue | |||||||||||
| Total revenue | |||||||||||
| Cost of goods and services | |||||||||||
| Gross profit | |||||||||||
| Costs and expenses: | |||||||||||
| Selling, general and administrative expense | |||||||||||
| Loss on disposal group | |||||||||||
| Interest expense, net | |||||||||||
| Other expense, net | |||||||||||
| Income before income taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | |||||||||||
| Net income (loss) attributable to noncontrolling interest | ( | ||||||||||
| Net income attributable to ChampionX | $ | $ | |||||||||
| Earnings per share attributable to ChampionX: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted-average shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
CHAMPIONX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||
| Cash flow hedges | ( | ( | |||||||||
| Defined pension and other post-retirement benefits adjustments, net | |||||||||||
| Other comprehensive loss | ( | ( | |||||||||
| Comprehensive income | |||||||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interest | ( | ||||||||||
| Comprehensive income attributable to ChampionX | $ | $ | |||||||||
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, 2023 | December 31, 2022 | |||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Inventories, net | |||||||||||
| Assets held for sale | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property, plant, and equipment, net of accumulated depreciation of $ | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation and employee benefits | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Accrued distributor fees | |||||||||||
| Liabilities held for sale | |||||||||||
| 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, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Taxes withheld on issuance of stock-based awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
Dividends declared to common stockholders ($ | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Repurchase and cancellation of common stock | ( | ( | ( | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| 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, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Taxes withheld on issuance of stock-based awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
Dividends declared to common stockholders ($ | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
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) | 2023 | 2022 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash flows from operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Loss on disposal group | |||||||||||
| Stock-based compensation | |||||||||||
| Provision for inventory obsolescence and write-downs | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| (Gain) loss on disposal of fixed assets | ( | ( | |||||||||
| Amortization of deferred loan costs and accretion of discount | |||||||||||
| 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 flows provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sale of fixed assets | |||||||||||
| Acquisitions, net of cash acquired | ( | ||||||||||
| Net cash used for investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayment of long-term debt | ( | ( | |||||||||
| Repurchases of common stock | ( | ||||||||||
| Dividends paid | ( | ||||||||||
| Payments related to taxes withheld on stock-based compensation | ( | ( | |||||||||
| Payment of finance lease obligations | ( | ( | |||||||||
| Distributions to noncontrolling interest | ( | ||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Proceeds expected to be remitted under the Accounts Receivable Facility | |||||||||||
| Net cash used for financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | ( | ( | |||||||||
| Net decrease in cash and cash equivalents and restricted cash | ( | ( | |||||||||
| Cash and cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash and cash equivalents and restricted cash 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 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Business
ChampionX Corporation is a global leader in chemistry solutions, artificial lift systems, and highly engineered equipment and technologies that help companies drill for and produce oil and gas safely, efficiently, and sustainably around the world. Our expertise, innovative products, and digital technologies provide enhanced oil and gas production, transportation, and real-time emissions monitoring throughout the lifecycle of a well.
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.
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, 2022.
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, 2023.
Significant Accounting Policies
Please refer to “Note 1–Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for the discussion of our significant accounting policies.
New Accounting Standards Issued
In September 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2022-04, “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations,” which requires that a buyer in a supplier finance program disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. The ASU does not affect the recognition, measurement or financial statement presentation of obligations covered by supplier finance programs. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023, with early adoption permitted.
The adoption of this ASU did not have a material effect on our consolidated financial statements. See Note 15—Supply Chain Finance for information on our supplier finance programs.
6
NOTE 2—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 and asset monitoring technologies. 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.
We refer to our Production Chemical Technologies segment and our Reservoir Chemical Technologies segment collectively as our Chemical Technologies business. Although Reservoir Chemical Technologies is not required to be disclosed separately as a reportable segment based on materiality, management believes the additional information may contribute to a better understanding of the business. Other 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.
Segment revenue and segment operating profit
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| 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 | |||||||||||
Corporate and other (1) | |||||||||||
| Interest expense, net | |||||||||||
| Income before income taxes | $ | $ | |||||||||
_______________________
7
NOTE 3—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, emissions detection and monitoring, and other field services. Lease revenue is derived from rental income of leased production equipment. As our costs are shared across the various revenue categories, cost of goods sold is not tracked separately and is not discretely identifiable.
In certain geographical areas, the Company utilizes joint ventures and independent third-party distributors and sales agents to sell and market products and services. Amounts payable to independent third-party distributors and sales agents may fluctuate based on sales and timing of distributor fee payments. For services rendered by such independent third-party distributors and sales agents, the Company records the consideration received on a net basis within product revenue in our condensed consolidated statements of income. Additionally, amounts owed to distributors and sales agents are reported within accrued distributor fees within our consolidated balance sheets.
Revenue disaggregated by geography was as follows:
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||
| (in thousands) | Production Chemical Technologies | Production & Automation Technologies | Drilling Technologies | Reservoir Chemical Technologies | Corporate and other (1) | Total | |||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||||||||||||||
| Middle East & Africa | ( | ||||||||||||||||||||||||||||||||||
| Canada | |||||||||||||||||||||||||||||||||||
| Europe | |||||||||||||||||||||||||||||||||||
| Asia-Pacific | |||||||||||||||||||||||||||||||||||
| Australia | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||
| (in thousands) | Production Chemical Technologies | Production & Automation Technologies | Drilling Technologies | Reservoir Chemical Technologies | Corporate and other (1) | Total | |||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||||||||||||||
| Middle East & Africa | |||||||||||||||||||||||||||||||||||
| Canada | |||||||||||||||||||||||||||||||||||
| Europe | |||||||||||||||||||||||||||||||||||
| Asia-Pacific | |||||||||||||||||||||||||||||||||||
| Australia | |||||||||||||||||||||||||||||||||||
| 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.
8
Contract Balances
| (in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| Contract assets | $ | $ | |||||||||
| Contract liabilities - current | $ | $ | |||||||||
NOTE 4—INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The components of our definite- and indefinite-lived intangible assets were as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||
| Definite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Unpatented technologies | |||||||||||||||||||||||||||||||||||
| Favorable supply agreements | |||||||||||||||||||||||||||||||||||
| Trademarks | |||||||||||||||||||||||||||||||||||
| Patents | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| Trademarks | — | — | |||||||||||||||||||||||||||||||||
| In-process research and development | — | — | |||||||||||||||||||||||||||||||||
| — | — | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Goodwill
The carrying amount of goodwill, including changes therein, by reportable segment is below:
| (in thousands) | Production Chemical Technologies | Production & Automation Technologies | Drilling Technologies | Reservoir Chemical Technologies | Total | ||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||||||||||||||
| March 31, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Goodwill is not subject to amortization but is tested for impairment on an annual basis or more frequently if impairment indicators arise.
9
NOTE 5—DEBT
Long-term debt consisted of the following:
| (in thousands) | March 31, 2023 | December 31, 2022 | |||||||||
| 2022 Revolving Credit Facility | $ | $ | |||||||||
| 2022 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) Includes the mandatory amortization payments due within twelve months related to the 2022 Term Loan Facility as of March 31, 2023.
On June 7, 2022, we entered into a restated credit agreement, which provides for (i) a $625.0 million seven-year senior secured term loan B facility (the “2022 Term Loan Facility”) and (ii) a five-year senior secured revolving credit facility in an aggregate principal amount of $700.0 million, of which $100.0 million is available for the issuance of letters of credit (the “2022 Revolving Credit Facility,” together with the 2022 Term Loan Facility, the “Senior Secured Credit Facility”). The full amount of the 2022 Term Loan Facility was funded, and $135.0 million of the 2022 Revolving Credit Facility was drawn, on June 7, 2022. As of March 31, 2023, we had no outstanding balance on the 2022 Revolving Credit Facility.
The 2022 Term Loan Facility matures June 7, 2029 and the 2022 Revolving Credit Facility matures June 7, 2027. The 2022 Term Loan Facility is subject to mandatory amortization payments of 1 % per annum of the initial commitment paid quarterly, which began on December 30, 2022. The Senior Secured Credit Facility contains customary representations and warranties, covenants, and events of default for loan facilities of this type. We were in compliance with all covenants as of March 31, 2023.
At the Company’s election, outstanding borrowings under the Senior Secured Credit Facility will accrue interest at a per annum rate of (i) an adjusted SOFR rate plus the applicable spread or (ii) a base rate plus the applicable spread. On June 29, 2022, the Company executed a five-year amortizing floating-to-fixed interest rate swap to hedge our exposure to increases in variable interest rates on the 2022 Term Loan Facility. This interest rate swap agreement is based on a $300.0 million notional amount for the first three years, reducing to $150.0 million for years four and five. See Note 12—Derivatives and Hedging Transactions for additional information on interest rate swaps.
NOTE 6—COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and contingencies related to, among other things, workers’ compensation, general liability (including product liability), automobile claims, health care claims, environmental matters, and lawsuits. We record liabilities where a contingent loss is 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. In accordance with applicable GAAP, the Company discloses a contingent liability 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 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.
As of March 31, 2023 and December 31, 2022, we had $71.4 million and $82.4 million, respectively, of outstanding letters of credit, surety bonds and guarantees, which expire at various dates through 2039. 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, surety bonds, and guarantees in the event of default in the performance of our obligations, the probability of which we believe is remote.
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Litigation and Environmental Matters
The Company is party to various proceedings and claims incidental to its business, including matters arising under provisions relating to the protection of the environment. 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. While many of these matters involve inherent uncertainty, we believe that the amount of the liability, if any, ultimately incurred with respect to these proceedings and claims will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Environmental Matters
The Company is currently participating in environmental assessments and remediation at approximately 11 locations, the majority of which are in the United States (“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, 2023 and December 31, 2022, environmental liability accruals related to these locations were $6.0 million and $5.9 million, respectively.
Prior to the commencement of our operations as an independent publicly traded company 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, 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, 2023.
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 acquisition of the Chemical Technologies business in 2020 (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™ 9500, 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 remains one “B3” case that asserted claims against the COREXIT Defendants and that remains 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), the plaintiff will have 30 days after entry of final judgment in the case to appeal the Court’s summary judgment decision.
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NOTE 7—RESTRUCTURING AND OTHER RELATED CHARGES
We approved various restructuring plans related to the consolidation of product lines and associated facility closures and workforce reductions during prior periods, which we expect to be completed during 2023. We recognized charges of $2.2 million during the three months ended March 31, 2023, consisting primarily of contract termination costs, inventory obsolescence, and employee severance and related benefits. During the three months ended March 31, 2022, we recorded restructuring and other charges of $8.5 million.
The following table presents the restructuring and other related charges by segment as classified in our condensed consolidated statements of income.
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Segment restructuring charges (income): | |||||||||||
| Production Chemical Technologies | $ | $ | |||||||||
| Production & Automation Technologies | ( | ||||||||||
| Drilling Technologies | |||||||||||
| Reservoir Chemical Technologies | |||||||||||
| Corporate and other | ( | ||||||||||
| Total | $ | $ | |||||||||
| Statements of Income classification: | |||||||||||
| Cost of goods and services | $ | $ | ( | ||||||||
| Selling, general and administrative expense | |||||||||||
| Total | $ | $ | |||||||||
Our liability balance for restructuring and other related charges at March 31, 2023 reflects contract termination costs, employee severance and related benefits initiated during the period. Additional programs may be initiated during the remainder of 2023 with related restructuring charges.
The following table details our restructuring accrual activities during the three months ended March 31, 2023:
| (in thousands) | Restructuring Accrual Balance | ||||
| December 31, 2022 | $ | ||||
| Restructuring charges | |||||
| Asset sales and write-offs | ( | ||||
| Payments | ( | ||||
| Other, including foreign currency translation | ( | ||||
| March 31, 2023 | $ | ||||
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NOTE 8—STOCKHOLDERS' EQUITY
Dividends
On February 16, 2023, the Company announced that our Board of Directors (“Board”) approved an increase of our regular quarterly cash dividend to $0.085 per share of the Company’s common stock. Our first quarter cash dividend of $0.085 per share was declared on February 15, 2023 and is payable on April 28, 2023 to stockholders of record on April 7, 2023. As a result, we recorded a dividend payable of $17.5 million on our condensed consolidated balance sheet as of March 31, 2023. Subsequent dividend declarations, if any, including the amounts and timing of future dividends, are subject to approval by the Board and will depend on future business conditions, financial conditions, results of operations and other factors.
Repurchases
NOTE 9—EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and diluted earnings per share calculation was as follows:
| Three Months Ended March 31, | |||||||||||
| (in thousands, except per share data) | 2023 | 2022 | |||||||||
| Net income attributable to ChampionX | $ | $ | |||||||||
| Weighted-average number of shares outstanding | |||||||||||
| Dilutive effect of stock-based compensation | |||||||||||
| Total shares and dilutive securities | |||||||||||
| Earnings per share attributable to ChampionX: | |||||||||||
| Basic | $ | $ | |||||||||