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

FORM 10-Q

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

For the quarterly period ended September 30, 2019
or
o 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
Apergy 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)
Not Applicable
(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
APY
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 þ  No  o

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 þ  No  o

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 o
 
Accelerated filer o
Non-accelerated filer þ
 
Smaller reporting company o
 
 
Emerging growth company o

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 o

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

The registrant had 77,459,846 shares of common stock, $0.01 par value, outstanding as of November 15, 2019.



APERGY 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 include those set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, including the following:

Demand for our products and services, which is affected by changes in the price of, and demand for, crude oil and natural gas in domestic and international markets;
Our ability to successfully compete with other companies in our industry;
Our ability to develop and implement new technologies and services, as well as our ability to protect and maintain critical intellectual property assets;
Cost inflation and availability of raw materials;
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;
Our ability to successfully execute potential acquisitions;
Potential liabilities arising out of the installation or use of our products;
Continuing consolidation within our customers’ industry;
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;
The impact of tariffs and other trade measures on our business;
Changes in domestic and foreign governmental public policies, risks associated with entry into emerging markets, changes in statutory tax rates and unanticipated outcomes with respect to tax audits;
Failure to attract, retain and develop personnel for key management;
Credit risks related to our customer base or the loss of significant customers;
Our ability to protect or obtain intellectual property rights;
Disruptions in the political, regulatory, economic and social conditions of the countries in which we conduct business;
Deterioration in future expected profitability or cash flows and its effect on our goodwill;
Risks relating to improper conduct by any of our employees, agents or business partners;
Fluctuations in currency markets worldwide;
The impact of natural disasters and other unusual weather conditions on our business;
The impact of our indebtedness on our financial position and operating flexibility; and
Our ability to remediate the material weaknesses in internal control over financial reporting described in Item 4 of this Quarterly Report on Form 10-Q.

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

APERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Product revenue
$
244,651

 
$
283,102

 
$
787,698

 
$
807,949

Other revenue
33,730

 
33,366

 
98,428

 
97,495

Total revenue
278,381

 
316,468

 
886,126

 
905,444

Cost of goods and services
186,862

 
202,734

 
579,289

 
594,416

Gross profit
91,519

 
113,734

 
306,837

 
311,028

Selling, general and administrative expense
68,813

 
69,206

 
200,790

 
194,374

Interest expense, net
9,537

 
10,584

 
30,068

 
16,813

Other (income) expense, net
(309
)
 
725

 
3,469

 
3,917

Income before income taxes
13,478

 
33,219

 
72,510

 
95,924

Provision for income taxes
3,059

 
7,723

 
15,672

 
24,159

Net income
10,419

 
25,496

 
56,838

 
71,765

Net income attributable to noncontrolling interest
194

 
232

 
547

 
295

Net income attributable to Apergy
$
10,225

 
$
25,264

 
$
56,291

 
$
71,470

 
 
 
 
 
 
 
 
Earnings per share attributable to Apergy: *
 
 
 
 
 
 
 
Basic
$
0.13

 
$
0.33

 
$
0.73

 
$
0.92

Diluted
$
0.13

 
$
0.33

 
$
0.73

 
$
0.92

Weighted-average shares outstanding: *
 
 
 
 
 
 
 
Basic
77,460

 
77,340

 
77,416

 
77,340

Diluted
77,573

 
77,569

 
77,615

 
77,742

_______________________
* See Note 4—Earnings Per Share.

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

1


APERGY CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Net income
$
10,419

 
$
25,496

 
$
56,838

 
$
71,765

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments (1)
(2,900
)
 
(515
)
 
(836
)
 
(9,080
)
Pension and other post-retirement benefit plans:
 
 
 
 
 
 
 
Net actuarial gain (loss) arising during period

 

 
(323
)
 
170

Reclassification adjustment for net actuarial loss included in net income
68

 
86

 
203

 
181

Reclassification adjustment for settlement losses included in net income

 
353

 
355

 
353

Total pension and other post-retirement benefit plans (2)
68

 
439

 
235

 
704

Other comprehensive loss
(2,832
)
 
(76
)
 
(601
)
 
(8,376
)
Comprehensive income
7,587

 
25,420

 
56,237

 
63,389

Comprehensive income attributable to noncontrolling interest
194

 
232

 
547

 
295

Comprehensive income attributable to Apergy
$
7,393

 
$
25,188

 
$
55,690

 
$
63,094

_______________________
(1) Net of income tax (expense) benefit of nil for the three and nine months ended September 30, 2019 and 2018.
(2) Net of income tax (expense) benefit of $23 and $161 for the three months ended September 30, 2019 and 2018, respectively, and $202 and $123 for the nine months ended September 30, 2019 and 2018, respectively.

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

2


APERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Cash and cash equivalents
$
40,627

 
$
41,832

Receivables, net of allowances of $3,987 in 2019 and $5,178 in 2018
236,381

 
249,948

Inventories, net
219,614

 
218,319

Prepaid expenses and other current assets
34,516

 
20,211

Total current assets
531,138

 
530,310

Property, plant and equipment, net of accumulated depreciation of $420,113 in 2019 and $392,344 in 2018
249,385

 
244,328

Goodwill
910,693

 
904,985

Intangible assets, net of accumulated amortization of $407,724 in 2019 and $380,960 in 2018
251,411

 
283,688

Other non-current assets
29,626

 
8,445

Total assets
1,972,253

 
1,971,756

Liabilities and Equity
 
 
 
Accounts payable
114,185

 
131,058

Accrued compensation and employee benefits
40,416

 
40,546

Accrued expenses and other current liabilities
51,852

 
30,391

Total current liabilities
206,453

 
201,995

Long-term debt
588,580

 
666,108

Deferred income taxes
97,588

 
101,724

Other long-term liabilities
37,826

 
20,402

Total liabilities
930,447

 
990,229

Stockholders’ equity:
 

 
 

Common stock (2.5 billion shares authorized, $0.01 par value)
77.5 million shares and 77.4 million shares issued and outstanding in 2019 and 2018, respectively
775

 
774

Capital in excess of par value of common stock
971,075

 
965,372

Retained earnings
110,458

 
55,829

Accumulated other comprehensive loss
(43,507
)
 
(42,906
)
Total stockholders’ equity
1,038,801

 
979,069

Noncontrolling interest
3,005

 
2,458

Total equity
1,041,806

 
981,527

Total liabilities and equity
$
1,972,253

 
$
1,971,756


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

3


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


 
Common Stock
 
 
 
 
 
 
 
 
 
 
(in thousands)
Par
Value
 
Capital in excess of par value
 
Retained Earnings
 
Net Parent
Investment
in Apergy
 
Accum.
Other
Comp.
Loss
 
Non-controlling Interest
 
Total
December 31, 2017
$

 
$

 
$

 
$
1,662,052

 
$
(26,416
)
 
$
4,749

 
$
1,640,385

Cumulative effect of accounting changes

 

 

 
1,315

 
(1,315
)
 

 

Net income

 

 

 
24,052

 

 
142

 
24,194

Other comprehensive loss

 

 

 

 
(1,642
)
 

 
(1,642
)
Net transfer to Dover

 

 

 
(1,635
)
 

 

 
(1,635
)
March 31, 2018

 

 

 
1,685,784

 
(29,373
)
 
4,891

 
1,661,302

Net income (loss)

 

 
7,994

 
14,160

 

 
(79
)
 
22,075

Other comprehensive loss

 

 

 

 
(6,658
)
 

 
(6,658
)
Net transfer to/from Dover

 

 

 
(737,834
)
 
(1,450
)
 

 
(739,284
)
Reclassification of net parent investment in Apergy

 
962,110

 

 
(962,110
)
 

 

 

Issuance of common stock
773

 
(773
)
 

 

 

 

 

Stock-based compensation

 
851

 

 

 

 

 
851

Distributions to noncontrolling interest

 

 

 

 

 
(2,720
)
 
(2,720
)
Other

 

 

 

 

 
(39
)
 
(39
)
June 30, 2018
773

 
962,188

 
7,994

 

 
(37,481
)
 
2,053

 
935,527

Net income

 

 
25,264

 

 

 
232

 
25,496

Other comprehensive loss

 

 

 

 
(76
)
 

 
(76
)
Net transfer to/from Dover

 

 

 
3,088

 
(970
)
 

 
2,118

Reclassification of net parent investment in Apergy

 
3,088

 

 
(3,088
)
 

 

 

Stock-based compensation

 
1,768

 

 

 

 

 
1,768

Other

 

 

 

 

 
(71
)
 
(71
)
September 30, 2018
$
773

 
$
967,044

 
$
33,258

 
$

 
$
(38,527
)
 
$
2,214

 
$
964,762



4


 
Common stock
 
 
 
 
 
 
 
 
 
 
(in thousands)
Par
Value
 
Capital in excess of par value
 
Retained Earnings
 
Net Parent
Investment
in Apergy
 
Accum.
Other
Comp.
Loss
 
Non-controlling Interest
 
Total
December 31, 2018
$
774

 
$
965,372

 
$
55,829

 
$

 
$
(42,906
)
 
$
2,458

 
$
981,527

Cumulative effect of accounting changes (Note 2)

 

 
(1,662
)
 

 

 

 
(1,662
)
Net income

 

 
22,287

 

 

 
282

 
22,569

Other comprehensive income

 

 

 

 
1,189

 

 
1,189

Stock-based compensation

 
2,285

 

 

 



 
2,285

Taxes withheld on issuance of stock-based awards

 
(719
)
 

 

 

 

 
(719
)
Other

 

 

 

 

 
14

 
14

March 31, 2019
774

 
966,938

 
76,454

 

 
(41,717
)
 
2,754

 
1,005,203

Net income

 

 
23,779

 

 

 
71

 
23,850

Other comprehensive income

 

 

 

 
1,042

 

 
1,042

Stock-based compensation
1

 
2,735

 

 

 

 

 
2,736

Taxes withheld on issuance of stock-based awards

 
(1,080
)
 

 

 

 

 
(1,080
)
Other

 

 

 

 

 
(14
)
 
(14
)
June 30, 2019
775

 
968,593

 
100,233

 

 
(40,675
)
 
2,811

 
1,031,737

Net income

 

 
10,225

 

 

 
194

 
10,419

Other comprehensive loss

 

 

 

 
(2,832
)
 

 
(2,832
)
Stock-based compensation

 
2,524

 

 

 

 

 
2,524

Taxes withheld on issuance of stock-based awards

 
(42
)
 

 

 

 

 
(42
)
September 30, 2019
$
775

 
$
971,075

 
$
110,458

 
$

 
$
(43,507
)
 
$
3,005

 
$
1,041,806



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

5


APERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
Cash provided (required) by operating activities:
 
 
 
Net income
$
56,838

 
$
71,765

Adjustments to reconcile net income to net cash provided (required) by operating activities:
 
 
 
Depreciation
51,116

 
52,814

Amortization
38,504

 
38,863

Stock-based compensation
7,545

 
3,129

Impairment
1,849

 

Loss on sale of business
2,475

 

Deferred income taxes
(3,717
)
 
(4,674
)
Employee benefit plan expense
1,506

 
3,012

Other
517

 
6,286

Changes in operating assets and liabilities (net of effects of foreign exchange):
 
 
 
Receivables
12,218

 
(79,533
)
Inventories
11,455

 
(21,149
)
Prepaid expenses and other current assets
(16,742
)
 
(4,640
)
Accounts payable
(15,532
)
 
27,776

Accrued compensation and employee benefits
(3,651
)
 
10,628

Accrued expenses and other liabilities
14,288

 
23,709

Leased assets
(34,645
)
 
(33,331
)
Other
(634
)
 
(1,624
)
Net cash provided by operating activities
123,390

 
93,031

 
 
 
 
Cash provided (required) by investing activities:
 

 
 

Capital expenditures
(31,589
)
 
(42,883
)
Proceeds from sale of fixed assets
2,954

 
970

Payment on sale of business
(2,194
)
 

Payment on acquisition
(12,500
)
 

Purchase price adjustments on acquisition

 
53

Net cash required by investing activities
(43,329
)
 
(41,860
)
 
 
 
 
Cash provided (required) by financing activities:
 

 
 

Proceeds from long-term debt, net of discounts
36,500

 
713,963

Payment of debt issue costs

 
(16,006
)
Repayment of long-term debt
(111,500
)
 
(20,000
)
Distributions to Dover Corporation, net

 
(728,857
)
Distribution to noncontrolling interest

 
(2,720
)
Payment of finance lease obligations
(4,108
)
 
(3,174
)
Payments related to taxes withheld on stock-based compensation
(1,841
)
 

Net cash required by financing activities
(80,949
)
 
(56,794
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(317
)
 
(75
)
 
 
 
 
Net decrease in cash and cash equivalents
(1,205
)
 
(5,698
)
Cash and cash equivalents at beginning of period
41,832

 
23,712

Cash and cash equivalents at end of period
$
40,627

 
$
18,014

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

6


APERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1—BASIS OF PRESENTATION AND SEPARATION

Apergy Corporation (“Apergy”) is a leading provider of highly engineered equipment and technologies that help companies drill for and produce oil and gas safely and efficiently around the world. Our products provide efficient functioning throughout the lifecycle of a well—from drilling to completion to production. We report our results of operations in the following reporting segments: Production & Automation Technologies and Drilling Technologies. Our Production & Automation Technologies segment offerings consist of artificial lift equipment and solutions, including rod pumping systems, electric submersible pump systems, progressive cavity pumps and drive systems and plunger lifts, as well as a full automation and digital offerings consisting of equipment, software and Industrial Internet of Things solutions for downhole monitoring, wellsite productivity enhancement and asset integrity management. Our Drilling Technologies segment offerings provide market leading polycrystalline diamond cutters and bearings that result in cost effective and efficient drilling.

Separation and Distribution

On April 18, 2018, Dover Corporation’s (“Dover”) Board of Directors approved the separation of entities conducting its oil and gas energy business within Dover’s Energy segment (the “Separation”) into an independent, publicly traded company named Apergy Corporation. In accordance with the separation and distribution agreement, the two companies were separated by Dover distributing to Dover’s stockholders all 77,339,828 shares of common stock of Apergy on May 9, 2018. Each Dover shareholder received one share of Apergy stock for every two shares of Dover stock held at the close of business on the record date of April 30, 2018. Following the Separation, Dover retained no ownership interest in Apergy, and each company, as of May 9, 2018, has separate public ownership, boards of directors and management.

Basis of Presentation

Prior to the Separation, our results of operations, financial position and cash flows were derived from the consolidated financial statements and accounting records of Dover and reflect the combined historical results of operations, financial position and cash flows of certain Dover entities conducting its upstream oil and gas energy business within Dover’s Energy segment, including an allocated portion of Dover’s corporate costs. These financial statements have been presented as if such businesses had been combined for all periods prior to the Separation. All intercompany transactions and accounts within Dover were eliminated. The assets and liabilities were reflected on a historical cost basis since all of the assets and liabilities presented were wholly owned by Dover and were transferred within the Dover consolidated group. The statements of income also include expense allocations for certain corporate functions historically performed by Dover and not allocated to its operating segments, including corporate executive management, human resources, information technology, facilities, tax, shared services, finance and legal, including the costs of salaries, benefits and other related costs. These expense allocations were based on direct usage or benefit where identifiable, with the remainder allocated on the basis of revenue, headcount or other measures. These pre-Separation combined financial statements may not include all of the actual expenses that would have been incurred had we been a stand-alone public company during the periods presented prior to the Separation and consequently may not reflect our results of operations, financial position and cash flows had we been a stand-alone public company during the periods presented prior to the Separation. Actual costs that would have been incurred if we had been a stand-alone public company would depend on a variety of factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.

Prior to the Separation, transactions between Apergy and Dover, with the exception of transactions discussed in Note 3—Related Party Transactions, are reflected in the condensed consolidated statements of cash flows as a financing activity in “Distributions to Dover Corporation, net.” Intercompany notes payable to Dover prior to the Separation were not settled in cash. Accordingly, no interest expense related to intercompany debt was presented in the condensed consolidated statements of income for the period presented prior to the Separation. See Note 3—Related Party Transactions for additional information.

7


All financial information presented after the Separation represents the consolidated results of operations, financial position and cash flows of Apergy. Accordingly, our results of operations and cash flows consist of the consolidated results of Apergy during the periods ended September 30, 2019 and for the period from May 9, 2018 to September 30, 2018, and the combined results of operations and cash flows for the periods prior to May 9, 2018. Our balance sheets as of September 30, 2019 and December 31, 2018, reflect the consolidated balances of Apergy. Our management believes the assumptions underlying these condensed consolidated financial statements, including the assumptions regarding the allocation of corporate expenses from Dover for periods prior to the Separation, are reasonable.

The legal transfer of the oil and gas energy businesses from Dover to Apergy occurred on May 9, 2018; however, for ease of reference, and unless otherwise stated or the context otherwise requires, all references to “Apergy Corporation,” “Apergy,” “we,” “us” or “our” refer (i) prior to the Separation, to the Apergy businesses, consisting of entities, assets and liabilities conducting the oil and gas business within Dover’s Energy segment and (ii) after the Separation, to Apergy Corporation and its consolidated subsidiaries.

Interim Financial Information

The accompanying unaudited condensed consolidated financial statements of Apergy have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted. Therefore, these financial statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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, 2019.

Change in Accounting Estimate

Effective January 1, 2019, we changed our estimate of the useful lives for certain equipment used within our leased asset program in our Production & Automation Technologies segment to better reflect the estimated periods in which the assets will remain in service. The estimated useful lives of the equipment, previously estimated at three years, was increased to five years. The effect of this change in estimate for the three months ended September 30, 2019, was a reduction in depreciation expense of $2.5 million, an increase in net income of $1.9 million, and an increase in basic and diluted earnings per share of $0.02 per share. The effect of this change in estimate for the nine months ended September 30, 2019, was a reduction in depreciation expense of $6.5 million, an increase in net income of $4.9 million, and an increase in basic and diluted earnings per share of $0.06 per share.

Revisions, Reclassifications and Other Adjustments

We revised our previously issued financial statements for the nine months ended September 30, 2018, for the presentation of capital leases in the condensed consolidated statement of cash flow. The effect of the revisions was an increase of $0.2 million to cash provided by operating activities, a $3.0 million decrease to cash required by investing activities and a $3.2 million increase to cash required by financing activities.

Certain prior-year amounts have been reclassified to conform to the current presentation.


8


We recorded out-of-period adjustments primarily related to inventory and leased assets write-offs during the three months ended September 30, 2019 which increased revenue by $0.6 million, increased cost of goods and services by $2.6 million and decreased net income by $1.5 million. Management determined the errors were not material to the previously issued condensed consolidated interim financial statements as of and for the three months ended March 31, 2019 and the three and six months ended June 30, 2019. In addition, the correction of the errors in the three months ended September 30, 2019 was not material.

NOTE 2—NEW ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

Effective January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” This update requires a lessee to recognize in the statement of financial position a right-of-use asset representing its right to use the underlying asset for the lease term and a liability for future lease payments. Similar to past guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. Additionally, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors is now based on an assessment of whether a lease contract is economically similar to the purchase of a non-financial asset from the perspective of control. The update also requires quantitative and qualitative disclosures to enable users to understand the amount, timing, and judgments related to leases and the related cash flows. We applied the provisions of this ASU to our lease contracts as of January 1, 2019, using the modified retrospective method of adoption. Prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting policies. As of January 1, 2019, we recorded operating lease right-of-use assets of $27.0 million, operating lease liabilities of $28.7 million, and a reduction to retained earnings of $1.7 million as a result of the adoption of this guidance.

We have applied the following practical expedients and elections under the new standard:

We elected to utilize the package of transition practical expedients, which among other things, allowed us to carry forward our historical lease classifications for existing leases.
For contracts in which we are a lessee, we have elected to account for each lease component and its associated non-lease components as a single lease component.
We elected to utilize the short term lease exemption for lease contracts with a term of less than 12 months. These contracts are excluded from the measurement of our right-of-use assets and lease liabilities and are recognized in earnings on a straight-line basis over their lease term.
We elected to utilize the practical expedient to exclude sales tax from the measurement of lease revenue.

Lessee accounting—Lease liabilities are measured at the lease commencement date and are based on the present value of remaining payments contractually required under the contract. Payments that are variable in nature are excluded from the measurement of our lease liabilities and are recorded as an expense as incurred. Options to renew or extend a lease are included in the measurement of our lease liabilities only when it is reasonably certain that we will exercise these rights. In estimating the present value of our lease liabilities, payments are discounted at our incremental borrowing rate (“IBR”), which has been applied utilizing a portfolio approach. We utilized information publicly available from companies within our industry with similar credit profiles to construct a company-specific yield curve in order to estimate the rate of interest we would pay to borrow at various lease terms. At lease commencement, we recognize a lease right-of-use asset equal to our lease liability, adjusted for lease payments paid to the lessor prior to the lease commencement date, and any initial direct costs incurred. Operating lease expense is recorded on a straight-line basis over the lease term. For finance leases, we amortize our right-of-use assets on a straight-line basis over the shorter of the asset’s useful life or the lease term. Additionally, interest expense is recognized each period related to the accretion of our lease liabilities over their respective lease terms.

Lessor accounting—Our lease arrangements generally allow customers to rent equipment on a daily basis with no stated end date. Customers may return the equipment at any point subsequent to the lease commencement date without penalty. We account 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. Based on our assessment of the lease classification criteria, our lease arrangements have been classified as operating leases. Our lease arrangements generally include lease and non-lease components for which revenue is recognized based on each component’s standalone price. Lease revenue is recognized on a straight-line basis over the term of the lease and is included in “Other revenue” in the condensed consolidated

9


statement of income. Non-lease revenue related to our lease arrangements is recognized in accordance with our revenue recognition accounting policy. Assets in our lease program are reported in “Property, plant, and equipment, net” on our condensed consolidated balance sheets and are depreciated over their estimated useful lives to an estimated salvage value. Leased equipment damaged in operation is generally charged to the customer. Charges for damaged leased equipment is recorded as “Product revenue” and the remaining net book value of the leased asset is expensed as “Costs of goods and services” in the condensed consolidated statements of income.

See Note 13—Leases for additional information related to our lease accounting. See Note 20—Cash Flow Information for additional information regarding the presentation of our leases within our condensed consolidated statements of cash flows.

Effective July 1, 2019, we adopted ASU 2018-15, “Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update have been applied prospectively to all implementation costs incurred after the date of adoption. The impact of adopting the new standard was not material to our financial statements for the three months ended September 30, 2019.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The update amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which may result in earlier recognition of losses related to financial instruments. The guidance will be effective for us on January 1, 2020. Early adoption is permitted for annual periods beginning after December 15, 2018. We do not expect the adoption of this ASU to have a material impact on our financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” The amendment modifies certain disclosure requirements for defined benefit plans. Among other requirements and modifications, the amendment requires an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The guidance will be effective for us with our annual filing for the year ended December 31, 2020. We do not expect the adoption of this ASU to have a material impact on our financial statements.


NOTE 3—RELATED PARTY TRANSACTIONS

Prior to the Separation, Dover provided certain services to us, including corporate executive management, human resources, information technology, facilities, tax, shared services, finance and legal services. Dover continued to provide us certain of these services on a temporary basis following the Separation under a transition services agreement. Under the transition services agreement, Apergy paid a fee to Dover for services rendered under the transition services agreement, which fee was intended to allow Dover to recover all of its direct and indirect costs generally without profit. The transition services agreement was terminated on January 31, 2019, consistent with the initial term provided within the agreement.

Financial information presented prior to the Separation does not include all the expenses that would have been incurred had Apergy been a stand-alone public company. The corporate expenses allocated by Dover to these financial statements were $7.4 million for the nine months ended September 30, 2018, which were recorded in “Selling, general and administrative expense” in the condensed consolidated statement of income.

For periods prior to the Separation, transactions between Apergy and Dover are reflected in “Distributions to Dover Corporation, net” in the condensed consolidated statement of cash flows for the nine months ended September 30, 2018, as a financing activity. Revenue with Dover and its affiliates were not material for the periods presented. We recognized royalty expense of $2.3 million for the nine months ended September 30, 2018, related to the use of Dover’s intellectual property and patents which was included in “Other (income) expense, net” in the condensed consolidated statement of income. On April 1, 2018, patents and other intangibles owned by Dover related to our operations transferred to Apergy, and consequently, Apergy no longer incurred royalty charges related to these assets from Dover.

10


NOTE 4—EARNINGS PER SHARE

On May 9, 2018, 77,339,828 shares of our common stock were distributed to Dover stockholders in conjunction with the Separation. See Note 1—Basis of Presentation and Separation for additional information. For comparative purposes, and to provide a more meaningful calculation of weighted-average shares outstanding, we have assumed the shares issued in conjunction with the Separation to be outstanding as of the beginning of each period prior to the Separation. In addition, we have assumed the potential dilutive securities outstanding as of May 8, 2018, were outstanding and fully dilutive in each of the periods with positive income prior to the Separation.

A reconciliation of the number of shares used for the basic and diluted earnings per share calculation was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Net income attributable to Apergy
$
10,225

 
$
25,264

 
$
56,291

 
$
71,470

 
 
 
 
 
 
 
 
Weighted-average number of shares outstanding
77,460

 
77,340

 
77,416

 
77,340

Dilutive effect of stock-based compensation
113

 
229

 
199

 
402

Total shares and dilutive securities
77,573

 
77,569

 
77,615

 
77,742

 
 
 
 
 
 
 
 
Basic earnings per share attributable to Apergy
$
0.13

 
$
0.33

 
$
0.73

 
$
0.92

Diluted earnings per share attributable to Apergy
$
0.13

 
$
0.33

 
$
0.73

 
$
0.92



NOTE 5—ACQUISITIONS

On July 31, 2019, Apergy entered into an asset purchase agreement to acquire certain assets, which meet the definition of a business, used in the manufacturing of downhole monitoring systems. The acquisition is included among the consolidated subsidiaries reported in our Production & Automation Technologies segment and provides digital technology strategic to our artificial lift product offering.

The acquisition-date fair value of the consideration transferred consisted of the following:
(in thousands)
 
Cash
$
12,500

Contingent consideration (1)
1,500

Total consideration transferred
$
14,000

_______________________
(1) Contingent consideration is payable to the seller based on the acquired business exceeding a revenue target over an eighteen month period ending January 2021. Achievement of the revenue target is considered probable.

The following table summarizes the final fair values of the assets acquired at the acquisition date:
(in thousands)
 
Inventory
$
1,840

Customer relationships
2,650

Technology - Technical know-how
4,000

Goodwill
5,510

Total assets acquired
$
14,000



11


The amortization period is 15 years for acquired customer relationships and technology. The goodwill recognized as a result of the acquisition is tax deductible and primarily reflects the expected benefits to be derived from operational synergies. Results of operations of the acquired business have been included in our condensed consolidated financial statements as of the acquisition date. Pro forma results of operations have not been presented as the effects of the acquisition are not material to our condensed consolidated financial statements.


NOTE 6—DISPOSITIONS

During March 2019, we classified our pressure vessel manufacturing business in our Production & Automated Technologies segment as held for sale. We recognized an impairment loss of $1.7 million during the nine months ended September 30, 2019, which was recorded in “Selling, general and administrative expense” in the condensed consolidated statement of income, to adjust the carrying amount of the disposal group to fair value. See Note 17—Fair Value Measurements for additional information. In June 2019, we completed the sale of our pressure vessel manufacturing business and made a cash payment of $2.2 million, resulting in a loss on disposition of $2.5 million, which was recorded in “Other (income) expense, net” in the condensed consolidated statement of income for the nine months ended September 30, 2019.


NOTE 7—INVENTORIES

Inventories consisted of the following:
(in thousands)
September 30, 2019
 
December 31, 2018
Raw materials
$
49,752

 
$
52,057

Work in progress
14,603

 
11,416

Finished goods
179,548

 
180,624

 
243,903

 
244,097

LIFO and valuation adjustments
(24,289
)
 
(25,778
)
Inventories, net
$
219,614

 
$
218,319


12

Table of Contents



NOTE 8 — GOODWILL

The carrying amount of goodwill, including changes therein, by reporting segment was as follows:
(in thousands)
Production & Automation Technologies
 
Drilling Technologies
 
Total
December 31, 2018
$
803,849

 
$
101,136

 
$
904,985

Acquisition
5,510

 

 
5,510

Foreign currency translation
198

 

 
198

September 30, 2019
$
809,557

 
$
101,136

 
$
910,693



NOTE 9—DEBT

Long-term debt consisted of the following:
(in thousands)
September 30, 2019
 
December 31, 2018
Revolving credit facility
$

 
$

Term loan facility
295,000

 
370,000

6.375% Senior Notes due 2026
300,000

 
300,000

Finance lease obligations
3,706

 
7,485

Total
598,706

 
677,485

Net unamortized discounts and issuance costs
(10,126
)
 
(11,377
)
Total long-term debt
$
588,580

 
$
666,108


13

Table of Contents



NOTE 10—COMMITMENTS AND CONTINGENCIES

Guarantees and Indemnifications

We have provided indemnities in connection with sales of certain businesses and assets, including representations and warranties, covenants and related indemnities for environmental health and safety, tax and employment matters. We do not have any material liabilities recorded for these indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities.

In connection with the Separation, we entered into agreements with Dover that govern the treatment between Dover and us for certain indemnification matters and litigation responsibility. Generally, the separation and distribution agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and to place financial responsibility for the obligations and liabilities of Dover’s business with Dover. The separation and distribution agreement also establishes procedures for handling claims subject to indemnification and related matters. In addition, pursuant to the tax matters agreement, we have agreed to indemnify Dover and its affiliates against any and all tax-related liabilities incurred by them relating to the Separation and/or certain related transactions to the extent caused by an acquisition of Apergy stock or assets or by any other action or failure to act undertaken by Apergy or its affiliates.

During the three months ended September 30, 2019, and pursuant to the provisions of the tax matters agreement with Dover, we recognized $3.4 million of indemnification expense within “Selling, general and administrative expense” in the condensed consolidated statements of income with respect to certain liabilities related to tax audits for the 2012-2016 tax years. The tax audits and related assessments have not been completed.

As of September 30, 2019 and December 31, 2018, we had $13.0 million and $3.6 million, respectively, of outstanding letters of credit, surety bonds and guarantees which expire at various dates through 2025. These financial instruments are primarily maintained as security for insurance, warranty and other performance obligations. Generally, we would only be liable for the amount of these letters of credit and surety bonds in the event of default in the performance of our obligations, the probability of which we believe is remote.

Litigation and Environmental Matters

We are involved in various pending or potential legal actions in the ordinary course of our business. These proceedings primarily involve claims by private parties alleging injury arising out of use of our products, patent infringement, employment matters, and commercial disputes. We review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred and accrued to-date, and the availability and extent of insurance coverage. We accrue a liability for legal matters that are probable and estimable, and as of September 30, 2019 and December 31, 2018, these liabilities were not material. Management is unable to predict the ultimate outcome of these actions because of the inherent uncertainty of litigation. However, management believes the most probable, ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Prior to the Separation, groundwater contamination was discovered at the Norris Sucker Rods plant site located in Tulsa, Oklahoma ("Norris"). Initial remedial efforts were undertaken at the time of discovery of the contamination and Norris has since coordinated monitoring and remediation with the Oklahoma Department of Environmental Quality ("ODEQ"). As part of the ongoing long-term remediation process, Norris contracted an engineering and consulting firm to develop a range of possible additional remedial alternatives in order to accelerate the remediation process and associated cost estimates for the work. In October 2019, we received the firm’s preliminary remedial alternatives for consideration. Now that we have such recommendations, we expect to begin discussions with ODEQ regarding our proposed long-term remediation plan. The plan is subject to ODEQ’s review, input, and approval. Because we have not yet finalized a plan for further remediation at the site and discussions with ODEQ remain ongoing, we cannot fully anticipate the timing, outcome or possible impact of such further remedial activities, financial or otherwise. At September 30, 2019, as a result of the recommendations in the report, we have accrued liabilities for these remediation efforts of approximately $2.0 million with such charges recorded within “Selling, general and administrative expense” in the condensed consolidated statements of income. 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.

14


NOTE 11—STOCKHOLDERS' EQUITY

Capital stock—The following is a summary of our capital stock activity:

(in thousands)
Common Stock
March 31, 2018

Issuance of common stock
77,340

June 30, 2018
77,340

Shares issued—share-based compensation
1

September 30, 2018
77,341


(in thousands)
Common Stock
December 31, 2018
77,353

Shares issued—share-based compensation
39

March 31, 2019
77,392

Shares issued—share-based compensation
67

June 30, 2019
77,459

Shares issued—share-based compensation
1

September 30, 2019
77,460


Accumulated other comprehensive loss—Accumulated other comprehensive loss consisted of the following:

(in thousands)
Foreign Currency Translation
 
Defined Pension and Other Post-Retirement Benefits
 
Accumulated Other Comprehensive Loss
December 31, 2017
$
(21,936
)
 
$
(4,480
)
 
$
(26,416
)
Reclassification adjustment for cumulative effect of change in accounting principle

 
(1,315
)
 
(1,315
)
Other comprehensive loss before reclassifications, net of tax
(1,691
)
 

 
(1,691
)
Reclassification adjustment for net losses included in net income, net of tax

 
49

 
49

Other comprehensive income (loss), net of tax
(1,691
)
 
49

 
(1,642
)
March 31, 2018
(23,627
)
 
(5,746
)
 
(29,373
)
Net transfer from Dover

 
(1,450
)
 
(1,450
)
Other comprehensive income (loss) before reclassifications, net of tax
(6,874
)
 
170

 
(6,704
)
Reclassification adjustment for net losses included in net income, net of tax

 
46

 
46

Other comprehensive income (loss), net of tax
(6,874
)
 
216

 
(6,658
)
June 30, 2018
(30,501
)
 
(6,980
)
 
(37,481
)
Net transfer from Dover

 
(970
)
 
(970
)
Other comprehensive loss before reclassifications, net of tax
(515
)
 

 
(515
)
Reclassification adjustment for net losses included in net income, net of tax

 
439

 
439

Other comprehensive income (loss), net of tax
(515
)
 
439

 
(76
)
September 30, 2018
$
(31,016
)
 
$
(7,511
)
 
$
(38,527
)


15


(in thousands)
Foreign Currency Translation
 
Defined Pension and Other Post-Retirement Benefits
 
Accumulated Other Comprehensive Loss
December 31, 2018
$
(36,146
)
 
$
(6,760
)
 
$
(42,906
)
Other comprehensive income (loss) before reclassifications, net of tax
1,090

 
(323
)
 
767

Reclassification adjustment for net losses included in net income, net of tax

 
422

 
422

Other comprehensive income, net of tax
1,090

 
99

 
1,189

March 31, 2019
(35,056
)
 
(6,661
)
 
(41,717
)
Other comprehensive income before reclassifications, net of tax
974

 

 
974

Reclassification adjustment for net losses included in net income, net of tax

 
68

 
68

Other comprehensive income, net of tax
974

 
68

 
1,042

June 30, 2019
(34,082
)
 
(6,593
)
 
(40,675
)
Other comprehensive loss before reclassifications, net of tax
(2,900
)
 

 
(2,900
)
Reclassification adjustment for net losses included in net income, net of tax

 
68

 
68

Other comprehensive income (loss), net of tax
(2,900
)
 
68

 
(2,832
)
September 30, 2019
$
(36,982
)
 
$
(6,525
)
 
$
(43,507
)


Reclassifications from accumulated other comprehensive loss—Reclassification adjustments from accumulated other comprehensive loss to net income related to defined pension and other post-retirement benefits consisted of the following:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Affected line items on the condensed consolidated statements of income
(in thousands)
2019
 
2018
 
2019

2018
 
Amortization of actuarial loss and other (1)
$
91

 
$
116

 
$
274

 
$
242

 
Other (income) expense, net
Settlement loss (1)

 
484

 
486

 
484

 
Other (income) expense, net
Total before tax
91

 
600

 
760

 
726

 
Income before income taxes
Tax benefit
(23
)
 
(161
)
 
(202
)
 
(192
)
 
Provision for income taxes
 
$
68

 
$
439

 
$
558

 
$
534

 
Net income
_______________________
(1) These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost (See Note 15—Employee Benefit Plans for additional information).

16


NOTE 12—REVENUE

Disaggregation of Revenue
Revenue disaggregated by revenue type was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Product revenue
$
244,651

 
$
283,102

 
$
787,698

 
$
807,949

Service revenue
20,708

 
20,471

 
62,056

 
62,014

Lease and other revenue
13,022

 
12,895

 
36,372

 
35,481

Total revenue
$
278,381

 
$
316,468

 
$
886,126

 
$
905,444

Revenue disaggregated by end market in each of our reporting segments was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Drilling Technologies
$
54,878

 
$
75,254

 
$
202,764

 
$
209,727

Production & Automation Technologies:
 
 
 
 
 
 
 
Artificial lift
176,253

 
187,872

 
531,127

 
543,302

Digital products
34,460

 
31,248

 
100,056

 
86,761

Other production equipment
13,245

 
22,380

 
53,083

 
66,444

Intra-segment eliminations
(455
)
 
(286
)
 
(904
)
 
(790
)
 
223,503

 
241,214

 
683,362

 
695,717

Total revenue
$
278,381

 
$
316,468

 
$
886,126

 
$
905,444


Revenue disaggregated by geography was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
United States
$
210,905

 
$
252,747

 
$
680,396

 
$
712,499

Canada
19,224

 
20,759

 
54,009

 
58,639

Middle East
16,317

 
13,645

 
44,360

 
40,091

Europe
10,468

 
7,625

 
40,518

 
27,805

Latin America
6,835

 
8,364

 
23,936

 
25,097

Australia
8,002

 
8,939

 
22,009

 
24,951

Asia-Pacific and other
6,630

 
4,389

 
20,898

 
16,362

Total revenue
$
278,381

 
$
316,468

 
$
886,126

 
$
905,444


Revenue is attributed to regions based on the location of our direct customer, which in some instances is an intermediary and not necessarily the end user.

Contract balances

Contract assets and contract liabilities from contracts with customers were as follows:
(in thousands)
September 30, 2019
 
December 31, 2018
Contract assets
$
2,044

 
$
4,571

Contract liabilities - current
6,798

 
5,863


17


NOTE 13—LEASES

Lessee Accounting

We have operating and finance leases for real estate, vehicles and equipment. Certain of our vehicle leases include residual value guarantees, which have been excluded from the measurement of our lease liabilities as we do not believe it is probable the residual value guarantees will be paid at the end of the lease. Our real estate and vehicle leases generally include options to renew or extend the lease term at our discretion. These options are included in the measurement of our lease liabilities only when it is reasonably certain that we will exercise these rights.

Balance sheet presentation—Leases are presented in our condensed consolidated balance sheet as follows:
(in thousands)
 
Balance Sheet Classification
 
September 30, 2019
Right-of Use Assets:
 
 
 
 
Finance leases
 
Property, plant, and equipment, net
 
$
8,115

Operating leases
 
Other non-current assets
 
21,604

Total lease right-of-use assets
 
 
 
29,719

Lease Liabilities:
 
 
 
 
Finance leases - current
 
Accrued expenses and other current liabilities
 
4,336

Finance leases
 
Long-term debt
 
3,706

Operating leases - current
 
Accrued expenses and other current liabilities
 
7,709

Operating leases
 
Other long-term liabilities
 
16,758

Total lease liabilities
 
 
 
$
32,509


Components of total lease cost—Components of total lease cost were as follows:
(in thousands)
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Finance lease cost:
 
 
 
Amortization of right-of-use assets
$
1,041

 
$
3,717

Interest on lease liabilities
60

 
293

Operating lease cost
2,302

 
8,140

Short-term lease cost
1,331

 
3,253

Variable lease cost
145

 
707

Sublease income
(133
)
 
(367
)
Total net lease cost
$
4,746

 
$
15,743


Lease term and discount rate—Our weighted-average remaining lease term and weighted-average discount rate for operating and finance leases are as follows:
 
September 30, 2019
Weighted-average remaining lease term (years):
 
Operating lease
4.6

Finance lease
2.0

Weighted-average discount rate:
 
Operating lease
6.6
%
Finance lease
5.2
%

18


Maturity Analysis—Future minimum payments on our operating and finance leases as of September 30, 2019 are as follows:
(in thousands)
Operating
 
Finance
2019
$
2,482

 
$
1,509

2020
7,823

 
4,114

2021
4,646

 
2,368

2022
3,934

 
420

2023
3,471

 
77

Thereafter
7,017

 
2

Total future minimum lease payments
29,373

 
8,490

Interest included within lease payments
(4,906
)
 
(448
)
Total lease liabilities
$
24,467

 
$
8,042


Lessor Accounting

Lease revenue is primarily generated from our electric submersible pump (“ESP”) leased asset program within our Production & Automation Technologies segment. Our lease arrangements generally allow customers to rent equipment on a daily basis with no stated end date. Customers may return the equipment at any point subsequent to the lease commencement date without penalty. We account 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. The average length of these arrangements generally range from six months to nine months. Lease revenue was $11.6 million and $32.8 million for the three and nine month periods ended September 30, 2019, respectively.

Leased assets—Components of our leased assets are as follows:
(in thousands)
September 30, 2019
Property, plant, and equipment
$
170,889

Accumulated depreciation
(69,993
)
Property, plant, and equipment, net
$
100,896


Depreciation expense on our leased assets was $9.5 million and $27.3 million for the three month and nine month periods ended September 30, 2019, respectively.

19


NOTE 14—INCOME TAXES

Prior to the Separation, the operations of Apergy were included in Dover’s U.S. combined federal and state income tax returns. Consequently, income tax expense is presented for the pre-Separation periods as if Apergy filed its own tax returns in each jurisdiction and include tax losses and tax credits that may not reflect tax positions taken by Dover. In many cases, tax losses and tax credits generated by Apergy prior to the Separation have been utilized by Dover.

Our income tax provision reflected effective tax rates of 22.7% and 23.2% for the three months ended September 30, 2019 and 2018, respectively, and 21.6% and 25.2% for the nine months ended September 30, 2019 and 2018, respectively. The year-over-year decrease in the effective rates reflects tax benefits for foreign tax basis step-up, stock compensation, and favorable U.S. state tax rate changes. Additionally, the year-over-year decrease in the effective tax rates includes a one-time charge during the nine months ended September 30, 2018 related to certain reorganizations of our subsidiaries as a result of the Separation.


NOTE 15—EMPLOYEE BENEFIT PLANS

Prior to the Separation, certain of our employees participated in defined benefit and non-qualified plans sponsored by Dover, which included participants of other Dover subsidiaries. For periods prior to the Separation, we accounted for such plans as multi-employer benefit plans and recorded a proportionate share of the cost in our condensed consolidated statements of income.

Total net periodic benefit cost was $0.4 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively, and $1.5 million and $2.9 million for the nine months ended September 30, 2019 and 2018, respectively. Prior to the Separation, our net periodic benefit costs included benefit costs associated with plans accounted for as single-employer plans and an allocation from Dover for plans accounted for as multi-employer plans. After the Separation, total net periodic benefit costs include all costs associated with the plans we sponsor, including plans that transferred to Apergy.

20


NOTE 16—EQUITY AND CASH INCENTIVE PROGRAM

Prior to the Separation, Dover granted share-based awards to its officers and other key employees, including certain Apergy individuals. All awards granted under the program consisted of Dover common shares and are not necessarily indicative of the results that Apergy would have experienced as a stand-alone public company for the periods presented prior to the Separation. Effective with the Separation, outstanding Dover share-based awards were converted to Apergy share-based awards, with the exception of outstanding Dover performance share awards that relate to performance periods ending after the Separation. Such performance share awards were cancelled effective with the Separation.

Stock-based compensation expense is reported within “Selling, general and administrative expense” in the condensed consolidated statements of income. Stock-based compensation expense relating to all stock-based incentive plans was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Stock-based compensation expense
$
2,524

 
$
1,768

 
$
7,545

 
$
3,129

Tax benefit
(615
)
 
(421
)
 
(1,841
)
 
(717
)
Stock-based compensation expense, net of tax
$
1,909

 
$
1,347

 
$
5,704

 
$
2,412



A summary of activity relating to our share-based awards for the nine months ended September 30, 2019, is as follows:
(in shares)
Stock-Settled Appreciation Rights
 
Performance Share Awards
 
Restricted Stock Units
Outstanding at January 1, 2019
477,950

 
86,817

 
414,840

Granted

 
92,919

 
155,777

Forfeited
(7,030
)
 
(5,010
)
 
(16,032
)
Exercised / Vested
(46,125
)
 

 
(141,437
)
Outstanding at September 30, 2019
424,795

 
174,726

 
413,148


21


NOTE 17—FAIR VALUE MEASUREMENTS

We had no outstanding derivative contracts as of September 30, 2019 and December 31, 2018. Other assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, were not significant; thus, no fair value disclosures are presented.

The fair value, based on Level 1 quoted market rates, of our Senior Notes was approximately $300.0 million at September 30, 2019, as compared to the $300.0 million face value of the debt. The fair value, based on Level 2 quoted market rates, of our term loan facility was approximately $295.6 million at September 30, 2019, as compared to the $295.0 million face value of the debt.

The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, as well as amounts included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair value due to their short-term nature.

Impairment of Assets Held For Sale

In March 2019, we classified our pressure vessel manufacturing business in our Production & Automation Technologies segment as held for sale and recognized an impairment loss of $1.7 million to adjust the carrying amount of the disposal group to fair value. The fair value was determined by a negotiated selling price through a non-binding expression of interest with a third party, a Level 3 input. We completed the sale of our pressure vessel manufacturing business in June 2019. See Note 6—Dispositions for additional information.

Acquisition

On July 31, 2019, Apergy entered into an asset purchase agreement to acquire certain assets, which meet the definition of a business. See Note 5—Acquisitions for additional information. The fair value of the contingent consideration is based on the probability of the acquired business achieving an eighteen month revenue target, a Level 3 input. As of September 30, 2019, the estimated fair value of the contingent consideration liability was $1.5 million, as attainment of the revenue target was deemed probable.

Credit Risk

By their nature, financial instruments involve risk, including credit risk, for non-performance by counterparties. Financial instruments that potentially subject us to credit risk primarily consist of trade receivables. We manage the credit risk on financial instruments by transacting only with what management believes are financially secure counterparties, requiring credit approvals and credit limits, and monitoring counterparties’ financial condition. Our maximum exposure to credit loss in the event of non-performance by the counterparty is limited to the amount drawn and outstanding on the financial instrument. Allowances for losses on trade receivables are established based on collectability assessments.

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NOTE 18—SEGMENT INFORMATION

We report our results of operations in the following reporting segments: Production & Automation Technologies and Drilling Technologies. Segment revenue and segment operating profit were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Segment revenue:
 
 
 
 
 
 
 
Production & Automation Technologies
$
223,503

 
$
241,214

 
$
683,362

 
$
695,717

Drilling Technologies
54,878

 
75,254

 
202,764

 
209,727

Total revenue
$
278,381

 
$
316,468

 
$
886,126

 
$
905,444

 
 
 
 
 
 
 
 
Income before income taxes:
 
 

 
 
 
 
Segment operating profit:
 

 
 

 
 
 
 
Production & Automation Technologies
$
17,329

 
$
24,175

 
$
54,411

 
$
57,272

Drilling Technologies
13,796

 
26,209

 
64,853

 
71,738

Total segment operating profit
31,125

 
50,384

 
119,264

 
129,010

Corporate expense and other (1)
8,110

 
6,581

 
16,686

 
16,273

Interest expense, net
9,537

 
10,584

 
30,068

 
16,813

Income before income taxes
$
13,478

 
$
33,219

 
$
72,510

 
$
95,924

_______________________
(1)
Corporate expense and other includes costs not directly attributable or allocated to our reporting segments such as corporate executive management and other administrative functions, costs related to our Separation from Dover and the results attributable to our noncontrolling interest.

23


NOTE 19—CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Apergy Corporation has senior notes outstanding, the payment obligations of which are fully and unconditionally guaranteed by certain 100-percent-owned subsidiaries of Apergy on a joint and several basis. The following financial information presents the results of operations, financial position and cash flows for:

Apergy Corporation (issuer);
100-percent-owned guarantor subsidiaries;
All other non-guarantor subsidiaries; and
Adjustments and eliminations necessary to present Apergy results on a consolidated basis.

This condensed consolidating financial information should be read in conjunction with the accompanying condensed consolidated financial statements and related notes.

 
Three Months Ended September 30, 2019
(in thousands)
Apergy
Corporation
 
Subsidiary
Guarantors
 
Subsidiary
Non-guarantors
 
Adjustments
and
eliminations
 
Total
Product revenue
$

 
$
211,988

 
$
32,663

 
$

 
$
244,651

Other revenue

 
31,664

 
14,278

 
(12,212
)
 
33,730

Total revenue

 
243,652

 
46,941

 
(12,212
)
 
278,381

Cost of goods and services

 
162,031

 
36,979

 
(12,148
)
 
186,862

Gross profit

 
81,621

 
9,962

 
(64
)
 
91,519

Selling, general and administrative expense
64

 
62,289

 
6,460

 

 
68,813

Interest expense, net
9,502

 
32

 
3

 

 
9,537

Other (income) expense, net

 
(1,011
)
 
702

 

 
(309
)
Income (loss) before income taxes and equity in earnings of affiliates
(9,566
)
 
20,311

 
2,797

 
(64
)
 
13,478

Provision for (benefit from) income taxes
(2,180
)
 
2,181

 
3,072

 
(14
)
 
3,059

Income (loss) before equity in earnings of affiliates
(7,386
)
 
18,130

 
(275
)
 
(50
)
 
10,419

Equity in earnings of affiliates
17,611

 
5,926

 
5,841

 
(29,378
)
 

Net income
10,225

 
24,056

 
5,566

 
(29,428
)
 
10,419

Net income attributable to noncontrolling interest

 

 
194

 

 
194

Net income attributable to Apergy
$
10,225

 
$
24,056

 
$
5,372

 
$
(29,428
)
 
$
10,225

Comprehensive income attributable to Apergy
$
7,393

 
$
23,079

 
$
3,501

 
$
(26,580
)
 
$
7,393


24


 
Three Months Ended September 30, 2018
(in thousands)
Apergy
Corporation
 
Subsidiary
Guarantors
 
Subsidiary
Non-guarantors
 
Adjustments
and
eliminations
 
Total
Product revenue
$

 
$
250,549

 
$
32,553

 
$

 
$
283,102

Other revenue

 
32,230

 
11,933

 
(10,797
)
 
33,366

Total revenue

 
282,779

 
44,486

 
(10,797
)
 
316,468

Cost of goods and services

 
175,718

 
37,899

 
(10,883
)
 
202,734

Gross profit

 
107,061

 
6,587

 
86