SEC Filing - ChampionX Corporation

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

☐ 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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

The registrant had 77,505,318 shares of common stock, $0.01 par value, outstanding as of May 7, 2020.

APERGY CORPORATION

TABLE OF CONTENTS



PART I — FINANCIAL INFORMATION		Page
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Income (Loss)	1
	Condensed Consolidated Statements of Comprehensive Income (Loss)	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Executive Overview and Business Outlook	18
	Consolidated Results of Operations	24
	Segment Results of Operations	25
	Capital Resources and Liquidity	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
SIGNATURES		35
EXHIBIT INDEX		36

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, 2019, and Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q,

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 the novel coronavirus (“COVID-19”) on our business, liquidity, consolidated results of operations and consolidated financial condition;


•	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;

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 (LOSS)

(Unaudited)



	Three Months Ended March 31,
(in thousands, except per share data)	2020			2019
Product revenue	$	230,882		$	269,342
Other revenue	30,552			31,152
Total revenue	261,434			300,494
Cost of goods and services	179,095			197,483
Gross profit	82,339			103,011
Selling, general and administrative expense	78,143			64,129
Goodwill impairment	616,271			—
Long-lived asset impairment	40,980			1,746
Interest expense, net	9,039			10,527
Other (income) expense, net	(1,633		)	1,102
Income (loss) before income taxes	(660,461		)	25,507
Provision for (benefit from) income taxes	(27,006		)	5,569
Net income (loss)	(633,455		)	19,938
Net income attributable to noncontrolling interest	273			282
Net income (loss) attributable to Apergy	$	(633,728	)	$	19,656

Earnings (loss) per share attributable to Apergy:
Basic	$	(8.18	)	$	0.25
Diluted	$	(8.18	)	$	0.25
Weighted-average shares outstanding:
Basic	77,477			77,363
Diluted	77,477			77,640

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

APERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended March 31,
(in thousands)	2020			2019
Net income (loss)	$	(633,455	)	$	19,938
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ⁽¹⁾	(11,052		)	1,090
Pension and other post-retirement benefit plans:
Net actuarial loss arising during period	—			(323		)
Reclassification adjustment for net actuarial loss included in net income	99			67
Reclassification adjustment for settlement losses included in net income	—			355
Total pension and other post-retirement benefit plans ⁽²⁾	99			99
Other comprehensive income (loss)	(10,953		)	1,189
Comprehensive income (loss)	(644,408		)	21,127
Comprehensive income attributable to noncontrolling interest	273			282
Comprehensive income (loss) attributable to Apergy	$	(644,681	)	$	20,845

_______________________

(1) Net of income tax (expense) benefit of nil for the three months ended March 31, 2020 and 2019.

(2) Net of income tax (expense) benefit of $33 and $38 for the three months ended March 31, 2020 and 2019, respectively.

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

APERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(in thousands)	March 31, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	53,636		$	35,290
Receivables, net of allowances of $11,279 in 2020 and $8,072 in 2019	218,903			219,874
Inventories, net	206,948			211,342
Prepaid expenses and other current assets	25,016			26,934
Total current assets	504,503			493,440
Property, plant and equipment, net of accumulated depreciation of $431,760 in 2020 and $426,722 in 2019	235,114			248,181
Goodwill	291,718			911,113
Intangible assets, net	183,926			238,707
Other non-current assets	29,981			31,384
Total assets	$	1,245,242		$	1,922,825
Liabilities and Equity
Accounts payable	$	118,791		$	120,291
Accrued compensation and employee benefits	30,770			38,470
Current portion of finance lease liabilities	4,696			4,845
Accrued expenses and other current liabilities	44,495			36,075
Total current liabilities	198,752			199,681
Long-term debt	559,532			559,821
Deferred income taxes	55,059			84,060
Other long-term liabilities	39,605			43,049
Total liabilities	852,948			886,611
Stockholders’ equity:
Common stock (2.5 billion shares authorized, $0.01 par value) 77.5 million shares issued and outstanding in 2020 and 2019	775			775
Capital in excess of par value of common stock	971,235			969,174
Retained earnings (accumulated deficit)	(528,253		)	107,048
Accumulated other comprehensive loss	(54,990		)	(44,037		)
Total stockholders’ equity	388,767			1,032,960
Noncontrolling interest	3,527			3,254
Total equity	392,294			1,036,214
Total liabilities and equity	$	1,245,242		$	1,922,825

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

APERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)



	Common Stock
(in thousands)	Shares	Par Value		Capital in Excess of Par Value			Retained Earnings		Accum. Other Comp. Loss			Non-controlling Interest		Total
December 31, 2018	77,353	$	774	$	960,773		$	54,884	$	(42,906	)	$	2,458	$	975,983
Net income	—	—		—			19,656		—			282		19,938
Other comprehensive income	—	—		—			—		1,189			—		1,189
Stock-based compensation	39	—		2,285			—		—			—		2,285
Taxes withheld on issuance of stock-based awards	—	—		(719		)	—		—			—		(719		)
Other	—	—		—			—		—			14		14
March 31, 2019	77,392	$	774	$	962,339		$	74,540	$	(41,717	)	$	2,754	$	998,690



	Common stock
(in thousands)	Shares	Par Value		Capital in Excess of Par Value			Retained Earnings (Accum. Deficit)			Accum. Other Comp. Loss			Non-controlling Interest		Total
December 31, 2019	77,460	$	775	$	969,174		$	107,048		$	(44,037	)	$	3,254	$	1,036,214
Cumulative effect of accounting changes, net of tax (Note 2)	—	—		—			(1,573		)	—			—		(1,573		)
Net income (loss)	—	—		—			(633,728		)	—			273		(633,455		)
Other comprehensive loss	—	—		—			—			(10,953		)	—		(10,953		)
Stock-based compensation	44	—		2,429			—			—			—		2,429
Taxes withheld on issuance of stock-based awards	—	—		(368		)	—			—			—		(368		)
March 31, 2020	77,504	$	775	$	971,235		$	(528,253	)	$	(54,990	)	$	3,527	$	392,294

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

APERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended March 31,
(in thousands)	2020			2019
Cash provided (required) by operating activities:
Net income (loss)	$	(633,455	)	$	19,938
Adjustments to reconcile net income to net cash provided (required) by operating activities:
Depreciation	16,970			17,071
Amortization	12,862			12,844
Stock-based compensation	2,429			2,285
Loss (gain) on sale of fixed assets	(386		)	12
Loss on goodwill and long-lived asset impairment	657,251			1,746
Provision for losses on accounts receivable	2,427			(117		)
Amortization of deferred loan costs and accretion of discount	708			648
Deferred income taxes	(28,417		)	(5,856		)
Employee benefit plan expense	383			770
Other	349			109
Changes in operating assets and liabilities (net of effects of foreign exchange):
Receivables	(6,740		)	(7,260		)
Inventories	6,587			664
Prepaid expenses and other current assets	4,129			4,096
Accounts payable	3,068			(8,160		)
Accrued compensation and employee benefits	(9,799		)	(10,584		)
Accrued expenses and other liabilities	12,153			11,576
Leased assets	(7,972		)	(20,501		)
Other	(3,325		)	629
Net cash provided by operating activities	29,222			19,910

Cash provided (required) by investing activities:
Capital expenditures	(7,467		)	(9,718		)
Proceeds from sale of fixed assets	721			2,475
Net cash required by investing activities	(6,746		)	(7,243		)

Cash provided (required) by financing activities:
Payment of debt issue costs	(1,284		)	—
Repayment of long-term debt	—			(25,000		)
Payment of finance lease obligations	(1,492		)	(1,234		)
Payments related to taxes withheld on stock-based compensation	(368		)	—
Net cash required by financing activities	(3,144		)	(26,234		)

Effect of exchange rate changes on cash and cash equivalents	(986		)	89

Net increase (decrease) in cash and cash equivalents	18,346			(13,478		)
Cash and cash equivalents at beginning of period	35,290			41,832
Cash and cash equivalents at end of period	$	53,636		$	28,354

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

APERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

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

Separation and Distribution

On May 9, 2018, Apergy became an independent, publicly traded company as a result of the distribution by Dover Corporation (“Dover”) of 100% of the outstanding common stock of Apergy to Dover’s stockholders. Dover’s Board of Directors approved the distribution on April 18, 2018 and Apergy’s Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission (“SEC”) on April 19, 2018. On May 9, 2018, Dover’s stockholders of record as of the close of business on the record date of April 30, 2018 received one share of Apergy stock for every two shares of Dover stock held at the close of business on the record date (the “Separation”). Following the Separation, Dover retained no ownership interest in Apergy. Apergy’s common stock began “regular-way” trading on the New York Stock Exchange (“NYSE”) under the “APY” symbol on May 9, 2018.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Apergy have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted. Therefore, these financial statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2019.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions that we may undertake in the future, actual results may differ from our estimates. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments unless otherwise specified) necessary for a fair statement of our financial condition and results of operations as of and for the periods presented. Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these financial statements may not be representative of the results that may be expected for the year ending December 31, 2020.

Noncontrolling Interest

For the quarters ended March 31, 2020, and 2019, we did not declare or pay distributions to the noncontrolling interest holder in Apergy Middle East Services LLC, a subsidiary in the Sultanate of Oman. We have a commission arrangement with our noncontrolling interest for 5% of certain annual product sales.

Revisions and Reclassifications

We revised our previously issued financial statements for the three months ended March 31, 2019, for the correction of immaterial errors related to: (i) the assessing and recording of liabilities for state sales tax and associated penalties and interest, primarily resulting in an understatement of our selling, general, and administrative expense and interest expense for the three

months ended March 31, 2019; and (ii) previously recorded amounts including, but not limited to, the write-off of inventory and leased assets, timing of revenue recognition, and revenue classification, that the Company concluded were immaterial to our previously filed condensed consolidated financial statements. See the following table for the impact of the corrections on our condensed consolidated financial statements:

Condensed Consolidated Statement of Income



	Three Months Ended March 31, 2019
(in thousands, except per share data)	As Reported		Adjustments			As Revised
Product revenue	$	269,534	$	(192	)	$	269,342
Other revenue ⁽¹⁾	32,157		(1,005		)	31,152
Total revenue	301,691		(1,197		)	300,494
Cost of goods and services	196,142		1,341			197,483
Gross profit	105,549		(2,538		)	103,011
Selling, general and administrative expense	63,601		528			64,129
Long-lived asset impairment ⁽²⁾	1,746		—			1,746
Interest expense, net	10,474		53			10,527
Other expense, net	1,090		12			1,102
Income before income taxes	28,638		(3,131		)	25,507
Provision for (benefit from) income taxes	6,069		(500		)	5,569
Net income	22,569		(2,631		)	19,938
Net income attributable to noncontrolling interest	282		—			282
Net income attributable to Apergy	$	22,287	$	(2,631	)	$	19,656

Earnings (loss) per share attributable to Apergy:
Basic	$	0.29	$	(0.04	)	$	0.25
Diluted	$	0.29	$	(0.04	)	$	0.25

Comprehensive income	$	23,758	$	(2,631	)	$	21,127
Comprehensive income attributable to Apergy	$	23,476	$	(2,631	)	$	20,845

_______________________

⁽¹⁾ Includes “Service revenue” and “Lease and other revenue” as reported in the condensed consolidated statements of income for the three months ended March 31, 2019.

⁽²⁾ Long-lived asset impairment has been reclassified from selling, general, and administrative expense to conform the with our current period presentation of long-lived asset impairment on the condensed consolidated statements of income (loss).

Condensed Consolidated Statement of Changes in Stockholders’ Equity



	March 31, 2019
(in thousands)	As Reported		Adjustments			As Revised
Stockholders’ Equity:
Capital in excess of par value of common stock	$	966,938	$	(4,599	)	$	962,339
Retained earnings	76,454		(1,914		)	74,540
Total equity	1,005,203		(6,513		)	998,690



(in thousands)	As Reported			Adjustments			As Revised
Total equity at December 31, 2018	$	981,527		$	(5,544	)	$	975,983
Cumulative effect of accounting changes	(1,662		)	1,662			—
Net income	22,569			(2,631		)	19,938
Total equity at March 31, 2019	1,005,203			(6,513		)	998,690

Condensed Consolidated Statements of Cash Flows



	Three Months Ended March 31, 2019
(in thousands)	As Reported			Adjustments			As Revised
Cash provided (required) by operating activities:
Net income	$	22,569		$	(2,631	)	$	19,938
Adjustments to reconcile net income to net cash provided (required) by operating activities:
Depreciation	17,080			(9		)	17,071
Deferred income taxes	(5,366		)	(490		)	(5,856		)
Loss (gain) on sale of fixed assets ⁽¹⁾	12			—			12
Provision for losses on accounts receivable ⁽¹⁾	(117		)	—			(117		)
Amortization of deferred loan costs and accretion of discount ⁽¹⁾	648			—			648
Other	131			(22		)	109
Changes in operating assets and liabilities (net of effects of foreign exchange):
Receivables	(8,462		)	1,202			(7,260		)
Inventories	(2,229		)	2,893			664
Accounts payable	(6,279		)	(1,881		)	(8,160		)
Accrued compensation and employee benefits	(12,827		)	2,243			(10,584		)
Accrued expenses and other liabilities	13,849			(2,273		)	11,576
Leased assets	(21,460		)	959			(20,501		)
Other	620			9			629

_______________________

⁽¹⁾ Each of these amounts were included within “Other” on the condensed consolidated statements of cash flows reported for the three months ended March 31, 2019. These amounts have been reclassified consistent with the presentation in the current reporting period.

NOTE 2—NEW ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

Effective January 1, 2020, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This update amends the impairment model to utilize an expected credit loss methodology in place of the incurred credit loss methodology for financial instruments. We applied the provisions of this ASU to our financial instruments, mostly consisting of trade receivables, as of January 1, 2020. We utilized the modified retrospective method of adoption; therefore, prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting policies. As of January 1, 2020, we recorded a cumulative adjustment to retained earnings of $1.6 million, net of $0.5 million of income tax benefit.

Our exposure to credit losses is primarily the result of product sales to our customers, resulting in trade receivables with payment terms generally ranging from 30 days to 90 days. We manage credit risk on trade receivables by transacting only with what management believes are financially secure customers. Our expected loss allowance for accounts receivable is estimated utilizing a single loss rate, as our customer base generally has similar collectability risk characteristics. We develop our loss rate estimate based on historical collection experience, and current economic and market conditions. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.

The following table provides a rollforward of our allowance for credit losses balance:



(in thousands)	Allowance for Credit Losses
December 31, 2019	$	8,072
Impact of adoption on January 1, 2020	2,042
Provision for expected credit losses	2,427
Accounts written off	(1,207		)
Foreign currency translation	(55		)
March 31, 2020	$	11,279

NOTE 3—INVENTORIES

Inventories consisted of the following:



(in thousands)	March 31, 2020			December 31, 2019
Raw materials	$	47,542		$	50,099
Work in progress	13,438			13,325
Finished goods	170,370			175,774
	231,350			239,198
LIFO and valuation adjustments	(24,402		)	(27,856		)
Inventories, net	$	206,948		$	211,342

NOTE 4—ASSET IMPAIRMENTS

During the first quarter of 2020, certain unprecedented events caused the rapid decline of several market indicators in the oil and gas industry. On March 6, 2020, Russia and the Organization of Petroleum Exporting Countries (“OPEC”) producers were unable to agree on the need to maintain and extend compliance with previously agreed upon production cuts. Consequently, Russia and Saudi Arabia each announced that they would reduce the prices at which they make oil available to the market and raise their crude oil production, leading to a price war and a substantial surplus in the supply of oil. The price per barrel of WTI crude oil decreased from $41.14 on March 6, 2020 to $20.51 on March 31, 2020, a decline of 50%.

Compounding this situation, demand for oil and gas commodities declined significantly as the world was impacted by the COVID-19 outbreak, which the World Health Organization declared as a pandemic on March 11, 2020. Since that time, various jurisdictions have attempted to implement or have implemented measures designed to contain the spread of the virus, including travel restrictions, stay-at-home or shelter-in-place orders and shutdowns of non-essential business, reducing the overall demand for oil and gas commodities. In response to lower oil prices and deteriorating market conditions, oil producers announced reductions of previously budgeted capital expenditures. The reduction in rig count levels in the first quarter of 2020 provided further evidence that oil producers were committed to reduced levels of capital investment in drilling especially in North America, which has led to reduced levels of demand for capital equipment and pricing pressures.

Additionally, Apergy’s common stock price declined from an average closing price of $24.62 during February 2020 to an average closing price of $8.26 during March 2020. On March 23, 2020 Apergy’s common stock price ended trading at $3.02, the lowest end of day stock price since Apergy’s stock began “regular-way” trading on the NYSE on May 9, 2018. We believe our market capitalization has been negatively impacted as a result of these market conditions and overall impact to our industry as described above.

Management determined that these events and their related impact to future revenues and cash flows constituted a triggering event in the first quarter of 2020, requiring us to perform a recoverability test of our long-lived assets and an interim impairment assessment of goodwill as of March 31, 2020.

Goodwill Impairment

The carrying amount of goodwill, including changes therein, by reporting segment is below:



(in thousands)	Production & Automation Technologies			Drilling Technologies		Total
December 31, 2019	$	809,977		$	101,136	$	911,113
Impairment	(616,271		)	—		(616,271		)
Foreign currency translation	(3,124		)	—		(3,124		)
March 31, 2020	$	190,582		$	101,136	$	291,718

Goodwill is not subject to amortization but is tested for impairment on an annual basis or more frequently if impairment indicators arise.

We performed a quantitative analysis for each of our reporting units to determine the existence of goodwill impairment and the amount of the impairment loss. In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches, which determined that the fair values were less than the respective carrying values for our Artificial Lift and Automation reporting units.

Our income-based valuation method determines the present value of estimated future cash flows to estimate the fair value of a reporting unit. Significant assumptions used in estimating our reporting unit fair values include: (i) annual revenue growth rates; (ii) operating margins; (iii) risk-adjusted discount rate; and (iv) terminal value determined using a long-term growth rate. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. Given the unprecedented uncertainty of both short-term and long-term market conditions, we utilized a weighted-average projection for estimated future cash flows that consists of three estimated future cash flows scenarios with the following weightings: (i) low case scenario with a 40% weighting, (ii) base case scenario with a 40% weighting, and (iii) high case scenario with a 20% weighting.

Under the market approach, we estimate a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factor in a control premium. Finally, we compare our estimates of fair values to our March 31, 2020 total public market capitalization and assess an implied control premium based on the 20-day average of our common stock.

The reporting unit carrying values were adjusted based on the long-lived asset impairment assessment noted below. Financial and credit market volatility directly impacts our fair value measurement through the weighted average cost of capital used to determine a discount rate. During times of volatility, significant judgment must be applied to determine whether credit market changes are a short-term or long-term trend. We utilized discount rates of 14.5% and 16.5% for our Artificial Lift and Automation reporting units, respectively.

During the first quarter of 2020, we recorded a $616.3 million impairment charge to goodwill, consisting of $539.2 million and $77.1 million in our Artificial Lift reporting unit and our Automation reporting unit, respectively. Both reporting units are within our Production & Automation Technologies reportable segment.

Long-lived Asset Impairment

Long-lived assets, which include property, plant and equipment, right of use assets, and identified intangible assets, comprise a significant amount of our total assets. The Company makes judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and estimated useful lives.

The negative market indicators described above, as well as the results of the previously mentioned fair value determinations of certain of our reporting units, were triggering events indicating that certain of our long-lived tangible and intangible assets may be impaired. We performed recoverability tests on our asset groups as of March 31, 2020, which indicated that long-lived assets associated with two of our asset groups within Production and Automation Technologies were not recoverable as the aggregate amount of estimated undiscounted cash flows of these asset groups was determined to be below their respective carrying values. We estimate the fair value of these intangible and fixed assets using an income approach that requires us to make long-term forecasts of our future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for our products and services, future market conditions and technological developments. The forecasts are dependent upon assumptions including those regarding oil prices and the general outlook for the global oil and gas industry, among other factors. Financial and credit market volatility directly impacts our fair value measurement through our income forecast. Changes to these assumptions, including, but not limited to: variability of spot and futures prices for crude oil; sustained declines in worldwide rig counts below current analysts’ forecasts; significant deterioration of external financing for our customers; higher risk premiums or higher cost of equity; or any other significant adverse economic news could require a provision for impairment.

Accordingly, the estimated fair value of each of these asset groups was below their respective carrying value and as a result, we recorded a long-lived asset impairment charge of $41.0 million in the first quarter of 2020, consisting of $40.4 million to customer relationships and $0.6 million to trademarks.

The components of our definite- and indefinite-lived intangible assets were as follows:



	March 31, 2020						December 31, 2019
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Definite-lived intangible assets:
Customer relationships ⁽¹⁾	$	442,696	$	287,833	$	154,863	$	560,316	$	353,189	$	207,127
Trademarks ⁽¹⁾	34,045		24,671		9,374		35,695		24,830		10,865
Patents	37,798		27,053		10,745		38,436		26,838		11,598
Unpatented technologies	13,700		9,878		3,822		13,700		9,811		3,889
Drawings and manuals	2,478		1,678		800		2,558		1,758		800
Other	5,199		4,477		722		5,332		4,504		828
	535,916		355,590		180,326		656,037		420,930		235,107
Indefinite-lived intangible assets:
Trademarks	3,600		—		3,600		3,600		—		3,600
Total	$	539,516	$	355,590	$	183,926	$	659,637	$	420,930	$	238,707

_______________________

(1) Includes impairment of customer relationship and trademark intangible assets of $40.4 million and $0.6 million, respectively, all of which relate to asset groups included within our Artificial Lift business.

NOTE 5—DEBT

Long-term debt consisted of the following:



(in thousands)	March 31, 2020			December 31, 2019
Revolving credit facility	$	—		$	—
Term loan facility	265,000			265,000
6.375% Senior Notes due 2026	300,000			300,000
Finance lease obligations	4,079			4,530
Total	569,079			569,530
Net unamortized discounts and issuance costs	(9,547		)	(9,709		)
Total long-term debt	$	559,532		$	559,821

On February 14, 2020, Apergy amended its credit agreement, which (i) provides for the incurrence of an additional $150 million of revolving commitments under the amended credit agreement, upon consummation of the planned merger with ChampionX (the “Merger”), (ii) permits the consummation of the Merger and the incurrence of a senior secured term loan facility in an aggregate amount up to $537 million by ChampionX, and (iii) continues to provide that all obligations under the amended agreement continue to be guaranteed by certain of Apergy’s wholly owned U.S. subsidiaries.

Subsequent event

In preparation for settling transaction expenses associated with the Merger, and to increase liquidity during current market conditions, we increased our cash balance by drawing $125.0 million on our revolver on April 24, 2020, leaving $118.9 million of available borrowing capacity.

NOTE 6—COMMITMENT AND CONTINGENCIES

Guarantees and Indemnifications

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

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

Pursuant to the provisions of the tax matters agreement with Dover, we recorded an indemnification liability of $3.4 million as of December 31, 2019, with respect to certain liabilities related to tax audits for the 2012-2016 tax years. We received notification in February 2020 that the tax audits and related assessments were completed, resulting in a final settlement amount of $3.0 million, which we have recorded as an indemnification liability as of March 31, 2020.

As of March 31, 2020 and December 31, 2019, we had $15.2 million and $15.7 million, respectively, of outstanding letters of credit, surety bonds and guarantees which expire at various dates through 2025. These financial instruments are primarily maintained as security for insurance, warranty and other performance obligations. Generally, we would only be liable for the amount of these letters of credit and surety bonds in the event of default in the performance of our obligations, the probability of which we believe is remote.

Litigation and Environmental Matters

We are involved in various pending or potential legal actions in the ordinary course of our business. These proceedings primarily involve claims by private parties alleging injury arising out of use of our products, patent infringement, employment matters, and commercial disputes. We review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred and accrued to-date, and the availability and extent of insurance coverage. We accrue a liability for legal matters that are probable and estimable, and as of March 31, 2020 and December 31, 2019, these liabilities were not material. Management is unable to predict the ultimate outcome of these actions because of the inherent uncertainty of litigation. However, management believes the most probable, ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Prior to the Separation, groundwater contamination was discovered at the Norris Sucker Rods plant site located in Tulsa, Oklahoma ("Norris"). Initial remedial efforts were undertaken at the time of discovery of the contamination and Norris has since coordinated monitoring and remediation with the Oklahoma Department of Environmental Quality ("ODEQ"). As part of the ongoing long-term remediation process, Norris contracted an engineering and consulting firm to develop a range of possible additional remedial alternatives in order to accelerate the remediation process and associated cost estimates for the work. In October 2019, we received the firm’s preliminary remedial alternatives for consideration. Now that we have such recommendations, we have begun discussions with ODEQ regarding our proposed long-term remediation plan. The plan is subject to ODEQ’s review, input, and approval. Because we have not yet finalized a plan for further remediation at the site and discussions with ODEQ remain ongoing, we cannot fully anticipate the timing, outcome or possible impact of such further remedial activities, financial or otherwise. As a result of the recommendations in the report, we accrued liabilities for these remediation efforts of approximately $2.0 million as of December 31, 2019. Liabilities could increase in the future at such time as we ultimately reach agreement with ODEQ on our remediation plan and such liabilities become probable and can be reasonably estimated, however, there have been no changes to our estimated liability as of March 31, 2020.

NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE LOSS

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



(in thousands)	Foreign Currency Translation			Defined Pension and Other Post-Retirement Benefits			Accumulated Other Comprehensive Loss
December 31, 2018	$	(36,146	)	$	(6,760	)	$	(42,906	)
Other comprehensive income (loss) before reclassifications, net of tax	1,090			(323		)	767
Reclassification adjustment for net losses included in net income, net of tax	—			422			422
Other comprehensive income, net of tax	1,090			99			1,189
March 31, 2019	$	(35,056	)	$	(6,661	)	$	(41,717	)



(in thousands)	Foreign Currency Translation			Defined Pension and Other Post-Retirement Benefits			Accumulated Other Comprehensive Loss
December 31, 2019	$	(35,210	)	$	(8,827	)	$	(44,037	)
Other comprehensive loss before reclassifications, net of tax	(11,052		)	—			(11,052		)
Reclassification adjustment for net losses included in net income, net of tax	—			99			99
Other comprehensive income (loss), net of tax	(11,052		)	99			(10,953		)
March 31, 2020	$	(46,262	)	$	(8,728	)	$	(54,990	)

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



	Three Months Ended March 31,						Affected line items on the condensed consolidated statements of income
(in thousands)	2020			2019
Amortization of actuarial loss and other	$	132		$	91		Other (income) expense, net
Settlement loss	—			486			Other (income) expense, net
Total before tax	132			577			Income (loss) before income taxes
Tax benefit	(33		)	(155		)	Provision for (benefit from) income taxes
	$	99		$	422		Net income (loss)

NOTE 8—EARNINGS PER SHARE

A reconciliation of the number of shares used for the basic and diluted earnings (loss) per share calculation was as follows:



	Three Months Ended March 31,
(in thousands, except per share data)	2020			2019
Net income (loss) attributable to Apergy	$	(633,728	)	$	19,656

Weighted-average number of shares outstanding	77,477			77,363
Dilutive effect of stock-based compensation ⁽¹⁾	—			277
Total shares and dilutive securities	77,477			77,640

Basic earnings (loss) per share attributable to Apergy	$	(8.18	)	$	0.25
Diluted earnings (loss) per share attributable to Apergy	$	(8.18	)	$	0.25

_______________________


(1)	See Note 12—Equity And Cash Incentive Programs for share-based awards outstanding as of March 31, 2020, all of which were excluded from diluted weighted-average number of shares outstanding during the three months ended March 31, 2020 due to their anti-dilutive impact. We excluded 0.3 million shares from our calculation as of March 31, 2019 due to their anti-dilutive impact.

NOTE 9—REVENUE

Disaggregation of Revenue

Revenue disaggregated by revenue type was as follows:



	Three Months Ended March 31,
(in thousands)	2020		2019
Product revenue	$	230,882	$	269,342
Service revenue	18,487		20,421
Lease and other revenue	12,065		10,731
Total revenue	$	261,434	$	300,494

Revenue disaggregated by end market in each of our reporting segments was as follows:



	Three Months Ended March 31,
(in thousands)	2020			2019
Drilling Technologies	$	55,955		$	77,535
Production & Automation Technologies:
Artificial lift	159,400			170,907
Digital products	33,922			31,290
Other production equipment	12,259			21,005
Intra-segment eliminations	(102		)	(243