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 June 30, 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

ChampionX Corporation

(Exact name of registrant as specified in its charter)



Delaware		82-3066826
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2445 Technology Forest Blvd,	Building 4, 12th Floor
The Woodlands,	Texas	77381
(Address of principal executive offices)		(Zip Code)

(281) 403-5772

(Registrant’s telephone number, including area code)

Apergy Corporation

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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	CHX	New York Stock Exchange

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

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

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



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

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

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

The registrant had 199,808,901 shares of common stock, $0.01 par value, outstanding as of August 3, 2020.

CHAMPIONX 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	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	Executive Overview and Business Outlook	32
	Consolidated Results of Operations	35
	Segment Results of Operations	39
	Capital Resources and Liquidity	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	62
SIGNATURES		63
EXHIBIT INDEX		64

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHAMPIONX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share data)	2020			2019		2020			2019
Product revenue	$	248,871		$	269,670	$	473,316		$	535,622
Service revenue	36,846			24,063		61,770			47,874
Lease and other revenue	13,197			12,437		25,262			23,168
Total revenue	298,914			306,170		560,348			606,664
Cost of goods and services	266,684			197,410		445,779			394,893
Gross profit	32,230			108,760		114,569			211,771
Selling, general and administrative expense	130,657			66,687		208,800			130,816
Goodwill impairment	—			—		616,271			—
Long-lived asset impairment	—			—		40,980			1,746
Interest expense, net	11,262			10,109		20,301			20,636
Other (income) expense, net	312			2,676		(1,321		)	3,778
Income (loss) before income taxes	(110,001		)	29,288		(770,462		)	54,795
Provision for (benefit from) income taxes	(954		)	6,280		(27,960		)	11,849
Net income (loss)	(109,047		)	23,008		(742,502		)	42,946
Net income attributable to noncontrolling interest	598			71		871			353
Net income (loss) attributable to ChampionX	$	(109,645	)	$	22,937	$	(743,373	)	$	42,593

Earnings (loss) per share attributable to ChampionX:
Basic	$	(0.95	)	$	0.30	$	(7.72	)	$	0.55
Diluted	$	(0.95	)	$	0.30	$	(7.72	)	$	0.55
Weighted-average shares outstanding:
Basic	115,149			77,425		96,313			77,394
Diluted	115,149			77,632		96,313			77,636

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

CHAMPIONX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2020			2019		2020			2019
Net income (loss)	$	(109,047	)	$	23,008	$	(742,502	)	$	42,946
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ⁽¹⁾	5,703			974		(5,349		)	2,064
Other activities, net ⁽²⁾	752			68		851			167
Other comprehensive income (loss)	6,455			1,042		(4,498		)	2,231
Comprehensive income (loss)	(102,592		)	24,050		(747,000		)	45,177
Comprehensive income attributable to noncontrolling interest	598			71		871			353
Comprehensive income (loss) attributable to ChampionX	$	(103,190	)	$	23,979	$	(747,871	)	$	44,824

_______________________

(1) Net of income tax (expense) benefit of $0 for the three and six months ended June 30, 2020 and 2019.

(2) Net of income tax (expense) benefit of $(33) and $(24) for the three months ended June 30, 2020 and 2019, respectively, and $(66) and $(179) for the six months ended June 30, 2020 and 2019, respectively.

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

CHAMPIONX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(in thousands)	June 30, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	141,895		$	35,290
Receivables, net	517,110			219,874
Inventories, net	527,642			211,342
Prepaid expenses and other current assets	71,900			26,934
Total current assets	1,258,547			493,440
Property, plant and equipment, net of accumulated depreciation of $463,962 in 2020 and $426,722 in 2019	944,745			248,181
Operating lease right-of-use assets	124,289			24,289
Goodwill	644,381			911,113
Intangible assets, net	485,988			238,707
Other non-current assets	62,883			7,095
Total assets	$	3,520,833		$	1,922,825
Liabilities and Equity
Current portion of long-term debt	$	31,656		$	4,845
Accounts payable	274,964			120,291
Accrued compensation and employee benefits	48,044			38,470
Current portion of operating lease liabilities	34,771			7,620
Accrued distributor fees	47,044			—
Accrued expenses and other current liabilities	121,870			28,455
Total current liabilities	558,349			199,681
Long-term debt	1,071,727			559,821
Deferred income taxes	156,622			84,060
Operating lease liabilities	85,668			19,419
Other long-term liabilities	63,871			23,630
Total liabilities	1,936,237			886,611
Stockholders’ equity:
Common stock (2.5 billion shares authorized, $0.01 par value) 199.8 million shares and 77.5 million shares issued and outstanding in 2020 and 2019, respectively	1,998			775
Capital in excess of par value of common stock	2,283,096			969,174
Retained earnings (accumulated deficit)	(637,861		)	107,048
Accumulated other comprehensive loss	(48,535		)	(44,037		)
Total stockholders’ equity	1,598,698			1,032,960
Noncontrolling interest	(14,102		)	3,254
Total equity	1,584,596			1,036,214
Total liabilities and equity	$	3,520,833		$	1,922,825

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

CHAMPIONX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)



	Common Stock
(in thousands)	Shares	Par Value		Capital in Excess of Par Value			Retained Earnings		Accum. Other Comp. Loss			Non-controlling Interest			Total
December 31, 2018	77,353	$	774	$	960,773		$	54,884	$	(42,906	)	$	2,458		$	975,983
Net income	—	—		—			19,656		—			282			19,938
Other comprehensive income	—	—		—			—		1,189			—			1,189
Stock-based compensation	39	—		2,285			—		—			—			2,285
Taxes withheld on issuance of stock-based awards	—	—		(719		)	—		—			—			(719		)
Other	—	—		—			—		—			14			14
March 31, 2019	77,392	$	774	$	962,339		$	74,540	$	(41,717	)	$	2,754		$	998,690
Net income	—	—		—			22,937		—			71			23,008
Other comprehensive income	—	—		—			—		1,042			—			1,042
Stock-based compensation	67	1		2,735			—		—			—			2,736
Taxes withheld on issuance of stock-based awards	—	—		(1,080		)	—		—			—			(1,080		)
Other	—	—		—			—		—			(14		)	(14		)
June 30, 2019	77,459	775		963,994			97,477		(40,675		)	2,811			1,024,382



	Common stock
(in thousands)	Shares	Par Value		Capital in Excess of Par Value			Retained Earnings (Accum. Deficit)			Accum. Other Comp. Loss			Non-controlling Interest			Total
December 31, 2019	77,460	$	775	$	969,174		$	107,048		$	(44,037	)	$	3,254		$	1,036,214
Cumulative effect of accounting changes, net of tax (Note 3)	—	—		—			(1,573		)	—			—			(1,573		)
Net income (loss)	—	—		—			(633,728		)	—			273			(633,455		)
Other comprehensive loss	—	—		—			—			(10,953		)	—			(10,953		)
Stock-based compensation	44	—		2,429			—			—			—			2,429
Taxes withheld on issuance of stock-based awards	—	—		(368		)	—			—			—			(368		)
March 31, 2020	77,504	$	775	$	971,235		$	(528,253	)	$	(54,990	)	$	3,527		$	392,294
Issuance of common stock related to the Merger	122,237	1,223		1,262,708			—			—			—			1,263,931
Issuance of replacement awards related to the Merger	—	—		43,964			—			—			—			43,964
Non-controlling interest acquired in the Merger	—	—		—			—			—			(16,015		)	(16,015		)
Net income (loss)	—	—		—			(109,645		)	—			598			(109,047		)
Other comprehensive income	—	—		—			—			6,455			—			6,455
Stock-based compensation	67	—		5,433			—			—			—			5,433
Taxes withheld on issuance of stock-based awards	—	—		(244		)	—			—			—			(244		)
Distributions to noncontrolling interest	—	—		—			—			—			(2,200		)	(2,200		)
Other	—	—		—			37			—			(12		)	25
June 30, 2020	199,808	1,998		2,283,096			(637,861		)	(48,535		)	(14,102		)	1,584,596

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

CHAMPIONX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended June 30,
(in thousands)	2020			2019
Cash provided by (used for) operating activities:
Net income (loss)	$	(742,502	)	$	42,946
Adjustments to reconcile net income to net cash provided (required) by operating activities:
Depreciation	58,139			34,190
Amortization	26,274			25,873
Stock-based compensation	7,862			5,021
Loss on disposal of fixed assets	4,040			65
Loss on goodwill and long-lived asset impairment	657,251			1,746
Loss on sale of business	—			2,475
Provision for losses on accounts receivable	3,498			(307		)
Provision for inventory obsolescence and write-downs	8,354			—
Amortization of deferred loan costs and accretion of discount	1,999			1,295
Deferred income taxes	(24,682		)	(5,300		)
Employee benefit plan expense	859			1,135
Other	(264		)	(418		)
Changes in operating assets and liabilities (net of effects of foreign exchange):
Receivables	77,777			(5,161		)
Inventories	24,794			1,029
Prepaid expenses and other current assets	22,088			(2,311		)
Accounts payable	(30,331		)	(3,088		)
Accrued compensation and employee benefits	(13,846		)	(7,989		)
Accrued expenses and other liabilities	4,717			(3,126		)
Leased assets	(9,311		)	(29,421		)
Other	1,317			647
Net cash provided by operating activities	78,033			59,301

Cash provided by (used for) investing activities:
Capital expenditures	(19,322		)	(22,688		)
Acquisitions, net of cash acquired	57,588			—
Proceeds from sale of fixed assets	1,066			2,475
Payment on sale of business	—			(2,194		)
Net cash provided by (used for) investing activities	39,332			(22,407		)

Cash provided by (used for) financing activities:
Proceeds from long-term debt, net of discounts	125,000			4,000
Payment of debt issue costs	(4,356		)	—
Repayment of long-term debt	(125,000		)	(54,000		)
Distribution to noncontrolling interest	(2,200		)	—
Payment of finance lease obligations	(2,802		)	(2,690		)
Payments related to taxes withheld on stock-based compensation	(612		)	(1,799		)
Net cash used for financing activities	(9,970		)	(54,489		)

Effect of exchange rate changes on cash and cash equivalents	(790		)	99

Net increase (decrease) in cash and cash equivalents	106,605			(17,496		)
Cash and cash equivalents at beginning of period	35,290			41,832
Cash and cash equivalents at end of period	$	141,895		$	24,336

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

CHAMPIONX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

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

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

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

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

Basis of Presentation

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

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

Change in Accounting Estimate

During the quarter, we entered into new commercial agreements, which changed the economics of the leased asset program of our Electrical Submersible Pump (“ESP”) subsidiary in our Production & Automation Technologies segment. As such, we re-evaluated the estimated useful life and salvage value of our assets based on the combination of new commercial contracts and historical operating trends related to the aging of our lease fleet, including functioning assets beyond original expected life. Based on our analysis, effective April 1, 2020, we changed our estimate of useful life and salvage values for certain equipment to better reflect the useful life and estimated values of these assets at the end of their useful life. The estimated useful life, previously estimated at 12 months, was increased to 18 months. The estimated salvage value of the equipment, previously estimated at 50%, was decreased to 0%. The effect of the changes in estimate for the three months ended June 30, 2020, was an increase in depreciation expense of $17.6 million, a decrease in net income of $15.4 million, and a decrease in basic and diluted earnings per share of $0.13 per share.

Reclassifications

Certain prior period amounts have been reclassified to conform to the presentation of the current period financial statements. Long-lived asset impairment for the six months ended June 30, 2019 has been reclassified from selling, general, and administrative expense to conform with our current period presentation of long-lived asset impairment on the condensed consolidated statements of income (loss). These reclassifications had no effect on the previously reported net loss.

Revisions

We revised our previously issued financial statements for the three and six months ended June 30, 2019, for the correction of immaterial errors related to: (i) the assessing and recording of liabilities for state sales tax and associated penalties and interest, primarily resulting in an understatement of our selling, general, and administrative expense and interest expense for the three and six months ended June 30, 2019; and (ii) previously recorded amounts including, but not limited to, the write-off of inventory and leased assets, timing of revenue recognition, and revenue classification, that the Company concluded were immaterial to our previously filed condensed consolidated financial statements. See the following table for the impact of the corrections on our condensed consolidated financial statements:

Condensed Consolidated Statement of Income



	Three Months Ended June 30, 2019
(in thousands, except per share data)	As Reported		Adjustments			As Revised
Product revenue	$	270,273	$	(603	)	$	269,670
Service revenue	24,071		(8		)	24,063
Lease and other revenue	11,710		727			12,437
Total revenue	306,054		116			306,170
Cost of goods and services	196,285		1,125			197,410
Gross profit	109,769		(1,009		)	108,760
Selling, general and administrative expense	66,642		45			66,687
Interest expense, net	10,057		52			10,109
Other expense, net	2,676		—			2,676
Income before income taxes	30,394		(1,106		)	29,288
Provision for income taxes	6,544		(264		)	6,280
Net income	23,850		(842		)	23,008
Net income attributable to noncontrolling interest	71		—			71
Net income attributable to ChampionX	$	23,779	$	(842	)	$	22,937

Earnings per share attributable to ChampionX:
Basic	$	0.31	$	(0.01	)	$	0.30
Diluted	$	0.31	$	(0.01	)	$	0.30

Comprehensive income	$	24,892	$	(842	)	$	24,050
Comprehensive income attributable to ChampionX	$	24,821	$	(842	)	$	23,979



	Six Months Ended June 30, 2019
(in thousands, except per share data)	As Reported		Adjustments			As Revised
Product revenue	$	536,417	$	(795	)	$	535,622
Service revenue	47,978		(104		)	47,874
Lease and other revenue	23,350		(182		)	23,168
Total revenue	607,745		(1,081		)	606,664
Cost of goods and services	392,427		2,466			394,893
Gross profit	215,318		(3,547		)	211,771
Selling, general and administrative expense	130,231		585			130,816
Long-lived asset impairment ⁽¹⁾	1,746		—			1,746
Interest expense, net	20,531		105			20,636
Other expense, net	3,778		—			3,778
Income before income taxes	59,032		(4,237		)	54,795
Provision for income taxes	12,613		(764		)	11,849
Net income	46,419		(3,473		)	42,946
Net income attributable to noncontrolling interest	353		—			353
Net income attributable to ChampionX	$	46,066	$	(3,473	)	$	42,593

Earnings per share attributable to ChampionX:
Basic