Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________ 
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
¨
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 001-08604
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13051374&doc=6
TEAM, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Delaware
 
74-1765729
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
13131 Dairy Ashford, Suite 600, Sugar Land, Texas
 
77478
(Address of Principal Executive Offices)
 
(Zip Code)
 
 
 
(281) 331-6154
(Registrant’s Telephone Number, Including Area Code)
 
 
 
None
(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, $0.30 par value
TISI
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  ¨
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  ¨
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 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
 
þ
 
 
 
 
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  þ
The Registrant had 30,293,191 shares of common stock, par value $0.30, outstanding as of August 1, 2019.
 


Table of Contents

INDEX
 
 
 
Page No.
 
 
 
 
 
 


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PART I—FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
TEAM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
12,750

 
$
18,288

Receivables, net of allowance of $14,431 and $15,182
265,104

 
268,352

Inventory
46,037

 
48,540

Income tax receivable
3,919

 
331

Prepaid expenses and other current assets
24,408

 
19,445

Total current assets
352,218

 
354,956

Property, plant and equipment, net
192,819

 
194,794

Intangible assets, net of accumulated amortization of $89,713 and $82,406
124,125

 
131,372

Operating lease right-of-use assets
66,500

 

Goodwill
282,156

 
281,650

Other assets, net
6,474

 
7,397

Deferred income taxes
7,585

 
7,652

Total assets
$
1,031,877

 
$
977,821

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and finance lease obligations
279

 
569

Current portion of operating lease obligations
17,314

 

Accounts payable
49,888

 
44,074

Other accrued liabilities
79,845

 
95,308

Total current liabilities
147,326

 
139,951

Deferred income taxes
8,221

 
6,106

Long-term debt and finance lease obligations
363,491

 
356,814

Operating lease obligations
53,945

 

Defined benefit pension liability
9,749

 
10,940

Other long-term liabilities
2,046

 
6,910

Total liabilities
584,778

 
520,721

Commitments and contingencies

 

Equity:
 
 
 
Preferred stock, 500,000 shares authorized, none issued

 

Common stock, par value $0.30 per share, 60,000,000 shares authorized; 30,293,191 and 30,184,330 shares issued, respectively
9,086

 
9,053

Additional paid-in capital
406,688

 
400,989

Retained earnings
62,881

 
81,450

Accumulated other comprehensive loss
(31,556
)
 
(34,392
)
Total equity
447,099

 
457,100

Total liabilities and equity
$
1,031,877

 
$
977,821


See accompanying notes to unaudited condensed consolidated financial statements.

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TEAM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
(Revised)
 
 
 
(Revised)
Revenues
$
315,829

 
$
343,889

 
$
585,428

 
$
646,274

Operating expenses
221,232

 
246,707

 
424,884

 
473,558

Gross margin
94,597

 
97,182

 
160,544

 
172,716

Selling, general and administrative expenses
81,593

 
93,174

 
163,860

 
182,833

Restructuring and other related charges, net

 
2,411

 
208

 
2,411

Gain on revaluation of contingent consideration

 
(202
)
 

 
(202
)
Operating income (loss)
13,004

 
1,799

 
(3,524
)
 
(12,326
)
Interest expense, net
7,586

 
7,631

 
15,011

 
15,228

Loss on convertible debt embedded derivative (see Note 8)

 
29,330

 

 
24,783

Other expense, net
313

 
285

 
255

 
332

Income (loss) before income taxes
5,105

 
(35,447
)
 
(18,790
)
 
(52,669
)
Less: Provision (benefit) for income taxes
(997
)
 
(4,106
)
 
(664
)
 
(9,064
)
Net income (loss)
$
6,102

 
$
(31,341
)
 
$
(18,126
)
 
$
(43,605
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.20

 
$
(1.04
)
 
$
(0.60
)
 
$
(1.45
)
Diluted
$
0.20

 
$
(1.04
)
 
$
(0.60
)
 
$
(1.45
)

See accompanying notes to unaudited condensed consolidated financial statements.

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TEAM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
(Revised)
 
 
 
(Revised)
Net income (loss)
$
6,102

 
$
(31,341
)
 
$
(18,126
)
 
$
(43,605
)
Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
672

 
(4,809
)
 
2,481

 
(4,935
)
Foreign currency hedge
(184
)
 
788

 
95

 
367

Other comprehensive income (loss), before tax
488

 
(4,021
)
 
2,576

 
(4,568
)
Tax (provision) benefit attributable to other comprehensive income (loss)
329

 
560

 
260

 
790

Other comprehensive income (loss), net of tax
817

 
(3,461
)
 
2,836

 
(3,778
)
Total comprehensive income (loss)
$
6,919

 
$
(34,802
)
 
$
(15,290
)
 
$
(47,383
)
 
See accompanying notes to unaudited condensed consolidated financial statements.


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TEAM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
 
Common
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
Balance at January 1, 2019
30,184

 
$
9,053

 
$
400,989

 
$
81,450

 
$
(34,392
)
 
$
457,100

Adoption of new accounting principle, net of tax

 

 

 
(767
)
 

 
(767
)
Net loss

 

 

 
(24,228
)
 

 
(24,228
)
Foreign currency translation adjustment, net of tax

 

 

 

 
1,809

 
1,809

Foreign currency hedge, net of tax

 

 

 

 
210

 
210

Non-cash compensation

 

 
2,434

 

 

 
2,434

Vesting of stock awards
63

 
19

 
(360
)
 

 

 
(341
)
Balance at March 31, 2019
30,247

 
$
9,072

 
$
403,063

 
$
56,455

 
$
(32,373
)
 
$
436,217

Net income

 

 

 
6,102

 

 
6,102

Foreign currency translation adjustment, net of tax

 

 

 

 
1,005

 
1,005

Foreign currency hedge, net of tax

 

 

 

 
(188
)
 
(188
)
Non-cash compensation

 

 
3,648

 

 

 
3,648

Vesting of stock awards
46

 
14

 
(23
)
 

 

 
(9
)
Other1

 

 

 
324

 

 
324

Balance at June 30, 2019
30,293

 
$
9,086

 
$
406,688

 
$
62,881

 
$
(31,556
)
 
$
447,099

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
29,953

 
$
8,984

 
$
352,500

 
$
135,486

 
$
(19,796
)
 
$
477,174

Adoption of new accounting principle, net of tax

 

 

 
6,780

 

 
6,780

Net loss

 

 

 
(12,264
)
 

 
(12,264
)
Foreign currency translation adjustment, net of tax

 

 

 

 
(2
)
 
(2
)
Foreign currency hedge, net of tax

 

 

 

 
(315
)
 
(315
)
Non-cash compensation

 

 
2,420

 

 

 
2,420

Vesting of stock awards
34

 
10

 
(235
)
 

 

 
(225
)
Balance at March 31, 2018
29,987

 
$
8,994

 
$
354,685

 
$
130,002

 
$
(20,113
)
 
$
473,568

Net loss

 

 

 
(31,341
)
 

 
(31,341
)
Foreign currency translation adjustment, net of tax

 

 

 

 
(4,041
)
 
(4,041
)
Foreign currency hedge, net of tax

 

 

 

 
580

 
580

Issuance of convertible debt, net of tax

 

 
37,540

 

 

 
37,540

Non-cash compensation

 

 
4,585

 

 

 
4,585

Vesting of stock awards
32

 
10

 
(10
)
 

 

 

Balance at June 30, 2018
30,019

 
$
9,004

 
$
396,800

 
$
98,661

 
$
(23,574
)
 
$
480,891

_________________
1
Amount reflects a revision of tax effects for the adoption of ASC 842. Further discussion on the effects of adoption are set forth in Note 1.

See accompanying notes to unaudited condensed consolidated financial statements.



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TEAM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended
June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
(Revised)
Net loss
$
(18,126
)
 
$
(43,605
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
24,650

 
32,434

Amortization of deferred loan costs and debt discount
3,743

 
3,416

Provision for doubtful accounts
889

 
5,567

Foreign currency (gain) loss
234

 
1,037

Deferred income taxes
2,466

 
(10,410
)
Gain on revaluation of contingent consideration

 
(202
)
(Gain) loss on asset disposal
(188
)
 
(912
)
Loss on convertible debt embedded derivative

 
24,783

Non-cash compensation cost
6,082

 
7,006

Other, net
(1,196
)
 
(1,951
)
(Increase) decrease:
 
 
 
Receivables
3,534

 
(29,361
)
Inventory
2,512

 
(3,502
)
Prepaid expenses and other current assets
(5,312
)
 
(4,250
)
Increase (decrease):
 
 
 
Accounts payable
4,627

 
(3,181
)
Other accrued liabilities
(15,156
)
 
4,873

Income taxes
(3,189
)
 
511

Net cash provided by (used in) operating activities
5,570

 
(17,747
)
Cash flows from investing activities:
 
 
 
Capital expenditures1
(14,396
)
 
(12,082
)
Proceeds from disposal of assets
782

 
1,463

Other
89

 
(483
)
Net cash used in investing activities
(13,525
)
 
(11,102
)
Cash flows from financing activities:
 
 
 
Net borrowings under revolving credit agreement
3,341

 
21,168

Contingent consideration payments
(428
)
 
(1,106
)
Debt issuance costs on Credit Facility

 
(855
)
Payments related to withholding tax for share-based payment arrangements
(351
)
 
(225
)
Other
(121
)
 

Net cash provided by financing activities
2,441

 
18,982

Effect of exchange rate changes on cash
(24
)
 
(1,389
)
Net decrease in cash and cash equivalents
(5,538
)
 
(11,256
)
Cash and cash equivalents at beginning of period
18,288

 
26,552

Cash and cash equivalents at end of period
$
12,750

 
$
15,296

_____________
1    Excludes accrued capital expenditures for the six months ended June 30, 2019 only.

See accompanying notes to unaudited condensed consolidated financial statements.

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TEAM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Description of business. Unless otherwise indicated, the terms “Team, Inc.,” “Team,” “the Company,” “we,” “our” and “us” are used in this report to refer to Team, Inc., to one or more of our consolidated subsidiaries or to all of them taken as a whole. We are a leading global provider of specialized industrial services, including inspection, engineering assessment and mechanical repair and remediation required in maintaining high temperature and high pressure piping systems and vessels that are utilized extensively in the refining, petrochemical, power, pipeline, aerospace and other heavy industries. We conduct operations in three segments: Inspection and Heat Treating (“IHT”), Mechanical Services (“MS”) and Quest Integrity (“Quest Integrity”). Through the capabilities and resources in these three segments, we believe that Team is uniquely qualified to provide integrated solutions involving in their most basic form: inspection to assess condition, engineering assessment to determine fitness for purpose in the context of industry standards and regulatory codes and mechanical services to repair, rerate or replace based upon the client’s election. In addition, our Company is capable of escalating with the client’s needs—as dictated by the severity of the damage found and the related operating conditions—from standard services to some of the most advanced services and integrated integrity management and asset reliability solutions available in the industry. We also believe that Team is unique in its ability to provide services in three distinct client demand profiles: (i) turnaround or project services, (ii) call-out services and (iii) nested or run-and-maintain services.
IHT provides standard and advanced non-destructive testing (“NDT”) services for the process, pipeline and power sectors, pipeline integrity management services, field heat treating services, as well as associated engineering and assessment services. These services can be offered while facilities are running (on-stream), during facility turnarounds or during new construction or expansion activities.
MS provides primarily call-out and turnaround services under both on-stream and off-line/shut down circumstances. Turnaround services are project-related and demand is a function of the number and scope of scheduled and unscheduled facility turnarounds as well as new industrial facility construction or expansion activities. The turnaround and call-out services MS provides include field machining, technical bolting, field valve repair and isolation test plugging services. On-stream services offered by MS represent the services offered while plants are operating and under pressure. These services include leak repair, fugitive emissions control and hot tapping.
Quest Integrity provides integrity and reliability management solutions for the process, pipeline and power sectors. These solutions encompass three broadly-defined disciplines: (1) highly specialized in-line inspection services for unpiggable process piping and pipelines using proprietary in-line inspection tools and analytical software, (2) advanced engineering and condition assessment services through a multi-disciplined engineering team and (3) advanced digital imaging including remote digital video imaging, laser scanning and laser profilometry-enabled reformer care services.
We offer these services globally through over 200 locations in 20 countries throughout the world with approximately 6,500 employees. We market our services to companies in a diverse array of heavy industries which include the petrochemical, refining, power, pipeline, steel, pulp and paper industries, as well as municipalities, shipbuilding, original equipment manufacturers (“OEMs”), distributors, and some of the world’s largest engineering and construction firms.
Basis for presentation. These interim financial statements are unaudited, but in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results for such periods. The condensed consolidated balance sheet at December 31, 2018 is derived from the December 31, 2018 audited consolidated financial statements. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain disclosures have been condensed or omitted from the interim financial statements included in this report. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on March 19, 2019 (“the 2018 Form 10K”).
Use of estimates. Our accounting policies conform to Generally Accepted Accounting Principles in the United States (“GAAP”). The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect our reported financial position and results of operations. We review significant estimates and judgments affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Estimates and judgments are based on information available at the time such estimates and judgments are made. Adjustments made with respect to the use of these estimates and judgments often relate to information not previously available. Uncertainties with respect to such estimates and judgments are inherent in the preparation of financial statements. Estimates and judgments are used in, among other things, (1) aspects of revenue recognition, (2) valuation of acquisition related tangible and

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intangible assets and assessments of all long-lived assets for possible impairment, (3) estimating various factors used to accrue liabilities for workers’ compensation, auto, medical and general liability, (4) establishing an allowance for uncollectible accounts receivable, (5) estimating the useful lives of our assets, (6) assessing future tax exposure and the realization of tax assets, (7) the valuation of the embedded derivative liability in our convertible debt, (8) selecting assumptions used in the measurement of costs and liabilities associated with defined benefit pension plans and (9) managing our foreign currency risk with certain debt obligations associated with net investments in foreign operations.
Fair value of financial instruments. Our financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts payable and debt obligations. The carrying amount of cash, cash equivalents, trade accounts receivable and trade accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. The fair value of our credit facility is representative of the carrying value based upon the variable terms and management’s opinion that the current rates available to us with the same maturity and security structure are equivalent to that of the banking facility. The fair value of our convertible senior notes as of June 30, 2019 and December 31, 2018 is $235.1 million and $231.5 million, respectively (inclusive of the fair value of the conversion option) and is a “Level 2” (as defined in Note 11) measurement, determined based on the observed trading price of these instruments.
Goodwill and intangible assets. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but are instead tested for impairment at least annually in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350 Intangibles—Goodwill and Other (“ASC 350”). Intangible assets with estimated useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with ASC 350. We assess goodwill for impairment at the reporting unit level, which we have determined to be the same as our operating segments. Each reporting unit has goodwill relating to past acquisitions.
Our goodwill annual test date is December 1. We measure goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. We performed our most recent annual impairment test as of December 1, 2018 and concluded that there was no impairment based upon a qualitative assessment to determine if it was more likely than not (that is, a likelihood of more than 50 percent) that the fair values of the reporting units were less than their respective carrying values as of the reporting date. There have been no events that have required an interim assessment of the carrying value of goodwill during 2019.
There was $282.2 million of goodwill at June 30, 2019 and $281.7 million at December 31, 2018. A rollforward of goodwill for the six months ended June 30, 2019 is as follows (in thousands): 
 
Six Months Ended
June 30, 2019
 
(unaudited)
 
IHT
 
MS
 
Quest Integrity
 
Total
Balance at beginning of period
$
192,608

 
$
55,627

 
$
33,415

 
$
281,650

Foreign currency adjustments
591

 
(87
)
 
2

 
506

Balance at end of period
$
193,199

 
$
55,540

 
$
33,417

 
$
282,156

There was $75.2 million of accumulated impairment losses at June 30, 2019 and December 31, 2018, comprised of $21.1 million and $54.1 million for IHT and MS, respectively, which relate to impairment losses recognized in the third quarter of 2017.
Allowance for doubtful accounts. In the ordinary course of business, a portion of our accounts receivable are not collected due to billing disputes, customer bankruptcies, dissatisfaction with the services we performed and other various reasons. We establish an allowance to account for those accounts receivable that we estimate will eventually be deemed uncollectible. The allowance for doubtful accounts is based on a combination of our historical experience and management’s review of long outstanding accounts receivable.
Concentration of credit risk. No single customer accounts for more than 10% of consolidated revenues.
Earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) available to Team stockholders by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing net income (loss) available to Team stockholders by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, (2) the dilutive effect of the assumed exercise of share-based compensation using the treasury stock method and (3) the dilutive effect of the assumed conversion of our convertible senior notes under the treasury stock method. The Company’s intent is to settle the principal amount of the convertible senior notes in cash upon conversion. If the conversion value exceeds the principal amount, the Company may elect to deliver shares of its common stock with respect

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to the remainder of its conversion obligation in excess of the aggregate principal amount (the “conversion spread”). Accordingly, the conversion spread is included in the denominator for the computation of diluted earnings per common share using the treasury stock method.

Amounts used in basic and diluted earnings (loss) per share, for the three and six months ended June 30, 2019 and 2018, are as follows (in thousands): 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Weighted-average number of basic shares outstanding
30,270

 
30,003

 
30,250

 
29,989

Stock options, stock units and performance awards
197

 

 

 

Convertible Senior Notes

 

 

 

Total shares and dilutive securities
30,467

 
30,003

 
30,250

 
29,989

For both the three and six months ended June 30, 2018 and six months ended June 30, 2019, all outstanding share-based compensation awards were excluded from the calculation of diluted loss per share because their inclusion would be antidilutive due to the net loss in those periods. Also, for both the three and six months ended June 30, 2019 and 2018, the convertible senior notes were excluded from diluted loss per share because the conversion price exceeded the average price of our common stock during those periods. For information on our convertible senior notes and our share-based compensation awards, refer to Note 8 and Note 12, respectively.
Revision to prior period consolidated financial statements. As noted in the previously issued 2018 Form 10-K, the Company identified errors in its previously issued 2018 unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2018. These prior period errors are related to the measurement of valuation allowances on deferred tax assets. The prior period condensed consolidated financial statements and other affected prior period financial information have been revised to correct these errors. The effect of correcting the errors increased our income tax benefit and favorably impacted our net loss by $1.1 million and $6.7 million in the three and six months ended June 30, 2018, respectively. Based on an analysis of quantitative and qualitative factors, the Company determined the related impacts were not material to its previously filed annual or interim consolidated financial statements, and therefore, amendments of previously filed reports are not required.

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The table below provides a summary of the financial statement line items which were impacted by these error corrections (in thousands, except per share data):
 
 
Three Months Ended June 30, 2018
 
 
As Previously Reported
 
Adjustments
 
As Revised
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
Effect on condensed consolidated statement of operations
 
 
 
 
 
 
Provision (benefit) for income taxes
 
$
(2,977
)
 
$
(1,129
)
 
$
(4,106
)
Net loss
 
$
(32,470
)
 
$
1,129

 
$
(31,341
)
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
Basic
 
$
(1.08
)
 
0.04

 
$
(1.04
)
Diluted
 
$
(1.08
)
 
0.04

 
$
(1.04
)
 
 
Six Months Ended June 30, 2018
 
 
As Previously Reported
 
Adjustments
 
As Revised
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
Effect on condensed consolidated statement of operations
 
 
 
 
 
 
Provision (benefit) for income taxes
 
$
(2,354
)
 
$
(6,710
)
 
$
(9,064
)
Net loss
 
$
(50,315
)
 
$
6,710

 
$
(43,605
)
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
Basic
 
$
(1.68
)
 
0.23

 
$
(1.45
)
Diluted
 
$
(1.68
)
 
0.23

 
$
(1.45
)
Newly Adopted Accounting Principles
Topic 842 - Leases. In February 2016, the FASB issued Accounting Standard Update No. 2016-02, Leases (“ASU 2016-02”), which establishes ASC Topic 842, Leases (“ASC 842”), replaced previous lease accounting guidance along with subsequent ASUs issued in 2018 to clarify certain provisions of ASU 2016-02. ASC 842 changes the accounting for leases, including a requirement to record leases with terms of greater than twelve months on the balance sheet as assets and liabilities. ASC 842 also requires us to expand our financial statement disclosures on leasing activities.
We adopted ASC 842 effective January 1, 2019 and elected the modified retrospective transition method, which specified the comparative financial information will not be restated and will continue to be reported under the lease standard in effect during those periods. We elected the “package of practical expedients,” which permits us not to reassess under the new standard our prior conclusions on lease identification, lease classification and initial direct costs. We also elected the short-term lease recognition practical expedient in which leases with a term of 12 months or less will not be recognized on the balance sheet and the practical expedient to not separate lease and non-lease components for the majority of our leases. We did not elect the hindsight practical expedient.

The impact of ASC 842 on our consolidated balance sheet beginning January 1, 2019 was the recognition of right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. The cumulative effect of adoption on January 1, 2019 resulted in a $0.4 million decrease, net of tax, to beginning retained earnings. The adoption of ASC 842 did not result in any material impacts to our statements of operations or statements of cash flows. Amounts recognized at January 1, 2019 for operating leases were as follows (in thousands):
 
January 1, 2019
 
(unaudited)
Operating lease right-of-use assets
$
66,555

Current portion of operating lease obligations
17,770

Operating lease obligations (non-current)
54,477


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Accounting Principles Not Yet Adopted

ASU No. 2016-13. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), along with subsequent ASUs issued in 2019 to clarify certain provisions of ASU 2016-13, which amends GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. ASU No. 2016-13 will be effective for us as of January 1, 2020. We are currently evaluating the impact this ASU will have on our ongoing financial reporting.

ASU No. 2018-15. In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), that requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in Topic 350. ASU 2018-15 requires a customer to disclose the nature of its hosting arrangements that are service contracts and provide disclosures as if the deferred implementation costs were a separate, major depreciable asset class. ASU No. 2018-15 will be effective for us as of January 1, 2020. Early adoption is permitted. We are currently evaluating the impact this ASU will have on our ongoing financial reporting.

2. REVENUE
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, we follow a five-step process to recognize revenue: 1) identify the contract with the customer, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations and 5) recognize revenue when the performance obligations are satisfied.
Most of our contracts with customers are short-term in nature and billed on a time and materials basis, while certain other contracts are at a fixed price. Certain contracts may contain a combination of fixed and variable elements. We act as a principal and have performance obligations to provide the service itself or oversee the services provided by any subcontractors. Revenue is measured based on consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties, such as taxes assessed by governmental authorities. In contracts where the amount of consideration is variable, we consider our experience with similar contracts in estimating the amount to which we will be entitled and recognize revenues accordingly. As most of our contracts contain only one performance obligation, the allocation of a contract’s transaction price to multiple performance obligations is generally not applicable. Customers are generally billed as we satisfy our performance obligations and payment terms typically range from 30 to 90 days from the invoice date. Billings under certain fixed-price contracts may be based upon the achievement of specified milestones, while some arrangements may require advance customer payment. Our contracts do not include significant financing components since the contracts typically span less than one year. Contracts generally include an assurance type warranty clause to guarantee that the services comply with agreed specifications. The warranty period typically is 12 months or less from the date of service. Warranty expenses were not material for the three and six months ended June 30, 2019 and 2018.
Revenue is recognized as (or when) the performance obligations are satisfied by transferring control over a service or product to the customer. Revenue recognition guidance prescribes two recognition methods (over time or point in time). Most of our performance obligations qualify for recognition over time because we typically perform our services on customer facilities or assets and customers receive the benefits of our services as we perform. Where a performance obligation is satisfied over time, the related revenue is also recognized over time using the method deemed most appropriate to reflect the measure of progress and transfer of control. For our time and materials contracts, we are generally able to elect the right-to-invoice practical expedient, which permits us to recognize revenue in the amount to which we have a right to invoice the customer if that amount corresponds directly with the value to the customer of our performance completed to date. For our fixed price contracts, we typically recognize revenue using the cost-to-cost method, which measures the extent of progress towards completion based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Under this method, revenue is recognized proportionately as costs are incurred. For contracts where control is transferred at a point in time, revenue is recognized at the time control of the asset is transferred to the customer, which is typically upon delivery and acceptance by the customer.

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Disaggregation of revenue. Essentially all of our revenues are associated with contracts with customers. A disaggregation of our revenue from contracts with customers by geographic region, by reportable operating segment and by service type is presented below (in thousands):
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
(unaudited)
 
(unaudited)
 
United States and Canada
 
Other Countries
 
Total
 
United States and Canada
 
Other Countries
 
Total
Revenue:
 
 
 
 
 
 
 
 
 
 

IHT
$
134,068

 
$
4,590

 
$
138,658

 
$
164,983

 
$
3,690

 
$
168,673

MS
107,176

 
37,721

 
144,897

 
111,964

 
37,014

 
148,978

Quest Integrity
24,649

 
7,625

 
32,274

 
16,990

 
9,248

 
26,238

Total
$
265,893

 
$
49,936

 
$
315,829

 
$
293,937

 
$
49,952

 
$
343,889

 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
(unaudited)
 
(unaudited)
 
United States and Canada
 
Other Countries
 
Total
 
United States and Canada
 
Other Countries
 
Total
Revenue:
 
 
 
 
 
 
 
 
 
 
 
IHT
$
257,688

 
$
8,026

 
$
265,714

 
$
313,193

 
$
6,899

 
$
320,092

MS
194,628

 
71,795

 
266,423

 
211,788

 
70,091

 
281,879

Quest Integrity
39,006

 
14,285

 
53,291

 
29,700

 
14,603

 
44,303

Total
$
491,322

 
$
94,106

 
$
585,428

 
$
554,681

 
$
91,593

 
$
646,274

 
Three Months Ended June 30, 2019
 
(unaudited)
 
Non-Destructive Evaluation and Testing Services
 
Repair and Maintenance Services
 
Heat Treating
 
Other
 
Total
Revenue:
 
 
 
 
 
 
 
 
 
IHT
$
107,991

 
$
136

 
$
17,511

 
$
13,020

 
$
138,658

MS

 
142,908

 
920

 
1,069

 
144,897

Quest Integrity
32,274

 

 

 

 
32,274

Total
$
140,265

 
$
143,044

 
$
18,431

 
$
14,089

 
$
315,829

 
Three Months Ended June 30, 2018
 
(unaudited)
 
Non-Destructive Evaluation and Testing Services1
 
Repair and Maintenance Services
 
Heat Treating
 
Other
 
Total
Revenue:
 
 
 
 
 
 
 
 
 
IHT
$
133,620

 
$
5,037

 
$
22,459

 
$
7,557

 
$
168,673

MS
155

 
146,175

 
439

 
2,209

 
148,978

Quest Integrity
26,238

 

 

 

 
26,238

Total
$
160,013

 
$
151,212

 
$
22,898

 
$
9,766

 
$
343,889

_________________
1
This service type is inclusive of the “Asset Integrity Management” and “Non-Destructive Evaluation” service types as disclosed in the Form 10-Q for the second quarter of 2018.

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Six Months Ended June 30, 2019
 
(unaudited)
 
Non-Destructive Evaluation and Testing Services
 
Repair and Maintenance Services
 
Heat Treating
 
Other
 
Total
Revenue:
 
 
 
 
 
 
 
 
 
IHT
$
210,927

 
$
498

 
$
36,304

 
$
17,985

 
$
265,714

MS

 
262,397

 
1,659

 
2,367

 
266,423

Quest Integrity
53,291

 

 

 

 
53,291

Total
$
264,218

 
$
262,895

 
$
37,963

 
$
20,352

 
$
585,428

 
Six Months Ended June 30, 2018
 
(unaudited)
 
Non-Destructive Evaluation and Testing Services1
 
Repair and Maintenance Services
 
Heat Treating
 
Other
 
Total
Revenue:
 
 
 
 
 
 
 
 
 
IHT
$
257,156

 
$
5,883

 
$
41,755

 
$
15,298

 
$
320,092

MS
155

 
277,374

 
943

 
3,407

 
281,879

Quest Integrity
44,303

 

 

 

 
44,303

Total
$
301,614

 
$
283,257

 
$
42,698

 
$
18,705

 
$
646,274

_________________
1
This service type is inclusive of the “Asset Integrity Management” and “Non-Destructive Evaluation” service types as disclosed in the Form 10-Q for the second quarter of 2018.
For additional information on our reportable operating segments and geographic information, refer to Note 15.
Contract balances. The timing of revenue recognition, billings and cash collections results in trade accounts receivable, contract assets and contract liabilities on the consolidated balance sheets. Trade accounts receivable include billed and unbilled amounts currently due from customers and represent unconditional rights to receive consideration. The amounts due are stated at their net estimated realizable value. Refer to Notes 1 and 3 for additional information on our trade receivables and the allowance for doubtful accounts. Contract assets include unbilled amounts typically resulting from sales under fixed-price contracts when the cost-to-cost method of revenue recognition is utilized, the revenue recognized exceeds the amount billed to the customer and the right to payment is conditional on something other than the passage of time. Amounts may not exceed their net realizable value. If we receive advances or deposits from our customers, a contract liability is recorded. Additionally, a contract liability arises if items of variable consideration result in less revenue being recorded than what is billed. Contract assets and contract liabilities are generally classified as current.
The following table provides information about trade accounts receivable, contract assets and contract liabilities as of June 30, 2019 and December 31, 2018 (in thousands):
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Trade accounts receivable, net1
$
265,104

 
$
268,352

Contract assets2
$
7,367

 
$
5,745

Contract liabilities3
$
1,738

 
$
1,784

_________________
1    Includes billed and unbilled amounts, net of allowance for doubtful accounts. See Note 3 for details.    
2    Included in the “Prepaid expenses and other current assets” line on the condensed consolidated balance sheets.
3    Included in the “Other accrued liabilities” line of the condensed consolidated balance sheets.
The $1.6 million increase in our contract assets from December 31, 2018 to June 30, 2019 is due to more fixed price contracts in progress at June 30, 2019 as compared to December 31, 2018. Contract liabilities as of June 30, 2019 have remained substantially the same compared to December 31, 2018. Due to the short-term nature of our contracts, contract liability balances as of the end of any period are generally recognized as revenue in the following quarter. Accordingly, essentially all of the contract liability balance at December 31, 2018 was recognized as revenue during the subsequent quarter.

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Contract costs. The Company recognizes the incremental costs of obtaining contracts as selling, general and administrative expenses when incurred if the amortization period of the asset that otherwise would have been recognized is one year or less. Assets recognized for costs to obtain a contract were not material as of June 30, 2019. Costs to fulfill a contract are recorded as assets if they relate directly to a contract or a specific anticipated contract, the costs generate or enhance resources that will be used in satisfying performance obligations in the future and the costs are expected to be recovered. Costs to fulfill a contract recognized as assets primarily consist of labor and materials costs and generally relate to engineering and set-up costs incurred prior to the satisfaction of performance obligations begins. Assets recognized for costs to fulfill a contract are included in the “Prepaid expenses and other current assets” line of the condensed consolidated balance sheets and were not material as of June 30, 2019. Such assets are recognized as expenses as we transfer the related goods or services to the customer. All other costs to fulfill a contract are expensed as incurred.
Remaining performance obligations. As of June 30, 2019, there were no material amounts of remaining performance obligations that are required to be disclosed. As permitted by ASC 606, we have elected not to disclose information about remaining performance obligations where i) the performance obligation is part of a contract that has an original expected duration of one year or less or ii) when we recognize revenue from the satisfaction of the performance obligation in accordance with the right-to-invoice practical expedient.

3. RECEIVABLES
A summary of accounts receivable as of June 30, 2019 and December 31, 2018 is as follows (in thousands): 
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Trade accounts receivable
$
205,081

 
$
207,266

Unbilled receivables
74,454

 
76,268

Allowance for doubtful accounts
(14,431
)
 
(15,182
)
Total
$
265,104

 
$
268,352


4. INVENTORY
A summary of inventory as of June 30, 2019 and December 31, 2018 is as follows (in thousands): 
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Raw materials
$
8,660

 
$
8,448

Work in progress
4,032

 
3,900

Finished goods
33,345

 
36,192

Total
$
46,037

 
$
48,540



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5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment as of June 30, 2019 and December 31, 2018 is as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Land
$
6,386

 
$
6,376

Buildings and leasehold improvements
58,788

 
57,006

Machinery and equipment
275,460

 
269,084

Furniture and fixtures
10,706

 
10,253

Capitalized Enterprise Resource Planning system development costs
46,637

 
46,637

Computers and computer software
17,463

 
15,826

Automobiles
4,728

 
4,879

Construction in progress
11,896

 
6,550

Total
432,064

 
416,611

Accumulated depreciation and amortization
(239,245
)
 
(221,817
)
Property, plant and equipment, net
$
192,819

 
$
194,794

Included in the table above are assets under finance leases of $5.3 million and $5.2 million as of June 30, 2019 and December 31, 2018, respectively, net of accumulated amortization. Depreciation expense for the three months ended June 30, 2019 and 2018 was $8.7 million and $8.8 million, respectively. Depreciation expense for the six months ended June 30, 2019 and 2018 was $17.3 million and $18.1 million, respectively. Construction in progress contains certain internal use software costs that have yet to be fully implemented.

6. INTANGIBLE ASSETS
A summary of intangible assets as of June 30, 2019 and December 31, 2018 is as follows (in thousands): 
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
 
 
 
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
174,933

 
$
(57,466
)
 
$
117,467

 
$
174,894

 
$
(51,160
)
 
$
123,734

Non-compete agreements
5,469

 
(5,163
)
 
306

 
5,433

 
(4,882
)
 
551

Trade names
24,742

 
(20,871
)
 
3,871

 
24,753

 
(20,594
)
 
4,159

Technology
7,844

 
(5,601
)
 
2,243

 
7,847

 
(5,187
)
 
2,660

Licenses
850

 
(612
)
 
238

 
851

 
(583
)
 
268

Total
$
213,838

 
$
(89,713
)
 
$
124,125

 
$
213,778

 
$
(82,406
)
 
$
131,372

Amortization expense for the three months ended June 30, 2019 and June 30, 2018 was $3.7 million and $7.1 million, respectively. Amortization expense for the six months ended June 30, 2019 and 2018 was $7.2 million and $14.3 million, respectively.


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7. OTHER ACCRUED LIABILITIES
A summary of other accrued liabilities as of June 30, 2019 and December 31, 2018 is as follows (in thousands): 
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Payroll and other compensation expenses
$
41,819

 
$
47,988

Insurance accruals
12,076

 
16,001

Property, sales and other non-income related taxes
6,188

 
7,271

Lease commitments
34

 
1,145

Contract liabilities
1,738

 
1,784

Accrued commission
2,894

 
2,290

Accrued interest
5,167

 
5,261

Volume discount
3,680

 
4,322

Contingent consideration

 
429

Professional fees
1,166

 
1,219

Other
5,083

 
7,598

Total
$
79,845

 
$
95,308


8. LONG-TERM DEBT, LETTERS OF CREDIT AND DERIVATIVES
As of June 30, 2019 and December 31, 2018, our long-term debt is summarized as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Credit Facility
$
159,987

 
$
156,843

Convertible debt1
198,330

 
195,184

Finance lease obligations
5,453

 
5,356

Total long-term debt and finance lease obligations
363,770

 
357,383

Less: current portion of long-term debt and finance lease obligations
279

 
569

Total long-term debt and finance lease obligations, less current portion
$
363,491

 
$
356,814

_________________
1
Comprised of principal amount outstanding, less unamortized discount and issuance costs. See Convertible Debt section below for additional information.
Credit Facility
In July 2015, we renewed our banking credit facility (the “Credit Facility”). In accordance with the second amendment to the Credit Facility, which was signed in February 2016, the Credit Facility had a borrowing capacity of up to $600.0 million and consisted of a $400.0 million, five-year revolving loan facility and a $200.0 million five-year term loan facility. The swing line facility is $35.0 million. On July 31, 2017, we completed the issuance of $230.0 million of 5.00% convertible senior notes in a private offering (the “Offering,” which is described further below) and used the proceeds from the Offering to repay in full the then-outstanding term-loan portion of our Credit Facility and a portion of the outstanding revolving borrowings. Concurrent with the completion of the Offering and the repayment of outstanding borrowings discussed above, we entered into the sixth amendment to the Credit Facility, effective as of June 30, 2017, which reduced the capacity of the Credit Facility to a $300 million revolving loan facility, subject to a borrowing availability test (based on eligible accounts, inventory and fixed assets). The Credit Facility matures in July 2020, bears interest based on a variable Eurodollar rate option (LIBOR plus 3.00% margin at June 30, 2019) and has commitment fees on unused borrowing capacity (0.50% at June 30, 2019). The Credit Facility limits our ability to pay cash dividends. The Company’s obligations under the Credit Facility are guaranteed by its material direct and indirect domestic subsidiaries and are secured by a lien on substantially all of the Company’s and the guarantors’ tangible and intangible property (subject to certain specified exclusions) and by a pledge of all of the equity interests in the Company’s material direct and indirect domestic subsidiaries and 65% of the equity interests in the Company’s material first-tier foreign subsidiaries.
The Credit Facility contains financial covenants, which were amended in March 2018 pursuant to the seventh amendment (the “Seventh Amendment”) to the Credit Facility. The Seventh Amendment eliminated the ratio of consolidated funded debt to consolidated EBITDA (the “Total Leverage Ratio,” as defined in the Credit Facility agreement) covenant through the remainder of the term of the Credit Facility and also modified both the ratio of senior secured debt to consolidated EBITDA (the “Senior

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Secured Leverage Ratio,” as defined in the Credit Facility agreement) and the ratio of consolidated EBITDA to consolidated interest charges (the “Interest Coverage Ratio,” as defined in the Credit Facility agreement) as follows. The Company is required to maintain a maximum Senior Secured Leverage Ratio of not more than 3.50 to 1.00 as of June 30, 2019 and not more than 2.75 to 1.00 as of September 30, 2019 and each quarter thereafter. With respect to the Interest Coverage Ratio, the Company is required to maintain a ratio of not less than 2.50 to 1.00 as of June 30, 2019 and each quarter thereafter. As of June 30, 2019, we are in compliance with the covenants in effect as of such date. The Senior Secured Leverage Ratio and the Interest Coverage Ratio stood at 2.66 to 1.00 and 2.81 to 1.00, respectively, as of June 30, 2019. At June 30, 2019, we had $12.8 million of cash on hand and had approximately $56 million of available borrowing capacity through our Credit Facility. As of June 30, 2019, we had $1.3 million of unamortized debt issuance costs that are being amortized over the life of the Credit Facility. As noted above, the Credit Facility matures on July 7, 2020. We have the intent to secure financing to meet future capital needs. These options include either amending and extending the Credit Facility or seeking other forms of financing.
Our ability to maintain compliance with the financial covenants is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties. Accordingly, there can be no assurance that we will be able to maintain compliance with the Credit Facility covenants as of any future date. In the event we are unable to maintain compliance with our financial covenants, we would seek to enter into an amendment to the Credit Facility with our bank group in order to modify and/or to provide relief from the financial covenants for an additional period of time. Although we have entered into amendments in the past, there can be no assurance that any future amendments would be available on terms acceptable to us, if at all.
In order to secure our casualty insurance programs we are required to post letters of credit generally issued by a bank as collateral. A letter of credit commits the issuer to remit specified amounts to the holder, if the holder demonstrates that we failed to meet our obligations under the letter of credit. If this were to occur, we would be obligated to reimburse the issuer for any payments the issuer was required to remit to the holder of the letter of credit. We were contingently liable for outstanding stand-by letters of credit totaling $17.6 million at June 30, 2019 and $22.8 million at December 31, 2018. Outstanding letters of credit reduce amounts available under our Credit Facility and are considered as having been funded for purposes of calculating our financial covenants under the Credit Facility.

Convertible Debt

Description of the Notes

On July 31, 2017, we issued $230.0 million principal amount of 5.00% Convertible Senior Notes due 2023 (the “Notes”). The Notes, which are senior unsecured obligations of the Company, bear interest at a rate of 5.0% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2018. The Notes will mature on August 1, 2023 unless repurchased, redeemed or converted in accordance with their terms prior to such date. The Notes will be convertible at an initial conversion rate of 46.0829 shares of our common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $21.70 per share. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture governing the Notes.
    
Holders may convert their Notes at their option prior to the close of business on the business day immediately preceding May 1, 2023, but only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on December 31, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such trading day;

if we call any or all of the Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or

upon the occurrence of specified corporate events described in the indenture governing the Notes.

On or after May 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders may, at their option, convert their Notes at any time, regardless of the foregoing circumstances.

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The Notes are initially convertible into 10,599,067 shares of common stock. Because the Notes could be convertible in full into more than 19.99% of our outstanding common stock, we were required by the listing rules of the New York Stock Exchange to obtain the approval of the holders of our outstanding shares of common stock before the Notes could be converted into more than 5,964,858 shares of common stock. The Notes will be convertible into, subject to various conditions, cash or shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, in each case, at the Company’s election.

If holders elect to convert the Notes in connection with certain fundamental change transactions described in the indenture governing the Notes, we will, under certain circumstances described in the indenture governing the Notes, increase the conversion rate for the Notes so surrendered for conversion.
We may not redeem the Notes prior to August 5, 2021. We will have the option to redeem all or any portion of the Notes on or after August 5, 2021, if certain conditions (including that our common stock is trading at or above 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive)), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

Accounting Treatment of the Notes

As of June 30, 2019 and December 31, 2018, the Notes were recorded in our condensed consolidated balance sheets as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Liability component:
 
 
 
Principal
$
230,000

 
$
230,000

Unamortized issuance costs
(5,307
)
 
(5,834
)
Unamortized discount
(26,363
)
 
(28,982
)
Net carrying amount of the liability component1
$
198,330

 
$
195,184

 
 
 
 
Equity component:
 
 
 
Carrying amount of the equity component, net of issuance costs2
$
13,912

 
$
13,912

_________________
1
Included in the “Long-term debt” line of the condensed consolidated balance sheets.
2
Relates to the portion of the Notes accounted for under ASC 470-20 (defined below) and is included in the “Additional paid-in capital” line of the condensed consolidated balance sheets.

Under ASC 470-20, Debt with Conversion and Other Options, (“ASC 470-20”), an entity must separately account for the liability and equity components of convertible debt instruments that may be settled entirely or partially in cash upon conversion (such as the Notes) in a manner that reflects the issuer’s economic interest cost. However, entities must first consider the guidance in ASC 815-15, Embedded Derivatives (“ASC 815-15”), to determine if an instrument contains an embedded feature that should be separately accounted for as a derivative. We applied this guidance as of the issuance date of the Notes and concluded that for the conversion feature for a portion of the Notes, we must recognize an embedded derivative under ASC 815-15, while the remainder of the Notes is subject to ASC 470-20.
The Company determined the portions of the Notes subject to ASC 815-15 and ASC 470-20 as follows. While the Notes are initially convertible into 10,599,067 shares of common stock, the occurrence of certain corporate events could increase the conversion rate, which could result in the Notes becoming convertible into a maximum of 14,838,703 shares. As of the issuance date of the Notes, 5,964,858 shares, or approximately 40% of the maximum number of shares, was authorized for issuance without shareholder approval, while 8,873,845 shares, or approximately 60%, would have been required to be settled in cash. Therefore, the Company concluded that embedded derivative accounting under ASC 815-15 was applicable to approximately 60% of the Notes, while the remaining 40% of the Notes was subject to ASC 470-20. We recorded the change in fair value of the embedded derivative liability in our results of operations through the shareholder approval date of May 17, 2018 and then reclassified the embedded derivative liability to stockholders’ equity at its May 17, 2018 fair value of $45.4 million during the second quarter of 2018. The related income tax effects of the reclassification charged directly to stockholders’ equity were $7.8 million. As a result

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of the reclassification to stockholders’ equity, the embedded derivative will no longer be marked to fair value each period. Losses on the embedded derivative liability recognized in the condensed consolidated statements of operations were $24.8 million for the six months ended June 30, 2018.
The following table sets forth interest expense information related to the Notes (dollars in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
2019
 
2018
 
2019
 
2018
Coupon interest
$
2,875

 
$
2,875

 
$
5,750

 
$
5,750

Amortization of debt discount and issuance costs
1,585

 
1,450

 
3,146

 
2,878

Total interest expense on convertible senior notes
$
4,460

 
$
4,325

 
$
8,896

 
$
8,628

 
 
 
 
 
 
 
 
Effective interest rate
9.12
%
 
9.12
%
 
9.12
%
 
9.12
%
As of June 30, 2019, the remaining amortization period for the debt discount and issuance costs is 49 months.
Derivatives and Hedging

ASC 815, Derivatives and Hedging (“ASC 815”), requires that derivative instruments be recorded at fair value and included in the balance sheet as assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception date of a derivative. Special accounting for derivatives qualifying as fair value hedges allows derivatives’ gains and losses to offset related results on the hedged item in the statement of operations. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Credit risks related to derivatives include the possibility that the counter-party will not fulfill the terms of the contract. We consider counterparty credit risk to our derivative contracts when valuing our derivative instruments.
Our borrowing of €12.3 million under the Credit Facility serves as an economic hedge of our net investment in our European operations as fluctuations in the fair value of the borrowing attributable to the U.S. Dollar/Euro spot rate will offset translation gains or losses attributable to our investment in our European operations. At June 30, 2019, the €12.3 million borrowing had a U.S. Dollar value of $14.0 million.
As discussed above, we previously recorded an embedded derivative liability for a portion of the Notes. In accordance with ASC 815-15, the embedded derivative instrument was recorded at fair value each period with changes in fair value reflected in our results of operations. No hedge accounting was applied. As a result of obtaining shareholder approval for the issuance of shares upon conversion of the Notes, we recorded the change in fair value of the embedded derivative liability in our results of operations through the shareholder approval date of May 17, 2018 and then reclassified the embedded derivative liability to stockholders’ equity at its May 17, 2018 fair value of $45.4 million during the second quarter of 2018. As a result of the reclassification to stockholders’ equity, the embedded derivative is no longer marked to fair value each period.

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The amounts recognized in other comprehensive income (loss), reclassified into income (loss) and the amounts recognized in income (loss) for the three and six months ended June 30, 2019 and 2018, are as follows (in thousands): 
 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
 
Gain (Loss)
Reclassified from
Other
Comprehensive
Income (Loss) to
Earnings
 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
 
Gain (Loss)
Reclassified from
Other
Comprehensive
Income (Loss) to
Earnings
 
Three Months Ended
June 30,
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
Six Months Ended
June 30,
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Derivatives Classified as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment hedge
$
(184
)
 
$
788

 
$

 
$

 
$
95

 
$
367

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) Recognized in Income (Loss)1
 
 
 
 
 
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
 
 
 
 
 
 
(unaudited)
 
(unaudited)
 
 
 
 
 
 
 
 
 
2019
 
2018
 
2019
 
2018
Derivatives Not Classified as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Embedded derivative in convertible debt
 
 
 
 
 
 
 
 
$

 
$
(29,330
)
 
$

 
$
(24,783
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_________________
1    Reflected as “Loss on convertible debt embedded derivative” in the condensed consolidated statements of operations.
The following table presents the fair value totals and balance sheet classification for derivatives designated as hedges and derivatives not designated as hedges under ASC 815 (in thousands): 
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
 
 
 
 
 
Classification
 
Balance Sheet
Location
 
Fair
Value
 
Classification
 
Balance Sheet
Location
 
Fair
Value
Derivatives Classified as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
Net investment hedge
Liability
 
Long-term debt
 
$
(3,999
)
 
Liability
 
Long-term debt
 
$
(3,904
)

9. LEASES

We determine if an arrangement is a lease at inception. Operating leases are included in “Operating lease right-of-use (‘ROU’) assets”, “operating lease liabilities” and “current portion of operating lease obligations” on our consolidated balance sheets. Finance leases are included in “property, plant and equipment, net”, “current portion of long-term debt and finance lease obligations” and “long-term debt and finance lease obligations” on our consolidated balance sheets.  

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments and short-term lease payments (leases with terms less than 12 months) are expensed as incurred.

We have lease agreements with lease and non-lease components for certain equipment, office, and vehicle leases. We have elected the practical expedient to not separate lease and non-lease components and account for both as a single lease component.

We have operating and finance leases primarily for equipment, offices, and vehicles. Our leases have remaining lease terms of 1 year to 15 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year.

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The components of lease expense are as follows (in thousands):
 
Three Months Ended
June 30, 2019
Six Months Ended
June 30, 2019
 
(unaudited)
(unaudited)
Operating lease costs
$
7,525

$
15,383

Variable lease costs
1,247

2,927

Finance lease costs:
 
 
Amortization of right-of-use assets
20

108

Interest on lease liabilities
92

173

Total lease cost
$
8,884

$
18,591


Other information related to leases are as follows (in thousands):
 
Three Months Ended
June 30, 2019
Six Months Ended
June 30, 2019
 
(unaudited)
(unaudited)
Supplemental cash flow information:
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
6,113

12,185

Operating cash flows from finance leases
85

220

Financing cash flows from finance leases
66

139

Right-of-use assets obtained in exchange for lease obligations
 
 
Operating leases
1,313

7,781

Finance leases
290

290


As of June 30, 2019, future minimum lease payments under non-cancellable leases (excluding short-term leases) are as follows (in thousands):
Twelve Months Ended December 31,
Operating Leases
 
Finance Lease
 
(unaudited)
 
(unaudited)
2019 (excluding the six months ended June 30, 2019)
$
11,623

 
$
292

2020
18,951

 
585

2021
13,690

 
589

2022
11,320

 
593

2023
9,102

 
543

Thereafter
24,356

 
5,641

Total future minimum lease payments
89,042

 
8,243

Less: Interest
(17,783
)
 
(2,790
)
Present value of lease liabilities
$
71,259

 
$
5,453



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As of December 31, 2018, we disclosed the following undiscounted future gross minimum lease payments for non-cancellable operating and finance leases (in thousands):
Twelve Months Ended December 31,
Operating Leases
 
Finance Lease
2019
$
23,315

 
$
583

2020
16,858

 
500

2021
12,577

 
504

2022
9,873

 
524

2023
7,846

 
525

Thereafter
23,224

 
5,631

Total minimum lease payments
$
93,693

 
$
8,267

Less: Interest on finance leases
 
 
(2,911
)
Total principal payable on finance leases
 
 
$
5,356


Amounts recognized in the condensed consolidated balance sheet are as follows (in thousands):
 
June 30, 2019
Operating Leases:
(unaudited)
Operating lease right-of-use assets
$
66,500

Current portion of operating lease obligations
17,314

Operating lease obligations (non-current)
53,945

 

Finance Leases:
 
Property, plant and equipment, net
$
5,336

Current portion of long-term debt and finance lease obligations
279

Long-term debt and finance lease obligations
5,174

 
 
Weighted average remaining lease term
 
Operating leases
6 years

Finance leases
14 years

Weighted average discount rate
 
Operating leases
8.4
%
Finance lease
6.3
%

As of June 30, 2019, we have no material additional operating and finance leases that have not yet commenced.


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10. EMPLOYEE BENEFIT PLANS
We have a defined benefit pension plan covering certain United Kingdom employees (the “U.K. Plan”). In connection with the sale of the Company’s Norwegian operations in 2018, all assets and liabilities associated with the defined benefit pension plan covering certain Norwegian employees (the “Norwegian Plan”) were transferred to the buyer. The schedule of net periodic pension credit includes only the U.K. Plan in 2019 and combined amounts from the Norwegian and U.K. Plans in 2018.
Net periodic pension credit includes the following components (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Service cost
$

 
$
23

 
$

 
$
47

Interest cost
586

 
588

 
1,179

 
1,189

Expected return on plan assets
(600
)
 
(948
)
 
(1,207
)
 
(1,918
)
Amortization of unrecognized prior service cost
8

 

 
16

 

Net periodic pension credit
$
(6
)
 
$
(337
)
 
$
(12
)
 
$
(682
)

The expected long-term rate of return on invested assets is determined based on the weighted average of expected returns on asset investment categories for the U.K. Plan as follows: 3.25% overall, 5.77% for equities and 2.66% for debt securities. We expect to contribute $2.3 million to the U.K. Plan for 2019, of which $1.2 million has been contributed through June 30, 2019.

11. FAIR VALUE MEASUREMENTS
We apply the provisions of ASC 820, Fair Value Measurement (“ASC 820”) which among other things, requires certain disclosures about assets and liabilities carried at fair value.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best information available. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The use of unobservable inputs is intended to allow for fair value determinations in situations in which there is little, if any, market activity for the asset or liability at the measurement date. We are able to classify fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy such that “Level 1” measurements include unadjusted quoted market prices for identical assets or liabilities in an active market, “Level 2” measurements include quoted market prices for identical assets or liabilities in an active market which have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets, and “Level 3” measurements include those that are unobservable and of a highly subjective measure.

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The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of June 30, 2019 and December 31, 2018. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):
 
June 30, 2019
 
(unaudited)
 
Quoted Prices
in Active
Markets for
Identical
Items (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$

 
$

Net investment hedge
$

 
$
(3,999
)
 
$

 
$
(3,999
)
 
December 31, 2018
 
Quoted Prices
in Active
Markets for
Identical
Items (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
429

 
$
429

Net investment hedge
$

 
$
(3,904
)
 
$

 
$
(3,904
)


There were no transfers in and out of Level 3 during the six months ended June 30, 2019 and 2018.
The fair value of contingent consideration liabilities classified in the table above were estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include a combination of actual cash flows and probability-weighted assessments of expected future cash flows related to the acquired businesses, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the acquisition agreements.
The following table represents the changes in the fair value of Level 3 contingent consideration liabilities (in thousands):
 
Six Months Ended
June 30, 2019
 
(unaudited)
Balance, beginning of period
$
429

Foreign currency effects
(1
)
Payment
(428
)
Balance, end of period
$



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12. SHARE-BASED COMPENSATION
We have adopted stock incentive plans and other arrangements pursuant to which our Board of Directors (the “Board”) may grant stock options, restricted stock, stock units, stock appreciation rights, common stock or performance awards to officers, directors and key employees. At June 30, 2019, there were approximately 1.6 million restricted stock units, performance awards and stock options outstanding to officers, directors and key employees. The exercise price, terms and other conditions applicable to each form of share-based compensation under our plans are generally determined by the Compensation Committee of our Board at the time of grant and may vary.