424B3
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Filed pursuant to Rule 424(b)(3)
Registration Statement No. 333-228389

PROSPECTUS

 

LOGO

Apergy Corporation

Offer to Exchange

$300,000,000 aggregate principal amount of its 6.375% Senior Notes due 2026 (the “exchange notes”), which have been registered under the Securities Act of 1933, as amended (the “Securities Act”), for any and all of its outstanding 6.375% Senior Notes due 2026 (the “outstanding notes” and such transaction, the “exchange offer”)

 

 

We are conducting the exchange offer in order to provide you with an opportunity to exchange your unregistered outstanding notes for the exchange notes that have been registered under the Securities Act.

The Exchange Offer

 

   

We will exchange all unregistered outstanding notes that are validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are registered under the Securities Act.

 

   

You may withdraw tenders of outstanding notes at any time prior to the expiration of the exchange offer.

 

   

The exchange offer expires at 11:59 p.m., New York City time, on December 19, 2018, unless extended (the “expiration date”). We do not currently intend to extend the expiration date.

 

   

The exchange of outstanding notes for exchange notes in the exchange offer will not constitute a taxable exchange or other taxable event for U.S. federal income tax purposes. See the discussion under the caption “Summary of Material United States Federal Income Tax Consequences” for more information. You should consult your own tax advisor as to the particular tax consequences to you of the exchange offer, as well as the tax consequences of the ownership and disposition of outstanding notes or exchange notes.

 

   

The terms of the exchange notes to be issued in the exchange offer are substantially identical to the outstanding notes, except that the exchange notes will be registered under the Securities Act, do not have any transfer restrictions and do not have registration rights or additional interest provisions.

Results of the Exchange Offer

 

   

Except as prohibited by applicable law, the exchange notes may be sold in the over-the-counter market, in negotiated transactions or through a combination of such methods.

 

   

We will not receive any proceeds from the exchange offer.

There is no established trading market for the exchange notes or the outstanding notes and we do not intend to list the exchange notes or the outstanding notes on any securities exchange.

All untendered outstanding notes will remain outstanding and continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the Indenture (as defined herein). In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the outstanding notes under the Securities Act.

Each broker-dealer that receives exchange notes for its own account in the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of those exchange notes. The letter of transmittal states that by so acknowledging and delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for outstanding notes where the broker-dealer acquired such outstanding notes as a result of market-making or other trading activities. We have agreed to keep effective the registration statement of which this prospectus is a part until 180 days after the completion of the exchange offer. See “Plan of Distribution.”

 

 

See “Risk Factors” beginning on page 12 for a discussion of certain risks that you should consider before participating in the exchange offer.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is November 21 , 2018.


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TABLE OF CONTENTS

 

Cautionary Statement Concerning Forward-Looking Statements

     1  

Summary

     3  

Risk Factors

     12  

Use of Proceeds

     38  

Selected Historical Financial Data

     39  

Our Business and Properties

     41  

Legal Proceedings

     55  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     56  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     79  

Quantitative and Qualitative Disclosures about Market Risk

     80  

Directors, Executive Officers and Corporate Governance

     81  

Executive Compensation

     88  

Director Compensation

     103  

Security Ownership of Certain Beneficial Owners and Management

     104  

Certain Relationships and Related Person Transactions

     106  

The Exchange Offer

     112  

Description of the Exchange Notes

     122  

Summary of Material United States Federal Income Tax Consequences

     182  

Plan of Distribution

     183  

Legal Matters

     183  

Experts

     183  

SEC Position on Indemnification for Securities Act Liabilities

     183  

Index to Financial Statements

     F-1  

 

 

Unless otherwise indicated or context otherwise requires, all references in this prospectus to “Apergy Corporation,” “Apergy,” “the Company,” “we,” “us,” “our” and “our company” refer (i) prior to the Separation (as defined herein), to the Apergy businesses, consisting of entities, assets and liabilities, conducting the upstream oil and gas business within Dover’s Energy segment and (ii) after the Separation, to Apergy Corporation and its consolidated subsidiaries.

References in this prospectus to “Dover” refer to Dover Corporation, a Delaware corporation and its consolidated subsidiaries (other than Apergy Corporation and its combined subsidiaries), unless the context otherwise requires or as otherwise specified herein.

This prospectus incorporates or references important business and financial information about Apergy that is not included in or delivered with this prospectus. This information is available without charge to any person to whom this prospectus is delivered, upon written or oral request. Written requests should be sent to:

Apergy Corporation

2445 Technology Forest Blvd

Building 4, 12th Floor

The Woodlands, Texas 77381

Attn: David Skipper

Oral requests should be made by telephoning (713) 230-8031.

To ensure timely delivery, you should make your request to us no later than December 12, 2018, which is five business days prior to the expiration date of the exchange offer.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” within the meaning of the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually related 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,” “will,” “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 risk, uncertainties (some of which are significant or beyond our control) and assumptions that could cause actual results to materially differ from our historical experience and our present expectations or projections. Known material factors that could cause actual results to materially differ from those contemplated in the forward-looking statements include those set forth in this prospectus under the heading entitled “Risk Factors,” which are summarized as follows:

 

   

Demand for our products and services, which is affected by changes in the price of, and demand for, crude oil and natural gas in domestic and international markets;

 

   

Our ability to successfully compete with other companies in our industry;

 

   

Our ability to develop and implement new technologies and services, as well as our ability to protect and maintain critical intellectual property assets;

 

   

Cost inflation and availability of raw materials;

 

   

Changes in federal, state and local legislation and regulations relating to hydraulic fracturing or oil and gas development and the potential for related litigation or restrictions on our customers;

 

   

Our ability to successfully execute our capital allocation and acquisition programs;

 

   

Potential liabilities arising out of the installation or use of our products;

 

   

Continuing consolidation within our customers’ industry;

 

   

A failure of our information technology infrastructure or any significant breach of security;

 

   

Changes in environmental and health and safety laws and regulations which may increase our costs, limit the demand for our products and services or restrict our operations;

 

   

Risks relating to our existing international operations and expansion into new geographical markets;

 

   

Changes in domestic and foreign governmental public policies, risks associated with entry into emerging markets, changes in statutory tax rates and unanticipated outcomes with respect to tax audits;

 

   

Failure to attract, retain and develop personnel for key management;

 

   

The impact of our indebtedness on our financial position and operating flexibility;

 

   

The impact of tariffs and other trade measures on our business;

 

   

Credit risks related to our customer base or the loss of significant customers;

 

   

Deterioration in future expected profitability or cash flows and its effect on our goodwill;

 

   

Disruptions in the political, regulatory, economic and social conditions of the countries in which we conduct business;

 

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Fluctuations in currency markets worldwide; and

 

   

Increased compliance costs for us and our customers due to changes in climate change legislation and other regulatory initiatives.

We undertake no obligation to publicly update or revise 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 by law.

WHERE YOU CAN FIND MORE INFORMATION

We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public on the SEC’s website at http://www.sec.gov.

We have filed with the SEC a registration statement on Form S-4 relating to the securities covered by this prospectus. This prospectus is a part of the registration statement and does not contain all of the information in the registration statement. Whenever a reference is made in this prospectus to a contract or other document of ours, please be aware that the reference is only a summary and that you should refer to the exhibits that are a part of the registration statement for a copy of the contract or other document. You may access a copy of the registration statement through the SEC’s website.

 

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SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus and is, therefore, qualified in its entirety by the more detailed information appearing elsewhere in this prospectus. It may not contain all the information that is important to you. We urge you to read carefully this entire prospectus and the other documents to which it refers to understand fully the terms of the exchange notes and the exchange offer. You should pay special attention to “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”

Our Business

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

Separation and Distribution

On April 18, 2018, the Dover Corporation (“Dover”) Board of Directors approved the separation of entities conducting its upstream oil and gas energy business within Dover’s Energy segment (the “Separation”) into an independent, publicly traded company named Apergy Corporation. In accordance with the separation and distribution agreement, the two companies were separated by Dover distributing to Dover’s stockholders all 77,339,828 shares of common stock of Apergy on May 9, 2018. Each Dover stockholder received one share of Apergy stock for every two shares of Dover stock held at the close of business on the record date of April 30, 2018. In conjunction with the Separation, Dover received a private letter ruling from the Internal Revenue Service (the “IRS”) to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, for U.S. federal income tax purposes, the distribution of Apergy common stock was not taxable to Dover or U.S. holders of Dover common stock, except in respect to cash received in lieu of fractional share interests. Following the Separation, Dover retained no ownership interest in Apergy, and each company, as of May 9, 2018, has separate public ownership, boards of directors and management. On May 9, 2018, Apergy common stock began “regular-way” trading on the New York Stock Exchange under the “APY” symbol. See “Certain Relationships and Related Person Transactions.”

Corporate Information

Apergy Corporation was incorporated in Delaware on October 10, 2017, under the name Wellsite Corporation and was renamed Apergy Corporation on February 2, 2018. Apergy was formed for the purpose of holding entities, assets and liabilities used in conducting Dover’s upstream oil and gas business within Dover’s Energy segment prior to the Separation. The address of our principal executive offices is 2445 Technology Forest Blvd, Building 4, 12th Floor, The Woodlands, Texas 77381. Our telephone number is (281) 403-5772.

We also maintain an internet site at www.apergy.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in deciding whether or not to participate in the exchange offer.



 

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The Exchange Offer

 

General

In connection with the private offering of the outstanding notes, we entered into a registration rights agreement with the initial purchasers in such offering pursuant to which we agreed, among other things, to deliver this prospectus to you and to use commercially reasonable efforts to complete the exchange offer within one year after the date of original issuance of the outstanding notes. You are entitled to exchange in the exchange offer your outstanding notes for the exchange notes that are identical in all material respects to the outstanding notes except:

 

   

the exchange notes have been registered under the Securities Act;

 

   

the exchange notes are not entitled to any registration rights which are applicable to the outstanding notes under the registration rights agreement; and

 

   

the additional interest provision of the registration rights agreement is not applicable.

 

The Exchange Offer

We are offering to exchange $300.0 million aggregate principal amount of 6.375% Senior Notes due 2026 that have been registered under the Securities Act for any and all of our existing restricted 6.375% Senior Notes due 2026.

 

  You may only exchange outstanding notes in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof.

 

Resale

Based on an interpretation by the staff of the SEC set forth in no-action letters issued to third parties, we believe that the exchange notes issued pursuant to the exchange offer in exchange for the outstanding notes may be offered for resale, resold and otherwise transferred by you (unless you are our “affiliate” within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that:

 

   

you are acquiring the exchange notes in the ordinary course of your business; and

 

   

you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the exchange notes.

 

  If you are a broker-dealer and receive exchange notes for your own account in exchange for outstanding notes that you acquired as a result of market-making activities or other trading activities, you must acknowledge that you will deliver this prospectus in connection with any resale of the exchange notes and that you are not our affiliate. See “Plan of Distribution.”


 

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  Any holder of outstanding notes who:

 

   

is our affiliate;

 

   

does not acquire exchange notes in the ordinary course of its business; or

 

   

tenders its outstanding notes in the exchange offer with the intention to participate, or for the purpose of participating, in a distribution of exchange notes,

 

  cannot rely on the position of the staff of the SEC enunciated in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in Shearman & Sterling (available July 2, 1993), or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes.

 

  Our belief that the exchange notes may be offered for resale without compliance with the registration or prospectus delivery provisions of the Securities Act is based on interpretations of the SEC for other exchange offers that the SEC expressed in some of its no-action letters to other issuers in exchange offers like ours. We cannot guarantee that the SEC would make a similar decision about our exchange offer. If our belief is wrong, or if you cannot truthfully make the representations mentioned above, and you transfer any exchange note issued to you in the exchange offer without meeting the registration and prospectus delivery requirements of the Securities Act, or without an exemption from such requirements, you could incur liability under the Securities Act. We are not indemnifying you for any such liability.

 

Expiration Date

The exchange offer will expire at 11:59 p.m., New York City time, on December 19, 2018, unless extended by us. We do not currently intend to extend the expiration date.

 

Withdrawal

You may withdraw the tender of your outstanding notes at any time prior to the expiration of the exchange offer. We will return to you any of your outstanding notes that are not accepted for any reason for exchange, without expense to you, promptly after the expiration or termination of the exchange offer.

 

Conditions to the Exchange Offer

The exchange offer is subject to customary conditions. We reserve the right to waive any defects, irregularities or conditions to exchange as to particular outstanding notes. See “The Exchange Offer—Conditions to the Exchange Offer.”

 

Procedures for Tendering Outstanding Notes

If you wish to participate in the exchange offer, you must either:

 

   

complete, sign and date the accompanying letter of transmittal, or a facsimile of the letter of transmittal, in accordance with the



 

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instructions contained in this prospectus and the letter of transmittal, and mail or deliver such letter of transmittal or facsimile thereof to the exchange agent at the address set forth on the cover page of the letter of transmittal; or

 

   

if you hold outstanding notes through the Depository Trust Company (“DTC”), comply with DTC’s Automated Tender Offer Program procedures described in this prospectus, by which you will agree to be bound by the letter of transmittal.

 

  By signing, or agreeing to be bound by, the letter of transmittal, you will represent to us that, among other things:

 

   

you are acquiring the exchange notes in the ordinary course of your business;

 

   

you have no arrangement or understanding with any person to participate in the distribution of the exchange notes;

 

   

you are not our “affiliate” within the meaning of Rule 405 under the Securities Act;

 

   

you are not engaged in, and do not intend to engage in, a distribution of the exchange notes; and

 

   

if you are a broker-dealer that will receive exchange notes for your own account in exchange for outstanding notes that were acquired as a result of market-making activities, you will deliver a prospectus, as required by law, in connection with any resale of such exchange notes.

 

Guaranteed Delivery Procedures

None.

 

Special Procedures for Beneficial Owners

If you are a beneficial owner of outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender those outstanding notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender those outstanding notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date.

 

Effect on Holders of Outstanding Notes

As a result of the making of the exchange offer, and upon acceptance for exchange of all validly tendered outstanding notes pursuant to the terms of the exchange offer, we will have fulfilled a covenant under the registration rights agreement. Accordingly, there will be no increase in the applicable interest rate on the outstanding notes under



 

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the circumstances described in the registration rights agreement. If you do not tender your outstanding notes in the exchange offer, you will continue to be entitled to all the rights and limitations applicable to the outstanding notes as set forth in the Indenture, except we will not have any further obligation to you to provide for the exchange and registration of untendered outstanding notes under the registration rights agreement. To the extent that outstanding notes are tendered and accepted in the exchange offer, the trading market for outstanding notes that are not so tendered and accepted could be adversely affected.

 

Consequences of Failure to Exchange

All untendered outstanding notes will remain outstanding and continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the Indenture. In general, the outstanding notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the outstanding notes under the Securities Act.

 

United States Federal Income Tax Consequences

The exchange of outstanding notes for exchange notes in the exchange offer will not constitute a taxable exchange or other taxable event for U.S. federal income tax purposes. See “Summary of Material United States Federal Income Tax Consequences.” You should consult your own tax advisor as to the particular tax consequences to you of the exchange offer, as well as the tax consequences of the ownership and disposition of outstanding notes or exchange notes.

 

Use of Proceeds

We will not receive any proceeds from the issuance of the exchange notes in the exchange offer. See “Use of Proceeds.”

 

Exchange Agent

Wells Fargo Bank, National Association is the exchange agent for the exchange offer. Any questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal should be directed to the exchange agent. The address and telephone number of the exchange agent are set forth in the section captioned “The Exchange Offer—Exchange Agent.”


 

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The Exchange Notes

The terms of the exchange notes and those of the outstanding notes are substantially identical, except that the transfer restrictions and registration rights relating to the outstanding notes do not apply to the exchange notes. For a more detailed description of the terms of the notes and the guarantees, see “Description of the Exchange Notes.” When we use the term “notes” in this prospectus, the term includes the outstanding notes and the exchange notes, as applicable.

 

Issuer

Apergy Corporation

 

Securities Offered

$300,000,000 aggregate principal amount of exchange notes.

 

Maturity Date

May 1, 2026.

 

Indenture

We will issue the exchange notes under the Indenture, dated as of May 3, 2018, as amended and supplemented (the “Indenture”), between us and Wells Fargo Bank, National Association, as trustee (the “Trustee”).

 

Interest Rate

6.375% per year.

 

Interest Payment Dates

May 1 and November 1 of each year.

 

Guarantees

The exchange notes will be guaranteed, jointly and severally, by all existing and future direct and indirect 100% owned domestic subsidiaries of Apergy that incur or that guarantee any obligations under our senior secured credit facilities (the “Senior Secured Credit Facilities”) (the “Guarantors”) or certain series of capital markets debt securities (other than the notes) of Apergy or any Guarantor. See “Description of the Exchange Notes—Guarantees.”

 

  All of our existing direct and indirect 100% owned domestic subsidiaries (other than certain immaterial subsidiaries) will guarantee the exchange notes. In the future, additional subsidiaries may not guarantee the notes and guarantees provided may be released in certain circumstances. See “Risk Factors—Risks Related to Holding the Exchange Notes—Claims of holders of the notes will be structurally subordinated to all obligations of our existing and future subsidiaries that do not become Guarantors of the notes.” In the event of a bankruptcy, liquidation, reorganization or similar proceeding of any of these non-Guarantor subsidiaries, the non-Guarantor subsidiaries will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to Apergy or a Guarantor. As a result, all of the existing and future liabilities of our non-Guarantor subsidiaries, including any claims of trade creditors, will be effectively senior to the notes. The Indenture does not limit the amount of liabilities that are not considered indebtedness that may be incurred by Apergy or its restricted subsidiaries, including the non-Guarantor subsidiaries.


 

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Ranking

The exchange notes and guarantees will constitute senior indebtedness of Apergy and the Guarantors and will rank:

 

   

pari passu in right of payment with any existing and future senior indebtedness of Apergy and the Guarantors, including under the Senior Secured Credit Facilities;

 

   

senior in right of payment to any future subordinated indebtedness of Apergy and the Guarantors;

 

   

effectively subordinated to all of Apergy’s and the Guarantors’ existing and future secured indebtedness, including the Senior Secured Credit Facilities, to the extent of the value of the collateral securing such indebtedness; and

 

   

structurally subordinated to all existing and future indebtedness and other claims and liabilities, including preferred stock, of Apergy’s subsidiaries that will not guarantee the notes (other than indebtedness and liabilities owed to Apergy or one of the Guarantors).

 

  As of September 30, 2018, the notes and related guarantees were effectively subordinated to approximately $395.0 million (excluding any original issue discount and deferred financing costs) principal amount of senior secured indebtedness, to the extent of the collateral securing such senior secured indebtedness, such indebtedness consisting solely of approximately $395.0 million (excluding any original issue discount and deferred financing costs) of borrowings under term loan B facility (the “Term Loan Facility”) of the Senior Secured Credit Facilities.

 

  As of September 30, 2018, we were able to incur approximately an additional $244.5 million of indebtedness under the senior secured revolving credit facility (the “Revolving Credit Facility”) of the Senior Secured Credit Facilities.

 

  See “Description of the Exchange Notes—Ranking.”

 

Optional Redemption

Except as described below, Apergy cannot redeem the notes before May 1, 2021. Thereafter, Apergy may redeem some or all of the notes at any time at the redemption prices listed under “Description of the Exchange Notes—Optional Redemption,” plus accrued and unpaid interest up to, but excluding, the redemption date.

 

  At any time and from time to time prior to May 1, 2021, Apergy may redeem some or all of the exchange notes at a price equal to 100% of the aggregate principal amount thereof plus the make-whole premium described under “Description of the Exchange Notes—Optional Redemption,” plus accrued and unpaid interest up to, but excluding, the redemption date.

 

 

At any time and from time to time prior to May 1, 2021, Apergy may redeem up to 35% of the aggregate principal amount of the notes at a



 

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redemption price of 106.375% of the aggregate principal amount thereof, plus accrued and unpaid interest up to, but excluding, the redemption date, with the net proceeds of certain equity offerings if at least 65% of the aggregate principal amount of notes issued remains outstanding afterward and Apergy redeems the notes within 180 days of completing the equity offering.

 

Change of Control Offer

If a Change of Control Repurchase Event (as defined under “Description of the Exchange Notes”) occurs, Apergy will be required to make an offer to purchase all of the notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest up to, but excluding, the repurchase date. See “Description of the Exchange Notes—Repurchase at the Option of Holders—Change of control repurchase events.”

 

Asset Sale Proceeds

If Apergy or any of its restricted subsidiaries engages in certain asset sales, Apergy will be required under certain circumstances to make an offer to purchase the notes at 100% of the principal amount thereof, plus accrued and unpaid interest up to, but excluding, the repurchase date. See “Description of the Exchange Notes—Repurchase at the Option of Holders—Asset sales.”

 

Covenants

The Indenture limits the ability of Apergy and its restricted subsidiaries to, among other things:

 

   

pay dividends or distributions, repurchase equity, prepay subordinated indebtedness and make other restricted payments;

 

   

incur additional indebtedness or issue certain preferred shares;

 

   

make certain investments;

 

   

sell or transfer certain assets;

 

   

incur liens on assets;

 

   

merge, consolidate or sell all or substantially all of its assets;

 

   

enter into transactions with affiliates;

 

   

designate our subsidiaries as unrestricted subsidiaries; and

 

   

create or cause to exist certain restrictions on the ability of non-Guarantor restricted subsidiaries to pay dividends or make other payments to us.

 

  These covenants are subject to important exceptions and qualifications. Following the first date on which (i) the notes have an investment grade rating, (ii) no default has occurred and is continuing under the Indenture and (iii) Apergy has delivered an officer’s certificate to the Trustee certifying that the conditions set forth in clauses (i) and (ii) above are satisfied, Apergy and its restricted subsidiaries will not be subject to certain of these covenants and the obligation to grant further guarantees will be terminated. See “Description of the Exchange Notes—Certain Covenants.”


 

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No Prior Market

The exchange notes will be new securities for which there is currently no market. We do not intend to apply for a listing of the exchange notes on any securities exchange or to arrange for the inclusion of the exchange notes on any automated dealer quotation system. Accordingly, there can be no assurance as to the development or liquidity of any market for the exchange notes. Accordingly, we cannot assure you that a liquid market for the exchange notes will develop or be maintained.

 

Risk Factors

You should consider carefully all of the information set forth in this prospectus prior to exchanging your outstanding notes. In particular, we urge you to consider carefully the factors set forth under the heading “Risk Factors.”


 

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RISK FACTORS

You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus. Any of the following risks could materially and adversely affect our business, financial condition, operating results or cash flow; however, these risks are not our only risks. In such a case, the trading price of the notes could decline or we may not be able to make payments of interest and principal on the notes, and you may lose all or part of your original investment.

Risks Related to Apergy’s Business

Trends in oil and natural gas prices may affect the drilling and production activity, profitability and financial stability of Apergy’s customers and therefore the demand for, and profitability of, Apergy’s products and services, which could have a material adverse effect on Apergy’s business, results of operations and financial condition.

The oil and gas industry is cyclical in nature and experiences periodic downturns of varying length and severity. Most recently, the oil and gas industry experienced a significant downturn in 2015 and 2016. Apergy’s ability to manage periodic industry downturns is important to its business, results and prospects. Demand for Apergy’s energy products and services is sensitive to the level of drilling and production activity of, and the corresponding capital spending by, oil and natural gas companies. The level of drilling and production activity is directly affected by trends in oil and natural gas prices, which are influenced by numerous factors affecting the supply and demand for oil and gas, including:

 

   

worldwide economic activity;

 

   

the level of exploration and production activity;

 

   

interest rates and the cost of capital;

 

   

environmental regulation;

 

   

federal, state and foreign policies regarding exploration and development of oil and gas;

 

   

the ability and/or desire of the Organization of the Petroleum Exporting Countries (“OPEC”) and other major producers to set and maintain production levels and pricing;

 

   

governmental regulations regarding future oil and gas exploration and production;

 

   

the cost of exploring and producing oil and gas;

 

   

the pace of adoption and cost of developing alternative energy sources;

 

   

the availability, expiration date and price of onshore and offshore leases;

 

   

the discovery rate of new oil and gas reserves in onshore and offshore areas;

 

   

the success of drilling for oil and gas in unconventional resource plays such as shale formations;

 

   

alternative opportunities to invest in onshore exploration and production opportunities;

 

   

domestic and global political and economic uncertainty, socio-political unrest and instability, terrorism or hostilities;

 

   

technological advances; and

 

   

weather conditions.

Oil and gas prices and the level of drilling and production activity have been characterized by significant volatility in recent years. In particular, the prices of oil and natural gas were highly volatile in 2014 and 2015 and declined dramatically. Prices of oil began to recover in late 2016, but there can be no assurance that increases

 

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will continue. Apergy expects continued volatility in both crude oil and natural gas prices, as well as in the level of drilling and production related activities. Even the perception of longer-term lower oil and natural gas prices can reduce or defer major capital expenditures by Apergy’s customers in the oil and gas industry. A significant downturn in the industry could result in the reduction in demand for Apergy’s products and services, and could have a material adverse effect on Apergy’s business, results of operations, financial condition and cash flows.

Apergy might be unable to compete successfully with other companies in its industry.

The markets in which Apergy operates are highly competitive. The principal competitive factors in Apergy’s markets are customer service, product quality and performance, price, breadth of product offering, market expertise and innovation. In some of Apergy’s product and service offerings, it competes with the oil and natural gas industry’s largest oilfield service providers. These large national and multi-national companies may have longer operating histories, greater financial, technical, and other resources, greater brand recognition, and a stronger presence in geographic markets than Apergy. In addition, Apergy competes with many smaller companies capable of competing effectively on a regional or local basis. Apergy’s competitors may be able to respond more quickly to new or emerging technologies and services, and changes in customer requirements. Many contracts are awarded on a bid basis, which further increases competition based on price. As a result of competition, Apergy may lose market share or be unable to maintain or increase prices for its present services, or to acquire additional business opportunities, which could have a material adverse effect on Apergy’s business, results of operations, financial condition and cash flows.

If Apergy is unable to develop new products and technologies, its competitive position may be impaired, which could materially and adversely affect its sales and market share.

The markets in which Apergy operates are characterized by changing technologies and introductions of new products and services. As a result, Apergy’s success is dependent upon its ability to develop or acquire new services and products on a cost-effective basis, to introduce them into the marketplace in a timely manner and to protect and maintain critical intellectual property assets related to these developments. Difficulties or delays in research, development or production of new products and technologies, or failure to gain market acceptance of new products and technologies, may significantly reduce future revenues and materially and adversely affect Apergy’s competitive position. While Apergy intends to continue committing substantial financial resources and effort to the development of new services and products, Apergy may not be able to successfully differentiate its services and products from those of its competitors. Apergy’s customers may not consider its proposed services and products to be of value to them or may not view them as superior to Apergy’s competitors’ services and products. In addition, competitors or customers may develop new technologies, which address similar or improved solutions to Apergy’s existing technology. Further, Apergy may not be able to adapt to evolving markets and technologies, develop new products, achieve and maintain technological advantages or protect technological advantages through intellectual property rights. If Apergy does not compete successfully, its business, results of operations, financial condition and cash flows could be materially adversely affected.

Apergy could lose customers or generate lower revenue, operating profits and cash flows if there are significant increases in the cost of raw materials or if Apergy is unable to obtain raw materials.

Apergy purchases raw materials, sub-assemblies and components for use in its manufacturing operations, which exposes Apergy to volatility in prices for certain commodities. Significant price increases for these commodities could adversely affect Apergy’s operating profits. While Apergy generally attempts to mitigate the impact of increased raw material prices by endeavoring to make strategic purchasing decisions, broaden its supplier base and pass along increased costs to customers, there may be a time delay between the increased raw material prices and the ability to increase the prices of products, or Apergy may be unable to increase the prices of products due to a competitor’s pricing pressure or other factors. In addition, while raw materials are generally available now, the inability to obtain necessary raw materials could affect Apergy’s ability to meet customer commitments and satisfy market demand for certain products. Certain of Apergy’s product lines depend on a

 

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limited number of third-party suppliers and vendors. The ability of these third parties to deliver raw materials may be affected by events beyond Apergy’s control. Consequently, a significant price increase in raw materials, or their unavailability, may result in a loss of customers and adversely impact Apergy’s business, results of operations, financial condition and cash flows.

Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related litigation could result in increased costs and additional operating restrictions or delays for Apergy’s customers, which could reduce demand for Apergy’s products and negatively impact Apergy’s business, financial condition and results of operations.

Environmental laws and regulations could limit Apergy’s customers’ exploration and production activities. Although Apergy does not directly engage in hydraulic fracturing activities, it provides products and services to hydraulic fracturing operators in the oil and natural gas industry. Hydraulic fracturing is a widely used industry production technique that is used to recover oil and/or natural gas from dense subsurface rock formations. The process involves the injection of water, proppants and chemicals, under pressure, into the formation to fracture the surrounding rock and stimulate production. The hydraulic fracturing process is typically regulated by state or local governmental authorities. However, the practice of hydraulic fracturing has become controversial in some areas and is undergoing increased scrutiny. Several federal agencies, regulatory authorities, and legislative entities are investigating the potential environmental impacts of hydraulic fracturing and whether additional regulation may be necessary. The U.S. Congress has from time to time considered, but has not yet adopted, legislation to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the process. The U.S. Environmental Protection Agency (“EPA”) has issued a number of regulations in recent years that may affect hydraulic fracturing; however, the current administration has more generally indicated an interest in scaling back or rescinding regulations that inhibit the development of the U.S. oil and gas industry. It is difficult to predict the extent to which proposed regulations will be implemented or the outcome of any related litigation.

In addition, various state and local governments have implemented, or are considering, increased regulatory oversight of hydraulic fracturing through additional permitting requirements, operational restrictions, disclosure requirements and temporary or permanent bans on hydraulic fracturing in certain areas such as environmentally sensitive watersheds. For example, many states have imposed disclosure requirements on hydraulic fracturing well owners and operators regarding the chemicals used in hydraulic fracturing. Some local governments have adopted and others may seek to adopt ordinances prohibiting or regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities within their jurisdictions. Concerns have been raised that hydraulic fracturing may also contribute to seismic activity and in response to these concerns, regulators in some states, including Texas, are seeking to impose additional requirements. Increased regulation and attention given to induced seismicity could lead to greater opposition to, and litigation concerning, oil and natural gas activities utilizing hydraulic fracturing or injection wells for waste disposal.

The adoption of new laws or regulations at the federal, state, or local levels imposing reporting obligations on, or otherwise limiting or delaying, the hydraulic fracturing process could make it more difficult to complete oil and gas wells, increase Apergy’s customers’ costs of compliance and doing business, and otherwise adversely affect the hydraulic fracturing services they perform, which could negatively impact demand for Apergy’s products and services. In addition, heightened political, regulatory and public scrutiny of hydraulic fracturing practices, including lawsuits, could expose Apergy or its customers to increased legal and regulatory proceedings, which could be time-consuming, costly or result in substantial legal liability or significant reputational harm. Apergy could be directly affected by adverse litigation, or indirectly affected if the cost of compliance or the risks of liability limit the ability or willingness of Apergy’s customers to operate. Such costs and scrutiny could directly or indirectly, through reduced demand for Apergy’s products and services, have a material adverse effect on its business, results of operations, financial condition and cash flows.

 

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Apergy’s growth and results of operations may be adversely affected if it is unsuccessful in its capital allocation and acquisition program.

If Apergy fails to allocate its capital appropriately, in respect of either its acquisition program or organic growth in its operations, it could be overexposed in certain markets and geographies and unable to expand into adjacent products or markets. Apergy expects to pursue a strategy of acquiring value creating, add-on businesses that broaden its existing position and global reach thereby complementing its existing businesses. However, there can be no assurance that Apergy will be able to continue to find suitable businesses to purchase, that Apergy will be able to acquire such businesses on acceptable terms, or that all closing conditions will be satisfied with respect to any pending acquisition. If Apergy is unsuccessful in its acquisition efforts, then its ability to continue to grow could be adversely affected. In addition, Apergy faces the risk that a completed acquisition may underperform relative to expectations. Apergy may not achieve the synergies originally anticipated, may become exposed to unexpected liabilities or may not be able to sufficiently integrate completed acquisitions into its current business and growth model. These factors could potentially have an adverse impact on Apergy’s business, results of operations, financial condition and cash flows.

Apergy’s products are used in operations that are subject to potential hazards inherent in the oil and natural gas industry and, as a result, Apergy is exposed to potential liabilities that may affect its financial condition and reputation.

Apergy’s products are used in potentially hazardous drilling, completion and production applications in the oil and natural gas industry where an accident or a failure of a product can potentially have catastrophic consequences. Risks inherent to these applications, such as equipment malfunctions and failures, equipment misuse and defects, explosions, blowouts and uncontrollable flows of oil, natural gas or well fluids and natural disasters can cause personal injury, loss of life, suspension of operations, damage to formations, damage to facilities, business interruption and damage to or destruction of property, surface water and drinking water resources, equipment and the environment. In addition, Apergy provides certain services that could cause, contribute to or be implicated in these events. If Apergy’s products or services fail to meet specifications or are involved in accidents or failures, Apergy could face warranty, contract or other litigation claims, which could expose Apergy to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, and pollution and other environmental damages. Apergy may agree to indemnify its customers against specific risks and liabilities. While Apergy currently maintains insurance protection against some of these risks, and seeks to obtain indemnity agreements from its customers requiring them to hold Apergy harmless from some of these risks, Apergy’s current insurance and contractual indemnity protection may not be sufficient or effective enough to protect it under all circumstances or against all risks. The defense of these lawsuits may require significant expenses and divert management’s attention, and Apergy may be required to pay damages that could adversely affect its business, results of operations, financial condition and cash flows. In addition, the frequency and severity of such incidents could affect insurability and relationships with customers, employees and regulators. In particular, Apergy’s customers may elect not to purchase its products or services if they view its safety record as unacceptable, which could cause Apergy to lose customers and substantial revenues.

Apergy’s customers’ industries are undergoing continuing consolidation that may impact Apergy’s results of operations.

The oil and gas industry is rapidly consolidating and, as a result, some of Apergy’s largest customers have consolidated and are using their size and purchasing power to seek economies of scale and pricing concessions. This consolidation may result in reduced capital spending by some of Apergy’s customers or the acquisition of one or more of Apergy’s primary customers, which may lead to decreased demand for Apergy’s products and services. Apergy cannot assure you that it will be able to maintain its level of sales to a customer that has consolidated or replace that revenue with increased business activity with other customers. As a result, the acquisition of one or more of Apergy’s primary customers may have a significant negative impact on Apergy’s

 

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business, results of operations, financial condition or cash flows. Apergy is unable to predict what effect consolidations in the industry may have on price, capital spending by its customers, its selling strategies, its competitive position, its ability to retain customers or its ability to negotiate favorable agreements with its customers.

Apergy is subject to information technology, cybersecurity and privacy risks.

Apergy depends on various information technologies throughout its company to store and process information and support its business activities. Apergy also manufactures and sells hardware and software to provide monitoring, controls and optimization of customer critical assets in oil and gas production and distribution. Apergy also provides services to maintain these systems and to enable higher return through their business and technical domain knowledge. Additionally, Apergy’s operations rely upon partners, vendors and other third-party providers of information technology software and services. If these technologies, systems, products or services are damaged, cease to function properly, are breached due to employee error, malfeasance, system errors, or other vulnerabilities, or are subject to cybersecurity attacks, such as those involving unauthorized access, malicious software and/or other intrusions, including by criminals, nation states or insiders, Apergy or its partners, vendors or other third parties could experience production downtimes, operational delays, other detrimental impacts on its operations or ability to provide products and services to its customers, the compromising of confidential, proprietary or otherwise protected information, including personal and customer data, destruction, corruption, or theft of data, security breaches, other manipulation, disruption, misappropriation or improper use of its systems or networks, financial losses from remedial actions, loss of business or potential liability, adverse media coverage, legal claims or legal proceedings, including regulatory investigations and actions, and/or damage to its reputation. While Apergy attempts to mitigate these risks by employing a number of measures, including employee training, technical security controls and maintenance of backup and protective systems, Apergy’s and its partners’, vendors’ and other third-parties’ systems, networks, products and services remain potentially vulnerable to known or unknown cybersecurity attacks and other threats, any of which could have a material adverse effect on Apergy’s business, results of operations, financial condition and cash flows.

Apergy and its customers are subject to extensive environmental and health and safety laws and regulations that may increase Apergy’s costs, limit the demand for Apergy’s products and services or restrict Apergy’s operations. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect Apergy’s results of operations.

Apergy’s operations and the operations of its customers are subject to numerous and complex federal, state, local and foreign laws and regulations relating to the protection of human health, safety and the environment. These laws and regulations affect Apergy’s customers by limiting or curtailing their exploration, drilling and production activities, the products and services Apergy designs, markets and sells and the facilities where Apergy manufactures its products. For example, Apergy’s operations and the operations of its customers are subject to numerous and complex laws and regulations that, among other things: may regulate the management and disposal of hazardous and non-hazardous wastes; may require acquisition of environmental permits related to its operations; may restrict the types, quantities and concentrations of various materials that can be released into the environment; may limit or prohibit operation activities in certain ecologically sensitive and other protected areas; may regulate specific health and safety criteria addressing worker protection; may require compliance with operational and equipment standards; may impose testing, reporting and record-keeping requirements; and may require remedial measures to mitigate pollution from former and ongoing operations. Sanctions for noncompliance with such laws and regulations may include revocation of permits, corrective action orders, administrative or civil penalties, criminal prosecution and the imposition of injunctions to prohibit certain activities or force future compliance.

Some environmental laws and regulations provide for joint and several strict liability for remediation of spills and releases of hazardous substances. In addition, Apergy or its customers may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as well as

 

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damage to natural resources. These laws and regulations may expose Apergy or its customers to liability for the conduct of or conditions caused by others, or for Apergy’s acts or for the acts of Apergy’s customers that were in compliance with all applicable laws and regulations at the time such acts were performed. Any of these laws and regulations could result in claims, fines or expenditures that could be material to Apergy’s business, results of operations, financial condition and cash flows.

Environmental laws and regulations, and the interpretation and enforcement thereof, change frequently, and have tended to become more stringent over time. New laws and regulations may have a material adverse effect on Apergy’s customers by limiting or curtailing their exploration, drilling and production activities, which may adversely affect Apergy’s operations by limiting demand for Apergy’s products and services. Additionally, the implementation of new laws and regulations may have a material adverse effect on Apergy’s operating results by requiring Apergy to modify its operations or products or shut down some or all of its facilities.

Apergy is subject to risks relating to existing international operations and expansion into new geographical markets.

Approximately 24%, 26% and 25% of Apergy’s revenues for 2017, 2016 and 2015, respectively, were derived outside the U.S. Apergy continues to focus on penetrating global markets as part of its overall growth strategy and expects sales from outside the U.S. to continue to represent a significant portion of its revenues. Apergy’s international operations and its global expansion strategy are subject to general risks related to such operations, including:

 

   

political, social and economic instability and disruptions;

 

   

government export controls, economic sanctions, embargoes or trade restrictions;

 

   

the imposition of duties and tariffs and other trade barriers;

 

   

limitations on ownership and on repatriation or dividend of earnings;

 

   

transportation delays and interruptions;

 

   

labor unrest and current and changing regulatory environments;

 

   

increased compliance costs, including costs associated with disclosure requirements and related due diligence;

 

   

difficulties in staffing and managing multi-national operations;

 

   

limitations on Apergy’s ability to enforce legal rights and remedies; and

 

   

access to or control of networks and confidential information due to local government controls and vulnerability of local networks to cyber risks.

If Apergy is unable to successfully manage the risks associated with expanding its global business or adequately manage operational risks of its existing international operations, the risks could have a material adverse effect on Apergy’s growth strategy involving expansion into new geographical markets, its reputation, its business, results of operations, financial condition and cash flows.

New tariffs and other trade measures could adversely affect our consolidated results of operations, financial position and cash flows.

Recently, the U.S. government imposed tariffs on steel and aluminum and a broad range of other products imported into the U.S. In response to the tariffs imposed by the U.S. government, the European Union, Canada, Mexico and China have announced tariffs on U.S. goods and services. The new tariffs have increased our manufacturing and material costs and any further trade restrictions, retaliatory trade measures and additional tariffs implemented could result in higher input costs to our products. We may not be able to fully mitigate the

 

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impact of these increased costs or pass price increases on to our customers. While tariffs and other retaliatory trade measures imposed by other countries on U.S. goods have not yet had a significant impact on our business or results of operations, we cannot predict further developments, and such existing or future tariffs could have a material adverse effect on our consolidated results of operations, financial position and cash flows.

Apergy’s business, profitability and reputation could be adversely affected by domestic and foreign governmental and public policy changes, risks associated with emerging markets, changes in statutory tax rates and laws, including recently enacted U.S. tax reform legislation, and unanticipated outcomes with respect to tax audits.

Apergy’s domestic and international sales and operations are subject to risks associated with changes in laws, regulations and policies (including environmental and employment regulations, export/import laws, tax policies such as export subsidy programs and research and experimentation credits, carbon emission regulations and other similar programs). Failure to comply with any of the foregoing could result in civil and criminal, monetary and non-monetary penalties, as well as damage to Apergy’s reputation. In addition, Apergy cannot provide assurance that its costs of complying with new and evolving regulatory reporting requirements and current or future laws, including environmental protection, employment, data security, data privacy and health and safety laws, will not exceed Apergy’s estimates. In addition, Apergy has made investments in certain countries, including Argentina, Australia, Bahrain, Colombia, Oman and Kenya, and may in the future invest in other countries, any of which may carry high levels of currency, political, compliance, or economic risk. While these risks or the impact of these risks are difficult to predict, any one or more of them could adversely affect Apergy’s business, profitability and reputation.

Apergy is subject to taxation in a number of jurisdictions. Accordingly, Apergy’s effective tax rate is impacted by changes in the mix among earnings in countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets, disagreements with taxing authorities with respect to the interpretation of tax laws and changes in tax laws. The amount of income taxes and other taxes paid could be adversely impacted by changes in statutory tax rates and laws (which have been and may in the future be under active consideration in various jurisdictions) and are subject to ongoing audits by domestic and international authorities. For example, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”), which was enacted on December 22, 2017, significantly changes U.S. tax law by, among other things, imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries and imposing limitations on the ability to deduct interest expense. If changes in statutory tax rates or laws or audits result in assessments different from amounts estimated, then Apergy’s business, results of operations, financial condition and cash flows may be adversely affected. In addition, changes in tax laws could have an adverse effect on our customers, resulting in lower demand for our products and services.

Failure to attract, retain and develop personnel for key management could have an adverse effect on Apergy’s results of operations, financial condition and cash flows.

Apergy’s growth, profitability and effectiveness in conducting its operations and executing its strategic plans depend in part on its ability to attract, retain and develop qualified personnel, align them with appropriate opportunities for key management positions and support for strategic initiatives. Additionally, during periods of increased investment in the oil and gas industry, competition to hire may increase and the availability of qualified personnel may be reduced. If Apergy is unsuccessful in its efforts to attract and retain qualified personnel, its business, results of operations, financial condition and cash flows could be adversely affected, its market share and competitive position could be adversely affected and/or Apergy could miss opportunities for growth and efficiencies.

The credit risks of Apergy’s customer base could result in losses.

Many of Apergy’s customers are oil and gas companies that have faced or may in the future face liquidity constraints during adverse commodity price environments like the recent industry downturn. These customers

 

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impact Apergy’s overall exposure to credit risk as they are also affected by prolonged changes in economic and industry conditions. If a significant number of Apergy’s customers experience a prolonged business decline or disruptions, Apergy may incur increased exposure to credit risk and bad debts.

Apergy’s revenue, operating profits and cash flows could be adversely affected if it is unable to protect or obtain patent and other intellectual property rights.

Apergy owns patents, trademarks, licenses and other forms of intellectual property related to its products and continuously invests in research and development that may result in innovations and general intellectual property rights. Apergy employs various measures to develop, maintain and protect its intellectual property rights. These measures may not be effective in capturing intellectual property rights, and they may not prevent Apergy’s intellectual property from being challenged, invalidated, or circumvented, particularly in countries where intellectual property rights are not highly developed or protected. Unauthorized use of Apergy’s intellectual property rights could adversely impact its competitive position and have a negative impact on its business, results of operations, financial condition and cash flows.

Climate change legislation and regulatory initiatives could result in increased compliance costs for Apergy and its customers.

Numerous proposals have been made and are likely to continue to be made at various levels of government to monitor and limit emissions of greenhouse gases (“GHG”). Past sessions of the U.S. Congress considered, but did not enact, legislation to address climate change. The EPA and other federal agencies under the previous administration issued regulations that aim to reduce GHG emissions; however, the current administration has more generally indicated an interest in scaling back or rescinding regulations addressing GHG emissions, including those affecting the U.S. oil and gas industry. It is difficult to predict the extent to which such policies will be implemented or the outcome of any related litigation. Any regulation of GHG emissions could result in increased compliance costs or additional operating restrictions for Apergy or its customers and limit or curtail exploration, drilling and production activities of Apergy’s customers, which could directly or indirectly, through reduced demand for Apergy’s products and services, adversely affect Apergy’s business, results of operations, financial condition and cash flows.

The loss of a significant customer could have an adverse impact on Apergy’s financial results.

Apergy’s customers represent some of the largest operators in the oil and gas drilling and production markets, including major integrated, large independent and foreign national oil and gas companies, as well as oil field equipment and service providers. In 2017, Apergy’s top 10 customers represented approximately 34% of total revenues, and no single customer accounted for more than 10% of Apergy’s revenues. While Apergy is not dependent on any one customer or group of customers, the loss of one or more of Apergy’s significant customers could have an adverse effect on its business, results of operations, financial condition and cash flows.

Apergy’s results may be impacted by current domestic and international economic conditions and uncertainties.

Apergy may be adversely affected by disruptions in the financial markets or declines in economic activity both domestically and internationally in those countries in which it operates. These circumstances will also impact Apergy’s suppliers and customers in various ways which could have an impact on Apergy’s business operations, particularly if global credit markets are not operating efficiently and effectively to support industrial commerce.

Apergy is subject to risk due to the volatility of global energy prices and regulations that impact drilling and production, with overall demand for Apergy’s products and services impacted by depletion rates, global economic conditions and related energy demands.

 

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Negative changes in worldwide economic and capital market conditions are beyond Apergy’s control, are highly unpredictable and can have an adverse effect on Apergy’s business, results of operations, financial condition, cash flows and cost of capital.

A significant decline in the future economic outlook of Apergy’s business and expected future cash flows could result in goodwill or intangible asset impairment charges, which would negatively impact its results of operations.

Apergy has significant goodwill and intangible assets. The valuation and classification of these assets and the assignment of useful lives involve significant judgments and the use of estimates. The testing of goodwill and intangibles for impairment requires significant use of judgment and assumptions, particularly as it relates to the determination of fair market value. A decrease in the long-term economic outlook and future cash flows of Apergy’s business could significantly impact asset values and potentially result in the impairment of intangible assets, including goodwill. Although fair values currently exceed carrying values for each reporting unit, the value of Apergy’s business was unfavorably impacted by the steep declines in revenue and order rates during 2015 and 2016 as drilling and production activity fell due to unfavorable oil prices and lower U.S. rig counts. Future economic declines could result in charges relating to impairments that could have a material adverse effect on Apergy’s results of operations in future periods.

Apergy’s reputation, ability to do business and results of operations may be impaired by improper conduct by any of its employees, agents or business partners.

While Apergy strives to maintain high standards, Apergy cannot provide assurance that its internal controls and compliance systems will always protect it from acts committed by its employees, agents or business partners that would violate U.S. and/or non-U.S. laws or fail to protect Apergy’s confidential information, including the laws governing payments to government officials, bribery, fraud, anti-kickback and false claims, competition, export and import compliance, money laundering and data privacy, as well as the improper use of proprietary information or social media. Any such violations of law or improper actions could subject Apergy to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil or criminal, monetary and non-monetary penalties and related stockholder lawsuits, could lead to increased costs of compliance and could damage Apergy’s reputation, its business, results of operations, financial condition and cash flows.

Apergy’s exposure to exchange rate fluctuations on cross-border transactions and the translation of local currency results into U.S. dollars could negatively impact its results of operations.

A portion of our business is transacted and/or denominated in foreign currencies, and fluctuations in currency exchange rates could have a significant impact on our reported results of operations, financial condition and cash flows, which are presented in U.S. dollars. Cross-border transactions, both with external parties and intercompany relationships, result in increased exposure to foreign exchange effects. Although the impact of foreign currency fluctuations on our results of operations has historically not been material, significant changes in currency exchange rates, principally the Canadian Dollar, Australian Dollar and Colombian Peso, could cause fluctuations in the reported results of Apergy’s business that could negatively affect its results of operations. Additionally, the strengthening of the U.S. dollar potentially exposes Apergy to competitive threats from lower cost producers in other countries and could result in unfavorable translation effects as the results of foreign locations are translated into U.S. dollars for reporting purposes.

Customer requirements and new regulations may increase Apergy’s expenses and impact the availability of certain raw materials, which could adversely affect its revenue and operating profits.

Apergy’s business uses parts or materials that are impacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requirement for disclosure of the use of “conflict minerals” mined in the Democratic Republic of the Congo and adjoining countries. It is possible that some of Apergy’s

 

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customers will require “conflict free” metals in products purchased from Apergy. Apergy is in the process of determining the country of origin of certain metals used by its business, as required by the Dodd-Frank Act. The supply chain due diligence and verification of sources may require several years to complete based on the current availability of smelter origin information and the number of vendors. Apergy may not be able to complete the process in the time frame required because of the complexity of its supply chain. Other governmental social responsibility regulations also may impact Apergy’s suppliers, manufacturing operations and operating profits.

The need to find alternative sources for certain raw materials or products because of customer requirements and regulations may impact Apergy’s ability to secure adequate supplies of raw materials or parts, lead to supply shortages, or adversely impact the prices at which its business can procure compliant goods.

Adverse and unusual weather conditions could have an adverse impact on Apergy’s business.

Apergy’s business could be materially and adversely affected by severe weather conditions. Hurricanes, tropical storms, flash floods, blizzards, cold weather and other severe weather conditions could result in evacuation of personnel, curtailment of services, damage to equipment and facilities, interruption in transportation of products and materials, and loss of productivity. For example, certain of Apergy’s manufactured products and components are manufactured at a single facility, and disruptions in operations or damage to any such facilities could reduce Apergy’s ability to produce products and satisfy customer demand. If Apergy’s customers are unable to operate or are required to reduce operations due to severe weather conditions, and as a result curtail purchases of Apergy’s products and services, Apergy’s business could be adversely affected.

Risks Related to the Separation

Apergy may not achieve some or all of the expected benefits of the Separation, and the Separation may adversely affect Apergy’s business.

Apergy may not be able to achieve the full strategic and financial benefits expected to result from the Separation, or such benefits may be delayed or not occur at all. The Separation is expected to provide the following benefits, among others:

 

   

The Separation will allow Apergy to more effectively pursue its own distinct operating priorities and strategies, and will enable the management of Apergy to pursue separate opportunities for long-term growth and profitability and to recruit, retain and motivate employees pursuant to compensation policies which are appropriate for their respective lines of business.

 

   

The Separation will permit Apergy to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business in a time and manner appropriate for its distinct strategy and business needs.

 

   

The Separation will enable investors to evaluate the merits, performance and future prospects of Apergy’s businesses and to invest in Apergy separately based on these distinct characteristics.

 

   

The Separation created an independent equity structure that will afford Apergy direct access to capital markets and will facilitate the ability to capitalize on its unique growth opportunities and effect future acquisitions utilizing, among other types of consideration, shares of its common stock.

Apergy may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (a) the Separation requires significant amounts of management’s time and effort, which may divert management’s attention from operating and growing Apergy’s business; (b) Apergy’s stock price may be more susceptible to market fluctuations and other events particular to one or more of Apergy’s products than if it were still a part of Dover; and (c) Apergy’s business is less diversified than Dover’s business prior to the Separation. If Apergy fails to achieve some or all of the benefits expected to result from the Separation, or if such benefits are delayed, the business, results of operations, financial condition and cash flows of Apergy could be adversely affected.

 

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Prior to the Separation, Apergy had no history operating as an independent publicly traded company, and Apergy’s historical financial information is not necessarily representative of the results that it would have achieved as a separate, publicly traded company and therefore may not be a reliable indicator of its future results.

Apergy was spun-off from Dover, its former parent company, on May 9, 2018 and had no operating history as a separate publicly traded company prior to the Separation. The historical information about Apergy for periods prior to the Separation refer to Apergy’s business as part of Dover. Apergy’s historical financial information for such periods is derived from the financial statements and accounting records of Dover and, accordingly, does not necessarily reflect the financial condition, results of operations or cash flows that Apergy would have achieved as a separate, publicly traded company during such periods presented or those that Apergy will achieve in the future primarily as a result of the factors described below:

 

   

Apergy will need to make significant investments to replicate or outsource certain systems, infrastructure and functional expertise. These initiatives to develop Apergy’s independent ability to operate without access to Dover’s existing operational and administrative infrastructure will be costly to implement. Apergy may not be able to operate its business efficiently or at comparable costs, and its profitability may decline; and

 

   

Prior to the Separation, Apergy relied upon Dover for working capital requirements and other cash requirements. Subsequent to the Separation, Dover does not provide Apergy with funds to finance Apergy’s working capital or other cash requirements. In addition, Apergy’s access to and cost of debt financing may be different from the historical access to and cost of debt financing under Dover. Differences in access to and cost of debt financing may result in differences in the interest rate charged to Apergy on financings, as well as the amounts of indebtedness, types of financing structures and debt markets that may be available to Apergy, which could have an adverse effect on Apergy’s business, financial condition, results of operations and cash flows.

For additional information about the past financial performance of Apergy’s business prior to the Separation and the basis of presentation of the historical combined financial statements, see the sections entitled “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this prospectus.

Dover may fail to perform under various transaction agreements executed as part of the Separation or Apergy may fail to have necessary systems and services in place when certain of the transaction agreements expire.

Apergy and Dover entered into certain agreements, such as the separation and distribution agreement, a transition services agreement and those other agreements discussed in greater detail in the section entitled “Certain Relationships and Related Person Transactions—Agreements with Dover,” which provide for the performance of services by each company for the benefit of the other for a period of time after the Separation. Apergy relies on Dover to satisfy its performance and payment obligations under these agreements. If Dover is unable to satisfy its obligations under these agreements, including its indemnification obligations, Apergy could incur operational difficulties or losses.

If Apergy does not have in place its own systems and services, does not have agreements with other providers of these services when the transitional or long-term agreements terminate, or if Apergy does not implement the new systems or replace Dover’s services successfully, Apergy may not be able to operate its business effectively, which could disrupt its business and have a material adverse effect on its business, results of operations, financial condition and cash flows. These systems and services may also be more expensive to install, implement and operate, or less efficient than the systems and services Dover is expected to provide during the transition period.

 

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Potential indemnification liabilities to Dover pursuant to the separation and distribution agreement could materially and adversely affect Apergy’s business, financial condition, results of operations and cash flows.

The separation and distribution agreement, among other things, provides for indemnification obligations designed to make Apergy financially responsible for substantially all liabilities that may exist relating to its business activities, whether incurred prior to or after the Separation. If Apergy is required to indemnify Dover under the circumstances set forth in the separation and distribution agreement, Apergy may be subject to substantial liabilities.

In connection with Apergy’s separation from Dover, Dover agreed to indemnify Apergy for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure Apergy against the full amount of such liabilities, or that Dover’s ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the separation and distribution agreement and certain other agreements with Dover, Dover agreed to indemnify Apergy for certain liabilities as discussed further in “Certain Relationships and Related Person Transactions—Agreements with Dover.” However, third parties could also seek to hold Apergy responsible for any of the liabilities that Dover has agreed to retain, and there can be no assurance that the indemnity from Dover will be sufficient to protect Apergy against the full amount of such liabilities, or that Dover will be able to fully satisfy its indemnification obligations. In addition, Dover’s insurers may attempt to deny coverage to Apergy for liabilities associated with certain occurrences of indemnified liabilities prior to the Separation. Moreover, even if Apergy ultimately succeeds in recovering from Dover or such insurance providers any amounts for which Apergy is held liable, Apergy may be temporarily required to bear these losses. Each of these risks could negatively affect Apergy’s business, results of operations, financial condition and cash flows.

Apergy is subject to continuing contingent liabilities of Dover following the Separation.

There are several significant areas where the liabilities of Dover may become Apergy’s obligations. For example, under the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and the related rules and regulations, each corporation that was a member of the Dover U.S. consolidated group during a taxable period or portion of a taxable period ending on or before the effective time of the distribution is jointly and severally liable for the U.S. federal income tax liability of the entire Dover U.S. consolidated group for that taxable period. Consequently, Apergy could be required to pay the entire amount of Dover’s consolidated U.S. federal income tax liability for a prior period, which could be substantial and in excess of the amount allocated to Apergy under the tax matters agreement between it and Dover. For a discussion of the tax matters agreement, see the section entitled “Certain Relationships and Related Person Transactions—Agreements with Dover—Tax Matters Agreement.” Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities.

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, Dover could be subject to significant tax liability and, in certain circumstances, Apergy could be required to indemnify Dover for material taxes pursuant to indemnification obligations under the tax matters agreement.

A condition to the Separation was the receipt by Dover of (i) a private letter ruling from the IRS (the “IRS Ruling”) together with an opinion of McDermott Will & Emery LLP, tax counsel to Dover, substantially to the effect that, among other things, the contribution and the distribution, taken together, would qualify as a tax-free reorganization for U.S. federal income tax purposes under Section 368(a)(1)(D) of the Code, and the distribution would qualify as a tax-free distribution to Dover’s stockholders under Section 355 of the Code or (ii) an opinion of McDermott Will & Emery LLP, tax counsel to Dover, substantially to the effect that, among other things, the contribution and the distribution, taken together, would qualify as a tax-free reorganization for U.S. federal income tax purposes under Section 368(a)(1)(D) of the Code and the distribution would qualify as a tax-free

 

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distribution to Dover’s stockholders under Section 355 of the Code. Prior to the distribution, Dover received the IRS Ruling. The IRS Ruling relies on, and the opinion of tax counsel relies on, certain facts and assumptions, and certain representations and undertakings from Dover and Apergy, including those regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, Dover and its stockholders may not be able to rely on the IRS Ruling or the opinion, and could be subject to significant tax liabilities. Notwithstanding the IRS Ruling and the opinion of tax counsel, the IRS could determine on audit that the distribution is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion. In addition, Dover and Apergy intend for certain related transactions to qualify for tax-free treatment under U.S. federal, state and local tax law and/or foreign tax law.

If the distribution is determined to be taxable for U.S. federal income tax purposes, Dover and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities. For example, if the distribution fails to qualify for tax-free treatment, Dover would for U.S. federal income tax purposes be treated as if it had sold the Apergy common stock in a taxable sale for its fair market value, and Dover’s stockholders who are subject to U.S. federal income tax would be treated as receiving a taxable distribution in an amount equal to the fair market value of the Apergy common stock received in the distribution. In addition, if certain related transactions fail to qualify for tax-free treatment under U.S. federal, state and local tax law and/or foreign tax law, Dover (and, under the tax matters agreement described below, Apergy) could incur significant tax liabilities under U.S. federal, state, local and/or foreign tax law, respectively.

Under the tax matters agreement between Dover and Apergy, Apergy would generally be required to indemnify Dover for taxes incurred by Dover that arise as a result of Apergy’s taking or failing to take, as the case may be, certain actions or any breach of any representations made by Apergy that, in either case, result in the distribution failing to meet the requirements of a tax-free distribution under Section 355 of the Code or of such related transactions failing to qualify for tax-free treatment. Also, under the tax matters agreement, Apergy would generally be required to indemnify Dover for one-half of taxes and other liabilities incurred by Dover if the distribution fails to meet the requirements of a tax-free distribution under Section 355 of the Code for reasons other than an act or failure to act on the part of Apergy or Dover, and therefore Apergy might be required to indemnify Dover for such taxes and liabilities due to circumstances and events not within the control of Apergy. Under the tax matters agreement, Apergy is also required to indemnify Dover for one-half of certain taxes incurred as a result of the restructuring activities undertaken to effectuate the distribution, whether payable upon filing tax returns related to the restructuring and distribution or upon a subsequent audit of those returns. Apergy’s indemnification obligations to Dover under the tax matters agreement are not limited by a maximum amount. If Apergy is required to indemnify Dover under the circumstances set forth in the tax matters agreement, Apergy may be subject to substantial liabilities, which could materially adversely affect its business, results of operations, financial condition and cash flows.

Under the tax matters agreement between Dover and Apergy, Dover may, in its sole discretion, make protective elections under Section 336(e) of the Code for Apergy and some or all of its domestic subsidiaries with respect to the distribution. If, notwithstanding the IRS Ruling and the opinion of tax counsel, the distribution fails to qualify as tax-free under Section 355 of the Code, the Section 336(e) elections would generally cause deemed sales of the assets of Apergy and its electing subsidiaries, causing the Dover group to recognize a gain to the extent the fair market value of the assets exceeded the basis of Apergy and its electing subsidiaries in such assets. In such case, to the extent that Dover is responsible for the resulting transaction taxes, Apergy generally would be required under the tax matters agreement to make periodic payments to Dover equal to the tax savings arising from a “step up” in the tax basis of Apergy’s assets.

Apergy may not be able to engage in certain corporate transactions as a result of the Separation.

To preserve the tax-free treatment to Dover and its stockholders of the contribution and the distribution and certain related transactions, under the tax matters agreement that Apergy entered into with Dover, Apergy is

 

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restricted from taking any action following the distribution that prevents the distribution and related transactions from being tax-free for U.S. federal income tax purposes. Under the tax matters agreement, for the two-year period following the distribution, Apergy may be prohibited, except in certain circumstances, from:

 

   

entering into any transaction resulting, when combined with prior transactions, in the acquisition of 40% or more of its stock or substantially all of its assets, whether by merger or otherwise;

 

   

merging, consolidating or liquidating;

 

   

issuing equity securities representing 40% or more of its stock, subject to certain exceptions and adjustments;

 

   

repurchasing its capital stock in excess of specified amounts;

 

   

ceasing to actively conduct its business or disposing of more than 25% of the assets used in its actively conducted business; and

 

   

engaging in certain internal transactions.

These restrictions may limit Apergy’s ability to pursue certain strategic transactions or other transactions that it may believe to be in the best interests of its stockholders or that might increase the value of its business. In addition, under the tax matters agreement, Apergy may be required to indemnify Dover against all or a portion of such tax liabilities as a result of the acquisition of Apergy’s stock or assets, even if it did not participate in or otherwise facilitate the acquisition. For more information, see the section entitled “Certain Relationships and Related Person Transactions—Agreements with Dover—Tax Matters Agreement.”

The spin-off and related internal restructuring transactions may expose Apergy to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements.

If Dover files for bankruptcy or is otherwise determined or deemed to be insolvent under federal bankruptcy laws, a court could deem the spin-off or certain internal restructuring transactions undertaken by Dover in connection with the Separation to be a fraudulent conveyance or transfer. Fraudulent conveyances or transfers are defined to include transfers made or obligations incurred with the actual intent to hinder, delay or defraud current or future creditors or transfers made or obligations incurred for less than reasonably equivalent value when the debtor was insolvent, or that rendered the debtor insolvent, inadequately capitalized or unable to pay its debts as they become due. A court could void the transactions or impose substantial liabilities upon Apergy, which could adversely affect Apergy’s financial condition and its results of operations. Among other things, the court could require Apergy’s stockholders to return to Dover some or all of the shares of its common stock issued in the spin-off, or require Apergy to fund liabilities of other companies involved in the restructuring transactions for the benefit of creditors.

The distribution of Apergy’s common stock is also subject to review under state corporate distribution statutes. Under the Delaware General Corporation Law, a corporation may only pay dividends to its stockholders either (i) out of its surplus (net assets minus capital) or (ii) if there is no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Although Dover made the distribution of Apergy’s common stock entirely out of surplus, Apergy cannot assure you that a court will not later determine that some or all of the distribution to Dover stockholders was unlawful.

Certain of Apergy’s executive officers and directors may have actual or potential conflicts of interest because of their previous positions at Dover.

Because of their former positions with Dover, certain of Apergy’s executive officers and directors own equity interests in Dover. Even though Apergy’s Board of Directors consists of a majority of directors who are independent, and Apergy’s executive officers who were formerly employees of Dover ceased to be employees of Dover upon the Separation, some of Apergy’s executive officers and directors will continue to have a financial

 

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interest in shares of Dover’s common stock. Continuing ownership of shares of Dover’s common stock and equity awards could create, or appear to create, potential conflicts of interest if Apergy and Dover pursue the same corporate opportunities or face decisions that could have different implications for Dover and Apergy.

Apergy may have received better terms from unaffiliated third parties than the terms it received in its agreements with Dover.

The agreements Apergy entered into with Dover in connection with the Separation, including the separation and distribution agreement, transition services agreement, tax matters agreement and employee matters agreement, which were prepared in the context of Apergy’s separation from Dover while Apergy was still a wholly owned subsidiary of Dover. Accordingly, during the period in which the terms of those agreements were prepared, Apergy did not have an independent board of directors or a management team that was independent of Dover. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. Arm’s-length negotiations between Dover and an unaffiliated third party in another form of transaction, such as a buyer in a sale of a business transaction, may have resulted in more favorable terms to the unaffiliated third party. For more information, see the section entitled “Certain Relationships and Related Person Transactions—Agreements with Dover.”

Apergy’s accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which it is subject following the Separation.

Prior to the Separation, Apergy’s financial results were included within the consolidated results of Dover, and Apergy believes that its financial reporting and internal controls were appropriate for a subsidiary of a public company. However, Apergy is now directly subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, the Indenture requires that we file annual, quarterly and current reports with respect to our business and financial condition. Beginning with our Annual Report on Form 10-K for the year ending December 31, 2019, Apergy will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which will require annual management assessments of the effectiveness of Apergy’s internal control over financial reporting. Apergy’s independent registered public accounting firm is not required to express an opinion as to the effectiveness of its internal control over financial reporting until after Apergy is no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). These reporting and other obligations may place significant demands on its management, administrative and operational resources, including accounting systems and resources.

The Exchange Act requires that Apergy file annual, quarterly and current reports with respect to its business and financial condition. Under the Sarbanes-Oxley Act, Apergy is required to maintain effective disclosure controls and procedures and internal control over financial reporting. To comply with these requirements, Apergy may need to upgrade its systems, implement additional financial and management controls, reporting systems and procedures and/or hire additional accounting and finance staff. Apergy expects to incur additional annual expenses for the purpose of addressing these requirements, and those expenses may be significant. If Apergy is unable to upgrade its financial and management controls, reporting systems, information technology systems and procedures in a timely and effective fashion, Apergy’s ability to comply with its financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on Apergy’s business, results of operations, financial condition or cash flows.

Apergy is an emerging growth company, and any decision on its part to comply with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make its securities less attractive to investors.

Apergy is an emerging growth company, and, for as long as it continues to be an emerging growth company, Apergy currently intends to take advantage of exemptions from various reporting requirements applicable to

 

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public companies other than “emerging growth companies,” including, but not limited to, not being required to have its independent registered public accounting firm audit its internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its registration statements, periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Apergy could be an emerging growth company for up to five years following the completion of the spin-off. Apergy will cease to be an emerging growth company upon the earliest of: (1) the end of the fiscal year following the fifth anniversary of the spin-off; (2) the first fiscal year after its annual gross revenues are $1.07 billion or more; (3) the date on which Apergy has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (4) the date on which Apergy is deemed to be a “large accelerated filer” under the Exchange Act. Apergy cannot predict if investors will find its securities less attractive if Apergy chooses to rely on these exemptions. If some investors find its securities less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for its securities and the price of its securities may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. Apergy has irrevocably elected not to avail itself of this accommodation allowing for delayed adoption of new or revised accounting standards, and, therefore, Apergy will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Risks Related to the Exchange Offer

There may be adverse consequences if you do not exchange your outstanding notes.

If you do not exchange your outstanding notes for exchange notes in the exchange offer, you will continue to be subject to restrictions on transfer of your outstanding notes as set forth in the offering memorandum distributed in connection with the May 2018 private offering of the outstanding notes. In general, the outstanding notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act. You should refer to “Summary—The Exchange Offer” and “The Exchange Offer” for information about how to tender your outstanding notes.

The tender of outstanding notes under the exchange offer will reduce the outstanding amount of the outstanding notes, which may have an adverse effect upon, and increase the volatility of, the market prices of the outstanding notes due to a reduction in liquidity.

Your ability to transfer the exchange notes may be limited if there is no active trading market, and there is no assurance that any active trading market will develop for the exchange notes.

We are offering the exchange notes to the holders of the outstanding notes. We do not intend to list the notes on any securities exchange. There is currently no established market for the exchange notes, and we cannot assure you as to the liquidity of markets that may develop for the exchange notes, your ability to sell the exchange notes or the price at which you would be able to sell the exchange notes. If such markets were to exist, the exchange notes could trade at prices that may be lower than their principal amount or purchase price depending on many factors, including prevailing interest rates, the market for similar notes, our financial and operating performance and other factors. We cannot assure you that an active market for the exchange notes will develop or, if developed, that it will continue. If no active trading market develops, you may not be able to resell the notes at their fair market value or at all.

 

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Certain persons who participate in the exchange offer must deliver a prospectus in connection with resales of the exchange notes.

We have not requested, and do not intend to request, an interpretation by the staff of the SEC as to whether the exchange notes issued pursuant to our exchange offer in exchange for the outstanding notes may be offered for resale, resold or otherwise transferred by any holder without compliance with the registration and prospectus delivery provisions of the Securities Act. Instead, based on interpretations of the staff of the SEC contained in Exxon Capital Holdings Corp., SEC no-action letter (April 13, 1988), Morgan Stanley & Co. Inc., SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1983), we believe that you may offer for resale, resell or otherwise transfer the exchange notes without compliance with the registration and prospectus delivery requirements of the Securities Act. We cannot guarantee that the SEC would make a similar decision about our exchange offer. If our belief is wrong, or if you cannot truthfully make the representations mentioned above, and you transfer any exchange note issued to you in the exchange offer without meeting the registration and prospectus delivery requirements of the Securities Act, or without an exemption from such requirements, you could incur liability under the Securities Act. Additionally, in some instances described in this prospectus under “Plan of Distribution,” certain holders of exchange notes will remain obligated to comply with the registration and prospectus delivery requirements of the Securities Act to transfer the exchange notes. If such a holder transfers any exchange notes without delivering a prospectus meeting the requirements of the Securities Act or without an applicable exemption from registration under the Securities Act, such a holder may incur liability under the Securities Act. We do not and will not assume, or indemnify such a holder against, this liability.

Risks related to Holding the Exchange Notes

Our indebtedness could adversely affect our financial condition and operating flexibility and prevent us from fulfilling our obligations under the notes.

In connection with the Separation, we incurred a significant amount of indebtedness. Subject to the limits contained in the credit agreement governing the Senior Secured Credit Facilities and the Indenture, we may be able to incur substantial additional indebtedness from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of indebtedness could intensify.

Specifically, our level of indebtedness could have important consequences, including:

 

   

making it more difficult for us to satisfy our obligations with respect to the notes and our other indebtedness;

 

   

limiting our ability to obtain additional financing to fund our business operations;

 

   

requiring a substantial portion of our cash flows to be dedicated to debt service payments;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under the Senior Secured Credit Facilities, are at variable rates of interest;

 

   

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

   

placing us at a disadvantage compared to other, less leveraged competitors; and

 

   

increasing our cost of borrowing.

In addition, the credit agreement governing the Senior Secured Credit Facilities and the Indenture contain restrictive covenants that limit our ability to engage in activities that may be in our long-term interests. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our indebtedness.

 

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Our ability to make payments on and to refinance our indebtedness as well as any future indebtedness that we may incur depends upon the level of cash flows generated by our operations, our ability to sell assets, availability under the Revolving Credit Facility and our ability to access the capital markets and/or other sources of financing. Our ability to generate cash is subject to general economic, industry, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are not able to repay or refinance our indebtedness as it becomes due, we may be forced to sell assets or take other disadvantageous actions, including (i) reducing financing in the future for working capital, capital expenditures, acquisitions and general corporate purposes or (ii) dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in the oil and gas industry could be impaired.

Despite our current level of indebtedness and restrictive covenants, we and our subsidiaries may still be able to incur substantially more indebtedness or make certain restricted payments, which could further exacerbate the risks to our financial condition described above.

We and our subsidiaries may be able to incur significant additional indebtedness, including additional secured indebtedness, in the future. Although the credit agreement governing the Senior Secured Credit Facilities and the Indenture contain restrictions on the incurrence of additional indebtedness and liens, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness and liens incurred in compliance with these restrictions could be substantial. As of September 30, 2018, the Revolving Credit Facility had unused commitments of up to approximately $250 million (less the amount of any outstanding letters of credit issued thereunder). All of those borrowings would be secured and therefore would be effectively senior to the notes and the guarantees by the Guarantors to the extent of the assets securing such indebtedness.

The Indenture permits us to incur certain additional indebtedness, including secured indebtedness, and will allow our non-Guarantor subsidiaries to incur additional indebtedness that would be structurally senior to the notes, and the Indenture does not prevent us from incurring other liabilities that do not constitute indebtedness as defined in the Indenture. If we incur any additional indebtedness that ranks equally with the notes, including any additional notes, the holders of that indebtedness will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our company. This may have the effect of reducing the amount of proceeds paid to you.

We are permitted under certain circumstances to designate some of our restricted subsidiaries under the Indenture as unrestricted subsidiaries. Those unrestricted subsidiaries will not be subject to many of the restrictive covenants in the Indenture and therefore will be able to incur indebtedness beyond the limitations specified in the Indenture and engage in other activities in which restricted subsidiaries may not engage.

We may also pursue investments in joint ventures or acquisitions, which may increase our indebtedness. Moreover, although the credit agreement governing the Senior Secured Credit Facilities and the Indenture contains restrictions on our ability to make restricted payments, including the declaration and payment of dividends, we will be able to make substantial restricted payments under certain circumstances. If new indebtedness is added to our current indebtedness levels, the related risks that we and the Guarantors now face could intensify.

The terms of the credit agreement governing the Senior Secured Credit Facilities and the Indenture restrict, and the documents governing other indebtedness that we may incur in the future may restrict, our current and future operations, particularly our ability to respond to changes or to take certain actions.

The credit agreement governing the Senior Secured Credit Facilities and the Indenture contain, and the documents governing other indebtedness that we may incur in the future may contain, a number of restrictive

 

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covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions on our ability to:

 

   

incur additional indebtedness and guarantee indebtedness;

 

   

create or incur liens;

 

   

engage in mergers or consolidations or sell all or substantially all of our assets;

 

   

sell, transfer or otherwise dispose of assets;

 

   

make investments, acquisitions, loans or advances or other restricted payments;

 

   

pay dividends or distributions, repurchase our capital stock or make certain other restricted payments;

 

   

prepay, redeem, or repurchase any subordinated indebtedness;

 

   

designate our subsidiaries as unrestricted subsidiaries;

 

   

enter into agreements which limit the ability of our non-Guarantor subsidiaries to pay dividends or make other payments to us; and

 

   

enter into certain transactions with our affiliates.

You should read the discussions under the headings “Description of the Exchange Notes—Certain Covenants” and See in Note 8—“Debt” accompanying the Interim Financial Statements (as defined herein) for further information about these covenants.

In addition, the restrictive covenants in the credit agreement governing the Senior Secured Credit Facilities require us to maintain specified financial ratios and satisfy other financial condition tests to the extent subject to certain financial covenant conditions. Our ability to meet those financial ratios and tests can be affected by events beyond our control. We may not meet those ratios and tests.

A breach of the covenants or restrictions under the Indenture or under the credit agreement governing the Senior Secured Credit Facilities could result in an event of default under the applicable indebtedness. Such a default may allow the creditors under such facility to accelerate the related indebtedness, which may result in the acceleration of any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing the Senior Secured Credit Facilities would permit the lenders under our Revolving Credit Facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under the Senior Secured Credit Facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. We will pledge substantially all of our assets as collateral under the Senior Secured Credit Facilities. In the event our lenders or holders of the notes accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness or be able to borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. As a result of these restrictions, we may be:

 

   

limited in how we conduct our business;

 

   

unable to raise additional indebtedness or equity financing to operate during general economic or business downturns; or

 

   

unable to compete effectively or to take advantage of new business opportunities.

These restrictions, along with restrictions that may be contained in agreements evidencing or governing other future indebtedness, may affect our ability to grow in accordance with our growth strategy.

 

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If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.

Any default under the agreements governing our indebtedness, including a default under the credit agreement governing the Senior Secured Credit Facilities, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including the credit agreement governing the Senior Secured Credit Facilities), we could be in default under the terms of the agreements governing such indebtedness.

In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders of our Revolving Credit Facility could elect to terminate their commitments and cease making further loans and the holders of such indebtedness could institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. Upon any bankruptcy filing, we would be stayed from making any ongoing payments on the notes (and any Guarantor that had also filed for bankruptcy would also be stayed from making any ongoing payments on the applicable guarantee), and the holders of the notes would not be legally entitled to receive post-petition interest or applicable fees, costs or charges, or any “adequate protection” under Title 11 of the United States Code (the “Bankruptcy Code”). Furthermore, if a bankruptcy case were to be commenced under the Bankruptcy Code, any payments made by us or a Guarantor within 90 days prior to commencement of such a case, could be subject to claims that we or such Guarantor were insolvent at the time any such payments were made and that all or a portion of such payments, which could include repayments of amounts due under the notes or a guarantee, might be deemed to constitute a preference under the Bankruptcy Code, and that such payments should be voided by the bankruptcy court and recovered from the recipients for the benefit of the entire bankruptcy estate. Also, in the event that we were to become a debtor in a bankruptcy case seeking reorganization or other relief under the Bankruptcy Code, a delay and/or substantial reduction in payments under the notes may otherwise occur. In addition, if our operating performance declines, or if we breach our covenants under our indebtedness, we may in the future need to seek waivers from the holders of such indebtedness and the required lenders under the Senior Secured Credit Facilities to avoid being in default. In such a case, we may not be able to obtain a waiver from the holders of such indebtedness and the required lenders on terms acceptable to us, or at all. If this occurs, we could be forced into bankruptcy or liquidation, and we may not be able to make payments on the notes.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our Senior Secured Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness could increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. As of September 30, 2018, approximately $395.0 million of our indebtedness (net of original issue discount and deferred financing costs) was variable rate debt. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.

Repayment of our debt, including the notes, is dependent on cash flow generated by Apergy’s subsidiaries.

Apergy is a holding company and all of our tangible assets are owned by Apergy’s subsidiaries. As such, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to

 

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make such cash available to Apergy, directly or indirectly, by dividend, loan, debt repayment or otherwise. Unless they are Guarantors of the notes, Apergy’s subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Apergy’s subsidiaries may not be able to, or be permitted to, make distributions or other payments to enable Apergy to make payments in respect of the notes. Each of Apergy’s subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit Apergy’s ability to obtain cash from its subsidiaries. While the terms of the Indenture and the credit agreement governing the Senior Secured Credit Facilities will limit the ability of Apergy’s subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments, these limitations are subject to waiver and to important qualifications and exceptions. In the event that Apergy does not receive distributions or other payments from its subsidiaries, Apergy may be unable to make required payments on the notes.

Your right to receive payments on the notes is effectively junior to the right of lenders who have a security interest in our assets to the extent of the value of those assets.

Our obligations under the notes and our Guarantors’ obligations under their guarantees of the notes are unsecured, but our obligations under the Senior Secured Credit Facilities and each Guarantor’s obligations under its guarantee of the Senior Secured Credit Facilities are secured by a security interest in substantially all of our domestic tangible and intangible assets, including the stock of substantially all of our 100% owned domestic subsidiaries. If we are declared bankrupt or insolvent, or if we default under the Senior Secured Credit Facilities, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of the notes, even if an event of default exists under the Indenture at such time. Furthermore, if the lenders foreclose and sell the pledged equity interests in any Guarantor under the notes, then that Guarantor will be released from its guarantee of the notes automatically and immediately upon such sale. In any such event, because the notes will not be secured by any of our assets or the equity interests in the Guarantors, it is possible that there would be no assets remaining from which your claims could be satisfied or, if any assets remained, they might be insufficient to satisfy your claims in full.

Claims of holders of the notes will be structurally subordinated to all obligations of our existing and future subsidiaries that do not become Guarantors of the notes.

The notes will be guaranteed, jointly and severally, by all existing and future direct and indirect 100% owned domestic subsidiaries of Apergy that incur or that guarantee any obligations under the Senior Secured Credit Facilities or certain series of capital markets debt securities (other than the notes) of Apergy or any Guarantor. Our subsidiaries that do not guarantee the notes, including any foreign subsidiaries and any subsidiaries that we designate as unrestricted, will have no obligation, contingent or otherwise, to pay amounts due under the notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment. Claims of holders of the notes will be structurally subordinated to all indebtedness and other obligations and liabilities of any non-Guarantor subsidiary such that in the event of insolvency, liquidation, reorganization, dissolution or other winding up of any subsidiary that is not a Guarantor, all of that subsidiary’s creditors (including trade creditors) would be entitled to payment in full out of that subsidiary’s assets before we would be entitled to any payment.

In addition, any dividend or other distribution made by a non-100% owned non-Guarantor subsidiary, such as a joint venture, would need to be made ratably to other equity holders and us. These non-100% owned subsidiaries may also be subject to restrictions on their ability to distribute cash to Apergy or a Guarantor in their financing or other agreements and, as a result, we may not be able to access their cash flow to service our debt obligations, including in respect of the notes.

The Indenture, subject to some limitations, permits our subsidiaries that do not guarantee the notes to incur additional indebtedness and does not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by these subsidiaries.

 

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As of the date hereof, we have 20 non-U.S. subsidiaries that do not guarantee the notes (including Apergy Middle East Services LLC (f/k/a Norris Production Solutions Middle East LLC), a subsidiary company in the Sultanate of Oman in which we own a 60% equity interest (“AMES”)).

In addition, our subsidiaries that provide, or will provide, guarantees of the notes will be automatically released from those guarantees upon the occurrence of certain events, including the following:

 

   

the designation of that subsidiary Guarantor as an unrestricted subsidiary;

 

   

the release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the notes by such subsidiary Guarantor; or

 

   

the sale or other disposition, including the sale of substantially all the assets, of that subsidiary Guarantor.

If any subsidiary guarantee is released, no holder of the notes will have a claim as a creditor against that subsidiary, and the indebtedness and other liabilities, including trade payables and preferred stock, if any, whether secured or unsecured, of that subsidiary will be effectively senior to the claim of any holders of the notes. See “Description of the Exchange Notes—Guarantees.”

The Indenture also permits us to designate certain of our subsidiaries as unrestricted subsidiaries, which subsidiaries would not be subject to the restrictive covenants in the Indenture. This means that these entities would be able to engage in many of the activities the Indenture restricts for Apergy and its restricted subsidiaries, such as incurring substantial additional indebtedness (secured or unsecured), making investments, selling, encumbering or disposing of substantial assets, entering into transactions with affiliates and entering into mergers or other business combinations. These actions could be detrimental to our ability to make payments when due and to comply with our other obligations under the notes, and could reduce the amount of our assets that would be available to satisfy your claims should we default on the notes. In addition, the initiation of bankruptcy or insolvency proceedings or the entering of a judgment against these entities, or their default under their other credit arrangements, will not result in a default under the notes.

The lenders under the Senior Secured Credit Facilities will have the discretion to release any Guarantors under those facilities in a variety of circumstances, which will cause those Guarantors to be released from their guarantees of the notes.

While any obligations under the Senior Secured Credit Facilities remain outstanding, any guarantee of the notes may be released without action by, or consent of, any holder of the notes or the Trustee, at the discretion of lenders under the Senior Secured Credit Facilities, if the related Guarantor is no longer a Guarantor of obligations under the Senior Secured Credit Facilities or certain other indebtedness. The lenders under the Senior Secured Credit Facilities will have the discretion to release the guarantees under the Senior Secured Credit Facilities in a variety of circumstances. Any of our subsidiaries that are released as a Guarantor of the Senior Secured Credit Facilities will automatically be released as a Guarantor of the notes. You will not have a claim as a creditor against any subsidiary that is no longer a Guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of notes.

Because each Guarantor’s liability under its guarantees may be reduced to zero, voided or released under certain circumstances, holders of notes may not receive any payments from some or all of the Guarantors.

Holders of notes have the benefit of the guarantees of the Guarantors. However, by their terms, the guarantees by the Guarantors are limited to the maximum amount that the Guarantors are permitted to guarantee under applicable law. Further, under the circumstances discussed more fully below, a court under federal and state fraudulent conveyance and transfer statutes could void or reduce the obligations under a guarantee or further

 

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subordinate it to all other obligations of the Guarantor. See “—Federal and state statutes allow courts, under specific circumstances, to void the notes and the guarantee of the notes by certain of our subsidiaries and to require holders of notes to return payments received from us, and if that occurs, you may not receive any payments on the notes.” As a result, a Guarantor’s liability under its guarantee could be reduced to zero or to another amount that would significantly reduce the value of the guarantee, depending upon, among other things, the amount of other obligations of such Guarantor. In addition, you will lose the benefit of a particular guarantee if it is released under certain circumstances described under “Description of the Exchange Notes—Guarantees.”

We may not be able to repurchase the notes upon a change of control.

Upon the occurrence of specific kinds of change of control events, we will be required to make an offer to purchase all of the notes at 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, up to but excluding the date of repurchase. Additionally, under the credit agreement governing the Senior Secured Credit Facilities, a change of control (as defined therein) will constitute an event of default that permits the lenders to accelerate the maturity of borrowings under the credit agreement and terminate their commitments to lend. The source of funds for any purchase of the notes and repayment of borrowings under the Senior Secured Credit Facilities would be our available cash or cash generated from our subsidiaries’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the notes upon a change of control because we may not have sufficient financial resources to purchase all of the debt securities that are tendered upon a change of control and repay our other indebtedness that will become due. If we fail to repurchase the notes in that circumstance, we will be in default under the indenture that will govern the notes. We may require additional financing from third parties to fund any such purchases, and we may be unable to obtain financing on satisfactory terms, or at all. Further, our ability to repurchase the notes may be limited by law. In order to avoid the obligations to repurchase the notes and events of default and potential breaches of the credit agreement governing the Senior Secured Credit Facilities, we may have to avoid certain change of control transactions that would otherwise be beneficial to us.

In addition, some important corporate events, such as leveraged recapitalizations, may not, under the Indenture, constitute a “change of control” that would require us to repurchase the notes, even though those corporate events could increase the level of our indebtedness or otherwise adversely affect our capital structure, credit ratings or the value of the notes. In addition, the occurrence of certain events that might otherwise constitute a “change of control” under the Indenture will not be deemed to be a “change of control repurchase event” if the notes have an investment grade rating from both Moody’s Investors Service, Inc. (together with any successor to its rating agency business, “Moody’s”) and Standard & Poor’s Ratings Services (together with any successor to its rating agency business, “S&P”) during the period (the “Trigger Period”) commencing 60 days prior to the first public announcement by Apergy of any “change of control” (or pending “change of control”) and ending 60 days following consummation of such “change of control” (which Trigger Period will be extended following consummation of a “change of control” for up to an additional 60 days for so long as any of Moody’s or S&P has publicly announced that it is considering a possible ratings change). See “Description of the Exchange Notes—Repurchase at the Option of Holders—Change of control repurchase event.”

Holders of the notes may not be able to determine when a change of control giving rise to their right to have the notes repurchased has occurred following a sale of “substantially all” of our assets.

The definition of change of control in the Indenture includes a phrase relating to the sale of “all or substantially all” of our assets. There is no precise established definition of the phrase “substantially all” under applicable law. Accordingly, the ability of a holder of the notes to require us to repurchase its notes as a result of a sale of less than all our assets to another person may be uncertain.

 

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Federal and state statutes allow courts, under specific circumstances, to void the notes and the guarantee of the notes by certain of our subsidiaries and to require holders of notes to return payments received from us, and if that occurs, you may not receive any payments on the notes.

Our issuance of the notes and the guarantee of the notes by certain of our subsidiaries may be subject to review under federal bankruptcy law and comparable provisions of state fraudulent transfer or fraudulent conveyance laws. While the relevant laws may vary from state to state, under such laws, the issuance of the notes or a guarantee could be voided, or claims in respect of the notes or a guarantee could be subordinated to all other debts of Apergy or of a Guarantor, as applicable, if, among other things, Apergy or the applicable Guarantor, at the time it incurred the indebtedness:

 

   

intended to hinder, delay or defraud any present or future creditor;

 

   

received less than reasonably equivalent value or fair consideration for the incurrence of such indebtedness and if Apergy or the applicable Guarantor:

 

   

was insolvent or rendered insolvent by reason of such incurrence;

 

   

was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or

 

   

intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.

A court might also void the notes or a guarantee without regard to the above factors, if the court found that we or the applicable Guarantor issued the notes or entered into its guarantee with the actual intent to hinder, delay or defraud its creditors.

In addition, any payment by us or that Guarantor pursuant to the notes or a guarantee, as applicable, could be voided and required to be returned to us or the Guarantor, as applicable, or to a fund for the benefit of our creditors or the creditors of the Guarantor. If the notes or guarantees were voided or limited under fraudulent transfer or other laws, any claim you may make against Apergy or the Guarantors for amounts payable on the notes would be unenforceable to the extent of such voidance or limitation. Moreover, the court could order you to return any payments previously made by Apergy or the Guarantors.

The measures of insolvency for purposes of these laws will vary depending upon the law applied in any proceeding to determine whether a voidable transfer has occurred, such that we cannot assure you as to what standard a court would apply in making these determinations or, regardless of the standard that a court uses, that any payments to the holders of the notes or under the guarantees did not constitute preferences, fraudulent transfers or conveyances on other grounds. Generally, however, our company or a Guarantor would be considered insolvent if:

 

   

the sum of its debts, including contingent liabilities, was greater than the fair value of all of its assets;

 

   

the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

   

it could not pay its debts as they become due.

On the basis of historical financial information, recent operating history and other factors, we believe that Apergy and each Guarantor is solvent, does not have unreasonably small capital for the business in which it is engaged and has not incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, that a court would agree with our conclusions in this regard.

If a court were to find that the issuance of the notes or the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes or such guarantee or

 

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subordinate the notes or such guarantee to presently existing and future indebtedness of ours or of the related Guarantor, or require the holders of the notes to repay any amounts received with respect to the notes or such guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the notes. Sufficient funds to repay the notes may not be available from other sources, including any remaining Guarantor, if any. Further, the voidance of the notes could result in an event of default with respect to our and our subsidiaries’ other indebtedness that could result in acceleration of such indebtedness.

As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is satisfied. A court may find that we or a Guarantor did not receive reasonably equivalent value or fair consideration for the notes or such guarantee if we or such Guarantor did not substantially benefit directly or indirectly from the issuance of the notes or such guarantee. Specifically, if the guarantees were legally challenged, any guarantee could also be subject to the claim that, since the guarantee was incurred for Apergy’s benefit, and only indirectly for the benefit of the applicable Guarantor, the obligations of the applicable Guarantor were incurred for less than fair consideration. A court could thus void the obligations under the guarantees, subordinate them to the applicable Guarantor’s other indebtedness or take other action detrimental to you as a holder of the notes.

Although each guarantee entered into by a subsidiary will contain a provision intended to limit that Guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not be effective (as a legal matter or otherwise) to protect those guarantees from being voided under fraudulent transfer law, or may reduce that Guarantor’s obligation to an amount that effectively makes its guarantee worthless.

In addition, any payment by us pursuant to the notes made at a time we were found to be insolvent could be voided and required to be returned to us or to a fund for the benefit of our creditors if such payment is made to an insider within a one-year period prior to a bankruptcy filing or within 90 days for any non-insider party if such payment would give such insider or non-insider party more than such creditor would have received in a distribution under Chapter 7 of the Bankruptcy Code, and certain applicable statutory defenses did not apply.

Finally, as a court of equity, the bankruptcy court may subordinate the claims in respect of the notes to other claims against us under the principle of equitable subordination, if the court determines that: (i) the holder of notes engaged in some type of inequitable conduct; (ii) such inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holder of notes; and (iii) equitable subordination is not inconsistent with the provisions of the bankruptcy code.

We may redeem your notes at our option, which may adversely affect your return.

As described under “Description of the Exchange Notes—Optional Redemption,” we have the right to redeem the notes in whole or in part beginning on May 1, 2021, at the redemption prices specified under “Description of the Exchange Notes—Optional Redemption.” At any time and from time to time prior to May 1, 2021, we may redeem some or all of the notes at a price equal to 100% of the aggregate principal amount thereof plus the make-whole premium described under “Description of the Exchange Notes—Optional Redemption,” plus accrued and unpaid interest up to, but excluding, the redemption date. At any time and from time to time prior to May 1, 2021, we may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 106.375% of the aggregate principal amount thereof, plus accrued and unpaid interest up to, but excluding, the redemption date, with the net proceeds of certain equity offerings if at least 65% of the aggregate principal amount of notes issued remains outstanding afterward and we redeem the notes within 180 days of completing the equity offering. We may choose to exercise this redemption right when prevailing interest rates are relatively low. As a result, you may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the notes.

 

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A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies could cause the liquidity or market value of the notes to decline and may increase our future borrowing costs and reduce our access to capital.

Our indebtedness currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Real or anticipated changes in our credit ratings will generally affect the market value of the notes. Credit ratings are not recommendations to purchase, hold or sell the notes. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure or marketing of the notes.

Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing. If any credit rating initially assigned to the notes is subsequently lowered or withdrawn for any reason, you may not be able to resell your notes without a substantial discount.

If the notes are rated investment grade at any time by both Moody’s and S&P’s, most of the restrictive covenants and corresponding events of default contained in the Indenture will be terminated.

If, at any time, the credit rating on the notes, as determined by both Moody’s and S&P’s Rating Services equals or exceeds Baa3 or BBB-, respectively, or any equivalent replacement ratings, we will no longer be subject to most of the restrictive covenants and corresponding events of default contained in the Indenture. If these restrictive covenants are terminated, the obligation to grant further guarantees of the notes will be terminated, and we may incur other indebtedness, make restricted payments and take other actions that would have been prohibited if these covenants had been in effect. Accordingly, if these covenants and corresponding events of default are terminated, holders of the notes will have less credit protection than at the time the notes were issued.

 

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USE OF PROCEEDS

We will not receive any cash proceeds from the issuance of the exchange notes pursuant to the exchange offer. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange a like principal amount of outstanding notes, the terms of which are identical in all material respects to the exchange notes, except that the exchange notes will not contain terms with respect to transfer restrictions, registration rights and additional interest for failure to observe certain obligations in the registration rights agreement. The outstanding notes surrendered in exchange for the exchange notes will be retired and cancelled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any change in our capitalization.

 

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SELECTED HISTORICAL FINANCIAL DATA

The following selected financial data reflects the combined and consolidated operations of Apergy. The selected combined income statement data for the years ended December 31, 2017, 2016, and 2015, and the selected combined balance sheet data as of December 31, 2017 and 2016, were derived from Apergy’s audited combined financial statements and accompanying notes (collectively, the “Audited Combined Financial Statements”) included elsewhere in this prospectus. The selected historical combined balance sheet data as of December 31, 2015, was derived from Apergy’s audited combined financial statements, which are not included in this prospectus. The selected historical combined financial data as of and for the years ended December 31, 2014 and 2013, and as of September 30, 2017, were derived from Apergy’s underlying financial records, which were derived from the financial records of Dover Corporation, and which are not included in this prospectus. In Apergy’s management opinion, the unaudited combined financial statements for these periods have been prepared on the same basis as the audited combined financial statements and include all adjustments, consisting only of normal recurring adjustments and allocations, necessary for a fair statement of the information for the periods presented.

The selected consolidated balance sheet data as of September 30, 2018, and the selected consolidated income statement data for the nine months ended September 30, 2018 and 2017, were derived from Apergy’s unaudited condensed consolidated financial statements and accompanying notes (collectively, the “Interim Financial Statements”), included elsewhere in this prospectus.

The selected historical financial data should be read in conjunction with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Audited Combined Financial Statements and the Interim Financial Statements.

 

    Nine Months Ended
September 30,
    Years Ended December 31,  
(in thousands)   2018     2017     2017     2016     2015     2014(1)     2013(1)  

Statement of income data:

             

Revenue

  $ 906,318     $ 745,093     $ 1,009,591     $ 751,337     $ 1,076,680     $ 1,530,631     $ 1,357,713  

Gross profit(2)

    311,713       244,764       318,467       195,328       334,639       621,091       576,084  

Provision for (benefit from) income taxes

    24,324       22,973       (22,284     (8,043     24,131       110,323       103,159  

Net income (loss)

    72,284       51,304       111,568       (10,791     53,134       223,496       217,026  

Net income (loss) attributable to Apergy

    71,989       50,444       110,638       (12,642     51,698       222,707       216,525  

Balance sheet data:

             

Cash and cash equivalents

  $ 18,014     $ 23,447     $ 23,712     $ 26,027     $ 10,417     $ 24,355     $ 14,475  

Property, plant and equipment, net

    236,067       210,478       211,832       201,747       232,886       250,482       196,966  

Total assets

    1,983,356       1,921,331       1,904,775       1,850,895       1,983,379       2,218,752       1,489,750  

Long-term debt, less current portion(2)

    687,543       3,708       3,742       1,919       3,282       3,516       1,294  

Total Apergy stockholders’ equity

    962,547       —         —         —         —         —         —    

Total Parent Company equity

    —         1,586,377       1,635,285       1,546,322       1,639,865       1,793,176       1,192,600  

Statement of cash flows data:

             

Net cash provided by operating activities

  $ 92,806     $ 41,205     $ 76,917     $ 129,709     $ 215,671     $ 280,990     $ 238,181  

Net cash used in investing activities(2)

    (44,809     (26,829     (46,506     (28,028     (34,101     (660,177     (82,000

Net cash provided by (used in) financing activities

    (53,620     (20,432     (33,003     (85,981     (194,977     389,149       (153,030

 

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(1)

During 2014, Apergy acquired Timberline Manufacturing Company, WellMark Holdings, Inc., and Accelerated Companies LLC in three separate transactions for net cash consideration of $627.0 million reflected in Net cash used in investing activities in the Statement of Cash Flows. During 2013, Apergy acquired SPIRIT Global Energy Solutions for net cash consideration of $47.4 million reflected in Net cash used in investing activities in the Statement of Cash Flows. The businesses were acquired to complement and expand upon existing operations within the Production & Automation Technologies segment. Our results of operations, financial position and cash flows reflect these businesses since the date of acquisition.

(2)

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

 

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OUR BUSINESS AND PROPERTIES

Overview

Apergy is a leading provider of highly engineered technologies that help companies drill for and produce oil and gas safely and efficiently around the world. Our products include a full range of equipment and technologies that enable efficient drilling and safe and efficient production throughout the lifecycle of a well. Our principal products consist of artificial lift equipment and solutions, including electric submersible pump systems (“ESP”), rod pumping systems (“Rod Lift”), gas lift systems, progressive cavity pump systems (“PCP”) and plunger lift systems, as well as polycrystalline diamond cutters (“PDCs”) for drilling. We also provide a comprehensive digital product offering consisting of equipment, software and Industrial Internet of Things (“IIoT”) solutions for downhole monitoring, wellsite productivity enhancement and asset integrity management. Our expansive digital product offering includes quartz pressure transducers and hybrid electronics, artificial lift controllers and optimization software, monitoring and predictive diagnostic instruments, and software for reciprocating machinery. Our products and technologies enhance our customers’ drilling and production economics.

Apergy’s products are used by a broad spectrum of customers in the global oil and gas industry, including national oil and gas companies, large integrated and independent oil and gas companies, all of the major oilfield equipment and services providers, and pipeline companies. We compete across major oil and gas markets globally with a particular strength in the North American onshore market. Our products are particularly well suited for unconventional/shale oil and gas markets. While our products are used in both the oil and gas markets, over 75% of our revenues come from oil markets.

The quality, innovative technology and performance of our technologies drive improved cost-effectiveness, productivity, efficiency and safety for our customers. We believe our strong market share in our core markets and our long-term customer relationships are due to our focus on technological advancement, product reliability and our commitment to superior customer service across the organization. Our long-term customer relationships and the consumable nature of many of our products also enable us to benefit from recurring revenues throughout the lifecycle of a producing well. We believe we are also differentiated from competitors through our proven business model focused on high customer intimacy, innovative technology and application engineering.

History and Development

Apergy was formerly a part of the Energy segment within Dover, a global, diversified industrial manufacturer. Apergy has a long history of innovation across these businesses and our heritage in the oil field equipment industry extends over 60 years. During this time, Apergy has expanded through a series of strategic acquisitions of well-known businesses and brands as well as internal growth initiatives. Key acquisitions that built our artificial lift platform include Harbison-Fischer, Accelerated, Wellmark, PCS Ferguson (f/k/a Production Controls Services, Inc.) and Oil Lift Technology. Our leading PDC business was created through the acquisition of US Synthetic. Over this time, Apergy has developed experience as an effective operator as well as a successful integrator of businesses.

Our Industry

We principally operate in the oil and gas drilling and production industry and provide a broad range of technologies and products that enhance oilfield efficiency, improve productivity, maximize reserve recovery and increase asset value. Demand for our products is impacted by overall global demand for oil and gas, which is expected to benefit from a variety of long-term fundamental trends.

According to the U.S. Energy Information Administration’s (the “EIA”) International Energy Outlook 2017 (the “EIA International Energy Outlook”), global economic expansion, coupled with a growing population, will help drive up global energy consumption by about 41% by the year 2050. The majority of this growth is forecasted

 

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to come from China, India and other Asian nations. Increasing urbanization and a significant expansion of the middle class globally are expected to contribute to higher personal and commercial transportation needs, rising electricity in homes and greater industrial energy demand. For these reasons, the EIA International Energy Outlook projects that demand for petroleum and other liquid fuels will grow by 28% from 2015 through 2050, while demand for natural gas will increase by 69% and natural gas will overtake coal as the world’s second largest fuel source during this period.

As new technology has unlocked resources previously considered too costly to produce, unconventional oil and natural gas reservoirs, particularly in the U.S., have become a larger part of the global energy supply landscape. Technological developments in horizontal drilling and hydraulic fracturing have enabled exploration and production (“E&P”) companies to access the vast hydrocarbon reserves contained in the unconventional oil and natural gas reservoirs of the U.S. In addition, North America is expected to become the largest liquefied natural gas (“LNG”) exporter due to growing demand for LNG from Asia and Europe. As a result, the U.S., an oil importer for decades, is on pace to become a net exporter of oil in the near-term.

The oil and gas industry has traditionally been volatile and is influenced by long-term, short-term and cyclical trends, including oil and gas supply and demand, current and projected oil and gas prices, and the level of upstream spending by E&P companies. As a result, demand for our technologies and products depends primarily upon the level of expenditures by our customers in the oil and natural gas industry, particularly those within the U.S. A rapid increase in supply over a seven year period from 2008 to 2015 contributed to a decline in oil and gas prices and reduced customer spending levels from year-end 2014 through 2016. Oil prices rebounded meaningfully in 2017 and have been relatively stable year to date in 2018, resulting in an increase in our customers’ spending and demand for Apergy’s technologies and products in both 2017 and year to date 2018. Although there remains a risk that oil prices and activity levels could deteriorate from current levels, we believe that the outlook for our businesses over the long-term is favorable. Increasing global demand for oil and gas as well as continued depletion of existing reservoirs will drive continued investment in the drilling and completion of new wells. In addition, productivity and efficiency are becoming increasingly important in the oil and gas industry as operators focus on improving per-well economics, driven by a flattening of the West Texas Intermediate crude oil (“WTI”) forward price curve, and the North American onshore oil and gas industry moving from an exploration phase into a more mature production phase.

Technology has become increasingly critical to oil and natural gas producers as a result of the maturity of the world’s oil and natural gas reservoirs, the acceleration of production decline, the focus on complex well designs and the oil and gas industry’s aging workforce. While the aggregate number of wells drilled per year has fluctuated relative to market conditions, E&P companies, on a proportional basis, have increased expenditures on technology in an effort to improve reservoir performance, increase oil and gas recovery and lower the cost per barrel produced over the life of a well. Our customers continue to seek, test and use production-enabling technologies at an increasing rate. We have invested substantially in building our technology offerings, which help us to provide more efficient tools and solutions to produce oil and natural gas. Apergy’s portfolio of data collection, controllers, and remote monitoring solutions are intended to improve reliability and drive down costs. We believe our efficiency enhancing products contribute to a reduction in the breakeven cost of unconventional development for our E&P customers. We believe our business will benefit as operators increasingly focus on optimizing production and improving per-well economics.

 

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Business Segments

Our business is organized into two reportable segments: Production & Automation Technologies; and Drilling Technologies.

 

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Production & Automation Technologies

Our Production & Automation Technologies segment generated revenues of $781.9 million in 2017, representing 77% of our total 2017 revenues. Production & Automation Technologies facilitates the efficient, safe and cost effective extraction of oil and gas. We design, manufacture, market and service a full range of artificial lift equipment, end-to-end automation and digital solutions, as well as other production equipment. A portion of Production & Automation Technologies revenue is derived from activity-based consumable products, as customers routinely replace items such as sucker rods, plunger lifts and pump parts. We believe that the combination of our artificial lift equipment and our end-to-end proprietary automation solutions helps oil and gas operators lower production costs and optimize well efficiency by enabling oil and gas operators to monitor, predict and optimize performance. Our products are sold under a collection of premier brands, which we believe are recognized by customers as leaders in their market spaces, including Harbison-Fischer, Norris, Alberta Oil Tool, Oil Lift Technology, PCS Ferguson, Pro-Rod, Upco, Accelerated, Norriseal-Wellmark, Quartzdyne, Spirit, Theta, Timberline and Windrock.

Within our Production & Automation Technologies segment, we offer artificial lift products, digital products and other production equipment.

 

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Artificial Lift

We believe artificial lift equipment is mission-critical to oil and gas operators as a means to increase pressure within the reservoir and improve oil and gas production. Artificial lift is a key technology for increasing oil and gas production throughout the lifecycle of a producing well and is therefore directly linked to operator economics. Apergy offers a full suite of artificial lift solutions to meet the varying needs of operators as oil production volume levels decline over the lifecycle of a producing well, as demonstrated in the figure below. Apergy’s comprehensive offering provides our customers with cost effective solutions tailored to a well’s specific characteristics and production volumes. Apergy is particularly strong within key U.S. basins where artificial lift technologies are prevalent. According to Spears, the U.S. is the world’s largest lift market, followed by Canada, and artificial lift technologies are used in approximately 95% of all producing wells in North America. We believe that our offerings also have significant international potential, as production rates continue to decline in existing wells in regions such as the Middle East, South America and Eastern Europe. Our artificial lift products represented approximately 77% of our Production & Automation Technologies segment revenues in 2017.

 

 

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Key artificial lift products include:

 

   

ESP: Our ESPs are fully integrated and customizable ESP systems that are used during the earlier stages of production when barrels per day volume is at its highest level. Apergy’s ESP products include centrifugal pumps, gas handling devices, motors, controls and digital solutions to monitor and optimize ESP performance.

 

   

Gas Lift: Gas lift is a method of artificial lift that involves injecting high pressure gas to lift oil from the wells. Gas lift is a preferred artificial lift for deviated wells and wells characterized by large amounts of sand or solid materials. Apergy has been delivering innovative and flexible gas lift solutions to our customers for more than 30 years. Our software takes into account the well complexity and production characteristics of the well to deliver the best gas lift solution for each well.

 

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Rod Lift: As well production extends beyond the initial years, operators typically begin to employ a Rod Lift extraction solution. Apergy’s Rod Lift solutions include standard and fit-for-purpose sucker rods and accessories as well as a full range of downhole pumps that address all rod pumping applications. We believe Rod Lift is one of the more prevalent lift solutions employed in wells in the U.S. and globally. Our Rod Lift business provides for significant recurring revenue as sucker rods, pumps and accessories are replaced with use.

 

   

PCP (Progressive Cavity Pump), Plunger, Hydraulic and Jet Lift Systems: Apergy also offers a full range of PCP solutions including top drives, high performance pumps, drive rods and controls; a broad range of plunger lift systems including surface, downhole equipment and controllers; and a full range of hydraulic and jet lift systems including jet pumps, hydraulic reciprocating pumps, surface multiplex pumps and automation controllers. These solutions are typically used in wells that have been producing for multiple years and are essential for increasing productivity at lower production volumes.

Digital

Our proprietary digital products are aimed at creating an end-to-end production optimization platform that enables oil and gas operators to monitor, predict and optimize well performance and drive improved return on investment during the production process. Apergy is a leading provider of productivity tools and performance management software for artificial lift and asset integrity management. Our software has modular architecture that enables specific solutions to be tailored to meet exact customer needs. Real-time data is used by our customers to drive decisions, enhance well servicing and obtain an accurate picture of the well’s functioning over time, resulting in a more connected, digital wellsite that not only operates more efficiently but is also safer and more secure. Our digital products represented approximately 10% of our Production & Automation Technologies segment revenues in 2017.

 

 

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Digital solutions touch multiple parts of the wellsite and allow an operator centralized monitoring and control. Smart instrumentation and hardware at the wellsite have sensing capabilities that allow the capture of data. Once captured, that data is communicated to a cloud based IIoT infrastructure platform where it can be analyzed and used to drive insights for customers. We believe that the combination of Apergy’s digital products and its strong artificial lift presence enables Apergy to drive the continued adoption of digital solutions by its

 

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customers. Apergy sees digital adoption as a key secular trend in the oil and gas industry, particularly in the current lower oil price environment where operators are focused on lowering the cost per barrel produced over the lifecycle of a well.

Digital solutions bring together multiple layers of equipment, sensors and software. A site may employ a full-scale solution (e.g., a fully connected wellsite using Apergy equipment and software) or a more application specific solution (e.g., a controller used for diagnostics on an ESP lift). Technologies included in Apergy’s digital products offering include:

 

   

Controllers and Software Solutions: Controllers and software solutions, including proprietary cloud-based software, to monitor and optimize artificial lift and production. Software is sold on a subscription based model and can be tailored to the breadth of solution the customer is seeking.

 

   

Downhole Monitoring, Logging and Management: Quartz pressure transducers and smart downhole tools for measuring, monitoring and logging downhole well conditions to improve well productivity.

 

   

Asset Integrity Management Solutions: End-to-End digital IIoT Solutions and portable analyzers to monitor, predict, and optimize health and performance of reciprocating compressors and engines used in wellsites, pipelines, refineries and chemical plants.

Other Production Equipment

Apergy also offers other production equipment including chemical injection systems, flow control valves, oil and water separation, gas conditioning, process heating and pressure vessel products. These products are complementary to our artificial lift and automation technologies offerings and are used by customers in the production of oil and gas. Apergy’s other production equipment allows Apergy to build its share of customers’ wallets and enhances our ability to cross-sell products across the production equipment portfolio. Our other production equipment offerings represented approximately 13% of our Production & Automation Technologies segment revenues in 2017.

As of December 31, 2017, our Production & Automation Technologies segment operated 18 manufacturing facilities in North America, Australia, Colombia and Oman, as well as 105 sales and service facilities in North America.

Drilling Technologies

Our Drilling Technologies segment generated revenues of $227.7 million in 2017, representing 23% of our total 2017 revenues. In operation for over 30 years, Drilling Technologies provides highly specialized products used in drilling oil and gas wells. We design, manufacture and market PDCs for use in oil and gas drill bits under the US Synthetic brand. Our proprietary PDCs are based on years of innovation and intellectual property development in material science applications including the production of highly stable synthetic diamonds, known as “polycrystalline diamonds.” US Synthetic has historically filed new patents at a rate of over 50 patents per year and has previously received the prestigious Shingo Prize for operational excellence. We believe our highly engineered PDCs are distinguished by their quality, rate of penetration and longevity. PDCs are a relatively small cost to the oil and gas operator in the context of overall drilling costs, but are critical to successful drilling. As a result, we believe our customers value the quality and performance of US Synthetic PDCs over less expensive alternatives because a lower quality PDC can cause unnecessary and expensive drilling delays. Over 95% of our PDCs are custom designed to meet unique customer requirements and are finished to exact customer specification to ensure optimal performance. PDCs are utilized in both vertical and horizontal drilling and need to be replaced as they wear out during the drilling process.

Key products of our Drilling Technologies segment include:

 

   

PDC Drill Bit Inserts: Custom designed and manufactured drill bit inserts that fit within a customer’s drill.

 

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Other Drilling Equipment: Apergy also offers long-lasting diamond bearings for process-fluid lubricated applications, including underwater applications, downhole drilling tools and industrial pumps, as well as diamond roof bolt mining tools for underground mining.

As of December 31, 2017, our Drilling Technologies segment operated two facilities, which are located in North America.

The following graphic illustrates where the key products of our Production & Automation Technologies and Drilling Technologies segments are used at a wellsite.

 

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Apergy’s Strengths

We believe that the following strengths position us well to achieve our primary business objective of creating value for all of our stakeholders, including our customers, employees and stockholders:

Attractive businesses benefiting from favorable industry trends in oil and gas.

We believe that increasing global demand for oil and gas and steady depletion of existing reservoirs will continue to drive investment in the drilling and completion of new wells, despite the current oversupply. The EIA International Energy Outlook forecasts that global tight gas, shale gas and coalbed methane production will grow by 3.6% per annum through 2050, driven primarily by demand in the U.S. Additionally, the EIA International Energy Outlook projects that global tight oil production will more than double between 2015 and 2040, growing from 5.0 Mmb/d in 2015 to 10.3 Mmb/d in 2040. At the same time, we believe the current oil price environment supports increased investment to maximize productivity from existing oil fields and increase the efficiency of oilfield operations. We believe operators’ continued focus on improving per-well economics, driven by a flattening of the WTI forward price curve, and the North American onshore oil and gas industry moving from an exploration phase into a more mature production phase, will increase demand for our artificial lift and wellsite automation solutions.

Substantial presence in growing basins, segments and regions.

For the year ended December 31, 2017, 84% of our revenue was generated in North America, where the onshore rig activity was the highest growth region in the oil and gas industry in 2017, achieving a 70% year-over-year increase. Onshore unconventional oil and gas production is expected to continue to grow in North America through 2050, according to the EIA Annual Outlook. Apergy has established positions in key

 

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North American unconventional basins, such as the Permian, Eagle Ford and Bakken basins, that are expected to experience continued growth in the coming years. We have also been expanding our presence in key international markets, including the Middle East, Latin America and Australia.

Significant recurring revenue enhances the stability of our results.

Historically, approximately 40% of our revenue is recurring. This includes replacement hardware, such as rod pumps and sucker rods, which replace previously deployed equipment in established producing wells. It also includes equipment service revenue, as well as ongoing revenue connected with our automation offering, particularly subscription-based revenue for automated well monitoring and management. We believe this recurring revenue enhances the predictability and stability of our revenue and cash flow, and helps to mitigate the impact of down market cycles.

Proven business model driving strong relative performance across market cycles.

We have built our business through differentiated technology and application engineering, high customer intimacy and superior customer service, continuous new product innovation and a culture of continuous improvement. We have also focused on delivering products and solutions that are non-commoditized and that we believe are critical to an oil or gas producer’s efficiency and profitability. Through this consistent approach, we have achieved strong relative operating results across market cycles, especially during down cycles, demonstrating the resilience of our business model. Despite the recent oil and gas market downturn, we achieved significant net cash provided by operating activities during 2015 and 2016, in part through proactive working capital management.

Industry leadership with strong brand portfolio and reputation for quality, performance and service.

Our products are sold under a collection of premier brands with strong reputations for quality, performance and service in the industry. These brands include Norris, Harbison-Fischer, Accelerated, PCS Ferguson, Oil Lift Technology, Norriseal-Wellmark, Spirit, Quartzdyne, Theta, Windrock and US Synthetic. Our heritage in the oil field equipment industry extends over 60 years. We believe the quality of our brands has enabled us to achieve a strong Net Promoter Score, which we believe is among the highest in the artificial lift market.

Comprehensive artificial lift portfolio in an attractive market segment.

Artificial lift is one of the fastest growing segments in oilfield equipment, as spending for artificial lift per well has outpaced other areas of growth. According to Spears, the global artificial lift market was approximately $8.3 billion in 2016 and grew approximately 6% in 2017. During the previous oil and gas upcycle from 2009 to 2014, the artificial lift market grew at an average annual rate of approximately 19%, according to Spears. Additionally, according to Spears, artificial lift spending per active rig has grown at an average annual rate of almost 8% between 2006 and 2017. We believe we are well positioned to benefit from this favorable trend with a broad portfolio of artificial lift solutions to drive productivity throughout the lifecycle of the well, including ESP, Rod Lift, PCP, plunger lift, hydraulic and jet lift systems.

Our automation business is well positioned to capitalize on increasing adoption of digital applications by our customers.

As our customers increasingly focus on maximizing the productivity and efficiency of existing wells, we believe they will continue to adopt automation technologies at the wellsite and that our business is well positioned to capitalize on this trend. We believe technology has become increasingly important to the oil and natural gas marketplace as a result of the maturity of the world’s oil and natural gas reservoirs, the acceleration of production decline, the focus on complex well designs and the oil and gas industry’s aging workforce. In the current lower oil price environment, our customers are focused on lowering the cost per barrel produced over the

 

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lifecycle of a well and have begun to seek, test and use production-enabling technologies at an increasing rate. We believe that our strong domain expertise, customer access and innovative hardware and proprietary optimization software offer advantages in this regard.

We are an award-winning global leader in PDCs for oil and gas drilling and an important partner to customers in achieving drilling productivity.

Our US Synthetic business has over thirty years of experience in the development and production of PDCs and has achieved a strong leadership position in the industry primarily due to our expertise in diamond science technology and our ongoing commitment to innovation, quality and superior customer service. We custom design PDCs to the specific characteristics of the unique geological formations in which our customers are drilling. We are able to analyze the needs of our customers and deliver customized solutions in a reliable and timely manner, enabling our customers to operate more efficiently and reduce their total drilling costs. US Synthetic is a recognized leader in lean manufacturing and engineering. Currently, US Synthetic remains the only upstream oilfield equipment company to receive the Shingo Prize for operational excellence.

Strong operating system that delivers sustainable performance.

We utilize an operating system that we believe distinguishes us from our peers. Our operating system is built on a foundation of a strong continuous improvement program that drives relentless focus on business process improvements and eliminating waste. Key focus areas of our operating system include strategic planning, organic growth, pricing, productivity, strategic sourcing and talent management. Our operating system has enabled us to deliver attractive margin and cash flow performance. We also believe this operating system allows us to integrate new businesses effectively and deliver value.

Executive management team with proven track record of success.

Our senior management team is led by Sivasankaran (“Soma”) Somasundaram, who serves as our President and Chief Executive Officer. Other members of Apergy’s senior management team include Jay A. Nutt, Senior Vice President and Chief Financial Officer, Paul E. Mahoney, President, Production and Automation Technologies, Robert K. Galloway, President, Drilling Technologies, Syed (“Ali”) Raza, Senior Vice President and Chief Digital Officer and Shankar Annamalai, Senior Vice President Operations. Our senior management team consists of proven industry operators, with an average of 24 years of relevant experience. We believe our senior leadership team has the extensive operational, financial and managerial experience needed to effectively navigate the key opportunities and challenges facing our business today and have been responsible for developing and executing our success to date. For more information regarding the executive officers of Apergy, see “Directors, Executive Officers and Corporate Governance—Executive Officers.”

Apergy’s Strategies

Our goal is to continue to create value and to become the leader at the wellsite, driving customer productivity and efficiency. We intend to achieve this goal by executing the following strategies:

Expand market coverage and increase market share in growing unconventional basins.

Onshore unconventional oil and gas production is expected to continue to grow in North America. The EIA International Energy Outlook projects global tight gas, shale gas and coalbed methane production to grow by 3.6% per annum through 2050, driven primarily by the U.S. According to the EIA Annual Outlook, shale output in the U.S. is expected to increase by approximately 130% over this period, while U.S. tight oil output will grow by approximately 74%. As a result, North America is projected to become a major exporter of natural gas during this period. Apergy has established positions with customers that operate in key North American unconventional basins, such as the Permian, Eagle Ford and Bakken basins, that are expected to experience continued growth in

 

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the coming years. We intend to expand our market coverage and increase our share in these markets by leveraging our existing customer relationships, sales and service infrastructure and new product initiatives. Key elements of the strategy will include expanding sales coverage, key account management to drive cross selling, targeted product launches to capture market share, data analytics to drive increased customer penetration opportunities and educational programs to drive awareness of our technology differentiation.

Capitalize on increasing customer adoption of automation solutions to drive wellsite productivity.

We believe our customers will increasingly adopt automation solutions to drive productivity and efficiency in the coming years. Technology has become increasingly critical to the oil and natural gas marketplace as a result of the maturity of the world’s oil and natural gas reservoirs, the acceleration of production decline, the focus on complex well designs and the oil and gas industry’s aging workforce. While the aggregate number of wells being drilled per year has fluctuated relative to market conditions, E&P companies have increased expenditures on technology in an effort to improve reservoir performance, increase oil and gas recovery and to lower the cost per barrel produced over the life of a well. Customers continue to seek, test and use production-enabling technologies at an increasing rate. We have invested a substantial amount of our time and resources into building our technology offerings, which help us to provide our customers with more efficient tools to produce oil and natural gas. Apergy’s proprietary automation solutions improve reliability and drive down costs. We offer a full range of automation solutions consisting of equipment, software and full end-to-end IIoT solutions to meet specific customer needs. We believe our automation solutions contribute to a reduction in the breakeven cost of unconventional development, improving the efficient use of capital and operating budgets of our E&P customers. We believe our business will benefit as operators increasingly focus on optimizing production and improving per-well economics. We intend to leverage our extensive customer access and deep domain expertise in these applications to capitalize on this growth trend.

Continue to innovate and expand our product offerings.

We intend to continue our strong track record of developing and launching new and innovative products that drive improved cost-effectiveness, productivity, efficiency and safety for our customers. We operate in a market that is characterized by rapidly changing technology and frequent new product introductions. As a result, we maintain an active research, development and engineering program with a focus on solving customer challenges and developing innovative technologies to improve customer efficiency and profitability. We believe maintaining a robust innovation pipeline will allow us to continue to win market share and increase our penetration in key markets and with key customers. In the near-term, we expect to launch several new products that will help our customers gain efficiency, reduce operating costs and improve safety. Key focus areas for innovation and new product launches include increasing the performance of our artificial lift systems, developing new digital platforms for our production management and asset integrity management solutions, increasing the drilling productivity of our PDC cutters and developing diamond bearings for new applications.

Continue to expand our global reach.

As producing wells in the Middle East continue to age and deplete and shale-based production continues to expand in areas like South America, our globally recognized brands, market ready products and application knowledge offer the opportunity for international market penetration and growth. We believe there will be a substantial opportunity in the coming years to leverage our technologies currently used in unconventional oil and gas production in North America in targeted international markets. To capitalize on these opportunities, we are focused on expanding our operations and capabilities in targeted global markets such as the Middle East, Latin America and Australia, regions which we believe have aging wells and significant unconventional resource development potential. For example, we recently completed an acquisition in Argentina that will give us access to the market and enable us to capitalize on shale developments in that country. We have begun to win tenders in these markets, and we expect to continue to build on these successes in the future, especially as these international markets move towards adopting artificial lift and automation technologies.

 

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Continue to drive margin expansion and cash from operations through operational excellence.

We remain focused on driving margin expansion and cash from operations as the oil and gas markets continue to recover. We have a demonstrated track record of strong relative performance through market cycles, including maintaining cash from operations positive throughout the recent oil and gas downturn. We are committed to continuing operational excellence and driving strong performance by utilizing our differentiated operating system. We plan to achieve this through a rigorous focus on improving productivity in our facilities, reducing material costs by strategic sourcing in best value countries, reducing working capital through effective inventory, receivables and payables management and eliminating waste in our processes through lean and continuous improvement principles.

Expand our technology and product portfolio through selective acquisitions.

In addition to our organic growth initiatives, we may choose to pursue select strategic acquisition opportunities as part of our growth strategy. We benefit from a track record of successfully growing our earnings and technology offering through selective acquisitions. For example, over the last cycle, we expanded our comprehensive artificial lift platform through several acquisitions, including Harbison-Fischer, Oil Lift Technology, PCS Ferguson, and Accelerated. Most recently, we completed the acquisition of an Argentina-based supplier of progressive cavity pump products and services in October of 2017. We have historically employed a disciplined approach to acquisitions focused on opportunities where we believe we can achieve an attractive return on our investment. These have included opportunities that (i) increased our exposure to the most important growth trends in the industry, (ii) added key products and technologies, (iii) enhanced our market position, (iv) expanded our geographic scope and/or (v) provided the opportunity to realize synergies while strengthening our capabilities. To the extent we choose to pursue acquisition opportunities, as part of our disciplined approach, we intend to focus on those that we believe will be accretive to earnings while consistent with our goal to maintain a strong and flexible balance sheet and healthy credit profile. In order to preserve the tax-free nature of the spin-off, we must execute any such transactions in compliance with the tax matters agreement. As a result, the ability of Apergy to engage in, among other things, certain mergers and equity transactions could be limited or restricted for a two-year period following the spin-off. See “Risk Factors—Risks Related to the Separation—Apergy may not be able to engage in certain corporate transactions as a result of the Separation.”

Competition

The markets in which we operate are highly competitive. The principal bases of competition in our markets are customer service, product quality and performance, price, breadth of product offering, market expertise and innovation. We believe we differentiate ourselves from our competitors through our model of high customer intimacy, differentiated technology, innovation and a high level of customer service.

We face competition from other manufacturers and suppliers of oil and gas production and drilling equipment. Key competitors include Weatherford International plc, Baker Hughes, a GE Company, Halliburton, BORETS, Tenaris, Novomet and Emerson in Production and Automation Technologies; as well as DeBeers (Element 6), Schlumberger Ltd. (Mega Diamond) and various Chinese suppliers in Drilling Technologies.

Customers, Sales and Distribution

We have built our business through high customer intimacy and superior customer service, and we view intense customer focus as being central to our goal of creating value for all of our stakeholders. Drawing on our deep industry and application engineering expertise, we strive to develop close, collaborative relationships with our customers. We work closely with our customers’ engineering teams to develop technologies and applications that help improve efficiency and productivity.

We have established deep and long-standing customer relationships with some of the largest operators in the oil and gas drilling and production markets. Our customers include national oil and gas companies, large and

 

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integrated independent oil and gas companies, all of the major oil field equipment and service providers, and pipeline companies.

We market and sell our products and technologies through a combination of sales representatives, technical seminars, trade shows and print advertising. We sell directly to customers through our direct sales force and indirectly through independent distributors and sales representatives. Our direct sales force is composed of highly trained industry experts who can advise our customers on the advantages of our technology and product offering. We have also developed an extensive network of 108 sales and service locations throughout key regions and basins in North America to better serve our customers. We also host forums and training sessions, such as our Artificial Lift Academy, where our customers can share their experiences and we can educate and train our customers in the use of our new technologies. Nearly all of our Drilling Technologies sales and over 70% of our Production & Automation Technologies sales in 2017 were sold directly to the end-use customer.

In addition to our direct sales force, we support a global network of distributors and representatives. We provide our distributors with sales and product literature, advertising and sales promotions, and technical assistance and training with our products. Many of our distributors also stock our products.

Our customer base is diverse and no single customer accounted for more than 10% of total revenue for the year ended December 31, 2017.

Intellectual Property

Apergy owns many patents, trademarks, licenses and other forms of intellectual property, which have been acquired over a number of years and, to the extent relevant, expire at various times over a number of years. A large portion of Apergy’s intellectual property consists of patents, unpatented technology and proprietary information constituting trade secrets that Apergy seeks to protect in various ways, including confidentiality agreements with employees and suppliers where appropriate. While Apergy’s intellectual property is important to its success, the loss or expiration of any of these rights, or any group of related rights, is not likely to materially affect Apergy’s results on a combined basis. Apergy believes that its commitment to continuous engineering improvements, new product development and improved manufacturing techniques, as well as strong sales, marketing and service efforts, are significant to its general leadership positions in the niche markets that it serves.

Research and Development and Engineering

Apergy operates in markets that are characterized by changing technology and frequent new product introductions. As a result, Apergy’s success is dependent on its ability to develop and introduce new technologies and products for its customers. Apergy maintains an active research, development and engineering program with a focus on developing innovative products and solutions as well as upgrading and improving existing offerings to satisfy the changing needs of its customers, expand revenue opportunities domestically and internationally, maintain or extend competitive advantages, improve product reliability and reduce production costs. Apergy believes maintaining a robust innovation pipeline will allow it to continue to win market share and increase its penetration in key markets and with key customers.

Raw Materials

Apergy uses a wide variety of raw materials, primarily metals and semi-processed or finished components. We have not historically experienced material impacts to our financial results due to shortages or the loss of any single supplier. Although the required raw materials are generally available, commodity pricing for metals, such as nickel, chrome, molybdenum, vanadium, manganese and steel scrap, fluctuate with the market. Although cost increases in commodities may be recovered through increased prices to customers, Apergy’s operating results are exposed to such fluctuations. Apergy attempts to control such costs through short-duration fixed-price contracts with suppliers and various other programs, such as Apergy’s global supply chain activities. In addition, Apergy sources material globally. This global supply chain is intended to provide Apergy with a cost-effective solution

 

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for raw materials. Our supply chain could be exposed to logistical disruptions. Apergy maintains domestic suppliers in most cases to provide temporary contingencies. Despite contingencies and back-up processes, sustained inflation and unpredictable disruptions to supply could have an adverse impact on our business.

Regulation and Environmental and Occupational Health and Safety Matters

Apergy’s operations are subject to a variety of international, national, state and local laws and regulations, including those relating to the discharge of materials into the environment, health and worker safety, or otherwise relating to human health and environmental protection. Failure to comply with these laws or regulations may result in the assessment of administrative, civil and criminal penalties, imposition of remedial or corrective action requirements, and the imposition of injunctions to prohibit certain activities or force future compliance.

In addition, Apergy depends on the demand for its products and services from the oil and gas industry and, therefore, is affected by changing taxes, price controls, tariffs and trade restrictions and other laws and regulations relating to the oil and gas industry in general, including those specifically directed to hydraulic fracturing and onshore products. The adoption of laws and regulations curtailing exploration, drilling or production in the oil and gas industry, or the imposition of more stringent enforcement of existing regulations, could adversely affect Apergy’s operations by limiting demand for Apergy’s products and services or restricting Apergy’s or its customers operations. For more information, see “Risk Factors—Risks Related to Apergy’s Business—Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related litigation could result in increased costs and additional operating restrictions or delays for Apergy’s customers, which could reduce demand for Apergy’s products and negatively impact Apergy’s business, financial condition and results of operations,” “—Apergy and its customers are subject to extensive environmental and health and safety laws and regulations that may increase Apergy’s costs, limit the demand for Apergy’s products and services or restrict Apergy’s operations. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect Apergy’s results of operations” and “—Climate change legislation and regulatory initiatives could result in increased compliance costs for Apergy and its customers.”

Apergy utilizes behavioral-based safety practices to promote a safe working environment for all its employees. On a consistent and regular basis, safety is discussed, measured and promoted in all levels of the organization. Additionally, Apergy’s operations are subject to a number of federal and state laws and regulations relating to workplace safety and worker health, such as the Occupational Safety and Health Act and regulations promulgated thereunder.

Apergy has incurred and will continue to incur operating and capital expenditures to comply with environmental, health and safety laws and regulations. Historically, there have been no material effects upon Apergy’s earnings and competitive position resulting from Apergy’s compliance with such laws or regulations; however, there can be no assurance that such costs will not be material in the future or that such future compliance will not have a material adverse effect on our business or operational costs.

Employees

Apergy employed approximately 3,200 persons in nine countries as of September 30, 2018. Approximately 100 of Apergy’s employees in the U.S. are subject to a collective bargaining agreement. Outside the U.S., some of Apergy’s employees are represented by unions or works councils. Apergy believes that it has good relations with its employees.

Properties

Apergy’s corporate headquarters is located in The Woodlands, Texas. Apergy maintains technical customer support offices and operating facilities in North America, the Middle East, Latin America and Australia.

 

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The number, type, location and size of the properties used by Apergy’s continuing operations as of December 31, 2017 are shown in the following charts, by segment:

 

     Number and Nature of Facilities      Square Footage (in 000s)  
     Manufacturing      Warehouse      Sales / 
Service /
Other
     Total      Owned      Leased(1)  

Production & Automation Technologies

     18        72        36        126        1,362        1,997  

Drilling Technologies

     1        —          1        2        173        11  

 

     Locations  
     North
America
     Australia      Other      Total  

Production & Automation Technologies

     107        7        12        126  

Drilling Technologies

     2        —          —          2  

 

(1)

Expiration dates on leased facilities range from 1 to 15 years.

Apergy believes that its owned and leased facilities are well-maintained and suitable for its operations.

 

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LEGAL PROCEEDINGS

Apergy and certain of its subsidiaries are parties to a number of legal proceedings incidental to their businesses. These proceedings primarily involve claims by private parties alleging injury arising out of use of Apergy’s products, intellectual property infringement, employment matters and commercial disputes. Management and legal counsel, at least quarterly, review the probable outcome of such proceedings, the costs and expenses reasonably expected to be incurred and currently accrued to-date. Apergy has reserves for legal matters that are probable and estimable, and at September 30, 2018 and December 31, 2017, 2016 and 2015, respectively, these reserves were not significant. While it is not possible at this time to predict the outcome of these legal actions, in the opinion of management, based on the aforementioned reviews, Apergy is not currently involved in any legal proceedings which, individually or in the aggregate, could have a material effect on its financial position, results of operations, or cash flows.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is our analysis of our financial performance, financial condition and significant trends that may affect our future performance. It should be read in conjunction with the Audited Combined Financial Statements and Interim Financial Statements, each included elsewhere in this prospectus. It contains forward-looking statements including, without limitation, statements relating to Apergy’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the words “believe,” “anticipate,” “expect,” “may,” “intend,” “foresee,” “guidance,” “estimate,” “potential,” “outlook,” “plan,” “should,” “will,” “would,” “could,” “target,” “forecast” and similar expressions, including the negative thereof. We do not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the disclosures under the heading: “Cautionary Statement Concerning Forward-Looking Statements.”

Executive Overview and Business Outlook

Apergy is a leading provider of highly engineered equipment and technologies that help companies drill for and produce oil and gas safely and efficiently around the world. Our products provide efficient functioning throughout the lifecycle of a well—from drilling to completion to production.

Separation and Distribution

On April 18, 2018, the Dover Board of Directors approved the separation of entities conducting its upstream oil and gas energy business within the Dover Energy segment into an independent, publicly traded company named Apergy Corporation. In accordance with the separation and distribution agreement, the two companies were separated by Dover distributing to its stockholders all 77,339,828 shares of Apergy common stock on May 9, 2018. Each Dover stockholder received one share of Apergy common stock for every two shares of Dover common stock held at the close of business on the record date of April 30, 2018. In conjunction with the Separation, Dover received a private letter ruling from the IRS to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, for U.S. federal income tax purposes, the distribution of Apergy common stock was not taxable to Dover or U.S. holders of Dover common stock, except in respect to cash received in lieu of fractional share interests. Following the Separation, Dover retained no ownership interest in Apergy, and each company now has separate public ownership, boards of directors and management. On May 9, 2018, Apergy common stock began “regular-way” trading on the New York Stock Exchange under the “APY” symbol.

Basis of Presentation

See Note 1—“Basis of Presentation” in the Audited Combined Financial Statements and Note 1—“Basis of Presentation and Separation” in the Interim Financial Statements for information on the basis of presentation of the Audited Combined Financial Statements and Interim Financial Statements included in this prospectus.

Business Environment

Our business provides a broad range of technologies and products for the oil and gas drilling and production industry and, as a result, is substantially dependent upon activity levels in the oil and gas industry. Demand for our products is impacted by overall global demand for oil and gas, ongoing depletion rates of existing wells which produce oil and gas, and our customers’ willingness to invest in the development and production of oil and gas resources. Our customers determine their operating and capital budgets based primarily on current and future

 

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crude oil and natural gas prices, U.S. and worldwide rig count and U.S. well completions. Crude oil and natural gas prices are impacted by geopolitical, macroeconomic and local events and have historically been subject to substantial volatility and cyclicality. Future higher oil and gas prices typically translate into higher exploration and production budgets. Rig count, footage drilled and exploration and production investment by oil and gas operators have often been used as leading indicators for the level of drilling and development activity in the oil and gas sector.

Market Conditions and Outlook

Oil supply markets tightened in the back half of 2017 and throughout the first half of 2018, driving 2018 average WTI crude prices higher. Although certain OPEC and non-OPEC producers announced their intention to increase production beginning in the third quarter of 2018, the crude oil price outlook remained relatively stable driven by expectations that these announced production increases would not offset falling production levels in Venezuela and Iran, given the anticipated declines in Iranian production as a result of the reinstatement of U.S. sanctions during late 2018. U.S., Canadian and worldwide rig counts increased sequentially in the third quarter of 2018. We expect continued growth in rig count, as well as footage drilled, as the demand for oil and gas continues to grow and commodity prices remain constructive. We expect that U.S. rig count growth will be more modest through the end of 2018 due to takeaway capacity constraints in the Permian basin and as oil and gas operators experience budgeting pressures as year-end approaches.

Recently announced tariffs by the U.S. government, and retaliatory tariffs and other trade restrictions by others, introduce uncertainty to our business since some of our products are impacted by the tariffs. We expect these products to experience higher input costs; however, we expect to be able to mitigate some of the impacts of higher costs through various measures, including price increases, supplier concessions and productivity improvement initiatives. In addition, we remain ready to respond to any changes in our customers’ plans based on the recent takeaway capacity issues in the Permian basin. Although we have not experienced any material impact to our business to date from slower Permian activity, we believe U.S. producers will redirect their capital to other basins which we currently serve.

Although risk remains that oil prices and activity levels could deteriorate from current levels, we believe the long-term outlook for our businesses is favorable. Increasing global demand for oil and gas, in combination with ongoing depletion of existing reservoirs, is expected to drive continued investment in the drilling and completion of new wells. In addition, productivity and efficiency are becoming increasingly important in the oil and gas industry as operators focus on improving per-well economics.

Average oil and gas prices, rig counts and well completions are summarized below:

 

    2017     2018  
    Q1     Q2     Q3     Q4     FY     Q1     Q2     Q3     YTD  

Average Price WTI Crude (per bbl)(a)

  $ 51.62     $ 48.10     $ 48.18     $ 55.27     $ 50.80     $ 62.91     $ 68.07     $ 69.69     $ 66.89  

Average Price Brent Crude (per bbl)(a)

    53.59       49.55       52.10       61.40       54.12       66.86       74.53       75.08       72.16  

Average Price Henry Hub Natural Gas (per mmBtu)(a)

    3.02       3.08       2.95       2.91       2.99       3.16       2.85       2.93       2.98  

U.S. Rig Count(b)

    742       895       946       921       876       966       1,039       1,051       1,019  

Canada Rig Count(b)

    295       117       208       204       206       269       108       209       195  

International Rig Count(b)

    939       958       947       949       948       970       968       1,003       980  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Worldwide Rig Count

    1,976       1,970       2,101       2,074       2,030       2,205       2,115       2,263       2,194  

U.S. Well Completions(a)

    786       954       1,043       1,043       957       1,054       1,198       1,270       1,175  

 

(a)

Source: EIA, as of October 1, 2018.

(b)

Source: Baker Hughes Rig Count, as of October 5, 2018.

 

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Components of our Results of Operations

Revenues—Our revenues are generated substantially from product sales, which approximated 89% and 91% of our revenues for the nine months ended September 30, 2018 and 2017, respectively, and 91%, 90% and 92% of our revenues for the years ended December 31, 2017, 2016 and 2015, respectively. The remaining revenue is derived from services and leases, which represented less than 8% and 5%, respectively, in all such periods. Product revenues are derived from the sale of drilling and production equipment. Service revenues are earned as we provide technical advisory assistance and field services related to our products. Lease revenue is derived from rental income of leased production equipment. Most of our operations are in the U.S. with approximately 79% and 76% of our sales derived domestically in the nine months ended September 30, 2018 and 2017, respectively, and 76%, 74% and 75% of our sales derived domestically in the years ended December 31, 2017, 2016 and 2015, respectively. International operations are spread across Canada, Europe, Australia, the Middle East, Asia-Pacific and South America. Foreign sales approximated 21% and 24% of our total revenues in the nine months ended September 30, 2018 and 2017, respectively, and 24%, 26% and 25% of our total revenues in the years ended December 31, 2017, 2016 and 2015, respectively.

Cost of goods and services—The principal elements of cost of goods and services are labor, raw materials and manufacturing overhead. Cost of goods and services as a percentage of revenues is influenced by the product mix sold in any particular period, the over or under absorption of manufacturing overhead and market conditions. Our costs related to our foreign operations do not significantly differ from our domestic costs.

Selling, general and administrative expense—Selling, general and administrative expense includes the costs associated with sales and marketing, general corporate overhead, business development expenses, compensation expense, stock-based compensation expense, legal expenses and expenses from other related administrative functions. Selling, general and administrative expense also includes allocations of costs that were incurred by Dover for functions such as corporate executive management, human resources, information technology, facilities, tax, shared services, finance and legal, including the costs of salaries, benefits and other related costs. These expenses have been allocated to Apergy based on direct usage or benefit where identifiable, with the remainder allocated on the basis of revenues, headcount, or other measures.

Other expense, net—Other expense, net primarily includes royalty expense and foreign currency gains and losses. Royalty expense is payable to Dover for our use of patents and intangible assets owned by Dover. The royalty is charged based upon Apergy revenues. Patents and intangibles owned by Dover related to Apergy transferred to Apergy upon the Separation. Following the Separation, no further royalty charges are expected to be incurred by Apergy from Dover. Foreign currency gains and losses includes re-measurement and settlement of foreign currency denominated balances and foreign currency hedging activities.

(Benefit from) provision for income taxes—We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining the provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. In our Audited Combined Financial Statements, (benefit from) provision for income taxes and deferred income tax balances have been calculated on a stand-alone basis, although our operations have historically been included in the tax returns filed by Dover. As a stand-alone entity, we file tax returns on our own behalf and our deferred taxes and effective tax rate may differ from those in historical periods prior to the Separation. The Tax Reform Act, which was enacted on December 22, 2017, significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Effective in 2018, the U.S. statutory rate decreased from 35% to 21%. In addition, our overall effective income tax rate can be lower or higher than the U.S. statutory rate due to U.S. state and local income taxes and the tax effect on foreign operations.

 

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Key Performance Indicators

Throughout this MD&A, we refer to measures used by management to evaluate performance, including a number of financial and operational measures. We believe that both of these operational measures provide us and our investors an indication of our performance and outlook. These measures include:

Bookings—Bookings represent the dollar value of customer orders for a particular period.

Book-to-bill ratio—The book-to-bill ratio is used as an indicator of demand versus current period revenue, and it compares the total dollar amount of orders received relative to revenues for the corresponding period. A ratio above 1.0 implies that more orders were received than filled, indicating strong customer demand, while a ratio below 1.0 implies weaker customer demand.

Results of Operations

Three Months Ended September 30, 2018 and 2017

 

     Three Months Ended
September 30,
    Change  

(dollars in thousands)

   2018     2017     $      %  

Revenue

   $ 316,468     $ 258,654       57,814        22.4  

Cost of goods and services

     202,734       173,880       28,854        16.6  
  

 

 

   

 

 

   

 

 

    

Gross profit

     113,734       84,774       28,960        34.2  

Selling, general and administrative expense

     69,022       54,828       14,194        25.9  

Interest expense, net

     10,584       79       10,505        *  

Other expense, net

     910       2,941       (2,031      *  
  

 

 

   

 

 

   

 

 

    

Income before income taxes

     33,218       26,926       6,292        23.4  

Provision for income taxes

     7,723       8,241       (518      (6.3
  

 

 

   

 

 

   

 

 

    

Net income

     25,495       18,685       6,810        36.4  

Net income attributable to noncontrolling interest

     232       264       (32      *  
  

 

 

   

 

 

   

 

 

    

Net income attributable to Apergy

   $ 25,263     $ 18,421       6,842        37.1  
  

 

 

   

 

 

   

 

 

    

Gross profit margin

     35.9     32.8        3.1  pts. 

Selling, general and administrative expense, percent of revenue

     21.8     21.2        0.6  pts. 

Effective tax rate

     23.2     30.6        (7.4 ) pts. 

 

*

Not meaningful

Revenue

Revenue for the third quarter of 2018 increased $57.8 million, or 22.4%, year-over-year driven by broad-based volume growth in our Production & Automation Technologies’ artificial lift and digital offerings due to improving oil and gas markets, particularly U.S. rig count and well completion activity. In addition, revenue increased in our Drilling Technologies segment year-over-year due to increased volumes driven by increased worldwide rig counts and footage drilled, combined with continued customer adoption of our diamond bearings technology.

Gross Profit

Gross profit for the third quarter of 2018 increased $29.0 million, or 34.2%, year-over-year, reflecting benefits of increased sales volumes in both our Production & Automation Technologies and Drilling Technologies segments, combined with the realization of productivity initiatives.

 

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Selling, General and Administrative Expense

Selling, general and administrative expense in the third quarter of 2018 increased $14.2 million, or 25.9%, year-over-year, primarily due to increased headcount in support of our growth initiatives, higher bonus accruals, and $4.4 million in professional fees and other related charges associated with the Separation.

Interest Expense, Net

Interest expense, net in the third quarter of 2018 increased $10.5 million year-over-year due to issuances of our Term Loan Facility and the outstanding notes during the second quarter of 2018.

Provision for Income Taxes

The effective tax rates for the third quarter of 2018 and 2017 were 23.2% and 30.6%, respectively. The year-over-year decrease in the effective tax rate was primarily due to the Tax Reform Act, which was enacted on December 22, 2017, and which reduced the U.S. corporate income tax rate from a maximum of 35% to 21%, effective January 1, 2018.

Nine Months Ended September 30, 2018 and 2017

 

     Nine Months Ended
September 30,
    Change  

(dollars in thousands)

   2018     2017     $      %  

Revenue

   $ 906,318     $ 745,093       161,225        21.6  

Cost of goods and services

     594,605       500,329       94,276        18.8  
  

 

 

   

 

 

   

 

 

    

Gross profit

     311,713       244,764       66,949        27.4  

Selling, general and administrative expense

     194,568       162,359       32,209        19.8  

Interest expense, net

     16,813       199       16,614        *  

Other expense, net

     3,724       7,929       (4,205      *  
  

 

 

   

 

 

   

 

 

    

Income before income taxes

     96,608       74,277       22,331        30.1  

Provision for income taxes

     24,324       22,973       1,351        5.9  
  

 

 

   

 

 

   

 

 

    

Net income

     72,284       51,304       20,980        40.9  

Net income attributable to noncontrolling interest

     295       860       (565      *  
  

 

 

   

 

 

   

 

 

    

Net income attributable to Apergy

   $ 71,989     $ 50,444       21,545        42.7  
  

 

 

   

 

 

   

 

 

    

Gross profit margin

     34.4     32.9        1.5  pts. 

Selling, general and administrative expense, percent of revenue

     21.5     21.8        (0.3 ) pts. 

Effective tax rate

     25.2     30.9        (5.7 ) pts. 

 

*

Not meaningful

Revenue

Revenue for the first nine months of 2018 increased $161.2 million, or 21.6%, year-over-year driven by broad-based volume growth in our Production & Automation Technologies’ artificial lift and digital offerings due to improving oil and gas markets, particularly U.S. rig count and well completion activity. In addition, revenue increased in our Drilling Technologies segment year-over-year due to increased volumes driven by increased U.S. rig counts and market share gains.

 

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Gross Profit

Gross profit for the first nine months of 2018 increased $66.9 million, or 27.4%, year-over year, reflecting benefits of increased sales volumes in both our Production & Automation Technologies and Drilling Technologies segments, combined with realization of productivity initiatives.

Selling, General and Administrative Expense

Selling, general and administrative expense for the first nine months of 2018 increased $32.2 million, or 19.8%, year-over-year, primarily due to increased headcount in support of our growth initiatives, higher bonus accruals and $9.5 million in professional fees and other related charges associated with the Separation.

Interest Expense, Net

Interest expense, net in the first nine months of 2018 increased $16.6 million year-over-year due to issuances of our Term Loan Facility and the outstanding notes during the second quarter of 2018.

Provision for Income Taxes

The effective tax rates for the first nine months of 2018 and 2017 were 25.2% and 30.9%, respectively. The year-over-year decrease in the effective tax rate was primarily due to the Tax Reform Act, which was enacted on December 22, 2017, and which reduced the U.S. corporate income tax rate from a maximum of 35% to 21%, effective January 1, 2018. This benefit was partially offset by tax on capital gains related to certain reorganizations of our subsidiaries as a result of the Separation.

Years Ended December 31, 2017, 2016 and 2015

 

     Years Ended December 31,     % / Point Change  

(dollars in thousands)

   2017     2016     2015     2017 vs. 2016     2016 vs. 2015  

Revenue

   $ 1,009,591     $ 751,337     $ 1,076,680       34.4     (30.2 )% 

Cost of goods and services

     691,124       556,009       742,041       24.3     (25.1 )% 
  

 

 

   

 

 

   

 

 

     

Gross profit

     318,467       195,328       334,639       63.0     (41.6 )% 

Gross profit margin

     31.5     26.0     31.1     5.5     (5.1 )% 

Selling, general and administrative expense

     219,517       205,409       245,723       6.8     (16.4 )% 

Selling, general and administrative expense as a percent of revenue

     21.7     27.3     22.8     (5.6     4.5  

Other expense, net

     9,666       8,753       11,651       10.4     (24.9 )% 

Income (loss) before income taxes

     89,284       (18,834     77,265       (574.1 )%      (124.4 )% 

Provision for (benefit from) income taxes

     (22,284     (8,043     24,131       177.1     (133.3 )% 

Effective tax rate

     (25.0 )%      42.7     31.2     (67.7     11.5  

Net income (loss)

     111,568       (10,791     53,134       (1,133.9 )%      (120.3 )% 

Less: Net income attributable to noncontrolling interest

     930       1,851       1,436       (49.8 )%      28.9

Net income (loss) attributable to Apergy

     110,638       (12,642     51,698       (975.2 )%      (124.5 )% 

Revenue

For the year ended December 31, 2017, revenue increased $258.3 million, or 34.4%, to $1.0 billion compared with 2016, driven by significant growth in U.S. and Canada rig counts and increased well completion activity during the year. Customer pricing did not have a significant impact to revenue in 2017.

 

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For the year ended December 31, 2017, U.S. revenue increased 37.7% compared with 2016, primarily due to a 72.1% increase in U.S. rig count from 509 rigs in 2016 to 876 rigs in 2017. Non-U.S. revenue increased 24.8% for the year ended December 31, 2017 compared with 2016 largely due to the increase in Canada rig count of 58% from 130 in 2016 to 206 in 2017.

For the year ended December 31, 2016, revenue decreased $325.3 million, or 30.2%, to $751.3 million compared with 2015, driven by significant declines in market fundamentals, especially with regard to U.S. rig count and end-customer capital spending. These reductions broadly impacted our segments. Customer pricing unfavorably impacted revenue by approximately 1.9% in 2016.

For the year ended December 31, 2016, U.S. revenue declined 30.8% compared with 2015, primarily as a result of a U.S. rig count decline of 48.0%, from 978 rigs in 2015 to 509 rigs in 2016. Non-U.S. revenue declined 28.4% for the year ended December 31, 2016 compared with 2015 largely due to the decline in oil and gas prices leading to decreased exploration and production activities outside of the U.S.

Gross Profit

For the year ended December 31, 2017, our gross profit increased $123.1 million, or 63.0%, to $318.5 million compared with 2016, primarily due to a significant increase in organic sales volume due to an improving oil and gas market compared to the prior year. Gross profit margin increased 550 basis points primarily due to the increase in sales volume, increased leverage on operating costs, the benefits of prior year restructuring actions and lower restructuring cost.

For the year ended December 31, 2016, our gross profit decreased $139.3 million, or 41.6%, to $195.3 million compared with 2015, primarily due to the significant decline in organic sales volumes related to the decline in the oil and gas market, which also led to decreased leverage on operating costs. This decline was partially offset by supply chain cost containment initiatives, cost savings realized from restructuring programs, net of costs, and a decrease in depreciation and amortization costs of $6.9 million. Gross profit margin declined 510 basis points primarily due to significant decline in sales volume combined with pricing weakness.

Selling, General and Administrative Expense

For the year ended December 31, 2017, selling, general and administrative expense increased $14.1 million, or 6.8%, to $219.5 million compared with 2016, primarily reflecting an increase in employee incentive compensation and corporate allocations as a result of a significant increase in revenues and earnings and an increase in the number of employees, partially offset by the benefits of prior restructuring actions and lower restructuring costs. As a percentage of revenue, selling, general and administrative expense decreased 560 basis points in 2017 to 21.7%, reflecting increased leverage of operating costs on a higher revenue base, partially offset by the aforementioned increase in expenses.

For the year ended December 31, 2016, selling, general and administrative expense decreased $40.3 million, or 16.4%, to $205.4 million compared with 2015, reflecting the impact of cost savings realized from restructuring programs and reduced discretionary spending, as well as a decrease in restructuring charges of $6.4 million. As a percentage of revenue, selling, general and administrative expense increased 450 basis points in 2016 to 27.3%, as we were unable to reduce costs as rapidly as sales were declining due to overall market weakness.

Other Expense, Net

For the years ended December 31, 2017, 2016 and 2015, other expense, net of $9.7 million, $8.8 million and $11.7 million, respectively, included royalty expenses paid to Dover of $9.8 million, $7.4 million and $10.4 million, respectively, for the use of patents and intangible assets owned by Dover. Patents and intangibles owned by Dover related to Apergy transferred to Apergy upon separation. Following the Separation, no further

 

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royalty charges are expected to be incurred by Apergy from Dover. Other expense, net also included $0.3 million of net foreign exchange gains for 2017 and $0.7 million of net foreign exchange losses for both 2016 and 2015 resulting from the re-measurement and settlement of foreign currency denominated balances including gains and losses on hedging activities.

Provision for (Benefit from) Income Taxes

Our businesses operate globally, as such, we generate income and losses in many different jurisdictions. For the years ended December 31, 2017, 2016 and 2015, pre-tax earnings generated in foreign jurisdictions was $22.4 million, $7.1 million and $15.6 million, respectively. As a percentage of our total pre-tax earnings (loss), foreign pre-tax earnings was 25.1%, (37.7)% and 20.2%, respectively. With regard to 2016, the rate of (37.7)% reflects foreign pre-tax earnings of $7.1 million as a percentage of our total pre-tax loss of $18.8 million. Foreign earnings are generally subject to local country tax rates that are below the 35.0% U.S. statutory tax rate as of December 31, 2017. As a result, our historical effective non-U.S. tax rate has typically been significantly lower than the U.S. statutory tax rate. Effective January 1, 2018, the U.S. statutory rate was permanently decreased to 21.0%, due to the Tax Reform Act.

For the year ended December 31, 2017, our effective tax rate was (25.0)%, driven predominantly by a provisional net tax benefit of $49.3 million due to the Tax Reform Act. The net tax benefit was primarily related to a $53.2 million impact from the re-measurement of deferred tax liabilities arising from a lower U.S. corporate income tax rate. The Tax Reform Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign earnings and profits through the year ended December 31, 2017. As a result, we also recorded a provisional tax expense related to the deemed repatriation of $3.9 million. The final impact may differ from these provisional amounts, and such differences may be material, due to, among other things, issuance of additional regulatory guidance, changes in interpretations and assumptions we made, and actions we may take as a result of the Tax Reform Act.

For the year ended December 31, 2016, our effective tax rate was 42.7% compared to 31.2% for the year ended December 31, 2015. The 2016 tax rate increased from 2015 primarily due to the impact of foreign operations and domestic manufacturing deductions.

The Company has not recorded a liability for uncertain tax positions at December 31, 2017 and 2016.

See Note 11—“Income Taxes” in the Audited Combined Financial Statements included elsewhere in this prospectus for additional details.

Net Income (Loss) Attributable to Apergy

For the year ended December 31, 2017, net income (loss) attributable to Apergy increased $123.3 million, or 975.2%, to net income of $110.6 million, compared with a net loss of $12.6 million for the year ended December 31, 2016. This increase was primarily driven by increased sales volume due to significant growth in U.S. and Canada rig counts, increased well completion activity during the year and the favorable impact in 2017 of the Tax Reform Act of $49.3 million.

For the year ended December 31, 2016, net (loss) income attributable to Apergy decreased $64.3 million, or 124.5%, to a $12.6 million net loss, compared with income of $51.7 million, for the year ended December 31, 2015. This decrease is primarily driven by significantly lower volume attributable to deteriorating oil and gas related market conditions, partially offset by savings from restructuring actions of approximately $60 million and decreases in restructuring charges of $6.1 million and depreciation and amortization of $7.9 million.

Restructuring Activities

The restructuring charges of $6.9 million incurred in 2017 related to restructuring programs designed to continue to optimize our operations within our Production & Automation Technologies segment through facility

 

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consolidations, exiting from certain non-strategic product lines and work force reductions. The Drilling Technologies segment did not incur any restructuring charges in 2017.

In 2016 and 2015, we incurred restructuring charges totaling $15.2 million and $21.2 million, respectively, relating to targeted facility consolidations at certain businesses, headcount reductions and other actions taken to optimize our cost structure. See Note 9—“Restructuring Activities” in the Audited Combined Financial Statements included elsewhere in this prospectus for additional details regarding our recent restructuring activities.

The cost savings realized as a result of restructuring programs and other cost management actions previously initiated were approximately $18 million, $60 million and $45 million during 2017, 2016 and 2015, respectively. The cost savings associated with these actions are reflected in cost of goods and services and selling, general and administrative expense in the combined statements of income.

Segment Results of Operations

Prior to the Separation, Apergy was part of the Dover Energy operating segment. As Apergy transitioned into a stand-alone company, its Chief Executive Officer, in his capacity as Chief Operating Decision Maker (“CODM”), evaluated how to view and measure the business performance. Based upon such evaluation, and effective during the fourth quarter of 2017, Apergy determined it is organized into two operating segments, which are also its reportable segments based on how the CODM analyzes performance, allocates capital and makes strategic and operational decisions. The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and segment operating profit. Segment results for the periods covered by the Audited Combined Financial Statements and the Interim Financial Statements are presented in accordance with this structure.

The summary that follows provides a discussion of the results of operations of both reportable segments: Production & Automation Technologies and Drilling Technologies. See Note 16—“Segment Information” in the Audited Combined Financial Statements for the years ended December 31, 2017, 2016 and 2015 and Note 17—“Segment Information” in the Interim Financial Statements for the three and nine month periods ended September 30, 2018 and 2017, each included elsewhere in this prospectus, for a reconciliation of segment revenue and segment operating profit to our results for the applicable periods.

Production & Automation Technologies

Three Months Ended September 30, 2018 and 2017

 

     Three Months Ended
September 30,
    Change  

(dollars in thousands)

   2018     2017     $      %  

Revenue

   $ 241,214     $ 199,454       41,760        20.9  

Operating profit

     24,257       8,403       15,854        188.7  

Operating profit margin

     10.1     4.2        5.9  pts. 

Depreciation and amortization

   $ 27,305     $ 25,690       1,615        6.3  

Royalty expense

     —         2,473       (2,473      *  

Restructuring and other related charges

     (39     8       (47      *  

Other measures:

         

Bookings

   $ 241,729     $ 209,615       32,114        15.3  

Book-to-bill ratio

     1.00       1.05       

 

*

Not meaningful

 

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Revenue

Production & Automation Technologies revenue increased $41.8 million, or 20.9%, year-over-year, driven by broad-based volume growth in our artificial lift offering, particularly from further penetration in the U.S. onshore electrical submersible pump market. Additionally, we realized higher revenue from our digital offerings due to increased customer adoption.

Operating Profit

Production & Automation Technologies operating profit increased $15.9 million year-over-year. The increase was primarily driven by growth in sales volume associated with improving oil and gas markets, particularly U.S. rig count and well completion activity. In addition, the increase in operating profit was due to productivity savings, partially offset by higher material costs related to aluminum and steel. Operating profit during the third quarter of 2018 benefitted from the absence of the royalty charge from Dover.

Bookings and Book-to-Bill

Bookings for the third quarter of 2018 increased $32.1 million, or 15.3%, year-over-year, reflecting ongoing market improvement. Our book-to-bill ratio was 1.00 in the third quarter of 2018, reflecting strong customer demand. The decline in our book-to-bill ratio year-over-year was due to a large customer order in the third quarter of 2017.

Nine Months Ended September 30, 2018 and 2017

 

     Nine Months Ended
September 30,
    Change  

(dollars in thousands)

   2018     2017     $      %  

Revenue

   $ 696,591     $ 578,429       118,162        20.4  

Operating profit

     57,957       26,247       31,710        120.8  

Operating profit margin

     8.3     4.5        3.8  pts. 

Depreciation and amortization

   $ 83,006     $ 73,475       9,531        13.0  

Royalty expense

     2,277       7,406       (5,129      (69.3

Restructuring and other related charges

     2,473       21       2,452        *  

Other measures:

         

Bookings

   $ 708,124     $ 596,296       111,828        18.8  

Book-to-bill ratio

     1.02       1.03       

 

*

Not meaningful

Revenue

Production & Automation Technologies revenue for the first nine months of 2018 increased $118.2 million, or 20.4%, year-over-year, driven by broad-based volume growth in our artificial lift offering, particularly from further penetration in the U.S. onshore electrical submersible pump market. Additionally, we realized higher revenue from our digital offerings due to increased customer adoption.

Operating Profit

Production & Automation Technologies operating profit increased $31.7 million year-over-year. The increase was primarily driven by growth in sales volume associated with improving oil and gas markets, particularly U.S. rig count and well completion activity. In addition, the increase in operating profit was due to productivity savings, partially offset by higher material costs related to aluminum and steel. Operating profit during the first nine months of 2018 benefitted from lower royalty charges from Dover which ended on April 1, 2018; however, this benefit was partially offset by restructuring charges incurred during the first nine months of 2018.

 

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Bookings and Book-to-Bill

Bookings for the first nine months of 2018 increased $111.8 million, or 18.8%, year-over-year, reflecting ongoing market improvement. Our book-to-bill ratio was 1.02 in the first nine months of 2018, reflecting strong customer demand.

Years Ended December 31, 2017, 2016 and 2015

 

     Years Ended December 31,      % Change  

(dollars in thousands)

   2017      2016     2015      2017 vs. 2016     2016 vs. 2015  

Revenue

   $ 781,938      $ 638,017     $ 912,383        22.6     (30.1 )% 

Segment operating profit (loss)

   $ 24,889      $ (21,687   $ 58,446        214.8     (137.1 )% 

Depreciation and amortization(1)

   $ 99,929      $ 99,607     $ 103,612        0.3     (3.9 )% 

Restructuring charges(2)

   $ 6,921      $ 12,757     $ 18,750        (45.7 )%      (32.0 )% 

Other measures:

            

Bookings

   $ 792,817      $ 625,149     $ 869,947        26.8     (28.1 )% 

Book-to-bill

     1.01        0.98       0.95        3.1     3.2

 

(1)

Depreciation and amortization expense reported in: a) cost of goods and services was $52.4 million, $49.6 million and $52.1 million for the years ended December 31, 2017, 2016 and 2015, respectively; and b) selling, general and administrative expense was $47.5 million, $50.0 million and $51.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. Depreciation and amortization expense includes acquisition-related depreciation and amortization of $57.4 million, $60.0 million and $63.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

(2)

Restructuring charges reported in: a) cost of goods and services were $6.3 million, $7.8 million and $6.9 million for the years ended December 31, 2017, 2016 and 2015, respectively; and b) selling, general and administrative expense was $0.6 million, $5.0 million and $11.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.

2017 Versus 2016

Production & Automation Technologies segment revenue increased for the year ended December 31, 2017, by $143.9 million, or 22.6%, compared to the prior year, driven by higher demand from our customers as a result of the increase of active drilling rigs and well completion activity in the U.S. and abroad. Customer pricing favorably impacted revenue by 0.4% for the year ended December 31, 2017.

Production & Automation Technologies segment operating profit for the year ended December 31, 2017 compared to prior year segment operating loss increased by $46.6 million, or 214.8%, primarily driven by an increase in sales volume due to improving oil and gas markets. The increase in operating profit included cost savings realized from restructuring programs of approximately $14.7 million as well as a reduction in restructuring charges of $5.8 million.

Bookings for the year ended December 31, 2017 increased $167.7 million, or 26.8%, compared to the prior year, reflecting market improvement. Segment book-to-bill was 1.01 in 2017, an increase of 3.1% compared to the prior year.

2016 Versus 2015

Production & Automation Technologies segment revenue decreased for the year ended December 31, 2016, by $274.4 million, or 30.1%, compared to the prior year, driven by lower demand from our customers as a result of the dramatic decrease in the price of oil and a decline of active drilling rigs and well completion activity in the U.S. and abroad due to global supply of oil and gas exceeding demand. Customer pricing unfavorably impacted revenue by approximately 1.9% in 2016.

 

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Production & Automation Technologies segment operating loss for the year ended December 31, 2016 compared to prior year segment operating profit decreased by $80.1 million, or 137.1%, primarily driven by a decline in sales volume due to deteriorating oil and gas markets. The decline was partially offset by the impact of cost savings realized from restructuring programs of approximately $47 million as well as a reduction in depreciation and amortization expense of $4.0 million and restructuring charges of $6.0 million.

Bookings for the year ended December 31, 2016 decreased $244.8 million, or 28.1%, compared to the prior year, reflecting ongoing market weakness. Segment book-to-bill was 0.98 in 2016, an increase of 3.2% compared to the prior year.

Drilling Technologies

Three Months Ended September 30, 2018 and 2017

 

     Three Months Ended
September 30,
    Change  

(dollars in thousands)

   2018     2017     $      %  

Revenue

   $ 75,254     $ 59,200       16,054        27.1  

Operating profit

     26,209       20,420       5,789        28.3  

Operating profit margin

     34.8     34.5        0.3  pts. 

Depreciation and amortization

   $ 2,717     $ 3,001       (284      (9.5

Restructuring and other related charges

     —         —         —       

Other measures:

         

Bookings

   $ 75,834     $ 56,142       19,692        35.1  

Book-to-bill ratio

     1.01       0.95       

Revenue

Drilling Technologies revenue increased $16.1 million, or 27.1%, year-over-year due to increased volumes driven by increased worldwide rig counts and continued customer adoption of our diamond bearings technology.

Operating Profit

Drilling Technologies operating profit increased $5.8 million year-over-year due to higher volumes driven by increased rig counts and overall operational productivity gains.

Bookings and Book-to-Bill

Bookings for the third quarter of 2018 increased $19.7 million, or 35.1%, year-over-year, reflecting improved market conditions. Our book-to-bill ratio was 1.01 in the third quarter of 2018, reflecting strong customer demand.

 

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Nine Months Ended September 30, 2018 and 2017

 

     Nine Months Ended
September 30,
    Change  

(dollars in thousands)

   2018     2017     $      %  

Revenue

   $ 209,727     $ 166,664       43,063        25.8  

Operating profit

     71,738       55,067       16,671        30.3  

Operating profit margin

     34.2     33.0        1.2  pts. 

Depreciation and amortization

   $ 8,379     $ 8,948       (569      (6.4

Restructuring and other related charges

     —         —         —       

Other measures:

         

Bookings

   $ 215,468     $ 170,786       44,682        26.2  

Book-to-bill ratio

     1.03       1.02       

Revenue

Drilling Technologies revenue increased $43.1 million, or 25.8%, year-over-year due to increased volumes driven by increased worldwide rig counts and footage drilled, market share gains and continued customer adoption of our diamond bearings technology.

Operating Profit

Drilling Technologies operating profit increased $16.7 million year-over-year due to higher volumes driven by increased U.S. rig counts and overall operational productivity gains.

Bookings and Book-to-Bill

Bookings for the first nine months of 2018 increased $44.7 million, or 26.2%, year-over-year, reflecting improved market conditions. Our book-to-bill ratio was 1.03 in 2018, reflecting strong customer demand.

Years Ended December 31, 2017, 2016 and 2015

 

     Years Ended December 31,      % Change  

(dollars in thousands)

   2017      2016      2015      2017 vs. 2016     2016 vs. 2015  

Revenue

   $ 227,653      $ 113,320      $ 164,297        100.9     (31.0 )% 

Segment operating profit

   $ 74,317      $ 8,397      $ 26,819        785.0     (68.7 )% 

Depreciation and amortization(1)

   $ 11,950      $ 12,448      $ 16,380        (4.0 )%      (24.0 )% 

Restructuring charges(2)

   $ —        $ 2,405      $ 2,480        (100.0 )%      (3.0 )% 

Other measures:

             

Bookings

   $ 232,796      $ 118,433      $ 160,756        96.6     (26.3 )% 

Book-to-bill

     1.02        1.05        0.98        (3 )%      7.1

 

(1)

Depreciation and amortization expense reported in: a) cost of goods and services was $11.5 million, $11.9 million and $13.0 million for the years ended December 31, 2017, 2016 and 2015, respectively; and b) selling, general and administrative expense was $0.4 million, $0.6 million and $3.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. Depreciation and amortization expense includes acquisition-related depreciation and amortization of $0.1 million and $3.0 million for the years ended December 31, 2016 and 2015, respectively. Acquisition-related depreciation and amortization was not significant for the year ended December 31, 2017.

(2)

Restructuring charges reported in: a) cost of goods and services were $1.7 million and $2.2 million for the years ended December 31, 2016 and 2015, respectively; and b) selling, general and administrative expense

 

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  was $0.7 million and $0.3 million for the years ended December 31, 2016 and 2015, respectively. There were no restructuring charges related to the Drilling Technologies segment for the year ended December 31, 2017.

2017 Versus 2016

Drilling Technologies segment revenue for the year ended December 31, 2017 increased $114.3 million, or 100.9%, compared to the prior year, driven by higher demand from our customers as a result of the increase in active drilling rigs in the U.S. and Canada. Customer pricing unfavorably impacted revenue by approximately 2.6% for the year ended December 31, 2017.

Drilling Technologies segment operating profit for the year ended December 31, 2017 increased $65.9 million, or 785.0%, compared to the prior year primarily driven by increased sales volume and from the benefit of approximately $2.9 million in restructuring savings, partially offset by unfavorable pricing.

Bookings for the year ended December 31, 2017 increased $114.4 million, or 96.6%, compared to the prior year, due to market improvement. Segment book-to-bill was 1.02 in 2017, a decrease of 2.9% compared to the prior year.

2016 Versus 2015

Drilling Technologies segment revenue for the year ended December 31, 2016 decreased $51.0 million, or 31.0%, compared to the prior year, driven by lower demand from our customers as a result of the dramatic decrease in the price of oil and a decline in active drilling rigs in the U.S. and abroad. Customer pricing did not have a significant impact to revenue for the year ended December 31, 2016.

Drilling Technologies segment operating profit for the year ended December 31, 2016 decreased $18.4 million, or 68.7%, compared to the prior year primarily driven by declining sales volume. The decline was partially offset by the impact of cost savings realized from restructuring actions of approximately $13 million as well as a reduction in depreciation and amortization expense of $3.9 million.

Bookings for the year ended December 31 2016, decreased $42.3 million, or 26.3%, compared to the prior year, due to ongoing market weakness. Segment book-to-bill was 1.05 in 2016, an increase of 7.1% compared to the prior year.

Capital Resources and Liquidity

Historically, Apergy has generated and expects to continue to generate positive cash flow from operations. In response to the unprecedented market conditions beginning in the second half of 2014 and continuing through 2016, we pursued a comprehensive contingency plan that aimed at managing short-term financial performance and preserving long-term competitive advantage. As part of this plan, we identified and preserved the core capabilities that will position us well for the recovery. We implemented aggressive restructuring actions aimed at facility and cost structure rationalization, including headcount reductions. Enterprise wide working capital reduction efforts were deployed specifically targeting inventory reductions and increases in supplier payment terms. Additionally, our global sourcing teams secured incremental material savings to lower product costs, while our operations teams drove incremental productivity gains within our factories. In parallel, we worked diligently to preserve key technology investments and customer relationships, as well as retention of key talent during this period. As a result of our efforts, we continued to generate positive cash from operating activities in 2015 and 2016. As the market began to stabilize in 2017, we saw a significant increase in U.S. rig count and customer spending. In response, we have utilized more cash to increase production and invest in working capital needs while still maintaining positive cash from operating activities.

 

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Subsequent to the Separation, we no longer participate in cash management and funding arrangements with Dover. Historically, we have utilized these arrangements to fund significant expenditures, such as manufacturing capacity expansion and acquisitions. Our ability to fund our operations and capital needs will depend on our ongoing ability to generate cash from operations and access capital markets. We believe that our future cash from operations and access to capital markets will provide adequate resources to fund working capital needs, make capital expenditures and strategic investments and pay dividends (if any).

Our ability to make payments on and to refinance our indebtedness, including the indebtedness incurred in conjunction with the Separation, as well as any indebtedness that we may incur in the future, will depend on our future ability to generate cash from operations, as well as financings or asset sales. Our cash and cash equivalents totaled $23.7 million and $26.0 million at December 31, 2017 and 2016, respectively, which was held by our non-pooling, non-U.S. operations. As a result of the Tax Reform Act, during 2018, we plan to make cash distributions to the U.S. from non-U.S. subsidiaries of up to an estimated $6.0 million, which is not anticipated to result in any withholding tax expense.

Prior to the Separation, our U.S. cash was pooled to Dover through intercompany advances and is not reflected on our combined balance sheets. AMES, where Apergy is the majority owner at 60% and has the controlling financial interest, held $9.5 million and $11.3 million of Apergy’s total cash and cash equivalents at December 31, 2017 and 2016, respectively. The funds are not formally segregated or legally restricted. Distributions are determined based upon simple majority vote and subject to customary statutory requirements. Apergy is entitled to 60% of any approved distributions.

Cash Flow Summary

The following tables are derived from our combined or consolidated statements of cash flows, as applicable:

 

     Years Ended December 31,  
Cash Flows from Continuing Operations (in thousands)    2017      2016      2015  

Net cash flows provided by (used in):

        

Operating activities

   $ 76,917      $ 129,709      $ 215,671  

Investing activities

     (46,506      (28,028      (34,101

Financing activities

     (33,003      (85,981      (194,977

 

     Nine Months Ended
September 30,
 
(in thousands)    2018      2017  

Cash provided by operating activities

   $ 92,806      $ 41,205  

Cash required by investing activities

     (44,809      (26,829

Cash required by financing activities

     (53,620      (20,432

Effect of exchange rate changes on cash and cash equivalents

     (75      3,476  
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (5,698    $ (2,580
  

 

 

    

 

 

 

Operating Activities

Nine Months Ended September 30, 2018 and 2017

We generated cash from operating activities for the nine months ended September 30, 2018 and 2017, of $92.8 million and $41.2 million, respectively. The increase in cash provided by operating activities was primarily driven by higher cash income generated from operations. Both our Production & Automation Technologies and Drilling Technologies segments reported increased earnings year-over-year. The increase was partially offset by cash required for working capital needs.

 

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Years Ended December 31, 2017, 2016 and 2015

Cash provided by operating activities for the year ended December 31, 2017 decreased $52.8 million compared to 2016. This decrease was primarily a result of higher investments in working capital driven by sales volume increases. For the year ended December 31, 2017, cash used to invest in working capital was $71.3 million, whereas for the year ended December 31, 2016, cash provided by working capital was $46.2 million, resulting in an overall decrease in cash of $117.5 million. The decrease in cash was partially offset by higher net income of $73.8 million, excluding non-cash activity from depreciation and amortization and the impact of the Tax Reform Act.

Cash provided by operating activities for the year ended December 31, 2016 decreased $86.0 million compared to 2015. This decrease was driven primarily by lower income of $80.3 million, excluding depreciation and amortization, due to lower sales volumes from the deteriorating oil and gas related market conditions. The decrease was also driven by lower cash inflows from working capital of $5.6 million primarily due to the aforementioned lower sales levels.

Investing Activities

Nine Months Ended September 30, 2018 and 2017

For the nine months ended September 30, 2018 and 2017, we used cash from investing activities of $44.8 million and $26.8 million, respectively. The increase in cash used by investing activities was primarily due to investments to support increased sales and investments in assets available to customers on a rental basis.

Years Ended December 31, 2017, 2016 and 2015

Cash used in investing activities resulted primarily from cash outflows for capital expenditures, acquisition of a business and the additions of intangible assets, partially offset by proceeds from the sale of property, plant and equipment. The majority of the activity in investing activities comprised the following:

Capital spending: Capital expenditures, primarily to support productivity, new product launches and investments in assets available to customers on a rental basis, were $41.2 million in 2017, $26.9 million in 2016 and $32.0 million in 2015 or 4.1%, 3.6% and 3.0%, respectively, as a percentage of revenue. Our capital expenditures increased $1.0 million for the year ended December 31, 2017 as compared to 2016, primarily within the Production & Automation Technologies segment, to invest in facility expansion to accommodate reorganization and consolidation elsewhere in the business.

Acquisition: In 2017, we deployed $8.8 million to acquire PCP Oil Tools, within the Production & Automation Technologies segment. See Note 4—“Acquisitions” in the Audited Combined Financial Statements included elsewhere in this prospectus for additional details.

Additions to intangible assets: During the years ended December 31, 2016 and 2015, we acquired patents for $3.7 million and $10.0 million, respectively, from Dover. We capitalized the patent costs in the combined balance sheets and are amortizing them to the combined statements of income based upon their estimated useful lives. There were no such additions in 2017.

Financing Activities

Nine Months Ended September 30, 2018 and 2017

Cash used in financing activities of $53.6 million for the nine months ended September 30, 2018, was the result of (i) net transfers to Dover of $728.9 million, primarily comprised of our $700 million payment to Dover related to the Separation, (ii) $20.0 million of debt repayment on our Term Loan Facility and (iii) $2.7 million of

 

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distributions to our noncontrolling interest holder in AMES. These payments were partially offset by issuances of long-term debt, net of debt issuance costs, of $698.0 million. Cash used in financing activities for the nine months ended September 30, 2017, primarily resulted from net transfers to Dover.

Years Ended December 31, 2017, 2016 and 2015

Cash used in financing activities prior to the Separation results primarily from using cash for net transfers to parent and the distribution to non-controlling interest. Transfers of cash to and from Dover are reflected as a component of Parent Company investment in Apergy in the combined balance sheets for periods prior to the Separation. During the years ended December 31, 2017 and 2016, we also made distributions to our noncontrolling interest holder in AMES of approximately $1.2 million and $1.7 million, respectively, with no similar activity during the year ended December 31, 2015.

Debt

Senior Notes

On May 3, 2018, and in connection with the Separation, we completed the private placement of $300 million in aggregate principal amount of the outstanding notes. Interest on the outstanding notes is payable semi-annually in arrears on May 1 and November 1 of each year. Net proceeds of $293.8 million from the offering were utilized to partially fund the cash payment to Dover and to pay fees and expenses incurred in connection with the Separation.

Senior Secured Credit Facilities

On May 9, 2018, Apergy entered into a credit agreement governing the terms of its the Senior Secured Credit Facilities, consisting of (i) a seven-year senior secured term loan B facility (which is referred to in this prospectus as the Term Loan Facility) and (ii) a five-year senior secured revolving credit facility (which is referred to in this prospectus as the Revolving Credit Facility), with JPMorgan Chase Bank, N.A. as administrative agent. The net proceeds of the Senior Secured Credit Facilities were used (i) to pay fees and expenses in connection with the Separation, (ii) partially fund the cash payment to Dover and (iii) provide for working capital and other general corporate purposes.

Term Loan Facility. The Term Loan Facility had an initial commitment of $415.0 million. The full amount of the Term Loan Facility was funded on May 9, 2018. Amounts borrowed under the Term Loan Facility that are repaid or prepaid may not be re-borrowed. The Term Loan Facility matures in May 2025. Net proceeds of $408.7 million from the Term Loan Facility were utilized to partially fund the cash payment to Dover at the Separation and to pay fees and expenses incurred in connection with the Separation.

Revolving Credit Facility. The Revolving Credit Facility consists of a five-year senior secured facility with aggregate commitments in an amount equal to $250.0 million, of which up to $50.0 million is available for the issuance of letters of credit. Amounts repaid under the Revolving Credit Facility may be re-borrowed. The Revolving Credit Facility matures in May 2023.

A summary of our Revolving Credit Facility at September 30, 2018 was as follows:

 

(in millions)

Description

   Amount      Debt
Outstanding
     Letters
of
Credit
     Unused
Capacity
     Maturity  

Revolving Credit Facility

   $ 250.0        —        $ 5.5      $ 244.5        May 2023  

As of September 30, 2018, we were in compliance with all restrictive covenants under our Senior Secured Credit Facilities. See Note 8—“Debt” to the Interim Financial Statements included elsewhere in this prospectus for additional information.

 

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Outlook

As a result of the Separation, we no longer participate in cash management and funding arrangements with Dover. Prior to the Separation, we utilized these arrangements to fund both daily operating activities and significant business expenditures, such as manufacturing capacity expansion and acquisitions.

We expect to generate our liquidity and capital resources through operations and, when needed, through our Revolving Credit Facility. We have $244.5 million of capacity available under our Revolving Credit Facility that we expect to utilize if working capital needs temporarily increase. The volatility in credit, equity and commodity markets creates some uncertainty for our businesses. However, management believes, based on our current financial condition and current expectations of future market conditions, that we will meet our short- and long-term needs with a combination of cash on hand, cash generated from operations, our use of our revolving credit facility and access to capital markets.

Over the next year, we expect to fund our organic capital expenditure needs and reduce our leverage through earnings growth and debt reduction. We continue to focus on improving our customer collection efforts and overall working capital turnover to improve our cash flow position. In 2018, we project spending approximately 3% of revenue for infrastructure related capital expenditures and an additional $25 million to $30 million for capital investments directed at expanding our portfolio of electrical submersible pump leased assets. During the fourth quarter of 2018, we expect to pay $7.7 million to Dover related to tax liabilities incurred as a result of the Separation.

Off-Balance Sheet Arrangements and Contractual Obligations

As of September 30, 2018, December 31, 2017 and December 31, 2016, we had approximately $5.5 million, $8.1 million and $16.0 million, respectively, outstanding in letters of credit with financial institutions, which expire at various dates between 2018 and 2020. These letters of credit are primarily maintained as security for insurance, warranty and other performance obligations. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations, the probability of which we believe is remote.

A summary of our combined contractual obligations and commitments as of December 31, 2017 and the years when these obligations are expected to be due is as follows:

 

            Payments Due by Period(1)  

(in thousands)

   Total      Less than
1 Year
     1-3 Years      3-5 Years      More than
5 Years
 

Rental commitments(2)

   $ 44,992      $ 11,668      $ 18,285        9,934      $ 5,105  

Purchase obligations(2)

     27,803        27,457        346        —          —    

Capital leases

     4,109        2,232        1,877        —          —    

Supplemental and post-retirement benefits(3)

     12,178        1,658        3,026        2,622        4,872  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations

   $ 89,082      $ 43,015      $ 23,534      $ 12,556      $ 9,977  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Historical amounts do not give effect to payments required under new indebtedness that we entered into in connection with the Separation, as described under “—Capital Resources and Liquidity—Debt.”

(2)

Represents off-balance sheet commitments and obligations for rental commitments related to operating leases and purchase obligations related to open purchase orders with our vendors.

(3)

Amounts represent estimated benefit payments under our unfunded defined benefit plans. See Note 14—“Employee Benefit Plans and Non-Qualified Plans” to the Audited Combined Financial Statements included elsewhere in this prospectus for additional information.

 

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One-time deemed repatriation obligations of unremitted earnings of foreign subsidiaries arising from the Tax Reform Act have been excluded from the above table as such obligations are those of Dover.

Risk Management

See “Quantitative and Qualitative Disclosures About Market Risk.”

Critical Accounting Policies

Critical Accounting Policies and Estimates

Our financial statements and related public financial information are based on the application of GAAP. GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts we report. These estimates can also affect supplemental information contained in our public disclosures, including information regarding contingencies, risk and our financial condition. The significant accounting policies used in the preparation of our financial statements are discussed in Note 2—“Summary of Significant Accounting Policies” in the Audited Combined Financial Statements included elsewhere in this prospectus. The accounting assumptions and estimates discussed in the section below are those that we consider most critical to an understanding of our financial statements because they inherently involve significant judgments and estimates. We believe our use of estimates and underlying accounting assumptions conforms to GAAP and is consistently applied.

Revenue Recognition—Beginning January 1, 2018, and in connection with the adoption of Accounting Standards Codification Topic 606, revenue is recognized to depict the transfer of control of the related goods and services. Prior to January 1, 2018, revenue was recognized when all of the following conditions were satisfied: (a) persuasive evidence of an arrangement exists; (b) price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or services have been rendered. The majority of the Company’s revenue is generated through the manufacture and sale of a broad range of specialized products and components, with revenue recognized upon transfer of title and risk of loss, which is generally upon shipment. The Company derives product revenue from the sale of software standalone products and software-enabled tangible products. Software product revenue is recorded when the software product is shipped to the customer or over the term of the contract. Service revenue is recognized as the services are performed. Lease revenue is recognized ratably over the lease term and the leased asset is included in property, plant and equipment and depreciated to its estimated residual value over the lease term.

In limited cases, our revenue arrangements with customers require delivery, installation, testing or other acceptance provisions to be satisfied before revenue is recognized. We include shipping costs billed to customers in revenue and the related shipping costs in cost of goods and services.

Inventories—Inventories for the majority of our subsidiaries, including all international subsidiaries, are stated at the lower of net realizable value, determined on the first-in, first-out (FIFO) basis, or cost. Certain domestic inventories are stated at cost, determined on the last-in, first-out (LIFO) basis, which is less than market value. Under certain market conditions, estimates and judgments regarding the valuation of inventories are employed by us to properly value inventories.

Goodwill and Other Intangible Assets—We have significant goodwill and intangible assets on our balance sheet as a result of past acquisitions. The valuation and classification of these assets and the assignment of useful lives involve significant judgments and the use of estimates. In addition, the testing of goodwill and intangibles for impairment requires significant use of judgment and assumptions, particularly as it relates to the determination of fair market value. Our indefinite-lived intangible assets and reporting units are tested and reviewed for impairment on an annual basis during the fourth quarter, or more frequently when indicators of impairment exist.

 

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Prior to the Separation, the Company was part of the Dover Energy operating segment. We performed the annual goodwill impairment test for the Audited Combined Financial Statements using our two historical reporting units within Dover Energy: (i) Drilling and Production, excluding a business component that was retained by Dover (“D&P”); and (ii) Dover Energy Automation (“DEA”) as of October 1, 2017 and 2016. Beginning in the fourth quarter of 2017, we also performed the annual goodwill impairment testing based upon the new segment structure discussed in “—Segment Results of Operations”. We performed goodwill impairment testing as of October 1, 2017 on our two new reporting units: (i) Production & Automation Technologies; and (ii) Drilling Technologies. When performing an impairment test, we estimate fair value using the income approach. Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rate based on our most recent views of the long-term outlook for each reporting unit. Actual results may differ from these estimates. The discount rates used in these analyses vary by reporting unit and are based on a capital asset pricing model and published relevant industry rates. We use discount rates commensurate with the risks and uncertainties inherent to each reporting unit and in our internally developed forecasts. Discount rates used in our 2017 and 2016 valuations were 10.0% and 10.5%, respectively.

Based on the impairment tests performed, the fair value of our reporting units exceeded their carrying value. As such, no goodwill impairment was recognized. As of October 1, 2017, the goodwill balances for the D&P and DEA reporting units were $733.6 million and $172.5 million, respectively. The D&P and DEA reporting units had fair values in excess of their carrying values of 90% and 233%, respectively. Under the new segment structure, as of October 1, 2017, the goodwill balances for the Production & Automation Technologies and Drilling Technologies reporting units were $805.0 million and $101.1 million, respectively. The Production & Automation Technologies and Drilling Technologies reporting units had fair values in excess of their carrying values of 69% and 464%, respectively. While we believe the assumptions used in the impairment analyses are reasonable and representative of expected results, if market conditions worsen or persist for an extended period of time, an impairment of goodwill or assets may occur. We will continue to monitor the long-term outlook and forecasts, including estimated future cash flows, for these businesses and the impact on the carrying value of goodwill and assets.

Employee Benefit Plans—Dover provides a defined benefit pension plan for its eligible U.S. employees and retirees. This plan was closed to new participants effective December 31, 2013. All pension-eligible employees as of December 31, 2013 continue to earn a pension benefit through December 31, 2023 as long as they remain employed by an operating company participating in the plan. As of the Plan Separation Date (as defined herein), Apergy participants in this plan (other than Norris USW Participants (as defined herein)) fully vested in their benefits, and all participants ceased accruing benefits. As such, the portion of our liability associated with this U.S. plan is not reflected in our consolidated balance sheets as this obligation will be maintained and serviced by Dover. Norris USW Participants were moved to a new pension plan, and continue to accrue benefits at Apergy following the Separation.

Dover also provides a defined benefit pension plan for its eligible salaried non-U.S. employees and retirees in Canada. As this obligation is being maintained and serviced by Dover, the portion of our liability associated with this non-U.S. plan is not reflected in our combined balance sheet as of December 31, 2017. This plan, including all assets and liabilities, was transferred to Apergy at the distribution date and was recorded at that point. Shortly before the Plan Separation Date, all non-Apergy participants in this plan ceased accruing benefits. The non-Apergy participants may elect a lump sum cash payment post-separation that will be the responsibility of Apergy, will be funded out of the plan assets, and could result in a non-cash settlement charge to earnings.

Dover also provides to certain U.S. management employees, through non-qualified plans, supplemental retirement benefits in excess of qualified plan limits imposed by federal tax law. Generally as of the Plan Separation Date, Apergy participants in these non-qualified plans no longer accrue benefits or are permitted to make contributions, as applicable. The benefit obligation attributable to our employees for these non-qualified plans are reflected in our consolidated balance sheet as of the distribution date.

 

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The Company also provides a defined benefit plan for certain hourly non-U.S. employees and retirees in Canada. The plan is closed to new participants; however, all active participants in this plan continue to accrue benefits. The plan is considered a direct obligation of the Company and is recorded within the Audited Combined Financial Statements and the Interim Financial Statements, respectively.

The Company sponsors a non-qualified plan covering certain U.S. employees and retirees of the Company. The plan provides supplemental retirement benefits in excess of qualified plan limits imposed by federal tax law. The plan is closed to new hires and all benefits under the plan are frozen. The plan is considered a direct obligation of the Company and is recorded within the Audited Combined Financial Statements and the Interim Financial Statements, respectively.

The valuation of our pension and other post-retirement plans requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. Inherent in these valuations are key assumptions, including discount rates, investment returns, projected salary increases and benefits and mortality rates. Annually, we review the actuarial assumptions used in our pension reporting and compare them with external benchmarks to ensure that they accurately account for our future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on our pension expense and related funding requirements. Our expected long-term rate of return on plan assets is reviewed annually based on actual returns, economic trends and portfolio allocation. Our discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. As disclosed in Note 14—“Employee Benefit Plans and Non-Qualified Plans” to the Audited Combined Financial Statements included elsewhere in this prospectus, the 2017 weighted-average discount rate used to measure our qualified defined benefit was 3.50%, a decrease from the 2016 discount rate of 3.75%. The lower 2017 discount rate is reflective of decreased market interest rates over this period. A 25 basis point decrease in the discount rate used for this plan would not have a material impact to the post retirement benefit obligations from the amount recorded in the financial statements at December 31, 2017. Our pension expense is also sensitive to changes in the expected long-term rate of return on plan assets.

Income Taxes—For purposes of the Audited Combined Financial Statements and the Interim Financial Statements prior to the Separation, respectively, the Company’s income tax expense and deferred tax balances have been estimated as if we had filed income tax returns on a stand-alone basis separate from Dover. Income taxes payable at each balance sheet date computed under the stand-alone return basis are classified within Parent Company investment in Apergy since Dover is legally liable for the tax. Accordingly, changes in income taxes payable are recorded as a component of financing activities in the combined statements of cash flows prior to the Separation. As a stand-alone entity, our deferred taxes and effective tax rate may differ from those of Dover in the historical periods prior to the Separation.

We record a provision (benefit) for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. A valuation allowance is recorded to reduce deferred tax assets to the net amount that is more likely than not to be realized.

We review deferred tax assets for recoverability at each reporting period. These assets are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. The need for reserves are evaluated, using more likely than not criteria, for ongoing audits regarding federal, state and international issues that are currently unresolved. We routinely monitor the potential impact of these situations and there are no reserves recorded for uncertain tax positions for Apergy. Reserves related to tax accruals and valuations related to deferred tax assets can be impacted by changes in tax codes and rulings, changes in statutory tax rates

 

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and our future taxable income levels. The provision for uncertain tax positions provides a recognition threshold and measurement attribute for financial statement tax benefits taken or expected to be taken in a tax return and disclosure requirements regarding uncertainties in income tax positions. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. It is our policy to record interest and penalties related to unrecognized tax benefits as a component of our provision for income taxes.

The Tax Reform Act, which was enacted on December 22, 2017, significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Tax Reform Act also provided for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017. The Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Reform Act also require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018, due to expense allocations required by the U.S. foreign tax credit rules. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its Audited Combined Financial Statements for the year ended December 31, 2017.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. We have recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities, and included these amounts in its Audited Combined Financial Statements for the year ended December 31, 2017. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Reform Act. In accordance with SAB 118 the financial reporting impact of the Tax Reform Act will be completed in the fourth quarter of 2018.

Contingencies—We have established liabilities for environmental and legal contingencies at both the business and corporate levels. A significant amount of judgment and the use of estimates are required to quantify our ultimate exposure in these matters. The liability balances are adjusted to account for changes in circumstances for ongoing issues and the establishment of additional liabilities for emerging issues. While we believe that the amount accrued to-date is adequate, future changes in circumstances could impact these determinations.

Restructuring—We establish liabilities for restructuring activities at an operation when management has committed to an exit or reorganization plan and when termination benefits are probable and can be reasonably estimated based on circumstances at the time the restructuring plan is approved by management or when termination benefits are communicated. Exit costs include future minimum lease payments on vacated facilities and other contractual terminations. In addition, asset impairments may be recorded as a result of an approved restructuring plan. The accrual of both severance and exit costs requires the use of estimates. Though we believe that these estimates accurately reflect the anticipated costs, actual results may be different than the estimated amounts.

Stock-Based Compensation—Prior to the Separation, our employees participated in Dover’s stock-based compensation plans. Stock-based compensation has been allocated to Apergy based on the awards and terms previously granted to our employees. The cost of awards is measured at the grant date based on the fair value of the award. The value of the portion of the award that is expected to ultimately vest is recognized as expense on a straight-line basis, generally over the explicit service period of three years (except for retirement-eligible

 

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employees and retirees) and is included in selling, general and administrative expense in the consolidated statements of income. Expense for awards granted to retirement-eligible employees is recorded over the period from the date of grant through the date the employee first becomes eligible to retire and is no longer required to provide service.

For awards granted prior to the Separation, we used the Black-Scholes valuation model to estimate the fair value of stock settled appreciation rights (“SARs”) and stock options granted to employees. The model requires that we estimate the expected life of the SAR or option, expected forfeitures and the volatility of Dover’s stock using historical data. After the Separation, we use the Monte Carlo valuation model to estimate the fair value of performance units granted to employees. The model simulates stock prices for companies using a volatility assumption based on a historical period equal to the remaining term of the performance period. See Note 12—“Equity and Cash Incentive Program” to the Audited Combined Financial Statements for additional information related to our stock-based compensation.

Recent Accounting Pronouncements—See Note 2—“New Accounting Standards” to our to Interim Financial Statements included elsewhere in this prospectus for a discussion of recent accounting pronouncements and recently adopted accounting standards.

 

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks, including fluctuations in commodity prices, foreign currency exchange rates and interest rates. After the Separation from Dover, we have not utilized derivative financial instruments to manage or mitigate our exposure to these risks. Also, we do not use derivative financial instruments where the objective is to generate profits solely from trading activities.

Commodity Price Risk

We use a wide variety of raw materials, primarily metals and semi-processed or finished components, that are generally available from a number of sources. While generally available, commodity pricing for metals, such as nickel, chrome, molybdenum, vanadium, manganese and steel scrap, fluctuate with the market. As a result, our operating results are exposed to market price fluctuations. Although some cost increases may be recovered through increased prices to customers if commodity prices trend upward, we attempt to control such costs through fixed-price contracts with suppliers and various other programs, such as our global supply chain activities.

Foreign Currency Risk

We conduct operations around the world in a number of different currencies. Many of our foreign subsidiaries have designated the local currency as their functional currency. Our earnings are therefore subject to change due to fluctuations in foreign currency exchange rates when the earnings in foreign currencies are translated into U.S. dollars. We do not hedge this translation impact on earnings. A 10% increase or decrease in the average exchange rates of all foreign currencies would have changed our revenue and income before income taxes by approximately 1.4% for the nine months ended September 30, 2018.

When transactions are denominated in currencies other than our subsidiaries’ respective functional currencies, both with external parties and intercompany relationships, these transactions result in increased exposure to foreign currency exchange effects. Currently, we do not manage these exposures through the use of derivative instruments. Consequently, significant changes in foreign currency exchange rates, particularly the Canadian Dollar, the Australian Dollar and the Colombian Peso, could have negative impacts in our reported results of operations.

Interest Rate Risk

Our use of fixed- or variable-rate debt directly exposes us to interest rate risk. Fixed-rate debt, such as the notes, exposes us to changes in the fair value of our debt due to changes in market interest rates. Fixed-rate debt also exposes us to the risk that we may need to refinance maturing debt with new debt at higher rates, or that we may be obligated to pay rates higher than the current market rate. Variable-rate debt, such as our term loan or borrowings under our Revolving Credit Facility, exposes us to short-term changes in market rates that impact our interest expense.

At September 30, 2018, we had unhedged variable rate debt of $395.0 million with an interest rate of 4.75%. Using sensitivity analysis to measure the impact of a change in the interest rate, a 10% adverse movement in the interest rate, or 48 basis points, would result in an increase to interest expense of $1.9 million on an annualized basis.

 

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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers

The following table sets forth information regarding the individuals who serve as Apergy’s executive officers. None of Apergy’s executive officers serve as employees or executive officers of Dover.

 

Name

   Age   

Position

Sivasankaran Somasundaram

   53    President and Chief Executive Officer

Jay A. Nutt

   55    Senior Vice President and Chief Financial Officer

Paul E. Mahoney

   54    President, Production & Automation Technologies

Robert K. Galloway

   52    President, Drilling Technologies

Syed Raza

   52    Senior Vice President and Chief Digital Officer

Julia Wright

   43    Senior Vice President, General Counsel and Secretary

Amy Thompson Broussard

   42    Senior Vice President and Chief Human Resources Officer

Shankar Annamalai

   37    Senior Vice President Operations

Sivasankaran (“Soma”) Somasundaram serves as Apergy’s President and Chief Executive Officer, and is a member of its Board of Directors. Mr. Somasundaram previously served as a Vice President of Dover Corporation and as President and Chief Executive Officer of Dover Energy, in which capacity he acted from August 2013 until the Separation. Previously, Mr. Somasundaram served as Executive Vice President (from November 2011 to August 2013) of Dover Energy, Executive Vice President (from January 2010 to November 2011) of Dover Fluid Management, President (from January 2008 to December 2009) of Dover’s Fluid Solutions Platform, President (from June 2006 to December 2007) of Dover’s Gas Equipment Group, and President (from March 2004 to May 2006) of Dover’s RPA Process Technologies. Prior to joining Dover, Mr. Somasundaram served in various global leadership roles at GL&V Inc. and Baker Hughes Inc. Mr. Somasundaram received a B.S. in Mechanical Engineering from Anna University and a M.S. in Industrial Engineering from University of Oklahoma.

Jay A. Nutt serves as Apergy’s Senior Vice President and Chief Financial Officer, a position that he held with Dover Energy from March 2018 until the Separation. Prior to joining Dover Energy, Mr. Nutt served as Senior Vice President and Controller of TechnipFMC plc, a life cycle services company for the energy industry, upon completion of the merger of FMC Technologies, Inc. and Technip S.A. in January 2017, Vice President, Controller and Treasurer of FMC Technologies, Inc., an oil service equipment manufacturer for the energy industry (from October 2015 to January 2017), and Vice President and Controller of FMC Technologies, Inc. (from August 2009 through October 2015). Mr. Nutt became Corporate Controller in July 2008 and prior to that held multiple positions in FMC Corporation and FMC Technologies leading the financial operations of multiple business units. Mr. Nutt received his undergraduate degree in accounting from Michigan State University and an MBA from Loyola University of Chicago.

Paul E. Mahoney serves as Apergy’s President, Production & Automation Technologies. Mr. Mahoney previously served as President of Dover Artificial Lift, part of Dover Energy, in which capacity he acted from January 2014 until the Separation. Previously, Mr. Mahoney served as Chief Operations Officer as well as Senior Vice President of Global Sales and Operations for Dover Artificial Lift (from January 2012 to December 2013). Prior to joining Dover Energy, Mr. Mahoney served in various sales and management roles at Emerson Electric Company a manufacturer of products and provider of engineering services for industrial, commercial and consumer markets including VP General Manager, Analyzers Group (from 2010 to 2012) within Emerson Process Management, VP Global Sales and Operations for the Analytical Group (from 2006 to 2010), and Director of Sales for the Process Automation Group (from 2002 to 2006). Mr. Mahoney received a B.S. in Electrical Engineering and Physics from the University of Buffalo and an MBA from Seattle University.

Robert K. Galloway serves as Apergy’s President, Drilling Technologies. Mr. Galloway previously served as President of US Synthetic, part of Dover Energy, in which capacity he acted from January 2010 until the

 

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Separation. Previously, Mr. Galloway served as Chief Operating Officer of US Synthetic, a developer and manufacturer of polycrystalline diamond wafers for oil and gas exploration (from November 2008 to December 2009) and Vice President of Operations of US Synthetic (from September 2005 to November 2008). Prior to joining Dover Energy, Mr. Galloway served in various engineering roles for Baker Hughes, Hughes Christensen (1995 – 1997). Mr. Galloway received a B.S. in Mechanical Engineering from the University of Utah.

Syed (“Ali”) Raza serves as Apergy’s Senior Vice President and Chief Digital Officer. Mr. Raza previously served as President of Dover Energy Automation, part of Dover Energy, in which capacity he acted from July 2016 until the Separation. Prior to joining Dover Energy, Mr. Raza was employed by Honeywell Process Solutions, an industrial process services company, as Vice President and General Manager—Advanced Solutions (from June 2014 to July 2016), General Manager Advanced Solutions—Europe, Middle East & Africa (from November 2013 to June 2014), General Manager—Americas (from February 2012 to November 2013) and Director, Global Business Development (from July 2006 to April 2012). Mr. Raza received a B.E. in Computer Systems Engineering from NED University of Engineering and Technology and a MSc in Computer Engineering from Wayne State University.

Julia Wright served as Apergy’s Senior Vice President, General Counsel and Secretary, a position she held with Dover Energy from February 2018 until the Separation. Prior to joining Dover Energy, Ms. Wright served as Vice President and General Counsel at Nabors Industries Ltd., an oil, natural gas and geothermal drilling contractor, from October 2016 to February 2018. Ms. Wright served in various capacities in the Nabors law department during her tenure from 2011 to 2016 and 2005 to 2009, including as Interim General Counsel (from August 2016 to October 2016), Assistant General Counsel (from April 2013 to August 2016) and Senior Counsel (from September 2011 to April 2013). Ms. Wright also served in senior legal roles at Tesco Corporation during her tenure from 2009 to 2011. She began her legal career as a corporate attorney at the international law firms Baker & McKenzie LLP and Vinson & Elkins L.L.P. Ms. Wright received a B.A. in Liberal Arts from Southern Methodist University, an M.A. in International Affairs from Columbia University and a J.D. from Fordham Law School.

Amy Thompson Broussard serves as Apergy’s Senior Vice President and Chief Human Resources Officer. Ms. Broussard previously served as Vice President, Human Resources, a position she held with Dover Energy from August 2016 until the Separation. Previously, Ms. Broussard served as the Vice President of Human Resources for Dover Artificial Lift (from October 2014 to August 2016). Prior to joining Dover Energy, Ms. Broussard was employed by Baker Hughes Inc., an oil and gas services company, in various human resources roles from 1998 to 2005 and 2006 to 2014), most recently serving as the Director of Human Resources for the Western Hemisphere HR Service Centers (from July 2013 to October 2014), as the Director of Human Resources for the US Land Region (from February 2012 to June 2013), and Director of Human Resources for the Middle East Region (from February 2010 to February 2012). Ms. Broussard received a B.S. in Human Resource Management from Louisiana State University and an MBA from the University of Dallas.

Shankar Annamalai serves as Apergy’s Senior Vice President Operations, a position he held with Dover Energy from May 2017 until the Separation. Prior to joining Dover Energy, Mr. Annamalai was employed by Pentair plc, a multinational diversified industrial company, and served as Global Vice President of Operations and Supply of Pentair Technical Solutions (from March 2015 to April 2017), Senior Director of Operations of Pentair Valves & Controls (from March 2013 to March 2015), and Director of Operations of Pentair Water (from June 2006 to March 2013). Mr. Annamalai received a B.S. in Mechanical Engineering and an MBA from Texas A&M University.

 

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Board of Directors

The following table sets forth information with respect to those persons who serve on Apergy’s Board of Directors and is followed by biographies of each such individual (except that Mr. Somasundaram’s biographical information is set forth above under “—Executive Officers”).

 

Name

   Age     

Title

Daniel W. Rabun

     64      Chairman of the Board of Directors

Sivasankaran Somasundaram

     53      Director, President & Chief Executive Officer

Stephen M. Todd

     70      Director

Stephen K. Wagner

     71      Director

Gary P. Luquette

     62      Director

Kenneth M. Fisher

     56      Director

Mamatha Chamarthi

     49      Director

Daniel W. Rabun

Age: 64

Chairman of the Board of Directors since 2018

Committees: Governance and Nominating; Compensation

Other Public Company Boards: 2

Experience: From 2007 to his retirement in May 2015, Mr. Rabun served as the Chairman of Ensco plc, an offshore drilling services company, based in London. He retired as President and Chief Executive Officer of Ensco in June 2014, having held the office of Chief Executive Officer for more than seven years and President for more than eight years.

From 1986 through 2005, prior to joining Ensco, Mr. Rabun was a partner with the international law firm of Baker & McKenzie LLP, where he provided legal advice to oil and gas companies.

Mr. Rabun has served on the Board of Directors and as a member of the Audit Committee of Golar LNG Ltd. since February 2015 and served as the non-executive Chairman from September 2015 to September 2017. He has also served on the Board of Directors of Apache Corporation since May 2015, where he is currently a member of the Management Development and Compensation Committee. During 2012, he served as Chairman of the International Association of Drilling Contractors. Mr. Rabun has also been a certified public accountant since 1976.

Skills and Qualifications: Mr. Rabun brings a variety of experiences to the Board, including service as Chairman of the Board, President, and Chief Executive Officer of Ensco. During Mr. Rabun’s term at Ensco, Ensco drilled some of the most complex wells for super majors, national oil companies, and independent operators in nearly every strategic oil and gas area in the world.

Mr. Rabun’s legal expertise gathered over many years at Baker & McKenzie LLP, accounting knowledge gained from having been a certified public accountant since 1976, along with his board committee experience as both an Audit Committee and Management Development and Compensation Committee member, provides substantial value to the Board.

Mr. Rabun’s international experience, global perspective, experience with strategic acquisitions, and financial acumen from having served a total of more than eight years as the business head of a public company, assist the Board in the assessment and management of risks faced by oil and gas companies.

 

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Sivasankaran Somasundaram

Age: 53

Director since 2018

Committees: None

Other Public Company Boards: None

Skills and Qualifications: Mr. Somasundaram’s strong international business background, having lived and worked in India, Germany, Singapore and Australia, deep operational insights and financial acumen from having served more than four years as President and Chief Executive Officer of Dover Energy, a segment of Dover, a public company, and years of experience in the energy industry makes him a valuable resource for the Board. Mr. Somasundaram’s technical experience developed during his time in a number of positions in businesses that serve the energy, chemical, mining, sanitary and other process industries, including RPA Process Technologies and Baker Hughes, along with his degrees in both Industrial and Mechanical Engineering, provide him with unique insights into the highly engineered technologies that Apergy provides to its customers.

Stephen M. Todd

Age: 70

Director since 2018

Committees: Audit

Other Public Company Boards: 2

Experience: Mr. Todd is a former Global Vice Chairman (from 2003 to 2010) of Assurance Professional Practice of Ernst & Young Global Limited, London, UK, an assurance, tax, transaction and advisory services firm; and prior thereto, various served in positions with Ernst & Young (since 1971). Mr. Todd is a member of the Board of Trustees and Chairman of the Audit Committee of PNC Funds and PNC Advantage Funds (registered management investment companies). Mr. Todd is also a member of the Board of Directors and Audit Committee of Dover.

Skills and Qualifications: Mr. Todd’s experience in the accounting profession makes him a valuable resource for the Board. Mr. Todd brings to the Board significant financial experience in both domestic and international business following a 40-year career at Ernst & Young where he specialized in assurance and audit. Mr. Todd developed and directed Ernst & Young’s Global Capital Markets Centers, which provide accounting, regulatory, internal control and financial reporting services to multinational companies in connection with cross-border debt and equity securities transactions and acquisitions, making him well suited to advise the Board on capital allocation decisions, financing alternatives, and acquisition activities. His experience, especially his years as Global Vice Chairman of Ernst & Young Global Limited’s Assurance Professional Practice and as audit partner for several multinational companies, gives him unique insights into accounting and financial issues relevant to multinational companies like Apergy, and he brings the perspective of an outside auditor to the Board.

Stephen K. Wagner

Age: 71

Director since 2018

Committees: Audit; Governance and Nominating (Chair)

Other Public Company Boards: 1

Experience: Mr. Wagner is a former Senior Advisor, Center for Corporate Governance, of Deloitte & Touche LLP, an audit, financial advisory, tax and consulting firm (from 2009 to 2011); Managing Partner, Center

 

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for Corporate Governance, of Deloitte (from 2005 to 2009); Deputy Managing Partner, Innovation, Audit and Enterprise Risk, United States, of Deloitte (from 2002 to 2007); and Co-Leader, Sarbanes-Oxley Services, of Deloitte (from 2002 to 2005). Mr. Wagner is a member of the Board of Directors, Audit Committee and Chairman of the Governance and Nominating Committee of Dover.

Skills and Qualifications: Mr. Wagner’s over 30 years of experience in accounting make him a valuable resource for the Board. His work with the Sarbanes-Oxley Act and other corporate governance regulations, including his years as Managing Partner at Deloitte & Touche’s Center for Corporate Governance, makes him well suited to advise the Board on financial, auditing and finance-related corporate governance matters as well as risk management. Mr. Wagner is an expert in risk oversight and co-authored a book on risk management entitled Surviving and Thriving in Uncertainty: Creating the Risk Intelligent Enterprise . He brings to the Board an outside auditor’s perspective on matters involving audit committee procedures, internal control and accounting and financial reporting matters.

Gary P. Luquette

Age: 62

Director since 2018

Committees: Governance and Nominating; Compensation (Chair)

Other Public Company Boards: 2

Experience: Mr. Luquette previously served as President and Chief Executive Officer of Frank’s International N.V., a global provider of engineered tubular services to the oil and gas industry, from January 2015 to November 2016, following which he served as a special advisor to Frank’s until his retirement in December 2016. Mr. Luquette also served as a member of Frank’s Supervisory Board from November 2013 to May 2017. From 2006 to September 2013, Mr. Luquette served as President of Chevron North America Exploration and Production, a unit of Chevron Corporation. Mr. Luquette began his career with Chevron in 1978 and, prior to serving as President, held several other key exploration and production positions in Europe, California, Indonesia and Louisiana. Mr. Luquette has served as the non-executive Chairman of the Board of Directors of McDermott International, Inc., a global offshore engineering and procurement company, since May 2014, where he is currently a member of the Compensation Committee. He has also served on the Board of Directors of Southwestern Energy Company since 2017, where he is currently a member of the Health, Safety, Environment and Corporate Responsibility Committee.

Skills and Qualifications: Mr. Luquette brings a depth of business, industry and strategic planning experience to the Board, including his two years as President and Chief Executive Officer at Frank’s International N.V., his seven years as President of Chevron North America Exploration and Production, along with his holding several key exploration and production positions at Chevron. Mr. Luquette’s international experience also adds a valuable global perspective to the Board.

Mr. Luquette’s extensive board committee participation, including his membership on the Compensation Committee at McDermott International, Inc. and Health, Safety, Environment and Corporate Responsibility Committee at Southwestern Energy Company, makes him well suited to advise the Board on various corporate governance matters.

 

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Kenneth M. Fisher

Age: 56

Director since 2018

Committees: Audit (Chair)

Other Public Company Boards: 1

Experience: Executive Vice President and Chief Financial Officer (from April 2014 to present) and Senior Vice President and Chief Financial Officer (from November 2009 to April 2014) of Noble Energy Inc., an oil and natural gas exploration and production company. Before joining Noble Energy, Mr. Fisher served in a number of senior leadership roles at Shell from 2002 to 2009, including as Executive Vice President of Finance for Upstream Americas, Director of Strategy & Business Development for Royal Dutch Shell plc in The Hague, Executive Vice President of Strategy and Portfolio for Global Downstream in London and Chief Financial Officer of Shell Oil Products U.S. responsible for U.S. downstream finance operations including Shell Pipeline Company. Prior to joining Shell in 2002, Mr. Fisher held senior finance positions within business units of General Electric Company. Mr. Fisher has served as the Chairman of the Board of Directors of the general partner of Noble Midstream Partners LP since October 2015. He also served on the Board of Directors of the general partner of CONE Midstream Partners LP from May 2014 to December 2017.

Skills and Qualifications: Mr. Fisher’s 33 years of business, strategy, mergers and acquisitions, and extensive financial management experience, along with his significant experience in the oil and gas industry, make him a valuable resource for the Board. His six senior finance leadership roles with Noble Energy, Shell and GE, including his years as the Chief Financial Officer of Noble Energy, make him well suited to advise the Board on financial, auditing and finance-related corporate governance matters.

Mamatha Chamarthi

Age: 49

Director since 2018

Committees: Compensation

Other Public Company Boards: None

Experience: Ms. Chamarthi is the Senior Vice President and Chief Digital Officer of ZF Friedrichshafen AG, a German supplier of driveline and chassis technology (from August 2016 to present). She has also served as Senior Vice President, Chief Digital Officer and Chief Information Officer of ZF TRW Automotive Holdings Corporation (from April 2014 to August 2016), Vice President and Chief Information Officer of CMS Energy Corporation (from May 2010 to December 2013) and Senior IT Executive of Daimler Financial Services (from August 2007 to May 2010).

Skills and Qualifications: Ms. Chamarthi’s 20 years of domestic and global technology experience in the energy, financial services and automotive industries makes her a valuable resource for the Board. Ms. Chamarthi brings to the Board significant experience collaborating with boards of directors, including technology and audit committees, as an officer of ZF Friedrichshafen AG, ZF TRW Automotive Holdings, CMS Energy and Daimler Financial. Her innovative technology and transformation experience provide her with unique insights into the highly engineered technologies that Apergy provides to its customers.

Apergy’s Board of Directors is divided into three approximately equal classes. The directors designated as Class I directors have terms expiring at the first annual meeting of stockholders following the distribution, which Apergy expects to hold in 2019. The directors designated as Class II directors have terms expiring at the second annual meeting of stockholders following the distribution, which Apergy expects to hold in 2020, and the directors

 

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designated as Class III directors have terms expiring at the third annual meeting of stockholders following the distribution, which Apergy expects to hold in 2021. Class I consists of Messr. Todd and Ms. Chamarthi; Class II consists of Messrs. Rabun and Luquette; and Class III consists of Messrs. Somasundaram, Fisher and Wagner. Commencing with the first annual meeting of stockholders following the Separation, directors elected to succeed those directors whose terms then expire will be elected for a term of office to expire at the 2022 annual meeting. Beginning at the 2022 annual meeting, all of Apergy’s directors will stand for election each year for annual terms, and Apergy’s Board of Directors will therefore no longer be divided into three classes. Members of Apergy’s Board of Directors will be elected by a plurality of the votes cast at each annual meeting of stockholders.

Director Independence

Apergy’s Board of Directors expects to make a determination that each current non-management director is independent under the standards established by the Sarbanes-Oxley Act and the applicable rules of the SEC and the NYSE. In the future, Apergy expects to make a determination of the independence of each nominee for director prior to his or her nomination for (re)election. No director may be deemed independent unless the board determines that he or she has no material relationship with Apergy, directly or as an officer, stockholder or partner of an organization that has a material relationship with Apergy.

Compensation Committee Interlocks and Insider Participation

During Apergy’s fiscal year ended 2017, Apergy was not an independent company and did not have a compensation committee or any other committee serving a similar function. Decisions as to Mr. Somasundaram’s compensation in 2017 were made by the Compensation Committee of Dover’s Board of Directors (the “Dover Compensation Committee”).

 

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EXECUTIVE COMPENSATION

For the fiscal year ended December 31, 2017 and December 31, 2016, Apergy was a 100% owned subsidiary of Dover and Dover’s senior management and the Dover Compensation Committee determined Apergy’s executive compensation. Since the Separation, the Apergy Compensation Committee and Board of Directors determine Apergy’s executive compensation.

This Executive Compensation section presents historical compensation information for Sivasankaran Somasundaram, who now serves as the Chief Executive Officer of Apergy and who is a named executive officer (“NEO”) of Apergy. The other NEOs at Apergy are Paul E. Mahoney and Syed Raza.

Summary Compensation Table

The Summary Compensation Table and notes show all remuneration paid to (i) Mr. Somasundaram by Dover for the fiscal years ended December 31, 2017 and December 31, 2016 and (ii) each of Mr. Mahoney and Mr. Raza by Dover for the fiscal year ended December 31, 2017.

 

Name and Principal Position

  Year     Salary
($)
    Stock
Awards
($)(1)
    Option
Awards
($)(2)
    Non-Equity
Incentive Plan
Compensation
($)(3)
    All Other
Compensation
($)(4)
    Total
($)
 

Sivasankaran Somasundaram

    2017       535,000       549,965       350,394       970,000       21,903       2,427,262  

President and Chief Executive Officer

    2016       502,000       550,001       355,313       355,000       13,832       1,776,146  

Paul E. Mahoney

    2017       386,250       79,994       76,462       240,000       16,963       799,669  

President, Production and Automation Technologies

             

Syed Raza

    2017       288,750       140,008       38,231       240,820       6,657       714,466  

Senior Vice President and Chief Digital Officer

             

 

(1)

The amounts generally represent (a) the aggregate grant date fair value of performance shares granted by Dover during the year indicated, calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 and (b) the aggregate grant date fair value of Dover restricted stock unit awards granted during the year, calculated in accordance with FASB ASC Topic 718. Under FASB ASC Topic 718, the 2016 and 2017 awards were considered performance and service conditioned. The grant date fair value for the 2016 Dover performance share awards was $57.25, and the grant date fair value for the 2017 Dover performance share awards was $79.28, determined in accordance with FASB ASC Topic 718 using the closing price of Dover’s common stock on the date of grant.

The amounts represent the aggregate grant date fair value of Dover awards granted during the year indicated, calculated in accordance with FASB ASC Topic 718 and do not correspond to the actual value that might be realized by the NEOs. The grant date fair value of Dover restricted stock unit awards was calculated in accordance with FASB ASC Topic 718 using the assumptions set forth in the footnotes to the Combined Financial Statements included elsewhere in this prospectus. All Dover restricted stock unit grants were eligible for dividend equivalent payments which are paid upon vesting. For a discussion of the assumptions relating to calculation of the cost of equity awards, see Note 12—“Equity and Cash Incentive Program” to the Audited Combined Financial Statements contained elsewhere in this prospectus.

(2)

The amounts represent the aggregate grant date fair value of Dover Stock Settled Appreciation Rights (“SSARs”) awards granted during the year indicated, calculated in accordance with FASB ASC Topic 718, and do not correspond to the actual value that may be realized by the NEOs. For a discussion of the assumptions relating to the calculation of the cost of the SSARs, see Note 12—“Equity and Cash Incentive Program” to the Audited Combined Financial Statements contained elsewhere in this prospectus.

 

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(3)

Amounts generally represent (i) the payouts earned under cash performance awards granted under the Dover Corporation 2012 Equity and Cash Incentive Plan (the “Dover LTIP”) for the three-year performance period ended December 31 of the year indicated and (ii) payments under Dover’s Annual Incentive Plan (the “Dover AIP”) for the year indicated, for which payments were made in the first quarter of the following year. As no payouts were earned under the Dover LTIP by any of the NEOs in any of the years indicated, the full amounts shown in each year were earned under the Dover AIP. Mr. Mahoney was granted cash performance units for the performance period ending December 31, 2017; however, the operations did not achieve the EBITDA growth and free cash flow required under iTSR (as defined below) to earn a payment. Mr. Raza was not granted cash performance units for the performance period ending December 31, 2017. Please see the Performance Shares, Cash Performance Units & iTSR section for a further explanation of iTSR.

(4)

The amount in 2017 for Mr. Somasundaram represents $9,450 in 401(k) matching contributions, $2,000 in health club membership reimbursement, as well as dividends received in respect of Dover restricted stock units. The amount in 2017 for Mr. Mahoney represents $9,450 in 401(k) matching contributions, as well as dividends received in respect of Dover restricted stock units. The amount in 2017 for Mr. Raza represents $6,657 in 401(k) matching contributions.

Narrative Disclosure to Summary Compensation Table

Executive Employment Arrangements

None of our NEOs has an individual employment agreement with us or with Dover.

2017 Dover Annual Incentive Plan

Each of our NEOs participated in the Dover AIP in 2017. An annual bonus may be earned each year under the Dover AIP based on an individual’s performance against both financial and individual strategic goals.

For 2017, 60% of Mr. Somasundaram’s annual bonus was based on the achievement of financial performance criteria. Financial targets for each of Mr. Mahoney and Mr. Raza were also set at 60% of the bonus target; however, 50% is based on operating company results and 10% is based on the same segment results as Mr. Somasundaram. The other 40% of the annual bonus was based on the achievement of individual strategic objectives designed to create long-term value for Dover stockholders.

Under the Dover AIP, executives can achieve anywhere between 0% and 200% of their target bonus. However, above-target payout is only earned for performance that is significantly above the targeted performance.

2017 Dover AIP Target Performance and Payout

Overall, Dover and its Apergy businesses performed above Dover and Apergy’s respective financial targets in 2017 and made progress on Dover and Apergy’s respective strategic objectives, including key acquisitions and divestures. Actual compensation varies widely based on the individual’s business unit and performance against specific strategic objectives.

2017 Dover AIP Funding

The Dover AIP is designed to reward executives, including our NEOs, for the achievement of financial and strategic objectives that are linked to Dover’s longer term goals. The Dover AIP was funded for Section 162(m) of the Code purposes by the achievement of an earnings per share (“EPS”) goal, as determined under the plan. Achievement of Dover’s EPS target allows maximum bonuses to be paid, subject to the negative discretion of the Dover Compensation Committee in determining the final bonuses. Achievement below the target reduces the

 

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bonus pool by 1% for every 1% below target; achievement above target does not increase the bonus pool. Taking into account the impact of businesses acquired during 2017, Dover’s 2017 EPS target was $3.50. Dover achieved adjusted EPS of $4.03, so bonuses were available to be paid at the maximum level.

2017 Dover AIP Financial Results Performance

Targets under the Dover AIP were set at the segment level for Dover’s segment NEOs such as Mr. Somasundaram. The financial targets listed below was utilized to determine the 60% of Mr. Somasundaram’s bonus tied to financial results. Financial targets for each of Mr. Mahoney and Mr. Raza were also set at 60% of the bonus target; however, 50% is based on operating company results and 10% is based on the same segment results as Mr. Somasundaram.

 

     2017 Targets(1)      2017 Results(1)  
     In $ millions  
     Sales      EDITDA(2)      Sales      EDITDA(2)  

Dover Energy—Sivasankaran Somasundaram

Dover Artificial Lift—Paul E. Mahoney

Dover Energy Automation—Syed Raza

    

1,270

575

137

 

 

 

    

276

119

32

 

 

 

    

1,406

605

153

 

 

 

    

327

115

38

 

 

 

 

(1)

Financial targets and results include both operating company and segment targets and results for Messrs. Mahoney and Raza.

(2)

EBITDA refers to earnings before interest, taxes, depreciation and amortization. The EBITDA results exclude unplanned fourth quarter 2017 restructuring charges.

2017 Dover AIP Individual Strategic Objective Performance

For 2017, each of Dover’s NEOs, including Mr. Somasundaram, had unique strategic objectives that were utilized to determine 40% of their annual incentive. Dover’s Chief Executive Officer developed strategic goals for his direct reports, including Mr. Somasundaram, which focused on measurable accomplishments in their individual areas of responsibility that would also benefit Dover’s stockholders over the long term.

Mr. Somasundaram (President & Chief Executive Officer of Apergy) led the preparation of Apergy to become a separate publicly traded company. In addition, he effectively managed the energy market rebound exceeding his organic growth, productivity and working capital targets. The safety record of the business did not improve as much as had been expected.

Mr. Mahoney (President, Production and Automation Technologies of Apergy) achieved productivity and organic growth targets, but did not meet the safety or working capital targets set for Dover Artificial Lift.

Mr. Raza (President, Senior Vice President and Chief Digital Officer of Apergy) achieved productivity and organic growth targets, as well as working capital improvements and a successful platform launch, but did not meet the safety targets set for Dover Energy Automation.

2017 AIP Payouts

Based on the performance of Mr. Somasundaram’s business unit and his performance against specific strategic objectives, his 2017 Dover AIP payout was $970,000, which was 181% of his 2017 Dover AIP target. Based on the performance of Mr. Mahoney’s business unit and his performance against specific strategic objectives, his 2017 Dover AIP payout was $240,000, which was 124% of his 2017 Dover AIP target. Based on the performance of Mr. Raza’s business unit and his performance against specific strategic objectives, his 2017 Dover AIP payout was $240,820, which was 167% of his 2017 Dover AIP target.

 

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Going forward: Apergy has adopted the Apergy Corporation Executive Officer Annual Incentive Plan (“Apergy AIP”) for Apergy’s executives. The Apergy Compensation Committee will determine the executives who participate in the Apergy AIP, determine the target bonus amounts for each participant, set the specific performance targets for the Apergy AIP bonuses and determine the final Apergy AIP bonus amounts to be paid to participants.

2017 Long-Term Incentive Compensation

The following table summarizes the components of Dover’s 2017 long-term incentive plan (“LTIP”) and the related performance criteria for awards granted in 2017 to Dover’s NEOs, including Mr. Somasundaram. All components of Dover’s 2017 LTIP awards are paid in stock to Dover’s NEOs and stock and cash performance units to all other participants.

 

                     LTIP COMPONENT                

  

    PERFORMANCE CRITERIA    

  

            VESTING OR EXERCISE             

PERIOD

Stock Settled Appreciation Rights    Market price of Dover’s common stock    SSARs are not exercisable until three years after grant; they remain exercisable for another seven years
Restricted Stock Units    Market price of Dover’s common stock    Awards vest ratably over three years
Performance Shares    iTSR (EBITDA growth and cash flow generation)    Awards vest at the end of three calendar years
Cash Performance Units    iTSR (EBITDA growth and cash flow generation)    Awards vest at the end of three calendar years

In 2017, Mr. Somasundaram’s LTIP award was comprised 50% of SSARs, 30% of performance shares and 20% of restricted stock units. In 2017, Mr. Mahoney’s and Mr. Raza’s LTIP awards were each comprised 30% of SSARs, 50% of cash performance units and 20% of restricted stock units.

Going forward: Dover adopted the Apergy Corporation 2018 Equity and Cash Incentive Plan (the “Apergy 2018 LTIP”), which provides equity-based awards to Apergy employees, including the Apergy NEOs, and Apergy directors. See “—New Apergy Plans—Long-Term Incentive Plan.” In connection with the Separation, the outstanding Dover performance shares and cash performance units held by Apergy NEOs were cancelled.

Performance Shares, Cash Performance Units & iTSR

Definition of iTSR. iTSR measures the change in enterprise value over a three-year period. EBITDA is assigned a multiple based on prevailing market multiples among industrial companies. iTSR tracks the change in that EBITDA-based value, along with operational free cash flow (defined as operating cash flow less capital spending, less cash used for acquisitions, plus cash received from divestitures) generated during the three-year performance period. The two together work similarly to an external TSR measure: the EBITDA-based value becomes a proxy for share price, and operational free cash flow becomes a proxy for dividends.

iTSR Targets, Threshold and Cap Levels. Awards are earned three years after the grant, provided iTSR exceeds a threshold level. No payouts will be made unless iTSR equals or exceeds 6%. The payout to any individual may not exceed 500,000 shares.

 

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Chart 1

Payouts of cash performance units are made on a sliding scale using the following formula:

 

 

LOGO

Chart 2

Payouts of performance shares are made on a sliding scale using the following formula:

 

 

LOGO

2017 Performance Share and Cash Performance Unit Payouts

For the performance period ended December 31, 2017, payouts of cash performance units were determined based on the sliding scale set forth in Chart 1 above and payouts of performance shares were determined based on the sliding scale set forth in Chart 2 above. Based on the sliding scale set forth in Chart 2 above and the performance of Mr. Somasundaram’s business unit, the payout of his performance shares relating to the performance period ended December 31, 2017 was 0 shares, due to an iTSR performance of (15.61)%. Based on the sliding scale set forth in Chart 1 above and the performance of Mr. Mahoney’s business unit, the payout of his cash performance units relating to the performance period ended December 31, 2017 was $0, due to an iTSR performance of (18.43)%. Mr. Raza did not receive a grant of cash performance units for the performance period ended December 31, 2017.

 

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Stock Settled Appreciation Rights

SSARs vest on the third anniversary of the grant date. Once SSARs vest, an NEO may exercise them any time prior to the expiration date, which is the tenth anniversary of the grant date. The proceeds from the exercise are paid to the NEO in the form of shares of Dover common stock.

Illustration of SSARs Exercise:

 

Base Price/Exercise Price:

   $ 60  

Fair Market Value (“FMV”) on date of exercise:

   $ 80  

Number of SSARs Granted:

     100  

 

EXERCISE STEP

   Gain in Value    Total Value
after Exercise
     Total Shares
Awarded post
Exercise(1)
 

Calculation Formula

   FMV—Exercise Price     
Gain in Value x
Number of SSARs
 
 
     Total Value ÷ FMV  

Result

   $80 – $60 = $20      $20 x 100 = $2,000        $2,000 ÷ $80 = 25  
   ($20 per SSAR)      

 

(1)

Subject to tax withholding.

Restricted Stock Units

Restricted stock unit grants vest ratably over three years. Executives do not actually own the shares underlying the units, nor enjoy the benefits of ownership, such as dividends and voting, until the vesting conditions are satisfied. Once vested, the NEO receives shares of Dover stock equivalent in number to the vested units and receives a cash amount equal to accrued dividends during the vesting period, net of withholding taxes.

Treatment of outstanding Dover equity awards: Effective as of the Separation, the Dover SSAR and restricted stock unit awards previously granted to Apergy’s NEOs were converted to corresponding Apergy equity awards under the new Apergy 2018 LTIP. In general, each award is subject to the same terms and conditions as were in effect prior to the Separation. The outstanding performance shares and cash performance units held by Apergy’s NEOs were cancelled as of the Separation. In addition, Apergy’s NEOs received new Apergy equity-based awards.

 

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Outstanding Equity Awards at Fiscal Year-End 2017

Dover awards listed below with grant dates beginning in 2013 were made under the Dover LTIP. Awards listed below with grant dates between 2006 through 2012 were made under the Dover Corporation 2005 Equity and Cash Incentive Plan (the “2005 Dover Plan”). All equity awards outstanding as of February 28, 2014 were adjusted as a result of the spin-off of Knowles Corporation to preserve the value of the awards in accordance with the Employee Matters Agreement, dated February 28, 2014, between Dover and Knowles Corporation.

 

Name

  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
    Option
Exercise
Price
($)
    Option
Expiration
Date
    Number
of Shares
or Units
of Stock
That Have
Not Vested
(#)
    Market
Value of
Shares or
Units
of Stock
That Have
Not Vested
($)
    Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)
    Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units or
Other Rights
That Have
Not Vested
($)
 

Somasundaram, Sivasankaran

      27,750 (1)       79.28       2/10/2027          
      38,428 (2)       57.25       2/11/2026          
      30,022 (3)       73.28       2/12/2025          
    24,239  (4)         82.51       3/10/2024          
    14,211 (5)         63.33       2/14/2023          
    15,620 (6)         57.62       2/9/2022          
    15,336 (7)         58.69       2/10/2021          
    23,816 (8)         37.79       2/11/2020          
            2,775(9)       280,247(12)       16,648(13)       1,681,281(16)  
            2,562(10)       258,736(12)       23,056(14)       2,328,425(16)  
            1,001(11)       101,091(12)       —  (15)       1,819,032(16)  

Mahoney, Paul E.

      6,054 (1)       79.28       2/10/2027          
      8,384 (2)       57.25       2/11/2026          
      6,550 (3)       73.28       2/12/2025          
    5,090 (4)         82.51       3/10/2024          
    5,052 (5)         63.33       2/14/2023          
    4,165 (6)         57.62       2/9/2022          
            336(9)       33,933(12)      
            2,213(10)       223,491(12)      
            364(11)       36,760(12)      

Raza, Syed

      3,027 (1)       79.28       2/10/2027       1,766(9)       178,348(12)      

 

(1)

SSARs granted on February 10, 2017 that are not exercisable until February 10, 2020.

(2)

SSARs granted on February 11, 2016 that are not exercisable until February 11, 2019.

(3)

SSARs granted on February 12, 2015 that become exercisable on February 12, 2018.

(4)

SSARs granted on March 10, 2014 that became exercisable on March 10, 2017.

(5)

SSARs granted on February 14, 2013 that became exercisable on February 14, 2016.

(6)

SSARs granted on February 9, 2012 that became exercisable on February 9, 2015.

(7)

SSARs granted on February 10, 2011 that became exercisable on February 10, 2014.

(8)

SSARs granted on February 11, 2010 that became exercisable on February 11, 2013.

(9)

Unvested portion of Dover restricted stock units granted on February 10, 2017. The units vest in three equal annual installments beginning on March 15, 2018.

(10)

Unvested portion of Dover restricted stock units granted on February 11, 2016. The units vest in three equal annual installments beginning on March 15, 2017.

(11)

Unvested portion of Dover restricted stock units granted on February 12, 2015. The units vest in three equal annual installments beginning on February 12, 2016.

(12)

The amount reflects the number of unvested Dover restricted stock units multiplied by $100.99, the closing price of Dover’s common stock on December 29, 2017.

 

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(13)

Dover performance shares granted on February 10, 2017 become payable after December 31, 2019 subject to the achievement of the applicable performance goal. The amount reflected in the table represents the number of shares payable based on the achievement of the maximum level of performance, 400%.

(14)

Dover performance shares granted on February 11, 2016 become payable after December 31, 2018 subject to the achievement of the applicable performance goal. The amount reflected in the table represents the number of shares payable based on achievement of the maximum level of performance, 400%.

(15)

Dover performance shares granted on February 12, 2015 become payable after December 31, 2017 subject to the achievement of the applicable performance goal. The performance goals were not met and no amounts were paid with respect to the performance shares granted on February 12, 2015.

(16)

The amount reflects the number of performance shares payable based on achievement of the maximum level of performance multiplied by $100.99, the closing price of Dover’s common stock on December 29, 2017.

Executive Severance Policies

Dover has an executive severance plan (the “Dover Severance Plan”) and a senior executive Change in Control (“CIC”) Severance Plan (the “Dover CIC Severance Plan”) in which all of Dover’s executives, including, prior to the Separation, our NEOs, were eligible to participate.

The Dover CIC Severance Plan likewise establishes a consistent policy regarding double-trigger CIC severance payments based on current market practices. The Dover CIC Severance Plan applies to all executives who are subject to Dover’s senior executive shareholding guidelines on the date of a CIC (as defined in such plan), including, prior to the Separation, Mr. Somasundaram. Each of the Dover Severance Plan and the Dover CIC Severance Plan gives Dover the right to recover amounts paid to an executive under the plan as required under any clawback policy of Dover as in effect from time to time or under applicable law. The Dover 2005 Plan, the Dover LTIP and Dover’s other benefit plans each has its own provisions relating to rights and obligations under the plan upon termination.

No Dover executive may receive severance benefits under more than one plan or arrangement. If Dover determines that (i) any payment or distribution to an executive in connection with CIC, whether under the Dover CIC Severance Plan or otherwise, would be subject to excise tax as an excess parachute payment under the Code and (ii) the executive would receive a greater net-after-tax amount by reducing the amount of the severance payment, Dover will reduce the severance payments made under the Dover CIC Severance Plan to the maximum amount that might be paid (but not less than zero) without the executive becoming subject to the excise tax. The Dover CIC Severance Plan does not provide any gross-up for excise taxes.

Under the Dover Severance Plan, each of our NEOs would have been entitled to the following payments in the event of non-CIC involuntary termination without “cause”, as defined in the plan:

 

   

Twelve (12) months’ salary continuation plus an amount equal to the pro rata portion of the annual bonus paid for the prior year, subject to the Dover Compensation Committee’s discretion to reduce the payment amount; and

 

   

A monthly amount equal to the then cost of COBRA health continuation coverage based on the level of health care coverage in effect on the termination date, if any, for the lesser of 12 months or the period that the executive receives COBRA benefits.

Under the Dover CIC Severance Plan, Mr. Somasundaram would have been entitled to receive the following severance payments if, within 18 months after a CIC, either his employment was terminated by Dover without “cause” or he terminated employment for “good reason,” as such terms are defined in the plan:

 

   

A lump sum payment equal to 2.0 multiplied by the sum of (i) his annual salary on the termination date or the CIC date, whichever is higher, and (ii) his target annual incentive bonus for the year in which the termination or the date of the CIC occurs, whichever is higher; and

 

   

A lump sum payment equal to the then cost of COBRA health continuation coverage, based on the level of health care coverage in effect on the termination date, if any, for one year.

 

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Under the Dover LTIP, upon a CIC of Dover (as defined in the Dover LTIP) and if, within 18 months following the date of the CIC, the participant’s employment is either involuntarily terminated other than for cause, death or disability, such that the participant is no longer employed by a Dover company or an event or condition that constitutes “good reason” under the LTIP occurs, and the participant subsequently resigns for good reason within applicable time limits and other applicable requirements under the LTIP:

 

   

All Dover options and Dover SSARs immediately vest upon the date of termination and become exercisable in accordance with the terms of the applicable award agreement;

 

   

All Dover cash performance and performance share awards will be deemed to have been earned “at target” as if the performance target had been achieved and such awards will immediately vest and become immediately due and payable on the date of termination; and

 

   

All outstanding restrictions, including any performance targets, on Dover restricted stock or Dover restricted stock unit awards will immediately vest or expire on the date of termination and be deemed to have been satisfied or earned “at target” as if the performance targets, if any, have been achieved, and the award will become immediately due and payable on the date of termination.

In the event of a CIC in which a participant’s outstanding awards are impaired in value or rights as determined solely in the discretion of Dover’s “continuing directors” (as defined in the LTIP), are not assumed by a successor corporation or an affiliate thereof, or are not replaced with an award or grant that, solely in the discretion of Dover’s continuing directors, will preserve the existing value of the outstanding awards at the time of the CIC:

 

   

All outstanding Dover options and Dover SSARs will immediately vest on the date of the CIC and become exercisable in accordance with the terms of the applicable award agreement;

 

   

All outstanding Dover performance share awards and cash performance awards will immediately vest and become due and payable on the date of the CIC as follows: the performance period of each such award will terminate on the last day of the month prior to the month in which the CIC occurs; the participant will be entitled to a cash or stock payment, the amount of which will be determined in accordance with the LTIP and the applicable award agreement prorated based on the number of months in the performance period which have passed prior to the CIC as compared to the total number of months in the original performance period; and

 

   

All outstanding restrictions, including any performance targets with respect to any Dover options, Dover SSARs, Dover restricted stock or Dover restricted stock unit awards will immediately vest or expire on the date of the CIC and be deemed to have been satisfied or earned at “target” as if the performance targets, if any, have been achieved and such awards will become immediately due and payable on the date of the CIC.

Each person granted an award under the Dover 2005 Plan or Dover LTIP is deemed to agree that, upon a tender or exchange offer, proxy solicitation or other action seeking to effect a CIC of Dover, he or she will not voluntarily terminate employment with Dover or any of its companies and, unless terminated by Dover, will continue to render services to Dover until the person seeking to effect a CIC of Dover has abandoned, terminated or succeeded in such person’s efforts to effect the CIC.

Under the Dover PRP, upon a CIC, each participant will become entitled to receive the actuarial value of the participant’s benefit accrued through the date of the CIC. Under the Dover Deferred Compensation Plan, amounts deferred under the plan will continue to accrue any earnings and will be payable in accordance with the elections made by the executive officer.

Going forward: Apergy has adopted the Apergy Corporation Executive Severance Plan (the “Apergy Severance Plan”) and the Apergy Corporation Senior Executive Change-in-Control Severance Plan (the “Apergy CIC Plan”), which offer executive severance and CIC benefits, as applicable, to certain Apergy employees

 

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(including Apergy’s NEOs) that are substantially similar to those provided to eligible Dover employees pursuant to the Dover Severance Plan and the Dover CIC Severance Plan, respectively. See “—New Apergy Plans—Apergy Severance Plan and Apergy CIC Plan.”

Employee Benefit Plans

401(k), Pension Plan and Health & Wellness Plans

Each of our NEOs were able to participate in retirement and benefit plans generally available to Dover’s employees on the same terms as other employees. Our NEOs do not receive enhanced health and wellness benefits.

Non-Qualified Retirement Plans

Dover offers two non-qualified plans with participation generally limited to individuals whose annual salary and bonus earnings exceed the IRS limits applicable to its qualified plans: the Dover PRP and the Dover Deferred Compensation Plan.

Mr. Somasundaram and Mr. Mahoney participated in the Dover PRP. After December 31, 2009, benefits under the Dover PRP before offsets are determined using the benefit calculation and eligibility criteria as under the pension plan, except that IRS limits on compensation and benefits do not apply. Prior to December 31, 2009, the participants in the Dover PRP accrued benefits greater than those offered in the Dover pension plan. Effective January 1, 2010, Dover modified this plan so that executives subject to IRS compensation limits will accrue future benefits that are substantially the same as benefits under the Dover pension plan. Individuals who participated in the Dover PRP prior to January 1, 2010 will receive benefits calculated under the prior benefit formula through December 31, 2009 and benefits calculated under the lower Dover PRP benefit formula on and after January 1, 2010. Amounts receivable by the executives under the Dover PRP are reduced by any amounts receivable by them under the Dover pension plan, any qualifying profit sharing plan, Dover-paid portion of social security benefits, and the amounts of the Dover match in its 401(k) plan.

Dover offers a deferred compensation plan to allow participants to elect to defer their receipt of some or all of their salary, bonuses and any payout of a cash performance award. Messrs. Somasundaram, Mahoney and Syed were eligible to participate in this plan. The plan permits Dover executive officers to defer receipt of part of their compensation to later periods and facilitates tax planning for the participants. Effective January 1, 2014, the Dover Deferred Compensation Plan was amended to provide for certain matching and additional contributions for participants who do not also participate in the Dover PRP. PRP Participants are not eligible for matching or additional contributions under the Dover Deferred Compensation Plan. Participants are not guaranteed any particular return on deferrals. As of the Plan Separation Date (as defined herein), Apergy participants, including Messrs. Somasundaram, Mahoney and Syed ceased deferring compensation under the Dover Deferred Compensation Plan. See the section entitled “Certain Relationships and Related Person Transactions—Agreements with Dover—Employee Matters Agreement—Non-Qualified Deferred Compensation Plans.”

Going forward: Apergy executive officers participate in retirement and benefits plans generally available to other Apergy employees on the same terms as other employees. Apergy has adopted the Apergy Executive Deferred Compensation Plan. See “—New Apergy Plans—Apergy Executive Deferred Compensation Plan.” Apergy adopted 401(k) and health and wellness benefits plans for Apergy employees effective January 1, 2018. See “—New Apergy Plans—Apergy 401(k) Plan.”

New Apergy Plans

Long-Term Incentive Plan

In connection with the distribution, Dover adopted the Apergy 2018 LTIP. The form of the Apergy 2018 LTIP has been incorporated by reference as an exhibit to the registration statement of which this prospectus is a

 

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part. The material features of the Apergy 2018 LTIP are summarized below, but this summary is qualified in its entirety by reference to the full text of the Apergy 2018 LTIP.

The Apergy Compensation Committee intends grants and awards under the Apergy 2018 LTIP to foster behavior that will produce the greatest increase in value for stockholders, reinforce key company goals and objectives that help drive stockholder value, and attract, motivate and retain officers, key employees and directors. The Apergy Compensation Committee intends to grant incentive awards for Apergy’s NEOs under the Apergy 2018 LTIP.

Duration and Amendment. The Apergy 2018 LTIP has a predetermined term of 10 years and will terminate in 2028. The Apergy Compensation Committee may make grants and awards at any time or from time to time before the Apergy 2018 LTIP terminates.

The Apergy Board of Directors may amend or terminate the Apergy 2018 LTIP as it deems advisable, except as provided for in the Apergy 2018 LTIP. In addition, without stockholder approval, the Apergy Board of Directors cannot approve either the (i) cancellation of outstanding options or SSARs and grants in substitution therefor of new awards having a lower exercise price or base price, as applicable, or (ii) amendment of outstanding options and SSARs to reduce the exercise price or base price thereof, as applicable (including cash buyouts).

Administration. The Apergy Compensation Committee will administer the Apergy 2018 LTIP. The Apergy Compensation Committee consists of independent members of the Apergy Board of Directors each of whom is also a “non-employee director” for purposes of the rules under the Exchange Act.

The Apergy Compensation Committee will select employees who shall receive awards, determine the number of shares covered thereby, and establish the terms, conditions and other provisions of the awards. The Apergy Board of Directors will determine the form and amount of directors’ compensation to be paid to directors from time to time, subject to the limits of the Apergy 2018 LTIP. The Apergy Compensation Committee will determine the procedures and terms under which a director may elect to defer receipt of his or her directors’ shares. The Apergy Compensation Committee may interpret the Apergy 2018 LTIP and establish, amend and rescind any rules relating to the Apergy 2018 LTIP. The Apergy Compensation Committee may delegate all or part of its responsibilities under the Apergy 2018 LTIP to the Chief Executive Officer to the extent permitted by Delaware law, except for granting awards to individuals subject to Section 16 of the Exchange Act. Only the Apergy Board of Directors may determine awards to members of the Apergy Board of Directors.

Eligibility. Officers and other key employees of Apergy and its subsidiaries, as selected by the Apergy Compensation Committee, and non-employee directors of Apergy will be eligible to participate in the Apergy 2018 LTIP.

Shares Reserved for Issuance; Share Counting. A total of 6,500,000 shares of Apergy common stock are reserved for issuance under the Apergy 2018 LTIP. The maximum number of shares issuable under the Apergy 2018 LTIP is subject to adjustments resulting from stock dividends, stock splits, recapitalizations, reorganizations and other similar changes.

Shares subject to stock options and SSARs will reduce the shares available for awards under the Apergy 2018 LTIP by one share for every one share issued. Performance share awards, restricted stock, restricted stock units that are settled in shares of Apergy common stock, directors’ shares and deferred stock units will reduce the shares available for awards under the Apergy 2018 LTIP by three shares for every one share awarded. Cash performance awards do not count against the pool of available shares. The number of shares earned when an award is exercised, vests or is paid out will count against the pool of available shares, including shares withheld to pay taxes or an option’s exercise price. Shares subject to an award under the Apergy 2018 LTIP that is cancelled, terminated, or forfeited or that expires will be available for reissuance under the Apergy 2018 LTIP.

 

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Award Limits. No non-employee director may be granted more than 20,000 shares of Apergy common stock in any fiscal year. No more than 5% of the aggregate share reserve may be awarded as restricted stock awards or restricted stock unit awards having a vesting period more rapid than annual pro rata vesting over a period of three years.

Types of Awards. The Apergy 2018 LTIP provides for stock options and SSAR grants, restricted stock awards, restricted stock units, performance share awards, cash performance awards, directors’ shares and deferred stock units. The Apergy 2018 LTIP also permits the issuance of awards to Apergy employees in substitution for such employees’ outstanding Dover awards (see the section entitled “—2017 Long-Term Incentive Compensation—Treatment of outstanding Dover equity awards”).

Stock Options and Stock-Settled Appreciation Rights. The Apergy Compensation Committee may grant options and SSARs under the Apergy 2018 LTIP. Grants of options under the Apergy 2018 LTIP permit the participant to acquire shares of Apergy common stock at an exercise price fixed on the date of grant during the life of the award. SSARs granted under the plan are “freestanding,” meaning they are granted separately from options and the exercise of SSARs is not linked in any way to the exercise of options. An SSAR allows the Apergy 2018 LTIP participant to receive the increase, if any, in the fair market value of the number of shares of Apergy common stock underlying the award during the life of the award over a base price set on the date of grant. The amount payable upon the exercise of the SSAR will be paid to the Apergy 2018 LTIP participant in shares of Apergy common stock. The Apergy Compensation Committee determines the exercise price for options and the base price of SSARs, which may not be less than the fair market value of the Apergy common stock on the date of grant. The Apergy Compensation Committee may provide for SSARs to be settled in cash to the extent the Apergy Compensation Committee determines to be advisable under foreign laws or customs.

The Apergy Compensation Committee determines any conditions to the exercisability of options and SSARs, including requirements of a period of continuous service by the participant (time vesting) or performance or other criteria. Options and SSARs may not generally be exercised prior to the third anniversary of the date of grant. The Apergy Compensation Committee also determines the term of each award, provided that the maximum term of any option or SSAR is ten years from the date of grant.

Restricted Stock and Restricted Stock Units. The Apergy Compensation Committee may award restricted stock or restricted stock units to participants under the Apergy 2018 LTIP. Restricted stock is registered in the name of a participant on the date of grant subject to vesting requirements and restricted stock units are rights credited to a bookkeeping account that will be settled by the delivery of shares if certain vesting conditions are satisfied. The Apergy Compensation Committee determines the vesting period, of not less than one year or more than five years, with respect to a restricted stock or restricted stock unit award and whether other restrictions, including the satisfaction of any performance targets, are applicable to the awards. A holder of unvested restricted stock may not exercise voting rights during the restriction period. No dividends or dividend equivalents will be paid on unvested restricted stock or restricted stock unit awards during the restriction period, but in the discretion of the Apergy Compensation Committee, dividend equivalents may be credited to an account for distribution to a participant after vesting.

Performance Share Awards. The Apergy Compensation Committee may grant performance share awards to employees that will become payable in shares of Apergy common stock upon the achievement of objective pre-established performance targets based on specified performance criteria over a performance period of not less than three full fiscal years. Awards may set a specific number of performance shares that may be earned, or a range of performance shares that may be earned depending on the degree of achievement of the pre-established performance targets. Shares of Apergy common stock in payment of performance shares will be issued only if the Apergy Compensation Committee has certified after the end of the performance period that the required performance targets have been met and the amount of the award.

Cash Performance Awards. The Apergy Compensation Committee may grant a participant the opportunity to earn a cash performance award conditional upon the satisfaction, over a performance period of not less than

 

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three full fiscal years, of certain pre-established objective performance targets based on specified performance criteria. The Apergy Compensation Committee will establish a percentage of the value created at the relevant business unit (or Apergy as a whole) during the performance period that the maximum total payout for that business unit (or Apergy as a whole) may not exceed. Cash in payment of cash performance awards will be issued only if the Apergy Compensation Committee has certified after the end of the performance period that the required performance targets have been met and the amount of the award.

Directors’ Shares and Deferred Stock Units. The Apergy Board of Directors may designate a percentage of a non-employee director’s compensation to be paid in directors’ shares or may in its discretion determine to pay a specified dollar amount or number of shares as part of the non-employee director’s annual compensation. Subject to procedures the Apergy Compensation Committee may establish from time to time, a non-employee director may elect to defer receipt of directors’ shares. Should a director elect to defer receipt of directors’ shares, deferred stock units will be credited to a bookkeeping account on the basis of one deferred stock unit for each directors’ share deferred, which deferred stock units will be settled by the delivery of Apergy common stock upon the termination of the director’s service as a director or, if earlier, upon a date specified by the director at the time of the deferral election. Dividend equivalents will be credited on deferred stock units and distributed at the same time the shares are delivered upon settlement of the deferred stock units.

Performance Criteria. Cash performance awards and performance share awards will be, and other awards may be, made subject to performance criteria. The Apergy Compensation Committee establishes performance targets based on the Apergy 2018 LTIP’s performance criteria that include objective formulas or standards for determining the amount of the performance award that may be payable to a participant when the targets are satisfied. The performance targets do not need to be the same for all participants.

The performance objectives under the Apergy 2018 LTIP will be based on one or more of the following performance criteria: (i) the attainment of certain target levels of, or a specified percentage increase in, revenues, income before income taxes and extraordinary items, income or net income, earnings before income tax, earnings before interest, taxes, depreciation and amortization, or a combination of any or all of the foregoing; (ii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax profits including, without limitation, those attributable to continuing and/or other operations; (iii) the attainment of certain target levels of, or a specified increase in, operational cash flow; (iv) the achievement of a certain level of, reduction of, or other specified objectives with regard to limiting the level of increase in, all or a portion of Apergy’s or an affiliate’s bank debt or other long-term or short-term public or private debt or other similar financial obligations of Apergy or affiliate, which may be calculated net of such cash balances and/or other offsets and adjustments as may be established by the Apergy Compensation Committee; (v) the attainment of a specified percentage increase in earnings per share or earnings per share from continuing operations; (vi) the attainment of certain target levels of, or a specified increase in, return on capital employed or return on invested capital or operating revenue or return on invested cash; (vii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax return on stockholders’ equity; (viii) the attainment of certain target levels of, or a specified increase in, economic value added targets based on a cash flow return on investment formula; (ix) the attainment of certain target levels in the fair market value of the shares of Apergy common stock; (x) market segment share; (xi) product release schedules; (xii) new product innovation; (xiii) product or other cost reductions; (xiv) brand recognition or acceptance; (xv) product ship targets; (xvi) customer satisfaction; (xvii) total stockholder return; (xviii) return on assets or net assets; (xix) assets, operating margin or profit margin; (xx) the growth in the value of an investment in Apergy common stock assuming the reinvestment of dividends; and (xxi) such other business or other performance criteria determined appropriate by the Apergy Compensation Committee.

Effect of Termination, Death, Disability or Change in Control on Awards. If a participant’s employment is voluntarily or involuntarily terminated other than for cause, vested stock options and SSARs will expire three months after the termination of the participant’s employment or the expiration of the original term, whichever is earlier. If a participant dies or becomes disabled while employed by Apergy, outstanding stock options and SSARs will fully vest and may be exercised by the participant or the participant’s estate, as applicable, for the

 

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balance of the original term or 60 months, whichever is shorter. If a participant retires at or after age 65, a participant may exercise options and SSARs that are, or within 60 months of the date of retirement become, exercisable, but not beyond the balance of the original term.

Subject to certain exceptions, cash performance awards, restricted stock, restricted stock units, and performance shares will be forfeited if such awards are not vested when a participant’s employment terminates. If a participant dies, becomes disabled while employed by Apergy, or in the event of any special circumstances as determined by the Apergy Compensation Committee, any purely temporal restrictions remaining with respect to restricted stock and restricted stock units will lapse, and, if any performance targets are applicable, the restricted stock and restricted stock units will continue to vest subject to attainment of applicable performance targets. If a participant retires at or after age 65, (i) the participant’s restricted stock and restricted stock units will continue to vest until the earlier of 60 months from the date of termination or such time as the remaining temporal restrictions lapse, subject to compliance with certain non-competition restrictions, and (ii) if the participant holds one or more performance-based restricted stock or restricted stock unit awards, such awards will be cancelled and will terminate, except that (a) the oldest performance-based restricted stock or restricted stock unit award will remain outstanding and entitle the participant to receive on the regular payment date the same number of shares of Apergy common stock that the participant would have earned had such participant been an employee of Apergy as of such payment date, subject to attainment of applicable performance targets, and (b) the Apergy Compensation Committee (or the Chief Executive Officer as its delegate, as applicable) will determine whether the participant is eligible to receive any shares of Apergy common stock with respect to any other performance-based restricted stock or restricted stock unit awards, and if so, the amount thereof, and any such payment will be subject to attainment of applicable performance targets.

In the case of cash performance awards and performance shares, if a participant dies or becomes disabled while employed by Apergy, a participant or the participant’s estate, as applicable, is entitled to a pro rata award for the period of service during the performance period, subject to attainment of applicable performance targets.

If the participant retires at or after age 65, a participant’s cash performance awards and performance shares will be cancelled and will terminate, except that (i) the oldest cash performance award and performance shares will remain outstanding and entitle the participant to receive on the regular payment date the same payment or number of shares of Apergy common stock, as applicable, that the participant would have earned had such participant been an employee of Apergy as of such payment date, subject to attainment of applicable performance targets, and (ii) the Apergy Compensation Committee (or the Chief Executive Officer as its delegate, as applicable) will determine whether the participant is eligible to receive any payment or shares of Apergy common stock, as applicable, with respect to any other cash performance awards or performance shares and, if so, the amount thereof, and any such payment or shares shall be subject to attainment of applicable performance targets.

The enhanced post-employment benefits for retirement at or after age 65 are conditioned upon a participant’s complying with certain non-competition restrictions that correspond to the period during which enhanced post-employment benefits are provided.

Vesting of outstanding awards to employees under the Apergy 2018 LTIP accelerates upon the consummation of a change in control (as defined in the Apergy 2018 LTIP) (including deemed satisfaction of applicable performance criteria “at target” as if such performance criteria had been achieved) and one of the following double-trigger vesting requirements: (i) involuntary termination other than for cause, death or disability within 18 months following the change in control, (ii) a resignation for good reason within 18 months following the change in control, or (iii) outstanding awards are not replaced by a successor with awards that preserve existing value, the awards are not assumed by a successor, or the awards are impaired in value or rights. In addition, the Apergy Compensation Committee has the right to take such other action with respect to awards in connection with a change in control as it determines to be appropriate. In the case of a change in the ownership of effective control of Apergy or in the ownership of a substantial portion of the assets of Apergy, any deferred

 

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stock units will settle on the date of such change in control or change in ownership by delivery of shares of Apergy common stock.

Apergy Severance Plan and Apergy CIC Plan

In connection with the distribution, Apergy adopted the Apergy Severance Plan and the Apergy CIC Plan, which offers executive severance and CIC benefits, as applicable, to certain Apergy employees (including Apergy’s NEOs) that are substantially similar to those provided to eligible Dover employees pursuant to the Dover Severance Plan and the Dover CIC Severance Plan, respectively.

Apergy Executive Deferred Compensation Plan

In connection with the distribution, Apergy adopted the Apergy Executive Deferred Compensation Plan to administer the deferred compensation liabilities with respect to certain Apergy employees under the Dover Deferred Compensation Plan and the Dover PRP which Apergy assumed pursuant to the employee matters agreement. For additional information, see “Certain Relationships and Related Person Transactions—Agreements with Dover—Employee Matters Agreement—Non-Qualified Deferred Compensation Plans.”

Apergy 401(k) Plan

As of the Plan Separation Date, Apergy established the Apergy USA, Inc. 401(k) Savings Plan, with Apergy participants’ accounts under the Dover 401(k) plan and the assets and liabilities allocable to such accounts transferring to the Apergy 401(k) Plan as of the Plan Separation Date or as soon as practicable thereafter. Apergy provides a matching contribution denominated as a percentage of the amount of salary deferred into the plan by a participant (including Apergy NEOs) during the course of the year.

 

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DIRECTOR COMPENSATION

Apergy’s non-employee directors receive annual compensation in an amount Apergy’s Board of Directors will set from time to time. The compensation is payable partly in cash and partly in Apergy common stock, in an allocation Apergy’s Board of Directors may adjust from time to time. Apergy directors initially receive an annual retainer of $225,000, payable $112,500 in cash and $112,500 in Apergy common stock. Apergy’s Board Chairman receives an additional annual retainer of $75,000, payable in cash. The chair of Apergy’s Audit Committee receives an additional annual retainer of $15,000, payable in cash. The chairs of Apergy’s Compensation Committee and Governance and Nominating Committee each receive an additional annual retainer of $10,000, payable in cash. If a director serves for less than a full calendar year, the compensation to be paid to that director may be prorated as deemed appropriate by Apergy’s Compensation Committee. For their service in 2018, the compensation paid to Apergy’s non-employee directors who were elected to Apergy’s Board of Directors effective on May 9, 2018 will be prorated based on the number of days from and including May 9, 2018 to and including December 31, 2018.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following tables sets forth, as of October 30, 2018 (except as otherwise noted), information with respect to the beneficial ownership of Apergy’s common stock by (1) each person Apergy believes is a beneficial owner of 5% or more of Apergy’s outstanding common stock, (2) each director and NEO of Apergy and (3) all of Apergy’s directors and executive officers as a group. Except as otherwise noted in the footnotes below, each person or entity identified below has sole voting and investment power with respect to such securities. The number of shares beneficially owned by each stockholder, director or executive officer is determined according to the rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose.

Holdings of Major Stockholders

The following table sets forth information regarding each stockholder who Apergy believes owns more than 5% of Apergy’s common stock, as of June 30, 2018.

 

Name of Beneficial Owner

   Shares of Apergy’s
Common Stock
Beneficially
Owned
    % of Class  

BlackRock, Inc.

     7,219,753 (1)       9.33

The Vanguard Group Inc.

     7,011,451 (2)       9.07

Boston Partners.

     6,247,942 (3)       8.08

FMR LLC

     3,933,192 (4)       5.09

 

(1)

Based on information contained in a Form 13F report for the quarter ended June 30, 2018, filed with the SEC by BlackRock, Inc. BlackRock, Inc.’s offices are located at 55 East 52nd Street, New York, NY 10022. BlackRock, Inc. has sole investment power over all 7,219,753 shares and sole voting power over 6,800,366 shares.

(2)

Based on information contained in a Form 13F report for the quarter ended June 30, 2018, filed with the SEC by Vanguard Group Inc. Vanguard Group Inc.’s offices are located at 100 Vanguard Blvd., Malvern, PA 19355. The Vanguard Group Inc. has sole investment power over 6,976,124 shares, shared investment power over 25,327 shares, sole voting power over 30,060 shares and shared voting power over 5,300 shares.

(3)

Based on information contained in a Form 13F report for the quarter ended June 30, 2018, filed with the SEC by Boston Partners. Boston Partners’ offices are located at One Beacon Street—30th Floor, Boston, MA 02108. Boston Partners has shared investment power over all 6,247,942 shares, sole voting power over 5,059,532 shares and shared voting power over 5,598 shares.

(5)

Based on information contained in a Form 13F report for the quarter ended June 30, 2018, filed with the SEC by FMR LLC. FMR LLC’s offices are located at 245 Summer Street, Boston, MA 02210. FMR LLC has shared investment power over all 3,933,192 and sole voting power over 565,363 shares.

 

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Holdings of Directors and Executive Officers

The following table sets forth the number of shares of Apergy’s common stock beneficially owned by (1) each director and NEO of Apergy and (2) all of Apergy’s directors and executive officers as a group. The address of each person shown in the table below is c/o Apergy Corporation, 2445 Technology Forest Blvd., Building 4, 12th Floor, The Woodlands, Texas 77381.

 

Name and Address of Beneficial Owner

   Shares of
Apergy’s
Common Stock
Beneficially
Owned
    % of
Class
 

Daniel W. Rabun

     2,525           

Sivasankaran Somasundaram

     165,523 (1)           

Gary P. Luquette

     —             

Stephen M. Todd

     3,989           

Stephen K. Wagner

     1,989           

Kenneth M. Fisher

     3,000           

Mamatha Chamarthi

     —             

Paul E. Mahoney

     33,555 (2)           

Syed Raza

     18,043 (3)           

Directors and executive officers as a group (14 persons)

     325,040 (4)           

 

*

Less than 1% of Apergy’s outstanding common stock.

(1)

Includes 12,967 shares held in a limited partnership of which Mr. Somasundaram is a partner and 894 shares held in Apergy’s 401(k) plan.

(2)

Includes 398 shares held in Apergy’s 401(k) plan.

(3)

Includes 58 shares held in Apergy’s 401(k) plan.

(4)

Includes 1,527 shares held in Apergy’s 401(k) plan.

 

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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

Procedures for Approval of Related Person Transactions

Apergy generally does not engage in transactions in which Apergy’s senior executive officers or directors, any of their immediate family members or any of Apergy’s stockholders owning 5% or more of Apergy’s outstanding shares of common stock have a material interest. Should a proposed transaction or series of similar transactions involve any such persons in an amount that exceeds $120,000, it will be subject to review and approval by the Governance and Nominating Committee in accordance with a written policy and the procedures adopted by Apergy’s Board of Directors, which is available with the governance materials on Apergy’s website at www.apergy.com.

Management will determine whether a proposed transaction requires review under the policy and, if so, will present the transaction to the Governance and Nominating Committee. The Governance and Nominating Committee will review the relevant facts and circumstances of the transaction and approve or reject the transaction. If the proposed transaction is immaterial or it is impractical or undesirable to defer the proposed transaction until the next committee meeting, the chair of the committee will decide whether to (i) approve the transaction and report the transaction at the next meeting or (ii) call a special meeting of the committee to review and approve the transaction. Should the proposed transaction involve the Chief Executive Officer or enough members of the Governance and Nominating Committee to prevent a quorum, the disinterested members of the committee will review the transaction and make a recommendation to Apergy’s Board of Directors, and disinterested members of the Board will then approve or reject the transaction. No director may participate in the review of any transaction in which he or she is a related person.

The Distribution by Dover

Dover distributed all of its shares of Apergy’s common stock to holders of Dover’s common stock entitled to such distribution, as described under “Summary—Separation and Distribution” elsewhere in this prospectus.

Agreements with Dover

Apergy and Dover operate separately, each as an independent public company. Prior to the Separation and distribution, Apergy and Dover entered into a separation and distribution agreement and several other agreements to effect the Separation and provide a framework for Apergy’s relationship with Dover after the Separation. These agreements govern the relationships between Dover and Apergy following the Separation and distribution and provide for the allocation between Apergy and Dover of Dover’s and Apergy’s assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after Apergy’s Separation from Dover. In addition to the separation and distribution agreement (which contains many of the key provisions related to Apergy’s separation from Dover and the distribution of Apergy’s shares of common stock to Dover stockholders), these agreements include:

 

   

the transition services agreement;

 

   

the tax matters agreement; and

 

   

the employee matters agreement.

The material agreements described below have been incorporated by reference as exhibits to the registration statement of which this prospectus forms a part, and the summaries below set forth material terms of such agreements. The summaries of the material agreements are qualified in their entireties by reference to the full text of the applicable agreements, which are incorporated by reference into this prospectus.

The Separation and Distribution Agreement

The separation and distribution agreement sets forth Apergy’s agreement with Dover regarding the principal transactions necessary to separate Apergy from Dover. It also sets forth other agreements that govern certain

 

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aspects of Apergy’s relationship with Dover after the completion of the separation plan. The parties entered into the separation and distribution agreement immediately before the distribution of Apergy’s common stock to Dover stockholders.

Releases and Indemnification. Except as otherwise provided in the separation and distribution agreement or any ancillary agreement, each party released and forever discharged the other party and its subsidiaries, affiliates and other related parties from all liabilities existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the distribution. The releases do not extend to obligations or liabilities under any agreements between the parties that remain in effect following the Separation pursuant to the separation and distribution agreement or any ancillary agreement. In addition, the separation and distribution agreement provided for cross-indemnities that, except as otherwise provided in the separation and distribution agreement, are principally designed to place financial responsibility for the obligations and liabilities of Apergy’s business with Apergy and financial responsibility for the obligations and liabilities of Dover’s business with Dover. Specifically, each party will, and will cause, its subsidiaries and affiliates to, indemnify, defend and hold harmless the other party, its affiliates and subsidiaries and each of its officers, directors, employees and agents for any losses arising out of or otherwise in connection with:

 

   

the liabilities each such party assumed or retained pursuant to the separation and distribution agreement; and

 

   

any breach by such party of the separation and distribution agreement or any ancillary agreement.

Indemnification with respect to taxes is governed solely by the tax matters agreement.

Legal Matters. Except as otherwise set forth in the separation and distribution agreement (or as further described below), each party to the separation and distribution agreement has assumed the liability for, and control of, all pending, threatened and future legal matters related to its own business or assumed or retained liabilities and has agreed to indemnify the other party for any liability arising out of or resulting from such assumed legal matters. With respect to any third party claims that implicate both Dover and Apergy (or their respective subsidiaries) the applicable parties will use commercially reasonable efforts to cooperate in defending any such claims. Subject to certain conditions, Dover may elect to have exclusive control of any actions pending at the time of the distribution that relate to the business, assets or liabilities of Apergy and also relate to the business, assets or liabilities of Dover and Dover or its subsidiaries are named as a target or defendant thereunder.

Insurance. Apergy is responsible for obtaining and maintaining at its sole cost and expense Apergy’s own insurance coverage and is no longer an insured party under Dover’s insurance policies following the Separation, except that, to the extent reasonably possible, Apergy continues to have coverage under existing shared policies with Dover for claims arising out of insured events that occurred prior to the distribution. Apergy has procured and will maintain at its own cost, for a period of at least five years following the Separation, general liability insurance with annual limits of at least $104.0 million.

Other Matters. Other matters governed by the separation and distribution agreement include access to financial and other information, intellectual property, confidentiality, access to and provision of records and treatment of outstanding guarantees and similar credit support.

Transition Services Agreement

Prior to the Separation, Apergy entered into a transition services agreement with Dover to provide for an orderly transition to being an independent company. Under the transition services agreement, Dover agreed to provide Apergy with various services, including information technology services, and Apergy agreed to provide Dover with various services. Apergy does not currently provide or expect to provide any services to Dover pursuant to the transition services agreement. However, subject to certain limitations, Dover has the right to request that Apergy provide services to Dover.

 

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Apergy pays a fee to Dover for any services utilized under the transition services agreement at an agreed amount as set forth in the agreement, which fee is generally intended to allow Dover to recover all of its direct and indirect costs, generally without profit. The transition services agreement was prepared in the context of a parent-subsidiary relationship and in the context of the separation of Dover into two companies. All services currently or to be provided under the transition services agreement are or will be provided for a specified period of time. Except as provided otherwise in the transition services agreement, or with respect to specific services with other specified terms, the initial term of the transition services agreement will end on January 31, 2019, and the term may then be extended until the one-year anniversary of execution of the transition services agreement or such other period set forth on the schedules thereto. Any service provided under the transition services agreement may be terminated under certain circumstances (including due to a material uncured breach, at the election of the party receiving such service at any time subject to certain conditions or at the election of the provider in the event such provider no longer employs the individuals needed to perform the services). The transition services agreement will terminate on the earliest to occur of (a) a date mutually agreed by the parties, (b) the latest date on which any service is to be provided under the transition services agreement, and (c) the date on which the provision of all services has been terminated by the parties. In addition, if either party materially breaches its obligations under the transition services agreement, such breach is not cured within 30 days after notice and there is no good faith dispute between the parties as to whether a material breach has occurred, the nonbreaching party may terminate the transition services agreement in its entirety or may choose to terminate the individual service as to which the uncured breach relates. After the expiration of the arrangements contained in the transition services agreement, Apergy may not be able to replace these services in a timely manner or on terms and conditions, including cost, as favorable as those Apergy has received from Dover. Apergy is working to increase its own internal capabilities in the future to reduce its reliance on Dover for these services. Apergy will have the right to receive reasonable information with respect to the charges to it by Dover and other service providers for transition services provided by them.

Tax Matters Agreement

Dover and Apergy entered into a tax matters agreement prior to the distribution which generally governs the respective rights, responsibilities and obligations of Dover and Apergy after the distribution with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes.

Allocation of taxes. In general, under the agreement:

 

   

Dover and Apergy are each liable for all pre-distribution U.S. federal income taxes, foreign income taxes and non-income taxes imposed on them or any of their subsidiaries (determined following the distribution);

 

   

Dover and Apergy are each liable for 50% of certain taxes that are incurred as a result of the restructuring activities undertaken to effectuate the distribution or as a result of the application of certain rules relating to consolidated federal income tax returns;

 

   

Apergy will be liable for taxes incurred by Dover that may arise if Apergy takes, or fails to take, as the case may be, certain actions that may result in the distribution failing to meet the requirements of a tax-free distribution under Section 355 of the Code;

 

   

Dover and Apergy are each liable for 50% of taxes incurred by Dover upon the distribution failing to meet the requirements for a tax-free distribution under Section 355 of the Code, where such failure was the result of an act or failure to act on the part of both Dover and Apergy or neither Dover or Apergy; and

 

   

Dover and Apergy are each liable for any transition tax under Section 965 of the Code resulting from the deferred foreign income of any of their non-U.S. subsidiaries (determined following the distribution).

Neither party’s obligations under the agreement are limited in amount or subject to any cap.

 

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Administrative matters. The agreement also assigns responsibilities for administrative matters, such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or similar proceedings. In addition, the agreement provides for cooperation and information sharing with respect to tax matters. Apergy is solely responsible for preparing and filing any tax return with respect to Apergy or its subsidiaries (determined following the distribution) for time periods beginning after the distribution. Dover is generally responsible for preparing and filing all other tax returns. Apergy generally has full responsibility and discretion to control tax contests with respect to tax returns that (i) include only Apergy and/or any of its subsidiaries (determined following the distribution) and (ii) are not relevant to taxes incurred as a result of the restructuring. Dover generally has full responsibility and discretion to control all other tax contests.

Preservation of the tax-free status of certain aspects of the Separation. Apergy and Dover intend the Separation and the distribution to qualify as a reorganization pursuant to which no gain or loss is recognized by Dover or its stockholders for U.S. federal income tax purposes under Sections 355, 368(a)(1)(D) and related provisions of the Code. In addition, Apergy and Dover intend for certain aspects of the Separation, the distribution and certain related transactions to qualify for tax-free treatment under U.S. federal, state and local tax law and/or foreign tax law.

Dover received an opinion from McDermott Will & Emery LLP that the distribution qualified as a transaction that is tax-free for U.S. federal income tax purposes under Section 355 and 368(a)(1)(D) of the Code, which opinion was confirmed on the distribution date. In addition, Dover received other opinions from McDermott Will & Emery LLP regarding the tax-free status of certain other aspects of the Separation. In connection with the receipt of tax opinions, Apergy and Dover made certain representations regarding the past and future conduct of their respective businesses and certain other matters.

Apergy also agreed to certain covenants that contain restrictions intended to preserve the tax-free status of the Separation, the distribution and certain related transactions. Apergy and certain of its subsidiaries were barred from taking any action, or failing to take any action, where such action or failure to act may be expected to result in any increased tax liability or reduced tax attribute of Dover or any of its subsidiaries (determined following the distribution). In addition, during the time period ending two years after the date of the distribution, these covenants include specific restrictions on the ability of Apergy and certain of its subsidiaries to:

 

   

issue or sell stock or other securities (including securities convertible into Apergy stock but excluding certain compensatory arrangements);

 

   

cease to actively conduct its business or dispose of assets outside the ordinary course of business; and

 

   

enter into certain other corporate transactions which would cause Apergy to undergo a 40% or greater change in its stock ownership.

Apergy generally agreed to indemnify Dover and its affiliates against any and all tax-related liabilities incurred by them relating to the Separation, the distribution and/or certain related transactions to the extent caused by an acquisition of Apergy stock or assets or by any other action or failure to act undertaken by Apergy or its affiliates. This indemnification provision will apply even if Apergy is permitted to take an action that would otherwise have been prohibited under the tax-related covenants described above. The term of this agreement is indefinite and it may only be terminated with the prior written consent of Dover and Apergy.

Employee Matters Agreement

Prior to the Separation, Apergy also entered into an employee matters agreement (the “EMA”) with Dover. The EMA allocated assets, liabilities and responsibilities relating to employee compensation and benefit plans and programs and other related matters in connection with the Separation, including the treatment of outstanding incentive awards and certain retirement and welfare benefit obligations, both inside and outside of the U.S. To the extent that any provisions of the EMA conflict with the provisions of a local transfer agreement or, in respect of jurisdictions outside of the U.S., with the terms of a contract entered into with an employee, the terms of such local transfer agreement or contract will govern in the applicable jurisdiction.

 

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Employment and Benefit Plans Generally. As of January 1, 2018 (the “Plan Separation Date”), Apergy established its own defined contribution plan and health and welfare benefit plans, and as of the distribution date, Apergy established its own non-qualified deferred compensation plan, each of which generally corresponds to the applicable Dover benefit plan. Effective immediately prior to the distribution date, Apergy and Dover continued the employment of Apergy employees and Dover employees, respectively. Apergy assumed severance liabilities (i) where severance relates to or results from a failure by Apergy to continue the employment of any Apergy employee, to continue employment on such terms and conditions that would preclude severance, or to comply with the EMA and (ii) in the event that severance is required to be paid to Apergy employees under applicable law without regard to such terms and conditions of employment or such continuation of employment.

Credited Service. Apergy provided for its employee benefit plans to credit service by Apergy employees with Dover prior to the applicable plan effective date for purposes of determining eligibility to participate, vesting and entitlement to benefits.

Defined Benefit Pension Plan. Apergy participants in the Dover U.S. defined benefit pension plan (the “Dover Pension Plan”) ceased accruing additional benefits following the distribution date. Effective as of the distribution date, Apergy participants are 100% vested in all benefits under the Dover Pension Plan, other than Apergy participants who accrued benefits under the Dover Pension Plan as a result of participating therein pursuant to a collective bargaining agreement with the United Steelworkers of America covering employees of Dover’s Norris division (such participants, “Norris USW Participants,” and such accrued benefits of Norris USW Participants, the “Norris Benefits”). Prior to the distribution date, Apergy established its own U.S. defined benefit pension plan for Norris USW Participants who participated in the Dover Pension Plan as of immediately prior to the distribution date (the “Apergy Pension Plan”). Effective as of the distribution date, the Apergy Pension Plan assumed all liabilities under the Dover Pension Plan related to the Norris Benefits and Dover retained and is solely responsible for all other liabilities with respect to Apergy participants under the Dover Pension Plan. Assets related to the Norris Benefits were transferred to the Apergy Pension Plan partly at and partly shortly after the distribution date.

Defined Contribution Plan. As of the Plan Separation Date, Apergy established its own 401(k) plan, with Apergy participants’ accounts under the Dover 401(k) plan and the assets and liabilities allocable to such accounts transferring to such Apergy 401(k) plan as of the Plan Separation Date.

Non-Qualified Deferred Compensation Plans. Generally, as of the Plan Separation Date, Apergy participants ceased deferring compensation under the Dover Deferred Compensation Plan. As of immediately prior to the distribution date, Apergy participants who were actively accruing benefits under the Dover Pension Replacement Plan ceased accruing additional benefits under such plan, and the benefit accrual of each such Apergy participant were converted into an account balance (subject to adjustment for applicable taxes). Prior to the distribution date, Apergy adopted its own non-qualified deferred compensation plan, which serves as the plan document for the Dover Deferred Compensation Plan and Dover Pension Replacement Plan liabilities assumed by Apergy as of the distribution date with respect Apergy participants in such plans who were Apergy employees as of such time. As of and following the distribution date, Apergy retained all liabilities and the administration of the Harbison-Fischer Manufacturing Company Restoration of Income Plan and the Harbison-Fischer Manufacturing Company Deferred Compensation Agreement.

Health and Welfare Plans. As of the Plan Separation Date, Apergy employees who participated in the Dover health and welfare plans ceased participation in such plans and commenced participation in the newly-established Apergy health and welfare plans. Dover will generally retain and be solely responsible for all liabilities relating to, arising out of or resulting from health and welfare coverage or claims incurred by Apergy participants under the Dover health and welfare plans prior to the Plan Separation Date.

Treatment of Cash Incentives. At the regularly scheduled payment date, Apergy will pay to each Apergy employee (and Dover will pay to each Dover employee) the annual cash incentive for 2018 based on actual

 

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performance. Each Dover long-term cash incentive award that is held by an Apergy employee with a performance period that extends beyond the distribution date was cancelled and forfeited as of the distribution date.

Treatment of Equity Awards. Other than with respect to Dover performance shares, the outstanding Dover equity awards held by Apergy employees were converted to Apergy equity awards and the outstanding Dover equity awards held by Dover employees were equitably adjusted, in each case, as of the distribution date (see the section entitled “Executive Compensation—2017 Long-Term Incentive Compensation—Treatment of outstanding Dover equity awards”). Generally, each Apergy equity award is subject to the same terms and conditions as were in effect prior to the distribution date. For purposes of the conversion into Apergy equity awards, a ratio was used equal to the average five-day pre-distribution price of Dover common stock over the average five-day post-distribution price of Apergy common stock. For purposes of the adjustment of Dover equity awards, a ratio was used equal to the average five-day pre-distribution price of Dover common stock over the average five-day post-distribution price of Dover common stock. Immediately prior to the distribution date, with respect to outstanding Dover performance shares held by Apergy employees, (i) each ongoing performance period was terminated and (ii) each such Dover performance share that relates to a performance period ending after the distribution date was cancelled.

Termination of the EMA. The EMA may not be terminated except by an agreement in writing signed by each of the parties.

 

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THE EXCHANGE OFFER

Purpose and Effect of the Exchange Offer

The outstanding notes were sold to the initial purchasers on May 3, 2018 pursuant to a purchase agreement. The initial purchasers subsequently sold the outstanding notes to qualified institutional buyers (as defined in Rule 144A under the Securities Act) in reliance on Rule 144A, and to persons in offshore transactions in reliance on Regulation S under the Securities Act.

We entered into a registration rights agreement with J.P. Morgan Securities LLC, as representative of the initial purchasers, on the issue date of the outstanding notes. In that agreement, we agreed for the benefit of the holders of the outstanding notes that we will use our commercially reasonable efforts to file with the SEC and cause to become effective a registration statement relating to a registered offer to exchange the outstanding notes for an issue of SEC-registered notes with terms identical in all material respects to the notes (except that the exchange notes will not be subject to restrictions on transfer or any increase in annual interest rate as described below).

After the SEC declares the exchange offer registration statement effective, we will use commercially reasonable efforts to commence promptly the registered offer to exchange the outstanding notes (and the related note guarantees) in return for the exchange notes (and the related note guarantees). The exchange offer will remain open for at least 20 business days (or longer if required by applicable law) after the date we send notice of the exchange offer to noteholders. For each outstanding note surrendered to us under the exchange offer, the noteholder will receive an exchange note of equal principal amount. Interest on each exchange note will accrue (1) from the last interest payment date on which interest was paid on the outstanding notes or (2), if no interest has been paid on the outstanding notes, from the issue date of the outstanding notes. A holder of outstanding notes that participates in the exchange offer will be required to make certain representations to us (as described in the registration rights agreement). Under existing interpretations of the SEC contained in several no action letters to third parties (as discussed in more detail below), the exchange notes (and the related note guarantees) will generally be freely transferable after the exchange offer without further registration under the Securities Act, except that any broker-dealer that participates in the exchange must deliver a prospectus meeting the requirements of the Securities Act when it resells the exchange notes.

In the event that (i) the exchange offer registration described above is not available or may not be completed because it would violate any applicable law or SEC interpretations, (ii) the exchange offer is not for any other reason completed on or prior to the date that is 365 days after the issue date of the outstanding notes or (iii) upon receipt of a written request from any initial purchaser representing that it holds “registrable securities” (as defined in the registration rights agreement) that are or were ineligible to be exchanged in the exchange offer, we will use our commercially reasonable efforts to file and to have become effective a shelf registration statement relating to resales of the notes and to keep that shelf registration statement effective until the earlier of (x) date that the notes cease to be registrable securities, including when all the outstanding notes covered by the shelf registration statement have been sold pursuant to the shelf registration statement, and (y) the second anniversary after the issue date of the outstanding notes.

We will, in the event of such a shelf registration, provide to each participating holder of outstanding notes copies of a prospectus, notify each participating holder of outstanding notes when the shelf registration statement has become effective and take certain other actions to permit resales of the outstanding notes. A holder of outstanding notes that sells outstanding notes under the shelf registration statement will generally be required to make certain representations to us (as described in the registration rights agreement) to be named as a selling security holder in the related prospectus, and will be subject to certain of the civil liability provisions under the Securities Act in connection with those sales and will be bound by the provisions of the registration rights agreement that are applicable to such a holder of outstanding notes (including certain indemnification obligations). Holders of outstanding notes will also be required to suspend their use of the prospectus included in

 

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the shelf registration statement under specified circumstances upon receipt of notice from us. Under applicable interpretations of the staff of the SEC, our affiliates will not be permitted to exchange their outstanding notes for exchange notes in the exchange offer.

If (i) the exchange offer is not completed on or prior to the date that is 365 days after the issue date of the notes, (ii) a shelf registration statement is required and the shelf registration statement is not declared effective on or prior to the later of the 365th day after the issue date and the 120th day after our obligation to file the shelf registration statement arises, (iii) if applicable, a shelf registration statement covering resales of the outstanding notes has been declared effective and such shelf registration statement ceases to be effective or the prospectus contained therein ceases to be usable for resales of the outstanding notes at any time during the required effectiveness period, and such failure to remain effective or be usable exists for more than 90 days (whether or not consecutive) in any 12-month period, or (iv) if applicable, a shelf registration statement covering resales of the outstanding notes has been declared effective and such shelf registration statement ceases to be effective or the prospectus contained therein ceases to be usable for resales of the outstanding notes on more than two occasions in any 12-month period (any such event, a “Registration Default”), the annual interest rate borne by the outstanding notes will be increased (i) 0.25% per annum for the first 90-day period immediately following the occurrence of such Registration Default and (ii) an additional 0.25% per annum with respect to each subsequent 90-day period, in each case until such Registration Default is cured or the outstanding notes cease to be registrable securities, up to a maximum of 1.00% per annum of additional interest (it being understood that in no event will we be required to pay additional interest for more than one Registration Default at any given time). A Registration Default is cured with respect to the outstanding notes, and additional interest ceases to accrue on such outstanding notes that are registrable securities, when the exchange offer is completed or the registration statement is declared effective. Any amounts of additional interest due will be payable in cash on the same original interest payment dates as interest on the outstanding notes is payable. The exchange notes will vote and consent together with the outstanding notes on all matters on which holders of outstanding notes or exchange notes are entitled to vote and consent. The exchange notes will be accepted for clearance through DTC.

We will agree to make available, during the period required by the Securities Act, a prospectus meeting the requirements of the Securities Act for use by participating broker-dealers and other persons, if any, with similar prospectus delivery requirements for use in connection with any resale of exchange notes. Any notes not tendered in the exchange offer shall continue to bear interest at the rate set forth on the cover of the offering memorandum distributed in connection with the May 2018 private offering of the outstanding notes and be subject to all the terms and conditions specified in the Indenture, including transfer restrictions, but will not retain any rights under the registration rights agreement (including with respect to increases in annual interest rate described above) after the consummation of the exchange offer.

Notwithstanding the foregoing, we will be entitled to suspend the occurrence of a Registration Default in the case of a shelf registration statement covering resales of the notes that has been declared effective in the event such shelf registration statement ceases to be effective, if the board of directors of the Company determines that there is a valid business purpose for such suspension and such shelf registration statement is suspended for not longer than 60 consecutive days or more than two times during any calendar year.

Each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes, where the broker-dealer acquired the outstanding notes as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes and that it did not purchase its outstanding notes from us or any of our affiliates. See “Plan of Distribution.”

Resale of Exchange Notes

Based on interpretations by the SEC set forth in no-action letters issued to third parties, we believe that you may resell or otherwise transfer exchange notes issued in the exchange offer without complying with the registration and prospectus delivery provisions of the Securities Act if:

 

   

you are acquiring the exchange notes in the ordinary course of your business;

 

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you do not have an arrangement or understanding with any person to participate in a distribution of the exchange notes;

 

   

you are not our affiliate within the meaning of Rule 405 under the Securities Act; and

 

   

you are not engaged in, and do not intend to engage in, a distribution of the exchange notes.

If you are our affiliate, or are engaging in, or intend to engage in, or have any arrangement or understanding with any person to participate in, a distribution of the exchange notes, or are not acquiring the exchange notes in the ordinary course of your business:

 

   

you cannot rely on the position of the SEC set forth in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the SEC’s letter to Shearman & Sterling, dated July 2, 1993, or similar no-action letters; and

 

   

in the absence of an exception from the position stated immediately above, you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes.

This prospectus may be used for an offer to resell, resale or other transfer of exchange notes only as specifically set forth in this prospectus. With regard to broker-dealers, only broker-dealers that acquired the outstanding notes as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes, where such outstanding notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. Read “Plan of Distribution” for more details regarding the transfer of exchange notes.

Our belief that the exchange notes may be offered for resale without compliance with the registration or prospectus delivery provisions of the Securities Act is based on interpretations of the SEC for other exchange offers that the SEC expressed in some of its no-action letters to other issuers in exchange offers like ours. We cannot guarantee that the SEC would make a similar decision about our exchange offer. If our belief is wrong, or if you cannot truthfully make the representations mentioned above, and you transfer any exchange note issued to you in the exchange offer without meeting the registration and prospectus delivery requirements of the Securities Act, or without an exemption from such requirements, you could incur liability under the Securities Act. We are not indemnifying you for any such liability.

Terms of the Exchange Offer

On the terms and subject to the conditions set forth in this prospectus and in the accompanying letter of transmittal, we will accept for exchange in the exchange offer any outstanding notes that are validly tendered and not validly withdrawn prior to the expiration date. Outstanding notes may only be tendered in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. We will issue exchange notes in principal amount identical to outstanding notes surrendered in the exchange offer.

The form and terms of the exchange notes will be identical in all material respects to the form and terms of the outstanding notes except the exchange notes will be registered under the Securities Act, will not bear legends restricting their transfer and will not provide for any additional interest upon our failure to fulfill our obligations under the registration rights agreement to complete the exchange offer, or file, and cause to be effective, a shelf registration statement, if required thereby, within the specified time period. The exchange notes will evidence the same indebtedness as the outstanding notes. The exchange notes will be issued under and entitled to the benefits of the Indenture. For a description of the Indenture, see “Description of the Exchange Notes.”

The exchange offer is not conditioned upon any minimum aggregate principal amount of outstanding notes being tendered for exchange.

 

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This prospectus and the letter of transmittal are being sent to all registered holders of outstanding notes. There will be no fixed record date for determining registered holders of outstanding notes entitled to participate in the exchange offer. We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Exchange Act, and the rules and regulations of the SEC. Outstanding notes that are not tendered for exchange in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits such holders have under the Indenture relating to such holders’ outstanding notes, except we will not have any further obligation to you to provide for the registration of the outstanding notes under the registration rights agreement.

We will be deemed to have accepted for exchange properly tendered outstanding notes when we have given written notice of the acceptance to the exchange agent. The exchange agent will act as agent for the tendering holders for the purposes of receiving the exchange notes from us and delivering exchange notes to holders. Subject to the terms of the registration rights agreement, we expressly reserve the right to amend or terminate the exchange offer and to refuse to accept the occurrence of any of the conditions specified below under “—Conditions to the Exchange Offer.”

If you tender your outstanding notes in the exchange offer, you will not be required to pay brokerage commissions or fees. We will pay all charges and expenses, other than certain applicable taxes described below in connection with the exchange offer. It is important that you read “—Fees and Expenses” below for more details regarding fees and expenses incurred in the exchange offer.

If you are a broker-dealer and receive exchange notes for your own account in exchange for outstanding notes that you acquired as a result of market-making activities or other trading activities, you must acknowledge that you will deliver this prospectus in connection with any resale of the exchange notes and that you did not purchase your outstanding notes from us or any of our affiliates. Read “Plan of Distribution” for more details regarding the transfer of exchange notes.

We make no recommendation to you as to whether you should tender or refrain from tendering all or any portion of your outstanding notes into the exchange offer. In addition, no one has been authorized to make this recommendation. You must make your own decision whether to tender into the exchange offer and, if so, the aggregate amount of outstanding notes to tender after reading this prospectus and the letter of transmittal and consulting with your advisors, if any, based on your financial position and requirements.

Expiration Date, Extensions and Amendments

The exchange offer expires at 11:59 p.m., New York City time, on December 19, 2018, which we refer to as the “expiration date”. However, if we, in our sole discretion, extend the period of time for which the exchange offer is open, the term “expiration date” will mean the latest date to which we shall have extended the expiration of the exchange offer.

To extend the period of time during which the exchange offer is open, we will notify the exchange agent of any extension by written notice, followed by notification by press release or other public announcement to the registered holders of the outstanding notes no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date.

We reserve the right, in our sole discretion:

 

   

to delay accepting for exchange any outstanding notes (only in the case that we amend or extend the exchange offer);

 

   

to extend the expiration date and retain all outstanding notes tendered in the exchange offer, subject to your right to withdraw your tendered outstanding notes as described under “—Withdrawal Rights”;

 

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to terminate the exchange offer if we determine that any of the conditions set forth below under “—Conditions to the Exchange Offer” have not been satisfied; and

 

   

subject to the terms of the registration rights agreement, to amend the terms of the exchange offer in any manner or waive any condition to the exchange offer. In the event of a material change in the exchange offer, including the waiver of a material condition, we will extend the offer period, if necessary, so that at least five business days remain in such offer period following notice of the material change.

Any delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by written notice (which may take the form of a press release or other public announcement) to the registered holders of the outstanding notes. If we amend the exchange offer in a manner that we determine to constitute a material change, or if we waive a material condition to the exchange offer, we will promptly disclose the amendment in a manner reasonably calculated to inform the holders of outstanding notes of that amendment.

In the event we terminate the exchange offer, all outstanding notes previously tendered and not accepted for payment will be returned promptly to the tendering holders.

Conditions to the Exchange Offer

Despite any other term of the exchange offer, we will not be required to accept for exchange, or to issue exchange notes in exchange for, any outstanding notes, and we may terminate or amend the exchange offer as provided in this prospectus prior to the expiration date if in our reasonable judgment:

 

   

the exchange offer or the making of any exchange by a holder violates any applicable law or interpretation of the SEC; or

 

   

any action or proceeding has been instituted or threatened in writing in any court or by or before any governmental agency with respect to the exchange offer that, in our judgment, would reasonably be expected to impair our ability to proceed with the exchange offer.

In addition, we will not be obligated to accept for exchange the outstanding notes of any holder that has not made to us:

 

   

the representations described under “—Purpose and Effect of the Exchange Offer;” or

 

   

any other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to us an appropriate form for registration of the exchange notes under the Securities Act.

We expressly reserve the right at any time or at various times to extend the period of time during which the exchange offer is open. Consequently, we may delay acceptance of any outstanding notes by giving written notice of such extension to the holders. We will return any outstanding notes that we do not accept for exchange for any reason without expense to the tendering holder promptly after the expiration or termination of the exchange offer. We also expressly reserve the right to amend or terminate the exchange offer and to reject for exchange any outstanding notes not previously accepted for exchange if we determine that any of the conditions of the exchange offer specified above have not been satisfied. We will give written notice of any extension, amendment, non-acceptance or termination to the holders of the outstanding notes as promptly as practicable. In the case of any extension, such notice will be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. Written notice to the holders may take the form of a press release or other public announcement.

We reserve the right to waive any defects, irregularities or conditions to the exchange as to particular outstanding notes. These conditions are for our sole benefit, and we may assert them regardless of the

 

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circumstances that may give rise to them or waive them in whole or in part at any time or at various times prior to the expiration of the exchange offer in our sole discretion. If we fail at any time to exercise any of the foregoing rights, this failure will not constitute a waiver of such right. Each such right will be deemed an ongoing right that we may assert at any time or at various times prior to the expiration of the exchange offer.

In addition, we will not accept for exchange any outstanding notes tendered, and will not issue exchange notes in exchange for any such outstanding notes, if at such time any stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the Indenture under the Trust Indenture Act of 1939, as amended.

Procedures for Tendering Outstanding Notes

To tender your outstanding notes in the exchange offer, you must comply with either of the following:

 

   

complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, have the signature(s) on the letter of transmittal guaranteed if required by the letter of transmittal and mail or deliver such letter of transmittal or facsimile thereof to the exchange agent at the address set forth below under “—Exchange Agent” prior to the expiration date; or

 

   

comply with DTC’s Automated Tender Offer Program procedures described below.

In addition:

 

   

the exchange agent must receive certificates for outstanding notes along with the letter of transmittal prior to the expiration of the exchange offer; or

 

   

the exchange agent must receive a timely confirmation of book-entry transfer of outstanding notes into the exchange agent’s account at DTC according to the procedures for book-entry transfer described below or a properly transmitted agent’s message prior to the expiration of the exchange offer.

The term “agent’s message” means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, which states that:

 

   

DTC has received an express acknowledgment from a participant in its Automated Tender Offer Program that is tendering outstanding notes that are the subject of the book-entry confirmation;

 

   

the participant has received and agrees to be bound by the terms of the letter of transmittal; and

 

   

we may enforce that agreement against such participant.

DTC is referred to herein as a “book-entry transfer facility.”

Your tender, if not withdrawn prior to the expiration of the exchange offer, constitutes an agreement between us and you upon the terms and subject to the conditions described in this prospectus and in the letter of transmittal.

The method of delivery of outstanding notes, letters of transmittal and all other required documents to the exchange agent is at your election and risk. Delivery of such documents will be deemed made only when actually received by the exchange agent. We recommend that instead of delivery by mail, you use an overnight or hand delivery service, properly insured. If you determine to make delivery by mail, we suggest that you use properly insured, registered mail with return receipt requested. In all cases, you should allow sufficient time to assure timely delivery to the exchange agent before the expiration of the exchange offer. Letters of transmittal and certificates representing outstanding notes should be sent only to the exchange agent, and not to us or to any book-entry transfer facility. No alternative, conditional or contingent tenders of outstanding notes will be accepted. You may request that your broker, dealer, commercial bank, trust company or nominee effect the above transactions for you.

 

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There is no procedure for guaranteed late delivery of the outstanding notes.

If you are a beneficial owner whose outstanding notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your outstanding notes, you should promptly contact the registered holder and instruct the registered holder to tender on your behalf. If you wish to tender the outstanding notes yourself, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either:

 

   

make appropriate arrangements to register ownership of the outstanding notes in your name; or

 

   

obtain a properly completed bond power from the registered holder of outstanding notes.

The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration of the exchange offer. Signatures on the letter of transmittal or a notice of withdrawal (as described below in “—Withdrawal Rights”), as the case may be, must be guaranteed by a member firm of a registered national securities exchange or of the Financial Industry Regulatory Authority, a commercial bank or trust company having an office or correspondent in the U.S. or another “eligible guarantor institution” within the meaning of Rule 17A(d)-15 under the Exchange Act unless the outstanding notes surrendered for exchange are tendered:

 

   

by a registered holder of the outstanding notes who has not completed the box entitled “Special Registration Instructions” or “Special Delivery Instructions” on the letter of transmittal; or

 

   

for the account of an eligible guarantor institution.

If the letter of transmittal is signed by a person other than the registered holder of any outstanding notes listed on the outstanding notes, such outstanding notes must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder’s name appears on the outstanding notes, and an eligible guarantor institution must guarantee the signature on the bond power.

If the letter of transmittal, any certificates representing outstanding notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, those persons should also indicate when signing and, unless waived by us, they should also submit evidence satisfactory to us of their authority to so act.

The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC’s system may use DTC’s Automated Tender Offer Program to tender outstanding notes. Participants in the program may, instead of physically completing and signing the letter of transmittal and delivering it to the exchange agent, electronically transmit their acceptance of outstanding notes for exchange by causing DTC to transfer the outstanding notes to the exchange agent in accordance with DTC’s Automated Tender Offer Program procedures for transfer. DTC will then send an agent’s message to the exchange agent.

Book-Entry Delivery Procedures

Promptly after the date of this prospectus, the exchange agent will establish an account with respect to the outstanding notes at DTC, as the book-entry transfer facility, for purposes of the exchange offer. Any financial institution that is a participant in the book-entry transfer facility’s system may make book-entry delivery of the outstanding notes by causing the book-entry transfer facility to transfer those outstanding notes into the exchange agent’s account at the facility in accordance with the facility’s procedures for such transfer. To be timely, book-entry delivery of outstanding notes requires receipt of a confirmation of a book-entry transfer, or a “book-entry confirmation,” prior to the expiration date.

In addition, in order to receive exchange notes for tendered outstanding notes, an agent’s message in connection with a book-entry transfer into the exchange agent’s account at the book-entry transfer facility or the

 

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letter of transmittal or a manually signed facsimile thereof, together with any required signature guarantees and any other required documents must be delivered or transmitted to and received by the exchange agent at its address set forth on the cover page of the letter of transmittal prior to the expiration of the exchange offer. Tender will not be deemed made until such documents are received by the exchange agent. Delivery of documents to the book-entry transfer facility does not constitute delivery to the exchange agent.

Acceptance of Outstanding Notes for Exchange

In all cases, we will promptly issue exchange notes for outstanding notes that we have accepted for exchange under the exchange offer only after the exchange agent timely receives:

 

   

outstanding notes or a timely book-entry confirmation of such outstanding notes into the exchange agent’s account at the book-entry transfer facility; and

 

   

a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent’s message.

In addition, each broker-dealer that is to receive exchange notes for its own account in exchange for outstanding notes must represent that such outstanding notes were acquired by that broker-dealer as a result of market-making activities or other trading activities and must acknowledge that it will deliver a prospectus that meets the requirements of the Securities Act in connection with any resale of the exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. See “Plan of Distribution.”

We will interpret the terms and conditions of the exchange offer, including the letter of transmittal and the instructions to the letter of transmittal, and will resolve all questions as to the validity, form, eligibility, including time of receipt, and acceptance of outstanding notes tendered for exchange. Our determinations in this regard will be final and binding on all parties. We reserve the absolute right to reject any and all tenders of any particular outstanding notes not properly tendered or to not accept any particular outstanding notes if the acceptance might, in our or our counsel’s judgment, be unlawful. We also reserve the absolute right to waive any defects or irregularities as to any particular outstanding notes prior to the expiration of the exchange offer.

Unless waived, any defects or irregularities in connection with tenders of outstanding notes for exchange must be cured within such reasonable period of time as we determine. None of Apergy, the exchange agent or any other person will be under any duty to give notification of any defect or irregularity with respect to any tender of outstanding notes for exchange, nor will any of them incur any liability for any failure to give notification. Any certificates representing outstanding notes received by the exchange agent that are not properly tendered and as to which the irregularities have not been cured or waived will be returned by the exchange agent to the tendering holder, unless otherwise provided in the letter of transmittal, promptly after the expiration of the exchange offer or termination of the exchange offer.

Withdrawal Rights

Except as otherwise provided in this prospectus, you may withdraw your tender of outstanding notes at any time prior to 11:59 p.m., New York City time, on the expiration date.

For a withdrawal to be effective:

 

   

the exchange agent must receive a written notice, which may be by facsimile or letter, of withdrawal at its address set forth below under “—Exchange Agent”; or

 

   

you must comply with the appropriate procedures of DTC’s Automated Tender Offer Program system.

Any notice of withdrawal must:

 

   

specify the name of the person who tendered the outstanding notes to be withdrawn;

 

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identify the outstanding notes to be withdrawn, including the certificate numbers and principal amount of the outstanding notes; and

 

   

where certificates for outstanding notes have been transmitted, specify the name in which such outstanding notes were registered, if different from that of the withdrawing holder.

If certificates for outstanding notes have been delivered or otherwise identified to the exchange agent, then, prior to the release of such certificates, you must also submit:

 

   

the serial numbers of the particular certificates to be withdrawn; and

 

   

a signed notice of withdrawal with signatures guaranteed by an eligible institution unless you are an eligible guarantor institution.

If outstanding notes have been tendered pursuant to the procedures for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the book-entry transfer facility to be credited with the withdrawn outstanding notes and otherwise comply with the procedures of the facility. We will determine all questions as to the validity, form and eligibility, including time of receipt of notices of withdrawal, and our determination will be final and binding on all parties. Any outstanding notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any outstanding notes that have been tendered for exchange but that are not exchanged for any reason will be returned to their holder, without cost to the holder, or, in the case of book-entry transfer, the outstanding notes will be credited to an account at the book-entry transfer facility, promptly after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn outstanding notes may be retendered by following the procedures described under “—Procedures for Tendering Outstanding Notes” above at any time prior to the expiration of the exchange offer.

Exchange Agent

Wells Fargo Bank, National Association has been appointed as the exchange agent for the exchange offer. Wells Fargo Bank, National Association also acts as trustee under the Indenture. You should direct all executed letters of transmittal and all questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal to the exchange agent addressed as follows:

 

By Mail, Overnight Courier or Hand Delivery:    By Facsimile Transmission
(eligible institutions only):

Wells Fargo Bank, N.A.

Corporate Trust Operations

MAC N9300-070

600 South Fourth Street

Minneapolis, Minnesota 55402

  

1-877-407-4679

 

To Confirm by Telephone:

 

1-800-344-5128

If you deliver the letter of transmittal to an address other than the one set forth above or transmit instructions via facsimile to a number other than the one set forth above, that delivery or those instructions will not be effective.

Fees and Expenses

The registration rights agreement provides that we will bear all expenses in connection with the performance of our obligations relating to the registration of the exchange notes and the conduct of the exchange offer. These expenses include registration and filing fees, accounting and legal fees and printing costs, among others. We will pay the exchange agent reasonable and customary fees for its services and reasonable out-of-pocket expenses. We will also reimburse brokerage houses and other custodians, nominees and fiduciaries for customary mailing and handling expenses incurred by them in forwarding this prospectus and related documents to their clients that are holders of outstanding notes and for handling or tendering for such clients.

 

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We have not retained any dealer-manager in connection with the exchange offer and will not pay any fee or commission to any broker, dealer, nominee or other person, other than the exchange agent, for soliciting tenders of outstanding notes pursuant to the exchange offer.

Accounting Treatment

We will record the exchange notes in our accounting records at the same carrying value as the outstanding notes, which is the aggregate principal amount as reflected in our accounting records on the date of exchanges. Accordingly, we will not recognize any gain or loss for accounting purposes upon the consummation of the exchange offer. We will record the expenses of the exchange offer as incurred.

Transfer Taxes

Holders who tender their outstanding notes for exchange will not be obligated to pay any transfer taxes in connection therewith. If, however, exchange notes are to be delivered to, or are to be issued in the name of, any person other than the registered holder of the outstanding notes tendered, or if a transfer tax is imposed for any reason other than on the exchange of outstanding notes in connection with the exchange offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to the tendering holder.

Consequences of Failure to Exchange

If you do not exchange your outstanding notes for exchange notes under the exchange offer, your outstanding notes will remain subject to the restrictions on transfer of such outstanding notes:

 

   

as set forth in the legend printed on the outstanding notes as a consequence of the issuance of the outstanding notes pursuant to the exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws; and

 

   

as otherwise set forth in the offering memorandum distributed in connection with the May 2018 private offering of the outstanding notes.

In general, you may not offer or sell your outstanding notes unless they are registered under the Securities Act or if the offer or sale is exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act.

Other

Participating in the exchange offer is voluntary, and you should carefully consider whether to accept. You are urged to consult your financial and tax advisors in making your own decision on what action to take.

We may in the future seek to acquire untendered outstanding notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. We have no present plans to acquire any outstanding notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered outstanding notes.

 

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DESCRIPTION OF THE EXCHANGE NOTES

General

Certain terms used in this description are defined under the subheading “—Certain Definitions.” In this description, (i) the term “Issuer” refers only to Apergy Corporation and not to any of its Affiliates and (ii) the terms “we,” “our” and “us” each refer to the Issuer and its consolidated Subsidiaries. When we use the term “notes” in this description, the term includes the outstanding notes and the exchange notes.

The Issuer issued the outstanding notes and will issue the exchange notes under the Indenture, dated as of May 3, 2018 (the “Original Indenture”), between the Issuer and the Trustee, as amended and supplemented by the Effective Date Supplemental Indenture, dated as of May 9, 2018, among the Guarantors and the Trustee (the “First Supplemental Indenture” and the Original Indenture, as amended and supplemented by the First Supplemental Indenture, the “Indenture”). Copies of the form of the Indenture (including the First Supplemental Indenture) and the registration rights agreement may be obtained from the Issuer upon request.

The following description is only a summary of the material provisions of the Indenture and does not purport to be complete and is qualified in its entirety by reference to the provisions of the Indenture, including the definitions therein of certain terms used below. We urge you to read the Indenture because it, not this description, defines your rights as Holders of the exchange notes. You may request copies of the Indenture at our address set forth under the heading “Where You Can Find More Information.”

Like the outstanding notes, the exchange notes:

 

   

will be unsecured senior debt obligations of the Issuer;

 

   

will be pari passu in right of payment with all existing and future Senior Indebtedness (including the Senior Credit Facilities) of the Issuer and the Guarantors;

 

   

will be effectively subordinated to all Secured Indebtedness of the Issuer and the Guarantors (including the Senior Credit Facilities) to the extent of the value of the assets securing such Indebtedness;

 

   

will be senior in right of payment to any future Subordinated Indebtedness (as defined with respect to the notes) of the Issuer and the Guarantors;

 

   

will be initially guaranteed on a senior unsecured basis by each Restricted Subsidiary of the Issuer that incurs or guarantees any Obligations under the Senior Credit Facilities; and

 

   

will be structurally subordinated to all existing and future Indebtedness and other claims and liabilities, including preferred stock, of Subsidiaries of the Issuer that are not Guarantors.

On the Issue Date, the Issuer was a 100% owned Subsidiary of Dover. Following the Issue Date, Dover completed the Separation. To effect the Separation:

 

   

Dover underwent a reorganization that, among other things and subject to limited exceptions, resulted in the allocation and transfer or assignment to the Issuer of the equity interests of the entities that held certain assets and liabilities conducting Dover’s upstream oil and gas business within its Energy segment and certain other assets and liabilities (the “contribution”);

 

   

Substantially concurrently with the contribution, the net proceeds of the offering of the outstanding notes were released from escrow as described under “—Escrow of proceeds; special mandatory redemption” in the Offering Memorandum, the term loan lenders under our Senior Credit Facilities funded the term loans thereunder in the amount of $415.0 million and the Issuer paid approximately $700.0 million of cash to Dover; and

 

   

Dover effected the distribution (the date of such distribution, the “Effective Date”) of the Issuer’s shares of common stock to Dover stockholders by causing us to register Dover’s stockholders as our stockholders on our books and records (the foregoing steps taken together, the “Spin-off”).

 

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The Spin-off, together with the reorganization referred to above and all other transactions pursuant to, and the performance of all other obligations under, the Spin-Off Documents (as defined herein), constitute “Transactions” for purposes of the Indenture and this “Description of the Exchange Notes.” For the purposes of this “Description of the Exchange Notes” and the Indenture, and the interpretation thereof, the Transactions shall be deemed to have occurred immediately prior to the Issue Date (and the Transactions were exempt from the limitations set forth under the heading “—Certain Covenants” below), and for all periods prior to the consummation of the Spin-off, the Issuer, its Subsidiaries and the other Subsidiaries of Dover transferred to the Issuer as part of the Transactions were deemed to have been Restricted Subsidiaries of the Issuer.

Guarantees

Any Restricted Subsidiary of the Issuer that incurs or guarantees Obligations under the Senior Credit Facilities or any series of capital markets debt securities (other than the notes) of the Issuer or a Guarantor issued in an aggregate principal amount of $50.0 million or more, will jointly and severally guarantee, as primary obligors and not merely as sureties, on a senior unsecured basis, the performance and full and punctual payment when due, whether at maturity, by acceleration or otherwise, of all obligations of the Issuer under the Indenture and the notes, whether for payment of principal of or interest on the notes, expenses, indemnification or otherwise, on the terms set forth in the Indenture by executing the Indenture. Each of the Guarantees will be a general unsecured obligation of the relevant Guarantor and will rank equal in right of payment to all existing and future Senior Indebtedness of each such Guarantor and will be effectively subordinated to all Secured Indebtedness of each such entity (including each Guarantor’s guarantee of Indebtedness or Obligations under our Senior Credit Facilities) to the extent of the value of the assets securing such Secured Indebtedness and will be senior in right of payment to all existing and future Subordinated Indebtedness of each such entity. The notes are structurally subordinated to Indebtedness and other liabilities of Subsidiaries of the Issuer that do not Guarantee the notes.

Not all of the Issuer’s Subsidiaries will Guarantee the notes. Unrestricted Subsidiaries, Foreign Subsidiaries and Restricted Subsidiaries that do not incur or guarantee Obligations under the Senior Credit Facilities or any series of capital markets debt securities (other than the notes) of the Issuer or a Guarantor issued in an aggregate principal amount of $50.0 million or more will not be required to be Guarantors. In the event of a bankruptcy, liquidation or reorganization of any of these non-guarantor Subsidiaries, such non-guarantor Subsidiaries will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Issuer or any other Guarantor. As of the Issue Date, the Issuer has one Subsidiary, Apergy Middle East Services LLC (“AMES”), a joint venture organized in the Sultanate of Oman with a local partner in which the Issuer owns a 60% equity interest, that is an “Unrestricted Subsidiary” (as defined in the Indenture). See “Risk Factors—Risks related to Holding the Exchange Notes—Claims of holders of the notes will be structurally subordinated to all obligations of our existing and future subsidiaries that do not become Guarantors of the notes.”

The obligations of each Guarantor under its Guarantee will be limited as necessary to prevent such Guarantee from constituting a fraudulent conveyance under applicable law and, therefore, are limited to the amount that such Guarantor could guarantee without such Guarantee constituting a fraudulent conveyance; this limitation, however, may not be effective to prevent such Guarantee from constituting a fraudulent conveyance. If a Guarantee was rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the applicable Guarantor, and, depending on the amount of such indebtedness, a Guarantor’s liability on its Guarantee could be reduced to zero. See “Risk Factors—Risks related to Holding the Exchange Notes—Federal and state statutes allow courts, under specific circumstances, to void the notes and the guarantee of the notes by certain of our subsidiaries and to require holders of notes to return payments received from us, and if that occurs, you may not receive any payments on the notes.”

Each Guarantor that makes a payment under its Guarantee will be entitled upon payment in full of all guaranteed obligations under the Indenture to a contribution from each other Guarantor in an amount equal to

 

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such other Guarantor’s pro rata portion of such payment based on the respective net assets of all the Guarantors at the time of such payment determined in accordance with GAAP.

Any Guarantee by a Guarantor of the notes shall provide by its terms that it shall be automatically and unconditionally released and discharged upon:

(i) (a) any sale, exchange or transfer (by merger or otherwise) of (I) the Capital Stock of such Guarantor (including any sale, exchange or transfer), after which the applicable Guarantor is no longer a Restricted Subsidiary or (II) all or substantially all of the assets of such Guarantor, which sale, exchange or transfer is made in compliance with the applicable provisions of the Indenture,

(b) the release or discharge of the guarantee by, or direct obligation of, such Guarantor with respect to the Senior Credit Facilities or capital markets debt securities that resulted in the creation of such Guarantee,

(c) the designation of any Guarantor as an Unrestricted Subsidiary in compliance with the applicable provisions of the Indenture,

(d) exercise of the legal defeasance option or covenant defeasance option by the Issuer as described under “—Legal Defeasance and Covenant Defeasance” or the Issuer’s obligations under the Indenture being discharged in accordance with the terms of the Indenture,

(e) the merger or consolidation of any Guarantor with and into the Issuer or another Guarantor that is the surviving Person in such merger or consolidatio