Quarterly Report (10-q)

Date : 07/31/2019 @ 9:21PM
Source : Edgar (US Regulatory)
Stock : FTS International Inc (FTSI)
Quote : 0.22  -0.0185 (-7.76%) @ 12:00AM
FTS share price Chart

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended June 30, 2019

OR

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

 

For the transition period from           to        

Commission file number 001-38382


 

FTSI_LOGO_HORIZ_4C.PNG

 

 

 

FTS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


 

 

 

 

Delaware

 

30-0780081

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

777 Main Street, Suite 2900, Fort Worth, Texas

(Address of principal executive offices)

 

76102

(Zip Code)

(817) 862-2000

(Registrant’s telephone number, including area code)

 

N/A

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


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

 

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

 

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

 

 

 

 

Large Accelerated Filer

 

Accelerated Filer

Non-accelerated Filer 

 

Smaller Reporting Company ☒  

 

 

Emerging Growth Company

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class

 

 

 

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

FTSI

 

New York Stock Exchange

 

As of July 26, 2019, the registrant had 109,032,732 shares of common stock, $0.01 par value, outstanding.

 

 

FTS INTERNATIONAL, INC.

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

 

Cautionary Statement Regarding Forward-Looking Statements

3

 

 

 

PART I  -

FINANCIAL INFORMATION

 

Item 1 .

Financial Statements (Unaudited)

4

 

  Consolidated Statements of Operations

4

 

  Consolidated Balance Sheets

5

 

  Consolidated Statements of Cash Flows

6

 

  Consolidated Statements of Stockholders’ Equity (Deficit)

7

 

  Notes to Consolidated Financial Statements

8

 

 

 

Item 2.  

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

15

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.  

Controls and Procedures

21

 

 

 

PART II  -

OTHER INFORMATION

 

Item 1.  

Legal Proceedings

22

Item 1A.  

Risk Factors

22

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3.  

Defaults Upon Senior Securities

22

Item 4.  

Mine Safety Disclosures

23

Item 5.  

Other Information

23

Item 6.  

Exhibits

23

 

Signatures

24

 

 

 

2

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. Forward-looking statements may be identified by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “likely,” “may,” “project,” “potential,” “seek,” “should,” “will,” “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operational performance or other events. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect and, therefore, investors should not unduly rely on such statements. The risks that could cause these forward-looking statements to be inaccurate include but are not limited to:

·

a decline in domestic spending by the onshore oil and natural gas industry;

·

volatility in oil and natural gas prices;

·

the effect of a loss of, financial distress of, or decline in activity levels of, one or more significant customers;

·

actions of the Organization of the Petroleum Exporting Countries, or OPEC, its members and other state-controlled oil companies relating to oil price and production controls;

·

our inability to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers;

·

the price and availability of alternative fuels and energy sources;

·

the discovery rates of new oil and natural gas reserves;

·

the availability of water resources, suitable proppant and chemicals in sufficient quantities and pricing for use in hydraulic fracturing fluids;

·

uncertainty in capital and commodities markets and the ability of oil and natural gas producers to raise equity capital and debt financing;

·

ongoing and potential securities litigation and other litigation and legal proceedings, including arbitration proceedings; and

·

a deterioration in general economic conditions or a weakening of the broader energy industry.

See the “Risk Factors” included in Item 1A of our annual report on Form 10-K for a more complete discussion of the risks and uncertainties mentioned above and for  a discussion of other risks and uncertainties we face that could cause our forward-looking statements to be inaccurate. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this quarterly report and hereafter in our other filings with the Securities and Exchange Commission and other public communications.

We caution that the risks and uncertainties identified by us may not be all of the factors that are important to investors. Furthermore, the forward-looking statements included in this quarterly report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.

3

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

 

 

FTS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(In millions, except per share amounts)

  

2019

  

2018

  

2019

  

2018

Revenue

 

 

   

 

 

   

 

 

   

 

 

   

Revenue

 

$

225.8

 

$

454.6

 

$

447.4

 

$

877.9

Revenue from related parties

 

 

 —

 

 

38.7

 

 

0.9

 

 

82.9

Total revenue

 

 

225.8

 

 

493.3

 

 

448.3

 

 

960.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

   

 

 

   

 

 

   

 

 

   

Costs of revenue (excluding depreciation of $20.7, $18.5, $41.1 and $36.9 respectively, included in depreciation and amortization below)

 

 

165.9

 

 

329.4

 

 

329.0

 

 

641.6

Selling, general and administrative

 

 

21.7

 

 

20.8

 

 

45.3

 

 

46.6

Depreciation and amortization

 

 

22.8

 

 

20.7

 

 

45.2

 

 

41.3

Impairments and other charges

 

 

2.8

 

 

4.0

 

 

63.6

 

 

6.0

(Gain) loss on disposal of assets, net

 

 

(1.2)

 

 

(0.2)

 

 

(0.9)

 

 

0.3

Total operating expenses

 

 

212.0

 

 

374.7

 

 

482.2

 

 

735.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

13.8

 

 

118.6

 

 

(33.9)

 

 

225.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(7.7)

 

 

(12.1)

 

 

(15.9)

 

 

(29.5)

(Loss) gain on extinguishment of debt, net

 

 

(0.1)

 

 

(0.8)

 

 

0.4

 

 

(10.1)

Equity in net income (loss) of joint venture affiliate

 

 

 —

 

 

(1.2)

 

 

0.6

 

 

(1.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

6.0

 

 

104.5

 

 

(48.8)

 

 

184.2

Income tax expense

 

 

0.1

 

 

0.9

 

 

0.3

 

 

1.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

5.9

 

$

103.6

 

$

(49.1)

 

$

182.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

5.9

 

$

103.6

 

$

(49.1)

 

$

605.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share attributable
to common stockholders

 

$

0.05

 

$

0.95

 

$

(0.45)

 

$

6.12

Shares used in computing basic and diluted
earnings per share

 

 

109.7

 

 

109.3

 

 

109.7

 

 

98.9

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

4

FTS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

  

June 30,

  

December 31,

(In millions, except share amounts)

  

2019

  

2018

ASSETS

 

 

   

 

 

   

Current assets

 

 

   

 

 

   

Cash and cash equivalents

 

$

162.1

 

$

177.8

Accounts receivable, net

 

 

141.6

 

 

158.3

Inventories

 

 

59.5

 

 

66.6

Prepaid expenses and other current assets

 

 

14.3

 

 

7.0

Total current assets

 

 

377.5

 

 

409.7

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

251.4

 

 

275.3

Operating lease right-of-use assets

 

 

34.8

 

 

 —

Intangible assets, net

 

 

29.5

 

 

29.5

Investment in joint venture affiliate

 

 

24.2

 

 

23.2

Other assets

 

 

5.1

 

 

6.0

Total assets

 

$

722.5

 

$

743.7

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

   

 

 

   

Current liabilities

 

 

   

 

 

   

Accounts payable

 

$

73.3

 

$

86.8

Accrued expenses

 

 

25.8

 

 

29.3

Current portion of operating lease liabilities

 

 

16.6

 

 

 —

Other current liabilities

 

 

12.1

 

 

16.3

Total current liabilities

 

 

127.8

 

 

132.4

 

 

 

 

 

 

 

Long-term debt

 

 

472.2

 

 

503.2

Operating lease liabilities

 

 

20.5

 

 

 —

Other liabilities

 

 

44.0

 

 

1.2

Total liabilities

 

 

664.5

 

 

636.8

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

   

 

 

   

 

 

 

 

 

 

 

Stockholders’ equity

 

 

   

 

 

   

Preferred stock, $0.01 par value, 25,000,000 shares authorized

 

 

 —

 

 

 —

Common stock, $0.01 par value, 320,000,000 shares authorized, 109,092,732 shares issued and outstanding at June 30, 2019 and 109,434,841 shares issued and outstanding at December 31, 2018

 

 

36.4

 

 

36.4

Additional paid-in capital

 

 

4,378.5

 

 

4,378.4

Accumulated deficit

 

 

(4,356.9)

 

 

(4,307.9)

Total stockholders’ equity

 

 

58.0

 

 

106.9

Total liabilities and stockholders’ equity

 

$

722.5

 

$

743.7

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

5

FTS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

(In millions)

  

2019

  

2018

Cash flows from operating activities

 

 

   

 

 

   

Net income (loss)

 

$

(49.1)

 

$

182.3

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

45.2

 

 

41.3

Stock-based compensation

 

 

6.7

 

 

5.0

Amortization of debt discounts and issuance costs

 

 

0.9

 

 

1.5

Impairment of assets

 

 

5.5

 

 

 —

(Gain) loss on disposal of assets, net

 

 

(0.9)

 

 

0.3

(Gain) loss on extinguishment of debt, net

 

 

(0.4)

 

 

10.1

Inventory write down

 

 

1.4

 

 

 —

Non-cash provision for supply commitment charges

 

 

56.7

 

 

6.0

Cash paid to settle supply commitment charges

 

 

(15.9)

 

 

(2.0)

Other non-cash items

 

 

 —

 

 

1.1

Changes in operating assets and liabilities:

 

 

   

 

 

   

Accounts receivable

 

 

16.8

 

 

(54.8)

Accounts receivable from related parties

 

 

 —

 

 

(19.4)

Inventories

 

 

5.6

 

 

(17.3)

Prepaid expenses and other assets

 

 

(8.6)

 

 

(0.8)

Accounts payable

 

 

(12.3)

 

 

21.0

Accrued expenses and other liabilities

 

 

(4.3)

 

 

(0.8)

Net cash provided by operating activities

 

 

47.3

 

 

173.5

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

   

 

 

   

Capital expenditures

 

 

(26.5)

 

 

(66.3)

Proceeds from disposal of assets

 

 

1.3

 

 

0.6

Net cash used in investing activities

 

 

(25.2)

 

 

(65.7)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

   

 

 

   

Repayments of long-term debt

 

 

(31.3)

 

 

(499.3)

Repurchase of common stock

 

 

(4.6)

 

 

 —

Taxes paid related to net share settlement of equity awards

 

 

(1.9)

 

 

 —

Net proceeds from issuance of common stock

 

 

 —

 

 

303.0

Payments of revolving credit facility issuance costs

 

 

 —

 

 

(2.4)

Net cash used in financing activities

 

 

(37.8)

 

 

(198.7)

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(15.7)

 

 

(90.9)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

177.8

 

 

217.2

Cash and cash equivalents at end of period

 

$

162.1

 

$

126.3

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

16.0

 

$

24.3

Income tax payments

 

$

1.4

 

$

0.8

Noncash investing and financing activities:

 

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

2.9

 

$

3.6

Operating lease liabilities incurred from obtaining right-of-use assets

 

$

10.5

 

$

 —

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

6

 

FTS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders’

(Dollars in millions and shares in thousands)

  

Shares

  

Amount

  

Capital

  

Deficit

  

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

109,435

 

$

36.4

 

$

4,378.4

 

$

(4,307.9)

 

$

106.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(55.0)

 

 

(55.0)

Cumulative effect of accounting change

 

 —

 

 

 —

 

 

 —

 

 

0.1

 

 

0.1

Activity related to stock plans

 

364

 

 

 —

 

 

1.3

 

 

 —

 

 

1.3

Balance at March 31, 2019

 

109,799

 

$

36.4

 

$

4,379.7

 

$

(4,362.8)

 

$

53.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

5.9

 

 

5.9

Repurchase of common stock

 

(761)

 

 

 —

 

 

(4.6)

 

 

 —

 

 

(4.6)

Activity related to stock plans

 

55

 

 

 —

 

 

3.4

 

 

 —

 

 

3.4

Balance at June 30, 2019

 

109,093

 

$

36.4

 

$

4,378.5

 

$

(4,356.9)

 

$

58.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders’

(Dollars in millions and shares in thousands)

  

Shares

  

Amount

  

Capital

  

Deficit

  

Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

51,783

 

$

35.9

 

$

3,712.1

 

$

(4,566.3)

 

$

(818.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

78.7

 

 

78.7

Activity related to stock plans

 

 —

 

 

 —

 

 

1.6

 

 

 —

 

 

1.6

Recapitalization of convertible preferred
stock to common stock

 

39,415

 

 

0.4

 

 

349.4

 

 

 —

 

 

349.8

Issuance of common stock

 

18,077

 

 

0.1

 

 

302.9

 

 

 —

 

 

303.0

Balance at March 31, 2018

 

109,275

 

$

36.4

 

$

4,366.0

 

$

(4,487.6)

 

$

(85.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

103.6

 

 

103.6

Activity related to stock plans

 

 —

 

 

 —

 

 

3.4

 

 

 —

 

 

3.4

Balance at June 30, 2018

 

109,275

 

$

36.4

 

$

4,369.4

 

$

(4,384.0)

 

$

21.8

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

7

FTS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 — BASIS OF PRESENTATION

Unless the context requires otherwise, the use of the terms “FTSI,” “Company”, “we,” “us,” “our” or “ours” in these Notes to Consolidated Financial Statements refer to FTS International, Inc., together with its consolidated subsidiaries. The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. Accordingly, certain information and disclosures normally included in our annual consolidated financial statements have been condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2018. In our opinion, the consolidated financial statements included herein contain all adjustments of a normal, recurring nature considered necessary for a fair presentation of the interim periods. The results of operations of the interim periods are not necessarily indicative of the results of operations to be expected for the full year. There were no items of other comprehensive income in the periods presented. The Company had $9.1 million of restricted cash at January 1, 2018 and zero restricted cash at June 30, 2019 and 2018.

Reclassifications

Current liabilities related to accrued supply commitment charges have been reclassified from accounts payable to other current liabilities on the balance sheet as of December 31, 2018, and the statement of cash flows for the six months ended June 30, 2018. These reclassifications had no effect on total assets, total liabilities, total equity, or net cash provided by operating activities as previously reported.

New Accounting Standards Updates

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases. The FASB subsequently issued a number of additional ASUs to update this guidance. This standard was issued to increase transparency and comparability among organizations by requiring that a right-of-use asset and corresponding lease liability be recorded on the balance sheet for leases with terms longer than 12 months. We elected to use three practical expedients allowed under the guidance. According to these practical expedients we did not reassess whether existing contracts are or contain a lease; we did not reassess whether existing leases are operating or finance leases; and we did not reassess the accounting for initial direct costs for existing leases. Our approach to adopting this new standard included a review of existing leases and other executory contracts that could contain embedded leases and we identified the key terms that were necessary for us to calculate the right-of-use asset and lease liability. These consolidated financial statements have been prepared in accordance with the new ASU utilizing the modified retrospective transition method, which resulted in the recording of operating lease liabilities of $38.7 million as of January 1, 2019 on our consolidated balance sheet with an immaterial effect on our consolidated statement of stockholders’ equity (deficit) and no related effect on our consolidated statement of operations.

 

 

NOTE 2 — JOINT VENTURE

In April 2019, FTSI announced that it expects to sell all of its 45% equity ownership interest in SinoFTS Petroleum Services Ltd., FTSI’s joint venture in China, to Sinopec Oilfield Services Corporation, FTSI’s joint venture partner. In exchange, FTSI, via its affiliate FTS International Netherlands B.V., will receive consideration of approximately $26.9 million for the sale of its equity interest, and via FTS International Services, LLC, will receive a royalty fee of approximately $5.8 million for a license for its intellectual property use and for future limited support of the joint venture’s operations. This transaction is subject to customary closing conditions and is expected to be completed in the third quarter of 2019. FTSI currently estimates that it will recognize a small gain on the sale of our equity interest and intends to use the proceeds from this transaction to repay debt.

 

8

NOTE 3 — INDEBTEDNESS AND BORROWING FACILITY

The following table summarizes our long-term debt:

 

 

 

 

 

 

 

 

  

June 30,

  

December 31,

(In millions)

  

2019

  

2018

Term loan due April 2021 ("Term Loan")

 

$

101.0

 

$

121.0

Senior notes due May 2022 ("2022 Senior Notes")

 

 

374.9

 

 

386.9

Total principal amount

 

 

475.9

 

 

507.9

Less unamortized discount and debt issuance costs

 

 

(3.7)

 

 

(4.7)

Total long-term debt

 

$

472.2

 

$

503.2

Estimated fair value of long-term debt

 

$

450.4

 

$

461.2

 

Estimated fair values for our  Term Loan and 2022 Senior Notes were determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the FASB’s fair value hierarchy. We believe we were in compliance with all of the covenants in our debt agreements at June 30, 2019.

Debt Repayments

In the first six months of 2019, we repaid $20.0 million of aggregate principal amount of Term Loan using cash on hand. We recognized a loss on this debt extinguishment of $0.1 million.

In the first six months of 2019, we repurchased $12.0 million of aggregate principal amount of 2022 Senior Notes in the qualified institutional buyer market using cash on hand. We recognized a gain on this debt extinguishment of $0.5 million.

Revolving Credit Facility

The maximum availability of credit under our revolving credit facility is limited at any time to the lesser of $250 million or a borrowing base. The borrowing base is based on percentages of eligible accounts receivable and eligible inventory and is subject to certain reserves. In an event of default or if the amount available under the credit facility is less than either 10% of our maximum availability or $12.5 million, we will be required to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0. If at any time borrowings and letters of credit issued under the credit facility exceed the borrowing base, we will be required to repay an amount equal to such excess.

As of June  30, 2019, the borrowing base was  $115.4 million and therefore our maximum availability under the credit facility was $115.4 million. As of June  30, 2019, there were no borrowings outstanding under the credit facility, and letters of credit totaling $3.0 million were issued, resulting in $112.4 million of availability under the credit facility.

We believe we were in compliance with all of the covenants in the credit facility at June  30, 2019.

NOTE 4 — LEASES

We lease certain administrative offices, sales offices, and operational facilities. We also lease some service equipment and light duty vehicles. These leases have remaining lease terms of 6 years or less. Some leases contain options to extend the leases, and some include options to terminate the leases. We do not include renewal or termination options in our assessment of the lease terms unless extension or termination for certain assets is deemed to be reasonably certain. The accounting for some of our leases requires significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rates, if necessary, to utilize in the calculation of our lease liabilities, and assessing the likelihood of renewal or termination options. We also have some lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

We provide residual value guarantees for our leases of light-duty vehicles and certain service equipment. No amounts related to these residual value guarantees have been deemed probable and included in the lease liability; however, if the value for all of the vehicles was zero at the end of the lease term, we would be required to pay $16.3 million for leases outstanding at June  30, 2019.

9

We had no material amount of finance leases or subleases at June  30, 2019. We had no material variable lease costs for the three or six months ended June  30, 2019. The following table summarizes the components of our lease costs:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(In millions)

  

2019

  

2019

Operating lease cost

 

$

5.8

 

$

12.0

Short-term lease cost

 

 

1.4

 

 

2.7

Total lease cost

 

$

7.2

 

$

14.7

 

Short-term lease costs represent costs related to leases with terms of one year or less. We elected the practical expedient to not recognize lease assets and liabilities for these leases. The following table includes other supplemental information for our operating leases:

 

 

 

 

 

  

Six Months Ended

 

 

June 30,

(Dollars in millions)

  

2019

Cash paid for amounts included in the measurement of our lease obligations

 

$

12.2

Right-of-use assets obtained in exchange for lease obligations

 

$

10.5

Right-of-use assets recognized upon adoption of the leasing standard

 

$

37.8

Weighted-average remaining lease term

 

 

2.6 years

Weighted-average discount rate

 

 

4.9%

 

The following table summarizes the maturity of our operating leases as of June  30, 2019:

 

 

 

 

 

  

 

(In millions)

  

 

Remainder of 2019

 

$

9.5

2020

 

 

15.6

2021

 

 

10.9

2022

 

 

1.2

2023

 

 

1.2

2024 and thereafter

 

 

1.0

Total lease payments

 

 

39.4

Less imputed interest

 

 

(2.3)

Total lease liabilities

 

$

37.1

 

 

 

 

NOTE 5 — SHARE REPURCHASE

In May 2019, our board of directors (our “Board”) approved an authorization for a total share repurchase of up to $100 million of the Company’s common stock to be executed through open market or private transactions. The authorization expires on May 14, 2020 and may be discontinued at any time. In the second quarter of 2019 we repurchased approximately 761,000 shares of common stock at an average price of $6.11 per share for a total of $4.6 million. At June  30, 2019,  $95.4 million of the authorized amount was available for share repurchases under this program.

The amount and timing of share repurchases are at the sole discretion of the Company, and plans for future share repurchases may be revised by the Board at any time. The share repurchase program could be affected by, among other things, changes in results of operations, capital expenditures, cash flows, and applicable tax laws.

NOTE 6 — REVENUE

The Company contracts with its customers to perform hydraulic fracturing services on one or more oil or natural gas wells. Under these arrangements, we satisfy our performance obligations as services are rendered, which is generally upon the completion of a fracturing stage or the passage of time. Pricing for our services is frequently negotiated with our customers and is based on prevailing market rates during each reporting period. The amounts we invoice our customers for services performed during a period are directly related to the value received by the customers for the period. There is no inherent uncertainty to the amount of consideration we will receive for services performed during a

10

period and no judgment is required to allocate a portion of the transaction price to a future period. Accordingly, we are not required to identify any unsatisfied performance obligations nor attribute any revenue to them.  We have no material contract assets or liabilities with our customers. We do not present disaggregated revenue because we do not believe this information is necessary to understand the nature, amount, timing and uncertainty of our revenues and cash flows.

NOTE 7 — IMPAIRMENTS AND OTHER CHARGES

The following table summarizes our impairments and other charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(In millions)

  

2019

  

2018

  

2019

  

2018

Supply commitment charges

 

$

0.1

 

$

4.0

 

$

56.7

 

$

6.0

Impairment of assets

 

 

2.7

 

 

 —

 

 

5.5

 

 

 —

Inventory write-down

 

 

 —

 

 

 —

 

 

1.4

 

 

 —

Total impairments and other charges

 

$

2.8

 

$

4.0

 

$

63.6

 

$

6.0

 

Supply Commitment Charges

We incur supply commitment charges when our purchases of sand from certain suppliers are less than the minimum purchase commitments in our supply contracts. According to the accounting guidance for firm purchase commitments, future losses that are considered likely are also required to be recorded in the current period.

During the first six months of 2019 and 2018, we recorded aggregate charges under these supply contracts of $56.7 million and $6.0 million, respectively. These charges relate to actual purchase shortfalls incurred, as well as forecasted losses expected to be incurred and settled in future periods. These purchase shortfalls are largely due to our customers choosing to procure their own sand, often from sand mines closer to their operating areas.

In May 2019, we restructured and amended our largest sand supply contract to reduce the total remaining commitment through 2024 by approximately $162 million. This reduced our annual commitment from $47.9 million to $21.0 million from 2019 through 2024. The reduced annual commitments of $21.0 million represent the annual payments we would make under the contract if we do not purchase any sand from this vendor. Due to the terms of the amended agreement and our estimated future purchases under this contract, we determined that we would not be able to satisfy $11.0 million of the $21.0 million annual commitment with sand purchases for the last five years of the contract. Therefore, in connection with this amendment, we recorded a supply commitment charge of $55.0 million in the first quarter of 2019 to accelerate these purchase shortfalls. After recording the $55.0 million supply commitment charge in the first quarter of 2019, the amount of accrued supply commitment charges for future periods that was recognized on our consolidated balance sheet at March 31, 2019 was $66.0 million. We paid $11.0 million of this amount in the second quarter of 2019 and we expect to pay the remaining $55.0 million in annual installments of $11.0 million from January 2020 through January 2024. These payments may be accelerated under limited circumstances. The remaining amount of the 2019 charges represent revised estimates of our purchase shortfalls under this contract for 2019.

After recording the $55.0 million supply commitment charge, the remaining annual purchase commitment that we must satisfy to avoid additional charges is $10.0 million. We will satisfy this annual purchase commitment if we purchase at least 1.0 million tons of sand per year, which we believe better matches our current and forecasted sand needs. If we purchase more than 1.0 million tons of sand in a year, then we could recover a portion of the supply commitment charge.

We entered into this contract in 2013 in connection with selling our sand mines, which was at a time when our then current and expected needs for sand were significantly higher than they are today. As our sand needs have declined over the years due to industry cycles or due to our customers choosing to procure their own sand, we and our supplier have continuously worked together to accommodate changing market conditions by amending the contract.

Estimated losses related to these supply contracts contain uncertainties, such as future customer demand and sand preferences. These uncertainties require us to use judgment to quantify these estimates. Actual results could materially differ from our estimates.

11

Discontinued Wireline Operations

In May 2019, we decided to discontinue our wireline operations due to underperformance. We are in the process of identifying the best options for disposing of these assets. As a result of this decision we recorded an asset impairment of $2.8 million and an inventory write-down of $1.4 million in the first quarter of 2019 to adjust these assets to their estimated fair market values and net realizable values, respectively.

Other Impairments

In the second quarter of 2019, we recorded $2.7 million of impairments for certain land and buildings that we no longer use.

NOTE 8 — INCOME TAXES

In 2012, we established a full valuation allowance with respect to our U.S. federal deferred tax assets and state deferred tax assets in excess of our deferred tax liabilities. We have continued to record a valuation allowance for these net deferred tax assets since 2012. As a result, we only recorded income tax expense for the three and six months ended June  30, 2019 and 2018 for states that limit the deduction of net operating loss carryforwards. Deferred tax assets related to our U.S. federal and state operating losses are still available to us to offset future taxable income, subject to limitations in the event of a change of control under Section 382 of the Internal Revenue Code. At June  30, 2019, we had not incurred such an ownership change.

At each reporting date, we consider all available positive and negative evidence to evaluate whether our deferred tax assets are more likely than not to be realized. A significant piece of negative evidence that we consider is that the Company generated a loss before income taxes for each year from 2012 to 2016. Such negative evidence weighs heavily against other more subjective positive evidence such as projections for future taxable income.

The Company generated income before income taxes in 2017 and 2018 and has generated cumulative income for its most recent three year period. This represents positive evidence that we may be able to realize some or all of our deferred tax assets; however, due to the negative evidence of our annual losses generated from 2012 through 2016, the significant cyclicality of our business in recent years,  and our loss before income taxes for the first six months of 2019, we concluded that a full valuation allowance was still required at June  30, 2019.

 

12

NOTE 9  — EARNINGS PER SHARE 

The numerators and denominators of the basic and diluted earnings per share (“EPS”) computations for our common stock are calculated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(In millions, except per share amounts)

  

2019

  

2018

  

2019

  

2018

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

5.9

 

$

103.6

 

$

(49.1)

 

$

182.3

Net reversal of convertible preferred stock
accretion due to recapitalization of convertible
preferred stock to common stock (1)

 

 

 —

 

 

 —

 

 

 —

 

 

423.2

Net income (loss) attributable to common
stockholders used for basic and diluted EPS computation

 

$

5.9

 

$

103.6

 

$

(49.1)

 

$

605.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used for
basic EPS computation

 

 

109.7

 

 

109.3

 

 

109.7

 

 

98.9

Dilutive potential common shares (2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Number of shares used for diluted EPS computation

 

 

109.7

 

 

109.3

 

 

109.7

 

 

98.9

Basic and diluted EPS

 

$

0.05

 

$

0.95

 

$

(0.45)

 

$

6.12

_________________________

(1)

The accreted value of our convertible preferred stock was $1,132.7 million at December 31, 2017. In connection with the Company’s initial public offering (“IPO”) in 2018, the convertible preferred stock was recapitalized into 39.4 million shares of common stock. These shares of common stock had a value of $709.5 million at the IPO share price of $18.00, which resulted in a net reversal of $423.2 million of convertible preferred stock accretion previously recognized.

(2)

The dilutive effect of employee restricted stock units was immaterial for the first quarter of 2018.

 

The following table includes common stock equivalents that were not included in the calculation of diluted EPS for the periods presented because the effect would be antidilutive. These securities could be dilutive in future periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(In millions)

  

2019

  

2018

  

2019

  

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee restricted stock units

 

 

2.1

 

 

 —

 

 

2.1

 

 

 —

 

 

 

 

NOTE 10 — COMMITMENTS AND CONTINGENCIES

Purchase Obligations

We have purchase commitments with certain vendors to supply a significant portion of the proppant used in our operations. These agreements have remaining terms ranging from one to six years. Some of these agreements have minimum unconditional purchase obligations. See Note 7 – “Impairments and Other Charges” for more discussion of these purchase commitments.

Litigation

In the ordinary course of business, we are subject to various legal proceedings and claims, some of which may not be covered by insurance. Many of these legal proceedings and claims are in early stages, and many of them seek an indeterminate amount of damages. We estimate and provide for potential losses that may arise out of legal proceedings and claims to the extent that such losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different from these estimates. When preparing our estimates, we consider, among other factors, the progress of each legal proceeding and claim, our

13

experience and the experience of others in similar legal proceedings and claims, and the opinions and views of legal counsel. Legal costs related to litigation contingencies are expensed as incurred.

With respect to the litigation matters below, if there is an adverse outcome individually or collectively, there could be a material adverse effect on the Company’s consolidated financial position or results of operations. These litigation matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Therefore, there can be no assurance as to the ultimate outcome of these matters. Regardless of the outcome, any such litigation and claims can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

Patterson v. FTS International Manufacturing, LLC and FTS International Services, LLC : On June 24, 2015, Joshua Patterson filed a lawsuit against the Company in the 115 th Judicial District Court of Upshur County, Texas, alleging, among other things, that the Company was negligent with respect to an automobile accident in 2013. Mr. Patterson sought monetary relief of more than $1 million. On July 19, 2018, a jury returned a verdict of approximately $100 million, including punitive damages, against the Company. The trial court reduced the judgment on November 12, 2018 to approximately $33 million. The Company’s insurance carriers have been defending the suit and are appealing the final judgment. The Company’s appellate brief was filed with the Tyler Court of Appeals on June 28, 2019. While the outcome of this case is uncertain, the Company has met its insurance deductible for this matter and we do not expect the ultimate resolution of this case to have a material adverse effect on our consolidated financial statements.

Securities Act Litigation : On February 22, 2019, Carol Glock filed a purported securities class action in the 160th Civil District Court of Dallas County, Texas (Cause No. DC-19-02668) against the Company, certain of our officers, directors and stockholders, and certain of the underwriters of our IPO. The petition is brought on behalf of an alleged class of persons or entities who purchased our common stock in or traceable to our IPO, and purports to allege claims arising under Sections 11 and 15 of the Securities Act of 1933, as amended. The petition generally alleges that the defendants violated federal securities laws relating to the disclosure in the registration statement and prospectus filed with the Securities and Exchange Commission in connection with our IPO. The petition seeks, among other relief, class certification, damages in an amount in excess of $1.0 million, and reasonable costs and expenses, including attorneys’ fees. The Company has insurance coverage on this matter and has hired counsel to vigorously defend the case. Defendants have filed Special Exceptions to the petition and have requested dismissal if the defects cannot be cured. While the outcome of this case is uncertain, we do not expect the ultimate resolution of this case to have a material adverse effect on our consolidated financial statements.

We believe that costs associated with other legal matters will not have a material adverse effect on our consolidated financial statements.

14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, the use of the terms “FTSI,” “Company”, “we,” “us,” “our” or “ours” refer to FTS International, Inc., together with its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this quarterly report on Form 10-Q as well as information in our annual report on Form 10-K for the year ended December 31, 2018. Unless otherwise specified, all comparisons made are to the corresponding period of 2018.

Overview

We are one of the largest providers of hydraulic fracturing services in North America. Our services stimulate hydrocarbon flow from oil and natural gas wells drilled by exploration and production (“E&P”) companies primarily in shale resource formations. We have 1.7 million total hydraulic horsepower across 34 fleets, with 21 fleets active as of June 30, 2019. We operate in five major basins in the United States: the Permian Basin, the SCOOP/STACK Formation, the Marcellus/Utica Shale, the Eagle Ford Shale and the Haynesville Shale.

Summary Financial Results

·

Total revenue for the second quarter and first six months of 2019 was $225.8 million and $448.3 million, which represented a decrease of $267.5 million and $512.5 million, respectively, from the same periods in 2018.

·

Net income for the second quarter was $5.9 million and net loss for the first six months of 2019 was $49.1 million, which represented a decrease of $97.7 million and $231.4 million, respectively, from the same periods in 2018. The first quarter of 2019 included a supply commitment charge of $56.6 million.

·

Adjusted EBITDA for the second quarter and first six months of 2019 was $41.9 million and $81.3 million, which represented a decrease of $103.4 million and $195.1 million, respectively, from the same periods in 2018.

·

Total principal amount of long-term debt was $475.9 million at June 30, 2019, which represented a decrease of $32.0 million from December 31, 2018.

Industry trends and business outlook

Our business depends on the willingness of E&P companies to make expenditures to explore for, develop, and produce oil and natural gas in the United States. The willingness of E&P companies to undertake these activities is predominantly influenced by current and expected future prices for oil and natural gas. A widely watched indicator of E&P companies’ aggregate activity levels is the drilling rig count, or rig count. The active horizontal rig count is a subset of the total rig count and is the most strongly correlated with the aggregate industry demand for hydraulic fracturing services. The average horizontal rig count was approximately 890 for the first six months of 2019, compared to an average of approximately 870 for the first six months of 2018, according to a report by Baker Hughes, a GE company. 

The prices that we are able to charge for our services is affected by the supply of hydraulic fracturing equipment that is available in the market to meet customer demand. Since the middle of 2018, the supply of hydraulic fracturing equipment has exceeded the demand for equipment, and as a result, the pricing for our services declined in the second half of 2018 and declined further in the first half of 2019. If the oversupply of equipment remains active in the market, pricing could decline further.

In response to this competitive market environment, we remain disciplined with respect to our number of active fleets and we remain focused on optimizing our utilization and profitability. We reduced our active fleet count from 28 fleets in the second quarter of 2018 to 21 fleets in the second quarter of 2019 because certain fleets did not meet our utilization and profitability targets. Subsequent to June 30, 2019, we reduced our active fleet count to 20. The current average pricing for hydraulic fracturing services remains below our profitability targets. Therefore, we remain focused on deploying additional fleets only for select opportunities in 2019.

15

In 2019, we expect our customers to remain disciplined with respect to their capital spending and therefore we will continue to manage our active capacity to best match demand from our customers and maximize our profitability and cash flow. Based on conversations with our customers, we currently expect a decrease in demand for our services in the second half of 2019. With this expected decrease in demand and the continuing oversupply of equipment in the market, we currently expect to reduce our active fleet count by two or three additional fleets in the third quarter of 2019. Despite the challenging market environment, we expect to continue to generate cash and repay debt in the second half of 2019.

Results of Operations

Revenue

Total revenue consists of revenue from hydraulic fracturing and wireline services. The following table includes certain operating statistics that affect our revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(Dollars in millions)

  

2019

  

2018

  

2019

  

2018

Revenue

 

$

225.8

 

$

454.6

 

$

447.4

 

$

877.9

Revenue from related parties

 

 

 —

 

 

38.7

 

 

0.9

 

 

82.9

Total revenue

 

$

225.8

 

$

493.3

 

$

448.3

 

$

960.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fracturing stages

 

 

7,230

 

 

9,356

 

 

13,970

 

 

17,508

Active fleets (1)

 

 

21.0

 

 

28.0

 

 

20.5

 

 

27.8

Total fleets (2)

 

 

34.0

 

 

32.0

 

 

34.0

 

 

32.0

_____________________________

(1)

Active fleets is the average number of fleets operating during the period. We had 21 and 26 active fleets at June 30, 2019 and 2018, respectively.

(2)

Total fleets is the total number of fleets owned at the end of the period.

Total revenue in the second quarter and first six months of 2019 decreased by $267.5 million and $512.5 million, respectively, from the same periods in 2018. This decrease was due to lower average pricing of our services, a lower number of average active fleets, an increase in the portion of customers who provided their own proppant and fuel, and a decrease in the prices for materials used in the fracturing process.

The number of fracturing stages completed per average active fleet for the second quarter and first six months of 2019 increased by 3.0% and 8.2%, respectively, from the same periods in 2018.

Costs of revenue

The following table summarizes our costs of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2019

 

2018

 

 

 

 

 

As a Percent

 

 

 

 

As a Percent

(Dollars in millions)

  

Dollars

  

of Revenue