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 JuneSeptember 30, 2021
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
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FTS INTERNATIONAL, INC. |
(Exact name of registrant as specified in its charter)
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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)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| | |||
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | FTSI | | NYSE American |
Series A Preferred Purchase Rights | | | | NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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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 ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
]
As of July 30,November 1, 2021, the registrant had 13,749,33713,750,545 shares of Class A common stock, par value $0.01 per share, and 312,306 shares of Class B common stock, par value $0.01 per share, outstanding.
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FTS INTERNATIONAL, INC.
TABLE OF CONTENTS
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PART I - | | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | |
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PART II - | | |
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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 (the “Exchange Act”). All statements other than statements of historical or current fact included in this quarterly report are forward-looking statements. 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,” “assume,” “believe,” “can have,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “might,” “objective,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “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. For example, all statements we make relating to our estimated and projected costs, expenditures and growth rates, our plans and objectives for future operations, growth or initiatives, orour strategies and our expectations regarding the consummation and effects of ProFrac Holdings, LLC’s proposed acquisition of us (the “ProFrac Acquisition”) are forward-looking statements. 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. These statements, and related risks and uncertainties, include, but are not limited to: the inability to consummate the proposed ProFrac Acquisition; the diversion of resources and disruptions to our business due to the proposed ProFrac Acquisition; the effects of our bankruptcy proceedingsthe proposed ProFrac Acquisition on our business, liquidity, results of operations and prospects and the interests of various constituents; a further decline or future decline in domestic spending by the onshore oil and natural gas industry; continued volatility or future volatility in oil and natural gas prices; deterioration in general economic conditions or a continued weakening or future weakening of the broader energy industry; federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production activities; our ability to obtain permits, approvals and authorizations from governmental and third parties; the effects of or changes to U.S. and foreign government regulation; the price and availability of alternative fuels and energy sources; the discovery rates of new oil and natural gas reserves; the ability to staff field personnel; shortages, delays in delivery, and interruptions in supply of equipment and materials; and other factors described in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2020 and our subsequent reports on Forms 10-Q and 8-K.
We make many of our forward-looking statements based on our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.
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)
| | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | ||||||||
| | Three Months Ended | | | Three Months Ended | | Six Months Ended | | | Six Months Ended | | Three Months Ended | | | Three Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||||||
| | June 30, | | | June 30, | | June 30, | | | June 30, | | September 30, | | | September 30, | | September 30, | | | September 30, | ||||||||
(Dollars in millions, except per share amounts) | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||||||
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 99.8 | | | $ | 29.5 | | $ | 195.7 | | | $ | 180.3 | | $ | 90.9 | | | $ | 32.1 | | $ | 286.6 | | | $ | 212.4 |
Revenue from related parties | | | — | | | | — | | | — | | | | 0.7 | | | — | | | | — | | | — | | | | 0.7 |
Total revenue | | | 99.8 | | | | 29.5 | | | 195.7 | | | | 181.0 | | | 90.9 | | | | 32.1 | | | 286.6 | | | | 213.1 |
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Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs of revenue (excluding depreciation of $13.8, $19.2, $27.2 and $39.7 respectively, included in depreciation and amortization below) | | | 75.2 | | | | 28.9 | | | 153.7 | | | | 143.5 | ||||||||||||||
Costs of revenue (excluding depreciation of $12.6, $16.8, $39.8 and $56.5 respectively, included in depreciation and amortization below) | | | 73.6 | | | | 30.7 | | | 227.3 | | | | 174.2 | ||||||||||||||
Selling, general and administrative | | | 12.5 | | | | 13.2 | | | 23.0 | | | | 30.9 | | | 11.7 | | | | 11.8 | | | 34.7 | | | | 42.7 |
Depreciation and amortization | | | 14.3 | | | | 20.2 | | | 28.2 | | | | 41.6 | | | 13.1 | | | | 17.8 | | | 41.3 | | | | 59.4 |
Impairments and other charges | | | 0.2 | | | | 10.3 | | | 0.5 | | | | 14.6 | | | 0.5 | | | | 19.4 | | | 1.0 | | | | 34.0 |
Loss on disposal of assets, net | | | — | | | | 0.2 | | | — | | | | 0.1 | | | 1.6 | | | | — | | | 1.6 | | | | 0.1 |
Total operating expenses | | | 102.2 | | | | 72.8 | | | 205.4 | | | | 230.7 | | | 100.5 | | | | 79.7 | | | 305.9 | | | | 310.4 |
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Operating loss | | | (2.4) | | | | (43.3) | | | (9.7) | | | | (49.7) | | | (9.6) | | | | (47.6) | | | (19.3) | | | | (97.3) |
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Interest expense, net | | | (0.1) | | | | (7.4) | | | (0.2) | | | | (14.7) | | | — | | | | (7.4) | | | (0.2) | | | | (22.1) |
Gain on extinguishment of debt, net | | | — | | | | — | | | — | | | | 2.0 | | | — | | | | — | | | — | | | | 2.0 |
Reorganization items | | | — | | | | — | | | (0.5) | | | | — | | | (0.3) | | | | (13.7) | | | (0.8) | | | | (13.7) |
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Loss before income taxes | | | (2.5) | | | | (50.7) | | | (10.4) | | | | (62.4) | | | (9.9) | | | | (68.7) | | | (20.3) | | | | (131.1) |
Income tax expense | | | 0.1 | | | | — | | | 0.1 | | | | — | | | 0.1 | | | | 0 | | | 0.2 | | | | 0 |
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Net loss | | $ | (2.6) | | | $ | (50.7) | | $ | (10.5) | | | $ | (62.4) | | $ | (10.0) | | | $ | (68.7) | | $ | (20.5) | | | $ | (131.1) |
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Basic and diluted loss per share | | $ | (0.19) | | | $ | (9.43) | | $ | (0.75) | | | $ | (11.61) | | $ | (0.71) | | | $ | (12.77) | | $ | (1.46) | | | $ | (24.39) |
Shares used in computing basic and diluted | | | 13,995 | | | | 5,379 | | | 13,992 | | | | 5,373 | | | 14,062 | | | | 5,381 | | | 14,016 | | | | 5,376 |
The accompanying notes are an integral part of these consolidated financial statements.
4
FTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | ||
| | June 30, | | December 31, | | September 30, | | December 31, | ||||
(In millions, except share amounts) | | 2021 | | 2020 | | 2021 | | 2020 | ||||
ASSETS | | | | | | | | | | | ||
Current assets | | | | | | | | | | | ||
Cash and cash equivalents | | $ | 98.9 | | $ | 94.0 | | $ | 87.9 | | $ | 94.0 |
Accounts receivable, net | | 46.8 | | | 26.9 | | 55.0 | | | 26.9 | ||
Inventories | | 34.5 | | | 29.0 | | 36.4 | | | 29.0 | ||
Prepaid expenses and other current assets | | | 4.7 | | | 19.5 | | | 4.9 | | | 19.5 |
Total current assets | | 184.9 | | | 169.4 | | 184.2 | | | 169.4 | ||
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Property, plant, and equipment, net | | 117.9 | | | 132.3 | | 129.2 | | | 132.3 | ||
Operating lease right-of-use assets | | 3.2 | | | 4.5 | | 3.0 | | | 4.5 | ||
Intangible assets, net | | 7.1 | | | 7.4 | | 7.0 | | | 7.4 | ||
Other assets | | | 1.4 | | | 1.4 | | | 1.5 | | | 1.4 |
Total assets | | $ | 314.5 | | $ | 315.0 | | $ | 324.9 | | $ | 315.0 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | ||
Current liabilities | | | | | | | | | | | ||
Accounts payable | | $ | 35.3 | | $ | 26.9 | | $ | 57.0 | | $ | 26.9 |
Accrued expenses | | | 15.2 | | | 12.5 | | | 13.8 | | | 12.5 |
Current portion of operating lease liabilities | | | 2.1 | | | 3.0 | | | 1.8 | | | 3.0 |
Other current liabilities | | | 0.3 | | | 0.3 | | | 0.3 | | | 0.3 |
Total current liabilities | | 52.9 | | | 42.7 | | 72.9 | | | 42.7 | ||
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Operating lease liabilities | | 2.1 | | | 3.3 | | 1.9 | | | 3.3 | ||
Other liabilities | | | 2.1 | | | 2.4 | | | 2.0 | | | 2.4 |
Total liabilities | | | 57.1 | | | 48.4 | | | 76.8 | | | 48.4 |
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Commitments and contingencies (Note 9) | | | | | | |||||||
Commitments and contingencies (Note 10) | | | | | | |||||||
| | | | | | | | | | | ||
Stockholders’ equity | | | | | | | | | | | ||
Preferred stock, $0.01 par value, 5,000,000 shares authorized, | | — | | | — | | — | | | — | ||
Successor Common stock Class A, $0.01 par value, 49,000,000 authorized, | | 0.1 | | | 0.1 | |||||||
Common stock Class A, $0.01 par value, 49,000,000 authorized, | | 0.1 | | | 0.1 | |||||||
Additional paid-in capital | | 281.2 | | | 279.9 | | 281.9 | | | 279.9 | ||
Accumulated deficit | | | (23.9) | | | (13.4) | | | (33.9) | | | (13.4) |
Total stockholders’ equity | | | 257.4 | | | 266.6 | | | 248.1 | | | 266.6 |
Total liabilities and stockholders’ equity | | $ | 314.5 | | $ | 315.0 | | $ | 324.9 | | $ | 315.0 |
The accompanying notes are an integral part of these consolidated financial statements.
5
FTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | ||||||
| | Successor | | | Predecessor | | Successor | | | Predecessor | ||||
| | Six Months Ended | | | Six Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||
| | June 30, | | | June 30, | | September 30, | | | September 30, | ||||
(In millions) | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||
Cash flows from operating activities | | | | | | | | | | | | | ||
Net loss | | $ | (10.5) | | | $ | (62.4) | | $ | (20.5) | | | $ | (131.1) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | ||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | ||||||||
Depreciation and amortization | | 28.2 | | | | 41.6 | | 41.3 | | | | 59.4 | ||
Stock-based compensation | | 2.6 | | | | 6.6 | | 3.3 | | | | 9.4 | ||
Amortization of debt discounts and issuance costs | | — | | | | 0.9 | | — | | | | 2.0 | ||
Loss on disposal of assets, net | | — | | | | 0.1 | | 1.6 | | | | 0.1 | ||
Gain on extinguishment of debt, net | | — | | | | (2.0) | | — | | | | (2.0) | ||
Non-cash provision for supply commitment charges | | — | | | | 9.1 | | — | | | | 9.1 | ||
Cash paid to settle supply commitment charges | | — | | | | (18.8) | | — | | | | (18.8) | ||
Non-cash reorganization items | | — | | | | 12.3 | ||||||||
Inventory write-down | | — | | | | 4.5 | | — | | | | 5.1 | ||
Other non-cash items | | — | | | | 0.8 | | 0.1 | | | | 0.9 | ||
Changes in operating assets and liabilities: | | | | | | | | | | | | | ||
Accounts receivable | | (19.9) | | | | 55.4 | | (28.2) | | | | 47.5 | ||
Inventories | | (5.5) | | | | 1.0 | | (7.4) | | | | 4.8 | ||
Prepaid expenses and other assets | | 1.2 | | | | 0.9 | | 0.6 | | | | (4.3) | ||
Accounts payable | | 7.8 | | | | (21.3) | | 13.4 | | | | (20.9) | ||
Accrued expenses and other liabilities | | | 1.1 | | | | (9.5) | | | 1.0 | | | | (4.3) |
Net cash provided by operating activities | | | 5.0 | | | | 6.9 | |||||||
Net cash provided by (used in) operating activities | | | 5.2 | | | | (30.8) | |||||||
| | | | | | | | | | | | | ||
Cash flows from investing activities | | | | | | | | | | | | | ||
Capital expenditures | | (12.8) | | | | (16.8) | | (25.8) | | | | (19.3) | ||
Proceeds from disposal of assets | | | — | | | | 0.1 | | | 3.1 | | | | 0.1 |
Net cash used in investing activities | | | (12.8) | | | | (16.7) | | | (22.7) | | | | (19.2) |
| | | | | | | | | | | | | ||
Cash flows from financing activities | | | | | | | | | | | | | ||
Repayments of long-term debt | | — | | | | (20.6) | | — | | | | (20.6) | ||
Taxes paid related to net share settlement of equity awards | | | — | | | | (0.1) | | | (1.3) | | | | (0.1) |
Net cash used in financing activities | | | — | | | | (20.7) | | | (1.3) | | | | (20.7) |
| | | | | | | | | | | | | ||
Net decrease in cash, cash equivalents, and restricted cash | | (7.8) | | | | (30.5) | | (18.8) | | | | (70.7) | ||
Cash, cash equivalents, and restricted cash at beginning of period | | | 106.7 | | | | 223.0 | | | 106.7 | | | | 223.0 |
Cash and cash equivalents at end of period | | $ | 98.9 | | | $ | 192.5 | | $ | 87.9 | | | $ | 152.3 |
| | | | | | | | | | | | | ||
Supplemental cash flow information: | | | | | | | | | | | | | | |
Interest paid | | $ | — | | | $ | 13.9 | | $ | — | | | $ | 14.6 |
Income tax payments | | $ | 0.2 | | | $ | — | | $ | 0.2 | | | $ | 0.4 |
Noncash investing and financing activities: | | | | | | | | | | | | | | |
Capital expenditures included in accounts payable | | $ | 1.2 | | | $ | 2.6 | | $ | 17.1 | | | $ | 0.1 |
Operating lease liabilities incurred from obtaining right-of-use assets | | $ | 1.0 | | | $ | 0.5 | | $ | 1.5 | | | $ | 0.6 |
Derecognition of lease liabilities and right-of-use assets due to lease termination | | $ | 1.1 | | | $ | 0.3 | | $ | 1.1 | | | $ | 10.7 |
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, 2021 Successor | | 13,990 | | $ | 0.1 | | $ | 279.9 | | $ | (13.4) | | $ | 266.6 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (7.9) | | | (7.9) |
Activity related to stock plan | | — | | | — | | | 0.9 | | | — | | | 0.9 |
Balance at March 31, 2021 Successor | | 13,990 | | $ | 0.1 | | $ | 280.8 | | $ | (21.3) | | $ | 259.6 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (2.6) | | | (2.6) |
Activity related to stock plan | | 72 | | | — | | | 0.4 | | | — | | | 0.4 |
Balance at June 30, 2021 Successor | | 14,062 | | $ | 0.1 | | $ | 281.2 | | $ | (23.9) | | $ | 257.4 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | 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, 2020 Predecessor | | 5,355 | | $ | 36.4 | | $ | 4,382.0 | | $ | (4,380.7) | | $ | 37.7 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (11.7) | | | (11.7) |
Activity related to stock plan | | 20 | | | — | | | 3.0 | | | — | | | 3.0 |
Balance at March 31, 2020 Predecessor | | 5,375 | | $ | 36.4 | | $ | 4,385.0 | | $ | (4,392.4) | | $ | 29.0 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (50.7) | | | (50.7) |
Activity related to stock plan | | 6 | | | — | | | 3.6 | | | — | | | 3.6 |
Balance at June 30, 2020 Predecessor | | 5,381 | | $ | 36.4 | | $ | 4,388.6 | | $ | (4,443.1) | | $ | (18.1) |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (68.7) | | | (68.7) |
Activity related to stock plan | | — | | | — | | | 2.8 | | | — | | | 2.8 |
Balance at September 30, 2020 Predecessor | | 5,381 | | $ | 36.4 | | $ | 4,391.4 | | $ | (4,511.8) | | $ | (84.0) |
| | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | 106.7 | | | 106.7 |
Activity related to stock plan | | 75 | | | — | | | 16.5 | | | — | | | 16.5 |
Balance at November 19, 2020 Predecessor | | 5,456 | | | 36.4 | | | 4,407.9 | | | (4,405.1) | | | 39.2 |
Cancellation of Predecessor Equity | | (5,456) | | | (36.4) | | | (4,407.9) | | | 4,405.1 | | | (39.2) |
Balance at November 19, 2020 Predecessor | | — | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Issuance of Successor Common Stock | | 13,990 | | | 0.1 | | | 279.5 | | | — | | | 279.6 |
Balance at November 19, 2020 Successor | | 13,990 | | | 0.1 | | | 279.5 | | | — | | | 279.6 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (13.4) | | | (13.4) |
Activity related to stock plan | | — | | | — | | | 0.4 | | | — | | | 0.4 |
Balance at December 31, 2020 Successor | | 13,990 | | $ | 0.1 | | $ | 279.9 | | $ | (13.4) | | $ | 266.6 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | Total | ||
| | Common Stock | | Paid-in | | Accumulated | | Stockholders’ | ||||||
(Dollars in millions and shares in thousands) | | Shares | | Amount | | Capital | | Deficit | | Equity | ||||
Balance at January 1, 2021 Successor | | 13,990 | | $ | 0.1 | | $ | 279.9 | | $ | (13.4) | | $ | 266.6 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (7.9) | | | (7.9) |
Activity related to stock plan | | — | | | — | | | 0.9 | | | — | | | 0.9 |
Balance at March 31, 2021 Successor | | 13,990 | | $ | 0.1 | | $ | 280.8 | | $ | (21.3) | | $ | 259.6 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (2.6) | | | (2.6) |
Activity related to stock plan | | 72 | | | — | | | 0.4 | | | — | | | 0.4 |
Balance at June 30, 2021 Successor | | 14,062 | | $ | 0.1 | | $ | 281.2 | | $ | (23.9) | | $ | 257.4 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (10.0) | | | (10.0) |
Activity related to stock plans | | — | | | — | | | 0.7 | | | — | | | 0.7 |
Balance at September 30, 2021 Successor | | 14,062 | | $ | 0.1 | | $ | 281.9 | | $ | (33.9) | | $ | 248.1 |
| | | | | | | | | | | | | | |
| | | | | | | 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, 2020 Predecessor | | 5,355 | | $ | 36.4 | | $ | 4,382.0 | | $ | (4,380.7) | | $ | 37.7 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (11.7) | | | (11.7) |
Activity related to stock plan | | 20 | | | — | | | 3.0 | | | — | | | 3.0 |
Balance at March 31, 2020 Predecessor | | 5,375 | | $ | 36.4 | | $ | 4,385.0 | | $ | (4,392.4) | | $ | 29.0 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (50.7) | | | (50.7) |
Activity related to stock plan | | 6 | | | — | | | 3.6 | | | — | | | 3.6 |
Balance at June 30, 2020 Predecessor | | 5,381 | | $ | 36.4 | | $ | 4,388.6 | | $ | (4,443.1) | | $ | (18.1) |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (68.7) | | | (68.7) |
Activity related to stock plan | | — | | | — | | | 2.8 | | | — | | | 2.8 |
Balance at September 30, 2020 Predecessor | | 5,381 | | $ | 36.4 | | $ | 4,391.4 | | $ | (4,511.8) | | $ | (84.0) |
| | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | 106.7 | | | 106.7 |
Activity related to stock plan | | 75 | | | — | | | 16.5 | | | — | | | 16.5 |
Balance at November 19, 2020 Predecessor | | 5,456 | | | 36.4 | | | 4,407.9 | | | (4,405.1) | | | 39.2 |
Cancellation of Predecessor Equity | | (5,456) | | | (36.4) | | | (4,407.9) | | | 4,405.1 | | | (39.2) |
Balance at November 19, 2020 Predecessor | | — | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Issuance of Successor Common Stock | | 13,990 | | | 0.1 | | | 279.5 | | | — | | | 279.6 |
Balance at November 19, 2020 Successor | | 13,990 | | | 0.1 | | | 279.5 | | | — | | | 279.6 |
| | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | (13.4) | | | (13.4) |
Activity related to stock plan | | — | | | — | | | 0.4 | | | — | | | 0.4 |
Balance at December 31, 2020 Successor | | 13,990 | | $ | 0.1 | | $ | 279.9 | | $ | (13.4) | | $ | 266.6 |
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
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, 2020. 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 0 items of other comprehensive income in the periods presented.
Emergence From Voluntary Reorganization Under Chapter 11
As described in “Note 1 – Description of Business”, “Note 2 – Restructuring”, and “Note 3 – Fresh Start Accounting” of our Consolidated Financial Statements from our annual report on Form 10-K for the year ended December 31, 2020, we filed voluntary petitions for bankruptcy on September 22, 2020, then emerged from bankruptcy on November 19, 2020, and adopted fresh-start accounting upon emergence.
References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to November 19, 2020. References to “Predecessor” or “Predecessor Company” relate to the financial position and results of operations of the Company prior to, and including, November 19, 2020.
Certain prior year financial statements are not comparable to our current year financial statements due to the adoption of fresh start accounting. Therefore, “black-line” financial statements are presented to distinguish between the Predecessor and Successor periods. The Company’s financial results for future periods will be different from historical trends and the differences may be material.
Intangible Assets
The amount of intangible assets recorded in our consolidated balance sheets as of JuneSeptember 30, 2021 (Successor) and December 31, 2020 (Successor) was $7.4 million, of which $6.0 million related to our indefinite-lived tradename and $1.4 million related to our developed technology which is being amortized on a straight-line basis over a period of three years. Accumulated amortization of this intangible as of JuneSeptember 30, 2021 (Successor) and December 31, 2020 (Successor) was $0.3$0.4 million and $0.1 million, respectively. Amortization expense in the secondthird quarter and first sixnine months of 2021 (Successor) was $0.1$0.2 million and $0.2$0.4 million, respectively. In the first halfnine months of 2020 (Predecessor), amortization expense was 0.
Fair Value of Financial Instruments
Money market funds, classified as cash and cash equivalents, are the only financial instruments that are measured and recorded at fair value on the Company’s balance sheets. The following table presents money market funds at their level within the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Principal Amount | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | | Principal Amount | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | ||||||||||
June 30, 2021 | | | | | | | | | | | | | | | | |||||||||||||||
September 30, 2021 | | | | | | | | | | | | | | | | |||||||||||||||
Money market funds | | $ | 60.0 | | $ | 60.0 | | $ | 60.0 | | $ | — | | $ | — | | $ | 60.0 | | $ | 60.0 | | $ | 60.0 | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 59.6 | | $ | 59.6 | | $ | 59.6 | | $ | — | | $ | — | | $ | 59.6 | | $ | 59.6 | | $ | 59.6 | | $ | — | | $ | — |
8
New Accounting Standards Update
In December 2019, the FASB issued ASU No. 2019-12, Simplification of Accounting for Income Taxes, which simplifies the accounting for income taxes by providing new guidance to reduce complexity and eliminate certain exceptions to the general approach to the income tax accounting model. The Company adopted this guidance effective January 1, 2021, which did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
NOTE 2 — RESTRICTED CASH
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated statement of cash flows.
| | | | | | | | | | | ||
| | June 30, | | December 31, | | September 30, | | December 31, | ||||
(In millions) | | 2021 | | 2020 | | 2021 | | 2020 | ||||
Cash and cash equivalents | | $ | 98.9 | | $ | 94.0 | | $ | 87.9 | | $ | 94.0 |
Restricted cash included in prepaid expenses and other current assets | | | — | | | 12.7 | | | — | | | 12.7 |
Total cash, cash equivalents, and restricted cash shown in the | | $ | 98.9 | | $ | 106.7 | | $ | 87.9 | | $ | 106.7 |
As of December 31, 2020 (Successor), restricted cash included unsettled escrow fees related to our bankruptcy emergence and cash used as collateral for other banking products.
NOTE 3 — CURRENT ECONOMIC ENVIRONMENT
Our business activities are concentrated in the well completion services segment of the oilfield services industry in the United States. The market for these services is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop, and produce oil and natural gas in the United States. The willingness of our customers to undertake these activities depends largely upon prevailing industry conditions and is predominantly influenced by current and expected future prices for oil and natural gas. Our customer base is also concentrated. Our business, financial condition and results of operations can be materially adversely affected if one or more of our significant customers ceases to engage us for our services on favorable terms, or at all, or fails to pay, or delays in paying us significant amounts of our outstanding receivables.
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 during this period. In 2020, the supply of equipment further exceeded demand as the demand for our services dropped significantly. Prices have rebounded slightlysignificantly due to the pandemic. Pricing has increased in the first half of 2021 but still remains below pre-pandemic levels. As a result, we remain disciplined with respect to theour number of active fleets, we deploy, and we remain focused on optimizing our utilization and cash flow.
The third quarter of 2021 was negatively impacted by underutilization driven by customer scheduling changes. We expect these to be non-recurring issues and expect our utilization to improve in the remainder of the year.
We focus on keeping our operational execution at the highest levels, further advancing our technology initiatives, and maintaining our industry leading safety performance. With this strategy, we strive to provide the best service quality for our customers while maintaining a low-cost structure. We believe that these efforts combined with the recent improvements in pricing will generate free cash flow in the future.
9
NOTE 4 — INDEBTEDNESS AND BORROWING FACILITY
Revolving Credit Facility
The maximum availability of credit under the Successor Company’s credit facility is limited at any time to the lesser of $40 million or the borrowing base. The borrowing base is based on percentages of eligible accounts receivable and is subject to certain reserves. In an event of default or if the amount available under the credit facility is less than either 12.5% of our maximum availability or $5.0 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.
The credit facility contains covenants that could, in certain circumstances, limit our ability to issue additional debt, repurchase or pay dividends on our common stock, sell substantially all of our assets, make certain investments, or enter into certain other transactions. We were in compliance with all of the covenants in the credit facility at JuneSeptember 30, 2021.
As of JuneSeptember 30, 2021 (Successor), the borrowing base was $35.7$36.6 million and therefore our maximum availability under the credit facility was $35.7$36.6 million. There were 0 borrowings outstanding under the credit facility, and letters of credit totaling $4.0$4.4 million were issued, resulting in $31.7$32.2 million of availability under the credit facility.
NOTE 5 — 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 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 6 — IMPAIRMENTS AND OTHER CHARGES
The following table summarizes our impairments and other charges:
| | | | | | | | | | | | | | | | | | | | | | | | | | |||
| | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | ||||||||
| | Three Months Ended | | | Three Months Ended | | Six Months Ended | | | Six Months Ended | | Three Months Ended | | | Three Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||||||
| | June 30, | | | June 30, | | June 30, | | | June 30, | | September 30, | | | September 30, | | September 30, | | | September 30, | ||||||||
(In millions) | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||||||
Transaction and strategic initiative costs | | $ | 0.2 | | | $ | — | | $ | 0.8 | | | $ | — | | $ | 0.5 | | | $ | 18.5 | | $ | 1.3 | | | $ | 18.5 |
Gain on contract termination | | | — | | | | — | | | (0.3) | | | | — | ||||||||||||||
Loss (Gain) on contract termination | | | — | | | | 0.3 | | | (0.3) | | | | 0.3 | ||||||||||||||
Supply commitment charges | | | — | | | | 5.9 | | | — | | | | 9.1 | | | — | | | | — | | | — | | | | 9.1 |
Inventory write-down | | | — | | | | 3.9 | | | — | | | | 4.5 | | | — | | | | 0.6 | | | — | | | | 5.1 |
Employee severance costs | | | — | | | | 0.5 | | | — | | | | 1.0 | | | — | | | | — | | | — | | | | 1.0 |
Total impairments and other charges | | $ | 0.2 | | | $ | 10.3 | | $ | 0.5 | | | $ | 14.6 | | $ | 0.5 | | | $ | 19.4 | | $ | 1.0 | | | $ | 34.0 |
Transaction and Strategic Initiative Costs
In the secondthird quarter and first sixnine months of 2021 (Successor), we incurred $0.2$0.5 million and $0.8$1.3 million of costs related to strategic initiatives. In the third quarter of 2020 (Predecessor), in preparation for and prior to filing our Chapter 11 Cases, we incurred and paid $7.0 million in legal and professional fees and paid $11.5 million to certain holders of our Term Loan Agreement and Secured Notes pursuant to the Restructuring Support Agreement.
Gain10
Loss (Gain) on Contract Termination
In the first quarter of 2021 (Successor), we terminated a portion of our operating lease for certain buildings. We recorded a net gain of $0.3 million as a result of this contract termination.
10
Table In the third quarter of Contents2020 (Predecessor), we terminated our operating leases for containerized proppant delivery and a sand supply contract. We recorded a net loss of $0.3 million as a result of these contract terminations.
Supply Commitment Charges
The Predecessor Company incurred supply commitment charges when our purchases of sand from certain suppliers were less than the minimum purchase commitments in our supply contracts.
In the secondthird quarter and first sixnine months of 2020 (Predecessor), we recorded aggregate charges under these supply contracts of $5.9 million0 and $9.1 million, respectively. The purchase shortfalls were largely due to our customers choosing to procure their own sand, often from sand mines closer to their operating areas.
The Company terminated all sand supply contracts upon emergence from bankruptcy. Any amounts due as outlined in the Plan were paid upon emergence and the Company does not expect any future commitment related to these Predecessor contracts.
Inventory Write-down
In the secondthird quarter and first sixnine months of 2020 (Predecessor), we recorded $3.9$0.6 million and $4.5$5.1 million, respectively, of inventory write-downs to reduce excess, obsolete and slow-moving inventory to its estimated net realizable value.
Employee Severance Costs
In the secondthird quarter and first sixnine months of 2020 (Predecessor), we incurred employee severance costs of $0.5 million0 and $1.0 million, respectively, in connection with our cost reduction measures to mitigate losses from the decline in customer activity levels due to the low commodity price environment.
NOTE 7 — ASSET DISPOSALS
In the third quarter of 2021 (Successor), we received $3.1 million of proceeds and recognized a $1.6 million loss on the sale of various assets; the majority of which is from the sale of our Shreveport facility and related assets.
NOTE 8 — INCOME TAXES
We provide a valuation allowance against allour deferred tax assets in excess of our deferred tax liabilities.which we believe are not likely to be realizable. As a result, no income tax benefit was recorded and income tax expense was only recorded for certain states that limit the deduction ofor do not provide for net operating loss carryforwards and for foreign income taxes.
Upon our emergence from bankruptcy on November 19, 2020, an ownership change under Internal Revenue Code Section 382 occurred. This change substantially reduced our pre-Chapter 11 net operating loss carryforwards and certain other tax deductions.
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 whether we have incurred cumulative losses (generally defined as losses before income taxes) in recent years. Such negative evidence weighs heavily against other more subjective positive evidence such as our projections for future taxable income. Due to the significant fluctuations of our business in recent years, the three year cumulative loss through JuneSeptember 30, 2021 and our losses before income taxes for the most recent periods, we concluded that a full valuation allowance was still required at JuneSeptember 30, 2021.
11
Upon our emergence from bankruptcy on November 19, 2020, we believe an ownership change under Internal Revenue Code Section (IRC) 382 occurred. An ownership change under IRC Section 382 would substantially reduce our ability to utilize pre-emergence net operating losses and other tax deductions related to built-in loss items. IRC Section 382(l)(5) can avoid the IRC Section 382 limit if certain requirements are met. If the Company were to incur an additional ownership change of more than 50% of their equity within a two (2) year period following emergence from Chapter 11, the Company’s tax attributes (mainly net operating losses) at the time of the second ownership change would be fully limited. In addition, limitations on the ability to deduct built-in loss items would exist for sixty (60) months following the second ownership change. As described in detail in Note 11 and in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company has entered into an agreement to be acquired by ProFrac Holdings. If this ProFrac transaction is consummated, it would represent an additional ownership change within two (2) years of emergence from bankruptcy.
NOTE 89 — 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |||
| | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | ||||||||
| | Three Months Ended | | | Three Months Ended | | Six Months Ended | | | Six Months Ended | | Three Months Ended | | | Three Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||||||
| | June 30, | | | June 30, | | June 30, | | | June 30, | | September 30, | | | September 30, | | September 30, | | | September 30, | ||||||||
(Dollars in millions, except per share amounts) | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||||||
Numerator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss used for basic and diluted EPS computations | | $ | (2.6) | | | $ | (50.7) | | $ | (10.5) | | | $ | (62.4) | | $ | (10.0) | | | $ | (68.7) | | $ | (20.5) | | | $ | (131.1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares used for | | | 13,995 | | | | 5,379 | | | 13,992 | | | | 5,373 | | | 14,062 | | | | 5,381 | | | 14,016 | | | | 5,376 |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dilutive potential of equity awards | | | — | | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | — |
Number of shares used for | | | 13,995 | | | | 5,379 | | | 13,992 | | | | 5,373 | | | 14,062 | | | | 5,381 | | | 14,016 | | | | 5,376 |
Basic and diluted EPS | | $ | (0.19) | | | $ | (9.43) | | $ | (0.75) | | | $ | (11.61) | | $ | (0.71) | | | $ | (12.77) | | $ | (1.46) | | | $ | (24.39) |
We had 361,000270,000 and 141,00095,000 restricted stock units outstanding as of JuneSeptember 30, 2021 (Successor) and JuneSeptember 30, 2020 (Predecessor), respectively, that were not included in the calculation of diluted EPS for the periods presented because the effect would be antidilutive. These securities would be included in the calculation of diluted EPS in future periods if the Company generates positive net income for purposes of the calculation. The Company also has performance based restricted stock units, stock options, and warrants outstanding that could become potentially dilutive in future periods depending on the company’s market capitalization.
NOTE 910 — COMMITMENTS AND CONTINGENCIES
Legal Contingencies
In the ordinary course of business, we are subject to various legal proceedings and claims, some of which may not be covered by insurance. Some 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 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.
12
With respect to the litigation matter 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. 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 litigation 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.
12
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 115th 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 appealed and the Twelfth Court of Appeals reversed the verdict in its entirety on August 26, 2020, remanding the case for a new trial. The Company’s insurance carriers are currently appealing one of the appellate findings with the Texas Supreme Court. No new trial date has been set. 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.
We believe that costs associated with other legal matters will not have a material adverse effect on our consolidated financial statements or financial condition.
NOTE 11 — SUBSEQUENT EVENTS
On October 21, 2021, we entered into an agreement and plan of merger to be acquired by ProFrac Holdings, LLC., a leading oilfield services company, in an all-cash transaction that values FTSI at approximately $407.5 million, including payments to holders of outstanding warrants. Under the terms of the agreement, which has been unanimously approved by FTSI’s Board of Directors, FTSI stockholders will receive $26.52 per share of FTSI common stock in cash. This represents approximately a 14% premium over the Company’s 60-day volume-weighted average closing share price through October 21, 2021.
13
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, 2020. Unless otherwise specified, all comparisons made are to the corresponding period of 2020. Certain prior year financial statements are not comparable to our current year financial statements due to the adoption of fresh start accounting. We believe that describing certain year-over-year variances in our activity levels, revenue and expenses facilitates a meaningful analysis of our results of operations and is useful in identifying current business trends. References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to November 19, 2020. References to “Predecessor” or “Predecessor Company” relate to the financial position and results of operations of the Company prior to, and including, November 19, 2020.
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 E&P companies. We had 1.41.3 million total hydraulic horsepower across 2825 fleets as of JuneSeptember 30, 2021. We averaged 13 active fleets in the secondthird quarter of 2021. We operate in the major basins in the United States.
Summary Financial Results
● | Total revenue for the |
● | Net loss for the |
● | Adjusted EBITDA for the |
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 410450 and 380400 for the secondthird quarter and first sixnine months of 2021, respectively, compared to an average of approximately 350220 and 530420 for the same respective periods last year, according to a report by Baker Hughes. This remains well below the average horizontal rig count of approximately 900 in 2018 according to the same report.
The prices that we are able to charge for our services are 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 during this period. In 2020, the supply of equipment further exceeded demand as the demand for our services dropped significantly. Prices have rebounded slightlysignificantly due to the pandemic. Pricing has increased in the first half of 2021 but still remains below pre-pandemic levels. As a result, we remain disciplined with respect to our number of active fleets, and we remain focused on optimizing our utilization and cash flow.
The third quarter of 2021 was negatively impacted by underutilization driven by customer scheduling changes. We expect these to be non-recurring issues and expect our utilization to improve in the remainder of the year.
14
We plan to focus on expanding our commercial strategy, further advancing our technology initiatives, and maintaining our industry leading safety performance. With this strategy, we strive to provide the best service quality for our customers while maintaining a low-cost structure. Currently, we believe that these efforts combined with the recent improvements in pricing will generate free cash flow in 2021 and position us for a longer-term recovery.
14
We closely monitor the COVID-19 pandemic and are focused on the health and welfare of our employees and the communities where we work, as well as maintaining business continuity. We have instituted health and safety procedures to protect our employees, customers, and their families.
If the pandemic were to shut down operations at our work sites, it could affect the financial condition of the Company. For that reason, we developed and activated a readiness plan to address COVID-19 specific issues in addition to our business continuity plan, which is designed to address emergency situations. To date, COVID-19 disruptions to our business operations have been successfully mitigated because of these efforts.
Proposed Acquisition
On October 21, 2021, we entered into an agreement and plan of merger to be acquired by ProFrac Holdings, LLC (“ProFrac”), a leading oilfield services company, in an all-cash transaction that values FTSI at approximately $407.5 million, including payments to holders of outstanding warrants. Under the terms of the agreement, which has been unanimously approved by FTSI’s Board of Directors (the “Board”), FTSI stockholders will receive $26.52 per share of FTSI common stock in cash. This represents approximately a 14% premium over the Company’s 60-day volume-weighted average closing share price through October 21, 2021.
The agreement includes a 45-day “go-shop” period expiring December 5, 2021. This allows the Board and its advisors to solicit alternative acquisition proposals from third parties. The Board will have the right to terminate the merger agreement with ProFrac to enter into a superior proposal, subject to the terms and conditions of the merger agreement.
The transaction with ProFrac is expected to close in the first quarter of 2022, subject to customary closing conditions, including approval by FTSI stockholders and receipt of regulatory approvals. The Company’s obligation to close the transaction is also conditioned upon approval by a majority of the Company’s stockholders, excluding its largest stockholder THRC Holdings, which is an affiliate of ProFrac. Upon closing of the transaction, the Company’s common stock will no longer be listed on any public market.
The foregoing description of the agreement and plan of merger is not complete and is qualified in its entirety by reference to the full text of such document, which is filed herewith as Exhibit 2.1 and incorporated herein by reference.
15
Results of Operations
Revenue
The following table includes certain operating statistics that affect our revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | ||||||||
| | Three Months Ended | | | Three Months Ended | | Six Months Ended | | | Six Months Ended | | Three Months Ended | | | Three Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||||||
| | June 30, | | | June 30, | | June 30, | | | June 30, | | September 30, | | | September 30, | | September 30, | | | September 30, | ||||||||
(Dollars in millions) | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||||||
Revenue | | $ | 99.8 | | | $ | 29.5 | | $ | 195.7 | | | $ | 180.3 | | $ | 90.9 | | | $ | 32.1 | | $ | 286.6 | | | $ | 212.4 |
Revenue from related parties | | | — | | | | — | | | — | | | | 0.7 | | | — | | | | — | | | — | | | | 0.7 |
Total revenue | | $ | 99.8 | | | $ | 29.5 | | $ | 195.7 | | | $ | 181.0 | | $ | 90.9 | | | $ | 32.1 | | $ | 286.6 | | | $ | 213.1 |
| | | | | | | | | | | | | | | | | | | | | | | | | ||||
Total fracturing stages | | | 7,569 | | | | 1,468 | | | 14,636 | | | 8,356 | | | 6,459 | | | | 3,243 | | | 21,095 | | | 11,599 | ||
Total pumping hours | | | 15,548 | | | | 2,631 | | | 30,324 | | | 17,683 | | | 12,864 | | | | 6,458 | | | 43,188 | | | 24,141 | ||
Fleet utilization percentage | | | 91% | | | | 46% | | | 91% | | | 78% | | | 83% | | | | 77% | | | 88% | | | 78% | ||
Active fleets (1) | | | 13.0 | | | | 5.0 | | | 13.0 | | | 10.5 | | | 13.0 | | | | 7.3 | | | 13.0 | | | 9.4 | ||
Total fleets (2) | | | 28.0 | | | | 28.0 | | | 28.0 | | | 28.0 | | | 25.0 | | | | 28.0 | | | 25.0 | | | 28.0 |
_____________________________
(1) | Active fleets is the average number of fleets operating during the period. We had 13 and |
(2) | Total fleets is the total number of fleets owned at the end of the period. |
Total revenue for the secondthird quarter and first sixnine months of 2021 (Successor) increased by $70.3$58.8 million and $14.7$73.5 million from the same periods in 2020 (Predecessor). These increases were primarily due to higher activity levels in the second quarterand third quarters of 2021 (Successor) measured by average active fleets, fleet utilization, stages, and pumping hours. These increases were partially offset by lower average pricing and a decrease in the amount of materials we supplied in our jobs.
The number of fracturing stages completed per average active fleet for the secondthird quarter and first sixnine months of 2021 (Successor) increased by 98.3%11.8% and 41.5%31.5% from the same periods in 2020 (Predecessor) due to lower activity experienced in the second quarterand third quarters of 2020 related to the pandemic.
1516
Costs of revenue
The following table summarizes our costs of revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | ||
| | Successor | | | | Predecessor | | | Successor | | | | Predecessor | | ||||||||||||
| | Three Months Ended June 30, | | | | Three Months Ended June 30, | | | Three Months Ended September 30, | | | | Three Months Ended September 30, | | ||||||||||||
| | 2021 | | | | 2020 | | | 2021 | | | | 2020 | | ||||||||||||
| | | | | As a Percent | | | | | | As a Percent | | | | | As a Percent | | | | | | As a Percent | ||||
(Dollars in millions) | | Dollars | | of Revenue | | | Dollars | | of Revenue | | Dollars | | of Revenue | | | Dollars | | of Revenue | ||||||||
Costs of revenue, excluding depreciation and amortization | | $ | 75.2 | | 75.4 | % | | | $ | 28.9 | | 98.0 | % | | $ | 73.6 | | 80.9 | % | | | $ | 30.7 | | 95.7 | % |
Depreciation — costs of revenue | | | 13.8 | | 13.8 | % | | | | 19.2 | | 65.1 | % | | | 12.6 | | 13.9 | % | | | | 16.8 | | 52.3 | % |
Total costs of revenue | | $ | 89.0 | | 89.2 | % | | | $ | 48.1 | | 163.1 | % | | $ | 86.2 | | 94.8 | % | | | $ | 47.5 | | 148.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | ||
| | Successor | | | | Predecessor | | | Successor | | | | Predecessor | | ||||||||||||
| | Six Months Ended June 30, | | | | Six Months Ended June 30, | | | Nine Months Ended September 30, | | | | Nine Months Ended September 30, | | ||||||||||||
| | 2021 | | | | 2020 | | | 2021 | | | | 2020 | | ||||||||||||
| | | | | As a Percent | | | | | As a Percent | | | | | As a Percent | | | | | As a Percent | ||||||
(Dollars in millions) | | Dollars | | of Revenue | | | Dollars | | of Revenue | | Dollars | | of Revenue | | | Dollars | | of Revenue | ||||||||
Costs of revenue, excluding depreciation and amortization | | $ | 153.7 | | 78.5 | % | | | $ | 143.5 | | 79.3 | % | | $ | 227.3 | | 79.3 | % | | | $ | 174.2 | | 81.8 | % |
Depreciation — costs of revenue | | | 27.2 | | 13.9 | % | | | | 39.7 | | 21.9 | % | | | 39.8 | | 13.9 | % | | | | 56.5 | | 26.5 | % |
Total costs of revenue | | $ | 180.9 | | 92.4 | % | | | $ | 183.2 | | 101.2 | % | | $ | 267.1 | | 93.2 | % | | | $ | 230.7 | | 108.3 | % |
Total costs of revenue for the secondthird quarter and first sixnine months of 2021 (Successor) increased by $40.9$38.7 million and decreased by $2.3$36.4 million, respectively from the same periods in 2020 (Predecessor). These changes were primarily due to the changes in our costs of revenue, excluding depreciation and due to lower activity experienced in the second quarterand third quarters of 2020 related to the pandemic.
Costs of revenue, excluding depreciation, for the secondthird quarter and first sixnine months of 2021 (Successor) increased by $46.3$42.9 million and $10.2$53.1 million, respectively, from the same periods in 2020 (Predecessor). These increases were due to higher labor and repair costs from operating a higher number of average active fleets partially offset by a decrease in the prices for materials used in the fracturing process, and a decrease in the portion of customers who provide their own proppant and fuel.
Depreciation for our service equipment for the secondthird quarter and first sixnine months of 2021 (Successor) decreased by $5.4$4.2 million and $12.5$16.7 million, respectively, from the same periods in 2020 (Predecessor). These decreases were driven primarily by reduced capital expenditures in the first half of 2021 and reduced asset values related to our restructuring and Fresh Start accounting in the fourth quarter of 2020.2020 (Predecessor) plus reduced capital expenditures in the first half of 2021(Successor).
Total costs of revenue as a percentage of total revenue for the secondthird quarter of 2021 (Successor) decreased by 73.953.2 percentage points from 163.1%148.0% in 2020 (Predecessor) to 89.2%94.8% in 2021 (Successor). Total costs of revenue as a percentage of total revenue for the first sixnine months of 2021 (Successor) decreased by 8.815.1 percentage points from 101.2%108.3% in 2020 (Predecessor) to 92.4%93.2% in 2021 (Successor). These decreases were primarily due to a higher utilization rate of our fleets in the second quarterand third quarters of 2021 (Successor).
Selling, general and administrative expense
Selling, general and administrative expense for the secondthird quarter and first sixnine months of 2021 (Successor) decreased by $0.7$0.1 million and $7.9$8.0 million, respectively, from the same periods in 2020 (Predecessor). These decreases were primarily due to lower stock compensation expense, lower bad debt expense, and reduced professional fees; offset by increased wages in the second quarterand third quarters of 2021 (Successor) from higher incentive compensation, higher headcount, and changes in base wages.
1617
Depreciation and amortization
The following table summarizes our depreciation and amortization:
| | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | ||||||||
| | Three Months Ended | | | Three Months Ended | | Six Months Ended | | | Six Months Ended | | Three Months Ended | | | Three Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||||||
| | June 30, | | | June 30, | | June 30, | | | June 30, | | September 30, | | | September 30, | | September 30, | | | September 30, | ||||||||
(In millions) | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||||||
Costs of revenue (1) | | $ | 13.8 | | | $ | 19.2 | | $ | 27.2 | | | $ | 39.7 | | $ | 12.6 | | | $ | 16.8 | | $ | 39.8 | | | $ | 56.5 |
Other (2) | | | 0.4 | | | | 1.0 | | | 0.8 | | | | 1.9 | | | 0.3 | | | | 1.0 | | | 1.1 | | | | 2.9 |
Amortization (3) | | | 0.1 | | | | — | | | 0.2 | | | | — | | | 0.2 | | | | — | | | 0.4 | | | | — |
Total depreciation and amortization | | $ | 14.3 | | | $ | 20.2 | | $ | 28.2 | | | $ | 41.6 | | $ | 13.1 | | | $ | 17.8 | | $ | 41.3 | | | $ | 59.4 |
_________________________
(1) | Related to service equipment discussed under the “Costs of revenue” heading of this discussion and analysis. |
(2) | Related to all long-lived assets other than service equipment. |
(3) | Related to amortization of our developed technology intangible asset. |
Depreciation and amortization for the secondthird quarter and first sixnine months of 2021 (Successor) decreased by $5.9$4.7 million and $13.4$18.1 million, respectively, from the same periods in 2020 (Predecessor). These decreases were driven primarily by reduced capital expenditures in the first half of 2021 (Successor) and reduced asset values related to our restructuring and Fresh Start accounting in the fourth quarter of 2020 (Predecessor) plus reduced capital expenditures in the first half of 2021 (Successor).
Impairments and other charges
The following table summarizes our impairments and other charges:
| | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | ||||||||
| | Three Months Ended | | | Three Months Ended | | Six Months Ended | | | Six Months Ended | | Three Months Ended | | | Three Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||||||
| | June 30, | | | June 30, | | June 30, | | | June 30, | | September 30, | | | September 30, | | September 30, | | | September 30, | ||||||||
(In millions) | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||||||
Transaction and strategic initiative costs | | $ | 0.2 | | | $ | — | | $ | 0.8 | | | $ | — | | $ | 0.5 | | | $ | 18.5 | | $ | 1.3 | | | $ | 18.5 |
Gain on contract termination | | | — | | | | — | | | (0.3) | | | | — | ||||||||||||||
Loss (Gain) on contract termination | | | — | | | | 0.3 | | | (0.3) | | | | 0.3 | ||||||||||||||
Supply commitment charges | | | — | | | | 5.9 | | | — | | | | 9.1 | | | — | | | | — | | | — | | | | 9.1 |
Inventory write-down | | | — | | | | 3.9 | | | — | | | | 4.5 | | | — | | | | 0.6 | | | — | | | | 5.1 |
Employee severance costs | | | — | | | | 0.5 | | | — | | | | 1.0 | | | — | | | | — | | | — | | | | 1.0 |
Total impairments and other charges | | $ | 0.2 | | | $ | 10.3 | | $ | 0.5 | | | $ | 14.6 | | $ | 0.5 | | | $ | 19.4 | | $ | 1.0 | | | $ | 34.0 |
Transaction and Strategic Initiative Costs: In the secondthird quarter and first sixnine months of 2021 (Successor), we incurred $0.2$0.5 million and $0.8$1.3 million inof costs related to specific strategic initiatives. In the third quarter of 2020 (Predecessor), in preparation for and prior to filing our Chapter 11 Cases, we incurred and paid $7.0 million in legal and professional fees and paid $11.5 million to certain holders of our Term Loan Agreement and Secured Notes pursuant to the Restructuring Support Agreement.
GainLoss (Gain) on Contract Termination: In the first quarter of 2021 (Successor), we terminated a portion of our operating lease for certain buildings. We recorded a net gain of $0.3 million as a result of this contract termination. In the third quarter of 2020 (Predecessor), we terminated our operating leases for containerized proppant delivery and a sand supply contract. We recorded a net loss of $0.3 million as a result of these contract terminations.
Supply Commitment Charges: The Predecessor Company incurred supply commitment charges when our purchases of sand from certain suppliers were less than the minimum purchase commitments in our supply contracts.
In the secondthird quarter and first sixnine months of 2020 (Predecessor), we recorded aggregate charges under these supply contracts of $5.9 millionzero and $9.1 million, respectively. The purchase shortfalls were largely due to our customers choosing to procure their own sand, often from sand mines closer to their operating areas.
18
The Company terminated all sand supply contracts upon emergence from bankruptcy. Any amounts due as outlined in the Plan were paid upon emergence and the Company does not expect any future commitment related to these Predecessor contracts.
17
Inventory Write-downs: In the secondthird quarter and first sixnine months of 2020 (Predecessor), we incurred $3.9recorded $0.6 million and $4.5$5.1 million, respectively, inof inventory write-downs to reduce excess, obsolete and slow-moving inventory to its estimated net realizable value.
Employee Severance Costs: In the secondthird quarter and first sixnine months of 2020 (Predecessor), we incurred employee severance costs of $0.5 millionzero and $1.0 million, respectively, in connection with our cost reduction measures to mitigate losses from the decline in customer activity levels due to the low commodity price environment.
Asset disposals
In the third quarter of 2021 (Successor), we received $3.1 million of proceeds and recognized a $1.6 million loss on the sale of various assets; the majority of which is from the sale of our Shreveport facility and related assets.
Interest expense, net
Interest expense, net of interest income, for the secondthird quarter and first sixnine months of 2021 (Successor) decreased by $7.3$7.4 million and $14.5$21.9 million, respectively, from the same periods in 2020 (Predecessor). These decreases were primarily due to the elimination of the Predecessor Company’s debt and related interest upon emergence from bankruptcy on November 19, 2020.
Extinguishment of debt
In the first sixnine months of 2020 (Predecessor), we repaid $22.6 million of aggregate principal amount of our Term Loan Agreement using cash on hand and recognized a gain on this debt extinguishment of $2.0 million. The Predecessor Company’s debt was eliminated upon emergence from bankruptcy on November 19, 2020.
Reorganization items
We havePredecessor expenses, gains and losses that are realized or incurred expenses associated withas of or subsequent to its petition date and as a direct result of the bankruptcy proceedings. These itemscases are classified as reorganization items in our consolidated statements of operations. We have incurred expenses associated with our bankruptcy proceedings. The following table summarizes our reorganization items:
| | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | ||||||||
| | Three Months Ended | | | Three Months Ended | | Six Months Ended | | | Six Months Ended | | Three Months Ended | | | Three Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||||||
| | June 30, | | | June 30, | | June 30, | | | June 30, | | September 30, | | | September 30, | | September 30, | | | September 30, | ||||||||
(In millions) | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||||||
Terminated executory contracts | | | — | | | | 9.8 | | | — | | | | 9.8 | ||||||||||||||
Derecognition of unamortized debt discounts and issuance costs | | | — | | | | 2.5 | | | — | | | | 2.5 | ||||||||||||||
Legal and professional fees | | $ | (0.1) | | | $ | — | | $ | 0.1 | | | $ | — | | $ | 0.1 | | | $ | 1.4 | | $ | 0.2 | | | $ | 1.4 |
Other claims and charges | | | 0.1 | | | | — | | | 0.4 | | | | — | | | 0.2 | | | | — | | | 0.6 | | | | — |
Total reorganization items | | $ | — | | | $ | — | | $ | 0.5 | | | $ | — | | $ | 0.3 | | | $ | 13.7 | | $ | 0.8 | | | $ | 13.7 |
Income taxes
We provide a valuation allowance against all deferred tax assets in excess of our deferred tax liabilities. As a result, income tax expense was only recorded for states that limit the deduction of net operating loss carryforwards and for foreign income taxes. See Note 78 — “Income Taxes” in the notes to our consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for more discussion of our valuation allowance.
1819
Reconciliation of Adjusted EBITDA
The following table reconciles our net income or loss to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor | ||||||||
| | Three Months Ended | | | Three Months Ended | | Six Months Ended | | | Six Months Ended | | Three Months Ended | | | Three Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||||||
| | June 30, | | | June 30, | | June 30, | | | June 30, | | September 30, | | | September 30, | | September 30, | | | September 30, | ||||||||
(In millions) | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||||||
Net loss | | $ | (2.6) | | | $ | (50.7) | | $ | (10.5) | | | $ | (62.4) | | $ | (10.0) | | | $ | (68.7) | | $ | (20.5) | | | $ | (131.1) |
Interest expense, net | | | 0.1 | | | | 7.4 | | | 0.2 | | | | 14.7 | | | — | | | | 7.4 | | | 0.2 | | | | 22.1 |
Income tax expense | | | 0.1 | | | | — | | | 0.1 | | | | — | | | 0.1 | | | | — | | | 0.2 | | | | — |
Depreciation and amortization | | | 14.3 | | | | 20.2 | | | 28.2 | | | | 41.6 | | | 13.1 | | | | 17.8 | | | 41.3 | | | | 59.4 |
Loss on disposal of assets, net | | | — | | | | 0.2 | | | — | | | | 0.1 | | | 1.6 | | | | — | | | 1.6 | | | | 0.1 |
Gain on extinguishment of debt, net | | | — | | | | — | | | — | | | | (2.0) | | | — | | | | — | | | — | | | | (2.0) |
Stock-based compensation | | | 1.7 | | | | 3.5 | | | 2.6 | | | | 6.6 | | | 0.7 | | | | 2.8 | | | 3.3 | | | | 9.4 |
Supply commitment charges | | | — | | | | 5.9 | | | — | | | | 9.1 | | | — | | | | — | | | — | | | | 9.1 |
Inventory write-down | | | — | | | | 3.9 | | | — | | | | 4.5 | | | — | | | | 0.6 | | | — | | | | 5.1 |
Employee severance costs | | | — | | | | 0.5 | | | — | | | | 1.0 | | | — | | | | — | | | — | | | | 1.0 |
Transaction and strategic initiative costs | | | 0.2 | | | | — | | | 0.8 | | | | — | | | 0.5 | | | | 18.5 | | | 1.3 | | | | 18.5 |
Gain on contract termination | | | — | | | | — | | | (0.3) | | | | — | ||||||||||||||
Loss (Gain) on contract termination | | | — | | | | 0.3 | | | (0.3) | | | | 0.3 | ||||||||||||||
Reorganization items | | | — | | | | — | | | 0.5 | | | | — | | | 0.3 | | | | 13.7 | | | 0.8 | | | | 13.7 |
Adjusted EBITDA (1) | | $ | 13.8 | | | $ | (9.1) | | $ | 21.6 | | | $ | 13.2 | | $ | 6.3 | | | $ | (7.6) | | $ | 27.9 | | | $ | 5.6 |
_____________________________
(1) | Adjusted EBITDA is a non-GAAP financial measure that we define as earnings before interest, income taxes, and depreciation and amortization; as well as, the following items, if applicable: gain or loss on disposal of assets; debt extinguishment gains or losses; inventory write-downs; |
Liquidity and Capital Resources
Sources of Liquidity
At JuneSeptember 30, 2021 (Successor), we had $98.9$87.9 million of cash and cash equivalents and $31.7$32.2 million of availability under our revolving credit facility, which resulted in a total liquidity position of $130.6$120.1 million. We believe that our cash and cash equivalents, any cash provided by operations, and the availability under our revolving credit facility will be sufficient to fund our operations, capital expenditures, and contractual obligations for at least the next 12 months.
The maximum availability of credit under the credit facility is limited at any time to the lesser of $40 million or the borrowing base. The borrowing base is based on percentages of eligible accounts receivable and is subject to certain reserves. As of JuneSeptember 30, 2021 (Successor), our borrowing base was $35.7$36.6 million and therefore our maximum availability under the credit facility was $35.7$36.6 million. There were no borrowings outstanding under the credit facility, and letters of credit totaling $4.0$4.4 million were issued, resulting in $31.7$32.2 million of availability under the credit facility.
1920
Cash Flows
The following table summarizes our cash flows:
| | | | | | | | | | | ||||
| | Successor | | | Predecessor | | Successor | | | Predecessor | ||||
| | Six Months Ended | | | Six Months Ended | | Nine Months Ended | | | Nine Months Ended | ||||
| | June 30, | | | June 30, | | September 30, | | | September 30, | ||||
(In millions) | | 2021 | | | 2020 | | 2021 | | | 2020 | ||||
Net income or (loss) adjusted for non-cash items | | $ | 20.3 | | | $ | (0.8) | | $ | 25.8 | | | $ | (34.8) |
Changes in operating assets and liabilities | | | (15.3) | | | | 26.5 | | | (20.6) | | | | 22.8 |
Cash paid to settle supply commitment charges | | | — | | | | (18.8) | | | — | | | | (18.8) |
Net cash provided by operating activities | | | 5.0 | | | | 6.9 | |||||||
Net cash provided by (used in) operating activities | | | 5.2 | | | | (30.8) | |||||||
Net cash used in investing activities | | | (12.8) | | | | (16.7) | | | (22.7) | | | | (19.2) |
Net cash used in financing activities | | | — | | | | (20.7) | | | (1.3) | | | | (20.7) |
Net decrease in cash, cash equivalents, and restricted cash | | | (7.8) | | | | (30.5) | | | (18.8) | | | | (70.7) |
Cash, cash equivalents, and restricted cash at beginning of period | | | 106.7 | | | | 223.0 | | | 106.7 | | | | 223.0 |
Cash and cash equivalents at end of period | | $ | 98.9 | | | $ | 192.5 | | $ | 87.9 | | | $ | 152.3 |
Cash flows from operating activities have historically been a significant source of liquidity we use to fund capital expenditures and repay our debt. Changes in cash flows from operating activities are primarily affected by the same factors that affect our net income, excluding non-cash items such as depreciation and amortization, stock-based compensation, impairments of assets, and estimated supply commitment charges.
Cash flows from operating activities: Net cash provided by operating activities was $5.0$5.2 million and $6.9$30.8 million in the first sixnine months of 2021 (Successor) and 2020 (Predecessor), respectively. Cash flows from operating activities consist of net income or loss adjusted for non-cash items, changes in operating assets and liabilities and cash paid to settle supply commitment charges. Net income or loss adjusted for non-cash items resulted in a cash increase of $20.3$25.8 million and a cash decrease of $0.8$34.8 million in the first sixnine months of 2021 (Successor) and 2020 (Predecessor), respectively. This change was primarily due to higher earnings in 2021 (Successor) after excluding supply commitment charges. This change was also due to the payments of $7.0 million in legal and professional fees and $11.5 million in 2020 (Predecessor) to certain holders of our Term Loan Agreement and Secured Notes in connection with obtaining their support for the Restructuring Plan. The net change in operating assets and liabilities resulted in a cash decrease of $15.3$20.6 million and a cash increase of $26.5$22.8 million in the first sixnine months of 2021 (Successor) and 2020 (Predecessor), respectively. The cash decrease in 2021 (Successor) was due to a build-up of working capital.
Cash flows from investing activities: Net cash used in investing activities was $12.8$22.7 million and $16.7$19.2 million in the first sixnine months of 2021 (Successor) and 2020 (Predecessor), respectively. This decreaseincrease was primarily due to decreasedincreased capital expenditures in 2021 (Successor).
Cash flows from financing activities: Net cash used in financing activities was zero$1.3 million and $20.7 million in the first sixnine months of 2021 (Successor) and 2020 (Predecessor), respectively. In the first sixnine months of 2021 (Successor) we used $1.3 million of cash to pay taxes related to equity awards. In the first nine months of 2020 (Predecessor) we used $20.6 million of cash to repay long-term debt. The Predecessor Company’s debt was eliminated upon emergence from bankruptcy on November 19, 2020.
2021
Cash Requirements
Contractual Commitments and Obligations
There have been no significant changes to our contractual obligations outside the ordinary course of business and bankruptcy proceedings since December 31, 2020. Please refer to our annual report on Form 10-K for the year ended December 31, 2020, for additional information regarding our contractual obligations.
Capital expenditures
The nature of our capital expenditures consists of a base level of investment required to support our current operations and amounts related to growth and company initiatives. Capital expenditures for the first sixnine months of 2021 (Successor) represented the amount necessary to support our current operations. We estimate that total capital expenditures in 2021 (Successor) will range from $45$40 million to $50$45 million, which will support our operations and includes approximately $13 million of growth capital expenditures to build a new fleet with Tier 4 Dynamic Gas Blending (“DGB”) engines. We have reached an agreement to deploy this fleet to a large U.S. independent E&P Company in the first quarter of 2022, in which we believe will provide favorable returns on the capital investment. Total construction costs for the new DGB fleet are expected to be approximately $26.0 million.
Our cash, cash equivalents, and any cash provided by operations will be used to fund our capital expenditure needs. We continuously evaluate our capital expenditures and the amount we ultimately spend will primarily depend on industry conditions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements, transactions, or special purpose entities.
Recently Issued Accounting Pronouncements
See Note 1 — “Basis of Presentation” in the notes to our consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the quantitative and qualitative disclosures about market risk disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of JuneSeptember 30, 2021, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of JuneSeptember 30, 2021 to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Changes in Internal Controls
There has been no change in internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our legal proceedings, see Note 910 — “Commitments and Contingencies” in the notes to our consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, which are incorporated by reference herein.
Item 1A. Risk Factors
There have been no material changesThe following risk factors are provided to update and supplement the corresponding risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
The proposed ProFrac Acquisition, including uncertainty regarding its consummation, subjects us to various risks and uncertainties that could have a material adverse effect on our business, financial condition and reputation, including
● | The efforts and costs to satisfy the closing conditions of the proposed acquisition may place a significant burden on management and internal resources. |
● | We could find it more difficult to attract, retain and motivate key personnel during the pendency of the proposed acquisition. Such personnel may perceive uncertainty regarding their future roles in our company following the consummation of the proposed acquisition. |
● | Customers, vendors and other third parties with whom we have business relationships could seek to modify, or could elect to not extend, their relationships with us. Such third parties may perceive uncertainty regarding our business following the consummation of the proposed acquisition. |
● | We and our directors and officers could be subject to litigation related to the proposed acquisition. Regardless of merit and outcome, lawsuits could require us to incur significant expenses, disrupt our operations and divert management’s time and resources. |
● | We have incurred, and expect to incur, legal, insurance, advisory and other transaction fees and expenses in connection with the proposed acquisition. Such costs could increase significantly if there are delays in the consummation of the proposed acquisition. |
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● | If the merger agreement is terminated under certain specified circumstances, we could be required to pay a $11.7 million fee, which would reduce our working capital and liquidity. |
● | The consummation of the ProFrac Acquisition is subject to the satisfaction of a number of conditions, some of which are beyond our control, including approval by our stockholders. There can be no assurance that the ProFrac Acquisition will be consummated on the expected timeline, if at all. If the ProFrac Acquisition is not completed, or is not completed on the expected timeline, the price of our securities could decline. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
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Item 6. Exhibits
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Exhibit |
| Description |
| Form |
| File |
| Exhibit |
| Filing Date |
---|---|---|---|---|---|---|---|---|---|---|
2.1 | | | 8-K | | 001-38382 | | 2.1 | | October 25, 2021 | |
| | | | | | | | | | |
10.1 | * | | | | | | | | | |
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31.1 | * | | | | | | | | | |
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31.2 | * | | | | | | | | | |
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32.1 | ** | | | | | | | | | |
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101.INS | | Inline XBRL Instance Document (the instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document) | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | |
_____________________________
*Filed herewith
**Previously filedFurnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FTS INTERNATIONAL, INC. | |
| | |
Dated: | By: | /s/ Michael J. Doss |
| | Michael J. Doss |
| | Chief Executive Officer and Director |
| | |
Dated: | By: | /s/ Lance D. Turner |
| | Lance D. Turner |
| | Chief Financial Officer and Treasurer Principal Accounting Officer) |
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