UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20182019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-38081
|
| | | | |
Liberty Oilfield Services Inc. |
(Exact Name of Registrant as Specified in its Charter) |
Delaware | |
Delaware | | 81-4891595 |
(State or Other Jurisdiction of Incorporation or Organization) | | | | (I.R.S. Employer Identification No.) |
| |
950 17th Street, Suite 2400 Denver, Colorado | | | | 80202 |
(Address of Principal Executive Offices) | (Zip Code) |
| | (Zip Code) |
(303) 515-2800 (Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to section 12(b) of the Act |
| | | | |
Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
| | | | |
Class A Common Stock, par value $0.01 | | LBRT | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports 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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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” and “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 ☐ (Do not check if a smaller reporting 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
As of July 31, 20182019, the registrant had 69,958,11375,144,104 shares of Class A Common Stock and 48,207,37237,379,889 shares of Class B Common Stock outstanding.
Our Class A Common Stock is traded on the New York Stock Exchange under the symbol “LBRT.” There is no public market for our Class B Common Stock.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) and certain other communications made by us contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange of 1934, as amended (the “Exchange Act”), including statements about our growth, future operating results, estimates, beliefs and expected performance. For this purpose, any statement that is not a statement of historical fact should be considered a forward-looking statement. We may use the words “believe,” “anticipate,” “plan,” “expect,” “intend,” “may,” “will,” “should” and similar expressions to help identify forward-looking statements. We cannot assure you that our assumptions and expectations will prove to be correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise and readers should not rely on the forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Quarterly Report. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Forward-looking statements may include statements about:
our business strategy;
our operating cash flows, the availability of capital and our liquidity;
our future revenue, income and operating performance;
our ability to sustain and improve our utilization, revenue and margins;
our ability to maintain acceptable pricing for our services;
our future capital expenditures;
our ability to finance equipment, working capital and capital expenditures;
competition and government regulations;
our ability to obtain permits and governmental approvals;
pending legal or environmental matters;
oil and natural gas prices;
acquisitions;
general economic conditions;
credit markets;
our ability to successfully develop our research and technology capabilities and implement technological developments and enhancements;
uncertainty regarding our future operating results;
return of capital to stockholders; and
plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.
We caution you that these forward-looking statements are subject to risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, decline in demand for our services, the cyclical nature and volatility of the oil and natural gas industry, a decline in, or substantial volatility of, crude oil and natural gas commodity prices, environmental risks, regulatory changes, the inability to comply with the financial and other covenants and metrics in our Credit Facilities (as defined herein), cash flow and access to capital, the timing of development expenditures and the other risks described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20172018 (the “Annual Report”). and contained in our other SEC filings.
All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
LIBERTY OILFIELD SERVICES INC.
Condensed Consolidated and Combined Balance Sheets
(Dollars in thousands, except share data)
| | | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
Assets | (unaudited) | (unaudited) |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 83,331 |
| | $ | 16,321 |
| $ | 32,503 |
| | $ | 103,312 |
|
Accounts receivable—trade | 221,464 |
| | 195,961 |
| 248,160 |
| | 153,589 |
|
Accounts receivable—related party | 4,106 |
| | 3,984 |
| — |
| | 15,139 |
|
Unbilled revenue | 118,280 |
| | 58,784 |
| 98,221 |
| | 79,233 |
|
Unbilled revenue—related party | — |
| | 59 |
| |
Inventories | 62,374 |
| | 55,524 |
| 86,809 |
| | 60,024 |
|
Prepaid and other current assets | 29,237 |
| | 21,396 |
| 20,332 |
| | 49,924 |
|
Total current assets | 518,792 |
| | 352,029 |
| 486,025 |
| | 461,221 |
|
Property and equipment, net | 561,014 |
| | 494,776 |
| 647,614 |
| | 627,053 |
|
Other assets | 11,751 |
| | 5,298 |
| 33,570 |
| | 28,227 |
|
Note receivable—related party | | 15,601 |
| | — |
|
Finance lease right-of-use assets | | 59,422 |
| | — |
|
Operating lease right-of-use assets | | 61,143 |
| | — |
|
Total assets | $ | 1,091,557 |
| | $ | 852,103 |
| $ | 1,303,375 |
| | $ | 1,116,501 |
|
Liabilities and Equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 93,288 |
| | $ | 66,846 |
| $ | 108,102 |
| | $ | 80,490 |
|
Accrued liabilities: | | | | | | |
Accrued vendor invoices | 64,575 |
| | 78,646 |
| 75,120 |
| | 67,771 |
|
Operational accruals | 13,276 |
| | 32,208 |
| 19,823 |
| | 36,414 |
|
Accrued salaries and benefits | 22,326 |
| | 24,990 |
| 22,963 |
| | 22,791 |
|
Deferred revenue | 3,844 |
| | 9,231 |
| |
Accrued interest and other | 8,013 |
| | 6,573 |
| 9,590 |
| | 9,585 |
|
Accrued liabilities—related party | — |
| | 2,000 |
| — |
| | 2,300 |
|
Current portion of long-term debt, net of discount of $1,375 and $1,739, respectively | 375 |
| | 11 |
| |
Current portion of long-term debt, net of discount of $1,353 and $1,365, respectively | | 397 |
| | 385 |
|
Current portion of finance lease liabilities | | 18,193 |
| | — |
|
Current portion of operating lease liabilities | | 16,508 |
| | — |
|
Total current liabilities | 205,697 |
| | 220,505 |
| 270,696 |
| | 219,736 |
|
Long-term debt, net of discount of $4,448 and $6,466, respectively, less current portion | 106,830 |
| | 196,346 |
| |
Long-term debt, net of discount of $3,153 and $3,826, respectively, less current portion | | 106,375 |
| | 106,139 |
|
Deferred tax liability | 37,243 |
| | — |
| 33,915 |
| | 32,994 |
|
Payable pursuant to tax receivable agreement | 2,291 |
| | — |
| |
Payable pursuant to tax receivable agreements | | 20,074 |
| | 16,818 |
|
Noncurrent portion of finance lease liabilities | | 35,843 |
| | — |
|
Noncurrent portion of operating lease liabilities | | 44,026 |
| | — |
|
Total liabilities | 352,061 |
| | 416,851 |
| 510,929 |
| | 375,687 |
|
Commitments & contingencies (Note 12) |
| |
| |
Redeemable common units | — |
| | 42,486 |
| |
Members’ equity: | | | | |
Members’ equity | — |
| | 392,766 |
| |
Stockholders’ equity: | | | | |
Commitments & contingencies (Note 13) | |
| |
|
Stockholders’ equity: | | | | |
Preferred Stock, $0.01 par value, 10,000 shares authorized and none issued and outstanding | — |
| | — |
| — |
| | — |
|
Common Stock: | | | | | | |
Class A, $0.01 par value, 400,000,000 shares authorized and 69,958,113 issued and outstanding as of June 30, 2018 and none issued and outstanding as of December 31, 2017 | 700 |
| | — |
| |
Class B, $0.01 par value, 400,000,000 shares authorized and 48,207,372 issued and outstanding as of June 30, 2018 and none issued and outstanding as of December 31, 2017 | 482 |
| | — |
| |
Class A, $0.01 par value, 400,000,000 shares authorized and 68,962,200 issued and outstanding as of June 30, 2019 and 68,359,871 issued and outstanding as of December 31, 2018 | | 690 |
| | 684 |
|
Class B, $0.01 par value, 400,000,000 shares authorized and 43,570,372 issued and outstanding as of June 30, 2019 and 45,207,372 issued and outstanding as of December 31, 2018 | | 436 |
| | 452 |
|
Additional paid in capital | 349,488 |
| | — |
| 318,099 |
| | 312,659 |
|
Retained earnings | 73,270 |
| | — |
| 152,322 |
| | 119,274 |
|
Total stockholders’ equity | 423,940 |
| | — |
| |
Total stockholders’ equity | | 471,547 |
| | 433,069 |
|
Noncontrolling interest | 315,556 |
| | — |
| 320,899 |
| | 307,745 |
|
Total equity | 739,496 |
| | 392,766 |
| 792,446 |
| | 740,814 |
|
Total liabilities and equity | $ | 1,091,557 |
| | $ | 852,103 |
| $ | 1,303,375 |
| | $ | 1,116,501 |
|
See Notes to Condensed Consolidated and Combined Financial Statements.
LIBERTY OILFIELD SERVICES INC.
Condensed Consolidated and Combined Statements of Income
(In thousands, except per share data)
(Unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 |
| 2018 | | 2019 | | 2018 |
Revenue: | | | | | | | | | | | | | | |
Revenue | $ | 628,084 |
| | $ | 334,740 |
| | $ | 1,119,182 |
| | $ | 583,958 |
| $ | 537,322 |
| | $ | 628,084 |
| | $ | 1,066,153 |
| | $ | 1,119,182 |
|
Revenue—related parties | — |
| | 11,985 |
| | 4,062 |
| | 15,161 |
| 4,825 |
| | — |
| | 11,142 |
| | 4,062 |
|
Total revenue | 628,084 |
| | 346,725 |
| | 1,123,244 |
| | 599,119 |
| 542,147 |
| | 628,084 |
| | 1,077,295 |
| | 1,123,244 |
|
Operating costs and expenses: | | | | | | | | | | | | | | |
Cost of services (exclusive of depreciation and amortization shown separately below) | 455,469 |
| | 267,626 |
| | 832,296 |
| | 479,259 |
| 426,444 |
| | 455,469 |
| | 855,743 |
| | 832,296 |
|
General and administrative | 27,313 |
| | 20,022 |
| | 48,990 |
| | 37,106 |
| 23,989 |
| | 27,313 |
| | 46,077 |
| | 48,990 |
|
Depreciation and amortization | 30,606 |
| | 17,521 |
| | 58,622 |
| | 31,667 |
| 40,368 |
| | 30,606 |
| | 78,755 |
| | 58,622 |
|
Loss (gain) on disposal of assets | 485 |
| | 10 |
| | 565 |
| | (33 | ) | |
Loss on disposal of assets | | 143 |
| | 485 |
| | 1,366 |
| | 565 |
|
Total operating costs and expenses | 513,873 |
| | 305,179 |
| | 940,473 |
| | 547,999 |
| 490,944 |
| | 513,873 |
| | 981,941 |
| | 940,473 |
|
Operating income | 114,211 |
| | 41,546 |
| | 182,771 |
| | 51,120 |
| 51,203 |
| | 114,211 |
| | 95,354 |
| | 182,771 |
|
Other expense: | | | | | | | | | | | | | | |
Interest expense | (3,540 | ) | | (1,750 | ) | | (10,034 | ) | | (3,202 | ) | 3,597 |
| | 3,540 |
| | 7,779 |
| | 10,034 |
|
Interest expense related party | — |
| | (761 | ) | | — |
| | (761 | ) | |
Total interest expense | (3,540 | ) | | (2,511 | ) | | (10,034 | ) | | (3,963 | ) | |
Net income before income taxes | 110,671 |
| | 39,035 |
| | 172,737 |
| | 47,157 |
| 47,606 |
| | 110,671 |
| | 87,575 |
| | 172,737 |
|
Income tax expense | 15,930 |
| | — |
| | 24,009 |
| | — |
| 7,083 |
| | 15,930 |
| | 13,143 |
| | 24,009 |
|
Net income | 94,741 |
| | 39,035 |
| | 148,728 |
| | 47,157 |
| 40,523 |
| | 94,741 |
| | 74,432 |
| | 148,728 |
|
Less: Net income attributable to Predecessor, prior to Corporate Reorganization | — |
| | 39,035 |
| | 8,705 |
| | 47,157 |
| — |
| | — |
| | — |
| | 8,705 |
|
Less: Net income attributable to noncontrolling interests | 45,146 |
| | — |
| | 66,753 |
| | — |
| 18,491 |
| | 45,146 |
| | 34,279 |
| | 66,753 |
|
Net income attributable to Liberty Oilfield Services Inc. stockholders | $ | 49,595 |
| | $ | — |
| | $ | 73,270 |
| | $ | — |
| $ | 22,032 |
| | $ | 49,595 |
| | $ | 40,153 |
| | $ | 73,270 |
|
| | | | | | | | | | | | | | |
Net income attributable to Liberty Oilfield Services Inc. stockholders per common share: | | | | | | | | | | | | | | |
Basic | $ | 0.72 |
| | | | $ | 1.06 |
| | | $ | 0.32 |
| | $ | 0.72 |
| | $ | 0.59 |
| | $ | 1.06 |
|
Diluted | $ | 0.71 |
| | | | $ | 1.05 |
| | | $ | 0.32 |
| | $ | 0.71 |
| | $ | 0.58 |
| | $ | 1.05 |
|
Weighted average common shares outstanding: | | | | | | | | | | | | | | |
Basic | 69,020 |
| | | | 68,977 |
| | | 68,404 |
| | 69,020 |
| | 67,918 |
| | 68,977 |
|
Diluted | 118,638 |
| | | | 118,407 |
| | | 114,338 |
| | 118,638 |
| | 114,277 |
| | 118,407 |
|
See Notes to Condensed Consolidated and Combined Financial Statements.
LIBERTY OILFIELD SERVICES INC.
Condensed Consolidated and Combined StatementStatements of Changes in Equity
(Amounts in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Class A Common Stock | | Shares of Class B Common Stock | | Class A Common Stock, Par Value | | Class B Common Stock, Par Value | | Additional Paid in Capital | | Retained Earnings | | Total Stockholders’ equity | | Noncontrolling Interest | | Total Equity |
Balance—December 31, 2018 | 68,360 |
| | 45,207 |
| | $ | 684 |
| | $ | 452 |
| | $ | 312,659 |
| | $ | 119,274 |
| | $ | 433,069 |
| | $ | 307,745 |
| | $ | 740,814 |
|
Distributions paid and payable to noncontrolling unitholders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (547 | ) | | (547 | ) |
Exchanges of Class B Common Stock for Class A Common Stock | 1,637 |
| | (1,637 | ) | | 16 |
| | (16 | ) | | 11,413 |
| | — |
| | 11,413 |
| | (11,413 | ) | | — |
|
Effect of exchange on deferred tax asset, net of liability under tax receivable agreements | — |
| | — |
| | — |
| | — |
| | 896 |
| | — |
| | 896 |
| | — |
| | 896 |
|
$0.05/unit distribution to noncontrolling unitholders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,358 | ) | | (4,358 | ) |
Regular cash dividends declared and distributions paid | — |
| | — |
| | — |
| | — |
| | — |
| | (7,107 | ) | | (7,107 | ) | | — |
| | (7,107 | ) |
Restricted stock and RSU forfeitures | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | — |
| | 2 |
|
Share repurchases | (1,303 | ) | | — |
| | (13 | ) | | — |
| | (13,017 | ) | | — |
| | (13,030 | ) | | (4,068 | ) | | (17,098 | ) |
Stock based compensation expense | — |
| | — |
| | — |
| | — |
| | 6,451 |
| | — |
| | 6,451 |
| | — |
| | 6,451 |
|
Vesting of restricted stock units | 268 |
| | — |
| | 3 |
| | — |
| | (303 | ) | | — |
| | (300 | ) | | (739 | ) | | (1,039 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 40,153 |
| | 40,153 |
| | 34,279 |
| | 74,432 |
|
Balance—June 30, 2019 | 68,962 |
| | 43,570 |
| | $ | 690 |
| | $ | 436 |
| | $ | 318,099 |
| | $ | 152,322 |
| | $ | 471,547 |
| | $ | 320,899 |
| | $ | 792,446 |
|
| | | Members’ Equity | | Shares of Class A Common Stock | | Shares of Class B Common Stock | | Class A Common Stock, Par Value | | Class B Common Stock, Par Value | | Additional Paid in Capital | | Retained Earnings | | Total Stockholders’ equity | | Noncontrolling Interest | | Total Equity | Members’ Equity | | Shares of Class A Common Stock | | Shares of Class B Common Stock | | Class A Common Stock, Par Value | | Class B Common Stock, Par Value | | Additional Paid in Capital | | Retained Earnings | | Total Stockholders’ equity | | Noncontrolling Interest | | Total Equity |
Balance—December 31, 2017 | $ | 392,766 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 392,766 |
| $ | 392,766 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 392,766 |
|
Return on redeemable common units | (149 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (149 | ) | (149 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (149 | ) |
Net income prior to Corporate Reorganization | 8,705 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,705 |
| 8,705 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,705 |
|
Balance prior to Corporate Reorganization | $ | 401,322 |
| | — |
| | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 401,322 |
| $ | 401,322 |
| | — |
| | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 401,322 |
|
Corporate Reorganization | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exchange of Liberty LLC Units for Class A Common Stock and Class B Common Stock and extinguishment of Redeemable Common Units | (401,322 | ) | | 55,986 |
| | 48,207 |
| | 560 |
| | 482 |
| | 446,824 |
| | — |
| | 447,866 |
| | — |
| | 46,544 |
| (401,322 | ) | | 55,986 |
| | 48,207 |
| | 560 |
| | 482 |
| | 446,824 |
| | — |
| | 447,866 |
| |
|
| | 46,544 |
|
Net deferred tax liability due to corporate reorganization | — |
| | — |
| | — |
| | — |
| | — |
| | (28,620 | ) | | — |
| | (28,620 | ) | | — |
| | (28,620 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | (28,620 | ) | | — |
| | (28,620 | ) | | — |
| | (28,620 | ) |
Initial Public Offering | | | | | | | | | | | | | | |
|
| | | |
|
| | | | | | | | | | | | | | | | | | | |
Issuance of Class A Common Stock, net of underwriter discount and offering costs | — |
| | 14,340 |
| | — |
| | 143 |
| | — |
| | 220,117 |
| | — |
| | 220,260 |
| | — |
| | 220,260 |
| — |
| | 14,340 |
| | — |
| | 143 |
| | — |
| | 220,117 |
| | — |
| | 220,260 |
| | — |
| | 220,260 |
|
Redemption of Legacy Ownership, net of underwriter discount | — |
| | (1,609 | ) | | — |
| | (16 | ) | | — |
| | (25,881 | ) | | — |
| | (25,897 | ) | | — |
| | (25,897 | ) | |
Issuance of restricted stock | — |
| | 1,258 |
| | — |
| | 13 |
| | — |
| | (13 | ) | | — |
| | — |
| | — |
| | — |
| |
Liability due to tax receivable agreement | — |
| | — |
| | — |
| | — |
| | — |
| | (2,291 | ) | | — |
| | (2,291 | ) | | — |
| | (2,291 | ) | |
Redemption of legacy ownership, net of underwriter discount | | — |
| | (1,609 | ) | | — |
| - | (16 | ) | | — |
| | (25,881 | ) | | — |
| | (25,897 | ) | | — |
| | (25,897 | ) |
Issuance of Restricted Stock | | — |
| | 1,258 |
| | — |
| | 13 |
| | — |
| | (13 | ) | | — |
| | — |
| | — |
| | — |
|
Liability due to tax receivable agreements | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,291 | ) | | — |
| | (2,291 | ) | | — |
| | (2,291 | ) |
Initial allocation of noncontrolling interest of Liberty LLC effective on the date of the IPO | — |
| | — |
| | — |
| | — |
| | — |
| | (261,844 | ) | | — |
| | (261,844 | ) | | 261,844 |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | (261,844 | ) | | — |
| | (261,844 | ) | | 261,844 |
| | — |
|
Distributions paid to noncontrolling interest unitholders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,041 | ) | | (13,041 | ) | |
Distribution paid and payable to noncontrolling interest unitholders | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,041 | ) | | (13,041 | ) |
Restricted stock forfeited | — |
| | (17 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | (17 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | 1,196 |
| | — |
| | 1,196 |
| | — |
| | 1,196 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1,196 |
| | — |
| | 1,196 |
| | — |
| | 1,196 |
|
Net income subsequent to the Corporate Reorganization and IPO | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 73,270 |
| | 73,270 |
| | 66,753 |
| | 140,023 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 73,270 |
| | 73,270 |
| | 66,753 |
| | 140,023 |
|
Balance—June 30, 2018 | $ | — |
| | 69,958 |
| | 48,207 |
| | $ | 700 |
| | $ | 482 |
| | $ | 349,488 |
| | $ | 73,270 |
| | $ | 423,940 |
| | $ | 315,556 |
| | $ | 739,496 |
| $ | — |
| | 69,958 |
| | 48,207 |
| | $ | 700 |
| | $ | 482 |
| | $ | 349,488 |
| | $ | 73,270 |
| | $ | 423,940 |
| | $ | 315,556 |
| | $ | 739,496 |
|
See Notes to Condensed Consolidated and Combined Financial Statements.
LIBERTY OILFIELD SERVICES INC.
Condensed Consolidated and Combined Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | 2019 | | 2018 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 148,728 |
| | $ | 47,157 |
| $ | 74,432 |
| | $ | 148,728 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 58,622 |
| | 31,667 |
| 78,755 |
| | 58,622 |
|
Loss (gain) on disposal of assets | 565 |
| | (33 | ) | |
Loss on disposal of assets | | 1,366 |
| | 565 |
|
Interest expense on finance lease liability
| | 1,350 |
| | — |
|
Amortization of debt issuance costs | 2,868 |
| | 280 |
| 1,105 |
| | 2,868 |
|
Inventory write-down | 3,389 |
| | 259 |
| — |
| | 3,389 |
|
Stock based compensation expense | 1,196 |
| | — |
| |
Deferred tax expense | 8,447 |
| | — |
| |
Non-cash lease expense | | 2,828 |
| | — |
|
Share based compensation expense | | 6,451 |
| | 1,196 |
|
Deferred income taxes | | 6,895 |
| | 8,447 |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (25,503 | ) | | (84,500 | ) | (94,571 | ) | | (25,503 | ) |
Accounts receivable—related party | (122 | ) | | (2,216 | ) | (462 | ) | | (122 | ) |
Unbilled revenue | (59,496 | ) | | (23,543 | ) | (18,988 | ) | | (59,496 | ) |
Unbilled revenue—related party | 59 |
| | 2,487 |
| — |
| | 59 |
|
Inventories | (10,239 | ) | | (10,891 | ) | (26,785 | ) | | (10,239 | ) |
Prepaid and other current assets | (24,088 | ) | | (11,984 | ) | |
Other assets | | 18,151 |
| | (24,088 | ) |
Accounts payable and accrued liabilities | 4,775 |
| | 95,834 |
| 53,343 |
| | 4,775 |
|
Accounts payable and accrued liabilities—related party | — |
| | 1,044 |
| (1,000 | ) | | — |
|
Payment of operating lease liability | | (5,157 | ) | | — |
|
Net cash provided by operating activities | 109,201 |
| | 45,561 |
| 97,713 |
| | 109,201 |
|
Cash flows from investing activities: | | | | | | |
Capital expenditures | (140,861 | ) | | (205,151 | ) | |
Proceeds from disposal of assets | 3,018 |
| | 264 |
| |
Purchases of property and equipment and construction in-progress | | (130,408 | ) | | (140,861 | ) |
Proceeds from sale of assets | | 344 |
| | 3,018 |
|
Net cash used in investing activities | (137,843 | ) | | (204,887 | ) | (130,064 | ) | | (137,843 | ) |
Cash flows from financing activities: | | | | | | |
Proceeds from issuance of common stock, net of underwriter discount | 230,174 |
| | — |
| — |
| | 230,174 |
|
Redemption of LLC Units from Legacy Owners | (25,897 | ) | | — |
| |
Redemption of Liberty LLC Units from legacy owners | | — |
| | (25,897 | ) |
Repayments of borrowings on term loan | (61,535 | ) | | (6,000 | ) | (438 | ) | | (61,535 | ) |
Proceeds from borrowings on line-of-credit | — |
| | 56,000 |
| |
Proceeds from Liberty Oilfield Services Holdings LLC | | — |
| | 2,115 |
|
Repayments of borrowings on line-of-credit | (30,000 | ) | | — |
| — |
| | (30,000 | ) |
Proceeds from Liberty Oilfield Services Holdings LLC | 2,115 |
| | — |
| |
Proceeds from related party bridge loans | — |
| | 60,000 |
| |
Payments on capital lease obligations | — |
| | (119 | ) | |
Payments on finance lease obligations | | (6,794 | ) | | — |
|
Class A Common Stock dividend | | (6,885 | ) | | — |
|
Restricted Stock Vesting | | (1,039 | ) | | — |
|
Distribution to noncontrolling interest unitholders | | (4,357 | ) | | (13,041 | ) |
Share buyback | | (18,398 | ) | | — |
|
Payment of deferred equity offering costs | | — |
| | (5,882 | ) |
Payments of debt issuance costs | (282 | ) | | (1,224 | ) | — |
| | (282 | ) |
Proceeds from issuance of redeemable common units | — |
| | 39,794 |
| |
Distributions paid to noncontrolling interest unitholders | (13,041 | ) | | — |
| |
Payment of deferred equity offering costs | (5,882 | ) | | — |
| |
Net cash provided by financing activities | 95,652 |
| | 148,451 |
| |
Advance payments on TRAs | | (547 | ) | | — |
|
Net cash (used in) provided by financing activities | | (38,458 | ) | | 95,652 |
|
Net increase (decrease) in cash and cash equivalents | 67,010 |
| | (10,875 | ) | (70,809 | ) | | 67,010 |
|
Cash and cash equivalents—beginning of period | 16,321 |
| | 11,484 |
| 103,312 |
| | 16,321 |
|
Cash and cash equivalents—end of period | $ | 83,331 |
| | $ | 609 |
| $ | 32,503 |
| | $ | 83,331 |
|
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for income taxes | $ | 15,026 |
| | $ | — |
| $ | 1,042 |
| | $ | 15,026 |
|
Cash paid for interest | $ | 7,555 |
| | $ | 3,438 |
| $ | 5,575 |
| | $ | 7,555 |
|
Non-cash investing and financing activities: | | | | | | |
Capital expenditures included in accounts payable and accrued liabilities | $ | 6,269 |
| | $ | 23,280 |
| $ | 10,353 |
| | $ | 6,269 |
|
Related party bridge loans exchanged for Redeemable Class 2 Common Units | $ | — |
| | $ | 60,761 |
| |
See Notes to Condensed Consolidated and Combined Financial Statements.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Note 1—Organization and Basis of Presentation
Organization
Liberty Oilfield Services Inc. (the “Company”) was incorporated as a Delaware corporation on December 21, 2016, to become a holding corporation for Liberty Oilfield Services New HoldCo LLC (“Liberty LLC”) and its subsidiaries upon completion of a corporate reorganization (as detailed below, the(the “Corporate Reorganization”) and planned initial public offering of the Company (“IPO”). The Company has no material assets other than its ownership of units in Liberty LLC.LLC (“Liberty LLC Units”). Please refer to the Company’s 2018 Annual Report (the “Annual Report”) for additional information on the Corporate Reorganization and IPO that were completed on January 17, 2018.
Prior to the Corporate Reorganization, Liberty Oilfield Services Holdings LLC (“Liberty Holdings”) wholly owned Liberty Oilfield Services LLC (“LOS”) and LOS Acquisition CO I LLC (“ACQI” and, together with LOS, the “Predecessor”), which includes the assets and liabilities of LOS Odessa RE Investments, LLC (“Odessa”) and LOS Cibolo RE Investments, LLC (“Cibolo”). Following the Corporate Reorganization, Liberty LLC wholly owns the Predecessor. Effective March 22, 2018, the assets of ACQI were contributed into LOS and ACQI was dissolved.
The Company, together with its subsidiaries, is a multi-basin provider of hydraulic fracturing services, with a focus on deploying the latest technologies in the technically demanding oil and gas reservoirs in which it operates, principally in North Dakota, Colorado, Wyoming and Texas.
Corporate Reorganization
In connection with the IPO, the Company completed a series of organizational transactions, including the following:
Liberty Holdings contributed all of its assets to Liberty LLC in exchange for Liberty LLC Units (as defined below);
Liberty Holdings liquidated and distributed to its then-existing owners (the “Legacy Owners”) Liberty LLC Units pursuant to the terms of the limited liability company agreement of Liberty Holdings and the Master Reorganization Agreement dated as of January 11, 2018, by and among the Company, Liberty Holdings, Liberty LLC, and the other parties named therein (the “Master Reorganization Agreement”);
Certain of the Legacy Owners directly or indirectly contributed all or a portion of their Liberty LLC Units to the Company in exchange for 55,685,027 shares of our Class A common stock, par value $0.01 per share (the “Class A Common Stock”), and 1,258,514 restricted shares of Class A Common Stock. Subsequent to the initial exchange, 1,609,122 shares of Class A Common Stock were redeemed for an aggregate price of $25.9 million, upon the exercise of the underwriters’ overallotment option;
the Company issued, at par, the Legacy Owners that continued to own Liberty LLC Units (the “Liberty Unit Holders”) an aggregate amount of 48,207,372 shares of our Class B common stock, par value $0.01 per share (the “Class B Common Stock”); and
the Company contributed the net proceeds it received from the IPO to Liberty LLC in exchange for additional Liberty LLC Units such that the Company holds a total number of Liberty LLC Units equal to the number of shares of Class A Common Stock outstanding following the IPO.
Initial Public Offering
On January 17, 2018 the Company completed its IPO of 14,640,755 shares of its Class A Common Stock at a public offering price of $17.00 per share, of which 14,340,214 shares were offered by the Company and 300,541 were offered by the selling shareholder. The Company received $220.3 million net proceeds from the IPO, after deducting approximately $13.4 million in underwriting discounts and commissions and $10.1 million of other offering costs. The Company did not receive any proceeds from the sale of the shares of Class A Common Stock by the selling shareholder. The Company used $25.9 million of net proceeds to redeem ownership interests in Liberty LLC from the Legacy Owners. The Company contributed the remaining net proceeds to Liberty LLC in exchange for units in Liberty LLC (the “Liberty LLC Units”). Liberty LLC used a portion of these net proceeds (i) to repay outstanding borrowings and accrued interest under the Predecessor’s ABL Facility (as defined herein), totaling approximately $30.1 million, (ii) to repay 35% of the Predecessor’s outstanding borrowings, accrued interest and prepayment premium under the Term Loan Facility (as defined herein), totaling approximately $62.5 million and (iii) for
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
general corporate purposes, including repayment of additional indebtedness and funding a portion of 2018 and other future capital expenditures. As of June 30, 2018, the Company owns 59.2% of Liberty LLC.
Basis of Presentation
The accompanying unaudited condensed consolidated and combined financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with the annual financial statements included in the 2017 Annual Report on Form 10-K.Report.
The accompanying unaudited condensed consolidated and combined financial statements and related notes present the condensed consolidated financial position, results of operations, cash flows, and equity of the Company as of and for the three and six months ended June 30, 20182019 and the combined financial position, results of operations, and cash flows, and equity of the PredecessorCompany as of December 31, 20172018 and for the three and six months ended June 30, 2017.2018. The interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim period. The results of operations for the three and six months ended June 30, 20182019 are not necessarily indicative of the results of operations expected for the entire fiscal year ended December 31, 2018.2019.
All intercompany amounts have been eliminated in the presentation of thesethe unaudited condensed consolidated and combined financial statements.statements of the Company. Comprehensive income is not reported due to the absence of items of other comprehensive income or loss during the periods presented. The condensed consolidated and combined financial statements include financial data at historical cost as the contribution of assets is considered to be a reorganization of entities under common control. The condensed consolidated and combined financial statements may not be indicative of the actual level of assets, liabilities and costs that would have been incurred by the Predecessor if it had operated as an independent, publicly-traded company during the periods prior to the IPO or of the costs expected to be incurred in the future. In the opinion of management, the adjustments necessary for a fair presentation of the combined financial statements in accordance with GAAP have been made. Such adjustments are of a normal recurring nature.
The unaudited condensed consolidated and combined financial statements for periods prior to January 17, 2018, reflect the historical results of the Predecessor. The unaudited condensed consolidated financial statements include the amounts of the Company and all majority owned subsidiaries where the Company has the ability to exercise control.
The Company’s operations are organized into a single reportable segment, which consists of hydraulic fracturing services.
Note 2—Significant Accounting Policies
Revenue RecognitionRecently Adopted Accounting Standards
Leases
EffectiveOn January 1, 2018,2019, the Company adopted a comprehensive new revenue recognition standard, Accounting Standards Update (“ASU”) No. 2016-02, Leases (Accounting Standard Codification (“ASC”) Topic 606-842)Revenue from Contracts with Customers. The details, as amended by other ASUs issued since February 2016 (“ASU 2016-02” or “ASC Topic 842”), using the modified retrospective transition method applied at the effective date of the significant changes to accounting policies resulting from the adoption of the new standard are set out below. The Company adopted the standard using a modified retrospective method; accordingly, the comparative information for the three and six months ended June 30, 2017 has not been adjusted and continues to be reported under the previous revenue standard. The adoption ofBy electing this standard did not have a material impact to the condensed consolidated financial position, reported revenue, results of operations or cash flows as of and for the three and six months ended June 30, 2018.
Under the new standard, revenue recognition is based on the transfer of control, or our customer’s ability to benefit from our services and products in an amount that reflects the consideration expected to be received in exchange for those services and products. In recognizing revenue for services and products, the transaction price is determined from sales orders or contracts with customers. Revenue is recognized at the completion of each fracturing stage, and in most cases the price at the end of each stage is fixed, however, in limited circumstances contracts may contain variable consideration.
Variable consideration typically may relate to discounts, price concessions and incentives. We estimate variable consideration based on the amount of consideration we expect to receive. The Company accrues revenue on an ongoing basis to reflect updated information for variable consideration as performance obligations are met.
The Company also assesses customers’ ability and intention to pay, which is based on a variety of factors including historical payment experience and financial condition. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 45 days.
From time to time, the Company may require partial payment in advance from new customers to secure credit or from existing customers in order to secure additional hydraulic fracturing services. Initially, such payments are recorded in the
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
accompanyingoptional transition method, information prior to January 1, 2019 has not been restated and continues to be reported under the accounting standards in effect for the period (ASC Topic 840).
The Company elected the package of practical expedients permitted under the transition guidance within the new standard, including the option to carry forward the historical lease classifications and assessment of initial direct costs, account for lease and non-lease components as a single lease, and to not include leases with an initial term of less than 12 months in the lease assets and liabilities.
The adoption of ASC Topic 842 resulted in the recognition of finance lease right-of-use assets, operating lease right-of-use assets, and lease liabilities for finance and operating leases. As of January 1, 2019, the adoption of the new standard resulted in the recognition of finance lease assets of $57.2 million, including $2.1 million and $2.0 million reclassified from prepaid and other current assets and other assets, respectively, and finance lease liabilities of $53.2 million. Additionally, the Company recorded operating lease assets of $64.0 million, including $1.9 million reclassified from prepaid and other current assets, and operating lease liabilities of $63.6 million, including $1.5 million reclassified from accrued interest and other liabilities as of January 1, 2019. There was no significant impact to the condensed consolidated and combined financial statements as deferred revenue, and upon performance of the agreed services,income, equity or cash flows. Refer to Note 5-Leases for additional disclosures required under ASC Topic 842.
For leases entered into after January 1, 2019, the Company recognizes revenue consistent withdetermines if an arrangement is a lease at inception and evaluates identified leases for operating or finance lease treatment. Operating or finance lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its revenue recognition policy described above. Asincremental borrowing rate based on the information available at the commencement date in determining the present value of June 30, 2018,lease payments. Lease terms may include options to renew, however, the Company had $3.8 million recorded as deferred revenue relatedtypically cannot determine its intent to renew a lease with reasonable certainty at inception.
Revenue Recognition
In connection with the unearned portionadoption of a prepayment from an existing customer to secure additional services from a new fleet by the end of 2017. The new fleet commenced services in December 2017, andASC Topic 842, the Company appliesdetermined that certain of its service revenue contracts contain a lease component. The Company elected to adopt a practical expedient available to lessors, which allows the prepayment inCompany to combine the lease and non-lease components and account for the combined component is accordance with the customer agreement as services are performed. Duringaccounting treatment for the three and six months ended June 30, 2018,predominant component. Therefore, the Company recognized $2.9 millioncombines the lease and $5.4 millionservice component for certain of the prepayment to revenue, respectively.
Fleet Start-up Costs
The Company incurs start-up costs to commission a new fleet or district. These costs include hiringCompany’s service contracts and training of personnel, and acquisition of consumable parts and tools. Start-up costs are expensed as incurred, and are reflected in general and administrative expenses in the combined statement of operations. Start-up costs for the three and six months ended June 30, 2018 were $3.3 million and $6.6 million, respectively, related to one and three new fleets deployed during each respective period. Start-up costs for the three and six months ended June 30, 2017 were $4.3 million and $8.9 million, respectively, related to four and six new fleets deployed during each respective period. The total amount of start-up costs incurred for the commissioning of each new fleet depends primarily on the number and timing of hiring additional personnel to staff such fleets, and such costs may not be entirely incurred in the same period as the fleet is deployed.
The terms and conditions of the Credit Facilities, defined herein, between the Company and its lenders provides for the add-back of costs or expenses incurred in connection with the acquisition, deployment and opening of any new hydraulic fracturing fleet or district in the computation of certain financial covenants. (See Note 5).
Recently Adopted Accounting Standards
In May 2014 the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity is required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additional disclosures are required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The Company adopted this standard on January 1, 2018 using the modified retrospective method. The Company did not record a cumulative effect adjustment to the opening balance of retained earnings, as no adjustment was necessary. The adoption of this standard did not impact the Company’s reported revenue, net income or cash flows.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The adoption of ASU 2016-01 did not have a material impact on the condensed consolidated and combined financial statements of the Company.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on eight different issues, intended to reduce diversity in practice on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of ASU 2016-15 did not have a material impact on the condensed consolidated and combined financial statements of the Company.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which requires entities to recognize the tax consequences of intercompany asset transfers in the period in which the transfer takes place, with the exception of inventory transfers. The adoption of ASU 2016-16 did not have a material impact on the condensed consolidated and combined financial statements of the Company.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which provides guidance to increase clarity and reduce both diversity in practice and cost and complexity when applying the existing accounting guidance on changes to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 require an entitycontinues to account for the effects of a modification unless all the following conditions are met: (i) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (ii) the vesting conditions of the modified award are the same as the vesting
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance in ASU 2017-09 is applied prospectively. The amendments in ASU 2017-09 are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company’s adoption of this guidance did not materially impact its condensed consolidated and combined financial statements.component under ASC Topic 606, Revenue from Contracts with Customers.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 is expected to impact the Company’s consolidated and combined financial statements as the Company has certain operating and real property lease arrangements for which it is the lessee. The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated and combined financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2019, with a modified-retrospective approach to be used for implementation. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. Specifically, this new guidance requires using a forward looking, expected loss model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This will replace the currently used model and may result in an earlier recognition of allowance for losses. The Company is currently evaluating the impact of the adoption of this standard will have on its condensed consolidated and combined financial statements.
Note 3—Inventories
Inventories consistThe Company incurs start-up costs to commission a new fleet or district. These costs include hiring and training of the following:
|
| | | | | | | |
| June 30, | | December 31, |
($ in thousands) | 2018 | | 2017 |
Proppants | $ | 32,588 |
| | $ | 30,523 |
|
Chemicals | 10,731 |
| | 10,660 |
|
Maintenance parts | 19,055 |
| | 14,341 |
|
| $ | 62,374 |
| | $ | 55,524 |
|
Aspersonnel, and acquisition of June 30, 2018, the lower of cost or net realizable value analysis resultedconsumable parts and tools. Start-up costs are expensed as incurred, and are reflected in general and administrative expenses in the Company recording a write-down to inventory carrying valuesstatement of $3.4 million, included as a component in cost of services in the condensed consolidated statements of incomeoperations. Start-up costs for the three and six month periodsmonths ended June 30, 2018.2019 were $0.4 million and $1.5 million, respectively. The Company deployed one fleet during the six months ended June 30, 2019. Start-up costs for the three and six months ended June 30, 2018 were $3.3 million and $6.6 million, respectively, related to one and three new fleets deployed during each respective period. The total amount of start-up costs incurred for the commissioning of each new fleet depends primarily on the number and timing of hiring additional personnel to staff such fleets, and such costs may not be entirely incurred in the same period as the fleet is deployed.
The terms and conditions of the Credit Facilities, defined herein, between the Company and its lenders provides for the add-back of costs or expenses incurred in connection with the acquisition, deployment and opening of any new hydraulic fracturing fleet or district in the computation of certain financial covenants (see Note 6).
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Note 3—Inventories
Inventories consist of the following:
|
| | | | | | | |
| June 30, | | December 31, |
($ in thousands) | 2019 | | 2018 |
Proppants | $ | 22,919 |
| | $ | 22,038 |
|
Chemicals | 12,780 |
| | 10,781 |
|
Maintenance parts | 51,110 |
| | 27,205 |
|
| $ | 86,809 |
| | $ | 60,024 |
|
During the three and six months ended June 30, 2019, the Company did not record any write-down to inventory carrying values.
Note 4—Property and Equipment
Property and equipment consist of the following:
| | | Estimated useful lives (in years) | | June 30, | | December 31, | Estimated useful lives (in years) | | June 30, | | December 31, |
($ in thousands) | | 2018 | | 2017 | | 2019 | | 2018 |
Land | N/A | | $ | 5,400 |
| | $ | 4,495 |
| N/A | | $ | 5,400 |
| | $ | 5,400 |
|
Field services equipment | 2-7 | | 684,397 |
| | 572,096 |
| 2-7 | | 919,614 |
| | 778,423 |
|
Vehicles | 4-7 | | 60,500 |
| | 60,815 |
| 4-7 | | 60,053 |
| | 59,807 |
|
Buildings and facilities | 5-30 | | 26,917 |
| | 24,260 |
| 5-30 | | 28,197 |
| | 27,795 |
|
Office equipment, furniture, and software | 2-7 | | 6,173 |
| | 5,879 |
| 2-7 | | 6,368 |
| | 6,200 |
|
| | 783,387 |
| | 667,545 |
| | 1,019,632 |
| | 877,625 |
|
Less accumulated depreciation and amortization | | (255,548 | ) | | (198,453 | ) | | (377,288 | ) | | (307,277 | ) |
| | 527,839 |
| | 469,092 |
| | 642,344 |
| | 570,348 |
|
Construction in-progress | N/A | | 33,175 |
| | 25,684 |
| N/A | | 5,270 |
| | 56,705 |
|
| | $ | 561,014 |
| | $ | 494,776 |
| | $ | 647,614 |
| | $ | 627,053 |
|
Depreciation expense for the three months ended June 30, 2019 and 2018 and 2017 was $30.6$37.4 million and $17.5$30.6 million, respectively. During the six months ended June 30, 20182019 and 2017,2018, the Company recognized depreciation expense of $58.6$73.1 million and $31.7$58.6 million, respectively.
Note 5—Leases
The Company has operating and finance leases primarily for vehicles, equipment, railcars, office space, and facilities. The terms and conditions for these leases vary by the type of underlying asset.
Certain leases include variable lease payments for items such as property taxes, insurance, maintenance, and other operating expenses associated with leased assets. Payments that vary based on an index or rate are included in the measurement of lease assets and liabilities at the rate as of the commencement date. All other variable lease payments are excluded from the measurement of lease assets and liabilities, and are recognized in the period in which the obligation for those payments is incurred.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The components of lease expense for the three and six months ended June 30, 2019 were as follows:
|
| | | | | | | |
| June 30, 2019 |
($ in thousands) | Three Months Ended | | Six Months Ended |
Finance lease cost: | | | |
Amortization of right-of-use assets | $ | 2,611 |
| | $ | 4,977 |
|
Interest on lease liabilities | 699 |
| | 1,350 |
|
Operating lease cost | 5,053 |
| | 10,264 |
|
Variable lease cost | 603 |
| | 1,607 |
|
Total lease cost | $ | 8,966 |
| | $ | 18,198 |
|
Rent expense recorded for the three and six months ended June 30, 2018 was $9.4 million and $17.3 million, respectively.
Supplemental cash flow and other information related to leases for the three and six months ended June 30, 2019 were as follows:
|
| | | | | | | |
| June 30, 2019 |
($ in thousands) | Three Months Ended | | Six Months Ended |
Cash paid for amounts included in measurement of liabilities: | | | |
Operating leases | $ | 2,752 |
| | $ | 10,550 |
|
Finance leases | 3,512 |
| | 6,794 |
|
Right-of-use assets obtained in exchange for new lease liabilities: | | | |
Operating leases | 625 |
| | 70,055 |
|
Finance leases | 6,718 |
| | 64,139 |
|
Lease terms and discount rates as of June 30, 2019 were as follows:
|
| | | |
| | June 30, |
| | 2019 |
Weighted-average remaining lease term: | | |
Operating leases | | 6.4 years |
|
Finance leases | | 1.8 years |
|
Weighted-average discount rate: | | |
Operating leases | | 5.4 | % |
Finance leases | | 5.2 | % |
Future minimum lease commitments as of June 30, 2019 are as follows:
|
| | | | | | | | |
($ in thousands) | | Finance | | Operating |
Remainder of 2019 | | $ | 7,241 |
| | $ | 9,679 |
|
2020 | | 26,788 |
| | 18,445 |
|
2021 | | 20,395 |
| | 13,584 |
|
2022 | | 3,444 |
| | 7,126 |
|
2023 | | — |
| | 4,245 |
|
Thereafter | | — |
| | 19,588 |
|
Total lease payments | | 57,868 |
| | 72,667 |
|
Less imputed interest | | (3,832 | ) | | (12,133 | ) |
Total | | $ | 54,036 |
| | $ | 60,534 |
|
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company’s vehicle leases typically include a residual value guarantee. For the Company’s vehicle leases classified as operating leases, the total residual value guaranteed as of June 30, 2019 is $3.1 million; the payment is not probable and therefore has not been included in the measurement of the lease liability and right-of-use asset. For vehicle leases that are classified as financing leases, the Company includes the residual value guarantee in the financing lease liability.
At December 31, 2018, future minimum lease payments under operating leases were as follows:
|
| | | | |
($ in thousands) | | |
Years Ending December 31, | | |
2019 | | $ | 42,717 |
|
2020 | | 48,685 |
|
2021 | | 32,390 |
|
2022 | | 6,093 |
|
2023 | | 4,303 |
|
Thereafter | | 19,742 |
|
| | $ | 153,930 |
|
Note 6—Debt
Debt consists of the following:
| | | June 30, | | December 31, | June 30, | | December 31, |
($ in thousands) | 2018 | | 2017 | 2019 | | 2018 |
Term Loan Outstanding | $ | 113,028 |
| | $ | 174,562 |
| |
Revolving Line of Credit | — |
| | 30,000 |
| |
Term Loan outstanding | | $ | 111,278 |
| | $ | 111,715 |
|
Deferred financing costs and original issue discount | (5,823 | ) | | (8,205 | ) | (4,506 | ) | | (5,191 | ) |
Total debt, net of deferred financing costs and original issue discount | $ | 107,205 |
| | $ | 196,357 |
| $ | 106,772 |
| | $ | 106,524 |
|
Current portion of long-term debt, net of discount | $ | 375 |
| | $ | 11 |
| $ | 397 |
| | $ | 385 |
|
Long-term debt, net of discount and current portion | 106,830 |
| | 196,346 |
| 106,375 |
| | 106,139 |
|
| $ | 107,205 |
| | $ | 196,357 |
| $ | 106,772 |
| | $ | 106,524 |
|
On September 19, 2017, theThe Company entered intohas two new credit agreements in effect for a revolving line of credit up to $250.0 million (the “ABL Facility”) and a $175.0 million term loan (the “Term Loan Facility”, and together with the ABL Facility the “Credit Facilities”). Following is a description of the ABL Facility and the Term Loan Facility.
ABL Facility
Under the terms of the ABL Facility, up to $250.0 million may be borrowed, subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory. As of June 30, 2018,2019, the borrowing base was calculated to be $235.4$234.2 million, and the Company had no borrowings outstanding, except for a letter of credit in the amount of $0.3 million, with $235.1$233.9 million of remaining availability. Borrowings under the ABL Facility bear interest at LIBOR or a base rate, plus an applicable LIBOR margin of 1.5% to 2.0% or base rate margin of 0.5% to 1.0%, as defined in the ABL Facility credit agreement. The unused commitment is subject to an unused commitment fee ofis 0.375% to 0.5%. Interest and fees are payable in arrears at the end of each month, or, in the case of LIBOR loans, at the end of each interest period.average monthly unused commitment. The ABL Facility matures on the earlier of (i) September 19, 2022 and (ii) to the extent the debt under the Term Loan Facility remains outstanding, 90 days prior to the final maturity of the Term Loan Facility, which matures on September 19, 2022. Borrowings under the ABL
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Facility are collateralized by accounts receivable and inventory, and further secured by the Company, Liberty LLC and R/C IV Non-U.S. LOS Corp., a Delaware corporation and a subsidiary of the Company, as parent guarantors.
Term Loan Facility
The Term Loan Facility provides for a $175.0 million term loan, of which $113.0$111.3 million remained outstanding as of June 30, 2018. Amounts outstanding bear interest at LIBOR or a base rate, plus an applicable margin of 7.625% or 6.625%, respectively, and the weighted average2019. The rate on borrowingsborrowing was 9.7%10.0% as of June 30, 2018.2019. The Company is required to make quarterly principal payments of 1% per annum of the initial principal balance, commencing on December 31, 2017, with final payment due at maturity on September 19, 2022. The Term Loan Facility is collateralized by the fixed assets of LOS and its subsidiaries, and is further secured by the Company, Liberty LLC and R/C IV Non-U.S. LOS Corp., a Delaware corporation and a subsidiary of the Company, as parent guarantors.
The Credit Facilities include certain non-financial covenants, including but not limited to restrictions on incurring additional debt and certain distributions. Moreover, the ability of the Company to incur additional debt and to make distributions is dependent on maintaining a maximum leverage ratio. The Term Loan Facility requires mandatory prepayments upon certain dispositions of property or issuance of other indebtedness, as defined, and annually a percentage of excess cash flow (25% to 50%, depending on leverage ratio, of consolidated net income less capital expenditures and other permitted payments, commencing with the year ending December 31, 2018). Certain mandatory prepayments and optional prepayments are subject
LIBERTY OILFIELD SERVICES INC.
Notes to a prepayment premium of 3% of the prepaid principal declining annually to 1% during the first three years of the term of the Term Loan Facility.Condensed Consolidated Financial Statements
(Unaudited)
The Credit Facilities are not subject to financial covenants unless liquidity, as defined in the respective credit agreements, drops below a specified level. Under the ABL Facility, the Company is required to maintain a minimum fixed charge coverage ratio, as defined in the credit agreement governing the ABL Credit Facility, of 1.0 to 1.0 for each period if excess availability is less than 10% of the borrowing base or $12.5 million, whichever is greater. Under the Term Loan Facility, the Company is required to maintain a minimum fixed charge coverage ratio, as defined, of 1.2 to 1.0 for each trailing twelve-month period if the Company’s liquidity, as defined, is less than $25.0 million for at least five consecutive business days.
The Company was in compliance with these covenants as of June 30, 2018.2019.
Maturities of debt are as follows:
|
| | | |
($ in thousands) | |
Year Ending June 30, | |
2019 | $ | 1,750 |
|
2020 | 2,188 |
|
2021 | 1,750 |
|
2022 | 1,312 |
|
2023 | 106,028 |
|
| $ | 113,028 |
|
Note 6—Redeemable Common Units
During February 2017, ACQI received $39.8 million in cash from Liberty Holdings in exchange for 40,000,000 redeemable common units of ACQI which accrue a return of 8% per annum (the “Redeemable Common Units”). The Redeemable Common Units were redeemable at the option of the holder on the later of (A) the earlier of an initial public offering or March 23, 2020 and (B) the second business day after all principal and interest outstanding under the ABL Facility have been paid in full and commitments thereunder are terminated. In accordance with ASC 505, “Equity”, due to their conditional redemption feature, the Redeemable Common Units were classified as temporary equity in the accompanying combined balance sheet as of December 31, 2017.
The Redeemable Common Units were deemed extinguished and satisfied in full in connection with the Corporate Reorganization (see Note 1). |
| | | |
($ in thousands) | |
Remainder of 2019 | $ | 1,313 |
|
2020 | 1,750 |
|
2021 | 1,750 |
|
2022 | 106,465 |
|
2023 | — |
|
| $ | 111,278 |
|
Note 7—Fair Value Measurements and Financial Instruments
The fair values of the Company’s assets and liabilities represent the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction at the reporting date. These fair value measurements
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. The Company discloses the fair values of its assets and liabilities according to the quality of valuation inputs under the following hierarchy:
Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities.
Level 2 Inputs: Inputs other than quoted prices that are directly or indirectly observable.
Level 3 Inputs: Unobservable inputs that are significant to the fair value of assets or liabilities.
The classification of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroborating market data becomes available. Assets and liabilities that are initially reported as Level 2 are subsequently reported as Level 3 if corroborating market data is no longer available. Transfers occur at the end of the reporting period. There were no transfers into or out of Levels 1, 2 and 3 during the six months ended June 30, 20182019 and 2017.2018.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, accrued liabilities, long-term debt, and capitalfinance and operating lease obligations. These financial instruments do not require disclosure by level. The carrying values of all the Company’s financial instruments included in the accompanying condensed consolidated balance sheets approximated or equaled their fair values at June 30, 20182019 and December 31, 2017.2018.
The carrying values of cash and cash equivalents, accounts receivable and accounts payable (including accrued liabilities) approximated fair value at June 30, 20182019 and December 31, 2017,2018, due to their short-term nature.
The carrying value of amounts outstanding under long-term debt agreements with variable rates approximated fair value at June 30, 20182019 and December 31, 2017,2018, as the effective interest rates approximated market rates.
Nonfinancial assets
The Company estimates fair value to perform impairment tests as required on long-lived assets. The inputs used to determine such fair value are primarily based upon internally developed cash flow models and would generally be classified within Level 3 in the event that such assets were required to be measured and recorded at fair value within the combined financial statements. There were no such measurements required as of June 30, 20182019 and December 31, 2017.2018.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Credit Risk
The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, and trade receivables.
The Company’s cash balances on deposit with financial institutions total $83.3$32.5 million and $16.3$103.3 million as of June 30, 20182019 and December 31, 2017,2018, respectively, which exceeded FDIC insured limits. The Company regularly monitors these institutions’ financial condition.
The majority of the Company’s customers have stated payment terms of 45 days or less. As of June 30, 20182019 and December 31, 2017, one customer2018, customers A and B accounted for 16%23% and 22%customers B and C accounted for 28% of total accounts receivable and unbilled revenue, respectively. The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. During the three months ended June 30, 2019, no customers accounted for more than 10% of total revenue, and during the three months ended June 30, 2018, and 2017, one customer A accounted for 15% and 28% of total revenue, respectively.revenue. During the six months ended June 30, 2019 and 2018, and 2017, one customer D accounted for 16%10% and 30%customer A accounted for 16% of total revenue, respectively.
As of June 30, 20182019 and December 31, 2017,2018, the Company had no provision for doubtful accounts.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Note 8—Equity
Preferred Stock
As of June 30, 20182019, the Company had 10,000 shares of preferred stock authorized, par value $0.01, with none issued and outstanding. If issued, each class or series of preferred stock will cover the number of shares and will have the powers, preferences, rights, qualifications, limitations and restrictions determined by the Company’s board of directors, which may include, among others, dividend rights, liquidation preferences, voting rights, conversion rights, preemptive rights and redemption rights. Except as provided by law or in a preferred stock designation, the holders of preferred stock will not be entitled to vote at or receive notice of any meeting of shareholders.stockholders.
Class A Common Stock
The Company had a total of 69,958,11368,962,200 shares of Class A Common Stock outstanding as of June 30, 20182019, which includes 937,716555,713 shares of unvested restricted stock. Holders of Class A Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders and are entitled to ratably receive dividends when and if declared by the Company’s board of directors.
Class B Common Stock
The Company had a total 48,207,372of 43,570,372 shares of Class B Common Stock outstanding as of June 30, 2018.2019. Holders of the Class B Common Stock are entitled to one vote per share on all matters to be voted upon by stockholders. Holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters presented to the Company’s stockholders for their vote or approval, except with respect to amendment of certain provisions of the Company’s certificate of incorporation that would alter or change the powers, preferences or special rights of the Class B Common Stock so as to affect them adversely, which amendments must be by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class, or as otherwise required by applicable law.
HoldersRestricted Stock Awards
Restricted stock awards are awards of Class BA Common Stock do not havethat are subject to restrictions on transfer and to a risk of forfeitures if the award recipient is no longer an employee or director of the Company for any rightreason prior to receive dividends, unless the dividend consistslapse of the restrictions.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the Company’s unvested restricted stock activity for the six months ended June 30, 2019:
|
| | | | | | |
| Number of Shares | | Grant Date Fair Value per Share (1) |
Outstanding at December 31, 2018 | 634,653 |
| | $ | — |
|
Vested | (78,940 | ) | | — |
|
Forfeited | — |
| | — |
|
Outstanding at June 30, 2019 | 555,713 |
| | $ | — |
|
(1) Prior to the IPO and Corporate Reorganization, Liberty Holdings issued Class B Common Stock orunits of rights, options, warrants or other securities convertible or exercisable into or exchangeableLiberty Holdings (“Legacy Units”). The Legacy Units were determined to have a de minimis grant-date fair value based on their assigned benchmark values. In connection with the Corporate Reorganization, the unvested Legacy Units were exchanged for 1,258,514 shares of restricted stock with the same terms and requisite vesting conditions. The shares of restricted stock retain the grant date fair value of the Legacy Units.
Restricted Stock Units
Restricted stock units (“RSUs”) granted pursuant to the Long Term Incentive Plan (“LTIP”), if they vest, will be settled in shares of the Company’s Class BA Common Stock. RSUs were granted with vesting terms up to five years. Changes in non-vested RSUs outstanding under the LTIP during the six months ended June 30, 2019 were as follows:
|
| | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value per Unit |
Non-vested as of December 31, 2018 | 1,193,683 |
| | $ | 19.24 |
|
Granted | 877,732 |
| | 15.09 |
|
Vested | (327,799 | ) | | 19.97 |
|
Forfeited | (13,029 | ) | | 19.12 |
|
Outstanding at June 30, 2019 | 1,730,587 |
| | $ | 17.00 |
|
Performance Restricted Stock Units
Performance restricted stock units (“PSUs”) granted pursuant to the LTIP, if they vest, will be settled in shares of the Company’s Class A Common Stock. PSUs were granted with a three year cliff vesting schedule, subject to a performance target compared to an index of competitors’ results over the three year period from January 1, 2019 through December 31, 2021. The Company records compensation expense based on the Company’s best estimate of the number of PSUs that will vest at the end of the performance period. If such performance targets are not met, or are not expected to be met, no compensation expense is recognized and any recognized compensation expense is reversed. Changes in non-vested PSUs outstanding under the LTIP during the six months ended June 30, 2019 were as follows:
|
| | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value per Unit |
Non-vested as of December 31, 2018 | — |
| | $ | — |
|
Granted | 356,908 |
| | 14.93 |
|
Vested | — |
| | — |
|
Forfeited | — |
| | — |
|
Outstanding at June 30, 2019 | 356,908 |
| | $ | 14.93 |
|
Stock-based compensation is included in cost of services and general and administrative expenses in the Company’s condensed consolidated statements of income. The Company recognized stock based compensation expense of $3.6 million and $6.5 million for the three and six months ended June 30, 2019. The Company recognized stock based compensation expense of $1.2 million in the three and six months ended June 30, 2018. There was approximately $29.3 million of unrecognized compensation expense relating to outstanding RSUs and PSUs as of June 30, 2019. The unrecognized compensation expense will be recognized on a straight-line basis over the weighted average remaining vesting period of 2.3 years.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Dividends
The Company paid proportionally with respect to each outstandingquarterly cash dividends of $0.05 per share of Class BA Common Stock on March 20 and a dividend consistingJune 20, 2019 to stockholders of record as of March 6 and June 6, 2019, respectively. During the six months ended June 30, 2019 Liberty LLC paid distributions of $11.2 million, or $0.05 per Liberty LLC Unit, to all holders of Liberty LLC Units as of the dates above, $6.9 million of which was paid to the Company. The Company used the proceeds of the distributions to pay the dividends to all holders of shares of Class A Common Stock oras of rights, options, warrants or other securities convertible or exercisable into or exchangeableMarch 6 and June 6, 2019, which totaled $6.9 million. Additionally, the Company accrued $0.2 million of dividends payable related to restricted shares and RSUs to be paid upon vesting. Dividends related to forfeited restricted shares and RSUs will be forfeited.
Share Repurchase Program
On September 10, 2018 the Company’s board of directors authorized a share repurchase plan to repurchase up to $100.0 million of the Company’s Class A Common Stock through September 30, 2019. On January 22, 2019, the Company’s board of directors authorized an additional $100.0 million under the share repurchase plan through January 31, 2021. During the six months ended June 30, 2019, Liberty LLC purchased and retired 1,303,003 Liberty LLC Units from the Company for $18.4 million, and the Company repurchased and retired 1,303,003 shares of Class A Common Stock for $18.4 million, or $14.66 average price per share. The repurchase in January completed the share repurchase amount authorized on September 10, 2018. Of the same terms is simultaneously paid to the holders of Class A Common Stock. Holders of Class B Common Stock do not have any right to receive a distribution upon liquidation or winding up of the Company.
The Liberty LLC Unit holders generally have the right (the “Redemption Right”) to cause Liberty LLC to acquire all or a portion of their Liberty LLC Units (and a corresponding number of shares of Class B Common Stock), for, at Liberty LLC’s election, (i) sharestotal amount of Class A Common Stock at a redemption ratiorepurchased, 117,647 shares were repurchased or returned from R/C Energy IV Direct Partnership, L.P., R/C IV Liberty Holdings, L.P. and Riverstone/Carlyle Energy Partners IV, L.P. (“R/C” and collectively, the “Riverstone Sellers”). For further details of one sharethis related party transaction see Note 12.
As of June 30, 2019, $98.7 million remains authorized for future repurchases of Class A Common Stock for each Liberty LLC Unit (and correspondingunder the share repurchase program.
LIBERTY OILFIELD SERVICES INC.
Notes to conversion rate adjustments for stock splits, stock dividends, and reclassifications and other similar transactions) or (ii) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, the Company (instead of Liberty LLC) will have the right (the “Call Right”) to, for administrative convenience, acquire each tendered Liberty LLC Unit directly from the redeeming Liberty Unit holder for, at its election, (x) one share of Class A Common Stock or (y) an equivalent amount of cash. In addition, upon a change of control of the Company, the Company has the right to require each holder of Liberty LLC Units (other than the Company) to exercise its Redemption Right with respect to some or all of such unitholder’s Liberty LLC Units. In connection with any redemption of Liberty LLC Units pursuant to the Redemption Right or the Call Right, the corresponding number of shares of Class B Common Stock will be canceled.Condensed Consolidated Financial Statements
(Unaudited)
Note 9—Net Income per Share
Basic net income per share measures the performance of an entity over the reporting period. Diluted net income per share measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The Company uses the “if-converted” method to determine the potential dilutive effect of its Class B Common Stock and the treasury stock method to determine the potential dilutive effect of outstanding restricted stock and restricted stock units.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
The following table reflects the allocation of net income to common stockholders and net income per share computations for the periods indicated based on a weighted average number of common stock outstanding for periodperiods subsequent to the Corporate Reorganization on January 17, 2018:
| | (In thousands, except per share data) | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | |
| | | Three Months Ended | | Six Months Ended |
(In thousands) | | | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
Basic Net Income Per Share | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Net income attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 49,595 |
| | $ | 73,270 |
| |
Net income attributable to Liberty Oilfield Services Inc. stockholders | | | $ | 22,032 |
| | $ | 49,595 |
| | $ | 40,153 |
| | $ | 73,270 |
|
Denominator: | | | |
|
| | | | | | | | |
Basic weighted average shares outstanding | | 69,020 |
| | 68,977 |
| | 68,404 |
| | 69,020 |
| | 67,918 |
| | 68,977 |
|
Basic net income per share attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 0.72 |
| | $ | 1.06 |
| |
Basic net income per share attributable to Liberty Oilfield Services Inc. stockholders | | | $ | 0.32 |
| | $ | 0.72 |
| | $ | 0.59 |
| | $ | 1.06 |
|
Diluted Net Income Per Share | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Net income attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 49,595 |
| | $ | 73,270 |
| |
Effect of exchange of the shares of Class B Common stock for shares of Class A Common Stock | | 34,171 |
| | 50,482 |
| |
Diluted net income attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 83,766 |
| | $ | 123,752 |
| |
Net income attributable to Liberty Oilfield Services Inc. stockholders | | | $ | 22,032 |
| | $ | 49,595 |
| | $ | 40,153 |
| | $ | 73,270 |
|
Effect of exchange of the shares of Class B Common Stock for shares of Class A Common Stock | | | 13,992 |
| | 34,171 |
| | 25,825 |
| | 50,482 |
|
Diluted net income attributable to Liberty Oilfield Services Inc. stockholders | | | $ | 36,024 |
| | $ | 83,766 |
| | $ | 65,978 |
| | $ | 123,752 |
|
Denominator: | | | | | | | | | | | | |
Basic weighted average shares outstanding | | 69,020 |
| | 68,977 |
| | 68,404 |
| | 69,020 |
| | 67,918 |
| | 68,977 |
|
Effect of dilutive securities: | | | |
|
| | | | | | | | |
Restricted stock | | 948 |
| | 994 |
| | 556 |
| | 948 |
| | 578 |
| | 994 |
|
Restricted stock units | | 463 |
| | 229 |
| | 1,808 |
| | 463 |
| | 1,717 |
| | 229 |
|
Class B Common Stock | | 48,207 |
| | 48,207 |
| | 43,570 |
| | 48,207 |
| | 44,064 |
| | 48,207 |
|
Diluted weighted average shares outstanding | | 118,638 |
| | 118,407 |
| | 114,338 |
| | 118,638 |
| | 114,277 |
| | 118,407 |
|
Diluted net income per share attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 0.71 |
| | $ | 1.05 |
| |
Diluted net income per share attributable to Liberty Oilfield Services Inc. stockholders | | | $ | 0.32 |
| | $ | 0.71 |
| | $ | 0.58 |
| | $ | 1.05 |
|
LLC Interest Issuance
Prior to the IPO and Corporate Reorganization, as described in Note 1, Liberty Holdings issued membership interests to investors in exchange for cash consideration. Total member contributions as of December 31, 2017 were $275.7 million, net of commitment and issuance fees. On January 17, 2018, in connection with the Corporate Reorganization, these membership interests were exchanged for Liberty LLC Units. See Note 1 for additional information regarding the Corporate Reorganization.
Unit-Based Compensation
Prior to the IPO and Corporate Reorganization, Liberty Holdings issued Class B units of Liberty Holdings (“Legacy Units”) to certain eligible employees of the Company. The Legacy Units were non-voting, except with respect to such matters that units are entitled to vote as a matter of law. In such cases, each Legacy Unit entitled the holder to 1/1000th of one vote. Certain Legacy Units granted to eligible participants had an assigned benchmark value and were subject to vesting in accordance with the terms of each award letter. Upon termination of the holder’s employment for any reason, Liberty Holdings had the right, but not the obligation, to repurchase from the recipient those vested Legacy Units at fair value.
The Company recognizes compensation expense for equity-based Legacy Units issued to employees based on the grant-date fair value of the awards and each award’s requisite service period. With the assistance from a third-party valuation expert, the Predecessor determined that the Legacy Units issued to employees were deemed to have a de minimis grant-date fair value based on their assigned benchmark values. In connection with the Corporate Reorganization, the unvested Legacy Units were exchanged for 1,258,514 shares of restricted stock with the same terms and requisite vesting conditions as the Legacy Units.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
There was no change in the classification of the awards, and the fair value of the awards was the same immediately before and after the exchange. As such, in accordance with ASU 2017-07, modification accounting was not applicable, and the restricted stock awards continue to be recognized at the grant date fair value of the Legacy Units.
Restricted Stock Awards
Restricted stock awards are awards of Class A Common Stock that are subject to restrictions on transfer and to a risk of forfeitures if the award recipient is no longer an employee or director of the Company for any reason prior to the lapse of the restrictions.
The following table summarizes the Company’s unvested restricted stock activity for the six months ended June 30, 2018:
|
| | | | | | |
| Number of Shares | | Grant Date Fair Value per Share (1) |
Shares of Restricted Stock Issued in Exchange for Legacy Units | 1,258,514 |
| | — |
|
Vested | (303,737 | ) | | — |
|
Forfeited | (17,061 | ) | | — |
|
Outstanding at June 30, 2018 | 937,716 |
| | $ | — |
|
(1) As discussed above the shares of restricted stock retain the grant date fair value of the Legacy Units.
Long Term Incentive Plan
On January 11, 2018, the Company adopted the Long Term Incentive Plan (“LTIP”) to incentivize employees, officers, directors and other service providers of the Company and its affiliates. The LTIP provides for the grant, from time to time, at the discretion of the Board or a committee thereof, of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards, substitute awards and performance awards. Subject to adjustment in the event of certain transaction or changes of capitalization in accordance with the LTIP, 12,908,734 shares of Class A Common Stock have been reserved for issuance pursuant to awards under the LTIP. Class A Common stock subject to an award that expires or is canceled, forfeited, exchanged, settled in cash or otherwise terminated without delivery of shares and shares withheld to pay the exercise price of, or to satisfy the withholding obligations with respect to, an award will again be available for delivery pursuant to other awards under the LTIP.
Restricted Stock Units
Restricted stock units (RSUs) granted pursuant to the LTIP, if they vest, will be settled in shares of the Company’s Class A Common Stock. RSUs were granted with vesting terms up to five years. Changes in non-vested RSUs outstanding under the LTIP during the six months ended June 30, 2018 were as follows:
|
| | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value per Unit |
Non-vested as of December 31, 2017 | — |
| | $ | — |
|
Granted | 900,876 |
| | 19.99 |
|
Vested | — |
| | — |
|
Forfeited | — |
| | — |
|
Outstanding at June 30, 2018 | 900,876 |
| | $ | 19.99 |
|
Stock-based compensation is included in cost of services and general and administrative expenses in the Company’s condensed consolidated and combined statements of income. The Company recognized stock based compensation expense of $1.2 million for the three and six months ended June 30, 2018. The Company recognized no stock based compensation expense prior to the Corporate Reorganization. There was approximately $16.8 million of unrecognized compensation expense relating to outstanding RSUs as of June 30, 2018. The unrecognized compensation expense will be recognized on a straight-line basis over the weighted average remaining vesting period of 2.8 years.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Note 9—10—Income Taxes
The Company is a corporation and is subject to U.S. federal, state and local income tax on its share of Liberty LLC’s taxable income. As a result of the IPO and Corporate Reorganization, the Company recorded deferred tax assets and liabilities for the difference between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes. Deferred tax assets have been recorded for tax attributes contributed to the Company as part of the Corporate Reorganization. Deferred tax liabilities of $28.6 million have been recorded in connection with the Liberty LLC Units acquired through reorganization. The initial deferred tax liability is recorded as a long term liability and additional paid in capital on the condensed consolidated balance sheet as of June 30, 2018.
The effective combined U.S. federal and state income tax rate applicable to the Company for the six months ended June 30, 2019 was 15.0%, compared to 13.9% for the period ended June 30, 2018 commencing on January 17, 2018, the date of the Corporate Reorganization, through June 30, 2018 was 13.9%.Reorganization. The Company’s effective tax rate is significantly less than the statutory federal tax rate of 21.0% primarily due to the shortened taxable period, as the Company was a pass-through entity prior to the IPO, and because no taxes are payable by the Company for the noncontrolling interest’s share of Liberty LLC’s pass through results for federal, state and local income tax reporting. The Company’s effective tax rate is lower for the period ended June 30, 2018, the shortened taxable period as the Company was a pass-through entity prior to the IPO. The Company recognized income tax expense of $7.1 million and $13.1 million during the three and six months ended June 30, 2019, respectively,
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
compared to $15.9 million during the three months ended June 30, 2018, and $24.0 million for the period commencing on January 17, 2018, the date of the Corporate Reorganization, through June 30, 2018, and $15.9 million during the three months ended June 30, 2018.
Tax Receivable Agreements
In connection with the IPO, on January 17, 2018, the Company entered into two Tax Receivable Agreements (the “TRAs”) with the R/C Energy IV Direct Partnership, L.P. and the Legacy Ownersthen existing owners that continued to own Liberty LLC Units (each such person and any permitted transferee, a “TRA Holder” and together, the “TRA Holders”). The TRAs generally provide for the payment by the Company of 85% of the net cash savings, if any, in U.S. federal, state, and local income tax and franchise tax (computed using simplifying assumptions to address the impact of state and local taxes) that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result, as applicable to each TRA Holder, of (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s Liberty LLC Units in connection with the IPO or pursuant to the exercise of the Redemption Rightredemption or the Company’s Call Right,call rights, (ii) any net operating losses available to the Company as a result of the Corporate Reorganization, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRAs.
The term of each TRA commenced on January 17, 2018, and will continue until all such tax benefits that are subject to such TRA have been utilized or expired, unlessDuring the Company experiences a change of control (as defined in the TRAs, which includes certain mergers, asset sales and other forms of business combinations) or the TRAs are terminated early (at the Company’s election or as a result of its breach), and the Company makes the termination payments specified in such TRA.
The amounts payable, as well as the timing of any payments, under the TRAs are dependent upon significant future events and assumptions, including the timing of thesix months ended June 30, 2019, redemptions of Liberty LLC Units the priceand shares of our Class AB Common Stock at the timeresulted in an increase of each redemption, the extent to which such redemptions are taxable transactions, the amount of the redeeming unit holder’s tax basis$5.1 million in its Liberty LLC Units at the time of the relevant redemption, the depreciation and amortization periods that apply to the increase in tax basis, the amount of net operating losses available to the Company as a result of the Corporate Reorganization, the amount and timing of taxable income the Company generates in the future, the U.S. federal income tax rate then applicable, and the portion of the Company’s paymentsamounts payable under the TRAs, that constitute imputed interest or give rise to depreciable or amortizableand a net increase of $6.0 million in deferred tax basis. Asassets, all of which were recorded through equity. At June 30, 2018, there have been no payments associated with2019, the TRA.
Prior toCompany’s liability under the Corporate Reorganization, one of the Legacy Owners contributedTRA was $21.9 million, a portion of its member interest in Liberty Holdings to R/C IV Non-U.S. LOS Corp (“R/C IV”). Subsequently, in conjunction with the Corporate Reorganization, R/C IV was contributed to Liberty LLC. R/C IV had net operating loss carryforwards totaling $11.1which is presented as a component of current liabilities of $1.8 million for federal income tax purposes and $7.8a portion of which is presented as a component of long term liabilities of $20.1 million, for certain state income tax purposes. As a result of the Company being in a net income position and the expected utilization ofrelated deferred tax assets the tax attributes contributed to the Company included a deferred tax asset of $2.6totaled $25.8 million. As of June 30, 2018, the Company recognized a $2.3 million payable pursuant to the TRAs, or 85% of the deferred tax asset that is expected to be realized.
Note 10—11—Defined Contribution Plan
The Company sponsors a 401(k) defined contribution retirement plan covering eligible employees. The Company makes matching contributions which were temporarily suspended in May 2015, but were resumed in April 2017 at a rate of $1.00 for each $1.00 of employee contribution, subject to a cap of 3% of the employee’s salary. In October 2017, the cap on these contributions was increased to 6% of the employee’s base salary. Contributions made by the Company were $6.7$8.0 million and
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
$1.2 $6.7 million for the six months ended June 30, 20182019 and 2017,2018, respectively, and $3.4$3.9 million and $1.2$3.4 million for the three months ended June 30, 20182019 and 2017,2018, respectively.
Note 11—12—Related Party Transactions
During January 2019, the Company repurchased 117,647 shares of Class A Common Stock from the Riverstone Sellers, at a weighted average purchase price of $17.00 per share, pursuant to the share repurchase program (see Note 8 - Equity -ShareRepurchase Program).
In connection with the Corporate Reorganization, the Company engaged in transactions with affiliates (see Note 1) including entering into two tax receivable agreementsthe TRAs with affiliates (see Note 9)10). Also in conjunction with the Corporate Reorganization, Liberty Holdings contributed $2.1 million of assets to Liberty LLC and Redeemable Common Units in the amount of $42.6 million were settled (see Note 6) and $2.0 million of accrued advisory fees to Riverstone were settled.
In September 2011, Liberty Resources LLC, an oil and gas exploration and production company, and its successor entity (collectively, the “Affiliate”) and LOS, companies with common ownership and management, entered into a services agreement (the “Services Agreement”) whereby the Affiliate iswas to provide certain administrative support functions to LOS and a master service agreement whereby LOS provides hydraulic fracturing services to the Affiliate at market service rates. The amounts incurred under the Services Agreement by LOS during the three and six months ended June 30, 2018, were $0 and $0.2 million, respectively, and $0 during the three and six months ended June 30, 2017. There was $0 payable as of June 30, 2018 and December 31, 2017. During June 2018, the Services Agreement was terminated.terminated during June 2018.
The amounts of the Company’s revenue related to hydraulic fracturing services provided to the Affiliate for the three months ended June 30, 2019 and 2018 was $4.8 million and 2017, was $0, and $12.0 million, respectively, and $3.9$11.1 million and $15.2$3.9 million for the six months ended June 30, 20182019 and 2017,2018, respectively. As of June 30, 20182019 and December 31, 2017, $4.1 million2018, $0 and $4.0$15.1 million, respectively, of the Company’s accounts receivable and $0 and $0.1 million, respectively, of the Company’s unbilled revenue was with the Affiliate.
The Company hashad no unbilled revenue with the Affiliate as of June 30, 2019 and December 31, 2018. On June 24, 2019 (the “Agreement Date”), the Company entered into an agreement with the Affiliate to amend payment terms for outstanding invoices due as of the Agreement Date to be due on July 31, 2020. Amounts outstanding from the Affiliate as of the Agreement Date were $15.6 million, which are presented as a note receivable-related party in the accompanying condensed consolidated balance sheet as of June 30, 2019. The balance outstanding as of the Agreement Date is subject to interest at 13% annual percent yield, retroactively applied to the respective invoice date. During the three and six months ended and as of June 30, 2019, interest income and accrued interest due from the Affiliate were each $0.7 million. Receivables earned for services performed after the Agreement Date will continue to be subject to normal 30-day payment terms.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Liberty Holdings entered into an advisory agreement dated December 30, 2011 with R/C, in which Riverstone isR/C agreed to provide certain administrative advisory services.services to Liberty Holdings. The Company incurred no service fees incurred during the three months ended June 30, 2018 and 2017 were $0 and $0.3 million, respectively, and $0 and $1.0 million for the six months ended June 30, 2019 and 2018, and 2017, respectively. Feesfees accrued as of June 30, 20182019 and December 31, 20172018 were $0 and $2.0$2.3 million, respectively. The amountadvisory services agreement was terminated pursuant to an agreement effective as of January 11, 2018. On January 11, 2018, Liberty Holdings, R/C and other parties entered into a Master Reorganization Agreement that, among other things, crystallized the “waterfall” provisions of Article VI of the Third Amended and Restated Limited Liability Agreement of Liberty Holdings, dated October 11, 2016 (the “Holdings LLC Agreement”) in connection with the IPO. As part of this crystallization, R/C and affiliated entities (collectively, the “R/C Affiliates”) received shares of Class A Common Stock, including 117,647 shares of Class A Common Stock (such 117,647 shares referred to as the “Issued Shares”) to compensate R/C Affiliates for certain accrued preferred returns but which would not have been issued had the $2.0 million in fees owed under the advisory agreement been paid in cash. Had this fee been paid in cash on or prior to January 11, 2018, R/C and Liberty Holdings acknowledge that R/C Affiliates would not have received the Issued Shares in the crystallization pursuant to the provisions of the Holdings LLC Agreement. Subsequently, during the fourth quarter of 2018, R/C asserted that certain provisions of the termination of services agreement provided for R/C to receive $2.0 million in cash as payment of those accrued fees. To resolve this matter, the Company agreed to pay R/C Affiliates $2.0 million in cash in exchange for the purchase, at the IPO price, or return of the Issued Shares and $0.3 million for interest and the settlement of the matter. Accordingly, $2.3 million was recorded as accrued liabilities - related party in the accompanying condensed consolidated balance sheet as of December 31, 2017 was settled2018 and subsequently paid in January 2019. The purchased and returned shares of Class A Common Stock were canceled and retired, and the Company does not expect to incur future expense related to the advisory agreement terminated in connection with the IPO.or termination thereof.
During 2016, Liberty Holdings entered into a future commitment to invest and become a noncontrolling minority member in Proppant Express Investments, LLC, (“PropX Investments”), the owner of Proppant Express Solutions, LLC (“PropX”), a provider of proppant logistics equipment. LOS iswas party to a services agreement (the “PropX Services Agreement”) whereby LOS iswas to provide certain administrative support functions to PropX, and LOS is to purchase and lease proppant logistics equipment from PropX. ForThe PropX Services Agreement was terminated on May 29, 2018, however the Company continues to purchase and lease equipment from PropX. During the three months ended June 30, 2019 and 2018, the Company made $0 purchases of proppant logistics equipment and 2017leased proppant logistics equipment for $2.4 million and $1.1 million, respectively. During the six months ended June 30, 2019 and 2018, the Company purchased proppant logistics equipment of $0 and $2.9$2.1 million, respectively, and leased proppant logistics equipment for $1.1incurred lease expenses of $4.9 million and $0.9$2.7 million, respectively. For the six months ended June 30, 2018 and 2017 the Company made purchases of $2.1 million and $5.8 million, respectively and lease payments of $2.7 million and $1.4 million, respectively. During the three months ended March 31, 2018, in exchange for a 5% discount, the Company made a prepayment to PropX for rented equipment in the amount of $5.4 million, all of which $1.6 million and $2.2 million was recognized as expense to costs of goods soldin the year ended December 31, 2018. The Company made an additional $4.2 million prepayment, in exchange for a 5% discount, during the three andmonths ended March 31, 2019, all of which was recognized in the six months ended June 30, 2018 and $3.3 million remains outstanding as of June 30, 2018, which is reflected in prepaids and other current assets. 2019.
Receivables from PropX as of June 30, 20182019 and December 31, 20172018 were $0. Payables to PropX as of June 30, 20182019 and December 31, 20172018 were $0.9$0.1 million and $0.7$0.2 million, respectively.
Note 12—13—Commitments & Contingencies
Operating Leases
The Company leases office space, facilities, equipment, railcars, and vehicles under non-cancelable operating leases. Rent expense for the three months ended June 30, 2018 and 2017, was $9.4 million and $7.6 million, respectively, and $17.3 million and $9.5 million for the six months ended June 30, 2018 and 2017, respectively.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
Future minimum lease payments are as follows:
|
| | | |
($ in thousands) | |
Year Ending June 30, | |
2019 | $ | 26,502 |
|
2020 | 27,245 |
|
2021 | 29,272 |
|
2022 | 7,330 |
|
2023 | 4,373 |
|
Thereafter | 28,100 |
|
| $ | 122,822 |
|
Purchase Commitments (tons per ton,and gallons per gallon and per rail car prices are not in thousands)
The Company enters into purchase and supply agreements to secure supply and pricing of proppants and chemicals. As of June 30, 20182019 and December 31, 2017,2018, the agreements commit the Company to purchase 12,237,0009,694,350 and 10,108,00011,266,000 tons, respectively, of proppant through December 31, 2021, during the remaining terms of the agreements at per ton prices varying from approximately $33.73 to $102.30, respectively, depending on the final delivery location and type of proppant.2021. Amounts above also include commitments to pay for transport fees on minimum amounts of proppants or railcars, including two contracts for a minimum of 100 railcars each per month at a rate of $630 to $750 per railcar, and one contract includes a $3.00 per ton fee on committed sand purchases.railcars.
Certain proppant supply agreements contain a clause whereby in the event that the Company fails to purchase minimum monthly volumes, as defined in the agreement, during any particular calendar month,a specific time period, a shortfall fee varying from $12.50 to $25.00 will be applied to each shortfall ton. The Company has the ability to mitigate the shortfall penalty in a certain period by purchasing proppant in excess of the requirement in another period.may apply. There were no shortfalls as of June 30, 2018.2019.
As of June 30, 2019 and December 31, 2018, the Company hashad commitments to purchase 23,565,00014,139,000 and 18,852,000 gallons of chemicals through December 31, 2020 at prices ranging from $1.082020.
LIBERTY OILFIELD SERVICES INC.
Notes to $1.83 per gallon.Condensed Consolidated Financial Statements
(Unaudited)
Future proppant, chemicalincluding rail car transport, and rail carchemical commitments are as follows: | | ($ in thousands) | | |
Years ended June 30, | | |
2019 | $ | 325,960 |
| |
Remainder of 2019 | | $ | 172,404 |
|
2020 | 262,377 |
| 261,984 |
|
2021 | 126,865 |
| 108,826 |
|
2022 | 12,229 |
| 3,433 |
|
2023 | — |
| — |
|
| $ | 727,431 |
| $ | 546,647 |
|
Litigation
From time to time, theThe Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions. The Company’s assessmentlitigation arising in the ordinary course of business. While the likely outcome of litigationthese matters is based on its judgment of a number of factors including experience with similar matters, past history, precedents, relevant financial and other evidence and facts specific tocurrently undeterminable, the matter. Notwithstanding the uncertainty as to the final outcome, based upon the information currently available, managementCompany does not believe anyexpect that the ultimate costs to resolve these matters in aggregate will have a material adverse effect on its condensed consolidated financial position or results of operations.
On February 23, 2017, SandBox Logistics, LLC and Oren Technologies, LLC (collectively, “SandBox”) filed suitNote 14—Selected Quarterly Financial Data
The following tables summarizes consolidated changes in the Houston Division of the U.S. District Courtequity for the Southern Districtthree months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Class A Common Stock | | Shares of Class B Common Stock | | Class A Common Stock, Par Value | | Class B Common Stock, Par Value | | Additional Paid in Capital | | Retained Earnings | | Total Stockholders’ equity | | Noncontrolling Interest | | Total Equity |
Balance—March 31, 2019 | 68,744 |
| | 43,570 |
| | $ | 687 |
| | $ | 436 |
| | $ | 314,967 |
| | $ | 133,877 |
| | $ | 449,967 |
| | $ | 305,515 |
| | $ | 755,482 |
|
Distributions paid and payable to noncontrolling unitholders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (325 | ) | | (325 | ) |
$0.05/unit Distribution to noncontrolling unitholders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,179 | ) | | (2,179 | ) |
Restricted stock and RSU forfeitures | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
Stock based compensation expense | — |
| | — |
| | — |
| | — |
| | 3,571 |
| | — |
| | 3,571 |
| | — |
| | 3,571 |
|
Regular cash dividends declared and distributions paid | — |
| | — |
| | — |
| | — |
| | — |
| | (3,588 | ) | | (3,588 | ) | | — |
| | (3,588 | ) |
RSU Vesting | 218 |
| | — |
| | 3 |
| | — |
| | (439 | ) | | — |
| | (436 | ) | | (603 | ) | | (1,039 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 22,032 |
| | 22,032 |
| | 18,491 |
| | 40,523 |
|
Balance—June 30, 2019 | 68,962 |
| | 43,570 |
| | $ | 690 |
| | $ | 436 |
| | $ | 318,099 |
| | $ | 152,322 |
| | $ | 471,547 |
| | $ | 320,899 |
| | $ | 792,446 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Class A Common Stock | | Shares of Class B Common Stock | | Class A Common Stock, Par Value | | Class B Common Stock, Par Value | | Additional Paid in Capital | | Retained Earnings | | Total Stockholders’ equity | | Noncontrolling Interest | | Total Equity |
Balance—March 31, 2018 | 69,971 |
| | 48,207 |
| | $ | 700 |
| | $ | 482 |
| | $ | 347,965 |
| | $ | 23,675 |
| | $ | 372,822 |
| | $ | 278,098 |
| | $ | 650,920 |
|
Distribution paid and payable to non-controlling interest unitholders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,688 | ) | | (7,688 | ) |
Offering costs for Issuance of Class A Common Stock | — |
| | — |
| | — |
| | — |
| | 327 |
| | — |
| | 327 |
| | — |
| | 327 |
|
Stock based compensation expense | — |
| | — |
| | — |
| | — |
| | 1,196 |
| | — |
| | 1,196 |
| | — |
| | 1,196 |
|
Restricted stock forfeited | (13 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 49,595 |
| | 49,595 |
| | 45,146 |
| | 94,741 |
|
Balance—June 30, 2018 | 69,958 |
| | 48,207 |
| | $ | 700 |
| | $ | 482 |
| | $ | 349,488 |
| | $ | 73,270 |
| | $ | 423,940 |
| | $ | 315,556 |
| | $ | 739,496 |
|
Note 15—Subsequent Events
On July 23, 2019, the Company’s board of Texas against PropX Investments, PropXdirectors approved a quarterly dividend of $0.05 per share of Class A Common Stock, and LOS. As described in Note 11, LOS is partya distribution of $0.05 per Liberty LLC Unit, to be paid on September 20, 2019 to holders of record as of September 6, 2019. The Company will use the PropX Services Agreement. SandBox alleges that LOS willfully infringes multiple U.S. patents and has breached an agreement between SandBox and LOS by “directing, controlling, and funding” inter partes review (“IPR”) requests before the U.S. Patent and Trademark Office (“USPTO”). In July 2018, SandBox requested permissionproceeds from the courtLiberty LLC distribution to allege additional breach of contract claims against LOS, including alleged breaches of a confidentialitypay the dividend.
LIBERTY OILFIELD SERVICES INC.
Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
agreementDuring July 2019, certain Liberty LLC Unitholders exercised their redemption rights and redeemed 6,190,483 Liberty LLC Units (and an exclusive purchasing covenant. SandBox seeks both monetary and injunctive relief from the court, as well as attorney’s fees and costs. LOS intends to vigorously defend against the claims brought by SandBox. The Company cannot predict with any degreeequivalent number of certainty the outcomeshares of the suit.
Note 13—Subsequent Events
On August 1, 2018 the Company announced its first quarterly dividend of $0.05 per shareClass B Common Stock) for 6,190,483 shares of Class A common stock,Common Stock of the Company. This exchange resulted in an increase to be paid on September 20, 2018 to holders of record as of September 6, 2018. Additionally, Liberty LLC will make a distribution of $0.05 per unit on September 20, 2018 to holders of recordthe ownership percentage of Liberty LLC Unitsowned by the Company. The Company expects to record a decrease to the Company’s deferred tax liability as of September 6, 2018.a result. In addition, the Company expects to record an increase to the payable pursuant to the TRAs.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in “Cautionary Note Regarding Forward-Looking Statements” and our Annual Report under the heading “Item 1A. Risk Factors.” We assume no obligation to update any of these forward-looking statements.
Unless the context otherwise requires, references to the terms “Company,” “we,” “us” and “our” refer to the Predecessor for periods prior to the IPO, and Liberty Oilfield Services Inc. and its consolidated subsidiaries for periods following the IPO.
Overview
We are a growing independent provider of hydraulic fracturing services to onshore oil and natural gas exploration and production (“E&P”) companies in North America. We have grown from one active hydraulic fracturing fleet in December 2011 to 2223 active fleets in August 2018. The demand for our hydraulic fracturing services exceeds our current capacity, and we expect, based on discussions with customers, to deploy one additionalas of June 30, 2019, including the addition of the latest fleet as well as add additional horsepower to existing fleets, during the fourth quarter of 2018, and add one additional fleet during the first quarter of 2019, for a total of 24 active fleets, representing approximately 1,170,000 hydraulic horsepower, including additional supporting horsepower. We added three fleets during the six months ended June 30, 2018 to bring our total active fleets to 22 as of June 30, 2018. Average active fleets during the six months ended June 30, 2018 and 2017 was 20.4 and 13.1, respectively, and 21.3 and 14.5 during the three months ended June 30, 2018 and 2017, respectively. Average active fleets is calculated as our daily average of active fleets for the relevant period. Our additional fleets are currently being built to our specifications.2019. We provide our services primarily in the Permian Basin, the Eagle Ford Shale, the DJ Basin, the Williston Basin and the Powder River Basin.
We believe the following characteristics both distinguish us from our competitors and are the foundations of our business: forming ongoing partnerships of trust and innovation with our customers; developing and utilizing technology to maximize well performance; and promoting a people-centered culture focused on our employees, customers and suppliers. We have developed strong relationships with our customers by investing significant time in fracture design collaboration, which substantially enhances their production economics. Our technological innovations have become even more critical as E&P companies have increased the completion complexity and fracture intensity of horizontal wells. We are proactive in developing innovative solutions to industry challenges, including developing: (i) our proprietary databases of U.S. unconventional wells to which we apply our proprietary multi-variable statistical analysis technologies to provide differential insight into fracture design optimization; (ii) our Liberty Quiet Fleet™Fleet® design which significantly reduces noise levels compared to conventional hydraulic fracturing fleets; and (iii) our hydraulic fracturing fluid systemsystems tailored to the specific reservoir properties in the DJ Basinbasins in which materially reduces completion costs without compromising production.we operate. We foster a people-centered culture built around honoring our commitments to customers, partnering with our suppliers and hiring, training and retaining people that we believe to be the best talent in our field, enabling us to be one of the safest and most efficient hydraulic fracturing companies in the United States.
Recent Trends and Outlook
Demand for our hydraulic fracturing services is predominantly influenced by the level of drilling and completion by E&P companies, which, in turn, depends largely on the current and anticipated profitability of developing oil and natural gas reserves. More specifically, demand for our hydraulic fracturing services is driven by the completion of hydraulic fracturing stages in unconventional wells, which, in turn, is driven by several factors including rig count, well count, service intensity and the timing and style of well completions.
Macro Conditions
In the second quarter of 2018,2019, the price of West Texas Intermediate crude oil averaged $68.02$59.88 compared with an average of $62.91$54.82 for the first quarter of 20182019 and an average of $48.14$68.02 for the second quarter of 2017. This has led to an increase in our customer activity levels, which is commonly measured by the active rig count.2018. In the second quarter of 2018,2019, the horizontal rig count in North America averaged 911868 compared to 831919 in the first quarter of 20182019 and 747 for911 in the second quarter of 2017,2018, according to a report by Baker Hughes, a GE company.
AlthoughEntering the fourth quarter of 2018, there is uncertaintywas an oversupply of staffed frac fleets in the market about the potential effectwhich, combined with reductions in customer activity, led to a rapid reduction of Permian Basin takeaway constraints, Liberty's operations in Permian continue to grow and thrive. The developing imbalancepricing for frac servicesservices. While there continues to be an oversupply of frac fleets in the Permian hasmarket, as the supply of active frac equipment balances with demand, we expect pricing to eventually improve. However, we do not yet impacted Liberty fleets. Markets outside the Permian remain constructive. currently expect this improvement to occur during 2019.
Based on these market conditions, the diversity of
Liberty's Liberty’s operating footprint, conversations with our customers and other factors, we expect demand for Liberty’s frac services to remain strong during 2018,stable for the remainder of the year, especially for our high-efficiency frac fleets. We do, however, expect to potentially see a decrease in the level of frac activity as we enter into the fourth quarter of 2019, as some customers may have fully spent their annual completions budget by that time.
How We Evaluate Our Operations
We use a variety of qualitative, operational and financial metrics to assess our performance. First and foremost of these is a qualitative assessment of customer satisfaction because ensuring we are a valuable partner to our customers is the key to achieving our quantitative business metrics. Among other measures, management considers each of the following:
Revenue;
Operating Income (Loss);
Net Income;
Net Income per Share;
EBITDA;
Adjusted EBITDA;
Net Income Before Income Taxes; and
Annualized Adjusted EBITDAEarnings per Average Active Fleet.Share.
Revenue
We analyze our revenue by comparing actual monthly revenue to our internal projections for a given period and to prior periods to assess our performance. We also assess our revenue in relation to the number of fleets we have deployed (revenue per average active fleet) from period to period.
Operating Income (Loss)
We analyze our operating income, (loss), which we define as revenues less direct operating expenses, depreciation and amortization and general and administrative expenses, to measure our financial performance. We believe operating income is a meaningful metric because it provides insight on profitability and true operating performance based on the historical cost basis of our assets. We also compare operating income to our internal projections for a given period and to prior periods.
EBITDA Adjusted EBITDA and Annualized Adjusted EBITDA per Average Active Fleet
We view EBITDA, Adjusted EBITDA and Annualized Adjusted EBITDA per Average Active Fleet as important indicators of performance. We define EBITDA as net income (loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted to eliminate the effects of items such as new fleet or new basin start-up costs, costs of asset acquisition, gain or loss on the disposal of assets, asset impairment charges, bad debt reserves, and non-recurring expenses that management does not consider in assessing ongoing operating performance. Average Active Fleets is calculated as the daily average of the number of active fleets for the period presented. Annualized Adjusted EBITDA per Average Active Fleet is calculated as Adjusted EBITDA annualized, divided by the Average Active Fleets for the same period. See “—Comparison of Non-GAAP Financial Measures” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Results of Operations
Three months ended June 30, 2018, compared to three months ended June 30, 2017
|
| | | | | | | | | | | |
| Three months ended June 30, |
Description | 2018 | | 2017 | | Change |
| (in thousands) |
Revenue | $ | 628,084 |
| | $ | 346,725 |
| | $ | 281,359 |
|
Cost of services, excluding depreciation and amortization shown separately | 455,469 |
| | 267,626 |
| | 187,843 |
|
General and administrative expenses | 27,313 |
| | 20,022 |
| | 7,291 |
|
Depreciation and amortization | 30,606 |
| | 17,521 |
| | 13,085 |
|
Loss (gain) on disposal of assets | 485 |
| | 10 |
| | 475 |
|
Operating income | 114,211 |
| | 41,546 |
| | 72,665 |
|
Interest expense | (3,540 | ) | | (2,511 | ) | | (1,029 | ) |
Net income before income taxes | 110,671 |
| | 39,035 |
| | 71,636 |
|
Income tax expense | 15,930 |
| | — |
| | 15,930 |
|
Net income | 94,741 |
| | 39,035 |
| | 55,706 |
|
Less: Net income attributable to Liberty LLC, prior to the Corporate Reorganization | — |
| | 39,035 |
| | (39,035 | ) |
Less: Net income attributable to noncontrolling interest | 45,146 |
| | — |
| | 45,146 |
|
Net income attributable to Liberty Oilfield Services Inc. stockholders | $ | 49,595 |
| | $ | — |
| | $ | 49,595 |
|
Revenue
Our revenue increased $281.4 million, or 81.1%, to $628.1 million for the three months ended June 30, 2018 compared to $346.7 million for three months ended June 30, 2017. The increase was due to the combined effect of a 46.9% increase in average active fleets deployed and a 23.3% increase in revenue per average active fleet. Our revenue per average active fleet increased to approximately $29.5 million for the three months ended June 30, 2018 as compared to approximately $23.9 million for the three months ended June 30, 2017, based on 21.3 and 14.5 average active fleets deployed during those respective periods. The increase in revenue per active fleet was due to improved pricing and throughput in conjunction with increased demand for our services.
Cost of Services
Cost of services (excluding depreciation and amortization) increased $187.8 million, or 70.2%, to $455.5 million for the three months ended June 30, 2018 compared to $267.6 million for the three months ended June 30, 2017. The higher expense is due to an increase in services provided and reflects a $129.0 million increase attributable to materials, which was driven by a 56.6% increase in material volumes in the three months ended June 30, 2018 compared to the same period in 2017. Personnel costs increased by $26.2 million, or 53.2%, to support the increased activity, including a 46.9% increase in average active fleets deployed. Additionally, the cost of components used in our repairs and maintenance operations increased by $22.7 million for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017.
General and Administrative Expenses
General and administrative expenses increased by $7.3 million, or 36.4%, to $27.3 million for the three months ended June 30, 2018 compared to $20.0 million for the three months ended June 30, 2017. Payroll and benefits and related office expenses increased approximately $2.5 million and $1.7 million, respectively, in connection with the increase in head count to support our expanded scope of operations and the six fleets deployed during the twelve months ended June 30, 2018. In addition, non-cash stock based compensation expense of $1.1 million was recognized during the three months ended June 30, 2018 compared to $0 during the same period in the prior year.
Depreciation and Amortization
Depreciation and amortization expense increased $13.1 million, or 74.7%, to $30.6 million for the three months ended June 30, 2018 compared to $17.5 million for the three months ended June 30, 2017, due to six additional hydraulic fracturing fleets deployed during the twelve months ended June 30, 2018.
Operating Income
We realized operating income of $114.2 million for the three months ended June 30, 2018 compared to $41.5 million for the three months ended June 30, 2017, primarily due to the increased number of hydraulic fracturing fleets deployed and the higher revenue per average active fleet in response to increased demand for our services described above. Generally, our financial results have improved significantly due to the increased drilling and completion activity by E&P companies during the recovery of the oil and gas industry beginning in the third quarter of 2016.
Interest Expense
The increase in interest expense of $1.0 million, or 41.0%, during the three months ended June 30, 2018 compared to the three months ended June 30, 2017 was primarily due to $1.7 million of deferred financing costs written off in connection with the pay down of 35% of the term loan and $0.9 million prepayment penalty assessed in connection with the pay down offset by a $0.8 million decrease in related party interest expense and a $0.8 million decrease in interest expense due to the lower average borrowings outstanding during the three months ended June 30, 2018 compared to the same period in 2017.
Net Income before Tax Expense
We realized net income before tax expense of $110.7 million for the three months ended June 30, 2018 compared to $39.0 million for the three months ended June 30, 2017. The increase in net income is primarily attributable to our expanded scope of operations following the deployment of six additional hydraulic fracturing fleets during the twelve months ended June 30, 2018.
Income Tax Expense
Our operations are taxed at a combined U.S. federal and state effective tax rate of 13.9%. As a pass-through entity prior to the IPO, our Predecessor was subject only to the Texas margin tax at a statutory rate of 1.0% and was not subject to U.S. federal income tax. We recognized $15.9 million of expense for the three months ended June 30, 2018 compared to $0 recognized during the three months ended June 30, 2017. This increase was attributable to our status as a corporation subject to U.S. federal income tax as well as a net increase in operating income, the components of which are discussed above.
Six months ended June 30, 2018, compared to six months ended June 30, 2017
|
| | | | | | | | | | | |
| Six months ended June 30, |
Description | 2018 | | 2017 | | Change |
| (in thousands) |
Revenue | $ | 1,123,244 |
| | $ | 599,119 |
| | $ | 524,125 |
|
Cost of services, excluding depreciation and amortization shown separately | 832,296 |
| | 479,259 |
| | 353,037 |
|
General and administrative expenses | 48,990 |
| | 37,106 |
| | 11,884 |
|
Depreciation and amortization | 58,622 |
| | 31,667 |
| | 26,955 |
|
Loss (gain) on disposal of assets | 565 |
| | (33 | ) | | 598 |
|
Operating income | 182,771 |
| | 51,120 |
| | 131,651 |
|
Interest expense | (10,034 | ) | | (3,963 | ) | | (6,071 | ) |
Net income before income taxes | 172,737 |
| | 47,157 |
| | 125,580 |
|
Income tax expense | 24,009 |
| | — |
| | 24,009 |
|
Net income | 148,728 |
| | 47,157 |
| | 101,571 |
|
Less: Net income attributable to Liberty LLC, prior to the Corporate Reorganization | 8,705 |
| | 47,157 |
| | (38,452 | ) |
Less: Net income attributable to noncontrolling interest | 66,753 |
| | — |
| | 66,753 |
|
Net income attributable to Liberty Oilfield Services Inc. stockholders | $ | 73,270 |
| | $ | — |
| | $ | 73,270 |
|
Revenue
Our revenue increased $524.1 million, or 87.5%, to $1,123.2 million for the six months ended June 30, 2018 compared to $599.1 million for six months ended June 30, 2017. The increase was due to the combined effect of a 55.7% increase in average active fleets deployed and a 20.4% increase in revenue per average active fleet. Our revenue per average active fleet increased to approximately $55.1 million for the six months ended June 30, 2018 as compared to approximately $45.7 million for the six
months ended June 30, 2017, based on 20.4 and 13.1 average active fleets deployed during those respective periods. The increase in revenue per active fleet was due to improved pricing and throughput in conjunction with increased demand for our services.
Cost of Services
Cost of services (excluding depreciation and amortization) increased $353.0 million, or 73.7%, to $832.3 million for the six months ended June 30, 2018 compared to $479.3 million for the six months ended June 30, 2017. The higher expense is due to an increase in services provided and reflects a $237.8 million increase attributable to materials, which was driven by a 59.1% increase in material volumes in the six months ended June 30, 2018 compared to the same period in 2017. Personnel costs increased by $59.7 million, or 70.0%, to support the increased activity, including a 55.7% increase in average active fleets deployed. Additionally, the cost of components used in our repairs and maintenance operations increased by $36.2 million for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017.
General and Administrative Expenses
General and administrative expenses increased by $11.9 million, or 32.0%, to $49.0 million for the six months ended June 30, 2018 compared to $37.1 million for the six months ended June 30, 2017. Payroll and benefits and related office expenses increased approximately $4.5 million and $3.2 million, respectively, in connection with the increase in head count to support our expanded scope of operations and the six fleets deployed during the twelve months ended June 30, 2018. In addition, non-cash stock based compensation expense of $1.1 million was recognized during the six months ended June 30, 2018 compared to $0 during the same period in the prior year.
Depreciation and Amortization
Depreciation and amortization expense increased $27.0 million, or 85.1%, to $58.6 million for the six months ended June 30, 2018 compared to $31.7 million for the six months ended June 30, 2017, due to six additional hydraulic fracturing fleets deployed during the twelve months ended June 30, 2018.
Operating Income
We realized operating income of $182.8 million for the six months ended June 30, 2018 compared to $51.1 million for the six months ended June 30, 2017, primarily due to the increased number of hydraulic fracturing fleets deployed and the higher revenue per average active fleet in response to increased demand for our services described above. Generally, our financial results have improved significantly due to the increased drilling and completion activity by E&P companies during the recovery of the oil and gas industry beginning in the third quarter of 2016.
Interest Expense
The increase in interest expense of $6.1 million, or 153.2%, during the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily due to $1.7 million of deferred financing costs written off in connection with the pay down of 35% of the term loan and $0.9 million prepayment penalty assessed in connection with the pay down and a $3.5 million increase in interest expense due to higher weighted average interest rate on borrowings outstanding during the six months ended June 30, 2018 compared to the same period in 2017.
Net Income before Tax Expense
We realized net income before tax expense of $172.7 million for the six months ended June 30, 2018 compared to $47.2 million for the six months ended June 30, 2017. The increase in net income is primarily attributable to our expanded scope of operations following the deployment of six additional hydraulic fracturing fleets during the twelve months ended June 30, 2018.
Income Tax Expense
Our operations are taxed at a combined U.S. federal and state effective tax rate of 13.9%. As a pass-through entity prior to the IPO, our Predecessor was subject only to the Texas margin tax at a statutory rate of 1.0% and was not subject to U.S. federal income tax. Subsequent to the IPO, we recognized $24.0 million of expense for the period commencing on January 17, 2018 through June 30, 2018 compared to none recognized during the six months ended June 30, 2017. This increase was attributable to our status as a corporation subject to U.S. federal income tax as well as a net increase in operating income, the components of which are discussed above.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted to eliminate the effects of items such as new fleet or new basin start-up costs, costs of asset acquisition, gain or loss on the disposal of assets, asset impairment charges, bad debt reserves, and non-recurring expenses that management does not consider in assessing ongoing operating performance. See “—Comparison of Non-GAAP Financial Measures” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Results of Operations
Three months ended June 30, 2019, compared to three months ended June 30, 2018
|
| | | | | | | | | | | |
| Three months ended June 30, |
Description | 2019 | | 2018 | | Change |
| (in thousands) |
Revenue | $ | 542,147 |
| | $ | 628,084 |
| | $ | (85,937 | ) |
Cost of services, excluding depreciation and amortization shown separately | 426,444 |
| | 455,469 |
| | (29,025 | ) |
General and administrative | 23,989 |
| | 27,313 |
| | (3,324 | ) |
Depreciation and amortization | 40,368 |
| | 30,606 |
| | 9,762 |
|
Loss on disposal of assets | 143 |
| | 485 |
| | (342 | ) |
Operating income | 51,203 |
| | 114,211 |
| | (63,008 | ) |
Interest expense | 3,597 |
| | 3,540 |
| | 57 |
|
Net income before income taxes | 47,606 |
| | 110,671 |
| | (63,065 | ) |
Income tax expense | 7,083 |
| | 15,930 |
| | (8,847 | ) |
Net income | 40,523 |
| | 94,741 |
| | (54,218 | ) |
Less: Net income attributable to noncontrolling interests | 18,491 |
| | 45,146 |
| | (26,655 | ) |
Net income attributable to Liberty Oilfield Services Inc. stockholders | $ | 22,032 |
| | $ | 49,595 |
| | $ | (27,563 | ) |
Revenue
Our revenue decreased $85.9 million, or 13.7%, to $542.1 million for the three months ended June 30, 2019 compared to $628.1 million for three months ended June 30, 2018. The decrease was due to a 20.1% decrease in revenue per average active fleet, partially offset by an 8.0% increase in average active fleets deployed. Our revenue per average active fleet decreased to approximately $23.6 million for the three months ended June 30, 2019 as compared to approximately $29.5 million for the three months ended June 30, 2018, with 23.0 and 21.3 average active fleets deployed during those respective periods. The decrease in revenue per average active fleet is due to the oversupply of staffed frac fleets combined with reduced demand from lower customer activity industrywide, resulting in lower prices for our services.
Cost of Services
Cost of services (excluding depreciation and amortization) decreased $29.0 million, or 6.4%, to $426.4 million for the three months ended June 30, 2019 compared to $455.5 million for the three months ended June 30, 2018. The lower expense is due to a decrease in materials pricing and reflects a $48.4 million decrease attributable to materials, despite a 3.4% increase in material volumes used in the three months ended June 30, 2019 compared to the same period in 2018. Unit prices for materials have come down with increased use of lower cost local sand. Personnel costs increased by $6.5 million, or 8.3%, to support the increased activity, including the 8.0% increase in average active fleets deployed. Additionally, the cost of components used in our repairs and maintenance operations increased by $13.6 million for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018.
General and Administrative
General and administrative expenses decreased by $3.3 million, or 12.2%, to $24.0 million for the three months ended June 30, 2019 compared to $27.3 million for the three months ended June 30, 2018. The decrease is primarily due to a $2.9 million decrease in start-up costs, which decreased 87.7% from $3.3 million for the three months ended June 30, 2018 to $0.4 million for the three months ended June 30, 2019 as no fleets were placed in service during the current year period.
Depreciation and Amortization
Depreciation and amortization expense increased $9.8 million, or 31.9%, to $40.4 million for the three months ended June 30, 2019 compared to $30.6 million for the three months ended June 30, 2018, due to one additional hydraulic fracturing fleet being deployed, and $2.6 million of depreciation related to the addition of finance leases in accordance with ASU 2016-02 Leases Topic 842 during the three months ended June 30, 2019.
Operating Income
We realized operating income of $51.2 million for the three months ended June 30, 2019 compared to $114.2 million for the three months ended June 30, 2018, a decrease of 55.2%. The decrease is primarily due to the $85.9 million, or 13.7%, decrease in total revenue, partially offset by a $22.9 million decrease in total operating expenses, components of which are discussed above.
Interest Expense
Interest expense was consistent between periods, decreasing slightly by $0.1 million, or 1.6%, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
Net Income before Income Taxes
We realized net income before tax expense of $47.6 million for the three months ended June 30, 2019 compared to $110.7 million for the three months ended June 30, 2018. The decrease in net income before income taxes is primarily attributable to a decrease in revenue, as discussed above, related to the decrease in pricing, offset by the deployment of one additional hydraulic fracturing fleet during the twelve months ended June 30, 2019.
Income Tax Expense
As a pass-through entity prior to the IPO, the Predecessor was subject only to the Texas margin tax at a statutory rate of 1.0% and was not subject to U.S. federal income tax. Subsequent to the IPO, the pre-tax net income attributable to the Company is taxed at a combined U.S. federal and state tax rate of approximately 23.0%, while no tax is provided for the results attributable to the noncontrolling interests which remains pass through income. We recognized $7.1 million of expense for the three months ended June 30, 2019, at an effective rate of 15.0%, compared to $15.9 million, at an effective rate of 13.9%,
recognized during the three months ended June 30, 2018. This decrease was attributable to the net decrease in operating income, the components of which are discussed above.
Six months ended June 30, 2019, compared to six months ended June 30, 2018
|
| | | | | | | | | | | |
| Six months ended June 30, |
Description | 2019 | | 2018 | | Change |
| (in thousands) |
Revenue | $ | 1,077,295 |
| | $ | 1,123,244 |
| | $ | (45,949 | ) |
Cost of services, excluding depreciation and amortization shown separately | 855,743 |
| | 832,296 |
| | 23,447 |
|
General and administrative | 46,077 |
| | 48,990 |
| | (2,913 | ) |
Depreciation and amortization | 78,755 |
| | 58,622 |
| | 20,133 |
|
Loss on disposal of assets | 1,366 |
| | 565 |
| | 801 |
|
Operating income | 95,354 |
| | 182,771 |
| | (87,417 | ) |
Interest expense | 7,779 |
| | 10,034 |
| | (2,255 | ) |
Net income before income taxes | 87,575 |
| | 172,737 |
| | (85,162 | ) |
Income tax expense | 13,143 |
| | 24,009 |
| | (10,866 | ) |
Net income | 74,432 |
| | 148,728 |
| | (74,296 | ) |
Less: Net income attributable to Liberty LLC, prior to the Corporate Reorganization | — |
| | 8,705 |
| | (8,705 | ) |
Less: Net income attributable to noncontrolling interests | 34,279 |
| | 66,753 |
| | (32,474 | ) |
Net income attributable to Liberty Oilfield Services Inc. stockholders | $ | 40,153 |
| | $ | 73,270 |
| | $ | (33,117 | ) |
Revenue
Our revenue decreased $45.9 million, or 4.1%, to $1,077.3 million for the six months ended June 30, 2019 compared to $1,123.2 million for six months ended June 30, 2018. The decrease was due to a 13.4% decrease in revenue per average active fleet, partially offset by a 10.8% increase in average active fleets deployed. Our revenue per average active fleet decreased to approximately $47.7 million for the six months ended June 30, 2019 as compared to approximately $55.1 million for the six months ended June 30, 2018, with 22.6 and 20.4 average active fleets deployed during those respective periods. The decrease in revenue per average active fleet is due to the oversupply of staffed frac fleets combined with reduced demand from lower customer activity industrywide, resulting in lower prices for our services.
Cost of Services
Cost of services (excluding depreciation and amortization) increased $23.4 million, or 2.8%, to $855.7 million for the six months ended June 30, 2019 compared to $832.3 million for the six months ended June 30, 2018. The higher expense is due to a $30.0 million increase in repairs and maintenance costs primarily related to the increased pump hours in the six months ended June 30, 2019 compared to the same period in 2018. Personnel costs also increased by $17.3 million, or 11.4%, to support the increased activity, including the 10.8% increase in average active fleets deployed. These increases were offset by a decrease in material costs of $28.6 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, despite a 17.1% increase in material volumes used in the respective periods. Unit prices for materials have come down with increased use of lower cost local sand.
General and Administrative
General and administrative expenses decreased by $2.9 million, or 5.9%, to $46.1 million for the six months ended June 30, 2019 compared to $49.0 million for the six months ended June 30, 2018. The decrease is primarily due to a $5.1 million decrease in start-up costs, which decreased 77.9% from $6.6 million for the six months ended June 30, 2018 to $1.5 million for the six months ended June 30, 2019. This decrease was offset by an increase in personnel and benefits related to a $3.3 million increase in stock based compensation expense.
Depreciation and Amortization
Depreciation and amortization expense increased $20.1 million, or 34.3%, to $78.8 million for the six months ended June 30, 2019 compared to $58.6 million for the six months ended June 30, 2018, due to one additional hydraulic fracturing fleet deployed, and $5.0 million of depreciation related to the addition of finance leases in accordance with ASU 2016-02 Leases Topic 842 during the twelve months ended June 30, 2019.
Operating Income
We realized operating income of $95.4 million for the six months ended June 30, 2019 compared to $182.8 million for the six months ended June 30, 2018. The decrease is primarily due to the $45.9 million decrease in total revenue, and a $41.5 million increase in total operating expenses, components of which are discussed above.
Interest Expense
The decrease in interest expense of $2.3 million, or 22.5%, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily due to a decrease in debt issuance cost amortization of $1.8 million, related to the $61.1 million paydown on the Term Loan Facility during the first quarter of 2018 with proceeds from the IPO, an increase of $1.1 million of interest income, offset by an increase in interest expense related to finance leases of $1.4 million.
Net Income before Income Taxes
We realized net income before tax expense of $87.6 million for the six months ended June 30, 2019 compared to $172.7 million for the six months ended June 30, 2018. The decrease in net income before income taxes is primarily attributable to the decrease in revenue and increase in total operating expenses, as discussed above.
Income Tax Expense
As a pass-through entity prior to the IPO, the Predecessor was subject only to the Texas margin tax at a statutory rate of 1.0% and was not subject to U.S. federal income tax. Subsequent to the IPO, the pre-tax net income attributable to the Company is taxed at a combined U.S. federal and state tax rate of approximately 23.0%, while no tax is provided for the results attributable to the noncontrolling interests which remains pass through income. We recognized $13.1 million of expense for the six months ended June 30, 2019, compared to $24.0 million recognized during the six months ended June 30, 2018. This decrease was attributable to the net decrease in operating income, the components of which are discussed above.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted to eliminate the effects of items such as new fleet or new basin start-up costs, costs of asset acquisitions, gain or loss on the disposal of assets, asset impairment charges, bad debt reserves and non-recurring expenses that management does not consider in assessing ongoing performance.
Our board of directors, management, investors and lenders use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and other items that impact the comparability of financial results from period to period. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. Additionally, the calculation of Adjusted EBITDA complies with the definition of Consolidated EBITDA, and other provisions ofas defined in our Credit Facilities. See “—Debt Agreements.”
Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income (loss) is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and
Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
The following tables present a reconciliation of EBITDA and Adjusted EBITDA to our net income, which is the most directly comparable GAAP measure for the periods presented:
EBITDA and Adjusted EBITDA
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
Description | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| (in thousands) | (in thousands) | | | | | | |
Net income | $ | 94,741 |
| | $ | 39,035 |
| | $ | 55,706 |
| | $ | 148,728 |
| | $ | 47,157 |
| | $ | 101,571 |
| $ | 40,523 |
| | $ | 94,741 |
| | $ | (54,218 | ) | | $ | 74,432 |
| | $ | 148,728 |
| | $ | (74,296 | ) |
Depreciation and amortization | 30,606 |
| | 17,521 |
| | 13,085 |
| | 58,622 |
| | 31,667 |
| | 26,955 |
| 40,368 |
| | 30,606 |
| | 9,762 |
| | 78,755 |
| | 58,622 |
| | 20,133 |
|
Interest expense | 3,540 |
| | 2,511 |
| | 1,029 |
| | 10,034 |
| | 3,963 |
| | 6,071 |
| 3,597 |
| | 3,540 |
| | 57 |
| | 7,779 |
| | 10,034 |
| | (2,255 | ) |
Income tax expense | 15,930 |
| | — |
| | 15,930 |
| | 24,009 |
| | — |
| | 24,009 |
| 7,083 |
| | 15,930 |
| | (8,847 | ) | | 13,143 |
| | 24,009 |
| | (10,866 | ) |
EBITDA | $ | 144,817 |
| | $ | 59,067 |
| | $ | 85,750 |
| | $ | 241,393 |
| | $ | 82,787 |
| | $ | 158,606 |
| $ | 91,571 |
| | $ | 144,817 |
| | $ | (53,246 | ) | | $ | 174,109 |
| | $ | 241,393 |
| | $ | (67,284 | ) |
Fleet start-up costs | 3,298 |
| | 4,277 |
| | (979 | ) | | 6,607 |
| | 8,889 |
| | (2,282 | ) | 406 |
| | 3,298 |
| | (2,892 | ) | | 1,460 |
| | 6,607 |
| | (5,147 | ) |
Asset acquisition costs | — |
| | 1,188 |
| | (1,188 | ) | | — |
| | 2,542 |
| | (2,542 | ) | |
Loss (gain) on disposal of assets | 485 |
| | 10 |
| | 475 |
| | 565 |
| | (33 | ) | | 598 |
| |
Loss on disposal of assets | | 143 |
| | 485 |
| | (342 | ) | | 1,366 |
| | 565 |
| | 801 |
|
Advisory services fees | — |
| | 251 |
| | (251 | ) | | 202 |
| | 1,045 |
| | (843 | ) | — |
| | — |
| | — |
| | — |
| | 202 |
| | (202 | ) |
Adjusted EBITDA | $ | 148,600 |
| | $ | 64,793 |
| | $ | 83,807 |
| | $ | 248,767 |
| | $ | 95,230 |
| | $ | 153,537 |
| $ | 92,120 |
| | $ | 148,600 |
| | $ | (56,480 | ) | | $ | 176,935 |
| | $ | 248,767 |
| | $ | (71,832 | ) |
EBITDA was $91.6 million for the three months ended June 30, 2019 compared to $144.8 million for the three months ended June 30, 2018 compared to $59.12018. Adjusted EBITDA was $92.1 million for the three months ended June 30, 2017. Adjusted EBITDA was2019 compared to $148.6 million for the three months ended June 30, 2018 compared to $64.8 million for the three months ended June 30, 2017. Annualized Adjusted EBITDA per Average Active Fleet was $28.0 million for the three months ended June 30, 2018 compared to $17.9 million for the three months ended June 30, 2017.2018. The increasesdecreases in EBITDA and Adjusted EBITDA resulted from decreases in revenue at a higher percentage than the increased revenue and otherdecreases in operating expenses. See factors described above under the captions Revenue, Cost of Services and General and Administrative Expensesabove.
EBITDA was $174.1 million for the six months ended June 30, 2019 compared to $241.4 million for the six months ended June 30, 2018 compared to $82.82018. Adjusted EBITDA was $176.9 million for the six months ended June 30, 2017. Adjusted EBITDA was2019 compared to $248.8 million for the six months ended June 30, 2018 compared to $95.2 million for the six months ended June 30, 2017. Annualized Adjusted EBITDA per Average Active Fleet was $24.6 million for the six months ended June 30, 2018 compared to $14.7 million for the six months ended June 30, 2017.2018. The increasesdecreases in EBITDA and Adjusted EBITDA resulted from the increaseddecreases in revenue, and otherpartially offset by comparable decreases in operating expenses. See factors described above under the captions Revenue, Cost of Services and General and Administrative Expensesabove.
Liquidity and Capital Resources
Overview
OurHistorically, our primary sources of liquidity prior to the IPO weredate have been cash flows from operations, capital contributionsproceeds from our ownersIPO and borrowings under our Credit Facilities. We expect to fund operations and organic growth with cash flows from operations. We may incur additional indebtedness or issue equity securities in order to fund growth opportunities that we pursue via acquisition. Our primary uses of capital have been capital expenditures to support organic growth and funding ongoing operations, including maintenance and fleet upgrades.
Cash and cash equivalents increaseddecreased by $67.0$70.8 million to $83.3$32.5 million as of June 30, 20182019 compared to $16.3$103.3 million as of December 31, 2017,2018, primarily attributable to net proceeds from the IPO. Going forward, we intend to financetiming of customer payments and services provided, as accounts receivable and unbilled revenue increased $94.6 million and $19.0 million, respectively. As a result of the majorityincreased balances in accounts receivable and unbilled revenue, the cash balance is lower as of our capital expenditures, contractual obligationsJune 30, 2019 until wells are completed and working capital needs with proceeds from the IPObilled, and operating cash flows.outstanding balances are paid. We believe that our operating cash flow and available borrowings under our Credit Facilities will be sufficient to fund our operations for at least the next twelve months.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | Six Months Ended June 30, | Six Months Ended June 30, |
Description | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change |
| (in thousands) | (in thousands) |
Net cash provided by operating activities | $ | 109,201 |
| | $ | 45,561 |
| | $ | 63,640 |
| $ | 97,713 |
| | $ | 109,201 |
| | $ | (11,488 | ) |
Net cash used in investing activities | (137,843 | ) | | (204,887 | ) | | 67,044 |
| (130,064 | ) | | (137,843 | ) | | 7,779 |
|
Net cash provided by financing activities | 95,652 |
| | 148,451 |
| | (52,799 | ) | |
Net increase in cash and cash equivalents | $ | 67,010 |
| | $ | (10,875 | ) | | $ | 77,885 |
| |
Net cash (used in) provided by financing activities | | (38,458 | ) | | 95,652 |
| | (134,110 | ) |
Net (decrease) increase in cash and cash equivalents | | $ | (70,809 | ) | | $ | 67,010 |
| | $ | (137,819 | ) |
Analysis of Cash Flow Changes Between the Six Months Ended June 30, 20182019 and 20172018
Operating Activities. Net cash provided by operating activities was $97.7 million for the six months ended June 30, 2019, compared to $109.2 million for the six months ended June 30, 2018, compared to $45.62018. The $11.5 million for the six months ended June 30, 2017. The $63.6 million increasedecrease in cash from operating activities was primarily attributable to a $524.1$45.9 million increasedecrease in revenues offset byand a $364.9$15.3 million increase in cash based operating expenses, as well as an increaseoffset by a reduction of $30.3 million in funds used to satisfy working capital obligations.
Investing Activities. Net cash used in investing activities was $130.1 million for the six months ended June 30, 2019, compared to $137.8 million for the six months ended June 30, 2018,2018. The Company deployed one fleet and purchased additional spare and pump down equipment to add to existing fleets in the six months ended June 30, 2019 compared to $204.9three fleets deployed in the six months ended June 30, 2018.
Financing Activities. Net cash used in financing activities was $38.5 million for the six months ended June 30, 2017. Capital expenditures, including amounts in Accounts Payable and Accrued Liabilities, were $128.4 million for the six months ended June 30, 20182019, compared to $198.7 million for the six months end June 30, 2017. The $67.0 million decrease in net cash used in investing activities was primarily due to the acquisition of Titan Frac Services LLC and other Texas real estate properties during the six months ended June 30, 2017.
Financing Activities. Net cash provided by financing activities wasof $95.7 million for the six months ended June 30, 2018, compared to $148.5 million for the six months ended June 30, 2017.2018. The $52.8$134.1 million decrease in cash provided by financing activities was primarily due to net repayment on debt of $91.5 million and distributions to noncontrolling interest holders of $13.0 million duringthe Company’s IPO in the six months ended June 30, 2018, compared to net borrowings of $110.0 million and $39.8which resulted in $194.0 million in net proceeds from issuancethe IPO, offset by the use of redeemable common units received duringproceeds to repay $91.5 million of long term debt. Further, in the six months ended June 30, 2017, offset2019 the Company repurchased shares of Class A Common Stock under the share repurchase programs that were authorized in September 2018 and January 2019, increasing the cash used in financing activities by $198.4$18.4 million. The Company also incurred $6.8 million of principal payments for finance leases recorded in net proceeds from the IPO.six months ended June 30, 2019 with the adoption of ASU 2016-02 Leases Topic 842.
ABL Facility
The Company’s ABL Facility provides for a line of credit up to $250.0 million, subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory. As of June 30, 2018,2019, the borrowing base was calculated to be $235.4$234.2 million, withand the Company had no amounts drawn and anborrowings outstanding, except for letter of credit forin the amount of $0.3 million, leaving $235.1with $233.9 million of availability. Borrowings under the ABL Facility bear interest at LIBOR or a base rate, plus an applicable LIBOR
margin of 1.5% to 2.0% or base rate margin of 0.5% to 1.0%, as defined in the ABL Facility credit agreement. The unused commitment is subject to an unused commitment fee of 0.375% to 0.5%. Interest and fees are payable in arrears at the end of each month, or, in the case of LIBOR loans, at the end of each interest period. The ABL Facility is not subjectmatures on the earlier of (i) September 19, 2022 and (ii) to financial covenants unless liquidity, as defined inthe extent the debt under the Term Loan Facility remains outstanding, 90 days prior to the final maturity of the Term Loan Facility, which matures on September 19, 2022. Borrowings under the ABL Facility credit agreement, drops below a specified level. Under the ABL Facility,are collateralized by accounts receivable and inventory, and further secured by the Company, is required to maintainLiberty LLC and R/C IV Non-U.S. LOS Corp., a minimum fixed charge coverage ratio, as defined in the ABL Facility credit agreement, of 1.0 to 1.0 for each period if excess availability is less than 10%Delaware corporation and a subsidiary of the borrowing base or $12.5 million, whichever is greater. The Company, was in compliance with these covenants as of June 30, 2018.parent guarantors.
Income Taxes
The Company is a corporation and is subject to U.S. federal, state and local income tax on its share of Liberty LLC’s taxable income. As a result of the IPO and Corporate Reorganization, the Company recorded deferred tax assets and liabilities for the difference between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes. Deferred tax assets have been recorded for tax attributes contributed to the Company as part of the reorganization. Deferred tax liabilities of $28.6 million have been recorded in connection with the Liberty LLC Units acquired through the Corporate Reorganization.
The effective combined U.S. federal and state income tax rate applicable to the Company for the six months ended June 30, 2019 was 15.0%, compared to 13.9% for the period ended June 30, 2018 was 13.9%.commencing on January 17, 2018, the date of the Corporate Reorganization. The Company’s effective tax rate is significantly less than the statutory federal tax rate of 21.0% primarily because no taxes are payable by the Company for the noncontrolling interest’s share of Liberty LLC’s pass through results for federal, state and local income tax reporting. The Company’s effective tax rate is higher for the six month period ended June 30, 2019, due to our status as a corporation subject to U.S. federal income tax for the entire six month period ended
June 30, 2019, as opposed to the shortened taxable period ended June 30, 2018, and due to various unitholders exercising their redemption rights, which increases the Company’s proportionate share of operating income. As a pass-through entity prior to the IPO, the Predecessor was subject only to the Texas margin tax at a statutory rate of 1.0% and was not subject to U.S. federal income tax. The Company recognized income tax expense of $24.0$13.1 million forduring the six months ended June 30, 2019, compared to $24.0 million during the shortened taxable period ended June 30, 2018.
Tax Receivable Agreements
In connection with the IPO, on January 17, 2018, the Company entered into the TRAs with the TRA Holders. The TRAs generally provide for the payment by the Company of 85% of the net cash savings, if any, in U.S. federal, state, and local income tax and franchise tax (computed using simplifying assumptions to address the impact of state and local taxes) that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result, as applicable to each TRA Holder, of (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’sHolders’ Liberty LLC Units in connection with the IPO or pursuant to the exercise of the Redemption Rightredemption or the Company’s Call Right,call rights, (ii) any net operating losses available to the Company as a result of the Corporate Reorganization, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRAs.
With respect to obligations the Company expects to incur under the TRAs (except in cases where the Company elects to terminate the TRAs early, the TRAs are terminated early due to certain mergers, asset sales, or other changes of control or the Company has available cash but fails to make payments when due), generally the Company may elect to defer payments due under the TRAs if the Company does not have available cash to satisfy its payment obligations under the TRAs or if its contractual obligations limit its ability to make such payments. Any such deferred payments under the TRAs generally will accrue interest. In certain cases, payments under the TRAs may be accelerated and/or significantly exceed the actual benefits, if any, the Company realizes in respect of the tax attributes subject to the TRAs. The Company accounts for amounts payable under the TRAs in accordance with ASC Topic 450, Contingent Consideration.Contingencies.
If the Company experiences a change of control (as defined under the TRAs) or the TRAs otherwise terminate early, the Company’s obligations under the TRAs could have a substantial negative impact on its liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control. There can be no assurance that we will be able to finance our obligations under the Tax Receivable Agreements.TRAs.
Critical Accounting Policies and Estimates
The condensed consolidated financial statements are prepared in accordance with U.S. GAAP, which require us to make estimates and assumptions (see Note 12 to the consolidated and combined financial statements included in the Annual Report). We believe that some of our accounting policies involve a higher degree of judgment and complexity than others. As of December 31, 2017,2018, our critical accounting policies included leases, revenue recognition, estimating the recoverability of accounts receivable, inventory valuation, accounting for income taxes and accounting for long-lived assets, accounting for derivative instruments, and accounting for abnormally low production levels.assets. These critical accounting policies are discussed more fully in the Annual Report.
Effective January 1, 2018,2019, the Company adopted Accounting Standard Codification Topic 606-Revenue from Contracts with Customers (seeASU No. 2016-02, Leases (Topic 842) (see Note 12 to the condensed consolidated and combined financial statements included in this Form 10-Q)Quarterly Report). There have been no other changes in our evaluation of our critical accounting policies since December 31, 2017.2018.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements as of June 30, 2018,2019, except for the operating leases and purchase commitments under supply agreements as disclosed above under “Item 1. Financial Statements—Note 12—13—Commitments & Contingencies.” As such, we are not materially exposed to any other financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk
At June 30, 2018, we had $113.0 million of debt outstanding, with a weighted average interest rate of 9.7%. Interest is calculated under the terms ofFor quantitative and qualitative disclosures about market risk, see Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in our Credit Facilities based on our selection, from timeAnnual Report. Our exposure to time, of one of the index rates available to us plus an applicable margin that varies based on certain factors. Assuming no change in the amount outstanding, the impact on interest expense of a 1% increase or decrease in the weighted average interest rate would be approximately $1.1 million per year. We domarket risk has not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.changed materially since December 31, 2018.
Item 4. Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2018.2019. The evaluation included certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2018,2019, our disclosure controls and procedures were effective, at the reasonable assurance level. Any controls and procedures, no matter how well designed and operated can only provide reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of all possible controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three monthsquarter ended June 30, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceeding
On February 23, 2017, SandBox filed suit in the Houston Division of the U.S. District Court for the Southern District of Texas against Proppant Express Investments, LLC, PropX, and LOS. LOS is party to a services agreement with PropX. SandBox alleges that LOS willfully infringes multiple U.S. patents and has breached an agreement between SandBox and LOS by “directing, controlling, and funding” IPR requests before the USPTO. In July 2018, SandBox requested permission from the court to allege additional breach of contract claims against LOS, including alleged breaches of a confidentiality agreement and an exclusive purchasing covenant.SandBox seeks both monetary and injunctive relief from the court, as well as attorney’s fees and costs. We intend to vigorously defend ourselves against the claims brought by SandBox.Proceedings
We are named defendants in certain lawsuits, investigationssubject to legal proceedings, claims and claimslitigation arising in the ordinary course of conducting our business, including certain environmental claims and employee-related matters, and we expect that we will be named defendants in similar lawsuits, investigations and claims in the future.business. While the outcome of these lawsuits, investigations and claims cannot be predicted with certainty,matters is currently undeterminable, we do not expect that the ultimate costs to resolve these matters towill have a material adverse impacteffect on our business,condensed consolidated financial position or results of operations, cash flows or financial condition. We have not assumed any liabilities arising out of these existing lawsuits, investigations and claims.operations.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in the Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results. There have been no material changes in ourthe risk factors from those described in our Annual Report or our other SEC filings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.No repurchases of shares of Class A Common Stock were made under our repurchase plans during the three months ended June 30, 2019.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits required to be filed by Item 6 are set forth in the Exhibit Index included below.
INDEX TO EXHIBITS
|
| | |
Exhibit Number | | Description |
| | |
2.1 | | |
| | |
3.1 | | |
| | |
3.2 | | |
| | |
4.1 | | |
| | |
4.2 | | |
| | |
10.1 | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
101.INS | | XBRL Instance Document * |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document * |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document * |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document * |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document * |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document * |
| | |
(1) | Incorporated by reference to the registrant’s Current Report on Form 8-K, filed on January 18, 2018. |
| |
(2) | Incorporated by reference to the registrant’s Amendment No. 1 to the Current Report on Form 8-K/A, filed on January 22, 2018. |
| | |
(3) | Incorporated by reference to the registrant’s Registration StatementCurrent Report on Form S-8,8-K, filed on June 28, 2018.July 29, 2019. |
| | |
(4) | Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q, filed on May 10, 2018. |
| |
* | Filed herewith. |
| | |
** | Furnished herewith. |
| | |
† | Denotes a management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | |
| | | Signature |
| | | /s/ Christopher A. Wright |
Date: | August 3, 20181, 2019 | By: | Christopher A. Wright |
| | | Chief Executive Officer (Principal Executive Officer) |
| | | |
| | | /s/ Michael Stock |
Date: | August 3, 20181, 2019 | By: | Michael Stock |
| | | Chief Financial Officer (Principal Financial Officer) |
| | | |
| | | /s/ Ryan T. Gosney |
Date: | August 3, 20181, 2019 | By: | Ryan T. Gosney |
| | | Chief Accounting Officer (Principal Accounting Officer) |