FTSINC Unless the context requires otherwise, the use of the terms "FTSI," "Company," "we," "us," "our" or "ours" refer toFTS International, Inc. , together with its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this quarterly report on Form 10-Q as well as information in our annual report on Form 10-K for the year endedDecember 31, 2020 . Unless otherwise specified, all comparisons made are to the corresponding period of 2020. Certain prior year financial statements are not comparable to our current year financial statements due to the adoption of fresh start accounting. We believe that describing certain year-over-year variances in our activity levels, revenue and expenses facilitates a meaningful analysis of our results of operations and is useful in identifying current business trends. References to "Successor" or "Successor Company " relate to the financial position and results of operations of the reorganized Company subsequent toNovember 19, 2020 . References to "Predecessor" or "Predecessor Company " relate to the financial position and results of operations of the Company prior to, and including,November 19, 2020 .
Overview
We are one of the largest providers of hydraulic fracturing services inNorth America . Our services stimulate hydrocarbon flow from oil and natural gas wells drilled by E&P companies. We had 1.4 million total hydraulic horsepower across 28 fleets as ofJune 30, 2021 . We averaged 13 active fleets in the second quarter of 2021. We operate in the major basins inthe United States .
Summary Financial Results
Total revenue for the second quarter and first six months of 2021 (Successor)
? was
million and$14.7 million , respectively, from the same periods in 2020 (Predecessor).
Net loss for the second quarter and first six months of 2021 (Successor) was
?
million and$51.9 million , respectively, from the same periods in 2020 (Predecessor).
Adjusted EBITDA for the second quarter and first six months of 2021 (Successor)
? was
million and
(Predecessor).
Industry trends and business outlook
Our business depends on the willingness of E&P companies to make expenditures to explore for, develop, and produce oil and natural gas inthe United States . The willingness of E&P companies to undertake these activities is predominantly influenced by current and expected future prices for oil and natural gas. A widely watched indicator of E&P companies' aggregate activity levels is the drilling rig count, or rig count. The active horizontal rig count is a subset of the total rig count and is the most strongly correlated with the aggregate industry demand for hydraulic fracturing services. The average horizontal rig count was approximately 410 and 380 for the second quarter and first six months of 2021, respectively, compared to an average of approximately 350 and 530 for the same respective periods last year, according to a report byBaker Hughes . The prices that we are able to charge for our services are affected by the supply of hydraulic fracturing equipment that is available in the market to meet customer demand. Since the middle of 2018, the supply of hydraulic fracturing equipment has exceeded the demand for equipment, and as a result, the pricing for our services declined during this period. In 2020, the supply of equipment further exceeded demand as the demand for our services dropped significantly. Prices have rebounded slightly in the first half of 2021, but we remain disciplined with respect to our number of active fleets, and we remain focused on optimizing our utilization and cash flow. We plan to focus on expanding our commercial strategy, further advancing our technology initiatives, and maintaining our industry leading safety performance. With this strategy, we strive to provide the best service quality for our customers while maintaining a low-cost structure. Currently, we believe that these efforts combined with the recent improvements in pricing will generate free cash flow in 2021 and position us for a longer-term recovery. 14
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We closely monitor the COVID-19 pandemic and are focused on the health and welfare of our employees and the communities where we work, as well as maintaining business continuity. We have instituted health and safety procedures to protect our employees, customers, and their families.
If the pandemic were to shut down operations at our work sites, it could affect the financial condition of the Company. For that reason, we developed and activated a readiness plan to address COVID-19 specific issues in addition to our business continuity plan, which is designed to address emergency situations. To date, COVID-19 disruptions to our business operations have been successfully mitigated because of these efforts.
Results of Operations
Revenue
The following table includes certain operating statistics that affect our
revenue:
Successor Predecessor Successor Predecessor
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(Dollars in millions) 2021 2020 2021 2020
Revenue $ 99.8 $ 29.5 $ 195.7 $ 180.3
Revenue from related parties - - - 0.7
Total revenue $ 99.8 $ 29.5 $ 195.7 $ 181.0
Total fracturing stages 7,569 1,468 14,636 8,356
Total pumping hours 15,548 2,631 30,324 17,683
Fleet utilization percentage 91% 46% 91% 78%
Active fleets (1) 13.0 5.0 13.0 10.5
Total fleets (2) 28.0 28.0 28.0 28.0
_____________________________
Active fleets is the average number of fleets operating during the period. We
(1) had 13 and three active fleets at
(Predecessor), respectively.
(2) Total fleets is the total number of fleets owned at the end of the period.
Total revenue for the second quarter and first six months of 2021 (Successor) increased by$70.3 million and$14.7 million from the same periods in 2020 (Predecessor). These increases were primarily due to higher activity levels in the second quarter of 2021 (Successor) measured by average active fleets, fleet utilization, stages, and pumping hours. These increases were offset by lower average pricing and a decrease in the amount of materials we supplied in our jobs.
The number of fracturing stages completed per average active fleet for the second quarter and first six months of 2021 (Successor) increased by 98.3% and 41.5% from the same periods in 2020 (Predecessor) due to lower activity experienced in the second quarter of 2020 related to the pandemic.
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Costs of revenue
The following table summarizes our costs of revenue:
Successor Predecessor
Three Months Ended June 30, Three Months Ended June 30,
2021 2020
As a Percent As a Percent
(Dollars in millions) Dollars of Revenue Dollars of Revenue
Costs of revenue, excluding
depreciation and amortization $ 75.2 75.4 % $ 28.9 98.0 %
Depreciation - costs of revenue 13.8 13.8 % 19.2 65.1 %
Total costs of revenue $ 89.0 89.2 % $ 48.1 163.1 %
Successor Predecessor
Six Months Ended June 30, Six Months Ended June 30,
2021 2020
As a Percent As a Percent
(Dollars in millions) Dollars of Revenue Dollars of Revenue
Costs of revenue, excluding
depreciation and amortization $ 153.7 78.5 % $ 143.5 79.3 %
Depreciation - costs of revenue 27.2 13.9 %
39.7 21.9 %
Total costs of revenue $ 180.9 92.4 % $ 183.2 101.2 %
Total costs of revenue for the second quarter and first six months of 2021 (Successor) increased by$40.9 million and decreased by$2.3 million , respectively from the same periods in 2020 (Predecessor). These changes were primarily due to the changes in our costs of revenue, excluding depreciation and due to lower activity experienced in the second quarter of 2020 related to the pandemic. Costs of revenue, excluding depreciation, for the second quarter and first six months of 2021 (Successor) increased by$46.3 million and$10.2 million , respectively, from the same periods in 2020 (Predecessor). These increases were due to higher labor costs from operating a higher number of average active fleets offset by a decrease in the prices for materials used in the fracturing process, and a decrease in the portion of customers who provide their own proppant and fuel. Depreciation for our service equipment for the second quarter and first six months of 2021 (Successor) decreased by$5.4 million and$12.5 million , respectively, from the same periods in 2020 (Predecessor). These decreases were driven by reduced capital expenditures in the first half of 2021 and reduced asset values related to our restructuring and Fresh Start accounting in the fourth quarter of 2020. Total costs of revenue as a percentage of total revenue for the second quarter of 2021 (Successor) decreased by 73.9 percentage points from 163.1% in 2020 (Predecessor) to 89.2% in 2021 (Successor). Total costs of revenue as a percentage of total revenue for the first six months of 2021 (Successor) decreased by 8.8 percentage points from 101.2% in 2020 (Predecessor) to 92.4% in 2021 (Successor). These decreases were primarily due to a higher utilization rate of our fleets in the second quarter of 2021 (Successor).
Selling, general and administrative expense
Selling, general and administrative expense for the second quarter and first six months of 2021 (Successor) decreased by$0.7 million and$7.9 million , respectively, from the same periods in 2020 (Predecessor). These decreases were primarily due to lower stock compensation expense, lower bad debt expense, and reduced professional fees; offset by increased wages in the second quarter of 2021 (Successor) from higher incentive compensation, higher headcount, and
changes in base wages.
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Depreciation and amortization
The following table summarizes our depreciation and amortization:
Successor Predecessor Successor Predecessor
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(In millions) 2021 2020 2021 2020
Costs of revenue (1) $ 13.8 $ 19.2 $ 27.2 $ 39.7
Other (2) 0.4 1.0 0.8 1.9
Amortization (3) 0.1 - 0.2 -Total depreciation and amortization $ 14.3 $
20.2 $ 28.2 $ 41.6
_________________________
(1) Related to service equipment discussed under the "Costs of revenue" heading
of this discussion and analysis.
(2) Related to all long-lived assets other than service equipment.
(3) Related to amortization of our developed technology intangible asset.
Depreciation and amortization for the second quarter and first six months of 2021 (Successor) decreased by$5.9 million and$13.4 million , respectively, from the same periods in 2020 (Predecessor). These decreases were driven by reduced capital expenditures in the first half of 2021 (Successor) and reduced asset values related to our restructuring and Fresh Start accounting in the fourth quarter of 2020 (Predecessor).
Impairments and other charges
The following table summarizes our impairments and other charges:
Successor Predecessor Successor Predecessor
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(In millions) 2021 2020 2021 2020Transaction and strategic initiative costs $ 0.2 $
- $ 0.8 $ -
Gain on contract termination - - (0.3) -
Supply commitment charges - 5.9 - 9.1
Inventory write-down - 3.9 - 4.5
Employee severance costs - 0.5 - 1.0Total impairments and other charges $ 0.2 $
10.3 $ 0.5 $ 14.6
Transaction and Strategic Initiative Costs: In the second quarter and first six months of 2021 (Successor), we incurred$0.2 million and$0.8 million in costs related to specific strategic initiatives.
Gain on Contract Termination: In the first quarter of 2021 (Successor), we
terminated a portion of our operating lease for certain buildings. We recorded a
net gain of
Supply Commitment Charges:The Predecessor Company incurred supply commitment charges when our purchases of sand from certain suppliers were less than the minimum purchase commitments in our supply contracts. In the second quarter and first six months of 2020 (Predecessor), we recorded aggregate charges under these supply contracts of$5.9 million and$9.1 million , respectively. The purchase shortfalls were largely due to our customers choosing to procure their own sand, often from sand mines closer to their operating areas. The Company terminated all sand supply contracts upon emergence from bankruptcy. Any amounts due as outlined in the Plan were paid upon emergence and the Company does not expect any future commitment related to these Predecessor contracts. 17 Table of Contents
Inventory Write-downs: In the second quarter and first six months of 2020
(Predecessor), we incurred
Employee Severance Costs: In the second quarter and first six months of 2020 (Predecessor), we incurred employee severance costs of$0.5 million and$1.0 million , respectively, in connection with our cost reduction measures to mitigate losses from the decline in customer activity levels due to the low commodity price environment.
Interest expense, net
Interest expense, net of interest income, for the second quarter and first six months of 2021 (Successor) decreased by$7.3 million and$14.5 million , respectively, from the same periods in 2020 (Predecessor). These decreases were primarily due to the elimination of thePredecessor Company's debt and related interest upon emergence from bankruptcy onNovember 19, 2020 .
Extinguishment of debt
In the first six months of 2020 (Predecessor), we repaid$22.6 million of aggregate principal amount of our Term Loan Agreement using cash on hand and recognized a gain on this debt extinguishment of$2.0 million .The Predecessor Company's debt was eliminated upon emergence from bankruptcy onNovember 19, 2020 . Reorganization items
We have incurred expenses associated with the bankruptcy proceedings. These items are classified as reorganization items in our consolidated statements of operations. The following table summarizes our reorganization items:
Successor Predecessor Successor Predecessor
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(In millions) 2021 2020 2021 2020
Legal and professional fees $ (0.1) $ - $ 0.1 $ -
Other claims and charges 0.1 - 0.4 -
Total reorganization items $ - $
- $ 0.5 $ -
Income taxes
We provide a valuation allowance against all deferred tax assets in excess of
our deferred tax liabilities. As a result, income tax expense was only recorded
for states that limit the deduction of net operating loss carryforwards and for
foreign income taxes. See Note 7 - "Income Taxes" in the notes to our
consolidated financial statements included elsewhere in this quarterly report on
Form 10-Q for more discussion of our valuation allowance.
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Reconciliation of Adjusted EBITDA
The following table reconciles our net income or loss to Adjusted EBITDA:
Successor Predecessor Successor Predecessor
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(In millions) 2021 2020 2021 2020
Net loss $ (2.6) $ (50.7) $ (10.5) $ (62.4)
Interest expense, net 0.1 7.4 0.2 14.7
Income tax expense 0.1 - 0.1 -
Depreciation and amortization 14.3 20.2 28.2 41.6
Loss on disposal of assets, net - 0.2 - 0.1
Gain on extinguishment of debt, net -
- - (2.0)
Stock-based compensation 1.7 3.5 2.6 6.6
Supply commitment charges - 5.9 - 9.1
Inventory write-down - 3.9 - 4.5
Employee severance costs - 0.5 - 1.0Transaction and strategic initiative costs 0.2 - 0.8 - Gain on contract termination -
- (0.3) -
Reorganization items - - 0.5 -
Adjusted EBITDA (1) $ 13.8 $ (9.1) $ 21.6 $ 13.2
_____________________________
Adjusted EBITDA is a non-GAAP financial measure that we define as earnings
before interest, income taxes, and depreciation and amortization; as well as,
the following items, if applicable: gain or loss on disposal of assets; debt
extinguishment gains or losses; inventory write-downs; asset and goodwill
impairments; stock-based compensation; supply commitment charges; acquisition
or disposition transaction costs; employee severance costs related to
corporate-wide cost reduction initiatives; transaction and strategic
initiative costs; reorganization items; and gain or loss on contract
termination. The most comparable financial measure to Adjusted EBITDA under
(1) GAAP is net income or loss. Adjusted EBITDA is used by management to evaluate
the operating performance of our business for comparable periods and it is a
metric used for management incentive compensation. Adjusted EBITDA should not
be used by investors or others as the sole basis for formulating investment
decisions, as it excludes a number of important items. We believe Adjusted
EBITDA is an important indicator of operating performance because it excludes
the effects of our capital structure and certain non-cash items from our
operating results. Adjusted EBITDA is also commonly used by investors in the
oilfield services industry to measure a company's operating performance,
although our definition of Adjusted EBITDA may differ from other industry
peer companies.
Liquidity and Capital Resources
Sources of Liquidity
AtJune 30, 2021 (Successor), we had$98.9 million of cash and cash equivalents and$31.7 million of availability under our revolving credit facility, which resulted in a total liquidity position of$130.6 million . We believe that our cash and cash equivalents, any cash provided by operations, and the availability under our revolving credit facility will be sufficient to fund our operations, capital expenditures, and contractual obligations for at least the next 12 months. The maximum availability of credit under the credit facility is limited at any time to the lesser of$40 million or the borrowing base. The borrowing base is based on percentages of eligible accounts receivable and is subject to certain reserves. As ofJune 30, 2021 (Successor), our borrowing base was$35.7 million and therefore our maximum availability under the credit facility was$35.7 million . There were no borrowings outstanding under the credit facility, and letters of credit totaling$4.0 million were issued, resulting in$31.7 million of availability under the credit facility. 19 Table of Contents Cash Flows
The following table summarizes our cash flows:
Successor Predecessor
Six Months Ended Six Months Ended
June 30, June 30,
(In millions) 2021 2020
Net income or (loss) adjusted for non-cash
items $ 20.3 $ (0.8)
Changes in operating assets and liabilities (15.3) 26.5 Cash paid to settle supply commitment charges -
(18.8)
Net cash provided by operating activities 5.0 6.9 Net cash used in investing activities (12.8)
(16.7)
Net cash used in financing activities -
(20.7)
Net decrease in cash, cash equivalents, and restricted cash (7.8)
(30.5)
Cash, cash equivalents, and restricted cash at beginning of period 106.7
223.0
Cash and cash equivalents at end of period $ 98.9 $
192.5
Cash flows from operating activities have historically been a significant source
of liquidity we use to fund capital expenditures and repay our debt. Changes in
cash flows from operating activities are primarily affected by the same factors
that affect our net income, excluding non-cash items such as depreciation and
amortization, stock-based compensation, impairments of assets, and estimated
supply commitment charges.
Cash flows from operating activities: Net cash provided by operating activities
was $5.0 million and $6.9 million in the first six months of 2021 (Successor)
and 2020 (Predecessor), respectively. Cash flows from operating activities
consist of net income or loss adjusted for non-cash items, changes in operating
assets and liabilities and cash paid to settle supply commitment charges. Net
income or loss adjusted for non-cash items resulted in a cash increase of $20.3
million and a cash decrease of $0.8 million in the first six months of 2021
(Successor) and 2020 (Predecessor), respectively. This change was primarily due
to higher earnings in 2021 (Successor) after excluding supply commitment
charges. The net change in operating assets and liabilities resulted in a cash
decrease of $15.3 million and a cash increase of $26.5 million in the first six
months of 2021 (Successor) and 2020 (Predecessor), respectively. The cash
decrease in 2021 (Successor) was due to a build-up of working capital.
Cash flows from investing activities: Net cash used in investing activities was
$12.8 million and $16.7 million in the first six months of 2021 (Successor) and
2020 (Predecessor), respectively. This decrease was primarily due to decreased
capital expenditures in 2021 (Successor).
Cash flows from financing activities: Net cash used in financing activities was
zero and $20.7 million in the first six months of 2021 (Successor) and 2020
(Predecessor), respectively. In the first six months of 2020 (Predecessor) we
used $20.6 million of cash to repay long-term debt. The Predecessor Company's
debt was eliminated upon emergence from bankruptcy on November 19, 2020 .
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Cash Requirements
Contractual Commitments and Obligations
There have been no significant changes to our contractual obligations outside the ordinary course of business and bankruptcy proceedings sinceDecember 31, 2020 . Please refer to our annual report on Form 10-K for the year endedDecember 31, 2020 , for additional information regarding our contractual obligations.
Capital expenditures
The nature of our capital expenditures consists of a base level of investment required to support our current operations and amounts related to growth and company initiatives. Capital expenditures for the first six months of 2021 (Successor) represented the amount necessary to support our current operations. We estimate that total capital expenditures in 2021 (Successor) will range from$45 million to$50 million , which will support our operations and includes$13 million of growth capital expenditures to build a new fleet with Tier 4 Dynamic Gas Blending ("DGB") engines. We have reached an agreement to deploy this fleet to a largeU.S. independentE&P Company in the first quarter of 2022, in which we believe will provide favorable returns on the capital investment. Total construction costs for the new DGB fleet are expected to be approximately$26.0 million .
Our cash, cash equivalents, and any cash provided by operations will be used to fund our capital expenditure needs. We continuously evaluate our capital expenditures and the amount we ultimately spend will primarily depend on industry conditions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements, transactions, or special purpose entities.
Recently Issued Accounting Pronouncements
See Note 1 - "Basis of Presentation" in the notes to our consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
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