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MarketScreener Homepage  >  Equities  >  Nyse  >  Liberty Oilfield Services Inc.    LBRT

LIBERTY OILFIELD SERVICES INC.

(LBRT)
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LIBERTY OILFIELD SERVICES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/30/2020 | 05:10am EST
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the accompanying unaudited
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," the Annual Report under the heading "Item 1A. Risk
Factors," and in "Part II - Other Information, Item 1A.-Risk Factors" included
herein. We assume no obligation to update any of these forward-looking
statements.
Overview
We are an independent provider of hydraulic fracturing services and goods to
onshore oil and natural gas exploration and production ("E&P") companies in
North America. We have grown from one hydraulic fracturing fleet in December
2011 to 24 fleets in the first quarter of 2020, including the addition of one
fleet in January 2020. We provide our services primarily in the Permian Basin,
the Eagle Ford Shale, the DJ Basin, the Williston Basin, the San Juan Basin, and
the Powder River Basin. In response to market conditions described below, in
April 2020, we reduced our headcount consistent with the temporary idling of
approximately half of our frac fleets.
On August 31, 2020, the Company and certain of its subsidiaries entered into the
Transaction Agreement with Schlumberger, pursuant to which the Company will
acquire certain assets and liabilities of Schlumberger's OneStim business, which
provides hydraulic fracturing pressure pumping services in onshore United States
and Canada in exchange for up to 66,326,134 shares of Class A Common Stock and
the Canadian Buyer Note. The Company expects that upon closing Schlumberger will
hold approximately 37% of the issued and outstanding shares of Common Stock,
including Class A Common Stock and Class B Common Stock. The parties to the
Transaction Agreement expect that the Canadian Buyer Note will be satisfied in
shares of Company Class A Common Stock. The Acquisition is subject to approval
by the stockholders of the Company, as well as other customary closing
conditions. The Acquisition is expected to close in the fourth quarter of 2020.
See "Item 1A. Risk Factors" in this Quarterly Report, for discussion of risks
related to the Acquisition. The combined company will deliver best-in-class
completion services for the sustainable development of unconventional resource
plays in the United States and Canada land markets.
Recent Trends and Outlook
While the COVID-19 pandemic will continue to bring uncertainty in global oil
demand in the months ahead, incremental monthly improvement in completions
activity is a welcome sign of progress. Domestic onshore rig counts have
increased weekly since late in the third quarter, marking a directional shift
from declines observed through much of the third quarter. The most recent
domestic onshore count for North America was 274 rigs reported as of October 23,
2020, up from the average in the third quarter of 2020 of 241, according to a
report by Baker Hughes, a GE company. We believe the increase in activity has
been in response to West Texas Intermediate ("WTI") prices that have largely
stabilized in recent months, relative to volatility observed during the second
quarter of 2020. In the third quarter of 2020, the price of WTI averaged $40.89
compared with an average of $27.96 for the second quarter of 2020 and an average
of $56.34 for the third quarter of 2019. Subsequent to September 30, 2020, the
price of WTI has averaged $40.01 through October 23, 2020.
With continued uncertainty surrounding the magnitude and timing of oil demand
recovery, the Organization of the Petroleum Exporting Countries ("OPEC") and
non-OPEC supply concerns, and ongoing investor pressure for better returns by
E&P companies than those achieved over the last decade, we are unable to predict
the degree and duration of many factors that may impact our future operating
results. The volatile global economic conditions stemming from the pandemic, the
liquidity situation for North American oil producers and the reaction of
international oil producers could also exacerbate the risk factors identified in
the Annual Report and our Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2020 and June 30, 2020. See also the risk factor relating to COVID-19
disclosed in "Item 1A.-Risk Factors" of this Quarterly Report.
In response to these developments, the continued duration and ultimate severity
of which is unknown, we have taken the following steps to protect our employees,
customers and business. During February 2020 we formed a COVID-19 response team
to implement safety procedures and contingency plans at both our customer
locations and in our facilities to ensure our ability to continue providing safe
and efficient services to our customers, while protecting the health of both
employees and customers.
We have been proactive in protecting our business during these unprecedented
events. During the second quarter, we moved quickly to preserve cash and protect
our balance sheet and announced strategic actions to align our cost structure
with demand for frac services. Regrettably, for the first time in the Company's
history we undertook a reduction of our personnel and staffed fleet count by
approximately 50%. We also suspended variable compensation plans and our 401(k)
match, implemented base salary reductions, executive and director compensation
reductions, operating cost rationalization, reduction
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of planned 2020 capital expenditures, and suspended our quarterly dividend.
Further, we implemented a company-wide employee furlough plan that flexes our
cost structure to align with the uncertain level of frac demand we experienced
during the second and third quarter of 2020. As of September 30, 2020 there were
no employees on furlough.
While the market for completion services has rebounded from lows experienced
during the second quarter, worldwide demand and supply for oil remain in flux
due to the effects of COVID-19. In the fourth quarter of 2020, we anticipate our
activity levels will improve over the third quarter 2020. However, we cannot
predict with any certainty when demand for, or pricing of, our frac services
will meaningfully increase. We believe decreased levels of demand as compared to
pre-COVID-19 activity levels will likely persist at least through early 2021.
Results of Operations
Three months ended September 30, 2020 compared to three months ended September
30, 2019
                                                                      Three months ended September 30,
Description                                                      2020                  2019              Change
                                                                               (in thousands)
Revenue                                                   $    147,495

$ 515,079$ (367,584) Cost of services, excluding depreciation and amortization shown separately

                                               139,237               421,007            (281,770)
General and administrative                                      18,807                25,302              (6,495)
Severance and related costs                                      1,109                     -               1,109
Depreciation and amortization                                   44,496                42,324               2,172
Gain on disposal of assets                                        (752)                 (124)               (628)
Operating (loss) income                                        (55,402)               26,570             (81,972)
Interest expense, net                                            3,595                 3,726                (131)
Net (loss) income before income taxes                          (58,997)               22,844             (81,841)
Income tax (benefit) expense                                    (9,972)                4,004             (13,976)
Net (loss) income                                              (49,025)               18,840             (67,865)

Less: Net (loss) income attributable to non-controlling interests

                                                      (14,523)                7,842             (22,365)

Net (loss) income attributable to Liberty Oilfield Services Inc. stockholders

                                $    (34,502)

$ 10,998$ (45,500)

Revenue

Our revenue decreased $367.6 million, or 71.4%, to $147.5 million for the three
months ended September 30, 2020 compared to $515.1 million for the three months
ended September 30, 2019. Average active fleets decreased 59.1% to 9.4 from 23.0
average active fleets deployed during the three months ended September 30, 2020
and 2019, respectively, related to the April 2020 reduction in staffed fleets in
response to market conditions, as discussed above in Recent Trends and Outlook.
Further, revenue per average active fleet decreased 29.9% to $15.7 million for
the three months ended September 30, 2020 compared to $22.4 million for the
three months ended September 30, 2019, attributable to deterioration in the
market as previously discussed.
Cost of Services
Cost of services (excluding depreciation and amortization) decreased $281.8
million, or 66.9%, to $139.2 million for the three months ended September 30,
2020 compared to $421.0 million for the three months ended September 30, 2019,
which is consistent with the decrease in operations and revenues discussed
above. The decrease in expense is primarily attributed to a decrease in material
costs of $187.7 million or 74.4% due to the lower volumes of materials consumed,
$23.0 million or 46.0% decrease in repairs and maintenance costs due to the
decrease in pump hours, and a $56.7 million or 63.8% decrease in personnel costs
due to the reduction in headcount, furlough and flexible cost structure, as well
as the temporary suspension of bonus and 401(k) match programs.
General and Administrative
General and administrative expenses decreased $6.5 million, or 25.7%, to $18.8
million for the three months ended September 30, 2020 compared to $25.3 million
for the three months ended September 30, 2019 primarily related to a decrease in
personnel costs, excluding share based compensation, of $5.8 million due to the
reduction in headcount, furlough and flexible cost structure, as well as the
temporary suspension of bonus and 401(k) match programs, as well as a $1.3
million decrease in travel and entertainment expenses. Additionally, general and
administrative expense included $3.3 million of share based compensation expense
during the three months ended September 30, 2020 compared to $2.4 million for
the three months ended September 30, 2019.
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Severance and Related Costs
Severance and related costs were $1.1 million for the three months ended
September 30, 2020 compared to $0 for the three months ended September 30, 2019.
The Company reduced its workforce in April 2020 and commenced furlough schedules
for remaining employees in May 2020. The Company paid insurance and other
benefits of $1.1 million for employees while they were on furlough. The Company
did not lay-off or furlough any employees in during 2019.
Depreciation and Amortization
Depreciation and amortization expense increased $2.2 million, or 5.1%, to $44.5
million for the three months ended September 30, 2020 compared to $42.3 million
for the three months ended September 30, 2019, due to one additional hydraulic
fracturing fleet and additional support equipment deployed in the twelve months
ended September 30, 2020.
Gain on disposal of assets
Gain on disposal of assets increased $0.6 million to $0.7 million for the three
months ended September 30, 2020 compared to $0.1 million for the three months
ended September 30, 2019, attributed to the disposition of assets, primarily
related to light duty vehicles.
Operating (Loss) Income
We realized operating loss of $55.4 million for the three months ended September
30, 2020 compared to income $26.6 million for the three months ended September
30, 2019, a decrease of $82.0 million. The decrease is primarily due to the
$367.6 million, or 71.4%, decrease in total revenue only partially offset by a
$285.6 million decrease in total operating expenses, the significant components
of which are discussed above. The decline in operating income was significantly
impacted by reduced customer work as a result of the COVID-19 pandemic and steep
decline in oil prices in March and April of 2020.
Interest Expense, net
Interest expense, net was consistent between periods, decreasing slightly by
$0.1 million during the three months ended September 30, 2020 compared to the
three months ended September 30, 2019.
Net (Loss) Income before Income Taxes
We realized net loss before income taxes of $59.0 million for the three months
ended September 30, 2020 compared to income of $22.8 million for the three
months ended September 30, 2019. The decrease is primarily attributable to a
decrease in revenue, as discussed above, related to the decrease in pricing and
activity.
Income Tax (Benefit) Expense
We recognized a tax benefit of $10.0 million for the three months ended
September 30, 2020, at an effective rate of 16.9%, compared to expense of $4.0
million, at an effective rate of 17.5%, recognized during the three months ended
September 30, 2019. This decrease in income tax expense is attributable to the
net decrease in operating income, the significant components of which are
discussed above.
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Nine months ended September 30, 2020 compared to nine months ended September 30,
2019

                                                                     Nine months ended September 30,
Description                                                   2020                 2019               Change
                                                                              (in thousands)
Revenue                                                   $  708,201

$ 1,592,374$ (884,173) Cost of services, excluding depreciation and amortization shown separately

                                             621,471            1,276,750            (655,279)
General and administrative                                    65,484               71,379              (5,895)
Severance and related costs                                   10,166                    -              10,166
Depreciation and amortization                                134,258              121,079              13,179
(Gain) loss on disposal of assets                               (520)               1,242              (1,762)
Operating (loss) income                                     (122,658)             121,924            (244,582)
Interest expense, net                                         10,859               11,505                (646)
Net (loss) income before income taxes                       (133,517)             110,419            (243,936)
Income tax (benefit) expense                                 (21,074)              17,147             (38,221)
Net (loss) income                                           (112,443)              93,272            (205,715)

Less: Net (loss) income attributable to non-controlling interests

                                                    (33,890)              42,121             (76,011)

Net (loss) income attributable to Liberty Oilfield Services Inc. stockholders

                                $  (78,553)

$ 51,151$ (129,704)

Revenue

Our revenue decreased $884.2 million, or 55.5%, to $708.2 million for the nine
months ended September 30, 2020 compared to $1,592.4 million for the nine months
ended September 30, 2019. Average active fleets decreased 46.1% to 12.3 from
22.8 average active fleets deployed during the nine months ended September 30,
2020 and 2019, respectively, related to the April 2020 reduction in staffed
fleets in response to market conditions, as discussed above in Recent Trends and
Outlook. Further, revenue per average active fleet decreased 17.6% to
$57.6 million for the nine months ended September 30, 2020 compared to
$69.8 million for the nine months ended September 30, 2019, attributable to
deterioration in the market as previously discussed.
Cost of Services
Cost of services (excluding depreciation and amortization) decreased
$655.3 million, or 51.3%, to $621.5 million for the nine months ended September
30, 2020 compared to $1,276.8 million for the nine months ended September 30,
2019, which is consistent with the decrease in operations and revenues discussed
above. The decrease in expense is primarily attributed to a decrease in material
costs of $415.0 million or 54.0% due to the lower volumes of materials consumed,
$85.2 million or 51.0% decrease in repairs and maintenance costs due to the
decrease in pump hours, and a $116.0 million or 45.0% decrease in personnel
costs due to the reduction in headcount as well as the temporary suspension of
bonus and 401(k) match programs.
General and Administrative
General and administrative expenses decreased $5.9 million, or 8.3%, to
$65.5 million for the nine months ended September 30, 2020 compared to
$71.4 million for the nine months ended September 30, 2019 primarily related to
an decrease in personnel costs, excluding share based compensation, of $11.0
million due to the reduction in headcount, furlough and flexible cost structure,
as well as the temporary suspension of bonus and 401(k) match programs, offset
by an increase in allowance for credit losses of $4.7 million. Additionally,
general and administrative expense included $9.4 million of share based
compensation expense during the nine months ended September 30, 2020 compared to
$6.8 million for the nine months ended September 30, 2019.
Severance and Related Costs
Severance and related costs were $10.2 million for the nine months ended
September 30, 2020 compared to $0 for the nine months ended September 30, 2019.
The Company reduced its workforce in April 2020 and commenced furlough schedules
for remaining employees in May 2020. The Company did not lay-off or furlough any
employees in during 2019.
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Depreciation and Amortization
Depreciation and amortization expense increased $13.2 million, or 10.9%, to
$134.3 million for the nine months ended September 30, 2020 compared to
$121.1 million for the nine months ended September 30, 2019, due to one
additional hydraulic fracturing fleet and additional support equipment deployed
in the twelve months ended September 30, 2020.
(Gain) Loss on disposal of assets
The Company recognized a gain on disposals of $0.5 million for the nine months
ended September 30, 2020 compared to a loss of $1.2 million for the nine months
ended September 30, 2019. The gain in 2020 is primarily related to proceeds on
sales of light duty trucks.
Operating (Loss) Income
We realized an operating loss of $122.7 million for the nine months ended
September 30, 2020 compared to operating income of $121.9 million for the nine
months ended September 30, 2019, a decrease of $244.6 million. The decrease is
primarily due to the $884.2 million, or 55.5%, decrease in total revenue only
partially offset by a $639.6 million decrease in total operating expenses, the
significant components of which are discussed above. The decline in operating
income was significantly impacted by reduced customer work as a result of the
COVID-19 pandemic and steep decline in oil prices in March and April.
Interest Expense, net
Interest expense, net was consistent between periods, decreasing slightly by
$0.6 million during the nine months ended September 30, 2020 compared to the
nine months ended September 30, 2019.
Net (Loss) Income before Income Taxes
We realized net loss before income taxes of $133.5 million for the nine months
ended September 30, 2020 compared to net income before income taxes of $110.4
million for the nine months ended September 30, 2019. The decrease is primarily
attributable to a decrease in revenue, as discussed above, related to the
decrease in pricing and activity.
Income Tax (Benefit) Expense
We recognized an income tax benefit of $21.1 million for the nine months ended
September 30, 2020, at an effective rate of 15.8%, compared to income tax
expense of $17.1 million, at an effective rate of 15.5%, recognized during the
nine months ended September 30, 2019. This decrease in income tax expense is
attributable to the decrease in operating income, the significant components of
which are discussed above.
Although the Company's tax rate was 15.8% for the nine months ended September
30, 2020, the Company expects the effective tax rate to be approximately 16.1%
for the full year ended December 31, 2020. The rate is lower for the nine months
ended September 30, 2020 due to discrete items recorded related to stock based
compensation and the Company's response to the CARES Act. The CARES Act allowed
the Company to carry back NOLs incurred during the year ended December 31, 2019
which allowed for the recognition of tax attributes during the nine months ended
September 30, 2020.
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, and 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,
allowance for credit losses, and nonrecurring 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.
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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 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:
Three and nine months ended September 30, 2020 compared to three and nine months
ended September 30, 2019: EBITDA and Adjusted EBITDA
                                           Three Months Ended September 30,                               Nine Months Ended September 30,
Description                            2020                  2019              Change               2020                 2019              Change
                                                    (in thousands)
Net income                     $    (49,025)$ 18,840

$ (67,865)$ (112,443)$ 93,272$ (205,715) Depreciation and amortization 44,496

                 42,324              2,172               134,258            121,079              13,179
Interest expense, net                 3,595                  3,726               (131)               10,859             11,505                (646)
Income tax expense                   (9,972)                 4,004            (13,976)              (21,074)            17,147             (38,221)
EBITDA                         $    (10,906)$ 68,894

$ (79,800)$ 11,600$ 243,003$ (231,403) Fleet start-up and lay-down costs

                                 5,958                  1,273              4,685                10,457              2,733               7,724
Asset acquisition costs               1,500                      -              1,500                 1,500                  -               1,500
(Gain) loss on disposal of
assets                                 (752)                  (124)              (628)                 (520)             1,242              (1,762)
Provision for credit losses               -                      -                  -                 4,678                  -               4,678
Severance and related costs           1,109                      -              1,109                10,166                  -              10,166
Adjusted EBITDA                $     (3,091)$ 70,043$ (73,134)$     37,881$ 246,978$ (209,097)


EBITDA was $(10.9) million for the three months ended September 30, 2020
compared to $68.9 million for the three months ended September 30, 2019.
Adjusted EBITDA was $(3.1) million for the three months ended September 30, 2020
compared to $70.0 million for the three months ended September 30, 2019. The
decreases in EBITDA and Adjusted EBITDA resulted from decreases in revenue only
partially offset by a decreases in operating expenses. See factors described
under the captions Revenue and Cost of Services above.
EBITDA was $11.6 million for the nine months ended September 30, 2020 compared
to $243.0 million for the nine months ended September 30, 2019. Adjusted EBITDA
was $37.9 million for the nine months ended September 30, 2020 compared to
$247.0 million for the nine months ended September 30, 2019. The decreases in
EBITDA and Adjusted EBITDA resulted from decreases in revenue only partially
offset by a decreases in operating expenses. See factors described under the
captions Revenue and Cost of Services above.
Liquidity and Capital Resources
Overview
Historically, our primary sources of liquidity have been cash flows from
operations, proceeds from our IPO, and borrowings under our Credit Facilities.
We expect to fund operations and organic growth with cash on hand, cash flows
from operations and available borrowings under our Credit Facilities. 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.
In response to the COVID-19 pandemic, we took significant steps to enhance our
financial position through an uncertain duration of reduced activity levels. We
reduced our planned 2020 capital expenditures budget by approximately 50% to
between $70 and $90 million. We reduced our fleet and personnel count by
approximately 50% and significantly reduced cash compensation costs through a
combination of suspended variable compensation plans and matching 401(k)
contributions as
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well as reductions to base salaries. We suspended our quarterly dividend in
April 2020. While the Company is unable to accurately foresee further impacts
from the COVID-19 pandemic, including the potential impact of periodically
adjusted borrowing base limits, levels of hedged production, unforeseen well
shut-ins and our customers' ability to timely pay receivables when due, we
believe our financial resources and liquidity levels, along with various
contingency plans to reduce costs, are sufficient to manage the impact currently
anticipated from the pandemic.
In connection with the Acquisition, Schlumberger has agreed to deliver at least
$60.0 million working capital, as defined, upon closing, which is anticipated
during the fourth quarter of 2020, or provide a cash payment to cure any
shortfall.
Cash and cash equivalents decreased by $27.9 million to $84.8 million as of
September 30, 2020 compared to $112.7 million as of December 31, 2019, while
working capital excluding cash decreased $23.0 million. We have no debt
maturities beyond a 1% quarterly amortization payment of $0.4 million until
September of 2022. 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:
                                                                  Nine Months Ended September 30,
Description                                                 2020                 2019              Change
                                                                          (in thousands)
Net cash provided by operating activities             $    70,006$ 245,075$ (175,069)
Net cash used in investing activities                     (81,271)            (157,694)             76,423
Net cash used in financing activities                     (16,606)             (50,698)             34,092

Net increase (decrease) in cash and cash equivalents $ (27,871)

$ 36,683$ (64,554)



Analysis of Cash Flow Changes Between the Nine Months Ended September 30, 2020
and 2019
Operating Activities. Net cash provided by operating activities was $70.0
million for the nine months ended September 30, 2020, compared to $245.1 million
for the nine months ended September 30, 2019. The $175.1 million decrease in
cash from operating activities is primarily attributable to a $884.2 million
decrease in revenues offset by a $639.6 million decrease in operating expense
and a $48.1 million increase in cash due to decreases in working capital for the
nine months ended September 30, 2020, compared to $8.1 million of cash from a
decrease in working capital for the nine months ended September 30, 2019.
Investing Activities. Net cash used in investing activities was $81.3 million
for the nine months ended September 30, 2020, compared to $157.7 million for the
nine months ended September 30, 2019. The decrease in net cash used in investing
activities is attributable to a decrease in capital expenditures in an effort to
reduce spending and the reduced fleet count.
Financing Activities. Net cash used in financing activities was $16.6 million
for the nine months ended September 30, 2020, compared to $50.7 million for the
nine months ended September 30, 2019. The $34.1 million decrease in cash used in
financing activities was primarily due to an $18.4 million decrease in share
repurchases and a $11.0 million reduction in dividends and per unit
distributions to non-controlling interest unit holders in the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019.
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.
Based upon the September 30, 2020 financial statements, the borrowing base is
currently $70.2 million, and the Company had no borrowings outstanding, except
for letter of credit in the amount of $0.8 million, resulting in $69.4 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 average
monthly 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 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 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.
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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.
The Company recognized an income tax benefit of $21.1 million, effective
combined U.S. federal and state income tax rate applicable to the Company of
15.8%, for the nine months ended September 30, 2020 compared to income tax
expense of $17.1 million, combined effective rate of 15.5%, for the nine months
ended September 30, 2019. Although the Company's tax rate is 15.8% for the nine
months ended September 30, 2020, the Company expects the effective tax rate to
be approximately 16.1% for the full year ended December 31, 2020. The rate is
lower for the nine months ended September 30, 2020 due to discrete items
recorded related to stock based compensation and the Company's response to the
CARES Act. The CARES Act allowed the Company to carry back NOLs incurred during
the year ended December 31, 2019 which allowed for the recognition of tax
attributes during the nine months ended September 30, 2020.
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 non-controlling interest's share of Liberty LLC's pass-through results
for federal, state, and local income tax reporting.
Tax Receivable Agreements
In connection with the IPO, on January 17, 2018, the Company entered into two
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 of the TRA Holders, 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 Holders' Liberty LLC Units in connection with the IPO or pursuant to the
exercise of the right of each Liberty Unit Holder (the "Redemption Right"),
subject to certain limitations, to cause Liberty LLC to acquire all or a portion
of its Liberty LLC Units for, at Liberty LLC's election, (A) shares of our Class
A Common Stock at the specific redemption ratio or (B) an equivalent amount of
cash, or, upon the exercise of the Redemption Right, the right of Liberty Inc.
(instead of Liberty LLC) to, for administrative convenience, acquire each
tendered Liberty LLC Unit directly from the redeeming Liberty Unit Holder for,
at its election, (1) one share of Class A Common Stock or (2) an equivalent
amount of cash, (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, 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 TRAs.
Critical Accounting Policies and Estimates
The condensed consolidated financial statements are prepared in accordance with
GAAP, which require us to make estimates and assumptions (see Note 2-Significant
Accounting Policies 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, 2019, 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. These critical accounting policies are discussed more fully in the
Annual Report.
Effective January 1, 2020, the Company adopted ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (see Note 2-Significant Accounting Policies to the condensed
consolidated financial statements included in this Quarterly Report).
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In April 2020, the Company adopted FASB Staff Q&A Topic 842 and Topic 840:
Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic
(see Note 2-Significant Accounting Policies to the condensed consolidated
financial statements included in this Quarterly Report).
There have been no other changes in our evaluation of our critical accounting
policies since December 31, 2019.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements as of September 30, 2020,
except for purchase commitments under supply agreements as disclosed above under
"Item 1. Financial Statements-Note 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.
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