Company Quick10K Filing
FTS International
Price2.59 EPS-0
Shares109 P/E-8
MCap283 P/FCF3
Net Debt256 EBIT-32
TEV539 TEV/EBIT-17
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-10
10-Q 2020-03-31 Filed 2020-04-30
10-K 2019-12-31 Filed 2020-02-27
10-Q 2019-09-30 Filed 2019-11-05
10-Q 2019-06-30 Filed 2019-07-31
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-02-28
10-Q 2018-09-30 Filed 2018-10-30
10-Q 2018-06-30 Filed 2018-08-01
10-Q 2018-03-31 Filed 2018-05-01
10-K 2017-12-31 Filed 2018-03-09
8-K 2020-09-04 Other Events
8-K 2020-08-22 Enter Agreement, Regulation FD, Exhibits
8-K 2020-08-14 Enter Agreement, Off-BS Arrangement
8-K 2020-08-10 Earnings, Exhibits
8-K 2020-06-17
8-K 2020-05-19
8-K 2020-05-08
8-K 2020-04-29
8-K 2020-04-10
8-K 2020-03-23
8-K 2020-02-12
8-K 2020-01-31
8-K 2019-12-12
8-K 2019-11-04
8-K 2019-09-26
8-K 2019-07-30
8-K 2019-05-16
8-K 2019-05-08
8-K 2019-05-03
8-K 2019-04-25
8-K 2019-02-27
8-K 2019-02-11
8-K 2018-12-28
8-K 2018-10-29
8-K 2018-09-26
8-K 2018-07-31
8-K 2018-04-30
8-K 2018-04-25
8-K 2018-03-01
8-K 2018-02-22

FTSI 10Q Quarterly Report

Part 1 - Financial Information
Item 1.Financial Statements
Note 1 - Basis of Presentation
Note 2 - Current Economic Environment
Note 3 - Indebtedness and Borrowing Facility
Note 4 - Stockholders' Equity
Note 5 - Revenue
Note 6 - Impairments and Other Charges
Note 7 - Income Taxes
Note 8 - Earnings per Share
Note 9 - Commitments and Contingencies
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.1 ftsi-20200630xex10d1.htm
EX-31.1 ftsi-20200630xex31d1.htm
EX-31.2 ftsi-20200630xex31d2.htm
EX-32.1 ftsi-20200630xex32d1.htm

FTS International Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
0.90.70.50.30.1-0.12016201720182020
Assets, Equity
0.50.40.30.10.0-0.12016201720182020
Rev, G Profit, Net Income
0.20.10.0-0.0-0.1-0.22016201720182020
Ops, Inv, Fin

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

OR

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

For the transition period from to

Commission file number 001-38382

FTSI_Logo_Horiz_4C.png

FTS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

30-0780081

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

777 Main Street, Suite 2900, Fort Worth, Texas

(Address of principal executive offices)

76102

(Zip Code)

(817) 862-2000

(Registrant’s telephone number, including area code)

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

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

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

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

Title of each class

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

FTSI

NYSE American

As of August 3, 2020, the registrant had 5,380,859 shares of common stock, $0.01 par value, outstanding.

Table of Contents

FTS INTERNATIONAL, INC.

TABLE OF CONTENTS

2

Table of Contents

Cautionary Statement Regarding Forward-Looking Statements

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

further declines in domestic spending by the onshore oil and natural gas industry;
continued volatility in oil and natural gas prices;
the effect of a loss of, financial distress of, or decline in activity levels of, one or more significant customers;
actions of the Organization of the Petroleum Exporting Countries, or OPEC, its members and other state-controlled oil companies relating to oil price and production controls;
our inability to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers;
the price and availability of alternative fuels and energy sources;
the discovery rates of new oil and natural gas reserves;
the availability of water resources, suitable proppant and chemicals in sufficient quantities and pricing for use in hydraulic fracturing fluids;
uncertainty in capital and commodities markets and the ability of oil and natural gas producers to raise equity capital and debt financing;
our ability to manage the maturities of our term loan and senior notes;
ongoing and potential securities litigation and other litigation and legal proceedings, including arbitration proceedings and our dispute with Covia Holdings Corporation (“Covia”) regarding a terminated supply agreement;
our ability to participate in consolidation opportunities within our industry;
the ability to successfully manage the economic and operational challenges associated with a disease outbreak, including epidemics, pandemics, or similar widespread public health concerns, including the novel coronavirus (“ COVID-19”) pandemic;
the ultimate geographic spread, duration and severity of the COVID-19 outbreak, and the effectiveness of actions taken, or actions that may be taken, by governmental authorities to contain such outbreak or treat its impact;
the ultimate duration and impact of geopolitical events that adversely affect the price of oil, including the Saudi-Russia price war earlier this year; and
a deterioration in general economic conditions or a weakening of the broader energy industry.

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

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

3

Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1.Financial Statements

FTS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

(Dollars in millions, except per share amounts)

2020

2019

2020

2019

Revenue

Revenue

$

29.5

$

225.8

$

180.3

$

447.4

Revenue from related parties

0.7

0.9

Total revenue

29.5

225.8

181.0

448.3

Operating expenses

Costs of revenue (excluding depreciation of $19.2, $20.7, $39.7 and $41.1 respectively, included in depreciation and amortization below)

28.9

164.8

143.5

326.9

Selling, general and administrative

13.2

21.7

30.9

45.3

Depreciation and amortization

20.2

22.8

41.6

45.2

Impairments and other charges

10.3

3.9

14.6

65.7

Loss (gain) on disposal of assets, net

0.2

(1.2)

0.1

(0.9)

Total operating expenses

72.8

212.0

230.7

482.2

Operating (loss) income

(43.3)

13.8

(49.7)

(33.9)

Interest expense, net

(7.4)

(7.7)

(14.7)

(15.9)

Gain (loss) on extinguishment of debt, net

(0.1)

2.0

0.4

Equity in net income of joint venture affiliate

0.6

(Loss) income before income taxes

(50.7)

6.0

(62.4)

(48.8)

Income tax expense

0.1

0.3

Net (loss) income

$

(50.7)

$

5.9

$

(62.4)

$

(49.1)

Basic and diluted (loss) earnings per share

$

(9.43)

$

1.08

$

(11.61)

$

(8.95)

Shares used in computing basic and diluted
earnings per share (in thousands)

5,379

5,484

5,373

5,483

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

4

Table of Contents

FTS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 30,

December 31,

(In millions, except share amounts)

2020

2019

ASSETS

Current assets

Cash and cash equivalents

$

192.5

$

223.0

Accounts receivable, net

20.8

77.0

Inventories

40.0

45.5

Prepaid expenses and other current assets

5.8

7.0

Total current assets

259.1

352.5

Property, plant, and equipment, net

203.7

227.0

Operating lease right-of-use assets

21.1

26.3

Intangible assets, net

29.5

29.5

Other assets

3.8

4.0

Total assets

$

517.2

$

639.3

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

Current liabilities

Accounts payable

$

16.8

$

36.4

Accrued expenses

13.0

22.9

Current portion of long-term debt

67.2

Current portion of operating lease liabilities

13.0

14.3

Other current liabilities

12.8

11.6

Total current liabilities

122.8

85.2

Long-term debt

367.8

456.9

Operating lease liabilities

9.7

13.9

Other liabilities

35.0

45.6

Total liabilities

535.3

601.6

Commitments and contingencies (Note 9)

Stockholders’ (deficit) equity

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

Common stock, $0.01 par value, 320,000,000 shares authorized, 5,380,859 shares issued and outstanding at June 30, 2020 and 5,355,370 shares issued and outstanding at December 31, 2019

36.4

36.4

Additional paid-in capital

4,388.6

4,382.0

Accumulated deficit

(4,443.1)

(4,380.7)

Total stockholders’ (deficit) equity

(18.1)

37.7

Total liabilities and stockholders’ (deficit) equity

$

517.2

$

639.3

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

5

Table of Contents

FTS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended

June 30,

(In millions)

2020

2019

Cash flows from operating activities

Net loss

$

(62.4)

$

(49.1)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

41.6

45.2

Stock-based compensation

6.6

6.7

Amortization of debt discounts and issuance costs

0.9

0.9

Loss (gain) on disposal of assets, net

0.1

(0.9)

Gain on extinguishment of debt, net

(2.0)

(0.4)

Non-cash provision for supply commitment charges

9.1

56.7

Cash paid to settle supply commitment charges

(18.8)

(15.9)

Impairment of assets

5.5

Inventory write-down

4.5

3.5

Other non-cash items

0.8

(1.1)

Changes in operating assets and liabilities:

Accounts receivable

55.4

16.8

Inventories

1.0

4.6

Prepaid expenses and other assets

0.9

(8.6)

Accounts payable

(21.3)

(12.3)

Accrued expenses and other liabilities

(9.5)

(4.3)

Net cash provided by operating activities

6.9

47.3

Cash flows from investing activities

Capital expenditures

(16.8)

(26.5)

Proceeds from disposal of assets

0.1

1.3

Net cash used in investing activities

(16.7)

(25.2)

Cash flows from financing activities

Repayments of long-term debt

(20.6)

(31.3)

Repurchase of common stock

(4.6)

Taxes paid related to net share settlement of equity awards

(0.1)

(1.9)

Net cash used in financing activities

(20.7)

(37.8)

Net decrease in cash and cash equivalents

(30.5)

(15.7)

Cash and cash equivalents at beginning of period

223.0

177.8

Cash and cash equivalents at end of period

$

192.5

$

162.1

Supplemental cash flow information:

Interest paid

$

13.9

$

16.0

Income tax payments

$

$

1.4

Noncash investing and financing activities:

Capital expenditures included in accounts payable

$

2.6

$

2.9

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

6

Table of Contents

FTS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

(Dollars in millions and shares in thousands)

Shares

Amount

Capital

Deficit

Equity

Balance at January 1, 2020

5,355

$

36.4

$

4,382.0

$

(4,380.7)

$

37.7

Net loss

(11.7)

(11.7)

Activity related to stock plan

20

3.0

3.0

Balance at March 31, 2020

5,375

$

36.4

$

4,385.0

$

(4,392.4)

$

29.0

Net loss

(50.7)

(50.7)

Activity related to stock plan

6

3.6

3.6

Balance at June 30, 2020

5,381

$

36.4

$

4,388.6

$

(4,443.1)

$

(18.1)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

(Dollars in millions and shares in thousands)

Shares

Amount

Capital

Deficit

Equity

Balance at January 1, 2019

5,472

$

36.4

$

4,378.4

$

(4,307.9)

$

106.9

Net loss

(55.0)

(55.0)

Cumulative effect of accounting change

0.1

0.1

Activity related to stock plan

18

1.3

1.3

Balance at March 31, 2019

5,490

$

36.4

$

4,379.7

$

(4,362.8)

$

53.3

Net income

5.9

5.9

Repurchase of common stock

(38)

(4.6)

(4.6)

Activity related to stock plan

3

3.4

3.4

Balance at June 30, 2019

5,455

$

36.4

$

4,378.5

$

(4,356.9)

$

58.0

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

7

Table of Contents

FTS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

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

Fair Value of Financial Instruments

Money market funds, classified as cash and cash equivalents, are the only financial instruments that are measured and recorded at fair value on the Company’s balance sheets. The following table presents money market funds at their level within the fair value hierarchy.

(In millions)

Total

Level 1

Level 2

Level 3

June 30, 2020

Money market funds

$

119.5

$

119.5

$

$

December 31, 2019

Money market funds

$

193.6

$

193.6

$

$

Reclassifications

All inventory write-downs have been reclassified from costs of revenue to impairments and other charges on the statements of operations for the three and six months ended June 30, 2019, to conform to current year presentation. This reclassification had no effect on operating income (loss) or net income (loss) as previously reported.

New Accounting Standards Updates

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This standard requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new standard also applies to financial assets arising from revenue transactions such as accounts receivables. We adopted this standard on January 1, 2020, and it had no material effect on our consolidated financial statements.

NOTE 2 — CURRENT ECONOMIC ENVIRONMENT

Our business activities are concentrated in the well completion services segment of the oilfield services industry in the United States. The market for these services is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop, and produce oil and natural gas in the United States. The willingness of our customers to undertake these activities depends largely upon prevailing industry conditions and is predominantly influenced by current and expected future prices for oil and natural gas. Our customer base is also concentrated. Our business, financial condition and results of operations can be materially adversely affected if one or more of our significant customers ceases to engage us for our services on favorable terms, or at all, or fails to pay, or delays in paying, us significant amounts of our outstanding receivables.

8

Table of Contents

A reduced demand for oil due to the COVID-19 pandemic and an increased supply of oil due to the Saudi-Russia price war earlier this year have substantially lowered the price of oil since March 2020. This lower price of oil and the pandemic have caused our customers to substantially reduce their hydraulic fracturing activities and the prices they are willing to pay for our services. We averaged five underutilized active fleets in the second quarter. We have started to see a slight increase in activity during the third quarter, but we have limited visibility into demand for the remainder of 2020 and 2021. We currently expect to average six to seven active fleets in the third quarter.

In response to this market environment, we are focused on offering a reduced number of active fleets into the market, as well as managing our fixed costs, to minimize the amount of cash needed to support our business during this time of low activity and low pricing levels. Our actions have included reducing labor costs through reductions in force, wage reductions, and furloughs. We are also negotiating with all our vendors to significantly reduce our non-labor costs. We are working to ensure the Company is well positioned to supply the industry with the hydraulic fracturing services that are an integral part of U.S. oil production.

We believe that our cash and cash equivalents and any cash provided by operations will be sufficient to fund our operations, capital expenditures, contractual obligations, and debt maturities for at least the next 12 months. However, if market conditions do not improve significantly over the next 12 months, we may not be able to repay or refinance our senior notes due in May of 2022.

We continually assess alternatives to our capital structure and evaluate strategic capital initiatives which may include, but are not limited to, equity and debt financings and the modification of existing debt, including the amount of debt outstanding, the types of debt issued and the maturity dates of our debt. These alternatives, if implemented, could materially affect our capitalization, debt ratios, cash balances and ability to participate in consolidation opportunities within our industry.

NOTE 3 — INDEBTEDNESS AND BORROWING FACILITY

The following table summarizes our total debt:

June 30,

December 31,

(In millions)

2020

2019

Term loan due April 2021 ("Term Loan")

$

67.4

$

90.0

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

369.9

369.9

Total principal amount

437.3

459.9

Less unamortized discount and debt issuance costs

(2.3)

(3.0)

Total debt

435.0

456.9

Less current portion

(67.2)

Total long-term debt

$

367.8

$

456.9

Estimated fair value of total debt

$

172.2

$

317.2

Estimated fair values for our Term Loan and 2022 Senior Notes were determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the FASB’s fair value hierarchy. We believe we were in compliance with all of the covenants in our debt agreements at June 30, 2020.

Debt Repayments

In the first six months of 2020, we repaid $22.6 million of aggregate principal amount of our Term Loan using cash on hand. We recognized a gain on this debt extinguishment of $2.0 million.

Revolving Credit Facility

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

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As of June 30, 2020, the borrowing base was $9.0 million and therefore our maximum availability under the credit facility was $9.0 million. As of June 30, 2020, there were no borrowings outstanding under the credit facility, and letters of credit totaling $4.0 million were issued, resulting in $5.0 million of availability under the credit facility. This availability requires us to maintain a minimum FCCR of 1.0 to 1.0. At our next compliance date in August 2020, we expect our FCCR to be below the minimum. We are evaluating our options, which include modifying or terminating the credit facility.

NOTE 4 — STOCKHOLDERS’ EQUITY

Reverse Stock Split

In May 2020, our board of directors (our “Board”) approved a reverse stock split of the Company’s issued and outstanding common stock on a one for twenty basis. The par value of the Company’s common stock and the number of shares authorized for issuance remained unchanged as a result of the reverse stock split. All common shares and stock awards presented in the unaudited consolidated financial statements have been retrospectively adjusted for the reverse stock split. In addition, the Company transferred the listing of the Company’s common stock from the New York Stock Exchange (the “NYSE”) to the NYSE American.

Share Repurchase

In May 2019, our Board approved an authorization for a total share repurchase of up to $100 million of the Company’s common stock to be executed through open market or private transactions. In the first six months of 2020, we repurchased zero shares of common stock. The authorization expired on May 14, 2020.

NOTE 5 — REVENUE

The Company contracts with its customers to perform hydraulic fracturing services on one or more oil or natural gas wells. Under these arrangements, we satisfy our performance obligations as services are rendered, which is generally upon the completion of a fracturing stage or the passage of time. Pricing for our services is frequently negotiated with our customers and is based on prevailing market rates during each reporting period. The amounts we invoice our customers for services performed during a period are directly related to the value received by the customers for the period. There is no inherent uncertainty to the amount of consideration we will receive for services performed during a period and no judgment is required to allocate a portion of the transaction price to a future period. Accordingly, we are not required to identify any unsatisfied performance obligations nor attribute any revenue to them. We have no material contract assets or liabilities with our customers. We do not present disaggregated revenue because we do not believe this information is necessary to understand the nature, amount, timing and uncertainty of our revenues and cash flows.

NOTE 6 — IMPAIRMENTS AND OTHER CHARGES

The following table summarizes our impairments and other charges:

Three Months Ended

Six Months Ended

June 30,

June 30,

(In millions)

2020

2019

2020

2019

Supply commitment charges

$

5.9

$

0.1

$

9.1

$

56.7

Employee severance costs

0.5

1.0

Impairment of assets

2.7

5.5

Inventory write-down

3.9

1.1

4.5

3.5

Total impairments and other charges

$

10.3

$

3.9

$

14.6

$

65.7

Supply Commitment Charges

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

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During the first six months of 2020 and 2019, we recorded aggregate charges under these supply contracts of $9.1 million and $56.7 million, respectively. These charges relate to actual purchase shortfalls incurred, as well as forecasted losses expected to be incurred and settled in future periods. Historically, these purchase shortfalls have been largely due to our customers choosing to procure their own sand, often from sand mines closer to their operating areas. The supply commitment charge in the second quarter of 2020 was primarily due to us giving notice to terminate our largest sand supply contract with Covia, which Covia is disputing. The supply commitment charge reflects, among other things, that if there are no further purchases of sand under the terminated contract, we will be unable to credit amounts already paid to Covia against our purchases, as permitted under the contract. See Note 9 — “Commitments and Contingencies” for more information.

In May 2019, we restructured and amended the Covia sand supply contract to reduce the total remaining commitment through 2024 by approximately $162 million. In connection with this amendment, we recorded a supply commitment charge of $55.0 million in the first quarter of 2019 to record losses on certain expected purchase shortfalls. The remaining amount of the 2019 charges represent revised estimates of our purchase shortfalls under this contract for 2019.

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

Employee Severance Costs

In the first six months of 2020, we incurred employee severance costs of $1.0 million in connection with our cost reduction measures to mitigate losses from the decline in customer activity levels due to the low commodity price environment. At June 30, 2020, we had a remaining liability for future severance payments of $0.2 million.

Discontinued Wireline Operations

In May 2019, we discontinued our wireline operations due to financial underperformance resulting from market conditions. As a result of this decision, we recorded an asset impairment of $2.8 million and an inventory write-down of $1.4 million in the first quarter of 2019 to adjust these assets to their estimated fair market values and net realizable values, respectively. We sold substantially all of these assets in 2019 and received net proceeds of approximately $3.7 million.

Other

In the second quarter of 2019, we recorded $2.7 million of impairments for certain land and buildings that we no longer use. The remaining amounts of inventory write-downs for the periods presented were to reduce excess, obsolete, and slow-moving inventory to its estimated net realizable value.

Risk of Future Impairments

As previously discussed, we have experienced a substantial downturn in our business resulting from the COVID-19 pandemic and the Saudi-Russia price war earlier this year. We concluded that this downturn was a triggering event to test our long-lived assets and indefinite-lived tradename for impairment. After testing these assets for impairment, we concluded that no impairments were required at June 30, 2020. These tests rely on two key inputs: the estimated severity and length of the current industry downturn and the magnitude of an industry recovery. If current industry conditions continue for a prolonged period or if our estimates of these key inputs are revised unfavorably in a future quarter, we will likely incur impairments of long-lived assets or our tradename in a future period.

NOTE 7 — INCOME TAXES

In 2012, we established a full valuation allowance with respect to our U.S. federal deferred tax assets and state deferred tax assets in excess of our deferred tax liabilities. We have recorded a full valuation allowance for these net deferred tax assets for each year since 2012. As a result, we only record income tax expense for states that limit the deduction of net operating loss carryforwards and for foreign income taxes. Deferred tax assets related to our U.S. federal and state tax net operating losses are still available to us to offset future taxable income, subject to limitations in

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the event of a change of control under Section 382 of the Internal Revenue Code. At June 30, 2020, we had not incurred such an ownership change.

At each reporting date, we consider all available positive and negative evidence to evaluate whether our deferred tax assets are more likely than not to be realized. A significant piece of negative evidence that we consider is whether we have incurred cumulative losses (generally defined as losses before income taxes) in recent years. Such negative evidence weighs heavily against other more subjective positive evidence such as our projections for future taxable income. We noted that for the three years ended December 31, 2019, we recorded cumulative income before income taxes of $391.2 million. Notwithstanding the three-year cumulative income, we concluded that a full valuation allowance was still required at June 30, 2020, because of the significant fluctuations of our business in recent years, and our losses before income taxes for the year ended December 31, 2019, and the for six months ended June 30, 2020.

NOTE 8 — EARNINGS PER SHARE

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

Three Months Ended

Six Months Ended

June 30,

June 30,

(Dollars in millions, except per share amounts)

2020

2019

2020

2019

Numerator:

Net (loss) income used for basic and diluted EPS computations

$

(50.7)

$

5.9

$

(62.4)

$

(49.1)

Denominator:

Weighted average shares used for
basic EPS computation (in thousands)

5,379

5,484

5,373

5,483

Effect of dilutive securities:

Dilutive potential of employee restricted stock units

Number of shares used for
diluted EPS computation (in thousands)

5,379

5,484

5,373

5,483

Basic and diluted EPS

$

(9.43)

$

1.08

$

(11.61)

$

(8.95)

We had 141,000 and 92,000 restricted stock units outstanding at June 30, 2020 and 2019, respectively, that were not included in the calculation of diluted EPS for the periods presented because the effect would be antidilutive. These securities could be dilutive in future periods.

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Purchase Obligations

We have purchase commitments with certain vendors to supply a significant portion of the proppant used in our operations. These agreements have remaining terms ranging from one to five years. Some of these agreements have minimum unconditional purchase obligations. See Note 6 – “Impairments and Other Charges” for more discussion of these purchase commitments.

Legal Contingencies

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

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

Patterson v. FTS International Manufacturing, LLC and FTS International Services, LLC: On June 24, 2015, Joshua Patterson filed a lawsuit against the Company in the 115th Judicial District Court of Upshur County, Texas, alleging, among other things, that the Company was negligent with respect to an automobile accident in 2013. Mr. Patterson sought monetary relief of more than $1 million. On July 19, 2018, a jury returned a verdict of approximately $100 million, including punitive damages, against the Company. The trial court reduced the judgment on November 12, 2018 to approximately $33 million. The Company’s insurance carriers have been defending the suit and are appealing the final judgment. The Twelfth Court of Appeals heard oral arguments on the Company’s appeal on February 13, 2020 and a decision is expected at any time. While the outcome of this case is uncertain, the Company has met its insurance deductible for this matter and we do not expect the ultimate resolution of this case to have a material adverse effect on our consolidated financial statements.

Securities Act Litigation: On February 22, 2019, Carol Glock filed a purported securities class action in the 160th Civil District Court of Dallas County, Texas (Cause No. DC-19-02668) against the Company, certain of our officers, directors and stockholders, and certain of the underwriters of our initial public offering of common stock (“IPO”). The complaint is brought on behalf of an alleged class of persons or entities who purchased our common stock in or traceable to our IPO, and purports to allege claims arising under Sections 11 and 15 of the Securities Act of 1933, as amended. The complaint seeks, among other relief, class certification, damages in an amount in excess of $1.0 million, and reasonable costs and expenses, including attorneys’ fees. FTSI’s original Special Exceptions were granted on August 16, 2019. Plaintiff amended its petition on September 16, 2019 and Defendants filed their Special Exceptions, which were denied on November 22, 2019. FTSI appealed this ruling to the Dallas Court of Appeals and subsequently to the Texas Supreme Court. Plaintiff filed notices of dismissal against the Chesapeake entities on June 18, 2020. The Chesapeake entities filed for bankruptcy on June 28, 2020 in the Southern District of Texas. Defendants filed notice of removal from State Court to Bankruptcy Court in the Northern District of Texas on July 6, 2020 on the basis of Chesapeake’s bankruptcy. Defendants filed a Motion to Transfer Venue to Bankruptcy Court in the Southern District of Texas, and the Bankruptcy Court will hear this Motion on August 25, 2020. FTSI has insurance coverage on this matter, but several of FTSI’s co-defendants have tendered requests for indemnification that are not covered by FTSI’s insurance. FTSI has agreed to indemnify the IPO underwriter co-defendants. While the outcome of this case is uncertain, we do not expect the ultimate resolution of this case to have a material adverse effect on our consolidated financial statements.

Covia Contract Dispute: The counterparty to our largest sand supply contract, Covia, filed a voluntary petition for relief under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas on June 29, 2020. FTSI became entitled to terminate its sand supply contract with Covia because of its bankruptcy filing. FTSI notified Covia of its termination of the sand supply contract on July 14, 2020, stating that no further amounts are due to Covia. Covia responded on July 22, 2020, claiming that FTSI is not entitled to terminate the agreement and is, therefore, obligated to make approximately $84 million in future payments and/or sand purchases through 2024. Covia also stated that, even if FTSI were permitted to terminate the supply contract, it would owe Covia $44 million. No formal legal proceedings have been initiated. Covia’s claims are not covered by insurance. At June 30, 2020, the Company had a remaining liability of $44.0 million for restructuring fees related to expected purchase shortfalls over the next four years for this contract, which was originally recorded in the first quarter of 2019. While the outcome of this dispute is uncertain, the ultimate resolution of this dispute may have a material adverse effect on our consolidated financial statements and financial condition.

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

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

Unless the context requires otherwise, the use of the terms “FTSI,” “Company,” “we,” “us,” “our” or “ours” refer to FTS International, Inc., together with its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this quarterly report on Form 10-Q as well as information in our annual report on Form 10-K for the year ended December 31, 2019. Unless otherwise specified, all comparisons made are to the corresponding period of 2019.

Overview

We are an independent hydraulic fracturing service company and one of the only vertically integrated service providers of its kind in North 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. We averaged five underutilized active fleets in the second quarter of 2020. We operate in five major basins in the United States: the Permian Basin, the SCOOP/STACK Formation, the Marcellus/Utica Shale, the Eagle Ford Shale and the Haynesville Shale.

Summary Financial Results

Total revenue for the second quarter and first six months of 2020 was $29.5 million and $181.0 million, which represented a decrease of $196.3 million and $267.3 million, respectively, from the same periods in 2019.
Net loss for the second quarter and first six months of 2020 was $50.7 million and $62.4 million, which represented a decrease of $56.6 million and $13.3 million, respectively, from the same periods in 2019. The first quarter of 2019 included a supply commitment charge of $56.6 million.
Adjusted EBITDA for the second quarter and first six months of 2020 was negative $9.1 million and positive $13.2 million, which represented a decrease of $52.1 million and $70.2 million, respectively, from the same periods in 2019.
Total principal amount of debt was $437.3 million at June 30, 2020, which represented a decrease of $22.6 million from December 31, 2019. The current portion of our long-term debt was $67.4 million, which relates to our Term Loan.

Industry trends and business outlook

Our business depends on the willingness of E&P companies to make expenditures to explore for, develop, and produce oil and natural gas in the United States. The willingness of E&P companies to undertake these activities depends largely upon prevailing industry conditions and 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 Baker Hughes 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 350 and 530 for the second quarter and first six months of 2020, respectively, compared to an average of approximately 870 and 890 for the same respective periods last year. The rig count and our customer activity began decreasing significantly in March 2020 as E&P companies began reacting to the significantly lower price of oil resulting from the COVID-19 pandemic and the Saudi-Russia price war. The horizontal rig count declined to 230 on June 26, 2020, which is the lowest level since 2005. The decrease in rig count has substantially lowered the demand for our hydraulic fracturing equipment as we averaged only five underutilized active fleets in the second quarter. We have started to see a slight increase in activity during the third quarter, but we have limited visibility into demand for the remainder of 2020 and 2021. We currently expect to average six to seven active fleets in the third quarter.

The prices that we are able to charge for our services is affected by the supply of hydraulic fracturing equipment that is available in the market to meet customer demand. The convergence of the COVID-19 pandemic and the Saudi-Russia price war during the first half of 2020 substantially reduced the pricing for our services, which are near breakeven levels on a cash basis.

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In response to this market environment, we are focused on offering a reduced number of active fleets into the market, as well as managing our fixed costs, to minimize the amount of cash needed to support our business during this time of low activity and low pricing levels. Our actions have included reducing labor costs through reductions in force, wage reductions, and furloughs. We are also negotiating with all our vendors to significantly reduce our non-labor costs.

We are working to ensure the Company is well positioned to supply the industry with the hydraulic fracturing services that are an integral part of U.S. oil production. We believe we have sufficient liquidity to manage through this environment for at least the next 12 months, as well as fund the investment to grow our active fleet count as activity levels recover. However, if market conditions do not improve significantly over the next 12 months, we may not be able to repay or refinance our 2022 Senior Notes.

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 closely follow the guidance of the Centers for Disease Control (“CDC”) and adhere to state and local regulations. We have instituted health and safety procedures to protect our employees, customers and their families such as:

Canceling all international travel and restricting all nonessential employee travel within the U.S.
Canceling all large group meetings and customer events or conducting such meetings virtually.
Limiting access to worksites, district, and office locations to essential personnel.
Training employees on CDC recommendations to help prevent the spread of respiratory viruses.
Pre-screening employees before returning to work sites.
Instituting work from home for appropriate positions.
Assembling a back-up crew to replace a crew that may have to be quarantined.
Isolating those employees who have contracted the virus or have been exposed to infected individuals.
Implementing more frequent cleaning and sanitizing of work areas.
Increased access to face coverings, hand washing stations and sanitizer.

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:

Three Months Ended

Six Months Ended

June 30,

June 30,

(Dollars in millions)

2020

2019

2020

2019

Revenue

$

29.5

$

225.8

$

180.3

$

447.4

Revenue from related parties

0.7

0.9

Total revenue

$

29.5

$

225.8

$

181.0

$

448.3

Total fracturing stages

1,468

7,230

8,356

13,970

Active fleets (1)

5.0

21.0

10.5

20.5

Total fleets (2)

28.0

34.0

28.0

34.0

_____________________________

(1)Active fleets is the average number of fleets operating during the period. We had three and 21 active fleets at June 30, 2020 and 2019, respectively.
(2)Total fleets is the total number of fleets owned at the end of the period. In the fourth quarter of 2019, we decided to dispose of certain idle equipment that reduced our fleets owned to 28 total fleets.

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Total revenue for the second quarter and first six months of 2020 decreased by $196.3 million and $267.3 million, respectively, from the same periods in 2019. This decrease was due a lower number of average active fleets, lower average pricing of our services, a decrease in the prices for materials used in the fracturing process, and an increase in the portion of customers who provided their own proppant and fuel.

The number of fracturing stages completed per average active fleet for the second quarter decreased by 14.7% due to our customer schedule not fully utilizing our fleets. The number of fracturing stages completed per average active fleet for the first six months of 2020 increased by 16.8% due to better operating efficiencies in the first quarter of 2020.

Costs of revenue

The following table summarizes our costs of revenue:

Three Months Ended June 30,

2020

2019

As a Percent

As a Percent

(Dollars in millions)

Dollars

of Revenue

Dollars

of Revenue

Costs of revenue, excluding depreciation and amortization

$

28.9

98.0

%

$

164.8

73.0

%

Depreciation — costs of revenue

19.2

65.1

%

20.7

9.2

%

Total costs of revenue

$

48.1

163.1

%

$

185.5

82.2

%

Six Months Ended June 30,

2020

2019

As a Percent

As a Percent

(Dollars in millions)

Dollars

of Revenue

Dollars

of Revenue

Costs of revenue, excluding depreciation and amortization

$

143.5

79.3

%

$

326.9

72.9

%

Depreciation — costs of revenue

39.7

21.9

%

41.1

9.2

%

Total costs of revenue

$

183.2

101.2

%

$

368.0

82.1

%

Total costs of revenue for the second quarter and first six months of 2020 decreased by $137.4 million and $184.8 million, respectively, from the same periods in 2019. This decrease was primarily due to the decrease in our costs of revenue, excluding depreciation.

Costs of revenue, excluding depreciation, for the second quarter and first six months of 2020 decreased by $135.9 million and $183.4 million, respectively, from the same periods in 2019. The decreases for 2020 were due to a lower number of average active fleets compared to the same period in 2019, a decrease in the prices for materials used in the fracturing process, and an increase in the portion of customers who provided their own proppant and fuel.

Depreciation for our service equipment for the second quarter and first six months of 2020 decreased by $1.5 million and $1.4 million, respectively, from the periods in 2019.

Total costs of revenue as a percentage of total revenue for the second quarter of 2020 increased by 80.9 percentage points from 82.2% in 2019 to 163.1% in 2020. Total costs of revenue as a percentage of total revenue for the first six months of 2020 increased by 19.1 percentage points from 82.1% in 2019 to 101.2% in 2020 This increase was primarily due a decrease in the pricing for our services and the lower utilization rate of our fleets in the second quarter of 2020.

Selling, general and administrative expense

Selling, general and administrative expense for the second quarter and first six months of 2020 decreased by $8.5 million and $14.4 million, respectively, from the same periods in 2019. This decrease was primarily due to lower compensation and benefits expense as well as the result of our cost-saving initiatives across the company.

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Depreciation and amortization

The following table summarizes our depreciation and amortization:

Three Months Ended

Six Months Ended

June 30,

June 30,

(In millions)

2020

2019

2020

2019

Costs of revenue (1)

$

19.2

$

20.7

$

39.7

$

41.1

Other (2)

1.0

2.1

1.9

4.1

Total depreciation and amortization

$

20.2

$

22.8

$

41.6

$

45.2

_________________________

(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.

Depreciation and amortization for the second quarter and first six months of 2020 decreased by $2.6 million and $3.6 million, respectively, from the same periods in 2019, which was due to certain assets being disposed or becoming fully depreciated.

Impairments and other charges

The following table summarizes our impairments and other charges:

Three Months Ended

Six Months Ended

June 30,

June 30,

(In millions)

2020

2019

2020

2019

Supply commitment charges

$

5.9

$

0.1

$

9.1

$

56.7

Employee severance costs

0.5

1.0

Impairment of assets

2.7

5.5

Inventory write-down

3.9

1.1

4.5

3.5

Total impairments and other charges

$

10.3

$

3.9

$

14.6

$

65.7

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

During the first six months of 2020 and 2019, we recorded aggregate charges under these supply contracts of $9.1 million and $56.7 million, respectively. These charges relate to actual purchase shortfalls incurred, as well as forecasted losses expected to be incurred and settled in future periods. Historically, these purchase shortfalls have been largely due to our customers choosing to procure their own sand, often from sand mines closer to their operating areas. We recorded a $5.9 million supply commitment charge in the second quarter of 2020 that was primarily due to us giving notice to terminate our largest sand supply contract with Covia, which Covia is disputing. The supply commitment charge reflects, among other things, that if there are no further purchases of sand under the terminated contract, we will be unable to credit amounts already paid to Covia against our purchases, as permitted under the contract. See Note 9 — “Commitments and Contingencies” in the notes to our consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for more information.

In May 2019, we restructured and amended the Covia sand supply contract to reduce the total remaining commitment through 2024 by approximately $162 million. In connection with this amendment, we recorded a supply commitment charge of $55.0 million in the first quarter of 2019 to record losses on certain expected purchase shortfalls. The remaining amount of the 2019 charges represent revised estimates of our purchase shortfalls under this contract for 2019.

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

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Employee Severance Costs: In the first six months of 2020, we incurred employee severance costs of $1.0 million in connection with our cost reduction measures to mitigate losses from the decline in customer activity levels due to the low commodity price environment.

Discontinued Wireline Operations: In May 2019, we discontinued our wireline operations due to financial underperformance resulting from market conditions. As a result of this decision, we recorded an asset impairment of $2.8 million and an inventory write-down of $1.4 million in the first quarter of 2019 to adjust these assets to their estimated fair market values and net realizable values, respectively.

Other: In the second quarter of 2019, we recorded $2.7 million of impairments for certain land and buildings that we no longer use. The remaining amounts of inventory write-downs for the periods presented were to reduce excess, obsolete, and slow-moving inventory to its estimated net realizable value.

Risk of Future Impairments: As previously discussed, we have experienced a substantial downturn in our business resulting from the COVID-19 pandemic and the Saudi-Russia price war earlier this year. We concluded that this downturn was a triggering event to test our long-lived assets and indefinite-lived tradename for impairment. After testing these assets for impairment, we concluded that no impairments were required at June 30, 2020. These tests rely on two key inputs: the estimated severity and length of the current industry downturn and the magnitude of an industry recovery. If current industry conditions continue for a prolonged period or if our estimates of these key inputs are revised unfavorably in a future quarter, we will likely incur impairments of long-lived assets or our tradename in a future period.

Interest expense, net

Interest expense, net of interest income, for the second quarter and first six months of 2020 decreased by $0.3 million and $1.2 million, respectively, from the same periods in 2019. These decreases were primarily due to lower average long-term debt balances and lower average interest rates for our Term Loan in 2020. These decreases were partially offset by lower interest received on our money market accounts in 2020.

Extinguishment of debt

In the first six months of 2020, we repaid $22.6 million of aggregate principal amount of Term Loan using cash on hand. We recognized a gain on this debt extinguishment of $2.0 million.

Income taxes

In 2012, we established a full valuation allowance with respect to our U.S. federal deferred tax assets and state deferred tax assets in excess of our deferred tax liabilities. We have continued to record a valuation allowance for these net deferred tax assets since 2012. As a result, we only record income tax expense 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:

Three Months Ended

Six Months Ended

June 30,

June 30,

(In millions)

2020

2019

2020

2019

Net (loss) income

$

(50.7)

$

5.9

$

(62.4)

$

(49.1)

Interest expense, net

7.4

7.7

14.7

15.9

Income tax expense

0.1

0.3

Depreciation and amortization

20.2

22.8

41.6

45.2

Loss (gain) on disposal of assets, net

0.2

(1.2)

0.1

(0.9)

Loss (gain) on extinguishment of debt, net

0.1

(2.0)

(0.4)

Stock-based compensation

3.5

3.7

6.6

6.7

Supply commitment charges

5.9

0.1

9.1

56.7

Inventory write-down

3.9

1.1

4.5

3.5

Impairment of assets

2.7

5.5

Employee severance cost

0.5

1.0

Adjusted EBITDA (1)

$

(9.1)

$

43.0

$

13.2

$

83.4

_____________________________

(1)Adjusted EBITDA is a non-GAAP financial measure that we define as earnings before interest, income taxes, and depreciation and amortization; as well as, the following items, if applicable: gain or loss on disposal of assets; debt extinguishment gains or losses; inventory write-downs, asset and goodwill impairments; gain on insurance recoveries; acquisition earn-out adjustments; stock-based compensation; supply commitment charges; acquisition or disposition transaction costs; gain on sale of equity interest in joint venture affiliate; and employee severance cost related to corporate-wide cost reduction initiatives. The most comparable financial measure to Adjusted EBITDA under 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

At June 30, 2020, we had $192.5 million of cash and cash equivalents and $5.0 million of availability under our revolving credit facility, which resulted in a total liquidity position of $197.5 million. We believe that our cash and cash equivalents and any cash provided by operations will be sufficient to fund our operations, capital expenditures, contractual obligations, and debt maturities for at least the next 12 months. However, if market conditions do not improve significantly over the next 12 months, we may not be able to repay or refinance our 2022 Senior Notes.

The maximum availability of credit under the credit facility is limited at any time to the lesser of $250 million or the borrowing base. The borrowing base is based on percentages of eligible accounts receivable and is subject to certain reserves. As of June 30, 2020, our borrowing base was $9.0 million and therefore our maximum availability under the credit facility was $9.0 million. As of June 30, 2020, there were no borrowings outstanding under the credit facility, and letters of credit totaling $4.0 million were issued, resulting in $5.0 million of availability under the credit facility. This availability requires us to maintain a minimum FCCR of 1.0 to 1.0. At our next compliance date in August 2020, we expect our FCCR to be below the minimum. We are evaluating our options, which include modifying or terminating the credit facility.

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Table of Contents

We continually assess alternatives to our capital structure and evaluate strategic capital initiatives which may include, but are not limited to, equity and debt financings and the modification of existing debt, including the amount of debt outstanding, the types of debt issued and the maturity dates of our debt. We may also from time to time seek to repay, retire, purchase or otherwise refinance or restructure our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, exchange offers or otherwise. These alternatives, if implemented, could materially affect our capitalization, debt ratios, cash balances and ability to participate in consolidation opportunities within our industry.

Cash Flows

The following table summarizes our cash flows:

Six Months Ended

June 30,

(In millions)

2020

2019

Net income or loss adjusted for non-cash items

$

(0.8)

$

67.0

Changes in operating assets and liabilities

26.5

(3.8)

Cash paid to settle supply commitment charges

(18.8)

(15.9)

Net cash provided by operating activities

6.9