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UsetheselinkstorapidlyreviewthedocumentTABLEOFCONTENTSINDEXTOFINANCIALSTATEMENTS
TableofContents
AsfiledwiththeSecuritiesandExchangeCommissiononFebruary1,2018
RegistrationNo.333-215998
UNITEDSTATESSECURITIESANDEXCHANGECOMMISSION
Washington,D.C.20549
AmendmentNo.7to
FORMS-1REGISTRATIONSTATEMENT
UNDERTHESECURITIESACTOF1933
FTSInternational,Inc.(Exactnameofregistrantasspecifiedinitscharter)
Delaware(Stateorotherjurisdictionofincorporationororganization)
1389(PrimaryStandardIndustrialClassificationCodeNumber)
30-0780081(I.R.S.Employer
IdentificationNumber)
777MainStreet,Suite2900FortWorth,Texas76102
(817)862-2000(Address,includingzipcode,andtelephonenumber,includingareacode,ofregistrant'sprincipalexecutiveoffices)
MichaelJ.DossChiefExecutiveOfficerFTSInternational,Inc.
777MainStreet,Suite2900FortWorth,Texas76102
(817)862-2000(Name,address,includingzipcode,andtelephonenumber,includingareacode,ofagentforservice)
Approximatedateofcommencementofproposedsaletothepublic:Assoonaspracticableaftertheeffectivedateofthisregistrationstatement.
IfanyofthesecuritiesbeingregisteredonthisFormaretobeofferedonadelayedorcontinuousbasispursuanttoRule415undertheSecuritiesActof1933checkthefollowingbox:o
IfthisFormisfiledtoregisteradditionalsecuritiesforanofferingpursuanttoRule462(b)undertheSecuritiesAct,checkthefollowingboxandlisttheSecuritiesActregistrationstatementnumberoftheearliereffectiveregistrationstatementforthesameoffering:o
IfthisFormisapost-effectiveamendmentfiledpursuanttoRule462(c)undertheSecuritiesAct,checkthefollowingboxandlisttheSecuritiesActregistrationstatementnumberoftheearliereffectiveregistrationstatementforthesameoffering:o
IfthisFormisapost-effectiveamendmentfiledpursuanttoRule462(d)undertheSecuritiesAct,checkthefollowingboxandlisttheSecuritiesActregistrationstatementnumberoftheearliereffectiveregistrationstatementforthesameoffering:o
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,asmallerreportingcompany,oranemerginggrowthcompany.Seethedefinitionsof"largeacceleratedfiler,""acceleratedfiler,""smallerreportingcompany"and"emerginggrowthcompany"inRule12b-2oftheSecuritiesExchangeActof1934.
Copiesto:CharlesT.Haag
Winston&StrawnLLP2501N.HarwoodSt.Dallas,Texas75201
(214)453-6500
EdwardB.WinslowJonesDay
77WestWackerDr.Chicago,Illinois60601
(312)782-3939
MerrittS.JohnsonShearman&SterlingLLP
599LexingtonAve.NewYork,NewYork10022
(212)848-4000
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Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection7(a)(2)(B)oftheSecuritiesAct.ý
CALCULATIONOFREGISTRATIONFEE
TitleofEachClassofSecuritiestobeRegistered
AmounttobeRegistered(1)(2)
ProposedMaximumOfferingPricePer
Share
ProposedMaximumAggregateOffering
Price(1)(2) Amountof
RegistrationFee(3)
CommonStock,$0.01parvaluepershare 22,425,000 $18.00 $403,650,000 $50,255
(1) EstimatedsolelyforthepurposeofcomputingtheamountoftheregistrationfeepursuanttoRule457(a)undertheSecuritiesActof1933.
(2) Includestheaggregateofferingpriceofadditionalsharesthattheunderwritershavetheoptiontopurchase.
(3) Ofthisamount$39,048waspreviouslypaidinconnectionwithpriorfilingsofthisregistrationstatement.
TheregistrantherebyamendsthisregistrationstatementonsuchdateordatesasmaybenecessarytodelayitseffectivedateuntiltheregistrantshallfileafurtheramendmentwhichspecificallystatesthatthisregistrationstatementshallthereafterbecomeeffectiveinaccordancewithSection8(a)oftheSecuritiesActoruntiltheregistrationstatementshallbecomeeffectiveonsuchdateastheSecuritiesandExchangeCommission,actingpursuanttosaidSection8(a),maydetermine.
LargeacceleratedfileroSmallerreportingcompanyo
AcceleratedfileroEmerginggrowthcompanyý
Non-acceleratedfilerý(Donotcheckifa
smallerreportingcompany)
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Theinformationinthisprospectusisnotcompleteandmaybechanged.WeandthesellingstockholdermaynotsellthesesecuritiesuntiltheregistrationstatementfiledwiththeSecuritiesandExchangeCommissioniseffective.Thisprospectusisnotanoffertosellthesesecuritiesanditisnotsolicitinganoffertobuythesesecuritiesinanystatewheretheofferorsaleisnotpermitted.
SUBJECTTOCOMPLETIONDATEDFEBRUARY1,2018
PRELIMINARYPROSPECTUS
19,500,000Shares
FTSInternational,Inc.CommonStock
ThisistheinitialpublicofferingofsharesofcommonstockofFTSInternational,Inc.Weareselling15,151,516sharesofourcommonstock.Thesellingstockholderidentifiedinthisprospectusissellinganadditional4,348,484sharesofourcommonstock.Wewillnotreceiveanyoftheproceedsfromthesaleofthesharesbythesellingstockholder.
Weexpectthepublicofferingpricetobebetween$15.00and$18.00pershare.Currently,nopublicmarketexistsfortheshares.Afterpricingofthisoffering,weexpectthattheshareswilltradeonTheNewYorkStockExchange,orNYSE,underthesymbol"FTSI."
Wequalifiedasan"emerginggrowthcompany"asdefinedunderthefederalsecuritieslaws,atthetimethatwesubmittedtotheSECaninitialdraftoftheregistrationstatementforthisoffering,and,assuch,haveelectedtocomplywithcertainreduceddisclosurerequirementsforthisprospectus.However,ourrevenuesforfiscalyear2017exceeded$1.07billion,and,asaresult,wewillnolongerbeeligiblefortheexemptionsfromdisclosureprovidedtoanemerginggrowthcompanyaftertheearlierofthecompletionofthisofferingandDecember31,2018.See"ProspectusSummary—ImplicationsofBeinganEmergingGrowthCompany."
Investinginourcommonstockinvolvesrisksthataredescribedinthe"RiskFactors"sectionbeginningonpage19ofthisprospectus.
Theunderwritersmayalsoexercisetheiroptiontopurchaseuptoanadditional2,925,000sharesfromtheCompany,atthepublicofferingprice,lesstheunderwritingdiscount,for30daysafterthedateofthisprospectustocoverover-allotments,ifany.
ThesellingstockholderinthisofferingisdeemedtobeanunderwriterwithinthemeaningofSection2(a)(11)oftheSecuritiesActof1933,asamended,ortheSecuritiesAct.
NeithertheSecuritiesandExchangeCommissionnoranystatesecuritiescommissionhasapprovedordisapprovedofthesesecuritiesordeterminedifthisprospectusistruthfulorcomplete.Anyrepresentationtothecontraryisacriminaloffense.
Theunderwritersexpecttodeliverthesharestopurchasersonorabout,2018.
Thedateofthisprospectusis,2018.
PricetoPublic
UnderwritingDiscountsandCommissions(1)
Proceeds,beforeexpenses,tous
Proceeds,beforeexpenses,tothesellingstockholder
Pershare $ $ $ $ Total $ $ $ $
(1) See"Underwriting"foradditionalinformationregardingtotalunderwritercompensation.
CreditSuisse MorganStanleyWellsFargoSecurities Barclays Citigroup EvercoreISIGuggenheimSecurities Simmons&CompanyInternational
EnergySpecialistsofPiperJaffray Tudor,Pickering,Holt&Co. Cowen
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TABLEOFCONTENTS
Weareresponsiblefortheinformationcontainedinthisprospectusandinanyfreewritingprospectuswemayauthorizetobedeliveredtoyou.Neitherwe,thesellingstockholdernortheunderwritershaveauthorizedanyonetoprovideyouwithinformationdifferentfrom,orinadditionto,thatcontainedinthisprospectusoranyrelatedfreewritingprospectus.We,thesellingstockholderandtheunderwritersareofferingtosell,andseekingofferstobuy,thesesecuritiesonlyinjurisdictionswhereoffersandsalesarepermitted.Theinformationinthisprospectusorinanyapplicablefreewritingprospectusisaccurateonlyasofitsdate,regardlessofitstimeofdeliveryoranysaleofthesesecurities.Ourbusiness,financialcondition,resultsofoperationsandprospectsmayhavechangedsincethatdate.
IndustryandMarketData
Themarketdataandcertainotherstatisticalinformationusedthroughoutthisprospectusarebasedonindependentindustrypublications,governmentpublicationsorotherpublishedindependentsources.Somedataisalsobasedonourgoodfaithestimates.Althoughwebelievethesethird-partysourcesarereliableandthattheinformationisaccurateandcomplete,wehavenotindependentlyverifiedtheinformation.
ReferencestooilpricesaretothespotpriceinU.S.DollarsperbarrelofWestTexasIntermediate,orWTI,anoilindexbenchmarkusedintheUnitedStates.ReferencestonaturalgaspricesaretothespotpriceinU.S.DollarsperonethousandcubicfeetofnaturalgasusingtheHenryHubindex,anaturalgasbenchmarkusedintheUnitedStates.
ReverseStockSplitandRecapitalization
Beforethisofferingwewilleffecta69.196592:1reversestocksplit,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Uponfilingouramendedandrestatedcertificateofincorporation,each69.196592sharesofcommonstockwillbecombinedintoandrepresentoneshareofcommonstock.Additionally,beforethisofferingourSeriesAconvertiblepreferredstock,orourconvertiblepreferredstock,willberecapitalizedintosharesofourcommonstock.Uponfilingouramendedandrestatedcertificateofincorporation,allsharesofconvertiblepreferredstockwillberecapitalizedinto39,450,826.48sharesofcommonstock,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Anychangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothecompletionofthisofferingbylessthan1%.For
(i)
PROSPECTUSSUMMARY 1RISKFACTORS 19CAUTIONARYNOTEREGARDINGFORWARD-LOOKINGSTATEMENTS 39USEOFPROCEEDS 42DIVIDENDPOLICY 43CAPITALIZATION 44DILUTION 46SELECTEDFINANCIALDATA 48MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS 52
BUSINESS 69MANAGEMENT 89EXECUTIVECOMPENSATION 99CERTAINRELATIONSHIPSANDRELATED-PARTYTRANSACTIONS 108PRINCIPALANDSELLINGSTOCKHOLDERS 111DESCRIPTIONOFCAPITALSTOCK 114DESCRIPTIONOFINDEBTEDNESS 118SHARESELIGIBLEFORFUTURESALE 121MATERIALU.S.FEDERALINCOMETAXCONSEQUENCESTONON-U.S.HOLDERS 124UNDERWRITING 128LEGALMATTERS 137EXPERTS 137WHEREYOUCANFINDMOREINFORMATION 137INDEXTOFINANCIALSTATEMENTS F-1
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additionalinformationregardingtherecapitalizationofourconvertiblepreferredstock,see"DescriptionofCapitalStock."Followingthereversestocksplitandrecapitalization,fractionalshareswillbepaidoutincash.
Followingthereversestocksplitandrecapitalization,ourauthorizedcapitalstockwillconsistof320,000,000sharesofcommonstockand25,000,000sharesofpreferredstockand91,280,087sharesofcommonstockwillbeoutstanding,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Inconnectionwiththisoffering,wewillissueanadditional15,151,516sharesofnewcommonstockand,immediatelyfollowingthisoffering,wewillhave106,431,603totalsharesofcommonstockoutstanding,assumingtheunderwritersdonotexercisetheiroptiontopurchaseadditionalshares.
ComparabilityofOperatingandStatisticalMetrics
Throughoutthisprospectus,wereferto"stagesfractured"andsimilarterms,including"stagesperactivefleet."Stagesfracturedisanoperatingandstatisticalmetricreferringtothenumberofindividualhydraulicfracturingprocedureswecompleteunderservicecontractswithourcustomers.Ourcustomerstypicallycompensateusbasedonthenumberofstagesfractured.Stagesperactivefleetisanoperatingmetricreferringtothestagesfracturedperactivefleetoveragiventimeperiod.Webelievestagesfracturedandstagesperactivefleetareimportantindicatorsofoperatingperformancebecausetheydemonstratethedemandforourservicesandourabilitytomeetthatdemandwithouractivefleets.Becauseweserviceavarietyofcustomersindifferentbasinswithdifferentformationcharacteristics,stagesfracturedandstagesperactivefleetaresubjecttoanumberofmaterialfactorsaffectingtheirusefulnessandcomparability.Forexample,basedoncustomerspecificationsandformationcharacteristics,someofourfleetsmaycompletestagesinvolvinghigherpressurejobdesignsormoreintenseproppantloading,takingmoretimetocomplete,whileotherfleetsmaycompletestagesinvolvinglowerpressurejobdesignsorlessintenseproppantloadings,takinglesstimetocomplete.Ourfleetsmayalsovarymateriallyinhydraulichorsepowerneededtoaccommodatethebasincharacteristicsandcustomerspecifications.Forthesereasons,stagesfracturedandstagesperactivefleetarenottheonlymeasuresthataffectourfinancialresults,however,webelievetheyareimportantmeasuresinmanagingourbusiness.Youshouldcarefullyreadandconsidertheotherinformationpresentedinthisprospectus,includinginformationunder"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"andourconsolidatedfinancialstatementsandrelatednotesincludedelsewhereinthisprospectus.
(ii)
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PROSPECTUSSUMMARY
Thissummaryprovidesabriefoverviewofinformationcontainedelsewhereinthisprospectus.Thissummarydoesnotcontainalltheinformationthatyoushouldconsiderbeforeinvestinginourcommonstock.Youshouldreadtheentireprospectuscarefullybeforemakinganinvestmentdecision,includingtheinformationpresentedundertheheadings"RiskFactors,""CautionaryNoteRegardingForward-LookingStatements"and"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"andthehistoricalconsolidatedfinancialstatementsandrelatednotestheretoincludedelsewhereinthisprospectus.
Unlessthecontextrequiresotherwise,referencesinthisprospectusto"FTSInternational,""Company,""we,""us,""our"or"ours"refertoFTSInternational,Inc.,togetherwithitssubsidiaries.Referencesinthisprospectusto"sellingstockholder"refertotheentityidentifiedasthesellingstockholderin"PrincipalandSellingStockholders."
OurCompany
WeareoneofthelargestprovidersofhydraulicfracturingservicesinNorthAmerica.Ourservicesenhancehydrocarbonflowfromoilandnaturalgaswellsdrilledbyexplorationandproduction,orE&P,companiesinshaleandotherunconventionalresourceformations.OurcustomersincludeChesapeakeEnergyCorporation,ConocoPhillips,DevonEnergyCorporation,EOGResources,Inc.,DiamondbackEnergy,Inc.,EQTCompany,RangeResourcesCorporation,andotherleadingE&PcompaniesthatspecializeinunconventionaloilandnaturalgasresourcesinNorthAmerica.
Weareoneofthetopthreehydraulicfracturingprovidersacrossouroperatingfootprint,whichconsistsoffiveofthemostactivemajorunconventionalbasinsintheUnitedStates:thePermianBasin,theSCOOP/STACKFormation,theMarcellus/UticaShale,theEagleFordShaleandtheHaynesvilleShale.ThefollowingmapshowsthebasinsinwhichweoperateandthenumberoffleetsoperatedineachbasinasofJanuary8,2018.
Wehave1.6milliontotalhydraulichorsepoweracross32fleets,with27fleetsactiveasofJanuary8,2018.Weareexperiencingasurgeindemandforourservices,whichhasledustoreactivate10fleetssincethebeginningof2017.Basedoncontinuedrequestsfromcustomersforadditionalfleets,weareintheprocessofreactivatingadditionalequipmentatourin-housemanufacturingfacility.Webelievewecanreactivateallofouridleequipmentforapproximately$34million,allowingustofurtherincreaseouroperatingfleetsbyfivefleets,orapproximately19%,overthenextninemonths.
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Thesurgeindemandforourserviceshasallowedustoraiseourpricessignificantly.Oilpriceshavemorethandoubledsincethe12-yearlowof$26.14inFebruary2016,reachingahighof$64.89inJanuary2018andaveraging$50.80in2017.Similarly,theU.S.horizontalrigcounthasincreasedby155%,fromalowof314rigsasofMay27,2016to802rigsasofJanuary19,2018,accordingtoanindustryreport.ThelargegrowthinE&Pdrillingactivityhascauseddemandforpressurepumpingservicestoexceedthesupplyofreadilyavailablefleets,whichhasledaveragepricingforourservicestorisemorethanapproximately56%sincethefourthquarterof2016.ThesepriceincreasesstartedinJanuary2017andcontinuedtoprogresstohigherlevelsthroughout2017.
Duringthelasttwoyears,weimplementedmeasurestoreduceouroperatingcostsandtoimproveouroperatingefficiencyincludingreducingthenumberofouractivefleetasdemandforourservicesdeclined.Wefocusedonourabilitytooperateouractivefleetsforasmanyhoursperdayanddayspermonthaspossibleinordertolimitthenon-productivetimeofouractivefleets.Asaresult,wehaveincreasedouraveragestagesperactivefleetperquartertorecordlevels.Theseoperationalimprovementsoccurreddespitesignificantreductionsinouroperatingcosts,includingreducingourquarterlyselling,generalandadministrativeexpensebyapproximately60%from2014levels.
Wemaintainedtheseimprovedcostandefficiencylevelsinthefourthquarterof2017,which,combinedwiththerecentriseinpricingforourservices,allowedustoachieveEBITDAlevelsgreaterthanwhatweexperiencedin2014.Weachievedtheseresultsdespitehavingconsiderablylowerpricingandfeweractivefleetsonaveragethanwehadin2014.Webelievewecancontinuetosustainthesecostreductionsandefficiencyimprovementsasactivitylevelsincrease.
Ourcustomerstypicallycompensateusbasedonthenumberofstagesfractured,andtheprimarycontributortothenumberofstageswecompleteisourabilitytoreducedowntimeonourequipment.Asaresult,webelievethenumberofstagesfracturedandtheaveragenumberofstagescompletedperactivefleetinagivenperiodoftimeareimportantoperatingmetricsforourbusiness.Thegraphsbelowshowthenumberofstageswecompletedperquarterandtheaveragestagesperactivefleetwecompletedperquarter.Foradditionalinformationregardingourfleetcapacityandaveragestagesperactivefleetperquarterasanoperatingmetric,see"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations—ResultsofOperations—Revenue"and"Business—OurServices—HydraulicFracturing."
Wemanufactureandrefurbishmanyofthecomponentsusedbyourfleets,includingconsumables,suchasfluid-ends.Wealsoperformsubstantiallyallthemaintenance,repairandrefurbishmentofourhydraulicfracturingfleets,includingthereactivationofidleequipment.Ourcosttoproducecomponentsandreactivatefleetsissignificantlylessthanthecosttopurchasecomparablequalitycomponentsandfleetsfromthird-partysuppliers.Forexample,wemanufacturefluid-endsandpower-endsatacostthatisapproximately50%to60%lessthanpurchasingthemfromoutsidesuppliers.Weestimatethatourcostadvantagesavesusapproximately$85millionperyearatpeakproductionlevels.Inaddition,wedesignedandassembledallofour32existingfleetsusinginternal
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resources,andwebelievewecouldassemblenewfleetsinternallyatasubstantialdiscounttothecostofbuyingthemnewfromthird-partyproviders.
Ourlargescaleandcultureofinnovationallowustotakeadvantageofleadingtechnologicalsolutions.Wearefocusedonidentifyingnewtechnologiesaimedat:increasingfracturingeffectivenessforourcustomers;reducingtheoperatingcostsofourequipment;andenhancingthehealth,safetyandenvironmental,orHSE,conditionsatourwellsites.Wehaveanumberofongoinginitiativesthatbuildonindustryinnovationsanddataanalyticstoachievethesetechnologyobjectives.Wealsoconductresearchanddevelopmentactivitiesthroughastrategicpartnershipwithathird-partytechnologycenterthatutilizeskeyemployeeswhowerepreviouslyaffiliatedwithourCompany.InJune2017,werenewedourservicesagreementwiththisthird-partytechnologycenterforaone-yearterm,withanoptionforustorenewforadditionalone-yearterms.
IndustryOverviewandTrends
TheprincipalfactorinfluencingdemandforhydraulicfracturingservicesisthelevelofhorizontaldrillingactivitybyE&Pcompaniesinunconventionaloilandnaturalgasreservoirs.Overthelastdecade,advancesindrillingandcompletiontechnologies,includinghorizontaldrillingandhydraulicfracturing,haveencouragedE&PcompaniestofocusondevelopingthevastoilandnaturalgasreservescontainedwithintheU.S.basinsinwhichweoperate.
Ourindustrygrewrapidlyuntilasignificantdeclineinoilandnaturalgaspricesfrom2014to2016causedadramaticreductionindrillingandcompletionactivity.Asoilandnaturalgaspriceshaverecoveredfromtheir2016lows,E&PcompaniesintheUnitedStateshaveincreasedtheirlevelofhorizontaldrilling,resultinginanuptickindemandforhydraulicfracturingservicesthathasstrainedavailablesupply.
TechnologicaladvancesinoilandnaturalgasextractioncontinuedthroughthedownturnandhaveincreasedtheefficiencyofE&Pcompanies,leadingtoanincreaseindemandforhydraulicfracturingunitsrelativetoeachactivedrillingrig.Inparticular,drillingspeedshaveincreaseddramatically,allowingrigstodrilllongerlateralsinfewerdays.Thelongerlaterallengthsincreasethedemandforpressurepumpingservicesrelativetotherigcountasevidencedbysignificantincreasesinboththenumberofstagesperwellandtheamountofproppantusedperwell,particularlyinrecentyears.Asaresult,E&Pcompaniesareabletocompletemorestagesusingfewerrigs,andmanyanalystsexpectdemandforhydraulicfracturingservicestosignificantlyoutpacegrowthinthehorizontalrigcount.
InNovember2016,May2017andNovember2017,certainoilproducingnationsandtheOrganizationofthePetroleumExportingCountries,orOPEC,agreedtolimitproductionofcrudeoilwiththegoalofraisingoilprices.Asaresult,U.S.E&Pcompanieshaveincreasedtheirlevelofhorizontaldrillingandcompletionactivityand,hence,demandforhydraulicfracturingserviceshasincreasedfromthelowsseeninmid-2016.Thisincreaseindemandhasledtohigherutilization,andinsomecasesshortages,ofavailablehorsepower.Webelievetheincreaseinactivitycoupledwithanundersupplyofavailablehorsepowerhasparticularlybenefitedus,andwebelieveallofourremaininginactivefleetscanbereturnedtoactiveservicewithinninemonths,ifmarketconditionsrequire.
CompetitiveStrengths
Webelievethatwearewellpositionedbecauseofthefollowingcompetitivestrengths:
Large scale and leading market share across five of the most active major U.S. unconventional resource basins
With1.6milliontotalhydraulichorsepowerinourfleet,weareoneofthelargesthydraulicfracturingserviceprovidersinNorthAmerica.Weoperateinfiveofthemostactivemajor
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unconventionalbasinsintheUnitedStates,includingthePermianBasin,theSCOOP/STACKFormation,theMarcellus/UticaShale,theEagleFordShaleandtheHaynesvilleShale,whichprovideusexposuretoavarietyofoilandnaturalgasproducersaswellasgeographies.Weareoneofthetopthreehydraulicfracturingprovidersacrossthisoperatingfootprintbasedonmarketshare.AccordingtoanindustryreportfromDecember2017,thesefiveoperatingbasinswillaccountforapproximately80%ofwell-completionspendingin2018and2019.
Thisgeographicdiversityreducesthevolatilityinourrevenueduetobasintrends,relativeoilandnaturalgasprices,adverseweatherandotherevents.Ourfivehydraulicfracturingdistrictsenableustorapidlyrepositionourfleetsbasedondemandtrendsamongdifferentbasins.Additionally,ourlargemarketshareineachofouroperatingbasinsallowsustospreadourfixedcostsoveragreaternumberoffleets.Furthermore,ourlargescalestrengthensournegotiatingpositionwithoursuppliersandourcustomers.
Pure-play, efficient hydraulic fracturing services provider with extensive experience in U.S. unconventional oil and natural gas production
Ourprimaryfocusishydraulicfracturing.FortheyearendedDecember31,2016andtheninemonthsendedSeptember30,2017,95%ofourrevenuescamefromhydraulicfracturingservices.FromDecember31,2010toJanuary8,2018,wehavecompletedmorethan163,000fracturingstagesacrossfiveofthemostactivemajorunconventionalbasinsintheUnitedStates.Thishistorygivesusinvaluableexperienceandoperationalcapabilitiesthatareattheleadingedgeofhorizontalwellcompletionsinunconventionalformations.
Wedesignedandassembledallofthehydraulicfracturingunitsandmuchoftheauxiliaryequipmentusedinourfleetstouniformspecificationsintendedspecificallyforworkinoilandnaturalgasbasinsrequiringhighpressuresandhighlevelsofsandintensity.Inaddition,weuseproprietarypumpswithfluid-endsthatarecapableofmeetingthemostdemandingpressure,flowrateandproppantloadingrequirementsencounteredinthefield.
Inordertoachievethehighestrevenuepotentialandhighestreturnsonourinvestedcapital,werunallofourfleetsin24-houroperationsallowingustooptimizetherevenue-producingabilityofouractivefleets.Inaddition,ratherthanperform"spotwork,"weprefertodedicateeachofourfleetstoaspecificcustomer,integratingourfleetintotheirdrillingprogramschedule.Thesearrangementsallowustoincreasethenumberofdayspermonththatourfleetisgeneratingrevenueandallowourcrewstobetterunderstandcustomerexpectationsresultinginimprovedefficiencyandsafety.
In-house manufacturing, equipment maintenance and refurbishment capabilities
Wemanufactureandrefurbishmanyofthecomponentsusedbyourfleets,includingconsumables,suchasfluid-ends.Wealsoperformsubstantiallyallthemaintenance,repairandrefurbishmentofourhydraulicfracturingfleets,includingthereactivationofouridleequipment.Ourcosttoproducecomponentsandreactivateidlefleetsissignificantlylessthanthecosttopurchasecomparablequalitycomponentsandfleetsfromthird-partysuppliers.Forexample,wemanufacturefluid-endsandpower-endsatacostthatisapproximately50%to60%lessthanpurchasingthemfromoutsidesuppliers.Inaddition,weperformfull-scalerefurbishmentsofourfracturingunitsatacostthatisapproximatelyhalfthecostofutilizinganoutsidesupplier.Weestimatethatthiscostadvantagesavesusapproximately$85millionperyearatpeakproductionlevels.Astrendsinourindustrycontinuetowardincreasingproppantlevelsandserviceintensity,theaddedwear-and-tearonhydraulicfracturingequipmentwillincreasetherateatwhichcomponentsneedtobereplacedforatypicalfleet,increasingourlong-termcostadvantageversusourcompetitorsthatdonothavesimilarin-housemanufacturingcapabilities.
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Ourmanufacturingcapabilitiesalsoreducetheriskthatwewillbeunabletosourceimportantcomponents,suchasfluid-ends,power-endsandotherconsumableparts.Duringperiodsofhighdemandforhydraulicfracturingservices,externalequipmentvendorsoftenreportorderbacklogsofuptoninemonths.Ourcompetitorsmaybeunabletosourcecomponentswhenneededormayberequiredtopayamuchhigherpricefortheircomponents,orboth,duetobottlenecksinsupplierproductionlevels.Wehavehistoricallymanufactured,andbelievewehavethecapacitytomanufacture,allmajorconsumablecomponentsrequiredtooperateall32ofourfleetsatfullcapacity.Wealsodesignedandassembledallofour32existingfleetsusinginternalresourcesandbelievewecanassemblenewfleetsinternallyatasubstantialdiscounttothecostofbuyingthemnewfromthird-partyproviders.
Additionally,manufacturingourequipmentinternallyallowsustoconstantlyimproveourequipmentdesigninresponsetotheknowledgewegainbyoperatinginharshgeologicalenvironmentsunderchallengingconditions.Thisrapidfeedbackloopbetweenourfieldoperationsandourmanufacturingoperationspositionsourequipmentattheleadingedgeofdevelopmentsinhydraulicfracturingdesign.
Uniform fleet of standardized, high specification hydraulic fracturing equipment
Wehaveauniformfleetofhydraulicfracturingequipment.Wedesignedourequipmenttouniformspecificationsintendedspecificallyforcompletionsworkinoilandnaturalgasbasinsrequiringhighlevelsofpressure,flowrateandsandintensity.Thestandardized,"plugandplay"natureofourfleetprovidesuswithseveraladvantages,including:reducedrepairandmaintenancecosts;reducedinventorycosts;theabilitytoredeployequipmentamongoperatingbasins;andreducedcomplexityinouroperations,whichimprovesoursafetyandoperationalperformance.Webelieveourtechnologicallyadvancedfleetsareamongthemostreliableandbestperformingintheindustrywiththecapabilitiestomeetthemostdemandingpressureandflowraterequirementsinthefield.
Ourstandardizedequipmentreducesourdowntimeasourmechanicscanquicklyandefficientlydiagnoseandrepairourequipment.Ouruniformequipmentalsoreducestheamountofinventoryweneedonhand.Weareabletomoreeasilyshiftfracturingpumpsandotherequipmentamongoperatingareasasneededtotakeadvantageofmarketconditionsandtoreplacetemporarilydamagedequipment.Thisflexibilityallowsustotargetcustomersthatareofferinghigherpricesforourservices,regardlessofthebasinsinwhichtheyoperate.Standardizedequipmentalsoreducesthecomplexityofouroperations,whichlowersourtrainingcosts.Additionally,webelieveourindustry-leadingsafetyrecordispartlyattributabletothestandardizationofourequipment,whichmakesiteasierformechanicsandequipmentoperatorstoidentifyanddiagnoseproblemswithequipmentbeforetheybecomesafetyhazards.
Safety leader
Safetyisatthecoreofouroperations.Oursafetyrecordfor2016wasthebestinourhistoryandwebelievesignificantlybetterthanourindustrypeergroup,basedondataprovidedbyreportsoftheU.S.BureauofLaborStatisticsfrom2011through2016.Forthepastthreeyears,webelieveourtotalrecordableincidentratewaslessthanhalfoftheindustryaverage.Duringthefirstquarterof2017,wereachedamilestoneofover10millionman-hourswithoutalosttimeincident.Manyofourcustomersimposeminimumsafetyrequirementsontheirsuppliersofhydraulicfracturingservices,andsomeofourcompetitorsarenotpermittedtobidonworkforcertaincustomersbecausetheydonotmeetthosecustomers'minimumsafetyrequirements.Becausesafetyisimportanttoourcustomers,oursafetyscorehelpsourcommercialteamtowinbusinessfromourcustomers.Oursafetyfocusisalsoamoralebenefitforourcrews,whichenhancesouremployeeretentionrates.Finally,webelievethatcontinuallysearchingforwaystomakeouroperationssaferistherightthingtodoforouremployeesandourcustomers.
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Experienced management and operating team
Duringthedownturn,ourmanagementteamfocusedonreducingcosts,increasingoperatingefficiencyanddifferentiatingourselvesthroughinnovation.Theteamhasanextensiveanddiverseskillset,withanaverageofover23yearsofprofessionalexperience.Ouroperationalandcommercialexecutiveshaveadeepunderstandingofunconventionalresourceformations,withanaverageofapproximately31yearsofoilandnaturalgasindustryexperience.Inaddition,asaresultofourpure-playfocusonhydraulicfracturinganddedicatedfleetstrategy,ouroperationsteamshaveextensiveknowledgeofthegeographiesinwhichweoperateaswellasthetechnicalspecificationsandotherrequirementsofourcustomers.WebelievethisknowledgeandexperienceallowsustoserviceavarietyofE&Pcompaniesacrossdifferentbasinsefficientlyandsafely.
OurStrategy
Ourprimarybusinessobjectiveistobethelargestpure-playproviderofhydraulicfracturingserviceswithinU.S.unconventionalresourcebasins.Weintendtoachievethisobjectivethroughthefollowingstrategies:
Capitalize on expected recovery and demand for our services
AsdemandforoilfieldservicesintheUnitedStatesrecovers,thehydraulicfracturingsectorisexpectedtogrowsignificantly.WebelievethatthecostperbarrelofoilfromunconventionalonshoreproductionisoneofthelowestintheUnitedStates,and,asaresult,E&Pcapitalhasshiftedtowardsthistypeofproduction.IndustryreportshaveforecastedthatthenumberofhorizontalwellsdrilledintheUnitedStateswillincreaseatacompoundannualgrowthrate,orCAGR,of20.7%from2016through2020.Inaddition,thesandutilizedinthecompletionofahorizontalwellhasmorethandoubledsince2014asoperatorscontinuetoinnovatetofindtheoptimaljobdesign.AsoneofthelargesthydraulicfracturingserviceprovidersinNorthAmerica,webelievewearewellpositionedtocapitalizeonthecontinuedincreaseintheonshoreoilandnaturalgasexplorationandproductionmarket.
Wehave1.6milliontotalhydraulichorsepoweracross32totalfleets,with27fleetsactiveasofJanuary8,2018.Asurgeindemandforourservicesledustoreactivate10fleetssincethebeginningof2017.Weareintheprocessofactivatingadditionalfleetsbasedoncontinuedcustomerinterestandwebelieveallofthisequipmentcanbereturnedtoservicewithinninemonths,ifmarketconditionsrequire.Weestimatetheaveragecosttoreactivateourinactivefleetstobeapproximately$6.9millionperfleet,whichincludescapitalexpenditures,repairschargedasoperatingexpenses,laborcostsandotheroperatingexpenses.
Deepen and expand relationships with customers that value our completions efficiency
Weserviceourcustomersprimarilywithdedicatedfleetsand24-houroperations.Wededicateoneormoreofourfleetsexclusivelytothecustomerforaperiodoftime,allowingforthosefleetstobeintegratedintothecustomer'sdrillingandcompletionschedule.Asaresult,weareabletoachievehigherlevelsofutilization,asmeasuredbythenumberofdayseachfleetisworkingpermonth,whichincreasesourprofitability.Inaddition,weoperateourfleetsona24-hourbasis,allowingustocompleteourservicesmoreefficientlywiththeleastamountofdowntime.Accordingly,weseektopartnerwithcustomersthathavealargenumberofwellsneedingcompletionandthatvalueefficiencyintheperformanceofourservice.Specifically,wetargetcustomerswhosecompletionsactivitytypicallyinvolvesminimaldowntimebetweenstages,ahighnumberofstagesperwell,multiplewellsperpadandashortdistancefromonewellpadsitetothenext.Thisstrategyalignswiththestrategyofmanyofourcustomers,whoaretryingtoachieveamanufacturing-stylemodelofdrillingandcompleting
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wellsinasequentialpatterntomaximizeeffectiveacreage.Weplantoleveragethisstrategytoexpandourrelationshipswithourexistingcustomersaswecontinuetoattractnewcustomers.
Capitalize on our uniform fleet, leading scale and significant basin diversity to provide superior performance with reduced operating costs
WeprimarilyservelargeindependentE&PcompaniesthatspecializeinunconventionaloilandnaturalgasresourcesinNorthAmerica.Becauseweoperateforcustomerswithsignificantscaleineachofouroperatingbasins,wehavethediversitytoreacttoandbenefitfrompositiveactivitytrendsinanybasinwithabalancedexposuretooilandnaturalgas.Ouruniformfleetallowsustocost-effectivelyredeployequipmentandfleetsamongexistingoperatingbasinstocapturethebestpricingandactivitytrends.Theuniformfleetiseasiertooperateandmaintain,resultinginreduceddowntimeaswellaslowertrainingcostsandinventorystockingrequirements.Ourgeographicbreadthalsoprovidesuswithopportunitiestocapitalizeoncustomerrelationshipsinonebasininordertowinbusinessinotherbasinsinwhichthecustomeroperates.Weintendtoleverageourscale,standardizedequipmentandcoststructuretogainmarketshareandwinnewbusiness.
Rapidly adopt new technologies in a capital efficient manner
Ourlargescaleandcultureofinnovationallowustotakeadvantageofleadingtechnologicalsolutions.Wehavebeenafastadopterofnewtechnologiesfocusedon:increasingfracturingeffectivenessforourcustomers,reducingtheoperatingcostsofourequipmentandenhancingtheHSEconditionsatourwellsites.Wehelpcustomersmonitorandmodifyfracturingfluidsanddesignsthroughourfluidresearchanddevelopmentoperationsthatweconductthroughastrategicpartnershipwithathird-partytechnologycenterthatutilizeskeyemployeeswhowerepreviouslyaffiliatedwithourCompany.InJune2017,werenewedourservicesagreementwiththisthird-partytechnologycenterforaone-yearterm,withanoptionforustorenewforadditionalone-yearterms.Thispartnershipallowsustoworkcloselywithourcustomerstorapidlyadoptandintegratenext-generationfluidbreakthroughs,suchasourNuFlo®1000fracturingfluiddiverter,intoourproductofferings.
Recentexamplesofinitiativesaimedatreducingouroperatingcostsinclude:vibrationsensorswithpredictivemaintenanceanalyticsonourheavyequipment;stainlesssteelfluid-endswithalongerusefullife;high-definitioncamerastoremotelymonitortheperformanceofourequipment;andadoptionofhardenedalloysandlubricantblendsforourconsumables.RecentexamplesofinitiativesaimedatimprovingourHSEconditionsinclude:dualfuelenginesthatcanrunonbothnaturalgasanddieselfuel;electronicpressurereliefsystems;spillpreventionandcontainmentsolutions;dustcontrolmitigation;electronicloggingdevices;andleadingcontainerizedproppantdeliverysolutions.
Reduce debt and maintain a more conservative capital structure
Webelievethatourcapitalstructureandliquidityuponcompletionofthisofferingwillimproveourfinancialflexibilitytocapitalizeefficientlyonourindustryrecovery,ultimatelyincreasingvalueforourstockholders.Tofurtherimproveourfinancialflexibility,weintendtoenterintoanasset-basedrevolvingcreditfacilityafterthecompletionofthisoffering.Ourfocuswillbeonthecontinuedprudentmanagementofourcapitalstructure.Webelievethisfocuscreatespotentialforsignificantoperatingleverageandstrongfreecashflowgenerationduringanindustryupcycle.Asaresult,webelieveweshouldbeabletonotonlymaketheinvestmentsnecessarytoremainamarketleaderinhydraulicfracturing,butalsotocontinuetostrengthenourbalancesheet.Ifweareabletosufficientlyreduceourindebtednessandcontinuetogeneratecashflowfromoperations,weexpecttoreturnvaluetoshareholders,includingbymeansofcashreturns,accretiveacquisitionsthatfitourmodelandfootprint,ortheconstructionofnewfleetsdependingonourbusinessoutlook.See"DividendPolicy"and"RiskFactors"formoreinformation.
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SelectedRisksAssociatedwithOurBusiness
Aninvestmentinourcommonstockinvolvesrisks.Youshouldcarefullyreadandconsidertheinformationpresentedundertheheading"RiskFactors"foranexplanationoftheserisksbeforeinvestinginourcommonstock.Inparticular,thefollowingconsiderationsmayoffsetourcompetitivestrengthsorhaveanegativeeffectonourstrategyoroperatingactivities,whichcouldcauseadecreaseinthepriceofourcommonstockandalossofallorpartofyourinvestment:
• Theoilandnaturalgasindustryiscyclicalandpricesarevolatile.Areductionorsustaineddeclineinoilandnaturalgasindustryorpricescouldadverselyaffectourbusiness,financialconditionandresultsofoperationsandourabilitytomeetourcapitalexpenditureobligationsandfinancialcommitments.
• Competitionintensifiedduringthedownturnandwerelyuponafewcustomersforasignificantportionofourrevenues.Decreaseddemandforourservicesorthelossofoneormoreoftheserelationshipscouldadverselyaffectourrevenues.
• Ouroperationsaresubjecttooperationalhazardsforwhichwemaynotbeadequatelyinsured.
• Ouroperationsaresubjecttovariousgovernmentalregulationsthatrequirecompliancethatcanbeburdensomeandexpensiveandmayadverselyaffectthefeasibilityofconductingouroperations.
• Anyfailurebyustocomplywithapplicablegovernmentallawsandregulations,includingthoserelatingtohydraulicfracturing,couldresultingovernmentalauthoritiestakingactionsthatcouldadverselyaffectouroperationsandfinancialcondition.
• Wehavesubstantialindebtednessandanyfailuretomeetourdebtobligationswouldadverselyaffectourliquidityandfinancialcondition.
• Ourmajorstockholders,MajuInvestments(Mauritius)PteLtd,orMaju,CHKEnergyHoldings,Inc.,orChesapeake,andSenjaCapitalLtd,orSenja,willcontinuetoexercisesignificantinfluenceovermattersrequiringstockholderapproval,andtheirinterestsmayconflictwiththoseofourotherstockholders.
ImplicationsofBeinganEmergingGrowthCompany
Asacompanywithlessthan$1.07billioninrevenueduringfiscalyear2016,wequalifiedasan"emerginggrowthcompany"asdefinedintheJumpstartOurBusinessStartupsActof2012,ortheJOBSAct,atthetimethatwesubmittedtotheSECaninitialdraftoftheregistrationstatementforthisoffering,and,assuch,haveelectedtocomplywithcertainreduceddisclosurerequirementsforthisprospectus.Thesereducedreportingrequirementsinclude:
• reduceddisclosureaboutourexecutivecompensationarrangements;and
• theabilitytopresentmorelimitedfinancialdataintheregistrationstatement,ofwhichthisprospectusisapart.
Ourrevenuesforfiscalyear2017exceeded$1.07billion,and,asaresult,wewillnolongerbeeligiblefortheexemptionsfromdisclosureprovidedtoanemerginggrowthcompanyaftertheearlierofthecompletionofthisofferingandDecember31,2018.
WehaveelectedtotakeadvantageofalloftheapplicableJOBSActprovisions,exceptthatwewillelecttooptoutoftheexemptionthatallowsemerginggrowthcompaniestoextendthetransitionperiodforcomplyingwithneworrevisedaccountingstandards(thiselectionisirrevocable).Accordingly,theinformationthatweprovideyoumaybedifferentthanwhatyoumayreceivefromotherpubliccompaniesinwhichyouholdequityinterests.
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OurPrincipalStockholders
Upontherecapitalizationofourconvertiblepreferredstockintocommonstockandthecompletionofthisoffering,Maju,ChesapeakeandSenjawillbeneficiallyownapproximately39.1%,20.7%and11.2%,respectively,ofourcommonstock,or38.1%,20.1%and10.9%,respectively,iftheunderwritersexercisetheiroptiontopurchaseadditionalsharesinfull.Formoreinformationregardingourbeneficialownershipsee"PrincipalandSellingStockholders."
MajuisanindirectwhollyownedsubsidiaryofTemasekHoldings(Private)Limited,orTemasek.TemasekisaninvestmentcompanybasedinSingaporewithanetportfolioofS$275billionasofMarch31,2017.ChesapeakeisawhollyownedsubsidiaryofChesapeakeEnergyCorporation,orChesapeakeParent.Establishedin1989,ChesapeakeParentisanoilandnaturalgasexplorationandproductioncompanyheadquarteredinOklahomaCity,Oklahoma.SenjaisaninvestmentcompanyaffiliatedwithRRJCapitalLimited,orRRJ.RRJisanAsianinvestmentfirmwithatotalofassetsundermanagementofcloseto$11billion.
Thesestockholderswillcontinuetoexercisesignificantinfluenceovermattersrequiringstockholderapproval,includingtheelectionofdirectors,changestoourorganizationaldocumentsandsignificantcorporatetransactions.See"CertainRelationshipsandRelatedPartyTransactions—Investors'RightsAgreements."Certainofourexistingstockholdersmaybeallocatedsharesofcommonstockintheoffering(see"Underwriting—DirectedShareProgram").Furthermore,weanticipatethatseveralindividualswhowillserveasourdirectorsuponcompletionofthisofferingwillbenomineesofMaju,ChesapeakeandSenja.See"RiskFactors—Ourthreelargeststockholderscontrolasignificantpercentageofourcommonstock,andtheirinterestsmayconflictwiththoseofourotherstockholders."
HistoryandConversion
Wewereoriginallyformedin2000.In2011,ourpriormajorityownerssoldtheirinteresttoanewlyformedDelawarelimitedliabilitycompanycontrolledbyaninvestorgroupcomprisedmainlyofMaju,ChesapeakeandSenja.Weconvertedfromalimitedliabilitycompanytoacorporationin2012.
CompanyInformation
Ourprincipalexecutiveofficesarelocatedat777MainStreet,Suite2900,FortWorth,Texas76102,andourtelephonenumberatthataddressis(817)862-2000.Ourwebsiteaddressiswww.ftsi.com.Informationcontainedonourwebsitedoesnotconstitutepartofthisprospectus.
RecentDevelopments
Preliminary Estimate of Fourth Quarter 2017 Results
Althoughourresultsofoperationsforthefourthquarter2017arenotyetfinal,wehaveusedtheinformationavailabletoustoprovideanestimateofourresults.
Fourthquarter2017revenuesareexpectedtobeapproximately$459million.Costsofrevenue,excludingdepreciationandamortization,isexpectedtobeapproximately$300millionforthefourthquarter2017.
TheCompanydeployedoneadditionalfleetduringthequarterandasofDecember31,2017had27activefleets.Theaveragenumberofactivefleetsduringthefourthquarterof2017was26.2.
Weareintheprocessofactivatingadditionalfleetsduetoincreasedcustomerdemand.Weexpectour28thfleettobeactivatedattheendofJanuary2018.Weestimatethecosttoreactivateourremainingfiveinactivefleetswillbeapproximately$6.9millionperfleet,includingcapitalexpenditures,repairschargedasoperatingexpense,laborcosts,andotheroperatingexpenses.SomeofthesecostswerealreadyincurredatDecember31,2017.
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TheCompanycompleted8,248stagesinthefourthquarterof2017.Activitylevelswereimpactedbyseasonalweatherandholidaydelayscommonlyexperiencedinthefourthquarter.
TheCompanyexpectsfourthquarter2017netincometobebetween$90millionand$95million,upapproximately11%fromthethirdquarterof2017.
AdjustedEBITDAisexpectedtobebetween$135millionand$140millionforthefourthquarter2017,upapproximately8%fromthethirdquarterof2017.
AdjustedEBITDAisanon-GAAPfinancialmeasurethatwedefineasearningsbeforeinterest;incometaxes;anddepreciationandamortization,aswellas,thefollowingitems,ifapplicable:gainorlossondisposalofassets;debtextinguishmentgainsorlosses;inventorywrite-downs,assetandgoodwillimpairments;gainoninsurancerecoveries;acquisitionearn-outadjustments;stock-basedcompensation;andacquisitionordispositiontransactioncosts.ThemostcomparablefinancialmeasuretoAdjustedEBITDAunderGAAPisnetincomeorloss.AdjustedEBITDAisusedbymanagementtoevaluatetheoperatingperformanceofourbusinessforcomparableperiodsanditisametricusedformanagementincentivecompensation.AdjustedEBITDAshouldnotbeusedbyinvestorsorothersasthesolebasisforformulatinginvestmentdecisions,asitexcludesanumberofimportantitems.WebelieveAdjustedEBITDAisanimportantindicatorofoperatingperformancebecauseitexcludestheeffectsofourcapitalstructureandcertainnon-cashitemsfromouroperatingresults.AdjustedEBITDAisalsocommonlyusedbyinvestorsintheoilfieldservicesindustrytomeasureacompany'soperatingperformance,althoughourdefinitionofAdjustedEBITDAmaydifferfromotherindustrypeercompanies.
ThefollowingtablereconcilesournetincometoAdjustedEBITDA:
Capitalexpendituresforthefourthquarter2017areexpectedtobeapproximately$30million,whichincludesapproximately$5millioninreactivationrelatedcapitalexpendituresand$10millioningrowthrelatedcapitalexpenditures.
Duringthefourthquarterof2017,wepurchasedcertaincomponentsthatcanbeusedtobuildtwoadditionalfleets,whichweexpecttocompleteinthesecondhalfof2018.Oncecompleted,ourtotalavailablefleetsizewouldbe34fleetsrepresenting1.7millionhydraulichorsepower.Weexpectthetotalcostofthesetwoadditionalfleetstobelessthan$50million,someofwhichwasalreadyincurredatDecember31,2017.
Thepreliminaryfinancialinformationfor,andasoftheendof,thefourthquarterof2017includedinthisprospectusreflectsmanagement'sestimatesbasedsolelyuponinformationavailabletousasofthedateofthisprospectusandistheresponsibilityofmanagement.Thepreliminaryfinancialresultspresentedhereinarenotacomprehensivestatementofourfinancialresultsforthefourthquarterof2017.Inaddition,thepreliminaryfinancialresultspresentedherein,includingtheliquidity
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ThreeMonthsEnded
December31,2017
ThreeMonthsEnded
September30,2017
(Inmillions) Low High Netincome $ 90.0 $ 95.0 $ 83.6Interestexpense,net 21.9 21.9 22.1Incometaxexpense 0.4 0.6 0.4Depreciationandamortization 21.4 21.4 22.1Loss(gain)ondisposalofassets,net 0.2 0.2 (0.8)Lossonextinguishmentofdebt 1.4 1.4 —AdjustedEBITDA $ 135.3 $ 140.5 $ 127.4
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andcapitalresourcestablepresentedbelow,havenotbeenaudited,reviewed,orcompiledbyourindependentregisteredpublicaccountingfirm,GrantThorntonLLP.Accordingly,GrantThorntonLLPdoesnotexpressanopinionoranyotherformofassurancewithrespecttheretoandassumesnoresponsibilityfor,anddisclaimsanyassociationwith,thisinformation.TheCompany'sactualresultsmaydiffermateriallyfromthesepreliminaryfinancialresultsduetothecompletionoftheCompany'sfinancialclosingprocedures,whichhavenotyetbeencompleted,finaladjustmentsandotherdevelopmentsthatmayarisebetweenthedateofthisprospectusandwhenresultsforthefourthquarterof2017arefinalized.Ouractualresultsforthefourthquarterof2017willnotbeavailableuntilafterthisofferingiscompleted.Therefore,youshouldnotplaceunduerelianceuponthesepreliminaryfinancialresults.Forinstance,duringthecourseofthepreparationoftherespectivefinancialstatementsandrelatednotes,additionalitemsthatwouldrequirematerialadjustmentstobemadetothepreliminaryestimatedfinancialresultspresentedabovemaybeidentified.Therecanbenoassurancethatthesepreliminaryestimateswillberealized,andestimatesaresubjecttorisksanduncertainties,manyofwhicharenotwithinourcontrol.Accordingly,thepreliminaryestimatedresultsdiscussedabovemaynotbeindicativeoffutureresults.See"CautionaryNoteRegardingForward-LookingStatements"and"RiskFactors."
Liquidity and Capital Resources
Duringthefourthquarterof2017,weretired$77.3millionofdebtprincipalthroughoptionalredemptionsandopenmarketrepurchases.AtDecember31,2017,wehad$208.1millionofcashandcashequivalentsandtotaldebtprincipalof$1,130million.Thefollowingtablesummarizesourlong-termdebt:
Inadditiontothedebtrepurchasesduringthefourthquarterof2017,onJanuary17,2018weissuedanunconditionalnoticetoredeemanadditional$60.0millionofourseniorsecuredfloatingratenotesdueJune15,2020,orthe2020Notes,onFebruary16,2018.Withinthirtydaysofthecompletionofthisoffering,theremaining$230.0millionofthe2020Noteswillberedeemed.
Asset-Based Revolving Credit Facility
Weintendtoenterintoa$250.0millionasset-basedrevolvingcreditfacilityfollowingtheconsummationofthisoffering.Weexpectthatwewillenterintothecreditfacilityuponredemptionoftheremaining2020Noteswiththeproceedsofthisoffering.Weintendtousethisfacilityforgeneralworkingcapitalpurposesinordertoprovideuswithmoreflexibilityandborrowingcapacity.
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(Inmillions) December31,
2017 September30,
2017 SeniorsecuredfloatingratenotesdueJune2020 $ 290.0 $ 350.0TermloandueApril2021 431.0 431.0SeniornotesdueMay2022 409.0 426.3Totalprincipalamount 1,130.0 1,207.3Lessunamortizeddiscountsanddebtissuancecosts (13.6) (15.7)Totallong-termdebt $ 1,116.4 $ 1,191.6
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TheOffering
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Commonstockofferedbyus
15,151,516shares.
Commonstockofferedbythesellingstockholder
4,348,484shares.
Over-allotmentoption
Wehavegrantedtheunderwritersanoption,exercisablefor30days,topurchaseuptoanaggregateof2,925,000additionalsharesofourcommonstocktocoverover-allotments,ifany.
Commonstockoutstandingafterthisoffering
106,431,603sharesor109,356,603sharesiftheunderwritersexercisetheiroptiontopurchaseadditionalsharesinfull.
Useofproceeds
Weexpecttoreceiveapproximately$233.4million(orapproximately$279.1millioniftheunderwriters'optiontopurchaseadditionalsharesinthisofferingisexercisedinfull)ofnetproceedsfromthesaleofthecommonstockofferedbyus,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointofthepricerangesetforthonthecoverpageofthisprospectus,afterdeductingunderwritingdiscountsandcommissionsandestimatedofferingexpenses.Each$1.00increase(decrease)inthepublicofferingpricewouldincrease(decrease)ournetproceedsbyapproximately$14.4million.Wewillnotreceiveanyproceedsfromthesaleofsharesbythesellingstockholder.
Weintendtousethenetproceedsfromthisofferingforgeneralcorporatepurposes,whichwillincluderepayingindebtednessunderthe2020Notes.See"UseofProceeds."
Dividendpolicy
Afterthecompletionofthisoffering,weintendtoretainfutureearnings,ifany,foruseintherepaymentofourexistingindebtednessandintheoperationandexpansionofourbusiness.Therefore,wedonotanticipatepayinganycashdividendsintheforeseeablefuturefollowingthisoffering.See"DividendPolicy."
Listingandtradingsymbol
Afterpricingofthisoffering,weexpectthatourshareswilltradeontheNYSEunderthesymbol"FTSI."
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Beforethisofferingwewilleffecta69.196592:1reversestocksplit,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Uponfilingouramendedandrestatedcertificateofincorporation,each69.196592sharesofcommonstockwillbecombinedintoandrepresentoneshareofcommonstock.Additionally,beforethisofferingourconvertiblepreferredstockwillberecapitalizedinto39,450,826.48sharesofcommonstock,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Achangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothecompletionofthisofferingbylessthan1%.Foradditionalinformationregardingtherecapitalizationofourconvertiblepreferredstock,see"DescriptionofCapitalStock."Followingthereversestocksplitandrecapitalization,fractionalshareswillbepaidoutincash.
Followingthereversestocksplitandrecapitalization,ourauthorizedcapitalstockwillconsistof320,000,000sharesofcommonstockand25,000,000sharesofpreferredstockand91,280,087sharesofcommonstockwillbeoutstanding,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Inconnectionwiththisoffering,wewillissueanadditional15,151,516sharesofnewcommonstockand,immediatelyfollowingthisoffering,wewillhave106,431,603totalsharesofcommonstockoutstanding,assumingtheunderwritersdonotexercisetheiroptiontopurchaseadditionalshares.
Unlessotherwisenoted,allinformationcontainedinthisprospectus:
• Assumestheunderwritersdonotexercisetheiroptiontopurchaseadditionalshares;
• Otherthanhistoricalfinancialdata,reflects(1)our69.196592:1reversestocksplitand(2)therecapitalizationofourconvertiblepreferredstockinto39,450,826.48sharesofcommonstock,ineachcase,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus;
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DirectedShareProgram Atourrequest,theunderwritershavereservedupto5.0%ofthecommonstockbeingofferedbythisprospectusforsaletoourdirectors,executiveofficers,employees,businessassociatesandrelatedpersonsatthepublicofferingprice.Thesaleswillbemadebytheunderwritersthroughadirectedshareprogram.Thenumberofsharesofcommonstockavailableforsaletothegeneralpublicwillbereducedtotheextenttheseindividualspurchasesuchreservedshares.Anyreservedsharesthatarenotsopurchasedwillbeofferedbytheunderwriterstothegeneralpubliconthesamebasisastheothersharesofferedbythisprospectus.Thesepersonsmustcommittopurchasenolaterthanthecloseofbusinessonthedayfollowingthedateofthisprospectus.Anydirectorsorexecutiveofficerspurchasingsuchreservedcommonstockwillbeprohibitedfromsellingsuchstockforaperiodof180daysafterthedateofthisprospectus.ThedirectedshareprogramwillbearrangedthroughMorgan&Stanley&Co.LLCandCreditSuisseSecurities(USA)LLC.Inaddition,theCompanyhasdirectedtheunderwriterstoallocateaportionofthesharesbeingofferedbytheCompanytocertainofourexistingstockholdersanddirectors.See"PrincipalandSellingStockholders"formoreinformation.
RiskFactorsYoushouldcarefullyreadandconsidertheinformationbeginningonpage19ofthisprospectussetforthundertheheading"RiskFactors"andallotherinformationsetforthinthisprospectusbeforedecidingtoinvestinourcommonstock.
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• ExcludessharesofcommonstockreservedforissuanceundertheFTSInternational,Inc.2014Long-TermIncentivePlan,orthe2014LTIPandundertheFTSInternational,Inc.2018EquityandIncentiveCompensationPlan,orthe2018Plan;and
• Excludessharesofcommonstockthat5%stockholders,directorsandexecutiveofficersmaypurchasethroughthedirectedshareprogramorotherwisethroughadirectedallocationofsharesinthisoffering.
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SUMMARYFINANCIALDATA
Thefollowingtablessetforthoursummaryhistoricalconsolidatedfinancialdatafortheperiodsandthedatesindicated.TheconsolidatedstatementsofoperationsdatafortheyearsendedDecember31,2015and2016andtheconsolidatedbalancesheetdataasofDecember31,2015and2016arederivedfromourauditedconsolidatedfinancialstatements,orAuditedConsolidatedFinancialStatements,thatareincludedelsewhereinthisprospectus.TheconsolidatedstatementsofoperationsdatafortheninemonthsendedSeptember30,2016and2017andtheconsolidatedbalancesheetdataasofSeptember30,2017arederivedfromourunauditedconsolidatedfinancialstatements,orUnauditedConsolidatedFinancialStatements,thatareincludedelsewhereinthisprospectus.Theresultsofoperationsfortheperiodspresentedbelowarenotnecessarilyindicativeoftheresultstobeexpectedforanyfutureperiod,andtheresultsforanyinterimperiodarenotnecessarilyindicativeoftheresultsthatmaybeexpectedforafullfiscalyear.
Youshouldreadthisinformationtogetherwith"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"andourconsolidatedfinancialstatementsandrelatednotesincludedelsewhereinthisprospectus.
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YearEndedDecember31,
NineMonthsEndedSeptember30,
(Dollarsinmillions,exceptpershareamounts) 2015 2016 2016 2017 StatementsofOperationsData: Revenue $ 1,375.3 $ 532.2 $ 379.8 $ 1,007.4Costsofrevenue,excludingdepreciationandamortization(1) 1,257.9 510.5 369.7 709.9Selling,generalandadministrative 154.7 64.4 51.5 62.0Depreciationandamortization 272.4 112.6 87.5 65.2Impairmentsandothercharges(2) 619.9 12.3 10.7 1.4Loss(gain)ondisposalofassets,net 5.9 1.0 1.1 (1.6)Gainoninsurancerecoveries — (15.1) (15.1) (2.9)Operatingincome(loss) (935.5) (153.5) (125.6) 173.4Interestexpense,net 77.2 87.5 66.1 64.8Loss(gain)onextinguishmentofdebt,net 0.6 (53.7) (53.7) —Equityinnetloss(income)ofjointventureaffiliate 1.4 2.8 2.6 (0.1)Income(loss)beforeincometaxes (1,014.7) (190.1) (140.6) 108.7Incometaxexpense(benefit)(3) (1.5) (1.6) — 0.9Netincome(loss) $ (1,013.2) $ (188.5) $ (140.6) $ 107.8Netlossattributabletocommonstockholders $ (1,158.1) $ (370.1) $ (272.7) $ (56.8)Basicanddilutedearnings(loss)pershareattributabletocommonstockholders $ (0.32) $ (0.10) $ (0.08) $ (0.02)
Sharesusedincomputingbasicanddilutedearnings(loss)pershare(inmillions) 3,589.7 3,586.5 3,586.5 3,586.4
BalanceSheetData(atendofperiod): Cashandcashequivalents $ 264.6 $ 160.3 $ 193.8Totalassets $ 907.4 $ 616.8 $ 827.1Totaldebt $ 1,276.2 $ 1,188.7 $ 1,191.6Convertiblepreferredstock(4) $ 349.8 $ 349.8 $ 349.8Totalstockholders'equity(deficit) $ (830.5) $ (1,019.0) $ (911.2)ProFormaData(5): Proformanetincome(loss) $ (168.3) $ 123.7Proformabasicanddilutedearnings(loss)pershareattributabletocommonstockholders $ (1.58) $ 1.16
Proformasharesusedincomputingbasicanddilutedearnings(loss)pershare(inmillions)(6) 106.5 106.5
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YearEndedDecember31,
NineMonthsEndedSeptember30,
(Dollarsinmillions,exceptpershareamounts) 2015 2016 2016 2017 Proformatotaldebt(atendofperiod) $ 847.2Proformatotalstockholders'equity(deficit)(atendofperiod) $ (342.6)OtherData: AdjustedEBITDA(7) $ (62.8) $ (50.8) $ (47.7) $ 234.2Netdebt(atendofperiod)(8) $ 1,011.6 $ 1,028.4 $ 997.8Proformanetdebt(atendofperiod)(8) $ 779.0Capitalexpenditures $ 79.1 $ 10.3 $ 6.1 $ 33.4Totalfracturingstages(9) 21,919 16,185 11,135 22,672
(1) TheamountofdepreciationandamortizationrelatedtoourcostsofrevenuethathasbeenclassifiedasdepreciationandamortizationinthistablefortheyearendedDecember31,2015and2016is$152.3millionand$98.9million,respectively,andfortheninemonthsendedSeptember30,2016and2017is$76.9millionand$56.7million,respectively.
(2) ForadiscussionofamountsrecordedfortheyearsendedDecember31,2015and2016andfortheninemonthsendedSeptember30,2016and2017,seeNote10—"ImpairmentsandOtherCharges"inNotestoourAuditedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusandNote4—"ImpairmentsandOtherCharges"inNotestoourUnauditedCondensedConsolidatedFinancialStatementsincludedelsewhereinthisprospectus.
(3) Consistsprimarilyofstatemargintaxesaccountedforasincometaxes.Thetaxeffectofournetoperatinglosseshasnotbeenreflectedinourresultsbecausewehaverecordedafullvaluationallowancewithregardstotherealizationofourdeferredtaxassetssince2012.
(4) TheholdersoftheconvertiblepreferredstockarealsocommonstockholdersoftheCompanyandcollectivelyappoint100%ofourboardofdirectors.Therefore,theconvertiblepreferredstockholderscandirecttheCompanytoredeemtheconvertiblepreferredstockatanytimeafterallofourdebthasbeenrepaid;however,wedidnotconsiderthistobeprobableforanyoftheperiodspresentedduetotheamountofdebtoutstanding.Therefore,wehavepresentedtheconvertiblepreferredstockastemporaryequitybuthavenotreflectedanyaccretionoftheconvertiblepreferredstockinthistableorinourConsolidatedFinancialStatements.SeeNote7—"ConvertiblePreferredStock"inNotestoourAuditedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusformoreinformation.AtSeptember30,2017,theliquidationpreferenceoftheconvertiblepreferredstockwasestimatedtobe$1,070.7million.
(5) Proformadatagiveseffectto(1)the69.196592:1reversestocksplit,(2)therecapitalizationofourconvertiblepreferredstockintoissuedandoutstandingcommonstock,(3)thesaleof15,151,516sharesofcommonstocktobeissuedbyusinthisoffering(assumingtheunderwritersdonotexercisetheiroptiontopurchaseadditionalshares)and(4)theuseofproceedstherefrom,asifeachoftheseeventsoccurredonJanuary1,2016forpurposesofthestatementofoperationsandSeptember30,2017,forpurposesofthebalancesheet,andforeachof(1),(2),(3)and(4),assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Additionally,theproformabalancesheetinformationreflectsashare-basedcompensationexpenseofapproximately$3.7millionassociatedwithrestrictedstockunitsissuedunderour2014LTIPthatwillvestimmediatelybeforeeffectivenessoftheregistrationstatement,ofwhichthisprospectusisapart,andwillbesettledincash.Anychangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothecompletionofthisofferingbylessthan1%.Foradditionalinformationregardingtherecapitalizationofourconvertiblepreferredstock,see"DescriptionofCapitalStock."
(6) TheproformasharesusedtocomputeproformaearningspersharefortheyearendedDecember31,2016andtheninemonthsendedSeptember30,2017,havebeenadjustedtoincludethesaleof15,151,516sharesofcommonstockbyusinthisoffering(assumingtheunderwritersdonotexercisetheiroptiontopurchaseadditionalshares)thatwouldgenerateonlyenoughproceedstorepaydebtasdescribedunder"UseofProceeds."
(7) AdjustedEBITDAisanon-GAAPfinancialmeasurethatwedefineasearningsbeforeinterest;incometaxes;anddepreciationandamortization,aswellas,thefollowingitems,ifapplicable:gainorlossondisposalofassets;debtextinguishmentgainsorlosses;inventorywrite-downs,assetandgoodwillimpairments;gainoninsurancerecoveries;acquisitionearn-outadjustments;stock-basedcompensation;andacquisitionor
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dispositiontransactioncosts.ThemostcomparablefinancialmeasuretoAdjustedEBITDAunderGAAPisnetincomeorloss.AdjustedEBITDAisusedbymanagementtoevaluatetheoperatingperformanceofourbusinessforcomparableperiodsanditisametricusedformanagementincentivecompensation.AdjustedEBITDAshouldnotbeusedbyinvestorsorothersasthesolebasisforformulatinginvestmentdecisions,asitexcludesanumberofimportantitems.WebelieveAdjustedEBITDAisanimportantindicatorofoperatingperformancebecauseitexcludestheeffectsofourcapitalstructureandcertainnon-cashitemsfromouroperatingresults.AdjustedEBITDAisalsocommonlyusedbyinvestorsintheoilfieldservicesindustrytomeasureacompany'soperatingperformance,althoughourdefinitionofAdjustedEBITDAmaydifferfromotherindustrypeercompanies.
Thefollowingtablereconcilesournetincome(loss)toAdjustedEBITDA:
YearEndedDecember31,
NineMonthsEnded
September30, (Inmillions) 2015 2016 2016 2017 Netincome(loss) $ (1,013.2) $ (188.5) $ (140.6) $ 107.8Interestexpense,net 77.2 87.5 66.1 64.8Incometaxexpense(benefit) (1.5) (1.6) — 0.9Depreciationandamortization 272.4 112.6 87.5 65.2Loss(gain)ondisposalofassets,net 5.9 1.0 1.1 (1.6)Loss(gain)onextinguishmentofdebt,net 0.6 (53.7) (53.7) —Inventorywrite-down 24.5 — — —Impairmentofassetsandgoodwill 572.9 7.0 7.0 —Gainoninsurancerecoveries — (15.1) (15.1) (2.9)Acquisitionearn-outadjustments (3.4) — — —Stock-basedcompensation 1.8 — — —AdjustedEBITDA $ (62.8)(a) $ (50.8)(b) $ (47.7)(c) $ 234.2(d)
(a) FortheyearendedDecember31,2015,AdjustedEBITDAhasnotbeenadjustedtoexcludethefollowingitems:employeeseverancecostsof$13.1million,supplycommitmentchargesof$11.0million,significantlegalcostsof$8.1million,leaseabandonmentchargesof$1.8million,andprofitof$2.4millionfromthesaleofequipmenttoourjointventureaffiliate.
(b) FortheyearendedDecember31,2016,AdjustedEBITDAhasnotbeenadjustedtoexcludethefollowingitems:employeeseverancecostsof$0.8million,supplycommitmentchargesof$2.5millionandleaseabandonmentchargesof$2.0million.
(c) FortheninemonthsendedSeptember30,2016,AdjustedEBITDAhasnotbeenadjustedtoexcludethefollowingitems:employeeseverancecostsof$0.8million,supplycommitmentchargesof$1.5millionandleaseabandonmentchargesof$1.4million.
(d) FortheninemonthsendedSeptember30,2017,AdjustedEBITDAhasnotbeenadjustedtoexcludeasupplycommitmentchargeof$1.0million.
(8) Netdebtisanon-GAAPfinancialmeasurethatwedefineastotaldebtlesscashandcashequivalents.ThemostcomparablefinancialmeasuretonetdebtunderGAAPisdebt.Netdebtisusedbymanagementasameasureofourfinancialleverage.Netdebtshouldnotbeusedbyinvestorsorothersasthesolebasisinformulatinginvestmentdecisionsasitdoesnotrepresentouractualindebtedness.Proformanetdebtisnetdebtadjustedasifwereceivedthenetproceedsfromthisofferingandwe(a)settledtherestrictedstockunitsgrantedunderthe2014LTIPincashand(b)redeemed$350.0millionofouroutstanding2020NotesasifeachoftheseeventsoccurredonSeptember30,2017.
Thefollowingtablereconcilesourtotaldebttonetdebt:
Asof
December31, Asof
September30, (Inmillions) 2015 2016 2017 Totaldebt $ 1,276.2 $ 1,188.7 $ 1,191.6Cashandcashequivalents (264.6) (160.3) (193.8)Netdebt $ 1,011.6 $ 1,028.4 $ 997.8
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Thefollowingtablereconcilesourtotaldebttoproformanetdebt:
(Inmillions) Asof
September30,2017 Totaldebt $ 1,191.6Repaymentof2020Notes (344.4)Proformatotaldebt 847.2Cashandcashequivalents 193.8Netproceedsfromthisoffering 233.4Cashsettlementof2014restrictedstockunits (3.7)Cashpaidtorepurchase2020Notes (355.3)Proformacashandcashequivalents 68.2Proformanetdebt $ 779.0
(9) See"Business—OurServices—HydraulicFracturing"fordetailsregardingfracturingstagesandfleetsandthetypesofagreementsweusetoprovidehydraulicfracturingservices.
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RISKFACTORS
Aninvestmentinourcommonstockinvolvesrisks.Youshouldcarefullyconsidertherisksanduncertaintiesdescribedbelow,togetherwithalloftheotherinformationcontainedinthisprospectus,includingthesectiontitled"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperation"andourconsolidatedfinancialstatementsandtherelatednotes,beforemakinganinvestmentdecision.Ourbusiness,financialconditionorresultsofoperationscouldbemateriallyadverselyaffectedbyanyoftheserisks.Thetradingpriceofourcommonstockcoulddeclineduetoanyoftheserisks,andyoumayloseallorpartofyourinvestment.
RisksRelatingtoOurBusiness
Our business depends on domestic spending by the onshore oil and natural gas industry, which is cyclical and significantly declined in 2015 and 2016.
Ourbusinessiscyclicalanddependsonthewillingnessofourcustomerstomakeoperatingandcapitalexpenditurestoexplorefor,developandproduceoilandnaturalgasintheUnitedStates.Thewillingnessofourcustomerstoundertaketheseactivitiesdependslargelyuponprevailingindustryconditionsthatareinfluencedbynumerousfactorsoverwhichwehavenocontrol,suchas:
• prices,andexpectationsaboutfutureprices,foroilandnaturalgas;
• domesticandforeignsupplyof,anddemandfor,oilandnaturalgasandrelatedproducts;
• thelevelofglobalanddomesticoilandnaturalgasinventories;
• thesupplyofanddemandforhydraulicfracturingandotheroilfieldservicesandequipmentintheUnitedStates;
• thecostofexploringfor,developing,producinganddeliveringoilandnaturalgas;
• availablepipeline,storageandothertransportationcapacity;
• leadtimesassociatedwithacquiringequipmentandproductsandavailabilityofqualifiedpersonnel;
• thediscoveryratesofnewoilandnaturalgasreserves;
• federal,stateandlocalregulationofhydraulicfracturingandotheroilfieldserviceactivities,aswellasE&Pactivities,includingpublicpressureongovernmentalbodiesandregulatoryagenciestoregulateourindustry;
• theavailabilityofwaterresources,suitableproppantandchemicalsinsufficientquantitiesforuseinhydraulicfracturingfluids;
• geopoliticaldevelopmentsandpoliticalinstabilityinoilandnaturalgasproducingcountries;
• actionsofOPEC,itsmembersandotherstate-controlledoilcompaniesrelatingtooilpriceandproductioncontrols;
• advancesinexploration,developmentandproductiontechnologiesorintechnologiesaffectingenergyconsumption;
• thepriceandavailabilityofalternativefuelsandenergysources;
• weatherconditionsandnaturaldisasters;
• uncertaintyincapitalandcommoditiesmarketsandtheabilityofoilandnaturalgasproducerstoraiseequitycapitalanddebtfinancing;and
• U.S.federal,stateandlocalandnon-U.S.governmentalregulationsandtaxes.
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Volatilityorweaknessinoilandnaturalgasprices(ortheperceptionthatoilandnaturalgaspriceswilldecreaseorremaindepressed)generallyleadstodecreasedspendingbyourcustomers,whichinturnnegativelyimpactsdrilling,completionandproductionactivity.Inparticular,thedemandforneworexistingdrilling,completionandproductionworkisdrivenbyavailableinvestmentcapitalforsuchwork.Whenthesecapitalinvestmentsdecline,ourcustomers'demandforourservicesdeclines.Becausethesetypesofservicescanbeeasily"started"and"stopped,"andoilandnaturalgasproducersgenerallytendtoberiskaversewhencommoditypricesareloworvolatile,wetypicallyexperienceamorerapiddeclineindemandforourservicescomparedwithdemandforothertypesofenergyservices.Anynegativeimpactonthespendingpatternsofourcustomersmaycauselowerpricingandutilizationforourservices,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperationsandcashflows.
Oil and natural gas prices declined significantly in 2015 and 2016 and remain volatile, which has adversely affected, and may continue to adversely affect, ourfinancial condition, results of operations and cash flows.
Thedemandforourservicesdependsonthelevelofspendingbyoilandnaturalgascompaniesfordrilling,completionandproductionactivities,whichareaffectedbyshort-termandlong-termtrendsinoilandnaturalgasprices,includingcurrentandanticipatedoilandnaturalgasprices.Oilandnaturalgasprices,aswellasthelevelofdrilling,completionandproductionactivities,historicallyhavebeenextremelyvolatileandareexpectedtocontinuetobehighlyvolatile.Forexample,oilpricesdeclinedsignificantlyin2015and2016,withWTIcrudeoilspotpricesdecliningfromamonthlyaverageof$105.79perbarrelinJune2014to$26.14perbarrelinFebruary2016.ThespotpriceperbarrelasofDecember29,2017was$60.42.Inlinewiththissustainedvolatilityinoilandnaturalgasprices,weexperiencedasignificantdeclineinpressurepumpingactivitylevelsacrossourcustomerbase.Thevolatileoilandnaturalgaspricesadverselyaffected,andcouldcontinuetoadverselyaffect,ourfinancialcondition,resultsofoperationsandcashflows.
Our customers may not be able to maintain or increase their reserve levels going forward.
Inadditiontotheimpactoffutureoilandnaturalgaspricesonourfinancialperformanceovertime,ourabilitytogrowfuturerevenuesandincreaseprofitabilitywilldependlargelyuponourcustomers'abilitytofind,developoracquireadditionalshaleoilandnaturalgasreservesthatareeconomicallyrecoverabletoreplacethereservestheyproduce.Hydraulicfracturedwellsaregenerallymoreshort-livedthanconventionalwells.OurcustomersownorhaveaccesstoafiniteamountofshaleoilandnaturalgasreservesintheUnitedStatesthatwillbedepletedovertime.Theproductionratefromshaleoilandnaturalgaspropertiesgenerallydeclinesasreservesaredepleted,whilerelatedper-unitproductioncostsgenerallyincreaseasaresultofdecreasingreservoirpressuresandotherfactors.Ifourcustomersareunabletoreplacetheshaleoilreservestheyownorhaveaccesstoattheratetheyproducesuchreserves,theirprovedreservesandproductionwilldeclineovertime.Reductionsinproductionlevelsbyourcustomersovertimemayreducethefuturedemandforourservicesandadverselyaffectourbusiness,financialcondition,resultsofoperationsandcashflows.
Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry.
AprolongedeconomicslowdownorrecessionintheUnitedStates,adverseeventsrelatingtotheenergyindustryorregional,nationalandglobaleconomicconditionsandfactors,particularlyaslowdownintheE&Pindustry,couldnegativelyimpactouroperationsandthereforeadverselyaffectourresults.Therisksassociatedwithourbusinessaremoreacuteduringperiodsofeconomicslowdownorrecessionbecausesuchperiodsmaybeaccompaniedbydecreasedexplorationanddevelopmentspendingbyourcustomers,decreaseddemandforoilandnaturalgasanddecreasedpricesforoilandnaturalgas.
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Competition in our industry intensifies during industry downturns, and we may not be able to provide services that meet the specific needs of our customers atcompetitive prices.
Themarketsinwhichweoperatearegenerallyhighlycompetitiveandhaverelativelyfewbarrierstoentry.Theprincipalcompetitivefactorsinourmarketsareprice,servicequality,safety,andinsomecases,breadthofproducts.Wecompetewithlargenationalandmulti-nationalcompaniesthathavelongeroperatinghistories,greaterfinancial,technicalandotherresourcesandgreaternamerecognitionthanwedo.Severalofourcompetitorsprovideabroaderarrayofservicesandhaveastrongerpresenceinmoregeographicmarkets.Inaddition,wecompetewithseveralsmallercompaniescapableofcompetingeffectivelyonaregionalorlocalbasis.Ourcompetitorsmaybeabletorespondmorequicklytoneworemergingtechnologiesandservicesandchangesincustomerrequirements.Somecontractsareawardedonabidbasis,whichfurtherincreasescompetitionbasedonprice.Pricingisoftentheprimaryfactorindeterminingwhichqualifiedcontractorisawardedajob.Thecompetitiveenvironmentmaybefurtherintensifiedbymergersandacquisitionsamongoilandnaturalgascompaniesorothereventsthathavetheeffectofreducingthenumberofavailablecustomers.Asaresultofcompetitionduringtherecentdownturn,wehadtolowerthepricesforourservices.Infuturedownturns,wemaylosemarketshareorbeunabletomaintainorincreasepricesforourpresentservicesortoacquireadditionalbusinessopportunities,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperationsandcashflows.
Pressureonpricingforourservicesresultingfromtherecentindustrydownturnimpactedourabilitytomaintainutilizationandpricingforourservicesorimplementpriceincreases,whichmayalsobeimpactedinfuturedownturns.Duringanyfutureperiodsofdecliningpricingforourservices,wemaynotbeabletoreduceourcostsaccordingly,whichcouldfurtheradverselyaffectourresultsofoperations.Also,wemaynotbeabletosuccessfullyincreasepriceswithoutadverselyaffectingourutilizationlevels.Theinabilitytomaintainourutilizationandpricinglevels,ortoincreaseourpricesascostsincrease,couldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
Inaddition,someE&Pcompanieshavebegunperforminghydraulicfracturingontheirwellsusingtheirownequipmentandpersonnel.Anyincreaseinthedevelopmentandutilizationofin-housefracturingcapabilitiesbyourcustomerscoulddecreasethedemandforourservicesandhaveamaterialadverseimpactonourbusiness.
We are dependent on a few customers operating in a single industry. The loss of one or more significant customers could adversely affect our financialcondition and results of operations.
OurcustomersareengagedintheE&PbusinessintheUnitedStates.Historically,wehavebeendependentuponafewcustomersforasignificantportionofourrevenues.FortheyearendedDecember31,2016andtheninemonthsendedSeptember30,2017,ourfourlargestcustomersgeneratedapproximately52%and33%,respectively,ofourtotalrevenue.Infiscalyears2015and2014,ourfourlargestcustomersgeneratedapproximately44%and45%,respectively,ofourtotalrevenue.Foradiscussionofourcustomersthatmakeup10%ormoreofourrevenues,see"Business—Customers."
Ourbusiness,financialconditionandresultsofoperationscouldbemateriallyadverselyaffectedifoneormoreofoursignificantcustomersceasestoengageusforourservicesonfavorabletermsoratallorfailstopayordelaysinpayingussignificantamountsofouroutstandingreceivables.Althoughwedohavecontractsformultipleprojectswithcertainofourcustomers,mostofourservicesareprovidedonaproject-by-projectbasis.
Additionally,theE&Pindustryischaracterizedbyfrequentconsolidationactivity.Changesinownershipofourcustomersmayresultinthelossof,orreductionin,businessfromthosecustomers,whichcouldmateriallyandadverselyaffectourfinancialcondition.
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We extend credit to our customers, which presents a risk of nonpayment of our accounts receivable.
Weextendcredittoallourcustomers.Duringtherecentindustrydownturn,manyofourcustomersexperiencedthesamefinancialandoperationalchallengesthatwedid,andsomeofourcustomersfiledforbankruptcyprotection.GiventhecyclicalnatureoftheE&Pindustry,we,aswellasourcustomers,mayexperiencesimilarchallengesinthefuture.Asaresult,wemayhavedifficultycollectingoutstandingaccountsreceivablefrom,orexperiencelongercollectioncycleswith,someofourcustomers,whichcouldhaveanadverseeffectonourfinancialconditionandcashflows.
Decreased demand for proppant has adversely affected, and could continue to adversely affect, our commitments under supply agreements.
Wehavepurchasecommitmentswithcertainvendorstosupplytheproppantusedinouroperations.Someoftheseagreementsaretake-or-payarrangementswithminimumpurchaseobligations.Duringtheindustrydownturn,ourminimumcontractualcommitmentsexceededtheamountofproppantneededinouroperations.Asaresult,wemademinimumpaymentsforproppantthatwewereunabletouse.Furthermore,someofourcustomershaveboughtandinthefuturemaybuyproppantdirectlyfromvendors,reducingourneedforproppant.Ifmarketconditionsdonotcontinuetoimprove,orourcustomersbuyproppantdirectlyfromvendors,wemayberequiredtomakeminimumpaymentsinfutureperiods,whichmayadverselyaffectourresultsofoperations,liquidityandcashflows.
We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers.
Thedeliveryofourservicesandproductsrequirespersonnelwithspecializedskillsandexperiencewhocanperformphysicallydemandingwork.Asaresultofthevolatilityintheenergyserviceindustryandthedemandingnatureofthework,workersmaychoosetopursueemploymentwithourcompetitorsorinfieldsthatofferamoredesirableworkenvironment.Ourabilitytobeproductiveandprofitablewilldependuponourabilitytoemployandretainskilledworkers.Inaddition,ourabilitytofurtherexpandouroperationsaccordingtogeographicdemandforourservicesdependsinpartonourabilitytorelocateorincreasethesizeofourskilledlaborforce.Thedemandforskilledworkersinourareasofoperationscanbehigh,thesupplymaybelimitedandwemaybeunabletorelocateouremployeesfromareasoflowerutilizationtoareasofhigherdemand.Asignificantincreaseinthewagespaidbycompetingemployerscouldresultinareductionofourskilledlaborforce,increasesinthewageratesthatwemustpay,orboth.Furthermore,asignificantdecreaseinthewagespaidbyusorourcompetitorsasaresultofreducedindustrydemandcouldresultinareductionoftheavailableskilledlaborforce,andthereisnoassurancethattheavailabilityofskilledlaborwillimprovefollowingasubsequentincreaseindemandforourservicesoranincreaseinwagerates.Ifanyoftheseeventsweretooccur,ourcapacityandprofitabilitycouldbediminishedandourgrowthpotentialcouldbeimpaired.
Wedependheavilyontheeffortsofexecutiveofficers,managersandotherkeyemployeestomanageouroperations.Theunexpectedlossorunavailabilityofkeymembersofmanagementortechnicalpersonnelmayhaveamaterialadverseeffectonourbusiness,financialcondition,prospectsorresultsofoperations.
Our operations are subject to inherent risks, including operational hazards. These risks may not be fully covered under our insurance policies.
Ouroperationsaresubjecttohazardsinherentintheoilandnaturalgasindustry,suchasaccidents,blowouts,explosions,craters,firesandoilspills.Thesehazardsmayleadtopropertydamage,personalinjury,deathorthedischargeofhazardousmaterialsintotheenvironment.Theoccurrenceofasignificanteventoradverseclaiminexcessoftheinsurancecoveragethatwemaintainorthatisnotcoveredbyinsurancecouldhaveamaterialadverseeffectonourfinancialconditionandresultsofoperations.
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Asiscustomaryinourindustry,ourservicecontractsgenerallyprovidethatwewillindemnifyandholdharmlessourcustomersfromanyclaimsarisingfrompersonalinjuryordeathofouremployees,damagetoorlossofourequipment,andpollutionemanatingfromourequipmentandservices.Similarly,ourcustomersagreetoindemnifyandholdusharmlessfromanyclaimsarisingfrompersonalinjuryordeathoftheiremployees,damagetoorlossoftheirequipment,andpollutioncausedfromtheirequipmentorthewellreservoir.Ourindemnificationarrangementsmaynotprotectusineverycase.Inaddition,ourindemnificationrightsmaynotfullyprotectusifthecustomerisinsolventorbecomesbankrupt,doesnotmaintainadequateinsuranceorotherwisedoesnotpossesssufficientresourcestoindemnifyus.Furthermore,ourindemnificationrightsmaybeheldunenforceableinsomejurisdictions.Ourinabilitytofullyrealizethebenefitsofourcontractualindemnificationprotectionscouldresultinsignificantliabilitiesandcouldadverselyaffectourfinancialcondition,resultsofoperationsandcashflows.
Wemaintaincustomaryinsurancecoverageagainstthesetypesofhazards.Weareself-insureduptoretentionlimitswithregardto,amongotherthings,workers'compensationandgeneralliability.Wemaintainaccrualsinourconsolidatedbalancesheetsrelatedtoself-insuranceretentionsbyusingthird-partydataandhistoricalclaimshistory.Theoccurrenceofaneventnotfullyinsuredagainst,orthefailureofaninsurertomeetitsinsuranceobligations,couldresultinsubstantiallosses.Inaddition,wemaynotbeabletomaintainadequateinsuranceinthefutureatratesweconsiderreasonable.Insurancemaynotbeavailabletocoveranyoralloftheriskstowhichwearesubject,or,evenifavailable,itmaybeinadequate.
We are subject to laws and regulations regarding issues of health, safety, and protection of the environment, under which we may become liable for penalties,damages, or costs of remediation.
Ouroperationsaresubjecttostringentlawsandregulationsrelatingtoprotectionofnaturalresources,cleanair,drinkingwater,wetlands,endangeredspecies,greenhousegases,nonattainmentareas,theenvironment,healthandsafety,chemicaluseandstorage,wastemanagement,andtransportationofhazardousandnon-hazardousmaterials.Theselawsandregulationssubjectustorisksofenvironmentalliability,includingleakagefromanoperator'scasingduringouroperationsoraccidentalspillsorreleasesontoorintosurfaceorsubsurfacesoils,surfacewater,groundwaterorambientair.
Someenvironmentallawsandregulationsmayimposestrictliability,jointandseveralliabilityorboth.Strictliabilitymeansthatwecouldbeexposedtoliabilityasaresultofourconductthatwaslawfulatthetimeitoccurred,ortheconductoforconditionscausedbythirdpartieswithoutregardtowhetherwecausedorcontributedtotheconditions.Additionally,environmentalconcerns,includingairanddrinkingwatercontaminationandseismicactivity,havepromptedinvestigationsthatcouldleadtotheenactmentofregulationsthatpotentiallycouldhaveamaterialadverseimpactonourbusiness.Sanctionsfornoncompliancewithenvironmentallawsandregulationscouldresultinfinesandpenalties(administrative,civilorcriminal),revocationsofpermits,expendituresforremediation,andissuanceofcorrectiveactionorders,andactionsarisingundertheselawsandregulationscouldresultinliabilityforpropertydamage,exposuretowasteandotherhazardousmaterials,nuisanceorpersonalinjuries.Suchclaimsorsanctionscouldcauseustoincursubstantialcostsorlossesandcouldhaveamaterialadverseeffectonourbusiness,financialcondition,andresultsofoperations.
Changes in laws and regulations could prohibit, restrict or limit our operations, increase our operating costs, adversely affect our results or result in thedisclosure of proprietary information resulting in competitive harm.
Variouslegislativeandregulatoryinitiativeshavebeenundertakenthatcouldresultinadditionalrequirementsorrestrictionsbeingimposedonouroperations.Legislationand/orregulationsarebeingconsideredatthefederal,stateandlocallevelsthatcouldimposechemicaldisclosurerequirements(suchasrestrictionsontheuseofcertaintypesofchemicalsorprohibitionsonhydraulicfracturing
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operationsincertainareas)andpriorapprovalrequirements.Iftheybecomeeffective,theseregulationswouldestablishadditionallevelsofregulationthatcouldleadtooperationaldelaysandincreasedoperatingcosts.Disclosureofourproprietarychemicalinformationtothirdpartiesortothepublic,evenifinadvertent,coulddiminishthevalueofourtradesecretsandcouldresultincompetitiveharmtous,whichcouldhaveanadverseimpactonourfinancialconditionandresultsofoperations.
Additionally,somejurisdictionsareorhaveconsideredzoningandotherordinances,theconditionsofwhichcouldimposeadefactobanondrillingand/orhydraulicfracturingoperations,andarecloselyexaminingpermitanddisposaloptionsforprocessedwater,whichifimposedcouldhaveamaterialadverseimpactonouroperatingcosts.Moreover,anymoratoriumorincreasedregulationofourrawmaterialsvendors,suchasourproppantsuppliers,couldincreasethecostofthosematerialsandadverselyaffecttheresultsofouroperations.
Wearealsosubjecttovarioustransportationregulationsthatincludecertainpermitrequirementsofhighwayandvehicleandhazardousmaterialsafetyauthorities.Theseregulationsgovernsuchmattersastheauthorizationtoengageinmotorcarrieroperations,safety,equipmenttesting,driverrequirementsandspecificationsandinsurancerequirements.Astheseregulationsdevelopandanynewregulationsareproposed,wehaveexperiencedandmaycontinuetoexperienceanincreaseinrelatedcosts.Wereceiveaportionoftheproppantusedinouroperationsbyrail.Anydelayorfailureinrailservicesduetochangesintransportationregulations,workstoppagesorlaborstrikes,couldadverselyeffecttheavailabilityofproppant.Wecannotpredictwhether,orinwhatform,anylegislativeorregulatorychangesormunicipalordinancesapplicabletoourlogisticsoperationswillbeenactedandtowhatextentanysuchlegislationorregulationscouldincreaseourcostsorotherwiseadverselyaffectourbusinessoroperations.
WecontinuetoassesstheimpactoftherecentlyenactedTaxCutsandJobsAct,orthenewtaxlaw,aswellasanyfutureregulationsimplementingthenewtaxlawandanyinterpretationsofthenewtaxlaw.Theeffectofthoseregulationsandinterpretations,aswellasanyadditionaltaxreformlegislationintheUnitedStatesorelsewhere,couldadverselyaffectourbusinessandfinancialcondition.
Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions ordelays.
Ourbusinessisdependentonourabilitytoconducthydraulicfracturingandhorizontaldrillingactivities.Hydraulicfracturingisusedtostimulateproductionofhydrocarbons,particularlynaturalgas,fromtightformations,includingshales.Theprocess,whichinvolvestheinjectionofwater,sandandchemicals,orproppants,underpressureintoformationstofracturethesurroundingrockandstimulateproduction,istypicallyregulatedbystateoilandnaturalgascommissions.However,federalagencieshaveassertedregulatoryauthorityovercertainaspectsoftheprocess.Forexample,onMay9,2014,theEPAissuedanAdvancedNoticeofProposedRulemakingseekingcommentonthedevelopmentofregulationsundertheToxicSubstancesControlActtorequirecompaniestodiscloseinformationregardingthechemicalsusedinhydraulicfracturing.TheEPAprojectspublishingaNoticeofProposedRulemakingbyJune2018,whichwoulddescribeaproposedmechanism—regulatory,voluntaryoracombinationofboth—tocollectdataonhydraulicfracturingchemicalsubstancesandmixtures.OnJune28,2016,theEPApublishedafinalruleprohibitingthedischargeofwastewaterfromonshoreunconventionaloilandnaturalgasextractionfacilitiestopubliclyownedwastewatertreatmentplans.TheEPAisalsoconductingastudyofprivatewastewatertreatmentfacilities(alsoknownascentralizedwastetreatment,orCWT,facilities)acceptingoilandnaturalgasextractionwastewater.TheEPAiscollectingdataandinformationrelatedtotheextenttowhichCWTfacilitiesacceptsuchwastewater,availabletreatmenttechnologies(andtheirassociatedcosts),dischargecharacteristics,financialcharacteristicsofCWTfacilitiesandtheenvironmentalimpactsofdischargesfromCWTfacilities.TheEPAenteredaconsentdecreewhichrequirestheagencytodeterminewhethertorevisetheResource
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ConservationandRecoveryActSubtitleDrulesforoilandgaswastebyMarch5,2019.Furthermore,legislationtoamendtheSafeDrinkingWaterAct,orSDWA,torepealtheexemptionforhydraulicfracturing(exceptwhendieselfuelsareused)fromthedefinitionof"undergroundinjection"andrequirefederalpermittingandregulatorycontrolofhydraulicfracturing,aswellaslegislativeproposalstorequiredisclosureofthechemicalconstituentsofthefluidsusedinthefracturingprocess,wereproposedinrecentsessionsofCongress.Additionally,theBureauofLandManagement,orBLM,hasestablishedregulationsimposingdrillingandconstructionrequirementsforoperationsonfederalorIndianlandsincludingmanagementrequirementsforsurfaceoperationsandpublicdisclosuresofchemicalsusedinthehydraulicfracturingfluids.However,onDecember29,2017,BLMpublishedarescissionoftheseregulations.Futureimpositionoftheseorsimilarregulationscouldcauseusorourcustomerstoincursubstantialcompliancecostsandanyfailuretocomplycouldhaveamaterialadverseeffectonourfinancialconditionorresultsofoperations.
OnMay12,2016,theEPAamendedtheNewSourcePerformanceStandardsunderthefederalCleanAirActtoimposenewstandardsformethaneandvolatileorganiccompounds,orVOCs,emissionsforcertainnew,modified,andreconstructedequipment,processes,andactivitiesacrosstheoilandnaturalgassector.Onthesameday,theEPAfinalizedaplantoimplementitsminornewsourcereviewprograminIndiancountryforoilandnaturalgasproduction,anditissuedforpubliccommentaninformationrequestthatwillrequirecompaniestoprovideextensiveinformationinstrumentalforthedevelopmentofregulationstoreducemethaneemissionsfromexistingoilandnaturalgassources.TheEPAannouncedintentionstopublishreconsideredproposedNewSourcePerformanceStandardsbyAugustof2018withafinalrevisedruleinSeptember2019.
InNovember2016,BLMpromulgatedregulationsaimedatcurbingairpollution,includinggreenhousegases,foroilandnaturalgasproducedonfederalandIndianlands.Variousstateshavefiledforapetitionforreviewoftheseregulations.OnJune15,2017,BLMpublishedaNoticeintheFederalRegisterproposingtopostponecompliancedatesforprovisionsoftherulethathadnotyetgoneintoeffectpendingjudicialreviewoftheRule.OnOctober4,2017,theU.S.DistrictCourtfortheNorthernDistrictofCaliforniainvalidatedBLM'sJune15,2017proposedpostponementofcompliancedeadlines.OnDecember8,2017,BLMpromulgatedafinalruledelaytotemporarilysuspendordelaycertainrequirementsuntilJanuary17,2019.Acoalitionofenvironmentalgroupshasfiledsuitchallengingthedelay.Atthispoint,wecannotpredictthefinalregulatoryrequirementsorthecosttocomplywithsuchrequirementswithanycertainty.
Therearecertaingovernmentalreviewseitherunderwayorbeingproposedthatfocusontheenvironmentalaspectsofhydraulicfracturingpractices.Theseongoingorproposedstudies,dependingontheirdegreeofpursuitandwhetheranymeaningfulresultsareobtained,couldspurinitiativestofurtherregulatehydraulicfracturingundertheSDWAorotherregulatoryauthorities.TheEPAcontinuestoevaluatethepotentialimpactsofhydraulicfracturingondrinkingwaterresourcesandtheinducedseismicactivityfromdisposalwellsandhasrecommendedstrategiesformanagingandminimizingthepotentialforsignificantinjection-inducedseismicevents.Forexample,inDecember2016,theEPAreleaseditsfinalreport,entitled"HydraulicFracturingforOilandGas:ImpactsfromtheHydraulicFracturingWaterCycleonDrinkingWaterResourcesintheUnitedStates,"onthepotentialimpactsofhydraulicfracturingondrinkingwaterresources.ThereportstatesthattheEPAfoundscientificevidencethathydraulicfracturingactivitiescanimpactdrinkingwaterresourcesundersomecircumstances,notingthatthefollowinghydraulicfracturingwatercycleactivitiesandlocal-orregional-scalefactorsaremorelikelythanotherstoresultinmorefrequentormoresevereimpacts:waterwithdrawalsforfracturingintimesorareasoflowwateravailability;surfacespillsduringthemanagementoffracturingfluids,chemicalsorproducedwater;injectionoffracturingfluidsintowellswithinadequatemechanicalintegrity;injectionoffracturingfluidsdirectlyintogroundwaterresources;dischargeofinadequatelytreatedfracturingwastewatertosurfacewaters;anddisposalorstorageoffracturingwastewaterinunlinedpits.Othergovernmentalagencies,includingtheU.S.Departmentof
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Energy,theU.S.GeologicalSurveyandtheU.S.GovernmentAccountabilityOffice,haveevaluatedorareevaluatingvariousotheraspectsofhydraulicfracturing.Theseongoingorproposedstudiescouldspurinitiativestofurtherregulatehydraulicfracturing,andcouldultimatelymakeitmoredifficultorcostlytoperformfracturingandincreasethecostsofcomplianceanddoingbusinessforourcustomers.Furthermore,theEPAplanstocontinueanenforcementinitiativetoensureenergyextractionactivitiescomplywithfederallaws.
InadditiontobansonhydraulicfracturingactivitiesinMaryland,NewYorkandVermont,severalstates,includingTexasandOhio,aswellasregionalauthoritiesliketheDelawareRiverBasinCommission,haveadoptedorareconsideringadoptingregulationsthatcouldrestrictorprohibithydraulicfracturingincertaincircumstances,imposemorestringentoperatingstandardsand/orrequirethedisclosureofthecompositionofhydraulicfracturingfluids.Anyincreasedregulationofhydraulicfracturing,intheseorotherstates,couldreducethedemandforourservicesandmateriallyandadverselyaffectourrevenuesandresultsofoperations.
Therehasbeenincreasingpubliccontroversyregardinghydraulicfracturingwithregardtotheuseoffracturingfluids,inducedseismicactivity,impactsondrinkingwatersupplies,useofwaterandthepotentialforimpactstosurfacewater,groundwaterandtheenvironmentgenerally.Anumberoflawsuitsandenforcementactionshavebeeninitiatedacrossthecountryimplicatinghydraulicfracturingpractices.Ifnewlawsorregulationsareadoptedthatsignificantlyrestricthydraulicfracturing,suchlawscouldmakeitmoredifficultorcostlyforustoperformfracturingtostimulateproductionfromtightformationsaswellasmakeiteasierforthirdpartiesopposingthehydraulicfracturingprocesstoinitiatelegalproceedingsbasedonallegationsthatspecificchemicalsusedinthefracturingprocesscouldadverselyaffectgroundwater.Inaddition,ifhydraulicfracturingisfurtherregulatedatthefederal,stateorlocallevel,ourcustomers'fracturingactivitiescouldbecomesubjecttoadditionalpermittingandfinancialassurancerequirements,morestringentconstructionspecifications,increasedmonitoring,reportingandrecordkeepingobligations,pluggingandabandonmentrequirementsandalsotoattendantpermittingdelaysandpotentialincreasesincosts.Suchlegislativeorregulatorychangescouldcauseusorourcustomerstoincursubstantialcompliancecosts,andcomplianceortheconsequencesofanyfailuretocomplybyuscouldhaveamaterialadverseeffectonourfinancialconditionandresultsofoperations.Atthistime,itisnotpossibletoestimatetheimpactonourbusinessofnewlyenactedorpotentialfederal,stateorlocallawsgoverninghydraulicfracturing.
Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result inadditional compliance obligations with respect to the release, capture, and use of carbon dioxide that could have a material adverse effect on our business,results of operations, and financial condition.
Changesinenvironmentalrequirementsrelatedtogreenhousegasesandclimatechangemaynegativelyimpactdemandforourservices.Forexample,oilandnaturalgasexplorationandproductionmaydeclineasaresultofenvironmentalrequirements,includinglandusepoliciesresponsivetoenvironmentalconcerns.Local,state,andfederalagencieshavebeenevaluatingclimate-relatedlegislationandotherregulatoryinitiativesthatwouldrestrictemissionsofgreenhousegasesinareasinwhichweconductbusiness.Becauseourbusinessdependsonthelevelofactivityintheoilandnaturalgasindustry,existingorfuturelawsandregulationsrelatedtogreenhousegasesandclimatechange,includingincentivestoconserveenergyorusealternativeenergysources,couldhaveanegativeimpactonourbusinessifsuchlawsorregulationsreducedemandforoilandnaturalgas.Likewise,suchrestrictionsmayresultinadditionalcomplianceobligationswithrespecttotherelease,capture,sequestration,anduseofcarbondioxideorothergasesthatcouldhaveamaterialadverseeffectonourbusiness,resultsofoperations,andfinancialcondition.
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Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impairour business.
Inmoststates,ourcustomersarerequiredtoobtainpermitsorauthorizationsfromoneormoregovernmentalagenciesorotherthirdpartiestoperformdrillingandcompletionactivities,includinghydraulicfracturing.Suchpermitsorapprovalsaretypicallyrequiredbystateagencies,butcanalsoberequiredbyfederalandlocalgovernmentalagenciesorotherthirdparties.Therequirementsforsuchpermitsorauthorizationsvarydependingonthelocationwheresuchdrillingandcompletionactivitieswillbeconducted.Aswithmostpermittingandauthorizationprocesses,thereisadegreeofuncertaintyastowhetherapermitwillbegranted,thetimeitwilltakeforapermitorapprovaltobeissuedandtheconditionswhichmaybeimposedinconnectionwiththegrantingofthepermit.Insomejurisdictions,suchasNewYorkStateandwithinthejurisdictionoftheDelawareRiverBasinCommission,certainregulatoryauthoritieshavedelayedorsuspendedtheissuanceofpermitsorauthorizationswhilethepotentialenvironmentalimpactsassociatedwithissuingsuchpermitscanbestudiedandappropriatemitigationmeasuresevaluated.InTexas,ruralwaterdistrictshavebeguntoimposerestrictionsonwateruseandmayrequirepermitsforwaterusedindrillingandcompletionactivities.Permitting,authorizationorrenewaldelays,theinabilitytoobtainnewpermitsortherevocationofcurrentpermitscouldcausealossofrevenueandpotentiallyhaveamateriallyadverseeffectonourbusiness,financialcondition,prospectsorresultsofoperations.
Wearealsorequiredtoobtainfederal,state,localand/orthird-partypermitsandauthorizationsinsomejurisdictionsinconnectionwithourwirelineservices.Thesepermits,whenrequired,imposecertainconditionsonouroperations.Anychangesintheserequirementscouldhaveamaterialadverseeffectonourfinancialcondition,prospectsandresultsofoperations.
Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areaswhere we operate.
Oilandnaturalgasoperationsinouroperatingareascanbeadverselyaffectedbyseasonalorpermanentrestrictionsondrillingactivitiesdesignedtoprotectvariouswildlife,whichmaylimitourabilitytooperateinprotectedareas.Permanentrestrictionsimposedtoprotectendangeredspeciescouldprohibitdrillingincertainareasorrequiretheimplementationofexpensivemitigationmeasures.Additionally,thedesignationofpreviouslyunprotectedspeciesasthreatenedorendangeredinareaswhereweoperatecouldresultinincreasedcostsarisingfromspeciesprotectionmeasures.Restrictionsonoilandnaturalgasoperationstoprotectwildlifecouldreducedemandforourservices.
Conservation measures and technological advances could reduce demand for oil and natural gas and our services.
Fuelconservationmeasures,alternativefuelrequirements,increasingconsumerdemandforalternativestooilandnaturalgas,technologicaladvancesinfueleconomyandenergygenerationdevicescouldreducedemandforoilandnaturalgas,resultinginreduceddemandforoilfieldservices.Theimpactofthechangingdemandforoilandnaturalgasservicesandproductsmayhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperationsandcashflows.
There may be a reduction in demand for our future services due to competition from alternative energy sources.
Oilandnaturalgascompeteswithothersourcesofenergyforconsumerdemand.TherearesignificantgovernmentalincentivesandconsumerpressurestoincreasetheuseofalternativeenergysourcesintheUnitedStatesandabroad.Anumberofautomotive,industrialandpowergenerationmanufacturersaredevelopingmorefuelefficientengines,hybridenginesandalternativecleanpowersystemsusingfuelcellsorcleanburningfuels.Greateruseofthesealternativesasaresultof
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governmentalincentivesorregulations,technologicaladvances,consumerdemand,improvedpricingorotherwiseovertimewillreducethedemandforourproductsandservicesandadverselyaffectourbusiness,financialcondition,resultsofoperationsandcashflowsgoingforward.
Limitations on construction of new natural gas pipelines or increases in federal or state regulation of natural gas pipelines could decrease demand for ourservices.
Therehasbeenincreasingpubliccontroversyregardingconstructionofnewnaturalgaspipelinesandthestringencyofcurrentregulationofnaturalgaspipelines.Delaysinconstructionofnewpipelinesorincreasedstringencyofregulationofexistingnaturalgaspipelinesateitherthestateorfederallevelcouldreducethedemandforourservicesandmateriallyandadverselyaffectourrevenuesandresultsofoperations.
Our existing fleets require significant amounts of capital for maintenance, upgrades and refurbishment and any new fleets we acquire may require significantcapital expenditures.
Ourfleetsrequiresignificantcapitalinvestmentinmaintenance,upgradesandrefurbishmenttomaintaintheireffectiveness.Whilewemanufacturemanyofthecomponentsnecessarytomaintain,upgradeandrefurbishourfleets,laborcostshaveincreasedinthepastandmayincreaseinthefuturewithincreasesindemand,whichwillrequireustoincuradditionalcoststoupgradeanyofourexistingfleetsorbuildanynewfleets.
Additionally,competitionoradvancesintechnologywithinourindustrymayrequireustoupdateorreplaceexistingfleetsorbuildoracquirenewfleets.Suchdemandsonourcapitalorreductionsindemandforourexistingfleetsandtheincreaseincostoflabornecessaryforsuchmaintenanceandimprovement,ineachcase,couldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperationsandcashflows.
Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could limit ourability to grow.
Theoilfieldservicesindustryiscapitalintensive.Inconductingourbusinessandoperations,wehavemade,andexpecttocontinuetomake,substantialcapitalexpenditures.Ourtotalcapitalexpenditureswere$10.3millionand$33.4million,respectively,fortheyearendedDecember31,2016andtheninemonthsendedSeptember30,2017.Since2015,wehavefinancedcapitalexpendituresprimarilywithfundingfromcashonhand.Wemaybeunabletogeneratesufficientcashfromoperationsandothercapitalresourcestomaintainplannedorfuturelevelsofcapitalexpenditureswhich,amongotherthings,maypreventusfromproperlymaintainingourexistingequipmentoracquiringnewequipment.Furthermore,anydisruptionsorcontinuingvolatilityintheglobalfinancialmarketsmayleadtoanincreaseininterestratesoracontractionincreditavailabilityimpactingourabilitytofinanceouroperations.Thiscircumstancecouldputusatacompetitivedisadvantageorinterferewithourgrowthplans.Furthermore,ouractualcapitalexpendituresforfutureyearscouldexceedourcapitalexpenditurebudgets.Intheeventourcapitalexpenditurerequirementsatanytimearegreaterthantheamountwehaveavailable,wecouldberequiredtoseekadditionalsourcesofcapital,whichmayincludedebtfinancing,jointventurepartnerships,salesofassets,offeringsofdebtorequitysecuritiesorothermeans.Wemaynotbeabletoobtainanysuchalternativesourceofcapital.Wemayberequiredtocurtailoreliminatecontemplatedactivities.Ifwecanobtainalternativesourcesofcapital,thetermsofsuchalternativemaynotbefavorabletous.Inparticular,thetermsofanydebtfinancingmayincludecovenantsthatsignificantlyrestrictouroperations.Ourinabilitytogrowasplannedmayreduceourchancesofmaintainingandimprovingprofitability.
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A third party may claim we infringed upon its intellectual property rights, and we may be subjected to costly litigation.
Ouroperations,includingequipment,manufacturingandfluidandchemicaloperationsmayunintentionallyinfringeuponthepatentsortradesecretsofacompetitororothercompanythatusesproprietarycomponentsorprocessesinitsoperations,andthatcompanymayhavelegalrecourseagainstouruseofitsprotectedinformation.Ifthisweretohappen,theseclaimscouldresultinlegalandothercostsassociatedwithlitigation.Iffoundtohaveinfringeduponprotectedinformation,wemayhavetopaydamagesormakeroyaltypaymentsinordertocontinueusingthatinformation,whichcouldsubstantiallyincreasethecostspreviouslyassociatedwithcertainproductsorservices,orwemayhavetodiscontinueuseoftheinformationorproductaltogether.Anyofthesecouldmateriallyandadverselyaffectourbusiness,financialconditionorresultsofoperations.
New technology may cause us to become less competitive.
Theoilfieldservicesindustryissubjecttotheintroductionofnewdrillingandcompletiontechniquesandservicesusingnewtechnologies,someofwhichmaybesubjecttopatentorotherintellectualpropertyprotections.Althoughwebelieveourequipmentandprocessescurrentlygiveusacompetitiveadvantage,ascompetitorsandothersuseordevelopneworcomparabletechnologiesinthefuture,wemaylosemarketshareorbeplacedatacompetitivedisadvantage.Furthermore,wemayfacecompetitivepressuretoimplementoracquirecertainnewtechnologiesatasubstantialcost.Someofourcompetitorshavegreaterfinancial,technicalandpersonnelresourcesthatmayallowthemtoenjoytechnologicaladvantagesandimplementnewtechnologiesbeforewecan.Wecannotbecertainthatwewillbeabletoimplementallnewtechnologiesorproductsonatimelybasisoratanacceptablecost.Thus,limitsonourabilitytoeffectivelyuseandimplementnewandemergingtechnologiesmayhaveamaterialadverseeffectonourbusiness,financialconditionorresultsofoperations.
Loss or corruption of our information or a cyberattack on our computer systems could adversely affect our business.
Weareheavilydependentonourinformationsystemsandcomputer-basedprograms,includingourwelloperationsinformationandaccountingdata.Ifanyofsuchprogramsorsystemsweretofailorcreateerroneousinformationinourhardwareorsoftwarenetworkinfrastructure,whetherduetocyberattackorotherwise,possibleconsequencesincludeourlossofcommunicationlinksandinabilitytoautomaticallyprocesscommercialtransactionsorengageinsimilarautomatedorcomputerizedbusinessactivities.Anysuchconsequencecouldhaveamaterialadverseeffectonourbusiness.
Theoilandnaturalgasindustryhasbecomeincreasinglydependentondigitaltechnologiestoconductcertainactivities.Atthesametime,cyberattackshaveincreased.TheU.S.governmenthasissuedpublicwarningsthatindicatethatenergyassetsmightbespecifictargetsofcybersecuritythreats.Ourtechnologies,systemsandnetworksmaybecomethetargetofcyberattacksorinformationsecuritybreaches.Thesecouldresultintheunauthorizedaccess,misuse,lossordestructionofourproprietaryandotherinformationorotherdisruptionofourbusinessoperations.Anyaccessorsurveillancecouldremainundetectedforanextendedperiod.Oursystemsforprotectingagainstcybersecurityrisksmaynotbesufficient.Ascyberincidentscontinuetoevolve,wemayberequiredtoexpendadditionalresourcestocontinuetomodifyorenhanceourprotectivemeasuresortoinvestigateandremediateanyvulnerabilitytocyberincidents.Additionally,ourinsurancecoverageforcyberattacksmaynotbesufficienttocoverallthelosseswemayexperienceasaresultofsuchcyberattacks.Anyadditionalcostscouldmateriallyadverselyaffectourresultsofoperations.
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One or more of our directors may not reside in the United States, which may prevent investors from obtaining or enforcing judgments against them.
BecauseoneormoreofourdirectorsmaynotresideintheUnitedStates,itmaynotbepossibleforinvestorstoeffectserviceofprocesswithintheUnitedStatesonournon-U.S.residentdirectors,enforcejudgmentsobtainedinU.S.courtsbasedonthecivilliabilityprovisionsoftheU.S.federalsecuritieslawsagainstournon-U.S.residentdirectors,enforceinforeigncourtsU.S.courtjudgmentsbasedoncivilliabilityprovisionsoftheU.S.federalsecuritieslawsagainstournon-U.S.residentdirectors,orbringanoriginalactioninforeigncourtstoenforceliabilitiesbasedontheU.S.federalsecuritieslawsagainstournon-U.S.residentdirectors.
Adverse weather conditions could impact demand for our services or impact our costs.
Ourbusinesscouldbeadverselyaffectedbyadverseweatherconditions.Forexample,unusuallywarmwinterscouldadverselyaffectthedemandforourservicesbydecreasingthedemandfornaturalgasorunusuallycoldwinterscouldadverselyaffectourcapabilitytoperformourservices,forexample,duetodelaysinthedeliveryofequipment,personnelandproductsthatweneedinordertoprovideourservicesandweather-relateddamagetofacilitiesandequipment,resultingindelaysinoperations.Ouroperationsinaridregionscanbeaffectedbydroughtsandlimitedaccesstowaterusedinourhydraulicfracturingoperations.Theseconstraintscouldadverselyaffectthecostsandresultsofoperations.
A terrorist attack or armed conflict could harm our business.
Terroristactivities,anti-terroristeffortsandotherarmedconflictsinvolvingtheUnitedStatescouldadverselyaffecttheU.S.andglobaleconomiesandcouldpreventusfrommeetingfinancialandotherobligations.Wecouldexperiencelossofbusiness,delaysordefaultsinpaymentsfrompayorsordisruptionsoffuelsuppliesandmarketsifwells,operationssitesorotherrelatedfacilitiesaredirecttargetsorindirectcasualtiesofanactofterrororwar.Suchactivitiescouldreducetheoveralldemandforoilandnaturalgas,which,inturn,couldalsoreducethedemandforourproductsandservices.Terroristactivitiesandthethreatofpotentialterroristactivitiesandanyresultingeconomicdownturncouldadverselyaffectourresultsofoperations,impairourabilitytoraisecapitalorotherwiseadverselyimpactourabilitytorealizecertainbusinessstrategies.
International operations subject us to additional economic, political and regulatory risks.
InFebruary2016,ourjointventurewiththeSinopecGroup,orSinopec,commencedhydraulicfracturingoperationsinChina.Internationaloperationsrequiresignificantresourcesandmayresultinforeignoperationsthatultimatelyarenotsuccessful.Ourjointventureoperationsandanyfurtherinternationalexpansionexposeustooperationalrisks,includingexposuretoforeigncurrencyratefluctuations,warorpoliticalinstability,limitationsonthemovementoffunds,foreignanddomesticgovernmentregulation,includingcompliancewiththeU.S.ForeignCorruptPracticesAct,andbureaucraticdelays.Thesemayincreaseourcostsanddistractkeypersonnel,whichmayadverselyaffectourbusiness,financialconditionorresultsofoperations.
Our ability to utilize our net operating loss carryforwards and certain tax amortization deductions may be delayed or limited.
AsofDecember31,2016,wehadfederalandstatenetoperatinglosscarryforwards,orNOLs,ofapproximately$1,600millionand$628million,respectively,whichifnotutilizedwillbegintoexpirestartingin2032forfederalpurposesand2017forstatepurposes.WemayusetheseNOLstooffsetagainsttaxableincomeforU.S.federalandstateincometaxpurposes.Additionally,weareallowedtodeductapproximately$190millionofamortizationexpenseonourfederalandstatetaxreturnsper
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yearfortaxyears2017through2025.However,Section382oftheInternalRevenueCodeof1986,asamended,mayreducetheamountoftheNOLswemayuseortaxamortizationwemaydeductforU.S.federalincometaxpurposesintheeventofcertainchangesinownershipofourCompany.ASection382"ownershipchange"generallyoccursifoneormorestockholdersorgroupsofstockholderswhoownatleast5%ofacompany'sstockincreasetheirownershipbymorethan50percentagepointsovertheirlowestownershippercentagewithinarollingthreeyearperiod—forexample,ifweand/orourthreelargeststockholdersweretosellsharesofourcommonstock,sothatfollowingsuchoffering,thepublicownedmorethan50%ofourcommonstock.Similarrulesmayapplyunderstatetaxlaws.Thisofferingorfutureissuancesorsalesofourstock,includingbyourlargestockholdersorcertainothertransactionsinvolvingourstockthatareoutsideofourcontrol,couldcausean"ownershipchange."Ifan"ownershipchange"hasoccurredinthepastoroccursinthefuture,includinginconnectionwiththisoffering,Section382wouldimposeanannuallimitontheamountofpre-ownershipchangeNOLsandothertaxattributes,includingpotentiallyaportionofourtaxamortizationdeduction,thatwecanusetoreduceourtaxableincome,potentiallyincreasingandacceleratingourliabilityforincometaxes,andalsopotentiallycausingthosetaxattributestoexpireunused.AnylimitationofourtaxamortizationdedutionorNOLscould,dependingontheextentofsuchlimitationandtheNOLspreviouslyused,resultinourretaininglesscashafterpaymentofU.S.federalandstateincometaxesduringanyyearinwhichwehavetaxableincome,ratherthanlosses,thanwewouldbeentitledtoretainifsuchNOLsortaxamortizationdeductionswerenotreducedasanoffsetagainstsuchincomeforU.S.federalandstateincometaxreportingpurposes,whichcouldadverselyimpactouroperatingresults.
RisksRelatingtoOurIndebtedness
We have substantial indebtedness. Any failure to meet our debt obligations would adversely affect our liquidity and financial condition.
AtSeptember30,2017,wehad$1.2billionoflong-termindebtednessoutstanding.Ourindebtednessaffectsouroperationsinseveralways,includingthefollowing:
• aportionofourcashflowsfromoperatingactivitiesmustbeusedtoserviceourindebtednessandisnotavailableforotherpurposes;
• thecovenantscontainedinthedebtagreementsgoverningouroutstandingindebtednesslimitourabilitytoborrowadditionalfunds,andmayalsoaffectourflexibilityinplanningfor,andreactingto,changesintheeconomyandinourindustry;and
• aloweringofthecreditratingsofourdebtmaynegativelyaffectthecost,terms,conditionsandavailabilityoffuturefinancing.
Ifourcashflowandothercapitalresourcesareinsufficienttofundourobligationsunderourdebtagreementsonacurrentbasisandatmaturity,orifweareotherwiseunabletocomplywiththecovenantsinthoseagreements,wewillneedtorefinanceorrestructureourdebt.Theproceedsoffutureborrowingsmaynotbesufficienttorefinanceorrepaythedebt,andwemaybeunabletocompletesuchtransactionsinatimelymanner,onfavorableterms,oratall.Inaddition,ifwefinanceouroperationsthroughadditionalindebtedness,thentherisksthatwenowfacerelatingtoourcurrentdebtlevelwouldintensify,anditwouldbemoredifficulttosatisfyourexistingfinancialobligations.Furthermore,ifadefaultoccursunderonedebtagreement,thenthiscouldcauseacross-defaultunderotherdebtagreements.
Weintendtousethenetproceedsfromthisofferingforgeneralcorporatepurposes,whichwillincluderepayingindebtednessunderour2020Notes.See"UseofProceeds."
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Liquidity is essential to our business, and it has been and may continue to be adversely affected.
Liquidityisessentialtoourbusinesstoserviceourdebtandpurchasethelabor,materialsandequipmentthatweusetooperateourbusiness.Additionally,webelievethataserviceprovider'sliquidityisimportanttoourcustomersbecauseadequateliquidityprovidesassurancethataserviceproviderwillhavethefinancialresourcestocontinuetooperateinchallengingindustryconditions.
Ourliquiditywasadverselyaffectedbytheindustrydownturnduetothelowornon-existentprofitmarginsforutilizationofourservices.Ourliquiditymaybefurtherimpairedbyunforeseencashexpenditures,whichmayariseduetocircumstancesbeyondourcontrol.
Additionally,thetermsofourexistingdebtinstrumentsrestrict,andanyfuturedebtinstrumentsmayfurtherrestrict,ourabilitytoincuradditionalindebtedness,sellcertainassetsandengageincertainbusinessactivities.Theserestrictionsprohibitactivitiesthatwecouldusetoincreaseourliquidity.Also,ourcurrentlendersandinvestorsholdafirstlienonaportionofourassetsascollateral,includingsubstantiallyallofourrevenue-generatingequipment.Newlendersandinvestorsmayrequireadditionalcollateral,whichcouldadditionallyimpairouraccesstoliquidity.Ifalternatefinancingisnotavailableonfavorabletermsoratall,wewouldberequiredtodecreaseourcapitalspendingtoanevengreaterextent.Anyadditionaldecreaseinourcapitalspendingwouldadverselyaffectourabilitytosustainorimproveourprofits.Refinancingmaynotbeavailable,andanyrefinancingofourdebtcouldbeathigherinterestrates,whichcouldfurtheradverselyaffectourliquidity.
Increases in interest rates could negatively affect our financing costs and our ability to access capital.
WehaveexposuretofutureinterestratesbasedonthevariableratedebtunderourtermloandueApril16,2021,ortheTermLoan,and2020Notesandtotheextentweraiseadditionaldebtinthecapitalmarketsatvariablerates,includinganyfuturerevolvingcreditfacility,tomeetmaturingdebtobligationsortofundourcapitalexpendituresandworkingcapitalneeds.Dailyworkingcapitalrequirementsaretypicallyfinancedwithoperationalcashflowandthroughtheuseofourexistingborrowings.TheinterestrateontheTermLoanandthe2020NotesisgenerallydeterminedfromtheapplicableLIBORrateattheborrowingdateplusapre-setmargin.Wearethereforesubjecttomarketinterestrateriskonthatportionofourlong-termdebtthatrelatestotheTermLoanand2020Notes.Wedonotemployriskmanagementtechniques,suchasinterestrateswaps,tohedgeagainstinterestratevolatility,andaccordinglysignificantandsustainedincreasesinmarketinterestratescouldmateriallyincreaseourfinancingcostsandnegativelyimpactourreportedresults.
RisksRelatingtothisOfferingandOurCommonStock
Our three largest stockholders control a significant percentage of our common stock, and their interests may conflict with those of our other stockholders.
Priortothecompletionofthisofferingandtherecapitalizationofourconvertiblepreferredstock,(1)Maju,anindirectwhollyownedsubsidiaryofTemasek,(2)Chesapeake,awhollyownedsubsidiaryofChesapeakeParent,and(3)Senja,aninvestmentcompanyaffiliatedwithRRJ,beneficiallyown40.7%,30.3%and11.2%,respectively,ofourcommonstockand50.7%,30.0%and13.87%,respectively,ofourconvertiblepreferredstock.Uponcompletionofthisofferingandtherecapitalizationofthepreferredstockintocommonstock,Maju,ChesapeakeandSenjawillbeneficiallyownapproximately39.1%,20.7%and11.2%,respectively,ofourcommonstock,or38.1%,20.1%and10.9%,respectively,iftheunderwritersexercisetheiroptiontopurchaseadditionalsharesinfull(suchownershippercentagesdonotreflectanysharesofourcommonstockpurchasedbyourexistingstockholdersthroughthedirectedshareprogramorotherwisethroughadirectedallocationofsharesinthisoffering).See"PrincipalandSellingStockholders."Asaresult,Maju,ChesapeakeandSenja,together,willcontinuetoexercisesignificantinfluenceovermattersrequiringstockholderapproval,
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includingtheelectionofdirectors,changestoourorganizationaldocumentsandsignificantcorporatetransactions.Furthermore,weanticipatethatseveralindividualswhowillserveasourdirectorsuponcompletionofthisofferingwillbenomineesofMaju,ChesapeakeandSenja.ThisconcentrationofownershipandrelationshipswithMaju,ChesapeakeandSenjamakeitunlikelythatanyotherholderorgroupofholdersofourcommonstockwillbeabletoaffectthewaywearemanagedorthedirectionofourbusiness.Inaddition,wehaveengaged,andexpecttocontinuetoengage,inrelatedpartytransactionsinvolvingChesapeake.See"CertainRelationshipsandRelatedPartyTransactions""PrincipalandSellingStockholders"and"Underwriting—DirectedShareProgram."Furthermore,priortocompletionofthisoffering,wewillenterintoinvestors'rightsagreementswithMaju,Chesapeake,SenjaandHamptonAssetHoldingLtd.,orHampton,whichwillcontainagreementsregarding,amongotherthings,directornomination,informationandobserverrights.See"CertainRelationshipsandRelatedPartyTransactions—Investors'RightsAgreements."TheinterestsofMaju,ChesapeakeandSenjawithrespecttomatterspotentiallyoractuallyinvolvingoraffectingus,suchasfutureacquisitionsandfinancings,mayconflictwiththeinterestsofourotherstockholders.Thiscontinuedconcentratedownershipwillmakeitmoredifficultforanothercompanytoacquireusandforyoutoreceiveanyrelatedtakeoverpremiumforyoursharesunlessthesestockholdersapprovetheacquisition.
A significant reduction by our major stockholders of their ownership interests in us could adversely affect us.
WebelievethatthesubstantialownershipinterestsofMaju,ChesapeakeandSenjainusprovidesthemwithaneconomicincentivetoassistustobesuccessful.IfMaju,ChesapeakeorSenjasellallorasubstantialportionoftheirownershipinterestinus,theymayhavelessincentivetoassistinoursuccessandtheirnomineesthatserveasmembersofourboardofdirectorsmayresign.Suchactionscouldadverselyaffectourabilitytosuccessfullyimplementourbusinessstrategieswhichcouldadverselyaffectourcashflowsorresultsofoperations.Inaddition,suchactionsmayprohibitusfromutilizingalloraportionofournetoperatinglosscarryforwards.See"—RisksRelatedtoourBusiness—Ourabilitytouseournetoperatinglosscarryforwardsmaybelimited."
The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering. In addition, an activeliquid trading market for our common stock may not develop and our stock price may be volatile.
Priortothisoffering,ourequitysecuritieswerenottradedonanymarket.Anactiveandliquidtradingmarketforourcommonstockmaynotdeveloporbemaintainedafterthisoffering.Liquidandactivetradingmarketsusuallyresultinlesspricevolatilityandmoreefficiencyincarryingoutinvestors'purchaseandsaleorders.Themarketpriceofourcommonstockcouldvarysignificantlyasaresultofanumberoffactors,someofwhicharebeyondourcontrol.Intheeventofadropinthemarketpriceofourcommonstock,youcouldloseasubstantialpartorallofyourinvestmentinourcommonstock.Theinitialpublicofferingpricewillbenegotiatedbetweenusandrepresentativesoftheunderwriters,basedonnumerousfactorsthatwediscussinthe"Underwriting"sectionofthisprospectus,andmaynotbeindicativeofthemarketpriceofourcommonstockafterthisoffering.Consequently,youmaynotbeabletosellsharesofourcommonstockatpricesequaltoorgreaterthanthepricepaidbyyouinthisoffering.
Thefollowingfactors,amongothers,couldaffectourstockprice:
• ouroperatingandfinancialperformance;
• quarterlyvariationsintherateofgrowthofourfinancialindicators,suchasnetincomepershare,netincomeandrevenues;
• changesinrevenueorearningsestimatesorpublicationofreportsbyequityresearchanalysts;
• speculationinthepressorinvestmentcommunity;
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• salesofourcommonstockbyusorourstockholders,ortheperceptionthatsuchsalesmayoccur;
• generalmarketconditions,includingfluctuationsinactualandanticipatedfuturecommodityprices;and
• domesticandinternationaleconomic,legalandregulatoryfactorsunrelatedtoourperformance.
Thestockmarketsingeneralhaveexperiencedextremevolatilitythathasoftenbeenunrelatedtotheoperatingperformanceofparticularcompanies.Thesebroadmarketfluctuationsmayadverselyaffectthetradingpriceofourcommonstock.
Purchasers of common stock in this offering will experience immediate and substantial dilution.
Basedonanassumedinitialpublicofferingpriceof$16.50pershare,themidpointofthepricerangesetforthonthecoverpageofthisprospectus,purchasersofourcommonstockinthisofferingwillexperienceanimmediateandsubstantialdilutionof$20.09pershareintheproformaasadjustednettangiblebookvaluepershareofourcommonstockfromtheinitialpublicofferingprice.OurproformaasadjustednettangiblebookvalueasofSeptember30,2017aftergivingeffecttothisofferingwouldbe$(3.59)pershare.See"Dilution"foracompletedescriptionofthecalculationofnettangiblebookvalue.
The requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, orthe Exchange Act, and the requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Act, may increase our costs. Wemay be unable to comply with these requirements in a timely or cost-effective manner.
Asapubliccompanywithlistedequitysecurities,wewillhavetocomplywithnumerouslaws,regulationsandrequirements,certaincorporategovernanceprovisionsoftheSarbanes-OxleyAct,theDodd-FrankWallStreetReformandConsumerProtectionAct,relatedregulationsoftheU.S.SecuritiesandExchangeCommission,ortheSEC,andtherequirementsofthenationalstockexchangeonwhichourcommonstockislisted,withwhichwearenotrequiredtocomplyasaprivatecompany.Complyingwiththesestatutes,regulationsandrequirementswillrequiretimeandattentionfromourboardofdirectorsandmanagementandwillincreaseourcostsandexpenses.Wewillneedto:
• instituteamorecomprehensivecompliancefunction;
• expand,evaluateandmaintainoursystemofinternalcontrolsoverfinancialreportingincompliancewiththerequirementsofSection404oftheSarbanes-OxleyActandtherelatedrulesandregulationsoftheSECandthePCAOB;
• establishnewinternalpolicies,suchasthoserelatingtodisclosurecontrolsandproceduresandinsidertrading;
• complywithcorporategovernanceandotherrulespromulgatedbythenationalstockexchangeonwhichourcommonstockislisted;
• prepareandfileannual,quarterlyandotherperiodicpublicreportsincompliancewiththefederalsecuritieslaws;
• prepareproxystatementsandsolicitproxiesinconnectionwithannualmeetingsofourstockholders;
• involveandretaintoagreaterdegreeoutsidecounselandaccountantsintheaboveactivities;and
• establishapubliccompanyinvestorrelationsfunction.
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Inaddition,wealsoexpectthatbeingapubliccompanysubjecttotheserulesandregulationswillrequireustoobtainincreaseddirectorandofficerliabilityinsurancecoverageandwemayberequiredtoincursubstantialcoststoobtainsuchcoverage.Thesefactorscouldalsomakeitmoredifficultforustoattractandretainqualifiedmembersofourboardofdirectors,particularlytoserveonourAuditCommittee,andqualifiedexecutiveofficers.
We qualified as an emerging growth company at the time that we submitted to the SEC an initial draft of the registration statement for this offering, and as aresult have certain reduced disclosure requirements in this prospectus.
Wequalifiedasanemerginggrowthcompany,asdefinedintheJOBSAct,atthetimethatwesubmittedtotheSECaninitialdraftoftheregistrationstatementforthisoffering,and,asaresult,haveelectedtocomplywithcertainreduceddisclosurerequirementsforthisprospectusinaccordancewiththeJOBSAct.Withthereduceddisclosurerequirement,wearenotrequiredtodisclosecertainexecutivecompensationinformationinthisprospectuspursuanttotheJOBSAct.Wealsoarerequiredtopresentonlytwoyearsofauditedfinancialstatementsandrelated"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"inthisprospectus.Ourrevenuesfor2017exceeded$1.07billion,however,and,asaresult,wewillnolongerbeeligiblefortheexemptionsfromdisclosureprovidedtoanemerginggrowthcompanyaftertheearlierofthecompletionofthisofferingandDecember31,2018.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholdersto replace or remove our current management and limit the market price of our common stock.
Provisionsinouramendedandrestatedcertificateofincorporationandamendedandrestatedbylawsmayhavetheeffectofdelayingorpreventingachangeofcontrolorchangesinourmanagement.Ouramendedandrestatedcertificateofincorporationandamendedandrestatedbylawswill:
• providethatourboardofdirectorsisclassifiedintothreeclassesofdirectors;
• providethatstockholdersmay,exceptassetforthintheinvestors'rightsagreements,whichwewillenterintowithMaju,Chesapeake,SenjaandHamptonpriortothecompletionofthisoffering,removedirectorsonlyforcauseandonlywiththeapprovalofholdersofatleast662/3%ofourthen-outstandingcapitalstock;
• providethattheauthorizednumberofdirectorsmaybechangedonlybyresolutionoftheboardofdirectors;
• providethatallvacancies,includingnewlycreateddirectorships,maybefilledbytheaffirmativevoteofamajorityofdirectorstheninoffice,eveniflessthanaquorum,except,atanytimeMaju,Chesapeake,SenjaandHamptonhavetherighttonominateadirectorundertheirrespectiveinvestors'rightsagreement,anyvacancyresultingfromthedeath,disability,retirement,resignation,orremoval,ofadirectornominatedbythesestockholderswillbefilledbytheapplicablenominatingstockholder;
• providethatourstockholdersmaynottakeactionbywrittenconsent,andmayonlytakeactionatannualorspecialmeetingsofourstockholders;
• providethatstockholders,otherthanMaju,Chesapeake,SenjaandHampton,seekingtopresentproposalsbeforeameetingofstockholdersortonominatecandidatesforelectionasdirectorsatameetingofstockholdersmustprovidenoticeinwritinginatimelymanner,andalsospecifyrequirementsastotheformandcontentofastockholder'snotice;
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• restricttheforumforcertainlitigationagainstustoDelaware;
• notprovideforcumulativevotingrights(thereforeallowingtheholdersofamajorityofthesharesofcommonstockentitledtovoteinanyelectionofdirectorstoelectallofthedirectorsstandingforelection);
• providethatspecialmeetingsofourstockholdersmaybecalledonlyby(1)theChairmanoftheboardofdirectors,(2)ourCEO,(3)theboardofdirectorspursuanttoaresolutionadoptedbyamajorityofthetotalnumberofauthorizeddirectorsor(4)stockholderswithatleast25%ofourthen-outstandingcapitalstock;
• providethat,exceptassetforthintheinvestors'rightsagreements,stockholderswillbepermittedtoamendouramendedandrestatedbylawsonlyuponreceivingatleast662/3%ofthevotesentitledtobecastbyholdersofalloutstandingsharesthenentitledtovotegenerallyintheelectionofdirectors,votingtogetherasasingleclass;and
• providethat,exceptassetforthintheinvestors'rightsagreements,certainprovisionsofouramendedandrestatedcertificateofincorporationmayonlybeamendeduponreceivingatleast662/3%ofthevotesentitledtobecastbyholdersofalloutstandingsharesthenentitledtovote,votingtogetherasasingleclass.
Theseprovisionsmayfrustrateorpreventanyattemptsbyourstockholderstoreplaceorremoveourcurrentmanagementbymakingitmoredifficultforstockholderstoreplacemembersofourboardofdirectors,whichisresponsibleforappointingthemembersofourmanagement.Inaddition,wewilloptoutoftheprovisionsofSection203oftheGeneralCorporationLawoftheStateofDelaware,orDGCL,whichgenerallyprohibitsaDelawarecorporationfromengaginginanyofabroadrangeofbusinesscombinationswithany"interested"stockholderforaperiodofthreeyearsfollowingthedateonwhichthestockholderbecamean"interested"stockholder.However,ouramendedandrestatedcertificateofincorporationwillprovidesubstantiallythesamelimitationsasaresetforthinSection203butwillalsoprovidethatMajuandChesapeakeandtheiraffiliatesandanyoftheirdirectorindirecttransfereesandanygroupastowhichsuchpersonsareapartydonotconstitute"interestedstockholders"forpurposesofthisprovision.
We may be unsuccessful in implementing required internal controls over financial reporting.
WearenotcurrentlyrequiredtocomplywiththeSEC'srulesimplementingSection404oftheSarbanes-OxleyAct,andarethereforenotrequiredtomakeaformalassessmentoftheeffectivenessofourinternalcontroloverfinancialreportingforthatpurpose.Uponbecomingapubliccompany,wewillberequiredtocomplywiththeapplicableSECrulesimplementingSections302and404oftheSarbanes-OxleyAct,whichwillrequireourmanagementtocertifyfinancialandotherinformationinourquarterlyandannualreportsandprovideanannualmanagementreportontheeffectivenessofourinternalcontroloverfinancialreporting.WewillnotberequiredtomakeourfirstassessmentofourinternalcontroloverfinancialreportinguntiltheyearfollowingourfirstannualreportrequiredtobefiledwiththeSEC.Tocomplywiththerequirementsofbeingapubliccompany,wewillneedtoimplementadditionalfinancialandmanagementcontrols,reportingsystemsandproceduresandhireadditionalaccounting,financeandlegalstaff.
Weareintheprocessofevaluatingourinternalcontrolsystemstoallowmanagementtoreportonourinternalcontrolsoverfinancialreporting.Furthermore,uponcompletionofthisprocess,wemayidentifycontroldeficienciesofvaryingdegreesofseverityunderapplicableSECandPCAOBrulesandregulationsthatremainunremediated.Asapubliccompany,wewillberequiredtoreport,amongotherthings,controldeficienciesthatconstitutea"materialweakness"orchangesininternalcontrolsthatmateriallyaffect,orarereasonablylikelytomateriallyaffect,internalcontrolsoverfinancialreporting.ThePCAOBhasdefinedamaterialweaknessasadeficiency,orcombinationofdeficiencies,
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ininternalcontroloverfinancialreportingsuchthatthereisareasonablepossibilitythatamaterialmisstatementofthecompany'sannualorinterimfinancialstatementswillnotbeprevented,ordetectedandsubsequentlycorrected,onatimelybasis.
Oureffortstodevelopandmaintaineffectiveinternalcontrolsmaynotbesuccessful,andwemaybeunabletomaintaineffectivecontrolsoverourfinancialprocessesandreportinginthefutureandcomplywiththecertificationandreportingobligationsunderSections302and404oftheSarbanes-OxleyAct.Anyfailuretoremediatefuturedeficienciesandtodevelopormaintaineffectivecontrols,oranydifficultiesencounteredinourimplementationorimprovementofourinternalcontrolsoverfinancialreportingcouldresultinmaterialmisstatementsthatarenotpreventedordetectedonatimelybasis,whichcouldpotentiallysubjectustosanctionsorinvestigationsbytheSEC,thenationalstockexchangeonwhichwelistedourcommonstockorotherregulatoryauthorities.Ineffectiveinternalcontrolscouldalsocauseinvestorstoloseconfidenceinourreportedfinancialinformation.
We may not pay dividends on our common stock and, consequently, you would achieve a return on your investment only if the price of our stock appreciates.
Wemaynotdeclaredividendsonsharesofourcommonstock.Additionally,wearecurrentlylimitedinourabilitytomakecashdistributionstostockholdersorrepurchasesharesofourcommonstockpursuanttothetermsofourTermLoanandtheindenturesgoverningour2020Notesandour6.250%seniorsecurednotesdueMay1,2022,orthe2022Notes.Ifwedonotmakecashdistributionstostockholdersorotherwisereturncashtostockholders,areturnonyourinvestmentinuswillonlybeachievedifthemarketpriceofourcommonstockappreciates,whichmaynotoccur,andyousellyoursharesataprofit.Thereisnoguaranteethatthepriceofourcommonstockinthemarketafterthisofferingwillexceedthepricethatyoupay.See"DividendPolicy."
Future sales of our common stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity orconvertible securities may dilute your ownership in us.
Wemayselladditionalsharesofcommonstockinsubsequentpublicofferingsandmayalsoissuesecuritiesconvertibleintoourcommonstock.Wealsointendtoregistersharesofcommonstockthatwehavegrantedasequityawardsormaygrantasequityawardsunderour2018Plan.Onceweregistertheseshares,theywillbeabletobesoldfreelyinthepublicmarket,subjecttovolumelimitationsapplicabletoaffiliates,applicablevestingperiodsandlock-upagreements.Uponthecompletionofthisoffering,wewillhave106,431,603outstandingsharesofcommonstock.Thisnumberincludes15,151,516sharesthatwearesellinginthisofferingand4,348,484sharesthatthesellingstockholderissellinginthisoffering,whichmayberesoldimmediatelyinthepublicmarket.Followingthecompletionofthisofferingandexcludinganysharesofourcommonstockpurchasedbyourexistingstockholdersthroughthedirectedshareprogramorotherwisethroughadirectedallocationofsharesinthisoffering,certainofouraffiliateswillown71.9%ofouroutstandingsharesofcommonstock,consistingof76,467,767shares,allofwhicharerestrictedfromimmediateresaleunderthefederalsecuritieslawsandaresubjecttothelock-upagreementsbetweensuchpartiesandtheunderwritersdescribedin"Underwriting,"butmaybesoldintothemarketinthefuture.
Wecannotpredictthesizeoffutureissuancesofourcommonstockortheeffect,ifany,thatfutureissuancesandsalesofsharesofourcommonstockwillhaveonthemarketpriceofourcommonstock.Salesofsubstantialamountsofourcommonstock(includingsharesissuedinconnectionwithanacquisition),ortheperceptionthatsuchsalescouldoccur,mayadverselyaffectprevailingmarketpricesofourcommonstock.
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If securities analysts do not publish research or reports about our business, publish inaccurate or unfavorable research or if they downgrade our stock or oursector, our common stock price and trading volume could decline.
Thetradingmarketforourcommonstockwillrelyinpartontheresearchandreportsthatindustryorfinancialanalystspublishaboutusorourbusiness.Wedonotcontroltheseanalysts.Furthermore,ifoneormoreoftheanalystswhodocoverusdowngradeourstockorourindustry,orthestockofanyofourcompetitors,orpublishinaccurateorunfavorableresearchaboutourbusiness,thepriceofourstockcoulddecline.Ifoneormoreoftheseanalystsceasescoverageofusorfailtopublishreportsonusregularly,wecouldlosevisibilityinthemarket,whichinturncouldcauseourstockpriceortradingvolumetodecline.
We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.
Ouramendedandrestatedcertificateofincorporationwillauthorizeustoissue,withouttheapprovalofourstockholders,oneormoreclassesorseriesofpreferredstockhavingsuchdesignations,preferences,limitationsandrelativerights,includingpreferencesoverourcommonstockrespectingdividendsanddistributions,asourboardofdirectorsmaydetermine.Thetermsofoneormoreclassesorseriesofpreferredstockcouldadverselyimpactthevotingpowerorvalueofourcommonstock.Forexample,wemightgrantholdersofpreferredstocktherighttoelectsomenumberofourdirectorsinalleventsoronthehappeningofspecifiedeventsortherighttovetospecifiedtransactions.Similarly,therepurchaseorredemptionrightsorliquidationpreferenceswemightassigntoholdersofpreferredstockcouldaffecttheresidualvalueofourcommonstock.
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CAUTIONARYNOTEREGARDINGFORWARD-LOOKINGSTATEMENTS
Thisprospectuscontains"forward-lookingstatements"thataresubjecttorisksanduncertainties.Allstatementsotherthanstatementsofhistoricalorcurrentfactincludedinthisprospectusareforward-lookingstatements.Forward-lookingstatementsrefertoourcurrentexpectationsandprojectionsrelatingtoourfinancialcondition,resultsofoperations,plans,objectives,strategies,futureperformanceandbusiness.Youcanidentifyforward-lookingstatementsbythefactthattheydonotrelatestrictlytohistoricalorcurrentfacts.Thesestatementsmayincludewordssuchas"anticipate,""assume,""believe,""canhave,""contemplate,""continue,""could,""design,""due,""estimate,""expect,""goal,""intend,""likely,""may,""might,""objective,""plan,""predict,""project,""potential,""seek,""should,""target,""will,""would"andotherwordsandtermsofsimilarmeaninginconnectionwithanydiscussionofthetimingornatureoffutureoperationalperformanceorotherevents.Forexample,allstatementswemakerelatingtoourestimatedandprojectedcosts,expendituresandgrowthrates,ourplansandobjectivesforfutureoperations,growthorinitiativesorstrategiesareforward-lookingstatements.Allforward-lookingstatementsaresubjecttorisksanduncertaintiesthatmaycauseactualresultstodiffermateriallyfromthosethatweexpectand,therefore,youshouldnotundulyrelyonsuchstatements.Therisksthatcouldcausetheseforwardlookingstatementstobeinaccurateincludebutarenotlimitedto:
• adeclineindomesticspendingbytheonshoreoilandnaturalgasindustry;
• volatilityinoilandnaturalgasprices;
• customers'inabilitytomaintainorincreasetheirreservesgoingforward;
• deteriorationingeneraleconomicconditionsoraweakeningofthebroaderenergyindustry;
• thecompetitivenatureoftheindustryinwhichweconductourbusiness;
• theeffectofalossof,orfinancialdistressof,oneormoresignificantcustomers;
• nonpaymentbycustomersweextendcreditto;
• demandforservicesinourindustry;
• actionsofOPEC,itsmembersandotherstate-controlledoilcompaniesrelatingtooilpriceandproductioncontrols;
• adeclineindemandforproppant;
• ourinabilitytoemployasufficientnumberofkeyemployees,technicalpersonnelandotherskilledorqualifiedworkers;
• theoccurrenceofasignificanteventoradverseclaiminexcessoftheinsurancecoveragewemaintain;
• finesorpenalties(administrative,civilorcriminal),revocationsofpermits,orissuanceofcorrectiveactionordersfornoncompliancewithhealth,safetyandenvironmentallawsandregulations;
• changesinlawsandregulationswhichimposeadditionalrequirementsorrestrictionsonbusinessoperations;
• federal,stateandlocalregulationofhydraulicfracturingandotheroilfieldserviceactivities,aswellasE&Pactivities,includingpublicpressureongovernmentalbodiesandregulatoryagenciestoregulateourindustry;
• existingorfuturelawsandregulationsrelatedtogreenhousegasesandclimatechange;
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• ourabilitytoobtainpermits,approvalsandauthorizationsfromgovernmentalandthirdparties,andtheeffectsoforchangestoU.S.andforeigngovernmentregulation;
• restrictionsondrillingactivitiesintendedtoprotectcertainspeciesofwildlife;
• conservationmeasuresandtechnologicaladvanceswhichreducedemandforoilandnaturalgas;
• thelevelofglobalanddomesticoilandnaturalgasinventories;
• thepriceandavailabilityofalternativefuelsandenergysources;
• thediscoveryratesofnewoilandnaturalgasreserves;
• limitationsonconstructionofnewnaturalgaspipelinesorincreasesinfederalorstateregulationofnaturalgaspipelines;
• theavailabilityofwaterresources,suitableproppantandchemicalsinsufficientquantitiesforuseinhydraulicfracturingfluids;
• thecostofexploringfor,developing,producinganddeliveringoilandnaturalgas;
• thirdpartyclaimsforpossibleinfringementofintellectualpropertyrights;
• introductionofnewdrillingorcompletiontechniques,orservicesusingnewtechnologiessubjecttopatentorotherintellectualpropertyprotections;
• leadtimesassociatedwithacquiringequipmentandproductsandavailabilityofqualifiedpersonnel;
• lossorcorruptionofourinformationoracyberattackonourcomputersystems;
• oneormoreofourdirectorsmaynotresideintheUnitedStateslimitingtheabilityofinvestorsfromobtainingorenforcingjudgmentsagainstthem;
• adverseweatherconditionscausingstoppageordelayinoperations;
• aterroristattackorarmedconflictdisruptingoperations;
• additionaleconomic,politicalandregulatoryrisksrelatedtointernationaloperations;
• geopoliticaldevelopmentsandpoliticalinstabilityinoilandnaturalgasproducingcountries;
• ourabilitytoutilizeournetoperatinglosses;
• ourinabilitytoserviceourdebtobligations;
• adverseeffectsonourfinancialstrategyandliquidity;
• increasesininterestrates;and
• uncertaintyincapitalandcommoditiesmarketsandtheabilityofoilandnaturalgasproducerstoraiseequitycapitalanddebtfinancing.
Wemakemanyofourforward-lookingstatementsbasedonouroperatingbudgetsandforecasts,whicharebasedupondetailedassumptions.Whilewebelievethatourassumptionsarereasonable,wecautionthatitisverydifficulttopredicttheimpactofknownfactors,anditisimpossibleforustoanticipateallfactorsthatcouldaffectouractualresults.
Seethe"RiskFactors"sectionofthisprospectusforamorecompletediscussionoftherisksanduncertaintiesmentionedaboveandfordiscussionofotherrisksanduncertaintieswefacethatcouldcauseourforward-lookingstatementstobeinaccurate.Allforward-lookingstatementsattributabletousareexpresslyqualifiedintheirentiretybythesecautionarystatementsaswellasothersmadeinthis
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prospectusandhereafterinourotherSECfilingsandpubliccommunications.Youshouldevaluateallforward-lookingstatementsmadebyusinthecontextoftheserisksanduncertainties.
Wecautionyouthattherisksanduncertaintiesidentifiedbyusmaynotbeallofthefactorsthatareimportanttoyou.Furthermore,theforward-lookingstatementsincludedinthisprospectusaremadeonlyasofthedatehereof.Weundertakenoobligationtopubliclyupdateorreviseanyforward-lookingstatementasaresultofnewinformation,futureeventsorotherwise,exceptasrequiredbylaw.
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USEOFPROCEEDS
Weestimatethatwewillreceivenetproceedsofapproximately$233.4millionfromoursaleof15,151,516sharesofourcommonstockinthisoffering,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointofthepricerangesetforthonthecoverpageofthisprospectus,afterdeductingunderwritingdiscountsandcommissionsandestimatedofferingexpensesofapproximately$16.6million.Iftheover-allotmentoptionthatwehavegrantedtotheunderwritersisexercisedinfull,weestimatethatthenetproceedstouswillbeapproximately$279.1million.
Each$1.00increase(decrease)intheassumedinitialpublicofferingpriceof$16.50pershare,themidpointofthepricerangesetforthonthecoverpageofthisprospectus,wouldincrease(decrease)thenetproceedstousbyapproximately$14.4million,assumingthatthenumberofsharesofferedbyus,assetforthonthecoverpageofthisprospectus,remainsthesame,andafterdeductingunderwritingdiscountsandcommissionsandestimatedofferingexpenses.
Weintendtousethenetproceedsfromthisofferingforgeneralcorporatepurposes,whichwillincluderepayingindebtednessunderour2020Notesassetforthbelow:
The2020NotesbearinterestatarateperannumequaltoLIBORplusamarginof7.500%perannum.The2020NotesmatureonJune15,2020.Wehaveprovidedtwonoticestotheholdersofthe2020Notes,(a)forredemptionof$60.0millionaggregateprincipalamountand(b)forredemptionoftheremaining$230.0millionaggregateprincipalamount,andinthecaseof(b),subjecttocompletionofthisofferingandtheclosingofanasset-basedcreditfacilityonsatisfactoryterms.Wewillredeemthenotesataredemptionpriceof101.500%oftheprincipalamount,plusaccruedandunpaidinterestto,butnotincludingtheredemptiondate.
See"DescriptionofIndebtedness"and"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations—LiquidityandCapitalResources"foradditionalinformationregardingourindebtednessandadiscussionofourcapitalneedsforthenext12months.
Wewillnotreceiveanyproceedsfromthesaleofsharesbythesellingstockholder.
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DIVIDENDPOLICY
Wecurrentlyintendtoretainthemajorityoffutureearnings,ifany,foruseintherepaymentofourexistingindebtednessandintheoperationandexpansionofourbusiness.Therefore,wemaynotpayanycashdividends.Thedeclarationandpaymentoffuturecashdividendswillbeatthesolediscretionofourboardofdirectors,subjecttoapplicablelaws.Anydecisiontopayfuturecashdividendswilldependuponvariousfactors,includingourresultsofoperations,financialcondition,capitalrequirements,contractualrestrictionswithrespecttothepaymentofdividends,investmentopportunitiesandotherfactorsthatourboardofdirectorsmaydeemrelevant.OurTermLoanandindenturesgoverningour2020Notesand2022Notescontainrestrictionsandanyfutureagreementsmaycontainrestrictionsonourabilitytopaydividendsormakeanyotherdistributionorpaymentonaccountofourcommonstock.
Foradditionalinformationregardingourindebtedness,see"DescriptionofIndebtedness."
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CAPITALIZATION
ThefollowingtablesetsforthourcashandcashequivalentsandcapitalizationasofSeptember30,2017:
• onanactualbasis;
• onaproformabasistogiveeffectto(1)our69.196592:1reversestocksplitand(2)therecapitalizationofallofourconvertiblepreferredstockintosharesofourcommonstockasifalloftheforegoingeventshadoccurredonSeptember30,2017,ineachcase,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus;and
• onaproformaasadjustedbasistogivefurthereffectto(1)thesaleofsharesofcommonstockinthisoffering(assumingtheunderwritersdonotexercisetheiroptiontopurchaseadditionalshares)atanassumedinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverofthisprospectus,afterdeductingunderwritingdiscountsandcommissionsandestimatedfeesandexpenses,(2)therepaymentof$350.0millionprincipalamountofourlong-termdebt,whichwouldhaveresultedinalossondebtextinguishmentof$10.9millionand(3)ashare-basedcompensationexpenseofapproximately$3.7millionassociatedwithrestrictedstockunitsthatwillvestimmediatelybeforeeffectivenessoftheregistrationstatement,ofwhichthisprospectusisapart,asifalloftheforegoingeventshadoccurredonSeptember30,2017.
Youshouldreadthefollowingtableinconjunctionwith"UseofProceeds,""SelectedFinancialData,""Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations,"andourconsolidatedfinancialstatementsandrelatednotesincludedelsewhereinthisprospectus.
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AsofSeptember30,2017
(Inmillions) Actual ProForma ProForma
AsAdjusted(1) Cashandcashequivalents $ 193.8 $ 193.8 $ 68.2Long-termdebt:
2020Notes 350.0 350.0 —TermLoan 431.0 431.0 431.02022Notes 426.3 426.3 426.3
Totalprincipalamount 1,207.3 1,207.3 857.3Lessunamortizeddiscountanddebtissuancecosts (15.7) (15.7) (10.1)Totallong-termdebt $ 1,191.6 $ 1,191.6 $ 847.2
SeriesAconvertiblepreferredstock,parvalue$0.01(2) 349.8 — —Stockholders'equity(3): Commonstock,parvalue$0.01 35.9 36.3 36.5Additionalpaid-incapital 3,712.1 4,061.5 4,294.7Accumulateddeficit (4,659.2) (4,659.2) (4,673.8)
Totalstockholders'deficit (911.2) (561.4) (342.6)Totalcapitalization $ 630.2 $ 630.2 $ 504.6
(1) A$1.00increase(decrease)intheassumedinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverofthisprospectus,wouldincrease
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(decrease)cashandcashequivalents,totalstockholders'deficitandtotalcapitalizationby$14.4million,assumingthatthenumberofsharesofferedbyus,assetforthonthecoverpageofthisprospectus,remainsthesame,afterdeductingunderwritingdiscountsandcommissionsandestimatedofferingexpenses.
(2) TheholdersoftheconvertiblepreferredstockarealsocommonstockholdersoftheCompanyandcollectivelyappoint100%ofourboardofdirectors.Therefore,theconvertiblepreferredstockholderscandirecttheCompanytoredeemtheconvertiblepreferredstockatanytimeafterallofourdebthasbeenrepaid;however,wedidnotconsiderthistobeprobablefortheperiodpresentedduetotheamountofdebtoutstanding.Therefore,wehavepresentedtheconvertiblepreferredstockastemporaryequity,butwehavenotreflectedanyaccretionoftheconvertiblepreferredstockinthistableorinourConsolidatedFinancialStatements.SeeNote7—"ConvertiblePreferredStock"inNotestoourAuditedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusformoreinformation.AtSeptember30,2017,theliquidationpreferenceoftheconvertiblepreferredstockwasestimatedtobe$1,070.7million.
(3) AsofSeptember30,2017,ourauthorizedcapitalstockconsistedof5,000,000,000sharesofcommonstockand350,000sharesofourconvertiblepreferredstockand3,586,408,881sharesofcommonstockand350,000sharesofconvertiblepreferredstockwereissuedandoutstanding.Beforethisoffering(1)wewilleffecta69.196592:1reversestocksplitand(2)allsharesofourconvertiblepreferredstockwillberecapitalizedinto39,450,826.48sharesofcommonstock,ineachcase,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Achangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothecompletionofthisofferingbylessthan1%.Foradditionalinformationregardingtherecapitalizationofourconvertiblepreferredstock,see"DescriptionofCapitalStock."Followingthereversestocksplitandrecapitalization,ourauthorizedcapitalstockwillconsistof320,000,000sharesofcommonstockand25,000,000sharesofpreferredstockand91,280,087sharesofcommonstockwillbeoutstanding.Inconnectionwiththisoffering,wewillissueanadditional15,151,516sharesofnewcommonstockand,immediatelyfollowingthecompletionofthisoffering,wewillhave106,431,603totalsharesofcommonstockoutstanding,ineachcase,assumingtheunderwritersdonotexercisetheiroptiontopurchaseadditionalshares.
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DILUTION
Ifyouinvestinourcommonstock,yourinterestwillbedilutedtotheextentofthedifferencebetweentheinitialpublicofferingpricepershareofourcommonstockandtheproformaasadjustednettangiblebookvaluepershareofourcommonstockafterthisoffering.Wecalculatenettangiblebookvaluepersharebydividingthenettangiblebookvalue(tangibleassetslesstotalliabilities)bythenumberofoutstandingsharesofcommonstock.
OurnettangiblebookvalueasofSeptember30,2017wasapproximately$(606.6)million,or$(0.17)pershareofcommonstock,nottakingintoaccountourreversestocksplitortherecapitalizationofouroutstandingconvertiblepreferredstockintosharesofcommonstock.OurproformanettangiblebookvalueasofSeptember30,2017wasapproximately$(606.6)million,or$(6.65)pershare,aftergivingeffecttoour69.196592:1reversestocksplitandtherecapitalizationofalloutstandingsharesofourconvertiblepreferredstockinto39,450,826.48sharesofourcommonstock,ineachcase,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Achangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothecompletionofthisofferingbylessthan1%.Followingthereversestocksplitandrecapitalization,fractionalshareswillbepaidoutincash.
Aftergivingeffecttothesaleof15,151,516sharesofcommonstockbyusinthisoffering,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointofthepricerangesetforthonthecoverpageofthisprospectus,lessunderwritingdiscountsandcommissionsandestimatedofferingexpenses,ourproformaasadjustednettangiblebookvalueasofSeptember30,2017wouldhavebeenapproximately$(382.2)million,orapproximately$(3.59)pershare.Thisrepresentsanimmediatedecreaseintheproformanettangiblebookvalueof$3.42persharetoexistingstockholdersandanimmediatedilutionof$20.09persharetoinvestorspurchasingsharesinthisoffering.Thefollowingtableillustratesthispersharedilution:
Iftheover-allotmentoptionthatwehavegrantedtotheunderwritersisexercisedinfull,ourproformaasadjustednettangiblebookvalueasofSeptember30,2017wouldbe$(336.5)million,theincreaseintheproformaasadjustednettangiblebookvaluepersharetoexistingstockholderswouldbe$(3.08)pershareandthedilutionpersharetoinvestorspurchasingsharesinthisofferingwouldbe$19.58pershare.
Each$1.00increase(decrease)intheassumedinitialpublicofferingpriceof$16.50pershare,themidpointofthepricerangesetforthonthecoverpageofthisprospectus,wouldincrease(decrease)theproformaasadjustednettangiblebookvaluepershareby$0.14pershareandthedilutionpersharetonewinvestorsby$0.14pershare,assumingthatthenumberofsharesofferedbyus,assetforthonthecoverpageofthisprospectus,remainsthesame,afterdeductingunderwritingdiscountsandcommissionsandestimatedofferingexpensespayablebyus.
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Assumedinitialpublicofferingpricepershare $ 16.50NettangiblebookvaluepershareasofSeptember30,2017 $ (0.17) Proformaincrease(decrease)innettangiblebookvaluepershareattributabletoreversestocksplitandrecapitalizationofconvertiblepreferredstock (6.48)
Proformaincreasepershareattributabletothisoffering 3.06 Proformaasadjustednettangiblebookvaluepershareafterthisoffering (3.59)Dilutionpersharetonewinvestorsinthisoffering $ 20.09
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Thefollowingtableshows,asofSeptember30,2017,onaproformaasadjustedbasisasdescribedabove,thedifferencebetweenthenumberofsharesofcommonstockpurchasedfromus,thetotalconsiderationpaidtousandtheaveragepricepershare(1)paidtousbyexistingstockholdersand(2)tobepaidbynewinvestorspurchasingcommonstockinthisofferingatanassumedinitialpublicofferingpriceof$16.50pershare,themidpointofthepricerangesetforthonthecoverpageofthisprospectus,beforedeductingunderwritingdiscountsandcommissionsandestimatedofferingexpenses.
Each$1.00increase(decrease)intheassumedinitialpublicofferingpriceof$16.50pershare,themidpointofthepricerangesetforthonthecoverpageofthisprospectus,wouldincrease(decrease)totalconsiderationpaidbynewinvestorsby$14.4million,assumingthatthenumberofsharesofferedbyus,assetforthonthecoverpageofthisprospectus,remainsthesame,afterdeductingunderwritingdiscountsandcommissionsandestimatedofferingexpenses.
Iftheover-allotmentoptionthatwehavegrantedtotheunderwritersisexercisedinfull,thepercentageofsharesheldbyexistingstockholderswilldecreaseto79.5%andthenumberofsharesheldbynewinvestorswillincreaseto22,425,000,or20.5%.
Thediscussionandtablesaboveexcludesharesofcommonstockreservedforissuanceunderthe2014LTIP.
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Total
Consideration
SharesPurchased
AveragePriceperShare
Number Percent Amount Percent Existingstockholders 86,931,603 81.7%$ 2,906,036,384 90.0%$ 33.43Newinvestors 19,500,000 18.3% 321,750,000 10.0% 16.50Total 106,431,603 100.0%$ 3,227,786,384 100.0%$ 30.33
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SELECTEDFINANCIALDATA
TheconsolidatedstatementsofoperationsdatafortheyearsendedDecember31,2015and2016,andtheconsolidatedbalancesheetdataasofDecember31,2015and2016,arederivedfromourAuditedConsolidatedFinancialStatementsthatareincludedelsewhereinthisprospectus.TheconsolidatedstatementsofoperationsdatafortheninemonthsendedSeptember30,2016and2017andtheconsolidatedbalancesheetdataasofSeptember30,2017arederivedfromourUnauditedConsolidatedFinancialStatementsthatareincludedelsewhereinthisprospectus.TheconsolidatedstatementsofoperationsdatafortheyearsendedDecember31,2012,2013,and2014andtheconsolidatedbalancesheetdataasofDecember31,2012,2013,and2014arederivedfromconsolidatedfinancialstatementsthatarenotincludedinthisprospectus.Theresultsofoperationsfortheperiodspresentedbelowarenotnecessarilyindicativeoftheresultstobeexpectedforanyfutureperiod,andtheresultsforanyinterimperiodarenotnecessarilyindicativeoftheresultsthatmaybeexpectedforafullfiscalyear.
Youshouldreadthisinformationtogetherwith"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"andourconsolidatedfinancialstatementsandrelatednotesincludedelsewhereinthisprospectus.
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YearEndedDecember31, NineMonths
EndedSeptember30, (Dollarsinmillions,exceptpershareamounts) 2012 2013 2014 2015 2016 2016 2017 StatementsofOperationsData: Revenue $ 1,925.0 $ 1,925.5 $ 2,368.4 $ 1,375.3 $ 532.2 $ 379.8 $ 1,007.4Costsofrevenue,excludingdepreciation,depletion,andamortization(1) 1,489.5 1,478.4 1,804.9 1,257.9 510.5 369.7 709.9
Selling,generalandadministrative 208.4 189.6 206.3 154.7 64.4 51.5 62.0Depreciation,depletionandamortization(2) 364.5 355.7 294.4 272.4 112.6 87.5 65.2Impairmentsandothercharges(3) 1,534.9 1,147.4 9.8 619.9 12.3 10.7 1.4Loss(gain)ondisposalofassets,net(4) 6.1 295.8 5.8 5.9 1.0 1.1 (1.6)Gainoninsurancerecoveries — — — — (15.1) (15.1) (2.9)Operatingincome(loss) (1,678.4) (1,541.4) 47.2 (935.5) (153.5) (125.6) 173.4Interestexpense,net 130.3 129.1 74.2 77.2 87.5 66.1 64.8Loss(gain)onextinguishmentofdebt,net 7.0 20.3 28.4 0.6 (53.7) (53.7) —Equityinnetloss(income)ofjointventureaffiliate — — — 1.4 2.8 2.6 (0.1)
Income(loss)beforeincometaxes (1,815.7) (1,690.8) (55.4) (1,014.7) (190.1) (140.6) 108.7Incometaxexpense(benefit)(5) 0.8 1.5 1.1 (1.5) (1.6) — 0.9Netincome(loss) $ (1,816.5) $ (1,692.3) $ (56.5) $ (1,013.2) $ (188.5) $ (140.6) $ 107.8Netlossattributabletocommonstockholders $ (1,837.4) $ (1,785.1) $ (172.4) $ (1,158.1) $ (370.1) $ (272.7) $ (56.8)
Basicanddilutedearnings(loss)pershareattributabletocommonstockholders $ (0.51) $ (0.50) $ (0.05) $ (0.32) $ (0.10) $ (0.08) $ (0.02)
Sharesusedincomputingbasicanddilutedearnings(loss)pershare(inmillions) 3,575.1 3,586.3 3,589.6 3,589.7 3,586.5 3,586.5 3,586.4
BalanceSheetData(atendofperiod): Cashandcashequivalents $ 210.9 $ 80.2 $ 10.5 $ 264.6 $ 160.3 $ 193.8Totalassets $ 3,990.9 $ 1,871.0 $ 1,902.3 $ 907.4 $ 616.8 $ 827.1Totaldebt $ 1,549.7 $ 1,076.6 $ 972.5 $ 1,276.2 $ 1,188.7 $ 1,191.6Convertiblepreferredstock(6) $ 349.8 $ 349.8 $ 349.8 $ 349.8 $ 349.8 $ 349.8Totalstockholders'equity(deficit) $ 1,926.8 $ 235.8 $ 181.0 $ (830.5) $ (1,019.0) $ (911.2)
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YearEndedDecember31, NineMonths
EndedSeptember30, (Dollarsinmillions,exceptpershareamounts) 2012 2013 2014 2015 2016 2016 2017 ProFormaData(7): Proformanetincome(loss) $ (168.3) $ 123.7Proformabasicanddilutedearnings(loss)pershareattributabletocommonstockholders $ (1.58) $ 1.16
Proformasharesusedincomputingbasicanddilutedearnings(loss)pershare(inmillions)(8) 106.5 106.5
Proformatotaldebt(atendofperiod) $ 847.2Proformatotalstockholders'equity(deficit)(atendofperiod) $ (342.6)
OtherData: AdjustedEBITDA(9) $ 237.5 $ 264.1 $ 359.3 $ (62.8) $ (50.8) $ (47.7) $ 234.2Netdebt(atendofperiod)(10) $ 1,338.8 $ 996.4 $ 962.0 $ 1,011.6 $ 1,028.4 $ 997.8Proformanetdebt(atendofperiod)(10) $ 779.0Capitalexpenditure $ 149.4 $ 79.4 $ 112.1 $ 79.1 $ 10.3 $ 6.1 $ 33.4Totalfracturingstages(11) 17,959 22,977 26,182 21,919 16,185 11,135 22,672
(1) Theamountofdepreciation,depletionandamortizationrelatedtoourcostsofrevenuethathasbeenclassifiedasdepreciation,depletionandamortizationinthistablefortheyearendedDecember31,2012,2013,2014,2015and2016is$226.6million,$223.7million,$175.7million,$152.3millionand$98.9million,respectively,andfortheninemonthsendedSeptember30,2016and2017is$76.9millionand$56.7million,respectively.
(2) Werecordeddepletionof$6.0millionand$4.2millionin2012and2013,respectively,relatedtooursandminesbeforesellingthoseassetsinthethirdquarterof2013.
(3) In2012,thisamountincludesagoodwillimpairmentof$1,484.9millionandatradenameimpairmentof$38.9million.In2013,thisamountincludesagoodwillimpairmentof$1,047.5millionandanassetimpairmentof$94.0millionrelatedtothesaleofoursandmining,processingandlogisticsassets.In2014,thisamountrelatedtonon-essentialequipmentandrealpropertyweidentifiedtosell.ForadiscussionofamountsrecordedfortheyearsendedDecember31,2015and2016andfortheninemonthsendedSeptember30,2016and2017,seeNote10—"ImpairmentsandOtherCharges"inNotestoourAuditedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusandNote4—"ImpairmentsandOtherCharges"inNotestoourUnauditedCondensedConsolidatedFinancialStatementsincludedelsewhereinthisprospectus.
(4) In2013,thisamountincludesalossof$289.7millionrelatedtothesaleofoursandmining,processingandlogisticsassets.
(5) Consistsprimarilyofstatemargintaxesaccountedforasincometaxes.Thetaxeffectofournetoperatinglosseshasnotbeenreflectedinourresultsbecausewehaverecordedafullvaluationallowancewithregardstotherealizationofourdeferredtaxassetssince2012.
(6) TheholdersoftheconvertiblepreferredstockarealsocommonstockholdersoftheCompanyandcollectivelyappoint100%ofourboardofdirectors.Therefore,theconvertiblepreferredstockholderscandirecttheCompanytoredeemtheconvertiblepreferredstockatanytimeafterallofourdebthasbeenrepaid;however,wedidnotconsiderthistobeprobableforanyoftheperiodspresentedduetotheamountofdebtoutstanding.Therefore,wehavepresentedtheconvertiblepreferredstockastemporaryequitybuthavenotreflectedanyaccretionoftheconvertiblepreferredstockinthistableorinourConsolidatedFinancialStatements.SeeNote7—"ConvertiblePreferredStock"inNotestoourAuditedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusformoreinformation.AtSeptember30,2017,theliquidationpreferenceoftheconvertiblepreferredstockwasestimatedtobe$1,070.7million.
(7) Proformadatagiveseffectto(1)the69.196592:1reversestocksplit,(2)therecapitalizationofourconvertiblepreferredstockinto39,450,826.48sharesofcommonstock,(3)thesaleof15,151,516sharesofcommonstocktobeissuedbyusinthisoffering(assumingtheunderwritersdonotexercisetheiroptiontopurchaseadditionalshares)and(4)theuseofproceedstherefrom,asifeachoftheseeventsoccurredonJanuary1,2016forpurposesofthestatementofoperationsandSeptember30,2017,forpurposesofthebalancesheet,andforeachof(1),(2),(3)and(4),assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Additionally,theproformabalancesheetinformationreflectsashare-basedcompensationexpenseofapproximately$3.7millionassociatedwithrestrictedstockunitsissuedunderour2014LTIPthatwillvestimmediatelybeforeeffectivenessoftheregistrationstatement,ofwhichthisprospectusisapart,andwillbesettledincash.Achangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothe
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completionofthisofferingbylessthan1%.Foradditionalinformationregardingtherecapitalizationofourconvertiblepreferredstock,see"DescriptionofCapitalStock."
(8) TheproformasharesusedtocomputeproformaearningspersharefortheyearendedDecember31,2016,andtheninemonthsendedSeptember30,2017,havebeenadjustedtoincludethesaleof15,151,516sharesofcommonstockbyusinthisofferingthatwouldgenerateonlyenoughproceedstorepaydebtasdescribedunder"UseofProceeds."
(9) AdjustedEBITDAisanon-GAAPfinancialmeasurethatwedefineasearningsbeforeinterest;incometaxes;anddepreciationandamortization,aswellas,thefollowingitems,ifapplicable:gainorlossondisposalofassets;debtextinguishmentgainsorlosses;inventorywrite-downs,assetandgoodwillimpairments;gainoninsurancerecoveries;acquisitionearn-outadjustments;stock-basedcompensation;andacquisitionordispositiontransactioncosts.ThemostcomparablefinancialmeasuretoAdjustedEBITDAunderGAAPisnetincomeorloss.AdjustedEBITDAisusedbymanagementtoevaluatetheoperatingperformanceofourbusinessforcomparableperiodsanditisametricusedformanagementincentivecompensation.AdjustedEBITDAshouldnotbeusedbyinvestorsorothersasthesolebasisforformulatinginvestmentdecisions,asitexcludesanumberofimportantitems.WebelieveAdjustedEBITDAisanimportantindicatorofoperatingperformancebecauseitexcludestheeffectsofourcapitalstructureandcertainnon-cashitemsfromouroperatingresults.AdjustedEBITDAisalsocommonlyusedbyinvestorsintheoilfieldservicesindustrytomeasureacompany'soperatingperformance,althoughourdefinitionofAdjustedEBITDAmaydifferfromotherindustrypeercompanies.
Thefollowingtablereconcilesournetincome(loss)toAdjustedEBITDA:
YearEndedDecember31,
NineMonthsEnded
September30, (Inmillions) 2012 2013 2014 2015 2016 2016 2017 Netincome(loss) $ (1,816.5) $ (1,692.3) $ (56.5) $ (1,013.2) $ (188.5) $ (140.6) $ 107.8Interestexpense,net 130.3 129.1 74.2 77.2 87.5 66.1 64.8Incometaxexpense(benefit) 0.8 1.5 1.1 (1.5) (1.6) — 0.9Depreciation,depletionandamortization 364.5 355.7 294.4 272.4 112.6 87.5 65.2
Loss(gain)ondisposalofassets,net 6.1 295.8 5.8 5.9 1.0 1.1 (1.6)
Loss(gain)onextinguishmentofdebt,net 7.0 20.3 28.4 0.6 (53.7) (53.7) —
Inventorywrite-down — — — 24.5 — — —Impairmentofassetsandgoodwill 1,533.9 1,145.2 9.8 572.9 7.0 7.0 —
Gainoninsurancerecoveries — — — — (15.1) (15.1) (2.9)Acquisitionearn-outadjustments — — — (3.4) — — —
Stock-basedcompensation 1.4 1.6 2.1 1.8 — — —Transactioncosts(a) 10.0 7.2 — — — — —AdjustedEBITDA $ 237.5 $ 264.1 $ 359.3 $ (62.8)(b) $ (50.8)(c) $ (47.7)(d) $ 234.2(e)
(a) In2012,thesecostsrelatedtoadebtrefinancingtransactionthatwasnotconsummatedandalossonanuncollectedreceivablethatwasrelatedtoachangeofcontroleventin2011.In2013,thesecostsrelatedtothesaleofourproppantassets.
(b) FortheyearendedDecember31,2015,AdjustedEBITDAhasnotbeenadjustedtoexcludethefollowingitems:employeeseverancecostsof$13.1million,supplycommitmentchargesof$11.0million,significantlegalcostsof$8.1million,leaseabandonmentchargesof$1.8million,andprofitof$2.4millionfromthesaleofequipmenttoourjointventureaffiliate.
(c) FortheyearendedDecember31,2016,AdjustedEBITDAhasnotbeenadjustedtoexcludethefollowingitems:employeeseverancecostsof$0.8million,supplycommitmentchargesof$2.5millionandleaseabandonmentchargesof$2.0million.
(d) FortheninemonthsendedSeptember30,2016,AdjustedEBITDAhasnotbeenadjustedtoexcludethefollowingitems:employeeseverancecostsof$0.8million,supplycommitmentchargesof$1.5millionandleaseabandonmentchargesof$1.4million.
(e) FortheninemonthsendedSeptember30,2017,AdjustedEBITDAhasnotbeenadjustedtoexcludeasupplycommitmentchargeof$1.0million.
(10) Netdebtisanon-GAAPfinancialmeasurethatwedefineastotaldebtlesscashandcashequivalents.ThemostcomparablefinancialmeasuretonetdebtunderGAAPisdebt.Netdebtisusedbymanagementasameasureofourfinancialleverage.Netdebtshouldnotbeusedbyinvestorsorothersasthesolebasisinformulatinginvestment
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decisionsasitdoesnotrepresentouractualindebtedness.Proformanetdebtisnetdebtadjustedasifwereceivedthenetproceedsfromthisofferingandwe(a)settledtherestrictedstockunitsgrantedunderthe2014LTIPincashand(b)redeemed$350.0millionofouroutstanding2020NotesasifeachoftheseeventsoccurredonSeptember30,2017.
Thefollowingtablereconcilesourtotaldebttonetdebt:
AsofDecember31, Asof
September30, (Inmillions) 2012 2013 2014 2015 2016 2017 Totaldebt $ 1,549.7 $ 1,076.6 $ 972.5 $ 1,276.2 $ 1,188.7 $ 1,191.6Cashandcashequivalents (210.9) (80.2) (10.5) (264.6) (160.3) (193.8)Netdebt $ 1,338.8 $ 996.4 $ 962.0 $ 1,011.6 $ 1,028.4 $ 997.8
Thefollowingtablereconcilesourtotaldebttoproformanetdebt:
(Inmillions) Asof
September30.2017 Totaldebt $ 1,191.6Repaymentof2020Notes (344.4)Proformatotaldebt 847.2Cashandcashequivalents 193.8Netproceedsfromthisoffering 233.4Cashsettlementof2014restrictedstockunits (3.7)Cashpaidtorepurchase2020Notes (355.3)Proformacashandcashequivalents 68.2Proformanetdebt $ 779.0
(11) See"Business—OurServices—HydraulicFracturing"regardingfracturingstagesandthetypesofserviceagreementsweusetoprovidehydraulicfracturingservices.
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MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS
Thefollowingdiscussionandanalysisofourfinancialconditionandresultsofoperationsshouldbereadinconjunctionwithourconsolidatedfinancialstatementsandrelatednotesthatappearelsewhereinthisprospectus.Inadditiontohistoricalconsolidatedfinancialinformation,thefollowingdiscussioncontainsforward-lookingstatementsthatreflectourplans,estimates,orbeliefs.Actualresultscoulddiffermateriallyfromthosediscussedintheforward-lookingstatements.Factorsthatcouldcauseorcontributetothesedifferencesincludethosediscussedbelowandelsewhereinthisprospectus,particularlyin"RiskFactors."
Overview
WeareoneofthelargestprovidersofhydraulicfracturingservicesinNorthAmerica.OurservicesenhancehydrocarbonflowfromoilandnaturalgaswellsdrilledbyE&Pcompaniesinshaleandotherunconventionalresourceformations.OurcustomersincludeChesapeakeEnergyCorporation,ConocoPhillips,DevonEnergyCorporation,EOGResources,Inc.,DiamondbackEnergy,Inc.,EQTCompany,RangeResourcesCorporationandotherleadingE&PcompaniesthatspecializeinunconventionaloilandnaturalgasresourcesinNorthAmerica.Weareoneofthetopthreehydraulicfracturingprovidersacrossouroperatingfootprint,whichconsistsoffiveofthemostactivemajorunconventionalbasinsintheUnitedStates:thePermianBasin,theSCOOP/STACKFormation,theMarcellus/UticaShale,theEagleFordShaleandtheHaynesvilleShale.Wemanufactureandassemblemanyofthecomponentsofourhydraulicfracturingfleets,includingallofthehydraulicpumpsandconsumables,suchasfluidends,weuseinouroperations.Wealsoperformsubstantiallyallrefurbishment,repairandmaintenanceservicesonourhydraulicfracturingfleets.
Significant developments in 2016 and the first nine months of 2017
• InFebruary2016,wesoldsubstantiallyallofourremainingsandtransportationequipmentandrelatedinventoryfor$8.0millionandbegantotakeadvantageoflowpricingandsandtransportationinnovationsbyutilizingthird-partyfreightproviderstotransportsandtoourjobsites.
• Ourjointventure,SinoFTSPetroleumServicesLtd.,orSinoFTS,completeditsfirsthydraulicfracturingjobsinChongqing,Chinain2016andcontinuestoexpanditspresenceintheChinesemarket.
• InJuly2016,wecompletedatenderofferandsubsequentpurchasesinthequalifiedinstitutionalbuyer/144Amarketforaportionofourlong-termdebtinwhichwerepurchasedapproximately$90.7millionofaggregateprincipalamountoflong-termdebtandrecordedagainondebtextinguishmentof$52.3million.
• Duringthefirstquarterof2017,wereachedamilestoneofover10millionman-hourswithoutalosttimeincident,thatissignificantlybetterthanourindustrypeergroup,accordingtotheU.S.BureauofLaborStatistics.
• Duetoimprovingindustryconditionsandouroperationalefficienciesduringthefirstninemonthsof2017,wegeneratedpositiveoperatingincomeforthefirsttimesince2014andpositivenetincomeforthefirsttimesince2011.
• Duringthefirstninemonthsof2017,weactivatedninefleetsinresponsetoincreasedcustomerdemand,whichbroughtourtotalactivefleetcountto26atSeptember30,2017.
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Trends that affected our business in 2016 and the first nine months of 2017
Ourbusinessiscyclical,andwedependonthewillingnessofourcustomerstomakeoperatingandcapitalexpenditurestoexplorefor,develop,andproduceoilandnaturalgasintheUnitedStates.Thewillingnessofourcustomerstoundertaketheseactivitiesispredominantlyinfluencedbycurrentandexpectedpricesforoilandnaturalgas.
Inearly2016,weexperiencedthelowestcommoditypricesinoveradecade;however,oilandnaturalgaspricesstartedimprovinginthesecondquarteroftheyearandgenerallyincreasedthroughtheremainderof2016.Thelowcommoditypricesatthebeginningof2016causedourcustomerstoreducetheiractivitylevelsandrequestlowerpricingforourservices.Ascommoditypricesimproved,weexperiencedanincreaseindemandforourservicesinthesecondhalfof2016.Thisincreaseinactivitycombinedwithalowerlevelofavailablehydraulicfracturingequipmentinthemarketallowedustorequestincreasedpricingforourservices.Manyofourcustomersagreedtopriceincreasesthattookeffectinthefirstquarterof2017.
Highercommoditypricesenabledourcustomerstosignificantlyincreasetheiractivitylevelsinthefirstninemonthsof2017,whichresultedinanincreaseinthehorizontalrigcountfrom532attheendof2016to794atSeptember29,2017,accordingtoareportbyBakerHughes,Inc.Thisincreaseincustomeractivitylevelsincreasedthedemandforhydraulicfracturingservicesabovetheavailablesupply.Asaresult,ourcustomersagreedtoadditionalpriceincreasesin2017,andweactivatedadditionalidlefleetstomeetthisdemand.
Business Outlook
Weanticipatethatcustomeractivitylevelswillremainstronginto2018,whichshouldprovideanopportunitytoactivateadditionalfleetsatfavorableoperatingmargins.Our28thfleetisscheduledtobeactivatedattheendofJanuary2018.Wearealsofocusedonminimizingcostinflationinthisenvironmenttooptimizeouroperatingmargins.
ResultsofOperations
Three and Nine Months Ended September 30, 2017 Compared to Three and Nine Months Ended September 30, 2016
Revenue
Werecognizerevenueuponthecompletionofastageofajob.Astageisconsideredcompletewhenwehavemetthespecificationssetforthbyourcustomer.Wetypicallycompletemultiplestagesperdayduringthecourseofajob.Invoicestypicallyincludeanequipmentchargeandmaterialchargesforproppant,chemicalsandotherproductsconsumedduringthecourseofprovidingourservices.See"Business—OurServices—HydraulicFracturing"fordetailsregardingfracturingstagesandfleetsand
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thetypesofagreementsweusetoprovidehydraulicfracturingservices.Thefollowingtableincludescertainoperatingstatisticsthataffectourrevenue:
Totalrevenueforthethirdquarterandfirstninemonthsof2017increasedby$323.6millionand$627.6million,respectively,fromthesameperiodsin2016.Theseincreasesinrevenuewereprimarilyduetoanincreaseinthenumberofstagescompletedandanincreaseinthepricesforourservicesin2017,bothofwhichweredrivenbyincreasedcustomerdemand.
Theaveragenumberofactivefleetsduringthethirdquarterandfirstninemonthsof2017increasedby9.1and7.3,respectively,fromthesameperiodsin2016,duetoincreasedcustomerdemand.AtSeptember30,2017,weevaluatedallofouridlefleetsandconcludedthateachofthesefleetsisavailabletoreturntoserviceafterourmaintenancepersonnelmakeanynecessaryrepairsandconfirmthattheequipmentisinoperatingcondition.Webelieveallofourremaininginactivefleetscanbereturnedtoactiveservicewithinninemonths,ifmarketconditionsrequire.Weestimatedthetotalcosttoreactivateallofourinactivefleets,asofSeptember30,2017,wouldbeapproximately$29million,includingcapitalexpenditures,repairschargedasoperatingexpense,laborcosts,andotheroperatingexpenses.AsofDecember31,2017,weestimatedthetotalcosttoreactivateallofourinactivefleetswouldbeapproximately$34.0million,includingcapitalexpenditures,repairschargedasoperatingexpense,laborcosts,andotheroperatingexpenses.
Theincreaseinrevenuefromrelatedpartiesinthethirdquarterandfirstninemonthsof2017wereduetoincreasesintheactivitylevelsforChesapeakeParent.
Costs of revenue
Theprimarycostsinvolvedinconductingourhydraulicfracturingservicesarecostsformaterialsusedinthefracturingprocessandcoststooperate,maintain,andrepairourfracturingequipment.Costsrelatedtothematerialsusedinthefracturingprocesstypicallyincludecostsforsandandotherproppants,costsforchemicalsaddedtothefracturingfluid,andfreightcoststotransportthesematerialstothewelllocation.Coststooperateourfracturingequipmentprimarilyconsistoflaborandfuelcosts.Whileweexcludecertainamountsofdepreciationandamortizationfromourcostsofrevenuelineitem,wehaveincludedtheamountsofdepreciationthatspecificallyrelatetoourrevenue
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ThreeMonthsEnded
September30,
NineMonthsEnded
September30, (Dollarsinmillions) 2016 2017 2016 2017 Revenue $ 123.8 $ 409.8 $ 377.1 $ 906.1Revenuefromrelatedparties 1.6 39.2 2.7 101.3Totalrevenue $ 125.4 $ 449.0 $ 379.8 $ 1,007.4Totalfracturingstages 4,367 8,196 11,135 22,672Activefleets(1) 15.7 24.8 15.1 22.4Totalfleets(2) 32.0 32.0 32.0 32.0
(1) Activefleetsistheaveragenumberoffleetsoperatingduringtheperiod.AsofDecember31,2016andSeptember30,2017,wehad17and26activefleets,respectively.
(2) Totalfleetsisthetotalnumberoffleetsownedduringtheperiod.
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generatingassetsinourdiscussionbelowtoprovidefurtherinformationregardingthetotalcostsofgeneratingourrevenues.Costsofrevenueasapercentageoftotalrevenueisasfollows:
Totalcostsofrevenueforthethirdquarterandfirstninemonthsof2017increasedby$167.6millionand$320.0million,respectively,fromthesameperiodsin2016.Theseincreaseswereprimarilyduetoincreasesinourcostsofrevenue,excludingdepreciation,whichwerepartiallyoffsetbydecreasesinthedepreciationexpenseforourserviceequipment.
Costsofrevenue,excludingdepreciation,forthethirdquarterandfirstninemonthsof2017increasedby$173.1millionand$340.2million,respectively,fromthesameperiodsin2016,duetoourhighernumberofactivefleets,increasednumberofstagescompletedduring2017,andincreasedcostsformaterialsusedinthefracturingprocess.
Depreciationforourserviceequipmentinthethirdquarterandfirstninemonthsof2017decreasedby$5.5millionand$20.2million,respectively,fromthesameperiodsin2016.Thesedecreasesweretheresultofassetdisposalsandcertainassetsbecomingfullydepreciated.Additionally,wegenerallyrefurbishourequipmentasitapproachestheendofitsusefullife,ratherthanreplaceitbypurchasingnewequipment.Thecostofrefurbishingourequipmentissignificantlylowerthanthecostofpurchasingnewequipment.Asmoreofourfleetshavebecomecomprisedofrefurbishedassetsinrecentyears,ourdepreciationhascorrespondinglydeclined.
Totalcostsofrevenueasapercentageoftotalrevenueforthethirdquarterdecreasedby49.2percentagepointsfrom120.1%in2016to70.9%in2017.Totalcostsofrevenueasapercentageoftotalrevenueforthefirstninemonthsof2017decreasedby41.5percentagepointsfrom117.6%in2016to76.1%in2017.Thesechangeswereprimarilyduetoincreasedpricingforourservicesandincreasedstagescompletedperactivefleetin2017.Thesefactorswerepartiallyoffsetbyincreasedcostsformaterialsusedinthefracturingprocess.
Selling, general and administrative expense
Selling,generalandadministrativeexpenseinthethirdquarterandfirstninemonthsof2017increasedby$5.9millionand$10.5millionfromthesameperiodsin2016.Theseincreaseswereprimarilyduetoincreasedincentivecompensationrelatedtoourimprovedoperatingresultsin2017andincreasedemployee-relatedcostsduetoourincreasedoverallheadcountin2017.Thefactorsthatcontributedtotheincreaseinselling,generalandadministrativeexpenseforthefirstninemonthsof2017werepartiallyoffsetbyalowercorporateemployeeheadcountinthefirstquarterof2017,whencomparedtothefirstquarter2016.
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ThreeMonthsEndedSeptember30, 2016 2017
(Dollarsinmillions) Dollars AsaPercentofRevenue Dollars
AsaPercentofRevenue
Costsofrevenue,excludingdepreciation $ 125.7 100.2%$ 298.8 66.6%Depreciation—costsofrevenue 24.9 19.9% 19.4 4.3%Totalcostsofrevenue $ 150.6 120.1%$ 318.2 70.9%
NineMonthsEndedSeptember30, 2016 2017
(Dollarsinmillions) Dollars AsaPercentofRevenue Dollars
AsaPercentofRevenue
Costsofrevenue,excludingdepreciation $ 369.7 97.4%$ 709.9 70.5%Depreciation—costsofrevenue 76.9 20.2% 56.7 5.6%Totalcostsofrevenue $ 446.6 117.6%$ 766.6 76.1%
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Depreciation and amortization
Thefollowingtablesummarizesourdepreciationandamortization:
Depreciationandamortizationinthethirdquarterandfirstninemonthsof2017decreasedby$6.2millionand$22.3millionfromthesameperiodsin2016.Thesedecreaseswereprimarilyduetodecreasesindepreciationforourserviceequipment,whichhasbeenpreviouslydiscussed.Theremainingdecreaseswereprimarilyduetoassetdisposalsandcertainassetsbecomingfullydepreciated.
Impairments and other charges
Thefollowingtablesummarizesourimpairmentsandothercharges:
Impairmentsandotherchargesincludesupplycommitmentchargesrelatedtocontractualinventorypurchasecommitmentstocertainproppantsuppliers.Duringthesecondquarterof2016and2017,werecordedchargesunderthesesupplyarrangementsof$1.5millionand$1.0million,respectively.The2016chargewasattributabletoourdecreasedvolumeofpurchasesfromthesesuppliersduetoourloweractivitylevelsandcertaincustomersprocuringtheirownproppants.The2017chargewasduetoourcustomerrequirementsnotsatisfyingourcontractedcommitmentsforcertainproppants.Foradditionalinformation,see"CriticalAccountingPoliciesandEstimates—UnconditionalPurchaseObligations."
Werecordedassetimpairmentsof$7.0millioninthefirstninemonthsof2016relatedtocertainpropertythatwenolongeruseandhadidentifiedtosell.
During2015and2016,wevacatedcertainleasedfacilitiestoconsolidateouroperations.Duringthefirstninemonthsof2016and2017,werecognizedexpenseof$1.4millionand$0.4million,respectively,inconnectionwiththeseactions.
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ThreeMonthsEnded
September30,
NineMonthsEnded
September30, (Inmillions) 2016 2017 2016 2017 Depreciation—costsofrevenue(1) $ 24.9 $ 19.4 $ 76.9 $ 56.7Depreciation—other(2) 3.4 2.7 10.6 8.5Totaldepreciationandamortization $ 28.3 $ 22.1 $ 87.5 $ 65.2
(1) Relatedtoserviceequipmentincludedin"Property,plant,andequipment,net"onourconsolidatedbalancesheetsdiscussedunderthe"Costsofrevenue"headingofthisdiscussionandanalysis.
(2) Relatedtoallassetsotherthanserviceequipmentincludedin"Property,plant,andequipment,net"onourconsolidatedbalancesheets.
ThreeMonthsEnded
September30,
NineMonthsEnded
September30, (Inmillions) 2016 2017 2016 2017 Impairmentofassets $ 4.4 $ — $ 7.0 $ —Supplycommitmentcharges — — 1.5 1.0Leaseabandonmentcharges 0.8 0.1 1.4 0.4Employeeseverancecosts — — 0.8 —Totalimpairmentsandothercharges $ 5.2 $ 0.1 $ 10.7 $ 1.4
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Weincurredemployeeseverancecostsof$0.8millioninthefirstquarterof2016.Thesecostswereincurredinconnectionwithourcorporateandoperatingrestructuringinitiatives.AsofDecember31,2016,wehadpaidallseverancepaymentsowedtoformeremployees.
Loss (gain) on disposal of assets, net
WesoldsubstantiallyallofoursandtransportationequipmentandrelatedinventoryinFebruary2016.Wereceived$8.0millionofproceedsandrecognizeda$0.3milliongainonthissale.Inthefirstninemonthsof2016and2017,wesoldanumberofothersurpluspiecesofequipment.Inthefirstninemonthsof2016,wereceived$18.3millionofproceedsandrecognizeda$1.4millionnetlossonthesaleoftheseassets.Inthefirstninemonthsof2017,wereceived$2.0millionofproceedsandrecognizeda$1.6millionnetgainonthesaleoftheseassets.
Gain on insurance recoveries
InJanuary2016,afiredestroyedsubstantiallyalloftheequipmentinoneofourfleets.Theseassetswereinsuredatvaluesgreaterthantheircarryingvalues.Inthefirstninemonthsof2016,wereceived$19.0millionofinsurancerecoveryproceedsfortheseassets,whichexceededtheircarryingvaluesby$15.1million.
InJanuary2017,afiredestroyedcertainequipmentinoneofourfleets.Theseassetswereinsuredatvaluesgreaterthantheircarryingvalues.Wereceived$4.2millionofinsurancerecoveryproceedsfortheseassets,whichexceededtheircarryingvaluesby$2.9million.
Interest expense, net
Interestexpense,netofinterestincome,increasedby$0.7millioninthethirdquarterof2017fromthesameperiodin2016.Thisincreasewasprimarilyduetohigheraverageinterestratesforour2020Notesin2017.
Interestexpense,netofinterestincome,decreasedby$1.3millioninthefirstninemonthsof2017fromthesameperiodin2016.Thisdecreasewasprimarilyduetoaloweraveragelong-termdebtbalance,whichwaspartiallyoffsetbyhigheraverageinterestratesforour2020Notesin2017.
Gain on extinguishment of debt
Inthethirdquarterof2016,wecompletedatenderofferandsubsequentpurchasesinthequalifiedinstitutionalbuyer/144Amarketforaportionofourlong-termdebtinwhichwerepurchased$90.7millionofaggregateprincipalamountoflong-termdebtandrecordedagainondebtextinguishmentof$52.3million.
Income tax expense
Incometaxexpensewas$0.4millioninthethirdquarterof2017and$0.9millionintheninemonthsendedSeptember30,2017.Theseamountsconsistedofstatemargintaxesaccountedforasincometaxes.In2012,werecordedavaluationallowancetoreduceournetdeferredtaxassetstozero.Wecontinuetoprovideavaluationallowanceagainstalldeferredtaxassetsinexcessofourdeferredtaxliabilities.Asaresult,wedidnotrecordanyU.S.federalorstateincometaxexpenseorbenefitrelatedtoourincomeorlossesfortheninemonthsendedSeptember30,2016and2017.
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Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue
Thefollowingtableincludescertainoperatingstatisticsthataffectourrevenue:
Totalrevenuein2016decreasedby$843.1millionfrom2015.Thisdecreasewasduetoalowerpricingenvironmentforbothourservicesandfracturingmaterialsin2016,lowercustomeractivityandwellcompletionlevelsin2016,resultinginfewerstagescompleted,andcertaincustomerschoosingtoprocuretheirownproppantsin2016.
Webeganextendingpriceconcessionstoourcustomersinthefirstquarterof2015asaresultofthedeclineinoilandgascommoditypricesthatbeganin2014.Ourcustomerssignificantlyreducedtheirhydraulicfracturingactivitiesinresponsetothelowercommoditypriceenvironment.Thisreductioninactivitylevelscreatedanoversupplyofserviceprovidersinourindustryand,consequently,marketpricesforourservicesdeclinedsignificantly.Inresponsetothelowerpricingenvironmentandlowercustomeractivitylevels,wereducedthenumberoffleetsoperatingduring2016byanaverageof7.4fleets.However,in2016weimprovedourabilitytooperateouractivefleetswithlessdowntimewhichincreasedthenumberofstageswecompletedperaverageactivefleet.
Thedecreaseinrevenuefromrelatedpartiesin2016wasduetoadecreaseintheactivitylevelsforChesapeakeParent.
Costs of revenue
Costsofrevenueasapercentageoftotalrevenueisasfollows:
Totalcostsofrevenuein2016decreasedby$800.8millionfrom2015.Thisdecreasewasprimarilyduetoadecreaseinourcostsofrevenue,excludingdepreciation,andadecreaseinthedepreciationexpenseforourserviceequipment.
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YearEndedDecember31,
(Dollarsinmillions) 2015 2016 Revenue $ 1,331.8 $ 529.5Revenuefromrelatedparties 43.5 2.7Totalrevenue $ 1,375.3 $ 532.2Totalfracturingstages 21,919 16,185Activefleets(1) 23.0 15.6Totalfleets(2) 33.0 32.0
(1) Activefleetsistheaveragenumberoffleetsoperatingduringtheperiod.
(2) Totalfleetsisthetotalnumberoffleetsownedduringtheperiod.
YearEndedDecember31, 2015 2016
(Dollarsinmillions) Dollars AsaPercentofRevenue Dollars
AsaPercentofRevenue
Costsofrevenue,excludingdepreciation $ 1,257.9 91.5%$ 510.5 95.9%Depreciation—costsofrevenue 152.3 11.1% 98.9 18.6%Totalcostsofrevenue $ 1,410.2 102.5%$ 609.4 114.5%
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Costsofrevenue,excludingdepreciation,in2016decreasedby$747.4millionfrom2015.Thisdecreasewasduetoourlowernumberofactivefleetsduring2016inresponsetolowercustomeractivityandwellcompletionlevels;lowerpricesformaterialsusedinthefracturingprocessin2016;theeffectofourcostreductioninitiativesin2016,whichresultedinsignificantsavingsinlaborandrepaircosts;andchangesincustomerjobrequirementsin2016.
Depreciationforourserviceequipmentin2016decreasedby$53.4millionfrom2015.Thisdecreasewastheresultofassetimpairments,assetdisposalsandcertainassetsbecomingfullydepreciated.Additionally,inrecentyearswehavechosentorefurbishourequipmentasitapproachestheendofitsusefullife,ratherthantoreplaceitbypurchasingnewequipment.Thecostofrefurbishingourequipmentissignificantlylowerthanitwouldbetopurchasenewequipment.Asmoreofourfleethasbecomecomprisedofrefurbishedassetsinrecentyears,ourdepreciationhascorrespondinglydeclined.
Totalcostsofrevenueasapercentageoftotalrevenueincreasedby12.0percentagepointsfrom102.5%in2015to114.5%in2016.Thischangewasprimarilyduetoincreasedpriceconcessionsweextendedtoourcustomersin2016,whichhavebeenpartiallyoffsetbyalowernumberofactivefleetsin2016,lowermaterialcosts;andourcostreductioninitiatives.Ourtotalcostsofrevenueexceededourtotalrevenueduringtheseperiodsprimarilyduetothepriceconcessionswehaveextendedtoourcustomersduringtheseperiods.
Selling, general and administrative expense
Selling,generalandadministrativeexpensein2016decreasedby$90.3millionfrom2015.Approximately$60millionofthisdecreasewasrelatedtoadecreaseinemployeeheadcountinconnectionwiththedownturninourbusiness.Approximately$10millionofthisdecreasewasduetolowerlegalcosts.Theremainingdecreasewasprimarilytheresultofourvariouscostsavinginitiatives.
Depreciation and amortization
Thefollowingtablesummarizesourdepreciationandamortization:
Depreciationandamortizationin2016decreasedby$159.8millionfrom2015.ThisdecreasewasprimarilyduetothecessationofamortizationassociatedwiththeintangibleassetsthatwereimpairedduringtheyearendedDecember31,2015,andthedecreaseindepreciationforourserviceequipmentwhichhasbeenpreviouslydiscussed.Theremainingdecreasewasprimarilyduetoassetdisposalsandcertainassetsbecomingfullydepreciated.
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YearEndedDecember31,
(Inmillions) 2015 2016 Depreciation—costsofrevenue(1) $ 152.3 $ 98.9Depreciation—other(2) 17.6 13.7Amortization(3) 102.5 —Totaldepreciationandamortization $ 272.4 $ 112.6
(1) Relatedtoserviceequipmentincludedin"Property,plant,andequipment,net"onourconsolidatedbalancesheetsdiscussedunderthe"Costsofrevenue"headingofthisdiscussionandanalysis.
(2) Relatedtoalllong-livedassetsotherthanserviceequipmentincludedin"Property,plant,andequipment,net"onourconsolidatedbalancesheet.
(3) Relatedtodefinite-livedintangibleassetsthatwerewrittendowntozeroduringtheyearendedDecember31,2015.
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Impairments and other charges
Thefollowingtablesummarizesourimpairmentsandothercharges:
ImpairmentofAssetsandGoodwill:During2016,werecordedassetimpairmentsof$7.0millionrelatedtoserviceequipmentandrealpropertythatwenolongeruseandidentifiedtosell.Duringthefirstninemonthsof2015,werecordedanon-cashgoodwillimpairmentof$7.1millionforourwirelinereportingunitandanassetimpairmentof$0.5millionrelatedtorealpropertythatwenolongeruse.
Inthefourthquarterof2015,weconcludedthatthepersistentlowcommoditypriceenvironmentanditseffectonourcurrentandforecastedcashflowsrequiredustoperformmultipleassetimpairmenttests.Asaresult,werecordedanumberofassetimpairmentsinthefourthquarterof2015.
• Weevaluatedthelong-livedassetsofourpressurepumpingassetgroupforimpairmentandconcludedthatthefairvalueofthisassetgroupwaslowerthanthecarryingvalueoftheassetsintheassetgroup.Werecognizedatotalimpairmentforthisassetgroupof$487.0million.Ofthisamount,$461.4millionwasattributabletoourcustomerrelationships,$20.6millionwasattributabletocertainequipment,and$5.0millionwasattributabletoourproprietarychemicalblends.
• Weevaluatedthelong-livedassetsofourwirelineassetgroupforimpairmentandconcludedthatthefairvalueofthisassetgroupwaslowerthanthecarryingvalueoftheassetsintheassetgroup.Werecognizedatotalimpairmentforthisassetgroupof$33.3million.Ofthisamount,$24.2millionwasattributabletocertainequipmentand$9.1millionwasattributabletoourcustomerrelationships.
• Weevaluatedourtradenameintangibleassetforimpairmentandconcludedthatthefairvalueofthisassetwaslowerthanitscarryingvalue,whichresultedinanimpairmentof$30.2million.
• Werecorded$14.8millionofimpairmentsforcertainlandandbuildingsthatwenolongeruse.
SupplyCommitmentCharges:Wehaverecordedsupplycommitmentchargesrelatedtocontractualinventorypurchasecommitmentstocertainproppantsuppliers.In2015and2016,werecordedchargesunderthesesupplyarrangementsof$11.0millionand$2.5million,respectively.Thesechargeswereattributabletoourdecreasedvolumeofpurchasesfromthesesuppliersduetoourloweractivitylevelsinbothperiods.Additionally,in2016,ourdecreasedpurchaseswerealsoduetocertaincustomersprocuringtheirownproppants.
LeaseAbandonmentCharges:During2015and2016,wevacatedcertainleasedfacilitiestoconsolidateouroperations.In2015and2016,werecognizedexpenseof$1.8millionand$2.0million,respectively,inconnectionwiththeseactions.
EmployeeSeveranceCosts:During2015and2016,weincurredemployeeseverancecostsof$13.1millionand$0.8million,respectively,inconnectionwithourcorporateandoperating
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YearEndedDecember31,
(Inmillions) 2015 2016 Impairmentofassetsandgoodwill $ 572.9 $ 7.0Supplycommitmentcharges 11.0 2.5Leaseabandonmentcharges 1.8 2.0Employeeseverancecosts 13.1 0.8Inventorywrite-down 24.5 —Acquisitionearn-outadjustments (3.4) —Totalimpairmentsandothercharges $ 619.9 $ 12.3
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restructuringinitiatives.AtDecember31,2015and2016,wehadpaidsubstantiallyallseverancepaymentsowedtoformeremployees.
InventoryWrite-down:During2015,wemadeimprovementstooursupplychainthatreducedourinventoryrequirements.Inconnectionwiththisinitiative,weexecutedaprogramtoliquidateexcessinventory.Werecordeda$24.5millioninventorywrite-downchargeinconnectionwiththisliquidationprogram.
AcquisitionEarn-OutAdjustments:Inthesecondquarterandfourthquarterof2015,weremeasuredthefairvalueofthecontingentconsiderationrelatedtoourwirelineacquisitionandwerecordedadjustmentstoreducethisliabilityby$3.0millionand$0.4million,respectively.AtDecember31,2015andDecember31,2016,thefairvalueofthecontingentconsiderationwaszeroandtheperiodtoearnthecontingentconsiderationexpiredonOctober31,2016.
Loss on disposal of assets, net
WesoldsubstantiallyallofourremainingsandtransportationequipmentandrelatedinventoryinFebruary2016.Wereceived$8.0millionofproceedsandrecognizeda$0.3milliongainonthissale.During2016,wesoldanumberofothersurpluspiecesofpropertyandequipment.Wereceivedanadditional$23.5millionofproceedsandrecognizeda$1.3millionnetlossonthesaleoftheseassets.
Gain on insurance recoveries
InJanuary2016,afireatoneofourjobsitesinOklahomadestroyedsubstantiallyalloftheequipmentinoneofourfleets.Theseassetswereinsuredatvaluesgreaterthantheircarryingvalues.Wereceived$19.0millionofinsurancerecoveryproceedsfortheseassets,whichexceededtheircarryingvaluesby$15.1million.
Interest expense, net
Interestexpense,netofinterestincome,in2016increasedby$10.3millionfrom2015.Theincreasewasduetoahigheraveragelong-termdebtbalanceandahigheraverageinterestrateforour2020Notesin2016.
Gain on extinguishment of debt, net
Inthethirdquarterof2016,wecompletedatenderofferandsubsequentpurchasesinthequalifiedinstitutionalbuyer/144Amarketforaportionofourlong-termdebtinwhichwerepurchased$90.7millionofaggregateprincipalamountoflong-termdebtandrecordedagainondebtextinguishmentof$52.3million.SeeNote6—"Debt"inNotestoourAuditedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusformoreinformation.
Income tax expense
In2012,werecordedavaluationallowancetoreduceournetdeferredtaxassetstozero.Wecontinuetoprovideavaluationallowanceagainstalldeferredtaxassetsinexcessofourdeferredtaxliabilities.Asaresult,wedidnotrecordanyU.S.federalorstateincometaxbenefitrelatedtoourlossesin2016or2015.SeeNote13—"IncomeTaxes"inNotestoourAuditedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusformoreinformationregardingourincometaxesandvaluationallowance.
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SelectedQuarterlyFinancialInformation
ToprovideadditionalfinancialinformationrelativetorecentquarterlyresultsoftheCompany,thefollowingtablepresentsselectedunauditedquarterlyfinancialinformationfortheyearendedDecember31,2016andtheninemonthsendedSeptember30,2017:
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QuarterEnded
(Dollarsinmillions) Mar.31,2016
Jun.30,2016
Sep.30,2016
Dec.31,2016
Mar.31,2017
Jun.30,2017
Sep.30,2017
StatementsofOperationsData: Revenue $ 148.7 $ 105.7 $ 125.4 $ 152.4 $ 213.5 $ 344.9 $ 449.0Costsofrevenue,excludingdepreciationandamortization 141.2 102.8 125.7 140.8 174.8 236.3 298.8
Selling,generalandadministrative 20.2 15.5 15.8 12.9 19.5 20.8 21.7Depreciationandamortization 30.1 29.1 28.3 25.1 21.8 21.3 22.1Impairmentsandothercharges 1.6 3.9 5.2 1.6 0.1 1.2 0.1Loss(gain)ondisposalofassets,net 2.8 (1.7) — (0.1) (0.4) (0.4) (0.8)Gainoninsurancerecoveries (12.5) (2.6) — — (2.6) (0.3) —Operating(loss)income (34.7) (41.3) (49.6) (27.9) 0.3 66.0 107.1Interestexpense,net (22.3) (22.4) (21.4) (21.4) (21.2) (21.5) (22.1)Gainonextinguishmentofdebt,net — 1.4 52.3 — — — —Equityinnet(loss)incomeofjointventureaffiliate (1.0) (0.9) (0.7) (0.2) 0.9 0.2 (1.0)
(Loss)incomebeforeincometaxes (58.0) (63.2) (19.4) (49.5) (20.0) 44.7 84.0Incometax(benefit)expense — — — (1.6) 0.1 0.4 0.4Net(loss)income $ (58.0) $ (63.2) $ (19.4) $ (47.9) $ (20.1) $ 44.3 83.6BalanceSheetData(endofperiod): Cashandcashequivalents $ 280.9 $ 264.8 $ 195.0 $ 160.3 $ 126.7 $ 138.5 $ 193.8Totaldebt $ 1,277.1 $ 1,276.1 $ 1,187.7 $ 1,188.7 $ 1,189.6 $ 1,190.6 $ 1,191.6
OtherData: AdjustedEBITDA $ (14.7) $ (15.4) $ (17.6) $ (3.1) $ 20.0 $ 86.8 $ 127.4Totalfracturingstages 3,273 3,495 4,367 5,050 6,523 7,953 8,196
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Thefollowingtablereconcilesournetincome(loss)toAdjustedEBITDA:
LiquidityandCapitalResources
Sources of Liquidity
AtSeptember30,2017,wehad$193.8millionofcash,whichrepresentedourtotalliquidityposition.Webelievethatourcashandanycashprovidedbyoperationswillbesufficienttofundouroperationsandcapitalexpendituresforatleastthenext12months.
Cash Flows for the Nine Months Ended September 30, 2016 and 2017
Thefollowingtablesummarizesourcashflows:
Cashflowsfromoperatingactivitieshavehistoricallybeenasignificantsourceofliquidityweusetofundcapitalexpendituresandrepayourdebt.Changesincashflowsfromoperatingactivitiesareprimarilyaffectedbythesamefactorsthataffectournetincome,excludingnon-cashitemssuchasdepreciationandamortization,stock-basedcompensation,andimpairmentsofassets.
Netcashusedinoperatingactivitieswas$74.1millionforthefirstninemonthsof2016comparedtonetcashprovidedbyoperatingactivitiesof$60.3millioninthesameperiodin2017.Cashflowsfromoperatingactivitiesconsistsofnetincomeorlossadjustedfornon-cashitemsandchangesinoperatingassetsandliabilities.Netincomeorlossadjustedfornon-cashitemsresultedinacashdecreaseof$106.9millionandacashincreaseof$171.8millionforthefirstninemonthsof2016and2017,respectively.Thisincreasewasprimarilyduetohigherearningsin2017.Thenetchangeinoperatingassetsandliabilitiesresultedinacashincreaseof$32.8millionandacashdecreaseof$111.5millionforthefirstninemonthsof2016and2017,respectively.Thenetchangeinoperating
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QuarterEnded
(Inmillions) Mar.31,2016
Jun.30,2016
Sep.30,2016
Dec.31,2016
Mar.31,2017
Jun.30,2017
Sep.30,2017
Net(loss)income $ (58.0) $ (63.2) $ (19.4) $ (47.9) $ (20.1) $ 44.3 $ 83.6Interestexpense,net 22.3 22.4 21.4 21.4 21.2 21.5 22.1Incometax(benefit)expense — — — (1.6) 0.1 0.4 0.4Depreciationandamortization 30.1 29.1 28.3 25.1 21.8 21.3 22.1Loss(gain)ondisposalofassets,net 2.8 (1.7) — (0.1) (0.4) (0.4) (0.8)Gainonextinguishmentofdebt,net — (1.4) (52.3) — — — —Impairmentofassetsandgoodwill 0.6 2.0 4.4 — — — —Gainoninsurancerecoveries (12.5) (2.6) — — (2.6) (0.3) —AdjustedEBITDA $ (14.7) $ (15.4) $ (17.6) $ (3.1) $ 20.0 $ 86.8 $ 127.4
NineMonthsEnded
September30, (Inmillions) 2016 2017 Net(loss)incomeadjustedfornon-cashitems $ (106.9) $ 171.8Changesinoperatingassetsandliabilities 32.8 (111.5)Netcash(usedin)providedbyoperatingactivities (74.1) 60.3Netcashprovidedby(usedin)investingactivities 42.1 (26.8)Netcashusedinfinancingactivities (37.6) —Net(decrease)increaseincash (69.6) 33.5Cash,beginningofperiod 264.6 160.3Cash,endofperiod $ 195.0 $ 193.8
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assetsandliabilitiesforthefirstninemonthsof2017wasprimarilyduetoanincreaseinworkingcapitalresultingfromourincreasedactivitylevel.
Netcashprovidedbyinvestingactivitieswas$42.1millionforthefirstninemonthsof2016comparedtocashusedininvestingactivitiesof$26.8millionforthefirstninemonthsof2017.Thischangewasprimarilyduetoincreasedcapitalexpendituresin2017,decreasedassetdisposalproceedsin2017anddecreasedinsurancerecoveryproceedsreceivedin2017.
Netcashusedinfinancingactivitiesforthefirstninemonthsof2016was$37.6million,whichwascomprisedofdebtrepurchases.
Cash Flows for the Years Ended December 31, 2015 and 2016
Thefollowingtablesummarizesourcashflows:
Cashflowsfromoperatingactivitieshavehistoricallybeenasignificantsourceofliquidityweusetofundcapitalexpendituresandrepayourdebt.Changesincashflowsfromoperatingactivitiesareprimarilyaffectedbythesamefactorsthataffectournetincome,excludingnon-cashitemssuchasdepreciationandamortization,stock-basedcompensation,andimpairmentsofassets.
Netcashusedinoperatingactivitieswas$109.8millionin2016comparedtonetcashprovidedbyoperatingactivitiesof$50.6millionin2015.Cashflowsfromoperatingactivitiesconsistsofnetlossadjustedfornon-cashitemsandchangesinoperatingassetsandliabilities.Netlossadjustedfornon-cashitemsresultedinacashdecreaseof$133.3millionand$130.9millionin2015and2016,respectively.Thenetchangeinoperatingassetsandliabilitiesresultedinacashincreaseof$183.9millionand$21.1millionin2015and2016,respectively.Thenetchangeinoperatingassetsandliabilitiesin2016wasprimarilyduetodecreasedaccountsreceivableandinventories,partiallyoffsetbydecreasedaccruedexpenses,whichwereallduetoourloweractivitylevelsin2016.
Netcashprovidedbyinvestingactivitiesin2016was$43.1millioncomparedtonetcashusedininvestingactivitiesof$97.9millionin2015.Thischangewasprimarilyduetoreducedcapitalexpendituresin2016,increasedassetdisposalproceedsin2016,andinsurancerecoveryproceedsreceivedin2016.
Netcashusedinfinancingactivitiesin2016was$37.6millioncomparedtonetcashprovidedbyfinancingactivitiesof$301.4millionin2015.Thenetdecreaseincashflowsin2016wasduetodebtrepurchases.Thenetincreaseincashflowsin2015wasduetotheissuanceof$350millionaggregateprincipalamountofour2020Notes,partiallyoffsetbyarepaymentofborrowingsunderourpreviouslyexistingrevolvingcreditfacility.
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YearEndedDecember31,
(Inmillions) 2015 2016 Netlossadjustedfornon-cashitems $ (133.3) $ (130.9)Changesinoperatingassetsandliabilities 183.9 21.1Netcashprovidedby(usedin)operatingactivities 50.6 (109.8)Netcash(usedin)providedbyinvestingactivities (97.9) 43.1Netcashprovidedby(usedin)financingactivities 301.4 (37.6)Netincrease(decrease)incash 254.1 (104.3)Cash,beginningofperiod 10.5 264.6Cash,endofperiod $ 264.6 $ 160.3
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CashRequirements
Contractual Commitments and Obligations
ThefollowingtablesummarizesourcontractualcommitmentsatDecember31,2016anddoesnotgiveeffecttotheuseofproceedsfromthisoffering:
In2016,wecompletedatenderofferandsubsequentpurchasesinthequalifiedinstitutionalbuyer/144Amarketforaportionofourlong-termdebtinwhichwerepurchased$90.7millionofaggregateprincipalamountoflong-termdebtandrecordedagainondebtextinguishmentof$52.3million.SeeNote6—"Debt"inNotestoourAuditedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusformoreinformationonourlong-termdebtobligations.
TherehavebeennomaterialchangestoourcontractualobligationssinceDecember31,2016.
Capital Expenditures
Thenatureofourcapitalexpendituresconsistsofabaselevelofinvestmentrequiredtosupportourcurrentoperationsandamountsrelatedtogrowthandcompanyinitiatives.Ourcapitalexpendituresfor2016representedthebaselevelofcapitalexpendituretosupportouroperations,aswereducedexpenditurestoconserveliquidityduringthemarketdownturn.Weestimatecapitalexpenditureswillincreasein2017toapproximately$60million.Webelievethislevelofcapitalexpenditureistheamountnecessarytosupportourcurrentoperationsandfleetreactivations.Ourcashandanycashprovidedbyoperationswillbeusedtofundourcapitalexpenditureneeds,whichwebelievewillbesufficienttosupportouroperationsinanimprovingenvironmentin2017and2018.Wecontinuouslyevaluateourcapitalexpendituresandtheamountweultimatelyspendwillprimarilydependonindustryconditions.
Off-BalanceSheetArrangements
Exceptforournormaloperatingleases,wedonothaveanyoff-balancesheetfinancingarrangements,transactions,orspecialpurposeentities.
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PaymentsDuebyPeriod
(Inmillions) Total LessThan1Year 1-3Years 3-5Years
Morethan5Years
Long-termdebtobligations $ 1,207.3 $ — $ — $ 781.0 $ 426.3Interestobligations(1)(2) 359.8 82.0 163.6 100.9 13.3Operatingleaseobligations 38.8 20.8 13.0 4.3 0.7Purchaseobligations 401.2 52.1 111.0 97.7 140.4Otherlong-termliabilitiesreflectedonthebalancesheet 1.7 — 1.7 — —Total $ 2,008.8 $ 154.9 $ 289.3 $ 983.9 $ 580.7
(1) Ourtermloanduein2021bearsinterestatavariableratebasedonLIBORplusamarginof4.75%perannum,butneverlessthan5.75%perannumduetoa1.00%LIBORfloor.AtDecember31,2016,LIBORwassubstantiallyequalto1.00%perannum;therefore,thefutureinterestpaymentamountsincludedinthetableforthistermloanhavebeencalculatedatthefloorrateof5.75%.
(2) Our2020NotesbearinterestatavariableratebasedonLIBORplusamarginof7.5%perannum.ThefutureinterestpaymentamountsincludedinthetableforthesenoteshavebeencalculatedattherateineffectatDecember31,2016.
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CriticalAccountingPoliciesandEstimates
Thepreparationofourconsolidatedfinancialstatementsandrelatednotesrequiresustomakeestimatesthataffectthereportedamountsofassets,liabilities,revenueandexpenses,andrelateddisclosuresofcontingentassetsandliabilities.Webasetheseestimatesonhistoricalresultsandvariousotherassumptionsbelievedtobereasonable,allofwhichformthebasisformakingestimatesconcerningthecarryingvaluesofassetsandliabilitiesthatarenotreadilyavailablefromothersources.Actualresultsmaydifferfromtheseestimates.
Inthenotesaccompanyingtheconsolidatedfinancialstatementsincludedelsewhereinthisprospectus,wedescribethesignificantaccountingpoliciesusedinthepreparationofourconsolidatedfinancialstatements.Webelievethatthefollowingrepresentthemostsignificantestimatesandmanagementjudgmentsusedinpreparingtheconsolidatedfinancialstatements.
Property, Plant, and Equipment
Wecalculatedepreciationbasedontheestimatedusefullivesofourassets.Whenassetsareplacedintoservice,wemakeestimateswithrespecttotheirusefullivesthatwebelievearereasonable.However,thecyclicalnatureofourbusiness,whichresultsinfluctuationsintheuseofourequipmentandtheenvironmentsinwhichweoperate,couldcauseustochangeourestimates,thusaffectingthefuturecalculationofdepreciation.
Wecontinuouslyperformrepairandmaintenanceexpendituresonourserviceequipment.Expendituresforrenewalsandbettermentsthatextendthelivesofourserviceequipment,whichmayincludethereplacementofsignificantcomponentsofserviceequipment,arecapitalizedanddepreciated.Otherrepairsandmaintenancecostsareexpensedasincurred.Thedeterminationofwhetheranexpenditureshouldbecapitalizedorexpensedrequiresmanagementjudgmentwithregardtotheeffectoftheexpenditureontheusefullifeoftheequipment.
Weseparatelyidentifyandaccountforcertainsignificantcomponentsofourhydraulicfracturingunitsincludingtheengine,transmission,andpump,whichrequiresustoseparatelyestimatetheusefullivesofthesecomponents.Forourotherserviceequipment,wedonotseparatelyidentifyandtrackdepreciationofspecificoriginalcomponents.Whenwereplacecomponentsoftheseassets,wetypicallyhavetoestimatethenetbookvaluesofthecomponentsthatareretired,whicharebasedprimarilyupontheirreplacementcosts,theiragesandtheiroriginalestimatedusefullives.
Definite-lived Intangible Assets
Theamortizationofourdefinite-livedintangibleassetsreflectedinourconsolidatedstatementsofoperationswas$102.5millionandzerofortheyearsendedDecember31,2015and2016,respectively.Theseintangibleassetswereprimarilyrelatedtocustomerrelationshipsandproprietarychemicalblendsacquiredinbusinessacquisitions.Wecalculatedamortizationfortheseassetsbasedontheirestimatedusefullives.Whentheseassetswererecorded,wemadeestimateswithrespecttotheirusefullivesthatwebelievedwerereasonable.However,theseestimatescontainedjudgmentsregardingthefutureutilityoftheseassetsandachangeinourassessmentoftheusefullivesoftheseassetscouldhavemateriallychangedthefuturecalculationofamortization.AtDecember31,2015,weimpairedallofourdefinite-livedintangibleassets.
Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets
Long-livedassets,suchasproperty,plant,equipmentanddefinite-livedintangibleassets,arereviewedforimpairmentwheneventsorchangesincircumstancesindicatethatthecarryingamountmaynotberecoverable,suchasinsufficientcashflowsorplanstodisposeoforselllong-livedassetsbeforetheendoftheirpreviouslyestimatedusefullives.Ifthecarryingamountisnotrecoverable,werecognizeanimpairmentlossequaltotheamountbywhichthecarryingamountexceedsfairvalue.We
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estimatefairvaluebasedontheincome,marketorcostvaluationtechniques.Ourfairvaluecalculationsforlong-livedassetsandintangibleassetscontainuncertaintiesbecausetheyrequireustoapplyjudgmentandestimatesconcerningfuturecashflows,strategicplans,usefullivesandassumptionsaboutmarketperformance.Wealsoapplyjudgmentintheselectionofadiscountratethatreflectstheriskinherentinourcurrentbusinessmodel.
Wehavehistoricallyacquiredgoodwillandindefinite-livedintangibleassetsrelatedtobusinessacquisitions.Goodwillrepresentstheexcessofthepurchasepriceoverthefairvalueofnetassetsacquired.Wereviewourgoodwillandindefinite-livedintangibleassetsonanannualbasis,atthebeginningofthefourthquarter,andwhenevereventsorchangesincircumstancesindicatethecarryingvalueofgoodwilloranintangibleassetmayexceeditsfairvalue.Ifthecarryingvalueofgoodwilloranintangibleassetexceedsitsfairvalue,werecognizeanimpairmentlossforthisdifference.Ourimpairmentlosscalculationsforgoodwillandindefinite-livedintangibleassetscontainuncertaintiesbecausetheyrequireustoestimatefairvaluesofourreportingunitsandintangibleassets,respectively.Weestimatefairvaluesbasedonvariousvaluationtechniquessuchasdiscountedcashflowsandcomparablemarketanalyses.Thesetypesofanalysescontainuncertaintiesbecausetheyrequireustomakejudgmentsandassumptionsregardingfutureprofitability,industryfactors,plannedstrategicinitiatives,discountratesandotherfactors.
Unconditional Purchase Obligations
Wehavehistoricallyenteredintosupplyarrangements,primarilyforsand,withourvendorsthatcontainunconditionalpurchaseobligations.Theserepresentobligationstotransferfundsinthefutureforfixedorminimumquantitiesofgoodsorservicesatfixedorminimumprices,suchas"take-or-pay"contracts.Weenterintotheseunconditionalpurchaseobligationarrangementsinthenormalcourseofbusinesstoensurethatadequatelevelsofsourcedproductareavailabletous.Toaccountforthesearrangements,wemustmonitorwhetherwemayberequiredtomakeaminimumpaymenttoavendorinafutureperiodbecauseourprojectedinventorypurchasesmaynotsatisfyourminimumcommitments.Ifweconcludethatitisprobablethatwewillmakeaminimumpaymentunderthesearrangements,wewillrecordanestimatedlossforthesecommitmentsinthecurrentperiod.
Alossrelatedtoanunconditionalpurchaseobligationcontainsuncertaintiesbecauseitrequiresustomakeassumptionsandapplyjudgmenttoforecastfuturedemand,determinetheultimateallocationofacommitmentshortfalltoourvariousvendors,andassessourabilitytocureacommitmentshortfallduringcureperiodsallowedforbycertainvendors.Althoughwebelievethatourjudgmentsandestimatesarereasonable,actualresultscoulddiffer,andwemaybesubjecttoadditionallossesorgainsthatcouldbematerialinfutureperiods.
Tax Contingencies
Wearesubjecttoincometaxesandotherstateandlocaltaxes.Ourtaxreturnsareperiodicallyauditedbyfederal,stateandlocaltaxauthorities.Theseauditsincludequestionsregardingourtaxfilingpositions,includingthetimingandamountofdeductionsandthereportingofvarioustaxabletransactions.Atanyonetime,multipletaxyearsaresubjecttoauditbythevarioustaxauthorities.Afterevaluatingtheexposuresassociatedwithourvarioustaxfilingpositions,wemayrecordaliabilityforsuchexposures.Anumberofyearsmayelapsebeforeaparticularmatter,forwhichwehaveestablishedaliability,isauditedandfullyresolvedorclarified.Weadjustourliabilityforthesetaxexposuresintheperiodinwhichataxpositioniseffectivelysettled,theperiodinwhichthestatuteoflimitationsexpiresfortherelevanttaxingauthoritytoexaminethetaxposition,orwhenmoreinformationbecomesavailable.
Ourliabilitiesforthesetaxpositionscontainuncertaintiesbecausemanagementisrequiredtomakeassumptionsandapplyjudgmenttoestimatetheexposuresassociatedwithourvariousfiling
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positions.Althoughwebelievethatourjudgmentsandestimatesarereasonable,actualresultscoulddiffer,andwemaybesubjecttolossesorgainsthatcouldbematerial.
RecentAccountingPronouncements
SeeNote2—"SummaryofSignificantAccountingPolicies"inNotestoourAuditedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusandNote1—"BasisofPresentation"andNote11—"SubsequentEvents"inNotestoourUnauditedCondensedConsolidatedFinancialStatementsincludedelsewhereinthisprospectusformoreinformation.
QuantitativeandQualitativeDisclosuresAboutMarketRisk
AtDecember31,2016,andSeptember30,2017,weheldnoderivativeinstrumentsthatmateriallyincreasedourexposuretomarketrisksforinterestrates,foreigncurrencyrates,commoditypricesorothermarketpricerisks.
Wearesubjecttointerestrateriskonaportionofourlong-termdebt.OurTermLoandue2021bearsinterestatavariableratebasedonLIBORplusamarginof4.75%perannum,witha1.00%LIBORfloor.AsofSeptember30,2017,LIBORwasabovethe1.00%floor.Thereforea1.00%increaseinLIBORwouldincreasetheannualinterestpaymentsforthisdebtbyapproximately$4.3million.
Our2020NotesbearinterestatavariableratebasedonLIBORplusamarginof7.50%perannum.Therefore,a1.00%increaseinLIBORwouldincreasetheannualinterestpaymentsforthesenotesbyapproximately$3.5million.
Wearesubjecttocommoditypriceriskrelatedtoourdieselfuelusage.A$0.25pergallonchangeinthepriceofdieselfuelwouldhavechangedourcostsofrevenue,excludingdepreciation,byapproximately$5million.
During2016andthefirstninemonthsof2017,substantiallyallofouroperationswereconductedwithintheUnitedStates;thereforewehadnosignificantexposuretoforeigncurrencyexchangeraterisk.
ChangeinAccountants
OnNovember10,2015,ourboardofdirectorsapprovedthedismissalofErnst&YoungLLP,orE&Y,fromitsroleasourindependentregisteredpublicaccountingfirm.
ThereportsofE&YonourconsolidatedfinancialstatementsfortheyearsendedDecember31,2014and2013,whicharenotincludedherein,didnotcontainanadverseopinionoradisclaimerofopinionandwerenotqualifiedormodifiedastouncertainty,auditscopeoraccountingprinciples.
DuringthetwofiscalyearsendedDecember31,2014,andinthesubsequentinterimperiodthroughNovember10,2015,wehadnodisagreementswithE&Yonanymatterofaccountingprinciplesorpractices,financialstatementdisclosureorauditingscopeorprocedure,whichdisagreements,ifnotresolvedtothesatisfactionofE&Y,wouldhavecausedE&Ytomakereferencetothesubjectmatterofthedisagreementsinconnectionwithitsreportsontheconsolidatedfinancialstatementsforsuchperiods.
WeprovidedE&YwithacopyofthisdisclosurepriortoitsfilingandrequestedthatE&YfurnishuswithaletteraddressedtotheSECstatingwhetheritagreeswiththeabovestatementsand,ifnot,statingtherespectinwhichitdoesnotagree.AcopyofE&Y'sletter,datedFebruary10,2017,isattachedasExhibit16.1.
OnNovember10,2015,ourboardofdirectorsapprovedtheengagementofGrantThorntonLLPasournewindependentregisteredpublicaccountingfirm.WedidnotconsultGrantThorntonLLPregarding(1)theapplicationofaccountingprinciplestoaspecifictransaction,eithercompletedorproposed,orthetypeofauditopinionthatmightberenderedonourfinancialstatements,or(2)anymatterthatwasthesubjectofadisagreement(asdefinedinItem304(a)(1)(iv)ofRegulationS-K)oranyreportableevent(asdescribedinItem304(a)(1)(v)ofRegulationS-K),duringthetwoyearsendedDecember31,2014and2013.
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BUSINESS
OurCompany
WeareoneofthelargestprovidersofhydraulicfracturingservicesinNorthAmerica.OurservicesenhancehydrocarbonflowfromoilandnaturalgaswellsdrilledbyE&Pcompaniesinshaleandotherunconventionalresourceformations.OurcustomersincludeChesapeakeEnergyCorporation,ConocoPhillips,DevonEnergyCorporation,EOGResources,Inc.,DiamondbackEnergyInc.,EQTCompany,RangeResourcesCorporation,andotherleadingE&PcompaniesthatspecializeinunconventionaloilandnaturalgasresourcesinNorthAmerica.
Wehave1.6milliontotalhydraulichorsepoweracross32fleets,with27fleetsactiveasofJanuary8,2018.FromDecember31,2010toJanuary8,2018,wehavecompletedmorethan163,000fracturingstagesacrossfiveofthemostactivemajorunconventionalbasinsintheUnitedStates.Thishistorygivesusvaluableexperienceandoperationalcapabilitiesattheleadingedgeofhorizontalwellcompletionsinunconventionalformations.AsoneofthelargesthydraulicfracturingserviceprovidersinNorthAmerica,webelievewearewellpositionedtocapitalizeontherecoveryoftheNorthAmericanoilandnaturalgasexplorationandproductionmarket.
Weareoneofthetopthreehydraulicfracturingprovidersacrossouroperatingfootprint,whichconsistsoffiveofthemostactivemajorunconventionalbasinsintheUnitedStates:thePermianBasin,theSCOOP/STACKFormation,theMarcellus/UticaShale,theEagleFordShaleandtheHaynesvilleShale.Ourmarketshareandourlarge-scaleoperatingpresenceacrossavarietyofactivebasinsprovidesuswithimportantstrategicadvantages,suchas:theabilitytoservelarge,multi-basincustomers;betternegotiatingpowerwithourcustomersandsuppliers;reducedvolatilityinouractivitylevelsascompletionsactivityendurescyclesindifferentbasins;andalowerrelativecoststructureforfixedoverheadandcorporatecosts.
ThefollowingmapshowsthebasinsinwhichweoperateandthenumberoffleetsoperatedfromeachbasinasofJanuary8,2018.
Weareexperiencingasurgeindemandforourservices,whichhasledustoreactivate10fleetssincethebeginningof2017.Basedoncontinuedrequestsfromcustomersforadditionalfleets,weareintheprocessofreactivatingadditionalequipmentatourin-housemanufacturingfacility.Thesurgeindemandforourserviceshasallowedustoraisepricessignificantly.Oilpriceshavemorethandoubledsincethe12-yearlowof$26.14inFebruary2016,reachingahighof$64.89inJanuary2018andaveraging$50.80in2017.Similarly,theU.S.horizontalrigcounthasincreasedby155%,fromalowof314rigsasofMay27,2016to802rigsasofJanuary19,2018,accordingtoanindustryreport.ThelargegrowthinE&Pdrillingactivityhascauseddemandforpressurepumpingservicestoexceedthesupplyofreadilyavailablefleets,whichhasledaveragepricingforourservicestorisemorethanapproximately56%fromthefourthquarterof2016.ThesepriceincreasesstartedinJanuary2017andcontinuedtoprogresstohigherlevelsthroughout2017.
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Duringthelasttwoyears,weimplementedmeasurestoreduceouroperatingcostsandtoimproveouroperatingefficiency,includingreducingthenumberofouractivefleetsasdemandforourservicesdeclined.Wefocusedonourabilitytooperateouractivefleetsforasmanyhoursperdayanddayspermonthaspossibleinordertolimitthenon-productivetimeofouractivefleets.Asaresult,wehaveincreasedouraveragestagesperactivefleetperquartertorecordlevels.Theseoperationalimprovementsoccurreddespitesignificantreductionsinouroperatingcosts,includingreducingourquarterlyselling,generalandadministrativeexpensebyapproximately60%from2014levels.
Wemaintainedtheseimprovedcostandefficiencylevelsinthefourthquarterof2017,which,combinedwiththerecentriseinpricingforourservices,allowedustoachieveEBITDAlevelsgreaterthanwhatweexperiencedin2014.Weachievedtheseresultsdespitehavingconsiderablylowerpricingandfeweractivefleetsonaveragethanwehadin2014.Webelievewecancontinuetosustainthesecostreductionsandefficiencyimprovementsasactivitylevelsincrease.
Ourcustomerstypicallycompensateusbasedonthenumberofstagesfractured,andtheprimarycontributortothenumberofstageswecompleteisourabilitytoreducedowntimeonourequipment.Asaresult,webelievethenumberofstagesfracturedandtheaveragenumberofstagescompletedperactivefleetinagivenperiodoftimeareimportantoperatingmetricsforourbusiness.Thegraphsbelowshowthenumberofstageswecompletedperquarterandtheaveragestagesperactivefleetwecompletedperquarter.Foradditionalinformationregardingourfleetcapacityandaveragestagesperactivefleetperquarterasanoperatingmetric,see"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations—ResultsofOperations—Revenue"and"—OurServices—HydraulicFracturing."
Wemanufactureandrefurbishmanyofthecomponentsusedbyourfleets,includingconsumables,suchasfluid-ends.Wealsoperformsubstantiallyallthemaintenance,repairandrefurbishmentofourhydraulicfracturingfleets,includingthereactivationofidleequipment.Ourcosttoproducecomponentsandreactivatefleetsissignificantlylessthanthecosttopurchasecomparablequalitycomponentsandfleetsfromthird-partysuppliers.Forexample,wemanufacturefluid-endsandpower-endsatacostthatisapproximately50%to60%lessthanpurchasingthemfromoutsidesuppliers.Weestimatethatourcostadvantagesavesusapproximately$85millionperyearatpeakproductionlevels.Inaddition,weperformfull-scalerefurbishmentsofourfracturingunitsatacostthatisapproximatelyhalfthecostofutilizinganoutsidesupplier.
Ourmanufacturingcapabilitiesalsoreducetheriskthatwewillbeunabletosourceimportantcomponents,suchasfluid-ends,power-endsandotherconsumableparts.Duringperiodsofhighdemandforhydraulicfracturingservices,externalequipmentvendorsoftenreportorderbacklogsofuptoninemonths.Ourcompetitorsmaybeunabletosourcecomponentswhenneededormayberequiredtopayamuchhigherpricefortheircomponents,orboth,duetobottlenecksinsupplierproductionlevels.Wehavehistoricallymanufactured,andbelievewehavethecapacitytomanufacture,allmajorconsumablecomponentsrequiredtooperateall32ofourfleetsatfullcapacity.Wedesignedandassembledallofour32existingfleetsusinginternalresourcesandwebelievewecouldassemble
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newfleetsinternallyatasubstantialdiscounttothecostofbuyingthemnewfromthird-partyproviders.
Wehaveauniformfleetofhydraulicfracturingequipment.Wedesignedourequipmenttouniformspecificationsintendedspecificallyforcompletionsworkinoilandnaturalgasbasinsrequiringhighlevelsofpressure,flowrateandsandintensity.Thestandardized,"plugandplay"natureofourfleetprovidesuswithseveraladvantages,including:reducedrepairandmaintenancecosts;reducedinventorycosts;theabilitytoredeployequipmentamongoperatingbasins;andreducedcomplexityinouroperations,whichimprovesoursafetyandoperationalperformance.
Ourlargescaleandcultureofinnovationallowsustotakeadvantageofleadingtechnologicalsolutions.Wehavebeenafastadopterofnewtechnologiesfocusedon:increasingfracturingeffectivenessforourcustomers,reducingtheoperatingcostsofourequipmentandenhancingtheHSEconditionsatourwellsites.Wehelpcustomersmonitorandmodifyfracturingfluidsanddesigns,throughourfluidresearchanddevelopmentoperationsthatweconductthroughastrategicpartnershipwithathird-partytechnologycenterthatutilizeskeyemployeeswhowerepreviouslyaffiliatedwithourCompany.InJune2017,werenewedourservicesagreementwiththisthird-partytechnologycenterforaone-yearterm,withanoptionforustorenewforadditionalone-yearterms.Thispartnershipallowsustoworkcloselywithourcustomerstorapidlyadoptandintegratenext-generationfluidbreakthroughs,suchasourNuFlo®1000fracturingfluiddiverter,intoourproductofferings.
Weowna45%interestinSinoFTS,whichisaChinesejointventurethatweformedinJune2014withSinopec.SinoFTSfractureditsfirstwellsinChinain2016.Althoughwedonotexpectrapidshort-termgrowth,thisjointventureprovidesuswithexperienceinoverseasoperationsthatcouldbebeneficialtousifhydraulicfracturingactivitybeginstogrowsignificantlyininternationalmarkets.
OurServices
Hydraulic Fracturing
Ourprimaryserviceofferingisprovidinghydraulicfracturingservices,alsoknownaspressurepumping,tooilandnaturalgasE&Pcompanies.Theseservicesaredesignedtoenhancehydrocarbonflowinoilandnaturalgaswells,thusincreasingtheamountofhydrocarbonsrecovered.Thedevelopmentofresourcesinunconventionalreservoirs,includingoilandnaturalgasshales,isatechnicallyandoperationallychallengingsegmentoftheoilfieldservicesmarketthathasexperiencedstronggrowthworldwide,particularlyintheUnitedStates.
Oilandnaturalgaswellsaretypicallydividedintooneormore"stages,"whichareisolatedzonesthatfocusthehigh-pressurefluidandproppantfromthehydraulicfracturingfleetintodistinctportionsofthewellandsurroundingreservoir.Thenumberofstagesthatwilldivideawellisdeterminedbythecustomer'sproposedjobdesign,andourcustomerstypicallycompensateusbasedoneachstagecompleted.Althoughthenumberandlengthofstagesmayvarybybasinandformationcharacteristics,wehavehistoricallymaintainedarelativelyconsistentpresenceineachoperatingbasin.Duringthelasttwoyears,asaresultofourcustomerstrendingtowardmoreintensecompletions,ourquarterlyaveragestagelength,measuredinminutestocomplete,hasincreasedbyapproximately16%.Despitethelongeraveragestagelengths,wehavebeenabletoincreaseouraveragestagesperactivefleetcomparedtotheendof2014.Wewereabletoincreaseouraveragestageperactivefleetsbecausetheprimarycontributortothenumberofstageswecompleteinaquarterisourabilitytoreducedowntimeonourequipment,ratherthananyvariabilityinoperatingbasinsorformationcharacteristics.Therefore,webelievethenumberofstagesthateachofouractivefleetscompletesinagivenperiodoftimeisanimportantoperatingmetric.
Hydraulicfracturingrepresentsthelargestcostofcompletingashaleoilornaturalgaswell.Theprocessconsistsofpumpingafracturingfluidintoawellcasingortubingatsufficientpressureto
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fracturetheformation.Thefracturingfluidprimarilyconsistsofwatermixedwithasmallamountofchemicalsandguar,formingahighlyviscousliquid.Materialsknownasproppants,inourcaseprimarilysand,aresuspendedinthefracturingfluidandarepumpedintothefracturetopropitopen.Oncethefracturesareopen,thefluidisdesignedto"break,"orreduceitsviscosity,sothatitwillmoreeasilyflowbackoutoftheformation.Theproppants,whichremainbehindintheformation,actasawedgethatkeepsthefracturesopen,allowingthetrappedhydrocarbonstoflowmorefreely.Asaresultofasuccessfulfracturingprocess,hydrocarbonrecoveryratesaresubstantiallyenhanced;thus,increasingthereturnoninvestmentforourcustomer.Theamountofhydrocarbonsproducedfromatypicalshaleoilornaturalgaswellgenerallydeclinesquickly,withproductionfromashalewelltypicallyfalling60%to70%inthefirstyear.Asaresult,E&Pcompaniesmustfracturenewwellstomaintainproductionlevels.
Wedesignedallofthehydraulicfracturingunitsandmuchoftheauxiliaryequipmentusedinourfleetstouniformspecificationsintendedspecificallyforworkinoilandnaturalgasbasinsrequiringhighpressuresandhighlevelsofsandintensity.Eachofourfleetstypicallyconsistsof16to25hydraulicfracturingunits;twoormoreblenders(oneusedasabackup),whichblendtheproppantandchemicalsintothehydraulicfluid;sandkingsandothertypesoflargecontainersusedtostoresandonlocation;variousvehiclesusedtotransportchemicals,gelsandothermaterials;andvariousservicetrucks.Eachhydraulicfracturingfleetincludesamobile,on-sitecontrolcenterthatmonitorspressures,ratesandvolumes,asapplicable.Eachcontrolcenterisequippedwithhighbandwidthsatellitehardwarethatprovidescontinuousuploadanddownloadofjobtelemetrydata.Thedataisdeliveredonareal-timebasistoon-sitejobpersonnel,thecustomerandanassignedcoordinatoratourheadquartersfordisplayinbothdigitalandgraphicalform.
Ourhydraulicfracturingunitsconsistprimarilyofahigh-pressurepump,adieselorcombineddieselandnaturalgasengine,atransmissionandvariousothersupportingequipmentmountedonatrailer.Thehighpressurepumpconsistsoftwokeyassemblies:thefluid-endandthepower-end.Althoughthepower-endofourpumpsgenerallylastsseveralyears,thefluid-end,whichisthepartofthepumpthroughwhichthefracturingfluidisexpelledunderhighpressure,isashorter-lastingconsumable,typicallylastinglessthanoneyear.Werefertothegroupofhydraulicfracturingunits,auxiliaryequipmentandvehiclesnecessarytoperformatypicalfracturingjobasa"fleet"andthepersonnelassignedtoeachfleetasa"crew."Ourfleetsoperateprimarilyona24-hour-per-daybasis,inwhichwetypicallystaffthreecrewsperfleet,includingonecrewwiththedayoff.Ourfocuson24-houroperationsallowsustokeepourequipmentworkingformorehoursperday,whichwebelieveenhancesourreturn-on-assetsovertime.
Weprimarilyenterintoserviceagreementswithourcustomersforoneormore"dedicated"fleets,ratherthanprovidingourfleetsprimarilyfor"spotwork."Underourtypicaldedicatedfleetagreement,wedeployoneormoreofourhydraulicfracturingfleetsexclusivelytothecustomertofollowthecustomer'scompletionscheduleandjobspecificationsuntiltheagreementexpiresoristerminatedinaccordancewithitsterms.Bycontrast,underatypicalspotworkagreement,thefleetmovesbetweencustomersasworkbecomesavailable.Webelievethatourstrategyofpursuingdedicatedfleetagreementsleadstohigherfleetutilization,asmeasuredbythenumberofdayseachfleetisworkingpermonth,whichwebelievereducesourmonth-to-monthrevenuevolatilityandimprovesourrevenueandprofitability.SeeNote2—"SummaryofSignificantAccountingPolicies—RevenueRecognition"inNotestoourAuditedConsolidatedFinancialStatementsfordiscussionofpricingunderourserviceagreementsandrevenuerecognizedforservices.
Animportantelementofhydraulicfracturingistheproperhandlingofthefracturingfluid.Inallofourhydraulicfracturingjobs,ourcustomersspecifythecompositionofthefracturingfluidtobeused.Sometimesthisfluidincludesproductsmarketedbyus.Ourcustomersareresponsibleforthedisposalofthefracturingfluidthatflowsbackoutofthewell,andwearenotinvolvedinthatprocessorinthedisposalofthefluid.Ourcontractsgenerallyrequireourcustomerstoindemnifyusagainst
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pollutionandenvironmentaldamagesoriginatingbelowthesurfaceofthegroundorarisingoutofwaterdisposal,orotherwisecausedbythecustomer,othercontractorsorotherthirdparties.Inturn,weindemnifyourcustomersforpollutionandenvironmentaldamagesoriginatingatorabovethesurfacecausedsolelybyus.
Wireline Services
Ourwirelineservicesprimarilyconsistofsettingplugsbetweenhydraulicfracturingstages,creatingperforationswithinhydraulicfracturingstagesandloggingthecharacteristicsofresourceformations.Ourwirelineservicesequipmentisdesignedtooperateunderhighpressureinunconventionalresourceformationswithoutdelayinghydraulicfracturingoperations.Wecurrentlyprovidewirelineservicesineachoftheareaswhereourhydraulicfracturingfleetsoperate.AsofJanuary8,2018,weowned51wirelineunits.
IndustryOverviewandTrends
Theoilandnaturalgasindustryhastraditionallybeenvolatileandisinfluencedbyacombinationoflong-term,short-termandcyclicaltrends,includingthedomesticandinternationalsupplyanddemandforoilandnaturalgas,currentandexpectedfuturepricesforoilandnaturalgasandtheperceivedstabilityandsustainabilityofthoseprices,productiondepletionratesandtheresultantlevelsofcashflowsgeneratedandallocatedbyE&Pcompaniestotheirwellcompletionsbudget.Theoilandnaturalgasindustryisalsoimpactedbygeneraldomesticandinternationaleconomicconditions,politicalinstabilityinoilproducingcountries,governmentregulations(bothintheUnitedStatesandelsewhere),levelsofcustomerdemand,theavailabilityofpipelinecapacityandotherconditionsandfactorsthatarebeyondourcontrol.
TheprincipalfactorinfluencingdemandforhydraulicfracturingservicesisthelevelofhorizontaldrillingactivitybyE&Pcompanies.Since2006,thesecompanieshaveincreasinglyfocusedonexploitingthehydrocarbonreservescontainedinNorthAmerica'sunconventionaloilandnaturalgasreservoirsbyutilizinghorizontaldrillingandhydraulicfracturing.Overthelastdecade,advancesinthesetechnologieshavemadethedevelopmentofmanyunconventionalresources,suchasoilandnaturalgasshaleformations,economicallyattractive.Theseadvancementsledtoadramaticincreaseinthedevelopmentofoil-andnaturalgas-producingbasinsintheUnitedStatesandacorrespondingincreaseinthedemandforhydraulicfracturingservices.Ourindustrygrewrapidlyuntilasignificantdeclineinoilandnaturalgaspricesfrom2014to2016causedadramaticreductionindrillingandcompletionactivity.
Thesignificantdeclineinoilandnaturalgaspricesthatbeganinthethirdquarterof2014continuedintoFebruary2016,whentheclosingpriceofoilreacheda12-yearlowof$26.14inFebruary2016.ThehorizontalrigcountintheUnitedStatesdeclinedby77%,fromitspeakof1,372rigsinNovember2014toalowof314rigsinMay2016,accordingtoaBakerHughes,Inc.reportdatedJanuary6,2017.Thereduceddrillingactivityledtoareductionindemandforhydraulicfracturingservicesandresultedinincreasedcompetitionandlowerpricesforhydraulicfracturingservices.Thelowcommoditypriceenvironmentcausedareductioninthecompletionactivitiesofmostofourcustomersandtheirspendingonourservices,whichsubstantiallyreducedthepriceswecouldchargeourcustomersandhadanegativeimpactonouractivitylevelsduringthisperiod.Webelievethefinancialdistressofmanyotherprovidersofhydraulicfracturingservicesledtosignificantmaintenancedeferralsandtheuseofidlefleetsforspareparts,resultinginamaterialreductionintotaldeployablefracturingfleets.
Recently,oilpriceshaveincreasedsincethe12-yearlowrecordedinFebruary2016,reachingahighof$64.89inJanuary2018andaveraging$50.80in2017.Ascommoditypriceshaverebounded,wehaveexperiencedanincreaseinthelevelofdemandforourservices.Althoughourindustry
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traditionallyhasbeenvolatile,thefollowingtrendsinourindustryshouldbenefitouroperationsandourabilitytoachieveourbusinessobjectivesascommoditypricesrecover:
LargeproductiongrowthfromU.S.oilandnaturalgasformations.TheaverageoilfieldproductionintheUnitedStatesgrewatacompoundannualgrowthrateof8.4%overtheperiodfrom2010through2016duetoproductiongainsfromunconventionalreservoirs.AccordingtotheU.S.EnergyInformationAdministration,orEIA,U.S.tightoilproductiongrewfromapproximately430,000barrelsperdayin2007toover4.6millionbarrelsperdayin2017throughNovember,representing70%oftotalU.S.crudeoilproductionin2017(asoftheendofNovember).AmajorityofthisincreasecamefromthePermianBasin,theSCOOP/STACKFormation,theMarcellus/UticaShale,theEagleFordShaleandtheHaynesvilleShale,whichareourfiveoperatingbasins,aswellastheWillistonBasin.Weexpectthatthiscontinuedgrowthwillresultinincreaseddemandforourservicesascommoditypricescontinuetostabilizeorincrease.
Increaseduseofhorizontaldrillingtodevelophigh-pressureU.S.resourcebasins.Thehorizontalrigcountasapercentageoftheoverallonshorerigcounthasincreasedeveryyearsince2007,whenhorizontalrigsrepresentedonlyapproximately25%ofthetotalU.S.onshorerigcounttoapproximately86%attheendof2017.WebelievehorizontaldrillingactivitywillcontinuetogrowasaportionofoverallonshorewellsdrilledintheUnitedStates,primarilyduetoE&Pcompaniesincreasinglydevelopingunconventionalresourcessuchasshales.Successfuleconomicproductionoftheseunconventionalresourcebasinsfrequentlyrequireshydraulicfracturingserviceslikethoseweprovide.
Fasterdrillingspeed.Thespeedofdrillingrigsisincreasingsignificantly,whichhasincreasedthenumberofwellsdrilledforagivenrigcount.Thespeedofdrillingmeansthatmorefracturingfleetsareneededforeveryactivedrillingrig.Onaveragethereusedtobefourdrillingrigsforeachfracturingfleet,butthatratioisnowlessthan3-to-1,andcontinuingtodecline.Asaresult,E&Pcompaniesareabletocompletemorestagesusingfewerrigs,andindustrysourcesexpectthattotalstagescompletedin2017willsurpass2014levelsatasignificantlylowercorrespondingrigcount.
Increasingcompletionsintensity.Longerlaterallengthsforhorizontalwellsandmoresandperlateralfootrequireincreasedhorsepowertoexecuteacompletion,whichmeansthatmorefracturingunitswillberequiredforeachfleet.Theincreasedamountofsandperlateralfootalsoincreasesthewear-and-tearoneachunit'scomponentsandparts,whichincreasestherepairandmaintenancecostsforeachfleet.Weexpectthattheprojectedincreaseindrillingspeedandsandintensitywillresultinanincreaseddemandfor,anddiminishedsupplyof,pressurepumpingservices.
Reducedsupplyofhydraulicfracturingservicesfromourcompetitors.ThehydraulicfracturingindustryintheUnitedStatesischaracterizedbyafewlargeproviders(sixwithover1millionhorsepower),severalmediumsizedproviders(ninewithbetween1millionand300,000horsepower)andasignificantnumberofsmallerproviders.Webelievethatmanyoftheseprovidershavebeendeferringordecliningtorepairtheirhydraulicfracturingequipmentasitbreaksdownfromordinaryuse.Thisphenomenonofproviderschoosingtoretireratherthanrepairbrokenequipmentisoftenreferredtoas"attrition."Accordingtoanindustryreport,thetotalworkinghorsepowerinNorthAmericadeclinedfromapproximately15millionin2014toapproximately6millionin2016.Additionally,thelargenumberofsmallserviceprovidersinourindustrymaymakeitanattractivecandidateforindustryconsolidation,whichwouldfurtherreducecompetition.Thesefactorsshouldleadtoabetterbalanceofsupplyanddemandandtohigherpricinglevelsforourservices.
Completionofrefracturingsanddrilled-but-uncompletedwells.Asproducingshalewellsage,theirlevelofproductiondeclines,typicallyfalling60%to70%inthefirstyear.Refracturingthesewellscanincreaseproductionlevels.Asthenumberandageofproducingunconventionalwellsincreases,themarketforrecompletionsisexpectedtoincrease.Inaddition,becausethecostofrecompletingawellis
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generallylowerthanthetotalcostofdrillingandcompletinganewwell,thedemandforrecompletionsisexpectedtoincreaserelativetodemandfornewcompletionsduringdepressedcommoditypriceenvironments.
Potentialdevelopmentofinternationalmarketsforourhydraulicfracturingservices.Therehasbeengrowinginternationalinterestinthedevelopmentofunconventionalresourcessuchasoilandnaturalgasshales.ThisinteresthasresultedinanumberofrecentlycompletedjointventuresbetweenmajorU.S.andinternationalE&PcompaniesrelatedtoshalebasinsintheUnitedStatesandacquisitionsofsignificantacreageinshalebasinsintheUnitedStatesbylarge,non-U.S.E&Pcompanies.Webelievethattheseacquisitionsandjointventures,whichgenerallyrequiretheinternationalpartnertocommittosignificantfuturecapitalexpenditures,willprovideadditionaldemandforhydraulicfracturingservicesinthecomingyears.Additionally,suchactivitymaystimulatedevelopmentofoilandnaturalgasshalesoutsidetheUnitedStates,suchastherecentactivitybyourSinoFTSjointventureinChongqing,China.
Increaseindemandforoilandnaturalgas.TheEIAprojectsthattheaverageWTIpricewillincreasethrough2040fromgrowingdemandandthedevelopmentofmorecostlyoilresources.TheEIAalsoanticipatescontinuedgrowthinlong-termU.S.domesticdemandfornaturalgas.Webelievethatasdemandforoilandnaturalgasincreases,E&Pactivitywillriseanddemandforourserviceswillincrease.RecenteventsincludingdeclinesinNorthAmericanproduction,attritioninthesupplyofhorsepowerinourindustryandagreementsbyOPECandcertainotheroil-producingcountriestoreduceoilproductionhaveprovidedupwardmomentumforenergyprices.Ifnear-termcommoditypricesstabilizeatcurrentlevelsorrecoverfurther,weexpectamoreactivedemandenvironmentduring2018and2019thanwasexperiencedin2015and2016.
CompetitiveStrengths
Webelievethatwearewellpositionedbecauseofthefollowingcompetitivestrengths:
Large scale and leading market share across five of the most active major U.S. unconventional resource basins
With1.6milliontotalhydraulichorsepowerinourfleet,weareoneofthelargesthydraulicfracturingserviceprovidersinNorthAmerica.WeoperateinfiveofthemostactivemajorunconventionalbasinsintheUnitedStates,includingthePermianBasin,theSCOOP/STACKFormation,theMarcellus/UticaShale,theEagleFordShaleandtheHaynesvilleShale,whichprovideusexposuretoavarietyofoilandnaturalgasproducersaswellasgeographies.Weareoneofthetopthreehydraulicfracturingprovidersacrossthisoperatingfootprintbasedonmarketshare.AccordingtoanindustryreportfromDecember2017,thesefiveoperatingbasinswillaccountforapproximately80%ofwell-completionsspendingin2018and2019.
Thisgeographicdiversityreducesthevolatilityinourrevenueduetobasintrends,relativeoilandnaturalgasprices,adverseweatherandotherevents.Ourfivehydraulicfracturingdistrictsenableustorapidlyrepositionourfleetsbasedondemandtrendsamongdifferentbasins.Additionally,ourlargemarketshareineachofouroperatingbasinsallowsustospreadourfixedcostsoveragreaternumberoffleets.Furthermore,ourlargescalestrengthensournegotiatingpositionwithoursuppliersandourcustomers.
Pure-play, efficient hydraulic fracturing services provider with extensive experience in U.S. unconventional oil and natural gas production
Ourprimaryfocusishydraulicfracturing.FortheyearendedDecember31,2016andtheninemonthsendedSeptember30,2017,95%ofourrevenuescamefromhydraulicfracturingservices.FromDecember31,2010toJanuary8,2018,wehavecompletedmorethan163,000fracturingstagesasof
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January8,2018acrossfiveofthemostactivemajorunconventionalbasinsintheUnitedStates.Thishistorygivesusinvaluableexperienceandoperationalcapabilitiesthatareattheleadingedgeofhorizontalwellcompletionsinunconventionalformations.
Wedesignedandassembledallofthehydraulicfracturingunitsandmuchoftheauxiliaryequipmentusedinourfleetstouniformspecificationsintendedspecificallyforworkinoilandnaturalgasbasinsrequiringhighpressuresandhighlevelsofsandintensity.Inaddition,weuseproprietarypumpswithfluid-endsthatarecapableofmeetingthemostdemandingpressure,flowrateandproppantloadingrequirementsencounteredinthefield.
Inordertoachievethehighestrevenuepotentialandhighestreturnsonourinvestedcapital,werunallofourfleetsin24-houroperationsallowingustooptimizetherevenue-producingabilityofouractivefleets.Inaddition,ratherthanperform"spotwork,"weprefertodedicateeachofourfleetstoaspecificcustomer,integratingourfleetintotheirdrillingprogramschedule.Thesearrangementsallowustoincreasethenumberofdayspermonththatourfleetisgeneratingrevenueandallowourcrewstobetterunderstandcustomerexpectationsresultinginimprovedefficiencyandsafety.
In-house manufacturing, equipment maintenance and refurbishment capabilities
Wemanufactureandrefurbishmanyofthecomponentsusedbyourfleets,includingconsumables,suchasfluid-ends.Wealsoperformsubstantiallyallthemaintenance,repairandrefurbishmentofourhydraulicfracturingfleets,includingthereactivationofouridleequipment.Ourcosttoproducecomponentsandreactivateidlefleetsissignificantlylessthanthecosttopurchasecomparablequalitycomponentsandfleetsfromthird-partysuppliers.Forexample,wemanufacturefluid-endsandpower-endsatacostthatisapproximately50%to60%lessthanpurchasingthemfromoutsidesuppliers.Inaddition,weperformfull-scalerefurbishmentsofourfracturingunitsatacostthatisapproximatelyhalfthecostofutilizinganoutsidesupplier.Weestimatethatthiscostadvantagesavesusapproximately$85millionperyearatpeakproductionlevels.Astrendsinourindustrycontinuetowardincreasingproppantlevelsandserviceintensity,theaddedwear-and-tearonhydraulicfracturingequipmentwillincreasetherateatwhichcomponentsneedtobereplacedforatypicalfleet,increasingourlong-termcostadvantageversusourcompetitorsthatdonothavesimilarin-housemanufacturingcapabilities.
Ourmanufacturingcapabilitiesalsoreducetheriskthatwewillbeunabletosourceimportantcomponents,suchasfluid-ends,power-endsandotherconsumableparts.Duringperiodsofhighdemandforhydraulicfracturingservices,externalequipmentvendorsoftenreportorderbacklogsofuptoninemonths.Ourcompetitorsmaybeunabletosourcecomponentswhenneededormayberequiredtopayamuchhigherpricefortheircomponents,orboth,duetobottlenecksinsupplierproductionlevels.Wehavehistoricallymanufactured,andbelievewehavethecapacitytomanufacture,allmajorconsumablecomponentsrequiredtooperateall32ofourfleetsatfullcapacity.Wealsodesignedandassembledallofour32existingfleetsusinginternalresourcesandbelievewecanassemblenewfleetsinternallyatasubstantialdiscounttothecostofbuyingthemnewfromthird-partyproviders.
Additionally,manufacturingourequipmentinternallyallowsustoconstantlyimproveourequipmentdesigninresponsetotheknowledgewegainbyoperatinginharshgeologicalenvironmentsunderchallengingconditions.Thisrapidfeedbackloopbetweenourfieldoperationsandourmanufacturingoperationspositionsourequipmentattheleadingedgeofdevelopmentsinhydraulicfracturingdesign.
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Uniform fleet of standardized, high specification hydraulic fracturing equipment
Wehaveauniformfleetofhydraulicfracturingequipment.Wedesignedourequipmenttouniformspecificationsintendedspecificallyforcompletionsworkinoilandnaturalgasbasinsrequiringhighlevelsofpressure,flowrateandsandintensity.Thestandardized,"plugandplay"natureofourfleetprovidesuswithseveraladvantages,including:reducedrepairandmaintenancecosts;reducedinventorycosts;theabilitytoredeployequipmentamongoperatingbasins;andreducedcomplexityinouroperations,whichimprovesoursafetyandoperationalperformance.Webelieveourtechnologicallyadvancedfleetsareamongthemostreliableandbestperformingintheindustrywiththecapabilitiestomeetthemostdemandingpressureandflowraterequirementsinthefield.
Ourstandardizedequipmentreducesourdowntimeasourmechanicscanquicklyandefficientlydiagnoseandrepairourequipment.Ouruniformequipmentalsoreducestheamountofinventoryweneedonhand.Weareabletomoreeasilyshiftfracturingpumpsandotherequipmentamongoperatingareasasneededtotakeadvantageofmarketconditionsandtoreplacetemporarilydamagedequipment.Thisflexibilityallowsustotargetcustomersthatareofferinghigherpricesforourservices,regardlessofthebasinsinwhichtheyoperate.Standardizedequipmentalsoreducesthecomplexityofouroperations,whichlowersourtrainingcosts.Additionally,webelieveourindustry-leadingsafetyrecordispartlyattributabletothestandardizationofourequipment,whichmakesiteasierformechanicsandequipmentoperatorstoidentifyanddiagnoseproblemswithequipmentbeforetheybecomesafetyhazards.
Safety leader
Safetyisatthecoreofouroperations.Oursafetyrecordfor2016wasthebestinourhistoryandwebelievesignificantlybetterthanourindustrypeergroup,basedondataprovidedbyreportsoftheU.S.BureauofLaborStatisticsfrom2011through2016.Forthepastthreeyears,webelieveourtotalrecordableincidentratewaslessthanhalfoftheindustryaverage.Duringthefirstquarterof2017,wereachedamilestoneofover10millionman-hourswithoutalosttimeincident.Manyofourcustomersimposeminimumsafetyrequirementsontheirsuppliersofhydraulicfracturingservices,andsomeofourcompetitorsarenotpermittedtobidonworkforcertaincustomersbecausetheydonotmeetthosecustomers'minimumsafetyrequirements.Becausesafetyisimportanttoourcustomers,oursafetyscorehelpsourcommercialteamtowinbusinessfromourcustomers.Oursafetyfocusisalsoamoralebenefitforourcrews,whichenhancesouremployeeretentionrates.Finally,webelievethatcontinuallysearchingforwaystomakeouroperationssaferistherightthingtodoforouremployeesandourcustomers.
Experienced management and operating team
Duringthedownturn,ourmanagementteamfocusedonreducingcosts,increasingoperatingefficiencyanddifferentiatingourselvesthroughinnovation.Theteamhasanextensiveanddiverseskillset,withanaverageofover23yearsofprofessionalexperience.Ouroperationalandcommercialexecutiveshaveadeepunderstandingofunconventionalresourceformations,withanaverageofapproximately31yearsofoilandnaturalgasindustryexperience.Inaddition,asaresultofourpure-playfocusonhydraulicfracturinganddedicatedfleetstrategy,ouroperationsteamshaveextensiveknowledgeofthegeographiesinwhichweoperateaswellasthetechnicalspecificationsandotherrequirementsofourcustomers.WebelievethisknowledgeandexperienceallowsustoserviceavarietyofE&Pcompaniesacrossdifferentbasinsefficientlyandsafely.
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OurStrategy
Ourprimarybusinessobjectiveistobethelargestpure-playproviderofhydraulicfracturingserviceswithinU.S.unconventionalresourcebasins.Weintendtoachievethisobjectivethroughthefollowingstrategies:
Capitalize on expected recovery and demand for our services
AsdemandforoilfieldservicesintheUnitedStatesrecovers,thehydraulicfracturingsectorisexpectedtogrowsignificantly.WebelievethatthecostperbarrelofoilfromunconventionalonshoreproductionisoneofthelowestintheUnitedStates,and,asaresult,E&Pcapitalhasshiftedtowardsthistypeofproduction.IndustryreportshaveforecastedthatthenumberofhorizontalwellsdrilledintheUnitedStateswillincreaseatacompoundannualgrowthrate,orCAGR,of20.7%from2016through2020.Inaddition,thesandutilizedinthecompletionofahorizontalwellhasmorethandoubledsince2014asoperatorscontinuetoinnovatetofindtheoptimaljobdesign.AsoneofthelargesthydraulicfracturingserviceprovidersinNorthAmerica,webelievewearewellpositionedtocapitalizeonthecontinuedincreaseintheonshoreoilandnaturalgasexplorationandproductionmarket.
Wehave1.6milliontotalhydraulichorsepoweracross32totalfleets,with27fleetsactiveasofJanuary8,2018.Asurgeindemandforourservicesledustoreactivate10fleetssincethebeginningof2017.Weareintheprocessofactivatingadditionalfleetsbasedoncontinuedcustomerinterest,andwebelieveallofthisequipmentcanbereturnedtoservicewithinninemonths,ifmarketconditionsrequire.Weestimatetheaveragecosttoreactivateourinactivefleetstobeapproximately$6.9millionperfleet,whichincludescapitalexpenditures,repairschargedasoperatingexpenses,laborcostsandotheroperatingexpenses.
Deepen and expand relationships with customers that value our completions efficiency
Weserviceourcustomersprimarilywithdedicatedfleetsand24-houroperations.Wededicateoneormoreofourfleetsexclusivelytothecustomerforaperiodoftime,allowingforthosefleetstobeintegratedintothecustomer'sdrillingandcompletionschedule.Asaresult,weareabletoachievehigherlevelsofutilization,asmeasuredbythenumberofdayseachfleetisworkingpermonth,whichincreasesourprofitability.Inaddition,weoperateourfleetsona24-hourbasis,allowingustocompleteourservicesmoreefficientlywiththeleastamountofdowntime.Accordingly,weseektopartnerwithcustomersthathavealargenumberofwellsneedingcompletionandthatvalueefficiencyintheperformanceofourservice.Specifically,wetargetcustomerswhosecompletionsactivitytypicallyinvolvesminimaldowntimebetweenstages,ahighnumberofstagesperwell,multiplewellsperpadandashortdistancefromonewellpadsitetothenext.Thisstrategyalignswiththestrategyofmanyofourcustomers,whoaretryingtoachieveamanufacturing-stylemodelofdrillingandcompletingwellsinasequentialpatterntomaximizeeffectiveacreage.Weplantoleveragethisstrategytoexpandourrelationshipswithourexistingcustomersaswecontinuetoattractnewcustomers.
Capitalize on our uniform fleet, leading scale and significant basin diversity to provide superior performance with reduced operating costs
WeprimarilyservelargeindependentE&PcompaniesthatspecializeinunconventionaloilandnaturalgasresourcesinNorthAmerica.Becauseweoperateforcustomerswithsignificantscaleineachofouroperatingbasins,wehavethediversitytoreacttoandbenefitfrompositiveactivitytrendsinanybasinwithabalancedexposuretooilandnaturalgas.Ouruniformfleetallowsustocost-effectivelyredeployequipmentandfleetsamongexistingoperatingbasinstocapturethebestpricingandactivitytrends.Theuniformfleetiseasiertooperateandmaintain,resultinginreduceddowntimeaswellaslowertrainingcostsandinventorystockingrequirements.Ourgeographicbreadth
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alsoprovidesuswithopportunitiestocapitalizeoncustomerrelationshipsinonebasininordertowinbusinessinotherbasinsinwhichthecustomeroperates.Weintendtoleverageourscale,standardizedequipmentandcoststructuretogainmarketshareandwinnewbusiness.
Rapidly adopt new technologies in a capital efficient manner
Ourlargescaleandcultureofinnovationallowustotakeadvantageofleadingtechnologicalsolutions.Wehavebeenafastadopterofnewtechnologiesfocusedon:increasingfracturingeffectivenessforourcustomers,reducingtheoperatingcostsofourequipmentandenhancingtheHSEconditionsatourwellsites.Wehelpcustomersmonitorandmodifyfracturingfluidsanddesignsthroughourfluidresearchanddevelopmentoperationsthatweconductthroughastrategicpartnershipwithathird-partytechnologycenterthatutilizeskeyemployeeswhowerepreviouslyaffiliatedwithourCompany.InJune2017,werenewedourservicesagreementwiththisthird-partytechnologycenterforaone-yearterm,withanoptionforustorenewforadditionalone-yearterms.Thispartnershipallowsustoworkcloselywithourcustomerstorapidlyadoptandintegratenext-generationfluidbreakthroughs,suchasourNuFlo®1000fracturingfluiddiverter,intoourproductofferings.
Recentexamplesofinitiativesaimedatreducingouroperatingcostsinclude:vibrationsensorswithpredictivemaintenanceanalyticsonourheavyequipment;stainlesssteelfluid-endswithalongerusefullife;high-definitioncamerastoremotelymonitortheperformanceofourequipment;andadoptionofhardenedalloysandlubricantblendsforourconsumables.RecentexamplesofinitiativesaimedatimprovingourHSEconditionsinclude:dualfuelenginesthatcanrunonbothnaturalgasanddieselfuel;electronicpressurereliefsystems;spillpreventionandcontainmentsolutions;dustcontrolmitigation;electronicloggingdevices;andleadingcontainerizedproppantdeliverysolutions.
Reduce debt and maintain a more conservative capital structure
Webelievethatourcapitalstructureandliquidityuponcompletionofthisofferingwillimproveourfinancialflexibilitytocapitalizeefficientlyonourindustryrecovery,ultimatelyincreasingvalueforourstockholders.Tofurtherimproveourfinancialflexibility,weintendtoenterintoa$250.0millionasset-basedrevolvingcreditfacilityfollowingtheconsummationofthisoffering.Weexpectthatwewillenterintothecreditfacilityuponredemptionoftheremaining2020Noteswiththeproceedsofthisoffering.Ourfocuswillbeonthecontinuedprudentmanagementofourcapitalstructure.Webelievethisfocuscreatespotentialforsignificantoperatingleverageandstrongfreecashflowgenerationduringanindustryupcycle.Asaresult,webelieveweshouldbeabletonotonlymaketheinvestmentsnecessarytoremainamarketleaderinhydraulicfracturing,butalsotocontinuetostrengthenourbalancesheet.Ifweareabletosufficientlyreduceourindebtednessandcontinuetogeneratecashflowfromoperations,weexpecttoreturnvaluetoshareholders,includingbymeansofcashreturns,accretiveacquisitionsthatfitourmodelandfootprint,ortheconstructionofnewfleetsdependingonourbusinessoutlook.See"DividendPolicy"and"RiskFactors"formoreinformation.
Properties
Ourprincipalpropertiesincludeourdistrictofficesandmanufacturingfacilities.Webelieveourfacilitiesareingoodconditionandsuitableforthepurposesforwhichtheyareused.
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Hydraulic Fracturing District Offices
Wehavefivedistrictofficesoutofwhichweconducthydraulicfracturingservices.Thefollowingtableprovidescertaininformationaboutourdistrictofficelocations.Weownthelandandfacilitiesateachoftheselocations.
Wealsoleasea22-acre,250,000squarefootfacilityinWilliamsport,PennsylvaniathatweusedasadistrictofficeuntilAugust2015.Weareactivelyseekingtosubleasethisfacility.Wemayalsoreopenthisfacilityifwedetermineitisneededforoperationsintheregioninthefuture.
Wireline District Offices
Wehavefivedistrictofficesoutofwhichweconductwirelineservices.Thefollowingtableprovidescertaininformationaboutourdistrictofficelocations.
Manufacturing Facilities
Wemanufacturetheproprietary,high-pressurepumps,includingthefluid-endsandpower-ends,aswellascertainotherequipment,thatweuseinourhydraulicfracturingoperationsina89,522squarefootfacilityownedbyusinFortWorth,Texas.
Weowna94,050-squarefootfacilityinAledo,Texasthatisusedforequipmentrepair,maintenanceandelectronicsinstallation.Wealsomanufacture,refurbishandassemblecertaincomponentsofourhydraulicfracturingunitsandotherserviceequipmentatthisfacility.
Principal Executive Offices
Wemaintainprincipalexecutiveofficesofapproximately33,000-squarefeetleasedbyusinFortWorth,Texas.
Sales Offices
Wehavefoursalesoffices,whichweleaseinHoustonandMidland,Texas,OklahomaCity,Oklahoma,andCanonsburg,Pennsylvania.
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Facilities
DistrictOffice PrimaryAreaofService Formation Size(Sq.Ft.)(approx.)
Acres(approx.)
Odessa,Texas SoutheastNewMexicoandWestTexas PermianBasin 82,800 36ElkCity,Oklahoma Oklahoma SCOOP/STACK 42,330 40WashingtonCounty,Pennsylvania Pennsylvania,WestVirginiaandOhio Marcellus/UticaShale 41,660 27Pleasanton,Texas SouthTexas EagleFordShale 62,950 113Shreveport,Louisiana EastTexasandWestLouisiana HaynesvilleShale 55,600 40
Facilities
DistrictOffice PrimaryAreaofService Formation Size(Sq.Ft.)(approx.)
Acres(approx.)
Odessa,Texas(1) SoutheastNewMexicoandWestTexas PermianBasin 7,200 3Yukon,Oklahoma(1) Oklahoma SCOOP/STACK 10,950 10Charleroi,Pennsylvania(1) OhioandPennsylvania Marcellus/UticaShale 28,000 3Pleasanton,Texas SouthTexas EagleFordShale 14,375 14Longview,Texas EastTexasandWestLouisiana HaynesvilleShale 36,000 14
(1) LeasedFacility
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Customers
Thecustomersweserveareprimarilylarge,independentE&PcompaniesthatspecializeinunconventionaloilandnaturalgasresourcesinNorthAmerica.Thefollowingtableshowsthecustomersthatrepresentedmorethan10%ofourtotalrevenueduringtheyearsendedDecember31,2015and2016andduringtheninemonthsendedSeptember30,2017.Thelossofanyofourlargestexistingcustomerscouldhaveamaterialadverseeffectonourresultsofoperations.
Suppliers
Wepurchasesomeofthepartsthatweuseintherefurbishmentandrepairofourheavyequipment,suchashydraulicfracturingunitsandblenders,andintherefurbishment,repairandmanufacturingofcertainmajorreplacementcomponentsofourheavyequipmentsuchasfluid-ends,power-ends,engines,transmissions,radiatorsandtrailers.WealsopurchasetheproppantsandchemicalsweuseinouroperationsandthedieselfuelforourequipmentfromavarietyofsuppliersthroughouttheUnitedStates.Wehavelong-termsupplyagreementswithfourvendorstosupplyasignificantportionoftheproppantusedinouroperations,rangingfromtwotoeightyears.Thesearetake-or-payagreementswithminimumunconditionalpurchaseobligations.Theseminimumpurchaseobligationswouldchangebaseduponthevendors'abilitytosupplytheminimumrequirements.Todate,wehavegenerallybeenabletoobtaintheequipment,partsandsuppliesnecessarytosupportouroperationsonatimelybasisatcompetitiveprices.Inthepast,wehaveexperiencedsomedelaysinobtainingthesematerialsduringperiodsofhighdemand.Wedonotcurrentlyexpectsignificantinterruptionsinthesupplyofthesematerials.Whilewebelievethatwewillbeabletomakesatisfactoryalternativearrangementsintheeventofanyinterruptioninthesupplyofthesematerialsand/orproductsbyoneofoursuppliers,therecanbenoassurancethattherewillbenopriceorsupplyissuesoverthelong-term.
Competition
Themarketinwhichweoperateishighlycompetitiveandhighlyfragmented.Ourcompetitionincludesmulti-nationaloilfieldservicecompaniesaswellasregionalcompetitors.Ourmajormulti-nationalcompetitorsareHalliburtonCompanyandSchlumbergerLimited,eachofwhichhassignificantlygreaterfinancialresourcesthanwedo.OurmajordomesticcompetitorsareRPC,Inc.,SuperiorEnergyServices,ProPetroHoldingCorp.,Patterson-UTIEnergy,Inc.,BJServices,Inc.,LibertyOilfieldServicesInc.andKeaneGroup,Inc.Certainofthesecompetitorsarelarge,multi-nationalandmajordomesticbusinessesthatprovideanumberofoilfieldservicesandproductsinadditiontohydraulicfracturing.Wealsofacecompetitionfromsmallerregionalserviceprovidersinsomeofthegeographiesinwhichweoperate.
81
YearEndedDecember31,
NineMonthsEnded
September30,2017
2015 2016 EPEnergyCorporation * 11% *ChesapeakeEnergyCorporation * * 10%EQTProductionCompany 12% 12% *VineOilandGas,L.P. * 10% *RangeResourcesCorporation 13% * *NewfieldExploration * 18% *MurphyOilCorporation 11% * *
* Lessthan10%.
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Competitioninourindustryisbasedonanumberoffactors,includingprice,servicequality,safety,andinsomecases,breadthofproducts.Webelieveweconsistentlydeliverexceptionalservicequality,basedinpartonthedurabilityofourequipment.Ourdurableequipmentreducesdowntimeduetoequipmentfailureandallowsourcustomerstoavoidcostsassociatedwithdelaysincompletingtheirwells.Bybeingabletomeetthemostdemandingpressureandflowraterequirements,ourequipmentalsoenablesustooperateefficientlyinchallenginggeologicalenvironmentsinwhichsomeofourcompetitorscannotoperateeffectively.
CyclicalNatureofIndustry
WeoperateinahighlycyclicalindustrydrivenmainlybythelevelofhorizontaldrillingactivitybyE&PcompaniesinunconventionaloilandnaturalgasreservoirsinNorthAmerica,whichinturndependslargelyoncurrentandanticipatedfuturecrudeoilandnaturalgaspricesandproductiondepletionrates.Acriticalfactorinassessingtheoutlookfortheindustryistheworldwidesupplyanddemandforoilandthedomesticsupplyanddemandfornaturalgas.Demandforoilandnaturalgasissubjecttolargeandrapidfluctuations.Thesefluctuationsaredrivenbycommoditydemandintheindustryandcorrespondingpriceincreases.Whenoilandnaturalgaspricesincrease,producersgenerallyincreasetheircapitalexpenditures,whichgenerallyresultsingreaterrevenuesandprofitsforoilfieldservicecompanies.However,increasedcapitalexpendituresalsoultimatelyresultingreaterproduction,whichhistorically,hasresultedinincreasedsuppliesandreducedpricesthat,inturn,tendtoreducedemandforoilfieldservicessuchashydraulicfracturingservices.Forthesereasons,ourresultsofoperationsmayfluctuatefromquartertoquarterandfromyeartoyear,andthesefluctuationsmaydistortperiod-to-periodcomparisonsofourresultsofoperations.
Seasonality
Seasonalityhasnotsignificantlyaffectedouroveralloperations.However,towardtheendofsomeyears,weexperiencesloweractivityinourpressurepumpingoperationsinconnectionwiththeholidaysandascustomers'capitalexpenditurebudgetsaredepleted.Occasionally,ouroperationshavebeennegativelyimpactedbysevereweatherconditions.
Employees
AtJanuary8,2018,wehadapproximately2,400employees.Ouremployeesarenotcoveredbycollectivebargainingagreements,noraretheymembersoflaborunions.Weconsiderourrelationshipwithouremployeestobegood.
Insurance
Ouroperationsaresubjecttohazardsinherentintheoilandnaturalgasindustry,includingaccidents,blowouts,explosions,fires,oilspillsandhazardousmaterialsspills.Theseconditionscancausepersonalinjuryorlossoflife,damagetoordestructionofproperty,equipment,theenvironmentandwildlifeandinterruptionorsuspensionofoperations,amongotheradverseeffects.Ifaseriousaccidentweretooccuratalocationwhereourequipmentandservicesarebeingused,itcouldresultinourbeingnamedasadefendanttoalawsuitassertingsignificantclaims.
Despiteourhighsafetystandards,wefromtimetotimehavesufferedaccidentsinthepastandweanticipatethatwecouldexperienceaccidentsinthefuture.Inadditiontothepropertyandpersonallossesfromtheseaccidents,thefrequencyandseverityoftheseincidentsaffectouroperatingcostsandinsurability,aswellasourrelationshipswithcustomers,employeesandregulatoryagencies.Anysignificantincreaseinthefrequencyorseverityoftheseincidents,orthegenerallevelofcompensationawards,couldadverselyaffectthecostof,orourabilitytoobtain,workers'compensationandother
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formsofinsuranceandcouldhaveotheradverseeffectsonourfinancialconditionandresultsofoperations.
Wecarryavarietyofinsurancecoveragesforouroperations,andwearepartiallyself-insuredforcertainclaims,intypesandamountsthatwebelievetobecustomaryandreasonableforourindustry.Thesecoveragesandretentionsaddresscertainrisksrelatingtocommercialgeneralliability,workers'compensation,businessauto,propertyandequipment,directorsandofficers,environment,pollutionandotherrisks.Althoughwemaintaininsurancecoverageoftypesandamountsthatwebelievetobecustomaryinourindustry,wearenotfullyinsuredagainstallrisks,eitherbecauseinsuranceisnotavailableorbecauseofthehighpremiumcostsrelativetoperceivedrisk.
EnvironmentalRegulation
Ouroperationsaresubjecttostringentlawsandregulationsgoverningthedischargeofmaterialsintotheenvironmentorotherwiserelatingtoenvironmentalprotection.Numerousfederal,stateandlocalgovernmentalagencies,suchastheU.S.EnvironmentalProtectionAgency,ortheEPA,issueregulationsthatoftenrequiredifficultandcostlycompliancemeasuresthatcarrysubstantialadministrative,civilandcriminalpenaltiesandmayresultininjunctiveobligationsfornon-compliance.Inaddition,somelawsandregulationsrelatingtoprotectionoftheenvironmentmay,incertaincircumstances,imposestrictliabilityforenvironmentalcontamination,renderingapersonliableforenvironmentaldamagesandcleanupcostswithoutregardtonegligenceorfaultonthepartofthatperson.Strictadherencewiththeseregulatoryrequirementsincreasesourcostofdoingbusinessandconsequentlyaffectsourprofitability.However,environmentallawsandregulationshavebeensubjecttofrequentchangesovertheyears,andtheimpositionofmorestringentrequirementscouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
Hydraulic Fracturing Activities. Certaingovernmentalreviewsareeitherunderwayorbeingproposedthatfocusonenvironmentalaspectsofhydraulicfracturingpractices.Forexample,inDecember2016,theEPAreleaseditsfinalreport,entitled"HydraulicFracturingforOilandGas:ImpactsfromtheHydraulicFracturingWaterCycleonDrinkingWaterResourcesintheUnitedStates,"onthepotentialimpactsofhydraulicfracturingondrinkingwaterresources.ThereportstatesthattheEPAfoundscientificevidencethathydraulicfracturingactivitiescanimpactdrinkingwaterresourcesundersomecircumstances,notingthatthefollowinghydraulicfracturingwatercycleactivitiesandlocal-orregional-scalefactorsaremorelikelythanotherstoresultinmorefrequentormoresevereimpacts:waterwithdrawalsforfracturingintimesorareasoflowwateravailability;surfacespillsduringthemanagementoffracturingfluids,chemicalsorproducedwater;injectionoffracturingfluidsintowellswithinadequatemechanicalintegrity;injectionoffracturingfluidsdirectlyintogroundwaterresources;dischargeofinadequatelytreatedfracturingwastewatertosurfacewaters;anddisposalorstorageoffracturingwastewaterinunlinedpits.Thereportdoesnotmakeanypolicyrecommendations.TheseongoingorproposedstudiescouldspurinitiativestofurtherregulatehydraulicfracturingunderthefederalSDWAorotherregulatorymechanisms.
Atthestatelevel,severalstateshaveadoptedorareconsideringlegalrequirementsthatcouldimposemorestringentpermitting,disclosureandwellconstructionrequirementsonhydraulicfracturingactivities.Forexample,inMay2013,theRailroadCommissionofTexasissueda"wellintegrityrule,"whichupdatestherequirementsfordrilling,puttingpipedownandcementingwells.Therulealsoincludesnewtestingandreportingrequirements,suchas(i)therequirementtosubmitcementingreportsafterwellcompletionoraftercessationofdrilling,whicheverislater,and(ii)theimpositionofadditionaltestingonwellslessthan1,000feetbelowusablegroundwater.ThewellintegrityruletookeffectinJanuary2014.Localgovernmentsalsomayseektoadoptordinanceswithintheirjurisdictionsregulatingthetime,placeandmannerofdrillingactivitiesingeneralorhydraulicfracturingactivitiesinparticular.Somestates,countiesandmunicipalitiesarecloselyexaminingwater-useissues,suchaspermitanddisposaloptionsforprocessedwater.Ifnewormorestringentfederal,stateorlocallegal
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restrictionsrelatingtothehydraulicfracturingprocessareadoptedinareaswhereweoperate,wecouldincurpotentiallysignificantaddedcoststocomplywithsuchrequirements,experiencedelaysorcurtailmentinthepursuitofdevelopmentactivitiesandperhapsevenbeprecludedfromdrillingwells.See"RiskFactors—Federalandstatelegislativeandregulatoryinitiativesrelatingtohydraulicfracturingcouldresultinincreasedcostsandadditionaloperatingrestrictionsordelays."
Remediation of Hazardous Substances. TheComprehensiveEnvironmentalResponse,CompensationandLiabilityAct,asamended,referredtoas"CERCLA"ortheSuperfundlaw,andcomparablestatelawsgenerallyimposeliability,withoutregardtofaultorlegalityoftheoriginalconduct,oncertainclassesofpersonsthatareconsideredtoberesponsibleforthereleaseofhazardousorotherstate-regulatedsubstancesintotheenvironment.Thesepersonsincludethecurrentowneroroperatorofacontaminatedfacility,aformerowneroroperatorofthefacilityatthetimeofcontaminationandthosepersonsthatdisposedorarrangedforthedisposalofthehazardoussubstancesatthefacility.UnderCERCLAandcomparablestatestatutes,personsdeemed"responsibleparties"aresubjecttostrictliabilitythat,insomecircumstances,maybejointandseveralforthecostsofremovingorremediatingpreviouslydisposedwastes(includingwastesdisposedoforreleasedbypriorownersoroperators)orpropertycontamination(includinggroundwatercontamination),fordamagestonaturalresourcesandforthecostsofcertainhealthstudies.Inaddition,itisnotuncommonforneighboringlandownersandotherthirdpartiestofileclaimsforpersonalinjuryandpropertydamageallegedlycausedbyhazardoussubstancesreleasedintotheenvironment.
Water Discharges. TheFederalWaterPollutionControlActof1972,asamended,alsoknownasthe"CleanWaterAct,"theSafeDrinkingWaterAct,theOilPollutionActandanalogousstatelawsandregulationsissuedthereunderimposerestrictionsandstrictcontrolsregardingtheunauthorizeddischargeofpollutants,includingproducedwatersandothernaturalgasandoilwastes,intonavigablewatersoftheUnitedStates,aswellasstatewaters.OnDecember13,2016,theEPAreleasedafinalreportwhichidentifieddischargeofinadequatelytreatedhydraulicfracturingwastewatertosurfacewaterresourcesashavingpotentialtoimpactdrinkingwaterresources.Thedischargeofpollutantsintoregulatedwatersisprohibited,exceptinaccordancewiththetermsofapermitissuedbytheEPAorthestate.UndertheCleanWaterAct,theEPAhasadoptedregulationsconcerningdischargesofstormwaterrunoff,whichrequirecoveredfacilitiestoobtainpermits.
TheselawsandregulationsalsoprohibitcertainotheractivityinwetlandsunlessauthorizedbyapermitissuedbytheU.S.ArmyCorpsofEngineers,whichwerefertoastheCorps.InSeptember2015,anewrulebecameeffectivewhichwasissuedbytheEPAandtheCorpsdefiningthescopeofthejurisdictionoftheEPAandtheCorpsoverwetlandsandotherwaters.TherulehasbeenchallengedincourtonthegroundsthatitunlawfullyexpandsthereachofCleanWaterAct'sprograms,andimplementationoftherulehasbeenstayedpendingresolutionofthecourtchallenge.InNovember2017,theEPAandtheCorpspublishedanewproposedruledefiningthescopeofjurisdictionandaddinganapplicabilitydateoftwoyearsafterthedateofafinalruleundertheproposedrulemakingeffort.Also,spillprevention,controlandcountermeasureplanrequirementsunderfederallawrequireappropriatecontainmentbermsandsimilarstructurestohelppreventthecontaminationofnavigablewaters.Noncompliancewiththeserequirementsmayresultinsubstantialadministrative,civilandcriminalpenalties,aswellasinjunctiveobligations.
Waste Handling. Wastesfromcertainofouroperations(suchasequipmentmaintenanceandpastchemicaldevelopment,blending,anddistributionoperations)aresubjecttothefederalResourceConservationandRecoveryActof1976,orRCRA,andcomparablestatestatutesandregulationspromulgatedthereunder,whichimposerequirementsregardingthegeneration,transportation,treatment,storage,disposalandcleanupofhazardousandnon-hazardouswastes.Withfederalapproval,theindividualstatesadministersomeoralloftheprovisionsofRCRA,sometimesinconjunctionwiththeirown,morestringentrequirements.Althoughcertainoilproductionwastesare
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exemptfromregulationashazardouswastesunderRCRA,suchwastesmayconstitute"solidwastes"thataresubjecttothelessstringentrequirementsofnon-hazardouswasteprovisions.IntheEPA's2016finalreportontheimpactsfromhydraulicfracturingondrinkingwaterresources,theEPAidentifieddisposalorstorageofhydraulicfracturingwastewaterinunlinedpitsasresultingincontaminationofgroundwaterresources.
Administrative,civilandcriminalpenaltiescanbeimposedforfailuretocomplywithwastehandlingrequirements.Moreover,theEPAorstateorlocalgovernmentsmayadoptmorestringentrequirementsforthehandlingofnon-hazardouswastesorcategorizesomenon-hazardouswastesashazardousforfutureregulation.LegislationhasbeenproposedfromtimetotimeinCongresstore-categorizecertainoilandnaturalgasexploration,developmentandproductionwastesas"hazardouswastes."SeveralenvironmentalorganizationshavealsopetitionedtheEPAtomodifyexistingregulationstorecategorizecertainoilandnaturalgasexploration,developmentandproductionwastesas"hazardous."Anysuchchangesinthelawsandregulationscouldhaveamaterialadverseeffectonourcapitalexpendituresandoperatingexpenses.
Fromtimetotime,releasesofmaterialsorwasteshaveoccurredatlocationsweown,ownedpreviouslyoratwhichwehaveoperations.ThesepropertiesandthematerialsorwastesreleasedthereonmaybesubjecttoCERCLA,RCRA,thefederalCleanWaterAct,andanalogousstatelaws.Undertheselawsorotherlawsandregulations,wehavebeenandmayberequiredtoremoveorremediatethesematerialsorwastesandmakeexpendituresassociatedwithpersonalinjuryorpropertydamage.Atthistime,withrespecttoanypropertieswherematerialsorwastesmayhavebeenreleased,butofwhichwehavenotbeenmadeaware,itisnotpossibletoestimatethepotentialcoststhatmayarisefromunknown,latentliabilityrisks.
Air Emissions. ThefederalCleanAirAct,asamended,andcomparablestatelawsandregulations,regulateemissionsofvariousairpollutantsthroughtheissuanceofpermitsandtheimpositionofotherrequirements.Inaddition,theEPAhasdeveloped,andcontinuestodevelop,stringentregulationsgoverningemissionsoftoxicairpollutantsfromspecifiedsources.Federalandstateregulatoryagenciescanimposeadministrative,civilandcriminalpenaltiesfornon-compliancewithairpermitsorotherrequirementsoftheCleanAirActandassociatedstatelawsandregulations.Wearerequiredtoobtainfederalandstatepermitsinconnectionwithsomeactivitiesunderapplicablelaws.Thesepermitsimposecertainconditionsandrestrictionsonouroperations,someofwhichrequiresignificantexpendituresforcompliance.Changesintheserequirements,orinthepermitsweoperateunder,couldincreaseourcostsorlimitoperations.
Additionally,theEPA'sTierIVregulationsapplytocertainoff-roaddieselenginesusedbyustopowerequipmentinthefield.Undertheseregulations,wearerequiredtoretrofitorretirecertainenginesandwearelimitedinthenumberofnon-compliantoff-roaddieselengineswecanpurchase.TierIVenginesarecostlierandnotwidelyavailable.UntilTierIV-compliantenginesthatmeetourneedsaremorewidelyavailable,theseregulationscouldlimitourabilitytoacquireasufficientnumberofdieselenginestoexpandourfleetandtoreplaceexistingenginesastheyaretakenoutofservice.
Other Environmental Considerations. E&PactivitiesonfederallandsmaybesubjecttotheNationalEnvironmentalPolicyAct,whichwerefertoasNEPA.NEPArequiresfederalagencies,includingtheDepartmentofInterior,toevaluatemajoragencyactionsthathavethepotentialtosignificantlyimpacttheenvironment.Inthecourseofsuchevaluations,anagencywillprepareanenvironmentalassessmentthatassessesthepotentialdirect,indirectandcumulativeimpactsofaproposedprojectand,ifnecessary,willprepareamoredetailedenvironmentalimpactstatementthatmaybemadeavailableforpublicreviewandcomment.E&Pactivities,aswellasproposedexplorationanddevelopmentplans,onfederallandsrequiregovernmentalpermitsthataresubjecttotherequirementsofNEPA.Thisprocesshasthepotentialtodelaythedevelopmentofoilandnaturalgasprojects.
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Variousstateandfederalstatutesprohibitcertainactionsthatadverselyaffectendangeredorthreatenedspeciesandtheirhabitat,migratorybirds,wetlands,andnaturalresources.ThesestatutesincludetheEndangeredSpeciesAct,theMigratoryBirdTreatyAct,theCleanWaterActandCERCLA.Wheretakingsoforharmtospeciesordamagestojurisdictionalstreamsorwetlandshabitatornaturalresourcesoccurormayoccur,governmententitiesorattimesprivatepartiesmayacttopreventoilandnaturalgasexplorationactivitiesorseekdamagesforharmtospecies,habitat,ornaturalresourcesresultingfromfillingofjurisdictionalstreamsorwetlandsorconstructionorreleasesofoil,wastes,hazardoussubstancesorotherregulatedmaterials.
BLMhasestablishedregulationstogovernhydraulicfracturingonfederalandIndianlands.The2015HydraulicFracturingonFederalandIndianLandsRule,ortheFederalandIndianLandsRule,imposesdrillingandconstructionrequirementsforoperationsonfederalorIndianlandsincludingmanagementrequirementsforsurfaceoperationsandpublicdisclosuresofchemicalsusedinthehydraulicfracturingfluids.InJune2016,theU.S.DistrictCourtofWyomingruledthattheBLMlackedstatutoryauthoritytopromulgatetheFederalandIndianLandsRule.OnJuly25,2017,BLMpublishedaNoticeintheFederalRegisterproposingtorescindtheFederalandIndianLandsRule.OnSeptember21,2017,theTenthCircuitdismissedasmoottheappealchallengingtheruleandvacatedtheJune2016U.S.DistrictCourtofWyomingdecisionthatinvalidatedtheFederalandIndianLandsRule.OnDecember29,2017,BLMpublishedarescissionoftheseregulations.BLMalsopromulgatedthe2016MethaneandWasteReductionRuletoreducewasteofnaturalgassuppliesandreduceairpollution,includinggreenhousegases,foroilandnaturalgasproducedonfederalandIndianlands.VariousstateshavefiledforapetitionforreviewoftheMethaneandWasteReductionRule.OnDecember8,2017,BLMpublishedafinalruledelayuntilJanuary2019forcertainrequirementsoftherulethathadnotyetgoneintoeffectpendingjudicialreviewoftherule.Acoalitionofenvironmentalgroupshasfiledsuitchallengingthedelay.Impositionoftheserulescouldincreaseourcostsorlimitoperations.
TheToxicSubstancesControlAct,orTSCA,requiresmanufacturersofnewchemicalsubstancestoprovidespecificinformationtotheAgencyforreviewpriortomanufacturingchemicalsorintroducingthemintocommerce.EPAhaspermittedmanufactureofnewchemicalnanoscalematerialsthroughtheuseofconsentordersorSignificantNewUseRulesunderTSCA.TheAgencyhasalsoallowedthemanufactureofnewchemicalnanoscalematerialsunderthetermsofcertainregulatoryexemptionswhereexposureswerecontrolledtoprotectagainstunreasonablerisks.OnMay19,2014,theEPApublishedanAdvancedNoticeofProposedRulemakingtoobtaindataonhydraulicfracturingchemicalsubstancesandmixtures.TheEPAprojectspublicationofanoticeofproposedrulemakinginJuneof2018.AnychangesinTSCAregulationscouldincreaseourcapitalexpendituresandoperatingexpenses.
Climate Change. InDecember2009,theEPAissuedanEndangermentFindingthatdeterminedthatemissionsofcarbondioxide,methaneandothergreenhousegasespresentanendangermenttopublichealthandtheenvironmentbecause,accordingtotheEPA,emissionsofsuchgasescontributetowarmingoftheearth'satmosphereandotherclimaticchanges.TheEPAlateradoptedtwosetsofrelatedrules,oneofwhichregulatesemissionsofgreenhousegasesfrommotorvehiclesandtheotherofwhichregulatesemissionsfromcertainlargestationarysourcesofemissions.Themotorvehiclerule,whichbecameeffectiveinJuly2010,limitsemissionsfrommotorvehicles.TheEPAadoptedthestationarysourcerule,whichwerefertoasthetailoringrule,inMay2010,anditbecameeffectiveJanuary2011.ThetailoringruleestablishednewemissionsthresholdsthatdeterminewhenstationarysourcesmustobtainpermitsunderthePreventionofSignificantDeterioration,orPSD,andTitleVprogramsoftheCleanAirAct.OnJune23,2014,inUtilityAirRegulatoryGroupv.EPA,theSupremeCourtheldthatstationarysourcescouldnotbecomesubjecttoPSDorTitleVpermittingsolelybyreasonoftheirgreenhousegasemissions.However,theCourtruledthattheEPAmayrequireinstallationofbestavailablecontroltechnologyforgreenhousegasemissionsatsourcesotherwisesubjecttothePSDandTitleVprograms.OnDecember19,2014,theEPAissuedtwomemoranda
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providingguidanceongreenhousegaspermittingrequirementsinresponsetotheSupremeCourt'sdecision.Initspreliminaryguidance,theEPAstatedthatitwouldundertakearulemakingactiontorescindanyPSDpermitsissuedundertheportionsofthetailoringrulethatwerevacatedbytheCourt.Intheinterim,theEPAissuedanarrowlycrafted"noactionassurance"indicatingitwillexerciseitsenforcementdiscretionnottopursueenforcementofthetermsandconditionsrelatingtogreenhousegasesinanEPA-issuedPSDpermit,andforrelatedtermsandconditionsinaTitleVpermit.OnApril30,2015,theEPAissuedafinalruleallowingpermittingauthoritiestorescindPSDpermitsissuedundertheinvalidregulations.InOctober2015,theEPAamendedthegreenhousegasreportingruletoaddthereportingofemissionsfromoilwellsusinghydraulicfracturing.Becauseofthiscontinuedregulatoryfocus,futureemissionregulationsoftheoilandnaturalgasindustryremainapossibility,whichcouldincreasethecostofouroperations.
Inaddition,theU.S.Congressoccasionallyattemptstoadoptlegislationtoreduceemissionsofgreenhousegases,andalmostone-halfofthestateshavetakenlegalmeasurestoreduceemissionsprimarilythroughtheplanneddevelopmentofgreenhousegasemissioninventoriesorregionalcapandtradeprograms.AlthoughtheU.S.Congresshasnotyetadoptedsuchlegislation,itmaydosointhefuture.Severalstatescontinuetopursuerelatedregulationsaswell.InDecember2015,theUnitedStatesjoinedtheinternationalcommunityatthe21stConferenceofthePartiesoftheUnitedNationsFrameworkConventiononClimateChangeinParis,France.TheresultingParisAgreementcallsforthepartiestoundertake"ambitiousefforts"tolimittheaverageglobaltemperature,andtoconserveandenhancesinksandreservoirsofgreenhousegases.TheParisAgreement,whichcameintoforceonNovember4,2016,establishesaframeworkforthepartiestocooperateandreportactionstoreducegreenhousegasemissions.AlthoughtheTrumpAdministrationhaswithdrawntheUnitedStatesfromtheParisAgreement,manystateandlocalofficialshavepubliclystatedtheyintendtoabidebythetermsoftheParisAgreement.Restrictionsonemissionsofmethaneorcarbondioxidethatmaybeimposedinvariousstatescouldadverselyaffecttheoilandnaturalgasindustrywhichcouldhaveamaterialadverseeffectonfuturedemandforourservices.Atthistime,itisnotpossibletoaccuratelyestimatehowpotentialfuturelawsorregulationsaddressinggreenhousegasemissionswouldimpactourcustomers'businessandconsequentlyourown.
Inaddition,claimshavebeenmadeagainstcertainenergycompaniesallegingthatgreenhousegasemissionsfromoilandnaturalgasoperationsconstituteapublicnuisanceunderfederalorstatecommonlaw.Asaresult,privateindividualsmayseektoenforceenvironmentallawsandregulationsandcouldallegepersonalinjuryorpropertydamages,whichcouldincreaseouroperatingcosts.
NORM. Inthecourseofouroperations,someofourequipmentmaybeexposedtonaturallyoccurringradioactivematerialsassociatedwithoilandnaturalgasdepositsand,accordinglymayresultinthegenerationofwastesandothermaterialscontainingnaturallyoccurringradioactivematerials,orNORM.NORMexhibitinglevelsofnaturallyoccurringradiationinexcessofestablishedstatestandardsaresubjecttospecialhandlinganddisposalrequirements,andanystoragevessels,pipingandworkareaaffectedbyNORMmaybesubjecttoremediationorrestorationrequirements.Becausecertainofthepropertiespresentlyorpreviouslyowned,operatedoroccupiedbyusmayhavebeenusedforoilandnaturalgasproductionoperations,itispossiblethatwemayincurcostsorliabilitiesassociatedwithNORM.
Pollution Risk Management. Weseektominimizethepossibilityofapollutioneventthroughequipmentandjobdesign,aswellasthroughemployeetraining.Wealsomaintainapollutionriskmanagementprogramifapollutioneventoccurs.Thisprogramincludesaninternalemergencyresponseplanthatprovidesspecificproceduresforouremployeestofollowintheeventofachemicalreleaseorspill.Inaddition,wehavecontractedwithseveralthird-partyemergencyrespondersinourvariousoperatingareasthatareavailableona24-hourbasistohandletheremediationandclean-upofanychemicalreleaseorspill.Wecarryinsurancedesignedtorespondtoforeseeableenvironmentalexposures.Thisinsuranceportfoliohasbeenstructuredinanefforttoaddressincidentsthatresultin
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bodilyinjuryorpropertydamageandanyensuingcleanupneededatourownedfacilitiesasaresultofthemobilizationandutilizationofourfleet,aswellasanyclaimsresultingfromouroperations.
Wealsoseektomanageenvironmentalliabilityrisksthroughprovisionsinourcontractswithourcustomersthatallocaterisksrelatingtosurfaceactivitiesassociatedwiththefracturingprocess,otherthanwaterdisposal,tousandrisksrelatingto"downhole"liabilitiestoourcustomers.Ourcustomersareresponsibleforthedisposalofthefracturingfluidthatflowsbackoutofthewellaswastewater.Thecustomersremovethewaterfromthewellusingacontrolledflow-backprocess,andwearenotinvolvedinthatprocessorthedisposalofthefluid.Ourcontractsgenerallyrequireourcustomerstoindemnifyusagainstpollutionandenvironmentaldamagesoriginatingbelowthesurfaceofthegroundorarisingoutofwaterdisposal,orotherwisecausedbythecustomer,othercontractorsorotherthirdparties.Inturn,weindemnifyourcustomersforpollutionandenvironmentaldamagesoriginatingatorabovethesurfacecausedsolelybyus.Weseektomaintainconsistentrisk-allocationandindemnificationprovisionsinourcustomeragreementstothegreatestextentpossible.Someofourcontracts,however,containlessexplicitindemnificationprovisions,whichtypicallyprovidethateachpartywillindemnifytheotheragainstliabilitiestothirdpartiesresultingfromtheindemnifyingparty'sactions,excepttotheextentsuchliabilityresultsfromtheindemnifiedparty'sgrossnegligence,willfulmisconductorintentionalact.
SafetyandHealthRegulation
WearesubjecttotherequirementsofthefederalOccupationalSafetyandHealthAct,whichisadministeredandenforcedbyOSHA,andcomparablestatelawsthatregulatetheprotectionofthehealthandsafetyofworkers.Inaddition,theOSHAhazardcommunicationstandardrequiresthatinformationbemaintainedabouthazardousmaterialsusedorproducedinoperationsandthatthisinformationbeprovidedtoemployees,stateandlocalgovernmentauthoritiesandthepublic.WebelievethatouroperationsareinsubstantialcompliancewiththeOSHArequirements,includinggeneralindustrystandards,recordkeepingrequirements,andmonitoringofoccupationalexposuretoregulatedsubstances.OSHAcontinuestoevaluateworkersafetyandtoproposenewregulations,suchasbutnotlimitedto,thenewruleregardingrespirablesilicasand.Althoughitisnotpossibletoestimatethefinancialandcomplianceimpactofthenewrespirablesilicasandruleoranyotherproposedrule,theimpositionofmorestringentrequirementscouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
IntellectualPropertyRights
Ourresearchanddevelopmenteffortsarefocusedonprovidingspecificsolutionstothechallengesourcustomersfacewhenfracturingandstimulatingwells.Inadditiontothedesignandmanufactureofinnovativeequipment,wehavealsodevelopedproprietaryblendsofchemicalsthatweuseinconnectionwithourhydraulicfracturingservices.WehavefourU.S.patents,onepatentinCanadaandonepatentinMexico,andhavefiledonepatentapplicationintheU.S.,relatingtofracturingmethods,thetechnologyusedinfluidends,hydraulicpumpsandotherequipment.WehavealsofiledtwoapplicationswiththePatentCooperationTreaty,therebypreservingourrighttoseekpatentprotectionincountriesthatareapartytothetreaty.
Webelievetheinformationregardingourcustomerandsupplierrelationshipsarealsovaluableproprietaryassets.Wehaveregisteredtrademarksforvariousnamesunderwhichourentitiesconductbusiness.Exceptfortheforegoing,wedonotownorlicenseanypatents,trademarksorotherintellectualpropertythatwebelievetobematerialtothesuccessofourbusiness.
LegalProceedings
Weareinvolvedinvariouslegalproceedingsfromtimetotimeintheordinarycourseofourbusiness.However,wearenotcurrentlyinvolvedinanylegalproceedingsthatwebelievearelikelytohaveamaterialadverseeffectonouroperationsorfinancialcondition.
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MANAGEMENT
DirectorsandExecutiveOfficers
Thefollowingpersonsserveasourdirectorsandexecutiveofficers:
MichaelJ.DosshasservedasourChiefExecutiveOfficersinceOctober2015.HejoinedourCompanyinJanuary2014asSeniorVicePresident—FinanceandTreasurerandwasnamedChiefFinancialOfficerinDecember2014.FromJuly2008untiljoiningourCompany,Mr.DossservedasVicePresidentofFinanceofEnergyTransferPartners,L.P.,orETP,amasterlimitedpartnershipthatownsandoperatesaportfolioofenergyassetsintheUnitedStatesandthenasVicePresidentofStrategicPlanningforitsaffiliateEnergyTransferEquity,L.P.PriortoETP,hewasaSeniorCreditOfficeratMoody'sInvestorsService,aproviderofcreditratings,researchandriskanalysis,coveringadiverseportfolioofoilandnaturalgasissuers.Priortothat,Mr.DossspentmorethansevenyearsofhiscareerinpublicaccountingatErnst&YoungLLPservingclientsintheoilandnaturalgasindustry.HeearnedaBachelorofBusinessAdministrationandMasterofProfessionalAccountingfromtheUniversityofTexasatAustin.Mr.DossalsoearnedaMasterofBusinessAdministrationfromColumbiaBusinessSchool.
BuddyPetersenhasservedasourChiefOperatingOfficer,orCOO,sinceOctober2015.HejoinedourCompanyinJune2015asSeniorVicePresident,ContinuousImprovementandwasnamedSeniorVicePresidentofOperationsandWirelineinAugust2015.Hehasover25yearsofexperienceintheoilandnaturalgasindustry.PriortojoiningourCompany,Mr.PetersenwasCOOofGoFracLLC,anoilandnaturalgasstimulationcompanyfromOctober2014toJune2015,VicePresidentofSalesforFrac-ChemInc.,anoilfieldchemicalmanufacturerandsupplierandanaffiliateofKochIndustries,fromAugust2013toOctober2014,PresidentandCOOofCompassWellServicesLLC,ahydraulicfracturingandcementingservicescompanyfromOctober2010toAugust2013,andCOOofAlliedCementingCo.,acompanyprovidingcementingandacidizingservicestotheoilandnaturalgasindustryfromOctober2007toOctober2010.Mr.Petersenspent14yearsworkinginvariousrolesofincreasingresponsibilitywithHalliburtonEnergyServices,orHalliburton,anoilfieldservicesand
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Name Age* PositionMichaelJ.Doss 45 ChiefExecutiveOfficer**BuddyPetersen 52 ChiefOperatingOfficerLanceTurner 37 ChiefFinancialOfficerandTreasurerKarenD.Thornton 47 ChiefAdministrativeOfficerJenniferL.Keefe 45 SeniorVicePresident,GeneralCounselandChiefComplianceOfficerPerryA.Harris 60 SeniorVicePresident,CommercialGohYongSiang 66 ChairmanDomenicJ.Dell'Osso,Jr. 41 DirectorBryanJ.Lemmerman 43 DirectorOngTiongSin 52 DirectorBoonSim 55 DirectorCarolJ.Johnson 58 DirectorNominee***
* AgesareasofJanuary8,2018
** MichaelJ.Dosswillbecomeamemberofourboardofdirectorsimmediatelyfollowingeffectivenessoftheregistrationstatement,ofwhichthisprospectusisapart
*** CarolJ.Johnsonwillbecomeamemberofourboardofdirectorsimmediatelyfollowingtheeffectivenessofouramendedandrestatedcertificateofincorporationandamendedandrestatedbylaws
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productscompany.InApril2017,Mr.PetersenjoinedtheboardofdirectorsofL.O.Transport,Inc.,acompanythatprovidestransportationservicestooilandgasproducers.Heearnedabachelor'sdegreeincivilengineeringfromNewMexicoStateUniversity.
LanceTurnerhasservedasourChiefFinancialOfficerandTreasurersinceOctober2015.HejoinedourCompanyinApril2014asDirectorofFinanceandwaspromotedtoVicePresidentofFinanceinJanuary2015.PriortojoiningourCompany,Mr.Turnerspentapproximately11yearswithErnst&YoungLLP,withthemajorityofthattimeintheirtransactionservicesgroupcoordinatingandadvisingclientsonbuysideandsellsidetransactionsinvariousindustries.HeearnedaBachelorofBusinessAdministrationandMasterofProfessionalAccountingfromtheUniversityofTexasatAustinandisaCertifiedPublicAccountantinthestateofTexas.
KarenD.ThorntonhasservedasourChiefAdministrativeOfficersinceMarch2017.Ms.ThorntonpreviouslyservedasourVicePresidentofHumanResourcesfromthetimeshejoinedourCompanyinMarch2014.PriortojoiningourCompany,shewasanindependentconsultantatAlkatConsultingandservedastheStrategicHumanCapitalManagementLeadfocusingonhumanresourcesandpayrollapplicationimplementationsforDarlingIngredientsInc.,anIrving,Texascompanyprovidingaglobalgrowthplatformforthedevelopmentandproductionofsustainablenaturalingredients,fromJune2013toMarch2014.PriortoAlkatConsulting,Ms.Thorntonservedinvariousleadershippositions,includingtheVicePresident,HumanResources&ManagementServicesfortheEmergencyMedicalServicesCorporationinDallas,Texas,from2001to2012.Ms.ThorntonreceivedherBachelorofScienceIndustrialManagementfromPurdueUniversityandherMasterofBusinessAdministrationfromTheUniversityofTexasatAustin'sRedMcCombsSchoolofBusiness.
JenniferL.KeefehasservedasourSeniorVicePresident,GeneralCounselandChiefComplianceOfficersinceMarch2017.Ms.KeefepreviouslyservedasourDeputyGeneralCounselmanagingourCommercialLitigation,EmploymentComplianceandRiskDepartmentsfromthetimeshejoinedourCompanyinSeptember2014.PriortojoiningourCompany,shewasapartnerintheDallas,TexasofficeoftheinternationallawfirmofSquirePattonBoggs,whereshejoinedinFebruary1997.Ms.KeefereceivedherBachelorofArtsinPoliticalScienceandSpanishfromVanderbiltUniversityandherJurisDoctorfromSouthernMethodistUniversityDedmanSchoolofLaw.SheislicensedtopracticelawinthestateofTexas.
PerryA.HarrishasservedasourSeniorVicePresident,CommercialsinceJuly2015.Mr.HarrisjoinedourCompanyasSeniorVicePresidentofWirelineOperationsinDecember2014uponouracquisitionofJ-WWirelineCompany,acase-holewirelinecompany.Priortotheacquisition,Mr.HarriswasPresidentofJ-WWirelineCompanyfromFebruary2012toDecember2014.Hehasmorethan36yearsofexperienceintheoilandnaturalgasindustry,includingover24yearsatHalliburton.AtHalliburton,Mr.Harrisheldvariousleadershippositions,includingNortheastU.S.AreaOperationsManager,NortheastU.S.SeniorDistrictManagerandWirelineGlobalBusinessDevelopment,Marketing&TechnologyManager.Heearnedabachelor'sdegreeinminingengineeringfromWestVirginiaUniversity.
GohYongSianghasservedasadirectorofourCompanysinceMay2011andcurrentlyisChairmanoftheboardofdirectors.Mr.GohisaboarddesigneeofMaju,anindirectwhollyownedsubsidiaryofTemasek,aninvestmentcompanybasedinSingaporeandourlargeststockholder.FromJuly2011untilhisretirementin2013,Mr.GohservedastheHeadofAustralia&NewZealandforTemasek.HeservedasCo-Head,Organization&LeadershipforTemasekfromApril2010toJuly2011andHeadofStrategicRelationsforTemasekfromAugust2006toApril2010.PriortojoiningTemasek,Mr.GohservedasPresidentofSTEngineering(USA).Mr.Gohprovidessignificantinsighttoourboardofdirectors,particularlyasitrelatestofinancialmattersandbusinessknowledge,fromhismanyyearsofexperienceatTemasekandotherprivateequityfirms.Mr.Goh'sinternationalexpertiseisalsobeneficialtoourboardofdirectors.
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DomenicJ.Dell'Osso,Jr.hasservedasadirectorofourCompanysinceMay2011.HeisaboarddesigneeofChesapeake,anoilandnaturalgasproducingcompany,andoneofourlargeststockholders.Currently,Mr.Dell'OssoisExecutiveVicePresidentandChiefFinancialOfficerofChesapeakeParent,oneofourcustomers,apositionhehasheldsinceNovember2010.Mr.Dell'OssoservedasVicePresident—FinanceofChesapeakeParentandChiefFinancialOfficerofChesapeakeParent'swhollyownedsubsidiary,ChesapeakeMidstreamDevelopment,L.P.,fromAugust2008toNovember2010.PriortojoiningChesapeakeParent,Mr.Dell'OssowasanenergyinvestmentbankerwithJefferies&Co.fromApril2006toAugust2008andBancofAmericaSecuritiesfrom2004toApril2006.Mr.Dell'OssopreviouslyservedasadirectorofthegeneralpartnerofChesapeakeMidstreamPartnersfrom2011to2014andasadirectorofChaparralEnergy,Inc.from2013to2014.Mr.Dell'Ossobringsextensivefinancialandbusinessexpertise,aswellasin-depthenergyindustryknowledge,toourboardofdirectorsfromhisserviceasChiefFinancialOfficerofChesapeakeParentandfromhisbackgroundininvestmentbanking.
BryanJ.LemmermanhasservedasadirectorofourCompanysinceFebruary2013.HeisaboarddesigneeofChesapeake.HeiscurrentlyVicePresident—BusinessDevelopmentatChesapeakeParent,apositionhehasheldsinceJune2015.HeservedasVicePresident—MarketingatChesapeakeParentfromOctober2014toJune2015,VicePresident—StrategicPlanningatChesapeakeParentfromOctober2013toOctober2014,VicePresident—FinanceatChesapeakeParentfromJanuary2012toSeptember2013andDirector—FinanceatChesapeakeParentfromMay2010toDecember2011.Mr.LemmermanhasservedasadirectorofSundropFuels,Inc.since2012.PriortojoiningChesapeakeParent,Mr.Lemmermanservedasaconsultanttovariousoilandnaturalgascompaniesandprivateequityfirms.Mr.LemmermanwasalsoaportfoliomanagerathedgefundsHighviewCapitalManagementandRitchieCapitalManagement.Mr.LemmermanprovidesextensiveenergyindustryandbusinessdevelopmentinsighttoourboardofdirectorsfromhisserviceatChesapeakeParentandfromhisbackgroundasaconsultanttohedgefunds,familyofficesandprivateequityfirms.
OngTiongSinhasservedasadirectorofourCompanysinceMay2011.Mr.OngisaboarddesigneeofSenja,aninvestmentcompanyaffiliatedwithRRJandoneofourlargeststockholders.Mr.Ongisthefounder,ChairmanandChiefExecutiveOfficerofRRJ,thegeneralpartnerofRRJCapitalMasterFundI,L.P.,aprivateequityfundestablishedinMarch2011whichfocusesonprivateequityinvestmentsinChinaandSoutheastAsia.FromJanuary2008toMarch2011,Mr.OngwasChiefExecutiveOfficerofHopuFund,aChina-focusedprivateequityfund.Previously,Mr.Onghada15-yearcareerwithGoldman,Sachs&Co.,aninvestmentbanking,securitiesandinvestmentmanagementfirm.BasedinBeijing,hewasaco-headofGoldmanSachsAsianEx-JapanInvestmentBankingDivision.Mr.OngbecameamanagingdirectorinthecorporatefinancedepartmentofasubsidiaryofGoldmanSachsin1996andapartnerin2000.PriortohistransfertoBeijing,Mr.Ongwastheco-presidentofGoldmanSachsSingaporeandhadpreviouslyworkedininvestmentbankingdivisionsinHongKongandNewYork.Mr.Ongbringsextensivefinancialandbankingexpertisetoourboardofdirectors,andhisexperienceinprivateequityprovidesagreatdealofknowledgewithrespecttoinvestmentinandoperationsofcompanies.HeearnedaBachelorofSciencefromCornellUniversityandaMasterofBusinessAdministrationfromtheUniversityofChicago.
BoonSimhasservedasadirectorofourCompanysinceJune2013.Mr.SimisaboarddesigneeofMaju.SinceSeptember2017,hehasservedastheManagingPartnerofArtiusCapitalPartners.HewaspreviouslyAdvisorySeniorDirectorofTemasekfromApril2016toDecember2017andPresident,AmericasGroup,HeadofMarketsGroupandHeadofCreditandLifeSciencePortfolioatTemasekfromJune2012toApril2016.PriortojoiningTemasek,Mr.SimwastheGlobalHeadofMergers&Acquisitions,orM&A,atCreditSuisse,aninvestmentbanking,securitiesandinvestmentmanagementfirmbasedinNewYorkandamemberofCreditSuisseInvestmentBank'sOperatingCommittee.Duringa20yearcareeratCreditSuisseandTheFirstBostonCorporation,apredecessorcompanyofCreditSuisse,Mr.SimhadheldvariousmanagementpositionsincludingHeadofM&AAmericasand
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Co-headofTechnologyGroup.PriortojoiningTheFirstBostonCorporation,Mr.SimwasadesignengineeratTexasInstrumentsInc.,asemiconductordesignandmanufacturingcompany,focusingonsemiconductordesign.Mr.Simprovidessignificantinsighttoourboardofdirectors,particularlyasitrelatestofinancialmattersandbusinessknowledge,fromhismanyyearsofexperienceatTemasek,CreditSuisseandTheFirstBostonCorporation.
CarolJ.JohnsonservedasPresidentandChiefOperatingOfficerofAlliedBartonSecurityServices,LLC,amannedguardingphysicalsecuritycompany,from2014to2016.From2011to2013,Ms.JohnsonservedasSeniorVicePresident,ClientExperienceatAlliedBartonSecurityServices.Ms.JohnsonhasservedontheboardofdirectorsofTheFederalReserveBankofPhiladelphiasince2015.ShehasalsobeenadirectoroftheUnionLeagueClubofPhiladelphiasince2016andadirectoroftheNationalAssociationofCorporateDirectors—PhiladelphiaChaptersince2017.Ms.Johnsonbringsstrategicleadership,operationalandfinancialexpertisetoourboardofdirectorsfromherbackgroundinleading,managingandgrowingcompanies.
BoardofDirectors
Ourboardofdirectorscurrentlyconsistsoffivedirectors,allofwhomwereelectedasdirectorspursuanttoouramendedandrestatedstockholdersagreement.Priortothecompletionofthisoffering,wewillterminatetheamendedandrestatedstockholdersagreement.See"CertainRelationshipsandRelatedPartyTransactions—StockholdersAgreement."
Priortothecompletionofthisoffering,thesizeofourboardofdirectorswillbeincreasedtosevendirectors,andwillconsistofGohYongSiang,DomenicJ.Dell'Osso,Jr.,BryanJ.Lemmerman,OngTiongSin,BoonSim,MichaelJ.DossandCarolJ.Johnson.Apluralityofallthevotescastatameetingofstockholdersdulycalledandatwhichaquorumispresentissufficienttoelectadirector.
Priortocompletionofthisoffering,wewillenterintoaninvestors'rightsagreementwithMajuandChesapeake,pursuanttowhich,eachofMajuandChesapeakewillhavetherighttonominate(1)twodirectorssolongasitbeneficiallyownsatleast15%ofourthen-outstandingsharesofcapitalstockor(2)onedirectorsolongasitbeneficiallyownsatleast5%butlessthan15%ofourthen-outstandingsharesofcapitalstock.
Priortothecompletionofthisoffering,wewillalsoenterintoaninvestors'rightsagreementwithSenjaandHampton,pursuanttowhich,SenjaandHamptonwillhavetherighttocollectivelynominateonedirectorsolongasitbeneficiallyownsatleast5%ofourthen-outstandingsharesofcapitalstock.
Priortothecompletionofthisoffering,ourcertificateofincorporationandbylawswillbeamendedandrestatedtoprovidethattheauthorizednumberofdirectorsmaybechangedonlybyresolutionoftheboardofdirectors.Ouramendedandrestatedcertificateofincorporationwillalsoprovidethatdirectorsmayonlyberemovedforcause.ToremoveadirectornotappointedbyMaju,ChesapeakeorSenjaforcause,662/3%ofthevotingpoweroftheoutstandingvotingstockmustvoteasasingleclasstoremovethedirectoratanannualorspecialmeeting.Ouramendedandrestatedcertificateofincorporationwillalsoprovidethat,ifadirectorisremovedorifavacancyoccursduetoeitheranincreaseinthesizeoftheboardorthedeath,resignation,disability,disqualificationorothercause,thevacancywillbefilledsolelybytheaffirmativevoteofamajorityoftheremainingdirectorstheninoffice,eveniflessthanaquorumremain,orbyasoleremainingdirectorandshallnotbefilledbythestockholders.However,atanytimeMaju,Chesapeake,SenjaandHamptonhavetherighttonominateadirectorundertheirrespectiveinvestors'rightsagreement,anyvacancyresultingfromthedeath,resignation,disability,disqualificationorothercause,ofadirectornominatedbythesestockholderswillbefilledbytheapplicablenominatingstockholder.
Theabilityofstockholderstoremovedirectorsonlyforcauseandtheinabilityofstockholderstocallspecialmeetings,mayhavetheeffectofdelayingorpreventingachangeincontrolormanagement.
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See"DescriptionofCapitalStock—Anti-TakeoverEffectsofProvisionsinourAmendedandRestatedCertificateofIncorporationandAmendedandRestatedBylaws"foradiscussionofotheranti-takeoverprovisionsfoundinouramendedandrestatedcertificateofincorporationandamendedandrestatedbylaws.
ClassifiedBoardofDirectors
Uponfiling,ouramendedandrestatedcertificateofincorporationwillprovidethatourboardofdirectorswillbedividedintothreeclasseswithstaggeredthree-yearterms.Onlyoneclassofdirectorswillbeelectedateachannualmeetingofstockholders,withtheotherclassescontinuingfortheremainderoftheirrespectivethree-yearterms.Ourboardofdirectorswillbedesignatedasfollows:
Messrs.SimandLemmermanwillbeClassIdirectors,andtheirtermswillexpireattheannualmeetingofstockholderstobeheldin2019;
Messrs.OngandDosswillbeClassIIdirectors,andtheirtermswillexpireattheannualmeetingofstockholderstobeheldin2020;and
Messrs.GohandDell'OssoandMs.JohnsonwillbeClassIIIdirectors,andtheirtermswillexpireattheannualmeetingofstockholderstobeheldin2021.
Anyadditionaldirectorshipsresultingfromanincreaseinthenumberofdirectorswillbedistributedamongthethreeclassessothat,asnearlyaspossible,eachclasswillconsistofone-thirdofourdirectors.
Thedivisionofourboardofdirectorsintothreeclasseswithstaggeredthree-yeartermsmaydelayorpreventachangeofourmanagementorachangeincontrol.See"DescriptionofCapitalStock—Anti-takeoverEffectsofProvisionsinourAmendedandRestatedCertificateofIncorporationandAmendedandRestatedBylaws"foradiscussionofotheranti-takeoverprovisionsfoundinouramendedandrestatedcertificateofincorporation.
DirectorIndependence
Uponthecompletionofthisoffering,ourboardofdirectorswillreviewatleastannuallytheindependenceofeachdirector.Duringthesereviews,theboardwillconsidertransactionsandrelationshipsbetweeneachdirector(andhisorherimmediatefamilyandaffiliates)andourCompanyanditsmanagementtodeterminewhetheranysuchtransactionsorrelationshipsareinconsistentwithadeterminationthatthedirectorisindependent.Thisreviewwillbebasedprimarilyonresponsesofthedirectorstoquestionsinadirectors'andofficers'questionnaireregardingemployment,business,familial,compensationandotherrelationshipswiththeCompanyandourmanagement.Ourboardhasdeterminedthatafterthecompletionofthisoffering,allofourdirectors,exceptMr.Doss,willbeindependentunderNYSElistingstandardsfortheboardofdirectors.AsrequiredbytheNYSE,weanticipatethatourindependentdirectorswillmeetinregularlyscheduledexecutivesessionsatwhichonlynon-managementdirectorsarepresent.Weintendtocomplywithfuturegovernancerequirementstotheextenttheybecomeapplicabletous.
CodeofBusinessConductandEthics
Priortothecompletionofthisoffering,wewilladoptanamendedandrestatedcodeofbusinessconductandethicsthatisapplicabletoallofouremployees,officers,anddirectors,includingourchiefexecutiveandchieffinancialofficer.Thecodeofbusinessconductandethicswillbeavailableonourwebsiteatwww.ftsi.compriortocompletionofthisoffering.Weexpectthatanyamendmenttothecode,oranywaiversofitsrequirements,willbedisclosedonourwebsite.Theinclusionofourwebsiteinthisprospectusdoesnotincludeorincorporatebyreferencetheinformationonourwebsiteintothisprospectus.
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BoardLeadershipStructure
Uponcompletionofthisoffering,ourboardofdirectorswillbeledbyGohYongSiangasChairman.TheChairmanwilloverseetheplanningoftheannualboardofdirectorscalendarand,inconsultationwiththeotherdirectors,willscheduleandsettheagendaformeetingsoftheboardofdirectors.Inaddition,theChairmanwillprovideguidanceandoversighttomembersofmanagementandactastheboardofdirectors'liaisontomanagement.Inthiscapacity,theChairmanwillbeactivelyengagedonsignificantmattersaffectingus.TheChairmanmayalsoleadourannualmeetingsofstockholdersandperformsuchotherfunctionsandresponsibilitiesasrequestedbytheboardofdirectorsfromtimetotime.
CommitteesoftheBoardofDirectors
Ourboardofdirectorshasestablishedanauditcommittee,acompensationcommitteeandnominatingandcorporategovernancecommittee,andmayestablishsuchothercommitteesasitshalldeterminefromtimetotime.Priortothecompletionofthisoffering,ourboardofdirectorswilladoptamendedandrestatedchartersfortheaudit,compensationandnominatingandcorporategovernancecommittes.Thechartersforeachofourcommitteeswillbeavailableonourwebsiteuponcompletionofthisoffering.Eachofthestandingcommitteesoftheboardofdirectorshastheresponsibilitiesdescribedbelow.
Audit Committee
Priortocompletionofthisoffering,ourauditcommitteeisexpectedtoconsistofCarolJ.Johnson,OngTiongSinandBryanJ.Lemmerman,withMs.Johnsonservingaschairofthecommittee.OurboardofdirectorshasdeterminedthatMs.JohnsonisindependentundertheNYSElistingstandardsandRule10A-3undertheExchangeActandatleastamajorityofcommitteememberswillbeindependentundersuchprovisionwithin90daysoftheeffectivenessoftheregistrationstatement,ofwhichthisprospectusisapartandallthecommitteememberswillbeindependentundersuchprovisionswithinoneyearoftheeffectivedateoftheregistrationstatementofwhichthisprospectusisapart.EachofthecommitteemembersisfinanciallyliteratewithintherequirementsoftheNYSElistingstandardsandourboardofdirectorshasdeterminedthateachofMr.LemmermanandMs.Johnsonqualifiesasan"auditcommitteefinancialexpert"asthattermisdefinedbytheapplicableSECregulationsandNYSEcorporategovernancelistingstandards.WeintendtocomplywiththeindependencerequirementsforallmembersoftheauditcommitteewithinthetimeperiodsrequiredundertheNYSElistingrulesandExchangeAct.
Ourauditcommitteewilloverseeouraccountingandfinancialreportingprocessandtheauditofourfinancialstatementsandassistourboardofdirectorsinmonitoringourfinancialsystemsandlegalandregulatorycompliance.Ourauditcommitteewillberesponsiblefor,amongotherthings:
• appointing,approvingthecompensationofandassessingtheindependenceofourindependentregisteredpublicaccountingfirm;
• pre-approvingauditandpermissiblenon-auditservices,andthetermsofsuchservices,tobeprovidedbyourindependentregisteredpublicaccountingfirm;
• reviewingannuallyareportbyourindependentregisteredpublicaccountingfirmregardingtheindependentregisteredpublicaccountingfirm'sinternalqualitycontrolproceduresandvariousissuesrelatingthereto;
• coordinatingtheoversightandreviewingtheadequacyofourinternalcontroloverfinancialreportingwithbothmanagementandourindependentregisteredpublicaccountingfirm;
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• reviewinganddiscussingwithmanagementandourindependentregisteredpublicaccountingfirmourannualandquarterlyfinancialstatementsandrelateddisclosures;
• periodicallyreviewinglegalcompliancematters,periodicallyreviewingsignificantaccountingandotherfinancialrisksorexposurestoourcompanyandreviewingand,ifappropriate,approvingalltransactionsbetweenourcompanyoritssubsidiariesandanyrelatedparty(asdescribedinItem404ofRegulationS-K);
• periodicallyreviewingourcodeofbusinessconductandethics;
• establishingpoliciesforthehiringofemployeesandformeremployeesofourindependentregisteredpublicaccountingfirm;and
• reviewingtheauditcommitteereportrequiredbySECregulationstobeincludedinourannualproxystatement.
Theauditcommitteewillhavethepowertoinvestigateanymatterbroughttoitsattentionwithinthescopeofitsdutiesandtheauthoritytoretaincounselandadvisorsatourexpensetofulfillitsresponsibilitiesandduties.
Compensation Committee
Priortocompletionofthisoffering,ourcompensationcommitteeisexpectedtoconsistofGohYongSiang,OngTiongSin,andDomenicJ.Dell'Osso,Jr.,withMr.Gohservingaschairofthecommittee.OurboardofdirectorshasdeterminedthateachofMessrs.Goh,Ong,andDell'OssoareindependentundertheNYSElistingstandardsandRule10C-1oftheExchangeActandthateachofMessrs.GohandOngqualifiesasa"non-employeedirector"withinthemeaningofRule16b-3(d)(3)undertheExchangeActandas"outsidedirectors"withinthemeaningofSection162(m)oftheInternalRevenueCodeof1986,asamended,ortheCode.
Ourcompensationcommitteewillberesponsiblefordevelopingandmaintainingourcompensationstrategiesandpolicies.Ourcompensationcommitteewillberesponsiblefor,amongotherthings:
• reviewingandapprovingouroverallexecutiveanddirectorcompensationphilosophytosupportouroverallbusinessstrategyandobjectives;
• reviewingandapproving,orasappropriate,recommendingtoourboardofdirectorsforapproval,basesalary,cashincentivecompensation,equitycompensation,andseverancerightsforourexecutiveofficers,includingourCEO;
• administeringourbroad-basedequityincentiveplans,includingthegrantingofstockawards;
• preparinganyreportonexecutivecompensationrequiredbytheapplicablerulesandregulationsoftheSECandotherregulatorybodies;
• managingsuchothermattersthatarespecificallydelegatedtoourcompensationcommitteebyapplicablelaworbytheboardofdirectorsfromtimetotime;and
• retainingandterminatingcompensationconsultantstoassistintheevaluationofourcompensationandapprovingthefeesandotherretentiontermsofsuchcompensationconsultants.
Thecompensationcommitteewillalsohavethepowertoinvestigateanymatterbroughttoitsattentionwithinthescopeofitsdutiesandauthoritytoretaincounselandadvisorsatourexpensetofulfillitsresponsibilitiesandduties.
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Nominating and Corporate Governance Committee
Priortocompletionofthisoffering,ournominatingandcorporategovernancecommitteeisexpectedtoconsistofDomenicJ.Dell'Osso,Jr.,OngTiongSin,andBoonSim,withMr.Dell'Ossoservingaschairofthecommittee.OurboardofdirectorshasdeterminedthateachofMessrs.Dell'Osso,Ong,andSimisindependentasdefinedbyNYSErules.
Ournominatingandcorporategovernancecommitteewilloverseeandassistourboardofdirectorsinreviewingandrecommendingcorporategovernancepoliciesandnomineesforelectiontoourboardofdirectorsanditscommittees.Thenominatingandcorporategovernancecommitteewillberesponsiblefor,amongotherthings:
• assessing,developing,andcommunicatingwithourboardofdirectorsconcerningtheappropriatecriteriafornominatingandappointingdirectors,includingthesizeandcompositionoftheboardofdirectors,corporategovernancepolicies,applicablelistingstandards,laws,rulesandregulations,andotherfactorsconsideredappropriatebyourboardofdirectors;
• identifyingandrecommendingtoourboardofdirectorsthedirectornomineesformeetingsofourstockholders,ortofillavacancyontheboardofdirectors,exceptassetforthintheinvestors'rightsagreements;
• havingsoleauthoritytoretainanysearchfirmusedtoidentifydirectorcandidatesandapprovethesearchfirm'sfeesandotherretentionterms;
• assessingandrecommendingtotheboardofdirectorsthecompositionofeachofitscommittees;
• reviewing,asnecessary,anyexecutiveofficer'srequesttoacceptadirectorshippositionwithanothercompany;
• developing,assessingandmakingrecommendationstoourboardofdirectorsconcerningcorporategovernancematters,includingappropriaterevisionstoouramendedandrestatedcertificateofincorporation,amendedandrestatedbylaws,corporategovernanceguidelinesandcommitteecharters;
• overseeingthemanagementcontinuityandsuccessionplanningprocesswithrespecttoourofficers;
• overseeinganannualevaluationofourboardofdirectors,itscommittees,andeachdirector;
• developingwithmanagementandmonitoringtheprocessoforientingnewdirectorsandcontinuingeducationforalldirectors;and
• regularlyreportingitsactivitiesandanyrecommendationstoourboardofdirectors.
Thenominatingandcorporategovernancecommitteewillalsohavethepowertoinvestigateanymatterbroughttoitsattentionwithinthescopeofitsduties.Itwillalsohavetheauthoritytoretaincounselandadvisorsatourexpenseforanymattersrelatedtothefulfillmentofitsresponsibilitiesandduties.
CompensationCommitteeInterlocksandInsiderParticipation
Noneofourexecutiveofficerscurrentlyserves,orinthepastyearhasserved,asamemberoftheboardofdirectorsorcompensationcommittee(orotherboardcommitteeperformingequivalentfunctions)ofanyentitythathasoneormoreofitsexecutiveofficersservingonourboardofdirectorsorcompensationcommittee.
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LimitationsofLiabilityandIndemnificationofDirectorsandOfficers
WeareincorporatedunderthelawsoftheStateofDelaware.Section145oftheDGCLprovidesthataDelawarecorporationmayindemnifyanypersonswhoare,orarethreatenedtobemade,partiestoanythreatened,pendingorcompletedaction,suitorproceeding,whethercivil,criminal,administrative,orinvestigative(otherthananactionbyorintherightofsuchcorporation),byreasonofthefactthatsuchpersonwasanofficer,director,employee,oragentofsuchcorporation,orisorwasservingattherequestofsuchcorporationasanofficer,director,employee,oragentofanothercorporationorenterprise.Theindemnitymayincludeexpenses(includingattorneys'fees),judgments,fines,andamountspaidinsettlementactuallyandreasonablyincurredbysuchpersoninconnectionwithsuchaction,suit,orproceeding,providedthatsuchpersonactedingoodfaithandinamannerheorshereasonablybelievedtobeinornotopposedtothecorporation'sbestinterestsand,withrespecttoanycriminalactionorproceeding,hadnoreasonablecausetobelievethathisorherconductwasillegal.ADelawarecorporationmayindemnifyanypersonswhoare,orarethreatenedtobemade,apartytoanythreatened,pending,orcompletedactionorsuitbyorintherightofthecorporationbyreasonofthefactthatsuchpersonwasadirector,officer,employee,oragentofsuchcorporation,orisorwasservingattherequestofsuchcorporationasadirector,officer,employee,oragentofanothercorporationorenterprise.Theindemnitymayincludeexpenses(includingattorneys'fees)actuallyandreasonablyincurredbysuchpersoninconnectionwiththedefenseorsettlementofsuchactionorsuitprovidedsuchpersonactedingoodfaithandinamannerheorshereasonablybelievedtobeinornotopposedtothecorporation'sbestinterestsexceptthatnoindemnificationispermittedwithoutjudicialapprovaliftheofficerordirectorisadjudgedtobeliabletothecorporation.Whereanofficerordirectorissuccessfulonthemeritsorotherwiseinthedefenseofanyactionreferredtoabove,thecorporationmustindemnifyhimorheragainsttheexpensesthatsuchofficerordirectorhasactuallyandreasonablyincurred.OuramendedandrestatedcertificateofincorporationandamendedandrestatedbylawswillprovidefortheindemnificationofourdirectorsandofficerstothefullestextentpermittedundertheDGCL.
Section102(b)(7)oftheDGCLpermitsacorporationtoprovideinitscertificateofincorporationthatadirectorofthecorporationshallnotbepersonallyliabletothecorporationoritsstockholdersformonetarydamagesforbreachoffiduciarydutiesasadirector,exceptforliabilityforany:
• transactionfromwhichthedirectorderivesanimproperpersonalbenefit;
• actoromissionnotingoodfaithorthatinvolvesintentionalmisconductoraknowingviolationoflaw;
• unlawfulpaymentofdividendsorredemptionofshares;or
• breachofadirector'sdutyofloyaltytothecorporationoritsstockholders.
Ouramendedandrestatedcertificateofincorporationwillincludesuchaprovision.Expensesincurredbyanydirectorindefendinganysuchaction,suitorproceedinginadvanceofitsfinaldispositionshallbepaidbyus,providedsuchdirectormustrepayamountsinexcessoftheindemnificationsuchdirectorisultimatelyentitledto.
Section174oftheDGCLprovides,amongotherthings,thatadirectorwhowillfullyornegligentlyapprovesofanunlawfulpaymentofdividendsoranunlawfulstockpurchaseorredemptionmaybeheldliableforsuchactions.Adirectorwhowaseitherabsentwhentheunlawfulactionswereapproved,ordissentedatthetime,mayavoidliabilitybycausinghisorherdissenttosuchactionstobeenteredinthebookscontainingminutesofthemeetingsoftheboardofdirectorsatthetimesuchactionoccurredorimmediatelyaftersuchabsentdirectorreceivesnoticeoftheunlawfulacts.
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IndemnificationAgreements
Weintendtoenterintoindemnificationagreementswitheachofourdirectorsandexecutiveofficers.TheseagreementswillrequireustoindemnifytheseindividualstothefullestextentpermittedunderDelawarelawagainstliabilitiesthatmayarisebyreasonoftheirservicetous,andtoadvanceexpensesincurredasaresultofanyproceedingagainstthemastowhichtheycouldbeindemnified.Wealsointendtoenterintoindemnificationagreementswithourfuturedirectorsandexecutiveofficers.
CorporateGovernanceGuidelines
OurboardofdirectorswilladoptcorporategovernanceguidelinesinaccordancewiththerulesoftheNYSE.
DirectorCompensation
Wedonotpayanycompensationtoourdirectorsdesignatedbyourstockholderspursuanttoouramendedandrestatedstockholdersagreement.Wedoreimburseourdirectorsforreasonableout-of-pocketexpensesthattheyincurinconnectionwiththeirserviceasdirectors,inaccordancewithourgeneralexpensereimbursementpolicies.
Webelievethatattractingandretainingqualifiednon-employeedirectorswillbecriticaltoourfuturegrowth.Uponcompletionofthisoffering,ourindependentdirectorsareexpectedtoreceivecompensationthatiscomparabletothecompensationthatisofferedtodirectorsofcompaniesthataresimilartoours,includingequity-basedcompensation.Weexpecttoreimburseourindependentdirectorsforreasonableout-of-pocketexpensesthattheyincurinconnectionwiththeirserviceasdirectors,inaccordancewithourgeneralexpensereimbursementpolicies.
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EXECUTIVECOMPENSATION
Summary Compensation Table
Thefollowingtablesummarizesthecompensationofourchiefexecutiveofficerandourtwoothermosthighlycompensatedofficers,orthenamedexecutiveofficers,duringtheyearsendedDecember31,2016and2017.
Employment Agreements
Wehavenotenteredintoemploymentagreementswithanyofourexecutiveofficers,otherthanPerryHarris.WeenteredintoanemploymentagreementwithMr.HarrisinDecember2014inconnectionwithouracquisitionoftheassetsofJ-WWirelineCompany.
OuragreementwithMr.Harrishasatermofthreeyearsandprovidesforabasesalaryofnotlessthan$320,000peryear.Mr.Harrisisalsoeligibletoparticipateinanyshort-termincentiveplanandinanylong-termincentiveplanwithanannualtargetawardpercentageundereachplanequaltoorexceeding40%ofhisbasesalary.Mr.Harrisisalsosubjecttonon-solicitation,confidentialityandnon-competeprovisions.
Mr.Harrisisalsoentitledtoretentionbonusesequalto10%,20%and40%ofhisannualbasesalarysetforthintheemploymentagreementuponhiscompletionofone,twoandthreeyearsofservice,respectively,withtheCompanyandsubjecttomeetingcertainperformancecriteria.Eachretentionbonusispayableininstallmentsinthecalendaryearfollowingtheapplicableserviceanniversary.
Additionally,ifMr.Harris'employmentisterminatedbeforetheendoftheterm:
• duetodeathordisability,hewillreceiveanyearnedbutunpaidcompensation,anyunpaidshort-termincentiveplancompensationforthecalendaryearendingbeforehistermination,aproratedamountofhistargetshort-termincentiveplancompensationfortheportionoftheyearhewasemployedandanyearnedbutunpaidretentionbonus;
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NameandPrincipalPosition Year Salary Bonus(1)(2)
StockAwards
OptionAwards
Non-EquityIncentivePlan
Compensation(3)
NonqualifiedDeferred
CompensationEarnings
AllOtherCompensation Total
MichaelJ.Doss 2017 $ 750,000 $ — $ — $ — $ 1,290,000 $ — $ — $ 2,040,000ChiefExecutiveOfficer
2016 $ 500,000 $ 60,000 $ — $ — $ — $ — $ — $ 560,000
BuddyPetersen
2017$ 500,000
$ —
$ —
$ —
$ 750,000
$ —
$ —
$ 1,250,000
ChiefOperatingOfficer
2016 $ 350,000 $ 40,000 $ — $ — $ — $ — $ — $ 390,000
PerryA.Harris
2017$ 350,000
$ 140,000
$ —
$ —
$ 441,000
$ —
$ —
$ 931,000
SeniorVicePresident,Commercial
2016 $ 320,000 $ 79,000 $ — $ — $ — $ — $ — $ 399,000
(1) For2016,ourboardofdirectorsapprovedacashbonuspoolamounttobepaidasdiscretionarybonuses.Ourboardofdirectorsdelegatedauthoritytoallocatethebonuspooltoourchiefexecutiveofficerinhissolediscretion.Thesediscretionarybonuseswerepaidinrecognitionofeachofthenamedexecutiveofficers'contributionstotheCompany'scostreductioninitiatives.
(2) For2017,includesretentionbonuspaymentsof40%ofMr.Harris'basesalarytobepaidtoMr.Harrisin2018forhis2017servicepursuanttothetermsofhisemploymentagreement.For2016,includesretentionbonuspaymentsof20%ofMr.Harris'basesalarytobepaidtoMr.Harrisin2017forhis2016servicepursuanttothetermsofhisemploymentagreement.
(3) RepresentspaymentsmadeundertheCompany's2017ShortTermIncentivePlan.Foradditionalinformation,see"—ShortTermIncentivePlans—2017ShortTermIncentivePlan."
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• byuswithoutcauseorbyhimforgoodreason(eachasdefinedinhisemploymentagreement),hewillreceiveanyearnedbutunpaidcompensation,hisbasesalarythroughtheone-yearanniversaryoftheterminationandtheaverageofhisshort-termincentiveplancompensationpaidorpayableforthepriorthreeyearsortheaverageofhisshort-termincentiveplancompensationforthenumberofyearsduringwhichhewaseligibletoparticipateintheshort-termincentiveplaniflessthanthreeandanyearnedbutunpaidretentionbonus;
• byusforcauseorbyhimwithoutgoodreason,hewillreceiveanyearnedbutunpaidcompensationandiftheterminationisbyhimwithoutgoodreasonandoccursafterthethirdanniversaryofthedateoftheagreement,hewillreceiveanyearnedbutunpaidretentionbonus;and
• byuswithoutcauseorbyhimforgoodreasonwithintwoyearsafterachangeofcontrol(asdefinedinhisemploymentagreement)hasoccurred,hewillreceiveanyearnedbutunpaidcompensationandalumpsumcashpaymentequaltothesumof(1)hisbasesalaryatthehighestannualrateineffectonorbeforehisterminationand(2)anamountequaltothegreaterof(a)theaverageofhisshort-termincentivecompensationpaidorpayablehadheremainedemployedforthepriorthreefullfiscalyearsendingbeforethedateoftermination,ortheaverageofhisshort-termincentiveplancompensationforthenumberofyearsduringwhichhewaseligibletoparticipateintheshort-termincentiveplaniflessthanthree;(b)theshort-termincentiveplancompensationpaidtohimforthelastfullfiscalyearofhisemployment;and(c)histargetshort-termincentiveplancompensationforthefiscalyearthatincludesthedateoftermination.
AlloftheseverancepaymentsdescribedabovearesubjecttoMr.Harris'executionofareleaseofclaimsandcompliancewiththenon-solicitation,confidentialityandnon-competeprovisionsoftheagreement.
Severance Agreements
WehaveenteredintoseveranceagreementswithMessrs.DossandPetersenthatprovideforpaymentstobemadetotherespectivenamedexecutiveofficerinconnectionwithaterminationofemployment.Theseagreementshaveaone-yeartermandinJune2017,thetermoftheseagreementswereextendedtoMay2018.EachofMessrs.DossandPeterseniseligibletoreceivealumpsumequalto1.5timeshisthen-currentannualbasesalaryasseverancefollowinghisterminationofemploymentbyuswithoutcause(asdefinedintheagreement),orbytheexecutiveforgoodreason(asdefinedintheagreement),subjecttohisexecutionofareleaseofclaimsandcompliancewiththenon-solicitation,confidentialityandnon-competeprovisionsoftheagreement.
Mr.Harris'employmentagreementprovidesforpaymenttobemadetohiminconnectionwithaterminationofhisemployment.Foradiscussionofthetermsoftheseverancepayments,see"—EmploymentAgreements."
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Outstanding Equity Awards at Fiscal Year-End
Thefollowingtablecontainsinformationregardingoutstandingequityawardsissuedunderour2014LTIP,beforeadjustingforour69.196592:1reversestocksplit,heldbyeachofournamedexecutiveofficersasofDecember31,2017.
2014 Long-Term Incentive Plan
InMarch2014,ourboardofdirectorsadopted,andourstockholdersapproved,the2014LTIP.Thepurposesofthe2014LTIParetoprovideanadditionalincentivetoselectedemployeeswhosecontributionsareessentialtothegrowthandsuccessofourbusinessinordertostrengthenthecommitmentofemployeestous,motivateemployeestofaithfullyanddiligentlyperformtheirresponsibilities,andattractandretaincompetentanddedicatedpersonswhoseeffortswillresultinourlong-termgrowthandprofitability.The2014LTIPprovidesforgrantsofrestrictedstockunits,andrestrictedstockunderaCEOdiscretionarypool,toemployeeparticipants.
SharesAvailable.Themaximumnumberofsharesofourcommonstockthatmaybeissuedunderthe2014LTIP,beforeadjustingforour69.196592:1reversestocksplit,is55,025,000.Underthe2014LTIP,55,000,000shareswereavailableforissuanceasrestrictedstockunitsand25,000wereavailableforissuanceasrestrictedstockorrestrictedstockunitsatthediscretionoftheCEO.Thesharesunderthe2014LTIParesubjecttoadjustmentintheeventof,amongotherthings,amerger,recapitalization,reorganization,spin-off,spin-out,specialdividend,stocksplit,combinationorexchangeofsharesorotherchangeincorporatestructureaffectingourcommonstock.
Eligibility.AnyemployeeoftheCompanyoritsaffiliatesselectedbytheadministratorinhisoritssolediscretioniseligibletoparticipateinthe2014LTIP.
Administration.TheCompensationCommitteeadministersthe2014LTIP,exceptthattheCEOadministersthe2014LTIPwithrespecttoawardsgrantedundertheCEOdiscretionarypool.Theadministratorhasbroaddiscretiontoadministerthe2014LTIP,includingthepowertodeterminetowhomandwhenawardswillbegranted,todeterminetheamountofawards,todeterminethetermsandconditions,notinconsistentwiththetermsofthe2014LTIPofeachawardgranted,todeterminetheeffect,ifanyofemployment,severanceandotheragreementsontheawards,todeterminefairmarketvalueoftheawards,toadopt,alterandrepealadministrativepracticesgoverningthe2014LTIP,toconstrueandinterpretthetermsandprovisionsofthe2014LTIPandtoexecuteallotherresponsibilitiespermittedorrequiredunderthe2014LTIP.The2014LTIPwillbeadministeredinaccordancewith,totheextentapplicable,Rule16b-3undertheExchangeAct.
RestrictedStockAwards.Arestrictedstockawardisagrantofsharesofcommonstocksubjecttoariskofforfeiture,restrictionsontransferabilityandanyotherrestrictionsdeterminedbytheadministrator.Exceptasotherwiseprovidedunderthetermsofthe2014LTIPoranawardagreement,
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Name
NumberofSharesorUnitsofStockThatHaveNotVested(#)
MarketValueofSharesorUnitsofStockThatHave
NotVested($)(1)(2) MichaelJ.Doss 880,207 $ 209,886BuddyPetersen — —PerryA.Harris 133,332 $ 31,793
(1) Themarketvalueisbasedupontheassumedinitialpublicofferingpriceof$16.50pershare,themidpointofthepricerangesetforthonthecoverpageofthisprospectus.
(2) Therestrictedstockunitswillvestimmediatelybeforeeffectivenessoftheregistrationstatement,ofwhichthisprospectusisapart,andwillbesettledincash.
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theholderofarestrictedstockawardunderthe2014LTIPwillgenerallyhaverightsasastockholder,includingtherighttovoteortoreceivedividends.Unlessotherwisedeterminedbytheadministrator,arestrictedstockawardwillbeforfeitedandreacquiredbyusuponterminationofemployment.Commonstockdistributedinconnectionwithastocksplitorstockdividend,andotherpropertydistributedasadividend,maybesubjecttothesamerestrictionsandriskofforfeitureastherestrictedstockwithrespecttowhichthedistributionwasmade.
RestrictedStockUnits.Restrictedstockunitsarerightstoreceivecommonstock,cashoracombinationofcommonstockandcashattheendofaspecifiedperiodasdeterminedbytheadministrator.Restrictedstockunitsmaybesubjecttorestrictions,includingariskofforfeitureandconditions,asdeterminedbytheadministrator.Unlessotherwisedeterminedbytheadministrator,restrictedstockunitswillbeforfeiteduponterminationofaparticipant'semployment.Theholderofarestrictedstockunitawardunderthe2014LTIPdoesnothaverightsasastockholder.
Immediatelybeforeeffectivenessoftheregistrationstatement,ofwhichthisprospectusisapart,therestrictedstockunitswillvestandwillbesubsequentlysettledincash.Uponcompletionofthisoffering,the2014LTIPwillbeterminatedandnofurtherawardswillbemadeunderthe2014LTIP.
Short Term Incentive Plans
2017ShortTermIncentivePlan
InDecember2016,ourboardofdirectorsapprovedthe2017short-termincentiveplan,or2017STIP,tomotivateemployeestodriveoutstandingcompanyperformance,provideflexibilitygiventheuncertainbusinessenvironmentandimproveemployeeretention.Thenamedexecutiveofficersareeligibletoparticipate.
The2017incentiveswerebasedontheachievementof:
• FinancialtargetsforAdjustedEBITDA;
• Safetyperformanceasmeasuredbyourtotalrecordableincidentrate,orTRIR;and
• Departmentkeyperformanceindicators,orKPIs.
The2017STIPprovidedforatargetawardequalto:100%ofbasesalaryforMr.Doss,80%ofbasesalaryforMr.Petersenand60%ofbasesalaryforMr.Harris.Thepayoutunderthe2017STIPwasbased55%onthefinancialtarget,20%onthesafetytargetand25%onKPI.TheCompensationCommitteesettargetsforeachquarterof2017.Theincentiveswerecontingentupontheminimumthresholdbeingachieved.Underthe2017STIP,theformulafordeterminingthepotentialpayoutpercentageforanamedexecutiveofficer'sfinancialtarget,was:(ActualAdjustedEBITDA–MinimumThreshold)/(FinancialGoal–MinimumThreshold).Ifthefinancialgoalwasachieved,thepayoutpercentagewouldbe100%.Ifthefinancialgoalwasexceeded,thepayoutpercentagecouldreachamaximumof200%.
Thefollowingtargetswereseteachquarter:
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First
Quarter2017 Second
Quarter2017 Third
Quarter2017 Fourth
Quarter2017 MinimumThreshold(AdjustedEBITDA) $ 3.0million $ 35million $ 75million $ 100million
FinancialGoal(AdjustedEBITDA) $ 10.0million $ 55million $ 95million $ 115million
SafetyGoal(TRIRonarolling12-monthbasis) 0.50orbetter 0.50orbetter 0.50orbetter 0.50orbetter
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KPIsweresetbythenamedexecutiveofficer'smanagerortheboardofdirectorsforMr.Doss.2017STIPawardsarepaidoutsubsequenttothequarterforwhichtheperformancemeasuresrelate.
2016Short-TermIncentivePlan
InDecember2015,ourboardofdirectorsapprovedthe2016short-termincentiveplan,or2016STIP,tomotivateemployeestodriveoutstandingcompanyperformance,provideflexibilitygiventheuncertainbusinessenvironmentandenhanceemployeeretention.Thenamedexecutiveofficerswereeligibletoparticipate.
The2016incentiveswerebasedontheachievementof:
• FinancialtargetsforAdjustedEBITDAlesscapitalexpenditures;
• SafetyperformanceasmeasuredbyourTRIR;and
• DepartmentKPIsandindividualperformance.
Eachnamedexecutiveofficerhadatargetawardcalculatedasapercentageofhisbasesalary,dependingonhisposition.Thepayoutunderthe2016STIPwasbased65%onthefinancialtarget,10%onthesafetytargetand25%onKPIandindividualperformance.TheCompensationCommitteesetthefinancialandKPItargetsforthefirstquarterof2016.Theincentiveswerecontingentupontheminimumfinancialtargetsbeingachieved.TheCompanydidnotachievetheminimumfinancialtargetinthefirstquarterof2016.Asaresult,nopayoutsweremadeforthefirstquarterof2016.Afterthefirstquarterof2016,theCompensationCommitteedidnotsetfinancialandKPItargetsandnoonewaseligibletoreceiveanawardunderthe2016STIP.
2018 Equity and Incentive Compensation Plan.
Priortothecompletionofthisoffering,ourboardofdirectorsandstockholderswilladoptthe2018Plan.Thematerialtermsofthe2018Planareasfollows:
Purpose.Thepurposeofthe2018Planistoattractandretainofficers,employees,directors,consultantsandotherkeypersonnelandtoprovidethosepersonsincentivesandawardsforperformance.
Administration;Effectiveness.The2018Planwillgenerallybeadministeredbythecompensationcommitteeofourboardofdirectors.Thecompensationcommitteehastheauthoritytodetermineeligibleparticipantsinthe2018Plan,andtointerpretandmakedeterminationsunderthe2018Plan.Anyinterpretationordeterminationbythecompensationcommitteeunderthe2018Planwillbefinalandconclusive.Thecompensationcommitteemaydelegatealloranypartofitsauthorityunderthe2018Plantoanysubcommitteethereof,andmaydelegateitsadministrativedutiesorpowerstooneormoreofourofficers,agentsoradvisors.The2018Planwillbeeffectivepriortothecompletionofthisoffering.
SharesAvailableforAwardsunderthe2018Plan.Subjecttoadjustmentasdescribedinthe2018Plan,thenumberofsharesofourcommonstockavailableforawardsunderthe2018Planshallbe,2,823,095,plusanysharesofourcommonstockthatbecomeavailableunderthe2018Planasaresultofforfeiture,cancellation,expiration,orcashsettlementofawards,ortheAvailableShares,withsuchsharessubjecttoadjustmenttoreflectanysplitorcombinationofourcommonstock.TheAvailableSharesmaybesharesoforiginalissuance,treasurysharesoracombinationoftheforegoing.
The2018Planalsocontainsthefollowingcustomarylimits:(1)calendaryearlimitsrelatingtothegrantofstockoptionsandstockappreciationrightsandforrestrictedstock,restrictedstockunits,performancesharesand/orotherstock-basedawardsthatareperformance-basedawardsintendedtosatisfytherequirementsfor"qualifiedperformance-basedcompensation"underSection162(m)ofthe
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Code,orQualifiedPerformance-BasedAwardsand;(2)limitsontheaggregatemaximumvaluethataparticipantmayreceiveinrespectofanawardofperformanceunitsand/orotherawardspayableincashthatareQualifiedPerformance-BasedAwards,oracashincentiveawardthatisaQualifiedPerformance-BasedAwardinanycalendaryear.
ShareCounting.Theaggregatenumberofsharesofourcommonstockavailableforawardunderthe2018Planwillbereducedbyoneshareofourcommonstockforeveryoneshareofourcommonstocksubjecttoanawardgrantedunderthe2018Plan.
Thefollowingsharesofourcommonstockwillbeadded(oraddedback,asapplicable)totheaggregatenumberofsharesofourcommonstockavailableunderthe2018Plan:(1)sharessubjecttoanawardthatiscancelledorforfeited,expiresorissettledforcash(inwholeorinpart);(2)sharesofourcommonstockwithheldbyusinpaymentoftheexercisepriceofastockoptiongrantedunderthe2018Plan;(3)sharesofourcommonstocktenderedorotherwiseusedinpaymentoftheexercisepriceofastockoptiongrantedunderthe2018Plan;(4)sharesofourcommonstockwithheldbyusortenderedorotherwiseusedtosatisfyataxwithholdingobligation;provided,however,thatwithrespecttorestrictedstock,thisprovisionwillonlybeineffectuntiltheten-yearanniversaryofthedatethe2018Planisapprovedbyourstockholders,and(5)sharesofourcommonstocksubjecttoanappreciationrightgrantedunderthe2018Planthatarenotactuallyissuedinconnectionwiththesettlementofsuchappreciationright.Inaddition,ifunderthe2018Planaparticipanthaselectedtogiveuptherighttoreceivecompensationinexchangeforsharesofourcommonstockbasedonfairmarketvalue,suchsharesofourcommonstockwillnotcountagainsttheaggregatenumberofsharesofourcommonstockavailableunderthe2018Plan.
Sharesofourcommonstockissuedortransferredpursuanttoawardsgrantedunderthe2018Planinsubstitutionfororinconversionof,orinconnectionwiththeassumptionof,awardsheldbyawardeesofanentityengaginginacorporateacquisitionormergerwithusoranyofoursubsidiaries,orsubstituteawards,willnotcountagainst,norotherwisebetakenintoaccountinrespectof,thesharelimitsunderthe2018Plan.Additionally,sharesofcommonstockavailableundercertainplansthatweoroursubsidiariesmayassumeinconnectionwithcorporatetransactionsfromanotherentitymaybeavailableforcertainawardsunderthe2018Plan,butwillnotcountagainst,norotherwisebetakenintoaccountinrespectof,thesharelimitsunderthe2018Plan.
TypesofAwardsUnderthe2018Plan.Pursuanttothe2018Plan,wemaygrantrestrictedstockunits,restrictedstock,stockoptions(includingincentivestockoptionsasdefinedinSection422oftheCode,orIncentiveStockOptions),appreciationrights,cashincentiveawards,performanceshares,performanceunits,andcertainotherawardsbasedonorrelatedtosharesofourcommonstock.
Eachgrantofanawardunderthe2018Planwillbeevidencedbyanawardagreementoragreements,whichwillcontainsuchtermsandprovisionsasthecompensationcommitteemaydetermine,consistentwiththe2018Plan.Thosetermsandprovisionsincludethenumberofoursharesofourcommonstocksubjecttoeachaward,vestingtermsandprovisionsthatapplyuponeventssuchasretirement,deathordisabilityoftheparticipantorintheeventofachangeincontrol.Abriefdescriptionofthetypesofawardswhichmaybegrantedunderthe2018Planissetforthbelow.
RestrictedStockUnits.Restrictedstockunitsawardedunderthe2018Planconstituteanagreementbyustodeliversharesofourcommonstock,cash,oracombinationthereof,totheparticipantinthefutureinconsiderationoftheperformanceofservices,butsubjecttothefulfillmentofsuchconditions(whichmayincludetheachievementofmanagementobjectives)duringtherestrictionperiodasthecompensationcommitteemayspecify.Eachgrantorsaleofrestrictedstockunitsmaybemadewithoutadditionalconsiderationorinconsiderationofapaymentbytheparticipantthatislessthanthefairmarketvalueofsharesofourcommonstockonthedateofgrant.Duringtherestrictionperiodapplicabletorestrictedstockunits,theparticipantwillhavenorighttotransferany
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rightsundertheawardandwillhavenorightsofownershipinthesharesofourcommonstockunderlyingtherestrictedstockunitsandnorighttovotethem.Rightstodividendequivalentsmaybeextendedtoandmadepartofanyrestrictedstockunitawardatthediscretionofandonthetermsdeterminedbythecompensationcommittee.Eachgrantofrestrictedstockunitswillspecifythattheamountpayablewithrespecttosuchrestrictedstockunitswillbepaidincash,sharesofourcommonstock,oracombinationofthetwo.
RestrictedStock.Restrictedstockconstitutesanimmediatetransferoftheownershipofsharesofourcommonstocktotheparticipantinconsiderationoftheperformanceofservices,entitlingsuchparticipanttodividend,votingandotherownershiprights,subjecttothesubstantialriskofforfeitureandrestrictionsontransferdeterminedbythecompensationcommitteeforaperiodoftimedeterminedbythecompensationcommitteeoruntilcertainmanagementobjectivesspecifiedbythecompensationcommitteeareachieved.Eachsuchgrantorsaleofrestrictedstockmaybemadewithoutadditionalconsiderationorinconsiderationofapaymentbytheparticipantthatislessthanthefairmarketvaluepershareofourcommonstockonthedateofgrant.
Anygrantofrestrictedstockmayspecifythetreatmentofdividendsordistributionspaidonrestrictedstockthatremainssubjecttoasubstantialriskofforfeiture.
StockOptions.Stockoptionsgrantedunderthe2018PlanmaybeeitherIncentiveStockOptionornon-qualifiedstockoptionsIncentiveStockOptions.Exceptwithrespecttosubstituteawards,IncentiveStockOptionsandnon-qualifiedstockoptionsmusthaveanexercisepricepersharethatisnotlessthanthefairmarketvalueofashareofourcommonstockonthedateofgrant.Thetermofastockoptionmaynotextendmorethantenyearsafterthedateofgrant.
Eachgrantwillspecifytheformofconsiderationtobepaidinsatisfactionoftheexerciseprice.
AppreciationRights.The2018Planprovidesforthegrantofappreciationrights.Anappreciationrightisarighttoreceivefromusanamountequalto100%,orsuchlesserpercentageasthecompensationcommitteemaydetermine,ofthespreadbetweenthebasepriceandthevalueofsharesofourcommonstockonthedateofexercise.
Anappreciationrightmaybepaidincash,sharesofourcommonstockoranycombinationthereof.Exceptwithrespecttosubstituteawards,thebasepriceofanappreciationrightmaynotbelessthanthefairmarketvalueofacommonshareonthedateofgrant.Thetermofanappreciationrightmaynotextendmorethantenyearsfromthedateofgrant.
CashIncentiveAwards,PerformanceShares,andPerformanceUnits.Performanceshares,performanceunitsandcashincentiveawardsmayalsobegrantedtoparticipantsunderthe2018Plan.Aperformanceshareisabookkeepingentrythatrecordstheequivalentofoneshareofourcommonstock,andaperformanceunitisabookkeepingentrythatrecordsaunitequivalentto$1.00orsuchothervalueasdeterminedbythecompensationcommittee.Eachgrantwillspecifythenumberoramountofperformancesharesorperformanceunits,ortheamountpayablewithrespecttocashincentiveawards,beingawarded,whichnumberoramountmaybesubjecttoadjustmenttoreflectchangesincompensationorotherfactors.
Theseawards,whengrantedunderthe2018Plan,becomepayabletoparticipantsuponoftheachievementofspecifiedmanagementobjectivesanduponsuchtermsandconditionsasthecompensationcommitteedeterminesatthetimeofgrant.Eachgrantmayspecifywithrespecttothemanagementobjectivesaminimumacceptablelevelofachievementandmaysetforthaformulafordeterminingthenumberofperformancesharesorperformanceunits,ortheamountpayablewithrespecttocashincentiveawards,thatwillbeearnedifperformanceisatorabovetheminimumorthresholdlevel,orisatorabovethetargetlevelbutfallsshortofmaximumachievement.Eachgrantwillspecifythetimeandmannerofpaymentofcashincentiveawards,performancesharesor
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performanceunitsthathavebeenearned,andanygrantmayfurtherspecifythatanysuchamountmaybepaidorsettledincash,sharesofourcommonstock,restrictedstock,restrictedstockunitsoranycombinationthereof.Anygrantofperformancesharesmayprovideforthepaymentofdividendequivalentsincashorinadditionalsharesofourcommonstock.
OtherAwards.Thecompensationcommitteemaygrantsuchotherawardsthatmaybedenominatedorpayablein,valuedinwholeorinpartbyreferenceto,orotherwisebasedon,orrelatedto,sharesofourcommonstockorfactorsthatmayinfluencethevalueofsuchsharesofourcommonstock,including,withoutlimitation,convertibleorexchangeabledebtsecurities,otherrightsconvertibleorexchangeableintosharesofourcommonstock,purchaserightsforsharesofourcommonstock,awardswithvalueandpaymentcontingentuponourperformanceofspecifiedsubsidiaries,affiliatesorotherbusinessunitsoranyotherfactorsdesignatedbythecompensationcommittee,andawardsvaluedbyreferencetothebookvalueofthesharesofourcommonstockorthevalueofsecuritiesof,ortheperformanceofoursubsidiaries,affiliatesorotherbusinessunits.
Adjustments;CorporateTransactions.Thecompensationcommitteewillmakeorprovideforsuchadjustmentsinthe:(1)numberofsharesofourcommonstockcoveredbyoutstandingstockoptions,appreciationrights,restrictedstock,restrictedstockunits,performancesharesandperformanceunitsgrantedunderthe2018Plan;(2)ifapplicable,numberofsharesofourcommonstockcoveredbyotherawardsgrantedpursuanttothe2018Plan;(3)exercisepriceorbasepriceprovidedinoutstandingstockoptionsandappreciationrights;(4)kindofsharescoveredthereby;(5)cashincentiveawards;and(6)otherawardterms,asthecompensationcommitteedeterminestobeequitablyrequiredinordertopreventdilutionorenlargementoftherightsofparticipantsthatotherwisewouldresultfrom(a)anystockdividend,stocksplit,combinationofshares,recapitalizationorotherchangeinourcapitalstructure,(b)anymerger,consolidation,spin-off,spin-out,split-off,split-up,reorganization,partialorcompleteliquidationorotherdistributionofassets,issuanceofrightsorwarrantstopurchasesecuritiesor(c)anyothercorporatetransactionoreventhavinganeffectsimilartoanyoftheforegoing.
Intheeventofanysuchtransactionorevent,orintheeventofachangeincontrol(asdefinedinthe2018Plan),thecompensationcommitteemayprovideinsubstitutionforanyoralloutstandingawardsunderthe2018Plansuchalternativeconsideration(includingcash),ifany,asitmayingoodfaithdeterminetobeequitableunderthecircumstancesandwillrequireinconnectiontherewiththesurrenderofallawardssoreplacedinamannerthatcomplieswithSection409AoftheCode.Inaddition,foreachstockoptionorappreciationrightwithanexercisepricegreaterthantheconsiderationofferedinconnectionwithanysuchtransactionoreventorchangeincontrol,thecompensationcommitteemayinitsdiscretionelecttocancelsuchstockoptionorappreciationrightwithoutanypaymenttothepersonholdingsuchstockoptionorappreciationright.Thecompensationcommitteewillmakeorprovideforsuchadjustmentstothenumbersandkindofsharesavailableforissuanceunderthe2018Planandthesharelimitsofthe2018Planasthecompensationcommitteeinitssolediscretionmayingoodfaithdeterminetobeappropriateinconnectionwithsuchtransactionorevent.However,anyadjustmenttothelimitonthenumberofsharesofourcommonstockthatmaybeissueduponexerciseofIncentiveStockOptionswillbemadeonlyif,andtotheextent,suchadjustmentwouldnotcauseanyoptionintendedtoqualifyasanIncentiveStockOptiontofailtosoqualify.
TransferabilityofAward.Exceptasotherwiseprovidedbythecompensationcommittee,nostockoption,appreciationright,restrictedshare,restrictedstockunit,performanceshare,performanceunit,cashincentiveaward,otherawardordividendequivalentspaidwithrespecttoawardsmadeunderthe2018Planmaybetransferredbyaparticipant.
AmendmentandTerminationofthe2018Plan.Ourboardofdirectorsgenerallymayamendthe2018Planfromtimetotime,inwholeorinpart.However,ifanyamendment(1)wouldmateriallyincreasethebenefitsaccruingtoparticipantsunderthe2018Plan,(2)wouldmateriallyincreasethe
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numberofsharesofourcommonstockwhichmaybeissuedunderthe2018Plan,(3)wouldmateriallymodifytherequirementsforparticipationinthe2018Plan,or(4)mustotherwisebeapprovedbyourstockholdersinordertocomplywithapplicablelawortherulesoftheNYSE,thensuchamendmentwillbesubjecttostockholderapprovalandwillnotbeeffectiveunlessanduntilsuchapprovalhasbeenobtained.
Ourboardofdirectorsmay,initsdiscretion,terminatethe2018Planatanytime.Terminationofthe2018Planwillnotaffecttherightsofparticipantsortheirsuccessorsunderanyawardsoutstandingandnotexercisedinfullonthedateoftermination.Nograntwillbemadeunderthe2018Planmorethantenyearsaftertheeffectivedateofthe2018Plan,butallgrantsmadeonorpriortosuchdateshallcontinueineffectthereaftersubjecttothetermsofthe2018Plan.
GrantsofAwards.Uponthecompletionofthisoffering,ourboardofdirectorswillgrantsubstantiallyallofthesharesreservedforissuanceunderthe2018Planasrestrictedstockunitstoouremployees.Oftherestrictedstockunitsgranteduponcompletionofthisoffering,ournamedexecutiveofficerswillreceivethefollowing:
Therestrictedstockunitswillbesettledinsharesofourcommonstocksubjecttothediscretionofthecompensationcommitteetosettletherestrictedstockunitsincash.
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Name
NumberofRestrictedStockUnits
PercentofPlanSharestobeGrantedUpon
IPO MichaelJ.Doss 500,000 17.7%BuddyPetersen 450,000 15.9%PerryA.Harris 250,000 8.9%
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CERTAINRELATIONSHIPSANDRELATEDPARTYTRANSACTIONS
ThefollowingisasummaryoftransactionsthatoccurredonorwereineffectafterJanuary1,2015thatwehavebeenapartyandwhichtheamountinvolvedexceeded$120,000andinwhichanyofourexecutiveofficers,directorsorbeneficialholdersofmorethan5%ofourcapitalstockhadorwillhaveadirectorindirectmaterialinterest.
RecapitalizationofConvertiblePreferredStock
Ourstockholdershaveagreedthatuponfilingouramendedandrestatedcertificateofincorporationthatourconvertiblepreferredstockwillberecapitalizedinto39,450,826.48sharesofcommonstock,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Anychangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothecompletionofthisofferingbylessthan1%.Foradditionalinformationregardingtherecapitalizationofourconvertiblepreferredstock,see"DescriptionofCapitalStock."Followingthereversestocksplitandrecapitalization,fractionalshareswillbepaidoutincash.
TransactionswithChesapeake
Chesapeakeisoneofourlargeststockholdersandisawhollyownedsubsidiaryofoneofourcustomers,ChesapeakeParent.WerecognizedrevenuefromChesapeakeParentforwell-completionservicesintheamountof$32.1millionand$2.5millionfortheyearsendedDecember31,2015and2016,respectively,and$101.3millionfortheninemonthsendedSeptember30,2017.
WearepartytoamasterserviceagreementdatedJuly9,2012,andamastercommercialagreementdatedDecember24,2016,withsubsidiariesofChesapeakeParent.TheseagreementsgoverntheperformanceofservicesandthesupplyofmaterialsorequipmenttoChesapeakeParent,thespecifictermsofwhichareaddressedinsubsequentwrittenpurchaseorworkorders.Theseagreementscontainstandardtermsandprovisions,includinginsurancerequirementsandconfidentialityobligationsandallocatescertainoperationalrisksthroughindemnityprovisions.
StockholdersAgreement
InSeptember2012,weenteredintoanamendedandrestatedstockholdersagreementwithMaju,Senja,Chesapeake,andotherstockholderspartythereto,asamendedinNovember2012,April2014,June2015,November2015andSeptember2016.Theamendedandrestatedstockholdersagreementcontainsagreementsamongourstockholdersregarding,amongotherthings,transferrestrictions,tagalongrights,dragalongrights,rightoffirstoffer,preemptiverightsanddirectornominationandinformationrights.Priortocompletionofthisoffering,wewillterminatetheamendedandrestatedstockholdersagreement.
Investors'RightsAgreements
Priortocompletionofthisoffering,wewillenterintoaninvestors'rightsagreementwithMajuandChesapeake,pursuanttowhichwewillberequiredtotakeallnecessaryactionforindividualsdesignatedbyMajuandChesapeaketobeincludedintheslateofnomineesrecommendedbytheboardofdirectorsforelectionbyourstockholders.Undertheinvestors'rightsagreement,eachofMajuandChesapeakewillhavetherighttonominate(1)twodirectorssolongasitbeneficiallyownsatleast15%ofourthen-outstandingsharesofcapitalstockor(2)onedirectorsolongasitbeneficiallyownsatleast5%butlessthan15%ofourthen-outstandingsharesofcapitalstock.Theinvestors'rightsagreementwillalsoprovidethatsolongasMajuorChesapeakebeneficiallyownsatleast5%ofourthen-outstandingsharesofcapitalstock,itmayelecttodesignateonenon-votingobservertoattendallmeetingsoftheboardofdirectorsandcommitteesoftheboardofdirectors.Theinvestors'
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rightsagreementalsoprovidesMajuorChesapeakewithcertaininformationrightsforsolongasitbeneficiallyownsatleast5%ofourthen-outstandingsharesofcommonstock.EachofMajuandChesapeakehaveagreedtotakeallreasonableactions,includingvotingorprovidingaconsentorproxy,toensuretheelectionoftheirrespectivenomineesandothertermsoftheinvestors'rightsagreement.
Undertheinvestors'rightsagreement,MajuandChesapeakemaydesignateitsnomineedirectortobeamemberofeachcommittee,subjecttocompliancewithapplicablestockexchangerequirements.Theinvestors'rightsagreementrestrictsourabilitytoadoptashareholderrightsplanandsimilararrangementsortobecomesubjecttotheprovisionsofSection203oftheDGCLwithouttheconsentofMajuandChesapeake.TheagreementalsograntsotherconsentrightstoMajuandChesapeake,includingforcharterandbylawprovisionsinconsistentwiththeinvestors'rightsagreement.
Theinvestors'rightsagreementwithMajuandChesapeakewillprovidethat(1)werenounceanyinterestinanybusinessopportunitiesofChesapeakeandMaju,theiraffiliatesanddirectorsnominatedbythem,andthatnoneoftheforegoinghaveanyobligationtoofferorpresentusthoseopportunitiesoranyrelatedinformationortouseanyinformationregardingotherorcompetingbusinessforus,(2)weacknowledgeourpriorandfutureagreementsandtransactionswithChesapeakeanditsaffiliatesand(3)wewaiveanyclaimsorrecourserelatingtotheforegoingmatters.
Priortocompletionofthisoffering,wewillalsoenterintoaninvestors'rightsagreementwithSenjaandHampton,pursuanttowhich,wewillberequiredtotakeallnecessaryactionfortheindividualcollectivelydesignatedbySenjaandHamptontobeincludedintheslateofnomineesrecommendedbytheboardofdirectorsforelectionbyourstockholders.Undertheinvestors'rightsagreement,SenjaandHamptonwillhavetherighttonominateonedirectorsolongastheycollectivelywiththeiraffiliatesownatleast5%ofourthen-outstandingsharesofcapitalstock.Theinvestors'rightsagreementwillalsoprovidethatsolongasSenjaandHamptoncollectivelywiththeiraffiliatesownatleast5%ofourthen-outstandingsharesofcapitalstock,theymayelecttodesignateonenon-votingobservertoattendallmeetingsoftheboardofdirectorsandcommitteesoftheboardofdirectors.Theinvestors'rightsagreementalsoprovidesSenjaandHamptonwithcertaininformationrightsforsolongastheycollectivelywiththeiraffiliatesownatleast5%ofourthen-outstandingsharesofcapitalstock.TheagreementwillalsograntotherrightstoSenjaandHampton,includingconsentrightsforcharterandbylawprovisionsinconsistentwiththeinvestors'rightsagreement.
Theinvestors'rightsagreementwithSenjaandHamptonwillprovidethat(1)werenounceanyinterestinanybusinessopportunitiesofSenjaandHampton,theiraffiliatesanddirectorsnominatedbythem,andthatnoneoftheforegoinghaveanyobligationtoofferorpresentusthoseopportunitiesoranyrelatedinformationortouseanyinformationregardingotherorcompetingbusinessforusand(2)wewaiveanyclaimsorrecourserelatingtotheforegoingmatters.
SenjaiswhollyownedbyRRJCapitalMasterFundI,L.P.RRJisthegeneralpartnerofRRJCapitalMasterFundI,L.P.RRJ'sboardofdirectors,whichconsistsofOngTiongSin,OngTiongBoon,EddieTehEweGuan,RizalBinIshakandKimYoungSo,exercisesvotingandinvestmentpoweroveroursharesheldbySenja.Further,Mr.Ong,Senja'sboarddesigneeonourboardofdirectorsisalsothesoleshareholderandsoledirectorofHampton.See"PrincipalandSellingStockholders"fordetailsofMaju,Chesapeake,SenjaandHampton.
RegistrationRightsAgreement
Priortocompletionofthisoffering,wewillenterintoaregistrationrightsagreementwithMaju,Chesapeake,SenjaandHampton.Underthetermsoftheregistrationrightsagreement,thepartiesmayrequestregistration,orademandregistration,ofalloraportionoftheircommonstock,orRegistrableShares,undertheSecuritiesAct.WewillnotbeobligatedtoeffectuatemorethanfourdemandregistrationsforeachofMajuandChesapeake,andmorethanfourdemandregistrationsforSenjaand
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Hamptoncollectively.Anydemandregistrationmustbeforananticipatedaggregateofferingpriceofatleast$50.0million.Inaddition,intheeventweregisteradditionalsharesofcommonstockforsaletothepublicfollowingthecompletionofthisoffering,wewillberequiredtogivenoticeoftheregistrationtothepartiestotheregistrationrightsagreementand,subjecttocertainlimitations,includesharesofcommonstockheldbythemintheregistration.Theagreementincludescustomaryindemnificationandcontributionprovisionsinfavorofthepartiestotheagreementagainstcertainlossesandliabilitiesarisingoutoforbaseduponanyfilingorotherdisclosuremadebyusundersecuritieslawsrelatingtosuchregistration.Inaddition,eachstockholderthathasregistrationrightspursuanttothisagreementwillagreenottosell,otherwisedisposeofanysecurities,orexerciseregistrationrightswithoutthepriorwrittenconsentoftheunderwritersforaperiodof180daysafterthedateofthisprospectus,subjecttocertaincustomaryexceptions,termsandconditions.Wewillgenerallypayallregistrationexpensesinconnectionwithourregistrationobligations.See"Underwriting"foradditionalinformationregardingsuchrestrictions.
ProceduresforApprovalofRelatedPartyTransactions
Followingthecompletionofthisoffering,pursuanttoouramendedandrestatedauditcommitteecharter,ourauditcommitteewillhavetheprimaryresponsibilityforreviewingandapprovingordisapproving"related-partytransactions,"whicharetransactionsbetweenusandrelatedpersonsinwhichtheaggregateamountinvolvedexceedsormaybeexpectedtoexceed$120,000andinwhicharelatedpersonhasorwillhaveadirectorindirectmaterialinterest.Uponthecompletionofthisoffering,ourpolicyregardingtransactionsbetweenusandrelatedpersonswillprovidethatthedefinitionofarelatedpersonwillinclude,amongothers,adirector,executiveofficer,nomineefordirectororgreaterthan5%beneficialownerofourcommonstock,ineachcasesincethebeginningofthemostrecentlycompletedfiscalyear,andanyoftheirimmediatefamilymembers.
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PRINCIPALANDSELLINGSTOCKHOLDERS
ThefollowingtablesetsforththebeneficialownershipofoursharesofcommonstockasofJanuary8,2018by:
• thesellingstockholder;
• eachpersonknowntoustobethebeneficialownerofmorethan5%ofoursharesofcommonstock;
• eachofournamedexecutiveofficers;
• eachofourdirectorsanddirectornominee;and
• allofourexecutiveofficersanddirectorsasagroup.
WehavedeterminedbeneficialownershipinaccordancewiththerulesoftheSECandtheinformationisnotnecessarilyindicativeofbeneficialownershipforanyotherpurpose.Unlessotherwiseindicatedbelow,toourknowledge,thepersonsandentitiesnamedinthetablehavesolevotingandsoleinvestmentpowerwithrespecttoallsharesthattheybeneficiallyown,subjecttocommunitypropertylawswhereapplicable.
Wehavebasedpercentageownershipofourcommonstockpriortothisofferingon91,280,087sharesofourcommonstockoutstandingasofJanuary8,2018after(1)givingeffecttoa69.196592:1reversestocksplit,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectusand(2)therecapitalizationofalloutstandingsharesofourconvertiblepreferredstockintoissuedandoutstandingcommonstock.Anychangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothecompletionofthisofferingbylessthan1%.Foradditionalinformationregardingtherecapitalizationofourconvertiblepreferredstock,see"DescriptionofCapitalStock."Followingthereversestocksplitandrecapitalization,fractionalshareswillbepaidoutincash.Percentageownershipofourcommonstockafterthisofferingassumesthesalebyusof15,151,516sharesofcommonstockinthisoffering.Percentageownershipafterthisofferingiftheunderwriters'optiontopurchaseadditionalsharesisexercisedinfullassumesthesalebyusof2,925,000sharesofourcommonstock.
Unlessotherwisenoted,theaddressofeachbeneficialownerlistedonthetablebelowisc/oFTSInternational,Inc.777MainStreet,Suite2900,FortWorth,Texas76102.Beneficialownershiprepresentinglessthan1%isdenotedwithanasterisk(*).Thestatementsconcerningvotingandinvestmentpowerincludedinthefootnotestothistableshallnotbeconstruedasadmissionsthatsuchpersonsarethebeneficialownersofsuchsharesofcommonstock.
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Thetabledoesnotreflectanysharesofcommonstockthat5%stockholders,directorsandexecutiveofficersmaypurchasethroughthedirectedshareprogramorotherwisethroughadirectedallocationofsharesinthisoffering.
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SharesBeneficially
OwnedPriortothisOffering
SharesBeneficially
OwnedAfterthisOffering
SharesBeneficially
OwnedAfterthisOfferingiftheUnderwriters'OptiontoPurchaseAdditionalSharesisExercisedinFull
NameofBeneficialOwner Number % Number % Number % SellingStockholderandother5%Stockholders:
MajuInvestments(Mauritius)PteLtd(1)(2) 41,666,542 45.6% 41,666,542 39.1% 41,666,542 38.1%CHKEnergyHoldings,Inc.(2)(3)† 26,344,594 28.9% 21,996,110 20.7% 21,996,110 20.1%SenjaCapitalLtd(4)(5)(6) 11,920,874 13.1% 11,920,874 11.2% 11,920,874 10.9%HamptonAssetHoldingLtd.(5)(7)(8) 884,241 1.0% 884,241 * 884,241 *NamedExecutiveOfficers,DirectorsandDirectorNominee:
MichaelJ.Doss — — — — — —BuddyPetersen — — — — — —PerryA.Harris — — — — — —GohYongSiang — — — — — —DomenicJ.Dell'Osso,Jr.(9) — — — — — —BryanJ.Lemmerman(9) — — — — — —OngTiongSin(10) 12,805,115 14.0% 12,805,115 12.0% 12,805,115 11.7%BoonSim — — — — — —CarolJ.Johnson — — — — — —Allexecutiveofficersandcurrentdirectorsasagroup(12persons) 12,805,115 14.0% 12,805,115 12.0% 12,805,115 11.7%
* Lessthan1%
† CHKEnergyHoldings,Inc.,asthesellingstockholder,isselling4,348,484sharesofourcommonstockinthisoffering.
(1) MajuInvestments(Mauritius)PteLtdiswhollyownedbyFullertonFundInvestmentsPteLtd,whichiswhollyownedbyTemasek.ThebusinessaddressofMajuInvestments(Mauritius)PteLtdisc/oSGGCorporateServices(Mauritius)Ltd,33,EdithCavellStreet,PortLouis,11324,RepublicofMauritius.
(2) Priortocompletionofthisoffering,wewillenterintoaninvestors'rightsagreementwithMajuandChesapeake.Pursuanttotheinvestors'rightsagreement,MajuandChesapeakemaybedeemedtohaveformedagrouppursuanttoRule13d-5(b)(1)oftheExchangeAct.Suchgroupcouldbedeemedtohavebeneficialownership,forpurposesofSections13(d)and13(g)oftheExchangeAct,ofallequitysecuritiesoftheCompanybeneficiallyownedbysuchparties.Suchpartieswould,asofJanuary8,2018bedeemedtobeneficiallyownanaggregateof68,011,136shares(74.5%)ofourcapitalstock.Eachstockholderpartytotheinvestors'rightsagreementdisclaimsbeneficialownershipofanysharesofourcommonstockownedbytheotherstockholderpartytotheagreement.
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ThesellingstockholderinthisofferingisdeemedtobeanunderwriterwithinthemeaningofSection2(a)(11)oftheSecuritiesAct.
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(3) CHKEnergyHoldings,Inc.isasubsidiaryofChesapeakeEnergyCorporation.ThebusinessaddressofCHKEnergyHoldings,Inc.is6100N.WesternAvenue,OklahomaCity,Oklahoma73118.
(4) SenjaCapitalLtdiswhollyownedbyRRJCapitalMasterFundI,L.P.,thegeneralpartnerofwhichisRRJCapitalLimited.ThebusinessaddressofSenjaCapitalLtdisCCSTrusteesLimited,263MainStreet,P.O.Box2196,RoadTown,Tortola,BritishVirginIslands.
(5) Priortocompletionofthisoffering,wewillenterintoaninvestors'rightsagreementwithSenjaandHampton.Pursuanttotheinvestors'rightsagreement,SenjaandHamptonmaybedeemedtohaveformedagrouppursuanttoRule13d-5(b)(1)oftheExchangeAct.Suchgroupcouldbedeemedtohavebeneficialownership,forpurposesofSections13(d)and13(g)oftheExchangeAct,ofallequitysecuritiesoftheCompanybeneficiallyownedbysuchparties.Suchpartieswould,asofJanuary8,2018bedeemedtobeneficiallyownanaggregateof12,805,115shares(14.0%)ofourcapitalstock.Eachstockholderpartytotheinvestors'rightsagreementdisclaimsbeneficialownershipofanysharesofourcommonstockownedbytheotherstockholderpartytotheagreement.
(6) RRJCapitalLimited'sboardofdirectors,consistingofOngTiongSin,OngTiongBoon,EddieTehEweGuan,RizalBinIshakandKimYoungSo,exercisesvotingandinvestmentpowerovertheseshares.
(7) HamptonAssetHoldingLtd.iswhollyownedbyOngTiongSin.ThebusinessaddressofHamptonAssetHoldingLtd.isCCSTrusteesLimited,263MainStreet,P.O.Box2196,RoadTown,TortolaBritishVirginIslands.
(8) OngTiongSin,soleshareholderandsoledirectorofHamptonAssetHoldingLtd.,hassolevotingandinvestmentpowerovertheseshares.
(9) Mr.Dell'OssoistheExecutiveVicePresidentandChiefFinancialOfficerofChesapeakeParent,andMr.LemmermanistheVicePresident—BusinessDevelopmentatChesapeakeParent.
(10) Mr.OngisthefounderandChiefExecutiveOfficerofRRJCapitalLimited,andsoleshareholderandsoledirectorofHamptonAssetHoldingLtd.,anddisclaimsbeneficialownershipofanysharesowneddirectlyorindirectlybySenjaCapitalLtd,excepttotheextentofhispecuniaryinteresttherein.Assuch,thesharesattributedtoMr.OngrepresentasumofthesharesbeneficiallyownedbySenjaCapitalLtdandHamptonAssetHoldingLtd.
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DESCRIPTIONOFCAPITALSTOCK
Thefollowingdescriptionsummarizescertainimportanttermsofourcapitalstock,astheyareexpectedtobeineffectpriortothecompletionofthisoffering.Wewilladoptanamendedandrestatedcertificateofincorporationandamendedandrestatedbylawsthatwillbecomeeffectivepriortothecompletionofthisoffering,andthisdescriptionsummarizestheprovisionsthatareincludedinsuchdocuments.Becauseitisonlyasummary,itdoesnotcontainalltheinformationthatmaybeimportanttoyou.Foracompletedescriptionofthematterssetforthinthissection,youshouldrefertoouramendedandrestatedcertificateofincorporation,ouramendedandrestatedbylaws,theregistrationrightsagreementandinvestors'rightsagreements,whichareincludedasexhibitstotheregistrationstatementofwhichthisprospectusformsapart,andtotheapplicableprovisionsofDelawarelaw.
ConvertiblePreferredStockRecapitalization
Uponfilingouramendedandrestatedcertificateofincorporation,anumberofsharesofourconvertiblepreferredstockwillconvertintocommonstockattherateof157.06839sharesofcommonstockpereachshareofconvertiblepreferredstock.Allremainingsharesofconvertiblepreferredstockwillbecancelled.Werefertothisconversionandthecancelationtogetherastherecapitalizationoftheconvertiblepreferredstock.Theconversionrateoftheconvertiblepreferredstockandsharestobecanceledwerecalculatedsothatfollowingtherecapitalizationstockholdersthatdidnotownconvertiblepreferredstockwouldown7%ofourcommonstockpriortothisoffering.Allpreferredstockholderswillshareequallyintheeconomicconsequencesofadjustingtheconvertiblepreferredstockthroughtherecapitalizationsothatstockholdersthatdidnotownconvertiblepreferredstockwouldownatleast3.75%ofourcommonstockpriortothisoffering.Inaddition,MajuandChesapeakearebearingalloftheeconomicconsequencesoffurtheradjustmentstotheconvertiblepreferredstocksothatanadditional3.25%ofourcommonstockimmediatelypriortothisofferingisheldbystockholdersthatdonotownconvertiblepreferredstock.Thecalculationsappliedintherecapitalizationofourconvertiblepreferredstockassumesaninitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectus.Anychangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothecompletionofthisofferingbylessthan1%.
Post-OfferingCapitalStructure
Immediatelyfollowingthecompletionofthisoffering,ourauthorizedcapitalstockwillconsistof345,000,000shares,$0.01parvaluepershare,ofwhich:
• 320,000,000sharesaredesignatedascommonstock;and
• 25,000,000sharesaredesignatedaspreferredstock.
Ourboardofdirectorsisauthorizedtoissueadditionalsharesofourcapitalstockwithoutstockholderapproval,exceptasrequiredbytheNYSElistingstandards.
CommonStock
Voting Rights. Theholdersofourcommonstockareentitledtoonevotepershareonanymattertobevoteduponbystockholders.Ouramendedandrestatedcertificateofincorporationwillnotprovideforcumulativevotinginconnectionwiththeelectionofdirectorsand,accordingly,holdersofmorethan50%ofthesharesvotingwillbeabletoelectallofthedirectors.Theholdersofamajorityofthesharesofcommonstockissuedandoutstandingconstituteaquorumatallmeetingsofstockholdersforthetransactionofbusiness.
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Dividends. Theholdersofourcommonstockareentitledtodividendsif,asandwhendeclaredbyourboardofdirectors,fromlegallyavailablefunds,subjecttocertaincontractuallimitationsonourabilitytodeclareandpaydividends.See"DividendPolicy."
Other Rights. Upontheconsummationofthisoffering,noholderofourcommonstockwillhaveanypreemptiverighttosubscribeforanysharesofourcapitalstockissuedinthefuture.
Uponanyvoluntaryorinvoluntaryliquidation,dissolution,orwindingupofouraffairs,theholdersofourcommonstockareentitledtoshareratablyinallassetsremainingafterpaymentofcreditorsandsubjecttopriordistributionrightsofourpreferredstock,ifany.
PreferredStock
Uponcompletionofthisoffering,ourboardofdirectorswillbeauthorized,subjecttolimitationsprescribedbyDelawarelaw,toissuepreferredstockinoneormoreseries,toestablishfromtimetotimethenumberofsharestobeincludedineachseries,andtofixthedesignation,powers,preferences,andrightsofthesharesofeachseriesandanyofitsqualifications,limitations,orrestrictions,ineachcasewithoutfurthervoteoractionbyourstockholders.Ourboardofdirectorscanalsoincreaseordecreasethenumberofsharesofanyseriesofpreferredstock,butnotbelowthenumberofsharesofthatseriesthen-outstanding,withoutanyfurthervoteoractionbyourstockholders.Ourboardofdirectorsmayauthorizetheissuanceofpreferredstockwithvotingorconversionrightsthatcouldadverselyaffectthevotingpowerorotherrightsoftheholdersofourcommonstock.Theissuanceofpreferredstock,whileprovidingflexibilityinconnectionwithpossibleacquisitionsandothercorporatepurposes,could,amongotherthings,havetheeffectofdelaying,deferring,orpreventingachangeinourcontrolandmightadverselyaffectthemarketpriceofourcommonstockandthevotingandotherrightsoftheholdersofourcommonstock.Wehavenocurrentplantoissueanysharesofpreferredstock.
RegistrationRights
Priortocompletionofthisoffering,wewillenterintoaregistrationrightsagreementwithMaju,Chesapeake,SenjaandHampton.Underthetermsoftheregistrationrightsagreement,thepartiesmaydemandregistrationoftheirRegistrableSharesundertheSecuritiesAct.WewillnotbeobligatedtoeffectuatemorethanfourdemandregistrationsforeachofMajuandChesapeake,andfourdemandregistrationsforSenjaandHamptoncollectively.Anydemandregistrationmustbeforananticipatedaggregateofferingpriceofatleast$50.0million.Inaddition,intheeventweregisteradditionalsharesofcommonstockforsaletothepublicfollowingthecompletionofthisoffering,wewillberequiredtogivenoticeoftheregistrationtothepartiestotheregistrationrightsagreementand,subjecttocertainlimitations,includesharesofcommonstockheldbythemintheregistration.Theagreementincludescustomaryindemnificationandcontributionprovisionsinfavorofthepartiestotheagreementagainstcertainlossesandliabilitiesarisingoutoforbaseduponanyfilingorotherdisclosuremadebyusundersecuritieslawsrelatingtosuchregistration.Inaddition,eachstockholderthathasregistrationrightspursuanttothisagreementwillagreenottosell,otherwisedisposeofanysecurities,orexerciseregistrationrightswithoutthepriorwrittenconsentoftheunderwritersforaperiodof180daysafterthedateofthisprospectus,subjecttocertaincustomaryexceptions,termsandconditions.Wewillgenerallypayallregistrationexpensesinconnectionwithourregistrationobligations.See"SharesEligibleforFutureSale—RegistrationRights"foradditionalinformationregardingsuchrestrictions.Allofourexistingconvertiblepreferredstockwillberecapitalizedintosharesofourcommonstockpriortotheclosingofthisoffering.Foradditionalinformationregardingtherecapitalizationofourconvertiblepreferredstock,see"—ConvertiblePreferredStockRecapitalization."
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Anti-takeoverEffectsofProvisionsinourAmendedandRestatedCertificateofIncorporationandAmendedandRestatedBylaws
Provisionsofouramendedandrestatedcertificateofincorporationandamendedandrestatedbylawsmaydelayordiscouragetransactionsinvolvinganactualorpotentialchangeinourcontrolorchangeinourmanagement,includingtransactionsinwhichstockholdersmightotherwisereceiveapremiumfortheirshares,ortransactionsthatourstockholdersmightotherwisedeemtobeintheirbestinterests.Therefore,theseprovisionscouldadverselyaffectthepriceofourcommonstock.Amongotherthings,ouramendedandrestatedcertificateofincorporationandamendedandrestatedbylawswill:
• providethatourboardofdirectorsisclassifiedintothreeclassesofdirectors;
• providethatstockholdersmay,exceptassetforthintheinvestors'rightsagreements,whichwewillenterintowithMaju,Chesapeake,SenjaandHamptonpriortothecompletionofthisoffering,removedirectorsonlyforcauseandonlywiththeapprovalofholdersofatleast662/3%ofourthen-outstandingcapitalstock;
• providethattheauthorizednumberofdirectorsmaybechangedonlybyresolutionoftheboardofdirectors;
• providethatallvacancies,includingnewlycreateddirectorships,maybefilledbytheaffirmativevoteofamajorityofdirectorstheninoffice,eveniflessthanaquorum,except,atanytimeMaju,Chesapeake,SenjaandHamptonhavetherighttonominateadirectorundertheirrespectiveinvestors'rightsagreement,anyvacancyresultingfromthedeath,disability,retirement,resignation,orremoval,ofadirectornominatedbythesestockholderswillbefilledbytheapplicablenominatingstockholder;
• providethatourstockholdersmaynottakeactionbywrittenconsent,andmayonlytakeactionatannualorspecialmeetingsofourstockholders;
• providethatstockholders,otherthanMaju,Chesapeake,SenjaandHampton,seekingtopresentproposalsbeforeameetingofstockholdersortonominatecandidatesforelectionasdirectorsatameetingofstockholdersmustprovidenoticeinwritinginatimelymanner,andalsospecifyrequirementsastotheformandcontentofastockholder'snotice;
• restricttheforumforcertainlitigationagainstustoDelaware;
• notprovideforcumulativevotingrights(thereforeallowingtheholdersofamajorityofthesharesofcommonstockentitledtovoteinanyelectionofdirectorstoelectallofthedirectorsstandingforelection);
• providethatspecialmeetingsofourstockholdersmaybecalledonlyby(1)theChairmanoftheboardofdirectors,(2)ourCEO,(3)theboardofdirectorspursuanttoaresolutionadoptedbyamajorityofthetotalnumberofauthorizeddirectorsor(4)stockholderswithatleast25%ofourthen-outstandingcapitalstock;
• providethat,exceptassetforthintheinvestors'rightsagreements,stockholderswillbepermittedtoamendouramendedandrestatedbylawsonlyuponreceivingatleast662/3%ofthevotesentitledtobecastbyholdersofalloutstandingsharesthenentitledtovotegenerallyintheelectionofdirectors,votingtogetherasasingleclass;and
• providethat,exceptassetforthintheinvestors'rightsagreements,certainprovisionsofouramendedandrestatedcertificateofincorporationmayonlybeamendeduponreceivingatleast662/3%ofthevotesentitledtobecastbyholdersofalloutstandingsharesthenentitledtovote,votingtogetherasasingleclass.
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Further,weintendtooptoutofSection203oftheDGCL.However,ouramendedandrestatedcertificateofincorporationwillcontainsimilarprovisionsprovidingthatwemaynotengageincertain"businesscombinations"withany"interestedstockholder"forathree-yearperiodfollowingthetimethatthestockholderbecameaninterestedstockholder,unless:
• priortosuchtime,ourboardofdirectorsapprovedeitherthebusinesscombinationorthetransactionwhichresultedinthestockholderbecominganinterestedstockholder;
• uponconsummationofthetransactionthatresultedinthestockholderbecominganinterestedstockholder,theinterestedstockholderownedatleast85%ofourvotingstockoutstandingatthetimethetransactioncommenced,excludingcertainshares;or
• atorsubsequenttothattime,thebusinesscombinationisapprovedbyourboardofdirectorsandbytheaffirmativevoteofholdersofatleast662/3ofouroutstandingvotingstockthatisnotownedbytheinterestedstockholder.
Generally,a"businesscombination"includesamerger,asset,orstocksaleorothertransactionresultinginafinancialbenefittotheinterestedstockholder.Subjecttocertainexceptions,an"interestedstockholder"isapersonwho,togetherwiththatperson'saffiliatesandassociates,owns,orwithinthepreviousthreeyearsowned,15%ormoreofouroutstandingvotingstock.Forpurposesofthissectiononly,"votingstock"hasthemeaninggiventoitinSection203oftheDGCL.OuramendedandrestatedcertificateofincorporationwillprovidethatMajuandChesapeakeandtheiraffiliatesandanyoftheirdirectorindirecttransfereesandanygroupastowhichsuchpersonsareaparty,donotconstitute"interestedstockholders"forpurposesofthisprovision.
Undercertaincircumstances,thisprovisionwillmakeitmoredifficultforapersonwhowouldbean"interestedstockholder"toeffectvariousbusinesscombinationswiththeCompanyforathree-yearperiod.ThisprovisionmayencouragecompaniesinterestedinacquiringtheCompanytonegotiateinadvancewithourboardofdirectorsbecausethestockholderapprovalrequirementwouldbeavoidedifourboardofdirectorsapproveseitherthebusinesscombinationorthetransactionwhichresultsinthestockholderbecominganinterestedstockholder.Theseprovisionsalsomayhavetheeffectofpreventingchangesinourboardofdirectorsandmaymakeitmoredifficulttoaccomplishtransactionswhichstockholdersmayotherwisedeemtobeintheirbestinterests.
ChoiceofForum
Unlessweconsenttotheselectionofanalternativeforum,theCourtofChanceryoftheStateofDelawarewillbe,tothefullestextentpermittedbylaw,thesoleandexclusiveforumforanyderivativeactionorproceedingbroughtonourbehalf;anyactionassertingaclaimofbreachoffiduciarydutyowedbyanyofourdirectors,officersorotheremployeestousortoourstockholders;anyactionassertingaclaimagainstusarisingpursuanttotheDGCLorouramendedandrestatedcertificateofincorporationorouramendedandrestatedbylawsorastowhichtheDGCLconfersjurisdictionontheCourtofChanceryoftheStateofDelaware;oranyactionassertingaclaimagainstusthatisgovernedbytheinternalaffairsdoctrine.
TransferAgentandRegistrar
ThetransferagentandregistrarforourcommonstockwillbeAmericanStockTransfer&TrustCompany,LLC.
Listing
Afterpricingofthisoffering,weexpectthatourshareswilltradeontheNYSEunderthesymbol"FTSI."
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DESCRIPTIONOFINDEBTEDNESS
AdescriptionofourTermLoan,2022Notesand2020Notesissetforthbelow.
TermLoan
InApril2014,weenteredintoaTermLoanintheinitialprincipalamountof$550,000,000andrelatedsecurityagreementswithasyndicateoffinancialinstitutionsaslendersandWellsFargoBank,N.A.,asadministrativeagent.BorrowingsunderourTermLoanwillmatureonApril16,2021.TheTermLoanalsopermits,upontermsandsubjecttoconditionssetforththerein,theincurrenceofadditionaltermloansonanuncommittedbasisinanaggregateprincipalamountnottoexceedthesumof$300millionplusanunlimitedamountoftermloansthatwouldnotcausetheproformaseniorsecurednetleverageratio(asdefinedtherein)toexceed4.00to1.00.
TheTermLoanisguaranteed,subjecttocertainexceptions,byourcurrentandfuturewhollyowneddomesticrestrictedsubsidiaries(otherthanforeignsubsidiaryholdingcompanies),andbyanyrestrictedsubsidiaryofoursthatisnotalreadyaguarantorthatguaranteesorbecomesanobligoronanyotherindebtednessofoursoraguarantorinanamountexceeding$5million.
OurobligationsunderourTermLoanaresecuredby(a)afirstprioritysecurityinterestinandlienin100%oftheexistingandafteracquiredstockofourdomesticsubsidiaries(otherthanforeignsubsidiaryholdingcompanies)and65%oftheexistingandafteracquiredvotingstockand100%oftheexistingandacquirednon-votingstockofourfirst-tierforeignsubsidiariesandforeignsubsidiaryholdingcompanies,ortheTermLoan/2022NotesCollateral,and(b)asecondprioritysecurityinterestinthe2020NotesCollateral,asdescribedbelow,ineachcasesubjecttopermittedliensandcertainexceptions.ThesecurityinterestssecuringtheTermLoanrankparipassuwiththesecurityinterestssecuringthe2022Notes.TheTermLoaniseffectivelyseniorinrightofpaymenttoourexistingandfutureindebtedness,includingthe2020Notes,thatissecuredbyalowerprioritylienontheTermLoan/2022NotesCollateralsecuringtheTermLoan,totheextentofthevalueofsuchassets,andequalinrightofpaymentthereafterandeffectivelyjuniorinrightofpaymenttoourexistingandfutureindebtedness,includingthe2020Notes,thatissecuredbyahigherprioritylienonthe2020NotesCollateralsecuringthe2020NotesorbyalienonassetsnotconstitutingcollateralfortheTermLoan,totheextentofthevalueofsuchassets,andequalinrightofpaymentthereafter.
OurTermLoanbearsinterestatarateperannumequaltoeitherabaserateorLIBOR,atouroption,plus,ineachcase,anapplicablemargin.LoansundertheTermLoanamortizeinequalquarterlyinstallmentsinanannualamountof1%oftheoriginalprincipalamount,withthebalancedueuponfinalmaturity.
OurTermLoancontainsanumberofcovenantsthat,amongotherthings,restrictourabilityandtheabilityofourrestrictedsubsidiariestograntliens,engageinmergers,sellassets,incurdebt,makerestrictedpaymentsandundertaketransactionswithaffiliates.
2022Notes
InApril2014,weissued$500,000,000inaggregateprincipalamountof6.250%seniorsecurednotespursuanttoanindenturebetweentheCompany,theguarantorstheretoandUSBankNationalAssociation,astrustee.The2022NotesmatureonMay1,2022.
Our2022Notesareguaranteed,subjecttocertainexceptions,byourcurrentandfuturewhollyowneddomesticrestrictedsubsidiaries(otherthanforeignsubsidiaryholdingcompanies),andbyanyrestrictedsubsidiaryofoursthatisnotalreadyaguarantorthatguaranteesorbecomesanobligoronanyotherindebtednessofoursoraguarantorinanamountexceeding$5million.
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The2022Notesaresecuredby(a)afirstprioritysecurityinterestintheTermLoan/2022NotesCollateraland(b)asecondprioritysecurityinterestinthe2020NotesCollateral,ineachcasesubjecttopermittedliensandcertainexceptions.Thesecurityinterestssecuringthe2022NotesrankparipassuwiththesecurityinterestssecuringourTermLoan.The2022Notesareeffectivelyseniorinrightofpaymenttoourexistingandfutureindebtedness,includingthe2020Notes,thatissecuredbyalowerprioritylienontheTermLoan/2022NotesCollateralsecuringthe2022Notes,totheextentofthevalueofsuchassets,andequalinrightofpaymentthereafterandeffectivelyjuniorinrightofpaymenttoourexistingandfutureindebtedness,includingthe2020Notes,thatissecuredbyahigherprioritylienonthe2020NotesCollateralsecuringthe2020Notesorbyalienonassetsnotconstitutingcollateralforthe2022Notes,totheextentofthevalueofsuchassets,andequalinrightofpaymentthereafter.
Interestonthe2022Notesaccruesatarateof6.250%perannum.Interestonthe2022NotesispayablesemiannuallyincashinarrearsonMay1andNovember1ofeachyear.
Theindenturegoverningour2022Notescontainsanumberofcovenantsthat,amongotherthings,restrictourabilityandtheabilityofourrestrictedsubsidiariestograntliens,engageinmergers,sellassets,incurdebt,makerestrictedpaymentsandundertaketransactionswithaffiliates.
2020Notes
InJune2015,weissued$350,000,000inaggregateprincipalamountofseniorsecuredfloatingratenotespursuanttoanindenturebetweentheCompany,theguarantorstheretoandUSBankNationalAssociation,astrustee.The2020NotesmatureonJune15,2020.
Our2020Notesareguaranteed,subjecttocertainexceptions,byourcurrentandfuturewhollyowneddomesticrestrictedsubsidiaries(otherthanforeignsubsidiaryholdingcompanies),andbyanyrestrictedsubsidiaryofoursthatisnotalreadyaguarantorthatguaranteesorbecomesanobligoronanyotherindebtednessofoursoraguarantorinanamountexceeding$5million.
The2020Notesaresecuredby(a)afirstprioritysecurityinterestinourandourguarantors'accountsreceivable,inventory,depositaccounts,cashandrelatedassetsandfracturing,fleetandcertainotherequipment,orthe2020NotesCollateraland(b)asecondprioritysecurityinterestintheTermLoan/2022NotesCollateral,ineachcasesubjecttopermittedliensandcertainexceptions.The2020Notesareeffectivelyseniorinrightofpaymenttoourexistingandfutureindebtedness,includingtheTermLoanand2022Notes,thatissecuredbyalowerprioritylienonthe2020NotesCollateralsecuringthe2020Notes,totheextentofthevalueofsuchassets,andequalinrightofpaymentthereafterandeffectivelyjuniorinrightofpaymenttoourexistingandfutureindebtedness,includingtheTermLoanand2022Notes,thatissecuredbyahigherprioritylienontheTermLoan/2022NotesCollateralsecuringtheTermLoanand2022Notesorbyalienonassetsnotconstitutingcollateralforthe2020Notes,totheextentofthevalueofsuchassets,andequalinrightofpaymentthereafter.
Interestonthe2020NotesaccruesatarateofLIBORplusamarginof7.500%perannum.Interestonthe2020Notesispayablequarterly,incashinarrears,onMarch15,June15,September15andDecember15ofeachyear.
Theindenturegoverningour2020Notescontainsanumberofcovenantsthat,amongotherthings,restrictourabilityandtheabilityofourrestrictedsubsidiariestograntliens,engageinmergers,sellassets,incurdebt,makerestrictedpaymentsandundertaketransactionswithaffiliates.
IntercreditorAgreements
ThecollateralagentundertheTermLoanandthecollateralagentundertheindenturegoverningthe2022NotesenteredintoaparipassuintercreditoragreementastotherelativeprioritiesoftheirrespectivesecurityinterestsintheassetssecuringtheTermLoanandthe2022Notes,andcertain
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futuresecuredindebtednessandcertainothermattersrelatingtotheadministrationoftheirrespectivesecurityinterests,includingintheeventofabankruptcy.
ThecollateralagentundertheTermLoan,thecollateralagentundertheindenturegoverningthe2022Notesandthecollateralagentundertheindenturegoverningthe2020Notesarepartiestoajuniorintercreditoragreementastotherelativeprioritiesoftheirrespectivesecurityinterestsintheassetssecuringthe2022Notes,theTermLoanandthe2020Notesandcertainfuturesecuredindebtednessandcertainothermattersrelatingtotheadministrationoftheirrespectivesecurityinterests,includingintheeventofabankruptcy.
Asset-BasedRevolvingCreditFacility
Weintendtoenterintoa$250.0millionasset-basedrevolvingcreditfacilityfollowingtheconsummationofthisoffering.Weexpectthatwewillenterintothecreditfacilityuponredemptionoftheremaining2020Noteswiththeproceedsofthisoffering.Weintendtousethisfacilityforgeneralworkingcapitalpurposesinordertoprovideuswithmoreflexibilityandborrowingcapacity.
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SHARESELIGIBLEFORFUTURESALE
Priortothisoffering,therehasbeennopublicmarketforourcommonstock.Futuresalesofsubstantialamountsofcommonstockinthepublicmarketcouldadverselyaffectprevailingmarketprices.Furthermore,sinceonlyalimitednumberofshareswillbeavailableforsaleshortlyafterthisofferingbecauseofcontractualandlegalrestrictionsonresaledescribedbelow,salesofsubstantialamountsofsharesofcommonstockinthepublicmarketaftertherestrictionslapsecouldadverselyaffecttheprevailingmarketpriceforoursharesofcommonstockaswellasourabilitytoraiseequitycapitalinthefuture.
SalesofRestrictedShares
Uponcompletionofthisoffering,our69.196592:1reservestocksplitandtherecapitalizationofourconvertiblepreferredstock,wewillhaveissuedandoutstandinganaggregateof106,431,603sharesofcommonstock,assuminganinitialpublicofferingpriceof$16.50pershare,themidpointoftherangesetforthonthecoverpageofthisprospectusandassumingnoexerciseoftheunderwriters'optiontopurchaseadditionalshares,andnoexerciseofoptionsaftersuchdate.Achangeinthepublicofferingpricewouldchangethenumberofsharesoutstandingpriortothecompletionofthisofferingbylessthan1%.Foradditionalinformationregardingtherecapitalizationofourconvertiblepreferredstock,see"DescriptionofCapitalStock."Onlythe19,500,000sharessoldinthisofferingwillbefreelytradablewithoutrestrictionorfurtherregistrationundertheSecuritiesAct,exceptforanysuchsharespurchasedbyour"affiliate,"asthattermisdefinedinRule144undertheSecuritiesAct.Exceptassetforthbelow,theremaining86,931,603sharesofcommonstockoutstandingafterthisofferingwillbe"restrictedsecurities"assuchtermisdefinedinRule144undertheSecuritiesActandmaybesubjecttolock-upagreements.Weexpecttheremainingshareswillgenerallybecomeavailableforsaleinthepublicmarketasfollows:
• 978,851restrictedshareswillbeeligibleforimmediatesaleupontheclosingofthisoffering;
• 85,952,752shareswillbeeligibleforsaleuponexpirationofthelock-upagreements181daysafterthedateofthisprospectus,subjecttoanyvolumeandotherlimitationsapplicabletotheholdersofsuchshares;and
• 76,467,767sharesregisteredinaccordancewiththetermsoftheregistrationrightsagreement.See"—RegistrationRightsAgreement"below.
Thenumbersabovedonotreflectanysharesofcommonstockthat5%stockholders,directorsandexecutiveofficersmaypurchasethroughthedirectedshareprogramorotherwisethroughadirectedallocationofsharesinthisofferingthatwillbesubjecttoalock-upagreement.
Rule144
Ingeneral,underRule144ascurrentlyineffect,apersonorpersonswhoisanaffiliate,orwhosesharesareaggregatedandwhoownssharesofcommonstockthatwereacquiredfromusorouraffiliateatleastsixmonthsago,wouldbeentitledtosell,withinanythree-monthperiod,anumberofsharesthatdoesnotexceedthegreaterof(1)1%ofourthen-outstandingsharesofcommonstock,whichwouldbeapproximately1,064,316sharesofcommonstockimmediatelyafterthisoffering,or(2)anamountequaltotheaverageweeklyreportedvolumeoftradinginoursharesofcommonstockonallnationalsecuritiesexchangesorreportedthroughtheautomatedquotationsystemofregisteredsecuritiesassociationsduringthefourcalendarweeksprecedingthedateonwhichnoticeofthesaleisfiledwiththeSEC.SalesinrelianceonRule144arealsosubjecttootherrequirementsregardingthemannerofsale,noticeandavailabilityofcurrentpublicinformationaboutus.
Apersonorpersonswhosesharesofcommonstockareaggregated,andwhoisnotdeemedtohavebeenoneofouraffiliatesatanytimeduringthe90daysimmediatelyprecedingthesale,maysell
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restrictedsecuritiesinrelianceonRule144(b)(1)withoutregardtothelimitationsdescribedabove,subjecttoourcompliancewithExchangeActreportingobligationsforatleastthreemonthsbeforethesale,andprovidedthatsixmonthshaveexpiredsincethedateonwhichthesamerestrictedsecuritieswereacquiredfromusoroneofouraffiliates,andprovidedfurtherthatsuchsalescomplywiththecurrentpublicinformationprovisionofRule144(untilthesecuritieshavebeenheldforoneyear).AsdefinedinRule144,an"affiliate"ofanissuerisapersonthatdirectly,orindirectlythroughoneormoreintermediaries,controls,oriscontrolledby,orisundercommoncontrolwith,thatsameissuer.
Rule701
Subjecttocertainlimitationsontheaggregateofferingpriceofatransactionandotherconditions,Rule701undertheSecuritiesAct,asineffectonthedateofthisprospectus,permitsresalesofsharesinrelianceuponRule144butwithoutcompliancewithcertainrestrictionsofRule144,includingtheholdingperiodrequirement.EmployeesordirectorswhopurchasedorreceivedsharesunderawrittencompensatoryplanorcontractmaybeentitledtorelyontheresaleprovisionsofRule701,butallholdersofRule701sharesarerequiredtowaituntil90daysafterthedateofthisprospectusbeforesellingtheirshares.
Lock-upAgreements
We,ourexecutiveofficersanddirectorsandourotherexistingsecurityholdershaveagreednottosellortransferanycommonstockorsecuritiesconvertibleinto,exchangeablefor,exercisablefor,orrepayablewithcommonstock,for180daysafterthedateofthisprospectus,subjecttocertaincustomaryexceptions,withoutfirstobtainingthewrittenconsentofCreditSuisseSecurities(USA)LLCandMorganStanley&Co.LLC.Specifically,weandtheseotherpersonshaveagreed,withcertainlimitedexceptions,nottodirectlyorindirectly
• offer,pledge,sell,orcontracttosellanycommonstock;
• sellanycontracttopurchaseanycommonstock;
• purchaseanycontracttosellanycommonstock;
• grantanyoption,right,orwarrantforthesaleofanycommonstock;
• lendorotherwisedisposeofortransferanycommonstock;
• requestordemandthatwefilearegistrationstatementrelatedtothecommonstock;or
• enterintoanyswaporotheragreementthattransfers,inwholeorinpart,theeconomicconsequenceofownershipofanycommonstockwhetheranysuchswaportransactionistobesettledbydeliveryofsharesorothersecurities,incashorotherwise.
Thislock-upprovisionalsoappliestocommonstockandtosecuritiesconvertibleintoorexchangeablefororrepayablewithcommonstockownednoworacquiredlaterbythepersonexecutingtheagreementorforwhichthepersonexecutingtheagreementlateracquiresthepowerofdisposition.CreditSuisseSecurities(USA)LLCandMorganStanley&Co.LLCmayreleasethecommonstockandothersecuritiessubjecttothelock-upagreementsdescribedabove,inwholeorinpart,atanytime.
RegistrationRightsAgreement
Priortocompletionofthisoffering,wewillenteraregistrationrightsagreementwithMaju,Chesapeake,SenjaandHampton.Underthetermsoftheregistrationrightsagreement,thepartiesmaydemandregistrationoftheirRegistrableSharesundertheSecuritiesAct,subjecttothelock-upagreementdescribedabove.RegistrationoftheRegistrableSharesundertheSecuritiesActwould
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resultinthembecomingfreelytradablewithoutrestrictionundertheSecuritiesActimmediatelyupontheeffectivenessoftheregistration.Anysalesofsecuritiesbythesestockholderscouldadverselyaffectthetradingpriceofoursharesofcommonstock.See"DescriptionofCapitalStock—RegistrationRights."
RegistrationStatementonFormS-8
Afterthecompletionofthisoffering,weintendtofilearegistrationstatementonFormS-8undertheSecuritiesActtoregistertheofferandsaleof2,823,095sharesofourcommonstockunderthe2018Plan.ThisregistrationstatementonFormS-8willbecomeeffectiveimmediatelyuponfiling,andsharesofourcommonstockcoveredbytheregistrationstatementmaythenbepubliclyresoldwithoutrestriction,subjecttotheRule144limitationsapplicabletoaffiliatesandtheapplicablelock-upagreements.See"ExecutiveCompensation"foradescriptionofour2018Plan.
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MATERIALU.S.FEDERALINCOMETAXCONSEQUENCESTONON-U.S.HOLDERS
ThefollowingisasummaryofmaterialU.S.federalincometaxconsiderationsrelevanttotheownershipanddispositionofourcommonstockbynon-U.S.holders(asdefinedbelow),butdoesnotpurporttobeacompleteanalysisofallthepotentialtaxconsiderationsrelatingthereto.ThissummaryisbasedupontheprovisionsoftheInternalRevenueCodeof1986,asamended(the"Code"),Treasuryregulationspromulgatedorproposedthereunder,administrativerulingsandjudicialdecisions,allasofthedatehereof.Theseauthoritiesmaybechanged,possiblywithretroactiveeffect,soastoresultinU.S.federalincometaxconsequencesdifferentfromthosesetforthbelow.
Thissummaryislimitedtonon-U.S.holderswhopurchaseourcommonstockpursuanttothisofferingandwhoholdsharesofourcommonstockascapitalassetswithinthemeaningofSection1221oftheCode(generally,non-U.S.holderswhoholdforinvestmentpurposes).Thissummarydoesnotaddressthetaxconsiderationsarisingunderthelawsofanynon-U.S.jurisdictionoranyU.S.stateorlocaljurisdictionorunderU.S.federalgiftandestatetaxlaws.Inaddition,thisdiscussiondoesnotaddresstaxconsiderationsapplicabletoaninvestor'sparticularcircumstancesortoinvestorsthatmaybesubjecttospecialtaxrules,including,withoutlimitation:
• banks,insurancecompaniesorotherfinancialinstitutions;
• personssubjecttothealternativeminimumtax;
• tax-exemptorganizations;
• controlledforeigncorporations,passiveforeigninvestmentcompanies;
• brokersordealersinsecuritiesorcurrencies;
• tradersinsecuritiesthatelecttouseamark-to-marketmethodofaccounting;
• personsthatown,oraredeemedtoown,morethanfivepercentofourcapitalstock(excepttotheextentspecificallysetforthbelow);
• certainformercitizensorformerlong-termresidentsoftheUnitedStates;
• personswhoholdourcommonstockasapositioninahedgingtransaction,"straddle,""conversiontransaction"orotherrisk-reductiontransaction;or
• personsdeemedtosellourcommonstockundertheconstructivesaleprovisionsoftheCode.
YOUAREURGEDTOCONSULTYOURTAXADVISORWITHRESPECTTOTHEAPPLICATIONOFTHEUNITEDSTATESFEDERALINCOMETAXLAWSTOYOURPARTICULARSITUATION,ASWELLASANYTAXCONSEQUENCESOFTHEPURCHASE,OWNERSHIPANDDISPOSITIONOFOURCOMMONSTOCKARISINGUNDERTHEUNITEDSTATESFEDERALESTATEORGIFTTAXRULES,UNITEDSTATESALTERNATIVEMINIMUMTAXRULESORUNDERTHELAWSOFANYNON-U.S.JURISDICTIONORANYU.S.STATEORLOCALTAXINGJURISDICTIONORUNDERANYAPPLICABLETAXTREATY.
Non-U.S.HolderDefined
Forpurposesofthisdiscussion,youareanon-U.S.holderifyouareanyholderthatisnot:
• acitizenorindividualresidentoftheUnitedStates;
• acorporationorotherentitytaxableasacorporationcreatedororganizedintheUnitedStatesorunderthelawsoftheUnitedStates,anystatethereofortheDistrictofColumbia;
• anestatewhoseincomeissubjecttoU.S.federalincometaxregardlessofitssource;
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• atrust(x)whoseadministrationissubjecttotheprimarysupervisionofaU.S.courtandwhichhasoneormore"U.S.persons"whohavetheauthoritytocontrolallsubstantialdecisionsofthetrustor(y)whichhasmadeanelectionunderapplicableTreasuryregulationstobetreatedasaU.S.person;or
• anentityorarrangementthatistreatedasapartnershipforU.S.federalincometaxpurposes.
Ifapartnership(includinganentityorarrangementclassifiedasapartnershipforU.S.federalincometaxpurposes)holdsourcommonstock,thetaxtreatmentofapartnergenerallywilldependonthestatusofthepartnerandupontheactivitiesofthepartnership.Accordingly,partnershipsthatholdourcommonstock,andpartnersinsuchpartnerships,shouldconsulttheirtaxadvisorsastotheirstatusasnon-U.S.holders.
Distributions
Otherthanasdescribedinthisprospectus,wehavenotmadeanydistributionsonourcommonstock,andwedonotexpecttomakeanydistributionsfortheforeseeablefuture.However,ifwedomakedistributionsonourcommonstock,otherthancertainproratadistributionsofcommonstock,thosepaymentswillconstitutedividendsforU.S.federalincometaxpurposesonlytotheextentpaidfromourcurrentoraccumulatedearningsandprofits,asdeterminedunderU.S.federalincometaxprinciples.Totheextentdistributionsexceedbothourcurrentandouraccumulatedearningsandprofits,theywillconstituteareturnofcapitalandfirstwillreduceyourbasisinourcommonstock,butnotbelowzero,andthenwillbetreatedascapitalgainfromthesaleofstock,subjecttothetaxtreatmentdescribedbelowin"—GainonSaleorOtherTaxableDispositionofCommonStock."
SubjecttothediscussionofbackupwithholdingandFATCAbelow,anydividend(asdeterminedundertheaboverules)paidtoyougenerallywillbesubjecttoU.S.federalwithholdingtaxatarateof30%ofthegrossamountofthedividend,orsuchlowerrateasmaybespecifiedbyanapplicableincometaxtreaty,excepttotheextentthatthedividendsare"effectivelyconnected"dividends,asdescribedbelow.Inordertobeeligibleforareducedtreatyrate,youmustprovideuswithaproperlycompletedInternalRevenueService,orIRS,FormW-8BENorW-8BEN-E(orotherappropriateversionofIRSFormW-8)certifyingqualificationforthereducedrate.Ifyouareanon-U.S.holderofsharesofourcommonstockwhoiseligibleforareducedrateofU.S.federalwithholdingtaxpursuanttoanincometaxtreaty,youmayobtainarefundofanyexcessamountswithheldbytimelyfilinganappropriateclaimforrefundwiththeIRS.Ifyouareanon-U.S.holderwhoholdsyourstockthroughafinancialinstitutionorotheragentactingonyourbehalf,youwillberequiredtoprovideappropriatedocumentationtotheagent,whichthenwillberequiredtoprovidecertificationtousorourpayingagent,eitherdirectlyorthroughotherintermediaries.
DividendsreceivedbyyouthatareeffectivelyconnectedwithyourconductofaU.S.tradeorbusiness(and,ifrequiredbyanapplicableincometaxtreaty,isattributabletoapermanentestablishmentorfixedbasemaintainedbyyouintheUnitedStates)areexemptfromsuchwithholdingtax.Inordertoobtainthisexemption,youmustprovideuswithanIRSFormW-8ECI(orsuccessorform)properlycertifyingsuchexemption.Sucheffectively-connecteddividends,althoughnotsubjecttoU.S.federalwithholdingtax,generallyaretaxedatthesamegraduatedratesapplicabletoU.S.persons,netofapplicabledeductionsandcredits.Inaddition,ifyouareacorporatenon-U.S.holder,dividendsyoureceivethatareeffectivelyconnectedwithyourconductofaU.S.tradeorbusinessmayalsobesubjectto"branchprofitstax"atarateof30%orsuchlowerrateasmaybespecifiedbyanapplicableincometaxtreaty.
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GainonSaleorOtherTaxableDispositionofCommonStock
SubjecttothediscussionofbackupwithholdingandFATCAbelow,yougenerallywillnotberequiredtopayU.S.federalincometaxonanygainrealizeduponthesaleorothertaxabledispositionofourcommonstockunless:
• thegainiseffectivelyconnectedwithyourconductofaU.S.tradeorbusiness(and,ifrequiredbyanapplicableincometaxtreaty,thegainisattributabletoapermanentestablishmentorfixedbasemaintainedbyyouintheUnitedStates);
• youareanindividualwhoispresentintheUnitedStatesforaperiodorperiodsaggregating183daysormoreduringthecalendaryearinwhichthesaleordispositionoccursandcertainotherconditionsaremet;or
• ourcommonstockconstitutesaU.S.realpropertyinterestbyreasonofourstatusasa"UnitedStatesrealpropertyholdingcorporation"forU.S.federalincometaxpurposes,oraUSRPHC,atanytimewithintheshorterofthefive-yearperiodprecedingthedispositionoryourholdingperiodforourcommonstock.
Ingeneral,wewouldbeaUSRPHCifour"U.S.realpropertyinterests"comprisedatleast50%ofthesumofthefairmarketvalueofourworldwiderealpropertyinterestsplusourotherassetsusedorheldinourtradeorbusiness.WebelievethatwearenotcurrentlyaUSRPHCand,baseduponourprojectionsastoourbusiness,wedonotexpecttobecomeaUSRPHC.However,becausethedeterminationofwhetherweareaUSRPHCdependsonthefairmarketvalueofourU.S.realpropertyrelativetothefairmarketvalueofourotherbusinessassets,therecanbenoassurancethatwewillnotbecomeaUSRPHCinthefuture.EvenifwebecomeaUSRPHC,however,aslongasourcommonstockisregularlytradedonanestablishedsecuritiesmarket(withinthemeaningofapplicableTreasuryregulations),suchcommonstockwillbetreatedasaU.S.realpropertyinterestonlyifyouactuallyorconstructivelyholdmorethanfivepercentofsuchregularlytradedcommonstockatanytimeduringtheapplicableperioddescribedabove.
Ifyouareanon-U.S.holderdescribedinthefirstbulletabove,yougenerallywillberequiredtopaytaxonthegainderivedfromthesale(netofapplicabledeductionsorcredits)underregulargraduatedU.S.federalincometaxratesgenerallyapplicabletoU.S.persons,andcorporatenon-U.S.holdersdescribedinthefirstbulletabovealsomaybesubjecttobranchprofitstaxata30%rateorsuchlowerrateasmaybespecifiedbyanapplicableincometaxtreaty.Ifyouareanindividualnon-U.S.holderdescribedinthesecondbulletabove,youwillberequiredtopayaflat30%taxonthegainderivedfromthesale,whichtaxmaybeoffsetbyU.S.sourcecapitallossesforthatyear(eventhoughyouarenotconsideredaresidentoftheUnitedStatesfortaxpurposes),providedthatthenon-U.S.holderhastimelyfiledU.S.federalincometaxreturnswithrespecttosuchlosses.ApplicableU.S.incometaxorothertreatiesmayprovidefordifferentrules.YoushouldconsultyourU.S.taxadvisorastotheapplicationofanysuchtreatiesinyourownsituation.
BackupWithholdingandInformationReporting
Generally,wemustreportannuallytotheIRStheamountofdividendspaidtoyou,yournameandaddress,andtheamountoftaxwithheld,ifany.Asimilarreportwillbesenttoyou.Pursuanttoapplicabletaxtreatiesorotheragreements,theIRSmaymakethesereportsavailabletotaxauthoritiesinyourcountryofresidence.
Paymentsofdividendsorofproceedsonthedispositionofstockmadetoyoumaybesubjecttoadditionalinformationreportingandbackupwithholdingatacurrentrateof24%unlessyouestablishanexemption,forexamplebyproperlycertifyingtoyournon-U.S.statusonaFormW-8BENorW-8BEN-E(oranotherappropriateversionofIRSFormW-8).Notwithstandingtheforegoing,backupwithholdingandinformationreportingmayapplyifeitherweorourpayingagenthasactual
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knowledge,orreasontoknow,thatyouareaU.S.personorthattheconditionsofanyotherexemptionarenot,infact,satisfied.
Backupwithholdingisnotanadditionaltax;rather,theU.S.federalincometaxliabilityofpersonssubjecttobackupwithholdingwillbereducedbytheamountoftaxwithheld.Ifwithholdingresultsinanoverpaymentoftaxes,arefundmaygenerallybeobtainedfromtheIRS,providedthattherequiredinformationisfurnishedtotheIRSinatimelymanner.
FATCA
TheForeignAccountTaxComplianceActprovisionsoftheCode,commonlyreferredtoas"FATCA"andtreasuryregulationspromulgatedthereunder,generallyimposea30%U.S.federalwithholdingtaxoncertainU.S.sourcepaymentsmadetocertain"foreignfinancialinstitutions"(whichtermincludesmostforeignhedgefunds,privateequityfunds,mutualfunds,securitizationvehiclesandotherforeigninvestmentvehicles)and"non-financialforeignentities"(asdefinedintheCode)thatfailtocomplywithinformationreportingruleswithrespecttotheirU.S.accountholdersandinvestors.UnderapplicableTreasuryRegulations,aforeignfinancialinstitutionornon-financialforeignentitygenerallywillbesubjecttoa30%U.S.federalwithholdingtaxwithrespecttoany"withholdablepayments,"unless(1)theforeignfinancialinstitutionundertakescertaindiligenceandreportingobligations,(2)thenon-financialforeignentityeithercertifiesthatitdoesnothaveany"substantialUnitedStatesowners"(asdefinedintheCode)orfurnishesidentifyinginformationregardingeachsubstantialUnitedStatesowner,or(3)theforeignfinancialinstitutionornon-financialforeignentityotherwisequalifiesforanexemptionfromtheserules.Ifthepayeeisaforeignfinancialinstitutionandissubjecttothediligenceandreportingrequirementsdescribedin(1)above,itmustgenerallyenterintoanagreementwiththeTreasuryrequiring,amongotherthings,thatitundertaketoidentifyaccountsheldbycertain"specifiedUnitedStatespersons"or"UnitedStates-ownedforeignentities"(eachasdefinedintheCode),annuallyreportcertaininformationaboutsuchaccounts,andwithhold30%oncertainpaymentstonon-compliantaccountholders.Forthispurpose,"withholdablepayments"generallyincludeU.S.-sourcedividends(whichwouldincludedividendsonourcommonstock)andtheentiregrossproceedsfromthesaleofanypropertyproducingsuchU.S.-sourcedividends(suchassharesofourcommonstock).TreasuryguidancedefersthiswithholdingobligationwithrespecttogrossproceedsfromdispositionsofstockuntilJanuary1,2019.ForeignfinancialinstitutionslocatedinjurisdictionsthathaveanintergovernmentalagreementwiththeUnitedStatesgoverningFATCAmaybesubjecttodifferentrules.Morethan100foreignjurisdictionshavesuchanintergovernmentalagreementwiththeUnitedStates.TherulesunderFATCAarecomplex.Allnon-U.S.holders,andparticularlyinvestorsthatholdnotesthroughanon-U.S.intermediary,areencouragedtoconsulttheirowntaxadvisorsregardingtheimplicationsofFATCAforaninvestmentinsharesofourcommonstock.
THEPRECEDINGDISCUSSIONOFUNITEDSTATESFEDERALTAXCONSIDERATIONSISFORGENERALINFORMATIONONLY.THISDISCUSSIONISNOTTAXADVICE.EACHPROSPECTIVEINVESTORSHOULDCONSULTITSOWNTAXADVISORREGARDINGTHEPARTICULARUNITEDSTATESFEDERAL,STATEANDLOCALANDNON-U.S.TAXCONSEQUENCESOFPURCHASING,HOLDINGANDDISPOSINGOFOURCOMMONSTOCK,INCLUDINGTHECONSEQUENCESOFANYPROPOSEDCHANGEINAPPLICABLELAWS.
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UNDERWRITING
CreditSuisseSecurities(USA)LLCandMorganStanley&Co.LLCareactingasrepresentativesofeachoftheunderwritersnamedbelow.Subjecttothetermsandconditionssetforthinanunderwritingagreementamongus,thesellingstockholderandtheunderwriters,weandthesellingstockholderhaveagreedtoselltotheunderwriters,andeachoftheunderwritershasagreed,severallyandnotjointly,topurchasefromusthenumberofsharesofcommonstocksetforthoppositeitsnamebelow.
Subjecttothetermsandconditionssetforthintheunderwritingagreement,theunderwritershaveagreed,severallyandnotjointly,topurchaseallofthesharessoldundertheunderwritingagreementifanyofthesesharesarepurchased.Ifanunderwriterdefaults,theunderwritingagreementprovidesthatthepurchasecommitmentsofthenondefaultingunderwritersmaybeincreasedortheunderwritingagreementmaybeterminated.
Weandthesellingstockholderhaveagreedtoindemnifytheseveralunderwritersagainstcertainliabilities,includingliabilitiesundertheSecuritiesAct,ortocontributetopaymentstheunderwritersmayberequiredtomakeinrespectofthoseliabilities.
Theunderwritersareofferingtheshares,subjecttopriorsale,when,asandifissuedtoandacceptedbythem,subjecttoapprovaloflegalmattersbytheircounsel,includingthevalidityoftheshares,andotherconditionscontainedintheunderwritingagreement,suchasthereceiptbytheunderwritersofofficer'scertificatesandlegalopinions.Theunderwritersreservetherighttowithdraw,cancelormodifyofferstothepublicandtorejectordersinwholeorinpart.
OptiontoPurchaseAdditionalShares
Wehavegrantedanoptiontotheunderwriters,exercisablefor30daysafterthedateofthisprospectus,topurchaseupto2,925,000additionalsharesfromusatthepublicofferingprice,lesstheunderwritingdiscountandcommissions.Theunderwritersmayexercisethisoptionsolelytocoveranyover-allotments.Iftheunderwritersexercisethisoption,eachwillbeobligated,subjecttoconditionscontainedintheunderwritingagreement,topurchaseanumberofadditionalsharesproportionatetothatunderwriter'sinitialamountreflectedintheabovetable.
CommissionsandDiscounts
Therepresentativeshaveadvisedusthattheunderwritersproposeinitiallytoofferthesharestothepublicatthepublicofferingpricesetforthonthecoverpageofthisprospectusandtodealersatthatpricelessaconcessionnotinexcessof$pershare.Theunderwritersmayallowadiscount
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Underwriter NumberofShares
CreditSuisseSecurities(USA)LLC MorganStanley&Co.LLC WellsFargoSecurities,LLC BarclaysCapitalInc. CitigroupGlobalMarketsInc. EvercoreGroupL.L.C. GuggenheimSecurities,LLC PiperJaffray&Co. Tudor,Pickering,Holt&Co.Securities,Inc. CowenandCompany,LLC Total 19,500,000
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notinexcessof$persharetootherdealers.Aftertheinitialoffering,thepublicofferingprice,concessionoranyothertermofthisofferingmaybechanged.
Thefollowingtableshowsthepublicofferingprice,underwritingdiscountandcommissionspaidbyus,proceedsbeforeexpensestous,underwritingdiscountsandcommissionspaidbythesellingstockholderandproceedstothesellingstockholder.Theinformationassumeseithernoexerciseorfullexercisebytheunderwritersoftheirover-allotmentoption.
Theexpensesofthisoffering,notincludingtheunderwritingdiscountandcommissions,areestimatedat$3.5millionandarepayablebyus.Wewillalsopayotherexpensesrelatedtothisoffering,includinglegalfeesandotherexpenses.WehaveagreedtoreimbursetheunderwritersforcertainexpensesrelatingtoclearingthisofferingwiththeFinancialIndustryRegulatoryAuthorityinanamountupto$50,000.Thesellingstockholderwillnotbearanyportionoftheseexpenses.
NoSalesofSimilarSecurities
We,ourexecutiveofficersanddirectors,thesellingstockholderandcertainofourotherexistingsecurityholdershaveagreednottosellortransferanycommonstockorsecuritiesconvertibleinto,exchangeablefor,exercisablefor,orrepayablewithcommonstock,for180daysafterthedateofthisprospectus,subjecttocertaincustomaryexceptions,withoutfirstobtainingthewrittenconsentofCreditSuisseSecurities(USA)LLCandMorganStanley&Co.LLC.Specifically,weandtheseotherpersonshaveagreed,withcertaincustomaryexceptions,nottodirectlyorindirectly:
• offer,pledge,sellorcontracttosellanycommonstock,
• sellanyoptionorcontracttopurchaseanycommonstock,
• purchaseanyoptionorcontracttosellanycommonstock,
• grantanyoption,rightorwarrantforthesaleofanycommonstock,
• lendorotherwisedisposeofortransferanycommonstock,
• requestordemandthatwefilearegistrationstatementrelatedtothecommonstock,or
• enterintoanyswaporotheragreementthattransfers,inwholeorinpart,theeconomicconsequenceofownershipofanycommonstockwhetheranysuchswaportransactionistobesettledbydeliveryofsharesorothersecurities,incashorotherwise.
Thislock-upprovisionappliestocommonstockandtosecuritiesconvertibleintoorexchangeableorexercisablefororrepayablewithcommonstock.Italsoappliestocommonstockownednoworacquiredlaterbythepersonexecutingtheagreementorforwhichthepersonexecutingtheagreementlateracquiresthepowerofdisposition.
Listing
Afterpricingofthisoffering,weexpectthatourshareswilltradeonNYSEunderthesymbol"FTSI."Inordertomeettherequirementsforlistingonthatexchange,theunderwritershave
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PerShare WithoutOption
WithOption
Publicofferingprice $ $ $ Underwritingdiscountandcommissionspaidbyus $ $ $ Proceeds,beforeexpenses,tous $ $ $ Underwritingdiscountsandcommissionspaidbythesellingstockholder $ $ $ Proceedstosellingstockholder $ $ $
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undertakentosellaminimumnumberofsharestoaminimumnumberofbeneficialownersasrequiredbythatexchange.
Beforethisoffering,therehasbeennopublicmarketforourcommonstock.Theinitialpublicofferingpricewillbedeterminedthroughnegotiationsamongusandtherepresentatives.Inadditiontoprevailingmarketconditions,thefactorstobeconsideredindeterminingtheinitialpublicofferingpriceare:
• thevaluationmultiplesofpubliclytradedcompaniesthattherepresentativesbelievetobecomparabletous,
• ourfinancialinformation,
• thehistoryof,andtheprospectsfor,ourcompanyandtheindustryinwhichwecompete,
• anassessmentofourmanagement,itspastandpresentoperations,andtheprospectsfor,andtimingof,ourfuturerevenues,
• thepresentstateofourdevelopment,and
• theabovefactorsinrelationtomarketvaluesandvariousvaluationmeasuresofothercompaniesengagedinactivitiessimilartoours.
Anactivetradingmarketforthesharesmaynotdevelop.Itisalsopossiblethatafterthisofferingtheshareswillnottradeinthepublicmarketatorabovetheinitialpublicofferingprice.
Theunderwritersdonotexpecttosellmorethan5%ofthesharesintheaggregatetoaccountsoverwhichtheyexercisediscretionaryauthority.
Stabilization
Theunderwritershaveadvisedusthat,pursuanttoRegulationMundertheExchangeAct,asamended,certainpersonsparticipatinginthisofferingmayengageintransactions,includingoverallotment,stabilizingbids,syndicatecoveringtransactionsortheimpositionofpenaltybids,whichmayhavetheeffectofstabilizingormaintainingthemarketpriceofourcommonstockatalevelabovethatwhichmightotherwiseprevailintheopenmarket.Overallotmentinvolvessyndicatesalesinexcessoftheofferingsize,whichcreatesasyndicateshortposition.Establishingshortsalespositionsmayinvolveeither"covered"shortsalesor"naked"shortsales.
"Covered"shortsalesaresalesmadeinanamountnotgreaterthantheunderwriters'optiontopurchaseadditionalsharesofourcommonstockinthisoffering.Theunderwritersmaycloseoutanycoveredshortpositionbyeitherexercisingtheiroptiontopurchaseadditionalsharesofourcommonstockorpurchasingsharesofourcommonstockintheopenmarket.Indeterminingthesourceofsharestocloseoutthecoveredshortposition,theunderwriterswillconsider,amongotherthings,thepriceofsharesavailableforpurchaseintheopenmarket,ascomparedtothepriceatwhichtheymaypurchasesharesthroughtheoptiontopurchaseadditionalshares.
"Naked"shortsalesaresalesinexcessoftheoptiontopurchaseadditionalsharesofourcommonstock.Theunderwritersmustcloseoutanynakedshortpositionbypurchasingsharesintheopenmarket.Anakedshortpositionismorelikelytobecreatediftheunderwritersareconcernedthattheremaybedownwardpressureonthepriceofthesharesofourcommonstockintheopenmarketafterpricingthatcouldadverselyaffectinvestorswhopurchaseinthisoffering.
Astabilizingbidisabidforthepurchaseofcommonstockonbehalfoftheunderwritersforthepurposeoffixingormaintainingthepriceofourcommonstock.Asyndicatecoveringtransactionisthebidfororthepurchaseofcommonstockonbehalfoftheunderwriterstoreduceashortpositionincurredbytheunderwritersinconnectionwiththisoffering.Similartootherpurchasetransactions,theunderwriter'spurchasestocoverthesyndicateshortsalesmayhavetheeffectofraisingor
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maintainingthemarketpriceofourcommonstockorpreventingorretardingadeclineinthemarketpriceofourcommonstock.Asaresult,thepriceofourcommonstockmaybehigherthanthepricethatmightotherwiseexistintheopenmarket.Apenaltybidisanarrangementpermittingtheunderwriterstoreclaimthesellingconcessionotherwiseaccruingtoasyndicatememberinconnectionwiththisofferingifthecommonstockoriginallysoldbysuchsyndicatememberarepurchasedinasyndicatecoveringtransactionandthereforehavenotbeeneffectivelyplacedbysuchsyndicatemember.
Neitherwenoranyoftheunderwritersmakesanyrepresentationorpredictionastothedirectionormagnitudeofanyeffectthatthetransactionsdescribedabovemayhaveonthepriceofourcommonstock.Theunderwritersarenotobligatedtoengageintheseactivitiesand,ifcommenced,anyoftheactivitiesmaybediscontinuedatanytime.
DirectedShareProgram
Atourrequest,theunderwritershavereservedupto5.0%ofthecommonstockbeingofferedbythisprospectusforsaletoourdirectors,executiveofficers,employees,businessassociatesandrelatedpersonsatthepublicofferingprice.Thesaleswillbemadethroughadirectedshareprogram.Thenumberofsharesofcommonstockavailableforsaletothegeneralpublicwillbereducedtotheextenttheseindividualspurchasesuchreservedshares.Anyreservedsharesthatarenotsopurchasedwillbeofferedbytheunderwriterstothegeneralpubliconthesamebasisastheothersharesofferedbythisprospectus.Thesepersonsmustcommittopurchasenolaterthanthecloseofbusinessonthedayfollowingthedateofthisprospectus.Anydirectorsorexecutiveofficerspurchasingsuchreservedcommonstockwillbeprohibitedfromsellingsuchstockforaperiodof180daysafterthedateofthisprospectus.ThedirectedshareprogramwillbearrangedthroughMorganStanley&Co.LLCandCreditSuisseSecurities(USA)LLC.Inaddition,theCompanyhasdirectedtheunderwriterstoallocateaportionofthesharesbeingofferedbytheCompanytocertainofourexistingstockholdersanddirectors.
ElectronicDistribution
Aprospectusinelectronicformatmaybemadeavailablebye-mailoronthewebsitesorthroughonlineservicesmaintainedbyoneormoreoftheunderwritersortheiraffiliates.Inthosecases,prospectiveinvestorsmayviewofferingtermsonlineandmaybeallowedtoplaceordersonline.Theunderwritersmayagreewithustoallocateaspecificnumberofsharesforsaletoonlinebrokerageaccountholders.Anysuchallocationforonlinedistributionswillbemadebytheunderwritersonthesamebasisasotherallocations.Otherthantheprospectusinelectronicformat,theinformationontheunderwriters'websitesandanyinformationcontainedinanyotherwebsitemaintainedbyanyoftheunderwritersisnotpartofthisprospectus,hasnotbeenapprovedand/orendorsedbyusortheunderwritersandshouldnotberelieduponbyinvestors.
Affiliations
Theunderwritersandcertainoftheirrespectiveaffiliatesarefullservicefinancialinstitutionsengagedinvariousactivities,whichmayincludesecuritiestrading,commercialandinvestmentbanking,financialadvisory,investmentmanagement,investmentresearch,principalinvestment,hedging,financingandbrokerageactivities.Theunderwritersandcertainoftheirrespectiveaffiliateshave,fromtimetotime,performed,andmayinthefutureperform,variousfinancialadvisoryandinvestmentbankingservicesfortheissuer,forwhichtheyreceivedorwillreceivecustomarycashfeesandexpenses,includingactingaslendersundertheasset-basedrevolvingcreditfacilityweintendtoenterintofollowingtheconsummationofthisoffering.Weexpectthatwewillenterintothecreditfacilityuponredemptionoftheremaining2020Noteswiththeproceedsofthisoffering.
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Intheordinarycourseoftheirvariousbusinessactivities,theunderwritersandcertainoftheirrespectiveaffiliatesmaymakeorholdabroadarrayofinvestmentsandactivelytradedebtandequitysecurities(orrelatedderivativesecurities)andfinancialinstruments(includingbankloans)fortheirownaccountandfortheaccountsoftheircustomers,andsuchinvestmentandsecuritiesactivitiesmayinvolvesecuritiesand/orinstrumentsoftheCompany.Theunderwritersandcertainoftheirrespectiveaffiliatesmayalsomakeinvestmentrecommendationsand/orpublishorexpressindependentresearchviewsinrespectofsuchsecuritiesorinstrumentsandmayatanytimehold,orrecommendtoclientsthattheyacquire,longand/orshortpositionsinsuchsecuritiesandinstruments.
NoticetoProspectiveInvestorsintheEuropeanEconomicArea
InrelationtoeachMemberStateoftheEuropeanEconomicAreawhichhasimplementedtheProspectusDirective,oraRelevantMemberState,witheffectfromandincludingthedateonwhichtheProspectusDirectiveisimplementedinthatRelevantMemberState,ortheRelevantImplementationDate,noofferofsharesmaybemadetothepublicinthatRelevantMemberStateotherthan:
• toanylegalentitywhichisaqualifiedinvestorasdefinedintheProspectusDirective;
• tofewerthan100or,iftheRelevantMemberStatehasimplementedtherelevantprovisionofthe2010PDAmendingDirective,150,naturalorlegalpersons(otherthanqualifiedinvestorsasdefinedintheProspectusDirective),aspermittedundertheProspectusDirective,subjecttoobtainingthepriorconsentoftherepresentatives;or
• inanyothercircumstancesfallingwithinArticle3(2)oftheProspectusDirective,
• providedthatnosuchofferofsharesshallrequireusortherepresentativestopublishaprospectuspursuanttoArticle3oftheProspectusDirectiveorsupplementaprospectuspursuanttoArticle16oftheProspectusDirective.
EachpersoninaRelevantMemberState(otherthanaRelevantMemberStatewherethereisaPermittedPublicOffer)whoinitiallyacquiresanysharesortowhomanyofferismadewillbedeemedtohaverepresented,acknowledgedandagreedthat(A)itisa"qualifiedinvestor"withinthemeaningofthelawinthatRelevantMemberStateimplementingArticle2(1)(e)oftheProspectusDirective,and(B)inthecaseofanysharesacquiredbyitasafinancialintermediary,asthattermisusedinArticle3(2)oftheProspectusDirective,thesharesacquiredbyitinthisofferinghavenotbeenacquiredonbehalfof,norhavetheybeenacquiredwithaviewtotheirofferorresaleto,personsinanyRelevantMemberStateotherthan"qualifiedinvestors"asdefinedintheProspectusDirective,orincircumstancesinwhichthepriorconsentoftheSubscribershasbeengiventotheofferorresale.InthecaseofanysharesbeingofferedtoafinancialintermediaryasthattermisusedinArticle3(2)oftheProspectusDirective,eachsuchfinancialintermediarywillbedeemedtohaverepresented,acknowledgedandagreedthatthesharesacquiredbyitintheofferhavenotbeenacquiredonanon-discretionarybasisonbehalfof,norhavetheybeenacquiredwithaviewtotheirofferorresaleto,personsincircumstanceswhichmaygiverisetoanofferofanysharestothepublicotherthantheirofferorresaleinaRelevantMemberStatetoqualifiedinvestorsassodefinedorincircumstancesinwhichthepriorconsentoftherepresentativeshasbeenobtainedtoeachsuchproposedofferorresale.
We,therepresentativesandtheiraffiliateswillrelyuponthetruthandaccuracyoftheforegoingrepresentation,acknowledgementandagreement.
ThisprospectushasbeenpreparedonthebasisthatanyofferofsharesinanyRelevantMemberStatewillbemadepursuanttoanexemptionundertheProspectusDirectivefromtherequirementtopublishaprospectusforoffersofshares.AccordinglyanypersonmakingorintendingtomakeanofferinthatRelevantMemberStateofshareswhicharethesubjectoftheofferingcontemplatedinthisprospectusmayonlydosoincircumstancesinwhichnoobligationarisesforusoranyofthe
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underwriterstopublishaprospectuspursuanttoArticle3oftheProspectusDirectiveinrelationtosuchoffer.Neitherwenortheunderwritershaveauthorized,nordotheyauthorize,themakingofanyofferofsharesincircumstancesinwhichanobligationarisesforusortheunderwriterstopublishaprospectusforsuchoffer.
Forthepurposeoftheaboveprovisions,theexpression"anoffertothepublic"inrelationtoanysharesinanyRelevantMemberStatemeansthecommunicationinanyformandbyanymeansofsufficientinformationonthetermsoftheofferandthesharestobeofferedsoastoenableaninvestortodecidetopurchaseorsubscribetheshares,asthesamemaybevariedintheRelevantMemberStatebyanymeasureimplementingtheProspectusDirectiveintheRelevantMemberStateandtheexpression"ProspectusDirective"meansDirective2003/71/EC(includingthe2010PDAmendingDirective,totheextentimplementedintheRelevantMemberStates)andincludesanyrelevantimplementingmeasureintheRelevantMemberStateandtheexpression"2010PDAmendingDirective"meansDirective2010/73/EU.
NoticetoProspectiveInvestorsintheUnitedKingdom
Inaddition,intheUnitedKingdom,thisdocumentisbeingdistributedonlyto,andisdirectedonlyat,andanyoffersubsequentlymademayonlybedirectedatpersonswhoare"qualifiedinvestors"(asdefinedintheProspectusDirective)(i)whohaveprofessionalexperienceinmattersrelatingtoinvestmentsfallingwithinArticle19(5)oftheFinancialServicesandMarketsAct2000(FinancialPromotion)Order2005,asamended,ortheOrder,and/or(ii)whoarehighnetworthcompanies(orpersonstowhomitmayotherwisebelawfullycommunicated)fallingwithinArticle49(2)(a)to(d)oftheOrder(allsuchpersonstogetherbeingreferredtoas"relevantpersons").ThisdocumentmustnotbeactedonorreliedonintheUnitedKingdombypersonswhoarenotrelevantpersons.IntheUnitedKingdom,anyinvestmentorinvestmentactivitytowhichthisdocumentrelatesisonlyavailableto,andwillbeengagedinwith,relevantpersons.
NoticetoProspectiveInvestorsinHongKong
WARNING.ThecontentsofthisdocumenthavenotbeenreviewedbyanyregulatoryauthorityinHongKong.Youareadvisedtoexercisecautioninrelationtotheoffer.Ifyouareinanydoubtaboutanyofthecontentsofthisdocument,youshouldobtainindependentprofessionaladvice.ThesharesmaynotbeofferedorsoldinHongKong,bymeansofanydocumentotherthan(a)to"professionalinvestors"asdefinedintheSecuritiesandFuturesOrdinance(Cap.571)ofHongKong(the"SFO")andanyrulesmadeunderthatOrdinance;or(b)inothercircumstanceswhichdonotresultinthedocumentbeinga"prospectus"asdefinedintheCompanies(WindingUpandMiscellaneousProvisions)Ordinance(Cap.32)ofHongKongorwhichdonotconstituteanoffertothepublicwithinthemeaningofthatOrdinance;and
(2)noadvertisement,invitationordocumentrelatingtothesharesmaybeissuedormaybeinthepossessionofanypersonforthepurposeofissue(ineachcasewhetherinHongKongorelsewhere)whichisdirectedat,orthecontentsofwhicharelikelytobeaccessedorreadby,thepublicofHongKong(exceptifpermittedtodosounderthesecuritieslawsofHongKong)otherthanwithrespecttoshareswhichareorareintendedtobedisposedofonlytopersonsoutsideHongKongoronlyto"professionalinvestors"asdefinedintheSFOandanyrulesmadeunderthatOrdinance."
NoticetoProspectiveInvestorsinJapan
TheshareshavenotbeenandwillnotberegisteredundertheFinancialInstrumentsandExchangeLawofJapan(LawNo.25of1948,asamended)and,accordingly,willnotbeofferedorsold,directlyorindirectly,inJapan,orforthebenefitofanyJapanesePersonortoothersforre-offeringorresale,directlyorindirectly,inJapanortoanyJapanesePerson,exceptincompliancewithallapplicablelaws,regulationsandministerialguidelinespromulgatedbyrelevantJapanese
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governmentalorregulatoryauthoritiesineffectattherelevanttime.Forthepurposesofthisparagraph,"JapanesePerson"shallmeananypersonresidentinJapan,includinganycorporationorotherentityorganizedunderthelawsofJapan.Aspartofthisoffering,theunderwritersmayofferthesharesinJapantoalistof49offereesinaccordancewiththeaboveprovisions.
NoticetoProspectiveInvestorsinSingapore
ThisprospectushasnotbeenregisteredasaprospectuswiththeMonetaryAuthorityofSingapore.Accordingly,thisprospectusandanyotherdocumentormaterialinconnectionwiththeofferorsale,orinvitationforsubscriptionorpurchase,ofthesharesmaynotbecirculatedordistributed,normaythesharesbeofferedorsold,orbemadethesubjectofaninvitationforsubscriptionorpurchase,whetherdirectlyorindirectly,topersonsinSingaporeotherthan(i)toaninstitutionalinvestorunderSection274oftheSecuritiesandFuturesAct(Chapter289);ortheSFA,(ii)toarelevantperson,oranypersonpursuanttoSection275(1A),andinaccordancewiththeconditions,specifiedinSection275oftheSFAor(iii)otherwisepursuantto,andinaccordancewiththeconditionsof,anyotherapplicableprovisionoftheSFA.WherethesharesaresubscribedorpurchasedunderSection275byarelevantpersonwhichis:(a)acorporation(whichisnotanaccreditedinvestor)thesolebusinessofwhichistoholdinvestmentsandtheentiresharecapitalofwhichisownedbyoneormoreindividuals,eachofwhomisanaccreditedinvestor;or(b)atrust(wherethetrusteeisnotanaccreditedinvestor)whosesolepurposeistoholdinvestmentsandeachbeneficiaryisanaccreditedinvestor,thenshares,debenturesandunitsofsharesanddebenturesofthatcorporationorthebeneficiaries'rightsandinterestinthattrustshallnotbetransferablefor6monthsafterthatcorporationorthattrusthasacquiredthesecuritiesunderSection275except:(i)toaninstitutionalinvestorunderSection274oftheSFAortoarelevantperson,oranypersonpursuanttoSection275(1A),andinaccordancewiththeconditions,specifiedinSection275oftheSFA;(ii)wherenoconsiderationisgivenforthetransfer;or(iii)byoperationoflaw.
NoticetoProspectiveInvestorsinSwitzerland
ThesharesmaynotbepubliclyofferedinSwitzerlandandwillnotbelistedontheSIXSwissExchange,ortheSIX,oronanyotherstockexchangeorregulatedtradingfacilityinSwitzerland.Thisdocumenthasbeenpreparedwithoutregardtothedisclosurestandardsforissuanceprospectusesunderart.652aorart.1156oftheSwissCodeofObligationsorthedisclosurestandardsforlistingprospectusesunderart.27ff.oftheSIXListingRulesorthelistingrulesofanyotherstockexchangeorregulatedtradingfacilityinSwitzerland.NeitherthisdocumentnoranyotherofferingormarketingmaterialrelatingtothesharesorthisofferingmaybepubliclydistributedorotherwisemadepubliclyavailableinSwitzerland.
Neitherthisdocumentnoranyotherofferingormarketingmaterialrelatingtothisoffering,us,theshareshavebeenorwillbefiledwithorapprovedbyanySwissregulatoryauthority.Inparticular,thisdocumentwillnotbefiledwith,andtheofferofshareswillnotbesupervisedby,theSwissFinancialMarketSupervisoryAuthorityFINMA,orFINMA,andtheofferofshareshasnotbeenandwillnotbeauthorizedundertheSwissFederalActonCollectiveInvestmentSchemes,orCISA.TheinvestorprotectionaffordedtoacquirersofinterestsincollectiveinvestmentschemesundertheCISAdoesnotextendtoacquirersofshares.
NoticetoProspectiveInvestorsintheDubaiInternationalFinancialCentre
ThisprospectussupplementrelatestoanExemptOfferinaccordancewiththeOfferedSecuritiesRulesoftheDubaiFinancialServicesAuthority,orDFSA.ThisprospectussupplementisintendedfordistributiononlytopersonsofatypespecifiedintheOfferedSecuritiesRulesoftheDFSA.Itmustnotbedeliveredto,orreliedonby,anyotherperson.TheDFSAhasnoresponsibilityforreviewingorverifyinganydocumentsinconnectionwithExemptOffers.TheDFSAhasnotapprovedthis
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prospectussupplementnortakenstepstoverifytheinformationsetforthhereinandhasnoresponsibilityfortheprospectussupplement.Thesharestowhichthisprospectussupplementrelatesmaybeilliquidand/orsubjecttorestrictionsontheirresale.Prospectivepurchasersofthesharesofferedshouldconducttheirownduediligenceontheshares.Ifyoudonotunderstandthecontentsofthisprospectussupplementyoushouldconsultanauthorizedfinancialadvisor.
NoticetoProspectiveInvestorsinthePeople'sRepublicofChina
ThisprospectusmaynotbecirculatedordistributedinthePRCandthesharesmaynotbeofferedorsolddirectlyorindirectlytoanyresidentofthePRC,orofferedorsoldtoanypersonforreofferingorresaledirectlyorindirectlytoanyresidentofthePRCexceptpursuanttoapplicablelawsandregulationsofthePRC.Forthepurposeofthisparagraphonly,thePRCdoesnotincludeTaiwanandthespecialadministrativeregionsofHongKongandMacau.
NeitherthisprospectusnoranyadvertisementorotherofferingmaterialmaybedistributedorpublishedinthePRC,exceptundercircumstancesthatwillresultincompliancewithanyapplicablelawsandregulations.
NoticetoProspectiveInvestorsinIndonesia
Theshareshavenotbeen,andwillnotbe,registeredwiththeIndonesianFinancialServicesAuthority(OtoritasJasaKeuangan),andtherefore,thesharesmaynotbeofferedorsoldwithinIndonesiaortoIndonesiancitizensoutsideofIndonesiainamannerwhichconstitutesapublicofferunderLawNo.8of1995onCapitalMarketsandtheimplementingregulations.Accordingly,theUnderwritershaverepresentedandagreedthattheywillnot,directlyorindirectly,expresslyorimplicitly:
(1)offerthesharestomorethan100,orsellthesharestomorethan50,partiesinIndonesiaand/orIndonesiancitizensoutsideofIndonesia;and
(2)offerthesharesbywayofmassmedia,includinganynewspaper,magazine,film,television,radioorotherelectronicmediaoranyletter,brochureorotherprintedmedium,distributedtomorethan100partiesinIndonesiaand/orIndonesiancitizensoutsideofIndonesia.
NoticetoProspectiveInvestorsinKorea
TheshareshavenotbeenandwillnotberegisteredwiththeFinancialServicesCommissionofKoreaforpublicofferinginKoreaundertheFinancialInvestmentServicesandCapitalMarketsAct(the"FSCMA"),andnoneofthesharesmaybeoffered,soldordelivered,orofferedorsoldtoanypersonforre-offeringorresale,directlyorindirectlyinKoreaortoanyresidentofKoreaexceptpursuanttoapplicablelawsandregulationsofKorea,includingtheFSCMAandtheForeignExchangeTransactionLaw(the"FETL")andthedecreesandregulationsthereunder.Furthermore,thesharesmaynotbere-soldtoKoreanresidentsunlessthepurchaserofthesharescomplieswithallapplicableregulatoryrequirements(including,butnotlimitedto,governmentalapprovalrequirementsundertheFETLanditssubordinatedecreesandregulations)inconnectionwiththepurchaseoftheshares.
NoticetoProspectiveInvestorsinMalaysia
NoprospectusorotherofferingmaterialordocumentinconnectionwiththeofferandsaleoftheshareshasbeenorwillberegisteredwiththeSecuritiesCommissionofMalaysia("Commission")fortheCommission'sapprovalpursuanttotheCapitalMarketsandServicesAct2007.Accordingly,thisprospectusandanyotherdocumentormaterialinconnectionwiththeofferorsale,orinvitationforsubscriptionorpurchase,ofthesharesmaynotbecirculatedordistributed,normaythesharesbeofferedorsold,orbemadethesubjectofaninvitationforsubscriptionorpurchase,whetherdirectlyorindirectly,topersonsinMalaysiaotherthan(i)aclosedendfundapprovedbytheCommission;
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(ii)aholderofaCapitalMarketsServicesLicence;(iii)apersonwhoacquirestheshares,asprincipal,iftheofferisontermsthatthesharesmayonlybeacquiredataconsiderationofnotlessthanRM250,000(oritsequivalentinforeigncurrencies)foreachtransaction;(iv)anindividualwhosetotalnetpersonalassetsortotalnetjointassetswithhisorherspouseexceedsRM3million(oritsequivalentinforeigncurrencies),excludingthevalueoftheprimaryresidenceoftheindividual;(v)anindividualwhohasagrossannualincomeexceedingRM300,000(oritsequivalentinforeigncurrencies)perannumintheprecedingtwelvemonths;(vi)anindividualwho,jointlywithhisorherspouse,hasagrossannualincomeofRM400,000(oritsequivalentinforeigncurrencies),perannumintheprecedingtwelvemonths;(vii)acorporationwithtotalnetassetsexceedingRM10million(oritsequivalentinaforeigncurrencies)basedonthelastauditedaccounts;(viii)apartnershipwithtotalnetassetsexceedingRM10million(oritsequivalentinforeigncurrencies);(ix)abanklicenseeorinsurancelicenseeasdefinedintheLabuanFinancialServicesandSecuritiesAct2010;(x)anIslamicbanklicenseeortakafullicenseeasdefinedintheLabuanFinancialServicesandSecuritiesAct2010;and(xi)anyotherpersonasmaybespecifiedbytheCommission;providedthat,intheeachoftheprecedingcategories(i)to(xi),thedistributionofthesharesismadebyaholderofaCapitalMarketsServicesLicencewhocarriesonthebusinessofdealinginsecurities.ThedistributioninMalaysiaofthisprospectusissubjecttoMalaysianlaws.Thisprospectusdoesnotconstituteandmaynotbeusedforthepurposeofpublicofferingoranissue,offerforsubscriptionorpurchase,invitationtosubscribefororpurchaseanysecuritiesrequiringtheregistrationofaprospectuswiththeCommissionundertheCapitalMarketsandServicesAct2007.
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LEGALMATTERS
ThevalidityofthesharesofcommonstockofferedbythisprospectuswillbepasseduponforFTSInternational,Inc.andthesellingstockholderbyJonesDay,Dallas,Texas.CertainlegalmattersinconnectionwiththisofferingwillbepasseduponfortheunderwritersbyShearman&SterlingLLP,NewYork,NewYork.
EXPERTS
TheauditedconsolidatedfinancialstatementsincludedinthisprospectusandelsewhereinthisregistrationstatementhavebeensoincludedinrelianceuponthereportofGrantThorntonLLP,independentregisteredpublicaccountants,upontheauthorityofsaidfirmasexpertsinaccountingandauditing.
WHEREYOUCANFINDMOREINFORMATION
WehavefiledwiththeSECaregistrationstatementonFormS-1(includingtheexhibits,schedulesandamendmentsthereto)undertheSecuritiesAct,withrespecttothesharesofourcommonstockofferedhereby.Thisprospectus,whichconstitutesapartoftheregistrationstatement,doesnotcontainalloftheinformationsetforthintheregistrationstatementandtheexhibitsandschedulesthereto.SomeitemsareomittedinaccordancewiththerulesandregulationsoftheSEC.Forfurtherinformationwithrespecttousandthecommonstockofferedhereby,wereferyoutotheregistrationstatementandtheexhibitsandschedulesfiledtherewith.Statementscontainedinthisprospectusastothecontentsofanycontract,agreementoranyotherdocumentaresummariesofthematerialtermsofthatcontract,agreementorotherdocument.Withrespecttoeachofthesecontracts,agreementsorotherdocumentsfiledasanexhibittotheregistrationstatement,referenceismadetotheexhibitsforamorecompletedescriptionofthematterinvolved.Acopyofthefiledregistrationstatement,andtheexhibitsandschedulesthereto,maybeinspectedwithoutchargeatthepublicreferencefacilitiesmaintainedbytheSECat100FStreetNE,Washington,D.C.20549.Copiesofthesematerialsmaybeobtained,uponpaymentofaduplicatingfee,fromthePublicReferenceSectionoftheSECat100FStreetNE,Washington,D.C.20549.PleasecalltheSECat1-800-SEC-0330forfurtherinformationontheoperationofthepublicreferencefacility.TheSECmaintainsawebsitethatcontainsreports,proxyandinformationstatementsandotherinformationregardingregistrantsthatfileelectronicallywiththeSEC.TheaddressoftheSEC'swebsiteishttp://www.sec.gov.
Afterwehavecompletedthisoffering,wewillfileannual,quarterlyandcurrentreports,proxystatementsandotherinformationwiththeSECpursuanttotheExchangeAct.Aftercompletionofthisoffering,weexpecttomakeourperiodicreportsandotherinformationfiledwithorfurnishedtotheSECavailable,freeofcharge,throughourwebsite,http://www.ftsi.com,assoonasreasonablypracticableafterthosereportsandotherinformationareelectronicallyfiledwithorfurnishedtotheSEC.Informationonourwebsiteoranyotherwebsiteisnotincorporatedbyreferenceintothisprospectusanddoesnotconstituteapartofthisprospectus.
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FTSINTERNATIONAL,INC.INDEXTOFINANCIALSTATEMENTS
F-1
PageAuditedConsolidatedFinancialStatementsasofandforthePeriodsEndedDecember31,2015and2016 ReportofIndependentRegisteredPublicAccountingFirm F-2ConsolidatedStatementsofOperations F-3ConsolidatedBalanceSheets F-4ConsolidatedStatementsofCashFlows F-5ConsolidatedStatementsofStockholders'Equity(Deficit) F-6NotestoConsolidatedFinancialStatements F-7
UnauditedConsolidatedFinancialStatementsasofandfortheThreeandNineMonthsEndedSeptember30,2016and2017
UnauditedConsolidatedStatementsofOperations F-33UnauditedConsolidatedBalanceSheets F-34UnauditedConsolidatedStatementsofCashFlows F-35NotestoUnauditedCondensedConsolidatedFinancialStatements F-36
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REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM
BoardofDirectorsandShareholdersFTSInternational,Inc.
WehaveauditedtheaccompanyingconsolidatedbalancesheetsofFTSInternational,Inc.(aDelawarecorporation)andsubsidiaries(the"Company")asofDecember31,2016and2015,andtherelatedconsolidatedstatementsofoperations,cashflows,andstockholders'equity(deficit),foreachofthetwoyearsintheperiodendedDecember31,2016.ThesefinancialstatementsaretheresponsibilityoftheCompany'smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.
WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.WewerenotengagedtoperformanauditoftheCompany'sinternalcontroloverfinancialreporting.Ourauditsincludedconsiderationofinternalcontroloverfinancialreportingasabasisfordesigningauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheCompany'sinternalcontroloverfinancialreporting.Accordingly,weexpressnosuchopinion.Anauditalsoincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.
Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofFTSInternational,Inc.andsubsidiariesasofDecember31,2016and2015,andtheresultsoftheiroperationsandtheircashflowsforeachofthetwoyearsintheperiodendedDecember31,2016inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.
/s/GRANTTHORNTONLLP
Dallas,TexasFebruary27,2017
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FTSINTERNATIONAL,INC.
CONSOLIDATEDSTATEMENTSOFOPERATIONS
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-3
YearEndedDecember31,
(Inmillions,exceptpershareamounts) 2015 2016 Revenue Revenue $ 1,331.8 $ 529.5Revenuefromrelatedparties 43.5 2.7Totalrevenue 1,375.3 532.2
Operatingexpenses Costsofrevenue(excludingdepreciationof$152.3and$98.9,respectively,includedindepreciationandamortizationbelow) 1,257.9 510.5
Selling,generalandadministrative 154.7 64.4Depreciationandamortization 272.4 112.6Impairmentsandothercharges 619.9 12.3Lossondisposalofassets,net 5.9 1.0Gainoninsurancerecoveries — (15.1)Totaloperatingexpenses 2,310.8 685.7
Operatingloss (935.5) (153.5)
Interestexpense,net (77.2) (87.5)(Loss)gainonextinguishmentofdebt,net (0.6) 53.7Equityinnetlossofjointventureaffiliate (1.4) (2.8)Lossbeforeincometaxes (1,014.7) (190.1)Incometaxbenefit (1.5) (1.6)Netloss $ (1,013.2) $ (188.5)Netlossattributabletocommonstockholders $ (1,158.1) $ (370.1)Basicanddilutedearnings(loss)pershareattributabletocommonstockholders $ (0.32) $ (0.10)Sharesusedincomputingbasicanddilutedearnings(loss)pershare 3,589.7 3,586.5Proformabasicanddilutedearnings(loss)pershareattributabletocommonstockholders(unaudited) $ (2.06)Sharesusedincomputingproformabasicanddilutedearnings(loss)pershare(unaudited) 91.3
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FTSINTERNATIONAL,INC.
CONSOLIDATEDBALANCESHEETS
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-4
December31, (Inmillions,exceptshareamounts) 2015 2016 ASSETS Currentassets Cash $ 264.6 $ 160.3Accountsreceivable,net 101.0 76.5Accountsreceivablefromrelatedparties 3.5 0.1Inventories 31.5 24.8Prepaidexpensesandothercurrentassets 22.0 17.7
Totalcurrentassets 422.6 279.4Property,plant,andequipment,net 430.6 284.3Intangibleassets,net 29.5 29.5Investmentinjointventureaffiliate 23.2 21.6Otherassets 1.5 2.0
Totalassets $ 907.4 $ 616.8LIABILITIESANDSTOCKHOLDERS'DEFICIT Currentliabilities Accountspayable $ 56.0 $ 60.8Accruedexpensesandothercurrentliabilities 52.0 34.8
Totalcurrentliabilities 108.0 95.6Long-termdebt 1,276.2 1,188.7Otherliabilities 3.9 1.7
Totalliabilities 1,388.1 1,286.0Commitmentsandcontingencies(Note14) SeriesAconvertiblepreferredstock,$0.01parvalue,350,000sharesauthorized,issuedandoutstandingatDecember31,2015and2016,respectively(aggregateamountofliquidationpreferenceof$906.1millionatDecember31,2016) 349.8 349.8
Stockholders'deficit Commonstock,$0.01parvalue,5,000,000,000sharesauthorized,3,586,503,220and3,586,408,881sharesissuedandoutstandingatDecember31,2015and2016,respectively 35.9 35.9
Additionalpaid-incapital 3,712.1 3,712.1Accumulateddeficit (4,578.5) (4,767.0)
Totalstockholders'deficit (830.5) (1,019.0)Totalliabilitiesandstockholders'deficit $ 907.4 $ 616.8
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FTSINTERNATIONAL,INC.
CONSOLIDATEDSTATEMENTSOFCASHFLOWS
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-5
YearEndedDecember31,
(Inmillions) 2015 2016 Cashflowsfromoperatingactivities Netloss $ (1,013.2) $ (188.5)Adjustmentstoreconcilenetlosstonetcashprovidedby(usedin)operatingactivities: Depreciationandamortization 272.4 112.6Amortizationofdebtdiscountsandissuancecosts 3.2 3.8Impairmentofassetsandgoodwill 572.9 7.0Lossondisposalofassets,net 5.9 1.0Loss(gain)onextinguishmentofdebt,net 0.6 (53.7)Gainoninsurancerecoveries — (15.1)Inventorywrite-down 24.5 —Acquisitionearn-outadjustments (3.4) —Othernon-cashitems 3.8 2.0
Changesinoperatingassetsandliabilities,netofacquisitions: Accountsreceivable 373.2 24.0Accountsreceivablefromrelatedparties 33.5 3.4Inventories 37.9 5.3Prepaidexpensesandotherassets 2.0 2.6Accountspayable (210.4) 2.8Accruedexpensesandotherliabilities (52.3) (17.0)
Netcashprovidedby(usedin)operatingactivities 50.6 (109.8)Cashflowsfrominvestingactivities Capitalexpenditures (79.1) (10.3)Cashpaidforacquisitions (1.7) —Investmentinjointventureaffiliate (14.8) —Proceedsfromdisposalofassets 9.7 31.5Proceedsfrominsurancerecoveries — 19.0Netchangeinrestrictedcash (12.0) 2.9Netcash(usedin)providedbyinvestingactivities (97.9) 43.1Cashflowsfromfinancingactivities Proceedsfromissuanceoflong-termdebt 366.5 —Paymentsofdebtissuancecosts (6.0) —Repaymentsoflong-termdebt (58.9) (37.6)Other (0.2) —Netcashprovidedby(usedin)financingactivities 301.4 (37.6)Netincrease(decrease)incashandcashequivalents 254.1 (104.3)Cashandcashequivalents,beginningofperiod 10.5 264.6Cashandcashequivalents,endofperiod $ 264.6 $ 160.3Supplementalcashflowinformation Interestpaid $ 74.3 $ 84.2Incometaxpayments,net $ 2.0 $ —
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FTSINTERNATIONAL,INC.
CONSOLIDATEDSTATEMENTSOFSTOCKHOLDERS'EQUITY(DEFICIT)
Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.
F-6
CommonStock
AdditionalPaid-inCapital
AccumulatedDeficit
TotalStockholders'Equity(Deficit)
(Inmillions) Shares Amount BalanceatJanuary1,2015 3,590.6 $ 35.9 $ 3,710.4 $ (3,565.3) $ 181.0
Netloss — — — (1,013.2) (1,013.2)Activityrelatedtostockplans (4.1) — 1.7 — 1.7BalanceatDecember31,2015 3,586.5 35.9 3,712.1 (4,578.5) (830.5)Netloss — — — (188.5) (188.5)Activityrelatedtostockplans (0.1) — — — —BalanceatDecember31,2016 3,586.4 $ 35.9 $ 3,712.1 $ (4,767.0) $ (1,019.0)
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FTSINTERNATIONAL,INC.
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS
NOTE1—DESCRIPTIONOFBUSINESS
Throughoutthenotestotheseconsolidatedfinancialstatements,theterms"FTSI,""we,""us,""our"or"ours"refertoFTSInternational,Inc.,togetherwithitsconsolidatedsubsidiaries.Wearealeadingindependentproviderofwellcompletionservices.Ourservicesandproductsaredesignedtoenhancetherecoveryratesofourcustomersfromwellsdrilledinshaleandotherunconventionalformations.WeprovidetheseservicesthroughoneofNorthAmerica'slargestfleetsofhydraulicfracturingequipment.Inaddition,weuseourexperienceandoperationalcapabilitiestoprovideothervalue-addedservicestoourcustomers,includingwirelineandpressurecontrolservices.Wealsohaveproprietarydesignandmanufacturingcapabilitiesthatallowustobuildandserviceourequipment.Substantiallyallofourbusinessactivitiessupportourwellcompletionservices.Wemanageourbusiness,allocateresources,andassessourfinancialperformanceonaconsolidatedbasis;thereforewedonothaveseparateoperatingsegments.
WeoperateprimarilyinthemostactiveunconventionaloilandnaturalgasbasinsintheUnitedStates,includingtheEagleFordShale,theMarcellus/UticaShale,theHaynesvilleShale,thePermianBasin,andtheOklahomaandnorthTexasareasoftheMid-Continentregion.
Concentrations of Risk
OurbusinessactivitiesareconcentratedinthewellcompletionservicessegmentoftheoilfieldservicesindustryintheUnitedStates.Themarketfortheseservicesiscyclical,andwedependonthewillingnessofourcustomerstomakeoperatingandcapitalexpenditurestoexplorefor,develop,andproduceoilandnaturalgasintheUnitedStates.Thewillingnessofourcustomerstoundertaketheseactivitiesdependslargelyuponprevailingindustryconditionsthatarepredominantlyinfluencedbycurrentandexpectedpricesforoilandnaturalgas.
Lowcommoditypriceshavecausedourcustomerstosignificantlyreducetheirhydraulicfracturingactivities,whichhascontributedtoalowerpricingenvironmentforourservicesin2016.Wecontinuetoaggressivelymanagealloperatingcostsandcapitalexpendituresduringthisperiodofreducedactivityandlowerpricing.Whileweexpecttohavesufficientliquiditytofundouroperationsandcapitalexpendituresoverthenext12months,wewillcontinuetoexploreopportunitiestofurtherimproveourliquidityandcapitalstructurebasedoncurrentandevolvingbusinessconditions.
Ourcustomerbaseisconcentrated.Ourbusiness,financialconditionandresultsofoperationscouldbemateriallyadverselyaffectedifoneormoreofoursignificantcustomersceasestoengageusforourservicesonfavorableterms,oratall,orfailstopay,ordelaysinpaying,ussignificantamountsofouroutstandingreceivables.Thefollowingtableshowsthecustomerswhorepresentedmorethan10%ofourtotalrevenueinanyoneoftheperiodsindicatedbelow:
F-7
YearEndedDecember31,
2015 2016 NewfieldExploration 8% 18%EQTProductionCompany 12% 12%EPEnergyCorporation 6% 11%VineOilandGas,L.P. 2% 10%MurphyOilCorporation 11% 2%RangeResourcesCorporation 13% 1%
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FTSINTERNATIONAL,INC.
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(Continued)
NOTE1—DESCRIPTIONOFBUSINESS(Continued)
In2015webeganexperiencingincreasedturnoverinourcustomerbaseascertaincustomersreducedtheiractivitylevelsorbecamemorefocusedonselectingthelowestcostserviceproviderduringtheindustrydownturn.
Related Parties
WehavehistoricallyprovidedservicesandsoldequipmenttoChesapeakeEnergyCorporation("Chesapeake")anditsaffiliates,whichbeneficiallyownapproximately30%ofouroutstandingcommonstockandhastherighttodesignatetwoindividualstoserveonourboardofdirectors.RevenueearnedfromChesapeakewas$32.1millionand$2.4millionin2015and2016,respectively.AllrevenueearnedfromChesapeakeisbasedontheprevailingmarketpricesforourservicesatthetimetheworkisperformed.AtDecember31,2015and2016,wehadnoaccountsreceivablefromChesapeake.
WesoldequipmenttoourChinesejointventurefor$11.4millionand$0.3millionin2015and2016,respectively.AtDecember31,2015and2016,wehadaccountsreceivablebalancesof$3.5millionand$0.1million,respectively,fromthisrelatedparty.
NOTE2—SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES
Basis of Presentation
WepreparedtheconsolidatedfinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica("GAAP").TheconsolidatedfinancialstatementsincludetheaccountsofFTSIandallmajority-owneddomesticandforeignsubsidiaries.Investmentsoverwhichwehavetheabilitytoexercisesignificantinfluenceoveroperatingandfinancialpolicies,butdonotholdacontrollinginterest,areaccountedforusingtheequitymethodofaccounting.Allsignificantintercompanyaccountsandtransactionshavebeeneliminatedinconsolidation.Therewerenoitemsofothercomprehensiveincomeintheperiodspresented.WeevaluatedsubsequenteventsthroughFebruary27,2017,whichisthedateatwhichthefinancialstatementswereavailabletobeissued,anddeterminedthattherewerenoadditionalitemstodisclose.
Use of Estimates
ThepreparationoffinancialstatementsinaccordancewithGAAPrequiresustomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilities,relatedrevenuesandexpenses,andthedisclosureofgainandlosscontingenciesatthedateofthefinancialstatementsandduringtheperiodspresented.Webasetheseestimatesonhistoricalresultsandvariousotherassumptionsbelievedtobereasonable,allofwhichformthebasisformakingestimatesconcerningthecarryingvaluesofassetsandliabilitiesthatarenotreadilyavailablefromothersources.Actualresultscoulddiffermateriallyfromthoseestimates.
Cash and Cash Equivalents
Cashequivalentsincludeonlyinvestmentswithanoriginalmaturityofthreemonthsorless.Weoccasionallyholdcashdepositsinfinancialinstitutionsthatexceedfederallyinsuredlimits.Wemonitorthecreditratingsandourconcentrationofriskwiththesefinancialinstitutionsonacontinuingbasistosafeguardourcashdeposits.
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FTSINTERNATIONAL,INC.
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(Continued)
NOTE2—SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(Continued)
Allowance for Doubtful Accounts
Weestablishanallowancefordoubtfulaccountsbasedonanumberoffactors,includingthelengthoftimethataccountsreceivablearepastdue,ourpreviouslosshistory,andthecustomer'screditworthiness.TheprovisionfordoubtfulaccountswasnotsignificantforanyperiodpresentedintheConsolidatedStatementsofOperations.
Inventories
Inventoriesconsistofproppantsandchemicalsthatareusedtoprovidehydraulicfracturingservices,maintenancepartsthatareusedtoserviceourhydraulicfracturingequipment,andexplosivesandperforatinggunsthatareusedtoprovideourwirelineservices.Proppantsgenerallyconsistofrawsand,resin-coatedsandorceramicparticles.Inventoriesarestatedatthelowerofcostormarketvalue.Thecostbasisofourinventoriesisbasedontheaveragecostmethodandincludesin-boundfreightcosts.
Asnecessary,werecordanadjustmenttodecreasethevalueofslowmovingandobsoleteinventorytoitsnetrealizablevalue.Todeterminetheadjustmentamount,weregularlyreviewinventoryquantitiesonhandandcomparethemtoestimatesoffutureproductdemand,marketconditions,productionrequirementsandtechnologicaldevelopments.
Restricted Cash
Wehavepledgedcashascollateralforlettersofcreditissuedtoourcasualtyandgeneralliabilityinsuranceprovider.Restrictedcashtotaled$12.0millionand$9.1millionatDecember31,2015and2016,respectively,andisincludedinprepaidexpensesandothercurrentassetsinourConsolidatedBalanceSheets.
Property, Plant, and Equipment
Property,plant,andequipmentisstatedatcostlessaccumulateddepreciation,whichisgenerallyprovidedbyusingthestraight-linemethodovertheestimatedusefullivesoftheindividualassets.Wemanufactureourhydraulicfracturingunitsandthecostofthisequipment,whichincludesdirectandindirectmanufacturingcosts,iscapitalizedandcarriedinconstruction-in-progressuntilitiscompleted.Expendituresforrenewalsandbettermentsthatextendthelivesofourserviceequipment,whichincludesthereplacementofsignificantcomponentsofserviceequipment,arecapitalizedanddepreciated.Otherrepairsandmaintenancecostsareexpensedasincurred.
Wecapitalizequalifyingcostsrelatedtotheacquisitionordevelopmentofinternal-usesoftware.Capitalizationofcostsbeginsaftertheconceptualformulationstagehasbeencompleted.Capitalizedcostsareamortizedovertheestimatedusefullifeofthesoftware,whichrangesbetweenthreeandfiveyears.TheunamortizedbalanceofcapitalizedsoftwarecostsatDecember31,2015and2016,was$17.6millionand$12.6million,respectively.Amortizationofcomputersoftwarewas$5.4millionand$5.7millionin2015and2016,respectively.
Goodwill and Intangible Assets
Goodwillistheamountbywhichtheconsiderationtransferredtoacquireabusinessexceedsthefairvalueoftheunderlyingindividualassetsandliabilitiesofthatbusiness.Goodwillandintangible
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FTSINTERNATIONAL,INC.
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(Continued)
NOTE2—SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES(Continued)
assetswithindefinitelivesarenotamortized.AtDecember31,2015and2016,theamountofgoodwillrecordedinourConsolidatedBalanceSheetswaszero.Intangibleassetswithdefinitelivesareamortizedonabasisthatreflectsthepatterninwhichtheeconomicbenefitsoftheintangibleassetsarerealized,whichisgenerallyonastraight-linebasisovertheasset'sestimatedusefullife.AtDecember31,2015and2016,theamountofintangibleassetswithdefinitelivesrecordedinourConsolidatedBalanceSheetswaszeroaftergivingeffecttoanimpairmentof$475.5millionduringtheyearendedDecember31,2015.
Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets
Long-livedassets,suchasproperty,plant,equipmentanddefinite-livedintangibleassets,arereviewedforimpairmentwheneventsorchangesincircumstancesindicatethatthecarryingvalueoftheassetmaynotberecoverable.Recoverabilityisassessedbasedontheundiscountedfuturecashflowsgeneratedbytheasset.Ifthecarryingamountofanassetisnotrecoverable,werecognizeanimpairmentlossequaltotheamountbywhichthecarryingamountexceedsfairvalue.Weestimatefairvaluebasedontheincome,market,orcostvaluationtechniques.
Goodwillandintangibleassetswithindefinitelivesarereviewedatleastannuallyforimpairment,andininterimperiodsifcertaineventsoccurindicatingthatthecarryingvalueofgoodwillorintangibleassetsmaybeimpaired.Weestimatefairvaluesutilizingvaluationmethodssuchasdiscountedcashflowsandcomparablemarketvaluations.Wehaveelectedthebeginningofthefourthquartertocompleteourannualimpairmenttests.
Equity Method Investments
Investmentsinwhichwehavetheabilitytoexercisesignificantinfluencebutnotcontrolareaccountedforpursuanttotheequitymethodofaccounting.Werecognizeourproportionateshareofearningsorlossesofouraffiliatesthreemonthsaftertheyoccur.Wheneventsandcircumstanceswarrant,investmentsaccountedforundertheequitymethodofaccountingareevaluatedforimpairment.Animpairmentchargeisrecordedwheneveradeclineinvalueofaninvestmentbelowitscarryingamountisdeterminedtobeother-than-temporary.
Income Taxes
Incometaxesareaccountedforusingtheassetandliabilitymethod.Deferredtaxesarerecognizedforthetaxconsequencesoftemporarydifferencesbyapplyingenactedstatutorytaxratesapplicabletofutureyearstodifferencesbetweenthefinancialstatementcarryingamountsandthetaxbasesofexistingassetsandliabilities.Theeffectondeferredtaxesofachangeintaxratesisrecognizedinincomeintheperiodthatincludestheenactmentdate.Werecognizefuturetaxbenefitstotheextentthatsuchbenefitsaremorelikelythannottoberealized.
Werecordavaluationallowancetoreduceadeferredtaxassetifbasedontheconsiderationofallavailableevidence,itismorelikelythannotthatallorsomeportionofthedeferredtaxassetwillnotberealized.Significantweightisgiventoevidencethatcanbeobjectivelyverified.Weevaluateourdeferredincometaxesquarterlytodetermineifavaluationallowanceisrequiredbyconsideringallavailableevidence,includinghistoricalandprojectedtaxableincomeandtaxplanningstrategies.Anydeferredtaxassetsubjecttoavaluationallowanceisstillavailabletoustooffsetfuturetaxableincome,subjecttoannuallimitationsintheeventofan"ownershipchange"underSection382oftheInternalRevenueCode.Wewilladjustapreviouslyestablishedvaluationallowanceifwechangeourassessmentoftheamountofdeferredincometaxassetthatismorelikelythannottoberealized.
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Revenue Recognition
Werecognizerevenueuponthecompletionofastage.Wetypicallycompleteoneormorestagesperday.Astageisconsideredcompletewhenwehavemetthespecificationssetforthbythecustomer,atwhichtimethecustomerisobligatedtopayusfortheservicesrendered.Thepriceforourservicesisagreedtowithourcustomerforeachstagecompleted.Thepriceforourservicestypicallyincludesanequipmentchargeandproductchargesforproppant,chemicalsandotherproductsactuallyconsumedduringthecourseofprovidingourservices.Theamountinvoicedtoourcustomerforacompletedstageisnotdependentuponthecompletionofanyotherstages.
Unconditional Purchase Obligations
Wehavehistoricallyenteredintosupplyarrangementswithourvendorsthatcontainunconditionalpurchaseobligations.Theserepresentobligationstotransferfundsinthefutureforfixedorminimumquantitiesofgoodsorservicesatfixedorminimumprices,suchas"take-or-pay"contracts.Weenterintotheseunconditionalpurchaseobligationarrangementsinthenormalcourseofbusinesstoensurethatadequatelevelsofsourcedproductareavailabletous.Toaccountforthesearrangements,wemustmonitorwhetherwemayberequiredtomakeaminimumpaymenttoavendorinafutureperiodbecauseourprojectedinventorypurchasesmaynotsatisfyourminimumcommitments.Ifweconcludethatitisprobablethatwewillmakeaminimumpaymentunderthesearrangements,wewillrecordanestimatedlossforthesecommitmentsinthecurrentperiod.
Stock-Based Compensation
Wemeasureallemployeestock-basedcompensationawardsusingafairvaluemethodandrecordthiscostintheconsolidatedfinancialstatements.Ourstock-basedcompensationrelatestorestrictedstockawardsorrestrictedstockunitsissuedtoouremployees.Onthedatethatanequity-classifiedawardisgranted,wedeterminethefairvalueoftheawardandrecognizethecompensationcostovertherequisiteserviceperiod,whichtypicallyistheperiodoverwhichtheawardvests.Forliability-classifiedawards,wedeterminethefairvalueoftheawardateachreportingdateandrecognizeaportionofthefairvalueequaltotheamountoftimethathaspassedintherequisiteserviceperiod.Forstock-basedawardswithgradedvestingbasedsolelyonthesatisfactionofaservicecondition,werecognizecompensationcostasasingleawardonastraight-linebasis.Forstock-basedawardswithperformanceconditionsthataffectvesting,weonlyrecognizecompensationcostwhenitisprobablethattheperformanceconditionswillbemet.
Becauseourstockisnotpubliclytraded,wemustestimatethefairvalueofourcommonstockforpurposesofdeterminingthefairvalueofourawards.Determiningthefairvalueofstock-basedawardsrequiresjudgment.Thefairvalueofthecommonstockunderlyingourstock-basedawardsisdeterminedusingthird-partyvaluations.Thesevaluationsutilizetheincomeandmarketapproachestodeterminethefairvalueofourcommonstock.
Fair Value Measurements
Fairvalueisdefinedasthepricethatwouldbereceivedfromsellinganassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatameasurementdate.Weapplythefollowingfairvaluehierarchy,whichprioritizestheinputsusedtomeasurefairvalueintothreelevels
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andbasesthecategorizationwithinthehierarchyuponthelowestlevelofinputthatisavailableandsignificanttothefairvaluemeasurement:
• LevelOne:Theuseofquotedpricesinactivemarketsforidenticalfinancialinstruments.
• LevelTwo:Theuseofquotedpricesforsimilarinstrumentsinactivemarketsorquotedpricesforidenticalorsimilarinstrumentsinmarketsthatarenotactiveorotherinputsthatareobservableinthemarketorcanbecorroboratedbyobservablemarketdata.
• LevelThree:Theuseofsignificantlyunobservableinputsthattypicallyrequiretheuseofmanagement'sestimatesofassumptionsthatmarketparticipantswoulduseinpricing.
New Accounting Standards Updates
InMay2014,theFinancialAccountingStandardsBoard("FASB")issuedAccountingStandardsUpdate("ASU")2014-09,RevenuefromContractswithCustomers.TheFASBhassubsequentlyissuedanumberofadditionalASUstoupdatethisguidance.Thisguidancewillsupersedesubstantiallyallexistingaccountingguidancerelatedtotheaccountingforrevenuetransactions.Thisguidanceestablishesacoreprinciplethatanentityshouldrecordrevenuewhenittransferscontrolofgoodsorservicestocustomersatanamountthatreflectstheconsiderationtowhichitexpectstobeentitledinexchangeforthosegoodsorservices.ThisguidanceisscheduledtobeeffectiveforourfinancialstatementsbeginningonJanuary1,2018.Weintendtoadoptthisguidanceusingthemodifiedretrospectivemethod;however,wehavenotcompletedanevaluationoftheeffectthatthisstandardwillhaveonourfinancialstatements.
InApril2015,FASBissuedASU2015-17,BalanceSheetClassificationofDeferredTaxes.Thepurposeofthisstandardistosimplifythepresentationofdeferredincometaxesbyrequiringthatdeferredtaxliabilitiesandassetsbeclassifiedasnoncurrentinaclassifiedbalancesheet.Thisguidancemaybeappliedonaprospectiveorretrospectivebasis.ThisstandardisscheduledtobeeffectiveforourfinancialstatementsbeginningonJanuary1,2017.EarlyadoptionispermittedandweadoptedthisstandardonDecember31,2015.
InAugust2014,theFASBissuedASU2014-15,DisclosureofUncertaintiesaboutanEntity'sAbilitytoContinueasaGoingConcern.Thisstandardrequiresmanagementtoevaluatewhetherthereissubstantialdoubtaboutanentity'sabilitytocontinueasagoingconcernwithinoneyearafterthedatethatthefinancialstatementsareissued.Substantialdoubtaboutanentity'sabilitytocontinueasagoingconcernexistswhenrelevantconditionsandeventsindicatethatitisprobablethattheentitywillbeunabletomeetitsobligationsastheybecomedue.Thisstandardrequirescertaindisclosuresinthefinancialstatementsdependingontheresultsofmanagement'sevaluation.ThisstandardwaseffectiveforourfinancialstatementsasofDecember31,2016.Wehavepreparedtheseconsolidatedfinancialstatementsinaccordancewiththisnewguidance.
InApril2015,theFASBissuedASU2015-03,SimplifyingthePresentationofDebtIssuanceCosts.Underthisnewstandard,debtissuancecostsreportedontheConsolidatedBalanceSheetsarereflectedasadirectdeductionfromtherelateddebtliabilityratherthanasanasset.Retrospectiveapplicationtopriorperiodsisrequired.ThisstandardwasscheduledtobeeffectiveforourfinancialstatementsbeginningonJanuary1,2016.EarlyadoptionwaspermittedandweadoptedthisstandardonDecember31,2015.
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InApril2015,theFASBissuedASU2015-11,SimplifyingtheMeasurementofInventory.Thisstandardwasissuedtosimplifythemeasurementofinventoryasthelowerofitscostbasisoritsnetrealizablevalue.ThisstandardisscheduledtobeeffectiveforourfinancialstatementsbeginningonJanuary1,2017.Earlyadoptionispermitted.WeelectedtoadoptthisstandardonJanuary1,2016,anditdidnothaveasignificanteffectonourfinancialstatements.
InFebruary2016,theFASBissuedASU2016-02,Leases.Thisstandardwasissuedtoincreasetransparencyandcomparabilityamongorganizationsbyrequiringmostleasesbeincludedonthebalancesheetandbyexpandingdisclosurerequirements.ThisstandardisscheduledtobeeffectiveforourfinancialstatementsbeginningonJanuary1,2019.Earlyadoptionispermitted.Wehavenotcompletedanevaluationoftheeffectthatthisstandardwillhaveonourfinancialstatements.
InAugust2016,theFASBissuedASU2016-15,ClassificationofCertainCashReceiptsandCashPayments.Thisstandardwasissuedtoreducethediversityinpracticeinhowcertaincashreceiptsandcashpaymentsarepresentedandclassifiedinthestatementofcashflows.ThisstandardisscheduledtobeeffectiveforourfinancialstatementsbeginningonJanuary1,2018.Earlyadoptionispermitted.Wehavenotcompletedanevaluationoftheeffectthatthisstandardwillhaveonourfinancialstatements.
InNovember2016,theFASBissuedASU2016-18,RestrictedCash.Thisstandardwasissuedtochangethepresentationofamountsgenerallydescribedasrestrictedcashandrestrictedcashequivalentstobeincludedwithcashandcashequivalentswhenreconcilingthebeginning-of-periodandend-of-periodtotalamountsshownonthestatementofcashflows.ThisstandardisscheduledtobeeffectiveforourfinancialstatementsbeginningonJanuary1,2018.Earlyadoptionispermitted.Wehavenotcompletedanevaluationoftheeffectthatthisstandardwillhaveonourfinancialstatements.
NOTE3—SUPPLEMENTALBALANCESHEETINFORMATION
Accounts Receivable
Thefollowingtablesummarizesouraccountsreceivablebalance:
Thechangeinallowancefordoubtfulaccountsisasfollows:
F-13
December31, (Inmillions) 2015 2016 Tradeaccountsreceivable $ 102.7 $ 78.8Allowancefordoubtfulaccounts (1.7) (2.3)Accountsreceivable,net $ 101.0 $ 76.5
(Inmillions) 2015 2016 Balanceatbeginningofyear $ 2.4 $ 1.7Provisionforbaddebts,netincludedinselling,general,andadministrativeexpense 0.7 1.3Uncollectablereceivableswrittenoff (1.4) (0.7)Balanceatendofyear $ 1.7 $ 2.3
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Inventories
Thefollowingtablesummarizesourinventories:
Prepaid Expenses and Other Current Assets
Thefollowingtablesummarizesourprepaidexpensesandothercurrentassets:
Property, Plant, and Equipment, net
Thefollowingtablesummarizesourproperty,plant,andequipment:
Wecapitalizeanallocatedamountofinterestonborrowingsforself-constructedassetsandequipmentduringtheirconstructionperiod.Wecapitalizedinterestof$0.5millionandzeroin2015and2016,respectively.Depreciationexpensewas$169.9millionand$112.6millionin2015and2016,respectively.
F-14
December31, (Inmillions) 2015 2016 Maintenanceparts $ 21.3 $ 18.1Proppantsandchemicals 8.4 5.0Other 1.8 1.7Totalinventories $ 31.5 $ 24.8
December31, (Inmillions) 2015 2016 Restrictedcash $ 12.0 $ 9.1Prepaidexpenses 10.0 6.2Assetsheldforsale — 0.8Other — 1.6Totalprepaidexpensesandothercurrentassets $ 22.0 $ 17.7
December31,
EstimatedUsefulLife(Inyears)(Dollarsinmillions) 2015 2016
Serviceequipment $ 843.1 $ 763.4 2.5-10Buildingsandimprovements 78.7 63.5 15-39Office,software,andotherequipment 46.7 45.2 3-7Vehiclesandtransportationequipment 13.3 5.5 5-20Land 10.8 8.0 N/AConstruction-in-processandother 26.2 18.6 N/A
Totalproperty,plant,andequipment 1,018.8 904.2 Accumulateddepreciationandamortization (588.2) (619.9)
Totalproperty,plant,andequipment,net $ 430.6 $ 284.3
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NOTE3—SUPPLEMENTALBALANCESHEETINFORMATION(Continued)
Accrued Expenses and Other Current Liabilities
Thefollowingtablesummarizesouraccruedliabilities:
NOTE4—ACQUISITIONSANDINVESTMENTS
Acquisition of Assets from J-W Wireline Company
OnOctober31,2014,weenteredintoadefinitiveagreementtoacquiresubstantiallyalloftheassetsandcertainliabilitiesofJ-WWirelineCompany("J-WWireline"),asubsidiaryofJ-WEnergyCompany.ThistransactionclosedonDecember5,2014.J-WWirelinespecializedindeephigh-pressureperforating,multiple-zonecompletions,comprehensivecased-holelogging,andpiperecovery.
Atclosing,wepaid$50millionplusanestimated$24.1millionforworkingcapitalincash.Wealsoagreedtopayupto$12.5millionofcontingentcashconsiderationineachof2015and2016basedontheachievementofearningstargetsforthe12monthperiodsendedOctober31,2015and2016.Duringthesecondquarterof2015,wefinalizedtheworkingcapitalpayment,theestimatedfairvalueofthecontingentconsideration,andthefairvaluesoftheassetsacquiredandliabilitiesassumedasoftheacquisitiondate.Thefollowingtablesummarizesthefinalpurchasepriceasoftheacquisitiondate:
F-15
December31, (Inmillions) 2015 2016 Sales,useandpropertytaxes $ 23.0 $ 17.7Employeecompensationandbenefits 8.2 5.6Interest 6.3 6.0Insurance 5.7 4.2Other 8.8 1.3Totalaccruedexpensesandothercurrentliabilities $ 52.0 $ 34.8
(Inmillions) Final
Allocation Cashconsideration $ 75.8Fairvalueofcontingentconsideration 3.4Totalpurchaseprice $ 79.2
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NOTE4—ACQUISITIONSANDINVESTMENTS(Continued)
Thefollowingtablesummarizesthefinalrecordingofassetsacquiredandliabilitiesassumedasoftheacquisitiondate:
WeestimatedthefairvalueofthecontingentconsiderationandtheassetsandliabilitiesacquiredasoftheDecember5,2014,acquisitiondateusinganin-usemodel,whichreflectsthevalueoftheacquiredassetsthroughtheiruseincombinationwithotherassetsasagroup.ThepremiumwepaidinexcessofthefairvalueofthenetassetsacquiredwasbasedontheestablishedbusinessofJ-WWirelineandourabilitytoexpandourofferingofwirelineservicestoourfullcustomerbase.
Investment in SinoFTS Joint Venture
In2014,weenteredintoa15-yearjointventureagreementwiththeSinopecGroup("Sinopec").ThisjointventurecollaborationoffershydraulicstimulationservicesinChina.Thejointventurecompany,SinoFTSPetroleumServicesLtd.("SinoFTS"),isowned55%bySinopecand45%byus.SinoFTSwillservebothSinopecandotherexplorationandproductioncompaniesthroughoutChina.Wecontributed$9.9million,$14.8millionandzerotoSinoFTSin2014,2015and2016,respectively.SinoFTSbeganperforminghydraulicfracturingservicesinChinain2016.
NOTE5—GOODWILLANDOTHERINTANGIBLEASSETS
Goodwill
ThechangesinthecarryingamountofgoodwillwereasfollowsfortheyearendedDecember31,2015.Therewasnoactivityduring2016.
Inconnectionwithourwirelineacquisition,weagreedtopayupto$12.5millionofcontingentcashconsiderationineachof2015and2016basedontheachievementofearningstargets.Thefinalfairvalueofthiscontingentconsiderationattheacquisitiondatewas$3.4million.Wewererequiredto
F-16
(Inmillions) Final
Allocation Accountsreceivable $ 23.2Inventories 3.3Property,plant,andequipment 39.8Intangibleassets 10.0Goodwill 3.8Totalassets 80.1Accruedexpensesandothercurrentliabilities (0.9)Totalpurchaseprice $ 79.2
(Inmillions) Goodwill
AccumulatedImpairment
Losses Net BalanceatJanuary1,2015 $ 7.1 $ — $ 7.1Goodwillimpairment — (7.1) (7.1)BalanceatDecember31,2015 $ 7.1 $ (7.1) $ —
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NOTE5—GOODWILLANDOTHERINTANGIBLEASSETS(Continued)
measurethefairvalueofthecontingentconsiderationateachreportingdate.ThefairvalueofthecontingentconsiderationwaszeroatbothDecember31,2015and2016.Thedecreaseinthefairvalueofthecontingentconsiderationwasduetoreducedactualandforecastedcashflowsforthisreportingunitduringtheearn-outperiods.ThesefairvalueswerebasedontheuseofunobservableinputsandareclassifiedasLevel3intheFASB'sfairvaluehierarchy.
ThereducedactualandforecastedcashflowsatJune30,2015,wereanindicatorthatweshouldconductaninterimgoodwillimpairmenttestforourwirelinereportingunitinthesecondquarterof2015.Asaresultofthistest,werecordedanon-cashimpairmentof$7.1millioninthesecondquarterof2015.Weestimatedthefairvalueusingtheincomeapproach.Thesignificantinputsemployedindeterminingfairvalueincluded,butwerenotlimitedto,projectedfinancialinformation,growthrates,terminalvalue,anddiscountrates.ThisfairvaluewasbasedontheuseofunobservableinputsandisclassifiedasLevel3intheFASB'sfairvaluehierarchy.
Other Intangible Assets
Thefollowingtablesummarizesourotherintangibleassetsandaccumulatedamortization:
Ourtradenamehasanindefinitelifeand,therefore,isnotamortized.Forourdefinite-livedintangibleassets,theweighted-averageamortizationperiodspriortotheimpairmentsin2015weretenyearsforcustomerrelationshipsandfiveyearsforproprietarychemicalblends.Inthefourthquarterof2015weimpairedallofourcustomerrelationshipsandproprietarychemicalblends.SeeNote10—"ImpairmentsandOtherCharges"formorediscussionofour2015impairments.
Amortizationfordefinite-livedintangibleassetswas$102.5millionin2015.Estimatedamortizationexpense,excludinganyfutureacquisitions,foreachofthenextfiveyearsiszeroduetotheimpairmentsrecordedin2015.
F-17
(Inmillions)
GrossCarryingValue
AccumulatedAmortization Impairments Net
AtDecember31,2015 Customerrelationships $ 873.8 $ (403.3) $ (470.5) $ —Tradename 59.7 — (30.2) 29.5Proprietarychemicalblends 73.5 (68.5) (5.0) —Total $ 1,007.0 $ (471.8) $ (505.7) $ 29.5AtDecember31,2016 Tradename 59.7 — (30.2) 29.5
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NOTE6—DEBT
Thefollowingtablesummarizesourlong-termdebt:
Estimatedfairvaluesforourtermloanandseniornotesweredeterminedusingrecenttradingactivityand/orbid-askspreadsandareclassifiedasLevel2intheFASB'sfairvaluehierarchy.
2020 Senior Floating Rate Notes
OnJune1,2015,wecompletedanofferingof$350millionofseniorsecuredfloatingratenotesdueJune15,2020,inaprivateofferingtoqualifiedinstitutionalbuyers("2020SeniorNotes").The2020SeniorNotesbearinterestatathree-monthLondonInterbankOfferedRate("LIBOR")plusamarginof7.5%perannum.Interestispayablequarterly,inarrears,onMarch15,June15,September15andDecember15.
The2020SeniorNoteswereissuedatadiscountof$3.5millionforaggregateconsiderationof$346.5millionandresultedinnetproceedstotheCompanyof$340.5millionafterdebtissuancecostsof$6.0million.
Theobligationtopayprincipalandinterestonthe2020SeniorNotesisjointlyandseverallyguaranteedonafullandunconditionalbasisbyallofourwhollyowneddomesticsubsidiaries.The2020SeniorNotesaresecuredonafirstprioritybasisbyouraccountsreceivable,inventory,depositaccounts,andcertainhydraulicfracturingandotherequipment.The2020SeniorNotesaresecuredonasecondprioritybasisby100%oftheequityinterestsofourexistingandfuturedomesticsubsidiariesand65%ofthevotingequityinterestsofourexistingandfutureforeignsubsidiaries.
The2020SeniorNotesareredeemable,atouroption,beginningonJune15,2016,atapremiumof3%.TheredemptionpremiumthendeclineseachyearuntilJune15,2018,atwhichtimewemayredeemthenotesatparvalue.
The2020SeniorNotescontaincovenantsthatcould,incertaincircumstances,limitourabilitytoissueadditionaldebt,repurchaseorpaydividendsonourcommonorpreferredstock,sellsubstantiallyallofourassets,makecertaininvestments,orenterintocertainothertransactions.
Wewereincompliancewithallofthecovenantsintheindenturegoverningour2020SeniorNotesatDecember31,2015and2016.
F-18
December31, 2015 2016 SeniorfloatingratenotesdueJune2020 $ 350.0 $ 350.0TermloandueApril2021 480.0 431.0SeniornotesdueMay2022 470.0 426.3Totalprincipalamount 1,300.0 1,207.3Lessunamortizeddiscountanddebtissuancecosts (23.8) (18.6)Totallong-termdebt $ 1,276.2 $ 1,188.7Estimatedfairvalueoflongtermdebt $ 508.4 $ 1,060.7
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NOTE6—DEBT(Continued)
2022 Senior Notes
OnApril16,2014,wecompletedanofferingof$500millionof6.25%seniorsecurednotesdueMay1,2022,inaprivateofferingtoqualifiedinstitutionalbuyers("2022SeniorNotes").Interestispayablesemiannually,inarrears,onMay1andNovember1.TheCompanyreceivednetproceedsof$489.7millionafterdebtissuancecostsof$10.3million.
Theobligationtopayprincipalandinterestonthe2022SeniorNotesisjointlyandseverallyguaranteedonafullandunconditionalbasisbyallofourwhollyowneddomesticsubsidiaries.The2022SeniorNotesaresecuredonafirstprioritybasisby100%oftheequityinterestsofourexistingandfuturedomesticsubsidiariesand65%ofthevotingequityinterestsofourexistingandfutureforeignsubsidiaries.The2022SeniorNotesaresecuredonasecondprioritybasisbyouraccountsreceivable,inventory,anddepositaccounts,whichalsosecureour2020SeniorNotesasdiscussedabove.Allsecurityrequirementsforthe2022SeniorNoteswillceaseuponthefullrepaymentofour$550milliontermloandiscussedbelow.
The2022SeniorNotesareredeemable,atouroption,beginningonMay1,2017,atapremiumofapproximately4.7%.TheredemptionpremiumthendeclineseachyearuntilMay1,2020,atwhichtimewemayredeemthenotesatparvalue.
The2022SeniorNotescontaincovenantsthatcould,incertaincircumstances,limitourabilitytoissueadditionaldebt,repurchaseorpaydividendsonourcommonorpreferredstock,sellsubstantiallyallofourassets,makecertaininvestments,orenterintocertainothertransactions.
In2016,werepurchased$43.7millionofaggregateprincipalamountof2022SeniorNotes.Werecognizedagainondebtextinguishmentof$25.4million.In2015,werepurchased$5.0millionofaggregateprincipalamountof2022SeniorNotes.Werecognizedagainondebtextinguishmentof$1.1million.
Wewereincompliancewithallofthecovenantsintheindenturegoverningour2022SeniorNotesatDecember31,2015and2016.
Term Loan
OnApril16,2014,weenteredintoa$550milliontermloan,whichmaturesonApril16,2021,("TermLoan")withagroupoflenderswithWellsFargoBank,N.A.,asadministrativeagent.TheTermLoanbearsinterestatLIBORplusamarginof4.75%perannum,witha1.00%LIBORfloor.Interestispayableoninterestrateresetdates,whichgenerallywillbeonathree-monthbasis.
TheTermLoanwasissuedatadiscountof$2.7millionforaggregateconsiderationof$547.3millionandresultedinnetproceedstotheCompanyof$540.0millionafterdebtissuancecostsof$7.3million.
TheobligationtopayprincipalandinterestontheTermLoanisjointlyandseverallyguaranteedonafullandunconditionalbasisbyallofourwhollyowneddomesticsubsidiaries.TheTermLoanissecuredonthesamebasisasthe2022SeniorNotesasdiscussedabove.
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NOTE6—DEBT(Continued)
TheTermLoancontainssubstantiallythesamecovenantsasthe2022SeniorNotesandthe2020SeniorNotes.NoneoftheTermLoan,the2022SeniorNotes,orthe2020SeniorNotescontainmaintenancefinancialcovenants.
In2016,werepaid$49.0millionofaggregateprincipalamountofTermLoan.Werecognizedagainondebtextinguishmentof$28.3million.
WewereincompliancewithallofthecovenantsintheTermLoanatDecember31,2015and2016.
Revolving Credit Facility
OnApril16,2014,weenteredintoafive-year,$200millionrevolvingcreditfacilitywithagroupoflendersandWellsFargoBank,N.A.,asadministrativeagent.Inconnectionwiththeissuanceofthe2020SeniorNotes,werepaidallamountsoutstandingunder,andterminated,thisrevolvingcreditfacilityin2015.Weincurredalossof$1.7million,whichprimarilyrelatedtothewrite-offofdeferredissuancecosts,inconnectionwiththeterminationoftherevolvingcreditfacility.Thisamountisclassifiedas"Gainorlossonextinguishmentofdebt,net"onourConsolidatedStatementsofOperations.
Thefollowingtablesummarizesthematuritiesofourlong-termdebtatDecember31,2016:
NOTE7—CONVERTIBLEPREFERREDSTOCK
InSeptember2012,weissuedandsold350,000sharesofSeriesAconvertiblepreferredstock,parvalue$0.01pershare(the"PreferredStock"),tocertainofourthenexistingcommonstockholders.ThePreferredStockwassoldforaggregateconsiderationof$350million,andresultedinnetproceedstotheCompanyof$349.8millionafterthepaymentof$0.2millioninissuancecosts.
EachshareofPreferredStockisconvertibleinto2,573sharesofourcommonstock,subjecttoadjustmentupontheoccurrenceofspecifiedeventssetforthundertermsofthePreferredStock.
ThePreferredStockisredeemableattheCompany'soptionatanytimeafterallofourdebthasbeenrepaid.TheredemptionpricepershareisanamountincashequaltotheoriginalpricepershareofthePreferredStock,plussuchadditionalamountaswouldgivetheholderanafter-taxinternalrateofreturnforinvestmentinthePreferredStockof25%perannum(the"AccretedAmount").AtDecember31,2016,theAccretedAmountofthePreferredStockwasestimatedtobe$906.1million.
F-20
(Inmillions) 2017 $ —2018 —2019 —2020 350.02021 431.02022andthereafter 426.3Totalprincipalamountoflong-termdebt $ 1,207.3
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NOTE7—CONVERTIBLEPREFERREDSTOCK(Continued)
ThePreferredStockismandatorilyconvertibleintosharesofourcommonstockinconnectionwithaninitialpublicofferingofourcommonstockifbothofthefollowingconditionsaremet(a"QualifiedIPO"):
• AggregateproceedstotheCompanyareatleast$250million;and
• Thesplit-adjustedinitialofferingpricetothepublicisnotlessthan$1.50pershare.
InconnectionwithaQualifiedIPO,eachshareofPreferredStockisconvertibleintothenumberofsharesofcommonstockthathasamarketvalue(basedontheinitialofferingpricetothepublic)equaltotheAccretedAmount.
ThePreferredStockismandatorilyredeemableforcashuponachangeofcontrol,providedthatallofourdebthasbeenrepaid.EachshareofPreferredStockwillberedeemedforanamountincashequaltothehigherof:
• TheAccretedAmountor
• TheoriginalpurchasepriceofthePreferredStockplusanamountequalto20%ofthethenoutstandingequityvalueoftheCompanydividedbythenumberofPreferredStocksharesthenoutstanding.
ThePreferredStockranksseniortoourcommonstockwithrespecttodividendrightsanddistributionrightsintheeventofanyliquidation,winding-upordissolutionoftheCompany.TheamountthateachshareofPreferredStockisentitledtoinliquidationisequaltotheAccretedAmount.
TheholdersofthePreferredStockarealsocommonstockholdersoftheCompanyandcollectivelycontrol100%ofourboardofdirectorseats.Therefore,thePreferredStockholderscandirecttheCompanytoredeemthePreferredStockatanytimeafterallofourdebthasbeenrepaid;however,wedidnotconsiderthistobeprobablefortheperiodspresentedduetotheamountofdebtoutstanding.Therefore,wehaveclassifiedthePreferredStockastemporaryequityonourConsolidatedBalanceSheetsbuthavenotrecordedanyaccretionofthePreferredStockinourconsolidatedfinancialstatements.
NOTE8—STOCK-BASEDCOMPENSATION
Restricted Stock Awards
Historically,certainmembersofourexecutiveteamweregrantedrestrictedstockawards.Theseawardsvestatvariouspointsintimeovervestingperiodsofuptofouryears.Themostcurrentfairvalueofoneshareofourcommonstockisutilizedtodeterminethefairvalueoftheawardonthe
F-21
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NOTE8—STOCK-BASEDCOMPENSATION(Continued)
grantdate.Thefollowingtablesummarizesourtransactionsrelatedtorestrictedstockawardsin2015.Therewerenotransactionsin2016.
Thetotalfairvalueofrestrictedstockvestedin2015was$2.4million.AtDecember31,2015and2016,therewerenounvestedrestrictedstockawards.
Restricted Stock Units
In2014,ourstockholdersapprovedthe2014Long-TermIncentivePlan("2014LTIP").The2014LTIPauthorizesthegrantofupto55millionrestrictedstockunits("RSU")tosalariedemployeesoftheCompany,asdeterminedbythecompensationcommitteeoftheboardofdirectors.ThisplanexpiresonMarch3,2024.The2014LTIPallowsforthegrantofstock-settledandcash-settledRSUs.TheCompanymayelect,atitssolediscretion,tosettleanyorallofthestock-settledRSUswhollyorpartlyincash.
Theawardsthatweregrantedin2014havethreevestingconditions:aperformanceconditionbasedonCompanygoals,aperformanceconditionbasedontheoccurrenceofaqualifyingliquidityeventsuchasaninitialpublicofferingofourcommonstock,andaservice-periodcondition.TheperformanceconditionwasbasedonCompanygoalsthatprovidedforanupwardordownwardadjustmenttotheRSUsgrantedbasedonCompanyperformance.Theservice-periodconditionprovidesthat50%ofthenumberofadjustedRSUsvestoneachofDecember31,2015,andDecember31,2016.
F-22
NumberofUnits
(inthousands)
Weighted-Average
GrantDateFairValue
UnvestedbalanceatJanuary1,2015 4,133 $ 0.61Granted — —Vestedorreleased(1) (3,967) 0.60Forfeited (166) 0.75UnvestedbalanceatDecember31,2015 — $ —
(1) Certaingrantedbutunvestedsharesarereleasedfortaxwithholdingsontheparticipant'sbehalf.
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NOTE8—STOCK-BASEDCOMPENSATION(Continued)
Thefollowingtablesummarizesourtransactionsrelatedtothestock-settledRSUs:
Undergenerallyacceptedaccountingprinciplesforstock-basedcompensation,aperformanceconditionthataffectsvestingandisbasedonacorporateliquidityeventsuchasaninitialpublicofferingofcommonstockprecludestherecognitionofcompensationexpenserelatedtotheawardsuntilthisperformanceconditionhasbeenmet.Therefore,nocompensationexpensefortheseawardswillberecognizeduntilthisperformanceconditionhasbeenmet.AtDecember31,2016,therewas$2.4millionoftotalunrecognizedcompensationcostrelatedtounvestedstock-settledRSUs.
Thecompensationcostchargedagainstincomeforallstock-basedcompensationwas$1.8millionandzeroin2015and2016,respectively.Thetotalincometaxbenefitforallstock-basedcompensationwas$0.2millionin2015;however,suchbenefitwasoffsetbythevaluationallowanceagainstourdeferredtaxassets.
NOTE9—RETIREMENTPLAN
Weoffera401(k)definedcontributionretirementplan("401(k)Plan"),whichallowsaparticipanttodefer,bypayrolldeductions,from0%to100%oftheparticipant'sannualcompensation,limitedtocertainannualmaximumssetbytheInternalRevenueCode.The401(k)Planhashistoricallyprovidedadiscretionarymatchingcontributiontoeachparticipant'saccount.Companymatchingcontributionstothe401(k)Planaremadeincashandwere$5.5millionin2015.TheCompanysuspendedmatchingcontributionsinJuly2015.
F-23
NumberofUnits
(inthousands)
Weighted-Average
GrantDateFairValue
UnvestedbalanceatJanuary1,2015 40,215 $ 0.22Granted — —Vested — —Forfeited (23,697) 0.22UnvestedbalanceatDecember31,2015 16,518 $ 0.22Granted — —Vested — —Forfeited (5,527) 0.22UnvestedbalanceatDecember31,2016 10,991 $ 0.22
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NOTE10—IMPAIRMENTSANDOTHERCHARGES
Thefollowingtablesummarizesourimpairmentsandothercharges:
Impairment of Assets and Goodwill
During2016,werecordedassetimpairmentsof$7.0millionrelatedtoserviceequipmentandrealpropertythatwenolongeruseandidentifiedtosell.Duringthefirstninemonthsof2015,werecordedanon-cashgoodwillimpairmentof$7.1millionforourwirelinereportingunitandanassetimpairmentof$0.5millionrelatedtorealpropertythatwenolongeruse.
Inthefourthquarterof2015,weconcludedthatthepersistentlowcommoditypriceenvironmentanditseffectonourcurrentandforecastedcashflowsrequiredustoperformmultipleassetimpairmenttests.Asaresult,werecordedanumberofassetimpairmentsinthefourthquarterof2015.
• Weevaluatedthelong-livedassetsofourpressurepumpingassetgroupforimpairmentandconcludedthatthefairvalueofthisassetgroupwaslowerthanthecarryingvalueoftheassetsintheassetgroup.Werecognizedatotalimpairmentforthisassetgroupof$487.0million.Ofthisamount,$461.4millionwasattributabletoourcustomerrelationships,$20.6millionwasattributabletocertainequipment,and$5.0millionwasattributabletoourproprietarychemicalblends.
• Weevaluatedthelong-livedassetsofourwirelineassetgroupforimpairmentandconcludedthatthefairvalueofthisassetgroupwaslowerthanthecarryingvalueoftheassetsintheassetgroup.Werecognizedatotalimpairmentforthisassetgroupof$33.3million.Ofthisamount$24.2millionwasattributabletocertainequipmentand$9.1millionwasattributabletoourcustomerrelationships.
• Weevaluatedourtradenameintangibleassetforimpairmentandconcludedthatthefairvalueofthisassetwaslowerthanitscarryingvalue,whichresultedinanimpairmentof$30.2million.
• Werecorded$14.8millionofimpairmentsforcertainlandandbuildingsthatwenolongeruse.
Wearecloselymonitoringcurrentindustryconditionsandfutureexpectations.Ourcurrentforecastanticipatesimprovingindustryconditionsin2017;however,iftheindustryconditionsfromthepasttwoyearscontinueforaprolongedperiodorworsen,wemaybesubjecttoadditionalimpairmentsoflong-livedassetsorintangibleassetsinfutureperiods.SeeNote15—"NonrecurringFairValueMeasurements"formoreinformationontheseimpairments.
F-24
YearEndedDecember31,
(Inmillions) 2015 2016 Impairmentofassetsandgoodwill $ 572.9 $ 7.0Supplycommitmentcharges 11.0 2.5Leaseabandonmentcharges 1.8 2.0Employeeseverancecosts 13.1 0.8Inventorywrite-down 24.5 —Acquisitionearn-outadjustments (3.4) —Totalimpairmentsandothercharges $ 619.9 $ 12.3
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NOTE10—IMPAIRMENTSANDOTHERCHARGES(Continued)
Supply Commitment Charges
Wehaverecordedsupplycommitmentchargesrelatedtocontractualinventorypurchasecommitmentstocertainproppantsuppliers.In2015and2016,werecordedchargesunderthesesupplyarrangementsof$11.0millionand$2.5million,respectively.Thesechargeswereattributabletoourdecreasedvolumeofpurchasesfromthesesuppliersduetoourloweractivitylevelsinbothperiods.Additionally,in2016,ourdecreasedpurchaseswerealsoduetocertaincustomersprocuringtheirownproppants.
Whilewehavesuccessfullyworkedwithourvendorstominimizechargesrelatedtothesepurchasecommitments,ifindustryconditionsdonotimproveorifweareunabletoworkwithourvendorsinthefuture,wemayincursupplycommitmentchargesinfutureperiods.
Lease Abandonment Charges
During2015and2016wevacatedcertainleasedfacilitiestoconsolidateouroperations.In2015and2016,werecognizedexpenseof$1.8millionand$2.0million,respectively,inconnectionwiththeseactions.
Employee Severance Costs
During2015and2016,weincurredemployeeseverancecostsof$13.1millionand$0.8million,respectively,inconnectionwithourcorporateandoperatingrestructuringinitiatives.AtDecember31,2015and2016,wehadpaidsubstantiallyallseverancepaymentsowedtoformeremployees.
Inventory Write-down
During2015,wemadeimprovementstooursupplychainthatreducedourinventoryrequirements.Inconnectionwiththisinitiativeweexecutedaprogramtoliquidateexcessinventory.Werecordeda$24.5millioninventorywrite-downchargeinconnectionwiththisliquidationprogram.
Acquisition earn-out adjustments
SeeNote5—"GoodwillandOtherIntangibleAssets"fordiscussionofouracquisitionearn-outadjustments.
NOTE11—ASSETDISPOSALS
WesoldsubstantiallyallofourremainingsandtransportationequipmentandrelatedinventoryinFebruary2016.Wereceived$8.0millionofproceedsandrecognizeda$0.3milliongainonthissale.During2016,wesoldanumberofothersurpluspiecesofpropertyandequipment.Wereceived$23.5millionofproceedsandrecognizeda$1.3millionnetlossonthesaleoftheseassets.
NOTE12—GAINONINSURANCERECOVERIES
InJanuary2016,afireatoneofourjobsitesinOklahomadestroyedsubstantiallyalloftheequipmentinoneofourfleets.Theseassetswereinsuredatvaluesgreaterthantheircarryingvalues.Wereceived$19.0millionofinsurancerecoveryproceedsfortheseassets,whichexceededtheircarryingvaluesby$15.1million.
F-25
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NOTE13—INCOMETAXES
Thefollowingtablesummarizesthecomponentsofincometaxexpense(benefit):
Actualincometaxexpense(benefit)differedfromtheamountcomputedbyapplyingthestatutoryfederalincometaxratetoincome(loss)beforeincometaxesasfollows:
F-26
YearEndedDecember31,
(Inmillions) 2015 2016 Current: Federal $ — $ —State (1.5) (1.6)
Totalcurrent (1.5) (1.6)Totaldeferred — —Incometaxbenefit $ (1.5) $ (1.6)
YearEndedDecember31,
(Inmillions) 2015 2016 Lossbeforeincometaxes $ (1,014.7) $ (190.1)Statutoryfederalincometaxrate 35.0% 35.0%Federalincometaxbenefitatstatutoryrate (355.1) (66.5)Changeinvaluationallowance 380.0 65.1Stateincometaxes,netoffederaleffect (26.8) (0.3)Othernon-deductibleexpenses 0.4 0.1Incometaxbenefit $ (1.5) $ (1.6)Effectivetaxrate 0.1% 0.8%
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NOTE13—INCOMETAXES(Continued)
Thetaxeffectsoftemporarydifferencesthatgiverisetosignificantportionsofthedeferredtaxassetsanddeferredtaxliabilitiesarepresentedbelow:
Becauseofourvaluationallowance,nodeferredtaxassetsorliabilitiesareincludedintheConsolidatedBalanceSheets.
AtDecember31,2016,ourgrossfederalnetoperatinglosscarryforwardswere$1.6billion,whichwillexpireonvariousdatesbetween2032and2036.AtDecember31,2016,ourgrossstatenetoperatinglosscarryforwardswere$628.0million,whichwillexpireonvariousdatesbetween2017and2036.
AreconciliationofthevaluationallowancefordeferredtaxassetsfromJanuary1,2015toDecember31,2016isasfollows:
In2012,weestablishedafullvaluationallowancewithrespecttoourU.S.federalnetdeferredtaxassetsandstatenetdeferredtaxassets.Weconsideredallavailablepositiveandnegativeevidenceinevaluatingwhetherthesedeferredtaxassetsweremorelikelythannottoberealized.Thesignificantnegativeevidenceofourlossgeneratedbeforeincometaxesin2012couldnotbeovercomebyconsideringothersourcesoftaxableincome,whichincludedthereversaloftaxabletemporarydifferencesandtax-planningstrategies.Asignificantpieceofnegativeevidencethatweconsideriscumulativelosses(generallydefinedaslossesbeforeincometaxes)incurredoverthemostrecentthree-yearperiod.Suchevidencelimitsourabilitytoconsiderothersubjectiveevidencesuchasour
F-27
December31, (Inmillions) 2015 2016 Deferredtaxassets: Goodwillandintangibleassets $ 725.4 $ 655.7Federalnetoperatinglosscarryforwards 433.2 564.9Statenetoperatinglosscarryforwards,netoffederalbenefit 24.9 28.3Accruedexpenses 12.8 7.9Other 17.4 3.7
Grossdeferredtaxassets 1,213.7 1,260.5Valuationallowance (1,175.1) (1,240.2)
Totaldeferredtaxassets 38.6 20.3Deferredtaxliabilities: Property,plant,andequipment 38.6 20.3
Totaldeferredtaxliabilities 38.6 20.3Netdeferredtaxassets $ — $ —
(Inmillions) 2015 2016 BalanceatJanuary1 $ 795.1 $ 1,175.1Additions,chargedtoexpense 380.0 65.1Deductions — —BalanceatDecember31 $ 1,175.1 $ 1,240.2
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NOTE13—INCOMETAXES(Continued)
projectionsforfuturegrowth.AtDecember31,2015and2016,wehadincurredcumulativelossesovertheapplicablethree-yearperiod.
WecontinuetoprovideavaluationallowanceagainstournetU.S.federalandstatedeferredtaxassets.DeferredtaxassetsrelatedtoourU.S.federalandstateoperatinglossesarestillavailabletoustooffsetfuturetaxableincome,subjecttolimitationsintheeventofachangeofcontrolunderSection382oftheInternalRevenueCode.AtDecember31,2016,wehadnotincurredsuchanownershipchange.Wewilladjustthisvaluationallowanceaswechangeourassessmentoftheamountofdeferredincometaxassetsthataremorelikelythannottoberealized.
Areconciliationoftheliabilityforgrossunrecognizedincometaxbenefits(excludinginterest)fromJanuary1,2015toDecember31,2016isasfollows:
Theamountofunrecognizedtaxbenefitsthat,ifrecognized,wouldaffecttheeffectivetaxratewas$1.6millionandzeroatDecember31,2015and2016,respectively.
Werecognizeaccruedinterestandpenaltiesrelatedtoanyuncertaintaxpositionsaspartofthetaxprovision.AtDecember31,2015and2016,wehad$0.2millionandzero,respectively,ofaccruedinterestexpenseassociatedwithunrecognizedtaxbenefits.Interestexpenseassociatedwithunrecognizedtaxbenefitswas$0.1millionin2015.
FTSInternational,Inc.anditsU.S.subsidiariesjoininthefilingofaU.S.federalconsolidatedincometaxreturn.Wedonotcurrentlyhavesignificantoperationsorundistributedearningsinforeignjurisdictions.Ourtaxreturnsarecurrentlysubjecttoexaminationinvariousfederalandstatejurisdictionsfortaxyearsfrom2012through2016.
NOTE14—COMMITMENTSANDCONTINGENCIES
Operating Leases
Weleasecertainadministrativeandsalesoffices,operationalfacilitiesandofficeequipmentinvariouscities.Wealsoleasesomeserviceequipmentandlightdutyvehicles.Someofourleaseagreementsincluderenewalorpurchaseoptionsthatwemaychoosetoexerciseattheendoftheleaseterm.Totalrentalexpenseunderouroperatingleaseswas$31.7and$19.6millionin2015and2016,respectively.
AtDecember31,2016,ourfutureminimumrentalcommitmentsdueundernon-cancellableoperatingleasesissummarizedbelow:
F-28
(Inmillions) 2015 2016 BalanceatJanuary1 $ 2.5 $ 1.4Lapseinapplicablestatuteoflimitations (1.1) (1.4)BalanceatDecember31 $ 1.4 $ —
(Inmillions) 2017 2018 2019 2020 2021 Thereafter Operatingleases $ 20.8 $ 8.8 $ 4.2 $ 2.4 $ 1.9 $ 0.7
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Purchase Obligations
Wehavepurchasecommitmentswithcertainvendorstosupplyasignificantportionoftheproppantusedinouroperations.Theseagreementshaveremainingtermsrangingfromtwotoeightyears.Someoftheseagreementsaretake-or-payagreementswithminimumunconditionalpurchaseobligations.Theseminimumpurchaseobligationscouldchangebaseduponthevendorsabilitytosupplyaminimumrequirement.Totalpurchasesmadeundertheseagreementswere$49.7millionand$20.9millionin2015and2016,respectively.AtDecember31,2016,ourfutureminimumpurchasecommitmentsdueundertheseagreementsissummarizedbelow:
Litigation
Intheordinarycourseofbusiness,wearesubjecttovariouslegalproceedingsandclaims,someofwhichmaynotbecoveredbyinsurance.Manyoftheselegalproceedingsandclaimsareinearlystages,andmanyofthemseekanindeterminateamountofdamages.Weestimateandprovideforpotentiallossesthatmayariseoutoflegalproceedingsandclaimstotheextentthatsuchlossesareprobableandcanbereasonablyestimated.Significantjudgmentisrequiredinmakingtheseestimatesandourfinalliabilitiesmayultimatelybemateriallydifferentfromtheseestimates.Whenpreparingourestimates,weconsider,amongotherfactors,theprogressofeachlegalproceedingandclaim,ourexperienceandtheexperienceofothersinsimilarlegalproceedingsandclaims,andtheopinionsandviewsoflegalcounsel.
In2012,ContinentalIndustriesGroup,Inc.("Continental")filedtwolawsuitsagainstFTSInternational,Inc.andFTSInternationalServices,LLCintheUnitedStatesDistrictCourt,SouthernDistrictofNewYorkthatwerecombinedintooneactionentitledContinentalIndustriesGroup,Inc.v.FTSInternational,Inc.andFTSInternationalServices,LLC.Initssuit,ContinentalclaimedthatFTSI(a)wrongfullyterminatedasupplyagreemententeredintobythepartiesin2011,and(b)wrongfullycancelledtwoallegedpurchaseordersfortheprocurementofguargum,akeycomponentofcertainchemicalsweutilizeinperformingourservicesforcustomers.Pursuanttothesupplyagreement,ContinentalhadagreedtoenterintoajointventurewithaCompanyinIndiatoarrangefortheconstructionofaguargum-processingfactorythatwouldproduceafiveyearsupplyofguarforFTSI.FTSIterminatedthesupplyagreementinmid-2012beforethefactorywascomplete.Withrespecttothepurchaseorderclaim,FTSIhadexpressedinterestinpurchasingguargumfromContinentalintransactionsseparatefromthesupplyagreement.FTSIdidnotpurchasetheguargum.ContinentalclaimedthatvalidpurchaseordershadbeenformedandthatFTSIwrongfullyterminatedthepurchaseorderswhenitdecidednottopurchasetheguargum.Continentalsoughtdamagesofapproximately$58.0millionrelatedtothesupplyagreementclaimandapproximately$4.5millionrelatedtothepurchaseorderclaim.FTSIfiledcounterclaimsagainstContinentalseekingdamagesinexcessof$69.0millionrepresentingthedifferencebetweenthepriceitpaidforguarguminthespotmarketandthepriceitwouldhavepaidunderthesupplyagreement.Ajurytrialforthiscasewasheldand,onNovember3,2015,thejuryreturnedverdictsinfavorofContinentalforbothclaims.ThejuryawardeddamagestoContinentalintheaggregateamountof$5.3million,ofwhich$2.1millionrelatedtothesupplyagreementcaseand$3.2millionrelatedtothepurchaseordercase.InJanuary2016,wesettled
F-29
(Inmillions) 2017 2018 2019 2020 2021 Thereafter Purchaseobligations $ 52.1 $ 59.1 $ 51.9 $ 49.5 $ 48.2 $ 140.4
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NOTE14—COMMITMENTSANDCONTINGENCIES(Continued)
thislawsuitwithContinentalforaconfidentialamountandthefinancialeffectsofthismatterhavebeenincludedinourconsolidatedfinancialstatementsasofDecember31,2015.
Webelievethatcostsassociatedwithotherlegalmatterswillnothaveamaterialadverseeffectonourconsolidatedfinancialstatements.
NOTE15—NONRECURRINGFAIRVALUEMEASUREMENTS
Thefollowingtablerepresentstheplacementinthefairvaluehierarchyofassetsthatweremeasuredatfairvalueonanonrecurringbasis.SeeNote10—"ImpairmentsandOtherCharges"forfurtherdiscussion.
F-30
Fairvaluemeasurementsusing
PreviousCarryingValues(1)
TotalFair
Value(1)
Level1 Level2 Level3 During2015 Pressurepumpingassetgroup(2) Customerrelationships(3) $ 461.4 $ — $ — $ — $ —Equipment(4) 424.0 403.4 — — 403.4Proprietarychemicalblends(3) 5.0 — — — —
$ 890.4 $ 403.4 $ — $ — $ 403.4Wirelineassetgroup(2) Propertyandequipment(4)(5) $ 39.2 $ 15.0 $ — $ — $ 15.0Customerrelationships(3) 9.1 — — — —Goodwill 7.1 — — — —
$ 55.4 $ 15.0 $ — $ — $ 15.0Tradename(3) $ 59.7 $ 29.5 $ — $ — $ 29.5Propertynolongerused(5) $ 22.8 $ 7.5 $ — $ — $ 7.5
During2016 Propertynolongerused $ 1.0 $ — $ — $ — $ —Long-livedassetsheldforsale(6) 12.4 6.4 — — 6.4
$ 13.4 $ 6.4 $ — $ — $ 6.4
(1) Representsthevalueonthedateofthefairvaluemeasurement.
(2) Valuedusingtheincomeapproachandthemarketapproachvaluationtechniques.
(3) Valuedusingtheincomeapproach.
(4) Equipmentvaluedusingthecostapproach,whichisavaluationtechniquethatestimatestheamountthatwouldbecurrentlyrequiredtoreplaceanasset'sservicecapacity.
(5) Propertyvaluedusingthemarketapproachbasedonthesalespricesofcomparablepropertiesand/orestimatesobtainedfromcommercialbrokers.
(6) Equipmentvaluebasedonpendingcontractprice.Assetsheldforsaleareclassifiedas"Prepaidexpensesandothercurrentassets"onourConsolidatedBalanceSheets.
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NOTE16—EARNINGS(LOSS)PERSHARE
Thenumeratorsanddenominatorsofthebasicanddilutedearnings(loss)pershare("EPS")computationsforourcommonstockarecalculatedasfollows:
F-31
YearEndedDecember31,
(Inmillions,exceptpershareamounts) 2015 2016 Numerator: Netloss $ (1,013.2) $ (188.5)Convertiblepreferredstockaccretion (144.9) (181.6)NetlossattributabletocommonstockholdersusedforbasicEPScomputation (1,158.1) (370.1)
Addbacktheeffectofdilutivesecurities: Convertiblepreferredstockaccretion(1) – –NetlossattributabletocommonstockholdersusedfordilutedEPScomputation $ (1,158.1) $ (370.1)
Denominator: WeightedaveragesharesusedforbasicEPScomputation 3,589.7 3,586.5
Effectofdilutivesecurities: Convertiblepreferredstock(1) – –Restrictedstockunits(2) – –Dilutivepotentialcommonshares – –NumberofsharesusedfordilutedEPScomputation 3,589.7 3,586.5
BasicanddilutedEPS $ (0.32) $ (0.10)
(1) DilutivesecuritiesinourdilutedEPScalculationdonotincludetheeffectsofconvertingtheconvertiblepreferredstockbecausetheeffectwouldbeantidilutive.Thenumberofcommonstockequivalentsattributabletoconvertiblepreferredstockwas901millionsharesforallperiodspresented.
(2) DilutivesecuritiesinourdilutedEPScalculationdonotincludeRSUsgrantedunderour2014LTIP.VestingoftheseRSUsisdependentuponthesatisfactionofbothaserviceconditionandacorporateliquidityeventsuchasaninitialpublicofferingofourcommonstock.AsofDecember31,2016,acorporateliquidityeventhadnotoccurredanduntilitoccurs,theholdersoftheseRSUshavenorightsinourundistributedearnings.Therefore,theyareexcludedfromtheeffectofdilutivesecurities.ThenumberofcommonstockequivalentsattributabletotheRSUswere16.5millionsharesand11.0millionsharesfortheyearsendedDecember31,2015and2016,respectively.
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NOTE17—UNAUDITEDPROFORMAINFORMATION
ThefollowingunauditedcalculationofthenumeratorsanddenominatorsofproformabasicanddilutedEPSgiveseffecttothefollowingasofthebeginningoftheperiod:
(1) our69.196592:1reversestocksplit;and
(2) Therecapitalizationofalloutstandingsharesofourconvertiblepreferredstockintoapproximately39.5millionsharesofcommonstock.
ThenumeratorsanddenominatorsoftheproformabasicanddilutedEPScomputationsforourcommonstockarecalculatedasfollows:
F-32
(Inmillions,exceptpershareamounts)
YearEndedDecember31,
2016 (unaudited) Numerator: NetlossattributabletocommonstockholdersusedforbasicEPScomputationasreported $ (370.1)Proformaadjustmenttoaddbackconvertiblepreferredstockaccretion 181.6ProformanetlossattributabletocommonstockholdersusedforproformabasicanddilutedEPScomputations $ (188.5)
Denominator: WeightedaveragesharesusedforbasicEPScomputationasreported 3,586.5Proformaadjustmenttoreflectreversestocksplit (3,534.7)Proformaadjustmenttoreflectrecapitalizationofpreferredstocktocommonstock 39.5NumberofsharesusedforproformabasicEPScomputation 91.3
Effectofdilutivesecurities: Dilutivesecurities —NumberofsharesusedforproformadilutedEPScomputation 91.3
ProformabasicanddilutedEPS $ (2.06)
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UNAUDITEDCONSOLIDATEDSTATEMENTSOFOPERATIONS
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
F-33
ThreeMonthsEnded
September30, NineMonthsEnded
September30, (Inmillions,exceptpershareamounts) 2016 2017 2016 2017 Revenue Revenue $ 123.8 $ 409.8 $ 377.1 $ 906.1Revenuefromrelatedparties 1.6 39.2 2.7 101.3Totalrevenue 125.4 449.0 379.8 1,007.4
Operatingexpenses Costsofrevenue(excludingdepreciationof$24.9,$19.4,$76.9and$56.7,respectively,includedindepreciationandamortizationbelow) 125.7 298.8 369.7 709.9
Selling,generalandadministrative 15.8 21.7 51.5 62.0Depreciationandamortization 28.3 22.1 87.5 65.2Impairmentsandothercharges 5.2 0.1 10.7 1.4(Gain)lossondisposalofassets,net — (0.8) 1.1 (1.6)Gainoninsurancerecoveries — — (15.1) (2.9)Totaloperatingexpenses 175.0 341.9 505.4 834.0
Operating(loss)income (49.6) 107.1 (125.6) 173.4Interestexpense,net (21.4) (22.1) (66.1) (64.8)Gainonextinguishmentofdebt 52.3 — 53.7 —Equityinnet(loss)incomeofjointventureaffiliate (0.7) (1.0) (2.6) 0.1(Loss)incomebeforeincometaxes (19.4) 84.0 (140.6) 108.7Incometaxexpense — 0.4 — 0.9Net(loss)income $ (19.4) $ 83.6 $ (140.6) $ 107.8Net(loss)incomeattributabletocommonstockholders $ (66.3) $ 25.1 $ (272.7) $ (56.8)Basicanddilutedearnings(loss)pershareattributabletocommonstockholders $ (0.02) $ 0.01 $ (0.08) $ (0.02)
Sharesusedincomputingbasicanddilutedearnings(loss)pershare 3,586.5 3,586.4 3,586.5 3,586.4Proformabasicanddilutedearnings(loss)pershareattributabletocommonstockholders $ 1.18
Sharesusedincomputingproformabasicanddilutedearnings(loss)pershare 91.3
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UNAUDITEDCONSOLIDATEDBALANCESHEETS
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
F-34
(Inmillions,exceptshareamounts) December31,
2016 September30,
2017
ProFormaSeptember30,
2017 ASSETS Currentassets Cash $ 160.3 $ 193.8 $ 193.8Accountsreceivable,net 76.5 238.4 238.4Accountsreceivablefromrelatedparties 0.1 22.2 22.2Inventories 24.8 42.2 42.2Prepaidexpensesandothercurrentassets 17.7 20.2 20.2Totalcurrentassets 279.4 516.8 516.8
Property,plant,andequipment,net 284.3 255.2 255.2Intangibleassets,net 29.5 29.5 29.5Investmentinjointventureaffiliate 21.6 22.6 22.6Otherassets 2.0 3.0 3.0Totalassets $ 616.8 $ 827.1 $ 827.1
LIABILITIESANDSTOCKHOLDERS'DEFICIT Currentliabilities Accountspayable $ 60.8 $ 137.5 $ 137.5Accruedexpensesandothercurrentliabilities 34.8 58.5 58.5Totalcurrentliabilities 95.6 196.0 196.0
Long-termdebt 1,188.7 1,191.6 1,191.6Otherliabilities 1.7 0.9 0.9Totalliabilities 1,286.0 1,388.5 1,388.5
Commitmentsandcontingencies(Note8) SeriesAconvertiblepreferredstock,$0.01parvalue,350,000sharesauthorized,issuedandoutstandingatDecember31,2016andSeptember30,2017,respectively;nosharesauthorized,issuedandoutstanding,proforma 349.8 349.8 —
Stockholders'deficit Commonstock,$0.01parvalue,5,000,000,000sharesauthorized,3,586,408,881sharesissuedandoutstandingatbothDecember31,2016andSeptember30,2017;320,000,000sharesauthorized,91,280,087sharesissuedandoutstanding,proforma 35.9 35.9 36.3
Additionalpaid-incapital 3,712.1 3,712.1 4,061.5Accumulateddeficit (4,767.0) (4,659.2) (4,659.2)Totalstockholders'deficit (1,019.0) (911.2) (561.4)Totalliabilitiesandstockholders'deficit $ 616.8 $ 827.1 $ 827.1
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FTSINTERNATIONAL,INC.
UNAUDITEDCONSOLIDATEDSTATEMENTSOFCASHFLOWS
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
F-35
NineMonthsEnded
September30, (Inmillions) 2016 2017 Cashflowsfromoperatingactivities Net(loss)income $ (140.6) $ 107.8Adjustmentstoreconcilenet(loss)incometonetcash(usedin)providedbyoperatingactivities: Depreciationandamortization 87.5 65.2Amortizationofdebtdiscountsandissuancecosts 2.8 2.9Impairmentofassets 7.0 —Loss(gain)ondisposalofassets,net 1.1 (1.6)Gainonextinguishmentofdebt (53.7) —Gainoninsurancerecoveries (15.1) (2.9)Othernon-cashitems 4.1 0.4
Changesinoperatingassetsandliabilities: Accountsreceivable 35.7 (161.2)Accountsreceivablefromrelatedparties 1.8 (22.2)Inventories 3.3 (18.2)Prepaidexpensesandotherassets 1.8 (5.0)Accountspayable (3.4) 72.1Accruedexpensesandotherliabilities (6.4) 23.0
Netcash(usedin)providedbyoperatingactivities (74.1) 60.3Cashflowsfrominvestingactivities Capitalexpenditures (6.1) (33.4)Proceedsfromdisposalofassets 26.3 2.0Proceedsfrominsurancerecoveries 19.0 4.2Netchangeinrestrictedcash 2.9 0.4Netcashprovidedby(usedin)investingactivities 42.1 (26.8)Cashflowsfromfinancingactivities Repaymentsoflong-termdebt (37.6) —Netcashusedinfinancingactivities (37.6) —Net(decrease)increaseincash (69.6) 33.5Cash,beginningofperiod 264.6 160.3Cash,endofperiod $ 195.0 $ 193.8
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FTSINTERNATIONAL,INC.
NOTESTOUNAUDITEDCONDENSEDCONSOLIDATEDFINANCIALSTATEMENTS
NOTE1—BASISOFPRESENTATION
Throughoutthenotestothesecondensedconsolidatedfinancialstatements,theterms"FTSI,""Company","we,""us,""our"or"ours"refertoFTSInternational,Inc.,togetherwithitsconsolidatedsubsidiaries.TheunauditedcondensedconsolidatedfinancialstatementshavebeenpreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica("GAAP")forinterimfinancialreporting.Accordingly,certaininformationanddisclosuresnormallyincludedinourannualconsolidatedfinancialstatementshavebeencondensedoromitted.TheseunauditedcondensedconsolidatedfinancialstatementsshouldbereadinconjunctionwithourauditedconsolidatedfinancialstatementsfortheyearendedDecember31,2016,includedelsewhereinthisprospectus.Inouropinion,thecondensedconsolidatedfinancialstatementsincludedhereincontainalladjustmentsofanormalrecurringnatureconsiderednecessaryforafairpresentationoftheinterimperiods.Theresultsofoperationsoftheinterimperiodsarenotnecessarilyindicativeoftheresultsofoperationstobeexpectedforthefullyear.Therewerenoitemsofothercomprehensiveincomeintheperiodspresented.WeevaluatedsubsequenteventsthroughOctober30,2017,whichisthedateatwhichthefinancialstatementswereavailabletobeissued,anddeterminedthattherewerenoadditionalitemstodisclose.
New Accounting Standards Updates
InMay2014,theFinancialAccountingStandardsBoard,orFASB,issuedAccountingStandardsUpdate,orASU,2014-09,RevenuefromContractswithCustomers.TheFASBhassubsequentlyissuedanumberofadditionalASUstoupdatethisguidance.Thisguidancewillsupersedesubstantiallyallexistingaccountingguidancerelatedtotheaccountingforrevenuetransactions.Thisguidanceestablishesacoreprinciplethatanentityshouldrecordrevenuewhenittransferscontrolofgoodsorservicestocustomersatanamountthatreflectstheconsiderationtowhichitexpectstobeentitledinexchangeforthosegoodsorservices.Weareintheprocessofdeterminingtheeffectsthatthenewstandardwillhaveonourconsolidatedfinancialstatements.Ourapproachincludesperformingareviewofkeycontractsandcomparinghistoricalaccountingpoliciesandpracticestothenewaccountingguidance.Ourservicescontractsareprimarilyshort-terminnature,andtherefore,basedonourinitialassessment,wedonotexpecttheadoptionofthisASUtohaveamaterialeffectonourresultsofoperations.WewilladoptthisstandardonJanuary1,2018,utilizingthemodifiedretrospectivemethod.
InFebruary2016,theFASBissuedASU2016-02,Leases.Thisstandardwasissuedtoincreasetransparencyandcomparabilityamongorganizationsbyrequiringthatmostleasesbeincludedonthebalancesheetandbyexpandingdisclosurerequirements.ThisstandardisscheduledtobeeffectiveforourfinancialstatementsbeginningonJanuary1,2019.Earlyadoptionispermitted.Wehavenotcompletedanevaluationoftheeffectthatthisstandardwillhaveonourfinancialstatements.
InAugust2016,theFASBissuedASU2016-15,ClassificationofCertainCashReceiptsandCashPayments.Thisstandardwasissuedtoreducethediversityinpracticeinhowcertaincashreceiptsandcashpaymentsarepresentedandclassifiedinthestatementofcashflows.ThisstandardisscheduledtobeeffectiveforourfinancialstatementsbeginningonJanuary1,2018.Earlyadoptionispermitted.Wedonotexpectthisstandardtohaveasignificanteffectonourfinancialstatements.
InNovember2016,theFASBissuedASU2016-18,RestrictedCash.Thisstandardwasissuedtochangethepresentationofamountsgenerallydescribedasrestrictedcashandrestrictedcashequivalentstobeincludedwithcashandcashequivalentswhenreconcilingthebeginning-of-periodandend-of-periodtotalamountsshownonthestatementofcashflows.Thisstandardisscheduledtobe
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FTSINTERNATIONAL,INC.
NOTESTOUNAUDITEDCONDENSEDCONSOLIDATEDFINANCIALSTATEMENTS(Continued)
NOTE1—BASISOFPRESENTATION(Continued)
effectiveforourfinancialstatementsbeginningonJanuary1,2018.Restrictedcashisclassifiedasprepaidexpensesandothercurrentassetsonourconsolidatedbalancesheetsandtotaled$12.0millionatDecember31,2015,$9.1millionatDecember31,2016,and$8.7millionatSeptember30,2017.
NOTE2—CONCENTRATIONSOFRISK
OurbusinessactivitiesareconcentratedinthewellcompletionservicessegmentoftheoilfieldservicesindustryintheUnitedStates.Themarketfortheseservicesiscyclical,andwedependonthewillingnessofourcustomerstomakeoperatingandcapitalexpenditurestoexplorefor,develop,andproduceoilandnaturalgasintheUnitedStates.Thewillingnessofourcustomerstoundertaketheseactivitiesdependslargelyuponprevailingindustryconditionsthatarepredominantlyinfluencedbycurrentandexpectedpricesforoilandnaturalgas.
Lowcommoditypricescausedourcustomerstosignificantlyreducetheirhydraulicfracturingactivitiesin2016,whichcontributedtoalowerpricingenvironmentforourservicesduringthisperiod.Duringthefirstninemonthsof2017,averagecommoditypricesimprovedfrom2016levels,whichledtoincreasedcustomeractivitylevels,increasedpricingforourservicesandincreasedutilizationofourequipment.However,afuturereductionincommoditypricescouldnegativelyaffectouroperatingresultsinfutureperiods.
Ourcustomerbaseisconcentrated.Ourbusiness,financialconditionandresultsofoperationscouldbemateriallyadverselyaffectedifoneormoreofoursignificantcustomersceasestoengageusforourservicesonfavorableterms,oratall,orfailstopay,ordelaysinpaying,ussignificantamountsofouroutstandingreceivables.
NOTE3—DEBT
Thefollowingtablesummarizesourlong-termdebt:
In2016,werepaid$49.0millionofaggregateprincipalamountofTermLoan.Werecognizedagainondebtextinguishmentof$28.3million.In2016,werepurchased$43.7millionofaggregateprincipalamountof2022SeniorNotes.Werecognizedagainondebtextinguishmentof$25.4million.Estimatedfairvaluesforourtermloanandseniornotesweredeterminedusingrecenttradingactivityand/orbid-askspreadsandareclassifiedasLevel2intheFASB'sfairvaluehierarchy.
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(Inmillions) December31,
2016 September30,
2017 SeniorfloatingratenotesdueJune2020 $ 350.0 $ 350.0TermloandueApril2021 431.0 431.0SeniornotesdueMay2022 426.3 426.3Totalprincipalamount 1,207.3 1,207.3Lessunamortizeddiscountsanddebtissuancecosts (18.6) (15.7)Totallong-termdebt $ 1,188.7 $ 1,191.6Estimatedfairvalueoflong-termdebt $ 1,060.7 $ 1,152.4
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FTSINTERNATIONAL,INC.
NOTESTOUNAUDITEDCONDENSEDCONSOLIDATEDFINANCIALSTATEMENTS(Continued)
NOTE4—IMPAIRMENTSANDOTHERCHARGES
Thefollowingtablesummarizesourimpairmentsandothercharges:
Impairmentsandotherchargesincludesupplycommitmentchargesrelatedtocontractualinventorypurchasecommitmentstocertainproppantsuppliers.Duringthesecondquarterof2016and2017,werecordedchargesunderthesesupplyarrangementsof$1.5millionand$1.0million,respectively.Thesechargeswereattributabletoourdecreasedvolumeofpurchasesfromthesesuppliersduetoourloweractivitylevelsinbothperiodsandcertaincustomersprocuringtheirownproppants.
Werecordedassetimpairmentsof$7.0millioninthefirstninemonthsof2016relatedtocertainpropertythatwenolongeruseandhadidentifiedtosell.ThefairvalueoftheseassetswasbasedonpendingsalepricesandisclassifiedasLevel3intheFASB'sfairvaluehierarchy.
During2015and2016wevacatedcertainleasedfacilitiestoconsolidateouroperations.Duringthefirstninemonthsof2016and2017,werecognizedexpenseof$1.4millionand$0.4million,respectively,inconnectionwiththeseactions.
Weincurredemployeeseverancecostsof$0.8millioninthefirstquarterof2016.Thesecostswereincurredinconnectionwithourcorporateandoperatingrestructuringinitiatives.AsofDecember31,2016,wehadpaidallseverancepaymentsowedtoformeremployees.
NOTE5—ASSETDISPOSALS
WesoldsubstantiallyallofoursandtransportationequipmentandrelatedinventoryinFebruary2016.Wereceived$8.0millionofproceedsandrecognizeda$0.3milliongainonthissale.Inthefirstninemonthsof2016and2017,wesoldanumberofothersurpluspiecesofequipment.Inthefirstninemonthsof2016,wereceived$18.3millionofproceedsandrecognizeda$1.4millionnetlossonthesaleoftheseassets.Inthefirstninemonthsof2017,wereceived$2.0millionofproceedsandrecognizeda$1.6millionnetgainonthesaleoftheseassets.
NOTE6—GAINONINSURANCERECOVERIES
InJanuary2016,afiredestroyedsubstantiallyalloftheequipmentinoneofourfleets.Theseassetswereinsuredatvaluesgreaterthantheircarryingvalues.Inthefirstninemonthsof2016,wereceived$19.0millionofinsurancerecoveryproceedsfortheseassets,whichexceededtheircarryingvaluesby$15.1million.
F-38
ThreeMonthsEnded
September30,
NineMonthsEnded
September30, (Inmillions) 2016 2017 2016 2017 Impairmentofassets $ 4.4 $ — $ 7.0 $ —Supplycommitmentcharges — — 1.5 1.0Leaseabandonmentcharges 0.8 0.1 1.4 0.4Employeeseverancecosts — — 0.8 —Totalimpairmentsandothercharges $ 5.2 $ 0.1 $ 10.7 $ 1.4
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FTSINTERNATIONAL,INC.
NOTESTOUNAUDITEDCONDENSEDCONSOLIDATEDFINANCIALSTATEMENTS(Continued)
NOTE6—GAINONINSURANCERECOVERIES(Continued)
InJanuary2017,afiredestroyedcertainequipmentinoneofourfleets.Theseassetswereinsuredatvaluesgreaterthantheircarryingvalues.Wereceived$4.2millionofinsurancerecoveryproceedsfortheseassets,whichexceededtheircarryingvaluesby$2.9million.
NOTE7—INCOMETAXES
Incometaxexpensewas$0.4millioninthethirdquarterof2017and$0.9millionintheninemonthsendedSeptember30,2017.Theseamountsconsistedofstatemargintaxesaccountedforasincometaxes.In2012,werecordedavaluationallowancetoreduceournetdeferredtaxassetstozero.Wecontinuetoprovideavaluationallowanceagainstalldeferredtaxassetsinexcessofourdeferredtaxliabilities.Asaresult,wedidnotrecordanyU.S.federalorstateincometaxexpenseorbenefitrelatedtoourincomeorlossesforthefirstninemonthsendedSeptember30,2016and2017.PleaseseeNote13—"IncomeTaxes"innotestoconsolidatedfinancialstatementsincludedinourconsolidatedfinancialstatementsfortheyearendedDecember31,2016,includedelsewhereinthisprospectusformoreinformationregardingourincometaxesandvaluationallowance.DeferredtaxassetsrelatedtoourU.S.federalandstateoperatinglossesarestillavailabletoustooffsetfuturetaxableincome.
NOTE8—COMMITMENTSANDCONTINGENCIES
Litigation
Intheordinarycourseofbusiness,wearesubjecttovariouslegalproceedingsandclaims,someofwhichmaynotbecoveredbyinsurance.Manyoftheselegalproceedingsandclaimsareinearlystages,andmanyofthemseekanindeterminateamountofdamages.Weestimateandprovideforpotentiallossesthatmayariseoutoflegalproceedingsandclaimstotheextentthatsuchlossesareprobableandcanbereasonablyestimated.Significantjudgmentisrequiredinmakingtheseestimatesandourfinalliabilitiesmayultimatelybemateriallydifferentfromtheseestimates.Whenpreparingourestimates,weconsider,amongotherfactors,theprogressofeachlegalproceedingandclaim,ourexperienceandtheexperienceofothersinsimilarlegalproceedingsandclaims,andtheopinionsandviewsoflegalcounsel.Webelievethatcostsassociatedwithourlegalmatterswillnothaveamaterialadverseeffectonourconsolidatedfinancialstatements.
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FTSINTERNATIONAL,INC.
NOTESTOUNAUDITEDCONDENSEDCONSOLIDATEDFINANCIALSTATEMENTS(Continued)
NOTE9—EARNINGS(LOSS)PERSHARE
Thenumeratorsanddenominatorsofthebasicanddilutedearnings(loss)pershare("EPS")computationsforourcommonstockarecalculatedasfollows:
NOTE10—PROFORMAINFORMATION
Pro Forma Balance Sheet Information
WehavepreparedanunauditedbalancesheetasofSeptember30,2017,togiveeffecttothefollowingtransactionsthatwilloccurinconnectionwithourinitialpublicoffering:
• A69.196592to1reversestocksplit;and
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ThreeMonthsEnded
September30, NineMonthsEnded
September30, (Inmillions,exceptpershareamounts) 2016 2017 2016 2017 Numerator: Net(loss)income $ (19.4) $ 83.6 $ (140.6) $ 107.8Convertiblepreferredstockaccretion (46.9) (58.5) (132.1) (164.6)Net(loss)incomeattributabletocommonstockholdersusedforbasicEPScomputation (66.3) 25.1 (272.7) (56.8)
Addbacktheeffectofdilutivesecurities: Convertiblepreferredstockaccretion(1) — — — —Net(loss)incomeattributabletocommonstockholdersusedfordilutedEPScomputation $ (66.3) $ 25.1 $ (272.7) $ (56.8)
Denominator: WeightedaveragesharesusedforbasicEPScomputation 3,586.5 3,586.4 3,586.5 3,586.4
Effectofdilutivesecurities: Convertiblepreferredstock(1) — — — —Restrictedstockunits(2) — — — —Dilutivepotentialcommonshares — — — —NumberofsharesusedfordilutedEPScomputation 3,586.5 3,586.4 3,586.5 3,586.4
BasicanddilutedEPS $ (0.02) $ 0.01 $ (0.08) $ (0.02)
(1) DilutivesecuritiesinourdilutedEPScalculationdonotincludetheeffectsofconvertingtheconvertiblepreferredstockbecausetheeffectwouldbeantidilutive.Thenumberofcommonstockequivalentsattributabletoconvertiblepreferredstockwas901millionsharesforallperiodspresented.
(2) DilutivesecuritiesinourdilutedEPScalculationdonotincluderestrictedstockunits,orRSUs,grantedunderour2014LTIP.VestingoftheseRSUsisdependentuponthesatisfactionofbothaserviceconditionandacorporateliquidityeventsuchasaninitialpublicofferingofourcommonstock.AsofSeptember30,2017,acorporateliquidityeventhadnotoccurredanduntilitoccurs,theholdersoftheseRSUshavenorightsinourundistributedearnings.Therefore,theyareexcludedfromtheeffectofdilutivesecurities.ThenumberofcommonstockequivalentsattributabletotheRSUswere11.8millionsharesand8.3millionsharesatSeptember30,2016and2017,respectively.
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FTSINTERNATIONAL,INC.
NOTESTOUNAUDITEDCONDENSEDCONSOLIDATEDFINANCIALSTATEMENTS(Continued)
NOTE10—PROFORMAINFORMATION(Continued)
• Therecapitalizationofalloutstandingsharesofourconvertiblepreferredstockintoapproximately39.5millionsharesofcommonstock.
Pro Forma Earnings (Loss) Per Share Information
ThefollowingunauditedcalculationofthenumeratorsanddenominatorsofproformabasicanddilutedEPSgiveseffecttothefollowingtransactionsthatwilloccurinconnectionwithourinitialpublicofferingasofthebeginningoftheperiod:
• A69.196592to1reversestocksplit;and
• Therecapitalizationofalloutstandingsharesofourconvertiblepreferredstockintoapproximately39.5millionsharesofcommonstock.
ThenumeratorsanddenominatorsoftheproformabasicanddilutedEPScomputationsforourcommonstockarecalculatedasfollows:
NOTE11—SUBSEQUENTEVENTS
Inconnectionwiththereissuanceoftheunauditedinterimfinancialstatements,theCompanyhasre-evaluatedsubsequenteventsthroughFebruary1,2018.TheCompanyhasconcludedthatnosubsequenteventhasoccurredthatrequiresdisclosure,exceptasnotedbelow:
• WehavesubstantiallycompletedtheprocessofdeterminingtheeffectsthatASU2014-09,RevenuefromContractswithCustomers,willhaveonourconsolidatedfinancialstatements.Based
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(Inmillions,exceptpershareamounts)
NineMonthsEnded
September30,2017
Numerator: NetlossattributabletocommonstockholdersusedforbasicEPScomputationasreported $ (56.8)Proformaadjustmenttoaddbackconvertiblepreferredstockaccretion 164.6ProformanetincomeattributabletocommonstockholdersusedforproformabasicanddilutedEPScomputations $ 107.8
Denominator: WeightedaveragesharesusedforbasicEPScomputationasreported 3,586.4Proformaadjustmenttoreflectreversestocksplit (3,534.6)Proformaadjustmenttoreflectrecapitalizationofpreferredstocktocommonstock 39.5NumberofsharesusedforproformabasicEPScomputation 91.3
Effectofdilutivesecurities: Dilutivesecurities —NumberofsharesusedforproformadilutedEPScomputation 91.3
ProformabasicanddilutedEPS $ 1.18
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FTSINTERNATIONAL,INC.
NOTESTOUNAUDITEDCONDENSEDCONSOLIDATEDFINANCIALSTATEMENTS(Continued)
NOTE11—SUBSEQUENTEVENTS(Continued)
onourassessment,weexpecttheadoptionofthisASUtohaveanimmaterialeffectonourresultsofoperations.
• InDecember2017theTaxCutsandJobsAct,ornewtaxlaw,wasenacted.Weareintheprocessofdeterminingtheeffectsthatthenewtaxlawwillhaveonourconsolidatedfinancialstatements.Thereductionofthefederalcorporatetaxratefrom35%to21%willmateriallyreducethecarryingvalueofournetdeferredtaxassets;althoughwehavenotyetcompletedthequantificationoftheamountofthechange.AnychangetothecarryingvalueofournetdeferredtaxassetsisexpectedtobeoffsetbyacorrespondingchangeinourvaluationallowanceatDecember31,2017.
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Throughandincluding,2018(the25thdayafterthedateofthisprospectus),alldealersthateffecttransactionsinourcommonstock,whetherornotparticipatinginthisoffering,mayberequiredtodeliveraprospectus.Thisisinadditiontothedealer'sobligationtodeliveraprospectuswhenactingasanunderwriterandwithrespecttoanunsoldallotmentorsubscription.
19,500,000Shares
FTSInternational,Inc.CommonStock
PRELIMINARYPROSPECTUS
,2018
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PARTII
INFORMATIONNOTREQUIREDINPROSPECTUS
ITEM13.OtherExpensesofIssuanceandDistribution
Thefollowingtablesetsforthanitemizedstatementoftheamountsofallexpenses(excludingunderwritingdiscountsandcommissions)payablebyusinconnectionwiththeregistrationofthecommonstockofferedhereby.WiththeexceptionofthefilingandlistingfeespayabletotheSEC,theFinancialIndustryRegulatoryAuthority,Inc.,orFINRA,andstockexchangelistingfee,theamountssetforthbelowareestimates.
ITEM14.IndemnificationofDirectorsandOfficers
WeareincorporatedunderthelawsoftheStateofDelaware.Section145oftheDGCLprovidesthataDelawarecorporationmayindemnifyanypersonswhoare,orarethreatenedtobemade,partiestoanythreatened,pendingorcompletedaction,suitorproceeding,whethercivil,criminal,administrativeorinvestigative(otherthananactionbyorintherightofsuchcorporation),byreasonofthefactthatsuchpersonwasanofficer,director,employeeoragentofsuchcorporation,orisorwasservingattherequestofsuchcorporationasanofficer,director,employeeoragentofanothercorporationorenterprise.Theindemnitymayincludeexpenses(includingattorneys'fees),judgments,finesandamountspaidinsettlementactuallyandreasonablyincurredbysuchpersoninconnectionwithsuchaction,suitorproceeding,providedthatsuchpersonactedingoodfaithandinamannerheorshereasonablybelievedtobeinornotopposedtothecorporation'sbestinterestsand,withrespecttoanycriminalactionorproceeding,hadnoreasonablecausetobelievethathisorherconductwasillegal.ADelawarecorporationmayindemnifyanypersonswhoare,orarethreatenedtobemade,apartytoanythreatened,pendingorcompletedactionorsuitbyorintherightofthecorporationbyreasonofthefactthatsuchpersonwasadirector,officer,employee,oragentofsuchcorporation,orisorwasservingattherequestofsuchcorporationasadirector,officer,employee,oragentofanothercorporationorenterprise.Theindemnitymayincludeexpenses(includingattorneys'fees)actuallyandreasonablyincurredbysuchpersoninconnectionwiththedefenseorsettlementofsuchactionorsuitprovidedsuchpersonactedingoodfaithandinamannerheorshereasonablybelievedtobeinornotopposedtothecorporation'sbestinterestsexceptthatnoindemnificationispermittedwithoutjudicialapprovaliftheofficerordirectorisadjudgedtobeliabletothecorporation.Whereanofficerordirectorissuccessfulonthemeritsorotherwiseinthedefenseofanyactionreferredtoabove,thecorporationmustindemnifyhimorheragainsttheexpensesthatsuchofficerordirectorhasactuallyandreasonablyincurred.Ouramendedandrestatedcertificateofincorporation,whichwillbecomeeffectiveuponeffectivenessofthisregistrationstatement,willprovidefortheindemnificationofourdirectorsandofficerstothefullestextentpermittedundertheDGCL.
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SECregistrationfee $ 50,255FINRAfilingfee 61,048NYSEListingfee 295,000Accountingfeesandexpenses 450,000Legalfeesandexpenses 1,750,000Printingandengravingexpenses 400,000Transferagentandregistrarfees 10,000Miscellaneous 483,697Total 3,500,000
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Section102(b)(7)oftheDGCLpermitsacorporationtoprovideinitscertificateofincorporationthatadirectorofthecorporationshallnotbepersonallyliabletothecorporationoritsstockholdersformonetarydamagesforbreachoffiduciarydutiesasadirector,exceptforliabilityforany:
• transactionfromwhichthedirectorderivesanimproperpersonalbenefit;
• actoromissionnotingoodfaithorthatinvolvesintentionalmisconductoraknowingviolationoflaw;
• unlawfulpaymentofdividends,unlawfulstockpurchaseorredemptionofshares;or
• breachofadirector'sdutyofloyaltytothecorporationoritsstockholders.
Ouramendedandrestatedcertificateofincorporationwillincludesuchaprovision.Expensesincurredbyanyofficerordirectorindefendinganysuchaction,suitorproceedinginadvanceofitsfinaldispositionshallbepaidbyus,providedsuchdirectormustrepayamountsinexcessoftheindemnificationsuchdirectorisentitledto.
Section174oftheDGCLprovides,amongotherthings,thatadirectorwhowillfullyornegligentlyapprovesofanunlawfulpaymentofdividendsoranunlawfulstockpurchaseorredemptionmaybeheldliableforsuchactions.Adirectorwhowaseitherabsentwhentheunlawfulactionswereapproved,ordissentedatthetime,mayavoidliabilitybycausinghisorherdissenttosuchactionstobeenteredinthebookscontainingminutesofthemeetingsoftheboardofdirectorsatthetimesuchactionoccurredorimmediatelyaftersuchabsentdirectorreceivesnoticeoftheunlawfulacts.
Weintendtoenterintoindemnificationagreementswitheachofourcurrentdirectorsandexecutiveofficers.TheseagreementsrequireustoindemnifytheseindividualstothefullestextentpermittedunderDelawarelawagainstliabilitiesthatmayarisebyreasonoftheirservicetous,andtoadvanceexpensesincurredasaresultofanyproceedingagainstthemastowhichtheycouldbeindemnified.Wealsointendtoenterintoindemnificationagreementswithourfuturedirectorsandexecutiveofficers.
Atpresent,thereisnopendinglitigationorproceedinginvolvinganyofourdirectorsorofficersastowhichindemnificationisrequiredorpermitted,andwearenotawareofanythreatenedlitigationorproceedingthatmayresultinaclaimforindemnification.
Wehaveaninsurancepolicycoveringourofficersanddirectorswithrespecttocertainliabilities,includingliabilitiesarisingundertheSecuritiesActorotherwise.
Weplantoenterintoanunderwritingagreementthatprovidesthattheunderwritersareobligated,undersomecircumstances,toindemnifyourdirectors,officersandcontrollingpersonsagainstspecifiedliabilities,includingliabilitiesundertheSecuritiesAct.
InsofarasindemnificationforliabilitiesarisingundertheSecuritiesActmaybepermittedtodirectors,officersorpersonscontrollingourcompanypursuanttotheforegoingprovisions,wehavebeeninformedthat,intheopinionoftheSEC,suchindemnificationisagainstpublicpolicyasexpressedintheSecuritiesActandisthereforeunenforceable.
ITEM15.RecentSalesofUnregisteredSecurities
Exceptassetforthbelow,inthethreeyearsprecedingthefilingofthisregistrationstatement,wehavenotissuedanysecuritiesthatwerenotregisteredundertheSecuritiesAct.
OnJune1,2015,wecompletedaprivateofferingof$350.0millioninprincipalamountofour2020Notes.Theinitialpurchaserofthe2020NoteswasWellsFargoSecurities,LLC.Pursuanttoapurchaseagreementbetweenusandtheinitialpurchaser,wesoldthe2020Notestotheinitialpurchaseratadiscountof1.0%,or$346.5million,andtheinitialpurchaserresoldthe2020Notesat
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partoqualifiedinstitutionalbuyersunderRule144AundertheSecuritiesActandtocertainpersonsinoffshoretransactionsinrelianceonRegulationSundertheSecuritiesAct.
OnAugust28,2015,weissued94,339sharesofcommonstocktoTomBates,aformerindependentdirectorofourCompany,forhisservicesasanindependentdirector.
Theissuancesofthe2022Notes,the2020NotesandtheissuancetoMr.BateswereexemptfromregistrationunderSection4(a)(2)oftheSecuritiesAct.TheissuanceoftherestrictedstockawardedtoMessrs.Randle,KrebsandAsadiwereexemptfromregistrationunderRule701undertheSecuritiesActastransactionspursuanttocompensatorybenefitplansandcontractsrelatingtocompensation.
Sincetheadoptionofour2014LTIP,wehavegranted46,380,671stock-settledrestrictedstockunitsunderthe2014LTIP.Duringthisperiod,norestrictedstockunitshavevested.AsofDecember31,2017,10,990,573stock-settledrestrictedstockunitsremainedoutstanding.Therestrictedstockunitswillvestimmediatelybeforetheeffectivenessofthisregistrationstatementandwillbesettledincash.
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ITEM16.ExhibitsandFinancialStatementSchedules
(a) Exhibits
Theexhibitsandfinancialstatementschedulesfiledaspartofthisregistrationstatementareasfollows:
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ExhibitNumber Description 1.1* FormofUnderwritingAgreement 3.1*** FormofAmendedandRestatedCertificateofIncorporationoftheCompany,tobeineffectpriortocompletionof
thisoffering 3.2*** FormofAmendedandRestatedBylawsoftheCompany,tobeineffectpriortocompletionofthisoffering 4.1*** Indenture,datedasofApril16,2014,amongFTSInternational,Inc.,asissuer,theguarantorsnamedthereinand
U.S.BankNationalAssociation,ascollateralagentandtrustee 4.2*** Indenture,datedasofJune1,2015,amongFTSInternational,Inc.,asissuer,theguarantorsnamedthereinand
U.S.BankNationalAssociation,ascollateralagentandtrustee 4.3*** FormofRegistrationRightsAgreement 4.4*** FormofInvestors'RightsAgreementbyandamongFTSInternational,Inc.,MajuInvestments(Mauritius)PteLtd
andCHKEnergyHoldings,Inc. 4.5*** FormofInvestors'RightsAgreementbyandamongFTSInternational,Inc.,SenjaCapitalLtdandHamptonAsset
HoldingLtd. 5.1* OpinionofJonesDayastothelegalityofthesecuritiesbeingregistered 10.1*** TermLoanAgreement,datedasofApril16,2014,amongFTSInternational,Inc.,WellsFargoBank,National
Association,asadministrativeagent,andotherlenderspartythereto 10.2***† EmploymentAgreement,datedasofDecember6,2014,betweenFTSInternational,Inc.andPerryHarris 10.3***† SeveranceAgreement,datedasofMay3,2016,betweenFTSInternational,Inc.andMichaelJ.Doss 10.4***† SeveranceAgreement,datedasofMay3,2016,betweenFTSInternational,Inc.andBuddyPetersen 10.5***† SeveranceAgreement,datedasofMay3,2016,betweenFTSInternational,Inc.andLanceTurner 10.6***† LetterAgreement,datedasofAugust5,2015,betweenFTSInternational,Inc.andLanceTurner 10.7***† LetterAgreement,datedasofMarch29,2017,betweenFTSInternational,Inc.andKarenD.Thornton 10.8***† LetterAgreement,datedasofMarch29,2017,betweenFTSInternational,Inc.andJenniferL.Keefe 10.9***† FTSInternational,Inc.2014Long-TermIncentivePlan
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ExhibitNumber Description 10.10***† FormofRestrictedStockUnitAgreement(StockSettled)underthe2014Long-TermIncentivePlan 10.11***† Descriptionof2016Short-TermIncentivePlan 10.12***† Descriptionof2017Short-TermIncentivePlan 10.13***† FormofIndemnificationAgreementbetweenFTSInternational,Inc.andeachofitsdirectorsandexecutive
officers 10.14*** MasterServiceAgreement,datedasofJuly9,2012,byandbetweenChesapeakeOperating,Inc.andFTS
InternationalServices,LLC 10.15*** MasterCommercialAgreement,datedasofDecember24,2016,byandbetweenChesapeakeOperating,LLCand
FTSInternationalServices,LLC 10.16*** SecurityAgreement,datedasofApril16,2014,byandamongFTSInternational,Inc.,FTSInternationalServices,
LLC,FTSInternationalManufacturing,LLCandU.S.BankNationalAssociation,ascollateralagent 10.17*** PariPassuIntercreditorAgreement,datedasofApril16,2014,amongFTSInternational,Inc.,FTSInternational
Services,LLC,FTSInternationalManufacturing,LLCandU.S.BankNationalAssociation,ascollateralagentandWellsFargoBank,NationalAssociation,initscapacityasadministrativeagentfortheTermSecuredParties(asdefinedtherein)
10.18*** JuniorLienIntercreditorAgreement,datedasofApril16,2014,amongFTSInternational,Inc.,FTSInternational
Services,LLC,FTSInternationalManufacturing,LLC,WellsFargoBank,NationalAssociationinitscapacityasadministrativeagentundertheTermLoanAgreement,USBankNationalAssociation,ascollateralagentandWellsFargoBank,NationalAssociation,initscapacityasadministrativeagentfortheABLSecuredParties(asdefinedtherein)
10.19*** JuniorLienIntercreditorAgreementJoinder,datedasofJune1,2015,amongFTSInternational,Inc.,FTS
InternationalServices,LLC,FTSInternationalManufacturing,LLC,WellsFargoBank,NationalAssociationinitscapacityasadministrativeagentundertheTermLoanAgreement,USBankNationalAssociation,ascollateralagentandWellsFargoBank,NationalAssociation,initscapacityasadministrativeagentfortheABLSecuredParties(asdefinedintheJuniorLienIntercreditorAgreement)
10.20*** GuarantyandSecurityAgreement,datedasofApril16,2014,fromFTSInternational,Inc.,FTSInternational
Services,LLCandFTSInternationalManufacturing,LLCtoWellsFargoBank,NationalAssociation 10.21*** AmendedandRestatedTrademarkSecurityAgreement,datedasofJune22,2015,fromFTSInternational
Services,LLCtoWellsFargoBank,NationalAssociationpursuanttotheTermLoanAgreementdatedApril16,2014
10.22*** AmendedandRestatedTrademarkSecurityAgreement,datedasofJune22,2015,fromFTSInternational
Services,LLCtoU.S.BankNationalAssociationpursuanttotheIndenturedatedApril16,2014 10.23*** AmendedandRestatedTrademarkSecurityAgreement,datedasofJune22,2015,fromFTSInternational
Services,LLCtoU.S.BankNationalAssociationpursuanttotheIndenturedatedJune1,2015
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(b) FinancialStatementSchedule
SeetheindextothefinancialstatementsincludedonpageF-1foralistofthefinancialstatementsincludedinthisregistrationstatement.
ITEM17.Undertakings
Theundersignedregistrantherebyundertakestoprovidetotheunderwritersattheclosingspecifiedintheunderwritingagreementcertificatesinsuchdenominationsandregisteredinsuchnamesasrequiredbytheunderwriterstopermitpromptdeliverytoeachpurchaser.
InsofarasindemnificationforliabilitiesarisingundertheSecuritiesActmaybepermittedtodirectors,officers,andcontrollingpersonsoftheregistrantpursuanttotheforegoingprovisions,orotherwise,theregistranthasbeenadvisedthatintheopinionoftheSECsuchindemnificationisagainstpublicpolicyasexpressedintheSecuritiesActandis,therefore,unenforceable.Intheeventthataclaimforindemnificationagainstsuchliabilities(otherthanthepaymentbytheregistrantofexpensesincurredorpaidbyadirector,officer,orcontrollingpersonoftheregistrantinthesuccessfuldefenseofanyaction,suit,orproceeding)isassertedbysuchdirector,officerorcontrollingpersonin
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ExhibitNumber Description 10.24***† FTSInternational,Inc.2017EquityandIncentiveCompensationPlan 10.25***† FormofRestrictedStockUnitAgreementunderthe2018EquityandIncentiveCompensationPlan 10.26***† FirstAmendmenttoSeveranceAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andMichael
J.Doss 10.27***† FirstAmendmenttoSeveranceAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andBuddy
Petersen 10.28***† FirstAmendmenttoSeveranceAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andLance
Turner 10.29***† LetterAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andKarenD.Thornton 10.30***† LetterAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andJenniferL.Keefe 16.1*** LetterfromErnst&YoungLLP,datedFebruary10,2017,regardingchangesinaccountant 21.1*** ListofSubsidiaries 23.1* ConsentofGrantThorntonLLP 23.2* ConsentofJonesDay(includedaspartofExhibit5.1hereto) 24.1*** PowerofAttorney 99.1*** ConsentofDirectorNominee(CarolJ.Johnson)
* Filedherewith
** Tobefiledbyamendment
*** Previouslyfiled
† Managementcontract,compensatoryplanorarrangement
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connectionwiththesecuritiesbeingregistered,theregistrantwill,unlessintheopinionofitscounselthematterhasbeensettledbycontrollingprecedent,submittoacourtofappropriatejurisdictionthequestionwhethersuchindemnificationbyitisagainstpublicpolicyasexpressedintheSecuritiesActandwillbegovernedbythefinaladjudicationofsuchissue.
Theundersignedregistrantherebyundertakesthat:
(1)ForpurposesofdetermininganyliabilityundertheSecuritiesAct,theinformationomittedfromtheformofprospectusfiledaspartofthisRegistrationStatementinrelianceuponRule430AandcontainedinaformofprospectusfiledbytheregistrantpursuanttoRule424(b)(1)or(4)or497(h)undertheSecuritiesActshallbedeemedtobepartofthisregistrationstatementasofthetimeitwasdeclaredeffective.
(2)ForthepurposeofdetermininganyliabilityundertheSecuritiesAct,eachpost-effectiveamendmentthatcontainsaformofprospectusshallbedeemedtobeanewregistrationstatementrelatingtothesecuritiesofferedtherein,andtheofferingofsuchsecuritiesatthattimeshallbedeemedtobetheinitialbonafideofferingthereof.
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SIGNATURES
PursuanttotherequirementsoftheSecuritiesActof1933,theregistranthasdulycausedthisRegistrationStatementonFormS-1tobesignedonitsbehalfbytheundersigned,thereuntodulyauthorizedintheCityofFortWorth,StateofTexas,onFebruary1,2018.
PursuanttotherequirementsoftheSecuritiesActof1933,thisRegistrationStatementonFormS-1hasbeensignedbythefollowingpersonsinthecapacitiesindicatedonFebruary1,2018.Thisdocumentmaybeexecutedbythesignatoriesheretoonanynumberofcounterparts,allofwhichconstituteoneandthesameinstrument.
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FTSINTERNATIONAL,INC.By:
/s/MICHAELJ.DOSS
Name: MichaelJ.Doss Title: ChiefExecutiveOfficer
Signature Title
/s/MICHAELJ.DOSS
MichaelJ.Doss
ChiefExecutiveOfficer(principalexecutiveofficer)
*
LanceTurner
ChiefFinancialOfficerandTreasurer(principalfinancialofficerandaccountingofficer)
*
GohYongSiang
Chairman
*
DomenicJ.Dell'Osso,Jr.
Director
*
BryanJ.Lemmerman
Director
*
OngTiongSin
Director
*
BoonSim
Director
*By: /s/MICHAELJ.DOSS
MichaelJ.Doss(MichaelJ.Doss,asAttorney-in-Fact)
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INDEXTOEXHIBITS
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ExhibitNumber Description 1.1* FormofUnderwritingAgreement 3.1*** FormofAmendedandRestatedCertificateofIncorporationoftheCompany,tobeineffectpriortocompletionof
thisoffering 3.2*** FormofAmendedandRestatedBylawsoftheCompany,tobeineffectpriortocompletionofthisoffering 4.1*** Indenture,datedasofApril16,2014,amongFTSInternational,Inc.,asissuer,theguarantorsnamedthereinand
U.S.BankNationalAssociation,ascollateralagentandtrustee 4.2*** Indenture,datedasofJune1,2015,amongFTSInternational,Inc.,asissuer,theguarantorsnamedthereinand
U.S.BankNationalAssociation,ascollateralagentandtrustee 4.3*** FormofRegistrationRightsAgreement 4.4*** FormofInvestors'RightsAgreementbyandamongFTSInternational,Inc.,MajuInvestments(Mauritius)PteLtd
andCHKEnergyHoldings,Inc. 4.5*** FormofInvestors'RightsAgreementbyandamongFTSInternational,Inc.,SenjaCapitalLtdandHamptonAsset
HoldingLtd. 5.1* OpinionofJonesDayastothelegalityofthesecuritiesbeingregistered 10.1*** TermLoanAgreement,datedasofApril16,2014,amongFTSInternational,Inc.,WellsFargoBank,National
Association,asadministrativeagent,andotherlenderspartythereto 10.2***† EmploymentAgreement,datedasofDecember6,2014,betweenFTSInternational,Inc.andPerryHarris 10.3***† SeveranceAgreement,datedasofMay3,2016,betweenFTSInternational,Inc.andMichaelJ.Doss 10.4***† SeveranceAgreement,datedasofMay3,2016,betweenFTSInternational,Inc.andBuddyPetersen 10.5***† SeveranceAgreement,datedasofMay3,2016,betweenFTSInternational,Inc.andLanceTurner 10.6***† LetterAgreement,datedasofAugust5,2015,betweenFTSInternational,Inc.andLanceTurner 10.7***† LetterAgreement,datedasofMarch29,2017,betweenFTSInternational,Inc.andKarenD.Thornton 10.8***† LetterAgreement,datedasofMarch29,2017,betweenFTSInternational,Inc.andJenniferL.Keefe 10.9***† FTSInternational,Inc.2014Long-TermIncentivePlan 10.10***† FormofRestrictedStockUnitAgreement(StockSettled)underthe2014Long-TermIncentivePlan 10.11***† Descriptionof2016Short-TermIncentivePlan 10.12***† Descriptionof2017Short-TermIncentivePlan 10.13***† FormofIndemnificationAgreementbetweenFTSInternational,Inc.andeachofitsdirectorsandexecutive
officers 10.14*** MasterServiceAgreement,datedasofJuly9,2012,byandbetweenChesapeakeOperating,Inc.andFTS
InternationalServices,LLC
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ExhibitNumber Description 10.15*** MasterCommercialAgreement,datedasofDecember24,2016,byandbetweenChesapeakeOperating,LLCand
FTSInternationalServices,LLC 10.16*** SecurityAgreement,datedasofApril16,2014,byandamongFTSInternational,Inc.,FTSInternational
Services,LLC,FTSInternationalManufacturing,LLCandU.S.BankNationalAssociation,ascollateralagent 10.17*** PariPassuIntercreditorAgreement,datedasofApril16,2014,amongFTSInternational,Inc.,FTSInternational
Services,LLC,FTSInternationalManufacturing,LLCandU.S.BankNationalAssociation,ascollateralagentandWellsFargoBank,NationalAssociation,initscapacityasadministrativeagentfortheTermSecuredParties(asdefinedtherein)
10.18*** JuniorLienIntercreditorAgreement,datedasofApril16,2014,amongFTSInternational,Inc.,FTSInternational
Services,LLC,FTSInternationalManufacturing,LLC,WellsFargoBank,NationalAssociationinitscapacityasadministrativeagentundertheTermLoanAgreement,USBankNationalAssociation,ascollateralagentandWellsFargoBank,NationalAssociation,initscapacityasadministrativeagentfortheABLSecuredParties(asdefinedtherein)
10.19*** JuniorLienIntercreditorAgreementJoinder,datedasofJune1,2015,amongFTSInternational,Inc.,FTS
InternationalServices,LLC,FTSInternationalManufacturing,LLC,WellsFargoBank,NationalAssociationinitscapacityasadministrativeagentundertheTermLoanAgreement,USBankNationalAssociation,ascollateralagentandWellsFargoBank,NationalAssociation,initscapacityasadministrativeagentfortheABLSecuredParties(asdefinedintheJuniorLienIntercreditorAgreement)
10.20*** GuarantyandSecurityAgreement,datedasofApril16,2014,fromFTSInternational,Inc.,FTSInternational
Services,LLCandFTSInternationalManufacturing,LLCtoWellsFargoBank,NationalAssociation 10.21*** AmendedandRestatedTrademarkSecurityAgreement,datedasofJune22,2015,fromFTSInternational
Services,LLCtoWellsFargoBank,NationalAssociationpursuanttotheTermLoanAgreementdatedApril16,2014
10.22*** AmendedandRestatedTrademarkSecurityAgreement,datedasofJune22,2015,fromFTSInternational
Services,LLCtoU.S.BankNationalAssociationpursuanttotheIndenturedatedApril16,2014 10.23*** AmendedandRestatedTrademarkSecurityAgreement,datedasofJune22,2015,fromFTSInternational
Services,LLCtoU.S.BankNationalAssociationpursuanttotheIndenturedatedJune1,2015 10.24***† FTSInternational,Inc.2017EquityandIncentiveCompensationPlan 10.25***† FormofRestrictedStockUnitAgreementunderthe2018EquityandIncentiveCompensationPlan 10.26***† FirstAmendmenttoSeveranceAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andMichael
J.Doss 10.27***† FirstAmendmenttoSeveranceAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andBuddy
Petersen 10.28***† FirstAmendmenttoSeveranceAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andLance
Turner 10.29***† LetterAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andKarenD.Thornton
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ExhibitNumber Description 10.30***† LetterAgreement,datedasofJune15,2017,betweenFTSInternational,Inc.andJenniferL.Keefe 16.1*** LetterfromErnst&YoungLLP,datedFebruary10,2017,regardingchangesinaccountant 21.1*** ListofSubsidiaries 23.1* ConsentofGrantThorntonLLP 23.2* ConsentofJonesDay(includedaspartofExhibit5.1hereto) 24.1*** PowerofAttorney 99.1*** ConsentofDirectorNominee(CarolJ.Johnson)
* Filedherewith** Tobefiledbyamendment*** Previouslyfiled† Managementcontract,compensatoryplanorarrangement
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Exhibit 1.1
FTS INTERNATIONAL, INC.
Shares of Common Stock
UNDERWRITING AGREEMENT
February1,2018CREDITSUISSESECURITIES(USA)LLC,MORGANSTANLEY&CO.LLCAsRepresentativesoftheSeveralUnderwriters,c/oCreditSuisseSecurities(USA)LLC,ElevenMadisonAvenue,NewYork,N.Y.10010-3629
DearSirs:
1.Introductory.FTSInternational,Inc.,aDelawarecorporation(“Company ”)agreeswiththeseveralUnderwritersnamedinScheduleAhereto(“Underwriters ”)toissueandselltotheseveralUnderwriters[•]sharesofitscommonstockandthestockholderlistedonScheduleBhereto(the“SellingStockholder ”)agreeswiththeseveralUnderwriterstoselltotheseveralUnderwritersanaggregateof[•]sharesoftheCompany’scommonstock(such[•]aggregatesharesbeingreferredtohereinasthe“Firm Securities ”).TheCompanyalsoagreestoselltotheUnderwriters,attheoptionoftheUnderwriters,anaggregateofnotmorethan[•]additionalsharesoftheCompany’scommonstock(together,“Optional Securities ”),assetforthbelow.TheFirmSecuritiesandtheOptionalSecuritiesarehereincollectivelycalledthe“Offered Securities ”.
EachofCreditSuisseSecurities(USA)LLC(“Credit Suisse ”)andMorganStanley&Co.LLC(“Morgan Stanley ”)hasagreedtoreserveaportionoftheFirmSecuritiestobepurchasedbyitunderthisAgreementforsaletotheCompany’sdirectors,officers,employeesandbusinessassociatesandotherpartiesrelatedtotheCompany(collectively,“Participants ”),assetforthintheGeneralDisclosurePackageandtheFinalProspectus(eachashereinafterdefined)undertheheading“Underwriting”(the“Directed Share Program ”).TheFirmSecuritiestobesoldbyeachofCreditSuisseandMorganStanleyanditsaffiliatespursuanttotheDirectedShareProgram,atthedirectionoftheCompany,arereferredtohereinafterasthe“DirectedShares”.AnyDirectedSharesnotorallyconfirmedforpurchasebyanyParticipantbytheendofthebusinessdayonwhichthisAgreementisexecutedwillbeofferedtothepublicbytheUnderwritersassetforthintheGeneralDisclosurePackageandtheFinalProspectus.TheCompanyagreesandconfirmsthatreferencesto“affiliates”ofMorganStanleythatappearinthisAgreementshallbeunderstoodtoincludeMitsubishiUFJMorganStanleySecuritiesCo.,Ltd.
2.RepresentationsandWarrantiesoftheCompany.TheCompanyrepresentsandwarrantsto,andagreeswith,theseveralUnderwritersthat:
(a)FilingandEffectivenessofRegistrationStatement;CertainDefinedTerms.TheCompanyhasfiledwiththeCommissionaregistrationstatementonFormS-1(No.333-215998)coveringtheregistrationoftheOfferedSecuritiesundertheAct,includingarelatedpreliminaryprospectusorprospectuses.Atanyparticulartime,thisinitialregistrationstatement,intheformthenonfilewiththeCommission,includingallinformationcontainedintheregistrationstatement(ifany)pursuanttoRule462(b)andthendeemedtobeapartoftheinitialregistrationstatement,andall430AInformationandall430CInformation,thatinanycasehasnotthenbeensupersededormodified,shallbereferredtoasthe“Initial Registration Statement ”.TheCompanymayalso
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havefiled,ormayfilewiththeCommission,aRule462(b)registrationstatementcoveringtheregistrationofOfferedSecurities.Atanyparticulartime,thisRule462(b)registrationstatement,intheformthenonfilewiththeCommission,includingthecontentsoftheInitialRegistrationStatementincorporatedbyreferencethereinandincludingall430AInformationandall430CInformation,thatinanycasehasnotthenbeensupersededormodified,shallbereferredtoasthe“Additional Registration Statement ”.
AsofthetimeofexecutionanddeliveryofthisAgreement,theInitialRegistrationStatementhasbeendeclaredeffectiveundertheActandisnot
proposedtobeamended.AnyAdditionalRegistrationStatementhasorwillbecomeeffectiveuponfilingwiththeCommissionpursuanttoRule462(b)andisnotproposedtobeamended.TheOfferedSecuritiesallhavebeenorwillbedulyregisteredundertheActpursuanttotheInitialRegistrationStatementand,ifapplicable,theAdditionalRegistrationStatement.
ForpurposesofthisAgreement:
“430A Information ”,withrespecttoanyregistrationstatement,meansinformationincludedinaprospectusandretroactivelydeemedtobeapart
ofsuchregistrationstatementpursuanttoRule430A(b).
“430C Information ”,withrespecttoanyregistrationstatement,meansinformationincludedinaprospectusthendeemedtobeapartofsuchregistrationstatementpursuanttoRule430C.
“Act ”meanstheSecuritiesActof1933,asamended.
“Applicable Time ”means[•][a/p]m(Easterntime)onthedateofthisAgreement.
“Closing Date” hasthemeaningdefinedinSection4hereof.
“Commission ”meanstheSecuritiesandExchangeCommission.
“Effective Time ”withrespecttotheInitialRegistrationStatementor,iffiledpriortotheexecutionanddeliveryofthisAgreement,theAdditional
RegistrationStatementmeansthedateandtimeasofwhichsuchRegistrationStatementwasdeclaredeffectivebytheCommissionorhasbecomeeffectiveuponfilingpursuanttoRule462(c).IfanAdditionalRegistrationStatementhasnotbeenfiledpriortotheexecutionanddeliveryofthisAgreementbuttheCompanyhasadvisedtheRepresentativesthatitproposestofileone,“Effective Time ”withrespecttosuchAdditionalRegistrationStatementmeansthedateandtimeasofwhichsuchRegistrationStatementisfiledandbecomeseffectivepursuanttoRule462(b).
“Exchange Act ”meanstheSecuritiesExchangeActof1934,asamended.
“Final Prospectus ”meanstheStatutoryProspectusthatdisclosesthepublicofferingprice,other430AInformationandotherfinaltermsofthe
OfferedSecuritiesandotherwisesatisfiesSection10(a)oftheAct.
“General Use Issuer Free Writing Prospectus ”meansanyIssuerFreeWritingProspectusthatisintendedforgeneraldistributiontoprospectiveinvestors,asevidencedbyitsbeingsospecifiedinScheduleCtothisAgreement.
“Issuer Free Writing Prospectus ”meansany“issuerfreewritingprospectus,”asdefinedinRule433,relatingtotheOfferedSecuritiesintheform
filedorrequiredtobefiledwiththeCommissionor,ifnotrequiredtobefiled,intheformretainedintheCompany’srecordspursuanttoRule433(g).
“Limited Use Issuer Free Writing Prospectus ”meansanyIssuerFreeWritingProspectusthatisnotaGeneralUseIssuerFreeWritingProspectus.
TheInitialRegistrationStatementandtheAdditionalRegistrationStatementarereferredtocollectivelyasthe“Registration Statements ”and
individuallyasa“Registration Statement ”.A“Registration Statement ”withreferencetoaparticulartimemeanstheInitialRegistration
2
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StatementandanyAdditionalRegistrationStatementasofsuchtime.A“Registration Statement ”withoutreferencetoatimemeanssuchRegistrationStatementasofitsEffectiveTime.Forpurposesoftheforegoingdefinitions,430AInformationwithrespecttoaRegistrationStatementshallbeconsideredtobeincludedinsuchRegistrationStatementasofthetimespecifiedinRule430A.
“Rules and Regulations ”meanstherulesandregulationsoftheCommission.
“Securities Laws ”means,collectively,theSarbanes-OxleyActof2002(“Sarbanes-Oxley ”),theAct,theExchangeAct,theRulesand
Regulations,theauditingprinciples,rules,standardsandpracticesapplicabletoauditorsof“issuers”(asdefinedinSarbanes-Oxley)promulgatedorapprovedbythePublicCompanyAccountingOversightBoardand,asapplicable,therulesoftheNewYorkStockExchange(“Exchange Rules ”).
“subsidiary ”meansanentityinwhichtheCompanyowns,directlyorindirectly,morethan50%ofitsoutstandingsecurities.
“Statutory Prospectus ”withreferencetoaparticulartimemeanstheprospectusincludedinaRegistrationStatementimmediatelypriortothat
time,includingany430AInformationor430CInformationwithrespecttosuchRegistrationStatement.Forpurposesoftheforegoingdefinition,430AInformationshallbeconsideredtobeincludedintheStatutoryProspectusasoftheactualtimethatformofprospectusisfiledwiththeCommissionpursuanttoRule424(b)orRule462(c)andnotretroactively.
“Testing-the-Waters Communication ”meansanyoralorwrittencommunicationwithpotentialinvestorsundertakeninrelianceonSection5(d)of
theAct.
“Written Testing-the-Waters Communication ”meansanyTesting-the-WatersCommunicationthatisawrittencommunicationwithinthemeaningofRule405undertheAct.
Unlessotherwisespecified,areferencetoa“rule”istotheindicatedruleundertheAct.
(b)CompliancewithSecuritiesActRequirements.(i)(A)AttheirrespectiveEffectiveTimes,(B)onthedateofthisAgreementand(C)oneach
ClosingDate,eachoftheInitialRegistrationStatementandtheAdditionalRegistrationStatement(ifany)conformedandwillconforminallmaterialrespectstotherequirementsoftheActandtheRulesandRegulations,anddidnotandwillnotincludeanyuntruestatementofamaterialfactoromittostateanymaterialfactrequiredtobestatedthereinornecessarytomakethestatementsthereinnotmisleading,(ii)onitsdate,atthetimeoffilingoftheFinalProspectuspursuanttoRule424(b)or(ifnosuchfilingisrequired)attheEffectiveTimeoftheAdditionalRegistrationStatementinwhichtheFinalProspectusisincluded,andoneachClosingDate,theFinalProspectuswillconforminallmaterialrespectstotherequirementsoftheActandtheRulesandRegulationsandwillnotincludeanyuntruestatementofamaterialfactoromittostateanymaterialfactrequiredtobestatedthereinornecessarytomakethestatementsthereinnotmisleading,and(iii)onthedateofthisAgreement,attheirrespectiveEffectiveTimesorissuedatesandoneachClosingDate,eachRegistrationStatement,theFinalProspectus,anyStatutoryProspectus,anyprospectuswrapper,andanyIssuerFreeWritingProspectuscompliedorcomply,andsuchdocumentsandanyfurtheramendmentsorsupplementstheretowillcomply,withanyapplicablelawsorregulationsofforeignjurisdictionsinwhichtheFinalProspectus,anyStatutoryProspectus,anyprospectuswrapperoranyIssuerFreeWritingProspectus,asamendedorsupplemented,ifapplicable,aredistributed.TheprecedingsentencedoesnotapplytostatementsinoromissionsfromanysuchdocumentbaseduponwritteninformationfurnishedtotheCompanybyanyUnderwriterthroughtheRepresentativesspecificallyforusetherein,itbeingunderstoodandagreedthattheonlysuchinformationisthatdescribedassuchinSection9(c)hereof.
(c)IneligibleIssuerStatus.(i)AtthetimeoftheinitialfilingoftheInitialRegistrationStatementand(ii)atthedateofthisAgreement,theCompany
wasnotandisnotan“ineligibleissuer,”asdefinedinRule405.
3
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(d)EmergingGrowthCompanyStatus.FromthetimeoftheinitialconfidentialsubmissionoftheInitialRegistrationStatementtotheCommission
(or,ifearlier,thefirstdateonwhichtheCompanyengageddirectlyorthroughanypersonauthorizedtoactonitsbehalfinanyTesting-the-WatersCommunication)throughthedatehereof,theCompanyhasbeenandwilldeemedtobe(includingasaresultofanyapplicableguidanceoftheCommissionoritsstaff)an“emerginggrowthcompany,”asdefinedinSection2(a)(19)oftheAct(an“Emerging Growth Company ”).
(e)GeneralDisclosurePackage.AsoftheApplicableTime,noneof(i)theGeneralUseIssuerFreeWritingProspectusesissuedatorpriortothe
ApplicableTime,thepreliminaryprospectus,datedFebruary1,2018(whichisthemostrecentStatutoryProspectusdistributedtoinvestorsgenerally)andtheotherinformation,ifany,statedinScheduleCtothisAgreementtobeincludedintheGeneralDisclosurePackage,allconsideredtogether(collectively,the“General Disclosure Package ”),(ii)anyindividualLimitedUseIssuerFreeWritingProspectus,whenconsideredtogetherwiththeGeneralDisclosurePackage,or(iii)anyindividualWrittenTesting-the-WatersCommunication,whenconsideredtogetherwiththeGeneralDisclosurePackage,includedanyuntruestatementofamaterialfactoromittedtostateanymaterialfactnecessaryinordertomakethestatementstherein,inthelightofthecircumstancesunderwhichtheyweremade,notmisleading.TheprecedingsentencedoesnotapplytostatementsinoromissionsfromanyStatutoryProspectus,anyIssuerFreeWritingProspectus,oranyWrittenTesting-the-WatersCommunicationinrelianceuponandinconformitywithwritteninformationfurnishedtotheCompanybyanyUnderwriterthroughtheRepresentativesspecificallyforusetherein,itbeingunderstoodandagreedthattheonlysuchinformationfurnishedbyanyUnderwriterconsistsoftheinformationdescribedassuchinSection9(c)hereof.
(f)IssuerFreeWritingProspectuses.EachIssuerFreeWritingProspectus,asofitsissuedateandatallsubsequenttimesthroughthecompletionof
thepublicofferandsaleoftheOfferedSecuritiesoruntilanyearlierdatethattheCompanynotifiedornotifiesCreditSuisseasdescribedinthenextsentence,didnot,doesnotandwillnotincludeanyinformationthatconflicted,conflictsorwillconflictwiththeinformationthencontainedintheRegistrationStatement.IfatanytimefollowingissuanceofanIssuerFreeWritingProspectusthereoccurredoroccursaneventordevelopmentasaresultofwhichsuchIssuerFreeWritingProspectusconflictedorwouldconflictwiththeinformationthencontainedintheRegistrationStatementorasaresultofwhichsuchIssuerFreeWritingProspectus,ifrepublishedimmediatelyfollowingsucheventordevelopment,wouldincludeanuntruestatementofamaterialfactoromittedorwouldomittostateamaterialfactnecessaryinordertomakethestatementstherein,inthelightofthecircumstancesunderwhichtheyweremade,notmisleading,(i)theCompanyhaspromptlynotifiedorwillpromptlynotifytheRepresentativesand(ii)theCompanyhaspromptlyamendedorwillpromptlyamendorsupplementsuchIssuerFreeWritingProspectustoeliminateorcorrectsuchconflict,untruestatementoromission.
(g)Testing-the-WatersCommunication.TheCompany(i)hasnotaloneengagedinanyTesting-the-WatersCommunicationand(ii)hasnot
authorizedanyoneotherthantheRepresentativestoengageinTesting-the-WatersCommunications.TheCompanyreconfirmsthattheRepresentativeshavebeenauthorizedtoactonitsbehalfinundertakingTesting-the-WatersCommunication.TheCompanyhasnotdistributedanyWrittenTesting-the-WatersCommunication.
(h)GoodStandingoftheCompany.TheCompanyhasbeendulyincorporatedandisexistingandingoodstandingunderthelawsoftheStateof
Delaware,withpowerandauthority(corporateandother)toownitspropertiesandconductitsbusinessasdescribedintheGeneralDisclosurePackageandtheFinalProspectus;andtheCompanyisdulyqualifiedtodobusinessingoodstandinginallotherjurisdictionsinwhichitsownershiporleaseofpropertyortheconductofitsbusinessrequiressuchqualification,exceptwherethefailuretobesoqualifiedwouldnotreasonablybeexpected,individuallyorintheaggregate,tohaveamaterialadverseeffectonthecondition(financialorotherwise),resultsofoperations,business,propertiesorprospectsoftheCompanyanditsrespectivesubsidiariestakenasawhole(“Material Adverse Effect ”).
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(i)Subsidiaries.EachsubsidiaryoftheCompanyhasbeendulyincorporatedorformedandisexistingandingoodstandingunderthelawsofthe
jurisdictionofitsincorporationorformation,withthecorporateorlimitedliabilitycompanypowerandauthoritytoownitspropertiesandconductitsbusinessasdescribedintheGeneralDisclosurePackageandtheFinalProspectus;andeachsubsidiaryoftheCompanyisdulyqualifiedtodobusinessasaforeigncorporationorlimitedliabilitycompanyingoodstandinginallotherjurisdictionsinwhichitsownershiporleaseofpropertyortheconductofitsbusinessrequiressuchqualification,exceptwherethefailuretosoqualifyorbeingoodstandingasaforeigncorporationorlimitedliabilitycompanyinsuchotherjurisdictionswouldnotreasonablybeexpected,individuallyorintheaggregate,tohaveaMaterialAdverseEffect;alloftheissuedandoutstandingcapitalstockorotherequityinterestsofeachsubsidiaryoftheCompanyhasbeendulyauthorizedandvalidlyissuedandisfullypaidandnon-assessable;andthecapitalstockorotherequityinterestsofeachsubsidiaryownedbytheCompany,directlyorthroughsubsidiaries,isownedfreefromliens,encumbrancesanddefects,exceptforsuchliensandencumbrancesasmayexistundertheCompany’sexisting2020Notes,2022NotesandTermLoan(eachasdefinedintheGeneralDisclosurePackageandtheFinalProspectus)asdisclosedintheGeneralDisclosurePackageandtheFinalProspectus.ThesubsidiariesoftheCompanylistedonScheduleDhereto,aretheonlysubsidiaries,directorindirect,oftheCompanyandeachsubsidiaryoftheCompanyisawhollyownedsubsidiary,directorindirect,oftheCompany.
(j)OfferedSecurities.TheOfferedSecuritiesandallotheroutstandingsharesofcapitalstockoftheCompanyhavebeendulyauthorized;the
authorizedequitycapitalizationoftheCompanyisassetforthintheGeneralDisclosurePackage;alloutstandingsharesofcapitalstockoftheCompanyare,and,whentheOfferedSecuritieshavebeendeliveredandpaidforinaccordancewiththisAgreementoneachClosingDate,suchOfferedSecuritieswillhavebeen,validlyissued,fullypaidandnon-assessable,willconformtotheinformationintheGeneralDisclosurePackageandtothedescriptionofsuchOfferedSecuritiescontainedintheFinalProspectus;thestockholdersoftheCompanyhavenopreemptiverightswithrespecttotheOfferedSecurities;andnoneoftheoutstandingsharesofcapitalstockoftheCompanyhavebeenissuedinviolationofanypreemptiveorsimilarrightsofanysecurityholder.ExceptassetforthintheRegistrationStatement,therearenooutstanding(i)securitiesorobligationsoftheCompanyconvertibleintoorexchangeableforanycapitalstockoftheCompany,(ii)warrants,rightsoroptionstosubscribefororpurchasefromtheCompanyanysuchcapitalstockoranysuchconvertibleorexchangeablesecuritiesorobligationsor(iii)obligationsoftheCompanytoissueorsellanysharesofcapitalstock,anysuchconvertibleorexchangeablesecuritiesorobligationsoranysuchwarrants,rightsoroptions.TheCompanyhasnot,directlyorindirectly,offeredorsoldanyoftheOfferedSecuritiesbymeansofany“prospectus”(withinthemeaningoftheActandtheRulesandRegulations)orusedany“prospectus”ormadeanyoffer(withinthemeaningoftheActandtheRulesandRegulations)inconnectionwiththeofferorsaleoftheOfferedSecurities,ineachcaseotherthanthepreliminaryprospectusreferredtoinSection2(e)hereof.
(k)OtherOfferings.ExceptassetforthintheGeneralDisclosurePackageandtheFinalProspectus,theCompanyhasnotsold,issuedordistributed
anycommonsharesduringthesix-monthperiodprecedingthedatehereof,includinganysalespursuanttoRule144Aunder,orRegulationDorSof,theAct,otherthancommonsharesissuedpursuanttoemployeebenefitplans,qualifiedstockoptionplansorotheremployeecompensationplansorpursuanttooutstandingoptions,rightsorwarrants.
(l)NoFinder’sFee.Therearenocontracts,agreementsorunderstandingsbetweentheCompanyandanypersonthatwouldgiverisetoavalidclaim
againsttheCompanyoranyUnderwriterforabrokeragecommission,finder’sfeeorotherlikepaymentinconnectionwiththisoffering.
(m)RegistrationRights.ExceptasdisclosedintheGeneralDisclosurePackageandtheFinalProspectus,therearenocontracts,agreementsorunderstandingsbetweentheCompanyandanypersongrantingsuchpersontherighttorequiretheCompanytofilearegistrationstatementunder
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theActwithrespecttoanysecuritiesoftheCompanyownedortobeownedbysuchpersonortorequiretheCompanytoincludesuchsecuritiesinthesecuritiesregisteredpursuanttoaRegistrationStatementorinanysecuritiesbeingregisteredpursuanttoanyotherregistrationstatementfiledbytheCompanyundertheAct.(collectively,“registration rights ”),andanypersontowhomtheCompanyhasgrantedregistrationrightshasagreednottoexercisesuchrightsuntilaftertheexpirationoftheLock-UpPeriodreferredtoinSection6(l)hereof.
(n)Listing.TheOfferedSecuritieshavebeenapprovedforlistingontheNewYorkStockExchange,subjecttonoticeofissuance.
(o)AbsenceofFurtherRequirements.Noconsent,approval,authorization,ororderof,orfilingorregistrationwith,anyperson(includingany
governmentalagencyorbodyoranycourt)isrequiredfortheconsummationofthetransactionscontemplatedbythisAgreementorinconnectionwiththeoffering,issuanceandsaleoftheOfferedSecuritiesbytheCompanyexceptforsuchconsents,approvals,authorizations,orders,filingsorregistrations(i)asshallhavebeenobtainedormadebytheCompany,andareinfullforceandeffectasoftheClosingDate,or(ii)asmayberequiredunderapplicablesecuritieslawsoftheseveralstatesoftheUnitedStatesorotherjurisdictionsinwhichtheOfferedSecuritiesmaybeofferedorsold.
(p)TitletoProperty.ExceptasdisclosedintheGeneralDisclosurePackageandtheFinalProspectus,theCompanyanditssubsidiarieshavegood
andvalidtitletoallrealpropertiesandallothermaterialpropertiesandassetsownedbythem,ineachcasefreefromliens,charges,encumbrancesanddefectsthatwouldmateriallyaffectthevaluethereoformateriallyinterferewiththeusemadeortobemadethereofbythemandexceptasdisclosedintheGeneralDisclosurePackageandtheFinalProspectus,theCompanyanditssubsidiariesholdanyleasedrealorpersonalpropertyundervalidandenforceableleaseswithnotermsorprovisionsthatwouldmateriallyinterferewiththeusemadeortobemadethereofbythem.
(q)AbsenceofDefaultsandConflictsResultingfromTransaction.Theexecution,deliveryandperformanceofthisAgreement,andtheissuance
andsaleoftheOfferedSecuritieswillnotresultinabreachorviolationofanyofthetermsandprovisionsof,orconstituteadefaultoraDebtRepaymentTriggeringEvent(asdefinedbelow)under,orresultintheimpositionofanylien,chargeorencumbranceuponanypropertyorassetsoftheCompanyoranyofitssubsidiariespursuantto,(i)thecharterorby-lawsoftheCompanyoranyofitssubsidiaries,(ii)anystatute,rule,regulationororderofanygovernmentalagencyorbodyoranycourt,domesticorforeign,havingjurisdictionovertheCompanyoranyofitssubsidiariesoranyoftheirproperties,or(iii)anyagreementorinstrumenttowhichtheCompanyoranyofitssubsidiariesisapartyorbywhichtheCompanyoranyofitssubsidiariesisboundortowhichanyofthepropertiesoftheCompanyoranyofitssubsidiariesissubject,except,inthecaseoftheforegoingclause(iii),foranysuchbreach,violation,lien,chargeorencumbrancethatwouldnot,individuallyorintheaggregate,resultinaMaterialAdverseEffect;a“Debt RepaymentTriggering Event ”meansanyeventorconditionthatgives,orwiththegivingofnoticeorlapseoftimewouldgive,theholderofanynote,debenture,orotherevidenceofindebtedness(oranypersonactingonsuchholder’sbehalf)therighttorequiretherepurchase,redemptionorrepaymentofalloraportionofsuchindebtednessbytheCompanyoranyofitssubsidiaries.
(r)AbsenceofExistingDefaultsandConflicts.NeithertheCompanynoranyofitssubsidiariesisinviolationofitsrespectiveconstituentdocuments
orindefault(orwiththegivingofnoticeorlapseoftimewouldbeindefault)underanyexistingobligation,agreement,covenantorconditioncontainedinanyindenture,loanagreement,mortgage,leaseorotheragreementorinstrumenttowhichanyofthemisapartyorbywhichanyofthemisboundortowhichanyofthepropertiesofanyofthemissubject,exceptsuchdefaultsthatwouldnotreasonablybeexpectedto,individuallyorintheaggregate,resultinaMaterialAdverseEffect.
(s)AuthorizationofAgreement.ThisAgreementhasbeendulyauthorized,executedanddeliveredbytheCompany.
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(t)PossessionofLicensesandPermits.TheCompanyanditssubsidiariespossess,andareincompliancewiththetermsof,allcertificates,
authorizations,licensesandpermits(“Licenses ”)necessaryormaterialtotheconductofthebusinessnowconductedorproposedintheGeneralDisclosurePackageandtheFinalProspectustobeconductedbythemexceptwherethefailuretopossessorcomplywithsuchLicenseswouldnotreasonablybeexpected,individuallyorintheaggregate,tohaveaMaterialAdverseEffect.TheCompanyanditssubsidiarieshavenotreceivedanynoticeofproceedingsrelatingtotherevocationormodificationofanyLicensesthat,ifdeterminedadverselytotheCompanyoranyofitssubsidiaries,wouldreasonablybeexpectedto,individuallyorintheaggregate,haveaMaterialAdverseEffect.
(u)AbsenceofLaborDispute.NolabordisputewiththeemployeesoftheCompanyoranyofitssubsidiariesexistsor,totheknowledgeofthe
Company,isimminentthatwouldreasonablybeexpected,individuallyorintheaggregate,tohaveaMaterialAdverseEffect.
(v)PossessionofIntellectualProperty.TheCompanyanditssubsidiariesown,possessorhaverightstotrademarks,tradenames,know-how,patents,patentapplications,copyrights,confidentialinformationandotherintellectualproperty(collectively,“intellectual property rights ”)necessarytoconductthebusinessaspresentlyoperated,andhavenotreceivedanynoticeofinfringementoforconflictwiththeintellectualpropertyrightsofothersthat,ifdeterminedadverselytotheCompanyoranyofitssubsidiaries,wouldreasonablybeexpected,individuallyorintheaggregate,tohaveaMaterialAdverseEffect.
(w)EnvironmentalLaws.ExceptasdisclosedintheGeneralDisclosurePackageandtheFinalProspectus,(i)(A)theCompanyanditssubsidiaries
areandhaveoperatedtheirbusinessincompliancewithallapplicablefederal,state,localornon-U.S.statutes,laws,rules,regulations,ordinances,codes,otherrequirementsorrulesoflaw(includingcommonlaw),orbindingdecisionsorordersofanydomesticorforeigngovernmentalagency,governmentalbodyorcourt,relatingtopollution,totheuse,handling,transportation,treatment,storage,discharge,disposalorreleaseofHazardousSubstances(definedbelow),totheprotectionorrestorationoftheenvironmentornaturalresources,tohealthandsafetyassuchrelatestoexposuretoHazardousSubstances,andtonaturalresourcedamages(collectively,“Environmental Laws ”),(B)totheknowledgeoftheCompany,neithertheCompanynoranyofitssubsidiariesowns,occupies,operatesorusesanyrealpropertyin,from,about,underoronwhichareleaseofHazardousSubstanceshasoccurred,(C)neithertheCompanynoranyofitssubsidiariesisconductingorfundinganyinvestigation,remediation,remedialactionormonitoringofactualorsuspectedHazardousSubstancescontaminationintheenvironment,(D)totheknowledgeoftheCompany,neithertheCompanynoranyofitssubsidiariesisliableorallegedlyliableunderanyapplicableEnvironmentalLawsforanyreleaseorthreatenedreleaseofHazardousSubstances,includingatanyoff-sitetreatment,storageordisposalsite,(E)neithertheCompanynoranyofitssubsidiariesissubjecttoanyclaimbyanygovernmentalagencyorgovernmentalbodyorpersonrelatingtoanyapplicableEnvironmentalLawsorHazardousSubstances,and(F)theCompanyanditssubsidiarieshavereceivedandareincompliancewithallpermits,licenses,authorizations,identificationnumbersorotherapprovalsrequiredunderapplicableEnvironmentalLawstoconducttheirrespectivebusinesses,exceptineachcasecoveredbyclauses(A)—(F)suchaswouldnotreasonablybeexpected,individuallyorintheaggregate,tohaveaMaterialAdverseEffect;(ii)totheknowledgeoftheCompany,therearenofactsorcircumstancesthatwouldreasonablybeexpectedtoresultinaviolationof,liabilityunder,orclaimpursuanttoanyEnvironmentalLawthatwouldreasonablybeexpected,individuallyorintheaggregate,tohaveaMaterialAdverseEffect;and(iii)intheordinarycourseofitsbusiness,theCompanyperiodicallyevaluatesthepotentialeffectofEnvironmentalLawsonthebusiness,properties,resultsofoperationsandfinancialconditionofitanditssubsidiaries,and,onthebasisofsuchevaluation,theCompanyhasreasonablyconcludedthatsuchEnvironmentalLawsarenotexpectedto,singlyorintheaggregate,haveaMaterialAdverseEffect.Forpurposesofthissubsection“HazardousSubstances”means(i)petroleumandpetroleumproducts,by-productsorbreakdownproducts,radioactivematerials,asbestos-containingmaterialsandpolychlorinatedbiphenyls,and(ii)anyotherchemical,materialorsubstancedefinedorregulatedastoxicorhazardousorasapollutant,contaminantor
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wasteunderanyapplicableEnvironmentalLaws.
(x)AccurateDisclosure.ThestatementsintheGeneralDisclosurePackageandtheFinalProspectusundertheheadings“MaterialU.S.Federal
IncomeTaxConsequencestoNon-U.S.Holders”,“DescriptionofCapitalStock”,“DescriptionofIndebtedness”,and“CertainRelationshipsandRelated-PartyTransactions”insofarassuchstatementssummarizelegalmatters,agreements,documentsorproceedingsdiscussedtherein,areaccurateandfairsummariesofsuchlegalmatters,agreements,documentsorproceedingsandpresenttheinformationrequiredtobeshown.
(y)AbsenceofManipulation.TheCompanyhasnottakenandwillnottake,directlyorindirectly,anyactiondesignedtoorthatmightbereasonably
expectedtocauseorresultinstabilizationormanipulationofthepriceofanysecurityoftheCompanytofacilitatethesaleorresaleoftheOfferedSecurities.
(z)InternalControlsandCompliancewiththeSarbanes-OxleyAct.TheCompany,itssubsidiariesandtheCompany’sBoardofDirectors(the“
Board ”)areincompliancewithSarbanes-OxleyandallapplicableExchangeRules.TheCompanymaintainsasystemofinternalcontrols,including,butnotlimitedto,disclosurecontrolsandprocedures,internalcontrolsoveraccountingmattersandfinancialreporting,aninternalauditfunctionandlegalandregulatorycompliancecontrols(collectively,“Internal Controls ”)thatcomplywiththeapplicableSecuritiesLawsandaresufficienttoprovidereasonableassurancesthat(i)transactionsareexecutedinaccordancewithmanagement’sgeneralorspecificauthorizations,(ii)transactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinconformitywithU.S.GenerallyAcceptedAccountingPrinciples(“GAAP ”)andtomaintainaccountabilityforassets,(iii)accesstoassetsispermittedonlyinaccordancewithmanagement’sgeneralorspecificauthorization,and(iv)therecordedaccountabilityforassetsiscomparedwiththeexistingassetsatreasonableintervalsandappropriateactionistakenwithrespecttoanydifferences.TheInternalControlsare,oruponconsummationoftheofferingoftheOfferedSecuritieswillbe,overseenbytheAuditCommittee(the“Audit Committee”)oftheBoardinaccordancewithExchangeRules.SincetheendoftheCompany’smostrecentfiscalyear,theCompanyhasnotpubliclydisclosedorreportedtotheAuditCommitteeortheBoard,andwithinthenext135daystheCompanydoesnotreasonablyexpecttopubliclydiscloseorreporttotheAuditCommitteeortheBoard,asignificantdeficiency,materialweakness(assuchtermsaredefinedinRule1-02ofRegulationS-XoftheCommission),changeinInternalControlsorfraudinvolvingmanagementorotheremployeeswhohaveasignificantroleinInternalControls(each,an“InternalControl Event ”).
(aa)AbsenceofAccountingIssues.TheCompany’sindependentauditorshavenotrecommendedtorevieworinvestigate(i)anymatterwhichcould
resultinarestatementoftheCompany’sconsolidatedfinancialstatementsforanyannualorinterimperiodduringthecurrentorpriorthreefiscalyearsor(ii)anyInternalControlEvent.
(bb)Litigation.Therearenopendingactions,suitsorproceedings(includinganyinquiriesorinvestigationsbyanycourtorgovernmentalagencyor
body,domesticorforeign)againstoraffectingtheCompany,anyofitssubsidiariesoranyoftheirrespectivepropertiesthat,ifdeterminedadverselytotheCompanyoranyofitssubsidiaries,wouldindividuallyorintheaggregatehaveaMaterialAdverseEffect,orwouldmateriallyandadverselyaffecttheabilityoftheCompanytoperformitsobligationsunderthisAgreement,orwhichareotherwisematerialinthecontextofthesaleoftheOfferedSecurities;andnosuchactions,suitsorproceedings(includinganyinquiriesorinvestigationsbyanycourtorgovernmentalagencyorbody,domesticorforeign)arethreatenedor,totheCompany’sknowledge,contemplated.
(cc)FinancialStatements.Thefinancialstatements,togetherwiththeschedulesandthenotesthereto,includedintheRegistrationStatement,the
GeneralDisclosurePackageandtheFinalProspectuspresentfairlythefinancialpositionoftheCompanyanditsconsolidatedsubsidiariesasofthedatesshownandtheirresultsofoperationsandcashflowsfortheperiodsshown,and,exceptasotherwisedisclosedintheGeneralDisclosurePackageandtheFinalProspectus,suchfinancial
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statementshavebeenpreparedinconformitywithGAAPappliedonaconsistentbasis.GrantThorntonLLP,whichhascertifiedtheauditedfinancialstatementsoftheCompanyincludedintheGeneralDisclosurePackageandtheFinalProspectus,isanindependentregisteredpublicaccountingfirmwithrespecttotheCompanywithintheRulesandRegulationsandasrequiredbytheActandtheapplicablerulesandguidancefromthePublicCompanyAccountingOversightBoard(UnitedStates).Ernst&YoungLLP,asofNovember10,2015andfortheperiodsforwhichitauditedthefinancialstatementsoftheCompany,wasanindependentauditorwithrespecttotheCompanyunderRule101oftheAmericanInstituteofCertifiedPublicAccountants’CodeofProfessionalConduct,anditsinterpretationsandrulings.ThesummaryandselectedfinancialandstatisticaldataincludedineachRegistrationStatement,theGeneralDisclosurePackageandtheFinalProspectuspresentsfairlytheinformationshownthereinandsuchdatahasbeencompiledonabasisconsistentwiththefinancialstatementspresentedthereinandthebooksandrecordsoftheCompany.ThestatisticalandmarketrelateddataandforwardlookingstatementsincludedintheGeneralDisclosurePackageandtheFinalProspectusarebasedonorderivedfromsourcesthattheCompanybelievestobereliableandaccurateinallmaterialrespectsandrepresentsitsgoodfaithestimatesaremadeonthebasisofdataderivedfromsuchsources.TheCompanydoesnothaveanymaterialliabilitiesorobligations,directorcontingent(includinganyoff-balancesheetobligationsorany“variableinterestentities”withinthemeaningofFinancialAccountingStandardsBoard’sAccountingStandardsCodificationTopic810),notdisclosedintheRegistrationStatement,theGeneralDisclosurePackageandtheFinalProspectus.TherearenofinancialstatementsthatarerequiredtobeincludedinanyRegistrationStatement,theGeneralDisclosurePackageortheFinalProspectusthatarenotincludedasrequired.
(dd)NoMaterialAdverseChangeinBusiness.ExceptasdisclosedintheGeneralDisclosurePackageandtheFinalProspectus,sincetheendofthe
periodcoveredbythelatestauditedfinancialstatementsincludedintheGeneralDisclosurePackageandtheFinalProspectus(i)therehasbeennochange,noranydevelopmentoreventinvolvingaprospectivechange,inthecondition(financialorotherwise),resultsofoperations,business,propertiesorprospectsoftheCompanyanditssubsidiaries,takenasawhole,thatismaterialandadverse,(ii)therehasbeennodividendordistributionofanykinddeclared,paidormadebytheCompanyonanyclassofitscapitalstock,(iii)therehasbeennomaterialadversechangeinthecapitalstock,short-termindebtedness,long-termindebtedness,netcurrentassetsornetassetsoftheCompanyanditssubsidiaries,(iv)therehasbeennomaterialtransactionenteredintoandthereisnomaterialtransactionthatisprobableofbeingenteredintobytheCompanyotherthantransactionsintheordinarycourseofbusiness,(v)therehasbeennoobligation,directorcontingent,thatismaterialtotheCompanytakenasawhole,incurredbytheCompany,exceptobligationsincurredintheordinarycourseofbusiness,and(vi)neithertheCompanynoranyofitssubsidiarieshassustainedanylossorinterferencewithitsbusinessoroperationsfromfire,explosion,flood,earthquakeorothernaturaldisasterorcalamity,whetherornotcoveredbyinsurance,orfromanylabordisputeordisturbanceorcourtorgovernmentalaction,orderordecreewhichcouldreasonablybeexpected,individuallyorintheaggregate,toresultinaMaterialAdverseEffect.
(ee)InvestmentCompanyAct.TheCompanyisnotanopen-endinvestmentcompany,unitinvestmenttrustorface-amountcertificatecompanythatis
orisrequiredtoberegisteredunderSection8oftheUnitedStatesInvestmentCompanyActof1940(the“Investment Company Act ”);andtheCompanyisnot,noraftergivingeffecttotheofferingandsaleoftheSecuritiesandtheapplicationoftheproceedsthereofasdescribedintheGeneralDisclosurePackageandtheFinalProspectus,willitbean“investmentcompany”asdefinedintheInvestmentCompanyAct.
(ff)RegulationsT,U,X.TheCompany,anyofitssubsidiariesoranyagentthereofactingontheirbehalfhasnottaken,andnoneofthemwilltake,
anyactionthatmightcausethisAgreementortheissuanceorsaleoftheOfferedSecuritiestoviolateRegulationT,RegulationUorRegulationXoftheBoardofGovernorsoftheFederalReserveSystem.
(gg)Ratings.No“nationallyrecognizedstatisticalratingorganization”assuchtermisdefinedinSection(3)(a)(62)oftheExchangeAct(i)has
imposed(orhasinformedtheCompanythatitis
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consideringimposing)anycondition(financialorotherwise)ontheCompany’sretaininganyratingassignedtotheCompanyoranysecuritiesoftheCompanyor(ii)hasindicatedtotheCompanythatitisconsideringanyoftheactionsdescribedinSection8(c)(ii)hereof.
(hh)Taxes.TheCompanyanditssubsidiarieshavefiledallfederal,state,localandnon-U.S.taxreturnsthatwererequiredtobefiledorhave
requestedextensionsthereof(exceptinanycaseinwhichthefailuresotofilewouldnotreasonablybeexpected,individuallyorintheaggregate,tohaveaMaterialAdverseEffect);and,exceptassetforthintheGeneralDisclosurePackageandtheFinalProspectus,theCompanyanditssubsidiarieshavepaidalltaxes(includinganyassessments,finesorpenalties)requiredtobepaidbythem,exceptforanysuchtaxes,assessments,finesorpenaltiescurrentlybeingcontestedingoodfaithoraswouldnotreasonablybeexpected,individuallyorintheaggregate,tohaveaMaterialAdverseEffect.
(ii)Insurance.TheCompanyanditssubsidiariesareinsuredbyinsurerswithappropriatelyratedclaimspayingabilitiesagainstsuchlossesandrisks
andinsuchamountsasareprudentandcustomaryforthebusinessesinwhichtheyareengaged;allpoliciesofinsuranceinsuringtheCompanyoranyofitssubsidiariesortheirrespectivebusinesses,assets,employees,officersanddirectorsareinfullforceandeffect;theCompanyanditssubsidiariesareincompliancewiththetermsofsuchpoliciesandinstrumentsinallmaterialrespects;andtherearenoclaimsbytheCompanyoranyofitssubsidiariesunderanysuchpolicyorinstrumentastowhichanyinsurancecompanyisdenyingliabilityordefendingunderareservationofrightsclauseexceptwherethefailuretodosowouldnotreasonablybeexpected,individuallyorintheaggregate,tohaveaMaterialAdverseEffect;neithertheCompanynoranysuchsubsidiaryhasbeenrefusedanyinsurancecoveragesoughtorappliedfor;neithertheCompanynoranysuchsubsidiaryhasanyreasontobelievethatitwillnotbeabletorenewitsexistinginsurancecoverageasandwhensuchcoverageexpiresortoobtainsimilarcoveragefromsimilarinsurersasmaybenecessarytocontinueitsbusinessatacostthatwouldnothaveaMaterialAdverseEffect,exceptassetforthinorcontemplatedintheGeneralDisclosurePackageandtheFinalProspectus;andtheCompanywillobtaindirectors’andofficers’insuranceinsuchamountsasiscustomaryforaninitialpublicoffering.
(jj)Anti-Corruption.NeithertheCompanyoranyofitssubsidiaries,noranyofficeroremployee,or,totheCompany’sknowledge,anydirector,
affiliate,agentorotherpersonassociatedwithoractingonbehalfoftheCompanyoranyofitssubsidiaries,hastakenanyactioninfurtheranceofanoffer,payment,promisetopay,orauthorizationorapprovalofthepaymentorgivingofmoney,property,giftsoranythingelseofvalue,directlyorindirectly,toany“governmentofficial”(includinganyofficeroremployeeofagovernmentorgovernment-ownedorcontrolledentityorofapublicinternationalorganization,oranypersonactinginanofficialcapacityfororonbehalfofanyoftheforegoing,oranypoliticalpartyorpartyofficialorcandidateforpoliticaloffice)toinfluenceofficialactionorsecureanimproperadvantage;andtheCompanyanditssubsidiariesand,totheCompany’sknowledge,itsaffiliateshaveconductedtheirbusinessesincompliancewithapplicableanti-corruptionlaws,including,butnotlimitedto,theForeignCorruptPracticesActof1977,asamended,andhaveinstitutedandmaintainedpoliciesandproceduresdesignedtopromoteandachievecompliancewithsuchlawsandwiththerepresentationandwarrantycontainedherein.
(kk)Anti-MoneyLaundering.TheoperationsoftheCompanyanditssubsidiariesandtotheCompany’sknowledge,itsaffiliates,areandhavebeen
conductedatalltimesincompliancewithallapplicablefinancialrecordkeepingandreportingrequirementsrelatingtoanti-moneylaundering,including,withoutlimitation,thoseofTitle18U.S.CodeSections1956and1957,theBankSecrecyAct,asamendedbyTitleIIIoftheUnitingandStrengtheningAmericabyProvidingAppropriateToolsRequiredtoInterceptandObstructTerrorismActof2001(USAPATRIOTAct),theCurrencyandForeignTransactionsReportingActof1970,asamended,andtheapplicableanti-moneylaunderingstatutes,lawsandregulationsofalljurisdictionswheretheCompanyanditssubsidiariesconductbusiness,therulesandregulationsthereunderandanyrelatedorsimilarrules,regulationsorguidelines,issued,administeredorenforcedbyanyapplicablegovernmental
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agency(collectively,the“Anti-Money Laundering Laws ”),andnoaction,suitorproceedingbyorbeforeanycourtorgovernmentalagency,authorityorbodyoranyarbitratorinvolvingtheCompanyoranyofitssubsidiariesandtotheCompany’sknowledge,itsaffiliates,withrespecttotheAnti-MoneyLaunderingLawsispendingor,tothebestknowledgeoftheCompany,threatened.
(ll)EconomicSanctions.
(i)NeithertheCompanynoranyofitssubsidiaries,noranydirector,officer,oremployeethereof,nor,totheCompany’sknowledge,any
agent,affiliateorrepresentativeoftheCompanyoranyofitssubsidiaries,isanindividualorentity(“Person ”)thatis,orisowned50%ormoreorcontrolledbyaPersonthatis:
(A)thesubjectofanysanctionsadministeredorenforcedbytheU.S.DepartmentofTreasury’sOfficeofForeignAssetsControl
(OFAC),theUnitedNationsSecurityCouncil(UN),theEuropeanUnion(EU),HerMajesty’sTreasury(UKHMT),theSwissSecretariatofEconomicAffairs(SECO),theHongKongMonetaryAuthority(HKMA),theMonetaryAuthorityofSingapore(MAS),orotherrelevantsanctionsauthority(collectively,“Sanctions”),nor
(B)located,organizedorresidentinacountryorterritorythatisthesubjectofcomprehensiveSanctions(including,without
limitation,Crimea,Cuba,Iran,NorthKoreaandSyria).
(ii)TheCompanywillnot,directlyorindirectly,usetheproceedsoftheoffering,orlend,contributeorotherwisemakeavailablesuchproceedstoanysubsidiary,jointventurepartnerorotherPerson:
(A)tofundorfacilitateanyactivitiesorbusinessoforwithanyPersonorinanycountryorterritorythat,atthetimeofsuchfunding
orfacilitation,isthesubjectofSanctions;or
(B)inanyothermannerthatwillresultinaviolationofSanctionsbyanyPerson(includinganyPersonparticipatingintheoffering,whetherasunderwriter,advisor,investororotherwise).
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(iii)Forthepastfiveyears,theCompanyanditssubsidiarieshavenotknowinglyengagedinandarenotnowknowinglyengagedinanydealingsortransactionswithanyPerson,orinanycountryorterritory,thatatthetimeofthedealingortransactionisorwasthesubjectofSanctions.
(mm)ERISACompliance.Noneofthefollowingeventshasoccurredorexists:(i)afailuretofulfilltheobligations,ifany,undertheminimum
fundingstandardsofSection302ofERISAwithrespecttoaPlandeterminedwithoutregardtoanywaiverofsuchobligationsorextensionofanyamortizationperiod;(ii)anauditorinvestigationbytheInternalRevenueService,theU.S.DepartmentofLabor,thePensionBenefitGuarantyCorporationoranyotherfederal,stateorforeigngovernmentalorregulatoryagencywithrespecttotheemploymentorcompensationofemployeesbytheCompanyoranyofitssubsidiariesthatcouldreasonablybeexpected,individuallyorintheaggregate,toresultinaMaterialAdverseEffect;or(iii)anyviolationofapplicablelaworqualificationstandardswithrespecttoaPlanbytheCompanyoranyofitssubsidiariesthatcouldreasonablybeexpected,individuallyorintheaggregate,toresultinaMaterialAdverseEffect.Noneofthefollowingeventshasoccurredorisreasonablylikelytooccur:(i)amaterialincreaseinthe“accumulatedpost-retirementbenefitobligations”(withinthemeaningofStatementofFinancialAccountingStandards106)oftheCompanyanditssubsidiaries
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comparedtotheamountofsuchobligationsintheCompany’smostrecentlycompletedfiscalyear;(ii)anyeventorconditiongivingrisetoaliabilityunderTitleIVofERISAwithrespecttoaPlanthatcouldreasonablybeexpected,individuallyorintheaggregate,toresultinaMaterialAdverseEffect;or(iii)thefilingofaclaimbyoneormoreemployeesorformeremployeesoftheCompanyoranyofitssubsidiariesrelatedtoitsortheiremploymentthatcouldreasonablybeexpected,individuallyorintheaggregate,toresultinaMaterialAdverseEffect.ForpurposesofthisparagraphandthedefinitionofERISA,theterm“Plan”meansaplan(withinthemeaningofSection3(3)ofERISA)withrespecttowhichtheCompanyoranyofitssubsidiariesmayhaveanyliability.
(nn)AbsenceofUnlawfulInfluence.TheCompanyhasnotofferedorsold,orcausedtheUnderwriterstoofferorsell,anyOfferedSecuritiestoany
personwiththespecificintenttounlawfullyinfluence(i)acustomerorsupplieroftheCompanytoalterthecustomer’sorsupplier’slevelortypeofbusinesswiththeCompanyor(ii)atradejournalistorpublicationtowriteorpublishfavorableinformationabouttheCompanyoritsproducts.
(oo)NoRestrictionsonPaymentsbySubsidiaries.ExceptassetforthintheGeneralDisclosurePackage,theFinalProspectusandintheindentures
governingthe2020Notes,the2022NotesandtheTermLoan,nosubsidiaryoftheCompanyiscurrentlyprohibited,directlyorindirectly,underanyagreementorotherinstrumenttowhichitisapartyorissubjectorotherwise,(i)frompayinganydividendstotheCompany,(ii)frommakinganyotherdistributiononsuchsubsidiary’scapitalstock,(iii)fromrepayingtotheCompanyanyloansoradvancestosuchsubsidiaryfromtheCompanyor(iv)fromtransferringanyofsuchsubsidiary’smaterialpropertiesorassetstotheCompanyoranyothersubsidiaryoftheCompany.
(pp)DirectedShareProgram.TheRegistrationStatement,theGeneralDisclosurePackageandtheFinalProspectus,anypreliminaryprospectus
andanyIssuerFreeWritingProspectusescomply,andanyfurtheramendmentsorsupplementstheretowillcomply,withanyapplicablelawsorregulationsofforeignjurisdictionsinwhichtheGeneralDisclosurePackage,theFinalProspectus,anypreliminaryprospectusandanyIssuerFreeWritingProspectus,asamendedorsupplemented,ifapplicable,aredistributedinconnectionwiththeDirectedShareProgram.
(qq)DirectedShareProgramConsent.Noconsent,approval,authorizationororderof,orqualificationwith,anygovernmentalbodyoragency,
otherthanthoseobtained,isrequiredinconnectionwiththeofferingoftheDirectedSharesinanyjurisdictionwheretheDirectedSharesarebeingoffered.
(rr)OffersunderDirectedShareProgram.TheCompanyhasnotoffered,orcausedCreditSuisse,anyCreditSuisseEntity(asdefinedin
Section9),MorganStanleyoranyMorganStanleyEntity(asdefinedinSection9)tooffer,FirmSecuritiestoanypersonpursuanttotheDirectedShareProgramwiththespecificintenttounlawfullyinfluence(i)acustomerorsupplieroftheCompanytoalterthecustomer’sorsupplier’slevelortypeofbusinesswiththeCompany,or(ii)atradejournalistorpublicationtowriteorpublishfavorableinformationabouttheCompanyoritsproducts.
3.RepresentationsandWarrantiesoftheSellingStockholder.TheSellingStockholderrepresentsandwarrantsto,andagreeswith,theseveral
Underwritersthat:
(a)TitletoSecurities.OneachClosingDatehereinaftermentioned,theSellingStockholderwillhavevalidtitleto,oravalid“securityentitlement”withinthemeaningofSection8-501oftheNewYorkUniformCommercialCode,inrespectof,theOptionalSecuritiestobedeliveredbytheSellingStockholderonsuchClosingDateandfullright,powerandauthoritytoenterintothisAgreementandtosell,assign,transferanddelivertheOptionalSecuritiestobedeliveredbytheSellingStockholderonsuchClosingDatehereunder;anduponthedeliveryofandpaymentfortheOfferedSecuritiesoneachClosingDatehereundertheseveralUnderwriterswillacquireavalid
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securityentitlementinrespectoftheOptionalSecuritiestobedeliveredbytheSellingStockholderonsuchClosingDate.
(b)AbsenceofFurtherRequirements.Noconsent,approval,authorizationororderof,orfilingwith,anyperson(includinganygovernmental
agencyorbodyoranycourt)isrequiredtobeobtainedormadebytheSellingStockholderfortheconsummationofthetransactionscontemplatedbythisAgreementorinconnectionwiththeofferingandsaleoftheOfferedSecurities,except(i)suchashavebeen,obtainedormade,andareinfullforceandeffectasoforpriortotheinitialClosingDate,or(ii)asmayberequiredunderapplicablesecuritieslawsoftheseveralstatesoftheUnitedStatesorotherjurisdictionsinwhichtheOfferedSecuritiesmaybeofferedorsold,exceptsuchaswouldnotreasonablybeexpectedtohaveamaterialadverseeffectontheabilityoftheSellingStockholdertoconsummatethetransactionscontemplatedbythisAgreement.
(c)AbsenceofDefaultsandConflictsResultingfromTransaction.Theexecution,deliveryandperformanceofthisAgreementandthe
consummationofthetransactionshereincontemplatedwillnotresultinabreachorviolationofanyofthetermsandprovisionsof,orconstituteadefaultunder,orresultintheimpositionof(i)anylien,chargeorencumbranceuponanypropertyorassetsoftheSellingStockholderpursuantto,anystatute,rule,regulationororderofanygovernmentalagencyorbodyoranycourthavingjurisdictionovertheSellingStockholderoranyofitsproperties;(ii)anyagreementoranyinstrumenttowhichtheSellingStockholderisapartyorbywhichtheSellingStockholderisboundortowhichanyofthepropertiesoftheSellingStockholderissubject;or(iii)thecharterorby-lawsoftheSellingStockholderthatisacorporationortheconstituentdocumentsoftheSellingStockholderthatisnotanaturalpersonoracorporation,except,inthecaseoftheforegoingclauses(i)and(ii),wheresuchbreach,violation,default,lien,chargeorencumbrancewouldnot,individuallyorintheaggregate,haveamaterialadverseeffectontheSellingStockholder’sabilitytoconsummatethetransactionscontemplatedbythisAgreement.
(d)FinalProspectus.Onitsdate,atthetimeoffilingoftheFinalProspectuspursuanttoRule424(b)or(ifnosuchfilingisrequired)atthe
EffectiveTimeoftheAdditionalRegistrationStatementinwhichtheFinalProspectusisincluded,andoneachClosingDate,theFinalProspectuswillnotincludeanyuntruestatementofamaterialfactoromittostateanymaterialfactrequiredtobestatedthereinornecessarytomakethestatementsthereinnotmisleading.TheprecedingsentenceappliesonlytowritteninformationfurnishedtotheCompanybytheSellingStockholderspecificallyandexpresslyforuseintheFinalProspectus,itbeingunderstoodandagreedthattheonlysuchinformationisthatdescribedassuchinSection9(b)hereof.
(e)NoUndisclosedMaterialInformation.AsofthedatehereofandeachClosingDate,thesaleoftheFirmSecuritiesbytheSellingStockholder
pursuanttothisAgreementisnotpromptedbyanymaterialinformationconcerningtheCompanyoranyofitssubsidiariesthatisnotsetforththeGeneralDisclosurePackageandtheFinalProspectus.
(f)GeneralDisclosurePackage.AsoftheApplicableTime,noneof(i)theGeneralDisclosurePackage,(ii)anyindividualLimitedUseIssuerFree
WritingProspectus,whenconsideredtogetherwiththeGeneralDisclosurePackage,or(iii)anyindividualTesting-the-WatersCommunication,whenconsideredtogetherwiththeGeneralDisclosurePackage,includedanyuntruestatementofamaterialfactoromittedtostateanymaterialfactnecessaryinordertomakethestatementstherein,inthelightofthecircumstancesunderwhichtheyweremade,notmisleading.TheprecedingsentenceappliesonlytowritteninformationfurnishedtotheCompanybytheSellingStockholderspecificallyandexpresslyforuseintheGeneralDisclosurePackage,anyindividualLimitedUseIssuerFreeWritingProspectusoranyTesting-the-WatersCommunication,itbeingunderstoodandagreedthattheonlysuchinformationisthatdescribedassuchinSection9(b)hereof.
(g)NoDistributionofOfferingMaterial.TheSellingStockholderhasnotdistributedandwillnotdistributeanyprospectusorotherofferingmaterial
inconnectionwiththeofferingandsaleoftheOfferedSecurities.
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(h)Testing-the-WatersCommunication.TheSellingStockholderhasnotengagedinanyTesting-the-WatersCommunication.
(i)GoodStandingofSellingStockholder.TotheextenttheSellingStockholderisanentity,theSellingStockholderisvalidlyexistingand,tothe
extentsuchconceptexistsintherelevantjurisdiction,ingoodstandingunderthelawsofthejurisdictionofitsorganization.
(j)AuthorizationofAgreement.ThisAgreementhasbeendulyauthorized,executedanddeliveredbyoronbehalfoftheSellingStockholder.
(k)NoFinder’sFee.ExceptasdisclosedintheGeneralDisclosurePackageandtheFinalProspectus,therearenocontracts,agreementsorunderstandingsbetweentheSellingStockholderandanypersonthatwouldgiverisetoavalidclaimagainsttheSellingStockholderoranyUnderwriterforabrokeragecommission,finder’sfeeorotherlikepaymentinconnectionwiththisoffering.
(l)AbsenceofManipulation.TheSellingStockholderhasnottaken,directlyorindirectly,anyactionthatisdesignedtoorthathasconstitutedor
thatwouldreasonablybeexpectedtocauseorresultinthestabilizationormanipulationofthepriceofanysecurityoftheCompanytofacilitatethesaleorresaleoftheOfferedSecurities.
(m)ContinuedCompliancewithSecuritiesLaws.If,atanytimewhenaprospectusrelatingtotheofferedSecuritiesis(orbutfortheexemptionin
Rule172wouldbe)requiredtobedeliveredundertheActbyanyUnderwriterordealer,anyeventoccursasaresultofwhichtheGeneralDisclosurePackageortheFinalProspectusasthenamendedorsupplementedwouldincludeanuntruestatementofamaterialfactoromittostateanymaterialfactnecessarytomakethestatementsthereinnotmisleadingwithrespecttotheSellingStockholder,inthelightofthecircumstancesunderwhichtheyweremade,theSellingStockholderwillpromptlynotifytheCompanyandtheRepresentativeofsuchchange.TheprecedingsentenceappliesonlytowritteninformationfurnishedtotheCompanybytheSellingStockholderspecificallyandexpresslyforuseintheGeneralDisclosurePackageortheFinalProspectus,itbeingunderstoodandagreedthattheonlysuchinformationisthatdescribedassuchinSection9(b)hereof.
(l)ERISA.SuchSellingStockholderisnot(1)anemployeebenefitplansubjecttoTitleIoftheEmployeeRetirementIncomeSecurityActof1974,
asamended(“ERISA”),(2)aplanoraccountsubjecttoSection4975oftheInternalRevenueCodeof1986,asamended,or(3)anentitydeemedtohold“planassets”ofanysuchplanoraccountunderSection3(42)ofERISA,29C.F.R.2510.3-101,orotherwise.
4.Purchase,SaleandDeliveryofOfferedSecurities.Onthebasisoftherepresentations,warrantiesandagreementsandsubjecttothetermsand
conditionssetforthherein,theCompanyandtheSellingStockholderagree,severallyandnotjointly,toselltoeachUnderwriter,andeachUnderwriteragrees,severallyandnotjointly,topurchasefromtheCompanyandtheSellingStockholder,atapurchasepriceof$[·]pershare,thenumberofFirmSecurities(subjecttoadjustmentbytheRepresentativesintheirdiscretiontoeliminatefractions)obtainedbymultiplying[·]FirmSecuritiesinthecaseoftheCompanyand[·]FirmSecuritiesinthecaseoftheSellingStockholder,ineachcase,bythefractionthenumeratorofwhichisthenumberofFirmSecuritiessetforthoppositethenameofsuchUnderwriterinScheduleAheretoandthedenominatorofwhichisthetotalnumberofFirmSecurities.
TheCompanyandtheSellingStockholderwilldelivertheFirmSecuritiestoorasinstructedbytheRepresentativesfortheaccountsoftheseveralUnderwritersinaformreasonablyacceptabletotheRepresentatives,againstpaymentofthepurchasepricebytheUnderwritersinFederal(sameday)fundsbywiretransfertoanaccountatabankspecified,asapplicable,bytheCompanyandtheSellingStockholderandacceptabletotheRepresentativesdrawntotheorderoftheCompanyandtheSellingStockholder,asapplicable,attheofficeofShearman&SterlingLLP,at9:00A.M.,NewYorktime,on[·],2018oratsuchothertimenotlaterthansevenfullbusinessdaysthereafterastheRepresentativesandtheCompany
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determine,suchtimebeinghereinreferredtoasthe“First Closing Date ”.ForpurposesofRule15c6-1undertheExchangeAct,theFirstClosingDate(iflaterthantheotherwiseapplicablesettlementdate)shallbethesettlementdateforpaymentoffundsanddeliveryofsecuritiesforalltheFirmSecuritiessoldpursuanttotheoffering.DeliveryoftheFirmSecuritieswillbemadethroughthefacilitiesoftheDepositaryTrustCompany(the“DTC ”)unlesstheRepresentativesshallotherwiseinstruct.
Inaddition,uponwrittennoticefromtheRepresentativesgiventotheCompanyfromtimetotime,notmorethan30dayssubsequenttothedateoftheFinalProspectus,theUnderwritersmaypurchaseallorlessthanalloftheOptionalSecuritiesatthepurchasepriceperSecuritytobepaidfortheFirmSecurities.TheCompanyagreestoselltotheUnderwritersthenumberofsharesofOptionalSecuritiesspecifiedinsuchnotice,andtheUnderwritersagree,severallyandnotjointly,topurchasesuchOptionalSecurities.TheOptionalSecuritiessoldbytheCompanyshallbepurchasedfromtheCompanyfortheaccountofeachUnderwriterinthesameproportionasthenumberofFirmSecuritiessetforthoppositesuchUnderwriter’snameonScheduleAheretobearstothetotalnumberofFirmSecurities(subjecttoadjustmentbytheRepresentativestoeliminatefractions)andmaybepurchasedbytheUnderwritersonlyforthepurposeofcoveringover-allotmentsmadeinconnectionwiththesaleoftheFirmSecurities.NoOptionalSecuritiesshallbesoldordeliveredunlesstheFirmSecuritiespreviouslyhavebeen,orsimultaneouslyare,soldanddelivered.TherighttopurchasetheOptionalSecuritiesoranyportionthereofmaybeexercisedfromtimetotimeandtotheextentnotpreviouslyexercisedmaybesurrenderedandterminatedatanytimeuponnoticebytheRepresentativestotheCompany.
EachtimeforthedeliveryofandpaymentfortheOptionalSecurities,beinghereinreferredtoasan“Optional Closing Date ”,whichmaybetheFirstClosingDate(theFirstClosingDateandeachOptionalClosingDate,ifany,beingsometimesreferredtoasa“Closing Date ”),shallbedeterminedbytheRepresentativesbutshallbenotlaterthanfivefullbusinessdaysafterwrittennoticeofelectiontopurchaseOptionalSecuritiesisgiven.TheCompanywilldelivertheOptionalSecuritiesbeingpurchasedoneachOptionalClosingDatetoorasinstructedbytheRepresentativesfortheaccountsoftheseveralUnderwriters,inaformreasonablyacceptabletotheRepresentativesagainstpaymentofthepurchasepricethereforeinFederal(sameday)fundsbywiretransfertotheaccountsatbanksacceptabletotheRepresentatives.DeliveryofanyOptionalSecuritieswillbemadethroughthefacilitiesofDTCunlesstheRepresentativesshallotherwiseinstruct.
5.OfferingbyUnderwriters.ItisunderstoodthattheseveralUnderwritersproposetooffertheOfferedSecuritiesforsaletothepublicassetforthintheFinalProspectus.
6.CertainAgreementsoftheCompanyandtheSellingStockholder.TheCompanyagreeswiththeseveralUnderwritersandtheSellingStockholderthat:
(a)AdditionalFilings.UnlessfiledpursuanttoRule462(c)aspartoftheAdditionalRegistrationStatementinaccordancewiththenextsentence,theCompanywillfiletheFinalProspectus,inaformapprovedbytheRepresentatives,withtheCommissionpursuanttoandinaccordancewithsubparagraph(1)(or,ifapplicableandifconsentedtobytheRepresentatives,subparagraph(4))ofRule424(b)notlaterthantheearlierof(A)thesecondbusinessdayfollowingtheexecutionanddeliveryofthisAgreementor(B)thefifteenthbusinessdayaftertheEffectiveTimeoftheInitialRegistrationStatement.TheCompanywilladvisetheRepresentativespromptlyofanysuchfilingpursuanttoRule424(b)andprovidesatisfactoryevidencetotheRepresentativesofsuchtimelyfiling.IfanAdditionalRegistrationStatementisnecessarytoregisteraportionoftheOfferedSecuritiesundertheActbuttheEffectiveTimethereofhasnotoccurredasoftheexecutionanddeliveryofthisAgreement,theCompanywillfiletheadditionalregistrationstatementor,iffiled,willfileapost-effectiveamendmenttheretowiththeCommissionpursuanttoandinaccordancewithRule462(b)onorpriorto10:00P.M.,NewYorktime,onthedateofthisAgreementor,ifearlier,onorpriortothetimetheFinalProspectusisfinalizedanddistributedtoanyUnderwriter,orwillmakesuchfilingatsuchlaterdateasshallhavebeenconsentedtobytheRepresentatives.
(b)FilingofAmendments:ResponsetoCommissionRequests.TheCompanywillpromptly
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advisetheRepresentativesofanyproposaltoamendorsupplementatanytimetheInitialRegistrationStatement,anyAdditionalRegistrationStatementoranyStatutoryProspectusandwillnoteffectsuchamendmentorsupplementationwithouttheRepresentatives’consent,whichshallnotbeunreasonablywithheld,andtheCompanywillalsoadvisetheRepresentativespromptlyof(i)theeffectivenessofanyAdditionalRegistrationStatement(ifitsEffectiveTimeissubsequenttotheexecutionanddeliveryofthisAgreement),(ii)anyamendmentorsupplementationofaRegistrationStatementoranyStatutoryProspectus,(iii)anyrequestbytheCommissionoritsstaffforanyamendmenttoanyRegistrationStatement,foranysupplementtoanyStatutoryProspectusorforanyadditionalinformation,(iv)theinstitutionbytheCommissionofanystoporderproceedingsinrespectofaRegistrationStatementorthethreateningofanyproceedingforthatpurpose,and(v)thereceiptbytheCompanyofanynotificationwithrespecttothesuspensionofthequalificationoftheOfferedSecuritiesinanyjurisdictionortheinstitutionorthreateningofanyproceedingsforsuchpurpose.TheCompanywilluseitsbesteffortstopreventtheissuanceofanysuchstoporderorthesuspensionofanysuchqualificationand,ifissued,toobtainassoonaspossiblethewithdrawalthereof.
(c)ContinuedCompliancewithSecuritiesLaws.If,atanytimewhenaprospectusrelatingtotheOfferedSecuritiesis(orbutfortheexemptionin
Rule172wouldbe)requiredtobedeliveredundertheActbyanyUnderwriterordealer,anyeventoccursasaresultofwhichtheFinalProspectusasthenamendedorsupplementedwouldincludeanuntruestatementofamaterialfactoromittostateanymaterialfactnecessarytomakethestatementstherein,inthelightofthecircumstancesunderwhichtheyweremade,notmisleading,orifitisnecessaryatanytimetoamendtheRegistrationStatementorsupplementtheFinalProspectustocomplywiththeAct,theCompanywillpromptlynotifytheRepresentativesofsucheventandwillpromptlyprepareandfilewiththeCommissionandfurnish,atitsownexpense,totheUnderwritersandthedealersandanyotherdealersuponrequestoftheRepresentatives,anamendmentorsupplementwhichwillcorrectsuchstatementoromissionoranamendmentwhichwilleffectsuchcompliance.NeithertheRepresentatives’consentto,northeUnderwriters’deliveryof,anysuchamendmentorsupplementshallconstituteawaiverofanyoftheconditionssetforthinSection8hereof.
(d)Testing-the-WatersCommunication.IfatanytimefollowingthedistributionofanyWrittenTesting-the-WatersCommunicationthereoccurredor
occursaneventordevelopmentasaresultofwhichsuchWrittenTesting-the-WatersCommunicationincludedorwouldincludeanuntruestatementofamaterialfactoromittedorwouldomittostateamaterialfactnecessaryinordertomakethestatementstherein,inthelightofthecircumstancesexistingatthatsubsequenttime,notmisleading,theCompanywillpromptlynotifytheRepresentativesandwillpromptlyamendorsupplement,atitsownexpense,suchWrittenTesting-the-WatersCommunicationtoeliminateorcorrectsuchstatementoromission.
(e)Rule158.Assoonaspracticable,butnotlaterthantheAvailabilityDate(asdefinedbelow),theCompanywillmakegenerallyavailabletoits
securityholdersanearningsstatementcoveringaperiodofatleast12monthsbeginningaftertheEffectiveTimeoftheInitialRegistrationStatement(or,iflater,theEffectiveTimeoftheAdditionalRegistrationStatement)whichwillsatisfytheprovisionsofSection11(a)oftheActandRule158undertheAct.Forthepurposeoftheprecedingsentence,“Availability Date ”meansthedayaftertheendofthefourthfiscalquarterfollowingthefiscalquarterthatincludessuchEffectiveTimeonwhichtheCompanyisrequiredtofileitsForm10-Qforsuchfiscalquarterexceptthat,ifsuchfourthfiscalquarteristhelastquarteroftheCompany’sfiscalyear,“AvailabilityDate”meansthedayaftertheendofsuchfourthfiscalquarteronwhichtheCompanyisrequiredtofileitsForm10-K.
(f)FurnishingofProspectuses.TheCompanywillfurnishtotheRepresentativescopiesofeachRegistrationStatement,eachrelatedStatutory
Prospectus,and,solongasaprospectusrelatingtotheOfferedSecuritiesis(orbutfortheexemptioninRule172wouldbe)requiredtobedeliveredundertheAct,theFinalProspectusandallamendmentsandsupplementstosuchdocuments,ineachcaseinsuchquantitiesastheRepresentativesrequest.TheFinalProspectusshallbesofurnishedonorpriorto3:00P.M.,NewYorktime,onthebusinessdayfollowingtheexecutionanddeliveryofthis
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Agreement.Allothersuchdocumentsshallbesofurnishedassoonasavailable.TheCompanywillpaytheexpensesofprintinganddistributingtotheUnderwritersallsuchdocuments.
(g)BlueSkyQualifications.TheCompanywillarrangeforthequalificationoftheOfferedSecuritiesforsaleunderthelawsofsuchjurisdictionsas
theRepresentativesdesignateandwillcontinuesuchqualificationsineffectsolongasrequiredforthedistribution.
(h)ReportingRequirements.Duringtheperiodoffiveyearshereafter,theCompanywillfurnishtotheRepresentativesand,uponrequest,toeachoftheotherUnderwriters,assoonaspracticableaftertheendofeachfiscalyear,acopyofitsannualreporttostockholdersforsuchyear;andtheCompanywillfurnishtotheRepresentatives(i)assoonasavailable,acopyofeachreportandanydefinitiveproxystatementoftheCompanyfiledwiththeCommissionundertheExchangeActormailedtostockholders,and(ii)fromtimetotime,suchotherinformationconcerningtheCompanyastheRepresentativesmayreasonablyrequest.However,solongastheCompanyissubjecttothereportingrequirementsofeitherSection13orSection15(d)oftheExchangeActandistimelyfilingreportswiththeCommissiononitsElectronicDataGathering,AnalysisandRetrievalsystem(oranysuccessorsystem)(“EDGAR ”),itisnotrequiredtofurnishsuchreportsorstatementstotheUnderwriters.
(i)PaymentofExpenses.TheCompanyagreeswiththeseveralUnderwritersthattheCompanywillpayallexpensesincidenttotheperformanceof
theobligationsoftheCompanyandtheSellingStockholderunderthisAgreement,includingbutnotlimitedtoanyfilingfeesandotherexpenses(includingfeesanddisbursementsofcounseltotheUnderwriters)incurredinconnectionwithqualificationoftheOfferedSecuritiesforsaleunderthelawsofsuchjurisdictionsastheRepresentativesdesignateandthepreparationandprintingofmemorandarelatingthereto,costsandexpensesrelatedtothereviewbytheFinancialIndustryRegulatoryAuthority,Inc.(“FINRA ”)oftheOfferedSecurities(includingfilingfeesandthefeesandexpensesofcounselfortheUnderwritersrelatingtosuchreviewinanamountnottoexceed$50,000),costsandexpensesrelatingtoinvestorpresentationsorany“roadshow”inconnectionwiththeofferingandsaleoftheOfferedSecuritiesincluding,withoutlimitation,anytravelexpensesoftheCompany’sofficersandemployeesandanyotherexpensesoftheCompanyincludingthecharteringofairplanes,feesandexpensesincidenttolistingtheOfferedSecuritiesontheNewYorkStockExchangeandothernationalandforeignexchanges,feesandexpensesinconnectionwiththeregistrationoftheOfferedSecuritiesundertheExchangeAct,allfeesanddisbursementsofcounselincurredbytheUnderwritersinconnectionwiththeDirectedShareProgramandstampduties,similartaxesordutiesorothertaxes,ifany,incurredbytheUnderwritersinconnectionwiththeDirectedShareProgram,anytransfertaxespayableinconnectionwiththedeliveryoftheOfferedSecuritiestotheUnderwritersandexpensesincurredindistributingpreliminaryprospectusesandtheFinalProspectus(includinganyamendmentsandsupplementsthereto)totheUnderwritersandforexpensesincurredforpreparing,printinganddistributinganyIssuerFreeWritingProspectusestoinvestorsorprospectiveinvestors.
(j)UseofProceeds.TheCompanywillusethenetproceedsreceivedbyitinconnectionwiththisofferinginthemannerdescribedinthe“Useof
Proceeds”sectionoftheGeneralDisclosurePackageandtheFinalProspectusand,exceptforasdisclosedintheGeneralDisclosurePackage,andtheFinalProspectus,theCompanydoesnotintendtouseanyoftheproceedsfromthesaleoftheOfferedSecuritieshereundertorepayanyoutstandingdebtowedtoanyUnderwriteroraffiliateofanyUnderwriter.
(k)AbsenceofManipulation.TheCompanywillnottake,directlyorindirectly,anyactiondesignedtoorthatwouldconstituteorthatmight
reasonablybeexpectedtocauseorresultin,stabilizationormanipulationofthepriceofanysecuritiesoftheCompanytofacilitatethesaleorresaleoftheOfferedSecurities.
(l)(A)RestrictiononSaleofSecuritiesbyCompany.Fortheperiodspecifiedbelow(the“Lock-Up Period ”),theCompanywillnot,directlyor
indirectly,takeanyofthefollowingactions
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withrespecttoitssharesofcommonstockoranysecuritiesconvertibleintoorexchangeableorexercisableforanyofitssharesofcommonstock(“Lock-Up Securities ”):(i)offer,sell,contracttosell,pledgeorotherwisedisposeofLock-UpSecurities,(ii)offer,sell,contracttosell,contracttopurchaseorgrantanyoption,rightorwarranttopurchaseLock-UpSecurities,(iii)enterintoanyswap,hedgeoranyotheragreementthattransfers,inwholeorinpart,theeconomicconsequencesofownershipofLock-UpSecurities,(iv)establishorincreaseaputequivalentpositionorliquidateordecreaseacallequivalentpositioninLock-UpSecuritieswithinthemeaningofSection16oftheExchangeActor(v)filewiththeCommissionaregistrationstatementundertheActrelatingtoLock-UpSecurities(exceptforregistrationstatementsonFormS-8withrespecttoanyandallsecuritiestobeissuedpursuanttotheCompany’s2014Long-TermIncentivePlanandtheCompany’s2018EquityandIncentiveCompensationPlan),orpubliclydisclosetheintentiontotakeanysuchaction,withoutthepriorwrittenconsentoftheRepresentatives,exceptissuancesofLock-UpSecuritiespursuanttotheconversionorexchangeofconvertibleorexchangeablesecuritiesortheexerciseofwarrantsoroptions,ineachcaseoutstandingonthedatehereofanddescribedintheGeneralDisclosurePackageandtheFinalProspectus.Further,theCompanymayissuesecuritiesorotherequity-basedawards,pursuanttoanyequityincentiveplan,stockbonusorotherstockplanorarrangementdescribedintheGeneralDisclosurePackageandtheFinalProspectus,includingpursuanttotheCompany’s2014Long-TermIncentivePlanandtheCompany’s2018EquityandIncentiveCompensationPlan;providedthattheholdersofanysuchsecuritiesdeliveralock-upagreementsubstantiallyintheformofExhibitDhereto.TheLock-UpPeriodwillcommenceonthedatehereofandcontinuefor180daysafterthedatehereoforsuchearlierdatethattheRepresentativesconsenttoinwriting.
(B)AgreementtoAnnounceLock-upWaiver.IftheRepresentativesagreetoreleaseorwaivetherestrictionssetforthinalock-upletter
describedinSection8(h)hereofforanofficerordirectoroftheCompanyandprovidestheCompanywithnoticeoftheimpendingreleaseorwaiveratleastthreebusinessdaysbeforetheeffectivedateofthereleaseorwaiver,theCompanyagreestoannouncetheimpendingreleaseorwaiverbyapressreleasesubstantiallyintheformofExhibitCheretothroughamajornewsserviceatleasttwobusinessdaysbeforetheeffectivedateofthereleaseorwaiver
(m)EmergingGrowthCompanyStatus.TheCompanywillpromptlynotifytheRepresentativesiftheCompanyceasestobetreatedasanEmerging
GrowthCompanyatanytimepriortothecompletionofthedistributionoftheOfferedSecuritieswithinthemeaningoftheAct.
(o)DirectedShareProgram.TheCompanywillcomplywithallapplicablesecuritiesandotherlaws,rulesandregulationsineachjurisdictioninwhichtheDirectedSharesareofferedinconnectionwiththeDirectedShareProgram.
7.FreeWritingProspectuses.TheCompanyandtheSellingStockholderrepresentandagreethat,unlessitobtainsthepriorconsentofthe
Representatives,andeachUnderwriterrepresentsandagreesthat,unlessitobtainsthepriorconsentoftheCompanyandtheRepresentatives,ithasnotmadeandwillnotmakeanyofferrelatingtotheOfferedSecuritiesthatwouldconstituteanIssuerFreeWritingProspectus,orthatwouldotherwiseconstitutea“freewritingprospectus,”asdefinedinRule405,requiredtobefiledwiththeCommission.AnysuchfreewritingprospectusconsentedtobytheCompanyandtheRepresentativesishereinafterreferredtoasa“Permitted Free Writing Prospectus .”TheCompanyrepresentsthatithastreatedandagreesthatitwilltreateachPermittedFreeWritingProspectusasan“issuerfreewritingprospectus,”asdefinedinRule433,andhascompliedandwillcomplywiththerequirementsofRules164and433applicabletoanyPermittedFreeWritingProspectus,includingtimelyCommissionfilingwhererequired,legendingandrecordkeeping.TheCompanyrepresentsthatithassatisfiedandagreesthatitwillsatisfytheconditionsinRule433toavoidarequirementtofilewiththeCommissionanyelectronicroadshow.
8.ConditionsoftheObligationsoftheUnderwriters.TheobligationsoftheseveralUnderwriterstopurchaseandpayfortheFirmSecuritiesontheFirstClosingDateandtheOptionalSecuritiestobepurchasedoneachOptionalClosingDatewillbesubjecttotheaccuracyoftherepresentationsandwarrantiesofthe
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CompanyandtheSellingStockholder(asthoughmadeonsuchClosingDate),totheaccuracyofthestatementsofCompanyofficersmadepursuanttotheprovisionshereof,totheperformancebytheCompanyandtheSellingStockholderofitsobligationshereunderandtothefollowingadditionalconditionsprecedent:
(a)Accountants’ComfortLetter.TheRepresentativesshallhavereceivedletters,dated,respectively,thedatehereofandeachClosingDate,ofeachofGrantThorntonLLPandErnst&YoungLLPintheformandsubstancesatisfactorytotheRepresentatives(exceptthat,inanyletterdatedaClosingDate,thespecifieddatereferredtointhecomfortlettersshallbeadatenomorethanthreedayspriortosuchClosingDate).
(b)EffectivenessofRegistrationStatement.IftheEffectiveTimeoftheAdditionalRegistrationStatement(ifany)isnotpriortotheexecutionand
deliveryofthisAgreement,suchEffectiveTimeshallhaveoccurrednotlaterthan10:00P.M.,NewYorktime,onthedateofthisAgreementor,ifearlier,thetimetheFinalProspectusisfinalizedanddistributedtoanyUnderwriter,orshallhaveoccurredatsuchlatertimeasshallhavebeenconsentedtobytheRepresentatives.TheFinalProspectusshallhavebeenfiledwiththeCommissioninaccordancewiththeRulesandRegulationsandSection6(a)hereof.PriortosuchClosingDate,nostopordersuspendingtheeffectivenessofaRegistrationStatementshallhavebeenissuedandnoproceedingsforthatpurposeshallhavebeeninstitutedor,totheknowledgeoftheSellingStockholder,theCompanyortheRepresentatives,shallbecontemplatedbytheCommission.
(c)NoMaterialAdverseChange.SubsequenttotheexecutionanddeliveryofthisAgreement,thereshallnothaveoccurred(i)anychange,orany
developmentoreventinvolvingaprospectivechange,inthecondition(financialorotherwise),resultsofoperations,business,propertiesorprospectsoftheCompanyanditssubsidiariestakenasawholewhich,inthejudgmentoftheRepresentativesismaterialandadverseandmakesitimpracticalorinadvisabletooffer,sellordelivertheOfferedSecuritiesinthemannerandonthetermsdescribedintheGeneralDisclosurePackageandtheFinalProspectus;(ii)anydowngradingintheratingofanydebtsecuritiesorpreferredstockoftheCompanybyany“nationallyrecognizedstatisticalratingorganization”(asdefinedforpurposesofSection3(a)(62)oftheExchangeAct),oranypublicannouncementthatanysuchorganizationhasundersurveillanceorreviewitsratingofanydebtsecuritiesorpreferredstockoftheCompany(otherthananannouncementwithpositiveimplicationsofapossibleupgrading,andnoimplicationofapossibledowngrading,ofsuchrating)oranyannouncementthattheCompanyhasbeenplacedonnegativeoutlook;(iii)anychangeinU.S.orinternationalfinancial,politicaloreconomicconditionsorcurrencyexchangeratesorexchangecontrolstheeffectofwhichissuchastomakeit,inthejudgmentoftheRepresentatives,impracticalorinadvisabletooffer,sellordelivertheOfferedSecuritiesinthemannerandonthetermsdescribedintheGeneralDisclosurePackageandtheFinalProspectusortoenforcecontractsforthesaleoftheOfferedSecurities,whetherintheprimarymarketorinrespectofdealingsinthesecondarymarket,(iv)anysuspensionormateriallimitationoftradinginsecuritiesgenerallyontheNewYorkStockExchangeortheNASDAQGlobalSelectMarket,oranysettingofminimumormaximumpricesfortradingonsuchexchange;(v)oranysuspensionoftradingofanysecuritiesoftheCompanyonanyexchangeorintheover-the-countermarket;(vi)anygeneralbankingmoratoriumdeclaredbyanyU.S.federalorNewYorkauthorities;(vii)anymajordisruptionofsettlementsofsecurities,payment,orclearanceservicesintheUnitedStatesoranyothercountrywheresuchsecuritiesarelistedor(viii)anyattackon,outbreakorescalationofhostilitiesoractofterrorisminvolvingtheUnitedStates,anydeclarationofwarbyCongressoranyothernationalorinternationalcalamityoremergencyif,inthejudgmentoftheRepresentatives,theeffectofanysuchattack,outbreak,escalation,act,declaration,calamityoremergencyissuchastomakeitinthejudgmentoftheRepresentativesimpracticalorinadvisabletooffer,sellordelivertheOfferedSecuritiesinthemannerandonthetermsdescribedintheGeneralDisclosurePackageandtheFinalProspectusortoenforcecontractsforthesaleoftheOfferedSecurities.
(d)OpinionofCounselfortheCompany.TheRepresentativesshallhavereceivedanopinion,datedsuchClosingDate,ofJonesDay,counselforthe
Company,intheformattachedheretoasExhibitA.
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(e)OpinionofCounselforCHKEnergyHoldings,Inc.TheRepresentativesshallhavereceivedanopinion,datedsuchClosingDate,ofBakerBotts
L.L.P.,counselforCHKEnergyHoldings,Inc.,insubstantiallytheformattachedheretoasExhibitB.
(f)OpinionofCounselforUnderwriters.TheRepresentativesshallhavereceivedfromShearman&SterlingLLP,counselfortheUnderwriters,suchopinionoropinions,datedsuchClosingDate,withrespecttosuchmattersastheRepresentativesmayrequireandtheSellingStockholdersandtheCompanyshallhavefurnishedtosuchcounselsuchdocumentsastheyreasonablyrequestforthepurposeofenablingthemtopassuponsuchmatters.
(g)Officers’Certificate.TheRepresentativesshallhavereceivedacertificate,datedsuchClosingDate,ofanexecutiveofficeroftheCompanyand
aprincipalfinancialoraccountingofficeroftheCompanyinwhichsuchofficersshallstatethat:therepresentationsandwarrantiesoftheCompanyinthisAgreementaretrueandcorrect;theCompanyhascompliedwithallagreementsandsatisfiedallconditionsonitsparttobeperformedorsatisfiedhereunderatorpriortosuchClosingDate;nostopordersuspendingtheeffectivenessofanyRegistrationStatementhasbeenissuedandnoproceedingsforthatpurposehavebeeninstitutedor,tothebestoftheirknowledgeandafterreasonableinvestigation,arecontemplatedbytheCommission;theAdditionalRegistrationStatement(ifany)satisfyingtherequirementsofsubparagraphs(1)and(3)ofRule462(b)wastimelyfiledpursuanttoRule462(b),includingpaymentoftheapplicablefilingfee;and,subsequenttothedateofthemostrecentfinancialstatementsintheGeneralDisclosurePackageandtheFinalProspectus,therehasbeennomaterialadversechange,noranydevelopmentoreventinvolvingaprospectivematerialadversechange,inthecondition(financialorotherwise),resultsofoperations,business,propertiesorprospectsoftheCompanyanditssubsidiariestakenasawholeexceptassetforthintheGeneralDisclosurePackageandtheFinalProspectus.
(h)Lock-UpAgreements.Onorpriortothedatehereof,theRepresentativesshallhavereceivedlockupagreementsintheformsetforthon
ExhibitDheretofromeachexecutiveofficer,director,stockholderandotherequityholderoftheCompanyspecifiedinScheduleEtothisAgreement.
(i)TaxFiling.Toavoida28%backupwithholdingtaxeachSellingStockholderwilldelivertotheRepresentativesaproperlycompletedandexecutedUnitedStatesTreasuryDepartmentFormW-9(orotherapplicableformorstatementspecifiedbyTreasuryDepartmentregulationsinlieuthereof).
(j)ChiefFinancialOfficers’Certificate.TheRepresentativesshallhavereceivedacertificate,dated,respectively,thedatehereofandasofthe
ClosingDate,ofthechieffinancialofficeroftheCompanywithrespecttocertainfinancialdataintheGeneralDisclosurePackageandFinalProspectus,informandsubstancesatisfactorytotheRepresentatives.
(k)Recapitalization.TherecapitalizationofthesharesoftheconvertiblepreferredstockoftheCompanyshallbeconsummatedinamanner
consistentinallmaterialrespectswiththedescriptionthereofintheGeneralDisclosurePackageandtheFinalProspectus.
TheCompanyandtheSellingStockholderwillfurnishtheRepresentativeswithsuchconformedcopiesofsuchopinions,certificates,lettersanddocumentsastheRepresentativesreasonablyrequest.TheRepresentativesmaywaiveonbehalfoftheUnderwriterscompliancewithanyconditionstotheobligationsoftheUnderwritershereunder,whetherinrespectofanOptionalClosingDateorotherwise.
9.IndemnificationandContribution.(a)IndemnificationofUnderwritersbytheCompany.TheCompanywillindemnifyandholdharmlesseachUnderwriter,itspartners,members,directors,officers,employees,agents,affiliatesandeachperson,ifany,whocontrolssuchUnderwriterwithinthemeaningofSection15oftheActorSection20oftheExchangeAct(eachan“Indemnified Party ”),againstanyandalllosses,claims,damagesorliabilities,jointorseveral,towhichsuchIndemnifiedPartymaybecomesubject,
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undertheAct,theExchangeAct,otherFederalorstatestatutorylaworregulationorotherwise,insofarassuchlosses,claims,damagesorliabilities(oractionsinrespectthereof)ariseoutoforarebaseduponanyuntruestatementorallegeduntruestatementofanymaterialfactcontainedinanypartofanyRegistrationStatementatanytime,anyStatutoryProspectusasofanytime,theFinalProspectus,anyIssuerFreeWritingProspectus,anyWrittenTesting-the-WatersCommunicationorariseoutoforarebasedupontheomissionorallegedomissionofamaterialfactrequiredtobestatedthereinornecessarytomakethestatementsthereinnotmisleading,andwillreimburseeachIndemnifiedPartyforanylegalorotherexpensesreasonablyincurredbysuchIndemnifiedPartyinconnectionwithinvestigatingordefendingagainstanyloss,claim,damage,liability,action,litigation,investigationorproceedingwhatsoever(whetherornotsuchIndemnifiedPartyisapartythereto),whetherthreatenedorcommenced,andinconnectionwiththeenforcementofthisprovisionwithrespecttoanyoftheaboveassuchexpensesareincurred;provided,however,thattheCompanywillnotbeliableinanysuchcasetotheextentthatanysuchloss,claim,damageorliabilityarisesoutoforisbaseduponanuntruestatementorallegeduntruestatementinoromissionorallegedomissionfromanyofsuchdocumentsinrelianceuponandinconformitywithwritteninformationfurnishedtotheCompanybyanyUnderwriterthroughtheRepresentativesspecificallyforusetherein,itbeingunderstoodandagreedthattheonlysuchinformationfurnishedbyanyUnderwriterconsistsoftheinformationdescribedassuchinsubsection(c)below.
(b)IndemnificationofUnderwritersbySellingStockholder.TheSellingStockholderwillindemnifyandholdharmlesseachIndemnifiedParty,againstanyandalllosses,claims,damagesorliabilities,jointorseveral,towhichsuchIndemnifiedPartymaybecomesubject,undertheAct,theExchangeAct,otherFederalorstatestatutorylaworregulationorotherwise,insofarassuchlosses,claims,damagesorliabilities(oractionsinrespectthereof)ariseoutoforarebaseduponanyuntruestatementorallegeduntruestatementofanymaterialfactcontainedinanypartofanyRegistrationStatementatanytime,anyStatutoryProspectusasofanytime,theFinalProspectus,anyWrittenTesting-the-WatersCommunicationoranyIssuerFreeWritingProspectus,orariseoutoforarebasedupontheomissionorallegedomissionofamaterialfactrequiredtobestatedthereinornecessarytomakethestatementsthereinnotmisleading,andwillreimburseeachIndemnifiedPartyforanylegalorotherexpensesreasonablyincurredbysuchIndemnifiedPartyinconnectionwithinvestigatingordefendingagainstanyloss,claim,damage,liability,action,litigation,investigationorproceedingwhatsoever(whetherornotsuchIndemnifiedPartyisapartythereto),whetherthreatenedorcommenced,andinconnectionwiththeenforcementofthisprovisionwithrespecttotheaboveassuchexpensesareincurred;provided,however,thattheSellingStockholderwillonlybeliableinanysuchcasetotheextentthatanysuchloss,claim,damageorliabilityarisesoutoforisbaseduponanuntruestatementorallegeduntruestatementinoromissionorallegedomissionfromanyofsuchdocumentsinrelianceuponandinconformitywithwritteninformationfurnishedtotheCompanybyanytheSellingStockholderspecificallyforusetherein,itbeingunderstoodandagreedthattheonlysuchinformationfurnishedbytheSellingStockholderconsistsofthefollowinginformation:theSellingStockholder’sname,correspondingshareamounts,beneficialownershipandaddressas
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setforthinthetableandrelatedfootnotesofPrincipalandSellingStockholderintheRegistrationStatementandFinalProspectusundertheheading“PrincipalandSellingStockholder”.TheliabilityoftheSellingStockholderpursuanttothissectionshallbelimitedtoanamountequaltotheaggregategrossproceedsafterunderwritingcommissionsanddiscounts,butbeforeexpenses,totheSellingStockholderfromthesaleoftheOptionalSecuritiessoldbytheSellingStockholderhereunder.
(c)IndemnificationoftheCompanyandSellingStockholder.EachUnderwriterwillseverallyandnotjointlyindemnifyandholdharmlesstheCompany,eachofitsdirectorsandeachofitsofficerswhosignsaRegistrationStatementandeachperson,ifany,whocontrolstheCompanywithinthemeaningofSection15oftheActorSection20oftheExchangeAct,andtheSellingStockholder(each,an“Underwriter Indemnified Party ”)againstanylosses,claims,damagesorliabilitiestowhichsuchUnderwriterIndemnifiedPartymaybecomesubject,undertheAct,theExchangeAct,orotherFederalorstatestatutorylaworregulationorotherwise,insofarassuchlosses,claims,damagesorliabilities(oractionsinrespectthereof)ariseoutoforarebaseduponanyuntruestatementorallegeduntruestatementofanymaterialfactcontainedinanypartofanyRegistrationStatementatanytime,anyStatutoryProspectusasofanytime,theFinalProspectus,anyWrittenTesting-the-WatersCommunicationoranyIssuerFreeWritingProspectusorariseoutoforarebasedupontheomissionortheallegedomissionofamaterialfactrequiredtobestatedthereinornecessarytomakethestatementsthereinnotmisleading,ineachcasetotheextent,butonlytothe
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extent,thatsuchuntruestatementorallegeduntruestatementoromissionorallegedomissionwasmadeinrelianceuponandinconformitywithwritteninformationfurnishedtotheCompanybysuchUnderwriterthroughtheRepresentativesspecificallyforusetherein,andwillreimburseanylegalorotherexpensesreasonablyincurredbysuchUnderwriterIndemnifiedPartyinconnectionwithinvestigatingordefendingagainstanysuchloss,claim,damage,liability,action,litigation,investigationorproceedingwhatsoever(whetherornotsuchUnderwriterIndemnifiedPartyisapartythereto),whetherthreatenedorcommenced,baseduponanysuchuntruestatementoromission,oranysuchallegeduntruestatementoromissionassuchexpensesareincurred,itbeingunderstoodandagreedthattheonlysuchinformationfurnishedbyanyUnderwriterconsistsofthefollowinginformationintheFinalProspectusfurnishedonbehalfofeachUnderwriter:theconcessionfiguresappearinginthesixthparagraphunderthecaption“Underwriting”andtheinformationcontainedinthefifteenthandtwenty-secondparagraphsunderthecaption“Underwriting”.
(d)ActionsagainstParties;Notification.PromptlyafterreceiptbyanindemnifiedpartyunderthisSectionofnoticeofthecommencementofanyaction,suchindemnifiedpartywill,ifaclaiminrespectthereofistobemadeagainstanindemnifyingpartyundersubsection(a),(b)or(c),notifytheindemnifyingpartyofthecommencementthereof;butthefailuretonotifytheindemnifyingpartyshallnotrelieveitfromanyliabilitythatitmayhaveundersubsection(a),(b)or(c)aboveexcepttotheextentthatithasbeenmateriallyprejudiced(throughtheforfeitureofsubstantiverightsordefenses)bysuchfailure;andprovidedfurtherthatthefailuretonotifytheindemnifyingpartyshallnotrelieveitfromanyliabilitythatitmayhavetoanindemnifiedpartyotherwisethanundersubsection(a),(b)or(c).Incaseanysuchactionisbroughtagainstanyindemnifiedpartyanditnotifiesanindemnifyingpartyofthecommencementthereof,theindemnifyingpartywillbeentitledtoparticipatethereinand,totheextentthatitmaywish,jointlywithanyotherindemnifyingpartysimilarlynotified,toassumethedefensethereof,withcounselsatisfactorytosuchindemnifiedparty(whoshallnot,exceptwiththeconsentoftheindemnifiedparty,becounseltotheindemnifyingparty),andafternoticefromtheindemnifyingpartytosuchindemnifiedpartyofitselectionsotoassumethedefensethereof,theindemnifyingpartywillnotbeliabletosuchindemnifiedpartyunderthisSectionforanylegalorotherexpensessubsequentlyincurredbysuchindemnifiedpartyinconnectionwiththedefensethereofotherthanreasonablecostsofinvestigation.Noindemnifyingpartyshall,withoutthepriorwrittenconsentoftheindemnifiedparty,effectanysettlementofanypendingorthreatenedactioninrespectofwhichanyindemnifiedpartyisorcouldhavebeenapartyandindemnitycouldhavebeensoughthereunderbysuchindemnifiedpartyunlesssuchsettlement(i)includesanunconditionalreleaseofsuchindemnifiedpartyfromallliabilityonanyclaimsthatarethesubjectmatterofsuchactionand(ii)doesnotincludeastatementasto,oranadmissionof,fault,culpabilityorafailuretoactbyoronbehalfofanindemnifiedparty.
(e)Contribution.IftheindemnificationprovidedforinthisSectionisunavailableorinsufficienttoholdharmlessanindemnifiedpartyundersubsection(a),(b)or(c)above,theneachindemnifyingpartyshallcontributetotheamountpaidorpayablebysuchindemnifiedpartyasaresultofthelosses,claims,damagesorliabilitiesreferredtoinsubsection(a),(b)or(c)above(i)insuchproportionasisappropriatetoreflecttherelativebenefitsreceivedbytheCompanyandtheSellingStockholderontheonehandandtheUnderwritersontheotherfromtheofferingoftheOfferedSecuritiesor(ii)iftheallocationprovidedbyclause(i)aboveisnotpermittedbyapplicablelaw,insuchproportionasisappropriatetoreflectnotonlytherelativebenefitsreferredtoinclause(i)abovebutalsotherelativefaultoftheCompanyandtheSellingStockholderontheonehandandtheUnderwritersontheotherinconnectionwiththestatementsoromissionswhichresultedinsuchlosses,claims,damagesorliabilitiesaswellasanyotherrelevantequitableconsiderations.TherelativebenefitsreceivedbytheCompanyandtheSellingStockholderontheonehandandtheUnderwritersontheothershallbedeemedtobeinthesameproportionasthetotalnetproceedsfromtheoffering(beforedeductingexpenses)receivedbytheCompanyandtheSellingStockholderbeartothetotalunderwritingdiscountsandcommissionsreceivedbytheUnderwriters.Therelativefaultshallbedeterminedbyreferenceto,amongotherthings,whethertheuntrueorallegeduntruestatementofamaterialfactortheomissionorallegedomissiontostateamaterialfactrelatestoinformationsuppliedbytheCompany,theSellingStockholderortheUnderwritersandtheparties’relativeintent,knowledge,accesstoinformationandopportunitytocorrectorpreventsuchuntruestatementoromission.Theamountpaidbyanindemnifiedpartyasaresultofthelosses,claims,damagesorliabilitiesreferredtointhefirstsentenceofthissubsection(e)shallbedeemedtoincludeanylegalorotherexpensesreasonablyincurredbysuchindemnifiedpartyinconnectionwithinvestigatingordefendinganyactionorclaimwhichisthesubjectofthissubsection(e).
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Notwithstandingtheprovisionsofthissubsection(e),noUnderwritershallberequiredtocontributeanyamountinexcessoftheamountbywhichthetotalpriceatwhichtheOfferedSecuritiesunderwrittenbyitanddistributedtothepublicwereofferedtothepublicexceedstheamountofanydamageswhichsuchUnderwriterhasotherwisebeenrequiredtopaybyreasonofsuchuntrueorallegeduntruestatementoromissionorallegedomission.Nopersonguiltyoffraudulentmisrepresentation(withinthemeaningofSection11(f)oftheAct)shallbeentitledtocontributionfromanypersonwhowasnotguiltyofsuchfraudulentmisrepresentation.TheUnderwriters’obligationsinthissubsection(e)tocontributeareseveralinproportiontotheirrespectiveunderwritingobligationsandnotjoint.TheCompany,theSellingStockholderandtheUnderwritersagreethatitwouldnotbejustandequitableifcontributionpursuanttothisSection9(e)weredeterminedbyprorataallocation(eveniftheUnderwritersweretreatedasoneentityforsuchpurpose)orbyanyothermethodofallocationwhichdoesnottakeaccountoftheequitableconsiderationsreferredtointhisSection9(e).
(f)DirectedShareProgramIndemnification.TheCompanyagreestoindemnifyandholdharmless(i)CreditSuisseandeachperson,ifany,whocontrolsCreditSuissewithinthemeaningofSection15oftheActorSection20oftheExchangeActandeachaffiliateofCreditSuissewithinthemeaningofRule405oftheSecuritiesAct(collectively,the“Credit Suisse Entities ”)and(ii)MorganStanleyandeachperson,ifany,whocontrolsMorganStanleywithinthemeaningofSection15oftheActorSection20oftheExchangeActandeachaffiliateofMorganStanleywithinthemeaningofRule405oftheSecuritiesAct(collectively,the“Morgan Stanley Entities ”),fromandagainstanyandalllosses,claims,damagesandliabilities(including,withoutlimitation,anylegalorotherexpensesreasonablyincurredinconnectionwithdefendingorinvestigatinganysuchactionorclaim)(i)causedbyanyuntruestatementorallegeduntruestatementofamaterialfactcontainedinanymaterialpreparedbyorwiththeconsentoftheCompanyfordistributiontoParticipantsinconnectionwiththeDirectedShareProgramorcausedbyanyomissionorallegedomissiontostatethereinamaterialfactrequiredtobestatedthereinornecessarytomakethestatementsthereinnotmisleading;(ii)causedbythefailureofanyParticipanttopayforandacceptdeliveryofDirectedSharesthattheParticipantagreedtopurchase;or(iii)relatedto,arisingoutof,orinconnectionwiththeDirectedShareProgram,otherthanlosses,claims,damagesorliabilities(orexpensesrelatingthereto)thatarefinallyjudiciallydeterminedtohaveresultedfromthebadfaithorgrossnegligenceoftheCreditSuisseEntitiesortheMorganStanleyEntities.
(g)Incaseanyproceeding(includinganygovernmentalinvestigation)shallbeinstitutedinvolvinganyCreditSuisseEntityorMorganStanleyEntityinrespectofwhichindemnitymaybesoughtpursuanttoparagraph(f)above,theCreditSuisseEntityortheMorganStanleyEntityseekingindemnityshallpromptlynotifytheCompanyinwritingandtheCompany,upontherequestoftheCreditSuisseEntityortheMorganStanleyEntity,shallretaincounselreasonablysatisfactorytotheCreditSuisseEntityortheMorganStanleyEntitytorepresenttheCreditSuisseEntityortheMorganStanleyEntityandanyotherstheCompanymaydesignateinsuchproceedingandshallpaythefeesanddisbursementsofsuchcounselrelatedtosuchproceeding.Inanysuchproceeding,anyCreditSuisseEntityorMorganStanleyEntityshallhavetherighttoretainitsowncounsel,butthefeesandexpensesofsuchcounselshallbeattheexpenseofsuchCreditSuisseEntityorMorganStanleyEntityunless(i)theCompanyshallhaveagreedtotheretentionofsuchcounselor(ii)thenamedpartiestoanysuchproceeding(includinganyimpleadedparties)includeboththeCompanyandtheCreditSuisseEntityortheMorganStanleyEntityandrepresentationofbothpartiesbythesamecounselwouldbeinappropriateduetoactualorpotentialdifferinginterestsbetweenthem.TheCompanyshallnot,inrespectofthelegalexpensesoftheCreditSuisseEntitiesortheMorganStanleyEntitiesinconnectionwithanyproceedingorrelatedproceedingsinthesamejurisdiction,beliableforthefeesandexpensesofmorethanoneseparatefirm(inadditiontoanylocalcounsel)forallCreditSuisseEntitiesorMorganStanleyEntities.AnysuchseparatefirmfortheCreditSuisseEntitiesortheMorganStanleyEntitiesshallbedesignatedinwritingbyCreditSuisseorMorganStanley,respectively.TheCompanyshallnotbeliableforanysettlementofanyproceedingeffectedwithoutitswrittenconsent,butifsettledwithsuchconsentoriftherebeafinaljudgmentfortheplaintiff,theCompanyagreestoindemnifytheCreditSuisseEntitiesortheMorganStanleyEntitiesfromandagainstanylossorliabilitybyreasonofsuchsettlementorjudgment.Notwithstandingtheforegoingsentence,ifatanytimeaCreditSuisseEntityorMorganStanleyEntityshallhaverequestedtheCompanytoreimburseitforfeesandexpensesofcounselascontemplatedbythesecondandthirdsentencesofthisparagraph,theCompanyagreesthatitshallbeliableforanysettlementofanyproceedingeffectedwithoutitswrittenconsentif(i)suchsettlementisenteredintomorethan30daysafter
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receiptbytheCompanyoftheaforesaidrequestand(ii)theCompanyshallnothavereimbursedtheCreditSuisseEntityortheMorganStanleyEntityinaccordancewithsuchrequestpriortothedateofsuchsettlement.TheCompanyshallnot,withoutthepriorwrittenconsentofCreditSuisseorMorganStanley,asthecasemaybe,effectanysettlementofanypendingorthreatenedproceedinginrespectofwhichanyCreditSuisseEntityorMorganStanleyEntityisorcouldhavebeenapartyandindemnitycouldhavebeensoughthereunderbysuchCreditSuisseEntityorMorganStanleyEntity,unlesssuchsettlementincludesanunconditionalreleaseoftheCreditSuisseEntitiesortheMorganStanleyEntitiesfromallliabilityonclaimsthatarethesubjectmatterofsuchproceeding.
(h)Totheextenttheindemnificationprovidedforinparagraph(f)aboveisunavailabletoaCreditSuisseEntityoraMorganStanleyEntityorinsufficientinrespectofanylosses,claims,damagesorliabilitiesreferredtotherein,thentheCompanyinlieuofindemnifyingtheCreditSuisseEntityortheMorganStanleyEntitythereunder,shallcontributetotheamountpaidorpayablebytheCreditSuisseEntityortheMorganStanleyEntityasaresultofsuchlosses,claims,damagesorliabilities(i)insuchproportionasisappropriatetoreflecttherelativebenefitsreceivedbytheCompanyontheonehandandtheMorganStanleyEntitiesontheotherhandfromtheofferingoftheDirectedSharesor(ii)iftheallocationprovidedbyclause(i)aboveisnotpermittedbyapplicablelaw,insuchproportionasisappropriatetoreflectnotonlytherelativebenefitsreferredtoinclause(i)abovebutalsotherelativefaultoftheCompanyontheonehandandoftheCreditSuisseEntitiesortheMorganStanleyEntitiesontheotherhandinconnectionwithanystatementsoromissionsthatresultedinsuchlosses,claims,damagesorliabilities,aswellasanyotherrelevantequitableconsiderations.TherelativebenefitsreceivedbytheCompanyontheonehandandtheCreditSuisseEntitiesorMorganStanleyEntitiesontheotherhandinconnectionwiththeofferingoftheDirectedSharesshallbedeemedtobeinthesamerespectiveproportionsasthenetproceedsfromtheofferingoftheDirectedShares(beforedeductingexpenses)andthetotalunderwritingdiscountsandcommissionsreceivedbytheCreditSuisseEntitiesortheMorganStanleyEntities,respectively,fortheDirectedShares,beartotheaggregatepublicofferingpriceoftheDirectedShares.Iftheloss,claim,damageorliabilityiscausedbyanuntrueorallegeduntruestatementofmaterialfactortheomissionorallegedomissiontostateamaterialfact,therelativefaultoftheCompanyontheonehandandtheCreditSuisseEntitiesortheMorganStanleyEntitiesontheotherhandshallbedeterminedbyreferenceto,amongotherthings,whethertheuntrueorallegeduntruestatementortheomissionorallegedomissionrelatestoinformationsuppliedbytheCompanyorbytheCreditSuisseEntitiesortheMorganStanleyEntitiesandtheparties’relativeintent,knowledge,accesstoinformationandopportunitytocorrectorpreventsuchstatementoromission.
(i)TheCompanyandtheCreditSuisseEntitiesandMorganStanleyEntitiesagreethatitwouldnotbejustorequitableifcontributionpursuanttoparagraph(h)aboveweredeterminedbyprorataallocation(evenifeachoftheCreditSuisseEntitiesandtheMorganStanleyEntitiesweretreatedasoneentityforsuchpurpose)orbyanyothermethodofallocationthatdoesnottakeaccountoftheequitableconsiderationsreferredtoinparagraph(h)above.TheamountpaidorpayablebytheCreditSuisseEntitiesortheMorganStanleyEntitiesasaresultofthelosses,claims,damagesandliabilitiesreferredtointheimmediatelyprecedingparagraphshallbedeemedtoinclude,subjecttothelimitationssetforthabove,anylegalorotherexpensesreasonablyincurredbytheCreditSuisseEntitiesortheMorganStanleyEntitiesinconnectionwithinvestigatingordefendinganysuchactionorclaim.Notwithstandingtheprovisionsofparagraph(h)above,noCreditSuisseEntityorMorganStanleyEntityshallberequiredtocontributeanyamountinexcessoftheamountbywhichthetotalpriceatwhichtheDirectedSharesdistributedtothepublicwereofferedtothepublicexceedstheamountofanydamagesthatsuchCreditSuisseEntityorMorganStanleyEntityhasotherwisebeenrequiredtopay.Theremediesprovidedforinparagraphs(g)through(j)arenotexclusiveandshallnotlimitanyrightsorremedieswhichmayotherwisebeavailabletoanyindemnifiedpartyatlaworinequity.
(j)Theindemnityandcontributionprovisionscontainedinparagraphs(f)through(j)shallremainoperativeandinfullforceandeffectregardlessof(i)anyterminationofthisAgreement,(ii)anyinvestigationmadebyoronbehalfofanyCreditSuisseEntityorMorganStanleyEntityortheCompany,itsofficersordirectorsoranypersoncontrollingtheCompanyand(iii)acceptanceofandpaymentforanyoftheDirectedShares.
10.DefaultofUnderwriters.IfanyUnderwriterorUnderwritersdefaultintheirobligationsto
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purchaseOfferedSecuritieshereunderoneithertheFirstClosingDateoranyOptionalClosingDateandtheaggregatenumberofsharesofOfferedSecuritiesthatsuchdefaultingUnderwriterorUnderwritersagreedbutfailedtopurchasedoesnotexceed10%ofthetotalnumberofsharesofOfferedSecuritiesthattheUnderwritersareobligatedtopurchaseonsuchClosingDate,theRepresentativesmaymakearrangementssatisfactorytotheCompanyforthepurchaseofsuchOfferedSecuritiesbyotherpersons,includinganyoftheUnderwriters,butifnosucharrangementsaremadebysuchClosingDate,thenon-defaultingUnderwritersshallbeobligatedseverally,inproportiontotheirrespectivecommitmentshereunder,topurchasetheOfferedSecuritiesthatsuchdefaultingUnderwritersagreedbutfailedtopurchaseonsuchClosingDate.IfanyUnderwriterorUnderwriterssodefaultandtheaggregatenumberofsharesofOfferedSecuritieswithrespecttowhichsuchdefaultordefaultsoccurexceeds10%ofthetotalnumberofsharesofOfferedSecuritiesthattheUnderwritersareobligatedtopurchaseonsuchClosingDateandarrangementssatisfactorytotheRepresentativesandtheCompanyforthepurchaseofsuchOfferedSecuritiesbyotherpersonsarenotmadewithin36hoursaftersuchdefault,thisAgreementwillterminatewithoutliabilityonthepartofanynon-defaultingUnderwriterortheCompanyexceptasprovidedinSection10(providedthatifsuchdefaultoccurswithrespecttoOptionalSecuritiesaftertheFirstClosingDate,thisAgreementwillnotterminateastotheFirmSecuritiesoranyOptionalSecuritiespurchasedpriortosuchtermination).AsusedinthisAgreement,theterm“Underwriter”includesanypersonsubstitutedforanUnderwriterunderthisSection.NothinghereinwillrelieveadefaultingUnderwriterfromliabilityforitsdefault.
11.SurvivalofCertainRepresentationsandObligations.Therespectiveindemnities,agreements,representations,warrantiesandotherstatementsoftheSellingStockholder,theCompanyoritsofficersandoftheseveralUnderwriterssetforthinormadepursuanttothisAgreementwillremaininfullforceandeffect,regardlessofanyinvestigation,orstatementastotheresultsthereof,madebyoronbehalfofanyUnderwriter,theSellingStockholder,theCompanyoranyoftheirrespectiverepresentatives,officersordirectorsoranycontrollingperson,andwillsurvivedeliveryofandpaymentfortheOfferedSecurities.IfthepurchaseoftheOfferedSecuritiesbytheUnderwritersisnotconsummatedforanyreasonotherthansolelybecauseoftheterminationofthisAgreementpursuanttoSection9hereof,theCompanywillreimbursetheUnderwritersforallout-of-pocketexpenses(includingfeesanddisbursementsofcounsel)reasonablyincurredbytheminconnectionwiththeofferingoftheOfferedSecurities,andtherespectiveobligationsoftheCompany,theSellingStockholdersandtheUnderwriterspursuanttoSection8hereofshallremainineffect.Inaddition,ifanyOfferedSecuritieshavebeenpurchasedhereunder,therepresentationsandwarrantiesinSection2andallobligationsunderSection5shallalsoremainineffect.
12.Notices.Allcommunicationshereunderwillbeinwritingand,ifsenttotheUnderwriters,willbemailed,deliveredortelecopiedandconfirmedtoCreditSuisseat,c/oCreditSuisseSecurities(USA)LLC,ElevenMadisonAvenue,NewYork,NewYork10010-3629,Attention:ICBMLegal,toMorganStanley&Co.LLCat1585Broadway,NewYork,NewYork10036,Attention:EquitySyndicateDesk,withacopytotheLegalDepartmentor,ifsenttotheCompany,willbemailed,deliveredortelecopiedandconfirmedtoitat777MainStreet,Suite2900,FortWorth,Texas76102,Attention:GeneralCounsel,or,ifsenttoCHKEnergyHoldings,Inc.,willbemailed,deliveredortelecopiedandconfirmedtoCHKEnergyHoldings,Inc.c/oChesapeakeEnergyCorporation,6100NorthWesternAvenue,OklahomaCity,Oklahoma73118,Attn:JamesR.Webb;provided,however,thatanynoticetoanUnderwriterpursuanttoSection8willbemailed,deliveredortelegraphedandconfirmedtosuchUnderwriter.
13.PATRIOTAct.InaccordancewiththerequirementsoftheUSAPatriotAct(TitleIIIofPub.L.107-56(signedintolawOctober26,2001)),eachUnderwriterisrequiredtoobtain,verifyandrecordinformationthatidentifiesitsrespectiveclients,includingtheCompany,whichinformationmayincludethenameandaddressoftheirrespectiveclients,aswellasotherinformationthatwillallowtheUnderwriterstoproperlyidentifytheirrespectiveclients.
14.Successors.ThisAgreementwillinuretothebenefitofandbebindinguponthepartiesheretoandtheirrespectivesuccessorsandtheofficersanddirectorsandcontrollingpersonsreferredtoinSection9,andnootherpersonwillhaveanyrightorobligationhereunder.
15.RepresentationofUnderwriters.TheRepresentativeswillactfortheseveralUnderwritersinconnectionwiththetransactionscontemplatedbythisAgreement,andanyactionunderthisAgreementtaken
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bytheRepresentativeswillbebindinguponalltheUnderwriters.
16.Counterparts.ThisAgreementmaybeexecutedinanynumberofcounterparts,eachofwhichshallbedeemedtobeanoriginal,butallsuchcounterpartsshalltogetherconstituteoneandthesameAgreement.
17.AbsenceofFiduciaryRelationship.TheCompanyandtheSellingStockholderacknowledgeandagreethat:
(a)NoOtherRelationship.TheRepresentativeshavebeenretainedsolelytoactasunderwritersinconnectionwiththesaleoftheOfferedSecuritiesandthatnofiduciary,advisoryoragencyrelationshipbetweentheCompanyortheSellingStockholder,ontheonehand,andtheRepresentatives,ontheother,hasbeencreatedinrespectofanyofthetransactionscontemplatedbythisAgreementortheFinalProspectus,irrespectiveofwhethertheRepresentativeshaveadvisedorareadvisingtheCompanyortheSellingStockholderonothermatters;
(b)Arms’LengthNegotiations.ThepriceoftheOfferedSecuritiessetforthinthisAgreementwasestablishedbyCompanyandtheSellingStockholderfollowingdiscussionsandarms-lengthnegotiationswiththeRepresentatives,andtheCompanyandtheSellingStockholderarecapableofevaluatingandunderstandingandunderstandandaccepttheterms,risksandconditionsofthetransactionscontemplatedbythisAgreement;
(c)AbsenceofObligationtoDisclose.TheCompanyandtheSellingStockholderhavebeenadvisedthattheRepresentativesandtheiraffiliatesareengagedinabroadrangeoftransactionswhichmayinvolveintereststhatdifferfromthoseoftheCompanyortheSellingStockholderandthattheRepresentativeshavenoobligationtodisclosesuchinterestsandtransactionstotheCompanyortheSellingStockholderbyvirtueofanyfiduciary,advisoryoragencyrelationship;and
(d)Waiver.TheCompanyandtheSellingStockholderwaive,tothefullestextentpermittedbylaw,anyclaimstheymayhaveagainsttheRepresentativesforbreachoffiduciarydutyorallegedbreachoffiduciarydutyandagreesthattheRepresentativesshallhavenoliability(whetherdirectorindirect)totheCompanyortheSellingStockholderinrespectofsuchafiduciarydutyclaimortoanypersonassertingafiduciarydutyclaimonbehalfoforinrightoftheCompany,includingstockholders,employeesorcreditorsoftheCompany.
18. ApplicableLaw. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.
TheCompanyherebysubmitstotheexclusivejurisdictionoftheFederalandstatecourtsintheBoroughofManhattaninTheCityofNewYorkinanysuitorproceedingarisingoutoforrelatingtothisAgreementorthetransactionscontemplatedhereby.TheCompanyirrevocablyandunconditionallywaivesanyobjectiontothelayingofvenueofanysuitorproceedingarisingoutoforrelatingtothisAgreementorthetransactionscontemplatedherebyinFederalandstatecourtsintheBoroughofManhattanintheCityofNewYorkandirrevocablyandunconditionallywaivesandagreesnottopleadorclaiminanysuchcourtthatanysuchsuitorproceedinginanysuchcourthasbeenbroughtinaninconvenientforum.
19.WaiverofJuryTrial.TheCompanyandtheSellingStockholderherebyirrevocablywaive,tothefullestextentpermittedbyapplicablelaw,anyandallrighttotrialbyjuryinanylegalproceedingarisingoutoforrelatingtothisAgreementorthetransactionscontemplatedhereby.
20.ResearchAnalystIndependenceandOtherActivitiesoftheUnderwriters.TheCompanyandtheSellingStockholderacknowledgethattheUnderwriters’researchanalystsandresearchdepartmentsarerequiredtobeseparatefrom,andnotinfluencedby,theirrespectiveinvestmentbankingdivisionsandaresubjecttocertainregulationsandinternalpolicies,andthatsuchUnderwriter’sresearchanalystsmayholdviewsandmakestatementsorinvestmentrecommendationsand/orpublishresearchreportswithrespectto
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theCompanyand/ortheofferingthatdifferfromtheviewsitsinvestmentbankingdivision.TheCompanyandtheSellingStockholderherebywaiveandrelease,tothefullestextentpermittedbyapplicablelaw,anyclaimsthattheCompanyandtheSellingStockholdermayhaveagainsttheUnderwritersarisingfromthefactthattheviewsexpressedbyitsresearchanalystsandresearchdepartmentsmaybedifferentfromorinconsistentwiththeviewsoradvicecommunicatedtotheCompanyandtheSellingStockholderbyeachUnderwriter’srespectiveinvestmentbankingdivision.TheCompanyandtheSellingStockholderalsoacknowledgethateachUnderwriterisafullservicesecuritiesfirmandassuchfromtimetotime,subjecttoapplicablesecuritieslaws,mayeffecttransactionsforitsownaccountortheaccountofitscustomers,maymakerecommendationsandprovideotheradvice,andmayholdlongorshortpositionsindebtorequitysecuritiesof,orderivativeproductsrelatedto,thecompaniesthatmaybethesubjectofthetransactionscontemplatedbythisAgreementandtheCompanyandtheSellingStockholderherebywaiveandrelease,tothefullestextentpermittedbyapplicablelaw,anyclaimsthattheCompanyandtheSellingStockholdermayhaveagainsteachUnderwriterwithrespecttoanysuchotheractivities.
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IftheforegoingisinaccordancewiththeRepresentatives’understandingofouragreement,kindlysignandreturntotheCompanyoneofthecounterparts
hereof,whereuponitwillbecomeabindingagreementamongtheCompany,theSellingStockholderandtheseveralUnderwritersinaccordancewithitsterms.
Verytrulyyours,
FTSINTERNATIONAL,INC.
By
Name:
Title:
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CHKENERGYHOLDINGS,INC.
By
Name:
Title:
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TheforegoingUnderwritingAgreementisherebyconfirmedandacceptedasofthedatefirstabovewritten.
CREDITSUISSESECURITIES(USA)LLC
By:
Name:
Title:
ActingonbehalfofitselfandastheRepresentativeoftheseveralUnderwriters.
30
MORGANSTANLEY&CO.LLC
By:
Name:
Title:
ActingonbehalfofitselfandastheRepresentativeoftheseveralUnderwriters.
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SCHEDULE A
Underwriter
Number of Firm Securities to be Purchased
CreditSuisseSecurities(USA)LLC
MorganStanley&Co.LLC
WellsFargoSecurities,LLC
BarclaysCapitalInc.
CitigroupGlobalMarketsInc.
EvercoreGroupL.L.C.
GuggenheimSecurities,LLC
PiperJaffray&Co.
Tudor,Pickering,Holt&Co.Securities,LLC
CowenandCompanyLLC
Total
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SCHEDULE B
SELLING STOCKHOLDERS
Underwriter
Number of Firm Securities
to be Sold CHKEnergyHoldings,Inc.
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SCHEDULE C
1.General Use Free Writing Prospectuses (included in the General Disclosure Package)2.Other Information Included in the General Disclosure Package
ThefollowinginformationisalsoincludedintheGeneralDisclosurePackage:
TheinitialpricetothepublicoftheOfferedSecurities.
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SCHEDULE D
FTSInternationalServices,LLCFTSInternationalManufacturing,LLCFTSInternationalVenturesI,LLCFTSInternationalVenturesII,LLCFTSInternationalNetherlands,LLCFTSInternationalNetherlandsIC.V.FTSInternationalNetherlandsIIC.V.FTSInternationalNetherlandsCoöperatiefU.A.FTSInternationalNetherlandsB.V.
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Exhibit A
Form of Opinion of Counsel to the Company
37
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Exhibit B
Form of Opinion of Counsel to CHK Energy Holdings, Inc.
38
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Exhibit C
Form of Press Release
[Company][Date][Company](the“[Company]”)announcedtodaythatCreditSuisseSecurities(USA)LLCandMorganStanley&Co.LLC,theleadbook-runningmanagersintheCompany’srecentpublicsaleofsharesofcommonstock,are[waiving][releasing]alock-uprestrictionwithrespecttosharesoftheCompany’scommonstockheldby[certainofficersordirectors][anofficerordirector]oftheCompany.The[waiver][release]willtakeeffecton,20,andthesharesmaybesoldonoraftersuchdate.This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and suchsecurities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of1933, as amended.
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Exhibit D
Form of Lock-Up Agreement
January,2018
FTSInternational,Inc.777MainStreet,Suite2900FortWorth,TX76102CreditSuisseSecurities(USA)LLCMorganStanley&Co.LLCc/oCreditSuisseSecurities(USA)LLC
ElevenMadisonAvenueNewYork,NY10010-3629
DearSirs:
AsaninducementtotheUnderwriterstoexecutetheUnderwritingAgreement(the“Underwriting Agreement ”),pursuanttowhichanofferingwillbemadethatisintendedtoresultintheestablishmentofapublicmarketforsharesofcommonstock,parvalue$0.01pershare(the“Securities ”)ofFTSInternational,Inc.,andanysuccessor(bymergerorotherwise)thereto,(the“Company ”),theundersignedherebyagreesthatduringtheperiodspecifiedinthefollowingparagraph(the“Lock-Up Period ”),theundersignedwillnotoffer,sell,contracttosell,pledgeorotherwisedisposeof,directlyorindirectly,anySecuritiesorsecuritiesconvertibleintoorexchangeableorexercisableforanySecurities,enterintoatransactionwhichwouldhavethesameeffect,orenterintoanyswap,hedgeorotherarrangementthattransfers,inwholeorinpart,anyoftheeconomicconsequencesofownershipoftheSecurities,whetheranysuchaforementionedtransactionistobesettledbydeliveryoftheSecuritiesorsuchothersecurities,incashorotherwise,orpubliclydisclosetheintentiontomakeanysuchoffer,sale,pledgeordisposition,ortoenterintoanysuchtransaction,swap,hedgeorotherarrangement,without,ineachcase,thepriorwrittenconsentofCreditSuisseSecurities(USA)LLC(“Credit Suisse ”)andMorganStanley&Co.LLC(“Morgan Stanley ”).Inaddition,theundersignedagreesthat,withoutthepriorwrittenconsentofCreditSuisseandMorganStanley,itwillnot,duringtheLock-UpPeriod,makeanydemandfororexerciseanyrightwithrespectto,theregistrationofanySecuritiesoranysecurityconvertibleintoorexercisableorexchangeablefortheSecurities.
TheinitialLock-UpPeriodwillcommenceonthedateofthisLock-UpAgreementandcontinueandincludethedate180daysafterthepublicofferingdatesetforthonthefinalprospectususedtoselltheSecurities(the“Public Offering Date ”)pursuanttotheUnderwritingAgreement,towhichyouareorexpecttobecomeparties.
AnySecuritiesreceivedafterthedatehereof(includingthosereceiveduponexerciseofoptionsortheconversionorexchangeofotheroutstandingsecuritiesgrantedtotheundersigned)willalsobesubjecttothisLock-UpAgreement.AnySecuritiesacquiredbytheundersignedintheopenmarketafterthedateoftheUnderwritingAgreementwillnotbesubjecttothisLock-UpAgreement,providedthat,withrespecttoanysaleorotherdispositionduringtheLock-UpPeriodofSecuritiesacquiredontheopenmarket,nofilingorpublicannouncementbyanypartytheretoundertheSecuritiesExchangeActof1934(the“Exchange Act ”)orotherwiseshallberequiredorshallbevoluntarilymadeinconnectionwithsuchsaleordisposition(otherthanafilingonaForm5madeaftertheexpirationoftheLock-UpPeriod).Additionally,therestrictionsinthisLock-UpAgreementshallnotapplyto(a)anyvestingandsettlementofequity-basedawardsoutstandingonthePublicOfferingDateundertheCompany’sequityincentiveplanoranyotherplanoragreementdescribedintheprospectusincludedintheCompany’sRegistrationStatementonFormS-1,providedthatanySecuritiesreceiveduponsuchvestingandsettlementwillalsobesubjecttothisLock-UpAgreement,andprovidedfurtherthattheundersignedortheCompany,asthecasemaybe,shallprovideCreditSuisseandMorganStanleypriorwrittennoticeinformingthemofanyfilingorpublicannouncementmadebyanypartyunder
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theExchangeActwithrespectthereto,(b)theenteringintoawrittentradingplandesignedtocomplywithRule10b5-1oftheExchangeAct,providedthatnosalesaremadepursuanttosuchtradingplanduringtheLock-UpPeriod,providedthatnofilingorpublicannouncementbyanypartyundertheExchangeActorotherwiseshallberequiredorshallbevoluntarilymadeinconnectionwithsuchtradingplan,(c)iftheundersignedisanindividual,transfersasabonafidegiftorgifts,(d)iftheundersignedisanindividual,transferstoafamilymember,trust,familylimitedpartnershiporfamilylimitedliabilitycompanyforthedirectorindirectbenefitoftheundersignedorhisorher“immediatefamily”membersasdefinedinRule16a-1undertheExchangeAct,(e)transfersbytestateorintestatesuccession,(f)iftheundersignedisapartnership,limitedliabilitycompanyoracorporation,transferstoitslimitedpartners,membersorstockholdersaspartofadistribution,ortoanycorporation,partnershiporotherentitythatisitsaffiliate,(g)totheextentapplicable,iftheundersignedisanindividual,transferstotheundersigned’semployer,ifrequiredbythetermsofsuchindividual’semployment,(h)transfersforbonafidetaxplanningpurposes,or(i)iftheundersignedisacorporation,partnershiporotherentity,transferstoawhollyownedsubsidiaryofsuchentity,providedthatineachtransferpursuanttoclauses(c)-(i)thetransfereeagreestobeboundinwritingbythetermsofthisLock-UpAgreementpriortosuchtransfer,suchtransfershallnotinvolveadispositionforvalueandnofilingorpublicannouncementbyanyparty(donor,donee,transferorortransferee)undertheExchangeActorotherwiseshallberequiredorshallbevoluntarilymadeinconnectionwithsuchtransfer(otherthanafilingonaForm5madeaftertheexpirationoftheLock-UpPeriod).
Infurtheranceoftheforegoing,theCompanyanditstransferagentandregistrarareherebyauthorizedtodeclinetomakeanytransferofsharesofSecuritiesifsuchtransferwouldconstituteaviolationorbreachofthisLock-UpAgreement.
IftheundersignedisanofficerordirectoroftheCompany,(i)CreditSuisseandMorganStanleyagreethat,atleastthreebusinessdaysbeforetheeffectivedateofanyreleaseorwaiveroftheforegoingrestrictionsinconnectionwithatransferofSecurities,CreditSuisseandMorganStanleywillnotifytheCompanyoftheimpendingreleaseorwaiver,and(ii)theCompanyhasagreedintheUnderwritingAgreementtoannouncetheimpendingreleaseorwaiverbypressreleasethroughamajornewsserviceatleasttwobusinessdaysbeforetheeffectivedateofthereleaseorwaiver.AnyreleaseorwaivergrantedbyCreditSuisseandMorganStanleyhereundertoanysuchofficerordirectorshallonlybeeffectivetwobusinessdaysafterthepublicationdateofsuchpressrelease.Theprovisionsofthisparagraphwillnotapplyif(a)thereleaseorwaiveriseffectedsolelytopermitatransfernotforconsiderationand(b)thetransfereehasagreedinwritingtobeboundbythesametermsdescribedinthisLock-UpAgreementtotheextentandforthedurationthatsuchtermsremainineffectatthetimeofthetransfer.
ThisLock-UpAgreementshallbebindingontheundersignedandthesuccessors,heirs,personalrepresentativesandassignsoftheundersigned.ThisLock-UpAgreementshalllapseandbecomenullandvoidifthePublicOfferingDateshallnothaveoccurredonorbeforeApril30,2018.This agreement shallbe governed by, and construed in accordance with, the laws of the State of New York.
Verytrulyyours,
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Exhibit 5.1
February1,2018FTSInternational,Inc.777MainStreet,Suite2900FortWorth,Texas76102
Re: RegistrationStatementonFormS-1,asamended(No.333-215998)
RelatingtotheInitialPublicOfferingofupto
22,425,000sharesofCommonStockofFTSInternational,Inc.LadiesandGentlemen:
WeareactingascounselforFTSInternational,Inc.,aDelawarecorporation(the“Company”),inconnectionwiththeinitialpublicofferingandsaleof(i)upto18,076,516shares(the“PrimaryShares”)oftheCompany’scommonstock,parvalue$0.01pershare(the“CommonStock”),bytheCompanyand(ii)upto4,348,484shares(the“SecondaryShares”and,togetherwiththePrimaryShares,the“Shares”)ofCommonStockbythestockholderoftheCompanynamedintheRegistrationStatement(asdefinedbelow)(the“SellingStockholder”),pursuanttotheUnderwritingAgreement(the“UnderwritingAgreement”),proposedtobeenteredintobyandamongtheCompany,theSellingStockholder,andCreditSuisseSecurities(USA),LLCandMorganStanley&Co.LLC,actingastherepresentativesoftheseveralunderwriterstobenamedinScheduleAtotheUnderwritingAgreement.
Inconnectionwiththeopinionsexpressedherein,wehaveexaminedsuchdocuments,recordsandmattersoflawaswehavedeemedrelevantornecessaryforpurposesofsuchopinions.Basedontheforegoingandsubjecttothefurtherassumptions,qualificationsandlimitationssetforthherein,weareoftheopinionthat:
1.ThePrimaryShares,whenissuedanddeliveredpursuanttotheUnderwritingAgreementagainstpaymentoftheconsiderationtherefor,asprovidedintheUnderwritingAgreement,willbevalidlyissued,fullypaidandnonassessable.
2.TheSecondarySharesarevalidlyissued,fullypaidandnonassessable.
Inrenderingtheopinionexpressedinparagraph1above,wehaveassumedthattheUnderwritingAgreementwillhavebeenexecutedanddeliveredbythe
partiesthereto,andtheresolutionsauthorizingtheCompanytoissueanddeliverthePrimarySharespursuanttotheUnderwritingAgreementwillbeinfullforceandeffectatalltimesatwhichthePrimarySharesareissuedanddeliveredbytheCompany.Inrenderingtheopinionexpressedinparagraph1above,wehavealsoassumedthattheCompanywillissueanddeliverthePrimarySharesafterfilingof
Page 240
theCompany’sAmendedandRestatedCertificate of IncorporationwiththeSecretaryofStateoftheStateofDelaware, tobeeffectiveuponcompletionoftheCompany’sinitial publicoffering,intheformapprovedbyusandfiledasanexhibittotheRegistrationStatementonFormS-1,asamended(No.333-215998)(the“RegistrationStatement”),filedbytheCompanytoeffectregistrationoftheSharesundertheSecuritiesActof1933(the“Act”).
TheopinionsexpressedhereinarelimitedtotheGeneralCorporationLawoftheStateofDelaware,andweexpressnoopinionastotheeffectofthelawsofanyotherjurisdictionontheopinionsexpressedherein.
Weherebyconsent tothefilingof this opinionas Exhibit 5.1to theRegistrationStatement andto thereferenceto our Firmunder thecaption“LegalMatters”intheprospectusconstitutingapartofsuchRegistrationStatement.Ingivingsuchconsent,wedonottherebyadmitthatweareincludedinthecategoryofpersonswhoseconsentisrequiredunderSection7oftheActortherulesandregulationsoftheSecuritiesandExchangeCommissionpromulgatedthereunder.
Verytrulyyours,
/s/JonesDay
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QuickLinks--Clickheretorapidlynavigatethroughthisdocument
Exhibit23.1
CONSENTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM
WehaveissuedourreportdatedFebruary27,2017,withrespecttotheconsolidatedfinancialstatementsofFTSInternational,Inc.containedintheRegistrationStatementandProspectus.WeconsenttotheuseoftheaforementionedreportintheRegistrationStatementandProspectus,andtotheuseofournameasitappearsunderthecaption"Experts."
/s/GRANTTHORNTONLLP
Dallas,TexasFebruary1,2018
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QuickLinks
Exhibit23.1
CONSENTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM
