UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from           to        

Commission file number 001-38382

(Exact name of registrant as specified in its charter)

(817) 862-2000

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

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

As of October 26, 2018, the registrant had 109,274,564 shares of common stock, $0.01 par value, outstanding.

FTS INTERNATIONAL, INC.

TABLE OF CONTENTS

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

PART 1 – FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements

FTS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

FTS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

FTS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

FTS INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

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

FTS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

Unless the context requires otherwise, the use of the terms “FTSI,” “Company”, “we,” “us,” “our” or “ours” in these Notes to Condensed Consolidated Financial Statements refer to FTS International, Inc., together with its consolidated subsidiaries. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. Accordingly, certain information and disclosures normally included in our annual consolidated financial statements have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2017. In our opinion, the condensed consolidated financial statements included herein contain all adjustments of a normal, recurring nature considered necessary for a fair presentation of the interim periods. The results of operations of the interim periods are not necessarily indicative of the results of operations to be expected for the full year. There were no items of other comprehensive income in the periods presented.

Initial Public Offering and Related Events

In February 2018, the Company completed an initial public offering (“IPO”) of its common stock, recapitalized its convertible preferred stock into shares of common stock, and effected a reverse stock split of its common stock. See Note 4 – “Stockholders’ Equity (Deficit)” for information about our IPO and these related events.

New Accounting Standards Updates

In May 2014, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”), 2014-09, Revenue from Contracts with Customers. The FASB subsequently issued a number of additional ASUs to update this guidance. This guidance superseded substantially all existing accounting guidance related to the accounting for revenue transactions. This guidance establishes a core principle that an entity should record revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. We adopted this standard on January 1, 2018. Our approach to adopting this standard included performing a review of key contracts and comparing historical accounting policies and practices to the new accounting guidance. The accounting for revenue under the new ASU is materially consistent with our previous revenue recognition process. These condensed consolidated financial statements have been prepared in accordance with the new ASU utilizing the modified retrospective method, which did not require a cumulative effect of accounting change at January 1, 2018. The required disclosures have been reflected in Note 5 – “Revenue.”

In February 2016, the FASB issued ASU 2016-02, Leases.  The FASB subsequently issued a number of additional ASUs to update this guidance. This standard was issued to increase transparency and comparability among organizations by requiring that a right-of-use asset and corresponding lease liability be recorded on the balance sheet for leases with terms longer than 12 months. This standard is scheduled to be effective for our financial statements beginning on January 1, 2019. We plan to transition to the new guidance using the modified retrospective transition method on the adoption date and we will recognize a cumulative-effect adjustment to our retained earnings for this accounting change on January 1, 2019.  We plan to elect three practical expedients allowed under the guidance. According to these practical expedients we will not reassess whether existing contracts are or contain a lease; we will not reassess whether existing leases are operating or finance leases; and we will not reassess the accounting for initial direct costs for existing leases. We are in the process of determining the effects that the new standard will have on our consolidated financial statements. Our approach includes a review of existing leases and other executory contracts that may contain embedded leases and identifying the key terms that will be necessary for us to calculate the right-of-use asset and lease liability. We  currently estimate that the adoption of this standard will increase our total assets by approximately $16 million and increase our total liabilities by approximately $17 million, with the difference recorded to retained earnings. These estimates could change before the completion of our adoption of this new guidance.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. This standard was issued to reduce the diversity in practice in how certain cash receipts and cash payments are presented and

classified in the statement of cash flows. We adopted this standard on January 1, 2018, and it had no effect on our condensed consolidated statements of cash flows.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash. This standard was issued to change the presentation of amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this standard on January 1, 2018, and the effects of this standard and related required disclosures have been reflected in our condensed consolidated statements of cash flows and Note 2 – “Restricted Cash.”

NOTE 2 — RESTRICTED CASH

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated statements of cash flows:

As of December 31, 2017, we had amounts included in restricted cash that represented amounts required to be set aside by contractual agreement with our casualty and general liability insurance provider and corporate credit card provider. In February 2018, these contractual agreements to set aside cash were terminated. Therefore, as of September 30, 2018, we had no restricted cash balance.

As a result of our adoption of ASU 2016-18, we recasted certain balances in our condensed consolidated statement of cash flows for the nine months ended September 30, 2017. The following table reflects the recasted balances:

The amount of restricted cash at January 1, 2017, and September 30, 2017, was $9.1 million and $8.7 million, respectively.

NOTE 3 — INDEBTEDNESS AND BORROWING FACILITY

The following table summarizes our long-term debt:

Estimated fair values for our term loan and senior notes were determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the FASB’s fair value hierarchy. We believe we were in compliance with all of the covenants in our debt agreements at September 30, 2018.

Debt Repayments

In January 2018, we repurchased $5.0 million of aggregate principal amount of senior notes due May 2022 (“2022 Senior Notes”) in the qualified institutional market using cash on hand. We recognized an immaterial gain on debt extinguishment.

In February 2018, we repaid all $290.0 million remaining principal amount of senior floating rate notes due June 2020 (“2020 Senior Notes”) using cash on hand and proceeds received from our IPO. See Note 4 – “Stockholders’ Equity (Deficit)” for more information about our IPO. We recognized a loss on this debt extinguishment of $8.3 million.

In the first nine months of 2018, we repaid $270.0 million of aggregate principal amount of term loan due April 2021 (“Term Loan”) using cash on hand and proceeds received from our IPO. We recognized a loss on this debt extinguishment of $2.4 million.

As of September 30, 2018, we had $565.0 million aggregate principal amount of long-term debt still outstanding. On October 26, 2018, we gave notice to repay $20.0 million of Term Loan on October 31, 2018, using cash on hand. We will recognize an immaterial loss on this debt extinguishment for a portion of unamortized discount and debt issuance costs.

Revolving Credit Facility

On February 22, 2018, we entered into a $250 million revolving credit facility, with an initial maturity date of February 22, 2023, with a group of lenders with Wells Fargo, N.A., as administrative agent. The maturity date of the facility could be accelerated to January 16, 2021 or January 31, 2022, if we do not repay or refinance our Term Loan or 2022 Senior Notes, respectively, before these dates.

LIBOR borrowings under the credit facility bear interest at LIBOR plus a margin of 1.75% to 2.00% per annum, depending on facility utilization. Base rate loans are also available at our option. The credit facility includes a $50 million sub-limit for the issuance of letters of credit. The issuance of letters of credit reduces the amount available under the facility. We also pay a commitment fee on the unused amount of the facility of 0.25% to 0.375% per annum, depending on facility utilization.

The obligations under the credit facility are secured by substantially all of our accounts receivable, inventory, deposit accounts, intellectual property and the equity of some current and future wholly-owned domestic and foreign subsidiaries.

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

The credit facility contains covenants that could, in certain circumstances, limit our ability to issue additional debt, repurchase or pay dividends on our common stock, sell substantially all of our assets, make certain investments, or enter into certain other transactions.

Our borrowing base is $170.7 million and therefore our maximum availability under the credit facility is $170.7 million. There were no borrowings outstanding under the credit facility, and letters of credit totaling $7.1 million were issued, resulting in $163.6 million of availability under the credit facility.

NOTE 4 — STOCKHOLDERS’ EQUITY (DEFICIT)

Initial Public Offering of Common Stock

We completed an IPO of 22.4 million shares of common stock at a price to the public of $18.00 per share, of which 18.1 million shares were sold by the Company and 4.3 million shares were sold by one of our stockholders, a subsidiary of Chesapeake Energy Corporation. The shares began trading on The New York Stock Exchange on February 2, 2018, under the ticker symbol “FTSI.” The Company received net proceeds from the offering of $303.0 million, after offering costs. We used the net proceeds from the offering for general corporate purposes, primarily debt repayments. The Company did not receive any proceeds from the offering of shares by the selling stockholder.

Reverse Stock Split

In connection with the IPO, we amended and restated our certificate of incorporation to effect a 69.258777:1 reverse stock split of our common stock.

Recapitalization of Convertible Preferred Stock

In connection with the IPO, a number of shares of our convertible preferred stock (“Preferred Stock”) converted into common stock at the rate of 155.944841 shares of common stock per each share of Preferred Stock. All remaining shares of Preferred Stock were canceled. We refer to this conversion and the cancelation together as the recapitalization of the Preferred Stock. The conversion rate of the Preferred Stock and shares canceled were calculated so that following the recapitalization, stockholders that did not own Preferred Stock would own 7% of our common stock prior to the IPO. The recapitalization of all outstanding shares of our Preferred Stock resulted in 39.4 million shares of common stock.

NOTE 5 — REVENUE

Historically, the Company has contracted with its customers to perform hydraulic fracturing services on one or more oil or natural gas wells. Under these arrangements, we satisfy our performance obligations as services are rendered, which is generally upon the completion of a fracturing stage. We typically complete one or more stages per day. A stage is considered complete when we have met the specifications set forth by the customer, at which time we have the right to invoice the customer and the customer is obligated to pay us for the services rendered. The price for our services typically includes an equipment charge and product charges for proppant, chemicals and other products actually consumed during the course of providing our services. The price for each stage of a particular well does not vary significantly. Payment terms average approximately two months from the date a stage is completed. All consideration owed to us for services performed during a period is fixed and our right to receive it is unconditional.

We have entered into alternative pricing arrangements for our services with some customers in recent periods. Under these arrangements, we provide our customer with exclusive use of a fracturing fleet for a period of time and satisfy our performance obligation as services are rendered, which is based on the passage of time rather than the completion of a stage. Under these arrangements, we have the right to receive consideration from a customer even if circumstances outside of our control prevent us from performing our work. All consideration owed to us for services performed during a period is fixed and our right to receive it is unconditional.

Pricing for our services is frequently negotiated with our customers and is based on prevailing market rates during each reporting period. The amounts we invoice our customers for services performed during a period are directly related to the value received by the customers for the period. There is no inherent uncertainty to the amount of consideration we will receive for services performed during a period and no judgment is required to allocate a portion of the transaction price to a future period. Accordingly, we are not required to identify any unsatisfied performance obligations nor attribute any revenue to them.

During the period ended September 30, 2018, we acted as a principal, rather than as an agent, for all of the goods and services that we provided to our customers; our customer arrangements did not include obligations for refunds or warranties of our work; and we did not incur incremental costs to obtain or fulfill contracts with our customers.

To comply with the FASB disclosure objective, we are required to disaggregate our revenue into categories if it will provide an enhanced understanding of how the nature, amount, timing, and uncertainty of our revenue and cash flows are

affected by economic factors. To evaluate an appropriate level of disaggregation of revenue, we considered the following aspects of our business:

Based on the above factors, we concluded that no additional disaggregation of revenue was necessary or meaningful to help depict the nature, amount, timing and uncertainty of our revenues and cash flows.

NOTE 6 — STOCK-BASED COMPENSATION

Our board of directors and stockholders have adopted the 2018 Equity and Incentive Compensation Plan (“2018 Plan”) to attract and retain officers, employees, directors, consultants and other key personnel and to provide those persons incentives and awards for performance. The 2018 Plan permits the grant of up to 2.8 million shares of common stock in the form of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, or other stock-based awards. Any shares that become available as a result of forfeiture, cancelation, expiration or cash settlement of an award are allowed to be granted again at a future date under the 2018 Plan. In the first nine months of 2018, the compensation committee of our board of directors granted 2.9 million shares to employees and a non-employee director in the form of restricted stock units (“RSUs”). Some of these awards were subsequently forfeited and granted again. 

RSUs are valued at the market price of a share of our common stock on the date of grant. Substantially all of these awards will vest in 25% increments over a four-year period from the date of grant and are expensed on a straight-line basis over that period, which is considered to be the requisite service period.

Stock-based compensation expense for these RSUs was $8.2 million for the nine months ended September 30, 2018. The weighted-average grant-date fair value per share of RSUs granted was $19.89 for the nine months ended September 30, 2018. At September 30, 2018, there was $45.4 million of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 3.4 years. The following table summarizes transactions related to the RSUs granted under the 2018 Plan.

As of September 30, 2018, 2.7 million shares of unvested RSUs were outstanding under this plan, and up to approximately 120,000 shares were available for future grants under this plan.

Immediately prior to the IPO, there were approximately 111,000 stock-settled RSUs and approximately 94,000 cash-settled RSUs outstanding under our 2014 Long-Term Incentive Plan (“2014 LTIP”). All RSUs vested upon the completion of our IPO, which qualified as the final vesting condition for these RSUs. The Company elected to settle all RSUs on a cash basis. The compensation expense recognized in the first nine months of 2018 for the stock-settled and cash-settled RSUs was $3.7 million. The 2014 LTIP was terminated after the payout of the RSUs.

NOTE 7 — IMPAIRMENTS AND OTHER CHARGES

The following table summarizes our impairments and other charges:

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

During the third quarter and the first nine months of 2018, we recorded aggregate charges under these supply contracts of $10.0 million and $16.0 million, respectively.  These charges related to actual purchase shortfalls incurred, as well as forecasted purchase shortfalls that are expected to be incurred and settled in future periods. Approximately $10 million of our 2018 supply commitment charges relate to estimated losses under these contracts for 2019. These purchase shortfalls are due to our customers choosing to provide their own proppant, our customers’ desire to purchase sand from sand mines closer to their operating areas, and increased purchase commitments in 2019.

A significant majority of our contracted proppant is for sand types that are mined primarily in the Midwestern United States (“Northern White” sand). Since we executed these contracts, customer demand for sand has shifted away from Northern White sand and towards lower-cost sand that is available from sand mines closer in proximity to our customers’ operating locations. We are in discussions with our vendors to modify our supply contracts to better align with our customers’ volume requirements, preferred sand types, and preferred sand mine locations.

Estimated losses related to these supply contracts contain uncertainties, such as future customer demand, future customer sand preferences, the legal defenses available to us, and the outcome of our ongoing vendor discussions. These uncertainties require us to use judgment to quantify the amount of these estimates. Actual results could materially differ from our estimate.

While we have successfully worked with our vendors to minimize charges related to these purchase commitments in the past, if we do not meet the minimum purchase commitments in the future and we are unable to adjust or avoid our contracted amounts, we may incur additional supply commitment charges in future periods.

During 2015 and 2016, we vacated certain leased facilities to consolidate our operations. During the first nine months of 2017, we recognized additional expense in connection with these actions.

NOTE 8 — GAIN ON INSURANCE RECOVERIES

In January 2017, a fire destroyed certain equipment in one of our fleets. These assets were insured at values greater than their carrying values. In the first nine months of 2017, we received $4.2 million of insurance recovery proceeds for these assets, which exceeded their carrying values by $2.9 million.

NOTE 9 — INCOME TAXES

In 2012, we established a full valuation allowance with respect to our U.S. federal deferred tax assets and state deferred tax assets in excess of our deferred tax liabilities. We have continued to record a valuation allowance for these net deferred tax assets since 2012. As a result, we only recorded income tax expense for the first nine months ended September 30, 2018 and 2017, for states that limit or disallow the deduction of net operating loss carryforwards. Please see Note 13 – “Income Taxes” in notes to consolidated financial statements included in our consolidated financial statements for the year ended December 31, 2017, for more information regarding our income taxes and valuation allowance. Deferred tax assets related to our U.S. federal and state operating losses are still available to us to offset future taxable income, subject to limitations in the event of a change of control under Section 382 of the Internal Revenue Code. At September 30, 2018, we had not incurred such an ownership change.

At each reporting date, we consider all available positive and negative evidence to evaluate whether our deferred tax assets are more likely than not to be realized. A significant piece of negative evidence that we consider is our cumulative losses (generally defined as losses before income taxes) incurred in recent fiscal years. Such evidence limits our ability to consider other subjective evidence such as our projections of future taxable income.

The Company generated income before income taxes in 2017 and in the first nine months of 2018. This represents positive evidence that we may be able to realize some or all of our deferred tax assets; however, due to the negative evidence of our cumulative losses in recent years and the significant cyclicality of our business, we believe that the earliest period when we may adjust the valuation allowance is the fourth quarter of 2018.

In December 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 that, among other things, changed the taxation of certain foreign earnings beginning January 2018.  We are still in the process of evaluating these new foreign tax law provisions, although we believe any effect of these provisions will be immaterial to our financial statements.  

NOTE 10—EARNINGS (LOSS) PER SHARE

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

_________________________

NOTE 11 — COMMITMENTS AND CONTINGENCIES

Purchase Obligations

We have purchase commitments with certain vendors to supply a significant portion of the proppant used in our operations and to assist us with the delivery of proppant to our job locations. There have been no significant changes to these purchase obligations since December 31, 2017. In 2019, our purchase commitments with one vendor are scheduled to increase significantly. See Note 7 – “Impairments and Other Charges” for more discussion of these increased commitments.

Litigation

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

Patterson v. FTS International Manufacturing, LLC and FTS International Services, LLC: On June 29, 2015, Joshua Patterson filed a lawsuit against the Company in the 115th Judicial District Court of Upshur County, Texas. The lawsuit alleges, among other things, that the Company was negligent with respect to an automobile accident that occurred between the Company and Mr. Patterson in 2013. Mr. Patterson sought monetary relief for damages incurred because of the accident. We believe this claim is covered under the Company’s insurance policies and our insurance carriers are defending the Company in this case. On July 19, 2018, the jury returned a verdict against the Company in the amount of approximately $100 million, including punitive damages, the majority of which are not recoverable under Texas law.  Mr. Patterson requested that the Court enter a Final Judgment in the amount of approximately $33 million. The Company’s insurance carriers plan to appeal the judgment and have requested a new trial. While the outcome of this case is uncertain, the Company has met its insurance deductible for this matter and we do not expect the ultimate resolution of this case to have a material adverse effect on our consolidated financial statements.

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

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

Unless the context requires otherwise, the use of the terms “FTSI,” “Company”, “we,” “us,” “our” or “ours” refer to FTS International, Inc., together with its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes that appear elsewhere in this quarterly report on Form 10-Q as well as information in our annual report on Form 10-K for the year ended December 31, 2017. Unless otherwise specified, all comparisons made are to the corresponding period of 2017.

Overview

We are one of the largest providers of hydraulic fracturing services in North America. Our services enhance hydrocarbon flow from oil and natural gas wells drilled by exploration and production companies in shale and other unconventional resource formations. Our customers include leading exploration and production companies that extract oil and natural gas resources in North America. We operate in five of the most active major basins in the United States: the Permian Basin, the SCOOP/STACK Formation, the Marcellus/Utica Shale, the Eagle Ford Shale and the Haynesville Shale. Substantially all of our business activities support our well completion services.

Summary Financial Results

Industry trends and business outlook

Our business depends on the willingness of our customers to make expenditures to explore for, develop, and produce oil and natural gas in the United States. The willingness of our customers to undertake these activities is predominantly influenced by current and expected future prices for oil and natural gas.

The price of West Texas Intermediate crude oil averaged approximately $63.00,  $68.00, and $70.00 for the first, second and third quarters of 2018, respectively, compared with an average of $52.00, $48.00, and $48.00 in 2017. This has led to an increase in the demand for hydraulic fracturing services, which is strongly correlated with the horizontal active rig count. The horizontal rig count averaged approximately 830, 910 and 920 for the first, second and third quarters of 2018, respectively, compared with an average of approximately 610, 750 and 800 in 2017, according to a report by Baker Hughes, a GE company. The increased rig count combined with the trend for horizontal well design to have longer lateral lengths and more sand pumped per well, has driven aggregate demand for hydraulic fracturing services in the United States to record levels. We expect this high demand will remain strong if crude oil prices continue at these levels.

The performance of our business is also driven by the supply of hydraulic fracturing equipment that is available in the market to meet customer demand. This supply is also at record levels. In response to a severe shortage of hydraulic fracturing equipment in 2017, new competitors and more equipment have entered the market in 2018. As a result of this additional supply of active equipment, combined with certain customers reducing their completions activity for operational reasons, we began to see the supply of equipment exceed the demand for equipment towards the end of the second quarter.

In response to this increased competition, we remain disciplined with respect to the number of active fleets we offer into the market to optimize our utilization and profitability. We reduced our active fleet count from 26 fleets at the end of the second quarter to 19 fleets at the end of the third quarter because certain fleets did not meet our utilization targets.

We currently expect to average 18 active fleets during the fourth quarter. However, we view many of these fleet reductions as temporary based on customer inquiries for our services in 2019.

Despite these trends, we expect continued profitability and cash generation for the remainder of 2018. We also expect that market conditions will increase demand for hydraulic fracturing services further in 2019, which we believe will balance the hydraulic fracturing services market and allow for continued profitability in 2019.

Other significant developments in 2018

Results of Operations

Revenue

Total revenue consists of revenue from hydraulic fracturing and wireline services. The following table includes certain operating statistics that affect our revenue:

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Total revenue for the third quarter and first nine months of 2018 decreased by $114.6 million and increased by $287.8 million, respectively, from the same periods in 2017. The decrease in revenue for the third quarter was due to a lower number of average active fleets, an increase in the portion of customers who provided their own proppant, and a decrease in the costs for materials used in the fracturing process. The increase in revenue for the first nine months of 2018 was due to a higher number of average active fleets and increased pricing of our services in the first half of the year, when compared to the same period in 2017.

The number of fracturing stages completed per active fleet for the third quarter and first nine months of 2018 decreased by 3% and 6%, respectively, from the same periods in 2017. These decreases were primarily due to an unusually high level of utilization in the second and early third quarter of 2017, which was driven by a significant shortage of active hydraulic fracturing equipment in the market, and increased winter weather delays in the first quarter of 2018 when compared with the same period in 2017.

Costs of revenue

Costs of revenue as a percentage of total revenue is as follows:

Total costs of revenue in the third quarter and the first nine months of 2018 decreased by $77.2 million and increased by $152.9 million, respectively, from the same periods in 2017. These changes were primarily due to the changes in our costs of revenue, excluding depreciation.

Costs of revenue, excluding depreciation, in the third quarter and first nine months of 2018 decreased by $76.6 million and increased by $153.9 million, respectively, from the same periods in 2017. These changes were primarily due to changes in our activity levels as illustrated by our fracturing stages completed and our average active fleets during these periods. Additionally, the decrease in the third quarter was partly due to an increase in the portion of customers who provided their own proppant, and a decrease in the costs for materials used in the fracturing process.

Depreciation for our service equipment in the third quarter and first nine months of 2018 was essentially flat when compared to the same periods in 2017. Depreciation for our service equipment had been declining in recent periods due to asset disposals, certain assets becoming fully depreciated, and the fact that we generally refurbish our equipment as it approaches the end of its useful life rather than replace it by purchasing new equipment. Because of our increased capital expenditures in recent periods and the fact that refurbished assets now make up a larger portion of our service equipment fleet, we believe that the trend for depreciation should be more consistent in future periods.

Total costs of revenue as a percentage of total revenue for the third quarter increased by 1.2 percentage points from 70.9% in 2017 to 72.1% in 2018. Total costs of revenue as a percentage of total revenue for the first nine months of 2018 decreased by 5.1 percentage points from 76.1% in 2017 to 71.0% in 2018. These changes were primarily due to an increase in the pricing for our services in the first half 2018 and a decrease in the pricing for our services in the third quarter of 2018 when compared to the same periods in 2017.

Selling, general and administrative expense

Selling, general and administrative (“SG&A”) expense in the first nine months of 2018 increased by $4.3 million from the same period in 2017. This increase was primarily due to stock-based compensation expense incurred in 2018. We incurred $3.7 million of expense to settle all remaining unvested awards from our 2014 Long Term Incentive Plan, which vested upon the completion of our IPO. We also incurred $8.2 million of non-cash expense related to RSU awards granted in 2018. These increases were partially offset by decreased cash-based incentive compensation expense in 2018.

SG&A expense for the third quarter of 2018 decreased by $2.0 million from the same period in 2017 because the net increase in total compensation expense was more than offset by a net decrease in our remaining SG&A costs in 2018.

Depreciation and amortization

The following table summarizes our depreciation and amortization:

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