Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “
Item 8
. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
On January 25, 2017, we consummated an IPO of 30,774,000 shares of our common stock, of which 15,700,000 shares were offered by us and 15,074,000 shares were offered by the selling stockholder. To effectuate the IPO, we effected a series of transactions that resulted in a reorganization of our business. Specifically, among other transactions, we effected the Organizational Transactions described within Note (
1
)
Basis of Presentation and Nature of Operations
of Part II, “
Item 8
. Financial Statements and Supplemental Data.”
The information in this “Management’s Discussion of Analysis of Financial Condition and Results of Operations” reflects the following: (1) as it pertains to periods prior to the completion of the IPO, the accounts of Keane Group; and (2) as it pertains to the periods subsequent to the completion of the IPO, the accounts of Keane.
This section and other parts of this Annual Report on Form 10-K contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “may,” “can,” “will,” “would,” “could,” “should,” the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, “
Item 1A
. Risk Factors” of this Annual Report on Form 10-K, which are incorporated herein by reference. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.
EXECUTIVE OVERVIEW
Organization
We are one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions. Our total capacity includes approximately
1.4 million
hydraulic horsepower. From our
29
currently deployable hydraulic fracturing fleets (“fleets”), 34 wireline trucks, 24 cementing units and other ancillary assets located in the Permian Basin, the Marcellus/Utica Shale, the Eagle Ford Formation, the Bakken Formation and other active oil and gas basins, we pride ourselves on providing industry-leading completion services with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We distinguish ourselves through three key principles, which include (i) our partnerships with high-quality customers, (ii) our intense focus on safety and efficiency and (iii) a track record of creating value for all our stakeholders.
We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to well-capitalized oil and gas exploration and production customers, with some of the highest quality and safety standards in the industry and long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion
requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, provides us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges.
We are organized into two reportable segments, consisting of Completion Services, which includes our hydraulic fracturing, wireline divisions and ancillary services; and Other Services, which exclusively includes our cementing division. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. Segment gross profit is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment gross profit as segment revenue less segment direct and indirect cost of services, excluding depreciation and amortization. Additionally, our operations management make rapid and informed decisions, such as price adjustments that offset commodity inflation and align with market rates, decisions to strategically deploy our existing and new fleets and real-time supply chain management decisions, by utilizing top line revenue, together with individual direct and indirect costs on a per stage and per fleet basis.
Asset Acquisition from Refinery Specialties, Incorporated
On July 24, 2018, we executed a purchase agreement with RSI to acquire approximately 90,000 hydraulic horsepower and related support equipment for approximately
$35.4 million
, inclusive of a
$0.8 million
deposit reimbursement related to future equipment deliveries. This acquisition was partially funded by the insurance proceeds we received in connection with a fire that resulted in damage to a portion of one of our fleets (for further details see Note
(
7
)
Property and Equipment, net
of Part II, “
Item 8
. Financial Statements and Supplementary Data”). We also assumed operating leases for light duty vehicles in connection with the RSI transaction, and RSI entered into a non-compete arrangement in turn with us. In September 2018, we reached an agreement with RSI to refund us $0.8 million of the purchase price due to repair costs required for certain acquired equipment. The resulting purchase price after the refund was
$34.6 million
, and we incurred
$0.4 million
of transaction costs related to the acquisition, bringing total cash consideration related to the acquisition to
$35.0 million
.
Acquisition of RockPile
On July 3, 2017, we acquired 100% of the outstanding equity interests of RockPile, a multi-basin provider of integrated well completion services in the U.S., whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. The acquisition of RockPile was completed for cash consideration of
$116.6 million
, subject to post-closing adjustments, 8,684,210 shares of our common stock and contingent value rights (“CVR”) granted pursuant to the Contingent Value Rights Agreement (“CVR Agreement”), as further described in Note
(3)
Acquisition
s)
of Part II, “
Item 8
. Financial Statements and Supplementary Data.”
Through this acquisition, we expanded our existing presence in the Permian Basin and Bakken Formation by increasing our hydraulic fracturing fleet size by more than 25%, and further strengthened our position as one of the largest pure-play providers of integrated well completion services in the U.S. We acquired 245,000 hydraulic horsepower at newbuild economics, eight wireline trucks, 10 cementing units and 12 workover rigs. We also acquired a high-quality customer base, with minimal overlap to our existing customer base and expanded certain service offerings and capabilities within our Other Services segment.
Subsequent to the acquisition, we sold the twelve acquired workover rigs during the third and fourth quarters of 2017.
In early April 2018, in accordance with the terms and conditions of the CVR Agreement, we calculated and paid the final Aggregate CVR Payment Amount, due to the Holders of the CVRs, of
$19.9 million
.
Financial results
Revenue in
2018
totaled
$2.1 billion
, an increase of
39%
compared to revenue in
2017
of
$1.5 billion
. Our strong revenue growth in
2018
was driven by the following factors, (i) an increase in deployed fleets as a result of a full-year contribution of assets acquired during the acquisition of Rockpile and additional newbuild fleets commissioned throughout 2018, (ii) stronger completions performance on a relative per crew basis in terms of stages completed and hours pumped and (iii) continued execution of our strategy of aligning with our clients under dedicated agreements, with periodic re-openers priced at market rate. We exited
2018
with
29
deployable fleets, which included the three newbuild fleets in 2018 and one fleet acquired through the acquisition of RSI. We exited
2017
with 27 operating fleets, which included six acquired fleets, including one newbuild fleet acquired through the acquisition of RockPile. In 2018, due to market conditions and client budget constraints creating white space on our calendar, we operated an equivalent of 24.5 fleets at 100% utilization, compared to 21.1 fleets at 100% utilization during 2017. The revenue growth drivers for 2018 had a favorable impact on operating margins, which is calculated by dividing operating income (loss) by revenue, but headwinds in input cost inflation persisted, particularly with, trucking, labor and chemicals, partially offset by deflation in sand prices due to surplus of sand supply. Consistent with our efforts to maintain and grow the supply of our key commodities and skilled workforce, as influenced by market demand, we continued to secure key contracts with suppliers, as well as position labor rates to facilitate retaining skilled employees and attracting new talent. We reported operating income of
$98.0 million
in
2018
, as compared to an operating income of
$9.3 million
in
2017
.
We reported net income of
$59.3 million
, or
0.54
per basic and diluted share, in
2018
, compared to net loss of
$36.1 million
, or
$(0.34)
per basic and diluted share, in
2017
. Excluding the adjustments discussed below, adjusted net income in
2018
and
2017
was $95.0 million and $4.1 million, respectively, or $0.87 and $(0.04) per basic and diluted share, respectively.
Net income in
2018
includes approximately $0.2 million of management adjustments to arrive at Adjusted Gross Profit (as defined herein), which is related to integration costs associated with the asset acquisition from RSI. Net income in
2018
includes a further $35.5 million of management adjustments to arrive at Adjusted EBITDA (as defined herein), driven by $17.2 million of non-cash stock compensation expense, $14.9 million gain from the insurance proceeds received in connection with the July 1, 2018 accidental fire, a $13.2 million adjustment to our CVR liability associated with the acquisition of RockPile, based on the cash settlement in early April 2018, $13.0 million of transaction costs primarily incurred to consummate the secondary stock offering completed in January 2018, $2.8 million of legal contingencies, a $2.7 million markdown to fair value of our idle real estate in Mathis, Texas, upon its sale, $0.9 million in refinancing costs, $0.5 million of integration costs associated with the asset acquisition from RSI and $0.1 million of other financing fees and expenses.
Net income in
2017
includes $11.2 million of management adjustments to arrive at Adjusted Gross Profit, driven by $12.4 million of re-commissioning costs for seven previously idled fleets, $1.7 million of acquisition and integration costs related to the acquisition of RockPile and $1.3 million of bonuses paid out to key operational employees in connection with our IPO, offset by a $4.2 million gain on disposal of assets. Net income in
2017
includes a further $20.8 million of management adjustments to arrive at Adjusted EBITDA, driven primarily by $10.7 million of transaction costs primarily related to the acquisition of RockPile, $10.6 million of non-cash stock compensation expense, a $7.8 million gain on indemnification settlements with Trican, $7.2 million of litigation contingencies, a $5.3 million gain related to the mark-to-market valuation adjustment of our CVR liability associated with the acquisition of RockPile, $3.6 million in bonuses to key personnel in connection with our IPO, $1.2 million of transaction costs related to the secondary offering in January 2018, $1.0 million of organizational restructuring costs, a $0.7 million gain due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and $0.2 million in commissioning costs.
Financial markets, liquidity, and capital resources
On January 25, 2017, we completed the IPO of
30,774,000
shares of our common stock at the public offering price of
$19.00
per share, which included
15,700,000
shares offered by us and
15,074,000
shares offered by the selling stockholder, including
4,014,000
shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to us, net of underwriters’ fees and capitalized cash payments of
$4.8 million
for professional services and other direct IPO related activities, was
$255.5 million
. The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s 2016 Term Loan Facility balance of
$99.0 million
and the associated prepayment premium of
$13.8 million
, and to repay
$50.0 million
of its
12%
secured notes due
2019
(“Senior Secured Notes”) and the associated prepayment premium of approximately
$0.5 million
. The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, we had
103,128,019
shares of common stock outstanding.
On February 17, 2017, we also obtained a $150.0 million asset-based revolving credit facility (“2017 ABL Facility”), replacing our pre-existing $100.0 million asset-based revolving credit facility. On December 22, 2017, our 2017 ABL Facility was amended to increase the commitments thereunder by $150.0 million, for total commitments of $300.0 million.
On May 25, 2018, we obtained a
$350.0 million
term loan facility (the “2018 Term Loan Facility”). The proceeds of the 2018 Term Loan Facility were used to repay Keane Group’s then-existing term loan facility (the “2017 Term Loan Facility”) and to pay related fees and expenses, with the excess proceeds going to fund general corporate purposes. As a result of entering into the 2018 Term Loan Facility, we experienced an average annualized savings of $7.9 million in interest expense in 2018, when compared to the 2017 Term Loan Facility.
At
December 31, 2018
, we had approximately
$80.2 million
of cash available. We also had
$184.0 million
available under our asset-based revolving credit facility as of
December 31, 2018
, which, with our cash balance, we believe provides us with sufficient liquidity for at least the next 12 months, including for capital expenditures and working capital investments.
We filed a Registration Statement on Form S-1 (File No. 333-222500) that was declared effective on January 17, 2018 by the Securities and Exchange Commission (the “SEC”) for an offering of shares of our common stock on behalf of Keane Investor (the “selling stockholder”). 15,320,015 shares were registered and sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters’ over-allotment option) at a price to the public of $18.25 per share. We did not sell any common stock in, and did not receive any of the proceeds from, the secondary offering. Subsequently, we filed a Registration Statement on Form S-3 (File No. 333-222831) that was effective upon its filing. In December 2018, the selling stockholder sold 5,251,249 shares of our common stock at a price to the public of $11.02 per share. In conjunction with this subsequent offering, we repurchased 520,000 shares of our common stock. We did not sell any common stock in, and did not receive any of the proceeds from this secondary offering. As a direct result of this secondary offering, Keane Investor owned approximately
49.6%
of our outstanding common stock as of
December 31, 2018
and currently owns approximately 49.5% of our common stock.
For additional information on market conditions and our liquidity and capital resources, see “Liquidity and Capital Resources,” and “Business Environment and Results of Operations” herein.
Fiscal 2018 Highlights
|
|
•
|
Acquisition:
executed strategic asset acquisition of approximately 90,000 hydraulic horsepower from RSI at attractive value;
|
|
|
•
|
Revenue:
increased average annualized Revenue per deployed fleet to $85.5 million in 2018 compared to $72.4 million in 2017;
|
|
|
•
|
Profitability:
increased average annualized Adjusted Gross Profit per fully-utilized fleet to $19.5 million in 2018 compared to $12.9 million in 2017;
|
|
|
•
|
Utilization:
increased efficiency by maintaining average fleet utilization of
88%
and increased wireline bundling to
78%
;
|
|
|
•
|
Safety:
achieved a total recordable incident rate of
0.37
, which remains substantially less than the industry average;
|
|
|
•
|
Balance sheet:
maintained and improved conservative balance sheet, financial flexibility and liquidity;
|
|
|
•
|
Liquidity:
generated operating cash flow of
$350.3 million
;
|
|
|
•
|
Share repurchases:
completed
$105 million
of stock repurchases, representing
8.1 million
shares of our common stock; and
|
|
|
•
|
Secondary offerings:
completed two secondary offerings on behalf of Keane Investor for approximately
18.6 million
shares, which increased public float and reduced Keane Investor’s ownership in the Company to 49.6% as of December 31, 2018 and 49.5% as of February 25, 2019.
|
Business outlook
In 2017 and through a significant portion of 2018, our industry experienced an increase in the level of drilling activity, driven by growth in E&P capital spending budgets. Commodity prices improved, with crude oil and natural gas prices well above levels prevailing at the beginning of 2017. West Texas Intermediate (“WTI”) crude oil prices averaged $64.94 per barrel in 2018, as compared to $50.88 per barrel in 2017, and Henry Hub Natural Gas prices averaged $3.17 per MMBtu in 2018, as compared to $2.99 per MMBtu in 2017. These dynamics, combined with the completion of previously drilled wells, led to significant growth in the demand for U.S. completion services. At the same time, the availability and supply of completions services was impacted by higher completions intensity, which drove increases in the amount of equipment that must be utilized per fleet and acceleration of maintenance cycles, both of which had a tightening effect on available supply.
In the fourth quarter of 2018, the industry faced growing headwinds, including E&P capital budget exhaustion, early achievement of E&P production targets, price differentials and normal seasonality, resulting in softness in demand for completions services. At the same time, the price of crude oil experienced a significant and rapid decline beginning in November 2018, exacerbating the negative impacts on completions activity. The decline in crude oil prices coincided with E&P budgeting processes, driving many E&P companies to delay budgeting cycles and activity in early 2019. In addition, as we reached the price re-opener periods on a portion of our dedicated agreements, the current imbalance of frac supply resulted in pressure on net price. Most of our customers see value in a long-term partnership with us, and as a result, traded some price concessions by us for extended terms or additional work scope. We currently believe we have strong visibility on utilization for approximately two-thirds of our fleets in 2019, providing a strong baseload upon which to build.
Fiscal 2019 Objectives
In 2019, our principal business objective continues to be growing our business and safely providing best-in-class services in Completion Services and Other Services segments, while delivering shareholder value. We expect to achieve our objective through:
|
|
•
|
partnering and growing with well-capitalized customers under dedicated agreements who focus their efforts on safety, high-efficiency completions, continuous improvement and innovation;
|
|
|
•
|
allocating our assets to maximize utilization and returns, including diversification of geographies and commodities;
|
|
|
•
|
maximizing profitability of fully-utilized fleets through leading-edge pricing and efficiencies;
|
|
|
•
|
investing in technology to further drive efficiencies and differentiation of service offerings;
|
|
|
•
|
leveraging our flexible and scalable logistics infrastructure to provide assurance of supply at lowest landed cost;
|
|
|
•
|
leveraging our platform to identify, retain and promote talent to sustain growth and support operational and commercial excellence;
|
|
|
•
|
pursuing organic expansion opportunities for our cementing assets;
|
|
|
•
|
maintaining agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply and optimize efficiency;
|
|
|
•
|
maintaining our conservative and flexible capital position, supporting continued growth and maintenance of active equipment;
|
|
|
•
|
exploring potential opportunities for mergers or acquisitions, focused on gaining scale, achieving synergies and delivering shareholder returns; and
|
|
|
•
|
returning capital to shareholders in a disciplined fashion.
|
Our operating performance and business outlook are described in more detail in “Business Environment and Results of Operations” herein.
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
We provide our services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation. These regions are expected to account for approximately
68%
of all new horizontal wells anticipated to be drilled during 2019 through 2021. In addition, the high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements.
In particular, we are one of the largest providers of completion services in the Permian Basin and the Marcellus Shale/Utica Shale, the most prolific and cost-competitive oil and natural gas basins in the U.S. According to Spears & Associates, the Permian Basin and the Marcellus Shale/Utica Shale are expected to account for
53%
of total active rigs in the U.S. during 2019 through 2021 based on forecasted rig counts. These basins have experienced a recovery in activity since the spring of 2016, with an
229%
increase in rig count from their combined May 2016 low of
170
to
560
as of
December 31, 2018
.
Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas demand.
Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices, which are summarized in the tables below.
The following table shows the average oil and natural gas prices for WTI and Henry Hub natural gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Oil price - WTI
(1)
|
|
$
|
64.94
|
|
|
$
|
50.88
|
|
|
$
|
43.14
|
|
Natural gas price - Henry Hub
(2)
|
|
$
|
3.17
|
|
|
$
|
2.99
|
|
|
$
|
2.52
|
|
(1)
Oil price measured in dollars per barrel
(2)
Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu
|
|
|
|
|
|
|
|
The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Product Type
|
|
2018
|
|
2017
|
|
2016
|
Oil
|
|
841
|
|
|
703
|
|
|
408
|
|
Natural Gas
|
|
190
|
|
|
172
|
|
|
100
|
|
Other
|
|
1
|
|
|
1
|
|
|
1
|
|
Total
|
|
1,032
|
|
|
876
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Drilling Type
|
|
2018
|
|
2017
|
|
2016
|
Horizontal
|
|
900
|
|
|
736
|
|
|
400
|
|
Vertical
|
|
63
|
|
|
70
|
|
|
60
|
|
Directional
|
|
69
|
|
|
70
|
|
|
49
|
|
Total
|
|
1,032
|
|
|
876
|
|
|
509
|
|
|
|
|
|
|
|
|
Our customers’ cash flows, in most instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets.
Following a trough in early 2016, oil prices and natural gas prices have recovered to
$45.15
and $
3.25
, respectively, or approximately
72%
and
118%
, respectively, as of
December 31, 2018
from their lows in early 2016 of
$26.19
and
$1.49
, respectively. As of January 2019, the US Energy Information Administration (the “EIA”) projects WTI spot prices to average
$53.0
in the first quarter of 2019 before gradually increasing to
$57.0
in the fourth quarter of 2019 and Henry Hub natural gas prices to average
$2.89
in 2019.
With the rebound in commodity prices from their lows in early 2016, drilling and completion activity continued to increase in 2017 and 2018, with U.S. active rig count in December 2018 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility continues to persist. Despite this market volatility, we continued to experience increased demand for our services during 2018.
The EIA projects that the average WTI spot price will increase through 2020 due to growing demand. As of January 2019, global liquids demand is expected to average
101.5 million
barrels per day in 2019. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale
developments. As of January 2019, natural gas demand in North America is expected to average
82.65 billion
cubic feet per day in 2019.
Our financial performance in 2018 is reflective of the increased demand within the completion services industry and our ability to navigate the anticipated sector-wide challenges in 2019.
RESULTS OF OPERATIONS IN
2018
COMPARED TO
2017
Year Ended
December 31, 2018
Compared with Year Ended
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Thousands of Dollars)
|
|
|
|
|
|
As a % of Revenue
|
|
Variance
|
Description
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
$
|
|
%
|
Completion Services
|
|
$
|
2,100,956
|
|
|
$
|
1,527,287
|
|
|
98
|
%
|
|
99
|
%
|
|
$
|
573,669
|
|
|
38
|
%
|
Other Services
|
|
36,050
|
|
|
14,794
|
|
|
2
|
%
|
|
1
|
%
|
|
21,256
|
|
|
144
|
%
|
Revenue
|
|
2,137,006
|
|
|
1,542,081
|
|
|
100
|
%
|
|
100
|
%
|
|
594,925
|
|
|
39
|
%
|
Completion Services
|
|
1,622,106
|
|
|
1,269,263
|
|
|
76
|
%
|
|
82
|
%
|
|
352,843
|
|
|
28
|
%
|
Other Services
|
|
38,440
|
|
|
13,298
|
|
|
2
|
%
|
|
1
|
%
|
|
25,142
|
|
|
189
|
%
|
Costs of services (excluding depreciation and amortization, shown separately)
|
|
1,660,546
|
|
|
1,282,561
|
|
|
78
|
%
|
|
83
|
%
|
|
377,985
|
|
|
29
|
%
|
Completion Services
|
|
478,850
|
|
|
258,024
|
|
|
22
|
%
|
|
17
|
%
|
|
220,826
|
|
|
86
|
%
|
Other Services
|
|
(2,390
|
)
|
|
1,496
|
|
|
0
|
%
|
|
0
|
%
|
|
(3,886
|
)
|
|
(260
|
%)
|
Gross profit
|
|
476,460
|
|
|
259,520
|
|
|
22
|
%
|
|
17
|
%
|
|
216,940
|
|
|
84
|
%
|
Depreciation and amortization
|
|
259,145
|
|
|
159,280
|
|
|
12
|
%
|
|
10
|
%
|
|
99,865
|
|
|
63
|
%
|
Selling, general and administrative expenses
|
|
114,258
|
|
|
93,526
|
|
|
5
|
%
|
|
6
|
%
|
|
20,732
|
|
|
22
|
%
|
(Gain) loss on disposal of assets
|
|
5,047
|
|
|
(2,555
|
)
|
|
0
|
%
|
|
0
|
%
|
|
7,602
|
|
|
(298
|
%)
|
Operating income
|
|
98,010
|
|
|
9,269
|
|
|
5
|
%
|
|
1
|
%
|
|
88,741
|
|
|
957
|
%
|
Other income (expense), net
|
|
(905
|
)
|
|
13,963
|
|
|
0
|
%
|
|
1
|
%
|
|
(14,868
|
)
|
|
(106
|
%)
|
Interest expense
|
|
(33,504
|
)
|
|
(59,223
|
)
|
|
(2
|
%)
|
|
(4
|
%)
|
|
25,719
|
|
|
(43
|
%)
|
Total other expenses
|
|
(34,409
|
)
|
|
(45,260
|
)
|
|
(2
|
%)
|
|
(3
|
%)
|
|
10,851
|
|
|
(24
|
%)
|
Income tax expense
|
|
(4,270
|
)
|
|
(150
|
)
|
|
0
|
%
|
|
0
|
%
|
|
(4,120
|
)
|
|
2,747
|
%
|
Net income (loss)
|
|
$
|
59,331
|
|
|
$
|
(36,141
|
)
|
|
3
|
%
|
|
(2
|
%)
|
|
$
|
95,472
|
|
|
(264
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue.
Total revenue is comprised of revenue from our Completion Services and Other Services segments. Revenue in
2018
increased by
$594.9 million
, or
39%
, to
$2.1 billion
from
$1.5 billion
in
2017
. This change in revenue by reportable segment is discussed below.
Completion Services:
Completion Services segment revenue increased by
$573.7 million
, or
38%
, to
$2.1 billion
in
2018
from
$1.5 billion
in
2017
. This change was primarily attributable to a 17% growth in our average number of fully-utilized fleets, as a result of a full-year contribution of assets acquired during the acquisition of Rockpile and deployment of additional fleets throughout 2018, together with increased stage count and efficiency from both our existing and newly-deployed fleets. These factors drove an increase in annualized revenue per fully-utilized fleet of 18%.
Other Services:
Other Services segment revenue
increased
by
$21.3 million
, or
144%
, to
$36.0 million
in
2018
from
$14.8 million
in
2017
. This increase in revenue was primarily attributable to the acquisition of Other Services divisions from RockPile and reactivation of cementing assets that were previously idled. Revenue in 2018 was primarily earned in our cementing division, while revenue in 2017 was earned in our cementing, workover and
coiled tubing divisions. We idled our coiled tubing division in December 2016 and divested our coiled tubing assets during the fourth quarter of 2017. We divested our workover assets during the third and fourth quarters of 2017.
Cost of services.
Cost of services in
2018
increased by
$378.0 million
, or
29%
, to
$1.7 billion
from
$1.3 billion
in
2017
. This change was driven by several factors including (i) higher activity in the Completion Services segment (as discussed above under
Revenue
), (ii) price inflation in our key input costs, including labor, chemicals, and sand trucking, partially offset by sand deflation, (iii) increased maintenance costs associated with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs and (iv) an increase in fleets working twenty-four hour operations. In
2018
, we had management adjustments of $0.2 million in integration costs related to our asset acquisition from RSI. In
2017
, we had management adjustments of $12.4 million in fleet commissioning costs, $1.7 million in acquisition and integration costs associated with the acquisition of RockPile and $1.3 million in bonuses paid out to key operational employees in connection with our IPO. Cost of services as a percentage of total revenue in
2018
was
78%
, which represented a decrease of
5%
from
83%
in
2017
. Excluding the above-mentioned management adjustments, total cost of services was $1.7 billion and $1.3 billion in
2018
and
2017
, or
78%
and 82% of revenue, respectively, a decrease as a percentage of revenue of 4%.
Cost of services, as a percentage of total revenue is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Description
|
|
2018
|
|
2017
|
|
% Change
|
Segment cost of services as a percentage of segment revenue:
|
|
|
|
|
|
|
Completion Services
|
|
77
|
%
|
|
83
|
%
|
|
(6
|
)%
|
Other Services
|
|
107
|
%
|
|
90
|
%
|
|
17
|
%
|
Total cost of services as a percentage of total revenue
|
|
78
|
%
|
|
83
|
%
|
|
(5
|
)%
|
|
|
|
|
|
|
|
The change in cost of services by reportable segment is further discussed below.
Completion Services:
Completion Services segment cost of services increased by
$352.8 million
, or
28%
, to
$1.6 billion
in
2018
from
$1.3 billion
in
2017
. As a percentage of segment revenue, total cost of services was
77%
and
83%
, in
2018
and
2017
, respectively,
a decrease
as a percentage of revenue of
6%
. This decrease was driven by higher revenue and operational performance on a per fleet basis, partially offset by (i) net price inflation in our key input costs and (ii) increased maintenance costs associated with increased service intensity and higher-pressure jobs. In
2018
, we had management adjustments of $0.2 million in integration costs related to our asset acquisition from RSI. In
2017
, we had management adjustments of $11.6 million in fleet commissioning costs, $1.7 million in acquisition and integration costs associated with the acquisition of RockPile and $1.3 million in bonuses paid out to key operational employees in connection with our IPO. Excluding the above-mentioned management adjustments, Completion Services segment cost of services was
$1.6 billion
and $1.3 billion in
2018
and
2017
, or
77%
and 82% of segment revenue, respectively, a decrease as a percentage of revenue of 5%.
Other Services:
Other Services segment cost of services increased by
$25.1 million
, or
189%
, to
$38.4 million
in
2018
from
$13.3 million
in
2017
. This change in cost of services was primarily due to a full year of costs incurred to ramp up our cementing division. In
2017
, we incurred management adjustments of $0.8 million in commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million in acquisition and integration costs associated with the acquisition of RockPile. Excluding the above-mentioned management adjustments, Other Services segment cost of services was
$38.4 million
and $12.4 million in
2018
and
2017
, or
107%
and 84% of segment revenue, respectively, an increase as a percentage of revenue of 23%.
Depreciation and amortization.
Depreciation and amortization expense increased by
$99.9 million
, or
63%
, to
$259.1 million
in
2018
from
$159.3 million
in
2017
. This change was primarily attributable to depreciation of additional equipment purchased in 2018 to maintain existing fleets, the purchase of newbuild equipment, the
assets acquired from RSI, a full-year depreciation of assets acquired in the RockPile acquisition and changes in the estimated useful lives of certain assets during the first half of 2018.
Selling, general and administrative expense.
Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by
$20.7 million
, or
22%
, to
$114.3 million
in
2018
from
$93.5 million
in
2017
. This change in SG&A was primarily related to non-cash compensation expense and transactions related to the secondary offering we consummated in January 2018, compared with transaction costs incurred in
2017
associated with the acquisition of RockPile. SG&A as a percentage of total revenue was
5%
in
2018
compared with
6%
in
2017
. Total management adjustments were $34.5 million in
2018
, driven by
$17.2 million
of non-cash stock compensation expense,
$13.0 million
of transaction costs primarily incurred to consummate the secondary stock offering completed in January 2018,
$2.8 million
of legal contingencies,
$0.9 million
in refinancing costs,
$0.5 million
of integration costs associated with the asset acquisition from RSI and $0.1 million of other financing fees and expenses. Management adjustments in
2017
were
$34.5 million
, driven by
$10.7 million
of transaction costs primarily incurred for the acquisition of RockPile,
$10.6 million
of non-cash compensation expense,
$5.8 million
of organizational restructuring costs and bonuses to key personnel in connection with our IPO, together with transaction costs related to our secondary offering in 2018,
$7.2 million
primarily related to litigation contingencies and
$0.2 million
related to commissioning costs. Excluding these management adjustments, SG&A expense was
$79.8 million
and
$59.0 million
in
2018
and
2017
, respectively, which represents
an increase
of
35%
.
(Gain) loss on disposal of assets.
Gain on disposal of assets in
2018
decreased by
$7.6 million
, to a loss of
$5.0 million
in
2018
from a gain of
$2.6 million
in
2017
. This change was primarily attributable to the sale of our coiled tubing units and ancillary coiled tubing equipment in 2017, together with the loss recognized on the sale of our idle real estate in Mathis, Texas in 2018 and the increase in early disposals of various hydraulic fracturing pump components in 2018.
Other income (expense), net.
Other income (expense), net, in
2018
decreased by
$14.9 million
, or
106%
, to expense of
$0.9 million
in
2018
from income of
$14.0 million
in
2017
. In 2018, other income (expense), net was primarily due to a $13.2 million adjustment to our Rockpile CVR liability, $2.7 million loss on foreign currency related to the wind-down of the Canadian entity, offset by a $14.9 million gain on the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire. In 2017, other income (expense), net was primarily due to a $7.8 million of indemnification settlements with Trican, $0.7 million from the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of our RockPile CVR liability.
Interest expense, net.
Interest expense, net of interest income, decreased by
$25.7 million
, or
43%
, to
$33.5 million
in
2018
from
$59.2 million
in
2017
. This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million in 2017, in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes, compared to the $7.6 million write-offs of deferred financing costs in 2018, in connection with the debt extinguishment of our 2017 Term Loan Facility.
While we incurred higher interest expense on our debt facilities in 2018 compared to our debt facilities in 2017, primarily due to the higher principal balance under the 2018 Term Loan Facility, this increase was offset by lower amortization expense of our unamortized deferred financing costs.
Effective tax rate.
Upon consummation of the IPO, the Company became a corporation subject to federal income taxes. Our effective tax rate on continuing operations in
2018
was
6.71%
, as compared to
(0.53)%
in 2017. For
2018
, the effective rate is primarily made up of state taxes and a tax benefit derived from the current period operating income offset by a valuation allowance. For
2017
, the effective rate was primarily made up of a tax benefit derived from the current period operating income offset by a valuation allowance. As a result of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to tax amortization on our indefinite-lived intangible assets.
Net income.
Net income was
$59.3 million
in
2018
, as compared with net loss of
$36.1 million
in
2017
. The increase from the net loss in
2017
is due to the changes in revenue and expenses discussed above.
Year Ended
December 31, 2017
Compared with Year Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Thousands of Dollars)
|
|
|
|
|
|
As a % of Revenue
|
|
Variance
|
Description
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Completion Services
|
|
$
|
1,527,287
|
|
|
$
|
410,854
|
|
|
99
|
%
|
|
98
|
%
|
|
$
|
1,116,433
|
|
|
272
|
%
|
Other Services
|
|
14,794
|
|
|
9,716
|
|
|
1
|
%
|
|
2
|
%
|
|
5,078
|
|
|
52
|
%
|
Revenue
|
|
1,542,081
|
|
|
420,570
|
|
|
100
|
%
|
|
100
|
%
|
|
1,121,511
|
|
|
267
|
%
|
Completion Services
|
|
1,269,263
|
|
|
401,891
|
|
|
82
|
%
|
|
96
|
%
|
|
867,372
|
|
|
216
|
%
|
Other Services
|
|
13,298
|
|
|
14,451
|
|
|
1
|
%
|
|
3
|
%
|
|
(1,153
|
)
|
|
(8
|
%)
|
Costs of services (excluding depreciation and amortization, shown separately)
|
|
1,282,561
|
|
|
416,342
|
|
|
83
|
%
|
|
99
|
%
|
|
866,219
|
|
|
208
|
%
|
Completion Services
|
|
258,024
|
|
|
8,963
|
|
|
17
|
%
|
|
2
|
%
|
|
249,061
|
|
|
2,779
|
%
|
Other Services
|
|
1,496
|
|
|
(4,735
|
)
|
|
0
|
%
|
|
(1
|
%)
|
|
6,231
|
|
|
(132
|
%)
|
Gross profit
|
|
259,520
|
|
|
4,228
|
|
|
17
|
%
|
|
1
|
%
|
|
255,292
|
|
|
6,038
|
%
|
Depreciation and amortization
|
|
159,280
|
|
|
100,979
|
|
|
10
|
%
|
|
24
|
%
|
|
58,301
|
|
|
58
|
%
|
Selling, general and administrative expenses
|
|
93,526
|
|
|
53,155
|
|
|
6
|
%
|
|
13
|
%
|
|
40,371
|
|
|
76
|
%
|
Gain on disposal of assets
|
|
(2,555
|
)
|
|
(387
|
)
|
|
0
|
%
|
|
0
|
%
|
|
(2,168
|
)
|
|
560
|
%
|
Impairment
|
|
—
|
|
|
185
|
|
|
0
|
%
|
|
0
|
%
|
|
(185
|
)
|
|
(100
|
%)
|
Operating income (loss)
|
|
9,269
|
|
|
(149,704
|
)
|
|
1
|
%
|
|
(36
|
%)
|
|
158,973
|
|
|
(106
|
%)
|
Other income, net
|
|
13,963
|
|
|
916
|
|
|
1
|
%
|
|
0
|
%
|
|
13,047
|
|
|
1,424
|
%
|
Interest expense
|
|
(59,223
|
)
|
|
(38,299
|
)
|
|
(4
|
%)
|
|
(9
|
%)
|
|
(20,924
|
)
|
|
55
|
%
|
Total other expenses
|
|
(45,260
|
)
|
|
(37,383
|
)
|
|
(3
|
%)
|
|
(9
|
%)
|
|
(7,877
|
)
|
|
21
|
%
|
Income tax expense
|
|
(150
|
)
|
|
—
|
|
|
0
|
%
|
|
0
|
%
|
|
(150
|
)
|
|
—
|
%
|
Net loss
|
|
$
|
(36,141
|
)
|
|
$
|
(187,087
|
)
|
|
(2
|
%)
|
|
(44
|
%)
|
|
$
|
150,946
|
|
|
(81
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue.
Total revenue is comprised of revenue from our Completion Services and Other Services segments. Revenue in
2017
increased by
$1.1 billion
, or
267%
, to
1.5 billion
from
420.6 million
in
2016
. This change in revenue by reportable segment is discussed below.
Completion Services:
Completion Services segment revenue
increased
by
$1.1 billion
, or
272%
, to
$1.5 billion
in
2017
from
$410.9 million
in
2016
. This change was primarily attributable to a 105% growth in our average number of deployed fleets, as a result of increased utilization of our combined asset base following our acquisition of RockPile and our acquisition of the majority of the U.S. assets and assumptions of certain liabilities of the Acquired Trican Operations, as well as increased stage count and efficiency from both our existing and newly-deployed recommissioned fleets. In addition, annualized revenue per deployed fleet increased 81%.
Other Services:
Other Services segment revenue increased by
$5.1 million
, or
52%
, to
14.8 million
in
2017
from
9.7 million
in
2016
. This change in revenue was primarily attributable to the acquisition of Other Services divisions from RockPile. Revenue in 2017 was earned in our cementing and workover divisions and revenue in 2016 was earned in our cementing and coiled tubing divisions. We idled our coiled tubing division in December 2016 and divested of our coiled tubing assets during the fourth quarter of 2017. We divested of our workover assets during the third and fourth quarters of 2017.
Cost of services.
Cost of services in
2017
increased by
$866.2 million
, or
208%
, to
$1.3 billion
from
$416.3 million
in
2016
. This change was driven by several factors including (i) higher activity in the Completion Services segment (as discussed above under Revenue), (ii) price inflation in our key input costs, including labor, sand and sand trucking, (iii) increased maintenance costs associated with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs, (iv) an increase in fleets working twenty-four hour operations and (v) rapid deployment and commissioning of our idle fleets. In 2017, we incurred $12.4 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.9 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $10.0 million primarily related to commissioning of our idle fleets. Cost of services as a percentage of total revenue in 2017 was 83%, which represented a decrease of 16% from 99% in 2016. Excluding the above-mentioned management adjustments, total cost of services was $1.3 billion and $392.4 million in 2017 and 2016 or 82% and 93% of revenue, respectively, a decrease as a percentage of revenue of 11%.
Cost of services, as a percentage of total revenue is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Description
|
|
2017
|
|
2016
|
|
% Change
|
Segment cost of services as a percentage of segment revenue:
|
|
|
|
|
|
|
Completion Services
|
|
83
|
%
|
|
98
|
%
|
|
(15
|
)%
|
Other Services
|
|
90
|
%
|
|
149
|
%
|
|
(59
|
)%
|
Total cost of services as a percentage of total revenue
|
|
83
|
%
|
|
99
|
%
|
|
(16
|
)%
|
|
|
|
|
|
|
|
The change in cost of services by reportable segment is further discussed below.
Completion Services:
Completion Services segment cost of services increased by
$867.4 million
, or
216%
, to
$1.3 billion
in
2017
from $401.9 million in
2016
. As a percentage of segment revenue, total cost of services was 83% and 98%, in 2017 and 2016, respectively, a decrease as a percentage of revenue of 15%. This change in cost of services was driven by (i) higher activity (as discussed above under Revenue), (ii) price inflation in our key input costs, including sand and trucking, (iii) increased maintenance costs associated with increased service intensity and higher-pressure jobs and (iv) rapid deployment and commissioning of our idle fleets. In 2017, we incurred $11.6 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.5 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $9.3 million primarily related to commissioning of our idle fleets. Excluding the above-mentioned management adjustments, Completion Services segment cost of services were $1.2 billion and $379.1 million in 2017 and 2016, or 82% and 92% of segment revenue, respectively, a decrease as a percentage of revenue of 10%.
Other Services:
Other Services segment cost of services decreased by $1.2 million, or 8%, to $13.3 million in 2017 from $14.5 million in 2016. This change in cost of services was primarily attributable to the idling of our cementing and coiled tubing divisions in April 2016 and December 2016, respectively, partially offset by the acquisition of Other Services divisions from RockPile. In 2017, we incurred management adjustments of $0.8 million of commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million of acquisition and integration costs associated with the acquisition of RockPile. In 2016, we incurred management adjustments of $0.7 million in commissioning costs and $0.4 million in acquisition and integration costs associated with the Acquired Trican Operations. Excluding the above-mentioned management adjustments, Other Services segment cost of services was $12.4 million and $13.4 million in 2017 and 2016, or 84% and 138% of segment revenue, respectively, a decrease as a percentage of revenue of 54%.
Depreciation and amortization.
Depreciation and amortization expense increased by $58.3 million, or 58%, to $159.3 million in 2017 from $101.0 million in 2016. This change was primarily attributable to depreciation of additional equipment purchased in 2017 to recondition existing fleets and the acquisition of the RockPile assets.
Selling, general and administrative expense.
Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $40.4 million, or 76%, to $93.5 million in 2017 from $53.2 million in 2016. This change in SG&A was primarily related to non-cash amortization expense of equity awards issued under our Equity and Incentive Award Plan in 2017 and transactions driving overall company growth associated with the acquisition of RockPile. SG&A as a percentage of total revenue was 6% in 2017 compared with 13% in 2016. Total management adjustments were $34.5 million in 2017, driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense for the restricted stock units and stock options awarded to certain of our employees in connection with our IPO, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, together with transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to commissioning costs. Management adjustments in 2016 were $26.9 million, primarily driven by $23.2 million of transaction costs and lease exit costs related to the integration of the Acquired Trican Operations, $2.0 million in non-cash compensation expense of our unit-based awards and $1.7 million in IPO-readiness costs. Excluding these management adjustments, SG&A expense was $59.0 million and $26.3 million in 2017 and 2016, respectively, which represents an increase of 124%.
Gain on disposal of assets.
Gain on disposal of assets in 2017 increased by $2.2 million, or 560%, to a gain of $2.6 million in 2017 from a gain of $0.4 million in 2016. This change was primarily attributable to the sale of our coiled tubing units and ancillary coiled tubing equipment, our air compressor units and idle property in Woodward, Oklahoma and Searcy, Arkansas.
Other income (expense), net.
Other income (expense), net, in 2017 increased by $13.0 million, or 1,424%, to income of $14.0 million in 2017 from income of $0.9 million in 2016. This change is primarily due to $7.8 million of gain on indemnification settlements with Trican, $0.7 million due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of our RockPile CVR liability.
Interest expense, net.
Interest expense, net of interest income, increased by $20.9 million, or 55%, to $59.2 million in 2017 from $38.3 million in 2016. This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million, incurred in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes. This increase was offset by lower interest expense under our 2017 Term Loan Facility, which replaced our 2016 Term Loan Facility and Senior Secured Notes that bore higher interest rates.
Effective tax rate.
Upon consummation of the IPO, the Company became a corporation subject to federal
income taxes. Our effective tax rate on continuing operations in 2017 was (0.53)%. The effective rate is primarily
made up of a tax benefit derived from the current period operating income offset by a valuation allowance. As a
result of market conditions and their corresponding impact on our business outlook, we determined that a valuation
allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The
remaining tax impact not offset by a valuation allowance is related to tax amortization on our indefinite-lived intangible assets.
Net loss.
Net loss was
$36.1 million
in
2017
, as compared with net loss of
$187.1 million
in
2016
. This decrease in net loss from 2016 is due to the changes in revenue and expenses discussed above.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note
(
18
) (
Commitments and Contingencies
)
of Part II, “
Item 8
. Financial Statements and Supplementary Data.”
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected.
As of
December 31, 2018
, we had
$80.2 million
of cash and
$351.2 million
of total debt, compared to
$96.1 million
of cash and
$282.9 million
of total debt as of
December 31, 2017
. In
2018
,
2017
and
2016
, we had capital expenditures of
$291.5 million
,
$189.6 million
and
$23.5 million
, respectively, exclusive of the cash payment attributable to the asset acquisition from RSI on July 24, 2018 of $35.0 million, the acquisition of RockPile on July 3, 2017 of
$116.6 million
and the acquisition of the Acquired Trican Operations on March 16, 2016 of
$203.9 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Net cash provided by (used) in operating activities
|
|
$
|
350,311
|
|
|
$
|
79,691
|
|
|
$
|
(54,054
|
)
|
Net cash used in investing activities
|
|
$
|
(297,506
|
)
|
|
$
|
(250,776
|
)
|
|
$
|
(227,161
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
(68,554
|
)
|
|
$
|
218,122
|
|
|
$
|
276,633
|
|
|
|
|
|
|
|
|
Significant sources and uses of cash during the year ended December 31, 2018
Sources of cash:
|
|
–
|
Net cash generated by operating activities in
2018
of
$350.3 million
was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment.
|
|
|
–
|
Cash provided by the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire was $18.1 million. For further details see Note
(
7
)
Property and Equipment, net
of Part II, “
Item 8.
Financial Statements and Supplementary Data.”
|
|
|
–
|
$4.7 million
in proceeds from sales of various assets, including our idle field operations facility in Mathis, Texas, within the Corporate segment, and hydraulic tractors and light general-purpose vehicles within the Completion Services segment.
|
|
|
–
|
Cash provided by the 2018 Term Loan Facility, net of debt discount, was $348.2 million.
|
Uses of cash:
|
|
–
|
$13.0 million of transaction costs, including underwriting discounts paid by the Company, primarily incurred to consummate the secondary stock offering completed in January 2018.
|
|
|
–
|
$7.9 million related to the portion of the cash settlement of our RockPile CVR liability that exceeded its acquisition-date fair value, with the remaining $12.0 million of the cash settlement cost reflected in the use of cash in financing activities as described below.
|
Investing activities:
|
|
–
|
Net cash used in investing activities of
$297.5 million
was primarily associated with our asset acquisition from RSI and our newbuild and maintenance capital spend on active fleets, offset by insurance proceeds and proceeds from various asset sales, as discussed above under “Sources of cash.” This activity primarily related to our Completion Services segment.
|
|
|
–
|
Cash used to repay our debt facilities, including capital leases but excluding interest, was $289.1 million.
|
|
|
–
|
Cash used to pay debt issuance costs associated with our debt facilities was
$7.3 million
.
|
|
|
–
|
Shares repurchased and retired related to our stock repurchase program totaled
$104.9 million
.
|
|
|
–
|
Shares repurchased and retired related to payroll tax withholdings on our share-based compensation totaled
$3.6 million
.
|
|
|
–
|
$12.0 million
related to the portion of the cash settlement of our RockPile CVR liability that was reflective of its acquisition-date fair value.
|
Significant sources and uses of cash during the year ended December 31, 2017
Sources of cash:
|
|
–
|
Net cash generated by operating activities in
2017
of
$79.7 million
was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. We also had proceeds of
$2.1 million
and
$4.2 million
from the indemnification settlement with Trican and our insurance company related to the acquisition of the Acquired Trican Operations. See Note
(
18
)
Commitments and Contingencies
of
Part II, “
Item 8.
Financial Statements and Supplementary Data.”
|
|
|
–
|
Total proceeds of $30.6 million from the sale of assets relating to our facilities in Woodward, Oklahoma and Searcy, Arkansas, certain air compressor units, coiled tubing assets and the twelve workover rigs acquired in the acquisition of RockPile. See Note
(
7
)
Property and Equipment, net
of
Part II, “
Item 8.
Financial Statements and Supplementary Data.”
|
|
|
–
|
Cash provided from IPO proceeds,
$255.5 million
. See Note
(1)(a) Initial Public Offering
of
Part II, “
Item 8.
Financial Statements and Supplementary Data.”
|
|
|
–
|
The 2017 Term Loan Facility, entered into on March 15, 2017, provided for $145.0 million, net of associated origination and other transactions fees. Proceeds received were primarily used to fully repay our Senior Secured Notes. statements.
|
|
|
–
|
An incremental term loan facility, entered into on July 3, 2017, provided for $131.1 million, net of associated origination and other transaction fees. Proceeds received were primarily used to fund the acquisition of RockPile.
|
Uses of cash:
|
|
–
|
Cash consideration of
$116.6 million
associated with the acquisition of RockPile, inclusive of a
$7.8 million
net working capital settlement.
|
|
|
–
|
Cash used for capital expenditures of
$164.4 million
, associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets, the newbuild acquired as part of the acquisition of RockPile and deposits on new equipment. This activity primarily related to our Completion Services segment.
|
|
|
•
|
Financing activities: Cash used to repay our debt facilities, including capital leases but excluding interest, in
2017
was
$310.8 million
. We used a portion of our IPO proceeds and the proceeds of the 2017 Term Loan Facility to repay our 2016 Term Loan Facility and Senior Secured Notes.
|
Significant sources and uses of cash during the year ended December 31, 2016
Sources of cash:
|
|
•
|
Investing activities: Total net proceeds of
$0.7 million
primarily related to the sale of assets from our idled drilling division within our Other Services segment.
|
|
|
•
|
Financing activities: Net cash provided from a capital contribution from shareholders of
$200.0 million
and the net proceeds from our 2016 Term Loan Facility of
$91.2 million
.
|
Uses of cash:
|
|
•
|
Operating activities: Net cash used in operating activities of
$54.1 million
was primarily attributable to competitive pricing pressure as a result of market conditions, combined with the acquisition, integration and commissioning costs of approximately
$47.3 million
associated with the acquisition of the Acquired Trican Operations.
|
|
|
–
|
Cash consideration of
$205.4 million
associated with the acquisition of the Acquired Trican Operations.
|
|
|
–
|
Cash used for capital expenditures of
$23.5 million
associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets.
|
|
|
•
|
Financing activities: Cash used to repay and service our debt facilities, including prepayment penalties and capital leases but excluding interest, in
2016
was
$8.8 million
.
|
Future sources and use of cash
Capital expenditures for 2019 are projected to be primarily related to maintenance capital spend to support our existing active fleets, wireline trucks and cementing units. We anticipate our capital expenditures will be funded by cash flows from operations. We currently estimate that our capital expenditures for 2019 will range between
$130.0 million
and
$150.0 million
.
Debt service for the year ended December 31, 2019 is projected to be
$30.4 million
, of which
$5.5 million
is related to capital leases. We anticipate our debt service will be funded by cash flows from operations.
On February 26, 2018, we announced that our board of directors authorized a 12-month stock repurchase program of up to $100.0 million of the Company’s outstanding common stock, with the intent of returning value to our shareholders as we continue to expect further growth and profitability. The program does not obligate us to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion. Effective October 26, 2018, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. Additionally, the program’s expiration date was extended to September 2019 from a previous expiration of February 2019. Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019.
Other factors affecting liquidity
Financial position in current market.
As of
December 31, 2018
, we had $
80.2 million
of cash and a total of
$184.0 million
available under our revolving credit facility. Furthermore, we have no material adverse change provisions in our bank agreements, and our debt maturities extend over a long period of time. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity for at least the next 12 months, including for capital expenditures, debt service, working capital investments and stock repurchases.
Guarantee agreements.
In the normal course of business, we have agreements with a financial institution under which $2.5 million of letters of credit were outstanding as of
December 31, 2018
.
Customer receivables
. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 days or less. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition.
Contractual Obligations
In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
Contractual obligations
|
|
Total
|
|
2019
|
|
2020-2022
|
|
2023-2025
|
|
2026+
|
Long-term debt, including current portion
(1)
|
|
$
|
348,250
|
|
|
$
|
3,500
|
|
|
$
|
10,500
|
|
|
$
|
334,250
|
|
|
$
|
—
|
|
Estimated interest payments
(2)
|
|
130,758
|
|
|
21,386
|
|
|
61,517
|
|
|
47,855
|
|
|
—
|
|
Capital lease obligations
(3)
|
|
11,449
|
|
|
5,484
|
|
|
5,965
|
|
|
—
|
|
|
—
|
|
Operating lease obligations
(4)
|
|
73,535
|
|
|
29,410
|
|
|
28,500
|
|
|
6,502
|
|
|
9,123
|
|
Purchase commitments
(5)
|
|
137,667
|
|
|
78,101
|
|
|
57,966
|
|
|
1,600
|
|
|
—
|
|
Equity-method investment
(6)
|
|
3,315
|
|
|
3,315
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Legal contingency
(7)
|
|
1,668
|
|
|
1,668
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
706,642
|
|
|
$
|
142,864
|
|
|
$
|
164,448
|
|
|
$
|
390,207
|
|
|
$
|
9,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Long-term debt represents our obligations under our 2018 Term Loan Facility, exclusive of interest payments. In addition, these amounts exclude
$7.5 million
of unamortized debt discount and debt issuance costs associated with our 2018 Term Loan Facility.
|
|
|
(2)
|
Estimated interest payments are based on debt balances outstanding as of
December 31, 2018
and include interest related to the 2018 Term Loan Facility.
Interest rates used for variable rate debt are based on the prevailing current London Interbank Offer Rate (
“
LIBOR
”
).
|
|
|
(3)
|
Capital lease obligations consist of obligations on our capital leases of hydraulic fracturing equipment and ancillary equipment with CIT Finance LLC and light weight vehicles with ARI Financial Services Inc. and Enterprise FM Trust and includes interest payments.
|
|
|
(4)
|
Operating lease obligations, inclusive of early termination buyouts, are related to our real estate, rail cars with Anderson Rail Group, Compass Rail VIII, SMBC Rail Services, Trinity Industries Leasing Company, and CIT Rail LLC and light duty vehicles with Enterprise FM Trust.
|
|
|
(5)
|
Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year.
|
|
|
(6)
|
Equity-method investment is related to our research and development commitments with our equity-method investee. See Notes
(
18
)
Commitments and Contingencies
and
(19)
Related Party Transactions
of Part II, “
Item 8
. Financial Statements and Supplementary Data” for further details.
|
|
|
(7)
|
The legal contingency is primarily related to various employment related claims. See Note
(
18
)
Commitments and Contingencies
of Part II, “
Item 8
. Financial Statements and Supplementary Data” for further details.
|
Principal Debt Agreements
2017 ABL Facility
Structure
. As of March 31, 2018, our 2017 ABL Facility provided for a $300.0 million revolving credit facility (with a $20.0 million subfacility for letters of credit), subject to a borrowing base in accordance with the terms agreed between us and the lenders. In addition, subject to approval by the applicable lenders and other customary conditions, the 2017 ABL Facility allows for an additional increase in commitments of up to $150.0 million. The 2017 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments.
Maturity
. The loans arising under the initial commitments under the 2017 ABL Facility mature on December 22, 2022. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively.
Interest
. Pursuant to the terms of the 2017 ABL Facility, amounts outstanding under the 2017 ABL Facility bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average
excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%. The average excess availability is set on the first day of each full fiscal quarter ending after December, 22, 2017. On or after June 22, 2018, at any time when consolidated EBITDA as of the then most recently ended four fiscal quarters for which financial statements are required to be delivered is greater than or equal to $250.0 million, the applicable margin will be reduced by 0.25%;
provided
that if consolidated EBITDA is less than $250.0 million as of a later four consecutive fiscal quarters, the applicable margin will revert to the levels set forth above.
2018 Term Loan Facility
On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into the 2018 Term Loan Facility with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The proceeds of the 2018 Term Loan Facility were used to refinance Keane Group’s then-existing term loan facility and to repay related fees and expenses, with the excess proceeds to fund general corporate purposes.
Structure.
The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the “2018 Term Loans”). As of
December 31, 2018
, there was $348.2 million principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loan Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immediately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00.
Maturity.
May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments.
Amortization.
The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding.
Interest.
The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default.
Prepayments
. The 2018 Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the 2018 Term Loan Facility and the agent for the 2017 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2017 ABL Facility to the extent the commitments under the 2017 ABL Facility are permanently reduced by such prepayments.
Guarantees.
Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility are guaranteed by the Company, Keane
Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the “2018 Term Loan Guarantors”).
Security.
Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2017 ABL Facility (the “ABL Facility Priority Collateral”).
Fees.
Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility.
Restricted Payment Covenant.
The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00.
“Cumulative Credit”, generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments).
Affirmative and Negative Covenants.
The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants.
Events of Default.
The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility).
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet financing arrangements, transactions or special purpose entities.
Related Party Transactions
Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect
material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction.
The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee.
Transaction prices with our related parties are commensurate with transaction prices in arms-length transactions. For further details about our transactions with Related Parties, see Note
(19)
Related Party Transactions
of Part II, “
Item 8
. Financial Statements and Supplementary Data.”
Recently Issued Accounting Standards
For discussion on the impact of accounting standards issued but not yet adopted to our consolidated and combined financial statements, see Note
(
24
)
New Accounting Pronouncements
of Part II, “
Item 8
. Financial Statements and Supplementary Data.”
Critical Accounting Policies and Estimates
The preparation of our consolidated and combined financial statements and related notes included within Part II, “
Item 8
. Financial Statements and Supplementary Data” requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. We believe the following are the critical accounting policies used in the preparation of our consolidated and combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “
Item 8
. Financial Statements and Supplementary Data.”
Business combinations
We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. These estimates are reviewed during the 12-month measurement period and adjusted based on actual results. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note
(3)
Acquisition
s
of Part II, “
Item 8
. Financial Statements and Supplementary Data” for further discussion of our recently completed acquisitions during 2017 and 2016.
Asset acquisitions
Asset acquisitions are measured based on their cost to us, including transaction costs incurred by us. An asset acquisition’s cost or the consideration transferred by us is assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred by us. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to us or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets and identifiable intangible assets. Goodwill is not recognized in an asset acquisition. See Note
(3)
Acquisition
s
of Part II, “
Item 8
. Financial Statements and Supplementary Data” for our asset acquisition from RSI in 2018.
Legal and environmental contingencies
From time to time, we are subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. Our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note
(
18
)
Commitments and Contingencies
of Part II, “
Item 8
. Financial Statements and Supplementary Data” for further discussion of our legal, environmental and other regulatory contingencies.
Valuation of long-lived assets, indefinite-lived assets and goodwill
We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings.
We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting segments, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. The expected future cash flows used for impairment reviews and related fair value calculations are based on subjective, judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges.
See Note
(
2
)
(h)
Goodwill and Indefinite-Lived Intangible Assets
and
(
2
)
(i)
Long-Lived Assets
of Part II, “
Item 8
. Financial Statements and Supplementary Data” for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended
December 31, 2018
,
2017
and
2016
.
Income Taxes
We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis.
In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In addition to our historical financial results, we consider forecasted market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.
We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of its tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined.
The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. We evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on our consolidated and combined financial statements as of December 31, 2017. Accordingly, we recorded a provision to income taxes for our assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on our consolidated and combined financial statements. We will continue to assess the impact of other aspects of U.S. tax reform on our tax positions and our consolidated and combined financial statements.
See Note
(
17
)
Income Taxes
of Part II, “
Item 8
. Financial Statements and Supplementary Data” for further discussion on income taxes for the years ended
December 31, 2018
,
2017
and
2016
.
New Accounting Pronouncements
For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note
(
24
)
New Accounting Pronouncements
of Part II, “
Item 8
. Financial Statements and Supplementary Data.”
NON-GAAP FINANCIAL MEASURES
From time to time in our financial reports, we will use certain non-GAAP financial measures to provide supplemental information that we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These non-GAAP measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitates review of our operating performance on a period-to-period basis. Other companies may have different capital structures, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Gross Profit provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies.
Adjusted EBITDA is defined as net income (loss) adjusted to eliminate the impact of interest, income taxes, depreciation and amortization, along with certain items management does not consider in assessing ongoing performance. Adjusted Gross Profit is defined as Adjusted EBITDA, further adjusted to eliminate the impact of all activities in the Corporate segment, such as selling, general and administrative expenses, along with cost of services items that management does not consider in assessing ongoing performance.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
|
|
|
Keane Group, Inc.
|
|
|
|
Audited Consolidated and Combined Financial Statements
|
|
Reports of Independent Registered Public Accounting Firm
|
|
Consolidated and Combined Balance Sheets
|
|
Consolidated and Combined Statements of Operations and Comprehensive Income (Loss)
|
|
Consolidated and Combined Statements of Changes in Owners’ Equity
|
|
Consolidated and Combined Statements of Cash Flows
|
|
Notes to Consolidated and Combined Financial Statements
|
|
|
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Keane Group, Inc.:
Opinion on the Consolidated and Combined Financial Statements
We have audited the accompanying consolidated and combined balance sheets of Keane Group Inc. and subsidiaries’ (the Company) as of December 31, 2018 and 2017, the related consolidated and combined statements of operations and comprehensive income (loss), changes in owners’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated and combined financial statements). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Houston, Texas
February 27, 2019
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Keane Group, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Keane Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated and combined balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated and combined statements of operations and comprehensive income (loss), changes in owners’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated and combined financial statements), and our report dated February 27, 2019 expressed an unqualified opinion on those consolidated and combined financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 27, 2019
KEANE GROUP, INC. AND SUBSIDIARIES
Consolidated and Combined Balance Sheets
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
80,206
|
|
|
$
|
96,120
|
|
|
Trade and other accounts receivable, net
|
|
210,428
|
|
|
238,018
|
|
|
Inventories, net
|
|
35,669
|
|
|
33,437
|
|
|
Assets held for sale
|
|
176
|
|
|
—
|
|
|
Prepaid and other current assets
|
|
5,784
|
|
|
8,519
|
|
|
Total current assets
|
|
332,263
|
|
|
376,094
|
|
|
Property and equipment, net
|
|
531,319
|
|
|
468,000
|
|
|
Goodwill
|
|
132,524
|
|
|
134,967
|
|
|
Intangible assets
|
|
51,904
|
|
|
57,280
|
|
|
Other noncurrent assets
|
|
6,569
|
|
|
6,775
|
|
|
Total assets
|
|
$
|
1,054,579
|
|
|
$
|
1,043,116
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
106,702
|
|
|
$
|
92,348
|
|
|
Accrued expenses
|
|
101,539
|
|
|
135,175
|
|
|
Current maturities of capital lease obligations
|
|
4,928
|
|
|
3,097
|
|
|
Current maturities of long-term debt
|
|
2,776
|
|
|
1,339
|
|
|
Customer contract liabilities
|
|
60
|
|
|
5,000
|
|
|
Stock-based compensation - current
|
|
4,281
|
|
|
4,281
|
|
|
Other current liabilities
|
|
294
|
|
|
914
|
|
|
Total current liabilities
|
|
220,580
|
|
|
242,154
|
|
|
Capital lease obligations, less current maturities
|
|
5,581
|
|
|
4,796
|
|
|
Long-term debt, net of unamortized deferred financing costs and unamortized debt discount, less current maturities
|
|
337,954
|
|
|
273,715
|
|
|
Stock-based compensation - noncurrent
|
|
—
|
|
|
4,281
|
|
|
Other noncurrent liabilities
|
|
3,283
|
|
|
5,078
|
|
|
Total noncurrent liabilities
|
|
346,818
|
|
|
287,870
|
|
|
Total liabilities
|
|
567,398
|
|
|
530,024
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
Common stock, par value $0.01 per share (authorized 500,000 shares, issued 104,188 shares)
|
|
1,038
|
|
|
1,118
|
|
|
Paid-in capital in excess of par value
|
|
455,447
|
|
|
541,074
|
|
|
Retained earnings (deficit)
|
|
31,494
|
|
|
(27,372
|
)
|
|
Accumulated other comprehensive loss
|
|
(798
|
)
|
|
(1,728
|
)
|
|
Total stockholders’ equity
|
|
487,181
|
|
|
513,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,054,579
|
|
|
$
|
1,043,116
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated and combined financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Operations and Comprehensive Income (Loss)
(Amounts in thousands, except for per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
2,137,006
|
|
|
$
|
1,542,081
|
|
|
$
|
420,570
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
Cost of services
(1)
|
|
1,660,546
|
|
|
1,282,561
|
|
|
416,342
|
|
Depreciation and amortization
|
|
259,145
|
|
|
159,280
|
|
|
100,979
|
|
Selling, general and administrative expenses
|
|
114,258
|
|
|
93,526
|
|
|
53,155
|
|
(Gain) loss on disposal of assets
|
|
5,047
|
|
|
(2,555
|
)
|
|
(387
|
)
|
Impairment
|
|
—
|
|
|
—
|
|
|
185
|
|
Total operating costs and expenses
|
|
2,038,996
|
|
|
1,532,812
|
|
|
570,274
|
|
Operating income (loss)
|
|
98,010
|
|
|
9,269
|
|
|
(149,704
|
)
|
Other income (expense):
|
|
|
|
|
|
|
Other income (expense), net
|
|
(905
|
)
|
|
13,963
|
|
|
916
|
|
Interest expense
(2)
|
|
(33,504
|
)
|
|
(59,223
|
)
|
|
(38,299
|
)
|
Total other expenses
|
|
(34,409
|
)
|
|
(45,260
|
)
|
|
(37,383
|
)
|
Income (loss) before income taxes
|
|
63,601
|
|
|
(35,991
|
)
|
|
(187,087
|
)
|
Income tax expense
(3)
|
|
(4,270
|
)
|
|
(150
|
)
|
|
—
|
|
Net income (loss)
|
|
59,331
|
|
|
(36,141
|
)
|
|
(187,087
|
)
|
Net loss attributable to predecessor
|
|
—
|
|
|
(7,918
|
)
|
|
—
|
|
Net loss attributable to Keane Group, Inc.
|
|
59,331
|
|
|
(28,223
|
)
|
|
(187,087
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(114
|
)
|
|
96
|
|
|
22
|
|
Hedging activities
|
|
(880
|
)
|
|
791
|
|
|
(1,784
|
)
|
Total comprehensive income (loss)
|
|
$
|
58,337
|
|
|
$
|
(35,254
|
)
|
|
$
|
(188,849
|
)
|
|
|
|
|
|
|
|
Net income (loss) per share
(4)
:
|
|
|
|
|
|
|
Basic net income(loss) per share
|
|
$
|
0.54
|
|
|
$
|
(0.34
|
)
|
|
$
|
(2.14
|
)
|
Diluted net income (loss) per share
|
|
$
|
0.54
|
|
|
$
|
(0.34
|
)
|
|
$
|
(2.14
|
)
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: basic
(3)
|
|
109,335
|
|
|
106,321
|
|
|
87,313
|
|
Weighted-average shares outstanding: diluted
(3)
|
|
109,660
|
|
|
106,321
|
|
|
87,313
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cost of services during the years ended
December 31, 2018
,
2017
, and
2016
excludes depreciation of
$245.6 million
,
$150.6 million
, and
$94.7 million
, respectively. Depreciation related to cost of services is presented within depreciation and amortization separately disclosed.
|
|
|
(2)
|
Interest expense during the year ended
December 31, 2018
includes
$7.6 million
in write-offs of deferred financing costs incurred in connection with the early debt extinguishment of the Company’s 2017 Term Loan Facility (as defined herein). Interest expense during the year ended
December 31, 2017
includes
$15.8 million
of prepayment penalties and
$15.3 million
in write-offs of deferred financing costs, incurred in connection with the refinancing by the Company
of its then existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) and the Company’s early debt extinguishment of its term loan facility provided by that certain credit agreement entered into on March 16, 2016 by KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders,
and Senior Secured Notes (as defined herein).
|
(3)
Income tax provision as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016.
|
|
(4)
|
The pro forma earnings per share amounts have been computed to give effect to the Organizational Transactions (as defined herein), including the limited liability company agreement of Keane Investor (as defined herein) to, among other things, exchange all of the Existing Owners’ (as defined herein) membership interests for the newly-created ownership interests. The earnings per share amounts for 2017 and 2016 have been computed to give effect to the Organizational Transactions, as if they had occurred on January 1, 2017, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the Existing Owners’ membership interests for the newly-created ownership interests.
|
See accompanying notes to the consolidated and combined financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Changes in Owners’ Equity
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’ equity
|
|
Common Stock
|
|
Paid-in Capital in Excess of Par Value
|
|
Retained Earnings (deficit)
|
|
Accumulated other comprehensive income (loss)
|
|
Total
|
Balance as of December 31, 2015
|
|
$
|
186,510
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(101,684
|
)
|
|
$
|
(4,666
|
)
|
|
$
|
80,160
|
|
Contribution of equity
|
|
222,646
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
222,646
|
|
Issuance of Class A and Class C Units
|
|
42,669
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,669
|
|
Unit awards amortization
|
|
1,985
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,985
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,879
|
|
|
1,879
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(187,087
|
)
|
|
—
|
|
|
(187,087
|
)
|
Balance as of December 31, 2016
|
|
$
|
453,810
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(288,771
|
)
|
|
$
|
(2,787
|
)
|
|
$
|
162,252
|
|
Net loss prior to the Organizational Transactions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,918
|
)
|
|
—
|
|
|
(7,918
|
)
|
Effect of the Organizational Transactions
|
|
(453,810
|
)
|
|
—
|
|
|
156,270
|
|
|
297,540
|
|
|
—
|
|
|
—
|
|
Issuance of common stock sold in initial public offering, net of offering costs and deferred stock awards for executives
|
|
—
|
|
|
1,031
|
|
|
245,902
|
|
|
—
|
|
|
—
|
|
|
246,933
|
|
Stock-based compensation recognized subsequent to the Organizational Transactions
|
|
—
|
|
|
—
|
|
|
10,578
|
|
|
—
|
|
|
—
|
|
|
10,578
|
|
Effect of RockPile acquisition
|
|
—
|
|
|
87
|
|
|
130,203
|
|
|
—
|
|
|
—
|
|
|
130,290
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,059
|
|
|
1,059
|
|
Deferred tax adjustment
|
|
—
|
|
|
—
|
|
|
(1,879
|
)
|
|
—
|
|
|
—
|
|
|
(1,879
|
)
|
Net loss subsequent to Organizational Transactions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28,223
|
)
|
|
—
|
|
|
(28,223
|
)
|
Balance as of December 31, 2017
|
|
$
|
—
|
|
|
$
|
1,118
|
|
|
$
|
541,074
|
|
|
$
|
(27,372
|
)
|
|
$
|
(1,728
|
)
|
|
$
|
513,092
|
|
Stock-based compensation
(1)
|
|
—
|
|
|
2
|
|
|
21,458
|
|
|
—
|
|
|
—
|
|
|
21,460
|
|
Shares repurchased and retired related to stock-based compensation
|
|
—
|
|
|
(1
|
)
|
|
(3,578
|
)
|
|
—
|
|
|
—
|
|
|
(3,579
|
)
|
Shares repurchased and retired related to stock repurchase program
|
|
—
|
|
|
(81
|
)
|
|
(103,507
|
)
|
|
(1,273
|
)
|
|
—
|
|
|
(104,861
|
)
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
808
|
|
|
930
|
|
|
1,738
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59,331
|
|
|
—
|
|
|
59,331
|
|
Balance as of December 31, 2018
|
|
$
|
—
|
|
|
$
|
1,038
|
|
|
$
|
455,447
|
|
|
$
|
31,494
|
|
|
$
|
(798
|
)
|
|
$
|
487,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Stock-based compensation during
2018
includes stock-based compensation expense recognized during the period of
$17.2 million
and the vested deferred stock awards of
$4.3 million
. Refer to Note
(
12
)
Stock-Based Compensation
for further discussion of the Company’s stock-based compensation.
|
See accompanying notes to the consolidated and combined financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
59,331
|
|
|
$
|
(36,141
|
)
|
|
$
|
(187,087
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
|
|
|
|
|
|
Depreciation and amortization
|
|
259,145
|
|
|
159,280
|
|
|
100,979
|
|
Amortization of deferred financing fees
|
|
3,147
|
|
|
5,241
|
|
|
4,152
|
|
(Gain) loss on disposal of assets
|
|
5,047
|
|
|
(2,555
|
)
|
|
(387
|
)
|
Equity-based compensation
|
|
17,166
|
|
|
10,578
|
|
|
1,985
|
|
Loss on debt extinguishment, including prepayment premiums
|
|
7,563
|
|
|
31,084
|
|
|
—
|
|
Loss on contingent consideration liability
|
|
13,254
|
|
|
—
|
|
|
—
|
|
Loss on foreign currency translation
|
|
2,621
|
|
|
—
|
|
|
—
|
|
Unrealized gain (loss) on derivatives
|
|
(880
|
)
|
|
791
|
|
|
(1,784
|
)
|
Realized (gain) loss on derivatives
|
|
(697
|
)
|
|
172
|
|
|
3,641
|
|
Gain on insurance proceeds recognized in other income
|
|
(14,892
|
)
|
|
—
|
|
|
—
|
|
Loss on impairment of assets
|
|
—
|
|
|
—
|
|
|
185
|
|
Accrued interest on loan—related party
|
|
—
|
|
|
—
|
|
|
471
|
|
Other non-cash expenses
|
|
—
|
|
|
(322
|
)
|
|
—
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Decrease (increase) in trade and other accounts receivable, net
|
|
27,485
|
|
|
(113,047
|
)
|
|
(13,027
|
)
|
Decrease (increase) in inventories
|
|
(2,725
|
)
|
|
(15,475
|
)
|
|
8,485
|
|
Decrease (increase) in prepaid and other current assets
|
|
2,734
|
|
|
20,294
|
|
|
(5,994
|
)
|
Decrease (increase) in other assets
|
|
362
|
|
|
(336
|
)
|
|
32
|
|
Increase (decrease) in accounts payable
|
|
11,304
|
|
|
(141
|
)
|
|
14,214
|
|
Decrease in customer contract liabilities
|
|
(4,940
|
)
|
|
—
|
|
|
—
|
|
Increase (decrease) in accrued expenses
|
|
(32,318
|
)
|
|
41,446
|
|
|
19,735
|
|
Increase (decrease) in other liabilities
|
|
(2,396
|
)
|
|
(21,178
|
)
|
|
346
|
|
Net cash provided by (used) in operating activities
|
|
350,311
|
|
|
79,691
|
|
|
(54,054
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
Asset and business acquisitions
|
|
(35,003
|
)
|
|
(116,576
|
)
|
|
(203,900
|
)
|
Purchase of property and equipment
|
|
(277,569
|
)
|
|
(141,340
|
)
|
|
(23,126
|
)
|
Advances of deposit on equipment
|
|
(4,153
|
)
|
|
(23,096
|
)
|
|
(420
|
)
|
Payments for leasehold improvements
|
|
(1,651
|
)
|
|
(157
|
)
|
|
—
|
|
Implementation of software
|
|
(883
|
)
|
|
(687
|
)
|
|
(453
|
)
|
Proceeds from sale of assets
|
|
4,652
|
|
|
30,565
|
|
|
711
|
|
Proceeds from insurance recoveries
|
|
18,247
|
|
|
515
|
|
|
22
|
|
Equity-method investment
|
|
(1,146
|
)
|
|
—
|
|
|
—
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments received (advances) on note receivable
|
|
—
|
|
|
—
|
|
|
5
|
|
Net cash used in investing activities
|
|
(297,506
|
)
|
|
(250,776
|
)
|
|
(227,161
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
—
|
|
|
255,494
|
|
|
—
|
|
Proceeds from the secured notes and term loan facilities
|
|
348,250
|
|
|
285,000
|
|
|
100,000
|
|
Payments on the secured notes and term loan facilities
|
|
(284,952
|
)
|
|
(289,902
|
)
|
|
(5,647
|
)
|
Payments on capital leases
|
|
(4,119
|
)
|
|
(2,861
|
)
|
|
(2,668
|
)
|
Prepayment premiums on early debt extinguishment
|
|
—
|
|
|
(15,817
|
)
|
|
—
|
|
Payment of debt issuance costs
|
|
(7,331
|
)
|
|
(13,792
|
)
|
|
(15,052
|
)
|
Payment of contingent consideration liability
|
|
(11,962
|
)
|
|
—
|
|
|
—
|
|
Shares repurchased and retired related to share repurchase program
|
|
(104,861
|
)
|
|
—
|
|
|
—
|
|
Shares repurchased and retired related to stock-based compensation
|
|
(3,579
|
)
|
|
—
|
|
|
—
|
|
Contributions
|
|
—
|
|
|
—
|
|
|
200,000
|
|
Net cash provided by (used in) financing activities
|
|
(68,554
|
)
|
|
218,122
|
|
|
276,633
|
|
Non-cash effect of foreign translation adjustments
|
|
(165
|
)
|
|
163
|
|
|
80
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
(15,914
|
)
|
|
47,200
|
|
|
(4,502
|
)
|
Cash, cash equivalents and restricted cash, beginning
|
|
96,120
|
|
|
48,920
|
|
|
53,422
|
|
Cash, cash equivalents and restricted cash, ending
|
|
$
|
80,206
|
|
|
$
|
96,120
|
|
|
$
|
48,920
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
24,528
|
|
|
$
|
30,104
|
|
|
$
|
25,516
|
|
CVR settlement
|
|
19,918
|
|
|
—
|
|
|
—
|
|
Income taxes
|
|
5,529
|
|
|
—
|
|
|
—
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Non-cash purchases of property and equipment
|
|
$
|
9,821
|
|
|
$
|
25,193
|
|
|
$
|
9,364
|
|
Non-cash reduction in capital lease obligations
|
|
114
|
|
|
20
|
|
|
1,281
|
|
Non-cash additions to capital lease obligations
|
|
6,831
|
|
|
2,739
|
|
|
—
|
|
Non-cash issuance of acquisition shares
|
|
—
|
|
|
130,290
|
|
|
—
|
|
Non-cash forgiveness of related party loan
|
|
—
|
|
|
—
|
|
|
22,646
|
|
Non-cash issuance of Class A and C Units
|
|
—
|
|
|
—
|
|
|
42,669
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated and combined financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(
1
)
Basis of Presentation and Nature of Operations
Keane Group, Inc. (the “Company”, “KGI” or “Keane”) was formed on October 13, 2016 as a Delaware corporation to be a holding corporation for Keane Group Holdings, LLC and its subsidiaries (collectively referred to as “Keane Group”), for the purpose of facilitating the initial public offering (the “IPO”) of shares of common stock of the Company.
The accompanying consolidated and combined financial statements were prepared using United States Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X.
The Company’s accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from the Company’s estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as consideration in an acquisition, equity-based incentive plan awards and derivatives.
Management believes the consolidated and combined financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position as of
December 31, 2018
and the results of its operations and cash flows for the years ended
December 31, 2018
,
2017
and
2016
. Such adjustments are of a normal recurring nature.
The consolidated and combined financial statements include the accounts of Keane Group, Inc. and its consolidated subsidiaries: Keane Group Holdings, LLC; KGH Intermediate Holdco I, LLC; KGH Intermediate Holdco II, LLC; Keane Frac, LP; Keane Frac TX LLC; Keane Frac ND, LLC; Keane Frac GP, LLC and Keane Completions CN Corp. All intercompany transactions and balances have been eliminated.
The consolidated financial statements for the period from January 1, 2016 to March 15, 2016 reflect only the historical results of the Company prior to the completion of the Company’s acquisition of the Acquired Trican Operations (as defined herein). The consolidated and combined financial statements for the period from January 1, 2017 to July 2, 2017 reflect only the historical results of the Company prior to the completion of the Company’s acquisition of RockPile (as defined herein).
Earnings per share and weighted-average shares outstanding for the years ended
December 31,
2017
and
2016
have been presented giving pro forma effect to the Organizational Transactions (as defined herein) as if they had occurred on January 1, 2016. Financial results for the years ended
December 31,
2017
and
2016
are the financial results of Keane Group, Inc. and Keane Group Holdings, LLC, the Company’s predecessor for accounting purposes, as there was no activity under Keane Group, Inc. prior to 2017.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(a) Initial Public Offering
On January 25, 2017, the Company completed the IPO of
30,774,000
shares of its common stock at the public offering price of
$19.00
per share, which included
15,700,000
shares offered by the Company and
15,074,000
shares offered by the selling stockholder, including
4,014,000
shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to the Company, net of underwriters’ fees and capitalized cash payments of
$4.8 million
for professional services and other direct IPO related activities, was
$255.5 million
. The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s term loan balance of
$99.0 million
and the associated prepayment premium of
$13.8 million
, and to repay
$50.0 million
of its
12%
secured notes due
2019
(“Senior Secured Notes”) and the associated prepayment premium of approximately
$0.5 million
. The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had
103,128,019
shares of common stock outstanding.
All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and netted against the gross proceeds of the offering through paid-in capital in excess of par value.
(b) Organizational Transactions
In connection with the IPO, the Company completed a series of organizational transactions (the “Organizational Transactions”), including the following:
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Certain entities affiliated with Cerberus Capital Management, L.P., certain members of the Keane family, Trican Well Service Ltd. (“Trican”) and certain members of the Company’s management team (collectively, the “Existing Owners”) contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC (“Keane Investor”);
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•
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Keane Investor contributed all of its equity interests in Keane Group to the Company in exchange for common stock of the Company; and
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•
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The Company’s independent directors received grants of restricted stock of the Company in substitution for their interests in Keane Group.
|
The Organizational Transactions represented a transaction between entities under common control and were accounted for similarly to pooling of interests in a business combination. The common stock of the Company issued to Keane Investor in exchange for its equity interests in Keane Group was recognized by the Company at the carrying value of the equity interests in Keane Group. In addition, the Company became the successor and Keane Group the predecessor for the purposes of financial reporting. The financial statements for the periods prior to the IPO and Organizational Transactions have been adjusted to combine and consolidate the previously separate entities for presentation purposes.
As a result of the Organizational Transactions and the IPO, (i) the Company became a holding company with no material assets other than its ownership of Keane Group, (ii) an aggregate of
72,354,019
shares of the Company’s common stock were owned by Keane Investor and certain of the Company’s independent directors, and Keane Investor entered into a Stockholders’ Agreement with the Company, (iii) the Existing Owners became holders of equity interests in the Company’s controlling stockholder, Keane Investor (and holders of Keane Group’s Class B and Class C Units became holders of Class B and Class C Units in Keane Investor) and (iv) the capital stock of the Company consists of (x) common stock, entitled to
one
vote per share on all matters submitted to a vote of stockholders and (y) undesignated and unissued preferred stock.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(
2
)
Summary of Significant Accounting Policies
(a) Business Combinations and Asset Acquisitions
Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standards Codification (“ASC”) 805, “Business Combinations”, as amended by Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, “Fair Value Measurements”, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850 using discounted cash flows and other applicable valuation techniques. Operating results of an acquired business are included in our results of operations from the date of acquisition.
Asset acquisitions, as defined in ASU 2017-01, are measured based on their cost to the Company, including transaction costs. An asset acquisition’s cost or the consideration transferred by the Company is assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash the Company paid to the seller as well as transaction costs incurred. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to the Company or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. Goodwill is not recognized in an asset acquisition.
Refer to Note
(3)
Acquisition
s
for discussion of the acquisitions completed in
2018
,
2017
, and
2016
.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight repurchase agreements and certificates of deposit with an initial term of less than three months.
Net cash received from certain dispositions or casualty events of more than
$25.0 million
per single transaction or
$50.0 million
per series of related transactions, under the 2018 Term Loan Facility (as defined herein), and of more than
$25.0 million
, under the 2017 ABL Facility (as defined herein), is considered to be restricted. The Company may, at management’s discretion, reinvest any part of such proceeds in assets (other than current assets) useful for its business (in the case of the 2018 Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2017 ABL Facility), in each case within
12 months
from the receipt date of such proceeds. Otherwise, the proceeds are required to be applied as a prepayment of the 2018 Term Loan Facility or any outstanding commitments under the 2017 ABL Facility.
The Company did
no
t have any qualifying asset sale proceeds or insurance proceeds that exceeded the dollar thresholds described above for the year ended
December 31, 2018
under the 2018 Term Loan Facility or 2017 ABL Facility. For the year ended
December 31, 2017
, the Company had a qualifying insurance recovery of
$0.5 million
under the 2017 Term Loan Facility.
The Company did
no
t have any restricted cash as of
December 31, 2018
and
2017
.
(c) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated and combined statements of cash flows. The Company analyzes the need for an allowance for doubtful accounts for estimated losses related to
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
potentially uncollectible accounts receivable on a case by case basis throughout the year. In establishing the required allowance, management considers historical losses, adjusted to take into account current market conditions and the Company’s customers’ financial condition, the balance of receivables in dispute, the current receivables aging and current payment patterns. The Company reserves amounts based on specific identification. Account balances are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Trade accounts receivable were
$210.1 million
and
$235.8 million
at
December 31, 2018
and
2017
, respectively. As of
December 31, 2018
and
2017
, the Company had an allowance for doubtful accounts of
$0.5 million
.
(d) Inventories
Inventories are stated at the lower of cost or market (net realizable value). Costs of inventories include purchase, conversion and condition. As inventory is consumed, the expense is recorded in cost of services in the consolidated and combined statements of operations and comprehensive income (loss) using the weighted average cost method for all inventories.
The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on our historical usage of inventory on-hand, volume on-hand versus anticipated usage, technological advances and consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow-moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on-hand or not fitting our equipment are written-off.
(e) Revenue Recognition
The Company adopted ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, effective January 1, 2018, using the modified retrospective method. Changes were made to the relevant business processes and the related control activities, including information systems, in order to monitor and maintain appropriate controls over financial reporting. There were no significant changes to the Company’s internal control over financial reporting due to the Company’s adoption of ASU 2014-09.
Revenue from the Company’s Completion Services and Other Services segments are earned as services are rendered, which is generally on a per stage or fixed monthly rate for the Company’s Completions Services segment and on a per job basis for the Other Services segment. All revenue is recognized when a contract with a customer exists, the performance obligations under the contract have been satisfied over time, the amount to which the Company has the right to invoice has been determined and collectability of amounts subject to invoice is probable. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the consolidated and combined statements of operations and comprehensive income (loss). To the extent fulfillment costs are considered separate performance obligations that are billable to the customer, the amounts billed are recorded as revenue in the consolidated and combined statements of operations and comprehensive income (loss). The Company does not incur contract acquisition and origination costs. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated and combined statements of operations and comprehensive income (loss) and net cash provided by operating activities in the consolidated and combined statements of cash flows.
The Company has elected the practical expedient to recognize revenue based upon the transactional value it has the right to invoice upon completion of each performance obligation per the contract terms, as the Company believes its right to consideration corresponds directly with the value transferred to the customer, and this expedient does not lend itself to the application of significant judgment. The Company has also elected the practical expedient to expense immediately mobilization costs, as the amortization period would always be less than one year. As a
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
result of electing these practical expedients, there was no material impact on the Company’s current revenue recognition processes and no retrospective adjustments were necessary.
The Company’s obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations.
Revenue from the Company’s Completion Services and Other Services segments are recognized as follows:
Completion Services
The Company provides hydraulic fracturing and wireline services pursuant to contractual arrangements, such as term contracts and pricing agreements. Revenue is recognized upon the completion of each performance obligation. The Company’s performance obligations under its Completion Services segment represent each stage frac’d or each stage perforated. Once a stage has been completed, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, any additional equipment used on the job and other miscellaneous items. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue.
Other Services
The Company provides cementing services pursuant to contractual arrangements, such as term contracts, or on a spot market basis. Revenue is recognized upon the completion of each performance obligation, which for cementing services, represents the portion of the well cemented: surface casing, intermediate casing or production liner. The performance obligations are satisfied over time. Jobs for these services are typically short term in nature, with most jobs completed in a day. Once the well has been cemented, a field ticket is created that includes charges for the services performed and the consumables used during the course of service. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue.
Disaggregation of Revenue
Revenue activities during the years ended
December 31, 2018
,
2017
and
2016
were as follows:
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Twelve Months Ended
December 31,
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2018
|
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2017
|
|
2016
|
Revenue by segment:
|
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|
|
|
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|
|
Completion Services
|
|
|
$
|
2,100,956
|
|
|
$
|
1,527,287
|
|
|
$
|
410,854
|
|
Other Services
|
|
|
36,050
|
|
|
14,794
|
|
|
9,716
|
|
Total revenue
|
|
|
$
|
2,137,006
|
|
|
$
|
1,542,081
|
|
|
$
|
420,570
|
|
|
|
|
|
|
|
|
|
Revenue by geography:
|
|
|
|
|
|
|
|
East
|
|
|
$
|
790,026
|
|
|
$
|
566,891
|
|
|
$
|
181,629
|
|
North
|
|
|
268,012
|
|
|
235,391
|
|
|
59,706
|
|
South
|
|
|
1,078,968
|
|
|
739,799
|
|
|
179,235
|
|
Total revenue
|
|
|
$
|
2,137,006
|
|
|
$
|
1,542,081
|
|
|
$
|
420,570
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Contract Balances
In line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is completed or at month-end. The majority of the Company’s jobs are completed in less than 30 days. Furthermore, it is currently not standard practice for the Company to execute contracts with prepayment features. As such, the Company’s contract liabilities are immaterial to its consolidated and combined balance sheets. Payment terms after invoicing are typically 30 days or less.
(f) Property and Equipment
Property and equipment, inclusive of equipment under capital lease, are generally stated at cost.
Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from
13 months
to
40 years
. Management bases the estimate of the useful lives and salvage values of property and equipment on expected utilization, technological change and effectiveness of its maintenance programs. When components of an item of property and equipment are identifiable and have different useful lives, they are accounted for separately as major components of property and equipment. Equipment held under capital leases are generally amortized on a straight-line basis over the shorter of the estimated useful life of the underlying asset and the term of the lease.
Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating costs and expenses in the consolidated and combined statements of operations and comprehensive income (loss).
Major classifications of property and equipment and their respective useful lives are as follows:
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|
|
Land
|
Indefinite life
|
Building and leasehold improvements
|
13 months – 40 years
|
Machinery and equipment
|
13 months – 10 years
|
Office furniture, fixtures and equipment
|
3 years – 5 years
|
Leasehold improvements are assigned a useful life equal to the term of the related lease.
In the first quarter of 2018, the Company reassessed the estimated useful lives of select machinery and equipment. The Company concluded that due to an increase in service intensity driven by a shift to more 24-hour work, higher stage volumes, larger stages and more proppant usage per stage, the estimated useful lives of these select machinery and equipment should be reduced by approximately
50%
.
In accordance with ASC 250, “Accounting Changes and Error Corrections,” the change in the estimated useful lives of the Company’s property and equipment was accounted for as a change in accounting estimate, on a prospective basis, effective January 1, 2018. This change resulted in an increase in depreciation expense and decrease in net income during the year ended
December 31, 2018
of
$15.0 million
in the consolidated and combined statement of operations and comprehensive income.
As a result of a system upgrade to its fixed asset accounting module, in the third quarter of 2018, the Company changed its depreciation method from mid-month straight-line depreciation to days straight-line depreciation. The impact of this change in depreciation method to the Company’s consolidated and combined statement of operations and comprehensive income (loss) was immaterial.
Depreciation methods, useful lives and residual values are reviewed annually.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(g) Major Maintenance Activities
The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset by greater than 12 months are capitalized.
(h)
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase price of a business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment analysis, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing the impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated to
one
reporting unit, Completion Services.
Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting segment, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. The Company’s goodwill is allocated solely to its Completion Services segment. If the carrying amount of the reportable segment exceeds its fair value, step two in the goodwill impairment test requires goodwill to be written down to its implied fair value through a charge to operating expense based on a hypothetical purchase price allocation method.
In
2018
, the Company performed Step 0 of the goodwill impairment assessment by reviewing relevant qualitative factors. The Company determined there were no events that would indicate the carrying amount of its goodwill may not be recoverable, and as such,
no
impairment charge was recognized. The Company’s assessment was based on the following factors: forecasted growth in gross domestic product for 2019, equity markets remain near all-time highs, commodity prices are projected at levels that would favor continued investment in drilling and well completion, production cuts by members of the Organization of the Petroleum Exporting Countries (“OPEC”) and non-OPEC members, positive trends and forecasts for the oil and gas industry and the Company’s positive projected financial results for 2019 across all of its reporting units.
No
goodwill impairment has been recognized since inception in 2013.
The Company’s indefinite-lived assets consist of the Company’s trade name. The Company assesses its indefinite-lived intangible assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable.
There was
no
indefinite-lived asset impairment recognized during
2018
,
2017
or
2016
.
(i)
Long-Lived Assets
The Company assesses its long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. For the Company’s property and equipment, the Company determined the lowest level of identifiable cash
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
flows that are independent of other asset groups to be at the service line level: hydraulic fracturing, wireline, cementing and drilling, except for an entity level asset group for assets that do not have identifiable independent cash flows. For the Company’s definite-lived intangible assets, the Company determined each intangible asset generates identifiable cash flows independent of one another and independent of the other assets in the operating segment with which they are associated. As such, the Company concluded that each intangible asset should be individually assessed for impairment.
Impairments exist when the carrying amount of an asset group exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. When alternative courses of action to recover the carrying amount of the asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset group’s carrying amount over its estimated fair value, such that the asset group’s carrying amount is adjusted to its estimated fair value, with an offsetting charge to operating expense.
The Company measures the fair value of its property and equipment using the discounted cash flow method or the market approach, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its acquired fracking fluid software technology using the “income based relief-from-royalty” method and the fair value of its non-compete agreement using “lost income” approach. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates.
In 2018 and 2017, for the Company’s property and equipment and definite-lived intangible assets, the Company determined there were no events that would indicate the carrying amount of these assets may not be recoverable, and as such,
no
impairment charge was recognized. The Company’s assessment was based on the following factors: there have been no significant decreases in the market price or use of the Company’s definite-lived assets, the Company continued to drive efficiencies, capabilities and utilization across all of its service lines, projected market and oil and gas industry conditions favor continued investment in drilling and well completion and the Company’s positive projected financial results for 2019 across all of its service lines.
In 2016, for the Company’s definite-lived assets, the Company recorded a
$0.2 million
impairment charge related to a non-compete agreement in the Other Services segment, because there were insufficient forecasted cash flows to support this intangible asset.
Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets.
(j) Derivative Instruments and Hedging Activities
The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the consolidated and combined balance sheets at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income (loss) until the hedged item affects earnings.
The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (i.e. cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
The Company discontinues hedge accounting prospectively, when it determines that the derivative is no longer highly effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the originally forecasted transaction is no longer probable of occurring or if management decides to remove the designation of the cash flow hedge. The net derivative instrument gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the originally hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. When it is probable that the originally forecasted transaction will not occur by the end of the originally specified time period, the Company recognizes immediately, in earnings, any gains and losses related to the hedging relationship that were recognized in accumulated other comprehensive income (loss). In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the consolidated and combined balance sheets and recognizes any subsequent changes in the derivative’s fair value in earnings.
(k) Fair Value Measurement
Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
|
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•
|
Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities.
|
|
|
•
|
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
•
|
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
|
Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(l) Stock-based compensation
The Company recognizes compensation expense for restricted stock awards, restricted stock units to be settled in common stock (“RSUs”) and non-qualified stock options (“stock options”) based on the fair value of the awards at the date of grant. The fair value of restricted stock awards and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common shares of the Company. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method best reflects actual stock-based compensation expense.
Compensation expense from time-based restricted stock awards, RSUs and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.
Deferred compensation expense associated with liability-based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company’s stock on the date of settlement.
Tax deductions on the stock-based compensation awards are not realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the consolidated and combined statements of cash flows.
The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by the Company withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees’ income tax obligations are accounted for as treasury shares that are subsequently retired. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
For additional information, see Note
(
12
)
Stock-Based Compensation
.
(m) Taxes
Upon consummation of the Organizational Transactions and the IPO, the Company became subject to U.S. federal income taxes. A provision for U.S. federal income tax has been provided in the consolidated and combined financial statements for the years ended
December 31, 2018
and
2017
.
Prior to 2019, the Company had a Canadian subsidiary, which was treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company was subject to foreign income tax.
The Company is responsible for certain state income and franchise taxes, which include Colorado, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas and West Virginia. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense.
See Note
(
17
)
Income Taxes
for a detailed discussion of the Company’s taxes and activities thereof during the years ended
December 31, 2018
,
2017
and
2016
.
(n) Commitments and Contingencies
The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the consolidated and combined statements of operations and comprehensive income (loss).
Legal costs associated with the Company’s loss contingencies are recognized immediately when incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss).
(o) Equity-method investments
Investments in non-controlled entities over which the Company has the ability to exercise significant influence over the noncontrolled entities’ operating and financial policies are accounted for under the equity-method. Under the equity-method, the investment in the non-controlled entity is initially recognized at cost and subsequently adjusted to reflect the Company’s share of the entity’s income (losses), any dividends received by the Company and any other-than-temporary impairments. Investments accounted for under the equity-method are presented within other noncurrent assets in the consolidated and combined balance sheets.
As of
December 31, 2018
and
2017
, the Company recognized
$1.7 million
and
$0.6 million
, respectively, for its only equity-method investment.
(p) Employee Benefits and Postemployment Benefits
Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan, state or federal law. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, “Compensation—Nonretirement Post-Employment Benefits.” In all other situations where the Company pays termination benefits, including supplemental benefits paid in excess of statutory minimum amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs in accordance with ASC 420, “Exit or Disposal Cost Obligations.” A liability is recognized for one-time termination benefits when the Company is committed to 1) making payments and the number of affected employees and the benefits received are known to both parties and 2) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal for which such amount can be reasonably estimated
(q) Leases
The Company leases certain facilities and equipment used in its operations. The Company evaluates and classifies its leases as operating or capital leases for financial reporting purposes. Assets held under capital leases are included in property and equipment on the consolidated and combined balance sheets. Operating lease expense is recorded on a straight-line basis over the lease term in the consolidated and combined statements of operation and
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
comprehensive income (loss). Landlord incentives are recorded as deferred rent and amortized as reductions to lease expense on a straight-line basis over the life of the applicable lease.
Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842). For further details on the impact of the adoption of this standard to the Company’s consolidated financial statements, see Note
(
24
)
New Accounting Pronouncements
:
(b)
Recently Issued Accounting Standards
.
(r) Research and development costs
Research and development costs are expensed as incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss). Research and development costs incurred directly by the Company were
$7.1 million
,
$3.7 million
and
$2.2 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
(s) Advertising costs
Advertising costs are expensed as incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss). Advertising costs incurred by the Company were
$0.3 million
,
$0.5 million
and
$0.4 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
(t) Pro-forma earnings per share
The earnings per share amounts for the years ended
December 31,
2017
and
2016
have been computed to give effect to the Organizational Transactions, as if they had occurred at the beginning of the earliest period presented, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the pre-existing membership interests of the Company for the newly-created ownership interests for common stock of KGI. The computations of earnings per share do not consider the
15,700,000
shares of common stock newly-issued by KGI to investors in the IPO.
(3)
Acquisition
s
(a) Trican
On March 16, 2016, the Company acquired the majority of the U.S. assets and assumed certain liabilities of Trican Well Service, L.P. (the “Acquired Trican Operations”) for total consideration of
$248.1 million
, comprised of
$199.4 million
in cash,
$6.0 million
in adjustments pursuant to terms of the acquisition agreement to Trican and
$42.7 million
in Class A and C Units in the Company (the “Trican Transaction”).
The Company accounted for the acquisition of the Acquired Trican Operations using the acquisition method of accounting. Assets acquired and liabilities assumed in connection with the acquisition have been recorded based on their fair values. The Company finalized the purchase price allocation in March 2017 and recorded the measurement period adjustments noted in the following table.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following table summarizes the fair value of the consideration transferred for the acquisition of the Acquired Trican Operations and the final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the acquisition date of the Acquired Trican Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchase Consideration:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation
|
|
Adjustments
|
|
Final Purchase Price Allocation
|
Cash consideration
|
|
$
|
199,400
|
|
|
$
|
—
|
|
|
$
|
199,400
|
|
Net working capital purchase price adjustment
|
|
6,000
|
|
|
—
|
|
|
6,000
|
|
Class A and C Units issued
|
|
42,669
|
|
|
—
|
|
|
42,669
|
|
Total consideration
|
|
$
|
248,069
|
|
|
$
|
—
|
|
|
$
|
248,069
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
37,377
|
|
|
$
|
—
|
|
|
$
|
37,377
|
|
Inventories
|
|
20,006
|
|
|
(202
|
)
|
|
19,804
|
|
Prepaid expenses
|
|
7,170
|
|
|
—
|
|
|
7,170
|
|
Property and equipment
|
|
205,546
|
|
|
(413
|
)
|
|
205,133
|
|
Intangible assets
|
|
3,880
|
|
|
—
|
|
|
3,880
|
|
Total identifiable assets acquired
|
|
273,979
|
|
|
(615
|
)
|
|
273,364
|
|
Accounts payable
|
|
(12,630
|
)
|
|
469
|
|
|
(12,161
|
)
|
Accrued expenses
|
|
(9,524
|
)
|
|
|
|
(9,524
|
)
|
Current maturities of capital lease obligations
|
|
(1,594
|
)
|
|
—
|
|
|
(1,594
|
)
|
Capital lease obligations, less current maturities
|
|
(2,386
|
)
|
|
—
|
|
|
(2,386
|
)
|
Other non-current liabilities
|
|
(1,372
|
)
|
|
—
|
|
|
(1,372
|
)
|
Total liabilities assumed
|
|
(27,506
|
)
|
|
469
|
|
|
(27,037
|
)
|
Goodwill
|
|
1,596
|
|
|
146
|
|
|
1,742
|
|
Total purchase price consideration
|
|
$
|
248,069
|
|
|
$
|
—
|
|
|
$
|
248,069
|
|
|
|
|
|
|
|
|
Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill was primarily attributable to expected synergies and the assembled workforce, and was allocated in its entirety to the Completion Services segment for the purposes of evaluating future goodwill impairment. A portion of the Goodwill is tax deductible.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Intangible assets related to the acquisition of Trican’s U.S. Operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
Estimated useful life
(in Years)
|
|
Fair value
(Thousands of Dollars)
|
Customer contracts
|
|
1.8
|
|
$
|
3,500
|
|
Non-compete agreements
|
|
2.0
|
|
50
|
|
Fracking Fluids
|
|
4.8
|
|
330
|
|
Total intangible assets
|
|
|
|
$
|
3,880
|
|
Weighted average life of finite-lived intangibles
|
|
2.1
|
|
|
For the valuation of the customer relationship intangible asset, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s cost of equity.
The non-compete agreements intangible asset was valued using the “lost income” approach including the probability of competing. Estimated cash flows were discounted at the weighted average cost of capital due to the low risk profile of this contract. The term of the non-compete agreement is two years from the closing date of the Trican Transaction.
As part of the acquisition of Trican’s U.S. Operations, the Company obtained the right to use certain proprietary fracking-related fluids, including MVP FracTM and TriVertTM (the “Fracking Fluids”), for its own pressure pumping services to its customers. The Fracking Fluids were valued using the “income-based relief-from-royalty” method. Under this method, revenues expected to be generated by the technology are multiplied by a selected royalty rate. The estimated after-tax royalty revenue stream is then discounted to present value using the Company’s cost of equity.
The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors.
The remaining amount of working capital purchase adjustment of
$1.5 million
, which was recorded as a payable on the date of acquisition, was reversed into income on the consolidated and combined statements of operations and comprehensive (loss) as part of the gain on the Trican indemnification settlement
.
This did not result in any adjustment to the purchase accounting, as the settlement occurred after the twelve-month measurement period was completed. See Note
(19)
Related Party Transactions
for further details.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following unaudited pro forma information assumes the acquisition of the Acquired Trican Operations occurred on January 1, 2015. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2016, or any operating efficiencies or inefficiencies that resulted from the acquisition of the Acquired Trican Operations. The information is not necessarily indicative of the results that would have been achieved had the Company controlled the Acquired Trican Operations during the period presented. The pro forma information does not include any integration or transactions costs that the Company incurred related to the acquisition in the periods following the period presented.
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Unaudited
|
|
|
Year Ended
December 31, 2016
|
Revenue
|
|
$
|
464,036
|
|
|
Net Income
|
|
$
|
(217,313
|
)
|
|
The Company’s consolidated and combined statement of operations and comprehensive loss include revenue (unaudited) of
$191.0 million
and gross profit (unaudited) of
$10.4 million
from the Acquired Trican Operations from the date of acquisition on March 16, 2016 to December 31, 2016.
(b) RockPile
On July 3, 2017 (the “RockPile Acquisition Date”), the Company acquired
100%
of the outstanding equity interests of RockPile Energy Services, LLC and its subsidiaries (“RockPile”) from RockPile Energy Holdings, LLC (the “Principal Seller”). RockPile was a multi-basin provider of integrated well completion services in the U.S., whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. Through this acquisition, the Company deepened its existing presence in the Permian Basin and Bakken Formation and further solidified its position as one of the largest pure-play providers of integrated well completion services in the U.S. This acquisition also enabled the Company to expand certain service offerings and capabilities within its Other Services segment.
The acquisition of RockPile was completed for cash consideration of
$116.6 million
, subject to post-closing adjustments,
8,684,210
shares of the Company’s common stock (the “Acquisition Shares”) and contingent value rights, as described below. The fair value of the Acquisition Shares, which is recorded in owners’ equity in the consolidated and combined balance sheet, was calculated using the closing price of the Company’s common stock on July 3, 2017, of
$16.29
, discounted by
7.9%
to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted.
Subject to the terms and conditions of the Contingent Value Rights Agreement (the “CVR Agreement”) by and among the Company, the Principal Seller and Permitted Holders (as defined in the CVR Agreement and, together with the Principal Seller, the “RockPile Holders”), the Company agreed to pay contingent consideration (the “Aggregate CVR Payment Amount”), which would equal the product of the Acquisition Shares held by RockPile on April 10, 2018 and the CVR Payment Amount, provided that the CVR Payment Amount did not exceed
$2.30
. The “CVR Payment Amount” was the difference between (a)
$19.00
and (b) the arithmetic average of the dollar volume weighted average price of the Company’s common stock on each trading day for twenty (
20
) trading days randomly selected by the Company during the thirty (
30
) trading day period immediately preceding the last business day prior to April 3, 2018 (the “Twenty-Day VWAP”). The Aggregate CVR Payment Amount was agreed to be reduced on a dollar for dollar basis if the sum of the following exceeds
$165.0 million
:
|
|
•
|
(i) the aggregate gross proceeds received in connection with the resale of any Acquisition Shares, plus
|
|
|
•
|
(ii) the product of the number of Acquisition Shares held by the RockPile Holders on April 10, 2018 and the Twenty-Day VWAP, plus
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
•
|
(iii) the Aggregate CVR Payment Amount.
|
In early April 2018, in accordance with the terms and conditions of the CVR Agreement, the Company calculated and paid the final Aggregate CVR Payment Amount, due to the RockPile Holders, of
$19.9 million
and recognized a loss of
$13.2 million
during the year ended December 31, 2018 in other income (expense), net in the consolidated statement of operations and comprehensive income.
The Company accounted for the acquisition of RockPile using the acquisition method of accounting. Assets acquired, liabilities assumed and equity issued in connection with the acquisition were recorded based on their fair values. The Company finalized the purchase price allocation in June 2018. Of the measurement period adjustments noted in the following table,
$11.3
million were recorded in 2017 and
$2.4
million were recorded in 2018.
The following table summarizes the fair value of the consideration transferred for the acquisition of RockPile and the final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the RockPile Acquisition Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchase Consideration:
|
|
Preliminary Purchase Price Allocation
|
|
Adjustments
|
|
Final Purchase Price Allocation
|
(Thousands of Dollars)
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
123,293
|
|
|
$
|
(6,717
|
)
|
|
$
|
116,576
|
|
Equity consideration
|
|
130,290
|
|
|
—
|
|
|
130,290
|
|
Contingent consideration
|
|
11,962
|
|
|
—
|
|
|
11,962
|
|
Less: Cash acquired
|
|
(20,379
|
)
|
|
20,379
|
|
|
—
|
|
Total purchase consideration, less cash acquired
|
|
$
|
245,166
|
|
|
$
|
13,662
|
|
|
$
|
258,828
|
|
|
|
|
|
|
|
|
Trade and other accounts receivable
|
|
$
|
57,117
|
|
|
$
|
1,484
|
|
|
$
|
58,601
|
|
Inventories, net
|
|
2,853
|
|
|
138
|
|
|
2,991
|
|
Prepaid and other current assets
|
|
13,630
|
|
|
(717
|
)
|
|
12,913
|
|
Property and equipment, net
|
|
157,654
|
|
|
8,653
|
|
|
166,307
|
|
Intangible assets
|
|
20,967
|
|
|
(1,267
|
)
|
|
19,700
|
|
Notes receivable
|
|
250
|
|
|
(250
|
)
|
|
—
|
|
Other noncurrent assets
|
|
363
|
|
|
(57
|
)
|
|
306
|
|
Total identifiable assets acquired
|
|
252,834
|
|
|
7,984
|
|
|
260,818
|
|
Accounts payable
|
|
(38,999
|
)
|
|
16,180
|
|
|
(22,819
|
)
|
Accrued expenses
|
|
(22,161
|
)
|
|
(13,315
|
)
|
|
(35,476
|
)
|
Deferred revenue
|
|
(23,053
|
)
|
|
698
|
|
|
(22,355
|
)
|
Other non-current liabilities
|
|
(827
|
)
|
|
(2,412
|
)
|
|
(3,239
|
)
|
Total liabilities assumed
|
|
(85,040
|
)
|
|
1,151
|
|
|
(83,889
|
)
|
Goodwill
|
|
77,372
|
|
|
4,527
|
|
|
81,899
|
|
Total purchase price consideration
|
|
$
|
245,166
|
|
|
$
|
13,662
|
|
|
$
|
258,828
|
|
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The goodwill in this acquisition was primarily attributable to expected synergies and new customer relationships and was allocated in its entirety to the Completions segment. All the goodwill recognized for the acquisition of RockPile is tax deductible with an amortization period of
15 years
.
Intangible assets related to the acquisition of RockPile consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Weighted average remaining
amortization period
(Years)
|
|
Gross
Carrying
Amounts
|
Customer contracts
|
|
10.8
|
|
$
|
19,700
|
|
Total
|
|
|
|
$
|
19,700
|
|
For the valuation of the customer relationship intangible asset within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset charges. Under this method, the Company calculated cash flows derived from the customer relationships and then deducted portions of the cash flow that could be attributed to supporting assets that contribute to the generation of said cash flows. Estimated cash flows were discounted at the weighted average cost of capital, adjusted for an intangible asset risk component. This premium reflects increased risk related to the specific intangible asset as compared to the Company as a whole.
For the valuation of the customer relationship intangible asset within the Other Services segment, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s weighted average cost of capital, adjusted for an intangible asset risk component.
The following transactions were recognized separately from the acquisition of assets and assumptions of liabilities in the acquisition of RockPile. Deal costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate RockPile’s operations with that of the Company, including retention bonuses and severance payments. Harmonization costs consist of expenses incurred in connection with aligning RockPile’s accounting processes and procedures and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred.
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Transaction Type
|
|
Year Ended
December 31, 2017
|
|
Location
|
Deal costs
|
|
$
|
513
|
|
|
Cost of services
|
Deal costs
|
|
6,166
|
|
|
Selling, general and administrative expenses
|
Integration
|
|
214
|
|
|
Cost of services
|
Integration
|
|
1,124
|
|
|
Selling, general and administrative expenses
|
Harmonization
|
|
656
|
|
|
Selling, general and administrative expenses
|
|
|
$
|
8,673
|
|
|
|
The following combined pro forma information assumes the acquisition of RockPile occurred on January 1, 2016. The pro forma information presented below is for illustrative purposes only and does not reflect future events
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
that occurred after July 2, 2017 or any operating efficiencies or inefficiencies that resulted from the acquisition of RockPile. The information is not necessarily indicative of results that would have been achieved had the Company controlled RockPile during the periods presented. Pro forma net loss for the year ended December 31, 2017 includes
$0.8 million
of non-recurring retention bonuses associated with the acquisition, which were incurred after the closing and
$1.8 million
of compensation costs associated with the executives of RockPile whom the Company retained. In addition, the Company incurred
$2.2 million
of transaction costs that were not reflected in this pro forma financial information, since they were incurred prior to the closing.
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Unaudited
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
1,732,279
|
|
|
$
|
543,966
|
|
Net loss
|
|
(49,348
|
)
|
|
(203,383
|
)
|
|
|
|
|
|
Net loss per share (basic and diluted)
|
|
$
|
(0.44
|
)
|
|
$
|
(2.12
|
)
|
Weighted-average shares outstanding (basic and diluted)
|
|
111,939
|
|
|
96,112
|
|
|
|
|
|
|
The Company’s consolidated and combined statement of operations and comprehensive income for 2017 includes revenue (unaudited) of
$192.2 million
and gross profit (unaudited) of
$29.8 million
, from the RockPile operations, from the date of acquisition on July 3, 2017 to December 31, 2017.
(c) Asset Acquisition from Refinery Specialties, Incorporated
On July 24, 2018, the Company executed a purchase agreement with Refinery Specialties, Incorporated (“RSI”) to acquire approximately
90,000
hydraulic horsepower and related support equipment for approximately
$35.4 million
, inclusive of an
$0.8 million
deposit reimbursement related to future equipment deliveries. This acquisition was partially funded by the insurance proceeds the Company received in connection with a fire that resulted in damage to a portion of one of the Company’s fleets (for further details see Note
(
7
)
Property and Equipment, net
)
. The Company also assumed operating leases for light duty vehicles in connection with the RSI transaction and RSI entered into a non-compete arrangement in turn with the Company. In September 2018, the Company, and RSI reached an agreement to refund the Company
$0.8 million
of the purchase price due to repair costs required for certain acquired equipment. The resulting purchase price after the refund was
$34.6 million
, and the Company incurred
$0.4 million
of transaction costs related to the acquisition, bringing total cash consideration related to the acquisition to
$35.0 million
.
The Company accounted for this acquisition as an asset acquisition pursuant to ASU 2017-01 and allocated the purchase price of the acquisition plus the transactions costs amongst the acquired hydraulic horsepower and related support equipment, as the fair value of the acquired hydraulic horsepower and related support equipment represented substantially all of the fair value of the gross assets acquired in the asset acquisition with RSI.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(4)
Intangible Assets
The intangible assets balance in the Company’s consolidated and combined balance sheets represents the fair value, net of amortization, as applicable, related to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31, 2018
|
|
|
Weighted average remaining
amortization period
(Years)
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer contracts
|
|
8.3
|
|
$
|
67,600
|
|
|
$
|
(27,755
|
)
|
|
$
|
39,845
|
|
Non-compete agreements
|
|
7.3
|
|
700
|
|
|
(362
|
)
|
|
338
|
|
Trade name
|
|
Indefinite life
|
|
10,200
|
|
|
—
|
|
|
10,200
|
|
Technology
|
|
1.8
|
|
2,262
|
|
|
(741
|
)
|
|
1,521
|
|
Total
|
|
|
|
$
|
80,762
|
|
|
$
|
(28,858
|
)
|
|
$
|
51,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31, 2017
|
|
|
Weighted average remaining
amortization period
(Years)
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer contracts
|
|
9.1
|
|
$
|
68,600
|
|
|
$
|
(23,049
|
)
|
|
$
|
45,551
|
|
Non-compete agreements
|
|
8.1
|
|
750
|
|
|
(360
|
)
|
|
390
|
|
Trade name
|
|
Indefinite life
|
|
10,200
|
|
|
—
|
|
|
10,200
|
|
Technology
|
|
2.1
|
|
3,023
|
|
|
(1,884
|
)
|
|
1,139
|
|
Total
|
|
|
|
$
|
82,573
|
|
|
$
|
(25,293
|
)
|
|
$
|
57,280
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to the intangible assets for the years ended
December 31, 2018
,
2017
and
2016
was
$6.3 million
,
$7.1 million
and
$5.7 million
, respectively.
Amortization for the Company’s intangible assets, excluding the trade name that has an indefinite useful life and in-process software, over the next five years, is as follows:
|
|
|
|
|
|
Year-end December 31,
|
|
(Thousands of Dollars)
|
2019
|
|
$
|
5,402
|
|
2020
|
|
5,278
|
|
2021
|
|
4,996
|
|
2022
|
|
4,973
|
|
2023
|
|
4,973
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(5) Goodwill
The changes in the carrying amount of goodwill for the years ended
December 31, 2018
,
2017
and
2016
were as follows:
|
|
|
|
|
|
(Thousands of Dollars)
|
Goodwill as of December 31, 2016
|
$
|
50,478
|
|
Acquisitions
|
84,489
|
|
Goodwill as of December 31, 2017
|
134,967
|
|
Acquisitions
|
(2,443
|
)
|
Goodwill as of December 31, 2018
|
$
|
132,524
|
|
The changes in the carrying amount of goodwill for the year ended
December 31, 2018
and
2017
consisted of purchase price adjustments related to the acquisition of RockPile. For additional information, see Note
(3)
(
Acquisition
s).
There were no triggering events identified and
no
impairment recorded since inception and for the years ended
December 31, 2018
,
2017
and
2016
.
(6) Inventories, net
Inventories, net, consisted of the following at
December 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2018
|
|
December 31,
2017
|
Sand, including freight
|
|
$
|
14,697
|
|
|
$
|
11,551
|
|
Chemicals and consumables
|
|
6,250
|
|
|
7,940
|
|
Materials and supplies
|
|
14,722
|
|
|
13,946
|
|
Total inventory, net
|
|
$
|
35,669
|
|
|
$
|
33,437
|
|
Inventories are reported net of obsolescence reserves of
$1.0 million
and
$0.3 million
as of
December 31, 2018
and
2017
, respectively. The Company recognized
$0.7 million
,
$0.3 million
and
$0.02 million
of obsolescence expense during the years ended
December 31, 2018
,
2017
and
2016
.
(
7
)
Property and Equipment, net
Property and Equipment, net consisted of the following at
December 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2018
|
|
December 31,
2017
|
Land
|
|
$
|
4,771
|
|
|
$
|
5,186
|
|
Building and leasehold improvements
|
|
32,134
|
|
|
30,322
|
|
Office furniture, fixtures and equipment
|
|
7,691
|
|
|
6,338
|
|
Machinery and equipment
|
|
1,041,212
|
|
|
773,516
|
|
|
|
1,085,808
|
|
|
815,362
|
|
Less accumulated depreciation
|
|
(562,813
|
)
|
|
(372,617
|
)
|
Construction in progress
|
|
8,324
|
|
|
25,255
|
|
Total property and equipment, net
|
|
$
|
531,319
|
|
|
$
|
468,000
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The machinery and equipment balance as of
December 31, 2018
and
2017
included
$10.0 million
of hydraulic fracturing equipment under capital lease. The machinery and equipment balance as of
December 31, 2018
and
2017
also included approximately
$11.2 million
and
$5.1 million
, respectively, of vehicles under capital leases. Accumulated depreciation for the hydraulic fracturing equipment under capital leases was
$9.3 million
and
$8.3 million
as of
December 31, 2018
and
2017
, respectively. Accumulated depreciation for the vehicles under capital leases was
$7.9 million
and
$1.6 million
as of
December 31, 2018
and
2017
, respectively.
All (gains) and losses are presented within (gain) loss on disposal of assets in the consolidated and combined statements of operations and comprehensive income (loss).
The following summarizes the proceeds received and (gains) losses recognized on the disposal of certain assets for the years ended
December 31, 2018
,
2017
and
2016
:
Year ended
December 31, 2018
During the year ended
December 31,
2018
, the Company divested the following assets:
|
|
•
|
idle field operations facility in Mathis, Texas, acquired as part of the Acquired Trican Operations, for net proceeds of
$1.1 million
and a net loss of
$2.7 million
, within the Corporate segment;
|
|
|
•
|
early disposals of hydraulic fracturing pump components for a net loss of
$3.5 million
. The loss on these early disposals were offset by the salvage values of transmission cores from failed transmissions. These assets were within the Completion Services segment; and
|
|
|
•
|
various immaterial assets for net proceeds of
$3.2 million
and a net gain of
$1.2 million
. These assets primarily consisted of hydraulic tractors and light general-purpose vehicles within the Completion Services and Corporate segments.
|
As of December 31, 2018, the Company classified various immaterial assets, primarily consisting of tractors within the Completions segment, as assets held for sale, in anticipation of closing on the sale in the first quarter of 2019. The Company ceased depreciation of these assets. The Company did not recognize a loss upon classification of these assets as held for sale.
Year ended
December 31, 2017
During the year ended
December 31, 2017
, the Company divested the following assets:
|
|
•
|
Idle facility in Searcy, Arkansas, acquired in the acquisition of the Acquired Trican Operations, for net proceeds of
$0.5 million
and a net loss of
$0.6 million
, within the Corporate segment;
|
|
|
•
|
Idle facility in Woodward, Oklahoma, acquired in the acquisition of the Acquired Trican Operations, for net proceeds of
$2.4 million
and a net gain of
$0.5 million
, within the Completion Services segment;
|
|
|
•
|
Air compressor units for net proceeds of
$0.9 million
and a net gain of
$0.9 million
, within the Other Services segment;
|
|
|
•
|
Twelve
workover rigs, acquired in the acquisition of RockPile, for net proceeds of
$16.7 million
with
no
(gain) or loss, within the Other Services segment;
|
|
|
•
|
Hydraulic fracturing operating equipment for a net loss of
$0.6 million
, within the Completions segment; and
|
|
|
•
|
Idle coiled tubing assets for net proceeds of
$10.0 million
and a net gain of
$3.5 million
, within the Other Services segment.
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Year Ended
December 31, 2016
During the year ended
December 31,
2016
, the Company divested various immaterial assets for net proceeds of
$0.7 million
and a net gain of
$0.4 million
, primarily within the Completions Services segment.
Casualty Loss
On July 1, 2018,
one
of the Company’s hydraulic frac fleets operating in the Permian Basin was involved in an accidental fire, which resulted in damage to a portion of the equipment in that fleet. The Company received
$18.1 million
of insurance proceeds for replacement cost of the damaged equipment, which offset the
$3.2 million
impairment loss recognized on the damaged equipment. The resulting gain of
$14.9 million
was recognized in other income (expense), net in the consolidated and combined statements of operations and comprehensive income.
(
8
)
Long-Term Debt
Long-term debt at
December 31, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2018
|
|
December 31,
2017
|
2017 Term Loan Facility
|
|
$
|
—
|
|
|
$
|
283,202
|
|
2018 Term Loan Facility
|
|
348,250
|
|
|
—
|
|
Capital leases
|
|
10,516
|
|
|
7,918
|
|
Less: Unamortized debt discount and debt issuance costs
|
|
(7,527
|
)
|
|
(8,173
|
)
|
Total debt, net of unamortized debt discount and debt issuance costs
|
|
351,239
|
|
|
282,947
|
|
Less: Current portion
|
|
(7,704
|
)
|
|
(4,436
|
)
|
Long-term debt, net of unamortized debt discount and debt issuance costs, including capital leases
|
|
$
|
343,535
|
|
|
$
|
278,511
|
|
Below is a summary of the Company’s credit facilities outstanding as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
2017 ABL Facility
(1)
|
|
2018 Term Loan Facility
(1)
|
Original facility size
|
|
$
|
300,000
|
|
|
$
|
350,000
|
|
Outstanding balance
|
|
$
|
—
|
|
|
$
|
348,250
|
|
Letters of credit issued
|
|
$
|
2,500
|
|
|
$
|
—
|
|
Available borrowing base commitment
|
|
$
|
183,985
|
|
|
n/a
|
|
Interest Rate
(2)
|
|
LIBOR or base rate plus applicable margin
|
|
|
LIBOR or base rate plus applicable margin
|
|
Maturity Date
|
|
December 22, 2022
|
|
|
May 25, 2025
|
|
|
|
|
|
|
(1)
For detailed discussion on the Company’s outstanding credit facilities, see “Liquidity and Capital Resources” under Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2)
London Interbank Offer Rate (“LIBOR”) is subject to a 1.00% floor.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Maturities of the 2018 Term Loan Facility for the next five years are presented below:
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year-end December 31,
|
|
|
2019
|
|
$
|
3,500
|
|
2020
|
|
3,500
|
|
2021
|
|
3,500
|
|
2022
|
|
3,500
|
|
2023
|
|
3,500
|
|
|
|
$
|
17,500
|
|
Deferred Charges and Other Costs
Deferred charges include deferred financing costs and debt discounts or debt premiums. Deferred charges are capitalized and amortized using the effective interest method and netted against the carrying amount of the related borrowing. The amortization is recorded in interest expense in the consolidated and combined statements of operations and comprehensive income (loss). Amortization expense related to the capitalized deferred charges for the years ended
December 31, 2018
,
2017
and
2016
was
$3.1 million
,
$5.2 million
, and
$4.2 million
, respectively.
On May 25, 2018, the Company entered into a term loan facility (the “2018 Term Loan Facility”), the proceeds of which were used to repay the Company’s pre-existing term loan facility (the “2017 Term Loan Facility”). No prepayment penalties were incurred in connection with the Company’s early debt extinguishment of its 2017 Term Loan Facility. Deferred charges associated with the 2017 Term Loan Facility that were expensed upon repayment of the 2017 Term Loan Facility were
$7.6 million
. Deferred charges associated with the 2018 Term Loan Facility that were capitalized upon recognition of the 2018 Term Loan Facility were
$9.0 million
. Unamortized deferred charges associated with the 2018 Term Loan Facility were
$7.5 million
as of
December 31, 2018
and are recorded in long-term debt, net of unamortized deferred charges and unamortized debt discount, less current maturities on the consolidated and combined balance sheets.
Deferred charges associated with the 2017 ABL Facility that were capitalized upon recognition of the 2017 ABL Facility were
$4.7 million
. The deferred financing costs related to the 2016 ABL Facility that remained unamortized when the 2016 ABL Facility was replaced with the 2017 ABL Facility was
$1.0 million
and is being amortized over the life of the 2017 ABL Facility. Unamortized deferred charges associated with the 2017 and 2016 ABL Facilities were
$4.0 million
and
$5.0 million
as of
December 31, 2018
and
2017
, respectively, and are recorded in other noncurrent assets on the consolidated and combined balance sheets.
Unamortized deferred charges associated with the Company’s capital leases were
$0.01 million
and
$0.02 million
as of
December 31, 2018
and
2017
.
Interest expense during the year ended December 31, 2017 included
$15.8 million
of prepayment penalties and
$15.3 million
in write-offs of deferred charges, incurred in connection with the Company’s refinancing of its 2016 ABL Facility and the Company’s early debt extinguishment of its 2016 Term Loan Facility and the Senior Secured Notes in 2017.
Capital Leases
The Company leases certain machinery, equipment and vehicles under capital leases that expire between 2019 and 2022.
The Company leases fracturing equipment under a capital lease with CIT. This lease has a lease term of
60 months
and interest rate of
4.73%
per annum. Total remaining principal balance outstanding on this lease as
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
of
December 31, 2018
and
2017
was
$2.6 million
and
$4.5 million
, respectively. Total interest expense incurred on this lease was
$0.2 million
,
$0.3 million
and
$0.3 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
The Company leased certain machinery and equipment under a capital lease with FNB that expired in 2018. Total remaining principal balance outstanding on this lease as of
December 31, 2018
and
2017
was
nil
and
$0.02 million
, respectively. Total interest expense incurred on this lease was less than
$0.01 million
for the years ended
December 31, 2018
,
2017
and
2016
.
As part of the acquisition of Trican’s U.S. Operations, the Company assumed capital leases for light weight vehicles with ARI Financial Services Inc. The lease terms on the vehicles range from
36
to
60 months
and interest rates range from
2.25%
to
3.75%
. In 2018, the Company leased additional light weight vehicles with ARI Financial Services, Inc. The new vehicle leases have terms of
48 months
and interest rates ranging from
3.48%
and
4.98%
. The total outstanding capital lease obligation on these leases as of
December 31, 2018
and
2017
was
$7.7 million
and
$3.0 million
, respectively. Total interest expense incurred on these leases was
$0.3 million
,
$0.04 million
and
$0.01 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
The Company leases light weight vehicles under capital leases with Enterprise Fleet Trust. The vehicle leases have terms of
48 months
and an interest rate of
8.5%
. The total outstanding capital lease obligation for the vehicles leased from Enterprise Fleet Trust as of
December 31, 2018
and
2017
was
$0.2 million
and
$0.3 million
, respectively. Total interest incurred for the years ended
December 31, 2018
,
2017
and
2016
was
$0.02 million
,
$0.01 million
and
nil
, respectively.
Depreciation of assets held under capital leases is included within depreciation expense. See Note
(
7
)
Property and Equipment, net
for further details.
Future annual capital lease commitments, including the interest component but excluding the unamortized deferred charges component, as of
December 31, 2018
for the next five years are listed below:
|
|
|
|
|
|
Year-end December 31,
|
|
(Thousands of Dollars)
|
2019
|
|
$
|
5,484
|
|
2020
|
|
2,652
|
|
2021
|
|
2,430
|
|
2022
|
|
883
|
|
2023
|
|
—
|
|
Subtotal
|
|
11,449
|
|
Less amount representing interest
|
|
(933)
|
|
|
|
$
|
10,516
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(9) Significant Risks and Uncertainties
The Company operates in
two
reportable segments: Completion Services and Other Services, with significant concentration in the Completion Services segment. During the years ended
December 31, 2018
,
2017
and
2016
, sales to Completion Services customers represented
98%
,
99%
and
98%
of the Company’s consolidated revenue, respectively. During the years ended
December 31, 2018
,
2017
and
2016
, sales to Completion Services customers represented
101%
,
99%
and
212%
of the Company’s consolidated gross profit, respectively.
The Company depends on its customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas in North America, which in turn, is affected by current and expected levels of oil and natural gas prices. Oil and natural gas prices began to decline drastically beginning late in the second half of 2014 and remained low through early 2016. This decline, sustained by global oversupply of oil and natural gas, drove the industry into a downturn. Recent events have provided upward momentum for energy prices. With the rebound in commodity prices from their lows in early 2016, drilling and completion activity continued to increase in 2017 and 2018, with U.S. active rig count in December 2018 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility continues to persist. Despite this market volatility, the Company continued to experience increased demand for our services during 2018.
For the year ended
December 31, 2018
, revenue from three customers individually represented more than
10%
and collectively represented
39%
of the Company’s consolidated revenue. For the year ended
December 31, 2017
, no customer individually represented more than
10%
of the Company’s consolidated revenue. For the year ended
December 31, 2016
, revenue, three customers individually represented more than
10%
and collectively represented
48%
of the Company’s consolidated revenue.
For the year ended
December 31, 2018
, purchases from two suppliers represented approximately
5%
to
10%
of the Company’s overall purchases. For the year ended
December 31, 2017
, purchases from one supplier represented approximately
5%
to
10%
of the Company’s overall purchases, respectively. The costs for each of these suppliers were incurred within the Completion Services segment.
(10)
Derivatives
Holdco II uses interest-rate-related derivative instruments to manage its variability of cash flows associated
with changes in interest rates on its variable-rate debt.
On May 25, 2018, the Company entered into the 2018 Term Loan Facility, which has an initial aggregate principal amount of
$350 million
, and repaid its pre-existing 2017 Term Loan Facility. The 2018 Term Loan Facility has a variable interest rate based on LIBOR, subject to a
1.0%
floor. As a result of this transaction, the Company desired to hedge additional notional amounts to continue to hedge approximately
50%
of its expected LIBOR exposure and to extend the terms of its swaps to align with the 2018 Term Loan Facility.
On June 22, 2018, the Company unwound its existing interest rate swaps and received
$3.2 million
in proceeds. The Company used the
$3.2 million
of proceeds to execute a new off-market interest rate swap. Under the terms of the new interest rate swap, the Company receives 1-month LIBOR, subject to a
1%
floor, and makes payments based on a fixed rate of
2.625%
. The new interest rate swap is effective through March 31, 2025 and has a notional amount of
$175.0 million
. The new interest rate swap was designated in a new cash flow hedge relationship.
The Company discontinued hedge accounting on the pre-existing interest rate swaps upon termination. At the time hedge accounting was discontinued, the exiting interest rate swaps had
$3.5 million
of deferred gains in accumulated other comprehensive loss. This amount was not reclassified from accumulated other comprehensive
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
loss into earnings, as it remained probable that the originally forecasted transaction will occur. This amount will be recognized into earnings through August 18, 2022, the termination date of the pre-existing interest rate swap.
The following tables present the fair value of the Company’s derivative instruments on a gross and net basis as of the periods shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
Derivatives
designated as
hedging
instruments
|
|
Derivatives
not
designated as
hedging
instruments
|
|
Gross Amounts
of Recognized
Assets and
Liabilities
|
|
Gross
Amounts
Offset in the
Balance
Sheet
(1)
|
|
Net Amounts
Presented in
the Balance
Sheet
(2)
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Other current asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other noncurrent asset
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other current liability
|
(129
|
)
|
|
—
|
|
|
(129
|
)
|
|
—
|
|
|
(129
|
)
|
Other noncurrent liability
|
(169
|
)
|
|
—
|
|
|
(169
|
)
|
|
—
|
|
|
(169
|
)
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
Other current asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other noncurrent asset
|
324
|
|
|
—
|
|
|
324
|
|
|
—
|
|
|
324
|
|
Other current liability
|
(254
|
)
|
|
—
|
|
|
(254
|
)
|
|
—
|
|
|
(254
|
)
|
Other noncurrent liability
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
With all of the Company’s financial trading counterparties, agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements.
|
|
|
(2)
|
There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged.
|
The following table presents gains and losses for the Company’s interest rate derivatives designated as cash flow hedges (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Location
|
Amount of gain (loss) recognized in other comprehensive income on derivative
|
|
$
|
(880
|
)
|
|
$
|
791
|
|
|
$
|
(1,784
|
)
|
|
OCI
|
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) (“AOCI”) into earnings
|
|
697
|
|
|
(72
|
)
|
|
(603
|
)
|
|
Interest Expense
|
Amount of loss reclassified from AOCI into earnings as a result of originally forecasted transaction becoming probable of not occurring
|
|
—
|
|
|
(100
|
)
|
|
(3,038
|
)
|
|
Interest Expense
|
The gain (loss) recognized in other comprehensive income for the derivative instrument is presented within the hedging activities line item in the consolidated and combined statements of operations and comprehensive income (loss).
There were
no
gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at
December 31, 2018
,
$0.7 million
of net gains will be reclassified from accumulated other comprehensive income into earnings within the next 12 months.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following table presents gains and losses for the Company’s interest rate derivatives not designated in a hedge relationship under ASC 815, “Derivative Financial Instruments,” (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Description
|
|
Location
|
|
2018
|
|
2017
|
|
2016
|
Gains (loss) on interest contracts
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
(367
|
)
|
|
$
|
240
|
|
See Note
(
11
)
(
Fair Value Measurements and Financial Information
)
for further information related to the Company’s derivative instruments.
(
11
)
Fair Value Measurements and Financial Information
The Company discloses the required fair values of financial instruments in its assets and liabilities under the hierarchy guidelines, in accordance with GAAP. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, long-term debt and capital lease obligations. As of
December 31, 2018
and
2017
, the carrying values of the Company’s financial instruments, included in its consolidated and combined balance sheets, approximated or equaled their fair values. There were no transfers into or out of Levels 1, 2 and 3 as of
December 31, 2018
and
2017
.
Recurring Fair Value Measurement
At
December 31, 2018
, the
one
financial instrument measured by the Company at fair value on a recurring bases was its interest rate derivative, and as of
December 31, 2017
, the
two
financial instruments measured by the Company at fair value on a recurring basis were its interest rate derivatives and the Aggregate CVR Payment Amount related to the acquisition of RockPile.
The fair market value of the derivative financial instrument reflected on the consolidated and combined balance sheets as of
December 31, 2018
and
2017
was determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data.
The fair market value of the Aggregate CVR Payment Amount reflected on the consolidated and combined balance sheet as of
December 31, 2017
of
$6.7 million
was determined using a Monte Carlo option pricing model that considered various assumptions, including the Company’s stock price, the length of the holding period and discount for volatility. The maturity date of the CVR Agreement was April 3, 2018, with the final settlement amount calculated and paid at
$19.9 million
.
The following tables present the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at
December 31, 2018
and
2017
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Aggregate CVR Payment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate derivatives
|
|
(298
|
)
|
|
—
|
|
|
(298
|
)
|
|
—
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
70
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Aggregate CVR Payment
|
|
6,665
|
|
|
—
|
|
|
6,665
|
|
|
—
|
|
Non-Recurring Fair Value Measurement
The fair values of indefinite-lived assets and long-lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired technology using the “income-based relief-from-royalty” method and the fair value of its non-compete agreement using the “lost income” approach. Assets acquired as a result of the acquisition of the Acquired Trican Operations, RockPile and RSI were recorded at their fair values on the date of acquisition. See Note
(3)
Acquisition
s
for further details.
Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs.
In
2018
and
2017
, the Company determined there were no events that would indicate the carrying amount of its indefinite-lived assets and long-lived assets may not be recoverable, and as such,
no
impairment charge was recognized.
In 2016, the Company recorded an impairment charge of
$0.2 million
associated with the non-compete agreement within its Other Services segment.
Credit Risk
The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables.
The Company’s cash balances on deposit with financial institutions totaled
$80.2 million
and
$96.1 million
as of
December 31, 2018
and
2017
, respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition.
The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor’s credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
The majority of the Company’s trade receivables have payment terms of
30
days or less. Significant customers are those that individually account for greater than 10% of the Company’s consolidated revenue or total accounts receivable. As of
December 31, 2018
, trade receivables from three customers individually represented more than 10% and collectively represented
49%
of the Company’s total accounts receivable. As of
December 31, 2017
, trade receivables from one customer individually represented more than 10% of the Company’s total accounts receivable, accounting for
17%
of total accounts receivable. The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has a process in place to collect all receivables within
30
to
60
days of aging. As of
December 31, 2018
and
2017
, the Company had
$0.5 million
in allowance for doubtful accounts, based on specific identification. The Company did
no
t write-off any
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
bad debts during
2017
, but did write-off
$0.6 million
of bad debt in
2018
, in connection with its litigation with Halcon Operating Co., Inc. and Halcon Energy Properties. For further detail, see Note
(
18
)
Commitments and Contingencies
.
(
12
)
Stock-Based Compensation
As of
December 31, 2018
, the Company has
four
types of equity-based compensation under its Equity and Incentive Award Plan: (i) deferred stock awards for
three
executive officers, (ii) restricted stock awards issued to independent directors, (iii) restricted stock units issued to executive officers and key management employees and (iv) non-qualified stock options issued to executive officers. The Company has reserved
7,734,601
shares of its common stock for awards that may be issued under the Equity and Incentive Award Plan.
For details on the Company’s accounting policies for determining stock-based compensation expense, see Note
(
2
)
Summary of Significant Accounting Policies
:
(l) Stock-based compensation
.
Non-cash stock compensation expense is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss).
The following table summarizes equity-based compensation costs for the years ended
December 31, 2018
,
2017
and
2016
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Class B Interests
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,984
|
|
Deferred stock awards
|
|
4,280
|
|
|
4,280
|
|
|
—
|
|
Restricted stock awards
|
|
611
|
|
|
399
|
|
|
—
|
|
Restricted stock units
|
|
9,822
|
|
|
4,766
|
|
|
—
|
|
Non-qualified stock options
|
|
2,453
|
|
|
1,133
|
|
|
—
|
|
Equity-based compensation cost
|
|
$
|
17,166
|
|
|
$
|
10,578
|
|
|
$
|
1,984
|
|
Tax benefit
(1)
|
|
(4,134
|
)
|
|
(2,532
|
)
|
|
—
|
|
Equity-based compensation cost, net of tax
|
|
$
|
13,032
|
|
|
$
|
8,046
|
|
|
$
|
1,984
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Prior to 2017, the Company was organized as a limited liability company and treated as a flow-through entity for federal and most state income tax purposes. As such, taxable income and any related tax credits were passed through to the Company’s members and included in their tax returns.
|
(a) 2016 Class B Interests - Management Incentive Plan
On March 16, 2016, the Company canceled all outstanding Class C units issued under its Class C Management Incentive Plan (the “Class C Plan”) and issued Class B units under the Keane Management Holdings LLC Management Incentive Plan (“Class B Plan”). Using an applicable conversion ratio specific to each participant, the Company issued
83,529
Class B units to former participants in the Class C Plan, of which
80,784
were fully vested upon issuance. The remaining
2,745
were subject to vesting based on the same time-based schedule that applied under a participant’s canceled Class C award agreement, subject to the participant’s continued employment, without regard to the achievement of any performance objectives that applied under the Class C units. In addition, on March 16, 2016, the Company issued
2,353
Class B units to a member of the Company’s management. These Class B units vested in three equal installments on each of the first
three
anniversaries of the grant date subject to continued service with the Company. The grant date fair value of the Class B units issued on March 16, 2016 was
$98.97
.
The Company accounted for the exchange of Class C units for Class B units as a modification. In accordance with the requirements of ASC 718, “Compensation - Stock Compensation,” the Company calculated
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
incremental fair value on the difference between the fair value of the modified award and the fair value of the original award immediately prior to the modification. The incremental fair value related to vested units was recognized immediately as compensation expense. The incremental fair value of unvested units and any remaining unrecognized compensation of the original awards was recognized as compensation expense over the remaining vesting period.
During the second quarter of 2016, the Company issued
1,177
Class B units to a member of the Company’s management. These Class B units vested in three equal installments on each of the first
three
anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was
$98.97
per Class B unit on the date of grant.
During the fourth quarter of 2016, the Company issued
6,471
Class B units to members of the board of directors of the Company (the “Board of Directors”) and
7,647
to other management personnel. These Class B units vested in
three
equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was
$73.20
per Class B unit on the date of grant.
The Company used the Option-Pricing Method to value Class B units. Since the Company’s equity was not publicly traded, expected volatility was estimated based on the volatility of similar entities with publicly traded equity. The risk-free rate for the expected term of the units was based upon the observed yields of U.S. Treasury financial instruments interpolated to match the expected time to liquidity. The Company also calculated the discount for lack of marketability using the Finnerty protective put model. The time to liquidity was based upon the expected time to a successful liquidity event.
As described in Note
(
1
)
Basis of Presentation and Nature of Operations
, in order to effectuate the IPO, the Company completed the Organizational Transactions, which resulted in the Existing Owners contributing all of their direct and indirect equity interests in Keane Group to Keane Investor.
The Company recognized
$2.0 million
of non-cash compensation expense into income related to the Company’s Class B Plan in the year ended
December 31, 2016
and
nil
in the years ended
December 31, 2017
and
2018
. As all vested and unvested membership units were contributed to Keane Investor, which is not a subsidiary of the Company, on January 20, 2017, the Company did not recognize any additional non-cash compensation expense associated with unvested membership units.
(b) Deferred stock awards
Upon consummation of the IPO, the executive officers of the Company identified in the table below became eligible for retention payments, the first on January 1, 2018 and the second on January 1, 2019, in the bonus amounts set forth in the table below. On March 16, 2017, the compensation committee (the “Compensation Committee”) of the Board of Directors approved, and each executive officer agreed, that in lieu of the executive officer’s cash retention payments, the executive officer was granted a deferred stock award under the Equity and Incentive Award Plan. Each executive officer’s deferred stock award provides that, subject to the executive officer remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his employment agreement with the Company, the executive officer will be entitled to receive payment of a stock bonus equal to the variable number of shares of the Company’s common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Bonus Amounts
|
|
|
First
|
|
Second
|
James C. Stewart
|
|
$
|
1,975,706
|
|
|
$
|
1,975,706
|
|
Gregory L. Powell
|
|
$
|
1,646,422
|
|
|
$
|
1,646,422
|
|
M. Paul DeBonis Jr.
|
|
$
|
658,569
|
|
|
$
|
658,569
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The Company accounted for these deferred stock awards as liability classified awards and recorded them at fair value based on the fixed monetary value on the date of grant. The Company recognized
$8.6 million
as a deferred compensation expense liability and contra-equity during the first quarter of 2017.
The first stock bonuses vested on January 1, 2018 and were paid on February 15, 2018. The second stock bonus vested January 1, 2019, with an original payout date of February 15, 2019, that was amended in February 2019 to a payout date of March 4, 2019. For the years ended
December 31, 2018
and
2017
, the Company recognized
$4.3 million
of non-cash stock compensation expense into earnings. As of
December 31, 2018
, total unamortized compensation cost related to unvested deferred stock awards was
nil
.
(c) Restricted stock awards
O
n January 20, 2017, upon consummation of the IPO, the Class B units issued to the independent members of the Board of Directors under the Class B Plan were converted into
114,580
restricted shares of the Company’s common stock.
Restricted stock awards granted in 2017 and 2018 have a three-year vesting period and one-year vesting period, respectively, provided that the participant does not incur a termination before the applicable vesting date. Restricted stock awards are not considered issued and outstanding for purposes of earnings per share calculations until vested.
This exchange of Class B units for restricted stock was treated as a modification of awards classified as equity under ASC 718, as the Company viewed the transaction as an exchange of the original award for a new award. To measure the compensation cost associated with the modification of the equity-classified awards, the Company calculated the incremental fair value based on the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. The incremental fair value immediately following the modification was
$0.3 million
, which is being expensed as non-cash stock compensation expense into earnings over the vesting period.
For the years ended
December 31, 2018
and
2017
, the Company recognized
$0.6 million
and
$0.4 million
, respectively, of non-cash stock compensation expense into income. As of
December 31, 2018
, total unamortized compensation cost related to unvested restricted stock awards was
$0.7 million
, which the Company expects to recognize over the remaining weighted-average period of
0.78 years
.
Rollforward of restricted stock awards as of
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Awards
|
|
Weighted average grant date fair value
|
Total non-vested at December 31, 2017
|
|
95,335
|
|
|
$
|
20.51
|
|
Shares issued
|
|
42,936
|
|
|
14.17
|
|
Shares vested
|
|
(44,507
|
)
|
|
20.93
|
|
Shares forfeited
|
|
—
|
|
|
—
|
|
Non-vested balance at December 31, 2018
|
|
93,764
|
|
|
$
|
17.40
|
|
|
|
|
|
|
(d) Restricted stock units
Restricted stock units are stock awards that vest over a one- to three-year service period.
For the years ended
December 31, 2018
and
2017
, the Company recognized
$9.8 million
and
$4.8 million
, respectively, of non-cash stock compensation expense into earnings. As of
December 31, 2018
, total unamortized
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
compensation cost related to unvested restricted stock units was
$20.3 million
, which the Company expects to recognize over the remaining weighted-average period of
1.88 years
.
Rollforward of restricted stock units as of
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Units
|
|
Weighted average grant date fair value
|
Total non-vested at December 31, 2017
|
|
1,099,620
|
|
|
$
|
14.62
|
|
Units issued
|
|
1,509,937
|
|
|
14.97
|
|
Units vested
|
|
(412,944
|
)
|
|
14.55
|
|
Actual units forfeited
|
|
(249,860
|
)
|
|
15.22
|
|
Non-vested balance at December 31, 2018
|
|
1,946,753
|
|
|
$
|
14.83
|
|
|
|
|
|
|
(e) Non-qualified stock options
Stock options granted in 2017 and 2018 have a
three
-year vesting period, provided that the participant does not incur a termination before the applicable vesting date. As the stock options vest, the award recipients can thereafter exercise their stock options up to the expiration date of the options, which is the date of the
six
-year anniversary from the grant date.
For the years ended
December 31, 2018
and
2017
, the Company recognized
$2.5 million
and
$1.1 million
, respectively, of non-cash stock compensation expense into earnings. As of
December 31, 2018
, total unamortized compensation cost related to unvested stock options was
$4.6 million
, which the Company expects to recognize over the remaining weighted-average period of
1.88
years.
Rollforward of stock options as of
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted average grant date fair value
|
Total outstanding at December 31, 2017
|
|
589,977
|
|
|
$
|
6.16
|
|
Options granted
|
|
647,768
|
|
|
7.28
|
|
Options exercised
|
|
—
|
|
|
—
|
|
Actual options forfeited
|
|
(18,728
|
)
|
|
6.68
|
|
Options expired
|
|
—
|
|
|
—
|
|
Total outstanding at December 31, 2018
|
|
1,219,017
|
|
|
$
|
6.75
|
|
|
|
|
|
|
There were
196,657
stock options exercisable or vested at
December 31, 2018
.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Assumptions used in calculating the fair value of the stock options granted during the year are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
2018 Options Granted
|
|
2017 Options Granted
|
Valuation assumptions:
|
|
|
|
|
Expected dividend yield
|
|
0
|
%
|
|
0
|
%
|
Expected equity volatility
|
|
46.3
|
%
|
|
51.5
|
%
|
Expected term (years)
|
|
6
|
|
|
6
|
|
Risk-free interest rate
|
|
2.7
|
%
|
|
1.6
|
%
|
Weighted average:
|
|
|
|
|
Exercise price per stock option
|
|
$
|
15.31
|
|
|
$
|
19.00
|
|
Market price per share
|
|
$
|
15.31
|
|
|
$
|
14.49
|
|
Weighted average fair value per stock option
|
|
$
|
7.28
|
|
|
$
|
6.16
|
|
|
|
|
|
|
(
13
)
Stockholders’ Equity
(a) Certificate of Incorporation
The Company was formed as a Delaware corporation on October 13, 2016. The Company’s certificate of incorporation provides for (i) the authorization of
500,000,000
shares of common stock with a par value of
$0.01
per share and (ii) the authorization of
50,000,000
shares of undesignated preferred stock with a par value of
$0.01
per share that may be issued from time to time by the Company’s Board of Directors in one or more series.
Each holder of the Company’s common stock is entitled to one vote per share and is entitled to receive dividends and any distributions upon the liquidation, dissolution or winding-up of the Company. The Company’s common stock has no preemptive rights, no cumulative voting rights and no redemption, sinking fund or conversion provisions.
(b) Keane Group Holdings Recapitalization
As described in Note
(
1
)
Basis of Presentation and Nature of Operations
,
the Company completed Organizational Transactions to effect the IPO that resulted in all equity interests in Keane Group, which consisted of
1,000,000
class A units,
176,471
class B units and
294,118
class C units, being converted to an aggregate of
87,428,019
shares of the Company’s common stock on January 20, 2017. The Organizational Transactions represented a transaction between entities under common control and was accounted for similar to pooling of interests. In accordance with the requirements of ASC 805, the Company recognized the aggregate
87,428,019
shares of common stock at the carrying amount of the equity interests in Keane Group on January 20, 2017, which totaled
$453.8 million
. The Company recorded
$0.9 million
of par value common stock and the remaining
$452.9 million
as paid-in capital in excess of par value. Furthermore, as the Organizational Transactions resulted in a change in the reporting entity from Keane Group Holdings, LLC to Keane Group, Inc., paid-in capital in excess of par value for Keane Group, Inc. was reduced by Keane Group’s retained deficit as of January 20, 2017 of
$296.7 million
.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(c) Initial Public Offering
As described in Note
(
1
)
Basis of Presentation and Nature of Operations
,
on January 25, 2017, the Company completed the IPO of
30,774,000
shares of its common stock at the public offering price of
$19.00
per share, which included
15,700,000
shares offered by the Company and
15,074,000
shares offered by the selling stockholder, including
4,014,000
shares sold as a result of the underwriters’ exercise of their overallotment option. The net proceeds of the IPO to the Company was
$255.5 million
, which were used to fully repay Holdco II’s term loan balance of
$99.0 million
and the associated prepayment penalty of
$13.8 million
, and repay
$50.0 million
of its
12%
secured notes due
2019
and the associated prepayment penalty of approximately
$0.5 million
. The remaining net proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had
103,128,019
shares of common stock outstanding.
All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and applied to the gross proceeds of the offering through paid-in capital in excess of par value.
(d) RockPile Acquisition
As described in Note
(3)
Acquisition
s,
the Company completed its acquisition of RockPile on July 3, 2017 for cash consideration of
$116.6 million
, subject to post-closing adjustments,
8,684,210
shares of the Company’s common stock and contingent value rights, as described in Note
(3)
Acquisition
s
. The fair value of the Acquisition Shares was calculated using the closing price of the Company’s common stock on July 3, 2017, of
$16.29
, discounted to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted. Upon completion of the acquisition of RockPile, the Company had
111,831,176
shares of common stock outstanding.
(e) Vesting of Stock Awards
During the year ended
December 31, 2018
,
513,613
shares were issued, net of share settlements for payment of payroll taxes, upon the vesting of certain RSUs and deferred stock awards. Shares withheld during the period were immediately retired by the Company.
(f) Secondary Offerings
On January 17, 2018, the Company’s Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering on behalf of Keane Investor, pursuant to which
15,320,015
shares were sold by the selling stockholder (including
1,998,262
shares sold pursuant to the exercise of the underwriters’ over-allotment option) at a price to the public of $
18.25
per share. The Company did not sell any common stock in, and did not receive any of the proceeds from, the offering. Upon completion of the offering, Keane Investor controlled
50.8%
of the Company’s outstanding common stock. During the
December 31, 2018
, the Company incurred
$13.0 million
of transaction costs on behalf of the selling stockholder, which were included within selling, general and administrative expenses in the consolidated and combined statement of operations and comprehensive income.
In February 2018, the Company filed a Registration Statement on Form S-3 (File No. 333-222831) that was effective upon its filing. In December 2018, a selling stockholder sold
5,251,249
of the Company’s common stock at a price to the public of
$11.02
per share. In conjunction with this offering, the Company repurchased
520,000
shares. The Company did not sell any common stock in, and did not receive any of the proceeds from, this offering. As a result of this offering, Keane Investor owned approximately
49.6%
of the Company’s outstanding common stock, and the Company ceased being a “controlled company” within the meaning of the NYSE rules.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(g) Stock Repurchase
During the year ended
December 31, 2018
, the Company settled
$105.0 million
of total share repurchases of its common stock at an average price of
$12.93
per share, representing a total of
8,111,764
common shares of the Company. As of
December 31, 2018
, the Company had approximately
$88.3 million
remaining for future share repurchases under its existing stock repurchase program. Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to
$100.0 million
. Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019. Of the total amount of shares repurchased in 2018,
1,248,440
shares and
520,000
shares were repurchased from White Deer Energy (as defined herein) and Keane Investor, respectively. The shares repurchased from Keane Investor were not repurchased under the Company’s existing stock repurchase program. For further details of these related-party transactions, see Note
(19)
Related Party Transactions
.
(14) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss in the equity section of the consolidated and combined balance sheets includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
Foreign currency
items
|
|
Interest rate
contract
|
|
AOCI
|
December 31, 2017
|
$
|
(2,507
|
)
|
|
$
|
779
|
|
|
$
|
(1,728
|
)
|
Net income (loss)
|
2,621
|
|
|
(697
|
)
|
|
1,924
|
|
Other comprehensive loss
|
(114
|
)
|
|
(880
|
)
|
|
(994
|
)
|
December 31, 2018
|
$
|
—
|
|
|
$
|
(798
|
)
|
|
$
|
(798
|
)
|
|
|
|
|
|
|
The following table summarizes reclassifications out of accumulated other comprehensive loss into earnings during years ended
December 31, 2018
,
2017
and
2016
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affected line item
in the consolidated and combined
statements of
operations and
comprehensive income (loss)
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
Interest rate derivatives, hedging
|
|
$
|
697
|
|
|
$
|
(172
|
)
|
|
$
|
(3,641
|
)
|
|
Interest expense
|
Foreign currency items
|
|
(2,621
|
)
|
|
—
|
|
|
—
|
|
|
Other income
|
Total reclassifications
|
|
$
|
(1,924
|
)
|
|
$
|
(172
|
)
|
|
$
|
(3,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(15) Earnings per Share
Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Diluted income or (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities that are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive.
A reconciliation of the numerators and denominators used for the basic and diluted net loss per share computations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
59,331
|
|
|
$
|
(36,141
|
)
|
|
$
|
(187,087
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
(1)
|
|
109,335
|
|
|
106,321
|
|
|
87,313
|
|
Dilutive effect of restricted stock awards granted to Board of Directors
|
|
17
|
|
|
36
|
|
|
—
|
|
Dilutive effect of deferred stock award granted to NEOs
|
|
214
|
|
|
—
|
|
|
—
|
|
Dilutive effect of RSUs granted under stock incentive plans
|
|
94
|
|
|
135
|
|
|
—
|
|
Dilutive effect of options granted under stock incentive plans
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted-average common shares outstanding
(2)
|
|
109,660
|
|
|
106,492
|
|
|
87,313
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The basic weighted-average common shares outstanding for the years ended
December 31, 2017
and
2016
have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the Company’s Existing Owners’ membership interests for the newly-created ownership interests.
|
|
|
(2)
|
As a result of the net loss incurred by the Company for the years ended
December 31, 2017
and
2016
, the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share.
|
(16)
Operating Leases
The Company has certain operating leases related to its real estate, rail cars and light duty vehicles. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices. There are no significant restrictions imposed on the Company by the leasing agreements with regard to asset dispositions or borrowing ability. Some lease arrangements include renewal and purchase options or escalation clauses. In addition, certain lease contracts include rent holidays, rent concessions and leasehold improvement incentives. Leasehold improvements made at the inception of a lease or during the lease term are amortized over the remaining period of
13 months
to
40 years
.
Rental expense for operations, excluding daily rentals and reimbursable rentals, was
$13.1 million
,
$11.8 million
and
$9.2 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. During the years ended
December 31, 2018
and
2017
, the Company recognized
$1.2 million
and
$0.6 million
, respectively, of rental expense related to non-cancelable sale-leasebacks on
68
Peterbilt tractors acquired during the RockPile acquisition that expire in 2020. Future minimum lease payments include
$0.3 million
related to the sale-leasebacks.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Sublease proceeds for the year ended
December 31, 2018
was
$0.05 million
, related to the subleased properties of the office space the Company vacated in 2017 and the Company’s Canadian operations. Sublease proceeds for the years ended
December 31, 2017
and
2016
were
$0.3 million
, all of which related to the subleased properties of the Company’s Canadian operations. The Canadian sublease proceeds were recorded as a reduction of the Company’s Canadian operations’ exit costs liability.
Minimum lease commitments remaining under operating leases, excluding early termination buyouts, for the next five years are
$58.0 million
, as listed below:
|
|
|
|
|
|
Year-end December 31,
|
|
(Thousands of Dollars)
|
2019
|
|
$
|
26,327
|
|
2020
|
|
18,017
|
|
2021
|
|
5,688
|
|
2022
|
|
4,795
|
|
2023
|
|
3,172
|
|
Total
|
|
$
|
57,999
|
|
The Company had
three
long-term operating leases in Canada that expired in 2018.
The Company assumed several real estate operating leases in connection with the acquisition of the Acquired Trican Operations. In an effort to consolidate its facilities and to reduce costs, the Company vacated
eight
of the combined properties and recorded a cease-use liability for the total amount of
$8.1 million
. Subsequent to the recording of the liability, the Company successfully negotiated exit agreements for
four
of the properties, resulting in net payments of
$2.6 million
. In December 2016, due to immediate need for office space, the Company decided to re-enter
one
of the leases acquired from Trican Well Service, L.P. (“Trican U.S.”) and renegotiated its terms. As a result, the amendment to the lease was accounted for as a new lease, and the cease-use liability associated with the lease in the amount of
$2.4 million
was reversed through the same line item in the statement of operations where it was previously recognized. In 2017, the Company vacated the outgrown facility and moved into the renegotiated office space and recorded a cease-use liability of
$0.5 million
. In 2018, the Company executed an early termination option for another property acquired from Trican U.S., resulting in a net payment of
$0.2 million
.
During the third quarter of 2017, the Company also assumed additional real estate operating leases in connection with the acquisition of Rockpile. As part of a further consolidation of operations, the Company vacated
one
of these facilities and recorded a cease-use liability of
$0.7 million
.
Exit costs, including accretion expense, are presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss).
The following table presents the roll forward of the cease-use liability:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Beginning balance at January 1, 2018
|
|
$
|
1,270
|
|
Exit costs
|
|
339
|
|
Cash buyout of lease
|
|
(156
|
)
|
Lease amortization and other adjustments
|
|
(727
|
)
|
Ending balance at December 31, 2018
|
|
$
|
726
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(
17
)
Income Taxes
Keane Group Holdings, LLC was originally organized as a limited liability company and treated as a flow-through entity for federal and most state income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns. As a result of the IPO and related Organizational Transactions, Keane Group, Inc. was formed as a corporation to hold all of the operational assets of Keane Group. Because Keane Group, Inc. is a taxable entity, the Company established a provision for deferred income taxes as of January 20, 2017. Accordingly, a provision for federal and state corporate income taxes has been made only for the operations of Keane Group, Inc. from January 20, 2017 through December 31, 2018 in the accompanying consolidated and combined financial statements.
The following table summarizes the income (loss) from continuing operations before income taxes in the following jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Domestic
|
|
$
|
66,260
|
|
|
$
|
(35,904
|
)
|
|
$
|
(187,308
|
)
|
Foreign
(1)
|
|
(2,659
|
)
|
|
(87
|
)
|
|
221
|
|
|
|
$
|
63,601
|
|
|
$
|
(35,991
|
)
|
|
$
|
(187,087
|
)
|
|
|
|
|
|
|
|
(1)
For further discussion on the loss from continuing operations before income taxes associated with the Company’s foreign operations, see Note
(21)
Wind-down of a Foreign Subsidiary
.
The components of the Company’s income tax provision are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
5,387
|
|
|
614
|
|
|
—
|
|
Foreign
|
|
31
|
|
|
—
|
|
|
—
|
|
Total current income tax provision
|
|
$
|
5,418
|
|
|
$
|
614
|
|
|
$
|
—
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(1,031
|
)
|
|
(536
|
)
|
|
—
|
|
State
|
|
(117
|
)
|
|
72
|
|
|
(114
|
)
|
Foreign
|
|
—
|
|
|
—
|
|
|
—
|
|
Total deferred income tax provision
|
|
(1,148
|
)
|
|
(464
|
)
|
|
(114
|
)
|
|
|
$
|
4,270
|
|
|
$
|
150
|
|
|
$
|
(114
|
)
|
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following table presents the reconciliation of the Company’s income taxes calculated at the statutory federal tax rate, currently 21%, to the income tax provision in its consolidated and combined statements of operations and comprehensive (loss). The statutory federal tax rate for 2017 and 2016 was 35% prior to the enactment of the Tax Cuts and Jobs Act in December 2017, which reduced the federal corporation rate from 35% to 21%, effective January 1, 2018. The Company’s effective tax rate for 2018 of
6.71%
differs from the statutory rate, primarily due to state taxes, and the change in the valuation allowance. The Company’s effective tax rate for 2017 and 2016 was
(0.53)%
and
0.06%
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2018
|
% of Income Before Income Taxes
|
|
December 31,
2017
|
% of Income Before Income Taxes
|
|
December 31,
2016
|
% of Income Before Income Taxes
|
Income tax provision computed at the statutory federal rate
|
|
$
|
13,356
|
|
21.00
|
%
|
|
$
|
(9,795
|
)
|
35.00
|
%
|
|
$
|
(65,480
|
)
|
35.00
|
%
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
1,408
|
|
2.21
|
%
|
|
(334
|
)
|
1.19
|
%
|
|
(114
|
)
|
0.06
|
%
|
Deferred tax asset valuation adjustment
|
|
(22,639
|
)
|
(35.59
|
)%
|
|
(32,593
|
)
|
116.46
|
%
|
|
—
|
|
—
|
%
|
Tax rate change
|
|
—
|
|
—
|
%
|
|
41,591
|
|
(148.61
|
)%
|
|
—
|
|
—
|
%
|
Permanent differences
|
|
5,237
|
|
8.23
|
%
|
|
630
|
|
(2.25
|
)%
|
|
|
|
Other
|
|
6,908
|
|
10.86
|
%
|
|
651
|
|
(2.32
|
)%
|
|
—
|
|
—
|
%
|
Flow through income not taxable
|
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
65,480
|
|
(35.00
|
)%
|
Income tax provision
|
|
$
|
4,270
|
|
6.71
|
%
|
|
$
|
150
|
|
(0.53
|
)%
|
|
$
|
(114
|
)
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. The Company adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, during 2017, and thus has classified all deferred tax assets and liabilities as noncurrent.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
3,979
|
|
|
$
|
2,467
|
|
|
$
|
—
|
|
Net operating loss carry-forwards
|
|
90,565
|
|
|
70,745
|
|
|
—
|
|
Accruals and other
|
|
4,524
|
|
|
3,994
|
|
|
—
|
|
Intangibles
|
|
—
|
|
|
—
|
|
|
231
|
|
Gross deferred tax assets
|
|
99,068
|
|
|
77,206
|
|
|
231
|
|
Valuation allowance
|
|
(41,779
|
)
|
|
(65,347
|
)
|
|
(139
|
)
|
Total deferred tax assets
|
|
$
|
57,289
|
|
|
$
|
11,859
|
|
|
$
|
92
|
|
Deferred tax liability:
|
|
|
|
|
|
|
PP&E and intangibles
|
|
$
|
(56,799
|
)
|
|
$
|
(11,319
|
)
|
|
$
|
—
|
|
Prepaids and other
|
|
(756
|
)
|
|
(1,954
|
)
|
|
—
|
|
Total deferred tax liability
|
|
(57,555
|
)
|
|
(13,273
|
)
|
|
—
|
|
Net deferred tax liability
|
|
$
|
(266
|
)
|
|
$
|
(1,414
|
)
|
|
$
|
92
|
|
|
|
|
|
|
|
|
As of
December 31, 2018
, the Company had total U.S. federal tax net operating loss (“NOL”) carryforwards of
$412.1 million
. Of this amount,
$105.3 million
related to the Company’s current year federal tax loss,
$72.4 million
was generated in prior year after the IPO transaction and the remaining
$234.4 million
was generated prior to the IPO transaction. As part of the IPO transaction (immediately before), the existing owners of Keane Group contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC, who then contributed those interests to the Company in exchange for common stock of the Company. This event constituted a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the Company as of the effective date of the acquisition. As of
December 31, 2018
, it is expected that the NOLs subject to IRC Section 382 will be available for use during the applicable carryforward period without becoming permanently lost by the Company. The Company’s Section 382 annual limitation is
$19.2 million
. This annual limitation is available to be carried forward to the following year if not utilized. As the Company realized a taxable loss for the year ended
December 31, 2018
, the current year limitation of
$19.2 million
will be available for use in 2019. As such, the total annual limitation available for use in 2019 will be
$56.5 million
. The Company’s total NOL carryforward available to reduce federal taxable income in 2019 is
$235.3 million
. Carryforwards from tax years beginning before January 1, 2018 will begin to expire in 2031, while carryforwards from tax years beginning on or after January 1, 2018 can be carried forward indefinitely.
Included in the Company’s recording of its initial deferred taxes, pursuant to the Organizational Transactions, are deferred tax liabilities related to certain of the Company’s indefinite-lived intangible assets. The deferred tax liability related to these indefinite-lived intangible assets will only reverse at the time of ultimate sale or impairment. At the time of the IPO, due to the uncertain timing of this reversal, the temporary differences associated with these indefinite-lived intangibles could not be considered a source of future taxable income for purposes of determining a valuation allowance, and as such, the deferred tax liability could not be used to support an equal amount of the deferred tax asset. This is often referred to as a “naked credit.” The Company recognized a deferred tax liability of
$1.9 million
associated with this naked credit upon the IPO. This is presented within other noncurrent liabilities in the consolidated and combined balance sheets. This amount will increase as additional tax amortization is recognized, but will only decrease if the indefinite-lived intangibles are sold, impaired or if the Company establishes indefinite-lived deferred tax assets such as NOLs with an indefinite life under the newly passed Tax Cuts and Jobs Act legislation (the “Tax Act”). In 2018, the Company finalized its analysis of the Tax Act and determined
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
that it could use the deferred tax liabilities related to indefinite lived intangibles as a source of income in determining the valuation allowance resulting in a reduction to its net deferred tax liability.
Total net deferred tax liability as of
December 31, 2018
and
2017
was
$0.3 million
and
$1.4 million
, which was comprised of the naked credit and state tax deferred liabilities.
ASC 740, “Income Taxes,” requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of
December 31, 2018
fully offsets the net deferred tax assets, excluding deferred tax liabilities related to certain indefinite lived intangibles. The valuation allowance as of December 31, 2017 fully offsets the impact of the initial benefit recorded related to the formation of Keane Group, Inc., excluding deferred tax liabilities related to certain indefinite lived intangibles. This initial deferred impact was recorded as an adjustment to equity due to a transaction between entities under common control. The valuation allowances as of
December 31, 2018
and 2017 were
$41.8 million
and
$65.3 million
, respectively.
Changes in the valuation allowance for deferred tax assets were as follows:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Valuation allowance as of the beginning of January 1, 2018
|
|
$
|
65,347
|
|
Charge as debit to equity
|
|
(929
|
)
|
Charge as (benefit) expense to income tax provision for current year activity
|
|
(22,639
|
)
|
Charge as (benefit) expense to income tax provision for change in deferred tax rate
|
|
—
|
|
Changes to other comprehensive income (loss)
|
|
—
|
|
Valuation allowance as of December 31, 2018
|
|
$
|
41,779
|
|
|
|
|
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The Company evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on its consolidated and combined financial statements as of December 31, 2017. Accordingly, the Company recorded a provision to income taxes for the Company’s assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on the Company’s consolidated and combined financial statements. The Company finalized its analysis of the Tax Act in 2018 and will continue to monitor guidance on provisions of the Tax Act to be issued by taxing authorities to assess the impact on the Company’s consolidated and combined financial statements.
There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended
December 31, 2018
,
2017
and
2016
. The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company’s tax returns and its accruals for tax
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company’s tax returns are open to audit under the statute of limitations for the years ended December 31, 2015 through December 31, 2017 for federal tax purposes and for the years ended December 31, 2014 through December 31, 2017 for state tax purposes.
(
18
)
Commitments and Contingencies
As of
December 31, 2018
and
2017
, the Company had
$4.2 million
and
$19.8 million
of deposits on equipment, respectively. Outstanding purchase commitments on equipment were
$43.6 million
and
$82.5 million
, as of
December 31, 2018
and
2017
, respectively.
As of
December 31, 2018
, the Company has committed
$2.4 million
and anticipates committing a further
$3.3 million
to research and development with its equity-method investee, which is expected to generate economic benefits in 2019.
As of
December 31, 2018
, the Company has a letter of credit of
$2.5 million
under the 2017 ABL Facility, which secures its performance obligations related to the Company’s CIT capital lease.
In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. The Company purchased
$107.4 million
,
$150.0 million
and
$24.6 million
amounts of proppant under its take-or-pay agreements during the years ended
December 31, 2018
,
2017
and
2016
.
Aggregate minimum commitments under long-term raw material supply agreements for the next five years as of
December 31, 2018
are listed below:
|
|
|
|
|
|
(Thousands of Dollars)
|
Year-end December 31,
|
|
2019
|
$
|
34,495
|
|
2020
|
32,803
|
|
2021
|
15,863
|
|
2022
|
9,300
|
|
2023
|
1,600
|
|
|
$
|
94,061
|
|
|
|
Litigation
From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. In accordance with GAAP, the Company accrues for contingencies where the occurrence of a material loss is probable and can be reasonably estimated, based on the Company’s best estimate of the expected liability. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its financial position or results of operations.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The Company was served with class and collective action claims alleging that the Company failed to pay a nationwide class of workers overtime in compliance with the Fair Labor Standards Act (“FLSA”) and state laws. On December 27, 2016,
two
former employees filed a complaint for a proposed collective action in United States District Court for the Southern District of Texas entitled Hickson and Villa v. Keane Group Holdings, LLC, et al., alleging certain field professionals were not properly classified under the FLSA and Pennsylvania law. In the first quarter of 2018, the parties agreed to settle the claims for
$4.2 million
, which was funded in the fourth quarter of 2018.
The Company was involved in a commercial dispute whereby a former customer commenced an arbitration proceeding, captioned Halcon Operating Co., Inc. and Halcon Energy Properties, Inc. v. Keane Frac LP and Keane Frac GP, LLC. The Company settled this claim for
$1.6 million
and wrote-off the associated
$0.6 million
of bad debt on its consolidated and combined balance sheet as of
December 31, 2018
.
Additionally, in November 2017, the Company was served with two class or collective claims, captioned Omar Castro v. Keane and Vu Tran v. Keane, both alleging that the Company failed to pay a Texas class of workers an appropriate overtime rate in compliance with the FLSA and state laws. These two claims were consolidated on January 30, 2018 and captioned Vu Tran, et al. v. Keane. After the Company substantially completed its discovery, the Company recognized an estimated liability in the third quarter of 2018, as the occurrence of a loss was probable and reasonably estimable. In the first quarter of 2019, the parties agreed to settle this consolidated claim for
$1.0 million
.
Environmental
The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company’s business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.
Regulatory Audits
In 2017, the Company was notified by the Texas Comptroller of Public Accounts that it will conduct a routine audit of Keane Frac TX, LLC’s direct payment sales tax for the periods of January 2014 through May 2017. As of December 31, 2018, the audit is ongoing; however, the Company currently anticipates that the audit could result in an assessment of
$0.8 million
, which has been recorded in selling, general and administrative expenses in the Company’s consolidated and combined statements of
operations and comprehensive income (loss).
(19)
Related Party Transactions
Cerberus Operations and Advisory Company, an affiliate of the Company’s principal equity holder, provides certain consulting services to the Company. The Company paid
$0.3 million
,
$0.3 million
and
$1.0 million
during the years ended
December 31, 2018
,
2017
and
2016
, respectively.
In connection with the Company’s reorganization, the Company engaged in transactions with affiliates. See Note
(
1
)
(
Basis of Presentation and Nature of Operations
)
and Note
(
13
) (
Stockholders’ Equity
)
for a description of these transactions.
In connection with the Company’s research and development initiatives, the Company has engaged in transactions with its equity-method investee. See Note
(
18
)
Commitments and Contingencies
for a description of these commitments. As of
December 31, 2018
, the Company has purchased
$1.7 million
of shares in its equity-method investee.
As part of the asset purchase agreement executed for our acquisition of the Acquired Trican Operations, certain representations and warranties were provided to the Company relating to the condition of the acquired machinery and equipment. The material maintenance expenditures incurred by the Company to bring all of the acquired machinery and equipment into proper working order exceeded the representations made in the asset purchase agreement. On June 12, 2017, the Company and Trican U.S. reached a settlement that resulted in proceeds to the Company of
$2.1 million
and net gain on settlement to the Company of
$3.6 million
. Trican, pursuant to its conditional rights under the Company’s Stockholders’ Agreement entered into in connection with the IPO, has appointed its President and Chief Executive Officer to serve as a member of the Board of Directors.
In December 2017, we sold our dormant coiled tubing assets, including
seven
coiled tubing units and ancillary equipment related thereto, to Patriot Well Solutions LLC, an affiliate of WDE RockPile Aggregate, LLC, for a purchase price of
$10.0 million
.
On May 29, 2018, the Company repurchased
1,248,440
shares of its common stock from WDE RockPile Aggregate, LLC (“White Deer Energy”) for $
16.02
per share or
$20.0 million
. At the time of the RockPile acquisition, the shares of the Company’s common stock that White Deer Energy acquired was valued at
$15.00
per share. The Company recognized the entire transaction as treasury stock that was subsequently retired, whereby the RockPile acquisition value of the shares of
$18.7 million
was recorded against paid-in capital in excess of par value and the remaining
$1.3 million
was recorded against retained earnings on the consolidated balance sheet as of
December 31, 2018
.
During 2018, the Company completed two secondary offerings on behalf of Keane Investor Holdings LLC. For further details, see Note
(
13
)
Stockholders’ Equity
: (f) Secondary Offerings.
(20) Retirement Benefits and Nonretirement Postemployment Benefits
Defined Contribution Plan
The Company sponsors a 401(k) defined contribution retirement plan covering eligible employees. The Company makes matching contributions of up to
3.5%
of compensation. Contributions made by the Company related to the years ended
December 31, 2018
,
2017
, and
2016
were
$6.7 million
,
$4.0 million
and
$1.4 million
, respectively.
Severance
The Company provides severance benefits to certain of its employees in connection with the termination of their employment. Severance benefits offered by the Company were
$0.6 million
,
$2.0 million
and
$1.6 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
(21)
Wind-down of a Foreign Subsidiary
During the first quarter of 2015, the Company’s Canadian operations lost an open bid for the renewal of a customer contract that had been material to the foreign operations in prior years. Due to the loss of this contract, coupled with the unfavorable market conditions driven by low oil prices, management decided to exit wireline operations in Canada and implemented an exit strategy to dispose of the assets of the Canadian operations in multiple phases.
The phases were as follows:
|
|
•
|
Phase 1 included completing the remainder of the customer contract during the first quarter of 2015.
|
|
|
•
|
Phase 2 included disposing of the physical assets of the Canadian operations by selling them to third parties or transferring them to Keane Frac, LP during the second quarter of 2015.
|
|
|
•
|
Phase 3 included repatriating
$8.0 million
CAD (
$6.7 million
USD) of cash from Keane Completions CN Corp.
|
|
|
•
|
Phase 4 included settlement of the outstanding obligations of the Canadian operations.
|
|
|
•
|
Phase 5 included transitioning the
$4.7 million
CAD of goodwill related to the Completion Services segment from Keane Completions CN Corp. to Holdco II as of December 31, 2015.
|
|
|
•
|
Phase 6 included the repatriation of remaining cash and settlement of obligations. This movement decreased the investment in the foreign subsidiary by
$2.7 million
.
|
During the fourth quarter of 2018, the Company liquidated its Canadian subsidiary, upon which it recognized a loss of
$2.6 million
from AOCI into earnings in the consolidated and combined statement of operations and comprehensive income for the year ended
December 31, 2018
.
All material costs associated with the wind-down of the Canadian subsidiary were identified and recognized during the year ended December 31, 2015.
The activity in the exit liabilities related to lease and contract obligations recognized in connection with the wind-down of the Canadian operations, which were presented as accrued liabilities on the consolidated and combined balance sheets, were as follows for the year ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
2018
|
|
2017
|
Beginning balance at January 1,
|
|
$
|
49
|
|
|
$
|
233
|
|
Charges incurred
|
|
(4
|
)
|
|
—
|
|
Cash payments net of cash receipts
|
|
4
|
|
|
(214
|
)
|
Currency lease accretion and other adjustments
|
|
(49
|
)
|
|
30
|
|
Total lease obligations, ending balance
|
|
$
|
—
|
|
|
$
|
49
|
|
(22)
Business Segments
Management operates the Company in
two
reporting segments: Completion Services and Other Services. Management evaluates the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. All inter-segment transactions are eliminated in consolidation.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with an operating segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Operations by business segment
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
2,100,956
|
|
|
$
|
1,527,287
|
|
|
$
|
410,854
|
|
Other Services
|
|
36,050
|
|
|
14,794
|
|
|
9,716
|
|
Total revenue
|
|
$
|
2,137,006
|
|
|
$
|
1,542,081
|
|
|
$
|
420,570
|
|
Gross profit (loss):
|
|
|
|
|
|
|
Completion Services
|
|
$
|
478,850
|
|
|
$
|
258,024
|
|
|
$
|
8,963
|
|
Other Services
|
|
(2,390
|
)
|
|
1,496
|
|
|
(4,735
|
)
|
Total gross profit
|
|
$
|
476,460
|
|
|
$
|
259,520
|
|
|
$
|
4,228
|
|
Operating income (loss):
|
|
|
|
|
|
|
Completion Services
|
|
$
|
234,756
|
|
|
$
|
115,691
|
|
|
$
|
(80,563
|
)
|
Other Services
|
|
(6,818
|
)
|
|
(197
|
)
|
|
(10,156
|
)
|
Corporate and Other
|
|
(129,928
|
)
|
|
(106,225
|
)
|
|
(58,985
|
)
|
Total operating income (loss)
|
|
$
|
98,010
|
|
|
$
|
9,269
|
|
|
$
|
(149,704
|
)
|
Depreciation and amortization:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
241,169
|
|
|
$
|
141,385
|
|
|
$
|
89,432
|
|
Other Services
|
|
4,428
|
|
|
5,757
|
|
|
5,087
|
|
Corporate and Other
|
|
13,548
|
|
|
12,138
|
|
|
6,460
|
|
Total depreciation and amortization
|
|
$
|
259,145
|
|
|
$
|
159,280
|
|
|
$
|
100,979
|
|
(Gain) loss on disposal of assets
|
|
|
|
|
|
|
Completion Services
|
|
$
|
2,925
|
|
|
$
|
948
|
|
|
$
|
(538
|
)
|
Other Services
|
|
—
|
|
|
(4,064
|
)
|
|
(44
|
)
|
Corporate and Other
|
|
2,122
|
|
|
561
|
|
|
195
|
|
Total (gain) on disposal of assets
|
|
$
|
5,047
|
|
|
$
|
(2,555
|
)
|
|
$
|
(387
|
)
|
Impairment:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other Services
|
|
—
|
|
|
—
|
|
|
185
|
|
Corporate and Other
|
|
—
|
|
|
—
|
|
|
—
|
|
Total impairment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
185
|
|
Exit Costs:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
506
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other Services
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate and Other
|
|
$
|
(167
|
)
|
|
$
|
1,221
|
|
|
$
|
5,696
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exit costs
|
|
$
|
339
|
|
|
$
|
1,221
|
|
|
$
|
5,696
|
|
Income tax provision
(1)
:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate and Other
|
|
(4,270
|
)
|
|
(150
|
)
|
|
—
|
|
Total income tax:
|
|
$
|
(4,270
|
)
|
|
$
|
(150
|
)
|
|
$
|
—
|
|
Net income (loss):
|
|
|
|
|
|
|
Completion Services
|
|
$
|
234,756
|
|
|
$
|
115,691
|
|
|
$
|
(80,563
|
)
|
Other Services
|
|
(6,818
|
)
|
|
(197
|
)
|
|
(10,156
|
)
|
Corporate and Other
|
|
(168,607
|
)
|
|
(151,635
|
)
|
|
(96,368
|
)
|
Total net income (loss)
|
|
$
|
59,331
|
|
|
$
|
(36,141
|
)
|
|
$
|
(187,087
|
)
|
Capital expenditures
(2)
:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
281,081
|
|
|
$
|
185,329
|
|
|
$
|
21,736
|
|
Other Services
|
|
9,510
|
|
|
1,718
|
|
|
487
|
|
Corporate and Other
|
|
952
|
|
|
2,582
|
|
|
1,322
|
|
Total capital expenditures
|
|
$
|
291,543
|
|
|
$
|
189,629
|
|
|
$
|
23,545
|
|
|
|
|
|
|
|
|
(1)
Income tax provision as presented in the consolidated and combined statement of operations and comprehensive income (loss) does not include the provision for Texas margin tax for 2016.
|
|
(2)
|
Capital expenditures do not include leasehold improvements and net assets from the asset acquisition of RSI on July 24, 2018 of
$35.0 million
, the business acquisition of RockPile on July 3, 2017 of
$116.6 million
or the business acquisition of the Acquired Trican Operations on March 16, 2016 of
$205.5 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2018
|
|
December 31,
2017
|
Total assets by segment:
|
|
|
|
|
Completion Services
|
|
$
|
894,467
|
|
|
$
|
863,419
|
|
Other Services
|
|
20,974
|
|
|
21,877
|
|
Corporate and Other
|
|
139,138
|
|
|
157,820
|
|
Total assets
|
|
$
|
1,054,579
|
|
|
$
|
1,043,116
|
|
|
|
|
|
|
Total assets by geography:
|
|
|
|
|
United States
|
|
$
|
1,054,550
|
|
|
$
|
1,041,596
|
|
Canada
|
|
29
|
|
|
1,520
|
|
Total assets
|
|
$
|
1,054,579
|
|
|
$
|
1,043,116
|
|
|
|
|
|
|
Goodwill by segment:
|
|
|
|
|
Completion Services
|
|
$
|
132,524
|
|
|
$
|
134,967
|
|
Total goodwill
|
|
$
|
132,524
|
|
|
$
|
134,967
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(23) Selected Quarterly Financial Data
The following table sets forth certain unaudited financial and operating information for each quarter of the years ended
December 31, 2018
and
2017
. The unaudited quarterly information includes all adjustments that, in the opinion of management, are necessary for the fair presentation of the information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
(Unaudited)
|
Selected Financial Data:
|
|
First
Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
|
$
|
513,016
|
|
|
$
|
578,533
|
|
|
$
|
558,908
|
|
|
$
|
486,549
|
|
Costs of services (excluding depreciation and amortization, shown separately)
|
|
403,408
|
|
|
447,685
|
|
|
436,799
|
|
|
372,654
|
|
Depreciation and amortization
|
|
60,051
|
|
|
59,404
|
|
|
68,287
|
|
|
71,403
|
|
Selling, general and administrative expenses
|
|
33,884
|
|
|
24,125
|
|
|
27,783
|
|
|
28,466
|
|
(Gain) loss on disposal of assets
|
|
769
|
|
|
3,287
|
|
|
1,113
|
|
|
(122
|
)
|
Total operating costs and expenses
|
|
498,112
|
|
|
534,501
|
|
|
533,982
|
|
|
472,401
|
|
Operating income
|
|
14,904
|
|
|
44,032
|
|
|
24,926
|
|
|
14,148
|
|
Other income (expense), net
|
|
(12,989
|
)
|
|
16
|
|
|
14,454
|
|
|
(2,386
|
)
|
Interest expense
|
|
(6,990
|
)
|
|
(14,317
|
)
|
|
(5,978
|
)
|
|
(6,219
|
)
|
Total other income (expenses)
|
|
(19,979
|
)
|
|
(14,301
|
)
|
|
8,476
|
|
|
(8,605
|
)
|
Income tax income (expense)
|
|
(3,168
|
)
|
|
936
|
|
|
(2,623
|
)
|
|
585
|
|
Net income (loss)
|
|
$
|
(8,243
|
)
|
|
$
|
30,667
|
|
|
$
|
30,779
|
|
|
$
|
6,128
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
(Unaudited)
|
Selected Financial Data:
|
|
First
Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
|
$
|
240,153
|
|
|
$
|
323,136
|
|
|
$
|
477,302
|
|
|
$
|
501,490
|
|
Costs of services (excluding depreciation and amortization, shown separately)
|
|
223,992
|
|
|
278,384
|
|
|
391,089
|
|
|
389,096
|
|
Depreciation and amortization
|
|
30,373
|
|
|
32,739
|
|
|
46,204
|
|
|
49,964
|
|
Selling, general and administrative expenses
|
|
17,986
|
|
|
22,337
|
|
|
28,592
|
|
|
24,611
|
|
(Gain) loss on disposal of assets
|
|
(434
|
)
|
|
(5
|
)
|
|
302
|
|
|
(2,418
|
)
|
Total operating costs and expenses
|
|
271,917
|
|
|
333,455
|
|
|
466,187
|
|
|
461,253
|
|
Operating income (loss)
|
|
(31,764
|
)
|
|
(10,319
|
)
|
|
11,115
|
|
|
40,237
|
|
Other expense (income), net
|
|
4
|
|
|
3,701
|
|
|
942
|
|
|
9,316
|
|
Interest expense
|
|
(40,361
|
)
|
|
(4,349
|
)
|
|
(7,195
|
)
|
|
(7,318
|
)
|
Total other income (expenses)
|
|
(40,357
|
)
|
|
(648
|
)
|
|
(6,253
|
)
|
|
1,998
|
|
Interest expense
|
|
(134
|
)
|
|
(931
|
)
|
|
(797
|
)
|
|
1,712
|
|
Net income (loss)
|
|
$
|
(72,255
|
)
|
|
$
|
(11,898
|
)
|
|
$
|
4,065
|
|
|
$
|
43,947
|
|
(
24
)
New Accounting Pronouncements
(a) Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and most industry-specific guidance. ASU 2014-09 sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity is required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additional disclosures are required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers,” which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. The Company adopted this standard as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s current revenue recognition processes or the Company’s consolidated and combined financial statements and did not require any retrospective adjustments to the consolidated and combined financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which (i) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and (iv) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for annual periods beginning after December 15, 2017. The Company adopted the
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
provisions of ASU 2016-01 effective January 1, 2018. The adoption of these standards did not have an impact on the Company’s consolidated and combined financial statements, as the Company did not have any active hedge accounting relationships as of the adoption date.
During 2016, FASB issued ASU 2016-08, “Principal versus Agent,” ASU 2016-10, “Licenses of Intellectual Property (IP) and Identification of Performance Obligations” and ASU 2016-12, “Narrow Scope Improvements and Practical Expedients”. During 2017, FASB issued ASC 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. All these ASUs are designed to address various issues raised by the constituents to the Transition Resource Group and help minimize diversity in practice in applying ASU 2014-09. The Company adopted these standards concurrently with the adoption of ASU 2014-09 as of January 1, 2018. The adoption of these standards did not have a material impact on the Company’s consolidated and combined financial statements.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Asset Other Than Inventory,” which requires entities to recognize the tax consequences of intercompany asset transfers in the period in which the transfer takes place, with the exception of inventory transfers. ASU 2016-16 is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. Entities must adopt the standard using a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The cumulative effect adjustments will include recognition of the income tax consequences of intra-entity transfers of assets, other than inventory, that occur before the adoption date. The Company adopted this standard as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated and combined financial statements, as the Company has minimal intra-entity transfers of qualifying assets.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017 and should be applied prospectively. The Company adopted this standard as of January 1, 2018. The adoption of this standard did not have an impact on the Company’s consolidated and combined financial statements.
In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements of Financial Instruments - Overall,” to make targeted improvements that addressed certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The targeted improvements address the discontinuation of, adjustments to and transition guidance for equity securities without a readily determinable fair value, forward contracts and purchased options, presentation requirements for certain fair value option liabilities and the measurement of changes in fair value option liabilities denominated in a foreign currency. The Company adopted this standard as of July 1, 2018. The adoption of this standard did not have an impact on the Company’s consolidated and combined financial statements.
In June 2018, the FASB issued ASU 2018-07, “Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2018. The Company early adopted this standard effective June 20, 2018. The adoption of this standard did not have an impact on the Company’s consolidated and combined financial statements, as the Company has only issued shares to employees or nonemployee directors and has previously recognized its nonemployee directors share-based payments in line with its recognition of share-based payments to employees, using the grant-date fair value of the equity instruments issued, amortized over the requisite service period.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(b)
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months, regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. In December 2018, the FASB issued ASU 2019-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which allows lessors to make a policy election to exclude sales taxes and other similar taxes from determining the consideration in the contract and variable payments not included in the consideration in the contract, requires lessors to exclude from variable payments lessor costs paid by lessees directly to third parties and clarified the accounting for variable payments for contracts with lease and nonlease components. Upon adoption of these standards, using the modified retrospective transition method, the Company is anticipating it will recognize a lease right of use asset and lease liability of approximately
$61 million
on its consolidated balance sheet on January 1, 2019, for its operating leases that existed upon the effective date, with no additional impact to its consolidated statements of operations and comprehensive income (loss) or statements of cash flows. The Company also determined that while its hydraulic fracturing fleets represent lease components in its customer contracts, these lease components do not represent the predominant components in its customer contracts. As such the Company has elected to account for the combined components of its customer contracts under ASC 606.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable and lease receivables. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” which clarified that receivables arising from operating leases are not within the scope of ASC 326-20, “Financial Instruments-Credit Losses-Measured at Amortized Cost,” and should be accounted for in accordance with ASC 842. ASU 2016-13 and ASU 2019-19 are effective for annual periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated and combined financial statements.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows companies to reclassify from accumulated other comprehensive income (loss) to retained earnings, any stranded tax effects resulting from complying with the Tax Cuts and Jobs Act legislation passed in December 2017. ASU 2018 02 is effective for annual periods beginning after December 15, 2018, and the Company will implement the provisions of this ASU effective January 1, 2019. The Company does not expect the adoption of this standard to impact its consolidated and combined financial statements, as due to the Company’s valuation allowance, there is no net tax effect stranded within accumulated other comprehensive income (loss).
In July 2018, the FASB issued ASU 2018-09, “Codification Improvements,” which made clarifications, correction of errors and minor improvements to ASC 220, “Income Statement - Reporting Comprehensive Income - Overall,” ASC 470-50, “Debt Modifications and Extinguishments,” ASC 480-10, “Distinguishing Liabilities from Equity -Overall,” ASC 718-740, “Compensation - Stock Compensation - Income Taxes,” ASC 805-740, “Business Combinations - Income Taxes,” ASC 815-10, “Derivatives and Hedging - Overall,” ASC 820-10, “Fair Value Measurement - Overall,” ASC 940-405, “Financial Services - Brokers and Dealers - Liabilities,” and ASC 962-325, “Plan Accounting - Defined Contribution to Pension Plans - Investments - Other.” The transition and effective dates
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
of ASU 2018-09 vary for each amendment. The Company does not expect the adoption of this standard to have a significant impact on its consolidated and combined financial statements, as it only has qualifying transactions that would be impacted by the amendments to ASC 718-740.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This standard removed, modified and added disclosure requirements from ASC 820. ASU 2018-13 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated and combined financial statements, as this standard primarily addresses disclosure requirements for Level 3 fair value measurements. The Company does not currently have or anticipate having Level 3 fair value instruments.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The amendments in this standard aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated and combined financial statements.
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." The amendments in this standard permit use of the Overnight Index Swap rate based on Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under ASC 815. ASU 2018-16 is effective for annual periods beginning after December 15, 2018. The adoption of this standard will not have an impact on the Company's consolidated and combined financial statements as the benchmark interest rate on its only existing interest rate swap is LIBOR.
In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.” The amendments in this standard clarified that certain transactions should be accounted for under ASC 606 if one of the collaborative arrangement participants meets the definition of a customer and that transactions between collaborative participants not directly related to sales to third parties should not be recognized as revenue under Topic 606, if one of the collaborative arrangement participants is not a customer. ASU 2018-18 is effective for annual periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated and combined financial statements.