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 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 under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, “
Item 8
. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. 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, as well as other value-added service offerings. Our total capacity includes approximately
1.2 million
hydraulic horsepower. From our 26 currently deployable hydraulic fracturing fleets (“fleets”), 31 wireline trucks, 24 cementing pumps and other ancillary assets located in the Permian Basin, the Marcellus Shale/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 our partnerships with our customers, our transparency concerning value creation and our responsibilities to employees and customers.
In December 2017, we placed orders for an aggregate of approximately 150,000 newbuild hydraulic horsepower representing three additional hydraulic fracturing fleets, with anticipated capital expenditures for the three fleets of approximately $115.0 million, expected to be delivered in the second and third quarters of 2018.
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 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 and wireline divisions and ancillary services; and Other Services, which includes our cementing and drilling divisions. 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, including price adjustments to offset commodity inflation and align with market, decisions to strategically deploy our existing and new fleets and real-time supply chain management decisions, by utilizing top line revenue, as well as individual direct and indirect costs on a per stage and per fleet basis.
Acquisition of RockPile
On July 3, 2017, the Company acquired 100% of the outstanding equity interests of RockPile. RockPile was a multi-basin provider of integrated well completion services in the United States, 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 the Company’s common stock and contingent value rights (“CVR”) granted pursuant to the CVR Agreement, as further described in Note
(3)
Acquisition
s)
of Part II, “
Item 8
. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K and in the Company's Current Report on Form 8-K filed on July 3, 2017.
Through this acquisition, we expanded our existing presence in the Permian Basin and Bakken Formation by increasing our pumping capacity by more than 25%, further strengthening our position as one of the largest pure-play providers of integrated well completion services in the United States. 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.
Financial results
Revenue in 2017 totaled
$1.5 billion
, an increase of 267% compared to revenue in
2016
of
$420.6 million
. Our strong revenue growth in
2017
was driven by the following factors, (i) completion of the acquisition of RockPile, which added 245,000 hydraulic horsepower, the largest contributor to year over year growth, (ii) continued deployment of available horsepower with seven fleets commissioned and deployed in 2017 and (iii) continued execution of our pricing strategy of aligning pricing with our clients under dedicated agreements with periodic re-openers priced at market rate. We exited
2016
with 13 operating fleets and exited 2017 with 26 operating, with six fleets, including one newbuild fleet, acquired through the acquisition of RockPile. On an average basis, we operated 21.1 fleets during
2017
compared to 9.8 fleets during
2016
. The revenue growth drivers for 2017 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 sand, trucking, labor, and chemicals. Consistent
with our efforts to maintain and grow the supply of key commodities and skilled workforce, as influenced by market capacity, 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
$9.3 million
in
2017
, as compared to an operating loss of
$149.7 million
in
2016
.
We reported net loss of
$36.1 million
, or
$0.34
per basic and diluted share, in
2017
, compared to net loss of
$187.1 million
, or
$2.14
per basic and diluted share, in
2016
. Net income in
2017
includes $15.4 million of management adjustments to cost of services to arrive at Adjusted Gross Profit. Approximately
$12.4 million
of this amount was driven by costs for the re-commissioning of seven previously idled fleet,
$1.7 million
by acquisition and integration costs incurred for the acquisition of RockPile and
$1.3 million
by bonuses paid out to key operational employees in connection with our IPO. Approximately
$34.5 million
of management adjustments to selling, general and administrative expenses to arrive at Adjusted EBITDA during
2017
were 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, as well as transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million in commissioning costs. Approximately $4.1 million of management adjustments to (gain) loss on disposal of assets to arrive at Adjusted EBITDA during 2017 were related 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. See Note
(
7
)
Property and Equipment, net
of Part II,"
Item 8.
Financial Statements and Supplementary Data"
for further details on these asset sales. Approximately
$13.8 million
of management adjustments to other income to arrive at Adjusted EBITDA during 2017 was primarily driven by $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 the CVR associated with the acquisition of RockPile.
Business outlook
Commodity prices improved significantly throughout 2017, following a period of depressed prices and activity throughout the industry downturn of 2015 and 2016. West Texas Intermediate (“WTI”) crude oil prices averaged $50.88 per barrel in 2017, compared to a low of $26.19 per barrel in February 2016. Henry Hub Natural Gas prices averaged $2.99 per MMBtu in 2017, compared to a low of $1.49 per MMBtu in March 2016. The general rebound in commodity prices has led to an increase in drilling activity across the industry, with total U.S. land rig count averaging 856 rigs in 2017, compared to an average of 486 rigs in 2016.
The increase in drilling rigs and activity, combined with the completion of previously drilled wells, has led to a significant growth in the demand for U.S. completions services. We continue to expect improvements in demand and higher leading-edge pricing for our services across our diversified footprint, as the availability of high-quality hydraulic fracturing equipment remains tight, capital expenditure for drilling and completions in the U.S. stabilizes at a higher level of activity and customers place increased focus on partnering with well-capitalized, safe and efficient service providers.
Given the energy industry's outlook for 2018 activity levels, we expect further increases in the demand for our services over the next several quarters, driven by supportive industry fundamentals, including higher commodity prices and increases in completions intensity. Across the industry, exploration and production companies are executing completion designs with greater intensity, including longer laterals, more stages per well, tighter well spacing and increased proppant loadings. We believe the availability and supply of completions services is impacted by increases in completions intensity, resulting in increases in the amount of equipment that must be utilized per job and acceleration of maintenance cycles, both of which have a tightening effect on available supply. Furthermore, given the fragmented nature of the completions services industry, combined with varying levels of asset readiness and capital availability, we expect further consolidation in the industry.
Oil and natural gas prices are significant drivers behind the pace and location of our customer activity. We actively monitor the trends in oil and natural gas prices and focus on maintaining flexibility. While commodity prices have improved throughout 2017 and into 2018, we expect volatility and uncertainty to remain in place throughout the year. This backdrop, combined with asset attrition and newbuild lead-times, should support an environment for attractive cash generation on our fleets throughout 2018.
The industry continues to face strain in sand supply, driven by weather-induced rail congestion, combined with mine-related issues due to rail-related output constraints, flooding impacts, delays on local mine start-ups and continued growth in demand. We are proactively managing these transitory issues facing the entire industry to limit the impact to our customers and business. In addition, continued tightening of the labor market could result in higher wage rates, as well as increased recruiting, hiring, onboarding and training costs.
We continue to believe in the strength of the near-term and long-term fundamentals of our business, including our high-quality, fit-for-purpose and well-maintained equipment, our financial strength and discipline and the scale and flexibility of our supply chain.
Fiscal 2017 Highlights
|
|
•
|
IPO: completed initial public offering and listing of common stock on NYSE
|
|
|
•
|
Utilization: deployed all idle fleets at attractive cost with full utilization
|
|
|
•
|
Newbuild: placed preemptive and strategic order for three newbuild fleets
|
|
|
•
|
Profitability: continued to increase annualized Adjusted Gross Profit per fleet
|
|
|
•
|
Mergers and acquisition: executed strategic acquisition of RockPile
|
|
|
•
|
Balance sheet: maintained and improved conservative balance sheet and liquidity
|
|
|
•
|
Portfolio optimization: sold workover rigs acquired in the acquisition of RockPile and coiled tubing assets acquired in the acquisition of the Acquired Trican Operations
|
Fiscal 2018 Outlook
In 2018, our principal business objective continues to be growing our business and safely providing best-in-class services in other Completion Services and Other Services segments. We expect to achieve our objective through:
|
|
•
|
partner and grow with customers who focus their efforts on high-efficiency completions jobs under dedicated agreements;
|
|
|
•
|
allocate our assets to maximize utilization and returns, including diversification of geography and commodity;
|
|
|
•
|
improve profitability of fully-utilized fleets through increased leading-edge pricing and efficiencies;
|
|
|
•
|
leverage our flexible and scalable logistics infrastructure to provide assurance of timely supply at lowest landed cost;
|
|
|
•
|
leverage our platform to identify, retain and promote talent to sustain growth and support operational excellence;
|
|
|
•
|
pursue expansion opportunities for our cementing assets;
|
|
|
•
|
maintain agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply;
|
|
|
•
|
maintain our conservative and flexible capital position, supporting continued growth and maintenance of active equipment; and
|
|
|
•
|
explore potential opportunities for mergers or acquisitions, focused on portfolio expansion and market opportunities.
|
Our operating performance and business outlook are described in more detail in “Business Environment and Results of Operations” herein.
Financial markets, liquidity, and capital resources
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 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, the Company 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 March 15, 2017, we obtained a $150.0 million term loan facility (the “2017 Term Loan Facility”). We used the proceeds from our 2017 Term Loan Facility to fully repay our Senior Secured Notes. On July 3, 2017, we secured $135.0 million in incremental term loans under an incremental term loan facility (the “Incremental Term Loan Facility” and together with the 2017 Term Loan Facility, the “New Term Loan Facility”), which are subject to substantially the same terms as the outstanding initial term loans under the 2017 Term Loan Facility. The majority of the proceeds from the incremental term loans was used to fund our acquisition of 100% of the outstanding equity interests of RockPile. As a result of entering into the Incremental Term Loan Facility, we expect our average annualized interest expense to increase from $12.4 million to $23.6 million.
At
December 31, 2017
, we had approximately
$96.1 million
of cash available. We also had
$199.7 million
available under our asset-based revolving credit facility as of
December 31, 2017
, 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.
On January 17, 2018, our Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering of shares of our common stock on behalf of Keane Investor (the "selling stockholder"), pursuant to which 15,320,015 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. Following completion of the secondary offering, Keane Investor owns approximately
50.7%
of the Company's outstanding common stock. We incurred
$1.2 million
of transaction costs related to the secondary offering in 2017, which were included under selling, general and administrative expenses within the consolidated
and combined statement of operations. We anticipate we will incur approximately
$12.9 million
of transactions costs related to the secondary offering in 2018, primarily related to the payment of underwriting discounts and commissions payable by the Company.
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.
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 70% of all new horizontal wells anticipated to be drilled during 2018 and 2019. 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 in the Permian Basin, Eagle Ford Basin and the Marcellus Shale/Utica Shale, the most prolific and cost-competitive oil and natural gas basins in the United States. According to Spears & Associates, the Permian Basin, Eagle Ford Basin and the Marcellus Shale/Utica Shale are expected to account for 61% of total active rigs in the U.S. during 2018 through 2022 based on forecasted rig counts. These basins have experienced a recovery in activity since the spring of 2016, with an 166% increase in rig count from their combined May 2016 low of 194 to 516 as of
December 31, 2017
.
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 consumption.
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,
|
|
|
2017
|
|
2016
|
|
2015
|
Oil price - WTI
(1)
|
|
$
|
50.88
|
|
|
$
|
43.14
|
|
|
$
|
48.69
|
|
Natural gas price - Henry Hub
(2)
|
|
2.99
|
|
|
2.52
|
|
|
2.63
|
|
(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
|
|
2017
|
|
2016
|
|
2015
|
Oil
|
|
703
|
|
|
408
|
|
|
750
|
|
Natural Gas
|
|
172
|
|
|
100
|
|
|
227
|
|
Other
|
|
1
|
|
|
1
|
|
|
1
|
|
Total
|
|
876
|
|
|
509
|
|
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Drilling Type
|
|
2017
|
|
2016
|
|
2015
|
Horizontal
|
|
736
|
|
|
400
|
|
|
744
|
|
Vertical
|
|
70
|
|
|
60
|
|
|
139
|
|
Directional
|
|
70
|
|
|
49
|
|
|
95
|
|
Total
|
|
876
|
|
|
509
|
|
|
978
|
|
|
|
|
|
|
|
|
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 $60.46 and $3.69, respectively, or approximately 131% and 148%, respectively, as of December 29, 2017, from their lows in early 2016 of $26.19 and $1.49, respectively. The US Energy Information Administration (the “EIA”) projects WTI spot prices to average $56.0 and $57.0 and Henry Hub natural gas prices to average $2.88 and $2.92 in 2018 and 2019, respectively.
With the rebound in commodity prices from their lows in early 2016, drilling and completion activity has continued to increase in 2017, with U.S. active rig count in December 2017 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 has continued to persist. Despite this market volatility, we continue to experience increased demand for our services and believe we are in a more stable demand environment than existed during the above-mentioned market decline.
The EIA projects that the average WTI spot price will increase through 2040 from growing demand and the development of more costly oil resources. Global liquids demand is expected to increase by approximately 1.0 million barrels per day from 2017 to 2018. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) expectations of continued growth in the U.S. gross domestic product; (ii) an increased likelihood that regulatory and legislative initiatives regarding domestic carbon emissions policy will drive greater demand for cleaner burning fuels such as natural gas; (iii) increased acceptance of natural gas as a clean and abundant domestic fuel source that can lead to greater energy independence of the U.S. by reducing its dependence on imported petroleum; (iv) the emergence of low-cost natural gas shale developments; and (v) continued growth in electricity generation from intermittent renewable energy sources, primarily wind and solar energy, for which natural-gas-fired generation is a logical back-up power supply source. Natural gas demand in North America is expected to increase by approximately 6.9 billion cubic feet per day from 2017 to 2018.
Across the industry, customers are executing well designs with increased sand tonnage pumped to help supersize their wells to increase well productivity. This increase in sand tonnage pumped has led to a significant
tightening in the market for sand and sand transportation. Coras Research, LLC forecasts that average proppant pumped per horizontal well will increase 18% to 14.4 million pounds by 2019 from an estimated 12.2 million pounds in 2017.
RESULTS OF OPERATIONS IN
2017
COMPARED TO
2016
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
|
)
|
|
0
|
%
|
Net income (loss)
|
|
$
|
(36,141
|
)
|
|
$
|
(187,087
|
)
|
|
(2
|
%)
|
|
(44
|
%)
|
|
$
|
150,946
|
|
|
(81
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue.
Total revenue is comprised of revenue from Completion Services and Other Services. 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 Trican Well Service, L.P. (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 $1.27 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
$1.25 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, as well as transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to acquisition and integration costs associated with the acquisition of RockPile. 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 the contingent value rights granted by the Company in connection with the acquisition of RockPile.
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 New 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
. The decrease from the net loss in
2016
is due to the changes in revenue and expenses discussed above.
Year Ended
December 31, 2016
Compared with Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Thousands of Dollars)
|
|
|
|
|
|
As a % of Revenue
|
|
Variance
|
Description
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Completion Services
|
|
$
|
410,854
|
|
|
$
|
363,820
|
|
|
98
|
%
|
|
99
|
%
|
|
$
|
47,034
|
|
|
13
|
%
|
Other Services
|
|
9,716
|
|
|
2,337
|
|
|
2
|
%
|
|
1
|
%
|
|
7,379
|
|
|
316
|
%
|
Revenue
|
|
420,570
|
|
|
366,157
|
|
|
100
|
%
|
|
100
|
%
|
|
54,413
|
|
|
15
|
%
|
Completion Services
|
|
401,891
|
|
|
305,036
|
|
|
96
|
%
|
|
83
|
%
|
|
96,855
|
|
|
32
|
%
|
Other Services
|
|
14,451
|
|
|
1,560
|
|
|
3
|
%
|
|
0
|
%
|
|
12,891
|
|
|
826
|
%
|
Cost of services (excluding depreciation and amortization, shown separately)
|
|
416,342
|
|
|
306,596
|
|
|
99
|
%
|
|
84
|
%
|
|
109,746
|
|
|
36
|
%
|
Completion Services
|
|
8,963
|
|
|
58,784
|
|
|
2
|
%
|
|
16
|
%
|
|
(49,821
|
)
|
|
(85
|
%)
|
Other Services
|
|
(4,735
|
)
|
|
777
|
|
|
(1
|
%)
|
|
0
|
%
|
|
(5,512
|
)
|
|
(709
|
%)
|
Gross profit
|
|
4,228
|
|
|
59,561
|
|
|
1
|
%
|
|
16
|
%
|
|
(55,333
|
)
|
|
(93
|
%)
|
Depreciation and amortization
|
|
100,979
|
|
|
69,547
|
|
|
24
|
%
|
|
19
|
%
|
|
31,432
|
|
|
45
|
%
|
Selling, general and administrative expenses
|
|
53,155
|
|
|
26,081
|
|
|
13
|
%
|
|
7
|
%
|
|
27,074
|
|
|
104
|
%
|
(Gain) on disposal of assets
|
|
(387
|
)
|
|
(270
|
)
|
|
0
|
%
|
|
0
|
%
|
|
(117
|
)
|
|
43
|
%
|
Impairment
|
|
185
|
|
|
3,914
|
|
|
0
|
%
|
|
1
|
%
|
|
(3,729
|
)
|
|
(95
|
%)
|
Operating loss
|
|
(149,704
|
)
|
|
(39,711
|
)
|
|
(36
|
%)
|
|
(11
|
%)
|
|
(109,993
|
)
|
|
277
|
%
|
Other income, net
|
|
916
|
|
|
(1,481
|
)
|
|
0
|
%
|
|
0
|
%
|
|
2,397
|
|
|
(162
|
%)
|
Interest expense
|
|
(38,299
|
)
|
|
(23,450
|
)
|
|
(9
|
%)
|
|
(6
|
%)
|
|
(14,849
|
)
|
|
63
|
%
|
Total other expenses
|
|
(37,383
|
)
|
|
(24,931
|
)
|
|
(9
|
%)
|
|
(7
|
%)
|
|
(12,452
|
)
|
|
50
|
%
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
0
|
%
|
|
0
|
%
|
|
—
|
|
|
—
|
%
|
Net loss
|
|
$
|
(187,087
|
)
|
|
$
|
(64,642
|
)
|
|
(44
|
%)
|
|
(18
|
%)
|
|
$
|
(122,445
|
)
|
|
189
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue.
Total revenue is comprised of revenue from Completion Services and Other Services. Revenue in
2016
increased by
$54.4 million
, or
15%
, to
$420.6 million
from
$366.2 million
in
2015
. This change in revenue by reportable segment is discussed below.
Completion Services:
Completion Services segment revenue
increased
by
$47.0 million
, or
13%
, to
$410.9 million
in
2016
from
$363.8 million
in
2015
. This change was primarily attributable to a 100% growth in the number of deployed hydraulic fracturing fleets, as a result of increased utilization of our combined asset base following our acquisition of the Acquired Trican Operations. This increase was offset by a 43% decrease in the revenue per deployed hydraulic fracturing fleet as a result of competitive pricing driven by current market conditions.
Other Services:
Other Services segment revenue increased by
$7.4 million
, or
316%
, to
$9.7 million
in
2016
from
$2.3 million
in
2015
. The change was primarily attributable to revenues from the coiled tubing and cementing divisions acquired in connection with the Acquired Trican Operations in 2016. This increase was offset by a
$2.3 million
reduction in revenues from the drilling division, which was idled in May 2015, as a result of the significant decrease in rig count.
Cost of services.
Cost of services in
2016
increased by
$109.7 million
, or
36%
, to
416.3 million
from
$306.6 million
in
2015
. This increase was driven by higher activity in the Completion Services segment, increased
costs in connection with a prolonged completion timeline driven by customer completion delays and increased maintenance costs associated with higher-pressure jobs. In addition, in 2016, we had one-time costs of $23.9 million, consisting of acquisition and integration costs of approximately $13.9 million associated with the Acquired Trican Operations and commissioning costs of approximately $10.0 million, including labor and maintenance, to deploy idle hydraulic fracturing fleets and coiled tubing units acquired from Trican. These increases were partially offset by our cost saving initiatives as described below. Costs of services as a percentage of total revenue for in 2016 was 99%, which represented an increase of 15% from 2015. Excluding one-time costs of $23.9 million (described above) and $1.4 million in 2016 and 2015, respectively, total costs of services was $392.4 million and $305.2 million in 2016 and 2015, or 93% and 83% of revenue, respectively, an increase as a percentage of revenue of 10%.
Cost of services, as a percentage of total revenue is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Description
|
|
2016
|
|
2015
|
|
% Change
|
Segment cost of services as a percentage of segment revenue:
|
|
|
|
|
|
|
Completion Services
|
|
98
|
%
|
|
84
|
%
|
|
14
|
%
|
Other Services
|
|
149
|
%
|
|
67
|
%
|
|
82
|
%
|
Total cost of services as a percentage of total revenue
|
|
99
|
%
|
|
84
|
%
|
|
15
|
%
|
|
|
|
|
|
|
|
The change in cost of services by reportable segment is further discussed below.
Completion Services:
Completion Services segment cost of services increased by
$96.9 million
, or
32%
, to
$401.9 million
in
2016
from
$305.0 million
in
2015
. As a percentage of segment revenue, total cost of services was
99%
and
84%
, in
2016
and
2015
, respectively, an increase as a percentage of revenue of
15%
. The increase in segment cost of services was driven by higher activity coupled with longer lateral segments and increased proppant volume and increased maintenance costs associated with higher-pressure jobs. In addition, in 2016, we had one-time costs of $22.8 million, consisting of acquisition and integration costs of approximately $13.5 million associated with the Acquired Trican Operations and commissioning costs of approximately $9.3 million, including labor and maintenance, to deploy idle hydraulic fracturing fleets acquired from Trican. These increases were partially offset by cost saving initiatives to drive down supply and material costs through negotiated price concessions from vendors, management of labor costs and our fixed cost structure through facility consolidation and other cost saving initiatives related to shipping and equipment costs. Excluding one-time costs of $22.8 million and $0.9 million in 2016 and 2015, respectively, Completion Services segment costs of services was $379.1 million and $304.2 million in 2016 and 2015, or 92% and 84% of segment revenue, respectively, an increase as a percentage of revenue of
8%.
Other Services:
Other Services segment cost of services increased by
$12.9 million
, or
826%
, to
$14.5 million
in
2016
from
$1.6 million
in
2015
. The increase was primarily attributable to cost of services in connection with the deployment of, and increased headcount related to, our coiled tubing and cementing operations acquired from Trican, which included one-time integration and commissioning costs of $1.1 million. This increase was partially offset by the $0.6 million decrease of cost of services related to the idling of our drilling services in May 2015. We idled our cementing services and coiled tubing division in April 2016 and December 2016, respectively. All associated overhead has been re-allocated to the Completion Services segment or eliminated. Excluding one-time costs of $1.1 million in 2016 described above, and $0.5 million in 2015, Other Services segment costs of services was $13.3 million and $1.1 million in 2016 and 2015, or 137% and 46% of segment revenue, respectively, which is an increase as a percentage of segment revenue of 91%. This increase was a result of unfavorable absorption of fixed costs on low revenue as coiled tubing was a new division acquired as part of the Acquired Trican Operations.
Depreciation and amortization.
Depreciation and amortization expense increased by
$31.4 million
, or
45%
, to
$101.0 million
in
2016
from
$69.5 million
in
2015
. This increase was primarily attributable to additional
depreciation and amortization expense of $42.1 million related to the property and equipment included in the Acquired Trican Operations. This increase was partially offset by a decrease in depreciation expense of Keane’s existing equipment due to some assets becoming fully depreciated and reduced capital expenditures in 2016.
Selling, general and administrative expense.
SG&A expense increased by
$27.1 million
, or
104%
, to
$53.2 million
in
2016
from
$26.1 million
in
2015
. The increase in SG&A expense is related to increased headcount, property taxes and insurance associated with a larger asset base as a result of the Acquired Trican Operations. SG&A as a percentage of total revenue was 13% in 2016 compared with 7% in 2015. Total one-time charges were $26.9 million in 2016 and $3.8 million in 2015, which were primarily related to the acquisition and integration of the Acquired Trican Operations and professional fees incurred in connection with the IPO. These costs were partially offset by a decrease in SG&A expenses of our Canadian subsidiary due to $2.5 million of wind-down costs incurred during 2015, which were no longer recurring during 2016. Excluding one-time costs of $26.9 million and $3.8 million described above, SG&A expense was $26.3 million and $22.3 million in 2016 and 2015, respectively, which represents an increase of 18% primarily driven by the acquisition of the Acquired Trican Operations.
Gain on disposal of assets.
Gain on disposal of assets, in
2016
increased by
$0.1 million
, or
43%
, to a gain of
$0.4 million
in
2016
from gain of
$0.3 million
in
2015
.
Impairment.
In
2016
, we recognized impairment expense of
$0.2 million
as a result of our non-compete agreement relating to the drilling business within our Other Services segment, due to the fact that this non-compete was no longer expected to generate any future cash flows. In
2015
, we recognized impairment expense of $3.9 million, which was comprised of a $2.4 million impairment on indefinite-lived intangible assets in our Completion Services segment as a result of the loss of certain customer relationships related to our acquisition of Ultra Tech Frac Services, LLC (the “UTFS Acquisition”), a $1.2 million impairment on the trade name of our drilling business in our Other Services segment and a $0.3 million impairment on our drilling rig fleet in our Other Services segment.
Other income (expense), net.
Other income (expense), net, in
2016
increased by
$2.4 million
, or
162%
, to income of
$0.9 million
in
2016
from expense of
$1.5 million
in
2015
. This increase in was primarily driven by an expense recognized in 2015 related to the forfeiture of a $1.7 million deposit due to the cancellation of a hydraulic fracturing equipment purchase order, which was no longer recurring during 2016.
Interest expense, net.
Interest expense, net of interest income, increased by
$14.8 million
, or
63%
, to
$38.3 million
in
2016
from
$23.5 million
in
2015
. This increase was primarily attributable to a $4.9 million increase in interest expense on our Senior Secured Notes due to an increase in the interest rate in accordance with the modified terms of the agreement governing the Senior Secured Notes; $7.0 million interest expense incurred on the 2016 Term Loan Facility in connection with the Trican acquisition; $1.8 million of unrealized and realized losses related to an interest rate swap derivative with all changes in its fair value being recognized within other expenses starting from March 2016, which is the date when hedge accounting was discontinued; and a $3.1 million increase in amortization of debt issuance costs and higher commitment fees incurred on the 2016 ABL Facility. These increases were partially offset by $1.7 million decrease in interest expense as a result of the forgiveness of interest on a $20 million related party loan with KG Fracing Acquisition Corp. and S&K Management Services, LLC, on March 16, 2016.
Net loss.
Net loss was
$187.1 million
in
2016
, as compared with net loss of
$64.6 million
in
2015
. This increase in net loss 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
)
to the consolidated and combined financial statements.
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, 2017
, we had
$96.1 million
of cash and
$278.5 million
of debt, compared to
$48.9 million
of cash and
$272.7 million
of debt as of
December 31, 2016
. In
2017
,
2016
and
2015
, we had capital expenditures of
$189.6 million
,
$23.5 million
and
$27.2 million
, respectively, exclusive of the cash payment attributable to the acquisition of RockPile on July 3, 2017 of
$116.6 million
or the Acquired Trican Operations on March 16, 2016 of $203.9 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Net cash provided by (used) in operating activities
|
|
$
|
79,691
|
|
|
$
|
(54,054
|
)
|
|
$
|
37,521
|
|
Net cash used in investing activities
|
|
$
|
(250,776
|
)
|
|
$
|
(227,161
|
)
|
|
$
|
(26,038
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
218,122
|
|
|
$
|
276,633
|
|
|
$
|
(10,518
|
)
|
|
|
|
|
|
|
|
Significant sources and uses of cash during
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" to the consolidated and combined financial statements.
|
|
|
–
|
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"
to the consolidated and combined financial statements.
|
|
|
–
|
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" to the consolidated and combined financial statements.
|
|
|
–
|
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. See Note
(
8
)
Long-Term Debt
of
Part II, "
Item 8
.
Financial Statements and Supplementary Data" to the consolidated and combined financial statements.
|
|
|
–
|
The 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. See Note
(
8
) (
Long-Term Debt
)
of
Part II, "
Item 8.
Financial Statements and Supplementary Data" to the consolidated and combined financial statements.
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
twelve months 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. See Note
(
8
) (
Long-Term Debt
)
of
Part II, "
Item 8.
Financial Statements and Supplementary Data" to the consolidated and combined financial statements.
|
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 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.
|
Significant sources and uses of cash during the
twelve months ended December 31, 2015
Sources of cash:
|
|
•
|
Operating activities: Net cash provided by operating activities of
$37.5 million
was primarily attributable to positive operating results generated by our Completion Services segment, as well as cash generated by working capital changes.
|
|
|
•
|
Investing activities: Total net proceeds of $1.3 million primarily related to the sale of assets from our idled drilling division within our Other Services segment.
|
Uses of cash:
|
|
•
|
Investing activities: Net cash used for investing activities of $27.2 million was primarily related to final payments upon delivery for our newbuild fleet, coupled with maintenance capital expenditures to support our active fleets.
|
|
|
•
|
Financing activities: Net cash used in financing activities was primarily related to repay and service our debt facilities, including capital leases but excluding interest, of $6.9 million and a final contingent consideration payment of $2.5 million made in February 2015 in connection with the acquisition of Ultra Tech Frac Services, LLC.
|
Future sources and use of cash
Capital expenditures for 2018 will be related to maintenance capital spend to support our existing active fleets and the completion of the three newbuild hydraulic fracturing fleets of approximately 150,000 hydraulic horsepower and three wireline spreads, which are anticipated to be delivered in the second and third quarters of 2018. We anticipate our capital expenditures will be funded by cash flows from operations. We currently estimate that our capital expenditures for 2018 will range between $230.0 million and $240.0 million.
Debt service for the twelve months period ended December 31, 2018 is projected to be $31.5 million. We anticipate our debt service will be funded by cash flows from operations.
On February 26, 2018, we announced that our Board of Directors has authorized a 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 duration of the stock buy-back program will be 12 months. 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.
Other factors affecting liquidity
Financial position in current market.
As of
December 31, 2017
, we had $
96.1 million
of cash and a total of
$199.7 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, contingent liabilities and stock repurchase.
Guarantee agreements.
In the normal course of business, we have agreements with a financial institution under which
$2.0 million
of letters of credit were outstanding as of
December 31, 2017
.
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, as well as unsettled political conditions. 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, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
Contractual obligations
|
|
Total
|
|
2018
|
|
2019-2021
|
|
2022-2024
|
|
2025+
|
Long-term debt, including current portion
(1)
|
|
$
|
283,200
|
|
|
$
|
2,850
|
|
|
$
|
8,550
|
|
|
$
|
271,800
|
|
|
$
|
—
|
|
Estimated interest payments
(2)
|
|
108,841
|
|
|
23,559
|
|
|
70,726
|
|
|
14,556
|
|
|
—
|
|
Capital lease obligations
(3)
|
|
8,518
|
|
|
3,633
|
|
|
4,885
|
|
|
—
|
|
|
—
|
|
Operating lease obligations
(4)
|
|
47,572
|
|
|
16,173
|
|
|
26,608
|
|
|
4,791
|
|
|
—
|
|
Purchase commitments
(5)
|
|
211,957
|
|
|
133,070
|
|
|
78,887
|
|
|
—
|
|
|
—
|
|
Equity method investment
|
|
1,138
|
|
|
1,138
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Legal contingency
|
|
4,250
|
|
|
4,250
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
665,476
|
|
|
$
|
184,673
|
|
|
$
|
189,656
|
|
|
$
|
291,147
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Long-term debt excludes interest payments on each obligation and represents our obligations under our New Term Loan Facility. In addition, these amounts exclude
$8.1
million of unamortized debt discount and debt issuance costs.
|
|
|
(2)
|
Estimated interest payments are based on debt balances outstanding as of
December 31, 2017
and include interest related to the New 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 with CIT Finance LLC and light weight vehicles with ARI Financial Services Inc and includes interest payments.
|
|
|
(4)
|
Operating lease obligations are related to our real estate, rail cars and light duty vehicles with ARI Financial Services Inc, Enterprise FM Trust, PNC Bank, Anderson Rail Group, CIT Bank, Compass Rail VIII, SMBC Rail Services and Trinity Industries Leasing Company.
|
|
|
(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.
|
Principal Debt Agreements
2017 ABL Facility
On February 17, 2017, Keane Group Holdings, LLC, Keane Frac, LP and KS Drilling, LLC (together with Keane Group Holdings, LLC, Keane Frac, LP and each other person that becomes an ABL Borrower under the 2017 ABL Facility (as defined herein) in accordance with the terms thereof, collectively, the “ABL Borrowers”) and the ABL Guarantors (as defined below) entered into an asset-based revolving credit agreement (the “February 2017 ABL Facility”) with each lender from time to time party thereto (the “2017 ABL Lenders”) and Bank of America, N.A., as administrative agent and collateral agent. The following is a summary of the material provisions of the 2017 ABL Facility. It does not include all of the provisions of the 2017 ABL Facility, does not purport to be complete and is qualified in its entirety by reference to the 2017 ABL Facility described.
Structure.
As of September 30, 2017, the February 2017 ABL Facility provided for a $150.0 million revolving credit facility (with a $20.0 million sub-facility for letters of credit), subject to a borrowing base (as described below). On December 22, 2017, we entered into an amended and restated February 2017 ABL Facility (the “Amended 2017 ABL Facility and, together with the February 2017 ABL Facility, the “2017 ABL Facility”). The Amended 2017 ABL Facility among other things, increased the total amount of aggregate commitments by an additional $150.0 million. As a result, the 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 (as described below). 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.
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.
Borrowing Base
. Pursuant to the terms of the 2017 ABL Facility, the amount of loans and letters of credit available under the 2017 ABL Facility is limited to, at any time of calculation, an amount equal to (a) 85% multiplied by the amount of eligible billed accounts; plus (b) 80% multiplied by the amount of eligible unbilled accounts; provided, that the amount attributable to clause (b) may not exceed 20% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (c)); plus (c) the lesser of (i) 70% of the cost and (ii) 85% of the appraised value of eligible inventory and eligible frac iron; provided, that the amount attributable to clause (c) may not exceed 15% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (b)); minus (d) the then applicable amount of all reserves.
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 London Interbank Offered Rate (“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 defined herein) 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.
Guarantees
. Subject to certain exceptions as set forth in the definitive documentation for the 2017 ABL Facility, the amounts outstanding under the 2017 ABL Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac GP, LLC, each ABL Borrower (other than with respect to its own obligations) and each subsidiary of KGI that will be required to execute and deliver a facility guaranty after February 17, 2017 (collectively, the “ABL Guarantors”).
Security
. Subject to certain exceptions as set forth in the definitive documentation for the 2017 ABL Facility, the obligations under the 2017 ABL Facility are (a) secured by a first-priority security interest in and lien on substantially all of the accounts receivable, inventory and frac iron equipment; certain other assets and property thereto, including chattel paper, instruments, certain investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the Company and its subsidiaries that are ABL Borrowers or ABL Guarantors under the 2017 ABL Facility (collectively, the “2017 ABL Facility Priority Collateral”) and (b) subject to certain exceptions, secured on a second-priority security interest in and lien on substantially all of the assets of KGI and the ABL Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral.
Fees
. Certain customary fees are payable to the lenders and the agents under the 2017 ABL Facility.
Restricted Payment Covenant
. The 2017 ABL Facility includes a covenant restricting our ability to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2017 ABL Facility provides that KGI may make cash dividends and other restricted payments in an aggregate amount not to exceed $25.0 million in any four consecutive fiscal quarter period, and to the extent Consolidated EBITDA in any four consecutive fiscal quarter period equals or exceeds $350.0 million, such amount is increased to $50.0 million for so long as Consolidated EBITDA continues to equal or exceed such threshold. Additionally, KGI may make additional cash dividends and other restricted payments to the extent no event of default exists or results therefrom and either (x) excess availability under the 2017 ABL Facility equals or exceeds the greater of (i) 17.5% of the lesser of the
aggregate commitments and the borrowing base and (ii) $30.0 million, before and after the making of any cash dividend or other restricted payment, and on a pro forma basis for the preceding 45 calendar day period, and the Consolidated Fixed Charge Coverage Ratio (as defined herein) is at least 1.0 to 1.0, or (y) excess availability equals or exceeds the greater of (i) 20% of the lesser of the aggregate commitments and the borrowing base and (ii) $35.0 million, before and after the making of any cash dividend or other restricted payment, and on a pro forma basis for the preceding 45 calendar day period.
“Consolidated EBITDA”, generally, is defined as net income plus reductions to net income attributable to interest, taxes, depreciation and amortization and certain other non-cash charges, including, subject to certain limitations, the addition of run-rate cost savings, operating expense reductions, restructuring charges and expenses and cost saving synergies, and acquisition, integration and divestiture costs and fleet commissioning costs.
“Consolidated Fixed Charge Coverage Ratio”, generally is defined as the ratio of (a) Consolidated EBITDA for the applicable period, minus certain capital expenditures and income taxes paid in cash during such period to (b) interest charges paid or required to be paid in cash, plus scheduled principal payments on certain indebtedness required to be made in cash, plus certain regularly scheduled restricted payments paid in cash, plus restricted payments made using the general restricted payments basket during such period.
Affirmative and Negative Covenants
. The 2017 ABL Facility contains various other affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2017 ABL Facility).
Financial Covenants
. Pursuant to the terms of the 2017 ABL Facility, the 2017 ABL Facility requires that the consolidated fixed charge coverage ratio not be lower than 1.0:1.0 as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered The Consolidated Fixed Charge Coverage Ratio will only be tested upon the occurrence of an event or default or if excess availability (or liquidity if no loan or letter of credit, other than any letter of credit that has been cash collateralized, is outstanding) is less than the greater of (i) 10% of the loan cap and (ii) $20.0 million at any time.
Events of Default
. The 2017 ABL Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2017 ABL Facility).
New Term Loan Facility
On March 15, 2017, Keane Group, Keane Frac, LP and KS Drilling, LLC (together with Keane Group, Keane Frac, LP and each other person that becomes a New Term Loan Borrower under the New Term Loan Facility in accordance with the terms thereof, collectively, the “New Term Loan Borrowers”) and the New Term Loan Guarantors (as defined below) entered into a term loan facility (the “2017 Term Loan Facility”) with each lender from time to time party thereto and Owl Rock, as administrative agent and collateral agent. On the RockPile Closing Date, the New Term Loan Borrowers and the New Term Loan Guarantors (as defined below) entered in an incremental term loan facility (the “Incremental Term Loan Facility” and, together with the 2017 Term Loan Facility, collectively, the “New Term Loan Facility”) with each of the incremental lenders party thereto, each of the existing lenders party thereto and Owl Rock, as administrative agent and collateral agent. The following is a summary of the material provisions of the New Term Loan Facility. It does not include all of the provisions of the New Term Loan Facility, does not purport to be complete and is qualified in its entirety by reference to the New Term Loan Facility described.
Structure.
The 2017 Term Loan Facility provides for a $150.0 million initial term loan facility and the Incremental Term Loan Facility provides for a $135.0 million incremental term loan facility (collectively, the “Term Loans”). In addition, subject to certain customary conditions, as of July 3, 2017, the New Term Loan Facility allows for additional incremental term loans in an amount equal to the sum of (a) $50.0 million (less certain amounts in connection with permitted notes and subordinated indebtedness), plus (b) an unlimited amount, subject to, in the case of subclause (b), immediately after giving effect thereto, the total net leverage ratio being less than 1.75:1.00.
Maturity.
August 18, 2022 or, if earlier, the stated maturity date of any other term loans or term commitments.
Amortization.
The loans under the 2017 Term Loan Facility amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding, commencing with June 30, 2017. The loans under the Incremental Term Loan Facility amortize in quarterly installments equal to (a) the aggregate original principal amount of the loans under the Incremental Term Loan Facility, times (b) the ratio of (x) the amount of all loans under the 2017 Term Loan Facility that are being repaid on such date to (y) the total aggregate principal amount of all loans under the 2017 Term Loan Facility that remained outstanding as of the RockPile Closing Date, but giving pro forma effect to the amortization payment to be made on June 30, 2017, commencing with September 30, 2017.
Interest.
The Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 6.25%, or (b) the adjusted LIBOR rate for such interest period (subject to a 1.00% floor) plus 7.25%. Following an event of default, the Term Loans bear interest at the rate otherwise applicable to such Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default.
Prepayments
. The New 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 New 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 New Term Loan Agreement) and (c) 50% (subject to step-downs to zero, in accordance with the Total Net Leverage Ratio (as defined below) of excess cash flow minus certain voluntary prepayments made under the New Term Loan Facility and all 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 New Term Loan Facility, the amounts outstanding under the New Term Loan Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac GP, LLC, each New Term Loan Borrower (other than with respect to its own obligations) and each subsidiary of KGI that will be required to execute and deliver a facility guaranty after March 15, 2017 (collectively, the “New Term Loan Guarantors”).
Security.
Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the obligations under the New Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of the New Term Loan Borrowers and the New Term Loan Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral and (b) a second-priority security interest in and lien on the 2017 ABL Facility Priority Collateral.
Fees.
Certain customary fees are payable to the lenders and the agents under the New Term Loan Facility.
Restricted Payment Covenant.
The New Term Loan Facility includes a covenant restricting our ability to pay dividends and make certain other restricted payments, subject to certain exceptions. The New Term Loan Facility provides that KGI may make cash dividends and other restricted payments in an aggregate amount not to exceed $25.0 million (subject to reduction based on certain outstanding investments and prepayments of indebtedness) during the term of the facility. If the pro forma Total Net Leverage Ratio (as defined below) is no greater than 3.0 to 1.0 after giving effect to such restricted payment, we can also pay dividends or make other restricted payments up to the amount of the Cumulative Credit (as defined below). Both of these exceptions are also subject to the requirements that there is no event of default and that we have unrestricted cash plus loan availability under the 2017 ABL Facility of at least $35.0 million after the making of any cash dividend or other restricted payment.
“Total Net Leverage Ratio”, generally, is defined as the ratio of (a) the aggregate principal amount of indebtedness in an amount that would be reflected on our balance sheet in accordance with GAAP (but hedging
exposure is included only for amounts exceeding $5.0 million) minus cash and cash equivalents not to exceed $100.0 million to (b) Consolidated EBITDA (calculated in substantially the same manner as in the 2017 ABL Facility).
“Cumulative Credit”, generally, is defined as an amount equal to the excess cash flow not required to repay the Term Loans plus other customary additions reduced by the amount of Cumulative Credit used prior to such time. However, for so long as the Total Net Leverage Ratio is less than 1.75:1:00 after giving effect to any proposed restricted payments, the amount of Cumulative Credit is unlimited.
Affirmative and Negative Covenants.
The New 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 New Term Loan Facility).
Financial Covenant.
The New Term Loan Facility provides that, as of the last day of any month, the sum of (a) unrestricted cash and cash equivalents of the New Term Loan Borrowers and the New Term Loan Guarantors that are deposited in blocked accounts (to the extent required to be subject to blocked account agreements under the New Term Loan Facility) and (b) the aggregate principal amount that is available for borrowing under the 2017 ABL Facility, may not be less than $35.0 million.
Events of Default.
The New Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the New Term Loan Facility).
Off-Balance Sheet Arrangements
Except for our normal operating leases, 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 (each, a “Family Member”) 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.
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" and
Item 13.
"Certain Relationships and Related-Party Transactions and Director Independence."
Critical Accounting Policies and Estimates
The preparation of our consolidated and combined financial statements and related notes to the consolidated and combined financial statements 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 consolidation 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 on our recently completed acquisitions during the years ended
December 31, 2017
and
2016
.
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 where 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 for the years ended
December 31, 2017
,
2016
and
2015
.
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)
(j)
Goodwill and Indefinite-Lived Intangible Assets
and (2)
(k)
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, 2017
,
2016
and
2015
.
Income Taxes
We account for income taxes in accordance with 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 the Company’s 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 will 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, new tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act was signed into law. We evaluated the provisions of the Tax Cuts and Jobs Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on the consolidated 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 Cuts and Jobs Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Cuts and Job Act are not expected to have an adverse impact on our consolidated financial statements. We will continue to analyze the impacts of the Tax Cuts and Jobs Act on the Company and refine our estimates in 2018.
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 Keane's ongoing operating performance, and thereby facilitates review of Keane's operating performance on a period-to-period basis. Other companies may have different capital structures, and comparability to Keane's 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 Keane's 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 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
|
|
Report of Independent Registered Public Accounting Firm
|
|
Consolidated and Combined Balance Sheets
|
|
Consolidated and Combined Statements of Operations and Comprehensive (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, 2017 and 2016, 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, 2017, 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, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
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 Public Company Accounting Oversight Board (United States) (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 28, 2018
KEANE GROUP, INC. AND SUBSIDIARIES
Consolidated and Combined Balance Sheets
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
96,120
|
|
|
$
|
48,920
|
|
|
Trade and other accounts receivable, net
|
|
238,018
|
|
|
66,277
|
|
|
Inventories, net
|
|
33,437
|
|
|
15,891
|
|
|
Prepaid and other current assets
|
|
8,519
|
|
|
14,618
|
|
|
Total current assets
|
|
376,094
|
|
|
145,706
|
|
|
Property and equipment, net
|
|
468,000
|
|
|
294,209
|
|
|
Goodwill
|
|
134,967
|
|
|
50,478
|
|
|
Intangible assets
|
|
57,280
|
|
|
44,015
|
|
|
Other noncurrent assets
|
|
6,775
|
|
|
2,532
|
|
|
Total assets
|
|
$
|
1,043,116
|
|
|
$
|
536,940
|
|
|
|
|
|
|
|
|
Liabilities and Owners' Equity
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
92,348
|
|
|
$
|
48,484
|
|
|
Accrued expenses
|
|
135,175
|
|
|
42,892
|
|
|
Current maturities of capital lease obligations
|
|
3,097
|
|
|
2,633
|
|
|
Current maturities of long-term debt
|
|
1,339
|
|
|
2,512
|
|
|
Stock based compensation - current
|
|
4,281
|
|
|
—
|
|
|
Deferred revenue
|
|
5,000
|
|
|
—
|
|
|
Other current liabilities
|
|
914
|
|
|
3,171
|
|
|
Total current liabilities
|
|
242,154
|
|
|
99,692
|
|
|
Capital lease obligations, less current maturities
|
|
4,796
|
|
|
5,442
|
|
|
Long-term debt, net of unamortized deferred financing costs and unamortized debt discount, less current maturities
|
|
273,715
|
|
|
267,238
|
|
|
Stock based compensation - noncurrent
|
|
4,281
|
|
|
—
|
|
|
Other noncurrent liabilities
|
|
5,078
|
|
|
2,316
|
|
|
Total noncurrent liabilities
|
|
287,870
|
|
|
274,996
|
|
|
Total liabilities
|
|
530,024
|
|
|
374,688
|
|
|
|
|
|
|
|
|
Owners’ equity
|
|
|
|
|
|
Members' equity
|
|
—
|
|
|
453,810
|
|
|
Common stock, par value $0.01 per share (authorized 500,000 shares, issued 111,831 shares)
|
|
1,118
|
|
|
—
|
|
|
Paid-in capital in excess of par value
|
|
541,074
|
|
|
—
|
|
|
Retained deficit
|
|
(27,372
|
)
|
|
(288,771
|
)
|
|
Accumulated other comprehensive (loss)
|
|
(1,728
|
)
|
|
(2,787
|
)
|
|
Total owners’ equity
|
|
513,092
|
|
|
162,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners’ equity
|
|
$
|
1,043,116
|
|
|
$
|
536,940
|
|
|
|
|
|
|
|
|
See accompanying notes to 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,
|
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
|
$
|
1,542,081
|
|
|
$
|
420,570
|
|
|
$
|
366,157
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
Cost of services
(1)
|
|
1,282,561
|
|
|
416,342
|
|
|
306,596
|
|
Depreciation and amortization
|
|
159,280
|
|
|
100,979
|
|
|
69,547
|
|
Selling, general and administrative expenses
|
|
93,526
|
|
|
53,155
|
|
|
26,081
|
|
Gain on disposal of assets
|
|
(2,555
|
)
|
|
(387
|
)
|
|
(270
|
)
|
Impairment
|
|
—
|
|
|
185
|
|
|
3,914
|
|
Total operating costs and expenses
|
|
1,532,812
|
|
|
570,274
|
|
|
405,868
|
|
Operating income (loss)
|
|
9,269
|
|
|
(149,704
|
)
|
|
(39,711
|
)
|
Other income (expense):
|
|
|
|
|
|
|
Other income (expense), net
|
|
13,963
|
|
|
916
|
|
|
(1,481
|
)
|
Interest expense
(2)
|
|
(59,223
|
)
|
|
(38,299
|
)
|
|
(23,450
|
)
|
Total other expenses
|
|
(45,260
|
)
|
|
(37,383
|
)
|
|
(24,931
|
)
|
Loss before income taxes
|
|
(35,991
|
)
|
|
(187,087
|
)
|
|
(64,642
|
)
|
Income tax expense
(3)
|
|
(150
|
)
|
|
—
|
|
|
—
|
|
Net loss
|
|
(36,141
|
)
|
|
(187,087
|
)
|
|
(64,642
|
)
|
Net loss attributable to predecessor
|
|
(7,918
|
)
|
|
—
|
|
|
—
|
|
Net loss attributable to Keane Group, Inc.
|
|
(28,223
|
)
|
|
(187,087
|
)
|
|
(64,642
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
96
|
|
|
22
|
|
|
(741
|
)
|
Hedging activities
|
|
791
|
|
|
1,857
|
|
|
(1,187
|
)
|
Total comprehensive loss
|
|
$
|
(35,254
|
)
|
|
$
|
(185,208
|
)
|
|
$
|
(66,570
|
)
|
|
|
|
|
|
|
|
Net loss per share
(4)
:
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(2.14
|
)
|
|
$
|
(0.74
|
)
|
Diluted net loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(2.14
|
)
|
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: basic
(3)
|
|
106,321
|
|
|
87,313
|
|
|
87,313
|
|
Weighted-average shares outstanding: diluted
(3)
|
|
106,321
|
|
|
87,313
|
|
|
87,313
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cost of services during the years ended
December 31, 2017
, 2016, and 2015 excludes depreciation of
$150.6 million
,
$94.7 million
, and
$64.3 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, 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 (as defined herein) of its 2016 ABL Facility (as defined herein) and the Company's early debt extinguishment of its 2016 Term Loan Facility (as defined herein) 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 and the provisions for Texas margin tax and Canadian federal tax for 2015.
|
|
(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.
|
See accompanying notes to 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, 2014
|
|
$
|
186,420
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(37,042
|
)
|
|
$
|
(2,738
|
)
|
|
$
|
146,640
|
|
Distributions
|
|
(222
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(222
|
)
|
Unit awards amortization
|
|
312
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
312
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,928
|
)
|
|
(1,928
|
)
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(64,642
|
)
|
|
—
|
|
|
(64,642
|
)
|
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
|
|
Equity-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
|
|
See accompanying notes to consolidated and combined financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated and Combined Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(36,141
|
)
|
|
$
|
(187,087
|
)
|
|
$
|
(64,642
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities
|
|
|
|
|
|
|
Depreciation and amortization
|
|
159,280
|
|
|
100,979
|
|
|
69,547
|
|
Amortization of deferred financing fees
|
|
5,241
|
|
|
4,152
|
|
|
2,112
|
|
Loss on debt extinguishment, including prepayment premiums
|
|
31,084
|
|
|
—
|
|
|
—
|
|
Gain on disposal of assets
|
|
(2,555
|
)
|
|
(387
|
)
|
|
(270
|
)
|
Unrealized loss on de-designation of a derivative
|
|
963
|
|
|
3,038
|
|
|
—
|
|
Accrued interest on loan—related party
|
|
—
|
|
|
471
|
|
|
2,174
|
|
Loss on impairment of assets
|
|
—
|
|
|
185
|
|
|
3,914
|
|
Equity-based compensation
|
|
10,578
|
|
|
1,985
|
|
|
312
|
|
Other non-cash (expense)
|
|
(322
|
)
|
|
—
|
|
|
—
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Decrease (increase) in trade and other accounts receivable, net
|
|
(113,047
|
)
|
|
(13,027
|
)
|
|
36,933
|
|
Decrease (increase) in inventories
|
|
(15,475
|
)
|
|
8,485
|
|
|
11,841
|
|
Decrease (increase) in prepaid and other current assets
|
|
20,294
|
|
|
(5,994
|
)
|
|
105
|
|
Decrease (increase) in other assets
|
|
(336
|
)
|
|
32
|
|
|
1,047
|
|
Increase (decrease) in accounts payable
|
|
(141
|
)
|
|
14,214
|
|
|
(12,650
|
)
|
Increase (decrease) in accrued expenses
|
|
41,446
|
|
|
19,735
|
|
|
(13,185
|
)
|
Increase (decrease) in other liabilities
|
|
(21,178
|
)
|
|
(835
|
)
|
|
283
|
|
Net cash provided by (used) in operating activities
|
|
79,691
|
|
|
(54,054
|
)
|
|
37,521
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Acquisition of business
|
|
(116,576
|
)
|
|
(203,900
|
)
|
|
—
|
|
Purchase of property and equipment
|
|
(141,340
|
)
|
|
(23,126
|
)
|
|
(26,086
|
)
|
Advances of deposit on equipment
|
|
(23,096
|
)
|
|
(420
|
)
|
|
(1,114
|
)
|
Implementation of software
|
|
(687
|
)
|
|
(453
|
)
|
|
(69
|
)
|
Proceeds from sale of assets
|
|
30,565
|
|
|
711
|
|
|
1,278
|
|
Payments for leasehold improvements
|
|
(157
|
)
|
|
—
|
|
|
(46
|
)
|
Proceeds from insurance recoveries
|
|
515
|
|
|
22
|
|
|
—
|
|
Payments received (advances) on note receivable
|
|
—
|
|
|
5
|
|
|
(1
|
)
|
Net cash used in investing activities
|
|
(250,776
|
)
|
|
(227,161
|
)
|
|
(26,038
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
255,494
|
|
|
—
|
|
|
—
|
|
Proceeds from the secured notes and term loan facility
|
|
285,000
|
|
|
100,000
|
|
|
—
|
|
Payments on the secured notes and term loan facility
|
|
(289,902
|
)
|
|
(5,647
|
)
|
|
(5,000
|
)
|
Payments on capital leases
|
|
(2,861
|
)
|
|
(2,668
|
)
|
|
(1,661
|
)
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated and Combined Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment premiums on early debt extinguishment
|
|
(15,817
|
)
|
|
—
|
|
|
—
|
|
Payment of debt issuance costs
|
|
(13,792
|
)
|
|
(15,052
|
)
|
|
(1,135
|
)
|
Payments on contingent consideration liability
|
|
—
|
|
|
—
|
|
|
(2,500
|
)
|
Contributions (distributions)
|
|
—
|
|
|
200,000
|
|
|
(222
|
)
|
Net cash provided by (used in) financing activities
|
|
218,122
|
|
|
276,633
|
|
|
(10,518
|
)
|
Non-cash effect of foreign translation adjustments
|
|
163
|
|
|
80
|
|
|
250
|
|
Net increase in cash, cash equivalents and restricted cash
|
|
47,200
|
|
|
(4,502
|
)
|
|
1,215
|
|
Cash, cash equivalents and restricted cash, beginning
|
|
48,920
|
|
|
53,422
|
|
|
52,207
|
|
Cash, cash equivalents and restricted cash, ending
|
|
$
|
96,120
|
|
|
$
|
48,920
|
|
|
$
|
53,422
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
30,104
|
|
|
$
|
25,516
|
|
|
$
|
19,157
|
|
Income taxes
|
|
—
|
|
|
—
|
|
|
220
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Non-cash purchases of property and equipment
|
|
$
|
25,193
|
|
|
$
|
9,364
|
|
|
$
|
3,138
|
|
Non-cash forgiveness of related party loan
|
|
—
|
|
|
22,646
|
|
|
—
|
|
Non-cash issuance of acquisition shares
|
|
130,290
|
|
|
—
|
|
|
—
|
|
Non-cash issuance of Class A and C Units
|
|
—
|
|
|
42,669
|
|
|
—
|
|
Non-cash reduction in capital lease obligations
|
|
20
|
|
|
1,281
|
|
|
—
|
|
Non-cash additions to capital lease obligations
|
|
2,739
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
See accompanying notes to 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.
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, 2017
, the results of its operations and its cash flows for the years ended
December 31, 2017
,
2016
, and
2015
. Such adjustments are of a normal recurring nature.
The consolidated and combined financial statements include the accounts of Keane Group, Inc. and Keane Group, each together with their consolidated subsidiaries.
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.
Earnings per share and weighted-average shares outstanding for the years ended
December 31, 2017
,
2016
, and
2015
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
,
2016
, and
2015
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.
(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.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(b) Organizational Transactions
In connection with the IPO, the Company completed a series of organizational transactions (the “Organizational Transactions”), including the following:
|
|
•
|
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”);
|
|
|
•
|
Keane Investor contributed all of its equity interests in Keane Group to the Company in exchange for common stock of the Company; and
|
|
|
•
|
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 is 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.
(
2
)
Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain amounts reported in the consolidated financial statements. Actual results could differ from those 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 a consideration in the acquisition, unit-based incentive plan awards and derivatives.
(b) Principles of Consolidation
The accompanying consolidated and combined financial statements have been prepared in accordance with U.S. GAAP and 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, KS Drilling, LLC and Keane Completions CN Corp.
All intercompany transactions and balances have been eliminated.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(c) Business Combinations
Business combinations are accounted for using the acquisition method of accounting in accordance with ASC 805, “Business Combinations”. 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. 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. Operating results of an acquired business are included in our results of operations from the date of acquisition. Refer to Note
(3)
Acquisition
s
for discussion of the acquisitions completed during 2017 and 2016.
(d) 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 qualifying asset sale proceeds and insurance recoveries, excluding asset sales related to certain permitted dispositions, of more than
$10.0 million
, under the New 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 New 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 New Term Loan Facility or the 2017 ABL Facility.
The Company did
no
t have any qualifying asset sale proceeds that exceeded the dollar thresholds described above for the year ended
December 31, 2017
. The Company had a qualifying insurance recovery of
$0.5 million
under the New Term Loan Facility for the year ended December 31,2017. The Company had a qualifying insurance recover of
$0.02 million
under the 2016 Term Loan Facility for the year ended
December 31, 2016
and had qualifying asset sale proceeds of
$0.2 million
for the year ended
December 31, 2015
. The Company did
no
t have any restricted cash as of
December 31, 2017
and
2016
.
(e) 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 statements of cash flows. The Company analyzes the need for an allowance for doubtful accounts for estimated losses related to 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 amount 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
$235.8 million
and
$65.4 million
at
December 31, 2017
and
December 31, 2016
, respectively. As of
December 31, 2017
and
December 31, 2016
, the Company had an allowance for doubtful accounts of
$0.5 million
and
nil
, respectively.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(f) 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 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.
(g) Revenue Recognition
Revenue from the Company’s Completion Services and Other Services segments are earned and recognized as services are rendered, which is generally on a per stage, daily or hourly rate. All revenue is recognized when persuasive evidence of an arrangement exists, the service is complete, the amount is determinable and collectability is reasonably assured. Contract acquisition and origination costs are expensed as incurred, and are recorded in selling, general and administrative expenses in the consolidated and combined statements of operations. Shipping and handling costs related to customer contracts are charged to cost of services in the consolidated and combined statements of operations. To the extent such costs are billable to the customer, the amounts are recorded as revenue. 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 net cash provided by operating activities in the consolidated and combined statements of cash flows.
Revenue from the Company’s Completion Services and Other Services 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, or on a spot market basis. Revenue is recognized upon the completion of each job. Once a job has been completed to the customer’s satisfaction, 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, which is recognized at the beginning of the job upon arriving on location, additional equipment used on the job, if any, and other miscellaneous items. This field ticket is used to create an invoice, which is sent to the customer upon the completion of each job.
Other Services
The Company provides certain complementary services such as cementing and drilling pursuant to contractual arrangements, such as term contracts. The Company typically charges the customer for the services performed and resources provided on a daily, hourly or per job basis. Jobs for these services are typically short term in nature, lasting anywhere from a few hours to several days. Revenue is recognized upon completion of each day’s work, based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment used on the job, and other miscellaneous items. The Company typically charges the customer for the services performed and resources provided on a daily basis at agreed-upon spot market rates.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
We will adopt a new revenue recognition standard effective January 1, 2018 that will supersede existing revenue recognition guidance.
(h) 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 life and salvage value of property and equipment on expected utilization, technological change and effectiveness of maintenance programs. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (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 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 statements of operations.
Major classifications of property and equipment and their respective useful lives are as follows:
|
|
|
Land
|
Indefinite life
|
Building and leasehold improvements
|
16 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.
Depreciation methods, useful lives and residual values are reviewed annually.
(i) 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.
(j)
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 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.
In 2016, the Company reassessed its reporting units and performed its goodwill impairment assessment as of October 31, 2016 based on
two
updated reporting units: Completion Services and Other Services. This is consistent with the Company’s reportable segments, which were reassessed effective January 1, 2016. Completion Services comprises hydraulic fracturing and wireline services, and Other Services segment comprises cementing and drilling services. In 2015, the Company performed its goodwill impairment assessment based on the then applicable reporting units: hydraulic fracturing, wireline and drilling.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
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 2017, the Company performed Step 0 of the goodwill impairment assessment for the goodwill associated with the Completion Services reporting unit, 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: commodity prices have stabilized, the Company continued to experience strong growth throughout 2017 in both revenue and EBITDA, the performance of the Company's stock price subsequent to its IPO, the enactment of the "Tax Relief for Individuals and Families" tax reform legislation and improved market conditions, as evidenced by growth in the U.S. gross domestic product, growth in the average annual return for the S&P 500 and Dow Jones indexes, production cuts by members of the Organization of the Petroleum Exporting Countries ("OPEC") and non-OPEC members and positive trends and forecasts for the oil and gas industry,
No
goodwill impairment has been recognized since inception in 2013.
The Company’s indefinite-lived assets consist of the Company’s trade names. 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
2017
,
2016
or
2015
.
(k)
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 flows that are independent of other asset groups to be at the service line level, hydraulic fracturing, wireline, drilling, coiled tubing and cementing, as well as 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 that 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.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
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 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. For the property and equipment and definite-lived intangible assets in each of the asset groups within the Company’s Completion Services segment, the Company’s assessment was based on the following factors: commodity prices have stabilized, market conditions have improved as evidenced by an increase in overall demand and pricing power for the Company’s hydraulic fracturing and wireline services, and the Company experienced strong revenue growth throughout 2017. For the property and equipment and definite-lived intangible asset in each of the asset groups within the Company’s Other Services segment, the Company’s assessment was based on the following factors: at October 31, 2017, the fair values of the drilling services’ property and equipment and cementing services’ property and equipment, acquired as a result of the acquisition of Trican’s U.S. Operations, were reflective of the deteriorated market conditions experienced from late 2014 through the first quarter of 2016. From the second quarter of 2016, oil and natural gas prices and rig count estimates have improved significantly, a trend which Management believes will continue throughout 2018. Also at October 31, 2017, the fair values of the cementing services' property and equipment and definite-lived customer contract, acquired as a result of the acquisition of RockPile, were recorded at appraised fair market only four months prior to the Company's impairment analysis, and the Company has plans to ramp up its idle cementing assets in 2018, in response to strong customer demand.
In 2016, for the Company’s definite-lived assets, the Company recorded a
$0.2 million
of impairment charge relating to a non-compete agreement in the Other Services segment, because there were insufficient forecasted cash flows to support this intangible asset.
In 2015, the continued fall in commodity prices was deemed a triggering event, and the Company tested its long-lived assets for impairment as of October 31, 2015. The Company recorded a
$2.4 million
impairment on its definite-lived customer contracts, as a result of the loss of certain customer relationships related to the Company’s acquisition of Ultra Tech Frac Services, LLC (“UTFS”). The Company recorded a
$1.2 million
impairment, on its trade name, under the Other Services segment, as it was determined the fair value of the trade name based on the net present value of future cash flows was less than the net book value as of the period then ended. The Company also recorded a
$0.3 million
impairment on its drilling rig fleet, as the continued fall in commodity prices resulted in a decline in the anticipated utilization rates for the drilling rig fleet, indicating these long-lived assets may not be recoverable.
See Note
(4)
Intangible Assets
and Note for further details on the Company's impairment of its intangible assets.
Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets.
(l) Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. 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 balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income 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 (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 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 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 effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is de-designated because a forecasted transaction is not probable of occurring or management determines to remove the designation of the cash flow hedge. 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 balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses related to the hedging relationship that were accumulated in other comprehensive income.
(m) 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 statements of operations and comprehensive loss.
(n) 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:
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
•
|
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.
(o) 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 i) make payments and the number of affected employees and the benefits received are known to both parties, and ii) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal and can reasonably estimate such amount.
(p) 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. As a newly established public company, the Company's attrition rate for key management personnel is insignificant. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method better reflects actual stock-based compensation expense. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
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.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Tax deductions on the stock-based compensation awards will not be 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.
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.
For additional information, see Note
(
12
)
(
Equity-Based Compensation
).
(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. Operating lease expense is recorded on a straight-line basis over the lease term. 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.
(r) Research and development costs
Research and development costs are expensed as incurred. Research and development costs incurred directly by the Company were
$3.7 million
,
$2.2 million
and
nil
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
(s) 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 year ended
December 31, 2017
.
See Note
(
17
)
(
Income Taxes
)
for a detailed discussion of the Company's taxes and activities thereof during the year ended
December 31, 2017
.
In addition, the Company has a Canadian subsidiary, which is treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company is subject to foreign income tax.
The Company is responsible for certain state income and franchise taxes, which include Pennsylvania, Texas and New York. These amounts are reflected as selling, general and administrative expense in the consolidated financial statements of the Company.
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. 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 income in the period that includes the enactment date.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(t) Equity-method investments
Investments in non-controlled entities over which the Company has the ability to exercise significant influence over the non-controlled 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, 2017
, the Company has recognized
$0.6 million
for its only equity-method investment.
(u) Pro-forma earnings per unit
The earnings per unit amounts 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 unit 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 certain measurement period adjustments during the quarter ended March 31, 2017.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 is primarily attributable to expected synergies and the assembled workforce. The entire amount of the goodwill was allocated to the Completion Services segment for the purposes of evaluating future goodwill impairment. A portion of the Goodwill is tax deductible.
Intangible assets related to the acquisition of Trican’s U.S. Operations consisted of the following:
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
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 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
(
18
) (
Commitments and Contingencies
)
for further details.
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.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
(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 income (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 Closing Date” or 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 United States, 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 United States. 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 does not exceed
$2.30
. The CVR Payment Amount is 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 shall 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
|
|
|
•
|
(iii) the Aggregate CVR Payment Amount.
|
As of
December 31, 2017
, the Company has recognized a liability of
$6.7 million
for the Aggregate CVR Payment Amount, which is recorded in current liabilities in the consolidated and combined balance sheet. This estimate is sensitive to change based on the historical and implied volatility in the price of the Company's common stock.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
On August 31, 2017, the Company delivered to the Principal Seller a closing statement with its determination of the final closing cash purchase price. This determination included the Company's calculation of working capital deficit, as compared to the Principal Seller's estimated working capital deficit used in determining the cash consideration paid on the RockPile Closing Date. Resolution of the differences between the Company's calculation and the Principal Seller's calculation of the working capital deficit has been completed and recorded as adjustments to our preliminary purchase accounting allocation, with no adverse impact on the Company's financial position.
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 purchase accounting is subject to the twelve-month measurement adjustment period to reflect any new information that may be obtained in the future about facts and circumstances that existed as of the RockPile Acquisition Date that, if known, would have affected the measurement of the amounts recognized as of that date.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following tables summarize the fair value of the consideration transferred for the acquisition of RockPile and the preliminary allocation of the purchase price to the fair values of the assets acquired, liabilities assumed and equity consideration at the RockPile Acquisition Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchase Consideration:
|
|
Preliminary Purchase Price Allocation
|
|
Adjustments
|
|
Purchase Price Allocation as of December 31, 2017
|
(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
|
|
|
$
|
1,588
|
|
|
$
|
58,705
|
|
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
|
|
|
8,088
|
|
|
260,922
|
|
Accounts payable
|
|
(38,999
|
)
|
|
16,242
|
|
|
(22,757
|
)
|
Accrued expenses
|
|
(22,161
|
)
|
|
(15,924
|
)
|
|
(38,085
|
)
|
Deferred revenue
|
|
(23,053
|
)
|
|
698
|
|
|
(22,355
|
)
|
Other non-current liabilities
|
|
(827
|
)
|
|
(2,412
|
)
|
|
(3,239
|
)
|
Total liabilities assumed
|
|
(85,040
|
)
|
|
(1,396
|
)
|
|
(86,436
|
)
|
Goodwill
|
|
77,372
|
|
|
6,970
|
|
|
84,342
|
|
Total purchase price consideration
|
|
$
|
245,166
|
|
|
$
|
13,662
|
|
|
$
|
258,828
|
|
|
|
|
|
|
|
|
Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill in this acquisition is primarily attributable to expected synergies and new customer relationships and was allocated to the Completions segment. All the goodwill recognized for the acquisition of RockPile is tax deductible with an amortization period of 15 years.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
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 that may occur after July 2, 2017 or any operating efficiencies or inefficiencies that may result 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 or the results that the Company will experience going forward. Pro forma net loss for the
twelve months ended December 31, 2016
includes
$0.8 million
of non-recurring
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
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. The pro forma information does not include any remaining future integration costs or transaction costs that the Company may incur related to the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Unaudited
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
1,732,279
|
|
|
$
|
543,966
|
|
Net income (loss)
|
|
(49,584
|
)
|
|
(206,417
|
)
|
|
|
|
|
|
Net loss per share (basic and diluted)
|
|
$
|
(0.44
|
)
|
|
$
|
(2.36
|
)
|
Weighted-average shares outstanding
|
|
|
|
|
Basic
|
|
111,735
|
|
|
87,313
|
|
Diluted
|
|
111,735
|
|
|
87,313
|
|
|
|
|
|
|
The Company’s consolidated and combined statement of operations and comprehensive income (loss) 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
.
(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, 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
|
|
|
|
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31, 2016
|
|
|
Weighted average remaining
amortization period
(Years)
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer contracts
|
|
8.8
|
|
$
|
52,400
|
|
|
$
|
(20,336
|
)
|
|
$
|
32,064
|
|
Non-compete agreements
|
|
8.7
|
|
750
|
|
|
(288
|
)
|
|
462
|
|
Trade name
|
|
0.9 - Indefinite life
|
|
11,090
|
|
|
(686
|
)
|
|
10,404
|
|
Technology
|
|
2.3
|
|
2,324
|
|
|
(1,239
|
)
|
|
1,085
|
|
Total
|
|
|
|
$
|
66,564
|
|
|
$
|
(22,549
|
)
|
|
$
|
44,015
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to the intangible assets for the years ended
December 31, 2017
,
2016
and
2015
was
$7.1 million
,
$5.7 million
and
$4.9 million
, respectively.
Amortization for the intangible assets excluding trade name of
$10.2 million
with indefinite useful life and in process software, over the next five years, is as follows:
|
|
|
|
|
|
Year-end December 31,
|
|
(Thousands of Dollars)
|
2018
|
|
$
|
6,010
|
|
2019
|
|
5,128
|
|
2020
|
|
5,041
|
|
2021
|
|
4,973
|
|
2022
|
|
4,973
|
|
(5) Goodwill
The changes in the carrying amount of goodwill for the years ended
December 31, 2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
(Thousands of Dollars)
|
Goodwill as of December 31, 2015
|
$
|
48,882
|
|
Acquisition of Trican's U.S. Operations
|
1,596
|
|
Goodwill as of December 31, 2016
|
50,478
|
|
Acquisitions
|
84,489
|
|
Goodwill as of December 31, 2017
|
$
|
134,967
|
|
The changes in the carrying amount of goodwill for the year ended
December 31, 2017
consisted of
$0.2 million
of purchase price adjustments related to the acquisition of the Acquired Trican Operation and
$84.3 million
recognized in connection with the acquisition of RockPile. These additions to goodwill were allocated to the Completion Services segment. Goodwill recognized in connection with the acquisition of Trican's U.S. Operations was allocated to the Completion Services segment. 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, 2017
,
2016
and
2015
.
(6) Inventories, net
Inventories, net, consisted of the following at
December 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2017
|
|
December 31,
2016
|
Sand, including freight
|
|
$
|
11,551
|
|
|
$
|
6,520
|
|
Chemicals and consumables
|
|
7,940
|
|
|
4,774
|
|
Materials and supplies
|
|
13,946
|
|
|
4,597
|
|
Total inventory, net
|
|
$
|
33,437
|
|
|
$
|
15,891
|
|
Inventories are reported net of obsolescence reserves of
$0.3 million
and
$0.1 million
as of
December 31, 2017
and
2016
, respectively. The Company recognized
$0.3 million
,
$0.02 million
and
$0.05 million
of obsolescence expense during the years ended
December 31, 2017
,
2016
and
2015
.
(
7
)
Property and Equipment, net
Property and Equipment, net consisted of the following at
December 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2017
|
|
December 31,
2016
|
Land
|
|
$
|
5,186
|
|
|
$
|
5,166
|
|
Building and leasehold improvements
|
|
30,322
|
|
|
30,750
|
|
Office furniture, fixtures and equipment
|
|
6,338
|
|
|
4,780
|
|
Machinery and equipment
|
|
773,516
|
|
|
514,017
|
|
|
|
815,362
|
|
|
554,713
|
|
Less accumulated depreciation
|
|
(372,617
|
)
|
|
(261,292
|
)
|
Construction in progress
|
|
25,255
|
|
|
788
|
|
Total property and equipment, net
|
|
$
|
468,000
|
|
|
$
|
294,209
|
|
|
|
|
|
|
The machinery and equipment balance as of
December 31, 2017
and
2016
included
$10.1 million
of hydraulic fracturing equipment under capital lease. The machinery and equipment balance as of
December 31, 2017
and
2016
also included approximately
$5.1 million
and
$2.4 million
, respectively, of vehicles under capital leases. Accumulated depreciation for the hydraulic fracturing equipment under capital leases was
$8.3 million
and
$5.7 million
as of
December 31, 2017
and
2016
, respectively. Accumulated depreciation for the vehicles under capital leases was
$1.6 million
and
$0.6 million
as of
December 31, 2017
and
2016
, respectively.
All (gains) and losses are presented within (gain) loss on disposal of assets in the consolidated and combined statements of operations. The following summarizes the proceeds received and (gains) losses recognized on the disposal of certain assets the years ended
December 31, 2017
,
2016
and
2015
:
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, divested for net proceeds of
$0.5 million
and a net loss of
$0.6 million
, within the Corporate segment;
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
•
|
Idle facility in Woodward, Oklahoma, acquired in the acquisition of the Acquired Trican Operations, divested for net proceeds of
$2.4 million
and a net gain of
$0.5 million
, within the Completion Services segment;
|
|
|
•
|
Air compressor units, divested 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, divested for net proceeds of
$16.7 million
with
no
(gain) or loss, within the Other Services segment;
|
|
|
•
|
Hydraulic fracturing operating equipment, divested for a net loss of
$0.6 million
, within the Completions segment; and
|
|
|
•
|
Idle coiled tubing assets, divested for net proceeds of
$10.0 million
and a net gain of
$3.5 million
, within the Other Services segment.
|
During the year ended
December 31,
2016
, the Company also 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.
During the year ended
December 31,
2015
, the Company divested of certain drilling assets and vehicles for net proceeds of
$1.3 million
and a net gain of
$0.3 million
, primarily within the Other Services segment.
(
8
)
Long-Term Debt
Long-term debt at
December 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2017
|
|
December 31,
2016
|
New Term Loan Facility
|
|
$
|
283,202
|
|
|
$
|
—
|
|
Senior Secured Notes
|
|
—
|
|
|
190,000
|
|
2016 Term Loan Facility
|
|
—
|
|
|
98,103
|
|
Capital leases
|
|
7,918
|
|
|
8,075
|
|
Less: Unamortized debt discount and debt issuance costs
|
|
(8,173
|
)
|
|
(18,353
|
)
|
Total debt, net of unamortized debt discount and debt issuance costs
|
|
282,947
|
|
|
277,825
|
|
Less: Current portion
|
|
(4,436
|
)
|
|
(5,145
|
)
|
Long-term debt, net of unamortized debt discount and debt issuance costs, including capital leases
|
|
$
|
278,511
|
|
|
$
|
272,680
|
|
2016 ABL Facility
On March 16, 2016, KGH Intermediate Holdco I, LLC, Holdco II, Keane Frac, LP, KS Drilling, LLC, Keane Frac ND, LLC, Keane Frac TX, LLC and Keane Frac GP, LLC entered into an amendment which modified their existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) with certain financial institutions (collectively, the “2016 ABL Lenders”) and PNC Bank, National Association (“PNC Bank”), as agent for the 2016 ABL Lenders.
On February 17, 2017, the Company replaced its 2016 ABL Facility with the 2017 ABL Facility (as described below).
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The Company expensed
$0.3 million
in deferred financing costs related to the proportionate decrease in the borrowing capacity with PNC Bank under the new 2017 ABL Facility. The remaining
$1.0 million
in deferred financing costs related to the 2016 ABL Facility is being amortized over the life of the 2017 ABL Facility.
2017 ABL Facility
On February 17, 2017, Keane Group Holdings, LLC, Keane Frac, LP and KS Drilling, LLC (together with Keane Group Holdings, LLC, Keane Frac, LP and each other person that becomes an ABL Borrower under the 2017 ABL Facility in accordance with the terms thereof, collectively, the “ABL Borrowers”) and the ABL Guarantors (as defined below) entered into an asset-based revolving credit agreement (the “February 2017 ABL Facility”) with each lender from time to time party thereto (the “2017 ABL Lenders”) and Bank of America, N.A., as administrative agent and collateral agent. The 2017 ABL Facility replaced the 2016 ABL Facility, which agreement was terminated in connection with the effectiveness of the 2017 ABL Facility.
No
early termination fees were incurred by the Company in connection with such termination. On December 22, 2017, KGI and certain of its subsidiaries amended and restated the asset-based revolving credit agreement governing the February 2017 ABL Facility (the "Amended 2017 ABL Facility" and together with the February 2017 ABL Facility, the "2017 ABL Facility") to, among other things, increase by
$150.0 million
the total amount of aggregate commitments by the lenders party thereto.
The 2017 ABL Facility provides for a
$300.0 million
revolving credit facility (with a
$20.0 million
subfacility for letters of credit), subject to a Borrowing Base (as defined below). In addition, subject to approval by the applicable lenders and other customary conditions, the 2017 ABL Facility allows for an increase in commitments of up to
$150.0 million
. Loans arising under the initial commitments of the 2017 ABL Facility, unless extended, 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.
Amounts outstanding under the 2017 ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings, LLC’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 London Interbank Offered Rate (“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 defined herein) 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. “Consolidated EBITDA,” generally, is defined as net income plus reductions to net income attributable to interest, taxes, depreciation and amortization and certain other non-cash charges, including, subject to certain limitations, the addition of run-rate cost savings, operating expense reductions, restructuring charges and expenses and cost saving synergies, and acquisition, integration and divestiture costs and fleet commissioning costs. Following an event of default, the 2017 ABL Facility bears interest at the rate otherwise applicable to such loans at such time plus an additional
2.00%
per annum during the continuance of such event of default, and the letter of credit fees increase by
2.00%
.
The amount of loans and letters of credit available under the 2017 ABL Facility is limited to, at any time of calculation, a borrowing base (the “Borrowing Base”) in an amount equal to (a)
85%
multiplied by the amount of eligible billed accounts; plus (b)
80%
multiplied by the amount of eligible unbilled accounts; provided, that the amount attributable to clause (b) may not exceed
20%
of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (c)); plus (c) the lesser of (i)
70%
of the cost and (ii)
85%
of the appraised value of eligible inventory and eligible frac iron; provided, that the amount attributable to
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
clause (c) may not exceed
15%
of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (b)); minus (d) the then applicable amount of all reserves.
Subject to certain exceptions, as set forth in the definitive documentation for the 2017 ABL Facility, the obligations under the 2017 ABL Facility are (a) secured by a first-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment; certain other assets and property related thereto, including chattel paper, certain investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the Company and its subsidiaries that are ABL Borrowers or ABL Guarantors under the 2017 ABL Facility (collectively, the “2017 ABL Facility Priority Collateral”) and (b) subject to certain exceptions, secured on a second-priority security interest in and lien on substantially all of the assets of KGI and the ABL Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral.
Subject to certain exceptions as set forth in the definitive documentation for the 2017 ABL Facility, the amounts outstanding under the 2017 ABL Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, Holdco II, Keane Frac GP, LLC, each ABL Borrower (other than with respect to its own obligations) and each subsidiary of Keane Group, Inc. that will be required to execute and deliver a facility guaranty after February 17, 2017 (collectively, the “ABL Guarantors”).
The 2017 ABL Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2017 ABL Facility), including a financial covenant, which provides that (a) if any event of default is occurring and continuing, (b) if no loan or letter of credit (other than any letter of credit that has been cash collateralized) is outstanding, liquidity is less than the greater of (i)
10%
of the lesser of (x) the commitments of the 2017 ABL Lenders, which as of
December 31, 2017
was
$300.0 million
, and (y) the Borrowing Base, at any time of determination (the “Loan Cap”) and (ii)
$20.0 million
at any time or (c) if any loan or letter of credit (other than any letter of credit that has been cash collateralized) is outstanding, excess availability is less than the greater of (i)
10%
of the Loan Cap and (ii)
$20.0 million
at any time, then the consolidated fixed charge coverage ratio, as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, may not be lower than
1.0
:1.0. This financial covenant will remain in effect until the thirtieth consecutive day that all such triggers no longer exist.
In connection with the February 2017 ABL Facility and the Amended 2017 ABL Facility in December 2017, the Company incurred
$4.7 million
of debt issuance costs during the year ended
December 31, 2017
. See
“Deferred Financing Costs”
below for discussion of unamortized debt issuance costs as of
December 31, 2017
.
There were
no
amounts outstanding under the 2017 ABL Facility as of
December 31, 2017
. The Company's availability under the 2017 ABL Facility was
$199.7 million
as of
December 31, 2017
.
2016 Term Loan Facility
On March 16, 2016, KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP, entered into a credit agreement (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. The 2016 Term Loan Facility provided for a
$100.0 million
term loan. The 2016 Term Loan Facility was prepaid in full on January 25, 2017, in connection with the IPO. The Company paid a prepayment premium of
$13.8 million
.
The Company accounted for this transaction as an early debt extinguishment and expensed
$8.2 million
in deferred financing costs associated with the 2016 Term Loan Facility.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
New Term Loan Facility
On March 15, 2017, Keane Group Holdings, LLC, Keane Frac, LP and KS Drilling, LLC (together with Keane Group Holdings, LLC, Keane Frac, LP and each other person that becomes a 2017 Term Loan Borrower under the 2017 Term Loan Facility in accordance with the terms thereof, collectively, the “2017 Term Loan Borrowers”) and the 2017 Term Loan Guarantors (as defined below) entered into a term loan agreement (the “2017 Term Loan Facility”) with each lender from time to time party thereto and Owl Rock Capital Corporation (“Owl Rock”), as administrative agent and collateral agent.
On July 3, 2017, the 2017 Term Loan Borrowers and the 2017 Term Loan Guarantors entered into an incremental term loan facility (the “2017 Incremental Term Loan Facility” and, together with the 2017 Term Loan Facility, collectively, the “New Term Loan Facility”) with each of the incremental lenders party thereto, each of the existing lenders party thereto and Owl Rock, as administrative agent and collateral agent.
The 2017 Term Loan Facility provides for a
$150.0 million
initial term loan facility, and the 2017 Incremental Term Loan Facility provides for a
$135.0 million
term loan facility (collectively, the “Term Loans”). In addition, subject to certain customary conditions, as of July 3, 2017, the New Term Loan Facility allows for additional incremental term loans in an amount equal to the sum of (a)
$50.0 million
(less certain amounts in connection with permitted notes and subordinated indebtedness), plus (b) an unlimited amount, subject to, in the case of subclause (b), immediately after giving effect thereto, the total net leverage ratio being less than
1.75
:1.00.
The Term Loans bear interest at a rate per annum equal to, at Keane Group Holdings, LLC's option, (a) the base rate plus
6.25%
, or (b) the adjusted LIBOR rate for such interest period (subject to a
1.00%
floor) plus
7.25%
. Following an event of default, the Term Loans bear interest at the rate otherwise applicable to such Term Loans at such time plus an additional
2.00%
per annum during the continuance of such event of default. The Term Loans mature on August 18, 2022 or, if earlier, the stated maturity date of any other term loans or term commitments. Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the obligations under the New Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of the 2017 Term Loan Borrowers and the 2017 Term Loan Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral and (b) a second-priority security interest in and lien on the 2017 ABL Facility Priority Collateral.
Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the amounts outstanding under the New Term Loan Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, Holdco II, Keane Frac GP, LLC, each 2017 Term Loan Borrower (other than with respect to its own obligations) and each subsidiary of Keane Group, Inc. that will be required to execute and deliver a facility guaranty after March 15, 2017 (collectively, the “2017 Term Loan Guarantors”).
The New 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 New Term Loan Facility), including a financial covenant, which provides that, as of the last day of any month, the sum of (a) unrestricted cash and cash equivalents of the 2017 Term Loan Borrowers and 2017 Term Loan Guarantors that are deposited in blocked accounts (to the extent required to be subject to blocked account agreements under the New Term Loan Facility) and (b) the aggregate principal amount that is available for borrowing under the 2017 ABL Facility, may not be less than
$35.0 million
. The Company was in compliance with all covenants under the New Term Loan Facility as of
December 31, 2017
.
In connection with the initial borrowings under the 2017 Term Loan Facility, the Company incurred
$5.0 million
of debt issuance costs during the quarter ended March 31, 2017. In connection with the borrowings under the 2017 Incremental Term Loan Facility, the Company incurred
$4.1 million
of debt issuance costs during the year ended
December 31, 2017
. The Company recorded both Term Loans on the balance sheet at their outstanding principal amounts, net of the unamortized debt issuance costs. See
“Deferred Financing Costs”
below for discussion of unamortized debt issuance costs as of
December 31, 2017
.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Maturities of the Term Loans for the next five years are presented below:
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year-end December 31,
|
|
|
2018
|
|
2,850
|
|
2019
|
|
2,850
|
|
2020
|
|
2,850
|
|
2021
|
|
2,850
|
|
2022
|
|
271,800
|
|
|
|
$
|
283,200
|
|
|
|
|
Any prepayment of the Term Loans will not result in a prepayment penalty.
Senior Secured Notes
The Company retired its existing note purchase agreement (the “NPA”) with certain financial institutions (collectively, the “Purchasers”) and U.S. Bank National Association, as agent for the Purchasers, in connection with the IPO and execution of the 2017 Term Loan Facility. In connection with the IPO,
$50.0 million
of the NPA was repaid on January 25, 2017. The remaining outstanding balance of
$138.7 million
was repaid in full on March 15, 2017, upon execution of the 2017 Term Loan Facility. The Company paid a prepayment premium of
$1.9 million
related to both repayments.
The Company accounted for this transaction as an early debt extinguishment and expensed
$6.8 million
in deferred financing costs associated with the NPA.
Deferred Financing Costs
Costs incurred to obtain financing 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 on the consolidated and combined statements of operations and comprehensive income (loss). Amortization expense related to the capitalized deferred financing costs for the years ended
December 31, 2017
,
2016
and
2015
was
$5.2 million
,
$4.2 million
and
$2.1 million
, respectively.
Unamortized deferred financing costs associated with the 2016 ABL Facility and the 2017 ABL Facility were
$5.0 million
and
$1.5 million
as of
December 31, 2017
and
2016
, respectively, and are recorded in other noncurrent assets on the consolidated and combined balance sheets.
Capital Leases
The Company leases certain machinery, equipment and vehicles under capital leases that expire between 2018 and 2021. The capital lease obligation for fracturing equipment obtained through a capital lease with CIT has a lease term of
60 months
and interest rate of
4.73%
per annum. Total remaining principal balance outstanding on the CIT lease as of December 31, 2017 and 2016 was
$4.5 million
and
$6.3 million
, respectively. Total interest expense incurred on this lease was
$0.3 million
,
$0.3 million
and
$0.4 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company leases certain machinery and equipment under a capital lease with FNB that expires in 2018. Total remaining principal balance outstanding on this lease as of December 31, 2017 and 2016 was
$0.02 million
and
$0.04 million
, respectively. Total interest expense incurred on this lease was less than
$0.01 million
for the years ended December 31, 2017 and 2016, respectively.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
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 2017, 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
3.60%
and
3.98%
. The total outstanding capital lease obligation on the vehicles leased from ARI as of December 31, 2017 and 2016 was
$3.0 million
and
$1.7 million
, respectively. Total interest expense incurred on these leases was
$0.04 million
and
$0.01 million
for the years ended December 31, 2017 and 2016, respectively.
In 2017, the Company entered into capital leases for light weight vehicles 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, 2017 was
$0.3 million
, and total interest incurred for the year ended December 31, 2017 was
$0.01 million
.
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 as of December 31, 2017 for the next five years are listed below:
|
|
|
|
|
|
Year-end December 31,
|
|
(Thousands of Dollars)
|
2018
|
|
$
|
3,633
|
|
2019
|
|
3,600
|
|
2020
|
|
758
|
|
2021
|
|
527
|
|
2022
|
|
—
|
|
Subtotal
|
|
8,518
|
|
Less amount representing interest
|
|
(600)
|
|
|
|
$
|
7,918
|
|
(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, 2017
,
2016
and
2015
, sales to Completion Services customers represented
99%
,
98%
, and
99%
of the Company’s consolidated revenue, respectively. During the years ended
December 31, 2017
,
2016
and
2015
, sales to Completion Services customers represented
99%
,
212%
, and
99%
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 has continued to increase in 2017, with U.S. active rig count in December 2017 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 has continued to persist. Despite this market volatility, the Company continues to experience increased demand for its services and believes it is in a more stable demand environment than existed during the above-mentioned market decline.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
For the year ended
December 31, 2017
, no customer represented more than
10%
of the Company's consolidated revenue. For the year ended
December 31, 2016
, revenue from the Company's top three customers individually represented
18%
,
15%
and
15%
of the Company's consolidated revenue, respectively. For the year ended
December 31, 2015
, revenue from the Company's top two customers represented
38%
and
21%
of the Company's consolidated revenue, respectively. Revenue is earned from each of these customers within the Completion Services segment.
For the years ended
December 31, 2017
,
2016
and
2015
, purchases from two suppliers, one supplier and four suppliers 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.
In September 2017, Holdco II amended an existing interest rate swap and entered into a new forward starting interest rate swap to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the New Term Loan Facility.
The amended swap, which is effective through September 30, 2019, is designated as a cash flow hedge. Under the terms of the interest rate swap, Holdco II receives 3-month LIBOR based variable interest rate payments, subject to a
1%
floor, and makes payments based on a fixed rate of
2.055%
; thereby hedging the variability of cash flows associated with changes in the benchmark LIBOR interest rate above
1.0%
. As of
December 31, 2017
, the notional amount of the interest rate swap was
$136.9 million
, decreasing quarterly by
$0.9 million
.
In conjunction with the amendment of the existing interest rate swap, Holdco II executed a new forward starting interest rate swap effective September 30, 2019 through August 18, 2022, which was designated as a cash flow hedge. Under the terms of the interest rate swap, Holdco II receives 3-month LIBOR based variable interest rate payments, subject to a
1%
floor, and makes payments based on a fixed rate of
2.345%
; thereby hedging the variability of cash flows associated with changes in the benchmark LIBOR interest rate above
1.0%
. The notional amount for the first quarterly reset period effective September 30, 2019 is
$130.3 million
, decreasing quarterly by
$0.9 million
.
Additionally, on September 28, 2017, the Company terminated
two
interest rate swaps that were not designated as hedges for a cash payment of
$0.8 million
.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
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, 2017:
|
|
|
|
|
|
|
|
|
|
Other current asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other noncurrent asset
|
324
|
|
|
—
|
|
|
324
|
|
|
—
|
|
|
324
|
|
Other current liability
|
(254
|
)
|
|
—
|
|
|
(254
|
)
|
|
—
|
|
|
(254
|
)
|
Other noncurrent liability
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
Other current asset
|
$
|
—
|
|
|
$
|
342
|
|
|
$
|
342
|
|
|
$
|
(342
|
)
|
|
$
|
—
|
|
Other noncurrent asset
|
129
|
|
|
—
|
|
|
129
|
|
|
(129
|
)
|
|
—
|
|
Other current liability
|
(313
|
)
|
|
(959
|
)
|
|
(1,272
|
)
|
|
342
|
|
|
(930
|
)
|
Other noncurrent liability
|
—
|
|
|
(1,473
|
)
|
|
(1,473
|
)
|
|
129
|
|
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(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,
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Location
|
Amount of gain (loss) recognized in other comprehensive income ("OCI") on derivative
|
|
$
|
791
|
|
|
$
|
(1,784
|
)
|
|
$
|
(2,765
|
)
|
|
OCI
|
Amount of loss reclassified from AOCI into income
|
|
(72
|
)
|
|
(603
|
)
|
|
(1,578
|
)
|
|
Interest Expense
|
Amount of loss reclassified from AOCI into income as a result of originally forecasted transaction becoming probable of not occurring
|
|
(100
|
)
|
|
(3,038
|
)
|
|
—
|
|
|
Interest Expense
|
The 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, 2017
,
$0.3 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 the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 815, “Derivative Financial Instruments,” (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Description
|
|
Location
|
|
2017
|
|
2016
|
|
2015
|
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, capital lease obligations and contingent liability. As of
December 31, 2017
and
2016
, 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 during the years ended
December 31, 2017
and
2016
.
Recurring Fair Value Measurement
At
December 31, 2017
and
2016
, 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 balance sheet as of
December 31, 2017
and
2016
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 balance sheet as of
December 31, 2017
was determined using a Monte Carlo option pricing model that considers various assumptions, including the Company's stock price, the length of the holding period and discount for volatility. The Aggregate CVR Payment Amount was not outstanding at December 31, 2016. This estimate is sensitive to change based on the historical and implied volatility in the price of the Company's common stock.
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, 2017
and
2016
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
70
|
|
|
$
|
—
|
|
Aggregate CVR Payment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Aggregate CVR Payment
|
|
6,665
|
|
|
—
|
|
|
6,665
|
|
|
—
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
2,274
|
|
|
—
|
|
|
2,274
|
|
|
—
|
|
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 and RockPile 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 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 related to its Other Services segment.
In 2015, the Company recorded a
$2.4 million
impairment on its definite-lived intangible assets, within its Completion Services segment, as a result of the loss of certain customer relationships related to the Company’s acquisition of Ultra Tech Frac Services, LLC (“UTFS”), a
$1.2 million
impairment on its trade name, within the Other Services segment, as it was determined the fair value of the trade name based on the net present value of future cash flows was less than the net book value as of
December 31, 2015
and a
$0.3 million
impairment on its drilling rig fleet, as the continued fall in commodity prices resulted in a decline in the anticipated utilization rates for the drilling rig fleet, indicating these long-lived assets may not be recoverable.
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
$96.1 million
and
$48.9 million
as of
December 31, 2017
and
2016
, 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.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The majority of the Company’s trade receivables have payment terms of
30
days or less. As of
December 31, 2017
, trade receivables from the Company's top customer represented
17%
of total accounts receivable. As of
December 31, 2016
, trade receivables from the top four customers individually represented
15%
,
14%
,
13%
and
12%
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 not had to write-off any bad debts for its customers as of
December 31, 2017
and
2016
and has a process in place to collect all receivables within
30
to
60 days
of aging.
(
12
)
Equity-Based Compensation
Under the Company's Equity and Incentive Award Plan, compensation expense for restricted stock awards, RSUs, non-qualified stock options and deferred compensation awards to be settled in shares of the Company's common stock is determined based on the fair value of the awards at the date of grant. The fair value of these awards 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 Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method better reflects actual stock-based compensation expense.
Compensation expense from time-based restricted stock awards, RSUs and non-qualified stock options is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Compensation expense associated with liability based awards, such as deferred compensation awards with a fixed monetary amount to be settled in shares of the Company's common stock at the closing price of the Company's stock on the vesting date, is recognized based on the fixed monetary amount agreed upon at the grant date and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.
As of
December 31, 2017
, the Company has
four
types of equity-based compensation under the 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.
The following table summarizes equity-based compensation costs for the years ended
December 31, 2017
,
2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Class C Interests
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
313
|
|
Class B Interests
|
|
—
|
|
|
1,984
|
|
|
—
|
|
Deferred stock awards
|
|
4,280
|
|
|
—
|
|
|
—
|
|
Restricted stock awards
|
|
399
|
|
|
—
|
|
|
—
|
|
Restricted stock units
|
|
4,766
|
|
|
—
|
|
|
—
|
|
Non-qualified stock options
|
|
1,133
|
|
|
—
|
|
|
$
|
—
|
|
Equity-based compensation cost
|
|
$
|
10,578
|
|
|
$
|
1,984
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(a) Class C Interests
Prior to the completion of the Trican Transaction, the Company sponsored its Class C Management Incentive Plan (the “Class C Plan”) to grant Class C units to management. Under the Class C Plan, a maximum of
149,425
Class C units were authorized, of which
113,283
were outstanding as of December 31, 2015. The Class C units granted under the Class C Plan vested based on the participants continued employment with the Company (“Time-Based Units”) and based on the achievement of performance objectives as determined by the Compensation Committee (“Performance-Based Units”). Generally, the Time-Based Units vested one-third on each of the first
three
anniversary dates of the grant date, subject to the participant’s continued employment. The Performance-Based Units vested over the same periods, subject to the attainment of certain performance objectives. As of March 16, 2016, of the total outstanding Class C units issued under the Class C Plan,
97,305
were fully vested and
4,408
were unvested.
The Company determined the fair value of the Class C unit awards with the assistance from a third-party valuation expert. The fair value of each Class C unit award was estimated on the date of grant using a Monte Carlo option pricing model. A significant input of the option pricing method was the enterprise value of Keane Group Holding, LLC. The Company estimated the enterprise value utilizing a combination of the income and market approaches. Additional significant inputs used in the option pricing method included the length of holding period, discount for lack of marketability and volatility.
The Company granted
8,815
Class C units in 2015. During 2015,
28,650
Class C units were bought back, respectively. The total amount paid during the year ended December 31, 2015 for Class C unit buy backs was
$0.2 million
. Furthermore, the Company recognized
$0.2 million
relating to withholding taxes on settlements for the year ended December 31, 2015.
Non-cash compensation cost related to Time-Based Units recognized in operating results during the year ended December 31, 2015 was
$0.2 million
. At December 31, 2015, there was
$0.2 million
of total unrecognized compensation cost related to unvested Time-Based Units under the Class C Plan.
Non-cash compensation cost with respect to the vested portion of the Performance-Based Units recognized in operating results during the year ended December 31, 2015 was
$0.2 million
. The awards for Performance-Based Units were accounted for at fair value. With respect to the remaining unvested portion of the Performance-Based Units,
no
compensation cost had been recognized as of December 31, 2015, because the performance criteria had not been defined.
(b) 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 (see “Class C Plan” below). In addition, on March 16, 2016, the Company also 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, the Company calculated 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
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
expense. The incremental fair value of unvested units and any remaining unrecognized compensation of the original awards will be 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 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.
During the years ended
December 31, 2017
and
2016
, the Company recognized
nil
and
$2.0 million
, respectively, of non-cash compensation expense into income related to the Company’s Management Incentive Plan. 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 will not recognize any additional non-cash compensation expense associated with unvested membership units in the future.
(c) 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 of the Company (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, and the second stock bonus will vest on January 1, 2019 to be paid on February 15, 2019. For the year ended
December 31, 2017
, the Company recognized
$4.3 million
of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of
December 31, 2017
, total unamortized compensation cost related to unvested deferred stock awards was
$4.3 million
, which the Company expects to recognize over the remaining weighted-average period of
1 year
.
(d) 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 Company’s Management Incentive Plan were converted into
114,580
restricted shares of the Company's common stock. These restricted stock awards vest with respect to
33.33%
of the shares beginning on October 1, 2017, and with respect to an additional
33.33%
of the shares on the next two anniversaries, 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, “Compensation - Stock Compensation,” 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 will be expensed as non-cash stock compensation expense into income over the vesting period.
On May 15, 2017, an independent member of the Board of Directors received
18,947
restricted shares of the Company’s common stock. This restricted stock award will vest with respect to
33.33%
of the shares on May 15, 2018, and with respect to an additional
33.33%
of the shares on the next two anniversaries, provided that the participant does not incur a termination before the applicable vesting date.
For the three and
twelve months ended December 31, 2017
, the Company recognized
$0.4 million
of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of
December 31, 2017
, 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
1.94
years.
Rollforward of restricted stock awards as of
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Awards
|
|
Weighted average grant date fair value
|
Total non-vested at January 20, 2017
|
|
114,580
|
|
|
$
|
22.00
|
|
Shares issued
|
|
18,947
|
|
|
14.49
|
|
Shares vested
|
|
(38,192
|
)
|
|
22.00
|
|
Shares forfeited
|
|
—
|
|
|
—
|
|
Non-vested balance at December 31, 2017
|
|
95,335
|
|
|
$
|
20.51
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(e) Restricted stock units
During the year ended
December 31, 2017
, executive officers and key management personnel received, in total,
1,238,127
RSUs under the Equity and Incentive Award Plan.
1,104,208
of these RSU awards vest with respect to
33.33%
beginning on January 20, 2018 and
133,919
of these RSU awards vest with respect to
33.33%
beginning on the first anniversary of the date of grant. The remaining RSU awards vest with respect to an additional
33.33%
on the next two anniversaries, provided that the participant does not incur a termination before the applicable vesting date. RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
The Company recognized these RSUs at fair value based on the closing price of the Company's common stock on the date of grant. The compensation expense associated with these RSUs will be amortized into income on a straight-line basis over the vesting period. For the year ended
December 31, 2017
, the Company recognized
$4.8 million
of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of
December 31, 2017
, total unamortized compensation cost related to unvested restricted stock units was
$11.3 million
, which the Company expects to recognize over the remaining weighted-average period of
2.11 years
.
On April 3, 2017, an executive officer of the Company awarded
23,263
RSUs to an officer of the Company pursuant to an authority delegated by the Compensation Committee. It was subsequently determined that such grant required approval from the Compensation Committee, and on September 13, 2017, the Compensation Committee ratified the action.
Rollforward of restricted stock units as of
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Units
|
|
Weighted average grant date fair value
|
Total non-vested at December 31, 2016
|
|
—
|
|
|
$
|
—
|
|
Units issued
|
|
1,238,127
|
|
|
14.66
|
|
Units vested
|
|
—
|
|
|
—
|
|
Actual units forfeited
|
|
(138,507
|
)
|
|
14.95
|
|
Non-vested balance at December 31, 2017
|
|
1,099,620
|
|
|
$
|
14.62
|
|
|
|
|
|
|
(f) Non-qualified stock options
On April 3, 2017, certain executive officers received, in total,
605,766
of non-qualified stock options under the Equity and Incentive Award Plan. These stock options vest with respect to
33.33%
of the stock options on January 20, 2018 and with respect to an additional
33.33%
of the stock options on the next two anniversaries. Additional non-qualified stock options were granted on July 3, 2017 and subsequently forfeited in September 2017. 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 of the grant date.
The Company recognized these stock options at fair value determined by applying the Black-Scholes model to the grant date market value of the underlying common shares of the Company. The compensation expense associated with these stock options will be amortized into income on a straight-line basis over the vesting period. For the year ended
December 31, 2017
, the Company recognized
$1.1 million
of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of
December 31, 2017
, total unamortized compensation cost related to unvested stock options was
$2.5 million
, which the Company expects to recognize over the remaining weighted-average period of
2.05 years
.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Rollforward of stock options as of
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted average grant date fair value
|
Total outstanding at December 31, 2016
|
|
—
|
|
|
$
|
—
|
|
Options granted
|
|
640,854
|
|
|
6.16
|
|
Options exercised
|
|
—
|
|
|
—
|
|
Actual options forfeited
|
|
(50,877
|
)
|
|
6.16
|
|
Options expired
|
|
—
|
|
|
—
|
|
Total outstanding at December 31, 2017
|
|
589,977
|
|
|
$
|
6.16
|
|
|
|
|
|
|
There were
no
stock options exercisable or vested at
December 31, 2017
.
Assumptions used in calculating the fair value of the stock options granted during the year are summarized below:
|
|
|
|
|
|
|
|
Weighted Average as of December 31, 2017
|
Valuation assumptions:
|
|
|
Expected dividend yield
|
|
0
|
%
|
Expected equity volatility
|
|
51.5
|
%
|
Expected term (years)
|
|
6
|
|
Risk-free interest rate
|
|
1.6
|
%
|
Exercise price per stock option
|
|
$
|
19.00
|
|
Market price per share
|
|
$
|
14.49
|
|
Weighted average fair value per stock option
|
|
$
|
6.16
|
|
|
|
|
(
13
)
Owners’ 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 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.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(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
.
(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.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(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, 2016
|
$
|
(2,603
|
)
|
|
$
|
(184
|
)
|
|
$
|
(2,787
|
)
|
Other comprehensive income, before tax
|
96
|
|
|
963
|
|
|
1,059
|
|
Income tax expense
(1)
|
—
|
|
|
—
|
|
|
—
|
|
December 31, 2017
|
$
|
(2,507
|
)
|
|
$
|
779
|
|
|
$
|
(1,728
|
)
|
|
|
|
|
|
|
(1) The deferred tax liability created by other comprehensive income was netted against the Company's deferred tax asset, which was offset by a valuation allowance.
The following table summarizes reclassifications out of accumulated other comprehensive (loss) during years ended
December 31, 2017
,
2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affected line item
in the consolidated and combined
statements of
operations and
comprehensive income (loss)
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Interest rate derivatives, hedging
|
|
$
|
(172
|
)
|
|
$
|
(3,641
|
)
|
|
$
|
(1,578
|
)
|
|
Interest expense
|
Foreign currency items
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other income
|
Total reclassifications
|
|
$
|
(172
|
)
|
|
$
|
(3,641
|
)
|
|
$
|
(1,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(15) Earnings per Share
Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. 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 which are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
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,
|
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(36,141
|
)
|
|
$
|
(187,087
|
)
|
|
$
|
(64,642
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
(1)
|
|
106,321
|
|
|
87,313
|
|
|
87,313
|
|
Dilutive effect of restricted stock awards granted to Board of Directors
|
|
36
|
|
|
—
|
|
|
—
|
|
Dilutive effect of deferred stock award granted to NEOs
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive effect of RSUs granted under stock incentive plans
|
|
135
|
|
|
—
|
|
|
—
|
|
Dilutive effect of options granted under stock incentive plans
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted-average common shares outstanding
(2)
|
|
106,492
|
|
|
87,313
|
|
|
87,313
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The basic weighted-average common shares outstanding have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor (as defined herein) 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
,
2016
and
2015
, 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 non-cancelable operating leases for various equipment and office facilities. 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 acquired from Trican Well Service, L.P. 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
10 months
to
35 years
.
Rental expense for operations, excluding daily rentals and reimbursable rentals, was
$11.8 million
,
$9.2 million
and
$6.3 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. During the year ended December 31, 2017, the company recognized
$0.6 million
of rental expense related to non-cancelable sale-leasebacks on
68
Peterbilt tractors acquired from the RockPile acquisition that expire in 2020. Future minimum lease payments include
$3.4 million
related to the sale leasebacks.
Sublease proceeds were
$0.3 million
,
$0.3 million
and
$0.05 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, all of which related to the subleased properties of the Company's Canadian operations. These sublease proceeds were recorded as a reduction of the Company's Canadian operations’ exit costs liability.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Minimum lease commitments remaining under operating leases for the next five years are
$45.4 million
, as listed below:
|
|
|
|
|
|
Year-end December 31,
|
|
(Thousands of Dollars)
|
2018
|
|
$
|
16,173
|
|
2019
|
|
14,408
|
|
2020
|
|
8,210
|
|
2021
|
|
3,990
|
|
2022
|
|
2,606
|
|
Total
|
|
$
|
45,387
|
|
The Company has
three
long-term operating leases in Canada that expire in 2018. The Company contracted sub-tenants for one of the leased properties during the fourth quarter of 2015 and for the other two properties in the second and fourth quarters of 2016, respectively. As of
December 31, 2017
, the total minimum sublease payments to be received in the future under the active subleases is
$0.01 million
in
2018
. The Company's subleases terminate after 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. 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
. During the third quarter of 2017, the Company 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, 2017
|
|
$
|
1,670
|
|
Exit costs
|
|
1,164
|
|
Cash buyout of lease
|
|
(702
|
)
|
Lease amortization and other adjustments
|
|
(862
|
)
|
Ending balance at December 31, 2017
|
|
$
|
1,270
|
|
|
|
|
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, 2017
in the accompanying consolidated and combined financial statements.
The following table summarizes the income from continuing operations before income taxes in the following jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
|
$
|
(35,904
|
)
|
|
$
|
(187,308
|
)
|
|
$
|
(64,470
|
)
|
Foreign
|
|
(87
|
)
|
|
221
|
|
|
(172
|
)
|
|
|
(35,991
|
)
|
|
(187,087
|
)
|
|
(64,642
|
)
|
|
|
|
|
|
|
|
The components of our income tax provision are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
614
|
|
|
—
|
|
|
—
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
(197
|
)
|
Total current income tax provision
|
|
614
|
|
|
—
|
|
|
(197
|
)
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(536
|
)
|
|
—
|
|
|
—
|
|
State
|
|
72
|
|
|
(114
|
)
|
|
—
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
990
|
|
Total deferred income tax provision
|
|
(464
|
)
|
|
(114
|
)
|
|
990
|
|
|
|
$
|
150
|
|
|
$
|
(114
|
)
|
|
$
|
793
|
|
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following table presents the reconciliation of our income taxes calculated at the statutory federal tax rate, currently 35%, to the income tax provision in our financial statements. The Company’s effective tax rate for 2017 of
(0.53)%
differs from the statutory rate, primarily due to state taxes, a valuation allowance and a reduction of the corporate income tax rate from 35% to 21%, due to the enactment of the Tax Cuts and Jobs Act in December 2017. The Company's effective tax rate for 2016 and 2015 was
0.06%
and
(1.23)%
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2017
|
% of Income Before Income Taxes
|
|
December 31,
2016
|
% of Income Before Income Taxes
|
|
December 31,
2015
|
% of Income Before Income Taxes
|
Income tax provision computed at the statutory federal rate
|
|
$
|
(9,795
|
)
|
35.00
|
%
|
|
$
|
(65,480
|
)
|
35.00
|
%
|
|
$
|
(22,625
|
)
|
35.00
|
%
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
(334
|
)
|
1.19
|
%
|
|
(114
|
)
|
0.06
|
%
|
|
—
|
|
—
|
%
|
Deferred tax asset valuation adjustment
|
|
(32,593
|
)
|
116.46
|
%
|
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
Tax rate change
|
|
41,591
|
|
(148.61
|
)%
|
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
Other
|
|
1,281
|
|
(4.57
|
)%
|
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
Flow through income not taxable
|
|
—
|
|
—
|
%
|
|
65,480
|
|
(35.00
|
)%
|
|
22,625
|
|
(35.00
|
)%
|
Foreign taxes
|
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
793
|
|
(1.23
|
)%
|
Income tax provision
|
|
$
|
150
|
|
(0.53
|
)%
|
|
$
|
(114
|
)
|
0.06
|
%
|
|
$
|
793
|
|
(1.23
|
)%
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
2,467
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net operating loss carry-forwards
|
|
70,745
|
|
|
—
|
|
|
—
|
|
Accruals and other
|
|
3,994
|
|
|
—
|
|
|
—
|
|
Intangibles
|
|
—
|
|
|
231
|
|
|
139
|
|
Gross deferred tax assets
|
|
77,206
|
|
|
231
|
|
|
139
|
|
Valuation allowance
|
|
(65,347
|
)
|
|
(139
|
)
|
|
(139
|
)
|
Total deferred tax assets
|
|
11,859
|
|
|
92
|
|
|
—
|
|
Deferred tax liability:
|
|
|
|
|
|
|
PP&E and intangibles
|
|
(11,319
|
)
|
|
—
|
|
|
(22
|
)
|
Prepaids and other
|
|
(1,954
|
)
|
|
—
|
|
|
—
|
|
Total deferred tax liability
|
|
(13,273
|
)
|
|
—
|
|
|
(22
|
)
|
Net deferred tax liability
|
|
$
|
(1,414
|
)
|
|
$
|
92
|
|
|
$
|
(22
|
)
|
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
As of December 31, 2017, the Company had total U.S. federal tax net operating loss (“NOL”) carryforwards of
$320.0 million
. Of this amount,
$85.6 million
related to the Company’s current year federal tax loss, 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, 2017, 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, 2017, the current year limitation of
$19.2 million
will be available for use in 2018. As such, the total annual limitation available for use in 2018 will be
$38.4 million
. The Company’s total NOL Carryforward available to reduce federal taxable income in 2018 is
$124.0 million
. These carryforwards will begin to expire in 2031.
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. Due to the uncertain timing of this reversal, the temporary differences associated with these indefinite-lived intangibles cannot be considered a source of future taxable income for purposes of determining a valuation allowance. As such, the deferred tax liability cannot 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 audited consolidated and combined balance sheet. 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.
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, 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 allowance as of
December 31, 2017
was
$65.3 million
. The valuation allowance for foreign deferred tax assets as of December 31, 2016 and 2015 of
$0.1 million
was related to the Company's tax basis in certain assets located in Canada.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Changes in the valuation allowance for deferred tax assets were as follows:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Valuation allowance as of the beginning of January 1, 2017
|
|
$
|
139
|
|
Charge as debit to equity
|
|
97,801
|
|
Charge as (benefit) expense to income tax provision for current year activity
|
|
8,032
|
|
Charge as (benefit) expense to income tax provision for change in deferred tax rate
|
|
(40,625
|
)
|
Changes to other comprehensive income
|
|
—
|
|
Valuation allowance as of December 31, 2017
|
|
$
|
65,347
|
|
|
|
|
In December 2017, the Tax Cuts and Jobs Act legislation was enacted. The Tax Cuts and Jobs Act includes significant changes to the U.S. corporate tax system, including a U.S. federal corporate income tax rate reduction from 35% to 21% as well as many other changes. ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation was enacted. As a result, the Company recorded a
$41.6 million
expense related to the re-measurement of the deferred tax assets and liabilities from 35% to the new 21% tax rate in December 2017. Additionally, the Company recorded a
$40.6 million
benefit related to the re-measurement of the ending valuation allowance from 35% to the new 21%. The effects of other provisions of the Act are not expected to have an adverse impact on our consolidated and combined financial statements. The Company will continue to analyze the impacts of the Tax Cuts and Jobs Act on the Company and refine its estimates as necessary in 2018.
There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended
December 31, 2017
,
2016
and
2015
. 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 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, 2014 through December 31, 2016 for federal tax purposes and for the years ended December 31, 2013 through December 31, 2016 for state tax purposes.
(
18
)
Commitments and Contingencies
As of
December 31, 2017
and
2016
, the Company had
$19.8 million
and
$0.1 million
of deposits on equipment, respectively. Outstanding purchase commitments on equipment were
$82.5 million
and
nil
, as of
December 31, 2017
and
2016
, respectively.
As of
December 31, 2017
, the Company anticipates committing
$4.2 million
to research and development with its equity-method investee, that is expected to generate economic benefits in 2019.
As of
December 31, 2017
and
2016
, the Company had issued letters of credit of
$2.0 million
under the 2017 ABL Facility and 2016 ABL Facility, respectively, which secured 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.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Aggregate minimum commitments under long-term raw material supply contracts for the next five years as of
December 31, 2017
are listed below:
|
|
|
|
|
|
(Thousands of Dollars)
|
Year-end December 31,
|
|
2018
|
$
|
45,942
|
|
2019
|
42,717
|
|
2020
|
26,087
|
|
2021
|
10,083
|
|
2022
|
—
|
|
|
$
|
124,829
|
|
|
|
Trican Indemnification Settlement
As part of the asset purchase agreement (the “APA”) executed for the 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 the Company incurred to bring all of the acquired machinery and equipment into proper working order exceeded the representations made in the APA. On June 12, 2017, the Company and Trican reached a settlement that resulted in proceeds of
$2.1 million
and net gain on settlement of
$3.6 million
. This gain is presented within other income in the consolidated and combined statements of operations and comprehensive income (loss).
The Company made a claim with its insurance company to recover additional funds under the representation and warranty policy associated with this acquisition. In October 2017, the Company reached an agreement with the insurance company to settle for
$4.2 million
.
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.
The Company has been 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. The parties agreed to settle the claims in the first quarter of 2018 for
$4.2 million
. Settlement of this collective action is subject to court approval. In accordance with GAAP, the Company recognized an estimated liability of
$4.2 million
as of December 31, 2017, as the occurrence of a loss was probable and reasonably estimable on this 2016 claim, based on events that occurred prior to the filing of the Company's 2017 Annual Report on Form 10-K.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Additionally, the Company is involved in a commercial dispute whereby a former customer has commenced an arbitration proceeding, captioned Halcon Operating Co., Inc. and Halcon Energy Properties, Inc. v. Keane Frac LP and Keane Frac GP, LLC, and on December 15, 2017, made a claim for contractual damages of approximately
$4.0 million
. The Company intends to vigorously dispute the merits of this asserted claim and plans to assert affirmative counterclaims for unpaid bills and other damages. The Company is currently unable to estimate the range of loss, if any, that may result from this matter.
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. The audit is expected to commence in March 2018. The Company is currently unable to estimate the range of loss, if any, that may result from this matter.
(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
,
$1.0 million
and
$0.7 million
during the years ended
December 31, 2017
,
2016
and
2015
, 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
) (
Owners’ 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, 2017, the Company has purchased
$0.6 million
of shares in its equity-method investee.
As part of the APA 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 APA. On June 12, 2017, the Company and Trican 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 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 Holdings LLC (the "selling stockholder"), 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 Holdings LLC controlled
50.9%
of the Company's outstanding common stock. Upon vesting of certain of the Company's RSUs on January 20, 2018, Keane Investor controls
50.7%
of the Company's outstanding common stock. The Company incurred
$1.2 million
of transaction costs on behalf of the selling stockholder related to the offering in 2017, which were included under selling, general and administrative expenses within the consolidated and combined statement of operations. The Company anticipates it will incur approximately
$12.9 million
of transactions costs related to the offering in 2018. Transaction costs consist of the underwriters' fees, other offering fees and expenses for professional services rendered specifically in connection with the offering.
(20) 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 were
$4.9 million
,
$1.4 million
and
$0.9 million
for the years ended December 31, 2017, 2016 and 2015, 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. The Company has
three
long-term operating leases still in effect. These leases and any trailing costs are settled on an ad hoc basis. The Company contracted sub-tenants for
one
of the leased properties during the fourth quarter of 2015 and for the other
two
properties in the second and fourth quarters of 2016.
|
|
|
•
|
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.
|
As of this time, Management has no formal plan to substantially liquidate its Canadian subsidiary.
As of
December 31, 2017
, all material costs associated with the wind-down of the Canadian subsidiary were identified, and we do
no
t expect to incur any additional significant costs associated with the wind-down of the Canadian subsidiary. Exit costs were incurred within the Company’s Completion Services reportable segment. The Company did
no
t incur any Canadian subsidiary exit related costs during the years ended December 31, 2017 or December 31, 2016.
Exit costs incurred during the year ended December 31, 2015 and the line items where they appear on the consolidated statements of operations and comprehensive loss were as follows:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Location in consolidated statements of operations and comprehensive loss
|
Description
|
Year ended December 31, 2015
|
Costs of services
|
|
|
|
Severance pay
|
$
|
208
|
|
Selling, general and administrative expenses
|
|
|
|
Severance pay
|
$
|
267
|
|
|
Consulting and legal fees
|
39
|
|
|
Retention pay
|
187
|
|
|
Asset sales and disposals costs
|
525
|
|
|
Lease exit costs
|
1,375
|
|
|
Other costs
|
121
|
|
|
|
$
|
2,514
|
|
The activity in the exit liabilities related to lease and contract obligations recognized in connection with the wind-down of the Canadian operations, which are presented as accrued liabilities on the consolidated balance sheets, were as follows for the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
2017
|
|
2016
|
Beginning balance at January 1,
|
|
$
|
233
|
|
|
$
|
759
|
|
Charges incurred
|
|
—
|
|
|
—
|
|
Cash payments net of cash receipts
|
|
(214
|
)
|
|
(290
|
)
|
Currency lease accretion and other adjustments
|
|
30
|
|
|
(236
|
)
|
Total lease obligations, ending balance
|
|
$
|
49
|
|
|
$
|
233
|
|
(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,
|
|
|
2017
|
|
2016
|
|
2015
|
Operations by business segment
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
1,527,287
|
|
|
$
|
410,854
|
|
|
$
|
363,820
|
|
Other Services
|
|
14,794
|
|
|
9,716
|
|
|
2,337
|
|
Total revenue
|
|
$
|
1,542,081
|
|
|
$
|
420,570
|
|
|
$
|
366,157
|
|
Gross profit (loss):
|
|
|
|
|
|
|
Completion Services
|
|
$
|
258,024
|
|
|
$
|
8,963
|
|
|
$
|
58,784
|
|
Other Services
|
|
1,496
|
|
|
(4,735
|
)
|
|
777
|
|
Total gross profit
|
|
$
|
259,520
|
|
|
$
|
4,228
|
|
|
$
|
59,561
|
|
Operating income (loss):
|
|
|
|
|
|
|
Completion Services
|
|
$
|
115,691
|
|
|
$
|
(80,563
|
)
|
|
$
|
(11,260
|
)
|
Other Services
|
|
(197
|
)
|
|
(10,156
|
)
|
|
(3,864
|
)
|
Corporate and Other
|
|
(106,225
|
)
|
|
(58,985
|
)
|
|
(24,587
|
)
|
Total operating income (loss)
|
|
$
|
9,269
|
|
|
$
|
(149,704
|
)
|
|
$
|
(39,711
|
)
|
Depreciation and amortization:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
141,385
|
|
|
$
|
89,432
|
|
|
$
|
65,114
|
|
Other Services
|
|
5,757
|
|
|
5,087
|
|
|
3,169
|
|
Corporate and Other
|
|
12,138
|
|
|
6,460
|
|
|
1,264
|
|
Total depreciation and amortization
|
|
$
|
159,280
|
|
|
$
|
100,979
|
|
|
$
|
69,547
|
|
(Gain) loss on disposal of assets
|
|
|
|
|
|
|
Completion Services
|
|
$
|
948
|
|
|
$
|
(538
|
)
|
|
$
|
357
|
|
Other Services
|
|
(4,064
|
)
|
|
(44
|
)
|
|
(651
|
)
|
Corporate and Other
|
|
561
|
|
|
195
|
|
|
24
|
|
Total (gain) on disposal of assets
|
|
$
|
(2,555
|
)
|
|
$
|
(387
|
)
|
|
$
|
(270
|
)
|
Impairment:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,443
|
|
Other Services
|
|
—
|
|
|
185
|
|
|
1,471
|
|
Corporate and Other
|
|
—
|
|
|
—
|
|
|
—
|
|
Total impairment
|
|
$
|
—
|
|
|
$
|
185
|
|
|
$
|
3,914
|
|
Exit Costs:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,722
|
|
Other Services
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate and Other
|
|
$
|
1,221
|
|
|
$
|
5,696
|
|
|
$
|
—
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exit costs
|
|
$
|
1,221
|
|
|
$
|
5,696
|
|
|
$
|
2,722
|
|
Income tax provision
(1)
:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate and Other
|
|
$
|
(150
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Total income tax:
|
|
$
|
(150
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Net income (loss):
|
|
|
|
|
|
|
Completion Services
|
|
$
|
115,691
|
|
|
$
|
(80,563
|
)
|
|
$
|
(11,260
|
)
|
Other Services
|
|
(197
|
)
|
|
(10,156
|
)
|
|
(3,864
|
)
|
Corporate and Other
|
|
(151,635
|
)
|
|
(96,368
|
)
|
|
(49,518
|
)
|
Total net loss
|
|
$
|
(36,141
|
)
|
|
$
|
(187,087
|
)
|
|
$
|
(64,642
|
)
|
Capital expenditures
(2)
:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
185,329
|
|
|
$
|
21,736
|
|
|
$
|
27,228
|
|
Other Services
|
|
1,718
|
|
|
487
|
|
|
8
|
|
Corporate and Other
|
|
2,582
|
|
|
1,322
|
|
|
10
|
|
Total capital expenditures
|
|
$
|
189,629
|
|
|
$
|
23,545
|
|
|
$
|
27,246
|
|
|
|
|
|
|
|
|
(1)
Income tax provision as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016 and the provisions for Texas margin tax and Canadian federal tax for 2015.
|
|
(2)
|
Capital expenditures do not include net assets from the acquisition of RockPile on July 3, 2017 of
$116.6 million
or the Acquired Trican Operations on March 16, 2016 of
$205.5 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2017
|
|
December 31,
2016
|
Total assets by segment:
|
|
|
|
|
Completion Services
|
|
$
|
863,419
|
|
|
$
|
412,947
|
|
Other Services
|
|
21,877
|
|
|
18,485
|
|
Corporate and Other
|
|
157,820
|
|
|
105,508
|
|
Total assets
|
|
$
|
1,043,116
|
|
|
$
|
536,940
|
|
|
|
|
|
|
Total assets by geography:
|
|
|
|
|
United States
|
|
$
|
1,041,596
|
|
|
$
|
535,395
|
|
Canada
|
|
1,520
|
|
|
1,545
|
|
Total assets
|
|
$
|
1,043,116
|
|
|
$
|
536,940
|
|
|
|
|
|
|
Goodwill by segment:
|
|
|
|
|
Completion Services
|
|
$
|
134,967
|
|
|
$
|
50,478
|
|
Total goodwill
|
|
$
|
134,967
|
|
|
$
|
50,478
|
|
|
|
|
|
|
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, 2017
and
2016
. 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, 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 income, net
|
|
4
|
|
|
3,701
|
|
|
942
|
|
|
9,316
|
|
Interest expense
|
|
(40,361
|
)
|
|
(4,349
|
)
|
|
(7,195
|
)
|
|
(7,318
|
)
|
Total other expenses
|
|
(40,357
|
)
|
|
(648
|
)
|
|
(6,253
|
)
|
|
1,998
|
|
Income tax income (expense)
|
|
(134
|
)
|
|
(931
|
)
|
|
(797
|
)
|
|
1,712
|
|
Net income (loss)
|
|
$
|
(72,255
|
)
|
|
$
|
(11,898
|
)
|
|
$
|
4,065
|
|
|
$
|
43,947
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
(Unaudited)
|
Selected Financial Data:
|
|
First
Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
|
$
|
61,195
|
|
|
$
|
91,589
|
|
|
$
|
116,753
|
|
|
$
|
151,033
|
|
Costs of services (excluding depreciation and amortization, shown separately)
|
|
67,845
|
|
|
85,039
|
|
|
120,480
|
|
|
142,978
|
|
Depreciation and amortization
|
|
13,968
|
|
|
27,723
|
|
|
30,256
|
|
|
29,032
|
|
Selling, general and administrative expenses
|
|
20,168
|
|
|
15,820
|
|
|
9,218
|
|
|
7,949
|
|
(Gain) loss on disposal of assets
|
|
(8
|
)
|
|
(464
|
)
|
|
176
|
|
|
(91
|
)
|
Impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
185
|
|
Total operating costs and expenses
|
|
101,973
|
|
|
128,118
|
|
|
160,130
|
|
|
180,053
|
|
Operating loss
|
|
(40,778
|
)
|
|
(36,529
|
)
|
|
(43,377
|
)
|
|
(29,020
|
)
|
Other expense (income), net
|
|
(133
|
)
|
|
(874
|
)
|
|
470
|
|
|
(379
|
)
|
Interest expense
|
|
8,408
|
|
|
10,037
|
|
|
9,963
|
|
|
9,891
|
|
Total other expenses
|
|
8,275
|
|
|
9,163
|
|
|
10,433
|
|
|
9,512
|
|
Net loss
|
|
$
|
(49,053
|
)
|
|
$
|
(45,692
|
)
|
|
$
|
(53,810
|
)
|
|
$
|
(38,532
|
)
|
(
24
)
New Accounting Pronouncements
(a) Recently Adopted Accounting Standards
In July 2015, the FASB issued ASU 2015-11, “Inventory, Simplifying the Measurement of Inventory,” which requires that an entity should measure inventory at the lower of cost and net realizable value. The realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The Company adopted this standard as of January 1, 2017. The adoption of this standard did not have a material impact on the Company's consolidated and combined financial statements.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet. The Company adopted this standard as of January 1, 2017, retrospectively. The adoption of this standard did not have a material impact on the Company's consolidated and combined financial statements for prior periods.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718),” which is effective for fiscal years and interim periods within fiscal years beginning after December 31, 2016, with a cumulative-effect and prospective approach to be used for implementation. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes. The Company adopted this standard as of January 1, 2017. The adoption of this standard did not have an adverse impact to the Company's financial condition or results of operations.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which is effective for fiscal years and interim periods within fiscal years beginning after December 15,
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
2017, with a full retrospective approach to be used upon implementation and early adoption allowed. ASU 2016-15 provides guidance on eight different issues intended to reduce diversity in practice on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this standard effective January 1, 2017, which impacted the presentation of its cash payments for prepayment penalties incurred in connection with the early termination of its 2016 ABL Facility, 2016 Term Facility and Senior Secured Notes. The Company presented the cash payments for the prepayment penalties as cash used in financing activities.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230), Restricted Cash,” which stipulates that the amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-the period and end-of-period total amounts shown on the statement of cash flows. The amendments to this update do not provide a definition of restricted cash or restricted cash equivalents. The Company early adopted this standard effective January 1, 2017. The adoption of this standard did not have any impact on the Company's consolidated and combined financial statements, as it does not have any restricted cash.
In December 2016, the FASB issued ASU 2016-19, “Technical Corrections and Improvements”, which provides technical corrections, clarifications and improvements on a wide range of topics in the ASC. The amendments in this ASU generally fall into one of four categories: (i) amendments related to differences between original guidance and the ASC, (ii) guidance clarification and reference corrections, (iii) simplification and (iv) minor improvements. Transition guidance varies based on the amendments in the ASUs. The amendments that require transition guidance are effective for fiscal years and interim periods beginning after December 15, 2016. The adoption of this standard did not have any impact on the Company's consolidated and combined financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates Step 2 of the goodwill impairment test with the goodwill impairment amount calculated as the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted prospectively for any impairment tests performed after January 1, 2017. The Company early adopted this standard, prospectively, as of January 1, 2017 and applied this standard to its annual goodwill impairment assessment.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies what constitutes a modification of a share-based payment award. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017, with early adoption permitted. The Company early adopted this standard effective January 1, 2017, which impacted the accounting for the equity-based awards, issued under the Equity and Incentive Award Plan, in its consolidated and combined financial statements. The Company applied this standard to determine that its conversion of the Class B units issued to the independent members of the Board of Directors into restricted shares required the Company to apply modification accounting.
In August 2017, the FASB issued ASC 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU 2017-12 simplifies the hedge documentation and effectiveness assessment requirements, eliminates the need to separately measure and report hedge ineffectiveness and requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The Company early adopted this standard effective September 28, 2017, in conjunction with its hedge designation of
two
interest rate swaps, to benefit from the ability to perform ongoing hedge effectiveness assessments on a qualitative basis and the removal of the requirement to separately measure and report hedge ineffectiveness. There were no active hedge relationships upon adoption. Accordingly, the adoption did not impact
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
the opening balance of accumulated other comprehensive income or net assets in the Company's consolidated and combined financial statements.
(b) Recently Issued 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 FASB 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 will be 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 will be 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 has completed its evaluation of the impact of the adoption of this ASU on its various revenue streams and established processes and determined the adoption of this ASU will not have a material impact on the Company's current revenue recognition processes.
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 will adopt these standards utilizing the modified retrospective method concurrently with the adoption of ASU 2014-09.
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, 2018. The Company will implement the provisions of ASU 2016-01 effective January 1, 2018. The Company does not anticipate the adoption of this standard will have a material impact on its consolidated and combined financial statements.
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. The Company anticipates the adoption of this standard will result in a significant increase in its assets and liabilities, as the Company has certain operating and real property lease arrangements for which it is the lessee. The standard is effective for the Company beginning on January 1, 2019.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the 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. Early adoption is permitted, but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. The Company does not expect the adoption of this standard to have a material impact on its 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 business. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017 and should be applied prospectively. Early adoption is allowed for transactions that occurred before the issuance date or effective date of the amendments only when the transaction has not been reported in the financial statements previously issued. The Company does not expect the adoption of this standard to have a material impact on its consolidated and combined financial statements.
In February 2017, the FASB issued ASU 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 Asset”. Subtopic 610-20 was issued as part of the new revenue recognition standard and provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. ASU 2017-05 (i) clarifies the definition of “in substance nonfinancial assets,” (ii) unifies guidance related to partial sales of nonfinancial assets, (iii) eliminates rules specifically addressing sales of real estate, (iv) removes exceptions to the financial asset derecognition model and (v) clarifies the accounting for contributions of nonfinancial assets to joint ventures. The Company will adopt this standard utilizing the modified retrospective method concurrently with the adoption of ASU 2014-09. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated and combined financial statements.
(25) Subsequent Events
Secondary Common Stock Offering
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 Holdings LLC (the "selling stockholder"), pursuant to which
15,320,015
shares were sold by the selling shareholder (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 Holdings LLC controlled
50.9%
of the Company's outstanding common stock. Upon vesting of certain of the Company's RSUs on January 20, 2018, Keane Investor Holdings LLC controls
50.7%
of the Company's outstanding common stock. The Company incurred
$1.2 million
of transaction costs on behalf of the selling stockholder related to the offering in 2017, which were included under selling, general and administrative expenses within the consolidated and combined statement of operations. The Company anticipates it will incur approximately
$12.9 million
of transactions costs related to the offering in 2018. Transaction costs consist of the underwriters' fees, other offering fees and expenses for professional services rendered specifically in connection with the offering.
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Stock Repurchase Program
On February 26, 2018, the Company announced that its Board of Directors has authorized a stock repurchase program of up to
$100.0 million
of the Company’s outstanding common stock, with the intent of returning value to its shareholders as management continues to expect further growth and profitability. The duration of the stock buy-back program will be
12 months
. The program does not obligate the Company 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 the Company's discretion.