Item 1. Condensed Consolidated Financial Statements (Unaudited)
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
117,092
|
|
|
$
|
80,206
|
|
Trade and other accounts receivable, net
|
|
199,099
|
|
|
210,428
|
|
Inventories, net
|
|
26,620
|
|
|
35,669
|
|
Assets held for sale
|
|
582
|
|
|
176
|
|
Prepaid and other current assets
|
|
5,940
|
|
|
5,784
|
|
Total current assets
|
|
349,333
|
|
|
332,263
|
|
Operating lease right-of-use assets
|
|
46,411
|
|
|
—
|
|
Finance lease right-of-use assets
|
|
8,876
|
|
|
—
|
|
Property and equipment, net
|
|
470,266
|
|
|
531,319
|
|
Goodwill
|
|
132,524
|
|
|
132,524
|
|
Intangible assets
|
|
50,941
|
|
|
51,904
|
|
Other noncurrent assets
|
|
6,486
|
|
|
6,569
|
|
Total assets
|
|
$
|
1,064,837
|
|
|
$
|
1,054,579
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
Liabilities
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
119,914
|
|
|
$
|
106,702
|
|
Accrued expenses
|
|
74,391
|
|
|
101,539
|
|
Current maturities of long-term operating lease liabilities
|
|
20,453
|
|
|
—
|
|
Current maturities of long-term finance lease liabilities
|
|
4,359
|
|
|
4,928
|
|
Current maturities of long-term debt
|
|
2,561
|
|
|
2,776
|
|
Customer contract liabilities
|
|
471
|
|
|
60
|
|
Stock-based compensation
|
|
—
|
|
|
4,281
|
|
Other current liabilities
|
|
1,309
|
|
|
294
|
|
Total current liabilities
|
|
223,458
|
|
|
220,580
|
|
Long-term operating lease liabilities, less current maturities
|
|
25,750
|
|
|
—
|
|
Long-term finance lease liabilities, less current maturities
|
|
5,709
|
|
|
5,581
|
|
Long-term debt, net of unamortized deferred financing costs and unamortized debt discount, less current maturities
|
|
336,417
|
|
|
337,954
|
|
Other noncurrent liabilities
|
|
8,247
|
|
|
3,283
|
|
Total noncurrent liabilities
|
|
376,123
|
|
|
346,818
|
|
Total liabilities
|
|
599,581
|
|
|
567,398
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
Common stock, par value $0.01 per share (authorized 500,000 shares, issued and outstanding 104,968 and 104,188 shares, respectively)
|
|
1,039
|
|
|
1,038
|
|
Paid-in capital in excess of par value
|
|
465,995
|
|
|
455,447
|
|
Retained earnings
|
|
6,037
|
|
|
31,494
|
|
Accumulated other comprehensive loss
|
|
(7,815
|
)
|
|
(798
|
)
|
Total stockholders' equity
|
|
465,256
|
|
|
487,181
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,064,837
|
|
|
$
|
1,054,579
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands)
See accompanying notes to unaudited condensed consolidated financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Amounts in thousands, except for per unit amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue
|
|
$
|
427,733
|
|
|
$
|
578,533
|
|
|
$
|
849,387
|
|
|
$
|
1,091,549
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of services
(1)
|
|
324,503
|
|
|
447,685
|
|
|
662,149
|
|
|
851,093
|
|
Depreciation and amortization
|
|
69,886
|
|
|
59,404
|
|
|
141,362
|
|
|
119,455
|
|
Selling, general and administrative expenses
|
|
32,571
|
|
|
24,125
|
|
|
60,507
|
|
|
58,009
|
|
Loss (gain) on disposal of assets
|
|
(330
|
)
|
|
3,287
|
|
|
151
|
|
|
4,056
|
|
Total operating costs and expenses
|
|
426,630
|
|
|
534,501
|
|
|
864,169
|
|
|
1,032,613
|
|
Operating income (loss)
|
|
1,103
|
|
|
44,032
|
|
|
(14,782
|
)
|
|
58,936
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
(43
|
)
|
|
16
|
|
|
405
|
|
|
(12,973
|
)
|
Interest expense
(2)
|
|
(5,477
|
)
|
|
(14,317
|
)
|
|
(10,872
|
)
|
|
(21,307
|
)
|
Total other expenses
|
|
(5,520
|
)
|
|
(14,301
|
)
|
|
(10,467
|
)
|
|
(34,280
|
)
|
Income (loss) before income taxes
|
|
(4,417
|
)
|
|
29,731
|
|
|
(25,249
|
)
|
|
24,656
|
|
Income tax (expense) benefit
|
|
(564
|
)
|
|
936
|
|
|
(1,538
|
)
|
|
(2,232
|
)
|
Net income (loss)
|
|
(4,981
|
)
|
|
30,667
|
|
|
(26,787
|
)
|
|
22,424
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
(31
|
)
|
|
(29
|
)
|
|
(65
|
)
|
Hedging activities
|
|
(3,682
|
)
|
|
99
|
|
|
(6,544
|
)
|
|
2,310
|
|
Total comprehensive loss
|
|
$
|
(8,663
|
)
|
|
$
|
30,735
|
|
|
$
|
(33,360
|
)
|
|
$
|
24,669
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
0.28
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.20
|
|
Diluted net loss per share
|
|
(0.05
|
)
|
|
0.27
|
|
|
(0.26
|
)
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: basic
|
|
104,837
|
|
|
111,319
|
|
|
104,631
|
|
|
111,663
|
|
Weighted-average shares outstanding: diluted
|
|
104,837
|
|
|
111,543
|
|
|
104,631
|
|
|
111,879
|
|
|
|
|
|
|
|
|
|
|
(1)
Cost of services during the
three and six
months ended
June 30, 2019
excludes depreciation of
$66.3 million
and
$133.9 million
, respectively. Cost of services during the
three and six
months ended
June 30, 2018
excludes depreciation of
$57.6 million
and
$115.7 million
, respectively. Depreciation related to cost of services is presented within depreciation and amortization disclosed separately.
(2)
Interest expense during the
three and six
ended June 30, 2018 includes
$7.6 million
in write-offs of deferred financing costs incurred in connection with the extinguishment of the Company's pre-existing 2017 term loan facility.
See accompanying notes to unaudited condensed consolidated financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
Paid-in capital in excess of par value
|
|
Retained earnings
|
|
Accumulated other comprehensive loss
|
|
Total
|
Balance as of December 31, 2018
|
|
$
|
1,038
|
|
|
$
|
455,447
|
|
|
$
|
31,494
|
|
|
$
|
(798
|
)
|
|
$
|
487,181
|
|
Stock-based compensation
|
|
2
|
|
|
8,277
|
|
|
—
|
|
|
—
|
|
|
8,279
|
|
Shares repurchased and retired related to share-based compensation
|
|
—
|
|
|
(2,861
|
)
|
|
—
|
|
|
—
|
|
|
(2,861
|
)
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,139
|
)
|
|
(3,139
|
)
|
New lease standard implementation
|
|
—
|
|
|
—
|
|
|
1,330
|
|
|
—
|
|
|
1,330
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
(21,806
|
)
|
|
—
|
|
|
(21,806
|
)
|
Balance as of March 31, 2019
|
|
$
|
1,040
|
|
|
$
|
460,863
|
|
|
$
|
11,018
|
|
|
$
|
(3,937
|
)
|
|
$
|
468,984
|
|
Stock-based compensation
(1)
|
|
—
|
|
|
5,637
|
|
|
—
|
|
|
—
|
|
|
5,637
|
|
Shares repurchased and retired related to share-based compensation
|
|
(1
|
)
|
|
(505
|
)
|
|
—
|
|
|
—
|
|
|
(506
|
)
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,878
|
)
|
|
(3,878
|
)
|
Net loss
|
|
—
|
|
|
—
|
|
|
(4,981
|
)
|
|
|
|
(4,981
|
)
|
Balance as of June 30, 2019
|
|
$
|
1,039
|
|
|
$
|
465,995
|
|
|
$
|
6,037
|
|
|
$
|
(7,815
|
)
|
|
$
|
465,256
|
|
|
|
(1)
|
Stock-based compensation during the
six months ended
June 30, 2019
includes stock-based compensation expense recognized during the period of
$9.6 million
and the vested deferred stock awards of
$4.3 million
. Refer to Note
(9) Stock-Based Compensation
for further discussion of the Company's stock-based compensation.
|
See accompanying notes to unaudited condensed consolidated financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
Paid-in capital in excess of par value
|
|
Retained deficit
|
|
Accumulated other comprehensive income (loss)
|
|
Total
|
Balance as of December 31, 2017
|
|
$
|
1,118
|
|
|
$
|
541,074
|
|
|
$
|
(27,372
|
)
|
|
$
|
(1,728
|
)
|
|
$
|
513,092
|
|
Issuance of common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
|
2
|
|
|
7,352
|
|
|
—
|
|
|
—
|
|
|
7,354
|
|
Shares repurchased and retired related to share-based compensation
|
|
(1
|
)
|
|
(3,338
|
)
|
|
—
|
|
|
—
|
|
|
(3,339
|
)
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,106
|
|
|
2,106
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
(8,243
|
)
|
|
—
|
|
|
(8,243
|
)
|
Balance as of March 31, 2018
|
|
$
|
1,119
|
|
|
$
|
545,088
|
|
|
$
|
(35,615
|
)
|
|
$
|
378
|
|
|
$
|
510,970
|
|
Stock-based compensation
(2)
|
|
3
|
|
|
4,037
|
|
|
—
|
|
|
—
|
|
|
4,040
|
|
Shares repurchased and retired related to stock repurchase program
|
|
(26
|
)
|
|
(38,825
|
)
|
|
(1,273
|
)
|
|
—
|
|
|
(40,124
|
)
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(172
|
)
|
|
(172
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
30,667
|
|
|
—
|
|
|
30,667
|
|
Balance as of June 30, 2018
|
|
$
|
1,096
|
|
|
$
|
510,300
|
|
|
$
|
(6,221
|
)
|
|
$
|
206
|
|
|
$
|
505,381
|
|
|
|
(2)
|
Stock-based compensation during the
six months ended
June 30, 2018
includes stock-based compensation expense recognized during the period of
$7.1 million
and the vested deferred stock awards of
$4.3 million
.
|
See accompanying notes to unaudited condensed consolidated financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
|
Net income (loss)
|
|
$
|
(26,787
|
)
|
|
$
|
22,424
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
|
|
|
|
Depreciation and amortization
|
|
141,362
|
|
|
119,455
|
|
Amortization of deferred financing fees
|
|
500
|
|
|
1,363
|
|
Loss on debt extinguishment, including prepayment premiums
|
|
—
|
|
|
7,550
|
|
Loss on disposal of assets
|
|
151
|
|
|
4,056
|
|
Loss on contingent consideration liability
|
|
—
|
|
|
13,254
|
|
Realized gain on derivative
|
|
(444
|
)
|
|
(310
|
)
|
Stock-based compensation
|
|
9,637
|
|
|
7,113
|
|
Other non-cash expense, net
|
|
8
|
|
|
—
|
|
Unrealized gain (loss) on derivative
|
|
(6,544
|
)
|
|
2,310
|
|
Changes in operating assets and liabilities
|
|
|
|
|
Decrease (increase) in trade and other accounts receivable, net
|
|
11,600
|
|
|
(8,899
|
)
|
Decrease (increase) in inventories
|
|
9,048
|
|
|
(7,618
|
)
|
Decrease (increase) in prepaid and other current assets
|
|
(257
|
)
|
|
(2,738
|
)
|
Increase in other assets
(1)
|
|
(46,950
|
)
|
|
(2,129
|
)
|
Increase in accounts payable
|
|
23,511
|
|
|
17,208
|
|
Decrease in accrued expenses
|
|
(27,141
|
)
|
|
(26,500
|
)
|
Decrease in customer contract liabilities
|
|
411
|
|
|
(2,460
|
)
|
Increase (decrease) in other liabilities
(1)
|
|
53,820
|
|
|
(654
|
)
|
Net cash provided by operating activities
|
|
141,925
|
|
|
143,425
|
|
Cash flows from investing activities
|
|
|
|
|
Purchase of property and equipment
|
|
(111,694
|
)
|
|
(128,178
|
)
|
Advances of deposit on equipment
|
|
(2,319
|
)
|
|
(804
|
)
|
Implementation of software
|
|
(1,783
|
)
|
|
(77
|
)
|
Proceeds from disposal of assets
|
|
18,348
|
|
|
1,076
|
|
Payments for leasehold improvements
|
|
—
|
|
|
(1,455
|
)
|
Equity method investment
|
|
—
|
|
|
(1,163
|
)
|
Proceeds from insurance recoveries
|
|
106
|
|
|
105
|
|
Net cash used in investing activities
|
|
(97,342
|
)
|
|
(130,496
|
)
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from the term loan facility
|
|
—
|
|
|
348,250
|
|
Payments on the secured notes and term loan facility
|
|
(1,750
|
)
|
|
(283,202
|
)
|
Payments on finance leases
|
|
(2,553
|
)
|
|
(1,786
|
)
|
Payment of debt issuance costs
|
|
—
|
|
|
(7,250
|
)
|
Payments on contingent consideration liability
|
|
—
|
|
|
(11,962
|
)
|
Shares repurchased and retired related to share repurchase program
|
|
—
|
|
|
(40,124
|
)
|
Shares repurchased and retired related to share-based compensation
|
|
(3,365
|
)
|
|
(3,339
|
)
|
Net cash (used in) provided by financing activities
|
|
(7,668
|
)
|
|
587
|
|
Non-cash effect of foreign translation adjustments
|
|
(29
|
)
|
|
(111
|
)
|
Net increase (decrease) in cash, cash equivalents
|
|
36,886
|
|
|
13,405
|
|
Cash and cash equivalents, beginning
|
|
80,206
|
|
|
96,120
|
|
Cash and cash equivalents, ending
|
|
$
|
117,092
|
|
|
$
|
109,525
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
Interest expense, net
|
|
$
|
10,847
|
|
|
$
|
13,117
|
|
Income taxes
|
|
1,500
|
|
|
2,066
|
|
Contingent value right (CVR) settlement
|
|
—
|
|
|
19,918
|
|
Non-cash investing and financing activities
(2)
:
|
|
|
|
|
Changes in accounts payable related to capital expenditures
|
|
(10,299
|
)
|
|
13,808
|
|
Non-cash additions to finance right-of-use assets
|
|
5,084
|
|
|
—
|
|
Non-cash additions to finance lease liabilities, including current maturities
|
|
5,087
|
|
|
—
|
|
Non-cash additions to operating right-of-use assets
|
|
61,670
|
|
|
—
|
|
Non-cash additions to operating lease liabilities, including current maturities
|
|
61,454
|
|
|
—
|
|
|
|
|
|
|
|
|
(1)
|
For further detail on the cash flows associated with the Company's right-of-use lease assets and lease liabilities, see Note
(11)
Leases
.
|
|
|
(2)
|
Non-cash additions for finance and operating leases were nil for the six months ended June 30, 2018, as the Company adopted ASC 842 January 1, 2019.
|
See accompanying notes to unaudited condensed consolidated financial statements.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
(
1
)
Basis of Presentation and Nature of Operations
On October 13, 2016, Keane Group, Inc. (the "Company" or "Keane") was formed 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.
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. Upon completion of the IPO and the reorganization, the Company had
103,128,019
shares of common stock outstanding.
The accompanying unaudited condensed consolidated financial statements were prepared using United States Generally Accepted Accounting Principles ("GAAP") and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by GAAP for annual financial statements and should be read together with the Company's Annual Report on
Form 10-K
for the year ended December 31, 2018, filed with the Securities and Exchange Commission (the "SEC") on February 27, 2019.
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 unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company's financial position as of
June 30, 2019
and the results of its operations and cash flows for the
three and six
months ended
June 30, 2019
and
2018
. Such adjustments are of a normal recurring nature.
All intercompany transactions and balances have been eliminated.
(
2
)
Summary of Significant Accounting Policies
(a) Business Combinations
Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standards Codification ("ASC") 805, "Business Combinations," as amended by Accounting Standards Update ("ASU") 2017-01, "Business Combinations (Topic 805), Clarifying the Definition of a Business." The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, "Fair Value Measurements," using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850 using discounted cash flows and other applicable valuation techniques. Operating results of an acquired business are included in our results of operations from the date of acquisition. Refer to Note (3) Merger with C&J Energy Services, Inc. ("C&J").
(b) Revenue Recognition
Effective January 1, 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, using the modified retrospective method. Changes were made to the relevant business processes and the related control activities, including information systems, in order to monitor and maintain appropriate controls over financial reporting. There were no significant changes to the Company's internal control over financial reporting due to the Company's adoption of ASU 2014-09.
Revenue from the Company's Completion Services and Other Services segments are earned as services are rendered, which is generally on a per stage or fixed monthly rate for the Company's Completion Services segment and on a per job basis for the Other Services segment. All revenue is recognized when a contract with a customer exists, the performance obligations under the contract have been satisfied over time, the amount to which the Company has the right to invoice has been determined and collectability of amounts subject to invoice is probable. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the unaudited condensed consolidated statements of operations and comprehensive loss. To the extent fulfillment costs are considered separate performance obligations that are billable to the customer, the amounts billed are recorded as revenue in the unaudited condensed consolidated statements of operations and comprehensive loss.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
The Company does not incur contract acquisition and origination costs. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the unaudited condensed consolidated statements of operations and comprehensive loss and net cash provided by operating activities in the unaudited condensed consolidated statements of cash flows.
The Company has elected the practical expedient to recognize revenue based upon the transactional value it has the right to invoice upon completion of each performance obligation per the contract terms. The Company believes its right to consideration corresponds directly with the value transferred to the customer, and this expedient does not lend itself to the application of significant judgment. The Company has also elected the practical expedient to expense immediately mobilization costs, as the amortization period would generally always be less than one year. As a result of electing these practical expedients, there was no material impact on the Company's current revenue recognition processes and no retrospective adjustments were necessary.
The Company's obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations.
Revenue from the Company's Completion Services and Other Services segments are recognized as follows:
Completion Services
The Company provides hydraulic fracturing and wireline services pursuant to contractual arrangements, such as term contracts and pricing agreements. Revenue is recognized upon the completion of each performance obligation. The Company's performance obligations under its Completion Services segment represent each stage frac'd or each stage perforated. Once a stage has been completed, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, any additional equipment used on the job and other miscellaneous items. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue.
Other Services
The Company provides cementing services pursuant to contractual arrangements, such as term contracts or on a spot market basis. Revenue is recognized upon the completion of each performance obligation, which for cementing services represents the portion of the well cemented: surface casing, intermediate casing or production liner. The performance obligations are satisfied over time. Jobs for these services are typically short term in nature, with most jobs completed in a day. Once the well has been cemented, a field ticket is created that includes charges for the services performed and the consumables used during the course of service. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
Disaggregation of Revenue
Revenue activities during the
three and six
months ended
June 30, 2019
and
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue by segment:
|
|
|
|
|
|
|
|
|
Completion Services
|
|
$
|
420,363
|
|
|
$
|
569,929
|
|
|
$
|
832,338
|
|
|
$
|
1,077,380
|
|
Other Services
|
|
7,370
|
|
|
8,604
|
|
|
17,049
|
|
|
14,169
|
|
Total revenue
|
|
$
|
427,733
|
|
|
$
|
578,533
|
|
|
$
|
849,387
|
|
|
$
|
1,091,549
|
|
|
|
|
|
|
|
|
|
|
Revenue by geography:
|
|
|
|
|
|
|
|
|
East
|
|
$
|
130,063
|
|
|
$
|
251,983
|
|
|
$
|
284,929
|
|
|
$
|
429,518
|
|
North
|
|
82,805
|
|
|
66,925
|
|
|
144,085
|
|
|
127,979
|
|
South
|
|
214,865
|
|
|
259,625
|
|
|
420,373
|
|
|
534,052
|
|
Total revenue
|
|
$
|
427,733
|
|
|
$
|
578,533
|
|
|
$
|
849,387
|
|
|
$
|
1,091,549
|
|
|
|
|
|
|
|
|
|
|
Contract Balances
In line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is completed or at month-end. The majority of the Company's jobs are completed in less than
30 days
. Furthermore, it is currently not standard practice for the Company to execute contracts with prepayment features. As such, the Company's contract liabilities are immaterial to its unaudited condensed consolidated balance sheets. Payment terms after invoicing are typically
30 days
or less.
(c) 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
. Property and equipment with an estimated useful life less than
13 months
are expensed as incurred. Management bases the estimate of the useful lives and salvage values of property and equipment on expected utilization, technological change and effectiveness of maintenance programs. When components of an item of property and equipment have different useful lives, they are accounted for separately as major components of property and equipment. Equipment held under capital leases are generally amortized on a straight-line basis over the shorter of the estimated useful life of the underlying asset and the term of the lease.
Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating costs and expenses in the unaudited condensed consolidated statements of operations and comprehensive loss.
Major classifications of property and equipment and their respective useful lives are as follows:
|
|
|
Land
|
Indefinite life
|
Building and leasehold improvements
|
13 months – 40 years
|
Machinery and equipment
|
13 months – 10 years
|
Office furniture, fixtures and equipment
|
3 years – 5 years
|
Leasehold improvements are assigned a useful life equal to the term of the related lease.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
In the first quarter of 2018, the Company reassessed the estimated useful lives of select machinery and equipment. The Company concluded that due to an increase in service intensity driven by a shift to more 24-hour work, higher stage volume, larger stages and more proppant usage per stage, the estimated useful lives of these select machinery and equipment should be reduced by approximately
50%
. In accordance with ASC 250, "Accounting Changes and Error Corrections," the change in the estimated useful lives of the Company's property and equipment was accounted for as a change in accounting estimate, on a prospective basis, effective January 1, 2018. This change resulted in an increase in depreciation expense and decrease in net income during the
six months ended
June 30, 2018
of
$10.0 million
in the unaudited condensed consolidated statement of operations and comprehensive loss.
Depreciation methods, useful lives and residual values are reviewed annually.
(d) Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and subsequently-issued related ASUs, which set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors, using the modified retrospective method. In connection with the adoption of these standards, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases.
In accordance with ASU 2016-02, the Company considers any contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration to be a lease. The Company determines whether the contract into which it has entered is a lease at the lease inception date. Rental arrangements with term lengths of one month or less are not disclosed.
For lessees, leases can be classified as finance leases or operating leases, while for lessors, leases can be classified as sales-type leases, direct financing leases or operating leases. All leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents the Company's obligation to make lease payments arising from the lease and a right-of-use asset, which represents the Company's right to use the underlying asset being leased.
For leases in which the Company is the lessee, the Company uses a collateralized incremental borrowing rate to calculate the lease liability, as for most leases, the implicit rate in the lease is unknown. The collateralized incremental borrowing rate is based on a yield curve over various term lengths that approximates the borrowing rate the Company would receive if it collateralized its lease arrangements with all of its assets. For leases in which the Company is the lessor, the Company uses the rate implicit in the lease.
For finance leases, the Company amortizes the right-of-use asset on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term and records this amortization in rent expense on the unaudited condensed consolidated statements of operations and comprehensive loss. The Company adjusts the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the unaudited condensed consolidated statements of operations and comprehensive loss. For operating leases, the Company recognizes one single lease cost, comprised of the lease payments and amortization of any associated initial direct costs, within rent expense on the unaudited condensed consolidated statements of operations and comprehensive loss. Variable lease costs not included in the determination of the lease liability at the commencement of a lease are recognized in the period when the specified target that triggers the variable lease payments becomes probable.
In accordance with ASU 2016-02, the Company has made the following elections for its lease accounting:
|
|
•
|
all short-term leases with term lengths of 12 months or less will not be capitalized; the underlying class of assets to which the Company has applied this expedient is primarily its apartment leases;
|
|
|
•
|
for non-revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one lease component and accounted for under ASU 2016-02; and
|
|
|
•
|
for revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one component and accounted for under ASC 606.
|
As part of the Company's adoption of ASU 2016-02, the Company elected to adopt the standard using the modified retrospective transition method and elected the practical expedient transition method package whereby the Company did not:
|
|
•
|
reassess whether any expired or existing contracts contained leases;
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
|
|
•
|
reassess the lease classification for any expired or existing leases; and
|
|
|
•
|
reassess initial direct costs for any existing leases.
|
For additional information, see Note
(11)
Leases
.
(e) 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 consolidated balance sheets at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income (loss) until the hedged item affects earnings.
The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (i.e. cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
The Company discontinues hedge accounting prospectively, when it determines that the derivative is no longer 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 condensed consolidated 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, any gains and losses related to the hedging relationship that were recognized in accumulated other comprehensive income (loss).
(f) 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 time-based 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 grant-date fair value of performance-based RSUs with market conditions is valued using a Monte Carlo simulation method that incorporates the probability of the performance conditions being met as of the grant date. The fair value of stock options is determined by applying the Black-Scholes model to the grant date market value of the underlying common shares of the Company. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method better reflects actual stock-based compensation expense.
Compensation expense from time-based restricted stock awards, RSUs and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.
Deferred compensation expense associated with liability-based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company's stock on the date of settlement.
Tax deductions on the stock-based compensation awards are not realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
Company will receive a tax deduction. If the tax deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the unaudited condensed consolidated statements of cash flows.
The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by the Company withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees' income tax obligations are accounted for as treasury shares that are subsequently retired. The cash flows resulting from any shares acquired will be classified as financing cash flows in the unaudited condensed consolidated statements of cash flows.
Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
For additional information, see Note
(9)
Stock-Based Compensation
.
(3) Merger with C&J
Background
On June 17, 2019, Keane and C&J announced that they entered into an agreement and plan of merger (the "Merger Agreement") with King Merger Sub Corp. ("Merger Sub") providing that, among other things and subject to the terms and conditions of the Merger Agreement, at the effective time:
|
|
•
|
Merger Sub will merge with and into C&J, with C&J surviving and continuing as the surviving corporation as a direct, wholly-owned subsidiary of Keane (the "Merger");
|
|
|
•
|
Each share of C&J common stock issued and outstanding immediately prior to the effective time will be canceled and converted into the right to receive
1.6149
shares of Keane common stock plus cash in lieu of any fractional shares that otherwise would have been issued;
|
|
|
•
|
Keane will be renamed and Keane common stock, including the shares to be issued in the Merger, will be listed on the New York Stock Exchange under a new ticker symbol; and
|
|
|
•
|
(a) each outstanding C&J stock option will convert into a stock option relating to shares of Keane common stock, (b) each outstanding C&J restricted stock award will convert into a restricted award relating to shares of Keane common stock, (c) each outstanding C&J restricted stock unit award will convert into a Keane restricted stock unit award relating to shares of Keane common stock, and (d) each outstanding C&J performance share award will convert into a restricted award relating to shares of Keane common stock. The number of shares of C&J common stock subject to C&J performance share awards shall be deemed to be the number of shares subject to the C&J performance share award with performance deemed achieved at target performance levels.
|
C&J and Keane estimate that holders of C&J common stock as of immediately prior to the effective time will hold, in the aggregate, approximately
50%
of the issued and outstanding shares of common stock of the combined company (based on fully diluted shares outstanding of the combined company) immediately following the effective time, and holders of shares of Keane common stock as of immediately prior to the effective time will hold, in the aggregate, approximately
50%
of the issued and outstanding shares of common stock of the combined company (based on fully diluted shares outstanding of the combined company) immediately following the effective time.
The consummation of the Merger is subject to the satisfaction or waiver of certain conditions, including, among others, approval by the stockholders of Keane of the issuance of shares of Keane common stock and approval by the stockholders of C&J of the Merger Agreement, as well as the expiration or earlier termination of any applicable waiting period, and the receipt of certain regulatory approvals, including those under domestic antitrust and competition laws, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). In connection with the Merger, Keane
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
and C&J each filed a Notification and Report Form under the HSR Act with the U.S. Federal Trade Commission and the DOJ on June 28, 2019. On July 18, 2019, the companies received notification of early termination of the waiting period under the HSR Act.
In accordance with the terms of the Merger Agreement, Keane Investor Holdings LLC ("Keane Investor"), which beneficially owns
51,668,175
shares of Keane common stock, has entered into a Support Agreement and Irrevocable Proxy (the "Support Agreement"), dated June 16, 2019, by and among Keane Investor, Cerberus Capital Management, L.P. ("Cerberus"), an affiliate of Keane Investor, and C&J. The Support Agreement places certain restrictions on the transfer of the shares of Keane held by Keane Investor and Cerberus, including, subject to certain exceptions, that for the period commencing at the effective time and continuing for
forty-five days
thereafter, Keane Investor and Cerberus shall not sell, transfer, assign, pledge, encumber or otherwise dispose of, directly or indirectly, their shares of Keane common stock or any other securities convertible into or exchangeable for Keane common stock. In addition, the Support Agreement includes covenants that, with limited exceptions, require Keane Investor (which owns approximately
49.2%
of the outstanding shares of Keane common stock) to vote its shares in favor of the share issuance to C&J stockholders and against actions that may impair or impede the transactions contemplated by the Merger Agreement.
Keane has agreed to operate its business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the proposed Merger, subject to specific exceptions set forth in the Merger Agreement, and have agreed to certain other customary restrictions on operations, as set forth in the Merger Agreement.
Accounting for Merger with C&J
The initial allocation of preliminary consideration to tangible and intangible assets acquired and liabilities assumed was based on management's preliminary estimate of their respective fair values as of March 31, 2019, are not considered final, and may differ materially from the final amounts. The final allocation of consideration to tangible and intangible assets acquired and liabilities assumed will be completed subsequent to the closing of the Merger, currently expected in the fourth quarter 2019, in accordance with ASC 805, Business Combinations.
GAAP requires that
one
of the two companies in the Merger be designated as the acquirer for accounting purposes based on the evidence available. In identifying Keane as the acquiring entity for accounting purposes, the companies took into account which entity is issuing its equity interests, the existence of a large minority interest, the intended corporate governance structure of the combined company, and the intended senior management of the combined company. No single factor was the sole determinant in the overall conclusion that Keane is the accounting acquirer; rather, all factors were considered in arriving at the conclusion. The final determination of the accounting acquirer will be made on the closing date of the Merger. While not expected, such final determination may differ from the description above if facts or circumstances change.
Keane, as the accounting acquirer, will account for the transaction by using Keane historical information and accounting policies and adding the assets and liabilities of C&J as of the closing date at their respective estimated fair values.
Preliminary Consideration
The initial allocation of the preliminary consideration is approximately
$689.6 million
, consisting of (i) equity consideration in the form of Keane shares issued to C&J stockholders with a preliminary estimate of
$683.9 million
and (ii) replacement share based compensation awards attributable to pre-Merger services with a preliminary value of
$5.7 million
.
The preliminary estimate of the consideration does not purport to represent the actual value of the total consideration that will be received by the C&J stockholders when the Merger is completed. The fair value of the equity securities comprising the consideration will be measured on the closing date of the Merger at the then-current market price per share of Keane common stock. This requirement will likely result in a difference from the
$6.50
per share as of July 3, 2019, assumed in the calculation, and that difference may be material.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
(4) Inventories, net
Inventories, net, consisted of the following as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Sand, including freight
|
|
$
|
8,414
|
|
|
$
|
14,697
|
|
Chemicals and consumables
|
|
4,314
|
|
|
6,250
|
|
Materials and supplies
|
|
13,892
|
|
|
14,722
|
|
Total inventory, net
|
|
$
|
26,620
|
|
|
$
|
35,669
|
|
Inventories are reported net of obsolescence reserves of
$1.4 million
and
$1.0 million
as of
June 30, 2019
and
December 31, 2018
, respectively. The Company recognized
$0.1 million
and
nil
of obsolescence expense during the
three months ended June 30, 2019
and
2018
, respectively. The Company recognized
$0.4 million
, each, of obsolescence expense during the
six months ended June 30,
2019
and
2018
, respectively.
(
5
)
Property and Equipment, net
Property and Equipment, net consisted of the following as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Land
|
|
$
|
6,716
|
|
|
$
|
4,771
|
|
Building and leasehold improvements
|
|
32,147
|
|
|
32,134
|
|
Office furniture, fixtures and equipment
|
|
8,035
|
|
|
7,691
|
|
Machinery and equipment
|
|
1,037,490
|
|
|
1,041,212
|
|
|
|
1,084,388
|
|
|
1,085,808
|
|
Less accumulated depreciation
|
|
(618,708
|
)
|
|
(562,813
|
)
|
Construction in progress
|
|
4,586
|
|
|
8,324
|
|
Total property and equipment, net
|
|
$
|
470,266
|
|
|
$
|
531,319
|
|
|
|
|
|
|
Three and six
months ended
June 30, 2019
All (gains) and losses are presented within (gain) loss on disposal of assets in the unaudited condensed consolidated statements of operations and comprehensive loss. The following describes by segment the total (gains) losses recognized on the disposal of certain assets of
$0.3 million
net gain and
$0.2 million
net loss for the
three and six
months ended
June 30, 2019
, respectively:
|
|
•
|
During the three and six months ended June 30, 2019, the Company recognized a net loss of
$2.4 million
and
$5.7 million
, respectively, primarily relating to early disposals of various hydraulic fracturing pump components and iron within the Completion Services segment, offset primarily by salvage value on cores from end of life transmissions.
|
|
|
•
|
During the three and six months ended June 30, 2019, the Company recognized a net gain of
$2.5 million
and
$4.9 million
, respectively, within the Completions Services segment, related to the divestiture of various hydraulic fracturing equipment. The sales proceeds for these divestitures were
$6.5 million
and
$10.6 million
, respectively.
|
|
|
•
|
During the three and six months ended June 30, 2019, the Company recognized a net gain of
$0.2 million
and
$0.6 million
primarily related to divesting trailers, vehicles and other various immaterial assets within the Corporate and Others business segment.
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
Three and six
months ended
June 30, 2018
The following describes by segment the total (gains) losses recognized on the disposal of certain assets of
$3.3 million
and
$4.1 million
for the three and six months ended June 30, 2018:
|
|
•
|
During the three months ended June 30, 2018, the Company recognized a loss of
$2.7 million
relating to the sale of its field operations facility in Mathis, Texas within the Corporate and Others business segment.
|
|
|
•
|
During the three and six months ended June 30, 2018, the Company divested of various immaterial assets for a net loss of
$0.6 million
and
$1.4 million
, respectively. These assets primarily consisted of hydraulic fracturing pump components within the Completion Services segment.
|
(6) 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
three months ended June 30, 2019
and
2018
, sales to Completion Services customers represented
98%
and
99%
of the Company's consolidated revenue, respectively. During the
three months ended June 30, 2019
and
2018
, sales to Completion Services customers represented
99%
and
100%
of the Company's consolidated gross profit. During the
six months ended June 30, 2019
and
2018
, sales to Completion Services customers represented
98%
and
99%
of the Company's consolidated revenue, respectively. During the
six months ended June 30, 2019
and
2018
, sales to Completion Services customers represented
100%
and
100%
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 onshore in the U.S. This activity is driven by many factors, including current and expected oil and natural gas prices. The U.S. energy industry experienced a significant downturn in the second half of 2014 through early 2016, driven primarily by global oversupply and a decline in commodity prices. From early 2016 through late 2018, the U.S. generally experienced some recovery in commodity prices and drilling and completion activity. Over this time frame, the U.S. active rig count increased from a trough of
404
rigs in May 2016 to a peak of
1,083
rigs in December 2018, driving significant demand for the Company's completion services.
Even though West Texas Intermediate crude oil prices have improved from the low of
$42.53
per barrel in late-December 2018 to
$59.30
as of July 15, 2019. Supply and demand for completion services remains challenged, resulting in adverse pricing, utilization impacts and ongoing commodity price volatility. More recently, the increased focus on electric hydraulic fracturing or other advanced technological fleets, impacting demands on conventional fracturing technology, has led to growing oversupply and capital investment concerns.
In response to these ongoing pressures, Keane's continued success is attributable primarily to the Company's high level of efficiency achieved at the wellsite, as well as its high-quality customer base and dedicated contract model, which provides visibility to a baseload of activity for 2019.
For the
three months ended June 30, 2019
revenue from the Company's top
four
customers individually represented
10%
or more and collectively represented
67%
of the Company's consolidated revenue. For the
three months ended June 30, 2018
, revenue from the Company's top four customers individually represented
10%
or more and collectively represented
54%
of the Company's consolidated revenue. For the
six months ended June 30, 2019
, revenue from each of the Company's top
four
customers individually represented
10%
or more and collectively represented
60%
of the Company's consolidated revenue. For the
six months ended June 30, 2018
, revenue from each of the Company's top four customers individually represented
10%
or more and collectively represented
50%
of the Company's consolidated revenue. Revenue is earned from each of these customers within the Completion Services segment.
For the
three and six
months ended
June 30, 2019
, purchases from
one
supplier represented approximately
5%
to
10%
of the Company's overall purchases, and for the
three and six
months ended
June 30, 2018
,
two
suppliers represented approximately
5%
to
10%
of the Company's overall purchases. The costs for each of these suppliers were incurred within the Completion Services segment.
(7) Derivatives
The Company uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt.
On May 25, 2018, the Company, and certain subsidiaries of the Company as guarantors, entered into a term loan facility (the "2018 Term Loan Facility") with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
collateral agent. The 2018 Term Loan Facility has an initial aggregate principal amount of
$350 million
and proceeds were used to repay the Company's pre-existing 2017 term loan facility. The 2018 Term Loan Facility has a variable interest rate based on the London Interbank Offer Rate ("LIBOR"), subject to a
1.0%
floor. As a result of this transaction, the Company desired to hedge additional notional amounts to continue to hedge approximately
50%
of its expected LIBOR exposure and to extend the terms of its swaps to align with the 2018 Term Loan Facility.
On June 22, 2018, the Company unwound its existing interest rate swaps and received
$3.2 million
in proceeds. The Company used the
$3.2 million
of proceeds to execute a new off-market interest rate swap. Under the terms of the new interest rate swap, the Company receives 1-month LIBOR, subject to a
1%
floor, and makes payments based on a fixed rate of
2.625%
. The new interest rate swap is effective through March 31, 2025 and has a notional amount of
$175 million
. The new interest rate swap was designated in a new cash flow hedge relationship.
The Company discontinued hedge accounting on the pre-existing interest rate swaps upon termination. At
the time hedge accounting was discontinued, the exiting interest rate swaps had
$3.5 million
of deferred gains in accumulated other comprehensive loss. This amount was not reclassified from accumulated other comprehensive loss into earnings, as it remained probable that the originally forecasted transaction will occur. This amount will be recognized into earnings through August 18, 2022, the termination date of the pre-existing interest rate swap.
The following tables present the fair value of the Company's derivative instruments on a gross and net basis as of the periods shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
Derivatives
designated as
hedging
instruments
|
|
Derivatives
not
designated as
hedging
instruments
|
|
Gross Amounts
of Recognized
Assets and
Liabilities
|
|
Gross
Amounts
Offset in the
Balance
Sheet
(1)
|
|
Net Amounts
Presented in
the Balance
Sheet
(2)
|
As of June 30, 2019:
|
|
|
|
|
|
|
|
|
|
Other current liability
|
(1,309
|
)
|
|
—
|
|
|
(1,309
|
)
|
|
—
|
|
|
(1,309
|
)
|
Other noncurrent liability
|
(5,414
|
)
|
|
—
|
|
|
(5,414
|
)
|
|
—
|
|
|
(5,414
|
)
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Other current liability
|
(129
|
)
|
|
—
|
|
|
(129
|
)
|
|
—
|
|
|
(129
|
)
|
Other noncurrent liability
|
(169
|
)
|
|
—
|
|
|
(169
|
)
|
|
—
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company's agreement with its financial trading counterparty allows for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreement.
|
|
|
(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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Location
|
Amount of gain (loss) recognized in total other comprehensive loss on derivative
|
|
$
|
(3,682
|
)
|
|
$
|
99
|
|
|
$
|
(6,544
|
)
|
|
$
|
2,310
|
|
|
OCI
|
Amount of gain reclassified from accumulated other comprehensive loss into earnings
|
|
196
|
|
|
239
|
|
|
444
|
|
|
310
|
|
|
Interest Expense
|
The gain (loss) recognized in other comprehensive loss for the derivative instrument is presented within hedging activities in the unaudited condensed consolidated statements of operations and comprehensive loss.
There were
no
gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values as of
June 30, 2019
,
$0.8 million
of net losses will be reclassified from accumulated other comprehensive loss into earnings within the next 12 months.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
See Note
(
8
)
Fair Value Measurements and Financial Information
for discussion on fair value measurements related to the Company's derivative instruments.
(
8
)
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. As of
June 30, 2019
, the Company's financial instruments consisted of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, long-term debt and lease obligations. As of
June 30, 2019
and
December 31, 2018
, the carrying values of the Company's financial instruments, included in its condensed consolidated balance sheets, approximated or equaled their fair values.
Recurring Fair Value Measurement
As of
June 30, 2019
and
December 31, 2018
, the
one
financial instrument measured by the Company at fair value on a recurring basis was its interest rate derivative.
The fair market value of the derivative financial instrument reflected on the condensed consolidated balance sheets as of
June 30, 2019
and
December 31, 2018
were determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instrument, time value, implied volatilities, nonperformance risk as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data.
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
June 30, 2019
and
December 31, 2018
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
June 30, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
(6,723
|
)
|
|
—
|
|
|
(6,723
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate derivative
|
|
(298
|
)
|
|
—
|
|
|
(298
|
)
|
|
—
|
|
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.
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.
During the
six months ended June 30, 2019
and
2018
, 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.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
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
$117.1 million
and
$80.2 million
as of
June 30, 2019
and
December 31, 2018
, respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions' financial condition.
The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor's credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
The majority of the Company's trade receivables have payment terms of
30
days or less. Significant customers are those that individually account for 10% or more of the Company's consolidated revenue or total accounts receivable. As of
June 30, 2019
, trade receivables from
five
customers individually represented 10% or more and collectively represented
56%
of the Company's total accounts receivable. As of
December 31, 2018
, trade receivables from three customers individually represented 10% or more and collectively represented
49%
of the Company's total accounts receivable. The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has a process in place to collect all receivables within
30
to
60 days
of aging. As of
June 30, 2019
and December 31, 2018, the Company had
$0.9 million
and
$0.5 million
in allowance for doubtful accounts, respectively, based on specific identification. The Company wrote-off
$0.3 million
and
$0.5 million
of bad debts during the
three and six
months ended
June 30, 2019
, but did not write-off of any bad debts during the
six months ended June 30, 2018
.
(9)
Stock-Based Compensation
As of
June 30, 2019
, the Company has
four
types of stock-based compensation under the Equity and Incentive Award Plan (the "Plan"): (i) restricted stock awards issued to independent directors, (ii) time-based restricted stock units awards, (iii) performance-based restricted stock unit awards ("performance-based RSUs") and (iv) non-qualified stock options. RSUs and non-qualified stock options are issued to executive officers and other key management personnel. The Company has reserved
11,934,601
shares of its common stock for awards that may be issued under the Plan.
The following table summarizes stock-based compensation costs for the
three months ended June 30, 2019
and
2018
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Deferred stock awards
|
|
$
|
—
|
|
|
$
|
1,070
|
|
|
$
|
—
|
|
|
$
|
2,140
|
|
Restricted stock awards
|
|
381
|
|
|
90
|
|
|
621
|
|
|
180
|
|
Restricted stock time-based unit awards
|
|
4,171
|
|
|
2,240
|
|
|
7,224
|
|
|
3,756
|
|
Non-qualified stock options
|
|
675
|
|
|
630
|
|
|
1,355
|
|
|
1,037
|
|
Restricted stock performance-based unit awards
|
|
410
|
|
|
—
|
|
|
437
|
|
|
—
|
|
Equity-based compensation cost
|
|
$
|
5,637
|
|
|
$
|
4,030
|
|
|
$
|
9,637
|
|
|
$
|
7,113
|
|
Tax Benefit
|
|
(1,360
|
)
|
|
(973
|
)
|
|
(2,341
|
)
|
|
(1,713
|
)
|
Equity-based compensation cost, net of tax
|
|
$
|
4,277
|
|
|
$
|
3,057
|
|
|
$
|
7,296
|
|
|
$
|
5,400
|
|
|
|
|
|
|
|
|
|
|
Performance-based RSU awards
Effective March 25, 2019, the Company issued
327,401
of performance-based RSUs to
four
executive officers under the Plan, which were fair valued at
$3.6 million
using a Monte Carlo simulation method.
163,700
of these performance-based RSUs vest at December 31, 2020 (the "
two
-year performance-based RSUs"), while the remaining
163,701
of these performance-based RSUs vest at December 31, 2021 (the "
three
-year performance-based RSUs"). Each vesting is subject to a payout percentage based on the Company's annualized total stockholder return ranking relative to its total stockholder return peer group achieved during the performance period, which extends from January 1, 2019 to December 31, 2020 for the
two
-year performance-based RSUs and January 1, 2019 to December 31, 2021 for the
three
-year performance-based RSUs. The number of shares that may be earned at the end of the vesting period ranges from
25%
to
200%
of the target award amount, if the threshold performance criteria is met. These performance-based RSUs will be settled in the Company's common stock and are classified as equity awards. The compensation expense associated with these performance-based RSUs will be amortized into earnings on a straight-line basis. As of
June 30, 2019
, total unamortized compensation cost related to unvested performance-based RSUs was
$3.1 million
, which the Company expects to recognize over the weighted-average period of
2.01
years.
(10) 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 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.
A reconciliation of the numerators and denominators used for the basic and diluted net income (loss) per share computations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,981
|
)
|
|
$
|
30,667
|
|
|
$
|
(26,787
|
)
|
|
$
|
22,424
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
(1)
|
|
104,837
|
|
|
111,319
|
|
|
104,631
|
|
|
111,663
|
|
Dilutive effect of restricted stock awards granted to Board of Directors
|
|
29
|
|
|
58
|
|
|
35
|
|
|
57
|
|
Dilutive effect of time-based restricted stock awards granted under the Plan
|
|
15
|
|
|
166
|
|
|
158
|
|
|
159
|
|
Dilutive effect of performance-based restricted stock awards granted under the Plan
|
|
327
|
|
|
—
|
|
|
327
|
|
|
—
|
|
Diluted weighted-average common shares outstanding
(1)
|
|
105,208
|
|
|
111,543
|
|
|
105,151
|
|
|
111,879
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As a result of the net loss incurred by the Company for the three and six months ended June 30, 2019, 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.
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
(11)
Leases
The Company adopted ASU 2016-02, "Leases (Topic 842)," and subsequently-issued related ASUs, which set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors, effective January 1, 2019, using the modified retrospective method. Upon adoption, the Company recognized a lease right-of-use asset and lease liability of approximately
$61.0 million
on its unaudited condensed consolidated balance sheet on January 1, 2019, for its operating leases that existed upon the effective date, with no additional impact to its unaudited condensed consolidated statements of operations and comprehensive loss or statements of cash flows.
The Company has operating leases for certain of its corporate offices, field shops, apartments, warehouses, rail cars, frac pumps, trailers, tractors and certain other equipment. The Company also has both operating and finance leases for its light duty vehicles.
The Company's leases have variable payments with annual escalations that are based on the proportion by which the consumer price index ("CPI") for all urban consumers increased over the CPI index for the prior comparative year. The Company's leases have remaining lease terms of less than
1 year
to
15 years
, some of which include extension and termination option. None of these extension and termination options were used to determine the Company's right-of-use assets and lease liabilities, as the Company has not determined it is probable that it will exercise any of these options. None of the Company's leases have residual value guarantees.
The components of the Company's lease costs are as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
Three Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2019
|
Operating lease cost
|
$
|
6,593
|
|
|
$
|
13,226
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
855
|
|
|
1,704
|
|
Interest on lease liabilities
|
136
|
|
|
356
|
|
Total finance lease cost
|
991
|
|
|
2,060
|
|
Short-term lease cost
|
96
|
|
|
286
|
|
Variable lease cost
(1)
|
3,448
|
|
|
8,911
|
|
Sublease income
|
(33
|
)
|
|
(61
|
)
|
Total lease cost
|
$
|
11,095
|
|
|
$
|
24,422
|
|
(1)
Cost from variable amounts excluded from determination of lease liability.
Supplemental cash flows related to leases are as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2019
|
Cash paid for amounts included in the measurements of lease liabilities
|
|
|
Operating cash flows from operating leases
|
|
$
|
13,081
|
|
Operating cash flows from finance leases
|
|
293
|
|
Financing cash flows from finance leases
|
|
2,553
|
|
Weighted average remaining lease terms are as follows:
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
Operating leases
|
5.00 years
|
Finance leases
|
2.58 years
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
Weighted average discount rate on the Company's lease liabilities are as followsfour
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
Operating leases
|
6.57%
|
Finance leases
|
5.79%
|
|
|
Maturities of the Company's lease liabilities as of
June 30, 2019
, per ASU 2016-02, were as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Year ending December 31,
|
Operating leases
|
|
Finance leases
|
2019
|
$
|
11,814
|
|
|
$
|
3,270
|
|
2020
|
18,564
|
|
|
3,164
|
|
2021
|
5,598
|
|
|
2,892
|
|
2022
|
4,281
|
|
|
1,395
|
|
2023
|
2,838
|
|
|
165
|
|
Thereafter
|
12,492
|
|
|
—
|
|
Total undiscounted remaining minimum lease payments
|
55,587
|
|
|
10,886
|
|
Less imputed interest
|
(9,384
|
)
|
|
(818
|
)
|
Total discounted remaining minimum lease payments
|
$
|
46,203
|
|
|
$
|
10,068
|
|
|
|
|
|
Minimum lease commitments, excluding early termination buyouts, remaining under the Company's operating leases and capital leases, for the next five years per ASC 840, "Leases," as of
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Year ending December 31,
|
Operating leases
|
|
Capital leases
|
2019
|
$
|
26,327
|
|
|
$
|
5,484
|
|
2020
|
18,017
|
|
|
2,652
|
|
2021
|
5,688
|
|
|
2,430
|
|
2022
|
4,795
|
|
|
883
|
|
2023
|
3,172
|
|
|
—
|
|
Total
|
$
|
57,999
|
|
|
$
|
11,449
|
|
|
|
|
|
The Company did not make any lease reassessments or modifications nor did it recognize any gains or losses on sale-leaseback transactions during the
three and six
months ended
June 30, 2019
.
As of
June 30, 2019
, the Company does not have additional operating and finance leases that have not yet commenced, nor did the Company have any lease transactions with any of its related parties.
(
12
)
Commitments and Contingencies
As of
June 30, 2019
and
December 31, 2018
, the Company had
$1.1 million
and
$4.2 million
of deposits on equipment, respectively. Outstanding purchase commitments on equipment were
$28.4 million
and
$43.6 million
, as of
June 30, 2019
and
December 31, 2018
, respectively.
As of
June 30, 2019
, the Company had committed
$4.9
million to research and development with its equity-method investee, that is expected to generate economic benefits in 2019.
As of
June 30, 2019
and
December 31, 2018
, the Company had issued letters of credit of
$2.8 million
and
$2.5 million
, respectively, under the Company's asset-based revolving credit facility obtained on February 17, 2017, as amended on December 22, 2017, which secured performance obligations related to the Company's capital lease with CIT Finance LLC and the Company's casualty insurance policy.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. The Company purchased
$32.6 million
and
$38.0 million
amounts of proppant under its take-or-pay agreements during the
three months ended June 30, 2019
and
2018
, respectively. The Company purchased
$50.7 million
and
$74.6 million
amounts of proppant under it take-or-pay agreements during the
six months ended June 30, 2019
and
2018
, respectively.
Aggregate minimum commitments under long-term raw material supply contracts for the next five years as of
June 30, 2019
are listed below:
|
|
|
|
|
|
(Thousands of Dollars)
|
2019
|
$
|
18,369
|
|
2020
|
29,053
|
|
2021
|
14,925
|
|
2022
|
9,300
|
|
2023
|
1,600
|
|
|
$
|
73,247
|
|
|
|
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.
In November 2017, the Company was served with two class or collective action claims, captioned Omar Castro v. Keane and Vu Tran v. Keane, both alleging that the Company failed to pay a Texas class of workers an appropriate overtime rate in compliance with the Fair Labor Standards Acts and state laws. These two claims were consolidated on January 30, 2018 and captioned Vu Tran, et al. v. Keane. After the Company substantially completed its discovery, the Company recognized an estimated liability in the third quarter of 2018, as the occurrence of a loss was probable and reasonably estimable. In the first quarter of 2019, the parties agreed to settle this consolidated claim for
$1.0 million
. In the second quarter of 2019, the settlement payments were submitted for a total of
$0.9 million
and the matter is no longer open.
In June 2016, the Company filed suit for declaratory judgment against Ceramifrac Proppants, LLC ("Ceramifrac"), captioned Keane Frac ND, LLC & Keane Group Holdings, LLC v. Ceramifrac Proppants, LLC, contending that the Company had no obligations to pay for ceramic proppant for which the Company was billed for in 2015, but of which it never took possession. The Company contended it never agreed to purchase the product in question. The case went to jury trial on March 19, 2019, and upon conclusion of the trial, the jury rendered an adverse verdict resulting in a judgment awarding Ceramifrac
$4.1 million
in damages. In the first quarter of 2019, the Company recognized an estimated liability of
$4.1 million
. During the second quarter of 2019, the parties settled for
$3.8 million
, which was subsequently paid in early July 2019, and the case is now closed.
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
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 ongoing; however, the Company anticipated and recorded an estimate for a potential assessment of approximately
$3.2 million
during the first quarter of 2019. Subsequently, the Company made a
$2.1 million
prepayment in June 2019. These amounts are recorded in selling, general and administrative expenses in the Company's consolidated statements of operations and comprehensive loss.
(13)
Related Party Transactions
Cerberus Operations and Advisory Company and Cerberus Capital Management, L.P., affiliates of the Company's principal equity holder, provide certain consulting services to the Company. The Company paid
$1.1 million
and
$0.2 million
during the
three months ended June 30, 2019
and
2018
, respectively, for these services. The Company paid
$1.5 million
and
$0.2 million
during the
six months ended June 30, 2019
and
2018
, respectively, for these services.
In connection with the Company's research and development initiatives, the Company has engaged in transactions with its equity-method investee. As of
June 30, 2019
, the Company has purchased
$1.7 million
of shares in its equity-method investee.
(14)
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.
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 and equipment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Three months ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Operations by business segment
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Completion Services
|
|
$
|
420,363
|
|
|
$
|
569,929
|
|
|
$
|
832,338
|
|
|
$
|
1,077,380
|
|
Other Services
|
|
7,370
|
|
|
8,604
|
|
|
17,049
|
|
|
14,169
|
|
Total revenue
|
|
$
|
427,733
|
|
|
$
|
578,533
|
|
|
$
|
849,387
|
|
|
$
|
1,091,549
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
Completion Services
|
|
$
|
102,131
|
|
|
$
|
131,245
|
|
|
$
|
187,436
|
|
|
$
|
241,632
|
|
Other Services
|
|
1,099
|
|
|
(397
|
)
|
|
(198
|
)
|
|
(1,176
|
)
|
Total gross profit
|
|
$
|
103,230
|
|
|
$
|
130,848
|
|
|
$
|
187,238
|
|
|
$
|
240,456
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Completion Services
|
|
$
|
36,857
|
|
|
$
|
75,694
|
|
|
$
|
54,824
|
|
|
$
|
129,959
|
|
Other Services
|
|
468
|
|
|
(1,716
|
)
|
|
(1,702
|
)
|
|
(3,893
|
)
|
Corporate and Other
|
|
(36,222
|
)
|
|
(29,946
|
)
|
|
(67,904
|
)
|
|
(67,130
|
)
|
Total operating income (loss)
|
|
$
|
1,103
|
|
|
$
|
44,032
|
|
|
$
|
(14,782
|
)
|
|
$
|
58,936
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Completion Services
|
|
$
|
65,672
|
|
|
$
|
54,618
|
|
|
$
|
132,419
|
|
|
$
|
109,798
|
|
Other Services
|
|
631
|
|
|
1,319
|
|
|
1,504
|
|
|
2,717
|
|
Corporate and Other
|
|
3,583
|
|
|
3,467
|
|
|
7,439
|
|
|
6,940
|
|
Total depreciation and amortization
|
|
$
|
69,886
|
|
|
$
|
59,404
|
|
|
$
|
141,362
|
|
|
$
|
119,455
|
|
(Gain) loss on disposal of assets
|
|
|
|
|
|
|
|
|
Completion Services
|
|
$
|
(398
|
)
|
|
$
|
933
|
|
|
$
|
193
|
|
|
$
|
1,875
|
|
Other Services
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate and Other
|
|
68
|
|
|
2,354
|
|
|
(42
|
)
|
|
2,181
|
|
Total (gain) loss on disposal of assets
|
|
$
|
(330
|
)
|
|
$
|
3,287
|
|
|
$
|
151
|
|
|
$
|
4,056
|
|
Exit costs:
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
$
|
—
|
|
|
$
|
(171
|
)
|
|
$
|
—
|
|
|
$
|
(153
|
)
|
Total exit costs
|
|
$
|
—
|
|
|
$
|
(171
|
)
|
|
$
|
—
|
|
|
$
|
(153
|
)
|
Income tax provision:
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
$
|
(564
|
)
|
|
$
|
936
|
|
|
$
|
(1,538
|
)
|
|
$
|
(2,232
|
)
|
Total income tax:
|
|
(564
|
)
|
|
$
|
936
|
|
|
$
|
(1,538
|
)
|
|
$
|
(2,232
|
)
|
Net income (loss):
|
|
|
|
|
|
|
|
|
Completion Services
|
|
$
|
36,856
|
|
|
$
|
75,694
|
|
|
$
|
54,823
|
|
|
$
|
129,959
|
|
Other Services
|
|
468
|
|
|
(1,716
|
)
|
|
(1,702
|
)
|
|
(3,893
|
)
|
Corporate and Other
|
|
(42,305
|
)
|
|
(43,311
|
)
|
|
(79,908
|
)
|
|
(103,642
|
)
|
Total net income (loss)
|
|
$
|
(4,981
|
)
|
|
$
|
30,667
|
|
|
$
|
(26,787
|
)
|
|
$
|
22,424
|
|
Capital expenditures
(1)
:
|
|
|
|
|
|
|
|
|
Completion Services
|
|
$
|
51,680
|
|
|
$
|
95,865
|
|
|
$
|
99,699
|
|
|
$
|
143,761
|
|
Other Services
|
|
—
|
|
|
1,497
|
|
|
646
|
|
|
1,544
|
|
Corporate and Other
|
|
1,990
|
|
|
569
|
|
|
3,330
|
|
|
886
|
|
Total capital expenditures
|
|
$
|
53,670
|
|
|
$
|
97,931
|
|
|
$
|
103,675
|
|
|
$
|
146,191
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes expenditures for leasehold improvements and finance leases.
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Total assets by segment:
|
|
|
|
|
Completion Services
|
|
$
|
859,126
|
|
|
$
|
894,467
|
|
Other Services
|
|
16,689
|
|
|
20,974
|
|
Corporate and Other
|
|
189,022
|
|
|
139,138
|
|
Total assets
|
|
$
|
1,064,837
|
|
|
$
|
1,054,579
|
|
|
|
|
|
|
Total assets by geography:
|
|
|
|
|
United States
|
|
$
|
1,064,837
|
|
|
$
|
1,054,550
|
|
Canada
|
|
—
|
|
|
29
|
|
Total assets
|
|
$
|
1,064,837
|
|
|
$
|
1,054,579
|
|
|
|
|
|
|
Goodwill by segment:
|
|
|
|
|
Completion Services
|
|
$
|
132,524
|
|
|
$
|
132,524
|
|
Total goodwill
|
|
$
|
132,524
|
|
|
$
|
132,524
|
|
|
|
|
|
|
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
(
15
)
New Accounting Pronouncements
(a) Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months, regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. In December 2018, the FASB issued ASU 2019-20, "Leases (Topic 842): Narrow-Scope Improvements for Lessors," which allows lessors to make a policy election to exclude sales taxes and other similar taxes from determining the consideration in the contract and variable payments not included in the consideration in the contract, requires lessors to exclude from variable payments lessor costs paid by lessees directly to third parties and clarified the accounting for variable payments for contracts with lease and nonlease components. The Company adopted these standards effective January 1, 2019, using the modified retrospective transition method. The Company recognized a lease right-of-use asset and lease liability of approximately
$61.0 million
on its unaudited condensed consolidated balance sheet on January 1, 2019, for its operating leases that existed upon the effective date, with no additional impact to its unaudited condensed consolidated statements of operations and comprehensive loss or statements of cash flows. The Company also determined that while its hydraulic fracturing fleets represent lease components in its customer contracts, these lease components do not represent the predominant components in its customer contracts. As such the Company has elected to account for the combined components of its customer contracts under ASC 606. In connection with the adoption of these standards, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases.
The effect of the lease standards adoption on the unaudited condensed consolidated balance sheet as of January 1, 2019 is as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
January 1, 2019
|
Balance sheet line item
|
|
As Previously Reported
|
|
ASU 2016-02 Adoption
|
|
As Adjusted
|
Operating lease right-of-use assets
|
|
$
|
—
|
|
|
$
|
60,946
|
|
|
$
|
60,946
|
|
Finance lease right-of-use assets
|
|
—
|
|
|
7,864
|
|
|
7,864
|
|
Property and equipment, net
|
|
531,319
|
|
|
(7,864
|
)
|
|
523,455
|
|
Other noncurrent assets
|
|
6,569
|
|
|
(9
|
)
|
|
6,560
|
|
Accrued expenses and other current liabilities
|
|
(101,833
|
)
|
|
1,066
|
|
|
(100,767
|
)
|
Current maturities of operating lease liabilities
|
|
—
|
|
|
(25,211
|
)
|
|
(25,211
|
)
|
Current maturities of finance lease liabilities
|
|
—
|
|
|
(4,928
|
)
|
|
(4,928
|
)
|
Current maturities of capital lease obligations
|
|
(4,928
|
)
|
|
4,928
|
|
|
—
|
|
Long-term operating lease liabilities, less current maturities
|
|
—
|
|
|
(35,512
|
)
|
|
(35,512
|
)
|
Long-term finance lease liabilities, less current maturities
|
|
—
|
|
|
(5,581
|
)
|
|
(5,581
|
)
|
Capital lease obligations, less current maturities
|
|
(5,581
|
)
|
|
5,581
|
|
|
—
|
|
Other noncurrent liabilities
|
|
(3,283
|
)
|
|
50
|
|
|
(3,233
|
)
|
Retained earnings
|
|
31,494
|
|
|
(1,330
|
)
|
|
30,164
|
|
|
|
|
|
|
|
|
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows companies to reclassify from accumulated other comprehensive income to retained earnings, any stranded tax effects resulting from complying with the Tax Cuts and Jobs Act legislation passed in December 2017. ASU 2018-02 is effective for annual periods beginning after December 15, 2018. The Company implemented the provisions of this ASU effective January 1, 2019, with no impact to its unaudited condensed
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
consolidated financial statements, as due to the Company's valuation allowance, there is no net tax effect stranded within accumulated other comprehensive loss.
In July 2018, the FASB issued ASU 2018-09, "Codification Improvements," which made clarifications, correction of errors and minor improvements to ASC 220, "Income Statement - Reporting Comprehensive Income - Overall," ASC 470-50, "Debt Modifications and Extinguishments," ASC 480-10, "Distinguishing Liabilities from Equity -Overall," ASC 718-740, "Compensation - Stock Compensation - Income Taxes," ASC 805-740, "Business Combinations - Income Taxes," ASC 815-10, "Derivatives and Hedging - Overall," ASC 820-10, "Fair Value Measurement - Overall," ASC 940-405, "Financial Services - Brokers and Dealers - Liabilities," and ASC 962-325, "Plan Accounting - Defined Contribution to Pension Plans - Investments - Other." The Company adopted this standard effective January 1, 2019, with no significant impact to its unaudited condensed consolidated financial statements, as the transactions it conducts that qualify under ASU 2018-09 are only impacted by the amendments to ASC 718-740.
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." The amendments in this standard permit use of the Overnight Index Swap rate based on Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under ASC 815. ASU 2018-16 is effective for annual periods beginning after December 15, 2018. The Company adopted this standard effective January 1, 2019, with no impact to its unaudited condensed consolidated financial statements, as the benchmark interest rate on its existing debt facility and interest rate swap is LIBOR.
In January 2019, the FASB issued ASU 2019-01, "Leases (Topic 842) - Codification Improvements." The amendments in this standard provide implementation guidance with regards to determining the fair value of an underlying leased asset by lessors that are not manufacturers or dealers, presentation of cash received from leases by lessors in sales-type or direct financing leases on the statement of cash flows and transition disclosures related to ASC 250, "Accounting Changes and Error Corrections." The amendments in this standard are effective January 1, 2020, except for those related to transition disclosures that are effective immediately on January 1, 2019. Early adoption is permitted. The Company adopted this standard effective January 1, 2019 with no impact to its unaudited condensed consolidated financial statements, as the Company does not have any leases for which lessor accounting is applied under ASC 842.
(b) Recently Issued Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable and lease receivables. In November 2018, the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses," which clarified that receivables arising from operating leases are not within the scope of ASC 326-20, "Financial Instruments-Credit Losses-Measured at Amortized Cost," and should be accounted for in accordance with ASC 842. In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarified certain amendments related to ASU 2016-13. The Company is currently in the process of evaluating the impact the adoption of these standards will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This standard removed, modified and added disclosure requirements from ASC 820. ASU 2018-13 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements, as this standard primarily addresses disclosure requirements for Level 3 fair value measurements. The Company does not currently have or anticipate having Level 3 fair value instruments.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." The amendments in this standard aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606." The amendments in this standard clarified that certain transactions should be accounted for under
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Notes to the Unaudited Condensed Consolidated Financial Statements
ASC 606 if one of the collaborative arrangement participants meets the definition of a customer and that transactions between collaborative participants not directly related to sales to third parties should not be recognized as revenue under Topic 606, if one of the collaborative arrangement participants is not a customer. ASU 2018-18 is effective for annual periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments- Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarifies certain aspects of the amendments in ASU 2016-01, 2016-13, and 2017-12. The Company has determined that only the clarifications related to ASU 2016-13 applies to it, as the Company does not currently have or anticipate to have fair value hedging. ASC 2019-04 is effective for annual periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief," which clarifies certain aspects of the amendments in ASU 2016-13, ASC 2019-05 is effective for annual periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of Keane Group, Inc.'s (the "Company", "Keane", "we" or "our") financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related condensed footnotes included within Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q, as well as our
Annual Report on Form 10-K
for the year ended
December 31, 2018
.
EXECUTIVE OVERVIEW
Organization
We are one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions. Our total capacity includes approximately
1.4 million
hydraulic horsepower. From our
29
currently deployable hydraulic fracturing fleets ("fleets"),
34
wireline trucks,
24
cementing units and other ancillary assets located in the Permian Basin, the Marcellus/Utica Shale, the Bakken Formation, the SCOOP/STACK Formation and other active oil and gas basins, we pride ourselves on providing industry-leading completion services with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We distinguish ourselves through three key principles, which include (i) our partnerships with high-quality customers, (ii) our intense focus on safety and efficiency and (iii) our focus on value creation for all our stakeholders.
We provide our services in conjunction with onshore well development, including stimulation operations on existing wells, to well-capitalized oil and gas exploration and production ("E&P") customers, with some of the highest quality and safety standards in the industry and long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, provides us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers' completion requirements and unique challenges.
We are organized into two reportable segments, consisting of Completion Services, which includes our hydraulic fracturing, wireline divisions and ancillary services; and Other Services, which exclusively includes our cementing division. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. Segment gross profit is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment gross profit as segment revenue less segment direct and indirect cost of services, excluding depreciation and amortization. Additionally, our operations management make rapid and informed decisions, such as price adjustments that offset commodity movements and align with market rates, decisions to strategically deploy our existing and new fleets and real-time supply
chain management decisions, by utilizing top line revenue, together with individual direct and indirect costs on a per stage and per fleet basis.
Merger with C&J
On June 16, 2019, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with C&J Energy Services, Inc. ("C&J") and King Merger Sub Corp. ("Merger Sub").
The Merger Agreement provides that, among other things and subject to the terms and conditions of the Merger Agreement, (a) Merger Sub will merge with and into C&J (the "Merger"), with C&J surviving and continuing as the surviving corporation in the Merger as a direct, wholly-owned subsidiary of Keane, and (b) at the effective time of the Merger, each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately before the effective time shall be converted into and become one validly issued, fully paid and non-assessable share of common stock, par value $0.01 per share, of the surviving corporation and each outstanding share of common stock of C&J (other than shares beneficially owned by C&J) will be converted into the right to receive 1.6149 shares of common stock of Keane, plus cash in lieu of any fractional shares that otherwise would have been issued. Immediately following the effective time, C&J shall be merged with and into King Merger Sub II LLC ("LLC Sub"), with LLC Sub continuing as the surviving entity as a direct, wholly-owned subsidiary of Keane.
At the effective time, Keane will be renamed and Keane common stock, including the shares to be issued in the Merger, will be listed on the New York Stock Exchange under a new ticker symbol. C&J and Keane estimate that holders of C&J common stock as of immediately prior to the effective time will hold, in the aggregate, approximately 50% of the issued and outstanding shares of common stock of the combined company (based on fully diluted shares outstanding of the combined company) immediately following the effective time, and holders of shares of Keane common stock as of immediately prior to the effective time will hold, in the aggregate, approximately 50% of the issued and outstanding shares of common stock of the combined company (based on fully diluted shares outstanding of the combined company) immediately following the effective time.
The consummation of the Merger is subject to the satisfaction or waiver of certain conditions, including, among others, approval by the stockholders of Keane of the issuance of shares of Keane common stock and approval by the stockholders of C&J of the Merger Agreement, as well as the expiration or earlier termination of any applicable waiting period, and the receipt of certain regulatory approvals, including those under domestic antitrust and competition laws, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). In connection with the Merger, Keane and C&J each filed a Notification and Report Form under the HSR Act with the U.S. Federal Trade Commission and the DOJ on June 28, 2019. On July 18, 2019, the companies received notification of early termination of the waiting period under the HSR Act.
In accordance with the terms of the Merger Agreement, Keane Investor Holdings LLC ("Keane Investor"), which beneficially owns 51,668,175 shares of Keane common stock, has entered into a Support Agreement and Irrevocable Proxy (the "Support Agreement"), dated June 16, 2019, by and among Keane Investor, Cerberus Capital Management, L.P. ("Cerberus"), an affiliate of Keane Investor, and C&J. The Support Agreement places certain restrictions on the transfer of the shares of Keane held by Keane Investor and Cerberus, including, subject to certain exceptions, that for the period commencing at the effective time and continuing for forty-five days thereafter, Keane Investor and Cerberus shall not sell, transfer, assign, pledge, encumber or otherwise dispose of, directly or indirectly, their shares of Keane common stock or any other securities convertible into or exchangeable for Keane common stock. In addition, the Support Agreement includes covenants that, with limited exceptions, require Keane Investor (which owns approximately 49.2% of the outstanding shares of Keane common stock) to vote its shares in favor of the share issuance to C&J stockholders and against actions that may impair or impede the transactions contemplated by the Merger Agreement.
We filed a Registration Statement on Form S-4 (
File No. 333-232662
) with the SEC on July 16, 2019. We have agreed to operate our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the proposed Merger, subject to specific exceptions set forth in the Merger Agreement, and have agreed to certain other customary restrictions on operations, as set forth in the Merger Agreement.
Financial results
Revenue for the three months ended June 30, 2019 and 2018 was $
427.7 million
and
$578.5 million
, respectively. Revenue for the six months ended June 30, 2019 and 2018 was $
849.4 million
and $
1.1 billion
, respectively. The net decline in each comparative period was driven primarily by a decrease in rig count, fleet utilization, combined with pricing pressures from macroeconomic market conditions. This decrease in utilization was primarily from our customers shifting their focus to capital discipline through reduced activity levels and pricing. Despite pricing pressures, we retained our core customer base by aligning with high quality and efficient customers under dedicated agreements. Offsetting these declines increase in operational performance, with higher pumping times.
Gross profit for the three months ended June 30, 2019 and 2018 was
$103.2 million
and
$130.8 million
, respectively. Gross profit for the
six months ended June 30, 2019
and 2018 was
$187.2 million
and
$240.5 million
, respectively. Gross profit drivers for 2019 had a favorable impact on operating margins, driven by deflation in key input costs. Consistent with our efforts to maintain and grow the supply of our key commodities and skilled workforce, as influenced by market demand, we continued to secure key contracts with suppliers, as well as position labor rates to facilitate retaining skilled employees and attracting new talent.
We reported net loss of
$5.0 million
, or
$0.05
per basic and diluted share during the three months ended June 30, 2019, compared to net income of
$30.7 million
or
$0.28
and
$0.27
, per basic and diluted share, respectively, during the three months ended June 30, 2018. We reported net loss of
$26.8 million
, or
$0.26
per basic and diluted share during the six months ended June 30, 2019, compared to net income of
$22.4 million
or
$0.20
per basic and diluted share, during the six months ended June 30, 2018. The following tables reconcile net income to Adjusted EBITDA, including management adjustments for the three and six months ended June 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Completion Services
|
|
Other Services
|
|
Corporate and Other
|
|
Total
|
Net Income (loss)
|
36,856
|
|
|
468
|
|
|
(42,305
|
)
|
|
(4,981
|
)
|
Interest expense, net
|
—
|
|
|
—
|
|
|
5,477
|
|
|
5,477
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
564
|
|
|
564
|
|
Depreciation and amortization
|
65,672
|
|
|
631
|
|
|
3,583
|
|
|
69,886
|
|
EBITDA
|
102,528
|
|
|
1,099
|
|
|
(32,681
|
)
|
|
70,946
|
|
Plus Management Adjustments:
|
|
|
|
|
|
|
|
Acquisition, integration and expansion
|
—
|
|
|
—
|
|
|
6,108
|
|
|
6,108
|
|
Non-cash stock compensation
(1)
|
—
|
|
|
—
|
|
|
5,637
|
|
|
5,637
|
|
Other
(2)
|
—
|
|
|
—
|
|
|
(326
|
)
|
|
(326
|
)
|
Adjusted EBITDA
|
102,528
|
|
|
1,099
|
|
|
(21,262
|
)
|
|
82,364
|
|
Selling, general and administrative
|
—
|
|
|
—
|
|
|
32,571
|
|
|
32,571
|
|
(Gain) loss on disposal of assets
|
(398
|
)
|
|
—
|
|
|
68
|
|
|
(330
|
)
|
Other expense
|
—
|
|
|
—
|
|
|
43
|
|
|
43
|
|
Less Management Adjustments not associated with cost of services
|
—
|
|
|
—
|
|
|
(11,419
|
)
|
|
(11,419
|
)
|
Adjusted gross profit
|
102,130
|
|
|
1,099
|
|
|
—
|
|
|
103,229
|
|
|
|
(1)
|
Represents non-cash amortization of equity awards issued under Keane Group, Inc.'s Equity and Incentive Award Plan (the "Plan"). According to the Plan, the Compensation Committee of the Board of Directors can approve awards in the form of restricted stock, restricted stock units, and/or other deferred compensation. Consistent with prior policy, amortization of awards is made ratably over the vesting periods, beginning with the grant date, based on the total fair value determined on grant date and recorded in selling, general and administrative expenses.
|
|
|
(2)
|
Represents legal contingencies, which are recorded in selling, general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Completion Services
|
|
Other Services
|
|
Corporate and Other
|
|
Total
|
Net Income (loss)
|
54,823
|
|
|
(1,702
|
)
|
|
(79,908
|
)
|
|
(26,787
|
)
|
Interest expense, net
|
—
|
|
|
—
|
|
|
10,872
|
|
|
10,872
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
1,538
|
|
|
1,538
|
|
Depreciation and amortization
|
132,419
|
|
|
1,504
|
|
|
7,439
|
|
|
141,362
|
|
EBITDA
|
187,242
|
|
|
(198
|
)
|
|
(60,059
|
)
|
|
126,985
|
|
Plus Management Adjustments:
|
|
|
|
|
|
|
|
Acquisition, integration and expansion
|
—
|
|
|
—
|
|
|
6,108
|
|
|
6,108
|
|
Non-cash stock compensation
(1)
|
—
|
|
|
—
|
|
|
9,610
|
|
|
9,610
|
|
Other
(2)
|
—
|
|
|
—
|
|
|
3,794
|
|
|
3,794
|
|
Adjusted EBITDA
|
187,242
|
|
|
(198
|
)
|
|
(40,547
|
)
|
|
146,497
|
|
Selling, general and administrative
|
—
|
|
|
—
|
|
|
60,507
|
|
|
60,507
|
|
(Gain) loss on disposal of assets
|
193
|
|
|
—
|
|
|
(42
|
)
|
|
151
|
|
Other expense
|
—
|
|
|
—
|
|
|
(405
|
)
|
|
(405
|
)
|
Less Management Adjustments not associated with cost of services
|
—
|
|
|
—
|
|
|
(19,513
|
)
|
|
(19,513
|
)
|
Adjusted gross profit (loss)
|
187,435
|
|
|
(198
|
)
|
|
—
|
|
|
187,237
|
|
|
|
(1)
|
Represents non-cash amortization of equity awards issued under the Plan. According to the Plan, the Compensation Committee of the Board of Directors can approve awards in the form of restricted stock, restricted stock units, and/or other deferred compensation. Consistent with prior policy, amortization of awards is made ratably over the vesting periods, beginning with the grant date, based on the total fair value determined on grant date and recorded in selling, general and administrative expenses.
|
|
|
(2)
|
Represents legal contingencies, which are recorded in selling, general and administrative expenses.
|
Financial markets, liquidity, and capital resources
As of
June 30, 2019
, we had a cash balance of approximately
$117.1 million
. We also had
$173.5 million
available under our asset-based revolving credit facility as of
June 30, 2019
, which, with our cash balance, we believe provides us with sufficient liquidity for at least the next 12 months, including capital expenditures and working capital investments.
For additional information on market conditions and our liquidity and capital resources, see "Liquidity and Capital Resources."
Current highlights
Safety
|
|
•
|
We achieved a rolling 12 month average total recordable incident rate of 0.36 during the second quarter of 2019, which remains substantially less than the industry average.
|
Strategic Initiatives and Opportunities
|
|
•
|
On June 17, 2019, Keane announced plans to merge with C&J in a transaction that will create one of the largest U.S. well completion services companies. The transaction remains on target to close in the fourth quarter of 2019.
|
Customer Partnerships
|
|
•
|
During the second quarter of 2019, Keane converted one spot hydraulic fracturing fleet to a dedicated agreement with a major operator in the Permian Basin, expanding our portfolio of blue chip customers under dedicated agreements. We remain focused on partnering with highly efficient customers with shared values.
|
Technology
|
|
•
|
Keane is advancing on its strategy of driving efficiency and enhancing safety through our multi-pronged approach to surface, digital and downhole technologies. In close collaboration with our customers and industry partners, Keane continues to invest in the development and deployment of a range of new technologies across integrated completions. Our focus on innovation is contributing to tangible results, as evidenced by increased pumping hours per fleet, reduction in non-productive time and cost savings during the second quarter of 2019.
|
Efficiency
|
|
•
|
Keane achieved record pump times during the second quarter of 2019, driven by execution, deployment of technology, and improvements in the frac calendar. Efficiency remains a key differentiator and why customers choose to partner with Keane.
|
Business outlook
Throughout a majority of 2018, market conditions for completion services were positive, including tightness in supply and demand for completion services equipment and supportive commodity prices. However, beginning in late 2018, the industry faced growing headwinds, including E&P capital budget exhaustion, early achievement of E&P production targets, price differentials and normal seasonality resulting in softness in demand for completion services. At the same time, the price of crude oil experienced a significant and rapid decline beginning in November 2018, exacerbating the negative impacts on completion services activity. Together, these factors led to lower activity levels, delays in the 2019 budgeting cycle for many E&P companies and an imbalance of hydraulic fracturing equipment supply.
Since the beginning of 2019, West Texas Intermediate crude oil prices have improved from a low of
$42.53
per barrel in late-December 2018 to
$59.30
barrel as of July 15, 2019. Improved crude oil prices, combined with budget resets and the alleviation of seasonal and other temporary headwinds resulted in a stabilization in pricing for completion services. Effectively managing these external factors impacting the industry, Keane has performed well, achieving improving efficiencies and financial performance during the first two quarters of 2019.
Currently, completions activity and commodity prices remain dynamic, with many operators focused on capital discipline. We currently believe we have good visibility into continued strength in activity for the third quarter of 2019, and are carrying momentum into the back half of 2019. As of June 30, 2019, we have
23
fleets deployed, with most of them committed through at least 2019. Market dynamics can be quick to develop, particularly during the latter part of the year, including budget exhaustion and other seasonal factors. Keane is focused on remaining close to its customers, and will remain responsive to market conditions. However, to date, Keane has not received indication of any planned slowdown in activity from customers.
RESULTS OF OPERATIONS IN
2019
COMPARED TO
2018
Three Months Ended June 30, 2019
Compared with
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
(Thousands of Dollars)
|
|
|
|
|
|
As a % of Revenue
|
|
Variance
|
Description
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
$
|
|
%
|
Completion Services
|
|
$
|
420,363
|
|
|
$
|
569,929
|
|
|
98
|
%
|
|
99
|
%
|
|
$
|
(149,566
|
)
|
|
(26
|
%)
|
Other Services
|
|
7,370
|
|
|
8,604
|
|
|
2
|
%
|
|
1
|
%
|
|
(1,234
|
)
|
|
(14
|
%)
|
Revenue
|
|
427,733
|
|
|
578,533
|
|
|
100
|
%
|
|
100
|
%
|
|
(150,800
|
)
|
|
(26
|
%)
|
Completion Services
|
|
318,232
|
|
|
438,684
|
|
|
74
|
%
|
|
76
|
%
|
|
(120,452
|
)
|
|
(27
|
%)
|
Other Services
|
|
6,271
|
|
|
9,001
|
|
|
1
|
%
|
|
2
|
%
|
|
(2,730
|
)
|
|
(30
|
%)
|
Costs of services (excluding depreciation and amortization, shown separately)
|
|
324,503
|
|
|
447,685
|
|
|
76
|
%
|
|
77
|
%
|
|
(123,182
|
)
|
|
(28
|
%)
|
Completion Services
|
|
102,131
|
|
|
131,245
|
|
|
24
|
%
|
|
23
|
%
|
|
(29,114
|
)
|
|
(22
|
%)
|
Other Services
|
|
1,099
|
|
|
(397
|
)
|
|
0
|
%
|
|
0
|
%
|
|
1,496
|
|
|
(377
|
%)
|
Gross profit
|
|
103,230
|
|
|
130,848
|
|
|
24
|
%
|
|
23
|
%
|
|
(27,618
|
)
|
|
(21
|
%)
|
Depreciation and amortization
|
|
69,886
|
|
|
59,404
|
|
|
16
|
%
|
|
10
|
%
|
|
10,482
|
|
|
18
|
%
|
Selling, general and administrative expenses
|
|
32,571
|
|
|
24,125
|
|
|
8
|
%
|
|
4
|
%
|
|
8,446
|
|
|
35
|
%
|
(Gain) loss on disposal of assets
|
|
(330
|
)
|
|
3,287
|
|
|
0
|
%
|
|
1
|
%
|
|
(3,617
|
)
|
|
(110
|
%)
|
Operating income
|
|
1,103
|
|
|
44,032
|
|
|
0
|
%
|
|
8
|
%
|
|
(42,929
|
)
|
|
(97
|
%)
|
Other income (expenses), net
|
|
(43
|
)
|
|
16
|
|
|
0
|
%
|
|
0
|
%
|
|
(59
|
)
|
|
(369
|
%)
|
Interest expense
|
|
(5,477
|
)
|
|
(14,317
|
)
|
|
(1
|
%)
|
|
(2
|
%)
|
|
8,840
|
|
|
(62
|
%)
|
Total other expenses
|
|
(5,520
|
)
|
|
(14,301
|
)
|
|
(1
|
%)
|
|
(2
|
%)
|
|
8,781
|
|
|
(61
|
%)
|
Income tax expense
|
|
(564
|
)
|
|
936
|
|
|
0
|
%
|
|
0
|
%
|
|
(1,500
|
)
|
|
(160
|
%)
|
Net income (loss)
|
|
$
|
(4,981
|
)
|
|
$
|
30,667
|
|
|
(1
|
%)
|
|
5
|
%
|
|
$
|
(35,648
|
)
|
|
(116
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
Gross profit during the
three months ended June 30, 2019
decreased
by
$27.6 million
, or
21%
, to
$103.2 million
from
$130.8 million
during the
three months ended June 30, 2018
. This change in gross profit by reportable segment is discussed below.
Completion Services:
Gross profit for Completion Services
decreased
by
$29.1 million
, or
22%
, to
$102.1 million
during the three months ended June 30, 2019 from
$131.2 million
during the
three months ended June 30, 2018
. Gross profit for Completion Services decreased primarily related to a decrease in our fully utilized fleet year over year and pricing pressures from market conditions.
Other Services:
Gross profit for Other Services
increased
by
$1.5 million
, or
377%
, to
$1.1 million
during the three months ended June 30, 2019 from
$(0.4) million
during the
three months ended June 30, 2018
. Gross profit for Other Services was driven by strong execution, in addition to our decision in the first quarter of 2019 to idle activity in one of our operating regions.
Equipment Utilization:
Depreciation and amortization expense as a percentage of revenues was
16%
and
10%
during the
three months ended June 30, 2019
and
2018
, respectively. Loss on disposal of assets decreased by
$3.6 million
, or
110%
, to a gain of
$0.3 million
during the
three months ended June 30, 2019
from a loss of
$3.3 million
during the
three months ended June 30, 2018
. The change in depreciation and amortization was primarily related to additional equipment purchases from an acquisition in late 2018, maintenance spend for fleet readiness, and other equipment used for enhancing safety and efficiency through our multi-faceted approach of surface, digital and downhole technologies. The decrease in loss is primarily related to loss generated in the second quarter of 2018 as a result of the Mathis facility sale for $2.7 million, combined with gains generated on the sale of tractors in second quarter of 2019.
Selling, general and administrative expense:
Selling, general and administrative ("SG&A") expense as a percentage of revenues was
8%
and
4%
during the
three months ended June 30, 2019
and
2018
. SG&A includes certain one-time items such as
$5.6 million
of non-cash stock compensation expense and
$6.1 million
of transaction costs related to the Merger, offset by
$0.3 million
related to final adjustments related to prior legal matter.
Effective tax rate:
Our effective tax rate on continuing operations for the
three months ended June 30, 2019
was 12.77%. The difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes and change in 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 not 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, state tax deferred liabilities and current state income taxes.
Six Months Ended June 30, 2019
Compared with
Six Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(Thousands of Dollars)
|
|
|
|
|
|
As a % of Revenue
|
|
Variance
|
Description
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
$
|
|
%
|
Completion Services
|
|
$
|
832,338
|
|
|
$
|
1,077,380
|
|
|
98
|
%
|
|
99
|
%
|
|
$
|
(245,042
|
)
|
|
(23
|
%)
|
Other Services
|
|
17,049
|
|
|
14,169
|
|
|
2
|
%
|
|
1
|
%
|
|
2,880
|
|
|
20
|
%
|
Revenue
|
|
849,387
|
|
|
1,091,549
|
|
|
100
|
%
|
|
100
|
%
|
|
(242,162
|
)
|
|
(22
|
%)
|
Completion Services
|
|
644,903
|
|
|
835,748
|
|
|
76
|
%
|
|
77
|
%
|
|
(190,845
|
)
|
|
(23
|
%)
|
Other Services
|
|
17,246
|
|
|
15,345
|
|
|
2
|
%
|
|
1
|
%
|
|
1,901
|
|
|
12
|
%
|
Costs of services (excluding depreciation and amortization, shown separately)
|
|
662,149
|
|
|
851,093
|
|
|
78
|
%
|
|
78
|
%
|
|
(188,944
|
)
|
|
(22
|
%)
|
Completion Services
|
|
187,436
|
|
|
241,632
|
|
|
22
|
%
|
|
22
|
%
|
|
(54,196
|
)
|
|
(22
|
%)
|
Other Services
|
|
(198
|
)
|
|
(1,176
|
)
|
|
0
|
%
|
|
0
|
%
|
|
978
|
|
|
(83
|
%)
|
Gross profit
|
|
187,238
|
|
|
240,456
|
|
|
22
|
%
|
|
22
|
%
|
|
(53,218
|
)
|
|
(22
|
%)
|
Depreciation and amortization
|
|
141,362
|
|
|
119,455
|
|
|
17
|
%
|
|
11
|
%
|
|
21,907
|
|
|
18
|
%
|
Selling, general and administrative expenses
|
|
60,507
|
|
|
58,009
|
|
|
7
|
%
|
|
5
|
%
|
|
2,498
|
|
|
4
|
%
|
Loss on disposal of assets
|
|
151
|
|
|
4,056
|
|
|
0
|
%
|
|
0
|
%
|
|
(3,905
|
)
|
|
(96
|
%)
|
Operating income (loss)
|
|
(14,782
|
)
|
|
58,937
|
|
|
(2
|
%)
|
|
5
|
%
|
|
(73,719
|
)
|
|
(125
|
%)
|
Other income (expenses), net
|
|
405
|
|
|
(12,973
|
)
|
|
0
|
%
|
|
(1
|
%)
|
|
13,378
|
|
|
(103
|
%)
|
Interest expense
|
|
(10,872
|
)
|
|
(21,307
|
)
|
|
(1
|
%)
|
|
(2
|
%)
|
|
10,435
|
|
|
(49
|
%)
|
Total other expenses
|
|
(10,467
|
)
|
|
(34,280
|
)
|
|
(1
|
%)
|
|
(3
|
%)
|
|
23,813
|
|
|
(69
|
%)
|
Income tax expense
|
|
(1,538
|
)
|
|
(2,232
|
)
|
|
0
|
%
|
|
0
|
%
|
|
694
|
|
|
(31
|
%)
|
Net income (loss)
|
|
$
|
(26,787
|
)
|
|
$
|
22,424
|
|
|
(3
|
%)
|
|
2
|
%
|
|
$
|
(49,211
|
)
|
|
(219
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
Gross profit during the
six months ended June 30, 2019
decreased
by
$53.2 million
, or
22%
, to
$187.2 million
from
$240.5 million
during the
six months ended June 30, 2018
. This change in gross profit by reportable segment is discussed below.
Completion Services:
Gross profit for Completion Services
decreased
by
$54.2 million
, or
22%
, to
$187.4 million
during the
six months ended June 30, 2019
from
$241.6 million
during the
six months ended June 30, 2018
. Gross profit for Completion Services decreased primarily related to a decrease in our fully utilized fleet year over year and pricing pressures from market conditions.
Other Services:
Gross profit for Other Services
increased
by
$1.0 million
, or
83%
, to
$0.2 million
during the
six months ended June 30, 2019
from
$(1.2) million
during the
six months ended June 30, 2018
. Gross profit for Other Services was driven by strong execution, in addition to our decision in the first quarter of 2019 to idle activity in one of our operating regions.
Equipment Utilization:
Depreciation and amortization expense as a percentage of revenues was
17%
and
11%
during the
six months ended June 30, 2019
and
2018
, respectively. Loss on disposal of assets decreased by
$3.9 million
, or
96%
, to a loss of
$0.2 million
during the
six months ended June 30, 2019
from a loss of
$4.1 million
during the
six months ended June 30, 2018
. The change in depreciation and amortization was primarily related to additional equipment purchases from an acquisition in late 2018, maintenance spend for fleet readiness, and other equipment used for enhancing safety and efficiency through our multi-faceted approach of surface, digital and downhole technologies. The decrease in loss is primarily related to loss generated in the second quarter of 2018 as a result of the Mathis facility sale for $2.7 million, combined with gains generated on the sale of tractors in the second quarter of 2019.
Selling, general and administrative expense:
SG&A expense as a percentage of revenues was
7%
and
5%
during the
six months ended June 30, 2019
and
2018
, respectively. SG&A includes certain one-time items such as
$9.6 million
of non-cash stock compensation expense,
$6.1 million
of transaction costs related to the Merger, and
$3.8 million
related to legal matters.
Other income (expense), net:
Other income, net during the six months ended June 30, 2019 was
$0.4 million
. Other expense, net, during the six months ended June 30, 2018 was
$13.0 million
, primarily related to the adjustment to the contingent value right liability in the first quarter of 2018.
Effective tax rate:
Our effective tax rate on continuing operations for the
six months ended June 30, 2019
was 6.09%. The difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes and change in 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 not 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, state tax deferred liabilities and current state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents a company's ability to adjust its future cash flows to meet its needs and opportunities, both expected and unexpected.
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
6/30/2019
|
|
12/31/2018
|
Cash
|
|
$
|
117,092
|
|
|
$
|
80,206
|
|
Net Debt
|
|
338,977
|
|
|
340,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Net cash provided by operating activities
|
|
$
|
141,925
|
|
|
$
|
143,425
|
|
Net cash used in investing activities
|
|
(97,342
|
)
|
|
(130,496
|
)
|
Net cash (used in) provided by financing activities
|
|
(7,668
|
)
|
|
587
|
|
|
|
|
|
|
Significant sources and uses of cash during the
six months ended June 30, 2019
|
|
–
|
Net cash generated by operating activities during the six months ended June 30, 3019 of
$141.9 million
was a result of the utilization of
94%
of our deployed fleets and our thoroughness in receiving collections from our customers and controlling costs. We continue to focus on maintaining operational and spend efficiencies, resulting in positive working capital and net operating cash to support our capital expenditures and other investing activities.
|
Uses of cash:
|
|
–
|
Net cash used in investing activities for the six months ended June 30, 2019 of
$97.3 million
, consisting primarily of capital expenditures. This activity primarily related to our Completion Services segment.
|
|
|
–
|
Cash used to repay our debt facilities, excluding leases and interest, during the six months ended June 30, 2019 was
$1.7 million
.
|
|
|
–
|
Cash used to repay our finance leases during the six months ended June 30, 2019 was
$2.6 million
.
|
|
|
–
|
Shares repurchased and retired related to share-based compensation during the six months ended June 30, 2019 totaled
$3.4 million
.
|
Significant sources and uses of cash during the
six months ended June 30, 2018
Sources of cash:
|
|
–
|
Net cash generated by operating activities during the six months ended June 30, 2018 of
$143.4 million
was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment.
|
|
|
–
|
Cash provided by the 2018 term loan facility entered into by the Company, and certain subsidiaries of the Company as guarantors, with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent (the "2018 Term Loan Facility"), net of debt discount was
$348.2 million
.
|
Uses of cash:
|
|
–
|
Net cash used in investing activities of $
130.5 million
was primarily associated with our newbuild and maintenance capital spend on active fleets. This activity primarily related to our Completion Services segment.
|
|
|
–
|
Cash used to repay our debt facilities, including capital leases but excluding interest, during the six months ended June 30, 2018 was
$285.0 million
.
|
|
|
–
|
Cash used to pay debt issuance costs associated with our debt facilities was
$7.2 million
.
|
|
|
–
|
Shares repurchased and retired related to our stock repurchase program totaled
$40.1 million
.
|
|
|
–
|
Shares repurchased and retired related to payroll tax withholdings on our share-based compensation totaled
$3.3 million
.
|
|
|
–
|
The portion of the cash settlement of the contingent value right ("CVR") liability reflective of its acquisition-date fair value was
$12.0 million
. The remaining portion of the cash settlement of the CVR liability of
$7.9 million
is reflected in net cash provided by operating activities.
|
Future sources and use of cash
Capital expenditures for 2019 are projected to be primarily related to maintenance capital spend to support our existing active fleets, wireline trucks and cementing units. We anticipate our capital expenditures will be funded by cash flows from operations. We currently estimate that our capital expenditures for 2019 will range between $140.0 million and $160.0 million.
Debt service, exclusive of leases, for the year ended December 31, 2019 is projected to be
$27.0 million
. Our leverage ratio, as calculated pursuant to the terms of our debt agreement, is
0.74x
for the twelve rolling months ended June 30, 2019. We anticipate our debt service will be funded by cash flows from operations.
Effective February 25, 2019, our Board of Directors authorized a reset of capacity on our existing stock repurchase program back to $100 million. Additionally, the program's expiration date was extended to December 2019 from a previous expiration date of September 2019. As of June 16, 2019, pursuant to the terms of the Merger Agreement, our existing stock repurchase program has been suspended.
Other factors affecting liquidity
Financial position in current market.
As of
June 30, 2019
, we had $
117.1 million
of cash and a total of
$173.5 million
available under our revolving credit facility. As of
June 30, 2019
, we were compliant with all financial and non-financial covenants in our bank agreements. 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 repurchases.
Guarantee agreements.
In the normal course of business, we have agreements with a financial institution under which
$2.8 million
of letters of credit were outstanding as of
June 30, 2019
.
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. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers' cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition.
Contractual Obligations
In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
Contractual obligations
|
|
Total
|
|
2019
|
|
2020-2022
|
|
2023-2025
|
|
2026+
|
Long-term debt, including current portion
(1)
|
|
$
|
346,500
|
|
|
$
|
1,750
|
|
|
$
|
10,500
|
|
|
$
|
334,250
|
|
|
$
|
—
|
|
Estimated interest payments
(2)
|
|
127,757
|
|
|
11,341
|
|
|
65,678
|
|
|
50,738
|
|
|
—
|
|
Finance lease obligations
(3)
|
|
10,885
|
|
|
3,270
|
|
|
7,450
|
|
|
165
|
|
|
—
|
|
Operating lease obligations
(4)
|
|
55,588
|
|
|
11,814
|
|
|
28,444
|
|
|
6,169
|
|
|
9,161
|
|
Purchase commitments
(5)
|
|
101,602
|
|
|
46,724
|
|
|
53,278
|
|
|
1,600
|
|
|
—
|
|
Equity-method investment
(6)
|
|
1,451
|
|
|
1,451
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Legal contingency
(7)
|
|
3,910
|
|
|
3,910
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
647,693
|
|
|
$
|
80,260
|
|
|
$
|
165,350
|
|
|
$
|
392,922
|
|
|
$
|
9,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Long-term debt excludes interest payments on each obligation and represents our obligations under our 2018 Term Loan Facility. In addition, these amounts exclude $7.5 million of unamortized debt discount and debt issuance costs.
|
|
|
(2)
|
Estimated interest payments are based on debt balances outstanding as of
June 30, 2019
and include interest related to the 2018 Term Loan Facility.
Interest rates used for variable rate debt are based on the prevailing current London Interbank Offer Rate (
"
LIBOR
"
).
|
|
|
(3)
|
Finance lease obligations consist of obligations on our finance leases of hydraulic fracturing equipment and ancillary equipment with CIT Finance LLC, light weight vehicles with ARI Financial Services Inc. and Enterprise FM Trust, and includes interest payments.
|
|
|
(4)
|
Operating lease obligations are related to our real estate, rail cars with Anderson Rail Group, Compass Rail VIII, SMBC Rail Services and Trinity Industries Leasing Company, and light duty vehicles with ARI Financial Services Inc., Enterprise FM Trust and PNC Bank.
|
|
|
(5)
|
Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year.
|
|
|
(6)
|
See Notes
(
12
)
Commitments and Contingencies
and
(13)
Related Party Transactions
of Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)" for further details on our equity-method investment.
|
|
|
(7)
|
The legal contingency is mainly related to the settlement of Keane Group Holdings, LLC v. Ceramifrac Proppants, LLC. See Note (
12
)
Commitments and Contingencies
of Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)" for further details.
|
Principal Debt Agreements
2017 ABL Facility
Structure
. As of
June 30, 2019
, the Company's asset-based revolving credit facility obtained on February 17, 2017 and as amended on December 22, 2017 (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 in accordance with the terms agreed between us and the lenders. In addition, subject to approval by the applicable lenders and other customary conditions, the 2017 ABL Facility allows for an additional increase in commitments of up to $150.0 million. The 2017 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments.
Maturity
. The loans arising under the initial commitments under the 2017 ABL Facility mature on December 22, 2022. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively.
Interest
. Pursuant to the terms of the 2017 ABL Facility, amounts outstanding under the 2017 ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings LLC and its subsidiaries' ("Keane Group") option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%. The average excess availability is set on the first day of each full fiscal quarter ending after December, 22, 2017. On or after June 22, 2018, at any time when consolidated EBITDA as of the then most recently ended four fiscal quarters for which financial statements are required to be delivered is greater than or equal to $250.0 million, the applicable margin will be reduced by 0.25%;
provided
that if consolidated EBITDA is less than $250.0 million as of a later four consecutive fiscal quarters, the applicable margin will revert to the levels set forth above.
2018 Term Loan Facility
On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into the 2018 Term Loan Facility with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The proceeds of the 2018 Term Loan Facility were used to refinance Keane Group's then-existing term loan facility and to repay related fees and expenses, with the excess proceeds used to fund general corporate purposes.
Structure.
The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the "2018 Term Loans"). As of
June 30, 2019
, there was
$346.5 million
principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loan Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immediately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00.
Maturity.
May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments.
Amortization.
The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding.
Interest.
The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group's option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default.
Prepayments
. The 2018 Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the 2018 Term Loan Facility and the agent for the 2017 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2017 ABL Facility to the extent the commitments under the 2017 ABL Facility are permanently reduced by such prepayments.
Guarantees.
Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility are guaranteed by the Company, Keane Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the "2018 Term Loan Guarantors").
Security.
Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2017 ABL Facility (the "ABL Facility Priority Collateral").
Fees.
Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility.
Restricted Payment Covenant.
The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00.
"Cumulative Credit," generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments).
Affirmative and Negative Covenants.
The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants.
Events of Default.
The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility).
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet financing arrangements, transactions or special purpose entities.
Related Party Transactions
Our Board of Directors has adopted a written policy and procedures (the "Related Party Policy") for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our Board of Directors. For purposes of the Related Party Policy, a "Related Party Transaction" is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the Company or any of its subsidiaries is a participant and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party's interests in the transaction.
The Related Party Policy defines "Related Party" as any person who is, or, at any time since the beginning of the Company's last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members include 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
(13)
Related Party Transactions
of Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements and related notes to the unaudited condensed consolidated financial statements included within Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)" 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. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included within Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)" of this Quarterly Report on Form 10-Q, as well as our consolidated and combined financial statements and related notes included in Part II, "Item 8. Financial Statements and Supplementary Data" and Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of
our 2018 Annual Report on
Form 10-K
for the year ended
December 31, 2018
.
We believe the following is a new critical accounting policy used in the preparation of our unaudited condensed consolidated financial statements.
(a) Leases
Per ASU 2016-02, "Leases (Topic 842)," lessees can classify leases as finance leases or operating leases, while lessors can classify leases as sales-type, direct financing or operating leases. All leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents our obligation to make lease payments arising from the lease, along with a corresponding right-of-use asset, which represents our right to use the underlying asset being leased. For leases in which we are the lessee, we use a collateralized incremental borrowing rate to calculate the lease liability, as in most cases we do not know the lessor's implicit rate in the lease. Establishing our lease obligations on our unaudited condensed consolidated balance sheets require judgmental assessments of the term lengths of each and the interest rate yield curve that best represents the collateralized incremental borrowing rate to apply to each lease. We engage third-party specialists to assist us in determining the collateralized incremental borrowing rate yield curve. Errors in determining the lease term lengths and/or selecting the best representative collateralized incremental borrowing rate can have a material adverse effect on our unaudited condensed consolidated financial statements. For further details about our leases, see Note
(11)
Leases
of Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
(b) Income Taxes
The income tax expense on continuing operations for the six months ended June 30, 2019 resulted in an effective tax rate of
6.09%
. The difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes and change in valuation allowance.
After considering all available positive and negative evidence, we determined it is not more likely than not that we will not utilize our net deferred tax assets in the foreseeable future and continued to maintain a full valuation allowance. The net deferred tax liabilities as of June 30, 2019 were
$0.2 million
and were related to tax amortization on our indefinite-lived intangible assets and certain state deferred taxes.
The completion of the Merger may result in a change in our net deferred tax position. Any impact on the deferred tax position of an acquiring entity for accounting purposes caused by a business combination is recorded in the acquiring company's financial statements outside of acquisition accounting. This accounting requirement may result in a significant fluctuation in our effective tax rate. We currently do not have an estimate for the tax impact.
(c) New Accounting Pronouncements
For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note
(
15
)
New Accounting Pronouncements
of Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
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 items that management does not consider in assessing ongoing performance.