Keane Group, Inc. (Form: 10-K/A, Received: 08/19/2019 16:23:33)





UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549


FORM	10-K/A
(Amendment No. 1)

(Mark One)



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

For the fiscal year ended December 31, 2018



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

For the transition period from _____ to _____

Commission File Number 001-37988

Keane Group, Inc.

(Exact Name of Registrant as Specified in its Charter)



Delaware				38-4016639
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

1800 Post Oak Boulevard	Suite 450	Houston	TX	77056
(Address of principal executive offices)				(Zip code)

Registrant’s telephone number, including area code: (713) 960-0381

Securities registered pursuant to Section 12(b) of the Act



Title of Each Class	Trading Symbol	Name of Each Exchange On Which Registered
Common Stock, $0.01 par value	FRAC	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

_______________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging Growth Company	☐

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

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

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold on June 30, 2018, was approximately $716.4 million.

As of February 25, 2019, the registrant had 104,405,121 shares of common stock outstanding.

Explanatory Note

Keane Group, Inc. (the “Company”) is filing this Amendment No. 1 to its Annual Report on Form 10-K (this “Amendment”) for the fiscal year ended December 31, 2018, which was originally filed with the Securities and Exchange Commission (“SEC”) on February 27, 2019 (the “Original Filing”). In response to an SEC comment letter dated August 12, 2019, this Amendment makes certain revisions to the cover page, Part II, “Item 6. Selected Financial Data” and Part II, “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” of the Original Filing to reflect the following revisions:


•	include selected financial data for the fiscal year ended December 31, 2014;


•	detail the three reconciliations of our non-GAAP measures of adjusted net income from Net Income, adjusted EBITDA from Net Income and adjusted gross profit from gross profit; and


•	revise measures of gross profit in Results of Operations to reflect revenues net of all costs of services, including applicable depreciation and amortization.

In addition, as required by Rule 12b-15 under the Securities Act of 1934, as amended, new certifications by the Company's principal executive officer and principal financial officer are filed as exhibits to this Amendment under Part IV, “Item 15. Exhibits, Financial Statement Schedules” hereof.

Except for the foregoing amended information or where otherwise noted, this Amendment does not reflect events that occurred after the Original Filing or modify or update those disclosures affected by subsequent events.

This Amendment should be read in conjunction with the Original Filing.

The Company is concurrently filing amendments (the “Form 10-Q Amendments”) to its Form 10-Q for the quarter ended March 31, 2019 filed on May 7, 2019 and for the quarter ended June 30, 2019 filed on July 31, 2019 to conform to changes made to the results of operations included in this Amendment. The Form 10-Q Amendments being filed concurrently with this Amendment to modify certain line items of the results of operations, revising the gross profit measures to reflect revenues net of all cost of services, including applicable depreciation and amortization, and breaking out reconciliations of non-GAAP measures to most directly comparable GAAP measures.

TABLE OF CONTENTS



	PART II

Item 6.	Selected Financial Data	5

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

	PART IV

Item 15.	Exhibits and Financial Schedules	36

	Signatures	37

PART II

Item 6. Selected Financial Data

The selected financial data for the periods presented was derived from the audited consolidated and combined financial statements of Keane and should be read in conjunction with Part I, “Item 1A. Risk Factors,” Part II, “Item 7. Management’s Discussion and Analysis of Financial and Results of Operations” and our audited consolidated and combined financial statements included in Part II, “Item 8. Financial Statements and Supplementary Data.”



	Year ended December 31, 2018			Year ended December 31, 2017⁽¹⁾			Year ended December 31, 2016⁽²⁾			Year ended December 31, 2015			Year ended December 31, 2014
(in thousands of dollars, except per share amounts)
Statement of Operations Data:
Revenue	$	2,137,006		$	1,542,081		$	420,570		$	366,157		$	395,834
Cost of services⁽³⁾	1,660,546			1,282,561			416,342			306,596			323,718
Depreciation and amortization	259,145			159,280			100,979			69,547			68,254
Selling, general and administrative expenses	114,258			93,526			53,155			26,081			25,459
(Gain) loss on disposal of assets	5,047			(2,555		)	(387		)	(270		)	—
Impairment	—			—			185			3,914			11,098
Total operating costs and expenses	2,038,996			1,532,812			570,274			405,868			428,529
Operating income (loss)	98,010			9,269			(149,704		)	(39,711		)	(32,695		)
Other income (expense), net	(905		)	13,963			916			(1,481		)	(2,418		)
Interest expense⁽⁴⁾	(33,504		)	(59,223		)	(38,299		)	(23,450		)	(10,473		)
Total other expenses	(34,409		)	(45,260		)	(37,383		)	(24,931		)	(12,891		)
Income (loss) before income taxes	63,601			(35,991		)	(187,087		)	(64,642		)	(45,586		)
Income tax expense	(4,270		)	(150		)	—			—			—
Net income (loss)	$	59,331		$	(36,141	)	$	(187,087	)	$	(64,642	)	$	(45,586	)
Per Share Data⁽⁵⁾
Basic net income (loss) per share	$	0.54		$	(0.34	)	$	(2.14	)	$	(0.74	)	$	(0.52	)
Diluted net income (loss) per share	0.54			(0.34		)	(2.14		)	(0.74		)	(0.52		)
Weighted average number of shares: basic	109,335			106,321			87,313			87,313			87,313
Weighted average number of shares: diluted	109,660			106,321			87,313			87,313			87,313
Statement of Cash Flows Data:
Cash flows from operating activities	$	350,311		$	79,691		$	(54,054	)	$	37,521		$	18,732
Cash flows from investing activities	(297,506		)	(250,776		)	(227,161		)	(26,038		)	(138,870		)
Cash flows from financing activities	(68,554		)	218,122			276,633			(10,518		)	137,298



	Year ended December 31, 2018		Year ended December 31, 2017⁽¹⁾		Year ended December 31, 2016⁽²⁾		Year ended December 31, 2015		Year ended December 31, 2014
Other Financial Data:
Capital expenditures⁽⁶⁾	$	291,543	$	189,629	$	23,545	$	27,246	$	141,393
Adjusted EBITDA⁽⁸⁾	391,856		214,525		1,921		41,885		59,563
Balance Sheet Data (at end of period):
Total assets	$	1,054,579	$	1,043,116	$	536,940	$	324,795	$	418,855
Long-term debt (including current portion) ⁽⁷⁾	340,730		275,055		269,750		207,067		208,688
Total liabilities	567,398		530,024		374,688		244,635		272,215
Total stockholders’ equity	487,181		513,092		162,252		80,160		146,640


(1)	Commencing on July 3, 2017, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of RockPile.


(2)	Commencing on March 16, 2016, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of the Acquired Trican Operations.


(3)	Excludes depreciation and amortization, shown separately.

(4)

Interest expense during the year ended December 31, 2018 includes $7.6 million in write-offs of deferred financing costs, incurred in connection with the early debt extinguishment of our 2017 Term Loan Facility (as defined herein). Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing of our then existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) and the early debt extinguishment of our the term loan facility provided by that certain credit agreement entered into on March 16, 2016 by KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders, and Senior Secured Notes (as defined herein).

(5)

The pro forma earnings per unit amounts for 2017, 2016, 2015, and 2014 have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of our Existing Owners’ membership interests for the newly-created ownership interests. The computations of pro forma earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by the Company to investors in the IPO.

(6)

Capital expenditures do not include, for the year ended December 31, 2018, $35.0 million of capital expenditures related to the asset acquisition from RSI, for the year ended December 31, 2017, $116.6 million of capital expenditures related to the acquisition of RockPile and, for the year ended December 31, 2016, $205.4 million of capital expenditures related to the acquisition of the Acquired Trican Operations.


(7)	Long-term debt includes $7.5 million, $8.2 million and $18.4 million of unamortized debt discount and debt issuance costs for 2018, 2017 and 2016, respectively, and excludes capital lease obligations.

(8)

Adjusted EBITDA is a Non-GAAP financial measure that provides supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other generally accepted accounting principles (“GAAP”) measures such as net income and operating income. This non-GAAP financial measure excludes the financial impact of items we do not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures and comparability to our results of operations may be impacted by the effects of acquisition accounting on its depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA provides helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies.

Adjusted EBITDA is defined as net income (loss) adjusted to eliminate the impact of interest, income taxes, depreciation and amortization, along with certain items management does not consider in assessing ongoing performance.

Set forth below is a reconciliation of net income (loss) to Adjusted Net Income (Loss), net income (loss) to Adjusted EBITDA, and gross profit (loss) to Adjusted Gross Profit (Loss)⁽¹⁾:

(1)

Adjusted Net Income (Loss), Adjusted EBITDA, and Adjusted Gross Profit (Loss) are Non-GAAP financial measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other generally accepted accounting principles (“GAAP”) measures such as net income, operating income and gross profit. These non-GAAP financial measures exclude the financial impact of items we do not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures and comparability to our results of operations may be impacted by the effects of acquisition accounting on its depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted Net Income (Loss), Adjusted EBITDA, and Adjusted Gross Profit (Loss) provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies.

Adjusted Net Income (Loss) is defined as net income (loss) adjusted to eliminate certain items management does not consider in assessing ongoing performance. 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 (Loss) is defined as gross profit (loss) adjusted to eliminate the impact of depreciation and amortization, included in cost of services, along with certain cost of services that management does not consider in assessing ongoing performance.



	(Thousands of Dollars) Year Ended December 31,
	2018			2017			2016			2015			2014
Net income (loss)	$	59,331		$	(36,141	)	$	(187,087	)	$	(64,642	)	$	(45,586	)
Acquisition, integration and expansion^(a)	16,609			(4,674		)	35,630			6,272			9,062
Offering-related expenses^(b)	12,969			7,069			1,672			—			—
Commissioning costs	—			12,565			9,998			—			—
Impairment of assets^(c)	—			—			185			3,914			11,098
Non-cash stock compensation^(d)	17,166			10,578			1,985			312			2,417
Changes in value of financial instruments^(e)	—			—			—			—			2,270
Other^(f)	(11,138		)	6,475			374			2,239			1,209
Adjusted Net Income (Loss)	$	94,937		$	(4,128	)	$	(137,243	)	$	(51,905	)	$	(19,530	)
Per share data^(g)
Net income (loss) per share, basic	$	0.54		$	(0.34	)	$	(2.14	)	$	(0.74	)	$	(0.52	)
Net income (loss) per share, diluted	$	0.54		$	(0.34	)	$	(2.14	)	$	(0.74	)	$	(0.52	)
Adjusted net income (loss) per share, basic	$	0.87		$	(0.04	)	$	(1.57	)	$	(0.59	)	$	(0.22	)
Adjusted net income (loss) per share, diluted	$	0.87		$	(0.04	)	$	(1.57	)	$	(0.59	)	$	(0.22	)

(a)

Represents professional fees, integration and divestiture costs, contingent value rights liability adjustments, earn-outs, lease-termination costs, severance, start-up and other costs associated with the acquisition of RockPile, the Acquired Trican Operations, the integration and the acquisition of Ultra Tech Frac Services, LLC, the asset acquisition from RSI and organic growth initiatives and wind-down of our Canadian operations. For the year ended December 31, 2018, $0.2 million was recorded in cost of services, $0.4 million was recorded in selling, general and administrative expenses, $2.7 million was recorded in gain on disposal of assets and $13.3 million was recorded in other expense, net. For the year ended December 31, 2017, $1.7 million was recorded in costs of services, $10.7 million was recorded in selling, general and administrative expense, $3.3 million gain was recorded in gain on disposal of assets and $13.8 million of income was recorded in other expense, net. For the year ended December 31, 2016, $13.9 million was recorded in costs of services, $21.4 million was recorded in selling, general and administrative expenses and $0.3 million was recorded in other expense, net. For the year ended December 31, 2015, $1.1 million was recorded in costs of services, $2.9 million was recorded in selling, general and administrative expenses, $0.6 million gain was recorded in gain on disposal of assets and $1.7 million was recorded in other expense, net. For the year ended December 31, 2014, $8.6 million was recorded in costs of services, $0.3 million was recorded in selling, general and administrative expenses and $0.2 million was recorded in other expense, net.

(b)

Represents professional fees and other miscellaneous expenses related to the Organizational Transactions, the Company's initial public offering and the sale of the Company's stock by a selling stockholder in January 2018. For the year ended December 31, 2018, $13.0 million was recorded in selling, general and administrative expenses. For the year ended December 31, 2017, $1.3 million was recorded in cost of services and $5.8 million was recorded in selling, general and administrative expense. For the year ended December 31, 2016, $1.7 million was recorded in selling, general and administrative expenses.


(c)	Represents non-cash impairment charges with respect to our long-lived assets and intangible assets.

(d)

In 2018 and 2017, 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. In 2016, 2015, and 2014, represents adjustments to the non-cash profit interests related to Keane Group Holdings, LLC. In all years, these costs were recorded in selling, general and administrative expenses.


(e)	Represents non-cash loss on debt extinguishment.

(f)

Represents gain recognized for insurance proceeds received in connection with a fire that damaged a portion of one hydraulic fracturing fleet on July 1, 2018, contingency accruals related to certain litigation claims, readiness costs associated with our initial internal controls design documentation for Sarbanes-Oxley compliance, using COSO 2013 framework, net gains on disposal of assets, rating agency fees for establishing initial ratings in connection with entering into the 2018 Term Loan Facility (as defined herein) and forfeiture of deposits on hydraulic fracturing equipment purchase orders. For the year ended December 31, 2018, $3.8 million was recorded in selling, general and administrative expenses and $14.9 million was recorded in other expense, net. For the year ended December 31, 2017, $0.7 million was recorded in gain on disposal of assets and $7.2 million was recorded in selling, general and administrative expenses. For the year ended December 31, 2016, $0.4 million was recorded in other expense, net. For the year ended December 31, 2015, $0.2 million was recorded in costs of services and $2.0 million was recorded in other expense, net. For the year ended December 31, 2014, $0.7 million was recorded in selling, general and administrative expenses and $0.5 million was recorded in other expense, net.

(g)



	(Thousands of Dollars) Year Ended December 31,
	2018			2017			2016			2015			2014
Net income (loss)	$	59,331		$	(36,141	)	$	(187,087	)	$	(64,642	)	$	(45,586	)
Depreciation and amortization	259,145			159,280			100,979			69,547			68,254
Interest expense, net	33,504			59,223			38,299			23,450			10,473
Income tax (benefit) expense^(a)	4,270			150			(114		)	793			366
EBITDA	$	356,250		$	182,512		$	(47,923	)	$	29,148		$	33,507
Acquisition, integration and expansion^(b)	16,609			(4,674		)	35,630			6,272			9,062
Offering-related expenses^(c)	12,969			7,069			1,672			—			—
Commissioning costs	—			12,565			9,998			—			—
Impairment of assets^(d)	—			—			185			3,914			11,098
Non-cash stock compensation^(e)	17,166			10,578			1,985			312			2,417
Changes in value of financial instruments^(f)	—			—			—						2,270
Other^(g)	(11,138		)	6,475			374			2,239			1,209
Adjusted EBITDA	$	391,856		$	214,525		$	1,921		$	41,885		$	59,563


(a)	Income tax (benefit) expense as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016. For 2016, 2015, and 2014, income tax (benefit) includes add-back for income tax expense related to Canadian operations recorded in selling, general and administrative expenses in the consolidated statement of operations.

(b)

(c)


(d)	Represents non-cash impairment charges with respect to our long-lived assets and intangible assets.

(e)


(f)	Represents non-cash loss on debt extinguishment.

(g)



	(Thousands of Dollars) Year Ended December 31,
	2018		2017		2016			2015			2014
Gross profit (loss)	$	230,863	$	112,378	$	(90,291	)	$	(8,722	)	$	4,381
Depreciation and amortization	245,597		147,142		94,519			68,283			67,735
Gross profit (loss) excluding depreciation and amortization	$	476,460	$	259,520	$	4,228		$	59,561		$	72,116
Acquisition, integration and expansion^(a)	227		1,806		13,599			1,133			—
Offering-related expenses^(b)	—		1,266		—			—			—
Commissioning costs	—		12,368		9,998			—			—
Other expenses	—		—		—			220			—
Total Management adjustments	$	227	$	15,440	$	23,597		$	1,353		$	—
Adjusted Gross Profit	$	476,687	$	274,960	$	27,825		$	60,914		$	72,116


(a)	Represents professional fees, integration and divestiture costs, contingent value rights liability adjustments, earn-outs, lease-termination costs, severance, start-up and other costs associated with the acquisition of RockPile and the Acquired Trican Operations, the asset acquisition from RSI and organic growth initiatives and wind-down of our Canadian operations.


(b)	Represents professional fees and other miscellaneous expenses related to the Organizational Transactions, the Company's initial public offering and the sale of the Company’s stock by a selling stockholder in January 2018.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

On January 25, 2017, we consummated an IPO of 30,774,000 shares of our common stock, of which 15,700,000 shares were offered by us and 15,074,000 shares were offered by the selling stockholder. To effectuate the IPO, we effected a series of transactions that resulted in a reorganization of our business. Specifically, among other transactions, we effected the Organizational Transactions described within Note (1) Basis of Presentation and Nature of Operations of Part II, “Item 8. Financial Statements and Supplemental Data.”

The information in this “Management’s Discussion of Analysis of Financial Condition and Results of Operations” reflects the following: (1) as it pertains to periods prior to the completion of the IPO, the accounts of Keane Group; and (2) as it pertains to the periods subsequent to the completion of the IPO, the accounts of Keane.

This section and other parts of this Annual Report on Form 10-K contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “may,” “can,” “will,” “would,” “could,” “should,” the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, “Item 1A. Risk Factors” of this Annual Report on Form 10-K, which are incorporated herein by reference. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.

EXECUTIVE OVERVIEW

Organization

We are one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions. Our total capacity includes approximately 1.4 million hydraulic horsepower. From our 29 currently deployable hydraulic fracturing fleets (“fleets”), 34 wireline trucks, 24 cementing units and other ancillary assets located in the Permian Basin, the Marcellus/Utica Shale, the Eagle Ford Formation, the Bakken Formation and other active oil and gas basins, we pride ourselves on providing industry-leading completion services with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We distinguish ourselves through three key principles, which include (i) our partnerships with high-quality customers, (ii) our intense focus on safety and efficiency and (iii) a track record of creating value for all our stakeholders.

We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to well-capitalized oil and gas exploration and production customers, with some of the highest quality and safety standards in the industry and long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion

requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, provides us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges.

We are organized into two reportable segments, consisting of Completion Services, which includes our hydraulic fracturing, wireline divisions and ancillary services; and Other Services, which exclusively includes our cementing division. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. Segment gross profit is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment gross profit as segment revenue less segment direct and indirect cost of services, excluding depreciation and amortization. Additionally, our operations management make rapid and informed decisions, such as price adjustments that offset commodity inflation and align with market rates, decisions to strategically deploy our existing and new fleets and real-time supply chain management decisions, by utilizing top line revenue, together with individual direct and indirect costs on a per stage and per fleet basis.

Asset Acquisition from Refinery Specialties, Incorporated

On July 24, 2018, we executed a purchase agreement with RSI to acquire approximately 90,000 hydraulic horsepower and related support equipment for approximately $35.4 million, inclusive of a $0.8 million deposit reimbursement related to future equipment deliveries. This acquisition was partially funded by the insurance proceeds we received in connection with a fire that resulted in damage to a portion of one of our fleets (for further details see Note (7) Property and Equipment, net of Part II, “Item 8. Financial Statements and Supplementary Data”). We also assumed operating leases for light duty vehicles in connection with the RSI transaction, and RSI entered into a non-compete arrangement in turn with us. In September 2018, we reached an agreement with RSI to refund us $0.8 million of the purchase price due to repair costs required for certain acquired equipment. The resulting purchase price after the refund was $34.6 million, and we incurred $0.4 million of transaction costs related to the acquisition, bringing total cash consideration related to the acquisition to $35.0 million.

Acquisition of RockPile

On July 3, 2017, we acquired 100% of the outstanding equity interests of RockPile, a multi-basin provider of integrated well completion services in the U.S., whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. The acquisition of RockPile was completed for cash consideration of $116.6 million, subject to post-closing adjustments, 8,684,210 shares of our common stock and contingent value rights (“CVR”) granted pursuant to the Contingent Value Rights Agreement (“CVR Agreement”), as further described in Note (3) Acquisitions) of Part II, “Item 8. Financial Statements and Supplementary Data.”

Through this acquisition, we expanded our existing presence in the Permian Basin and Bakken Formation by increasing our hydraulic fracturing fleet size by more than 25%, and further strengthened our position as one of the largest pure-play providers of integrated well completion services in the U.S. We acquired 245,000 hydraulic horsepower at newbuild economics, eight wireline trucks, 10 cementing units and 12 workover rigs. We also acquired a high-quality customer base, with minimal overlap to our existing customer base and expanded certain service offerings and capabilities within our Other Services segment.

Subsequent to the acquisition, we sold the twelve acquired workover rigs during the third and fourth quarters of 2017.

In early April 2018, in accordance with the terms and conditions of the CVR Agreement, we calculated and paid the final Aggregate CVR Payment Amount, due to the Holders of the CVRs, of $19.9 million.

Financial results

Revenue in 2018 totaled $2.1 billion, an increase of 39% compared to revenue in 2017 of $1.5 billion. Our strong revenue growth in 2018 was driven by the following factors, (i) an increase in deployed fleets as a result of a full-year contribution of assets acquired during the acquisition of Rockpile and additional newbuild fleets commissioned throughout 2018, (ii) stronger completions performance on a relative per crew basis in terms of stages completed and hours pumped and (iii) continued execution of our strategy of aligning with our clients under dedicated agreements, with periodic re-openers priced at market rate. We exited 2018 with 29 deployable fleets, which included the three newbuild fleets in 2018 and one fleet acquired through the acquisition of RSI. We exited 2017 with 27 operating fleets, which included six acquired fleets, including one newbuild fleet acquired through the acquisition of RockPile. In 2018, due to market conditions and client budget constraints creating white space on our calendar, we operated an equivalent of 24.5 fleets at 100% utilization, compared to 21.1 fleets at 100% utilization during 2017. The revenue growth drivers for 2018 had a favorable impact on operating margins, which is calculated by dividing operating income (loss) by revenue, but headwinds in input cost inflation persisted, particularly with, trucking, labor and chemicals, partially offset by deflation in sand prices due to surplus of sand supply. Consistent with our efforts to maintain and grow the supply of our key commodities and skilled workforce, as influenced by market demand, we continued to secure key contracts with suppliers, as well as position labor rates to facilitate retaining skilled employees and attracting new talent. We reported operating income of $98.0 million in 2018, as compared to an operating income of $9.3 million in 2017.

We reported net income of $59.3 million, or 0.54 per basic and diluted share, in 2018, compared to net loss of $36.1 million, or $(0.34) per basic and diluted share, in 2017. Excluding management adjustments, Adjusted Net Income (Loss) in 2018 and 2017 was $95.0 million and ($4.1) million, respectively, or $0.87 and $(0.04) per basic and diluted share, respectively. Refer to Item 6. Selected Financial Data for reconciliation between net income (loss) and Adjusted Net Income (Loss).

Financial markets, liquidity, and capital resources

On January 25, 2017, we completed the IPO of 30,774,000 shares of our common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by us and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to us, net of underwriters’ fees and capitalized cash payments of $4.8 million for professional services and other direct IPO related activities, was $255.5 million. The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s 2016 Term Loan Facility balance of $99.0 million and the associated prepayment premium of $13.8 million, and to repay $50.0 million of its 12% secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $0.5 million. The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, we had 103,128,019 shares of common stock outstanding.

On February 17, 2017, we also obtained a $150.0 million asset-based revolving credit facility (“2017 ABL Facility”), replacing our pre-existing $100.0 million asset-based revolving credit facility. On December 22, 2017, our 2017 ABL Facility was amended to increase the commitments thereunder by $150.0 million, for total commitments of $300.0 million.

On May 25, 2018, we obtained a $350.0 million term loan facility (the “2018 Term Loan Facility”). The proceeds of the 2018 Term Loan Facility were used to repay Keane Group’s then-existing term loan facility (the “2017 Term Loan Facility”) and to pay related fees and expenses, with the excess proceeds going to fund general corporate purposes. As a result of entering into the 2018 Term Loan Facility, we experienced an average annualized savings of $7.9 million in interest expense in 2018, when compared to the 2017 Term Loan Facility.

At December 31, 2018, we had approximately $80.2 million of cash available. We also had $184.0 million available under our asset-based revolving credit facility as of December 31, 2018, which, with our cash balance, we

believe provides us with sufficient liquidity for at least the next 12 months, including for capital expenditures and working capital investments.

We filed a Registration Statement on Form S-1 (File No. 333-222500) that was declared effective on January 17, 2018 by the Securities and Exchange Commission (the “SEC”) for an offering of shares of our common stock on behalf of Keane Investor (the “selling stockholder”). 15,320,015 shares were registered and sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters’ over-allotment option) at a price to the public of $18.25 per share. We did not sell any common stock in, and did not receive any of the proceeds from, the secondary offering. Subsequently, we filed a Registration Statement on Form S-3 (File No. 333-222831) that was effective upon its filing. In December 2018, the selling stockholder sold 5,251,249 shares of our common stock at a price to the public of $11.02 per share. In conjunction with this subsequent offering, we repurchased 520,000 shares of our common stock. We did not sell any common stock in, and did not receive any of the proceeds from this secondary offering. As a direct result of this secondary offering, Keane Investor owned approximately 49.6% of our outstanding common stock as of December 31, 2018 and currently owns approximately 49.5% of our common stock.

For additional information on market conditions and our liquidity and capital resources, see “Liquidity and Capital Resources,” and “Business Environment and Results of Operations” herein.

Fiscal 2018 Highlights


•	Acquisition: executed strategic asset acquisition of approximately 90,000 hydraulic horsepower from RSI at attractive value;


•	Revenue: increased average annualized Revenue per deployed fleet to $85.5 million in 2018 compared to $72.4 million in 2017;


•	Profitability: increased average annualized Adjusted Gross Profit per fully-utilized fleet to $19.5 million in 2018 compared to $12.9 million in 2017;


•	Utilization: increased efficiency by maintaining average fleet utilization of 88% and increased wireline bundling to 78%;


•	Safety: achieved a total recordable incident rate of 0.37, which remains substantially less than the industry average;


•	Balance sheet: maintained and improved conservative balance sheet, financial flexibility and liquidity;


•	Liquidity: generated operating cash flow of $350.3 million;


•	Share repurchases: completed $105 million of stock repurchases, representing 8.1 million shares of our common stock; and


•	Secondary offerings: completed two secondary offerings on behalf of Keane Investor for approximately 18.6 million shares, which increased public float and reduced Keane Investor’s ownership in the Company to 49.6% as of December 31, 2018 and 49.5% as of February 25, 2019.

Business outlook

In 2017 and through a significant portion of 2018, our industry experienced an increase in the level of drilling activity, driven by growth in E&P capital spending budgets. Commodity prices improved, with crude oil and natural gas prices well above levels prevailing at the beginning of 2017. West Texas Intermediate (“WTI”) crude oil prices averaged $64.94 per barrel in 2018, as compared to $50.88 per barrel in 2017, and Henry Hub Natural Gas

prices averaged $3.17 per MMBtu in 2018, as compared to $2.99 per MMBtu in 2017. These dynamics, combined with the completion of previously drilled wells, led to significant growth in the demand for U.S. completion services. At the same time, the availability and supply of completions services was impacted by higher completions intensity, which drove increases in the amount of equipment that must be utilized per fleet and acceleration of maintenance cycles, both of which had a tightening effect on available supply.

In the fourth quarter of 2018, the industry faced growing headwinds, including E&P capital budget exhaustion, early achievement of E&P production targets, price differentials and normal seasonality, resulting in softness in demand for completions services. At the same time, the price of crude oil experienced a significant and rapid decline beginning in November 2018, exacerbating the negative impacts on completions activity. The decline in crude oil prices coincided with E&P budgeting processes, driving many E&P companies to delay budgeting cycles and activity in early 2019. In addition, as we reached the price re-opener periods on a portion of our dedicated agreements, the current imbalance of frac supply resulted in pressure on net price. Most of our customers see value in a long-term partnership with us, and as a result, traded some price concessions by us for extended terms or additional work scope. We currently believe we have strong visibility on utilization for approximately two-thirds of our fleets in 2019, providing a strong baseload upon which to build.

Fiscal 2019 Objectives

In 2019, our principal business objective continues to be growing our business and safely providing best-in-class services in Completion Services and Other Services segments, while delivering shareholder value. We expect to achieve our objective through:


•	partnering and growing with well-capitalized customers under dedicated agreements who focus their efforts on safety, high-efficiency completions, continuous improvement and innovation;


•	allocating our assets to maximize utilization and returns, including diversification of geographies and commodities;


•	maximizing profitability of fully-utilized fleets through leading-edge pricing and efficiencies;


•	investing in technology to further drive efficiencies and differentiation of service offerings;


•	leveraging our flexible and scalable logistics infrastructure to provide assurance of supply at lowest landed cost;


•	leveraging our platform to identify, retain and promote talent to sustain growth and support operational and commercial excellence;


•	pursuing organic expansion opportunities for our cementing assets;


•	maintaining agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply and optimize efficiency;


•	maintaining our conservative and flexible capital position, supporting continued growth and maintenance of active equipment;


•	exploring potential opportunities for mergers or acquisitions, focused on gaining scale, achieving synergies and delivering shareholder returns; and


•	returning capital to shareholders in a disciplined fashion.

Our operating performance and business outlook are described in more detail in “Business Environment and Results of Operations” herein.

BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We provide our services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation. These regions are expected to account for approximately 68% of all new horizontal wells anticipated to be drilled during 2019 through 2021. In addition, the high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements.

In particular, we are one of the largest providers of completion services in the Permian Basin and the Marcellus Shale/Utica Shale, the most prolific and cost-competitive oil and natural gas basins in the U.S. According to Spears & Associates, the Permian Basin and the Marcellus Shale/Utica Shale are expected to account for 53% of total active rigs in the U.S. during 2019 through 2021 based on forecasted rig counts. These basins have experienced a recovery in activity since the spring of 2016, with an 229% increase in rig count from their combined May 2016 low of 170 to 560 as of December 31, 2018.

Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas demand.

Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices, which are summarized in the tables below.

The following table shows the average oil and natural gas prices for WTI and Henry Hub natural gas:



	Year Ended December 31,
	2018		2017		2016
Oil price - WTI⁽¹⁾	$	64.94	$	50.88	$	43.14
Natural gas price - Henry Hub⁽²⁾	$	3.17	$	2.99	$	2.52
⁽¹⁾Oil price measured in dollars per barrel ⁽²⁾ Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu

The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows:



	Year Ended December 31,
Product Type	2018	2017	2016
Oil	841	703	408
Natural Gas	190	172	100
Other	1	1	1
Total	1,032	876	509



	Year Ended December 31,
Drilling Type	2018	2017	2016
Horizontal	900	736	400
Vertical	63	70	60
Directional	69	70	49
Total	1,032	876	509

Our customers’ cash flows, in most instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets.

Following a trough in early 2016, oil prices and natural gas prices have recovered to $45.15 and $3.25, respectively, or approximately 72% and 118%, respectively, as of December 31, 2018 from their lows in early 2016 of $26.19 and $1.49, respectively. As of January 2019, the US Energy Information Administration (the “EIA”) projects WTI spot prices to average $53.0 in the first quarter of 2019 before gradually increasing to $57.0 in the fourth quarter of 2019 and Henry Hub natural gas prices to average $2.89 in 2019.

With the rebound in commodity prices from their lows in early 2016, drilling and completion activity continued to increase in 2017 and 2018, with U.S. active rig count in December 2018 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility continues to persist. Despite this market volatility, we continued to experience increased demand for our services during 2018.

The EIA projects that the average WTI spot price will increase through 2020 due to growing demand. As of January 2019, global liquids demand is expected to average 101.5 million barrels per day in 2019. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale

developments. As of January 2019, natural gas demand in North America is expected to average 82.65 billion cubic feet per day in 2019.

Our financial performance in 2018 is reflective of the increased demand within the completion services industry and our ability to navigate the anticipated sector-wide challenges in 2019.

RESULTS OF OPERATIONS IN 2018 COMPARED TO 2017

Year Ended December 31, 2018 Compared with Year Ended December 31, 2017



	Year Ended December 31,
(Thousands of Dollars)							As a % of Revenue				Variance
Description	2018			2017			2018		2017		$			%
Completion Services	$	2,100,956		$	1,527,287		98	%	99	%	$	573,669		38	%
Other Services	36,050			14,794			2	%	1	%	21,256			144	%
Revenue	2,137,006			1,542,081			100	%	100	%	594,925			39	%
Completion Services	1,622,106			1,269,263			76	%	82	%	352,843			28	%
Other Services	38,440			13,298			2	%	1	%	25,142			189	%
Costs of services	1,660,546			1,282,561			78	%	83	%	377,985			29	%
Completion Services	241,169			141,385			11	%	9	%	99,784			71	%
Other Services	4,428			5,757			0	%	0	%	(1,329		)	(23	%)
Depreciation and amortization	245,597			147,142			11	%	10	%	98,455			67	%
Completion Services	237,681			116,639			11	%	8	%	121,042			104	%
Other Services	(6,818		)	(4,261		)	0	%	0	%	(2,557		)	60	%
Gross profit	230,863			112,378			11	%	7	%	118,485			105	%
Depreciation and amortization - selling, general and administrative	13,548			12,138			1	%	1	%	1,410			12	%
Selling, general and administrative expenses	114,258			93,526			5	%	6	%	20,732			22	%
(Gain) loss on disposal of assets	5,047			(2,555		)	0	%	0	%	7,602			(298	%)
Operating income	98,010			9,269			5	%	1	%	88,741			957	%
Other income (expense), net	(905		)	13,963			0	%	1	%	(14,868		)	(106	%)
Interest expense	(33,504		)	(59,223		)	(2	%)	(4	%)	25,719			(43	%)
Total other expenses	(34,409		)	(45,260		)	(2	%)	(3	%)	10,851			(24	%)
Income tax expense	(4,270		)	(150		)	0	%	0	%	(4,120		)	2,747	%
Net income (loss)	$	59,331		$	(36,141	)	3	%	(2	%)	$	95,472		(264	%)

Revenue. Total revenue is comprised of revenue from our Completion Services and Other Services segments. Revenue in 2018 increased by $594.9 million, or 39%, to $2.1 billion from $1.5 billion in 2017. This change in revenue by reportable segment is discussed below.

Completion Services: Completion Services segment revenue increased by $573.7 million, or 38%, to $2.1 billion in 2018 from $1.5 billion in 2017. This change was primarily attributable to a 17% growth in our average number of fully-utilized fleets, as a result of a full-year contribution of assets acquired during the acquisition of Rockpile and deployment of additional fleets throughout 2018, together with increased stage count and efficiency from both our existing and newly-deployed fleets. These factors drove an increase in annualized revenue per fully-utilized fleet of 18%.

Other Services: Other Services segment revenue increased by $21.3 million, or 144%, to $36.0 million in 2018 from $14.8 million in 2017. This increase in revenue was primarily attributable to the acquisition of Other

Services divisions from RockPile and reactivation of cementing assets that were previously idled. Revenue in 2018 was primarily earned in our cementing division, while revenue in 2017 was earned in our cementing, workover and coiled tubing divisions. We idled our coiled tubing division in December 2016 and divested our coiled tubing assets during the fourth quarter of 2017. We divested our workover assets during the third and fourth quarters of 2017.

Cost of services. Cost of services in 2018 increased by $378.0 million, or 29%, to $1.7 billion from $1.3 billion in 2017. This change was driven by several factors including (i) higher activity in the Completion Services segment (as discussed above under Revenue), (ii) price inflation in our key input costs, including labor, chemicals, and sand trucking, partially offset by sand deflation, (iii) increased maintenance costs associated with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs and (iv) an increase in fleets working twenty-four hour operations. In 2018, we had management adjustments of $0.2 million in integration costs related to our asset acquisition from RSI. In 2017, we had management adjustments of $12.4 million in fleet commissioning costs, $1.7 million in acquisition and integration costs associated with the acquisition of RockPile and $1.3 million in bonuses paid out to key operational employees in connection with our IPO. Cost of services as a percentage of total revenue in 2018 was 78%, which represented a decrease of 5% from 83% in 2017. Excluding the above-mentioned management adjustments, total cost of services was $1.7 billion and $1.3 billion in 2018 and 2017, or 78% and 82% of revenue, respectively, a decrease as a percentage of revenue of 4%.

Cost of services, as a percentage of total revenue is presented below:



	Year Ended December 31,
Description	2018		2017		% Change
Segment cost of services as a percentage of segment revenue:
Completion Services	77	%	83	%	(6	)%
Other Services	107	%	90	%	17	%
Total cost of services as a percentage of total revenue	78	%	83	%	(5	)%

The change in cost of services by reportable segment is further discussed below.

Completion Services: Completion Services segment cost of services increased by $352.8 million, or 28%, to $1.6 billion in 2018 from $1.3 billion in 2017. As a percentage of segment revenue, total cost of services was 77% and 83%, in 2018 and 2017, respectively, a decrease as a percentage of revenue of 6%. This decrease was driven by higher revenue and operational performance on a per fleet basis, partially offset by (i) net price inflation in our key input costs and (ii) increased maintenance costs associated with increased service intensity and higher-pressure jobs. In 2018, we had management adjustments of $0.2 million in integration costs related to our asset acquisition from RSI. In 2017, we had management adjustments of $11.6 million in fleet commissioning costs, $1.7 million in acquisition and integration costs associated with the acquisition of RockPile and $1.3 million in bonuses paid out to key operational employees in connection with our IPO. Excluding the above-mentioned management adjustments, Completion Services segment cost of services was $1.6 billion and $1.3 billion in 2018 and 2017, or 77% and 82% of segment revenue, respectively, a decrease as a percentage of revenue of 5%.

Other Services: Other Services segment cost of services increased by $25.1 million, or 189%, to $38.4 million in 2018 from $13.3 million in 2017. This change in cost of services was primarily due to a full year of costs incurred to ramp up our cementing division. In 2017, we incurred management adjustments of $0.8 million in commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million in acquisition and integration costs associated with the acquisition of RockPile. Excluding the above-mentioned management adjustments, Other Services segment cost of services was $38.4 million and $12.4 million in 2018 and 2017, or 107% and 84% of segment revenue, respectively, an increase as a percentage of revenue of 23%.

Depreciation and amortization. In aggregate, depreciation and amortization expense increased by $99.9 million, or 63%, to $259.1 million in 2018 from $159.3 million in 2017. This change was primarily attributable to

depreciation of additional equipment purchased in 2018 to maintain existing fleets, the purchase of newbuild equipment, the assets acquired from RSI, a full-year depreciation of assets acquired in the RockPile acquisition and changes in the estimated useful lives of certain assets during the first half of 2018.

Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $20.7 million, or 22%, to $114.3 million in 2018 from $93.5 million in 2017. This change in SG&A was primarily related to non-cash compensation expense and transactions related to the secondary offering we consummated in January 2018, compared with transaction costs incurred in 2017 associated with the acquisition of RockPile. SG&A as a percentage of total revenue was 5% in 2018 compared with 6% in 2017. Total management adjustments were $34.5 million in 2018, driven by $17.2 million of non-cash stock compensation expense, $13.0 million of transaction costs primarily incurred to consummate the secondary stock offering completed in January 2018, $2.8 million of legal contingencies, $0.9 million in refinancing costs, $0.5 million of integration costs associated with the asset acquisition from RSI and $0.1 million of other financing fees and expenses. Management adjustments in 2017 were $34.5 million, driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, together with transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to commissioning costs. Excluding these management adjustments, SG&A expense was $79.8 million and $59.0 million in 2018 and 2017, respectively, which represents an increase of 35%.

(Gain) loss on disposal of assets. Gain on disposal of assets in 2018 decreased by $7.6 million, to a loss of $5.0 million in 2018 from a gain of $2.6 million in 2017. This change was primarily attributable to the sale of our coiled tubing units and ancillary coiled tubing equipment in 2017, together with the loss recognized on the sale of our idle real estate in Mathis, Texas in 2018 and the increase in early disposals of various hydraulic fracturing pump components in 2018.

Other income (expense), net. Other income (expense), net, in 2018 decreased by $14.9 million, or 106%, to expense of $0.9 million in 2018 from income of $14.0 million in 2017. In 2018, other income (expense), net was primarily due to a $13.2 million adjustment to our Rockpile CVR liability, $2.7 million loss on foreign currency related to the wind-down of the Canadian entity, offset by a $14.9 million gain on the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire. In 2017, other income (expense), net was primarily due to a $7.8 million of indemnification settlements with Trican, $0.7 million from the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of our RockPile CVR liability.

Interest expense, net. Interest expense, net of interest income, decreased by $25.7 million, or 43%, to $33.5 million in 2018 from $59.2 million in 2017. This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million in 2017, in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes, compared to the $7.6 million write-offs of deferred financing costs in 2018, in connection with the debt extinguishment of our 2017 Term Loan Facility. While we incurred higher interest expense on our debt facilities in 2018 compared to our debt facilities in 2017, primarily due to the higher principal balance under the 2018 Term Loan Facility, this increase was offset by lower amortization expense of our unamortized deferred financing costs.

Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal income taxes. Our effective tax rate on continuing operations in 2018 was 6.71%, as compared to (0.53)% in 2017. For 2018, the effective rate is primarily made up of state taxes and a tax benefit derived from the current period operating income offset by a valuation allowance. For 2017, the effective rate was primarily made up of a tax benefit derived from the current period operating income offset by a valuation allowance. As a result of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to tax amortization on our indefinite-lived intangible assets.

Net income. Net income was $59.3 million in 2018, as compared with net loss of $36.1 million in 2017. The increase from the net loss in 2017 is due to the changes in revenue and expenses discussed above.

Year Ended December 31, 2017 Compared with Year Ended December 31, 2016



	Year Ended December 31,
(Thousands of Dollars)							As a % of Revenue				Variance
Description	2017			2016			2017		2016		$			%
Completion Services	$	1,527,287		$	410,854		99	%	98	%	$	1,116,433		272	%
Other Services	14,794			9,716			1	%	2	%	5,078			52	%
Revenue	1,542,081			420,570			100	%	100	%	1,121,511			267	%
Completion Services	1,269,263			401,891			82	%	96	%	867,372			216	%
Other Services	13,298			14,451			1	%	3	%	(1,153		)	(8	%)
Costs of services	1,282,561			416,342			83	%	99	%	866,219			208	%
Completion Services	141,385			89,432			9	%	21	%	51,953			58	%
Other Services	5,757			5,087			0	%	1	%	670			13	%
Depreciation and amortization	147,142			94,519			10	%	22	%	52,623			56	%
Completion Services	116,639			(80,469		)	8	%	(19	%)	197,108			(245	%)
Other Services	(4,261		)	(9,822		)	0	%	(2	%)	5,561			(57	%)
Gross profit	112,378			(90,291		)	7	%	(21	%)	202,669			(224	%)
Depreciation and amortization - selling, general and administrative	12,138			6,460			1	%	2	%	5,678			88	%
Selling, general and administrative expenses	93,526			53,155			6	%	13	%	40,371			76	%
Gain on disposal of assets	(2,555		)	(387		)	0	%	0	%	(2,168		)	560	%
Impairment	—			185			0	%	0	%	(185		)	(100	%)
Operating income (loss)	9,269			(149,704		)	1	%	(36	%)	158,973			(106	%)
Other income, net	13,963			916			1	%	0	%	13,047			1,424	%
Interest expense	(59,223		)	(38,299		)	(4	%)	(9	%)	(20,924		)	55	%
Total other expenses	(45,260		)	(37,383		)	(3	%)	(9	%)	(7,877		)	21	%
Income tax expense	(150		)	—			0	%	0	%	(150		)	—	%
Net loss	$	(36,141	)	$	(187,087	)	(2	%)	(44	%)	$	150,946		(81	%)

Revenue. Total revenue is comprised of revenue from our Completion Services and Other Services segments. Revenue in 2017 increased by $1.1 billion, or 267%, to $1.5 billion from $420.6 million in 2016. This change in revenue by reportable segment is discussed below.

Completion Services: Completion Services segment revenue increased by $1.1 billion, or 272%, to $1.5 billion in 2017 from $410.9 million in 2016. This change was primarily attributable to a 105% growth in our average number of deployed fleets, as a result of increased utilization of our combined asset base following our acquisition of RockPile and our acquisition of the majority of the U.S. assets and assumptions of certain liabilities of the Acquired Trican Operations, as well as increased stage count and efficiency from both our existing and newly-deployed recommissioned fleets. In addition, annualized revenue per deployed fleet increased 81%.

Other Services: Other Services segment revenue increased by $5.1 million, or 52%, to 14.8 million in 2017 from 9.7 million in 2016. This change in revenue was primarily attributable to the acquisition of Other Services divisions from RockPile. Revenue in 2017 was earned in our cementing and workover divisions and revenue in 2016 was earned in our cementing and coiled tubing divisions. We idled our coiled tubing division in

December 2016 and divested of our coiled tubing assets during the fourth quarter of 2017. We divested of our workover assets during the third and fourth quarters of 2017.

Cost of services. Cost of services in 2017 increased by $866.2 million, or 208%, to $1.3 billion from $416.3 million in 2016. This change was driven by several factors including (i) higher activity in the Completion Services segment (as discussed above under Revenue), (ii) price inflation in our key input costs, including labor, sand and sand trucking, (iii) increased maintenance costs associated with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs, (iv) an increase in fleets working twenty-four hour operations and (v) rapid deployment and commissioning of our idle fleets. In 2017, we incurred $12.4 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.9 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $10.0 million primarily related to commissioning of our idle fleets. Cost of services as a percentage of total revenue in 2017 was 83%, which represented a decrease of 16% from 99% in 2016. Excluding the above-mentioned management adjustments, total cost of services was $1.3 billion and $392.4 million in 2017 and 2016 or 82% and 93% of revenue, respectively, a decrease as a percentage of revenue of 11%.

Cost of services, as a percentage of total revenue is presented below:



	Year Ended December 31,
Description	2017		2016		% Change
Segment cost of services as a percentage of segment revenue:
Completion Services	83	%	98	%	(15	)%
Other Services	90	%	149	%	(59	)%
Total cost of services as a percentage of total revenue	83	%	99	%	(16	)%

The change in cost of services by reportable segment is further discussed below.

Completion Services: Completion Services segment cost of services increased by $867.4 million, or 216%, to $1.3 billion in 2017 from $401.9 million in 2016. As a percentage of segment revenue, total cost of services was 83% and 98%, in 2017 and 2016, respectively, a decrease as a percentage of revenue of 15%. This change in cost of services was driven by (i) higher activity (as discussed above under Revenue), (ii) price inflation in our key input costs, including sand and trucking, (iii) increased maintenance costs associated with increased service intensity and higher-pressure jobs and (iv) rapid deployment and commissioning of our idle fleets. In 2017, we incurred $11.6 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.5 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $9.3 million primarily related to commissioning of our idle fleets. Excluding the above-mentioned management adjustments, Completion Services segment cost of services were $1.2 billion and $379.1 million in 2017 and 2016, or 82% and 92% of segment revenue, respectively, a decrease as a percentage of revenue of 10%.

Other Services: Other Services segment cost of services decreased by $1.2 million, or 8%, to $13.3 million in 2017 from $14.5 million in 2016. This change in cost of services was primarily attributable to the idling of our cementing and coiled tubing divisions in April 2016 and December 2016, respectively, partially offset by the acquisition of Other Services divisions from RockPile. In 2017, we incurred management adjustments of $0.8 million of commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million of acquisition and integration costs associated with the acquisition of RockPile. In 2016, we incurred management adjustments of $0.7 million in commissioning costs and $0.4 million in acquisition and integration costs associated with the Acquired Trican Operations. Excluding the above-mentioned management

adjustments, Other Services segment cost of services was $12.4 million and $13.4 million in 2017 and 2016, or 84% and 138% of segment revenue, respectively, a decrease as a percentage of revenue of 54%.

Depreciation and amortization. In aggregate, depreciation and amortization expense increased by $58.3 million, or 58%, to $159.3 million in 2017 from $101.0 million in 2016. This change was primarily attributable to depreciation of additional equipment purchased in 2017 to recondition existing fleets and the acquisition of the RockPile assets.

Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $40.4 million, or 76%, to $93.5 million in 2017 from $53.2 million in 2016. This change in SG&A was primarily related to non-cash amortization expense of equity awards issued under our Equity and Incentive Award Plan in 2017 and transactions driving overall company growth associated with the acquisition of RockPile. SG&A as a percentage of total revenue was 6% in 2017 compared with 13% in 2016. Total management adjustments were $34.5 million in 2017, driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense for the restricted stock units and stock options awarded to certain of our employees in connection with our IPO, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, together with transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to commissioning costs. Management adjustments in 2016 were $26.9 million, primarily driven by $23.2 million of transaction costs and lease exit costs related to the integration of the Acquired Trican Operations, $2.0 million in non-cash compensation expense of our unit-based awards and $1.7 million in IPO-readiness costs. Excluding these management adjustments, SG&A expense was $59.0 million and $26.3 million in 2017 and 2016, respectively, which represents an increase of 124%.

Gain on disposal of assets. Gain on disposal of assets in 2017 increased by $2.2 million, or 560%, to a gain of $2.6 million in 2017 from a gain of $0.4 million in 2016. This change was primarily attributable to the sale of our coiled tubing units and ancillary coiled tubing equipment, our air compressor units and idle property in Woodward, Oklahoma and Searcy, Arkansas.

Other income (expense), net. Other income (expense), net, in 2017 increased by $13.0 million, or 1,424%, to income of $14.0 million in 2017 from income of $0.9 million in 2016. This change is primarily due to $7.8 million of gain on indemnification settlements with Trican, $0.7 million due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of our RockPile CVR liability.

Interest expense, net. Interest expense, net of interest income, increased by $20.9 million, or 55%, to $59.2 million in 2017 from $38.3 million in 2016. This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million, incurred in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes. This increase was offset by lower interest expense under our 2017 Term Loan Facility, which replaced our 2016 Term Loan Facility and Senior Secured Notes that bore higher interest rates.

Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal

income taxes. Our effective tax rate on continuing operations in 2017 was (0.53)%. The effective rate is primarily

made up of a tax benefit derived from the current period operating income offset by a valuation allowance. As a

result of market conditions and their corresponding impact on our business outlook, we determined that a valuation

allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The

remaining tax impact not offset by a valuation allowance is related to tax amortization on our indefinite-lived intangible assets.

Net loss. Net loss was $36.1 million in 2017, as compared with net loss of $187.1 million in 2016. This decrease in net loss from 2016 is due to the changes in revenue and expenses discussed above.

ENVIRONMENTAL MATTERS

We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note (18) (Commitments and Contingencies) of Part II, “Item 8. Financial Statements and Supplementary Data.”

LIQUIDITY AND CAPITAL RESOURCES

Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected.

As of December 31, 2018, we had $80.2 million of cash and $351.2 million of total debt, compared to $96.1 million of cash and $282.9 million of total debt as of December 31, 2017. In 2018, 2017 and 2016, we had capital expenditures of $291.5 million, $189.6 million and $23.5 million, respectively, exclusive of the cash payment attributable to the asset acquisition from RSI on July 24, 2018 of $35.0 million, the acquisition of RockPile on July 3, 2017 of $116.6 million and the acquisition of the Acquired Trican Operations on March 16, 2016 of $203.9 million.



	(Thousands of Dollars)
	Year Ended December 31,
	2018			2017			2016
Net cash provided by (used) in operating activities	$	350,311		$	79,691		$	(54,054	)
Net cash used in investing activities	$	(297,506	)	$	(250,776	)	$	(227,161	)
Net cash provided by (used in) financing activities	$	(68,554	)	$	218,122		$	276,633

Significant sources and uses of cash during the year ended December 31, 2018

Sources of cash:


•	Operating activities:


–	Net cash generated by operating activities in 2018 of $350.3 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment.


•	Investing activities:


–	Cash provided by the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire was $18.1 million. For further details see Note (7) Property and Equipment, net of Part II, “Item 8. Financial Statements and Supplementary Data.”


–	$4.7 million in proceeds from sales of various assets, including our idle field operations facility in Mathis, Texas, within the Corporate segment, and hydraulic tractors and light general-purpose vehicles within the Completion Services segment.


•	Financing activities:


–	Cash provided by the 2018 Term Loan Facility, net of debt discount, was $348.2 million.

Uses of cash:


•	Operating activities:


–	$13.0 million of transaction costs, including underwriting discounts paid by the Company, primarily incurred to consummate the secondary stock offering completed in January 2018.


–	$7.9 million related to the portion of the cash settlement of our RockPile CVR liability that exceeded its acquisition-date fair value, with the remaining $12.0 million of the cash settlement cost reflected in the use of cash in financing activities as described below.

Investing activities:


–	Net cash used in investing activities of $297.5 million was primarily associated with our asset acquisition from RSI and our newbuild and maintenance capital spend on active fleets, offset by insurance proceeds and proceeds from various asset sales, as discussed above under “Sources of cash.” This activity primarily related to our Completion Services segment.


•	Financing activities:


–	Cash used to repay our debt facilities, including capital leases but excluding interest, was $289.1 million.


–	Cash used to pay debt issuance costs associated with our debt facilities was $7.3 million.


–	Shares repurchased and retired related to our stock repurchase program totaled $104.9 million.


–	Shares repurchased and retired related to payroll tax withholdings on our share-based compensation totaled $3.6 million.


–	$12.0 million related to the portion of the cash settlement of our RockPile CVR liability that was reflective of its acquisition-date fair value.

Significant sources and uses of cash during the year ended December 31, 2017

Sources of cash:


•	Operating activities:

–

Net cash generated by operating activities in 2017 of $79.7 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. We also had proceeds of $2.1 million and $4.2 million from the indemnification settlement with Trican and our insurance company related to the acquisition of the Acquired Trican Operations. See Note (18) Commitments and Contingencies of Part II, “Item 8. Financial Statements and Supplementary Data.”


•	Investing activities:


–	Total proceeds of $30.6 million from the sale of assets relating to our facilities in Woodward, Oklahoma and Searcy, Arkansas, certain air compressor units, coiled tubing assets and the twelve workover rigs acquired in the acquisition of RockPile. See Note (7) Property and Equipment, net of Part II, “Item 8. Financial Statements and Supplementary Data.”


•	Financing activities:


–	Cash provided from IPO proceeds, $255.5 million. See Note (1)(a) Initial Public Offering of Part II, “Item 8. Financial Statements and Supplementary Data.”


–	The 2017 Term Loan Facility, entered into on March 15, 2017, provided for $145.0 million, net of associated origination and other transactions fees. Proceeds received were primarily used to fully repay our Senior Secured Notes. statements.


–	An incremental term loan facility, entered into on July 3, 2017, provided for $131.1 million, net of associated origination and other transaction fees. Proceeds received were primarily used to fund the acquisition of RockPile.

Uses of cash:


•	Investing activities:


–	Cash consideration of $116.6 million associated with the acquisition of RockPile, inclusive of a $7.8 million net working capital settlement.


–	Cash used for capital expenditures of $164.4 million, associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets, the newbuild acquired as part of the acquisition of RockPile and deposits on new equipment. This activity primarily related to our Completion Services segment.


•	Financing activities: Cash used to repay our debt facilities, including capital leases but excluding interest, in 2017 was $310.8 million. We used a portion of our IPO proceeds and the proceeds of the 2017 Term Loan Facility to repay our 2016 Term Loan Facility and Senior Secured Notes.

Significant sources and uses of cash during the year ended December 31, 2016

Sources of cash:


•	Investing activities: Total net proceeds of $0.7 million primarily related to the sale of assets from our idled drilling division within our Other Services segment.


•	Financing activities: Net cash provided from a capital contribution from shareholders of $200.0 million and the net proceeds from our 2016 Term Loan Facility of $91.2 million.

Uses of cash:


•	Operating activities: Net cash used in operating activities of $54.1 million was primarily attributable to competitive pricing pressure as a result of market conditions, combined with the acquisition, integration and commissioning costs of approximately $47.3 million associated with the acquisition of the Acquired Trican Operations.


•	Investing activities:


–	Cash consideration of $205.4 million associated with the acquisition of the Acquired Trican Operations.


–	Cash used for capital expenditures of $23.5 million associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets.


•	Financing activities: Cash used to repay and service our debt facilities, including prepayment penalties and capital leases but excluding interest, in 2016 was $8.8 million.

Future sources and use of cash

Capital expenditures for 2019 are projected to be primarily related to maintenance capital spend to support our existing active fleets, wireline trucks and cementing units. We anticipate our capital expenditures will be funded by cash flows from operations. We currently estimate that our capital expenditures for 2019 will range between $130.0 million and $150.0 million.

Debt service for the year ended December 31, 2019 is projected to be $30.4 million, of which $5.5 million is related to capital leases. We anticipate our debt service will be funded by cash flows from operations.

On February 26, 2018, we announced that our board of directors authorized a 12-month stock repurchase program of up to $100.0 million of the Company’s outstanding common stock, with the intent of returning value to our shareholders as we continue to expect further growth and profitability. The program does not obligate us to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion. Effective October 26, 2018, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. Additionally, the program’s expiration date was extended to September 2019 from a previous expiration of February 2019. Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019.

Other factors affecting liquidity

Financial position in current market. As of December 31, 2018, we had $80.2 million of cash and a total of $184.0 million available under our revolving credit facility. Furthermore, we have no material adverse change provisions in our bank agreements, and our debt maturities extend over a long period of time. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity for at least the next 12 months, including for capital expenditures, debt service, working capital investments and stock repurchases.

Guarantee agreements. In the normal course of business, we have agreements with a financial institution under which $2.5 million of letters of credit were outstanding as of December 31, 2018.

Customer receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 days or less. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition.

Contractual Obligations

In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2018.



(Thousands of Dollars) Contractual obligations	Total		2019		2020-2022		2023-2025		2026+
Long-term debt, including current portion⁽¹⁾	$	348,250	$	3,500	$	10,500	$	334,250	$	—
Estimated interest payments⁽²⁾	130,758		21,386		61,517		47,855		—
Capital lease obligations⁽³⁾	11,449		5,484		5,965		—		—
Operating lease obligations⁽⁴⁾	73,535		29,410		28,500		6,502		9,123
Purchase commitments⁽⁵⁾	137,667		78,101		57,966		1,600		—
Equity-method investment⁽⁶⁾	3,315		3,315		—		—		—
Legal contingency⁽⁷⁾	1,668		1,668		—		—		—
	$	706,642	$	142,864	$	164,448	$	390,207	$	9,123


(1)	Long-term debt represents our obligations under our 2018 Term Loan Facility, exclusive of interest payments. In addition, these amounts exclude $7.5 million of unamortized debt discount and debt issuance costs associated with our 2018 Term Loan Facility.


(2)	Estimated interest payments are based on debt balances outstanding as of December 31, 2018 and include interest related to the 2018 Term Loan Facility. Interest rates used for variable rate debt are based on the prevailing current London Interbank Offer Rate (“LIBOR”).


(3)	Capital lease obligations consist of obligations on our capital leases of hydraulic fracturing equipment and ancillary equipment with CIT Finance LLC and light weight vehicles with ARI Financial Services Inc. and Enterprise FM Trust and includes interest payments.


(4)	Operating lease obligations, inclusive of early termination buyouts, are related to our real estate, rail cars with Anderson Rail Group, Compass Rail VIII, SMBC Rail Services, Trinity Industries Leasing Company, and CIT Rail LLC and light duty vehicles with Enterprise FM Trust.


(5)	Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year.


(6)	Equity-method investment is related to our research and development commitments with our equity-method investee. See Notes (18) Commitments and Contingencies and (19) Related Party Transactions of Part II, “Item 8. Financial Statements and Supplementary Data” for further details.


(7)	The legal contingency is primarily related to various employment related claims. See Note (18) Commitments and Contingencies of Part II, “Item 8. Financial Statements and Supplementary Data” for further details.

Principal Debt Agreements

2017 ABL Facility

Structure. As of March 31, 2018, our 2017 ABL Facility provided for a $300.0 million revolving credit facility (with a $20.0 million subfacility for letters of credit), subject to a borrowing base in accordance with the terms agreed between us and the lenders. In addition, subject to approval by the applicable lenders and other customary conditions, the 2017 ABL Facility allows for an additional increase in commitments of up to $150.0 million. The 2017 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments.

Maturity. The loans arising under the initial commitments under the 2017 ABL Facility mature on December 22, 2022. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively.

Interest. Pursuant to the terms of the 2017 ABL Facility, amounts outstanding under the 2017 ABL Facility bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average

excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%. The average excess availability is set on the first day of each full fiscal quarter ending after December, 22, 2017. On or after June 22, 2018, at any time when consolidated EBITDA as of the then most recently ended four fiscal quarters for which financial statements are required to be delivered is greater than or equal to $250.0 million, the applicable margin will be reduced by 0.25%; provided that if consolidated EBITDA is less than $250.0 million as of a later four consecutive fiscal quarters, the applicable margin will revert to the levels set forth above.

2018 Term Loan Facility

On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into the 2018 Term Loan Facility with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The proceeds of the 2018 Term Loan Facility were used to refinance Keane Group’s then-existing term loan facility and to repay related fees and expenses, with the excess proceeds to fund general corporate purposes.

Structure. The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the “2018 Term Loans”). As of December 31, 2018, there was $348.2 million principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loan Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immediately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00.

Maturity. May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments.

Amortization. The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding.

Interest. The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default.

Prepayments. The 2018 Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the 2018 Term Loan Facility and the agent for the 2017 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2017 ABL Facility to the extent the commitments under the 2017 ABL Facility are permanently reduced by such prepayments.

Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility are guaranteed by the Company, Keane

Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the “2018 Term Loan Guarantors”).

Security. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2017 ABL Facility (the “ABL Facility Priority Collateral”).

Fees. Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility.

Restricted Payment Covenant. The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00.

“Cumulative Credit”, generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments).

Affirmative and Negative Covenants. The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants.

Events of Default. The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility).

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet financing arrangements, transactions or special purpose entities.

Related Party Transactions

Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect

material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction.

The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee.

Transaction prices with our related parties are commensurate with transaction prices in arms-length transactions. For further details about our transactions with Related Parties, see Note (19) Related Party Transactions of Part II, “Item 8. Financial Statements and Supplementary Data.”

Recently Issued Accounting Standards

For discussion on the impact of accounting standards issued but not yet adopted to our consolidated and combined financial statements, see Note (24) New Accounting Pronouncements of Part II, “Item 8. Financial Statements and Supplementary Data.”

Critical Accounting Policies and Estimates

The preparation of our consolidated and combined financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data” requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. We believe the following are the critical accounting policies used in the preparation of our consolidated and combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data.”

Business combinations

We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. These estimates are reviewed during the 12-month measurement period and adjusted based on actual results. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note (3) Acquisitions of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion of our recently completed acquisitions during 2017 and 2016.

Asset acquisitions

Asset acquisitions are measured based on their cost to us, including transaction costs incurred by us. An asset acquisition’s cost or the consideration transferred by us is assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred by us. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to us or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets and identifiable intangible assets. Goodwill is not recognized in an asset acquisition. See Note (3) Acquisitions of Part II, “Item 8. Financial Statements and Supplementary Data” for our asset acquisition from RSI in 2018.

Legal and environmental contingencies

From time to time, we are subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. Our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note (18) Commitments and Contingencies of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion of our legal, environmental and other regulatory contingencies.

Valuation of long-lived assets, indefinite-lived assets and goodwill

We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings.

We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting segments, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. The expected future cash flows used for impairment reviews and related fair value calculations are based on subjective, judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges.

See Note (2)(h) Goodwill and Indefinite-Lived Intangible Assets and (2)(i) Long-Lived Assets of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended December 31, 2018, 2017 and 2016.

Income Taxes

We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to differences

between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis.

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In addition to our historical financial results, we consider forecasted market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.

We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of its tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined.

The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. We evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on our consolidated and combined financial statements as of December 31, 2017. Accordingly, we recorded a provision to income taxes for our assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on our consolidated and combined financial statements. We will continue to assess the impact of other aspects of U.S. tax reform on our tax positions and our consolidated and combined financial statements.

See Note (17) Income Taxes of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion on income taxes for the years ended December 31, 2018, 2017 and 2016.

New Accounting Pronouncements

For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note (24) New Accounting Pronouncements of Part II, “Item 8. Financial Statements and Supplementary Data.”

NON-GAAP FINANCIAL MEASURES

From time to time in our financial reports, we will use certain non-GAAP financial measures to provide supplemental information that we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These non-GAAP measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitates review of our operating performance on a period-to-period basis. Other companies may have different capital structures, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted Net Income (Loss), Adjusted EBITDA, and Adjusted Gross Profit (Loss) provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies.

Adjusted Net Income (Loss) is defined as net income (loss) adjusted to eliminate certain items management does not consider in assessing ongoing performance. 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 (Loss) is defined as gross profit (loss) adjusted to eliminate the impact of depreciation and amortization, along with cost of services that management does not consider in assessing ongoing performance.

PART IV

Item 15. Exhibits and Financial Schedules

The following documents are filed as part of this Amendment:

Financial Statements

No financial statements are filed with this Amendment.

Financial Statement Schedules:

No financial statement schedules are filed with this Amendment.

Exhibits

The exhibits listed in the Exhibit Index of the Original Filing and the exhibits listed in the Exhibit Index of this Amendment are filed with, or incorporated by reference, in this report. We are filing the following documents as exhibits to this Amendment.

EXHIBIT INDEX

Incorporated by Reference

Exhibit
Number

Exhibit Description

Filed/
Furnished
Herewith

Form

File No.

Exhibit

Filing
Date

31.1

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 19, 2019.



	Keane Group, Inc. (Registrant)

	By:	/s/ Robert W. Drummond
		Robert W. Drummond
		Chief Executive Officer and Director
		(Principal Executive Officer)



Date: August 19, 2019	By:	/s/ Gregory L. Powell
		Gregory L. Powell
		President and Chief Financial Officer
		(Principal Financial Officer)